MUTUAL FUND SELECT TRUST, 485BPOS, 1999-12-01

MUTUAL FUND SELECT TRUST
485BPOS, 1999-12-01

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

File No. 811-7841
Registration No. 333-13319
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 | |

Pre-Effective Amendment No. 2 | |

Post-Effective Amendment No. 4 |X|

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 | |

Amendment No. 6 |X|
-------------------------------
MUTUAL FUND SELECT TRUST
(Exact Name of Registrant as Specified in Charter)

1211 Avenue of the Americas, 41st Floor
New York, New York 10036
--------------------------------------------------
(Address of Principal Executive Office)

Registrant's Telephone Number, including Area Code: (212) 492-1600

Copies to:

George Martinez, Esq. Peter Eldridge, Esq. Gary S. Schpero, Esq.
BISYS Fund Services, Inc. Chase Manhattan Bank Simpson Thacher & Bartlett
3435 Stelzer Road 270 Park Avenue 425 Lexington Avenue
Columbus, Ohio 43219 New York, New York 10017 New York, New York 10017
- --------------------------------------------------------------------------------

(Name and Address of Agent for Service)

It is proposed that this filing will become effective:

<TABLE>
<S> <C> <C> <C>
[X] Immediately upon filing pursuant to [ ] on ( ) pursuant to
paragraph (b) paragraph (b)
[ ] 60 days after filing pursuant to [ ] on ( ) pursuant to
paragraph (a)(1) paragraph (a)(1)
[ ] 75 days after filing pursuant to [ ] on ( ) pursuant to
paragraph (a)(2) paragraph (a)(2) rule 485.
</TABLE>

If appropriate, check the following box:

[ ] this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.

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

The Registrant has registered an indefinite number or amount of its shares of
common stock for each of its series of shares under the Securities Act of 1933
pursuant to Rule 24f-2 under the Investment Company Act of 1940 on December 23,
1996 and the Rule 24f-2 Notice for the Registrant's fiscal year ended August 31,
1999 was filed on November 26, 1999.

<PAGE>

PROSPECTUS DECEMBER 1, 1999
- --------------------------------------------------

Chase Vista
Select Funds

SELECT
INTERMEDIATE
TAX FREE INCOME
FUND

SELECT TAX FREE
INCOME FUND

SELECT NEW YORK
INTERMEDIATE TAX
FREE INCOME FUND

SELECT
NEW JERSEY
TAX FREE INCOME
FUND

The Securities and
Exchange Commission
has not approved or
disapproved these
securities or determined
if this prospectus
is truthful or complete.
Any representation to the
contrary is a criminal
offense.

[Chase Vista Logo]
Chase Vista Funds [sm]

PSCVST-1-1299

<PAGE>

<TABLE>

<S> <C>
INFORMATION ABOUT THE FUNDS
SELECT INTERMEDIATE TAX FREE INCOME FUND 1
SELECT TAX FREE INCOME FUND 7
SELECT NEW YORK INTERMEDIATE TAX FREE INCOME
FUND 13
SELECT NEW JERSEY TAX FREE INCOME FUND 19

FUND MANAGEMENT
THE INVESTMENT ADVISER 25
PORTFOLIO MANAGERS 26

HOW YOUR ACCOUNT WORKS 27
WHO MAY BUY THESE SHARES 27
BUYING FUND SHARES 28
SELLING FUND SHARES 28
OTHER INFORMATION CONCERNING THE FUNDS 29

DISTRIBUTIONS AND TAXES 29

WHAT THE TERMS MEAN 31

FINANCIAL HIGHLIGHTS OF THE FUNDS 32

MORE INFORMATION Back cover
</TABLE>
<PAGE>

CHASE VISTA SELECT INTERMEDIATE TAX FREE INCOME FUND

The Fund's
objective

The Fund seeks
to provide monthly
dividends, which
are excluded from
gross income, and to
protect the value of
your investment by
investing primarily
in municipal
obligations.

Information about the Funds
The Fund's approach

As a fundamental policy, the Fund nor-
mally invests at least 80% of its assets
in municipal obligations whose interest
payments are:

o excluded from gross income
o excluded from the federal alternative
minimum tax on individuals

The Fund invests in securities that are
rated as investment grade by Moody's
Investors Service, Inc., Standard &
Poor's Corporation or Fitch Investors
Service Inc. It may also invest in
unrated securities which the advisers
believe are of comparable quality.

The Fund may also invest in deriva-
tives, inverse floaters and interest rate
caps, zero coupon securities and for-
ward commitments. These instruments
may be used to increase the Fund's
income or gain. Derivatives, which are
financial instruments whose value is
based on another security, index or
exchange rate, might also be used to
hedge various market risks.

The Fund seeks to develop an appro-
priate portfolio by comparing, among
other factors, credit quality, yields and
call provisions of different municipal
issuers, and examining structural
changes along the yield curve in an
attempt to maximize investment returns
while minimizing risk.

The average dollar-weighted maturity
of the Fund's portfolio will be between
three and 10 years.

1
<PAGE>

CHASE VISTA SELECT INTERMEDIATE TAX FREE INCOME FUND

Under normal market conditions, the Fund
reserves the right to invest up to 20%
of its total assets in securities that
pay interest subject to federal income
tax or the federal alternative minimum
tax on individuals. To temporarily
defend the value of its assets during
unusual market conditions, the Fund may
exceed this limit.

No more than 25% of total assets may be
invested in any one industry, other than
governments and public authorities.

The Fund may invest in money market
funds so that it can easily convert
investments into cash without losing a
significant amount of money in the
process.

The Fund may also invest in municipal
lease obligations. These allow the Fund
to participate in municipal lease
agreements and installment purchase
contracts.

The Fund may invest up to 25% of its
total assets in municipal lease
obligations backed by letters of credit
or guarantees from U.S. and foreign
banks and other foreign institutions.

There may be times when there are not
enough securities available to meet the
Fund's needs. On these occasions, the
Fund may invest in repurchase agreements
or Treasury securities that may be
subject to federal income tax.

The Fund may change any of its
non-fundamental investment
policies--including its investment
objective--without shareholder approval.[Logo]

FREQUENCY OF TRADING

How frequently the Fund buys
and sells securities
will vary from
year to year, depending on
market conditions.

2
<PAGE>

The main investment risks

All mutual funds carry a certain amount
of risk. You may lose money on your
investment in the Fund. Here are some
specific risks of investing in the
Select Intermediate Tax Free Income
Fund.

The principal value of fixed income
investments tends to fall when
prevailing interest rates rise.

A municipality that gets into financial
trouble could find it difficult to make
interest and principal payments, which
would hurt the Fund's returns and its
ability to preserve capital and
liquidity. A number of issuers have a
recent history of significant financial
difficulties. More than 5% of the Fund's
assets may be invested in any one
municipality, which could increase this
risk.

Under some circumstances, municipal
lease obligations might not pay interest
unless the state or municipal
legislature authorizes money for that
purpose. Some securities, including
municipal lease obligations, carry
additional risks. For example, they may
be difficult to trade or interest
payments may be tied only to a specific
stream of revenue.

Normally, the Fund may invest up to 20%
of its total assets in securities whose
interest is subject to the federal
alternative minimum tax. Consult your
tax professional for more information.

Since some municipal obligations may be
secured or guaranteed by banks and other
institutions, the risk to the Fund could
increase if the banking or financial
sector suffers an economic downturn.

The Fund may invest in municipal
obligations backed by foreign
institutions. This could carry more risk
than securities backed by U.S.
institutions, because of political or

3
<PAGE>

CHASE VISTA SELECT INTERMEDIATE TAX FREE INCOME FUND

economic instability, the imposition of
government controls, or regulations that
don't match U.S. standards.

The value of zero coupon securities and
inverse floaters tends to fluctuate
according to interest rate changes
significantly more than the value of
ordinary interest-paying debt
securities. The price of a security with
an interest rate cap will change more
often and to a greater degree than a
municipal security without it.

A forward commitment could lose value if
the underlying security falls in value
before the settlement date or if the
other party fails to meet its obligation
to complete the transaction.

Derivatives may be more risky than other
types of investments because they may
respond more to changes in economic
conditions than other types of
investments. If they are used for
non-hedging purposes, they could cause
losses that are significantly more than
the Fund's original investment.

The Fund is not diversified. It may
invest a greater percentage of its
assets in a particular issuer or group
of issuers than a diversified fund
would. That makes the value of its
shares more sensitive to economic
problems among those issuing the
securities. In addition, more than 25%
of the Fund's assets may be invested in
securities that rely on similar projects
for their income stream. As a result,
the Fund could be more susceptible to
developments that affect those projects.
[Logo]

Investments in the Fund are not
bank deposits or obligations of, or
guaranteed or endorsed by, The
Chase Manhattan Bank and are
not insured or guaranteed by the
Federal Deposit Insurance Corpora-
tion, Federal Reserve Board or any
other government agency.

4
<PAGE>

The Fund's past performance

This section shows the Fund's performance record. The bar chart shows how the
performance of the Fund's shares has varied from year to year. This provides
some indication of the risk of investing in the Fund. The table shows the
average annual return over the past year and since the Fund was launched. It
compares that performance to Lipper Intermediate Municipal Debt Fund Average, a
widely recognized benchmark for income funds.

On January 1, 1997, the Fund received the assets of a common trust fund which
had been maintained by Chase in a tax-free reorganization. The performance of
the Fund before that date is based on the historical performance of that common
trust fund. The historical performance of shares of the predecessor common
trust fund has been adjusted to reflect the Fund's expense levels (absent
reimbursements) that were in place at the time the Fund received the common
trust fund assets. For more information, see the Fund's Statement of Additional
Information.

The calculations assume that all dividends and distributions are reinvested in
the Fund. [Logo]

YEAR-BY-YEAR RETURNS
Past performance does not predict how
this Fund will perform in the future.

[Bar Chart]

1989 10.40%
1990 6.72%
1991 12.20%
1992 8.71%
1993 11.78%
1994 -3.96%
1995 14.39%
1996 3.76%
1997 8.21%
1998 6.56%

[End Bar Chart]

The total return for the Fund from January 1,
1999 to September 30, 1999 was -0.73%.

- --------------------------------------
BEST QUARTER 5.92%
- --------------------------------------
1st quarter, 1995
- --------------------------------------
WORST QUARTER -3.52%
- --------------------------------------
1st quarter, 1994

AVERAGE ANNUAL TOTAL RETURNS
For the periods ending December 31, 1998

<TABLE>
<CAPTION>
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
SELECT INTERMEDIATE TAX FREE
INCOME FUND 6.56% 5.62% 7.75%
- -------------------------------------------------------------------------------
LIPPER INTERMEDIATE MUNICIPAL
DEBT FUND AVERAGE 5.42% 5.24% 6.94%
- -------------------------------------------------------------------------------
</TABLE>

5
<PAGE>

CHASE VISTA SELECT INTERMEDIATE TAX FREE INCOME FUND

Fees and expenses

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

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT):

- -------------------------------------------------------------------------------
NONE
- -------------------------------------------------------------------------------

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*

<TABLE>
<CAPTION>
INVESTMENT DISTRIBUTION OTHER TOTAL FUND FEES
ADVISORY FEE (12b-1) FEES EXPENSES AND EXPENSES
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
0.30% NONE 0.45%# 0.75%#
- -------------------------------------------------------------------------------
</TABLE>

*The table is based on expenses incurred in the most recent fiscal year.
#Restated from most recent fiscal year to reflect current expense arrangements.

EXAMPLE This example helps you compare the cost of investing in the Fund with
the cost of investing in other mutual funds. This example assumes:

o you invest $10,000
o you sell all your shares at the end of the period
o your investment has a 5% return each year, and
o the Fund's operating expenses remain the same as shown above.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 77 $240 $417 $ 930
- -------------------------------------------------------------------------------
</TABLE>

6
<PAGE>

CHASE VISTA SELECT TAX FREE INCOME FUND

The Fund's
objective
The Fund seeks to
provide monthly
dividends that are
excluded from gross
income and to
protect the value of
your investment by
investing primarily
in municipal
obligations.

The Funds approach

As a fundamental policy, the Fund
normally invests at least 80% of its
assets in municipal obligations whose
interest payments are:

o excluded from gross income
o excluded from the federal alternative
minimum tax on individuals

The Fund may also invest in derivatives,
inverse floaters and interest rate caps,
zero coupon securities and forward
commitments. These instruments may be
used to increase the Fund's income or
gain. Derivatives, which are financial
instruments whose value is based on
another security, index or exchange
rate, might also be used to hedge
various market risks.

The Fund seeks to develop an appropriate
portfolio by comparing, among other
factors, credit quality, yields and call
provisions of different municipal
issuers, and examining structural
changes along the yield curve in an
attempt to maximize investment returns
while minimizing risk.

There is no restriction on the maturity
of the Fund's portfolio or on any
individual security in the portfolio.

Under normal market conditions, the Fund
reserves the right to invest up to

7
<PAGE>

CHASE VISTA SELECT TAX FREE INCOME FUND

20% of its total assets in securities
that pay interest subject to federal
income tax or the federal alternative
minimum tax on individu- als. To
temporarily defend the value of its
assets during unusual market conditions,
the Fund may exceed this limit.

No more than 25% of total assets may be
invested in any one industry, other than
governments and public authorities.

The Fund may invest in money market
funds so that it can easily convert
investments into cash without losing a
significant amount of money in the
process.

The Fund may also invest in municipal
lease obligations. These allow the Fund
to participate in municipal lease
agreements and installment purchase
contracts.

The Fund may invest up to 25% of its
total assets in municipal lease
obligations backed by letters of credit
or guarantees from U.S. and foreign
banks and other foreign institutions.

The Fund may change any of its
non-fundamental investment
policies--including its investment
objective--without shareholder approval.
[Logo]

FREQUENCY OF TRADING
How frequently the Fund buys
and sells securities will vary
from year to year, depending
on market conditions.
8
<PAGE>

The main investment risks

All mutual funds carry a certain amount
of risk. You may lose money on your
investment in the Fund. Here are some
specific risks of investing in the
Select Tax Free Income Fund.

The principal value of fixed income
investments tends to fall when
prevailing interest rates rise.

Normally, the Fund may invest up to 20%
of its total assets in securities whose
interest is subject to the federal
alternative minimum tax. Consult your
tax professional for more information.

Since some municipal obligations may be
secured or guaranteed by banks and other
institutions, the risk to the Fund could
increase if the banking or financial
sector suffers an economic downturn.

The Fund may invest in municipal
obligations backed by foreign
institutions. This could carry more risk
than securities backed by U.S.
institutions, because of political or

9
<PAGE>

CHASE VISTA SELECT TAX FREE INCOME FUND

economic instability, the imposition of
government controls, or regulations that
don't match U.S. standards.

A forward commitment could lose value if
the underlying security falls in value
before the settlement date or if the
other party fails to meet its obligation
to complete the transaction.

Investments in the Fund are not
bank deposits or obligations of,
or guaranteed or endorsed by,
The Chase Manhattan Bank and
are not insured or guaranteed
by the Federal Deposit Insurance
Corporation, Federal Reserve
Board or any other government
agency.

10
<PAGE>

The Fund's past performance

This section shows the Fund's performance record. The bar chart shows how the
performance of the Fund's shares has varied from year to year. This provides
some indication of the risk of investing in the Fund. The table shows the
average annual return over the past year and since the Fund was launched. It
compares that performance to Lipper General Municipal Debt Fund Average, a
widely recognized benchmark for income funds.

The calculations assume that all dividends and distributions are reinvested in
the Fund. [logo]

YEAR-BY-YEAR RETURNS

Past performance does not predict how
this Fund will perform in the future.

[Bar Chart]

1989 9.40%
1990 7.36%
1991 11.48%
1992 9.13%
1993 11.32%
1994 -3.88%
1995 14.44%
1996 4.09%
1997 9.11%
1998 6.49%

[End Bar Chart]

The total return for the Fund from January 1,
1999 to September 30, 1999 was -2.46%.

<TABLE>
<S> <C>
- ----------------------------------------
BEST QUARTER 5.72%
- ----------------------------------------
1st quarter, 1995
- ----------------------------------------
WORST QUARTER -3.29%
- ----------------------------------------
1st quarter, 1994
- ----------------------------------------
</TABLE>

11
<PAGE>

CHASE VISTA SELECT TAX FREE INCOME FUND

AVERAGE ANNUAL TOTAL RETURNS
For the periods ending December 31, 1998:

<TABLE>
<CAPTION>
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
SELECT TAX FREE INCOME FUND 6.49% 5.87% 7.78%
- -------------------------------------------------------------------------------
LIPPER GENERAL MUNICIPAL DEBT
FUND AVERAGE 5.33% 5.44% 7.68%
- -------------------------------------------------------------------------------
</TABLE>

Fees and expenses

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

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT):

- -------------------------------------------------------------------------------
NONE
- -------------------------------------------------------------------------------

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS)*

*The table is based on expenses incurred in the most recent fiscal year.
#Restated from most recent fiscal year to reflect current expense arrangements.

EXAMPLE This example helps you compare the cost of investing in the Fund with
the cost of investing in other mutual funds. The example assumes:

o you invest $10,000
o you sell all your shares at the end of the period
o your investment has a 5% return each year, and
o the Fund's operating expenses remain the same as shown above.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$77 $240 $417 $930
- -------------------------------------------------------------------------------
</TABLE>

12
<PAGE>

CHASE VISTA SELECT NEW YORK INTERMEDIATE TAX FREE INCOME FUND

The Fund's
objective

The Fund seeks to
provide monthly
dividends that are
excluded from gross
income and are
exempt from
New York State
and New York City
personal income
taxes. It also seeks to
protect the value of
your investment.

The Fund's approach

As a fundamental policy, the Fund
normally invests at least 80% of its
assets in New York municipal obligations
whose interest payments are:

o excluded from gross income and
exempt from New York State and
New York City income taxes

o excluded from the federal alternative
minimum tax on individuals

New York municipal obligations are those
issued by New York State, its political
subsidiaries, as well as Puerto Rico,
other U.S. territories and their
political subdivisions.

13
<PAGE>

CHASE VISTA SELECT NEW YORK INTERMEDIATE TAX FREE INCOME FUND

attempt to maximize investment returns
while minimizing risk.

The average dollar-weighted maturity of
the Fund's portfolio will be between
three and 10 years.

Under normal market conditions, the Fund
reserves the right to invest up to 20%
of its total assets in securities that
pay interest subject to federal income
tax, the federal alternative minimum tax
on individuals or New York State and New
York City personal income taxes. To
temporarily defend the value of its
assets during unusual market conditions,
the Fund may exceed this limit.

No more than 25% of total assets may be
invested in any one industry, other than
governments and public authorities.

The Fund may invest in money market
funds so that it can easily convert
investments into cash without losing a
significant amount of money in the
process.

The Fund may also invest in municipal
lease obligations. These allow the Fund
to participate in municipal lease
agreements and installment purchase
contracts.

The Fund may invest up to 25% of its
total assets in municipal lease
obligations backed by letters of credit
or guarantees from U.S. and foreign
banks and other foreign institutions.

The Fund may change any of its
non-fundamental investment
policies--including its investment
objective--without shareholder
approval.[Logo]

FREQUENCY OF TRADING

How frequently the Fund buys
and sells securities will vary
from year to year, depending
on market conditions.

14
<PAGE>

The main investment risks

All mutual funds carry a certain amount
of risk. You may lose money on your
investment in the Fund. Here are some
specific risks of investing in the
Select New York Intermediate Tax Free
Income Fund.

The principal value of fixed income
investments tends to fall when
prevailing interest rates rise.

The Fund invests primarily in New York
State and its municipalities and public
authorities. A number of municipal
issuers, including the State of New York
and New York City, have a history of
financial problems. If the state, or any
of the local government bodies, gets
into financial trouble, it could have
trouble paying interest and principal.
This would hurt the Fund's returns and
its ability to preserve capital and
liquidity. If more than 5% of the Fund's
assets are invested in any one
municipality, this risk could increase.

Normally, the Fund may invest up to 20%
of its total assets in securities whose
interest is subject to the federal
alternative minimum tax. Consult your
tax professional for more information.

Since some municipal obligations may be
secured or guaranteed by banks and other
institutions, the risk to the Fund could
increase if the banking or financial
sector suffers an economic downturn.

15
<PAGE>

CHASE VISTA SELECT NEW YORK INTERMEDIATE TAX FREE INCOME FUND

The Fund may invest in municipal
obligations backed by foreign
institutions. This could carry more risk
than securities backed by U.S.
institutions, because of political or
economic instability, the imposition of
government controls, or regulations that
don't match U.S. standards.

The value of zero coupon securities,
inverse floaters and interest rate caps
tends to fluctuate according to interest
rate changes significantly more than the
value of ordinary interest-paying debt
securities. The price of a security with
an interest rate cap will be more
volatile than a municipal security
without one.

A forward commitment could lose value if
the underlying security falls in value
before the settlement date or if the
other party fails to meet its obligation
to complete the transaction.

The Fund is not diversified. It may
invest a greater percentage of its
assets in a particular issuer or group
of issuers than a diversified fund
would. That makes the value of its
shares more sensitive to economic
problems among those issuing the
securities. In addition, more than 25%
of the Fund's assets Investments in the
Fund are not may be invested in
securities that rely on bank deposits or
obligations of, similar projects for
their income stream. As or guaranteed or
endorsed by, a result, the Fund could be
more susceptible The Chase Manhattan
Bank and to developments that affect
those projects.[Logo]

Investments in the Fund are not
bank deposits or obligations of,
or guaranteed or endorsed by,
The Chase Manhattan Bank and
are not insured or guaranteed
by the Federal Deposit Insurance
Corporation, Federal Reserve
Board or any other government
agency.

16
<PAGE>

The Fund's past performance

This section shows the Fund's performance record. The bar chart shows how the
performance of the Fund's shares has varied from year to year. This provides
some indication of the risk of investing in the Fund. The table shows the
average annual return over the past year and since the Fund was launched. It
compares that performance to Lipper New York Intermediate Municipal Debt Fund
Average, a widely recognized benchmark for income funds.

The calculations assume that all dividends and distributions are reinvested in
the Fund.[Logo]

YEAR-BY-YEAR RETURNS

Past performance does not predict how
this Fund will perform in the future.

[Bar Chart]

1989 12.38%
1990 5.44%
1991 11.82%
1992 9.08%
1993 11.28%
1994 -5.81%
1995 15.42%
1996 3.06%
1997 8.46%
1998 6.45%

[End Bar Chart]

The total return for the Fund from January 1,
1999 to September 30, 1999 was -1.30%.

BEST QUARTER 6.98%
- --------------------------------------
2nd quarter, 1989
- --------------------------------------
WORST QUARTER -4.27%
- --------------------------------------
1st quarter, 1994

17
<PAGE>

CHASE VISTA SELECT NEW YORK INTERMEDIATE TAX FREE INCOME FUND

AVERAGE ANNUAL TOTAL RETURNS
For the periods ending December 31, 1998

<TABLE>
<CAPTION>
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
SELECT NEW YORK INTERMEDIATE
TAX FUND 6.45% 5.28% 7.60%
- -------------------------------------------------------------------------------
LIPPER NEW YORK INTERMEDIATE
MUNICIPAL DEBT FUND AVERAGE 5.63% 4.86% 6.88%
- -------------------------------------------------------------------------------
</TABLE>

Fees and expenses

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

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT):

- -------------------------------------------------------------------------------
NONE
- -------------------------------------------------------------------------------

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*

<TABLE>
<CAPTION>
INVESTMENT DISTRIBUTION OTHER TOTAL FUND FEES
ADVISORY FEE (12b-1) FEES EXPENSES AND EXPENSES
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
0.30% NONE 0.48%# 0.78%#
- -------------------------------------------------------------------------------
</TABLE>

*The table is based on expenses incurred in the most recent fiscal year.
#Restated from most recent fiscal year to reflect current expense arrangements.

The actual other expenses are currently estimated at 0.45% and the total fees
and expenses are not expected to exceed 0.75%. That's because The Chase
Manhattan Bank (Chase) and some of the Fund's other service providers have
volunteered not to collect a portion of their fees and to reimburse others.
Chase and these other service providers may end this arrangement at any time.

EXAMPLE This example helps you compare the cost of investing in the Fund with
the cost of investing in other mutual funds. The example assumes:

o you invest $10,000
o you sell all your shares at the end of the period
o your investment has a 5% return each year, and
o the Fund's operating expenses are not waived and remain the same as shown
above.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 80 $ 249 $ 433 $ 966
- -------------------------------------------------------------------------------
</TABLE>

18
<PAGE>

CHASE VISTA SELECT NEW JERSEY TAX FREE INCOME FUND

The Fund's objective

The Fund seeks to
provide monthly
dividends that are
excluded from gross
income and are
exempt from the
New Jersey gross
income tax, that
state's personal
income tax.

The Fund's approach

As a fundamental policy, the Fund
normally invests at least 80% of its
assets in New Jersey municipal
obligations whose interest payments are:

o excluded from gross income and
exempt from New Jersey income taxes

o excluded from the federal alternative
minimum tax on individuals

New Jersey municipal obligations are
those issued by the State of New Jersey,
its political subsidiaries, as well as
Puerto Rico, other U.S. territories and
their political subdivisions.

19
<PAGE>

CHASE VISTA SELECT NEW JERSEY TAX FREE INCOME FUND

There is no restriction on the maturity
of the Fund's portfolio or on any
individual security in the portfolio.

Under normal market conditions, the Fund
reserves the right to invest up to 20%
of its total assets in securities that
pay interest subject to federal income
tax, the federal alternative minimum tax
on individuals or New Jersey personal
income taxes. To temporarily defend the
value of its assets during unusual
market conditions, the Fund may exceed
this limit.

No more than 25% of total assets may be
invested in any one industry, other than
governments and public authorities.

The Fund may invest in money market
funds so that it can easily convert
investments into cash without losing a
significant amount of money in the
process.

The Fund may also invest in municipal
lease obligations. These allow the Fund
to participate in municipal lease
agreements and installment purchase
contracts.

The Fund may invest up to 25% of its
total assets in municipal lease
obligations backed by letters of credit
or guarantees from U.S. and foreign
banks and other foreign institutions.

The Fund may change any of its
non-fundamental investment
policies--including its investment
objective--without shareholder
approval.[Logo]

FREQUENCY OF TRADING

How frequently the Fund buys
and sells securities will vary
from year to year, depending
on market conditions.

20
<PAGE>

The main investment risks

All mutual funds carry a certain amount
of risk. You may lose money on your
investment in the Fund. Here are some
specific risks of investing in the
Select New Jersey Tax Free Income Fund.

The principal value of fixed income
investments tends to fall when
prevailing interest rates rise.

The Fund invests primarily in the State
of New Jersey and its municipalities and
public authorities. If the state, or any
of the local government bodies, gets
into financial trouble, it could have
trouble paying interest and principal.
This would hurt the Fund's returns and
its ability to preserve capital and
liquidity. If more than 5% of the Fund's
assets are invested in any one
municipality, this risk could increase.

Normally, the Fund may invest up to 20%
of its total assets in securities whose
interest is subject to the federal
alternative minimum tax. Consult your
tax professional for more information.

Since some municipal obligations may be
secured or guaranteed by banks and other
institutions, the risk to the Fund could
increase if the banking or financial sector
suffers an economic downturn.

The Fund may invest in municipal obligations
backed by foreign institutions. This could
carry more risk than securities backed by

Investments in the Fund are not
bank deposits or obligations of,
or guaranteed or endorsed by,
The Chase Manhattan Bank and
are not insured or guaranteed
by the Federal Deposit Insurance
Corporation, Federal Reserve
Board or any other government
agency.
21
<PAGE>

CHASE VISTA SELECT NEW JERSEY TAX FREE INCOME FUND

U.S. institutions, because of political
or economic instability, the imposition
of government controls, or regulations
that don't match U.S. standards.

The value of zero coupon securities,
inverse floaters and interest rate caps
tends to fluctuate according to interest
rate charges significantly more than the
value of ordinary interest-paying debt
securities. The price of a security with
an interest rate cap will be more
volatile than a municipal security
without one.

A forward commitment could lose value if
the underlying security falls in value
before the settlement date or if the
other party fails to meet its obligation
to complete the transaction.

22
<PAGE>

The Fund's past performance

This section shows the Fund's performance record. The bar chart shows how the
performance of the Fund's shares has varied from year to year. This provides
some indication of the risk of investing in the Fund. The table shows the
average annual return over the past year and since the Fund was launched. It
compares that performance to Lipper New Jersey Municipal Debt Fund Average, a
widely recognized benchmark for income funds.

The calculations assume that all dividends and distributions are reinvested in
the Fund.

YEAR-BY-YEAR RETURNS

Past performance does not predict how
this Fund will perform in the future.

[Bar Chart]

1991 10.05%
1992 6.70%
1993 9.98%
1994 -2.38%
1995 11.72%
1996 3.16%
1997 7.66%
1998 6.20%

[End Bar Chart]

The total return for the Fund from January 1,
1999 to September 30, 1999 was -1.48%.

BEST QUARTER 4.70%
- --------------------------------------
1st quarter, 1995
- --------------------------------------
WORST QUARTER -2.60%
- --------------------------------------
1st quarter, 1994

23
<PAGE>

CHASE VISTA SELECT NEW JERSEY TAX FREE INCOME FUND

AVERAGE ANNUAL TOTAL RETURNS
For the periods ending December 31, 1998

<TABLE>
<CAPTION>
PAST 1 YEAR PAST 5 YEARS SINCE INCEPTION (5/1/90)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
SELECT NEW JERSEY TAX
FREE INCOME FUND 6.20% 5.16% 6.70%
- -------------------------------------------------------------------------------
LIPPER NEW JERSEY MUNICIPAL
DEBT FUND AVERAGE 5.61% 5.24% 7.71%
- -------------------------------------------------------------------------------
</TABLE>

Fees and expenses

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

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT):

- -------------------------------------------------------------------------------
NONE
- -------------------------------------------------------------------------------

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*

<TABLE>
<CAPTION>
INVESTMENT DISTRIBUTION OTHER TOTAL FUND FEES
ADVISORY FEE (12b-1) FEES EXPENSES AND EXPENSES
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
0.30% NONE 0.59%# 0.89%#
- -------------------------------------------------------------------------------
</TABLE>

*The table is based on expenses incurred in the most recent fiscal year.
#Restated from most recent fiscal year to reflect current expense arrangements.

EXAMPLE This example helps you compare the cost of investing in the Fund with
the cost of investing in other mutual funds. The example assumes:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 91 $ 284 $ 493 $ 1,096
- -------------------------------------------------------------------------------
</TABLE>

24
<PAGE>

THE INVESTMENT ADVISER

The Chase Manhattan Bank (Chase) is the
investment adviser to each Fund. Chase
is a wholly owned subsidiary of The
Chase Manhattan Corporation (CMC), a
bank holding company. Chase and its
predecessors have more than a century of
money management experience.

Chase is entitled to receive an advisory
fee at the annual rate of 0.30% of the
average daily net assets of each Fund.

Chase Asset Management, Inc. is the
sub-adviser to the Funds. Chase Asset
Management is a wholly owned subsidiary
of Chase. Chase Asset Management makes
the day-to-day investment decisions for
each Fund.

25
<PAGE>

THE INVESTMENT ADVISER

Portfolio Managers

TAX FREE INCOME FUND

Pamela Hunter, managing Director and
Head of Tax Exempt Investments at Chase,
is responsible for day-to-day management
of the Select Tax Free Income Fund. Ms.
Hunter manages the team that provides
tax exempt strategy, research and
portfolio management. She has been
employed at Chase and its predecessors
since 1980.

NEW YORK INTERMEDIATE TAX FREE INCOME FUND
AND NEW JERSEY TAX FREE INCOME FUND

Ms. Hunter and Richard Taormina are
responsible for the day-to-day
management of these two Funds. Mr.
Taormina is a Municipal Portfolio
Manager and Analyst at Chase. He joined
the company in October 1997. Before
joining Chase, he was a Senior Municipal
Bond Trader at The Vanguard Group of
Investment Companies, beginning in 1990.

INTERMEDIATE TAX FREE INCOME FUND

Ms. Hunter and Carolyn J. Gill are
responsible for the day-to-day
management of the Select Intermediate
Tax Free Income Fund. Ms. Gill is a Vice
President and Senior Portfolio Manager
at Chase. She has been employed at Chase
and its predecessors since 1986.[Logo]

26
<PAGE>

HOW YOUR ACCOUNT WORKS

Who may buy these shares

Only qualified investors may buy shares.
Qualified Fund investors are trusts,
fiduciary accounts and investment
management clients of Chase, other
financial institutions or their
affiliates. The financial institution
must have an agreement with the Funds to
buy and sell shares.

Financial institutions may set other
eligibility requirements, including
minimum investments. They must maintain
at least $5 million in an account with
one or more Chase Vista Select Funds on
behalf of their clients. If you are no
longer a qualified investor, your
financial institution may redeem your
shares or allow you to keep holding your
shares through a separate account. If
you hold Fund shares through a separate
account, you may incur additional fees.
The Funds may refuse to sell Fund shares
to any institution.

27
<PAGE>

HOW YOUR ACCOUNT WORKS

Buying Fund shares

Through your financial institution Tell
Chase or your financial institution
which Funds you want to buy. Your
financial institution is responsible for
forwarding orders in a timely manner.
Your financial institution may impose
different minimum investments and
earlier deadlines to buy shares.

The price of the shares is based on the
net asset value per share (NAV). NAV is
the value of everything a Fund owns,
minus everything it owes, divided by the
number of shares held by investors. If
the account administrator at your
financial institution receives your
order in proper form before the New York
Stock Exchange closes regular trading
(or the institution's earlier deadline,
if any) and the order, along with
payment in federal funds, is received by
the Funds before they close for
business, your order will be confirmed
at that day's net asset value. Each Fund
calculates its NAV once each day at the
close of regular trading on the New York
Stock Exchange (normally 4 p.m. Eastern
time.) Each fund generally values its
assets at their market value but may use
fair value if market prices are
unavailable.

You can buy shares on any business day
that the Federal Reserve Bank of New
York and the New York Stock Exchange are
open.

You must provide a Social Security
Number or Taxpayer Identification Number
when you open an account. Each Fund has
the right to refuse any purchase order
or to stop offering shares for sale at
any time.

The Fund will not issue certificates for
shares.

Selling Fund shares

Through your financial institution Tell
your financial institution which Funds
you want to sell. You must supply the
names of the registered shareholders on
your account and your account number.
Your financial institution is
responsible for sending the Funds all
necessary documents and may charge you
for this service.

You can sell some or all of your shares
on any day the Chase Vista Select Funds
Service Center is accepting purchase
orders. You'll receive the next NAV
calculated after the Chase Vista Funds
Service Center receives your order in
proper form from your financial
institution. If the Fund receives your
order before the New York Stock Exchange
closes regular trading, you will receive
that day's net asset value.

The Funds generally send proceeds of the
sale in federal funds to your financial
institution on the business day after
the Fund receives your request in proper
form.

Under unusual circumstances, the Funds
may stop accepting orders to sell shares
or postpone payment for more than seven
days, as federal securities laws permit.

28
<PAGE>

Other information concerning the Funds

You may authorize your financial
institution to act on redemption and
transfer instructions received by phone.
If someone trades on your account by
phone, your financial institution has a
responsibility to take all reasonable
precautions to confirm that the
instructions are genuine. If your
financial institution fails to use such
reasonable precautions, it may be liable
for any losses due to unauthorized or
fraudulent instructions. Investors
agree, however, that they will not hold
the Funds or their financial institution
or any of their agents liable for any
losses or expenses arising from any
sales request, if reasonable precautions
are taken.

Your financial institution may offer
other services. These could include
special procedures for buying and
selling Fund shares, such as
pre-authorized or systematic buying and
selling plans. Each financial
institution may establish its own terms
and conditions for these services.

Chase and its affiliates and the Funds
and their affiliates, agents and
subagents may share information about
shareholders and their accounts with
each other and with others unless this
sharing is prohibited by contract. This
information can be used for a variety of
purposes, including offering investment
and insurance products to shareholders.

Vista Fund Distributors, Inc. (VFD), a
subsidiary of The BISYS Group, Inc., is
the Funds' distributor. VFD is
unaffiliated with Chase.

Distributions and taxes

Each Fund can earn income and it can
realize capital gain. The Funds deduct
any expenses then pay out these earnings
to shareholders as distributions.

The Funds declare dividends daily and
distribute any net investment income
(other than short-term capital gains) at
least monthly. Each Fund distributes net
capital gain at least annually. You have
three options for your distributions.
You may: reinvest all of them in
additional Fund shares without a sales
charge; take distributions of net
investment income in cash or as a
deposit in a pre-assigned bank account
and reinvest distributions of net
capital gain in additional shares; or
take all distributions in cash or as a
deposit in a pre-assigned bank account.

If your financial institution does not
offer distribution reinvestment or if
you don't select an option when you open
your account, we'll pay all
distributions in cash. The taxation of
dividends won't be affected by the form
in which you receive them.

Dividends of net investment income are
usually taxable as ordinary income at
the federal, state and local levels.
Dividends of tax-exempt interest income
are not subject to federal income taxes,
but will generally be subject to state
and local taxes. However, for the New
York Intermediate Tax Free Income Fund,
New York residents will not have to pay
New York State or New York City personal
income taxes on tax-

29
<PAGE>

HOW YOUR ACCOUNT WORKS

exempt income from New York municipal
obligations. Similarly, for the New
Jersey Tax Free Income Fund, New Jersey
residents will not have to pay New
Jersey personal income taxes on
tax-exempt income from New Jersey
municipal obligations. The state or
municipality where you live my not
charge you state or local taxes on
tax-exempt interest earned on certain
bonds. Dividends earned on bonds issued
by the U.S. government and its agencies
may also be exempt from some types of
state and local taxes.

If you receive distributions of net
capital gain, the tax rate will be based
on how long the Fund held a particular
asset, not on how long you have owned
your shares. If you buy shares just
before a distribution, you will pay tax
on the entire amount of the taxable
distribution you receive, even thought
the NAV will be higher on that date
because it includes the distribution
amount.

Early in each calendar year, each Fund
will send you a notice showing the
amount of distributions you received in
the preceding year and the tax status of
those distributions.

The above is a general summary of the
tax implications of investing in the
Funds. Please consult your tax adviser
to see how investing in the Funds will
affect your own tax situation.[Logo]

30
<PAGE>

What the terms mean

DEBT SECURITIES: securities used by
issuers, such as governmental entities
and corporations, to borrow money. The
issuer usually pays a fixed, variable or
floating rate of interest and repays the
amount borrowed at the maturity date of
the security. However, if a borrower
issues a zero coupon debt security, it
does not make regular interest payments.

DISTRIBUTION FEE: a fee that covers the
cost of the distribution system used to
sell shares to the public.

DOLLAR-WEIGHTED AVERAGE MATURITY: The
average maturity of the Fund is the
average amount of time until the issuers
of the debt securities in the Fund's
portfolio must pay off the principal
amount of the debt. "Dollar weighted"
means the larger the dollar value of the
debt security in the Fund's portfolio,
the more weight it gets in calculating
this average.

INVESTMENT ADVISORY FEE: a fee paid to
the investment adviser to manage the
Fund and make decisions about buying and
selling the Fund's investments.

OTHER EXPENSES: miscellaneous items,
including transfer agency, custody and
registration fees.

REPURCHASE AGREEMENTS: a type of
short-term investment in which a dealer
sells securities to the Fund and agrees
to buy them back later at a set price.
In effect, the dealer is borrowing the
Fund's money for a short time, using the
securities as collateral.

SHAREHOLDER SERVICE FEE: a fee to cover
the cost of paying shareholder-
servicing agents to provide certain
support services for your account.[Logo]

31
<PAGE>

FINANCIAL HIGHLIGHTS

Chase Vista Select Intermediate Tax Free Income Fund

The Financial Highlights table is intended to help you understand the Fund's
financial performance for the periods since shares were first offered. The
total returns in the table represent the rate an investor would have earned or
lost on an investment in the Fund (assuming reinvestment of all dividends and
distributions).

The table set forth below provides selected per share data and ratios for one
Share.

This information is supplemented by financial statements including accompanying
notes appearing in the Fund's Annual Report to Shareholders for the year ended
August 31, 1999, which is incorporated by reference into the SAI. Shareholders
may obtain a copy of this annual report by contacting the Fund or their
Shareholder Servicing Agent.

The financial statements, which include the financial information set forth
below, have been audited by PricewaterhouseCoopers LLP, independent
accountants, whose report thereon is included in the Annual Report to
Shareholders.

<TABLE>
<CAPTION>
Year Ended
--------------------- 1/1/97*
Through
8/31/99 8/31/98 8/31/97
-------- ------- -------
PER SHARE OPERATING PERFORMANCE:
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.93 $10.85 $10.75
- ----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.52 0.56 0.39
Net gain or losses in securities
(both realized and unrealized) (0.39) 0.29 0.10
-------- ------- -------
Total from investment operations 0.13 0.85 0.49
-------- ------- -------
Less distributions:
Dividends from net investment income 0.52 0.56 0.39
Distributions from capital gains 0.12 0.21 --
-------- ------- -------
Total distributions 0.64 0.77 0.39
- ----------------------------------------------------------------------------------------------
Net asset value, end of period $10.42 $10.93 $10.85
- ----------------------------------------------------------------------------------------------
TOTAL RETURN 1.15% 8.08% 4.58%
- ----------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------
Net assets, end of period (millions) $ 729 $ 717 $ 631
- ----------------------------------------------------------------------------------------------
Ratio of expenses to average net assets# 0.03% 0.02% 0.02%
- ----------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets# 4.81% 5.10% 5.40%
- ----------------------------------------------------------------------------------------------
Ratio of expenses without waivers and assumption of
expenses to average net assets# 0.50% 0.50% 0.50%
- ----------------------------------------------------------------------------------------------
Ratio of net investment income without waivers and
assumption of expenses to average net assets# 4.34% 4.62% 4.92%
- ----------------------------------------------------------------------------------------------
Portfolio turnover rate 62% 71% 60%
- ----------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
#Short periods have been annualized.

32
<PAGE>

Chase Vista Select Tax Free Income Fund

The table set forth below provides selected per share data and ratios for one
Share.

<TABLE>
<CAPTION>
Year Ended
-------------------- 1/1/97*
Through
8/31/99 8/31/98 8/31/97
-------- ------- --------
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 6.60 $6.45 $ 6.39
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.34 0.35 0.24
Net gain or losses in securities
(both realized and unrealized) (0.37) 0.21 0.06
------- ------ -----
Total from investment operations (0.03) 0.56 0.30
------- ------ -----
Less distributions:
Dividends from net investment income 0.34 0.35 0.24
Distributions from capital gains 0.04 0.06 --
------- ------ -----
Total distributions 0.38 0.41 0.24
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $ 6.19 $6.60 $ 6.45
- ---------------------------------------------------------------------------------------------
TOTAL RETURN (0.63%) 8.99% 4.86%
- ---------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------
Net assets, end of period (millions) $ 744 $ 761 $ 677
- ---------------------------------------------------------------------------------------------
Ratio of expenses to average net assets# 0.03% 0.02% 0.02%
- ---------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets# 5.25% 5.39% 5.73%
- ---------------------------------------------------------------------------------------------
Ratio of expenses without waivers and assumption of
expenses to average net assets# 0.50% 0.50% 0.49%
- ---------------------------------------------------------------------------------------------
Ratio of net investment income without waivers and
assumption of expenses to average net assets# 4.78% 4.91% 5.26%
- ---------------------------------------------------------------------------------------------
Portfolio turnover rate 39% 47% 48%
- ---------------------------------------------------------------------------------------------
</TABLE>

*Commencement of operations.
#Short periods have been annualized.

33
<PAGE>

FINANCIAL HIGHLIGHTS

Chase Vista Select New York Intermediate Tax Free Income Fund

The table set forth below provides selected per share data and ratios for one
Share.

<TABLE>
<CAPTION>
Year Ended
----------------------- 1/1/97*
Through
8/31/99 8/31/98 8/31/97
------- ------- -------
PER SHARE OPERATING PERFORMANCE:
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 7.29 $ 7.15 $ 7.09
- --------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.35 0.37 0.26
Net gain or losses in securities
(both realized and unrealized) (0.31) 0.21 0.06
------- ------ ------
Total from investment operations 0.04 0.58 0.32
------- ------ ------
Less distributions:
Dividends from net investment income 0.35 0.37 0.26
Distributions from capital gains 0.07 0.07 --
------- ------ ------
Total distributions 0.42 0.44 0.26
- --------------------------------------------------------------------------------------------
Net asset value, end of period $ 6.91 $ 7.29 $ 7.15
- --------------------------------------------------------------------------------------------
TOTAL RETURN 0.38% 8.37% 4.62%
- --------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------
Net assets, end of period (millions) $ 295 $ 283 $ 235
- --------------------------------------------------------------------------------------------
Ratio of expenses to average net assets# 0.04% 0.03% 0.03%
- --------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets# 4.85% 5.08% 5.52%
- --------------------------------------------------------------------------------------------
Ratio of expenses without waivers and assumption of
expenses to average net assets# 0.53% 0.53% 0.53%
- --------------------------------------------------------------------------------------------
Ratio of net investment income without waivers and
assumption of expenses to average net assets# 4.36% 4.58% 5.02%
- --------------------------------------------------------------------------------------------
Portfolio turnover rate 39% 66% 32%
- --------------------------------------------------------------------------------------------
</TABLE>

*Commencement of operations.
#Short periods have been annualized.

34
<PAGE>

Chase Vista Select New Jersey Tax Free Income Fund

The table set forth below provides selected per share data and ratios for one
Share.

<TABLE>
<CAPTION>
Year Ended
-------------------- 1/1/97*
Through
8/31/99 8/31/98 8/31/97
------- ------- ---------
PER SHARE OPERATING PERFORMANCE:
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.24 $10.04 $ 9.99
- ----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.49 0.52 0.37
Net gain or losses in securities
(both realized and unrealized) (0.45) 0.24 0.05
-------- ------- -------
Total from investment operations 0.04 0.76 0.42
-------- ------- -------
Less distributions:
Dividends from net investment income 0.49 0.52 0.37
Distributions from capital gains 0.18 0.04 --
-------- ------- -------
Total distributions 0.67 0.56 0.37
- ----------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.61 $10.24 $ 10.04
- ----------------------------------------------------------------------------------------------
TOTAL RETURN 0.37% 7.82% 4.20%
- ----------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------
Net assets, end of period (millions) $ 68 $ 71 $ 64
- ----------------------------------------------------------------------------------------------
Ratio of expenses to average net assets# 0.04% 0.02% 0.02%
- ----------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets# 4.94% 5.16% 5.52%
- ----------------------------------------------------------------------------------------------
Ratio of expenses without waivers and assumption of
expenses to average net assets# 0.63% 0.63% 0.57%
- ----------------------------------------------------------------------------------------------
Ratio of net investment income without waivers and
assumption of expenses to average net assets# 4.35% 4.55% 4.97%
- ----------------------------------------------------------------------------------------------
Portfolio turnover rate 24% 60% 14%
- ----------------------------------------------------------------------------------------------
</TABLE>

*Commencement of operations.
#Short periods have been annualized.

35
<PAGE>

HOW TO REACH US

More information

You'll find more information about the
Funds in the following documents:

ANNUAL AND SEMI-ANNUAL REPORTS

Our annual and semi-annual reports
contain more information about each
Fund's investments and performance. The
annual report also includes details
about the market conditions and
investment strategies that had a
significant effect on each Fund's
performance during the last fiscal year.

STATEMENT OF ADDITIONAL
INFORMATION (SAI)

The SAI contains more detailed
information about the Funds and their
policies. By law, it's considered to be
part of this prospectus.

You can get a free copy of these
documents and other information, or ask
us any questions, by calling us at
1-800-34-VISTA or writing to:

Chase Vista Fund Service Center
P.O. Box 419392
Kansas City, MO 64141-6392

If you buy your shares through The Chase
Manhattan Bank or another institution,
you should contact that institution
directly for more information. You can
also find information on-line at
www.chasevista.com on the Internet.

You can write or e-mail the SEC's Public
Reference Room and ask them to mail you
information about the Funds, including
the SAI. They'll charge you a copying
fee for this service. You can also visit
the Public Reference Section and copy
the documents while you're there.

Public Reference Section of the SEC
Washington, DC 20549-0102
1-202-942-8090
Email: [email protected]

Reports, a copy of the SAI and other
information about the Funds is also
available on the SEC's website at
http://www.sec.gov.

The Fund's Investment Company Act File
No. is 811-7843

Chase Vista Funds
Fulfillment Center
393 Manley Street
West Bridgewater, MA 02379-1039
<PAGE>

STATEMENT OF
ADDITIONAL INFORMATION

December 1, 1999

SELECT INTERMEDIATE TAX FREE INCOME FUND
SELECT TAX FREE INCOME FUND
SELECT NEW YORK INTERMEDIATE TAX FREE INCOME FUND
SELECT NEW JERSEY TAX FREE INCOME FUND

One Chase Manhattan Plaza, Third Floor, New York, New York 10081

This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the
Prospectuses offering shares of the Funds. This Statement of Additional
Information should be read in conjunction with the Prospectus offering shares
of Select Intermediate Tax Free Income Fund, Select Tax Free Income Fund,
Select New York Intermediate Tax Free Income Fund and Select New Jersey Tax
Free Income Fund. Any reference to a "Prospectus" in this Statement of
Additional Information is a reference to the foregoing Prospectuses. Copies of
the Prospectus may be obtained by an investor without charge by contacting
Vista Fund Distributors, Inc. ("VFD"), the Funds' distributor (the
"Distributor"), at the above-listed address.

This Statement of Additional Information is NOT a prospectus and is authorized
for distribution to prospective investors only if preceded or accompanied by an
effective prospectus.

For more information about the Funds, simply call or write the Vista Select
Service Center at:

1-800-622-4273
Vista Select Service Center
P.O. Box 419392
Kansas City, MO 64141

MFST-SAI
<PAGE>

<TABLE>
Table of Contents Page
- -------------------------------------------------------------------------------------------------
<S> <C>
The Funds .................................................................................. 3
Investment Policies and Restrictions ....................................................... 3
Performance Information .................................................................... 16
Determination of Net Asset Value ........................................................... 19
Purchases and Redemptions .................................................................. 20
Tax Matters ................................................................................ 20
Management of the Trust and the Funds ...................................................... 25
Independent Accountants .................................................................... 34
Certain Regulatory Matters ................................................................. 34
General Information ........................................................................ 35
Appendix A--Description of Certain Obligations Issued or Guaranteed by U.S. Government
Agencies or Instrumentalities ............................................................ A-1
Appendix B--Description of Ratings ......................................................... B-1
Appendix C--Special Investment Considerations Relating to New York Municipal Obligations ... C-1
Appendix D--Special Investment Considerations Relating to New Jersey Municipal Obligations.. D-1
</TABLE>

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THE FUNDS

Mutual Fund Select Trust (the "Trust") is an open-end management
investment company which was organized as a business trust under the laws of
the Commonwealth of Massachusetts on October 1, 1996. The Trust presently
consists of 4 separate series (the "Funds"). All of the Funds are
non-diversified, as such term is defined in the Investment Company Act of 1940,
as amended (the "1940 Act"). The shares of the Funds are collectively referred
to in this Statement of Additional Information as the "Shares."

The Board of Trustees of the Trust provides broad supervision over the
affairs of the Trust including the Funds. The Chase Manhattan Bank ("Chase") is
the investment adviser for the Funds. Chase also serves as the Trust's
administrator (the "Administrator") and supervises the overall administration
of the Trust, including the Funds. A majority of the Trustees of the Trust are
not affiliated with the investment adviser or sub-advisers.

Effective as of December 29, 1997, Select New York Tax Free Income Fund
changed its name to Select New York Intermediate Tax Free Income Fund.

INVESTMENT POLICIES AND RESTRICTIONS

Investment Policies

The Prospectuses set forth the various investment policies applicable to
each Fund. The following information supplements and should be read in
conjunction with the related sections of each Prospectus. As used in this
Statement of Additional Information, with respect to those Funds and policies
for which they apply, the terms "Municipal Obligations" and "tax-exempt
securities" have the meanings given to them in the relevant Fund's Prospectus.
For descriptions of the securities ratings of Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P") and Fitch Investors Service,
Inc. ("Fitch"), see Appendix B. For a general discussion of special investment
considerations relating to investing in (i) New York and (ii) New Jersey
Municipal Obligations, see Appendices C and D, respectively.

The management style used for the Funds emphasizes several key factors.
Portfolio managers consider the security quality--that is, the ability of the
debt issuer to make timely payments of principal and interest. Also important
in the analysis is the relationship of a bond's yield and its maturity, in
which the managers evaluate the risks of investing in long-term higher-yielding
securities. Managers also use a computer model to simulate possible
fluctuations in prices and yields if interest rates change. Another step in the
analysis is comparing yields on different types of securities to determine
relative risk/reward profiles.

U.S. Government Securities. U.S. Government Securities include (1) U.S.
Treasury obligations, which generally differ only in their interest rates,
maturities and times of issuance, including U.S. Treasury bills (maturities of
one year or less), U.S. Treasury notes (maturities of one to ten years) and
U.S. Treasury bonds (generally maturities of greater than ten years); and (2)
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Treasury, (b) the right of the issuer to borrow
any amount listed to a specific line of credit from the U.S. Treasury, (c)
discretionary authority of the U.S. Government to purchase certain obligations
of the U.S. Government agency or instrumentality or (d) the credit of the
agency or instrumentality. Agencies and instrumentalities of the U.S.
Government include but are not limited to: Federal Land Banks, Federal
Financing Banks, Banks for Cooperatives, Federal Intermediate Credit Banks,
Farm Credit Banks, Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation, Federal National Mortgage Association, Student Loan Marketing
Association, United States Postal Service, Chrysler Corporate Loan Guarantee
Board, Small Business Administration, Tennessee Valley Authority and any other
enterprise established or sponsored by the U.S. Government. Certain U.S.
Government Securities, including U.S. Treasury bills, notes and bonds,
Government National Mortgage Association certificates and Federal Housing
Administration debentures, are supported by the full faith and credit of the
United States. Other U.S. Government Securities are issued or guaranteed by
federal agencies or government sponsored enterprises and are not supported by
the full faith and credit of the United States. These securities include
obligations that are supported by the

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<PAGE>

right of the issuer to borrow from the U.S. Treasury, such as obligations of
Federal Home Loan Banks, and obligations that are supported by the
creditworthiness of the particular instrumentality, such as obligations of the
Federal National Mortgage Association or Federal Home Loan Mortgage
Corporation. Agencies and instrumentalities issuing such obligations include
the Farm Credit System Financial Assistance Corporation, the Federal Financing
Bank, The General Services Administration, Federal Home Loan Banks, the
Tennessee Valley Authority and the Student Loan Marketing Association. For a
description of certain obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, see Appendix A.

In addition, certain U.S. Government agencies and instrumentalities issue
specialized types of securities, such as guaranteed notes of the Small Business
Administration, Federal Aviation Administration, Department of Defense, Bureau
of Indian Affairs and Private Export Funding Corporation, which often provide
higher yields than are available from the more common types of
government-backed instruments. However, such specialized instruments may only
be available from a few sources, in limited amounts, or only in very large
denominations; they may also require specialized capability in portfolio
servicing and in legal matters related to government guarantees. While they may
frequently offer attractive yields, the limited-activity markets of many of
these securities means that, if a Fund were required to liquidate any of them,
it might not be able to do so advantageously; accordingly, each Fund investing
in such securities intends normally to hold such securities to maturity or
pursuant to repurchase agreements, and would treat such securities (including
repurchase agreements maturing in more than seven days) as illiquid for
purposes of its limitation on investment in illiquid securities.

Bank Obligations. Investments in bank obligations are limited to those of
U.S. banks (including their foreign branches) which have total assets at the
time of purchase in excess of $1 billion and the deposits of which are insured
by either the Bank Insurance Fund or the Savings and Loan Insurance Fund of the
Federal Deposit Insurance Corporation, and foreign banks (including their U.S.
branches) having total assets in excess of $10 billion (or the equivalent in
other currencies), and such other U.S. and foreign commercial banks which are
judged by the advisers to meet comparable credit standing criteria.

Bank obligations include negotiable certificates of deposit, bankers'
acceptances, fixed time deposits and deposit notes. A certificate of deposit is
a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A bankers' acceptance is a short-term draft drawn on a commercial bank
by a borrower, usually in connection with an international commercial
transaction. The borrower is liable for payment as is the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Fixed time deposits are obligations of branches of United States banks or
foreign banks which are payable at a stated maturity date and bear a fixed rate
of interest. Although fixed time deposits do not have a market, there are no
contractual restrictions on the right to transfer a beneficial interest in the
deposit to a third party. Fixed time deposits subject to withdrawal penalties
and with respect to which a Fund cannot realize the proceeds thereon within
seven days are deemed "illiquid" for the purposes of its restriction on
investments in illiquid securities. Deposit notes are notes issued by
commercial banks which generally bear fixed rates of interest and typically
have original maturities ranging from eighteen months to five years.

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

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<PAGE>

Repurchase Agreements. A Fund will enter into repurchase agreements only
with member banks of the Federal Reserve System and securities dealers believed
creditworthy, and only if fully collateralized by securities in which such Fund
is permitted to invest. Under the terms of a typical repurchase agreement, a
Fund would acquire an underlying debt instrument for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase the instrument and the Fund to resell the instrument at a fixed
price and time, thereby determining the yield during the Fund's holding period.
This procedure results in a fixed rate of return insulated from market
fluctuations during such period. A repurchase agreement is subject to the risk
that the seller may fail to repurchase the security. Repurchase agreements are
considered under the 1940 Act to be loans collateralized by the underlying
securities. All repurchase agreements entered into by a Fund will be fully
collateralized at all times during the period of the agreement in that the
value of the underlying security will be at least equal to 100% of the amount
of the loan, including the accrued interest thereon, and the Fund or its
custodian or sub-custodian will have possession of the collateral, which the
Board of Trustees believes will give it a valid, perfected security interest in
the collateral. Whether a repurchase agreement is the purchase and sale of a
security or a collateralized loan has not been conclusively established. This
might become an issue in the event of the bankruptcy of the other party to the
transaction. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities would not be
owned by a Fund, but would only constitute collateral for the seller's
obligation to pay the repurchase price. Therefore, a Fund may suffer time
delays and incur costs in connection with the disposition of the collateral.
The Board of Trustees believes that the collateral underlying repurchase
agreements may be more susceptible to claims of the seller's creditors than
would be the case with securities owned by a Fund. Repurchase agreements will
give rise to income which will not qualify as tax-exempt income when
distributed by a Fund. Repurchase agreements maturing in more than seven days
are treated as illiquid for purposes of the Funds' restrictions on purchases of
illiquid securities. Repurchase agreements are also subject to the risks
described below with respect to stand-by commitments.

Reverse Repurchase Agreements. Reverse repurchase agreements involve sales
of portfolio securities of a Fund to member banks of the Federal Reserve System
or securities dealers believed creditworthy, concurrently with an agreement by
such Fund to repurchase the same securities at a later date at a fixed price
which is generally equal to the original sales price plus interest. A Fund
retains record ownership and the right to receive interest and principal
payments on the portfolio security involved.

Forward Commitments. In order to invest a Fund's assets immediately, while
awaiting delivery of securities purchased on a forward commitment basis,
short-term obligations that offer same-day settlement and earnings will
normally be purchased. Although short-term investments will normally be in
tax-exempt securities or Municipal Obligations, short-term taxable securities
or obligations may be purchased if suitable short-term tax-exempt securities or
Municipal Obligations are not available. When a commitment to purchase a
security on a forward commitment basis is made, procedures are established
consistent with the General Statement of Policy of the Securities and Exchange
Commission concerning such purchases. Since that policy currently recommends
that an amount of the respective Fund's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, a
separate account of such Fund consisting of cash, cash equivalents or high
quality debt securities equal to the amount of such Fund's commitments will be
established at such Fund's custodian bank. For the purpose of determining the
adequacy of the securities in the account, the deposited securities will be
valued at market value. If the market value of such securities declines,
additional cash, cash equivalents or highly liquid securities will be placed in
the account daily so that the value of the account will equal the amount of
such commitments by the respective Fund.

Although it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a forward commitment basis may
involve more risk than other types of purchases. Securities purchased on a
forward commitment basis and the securities held in the respective Fund's
portfolio are subject to changes in value based upon the public's perception of
the creditworthiness of the issuer and changes,

5
<PAGE>

real or anticipated, in the level of interest rates. Purchasing securities on a
forward commitment basis can involve the risk that the yields available in the
market when the delivery takes place may actually be higher or lower than those
obtained in the transaction itself. On the settlement date of the forward
commitment transaction, the respective Fund will meet its obligations from then
available cash flow, sale of securities held in the separate account, sale of
other securities or, although it would not normally expect to do so, from sale
of the forward commitment securities themselves (which may have a value greater
or lesser than such Fund's payment obligations). The sale of securities to meet
such obligations may result in the realization of capital gains or losses,
which are not exempt from federal, state or local taxation.

To the extent a Fund engages in forward commitment transactions, it will
do so for the purpose of acquiring securities consistent with its investment
objective and policies and not for the purpose of investment leverage, and
settlement of such transactions will be within 90 days from the trade date.

Illiquid Securities. For purposes of its limitation on investments in
illiquid securities, each Fund may elect to treat as liquid, in accordance with
procedures established by the Board of Trustees, certain investments in
restricted securities for which there may be a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933, as amended (the "Securities Act") and commercial obligations issued in
reliance on the so-called "private placement" exemption from registration
afforded by Section 4(2) of the Securities Act ("Section 4(2) paper"). Rule
144A provides an exemption from the registration requirements of the Securities
Act for the resale of certain restricted securities to qualified institutional
buyers. Section 4(2) paper is restricted as to disposition under the federal
securities laws, and generally is sold to institutional investors such as a
Fund who agree that they are purchasing the paper for investment and not with a
view to public distribution. Any resale of Section 4(2) paper by the purchaser
must be in an exempt transaction.

One effect of Rule 144A and Section 4(2) is that certain restricted
securities may now be liquid, though there is no assurance that a liquid market
for Rule 144A securities or Section 4(2) paper will develop or be maintained.
The Trustees have adopted policies and procedures for the purpose of
determining whether securities that are eligible for resale under Rule 144A and
Section 4(2) paper are liquid or illiquid for purposes of the limitation on
investment in illiquid securities. Pursuant to those policies and procedures,
the Trustees have delegated to the advisers the determination as to whether a
particular instrument is liquid or illiquid, requiring that consideration be
given to, among other things, the frequency of trades and quotes for the
security, the number of dealers willing to sell the security and the number of
potential purchasers, dealer undertakings to make a market in the security, the
nature of the security and the time needed to dispose of the security. The
Trustees will periodically review the Funds' purchases and sales of Rule 144A
securities and Section 4(2) paper.

Stand-by Commitments. When a Fund purchases securities it may also acquire
stand-by commitments with respect to such securities. Under a stand-by
commitment, a bank, broker-dealer or other financial institution agrees to
purchase at a Fund's option a specified security at a specified price.

The stand-by commitments that may be entered into by the Funds are subject
to certain risks, which include the ability of the issuer of the commitment to
pay for the securities at the time the commitment is exercised, the fact that
the commitment is not marketable by a Fund, and that the maturity of the
underlying security will generally be different from that of the commitment.

Floating and Variable Rate Securities; Participation Certificates. Floating
and variable rate demand instruments permit the holder to demand payment upon a
specified number of days' notice of the unpaid principal balance plus accrued
interest either from the issuer or by drawing on a bank letter of credit, a
guarantee or insurance issued with respect to such instrument. Investments by
the Funds in floating or variable rate securities normally will involve
industrial development or revenue bonds that provide for a periodic

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<PAGE>

adjustment in the interest rate paid on the obligation and may, but need not,
permit the holder to demand payment as described above. While there is usually
no established secondary market for issues of these types of securities, the
dealer that sells an issue of such security frequently will also offer to
repurchase the securities at any time at a repurchase price which varies and
may be more or less than the amount the holder paid for them.

The terms of these types of securities provide that interest rates are
adjustable at intervals ranging from daily to up to six months and the
adjustments are based upon the prime rate of a bank or other short-term rates,
such as Treasury Bills or LIBOR (London Interbank Offered Rate), as provided in
the respective instruments. The Funds will decide which floating or variable
rate securities to purchase in accordance with procedures prescribed by Board
of Trustees of the Trust in order to minimize credit risks.

The securities in which the Funds may be invested include participation
certificates, issued by a bank, insurance company or other financial
institution, in securities owned by such institutions or affiliated
organizations ("Participation Certificates"). A Participation Certificate gives
a Fund an undivided interest in the security in the proportion that the Fund's
participation interest bears to the total principal amount of the security and
generally provides the demand feature described below. Each Participation
Certificate is backed by an irrevocable letter of credit or guaranty of a bank
(which may be the bank issuing the Participation Certificate, a bank issuing a
confirming letter of credit to that of the issuing bank, or a bank serving as
agent of the issuing bank with respect to the possible repurchase of the
certificate of participation) or insurance policy of an insurance company that
the Board of Trustees of the Trust has determined meets the prescribed quality
standards for a particular Fund.

A Fund may have the right to sell the Participation Certificate back to
the institution and draw on the letter of credit or insurance on demand after
the prescribed notice period, for all or any part of the full principal amount
of the Fund's participation interest in the security, plus accrued interest.
The institutions issuing the Participation Certificates would retain a service
and letter of credit fee and a fee for providing the demand feature, in an
amount equal to the excess of the interest paid on the instruments over the
negotiated yield at which the Participation Certificates were purchased by a
Fund. The total fees would generally range from 5% to 15% of the applicable
prime rate or other short-term rate index. With respect to insurance, a Fund
will attempt to have the issuer of the Participation Certificate bear the cost
of any such insurance, although the Funds retain the option to purchase
insurance if deemed appropriate. Obligations that have a demand feature
permitting a Fund to tender the obligation to a foreign bank may involve
certain risks associated with foreign investment. A Fund's ability to receive
payment in such circumstances under the demand feature from such foreign banks
may involve certain risks such as future political and economic developments,
the possible establishments of laws or restrictions that might adversely affect
the payment of the bank's obligations under the demand feature and the
difficulty of obtaining or enforcing a judgment against the bank.

The advisers have been instructed by the Board of Trustees to monitor on
an ongoing basis the pricing, quality and liquidity of the floating and
variable rate securities held by the Funds, including Participation
Certificates, on the basis of published financial information and reports of
the rating agencies and other bank analytical services to which the Funds may
subscribe. Although these instruments may be sold by a Fund, it is intended
that they be held until maturity. Participation Certificates will only be
purchased by a Fund if, in the opinion of counsel to the issuer, interest
income on such instruments will be tax-exempt when distributed as dividends to
shareholders of such Fund.

Past periods of high inflation, together with the fiscal measures adopted
to attempt to deal with it, have seen wide fluctuations in interest rates,
particularly "prime rates" charged by banks. While the value of the underlying
floating or variable rate securities may change with changes in interest rates
generally, the floating or variable rate nature of the underlying floating or
variable rate securities should minimize changes in value of the instruments.
Accordingly, as interest rates decrease or increase, the potential for capital
appre-

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<PAGE>

ciation and the risk of potential capital depreciation is less than would be
the case with a portfolio of fixed rate securities. A Fund's portfolio may
contain floating or variable rate securities on which stated minimum or maximum
rates, or maximum rates set by state law, limit the degree to which interest on
such floating or variable rate securities may fluctuate; to the extent it does,
increases or decreases in value may be somewhat greater than would be the case
without such limits. Because the adjustment of interest rates on the floating
or variable rate securities is made in relation to movements of the applicable
banks' "prime rates" or other short-term rate adjustment indices, the floating
or variable rate securities are not comparable to long-term fixed rate
securities. Accordingly, interest rates on the floating or variable rate
securities may be higher or lower than current market rates for fixed rate
obligations of comparable quality with similar maturities.

The maturity of variable rate securities is deemed to be the longer of (i)
the notice period required before a Fund is entitled to receive payment of the
principal amount of the security upon demand or (ii) the period remaining until
the security's next interest rate adjustment. If variable rate securities are
not redeemed through the demand feature, they mature on a specified date which
may range up to thirty years from the date of issuance.

Zero Coupon and Stripped Obligations. The principal and interest
components of United States Treasury bonds with remaining maturities of longer
than ten years are eligible to be traded independently under the Separate
Trading of Registered Interest and Principal of Securities ("STRIPS") program.
Under the STRIPS program, the principal and interest components are separately
issued by the United States Treasury at the request of depository financial
institutions, which then trade the component parts separately. The interest
component of STRIPS may be more volatile than that of United States Treasury
bills with comparable maturities.

Zero coupon obligations are sold at a substantial discount from their
value at maturity and, when held to maturity, their entire return, which
consists of the amortization of discount, comes from the difference between
their purchase price and maturity value. Because interest on a zero coupon
obligation is not distributed on a current basis, the obligation tends to be
subject to greater price fluctuations in response to changes in interest rates
than are ordinary interest-paying securities with similar maturities. The value
of zero coupon obligations appreciates more than such ordinary interest-paying
securities during periods of declining interest rates and depreciates more than
such ordinary interest-paying securities during periods of rising interest
rates. Under the stripped bond rules of the Internal Revenue Code of 1986, as
amended, investments in zero coupon obligations will result in the accrual of
interest income on such investments in advance of the receipt of the cash
corresponding to such income.

Zero coupon securities may be created when a dealer deposits a U.S.
Treasury or federal agency security with a custodian and then sells the coupon
payments and principal payment that will be generated by this security
separately. Proprietary receipts, such as Certificates of Accrual on Treasury
Securities, Treasury Investment Growth Receipts and generic Treasury Receipts,
are examples of stripped U.S. Treasury securities separated into their
component parts through such custodial arrangements.

Additional Policies Regarding Derivative and Related Transactions

Introduction. As explained more fully below, the Funds may employ
derivative and related instruments as tools in the management of portfolio
assets. Put briefly, a "derivative" instrument may be considered a security or
other instrument which derives its value from the value or performance of other
instruments or assets, interest or currency exchange rates, or indexes. For
instance, derivatives include futures, options, forward contracts, structured
notes and various other over-the-counter instruments.

Like other investment tools or techniques, the impact of using derivatives
strategies or similar instruments depends to a great extent on how they are
used. Derivatives are generally used by portfolio managers in three ways:
First, to reduce risk by hedging (offsetting) an investment position. Second,
to substitute for

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<PAGE>

another security particularly where it is quicker, easier and less expensive to
invest in derivatives. Lastly, to speculate or enhance portfolio performance.
When used prudently, derivatives can offer several benefits, including easier
and more effective hedging, lower transaction costs, quicker investment and
more profitable use of portfolio assets. However, derivatives also have the
potential to significantly magnify risks, thereby leading to potentially
greater losses for a Fund.

Each Fund may invest its assets in derivative and related instruments
subject only to the Fund's investment objective and policies and the
requirement that the Fund maintain segregated accounts consisting of liquid
assets, such as cash, U.S. Government securities, or other high-grade debt
obligations (or, as permitted by applicable regulation, enter into certain
offsetting positions) to cover its obligations under such instruments with
respect to positions where there is no underlying portfolio asset so as to
avoid leveraging the Fund.

The value of some derivative or similar instruments in which the Funds
invest may be particularly sensitive to changes in prevailing interest rates or
other economic factors, and--like other investments of the Funds-- the ability
of a Fund to successfully utilize these instruments may depend in part upon the
ability of the advisers to forecast interest rates and other economic factors
correctly. If the advisers accurately forecast such factors and have taken
positions in derivative or similar instruments contrary to prevailing market
trends, the Funds could be exposed to the risk of a loss. The Funds might not
employ any or all of the strategies described herein, and no assurance can be
given that any strategy used will succeed.

Set forth below is an explanation of the various derivatives strategies
and related instruments the Funds may employ along with risks or special
attributes associated with them. This discussion is intended to supplement the
Funds' current prospectuses as well as provide useful information to
prospective investors.

Risk Factors. As explained more fully below and in the discussions of
particular strategies or instruments, there are a number of risks associated
with the use of derivatives and related instruments. There can be no guarantee
that there will be a correlation between price movements in a hedging vehicle
and in the portfolio assets being hedged. An incorrect correlation could result
in a loss on both the hedged assets in a Fund and the hedging vehicle so that
the portfolio return might have been greater had hedging not been attempted.
The advisers may accurately forecast interest rates, market values or other
economic factors in utilizing a derivatives strategy. In such a case, the Fund
may have been in a better position had it not entered into such strategy.
Hedging strategies, while reducing risk of loss, can also reduce the
opportunity for gain. In other words, hedging usually limits both potential
losses as well as potential gains. Strategies not involving hedging may
increase the risk to a Fund. Certain strategies, such as yield enhancement, can
have speculative characteristics and may result in more risk to a Fund than
hedging strategies using the same instruments. There can be no assurance that a
liquid market will exist at a time when a Fund seeks to close out an option,
futures contract or other derivative or related position. Many exchanges and
boards of trade limit the amount of fluctuation permitted in option or futures
contract prices during a single day; once the daily limit has been reached on
particular contract, no trades may be made that day at a price beyond that
limit. In addition, certain instruments are relatively new and without a
significant trading history. As a result, there is no assurance that an active
secondary market will develop or continue to exist. Finally, over-the-counter
instruments typically do not have a liquid market. Lack of a liquid market for
any reason may prevent a Fund from liquidating an unfavorable position.
Activities of large traders in the futures and securities markets involving
arbitrage, "program trading," and other investment strategies may cause price
distortions in these markets. In certain instances, particularly those
involving over-the-counter transactions, forward contracts there is a greater
potential that a counterparty or broker may default or be unable to perform on
its commitments. In the event of such a default, a Fund may experience a loss.

Specific Uses and Strategies. Set forth below are explanations various
strategies involving derivatives and related instruments which may be used by
the Funds.

Options on Securities and Securities Indexes. The Funds may PURCHASE, SELL
or EXERCISE call and put options on (i) securities, (ii) securities indexes,
and (iii) debt instruments.

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<PAGE>

Although in most cases these options will be exchange-traded, the Funds
may also purchase, sell or exercise over-the-counter options. Over-the-counter
options differ from exchange-traded options in that they are two-party
contracts with price and other terms negotiated between buyer and seller. As
such, over-the-counter options generally have much less market liquidity and
carry the risk of default or nonperformance by the other party.

One purpose of purchasing put options is to protect holdings in an
underlying or related security against a substantial decline in market value.
One purpose of purchasing call options is to protect against substantial
increases in prices of securities a Fund intends to purchase pending its
ability to invest in such securities in an orderly manner. A Fund may also use
combinations of options to minimize costs, gain exposure to markets or take
advantage of price disparities or market movements. For example, a Fund may
sell put or call options it has previously purchased or purchase put or call
options it has previously sold. These transactions may result in a net gain or
loss depending on whether the amount realized on the sale is more or less than
the premium and other transaction costs paid on the put or call option which is
sold. A Fund may write a call or put option in order to earn the related
premium from such transactions. Prior to exercise or expiration, an option may
be closed out by an offsetting purchase or sale of a similar option.

In addition to the general risk factors noted above, the purchase and
writing of options involve certain special risks. During the option period, a
fund writing a covered call (i.e., where the underlying securities are held by
the fund) has, in return for the premium on the option, given up the
opportunity to profit from a price increase in the underlying securities above
the exercise price, but has retained the risk of loss should the price of the
underlying securities decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price. The
Funds will not write uncovered options.

If a put or call option purchased by a Fund is not sold when it has
remaining value, and if the market price of the underlying security, in the
case of a put, remains equal to or greater than the exercise price or, in the
case of a call, remains less than or equal to the exercise price, such Fund
will lose its entire investment in the option. Also, where a put or call option
on a particular security is purchased to hedge against price movements in a
related security, the price of the put or call option may move more or less
than the price of the related security. There can be no assurance that a liquid
market will exist when a Fund seeks to close out an option position.
Furthermore, if trading restrictions or suspensions are imposed on the options
markets, a Fund may be unable to close out a position.

Futures Contracts and Options on Futures Contracts. The Funds may purchase
or sell (i) interest-rate futures contracts, (ii) futures contracts on
specified instruments or indices, and (iii) options on these futures contracts
("futures options").

The futures contracts and futures options may be based on various
instruments or indices in which the Funds may invest such as foreign
currencies, certificates of deposit, Eurodollar time deposits, securities
indices, economic indices (such as the Consumer Price Indices compiled by the
U.S. Department of Labor).

Futures contracts and futures options may be used to hedge portfolio
positions and transactions as well as to gain exposure to markets. For example,
a Fund may sell a futures contract--or buy a futures option--to protect against
a decline in value, or reduce the duration, of portfolio holdings. Likewise,
these instruments may be used where a Fund intends to acquire an instrument or
enter into a position. For example, a Fund may purchase a futures contract--or
buy a futures option--to gain immediate exposure in a market or otherwise
offset increases in the purchase price of securities or currencies to be
acquired in the future. Futures options may also be written to earn the related
premiums.

When writing or purchasing options, the Funds may simultaneously enter
into other transactions involving futures contracts or futures options in order
to minimize costs, gain exposure to markets, or take advantage of price
disparities or market movements. Such strategies may entail additional risks in
certain

10
<PAGE>

instances. Funds may engage in cross-hedging by purchasing or selling futures
or options on a security different from the security position being hedged to
take advantage of relationships between the two securities.

Investments in futures contracts and options thereon involve risks similar
to those associated with options transactions discussed above. The Funds will
only enter into futures contracts or options on futures contracts which are
traded on a U.S. or foreign exchange or board of trade, or similar entity, or
quoted on an automated quotation system.

Forward Contracts. A Fund may also use forward contracts to hedge against
changes in interest-rates, increase exposure to a market or otherwise take
advantage of such changes. An interest-rate forward contract involves the
obligation to purchase or sell a specific debt instrument at a fixed price at a
future date.

Interest Rate Transactions. The Funds may employ interest rate management
techniques, including transactions in options (including yield curve options),
futures, options on futures, forward exchange contracts, and interest rate
swaps.

A Fund will only enter into interest rate swaps on a net basis, i.e., the
two payment streams are netted out, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. Interest rate swaps do
not involve the delivery of securities, other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate swaps is limited to
the net amount of interest payments that a Fund is contractually obligated to
make. If the other party to and interest rate swap defaults, a Fund's risk of
loss consists of the net amount of interest payments that the Fund is
contractually entitled to receive. Since interest rate swaps are individually
negotiated, each Fund expects to achieve an acceptable degree of correlation
between its portfolio investments and its interest rate swap position.

A Fund may enter into interest rate swaps to the maximum allowed limits
under applicable law. A Fund will typically use interest rate swaps to shorten
the effective duration of its portfolio. Interest rate swaps involve the
exchange by a Fund with another party of their respective commitments to pay or
receive interest, such as an exchange of fixed rate payments for floating rate
payments.

Structured Products. The Funds may invest in interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of certain debt obligations. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, or specified instruments (such as commercial bank loans) and the
issuance by that entity of one or more classes of securities ("structured
products") backed by, or representing interests in, the underlying instruments.
The cash flow on the underlying instruments may be apportioned among the newly
issued structured products to create securities with different investment
characteristics such as varying maturities, payment priorities and interest
rate provisions, and the extent of the payments made with respect to structured
products is dependent on the extent of the cash flow on the underlying
instruments. A Fund may invest in structured products which represent derived
investment positions based on relationships among different markets or asset
classes.

The Funds may also invest in other types of structured products,
including, among others, inverse floaters, spread trades and notes linked by a
formula to the price of an underlying instrument. Inverse floaters have coupon
rates that vary inversely at a multiple of a designated floating rate (which
typically is determined by reference to an index rate, but may also be
determined through a dutch auction or a remarketing agent or by reference to
another security) (the "reference rate"). As an example, inverse floaters may
constitute a class of CMOs with a coupon rate that moves inversely to a
designated index, such as LIBOR (London Interbank Offered Rate) or the cost of
Funds Index. Any rise in the reference rate of an inverse floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an inverse floater causes an increase
in the coupon rate. A spread trade is an investment position relating to a
difference in the prices or interest rates of two securities where the value of
the investment position is determined by movements in the difference between
the prices or interest rates, as the case may be, of the respective securities.
When a Fund invests in notes linked to the price of an underlying instru-

11
<PAGE>

ment, the price of the underlying security is determined by a multiple (based
on a formula) of the price of such underlying security. A structured product
may be considered to be leveraged to the extent its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. Because they are linked to their underlying markets or securities,
investments in structured products generally are subject to greater volatility
than an investment directly in the underlying market or security. Total return
on the structured product is derived by linking return to one or more
characteristics of the underlying instrument. Because certain structured
products of the type in which the Fund anticipates it will invest may involve
no credit enhancement, the credit risk of those structured products generally
would be equivalent to that of the underlying instruments. A Fund is permitted
to invest in a class of structured products that is either subordinated or
unsubordinated to the right of payment of another class. Subordinated
structured products typically have higher yields and present greater risks than
unsubordinated structured products. Although a Fund's purchase of subordinated
structured products would have similar economic effect to that of borrowing
against the underlying securities, the purchase will not be deemed to be
leverage for purposes of a Fund's fundamental investment limitation related to
borrowing and leverage.

Certain issuers of structured products may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, a Fund's investments in
these structured products may be limited by the restrictions contained in the
1940 Act. Structured products are typically sold in private placement
transactions, and there currently is no active trading market for structured
products. As a result, certain structured products in which the Income Funds
invest may be deemed illiquid and subject to their limitation on illiquid
investments.

Investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security. In
addition, because structured products are typically sold in private placement
transactions, there currently is no active trading market for structured
products.

Additional Restrictions on the Use of Futures and Option Contracts. None
of the Funds is a "commodity pool" (i.e., a pooled investment vehicle which
trades in commodity futures contracts and options thereon and the operator of
which is registered with the CFTC) and futures contracts and futures options
will be purchased, sold or entered into only for bona fide hedging purposes,
provided that a Fund may enter into such transactions for purposes other than
bona fide hedging if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open contracts and options would not exceed 5%
of the liquidation value of the Fund's portfolio, provided, further, that, in
the case of an option that is in-the-money, the in-the-money amount may be
excluded in calculating the 5% limitation.

When a Fund purchases a futures contract, an amount of cash or liquid
securities will be deposited in a segregated account with such Fund's custodian
so that the amount so segregated, plus the initial deposit and variation margin
held in the account of its broker, will at all times equal the value of the
futures contract, thereby insuring that the use of such futures is unleveraged.

The Funds' ability to engage in the transactions described herein may be
limited by the current federal income tax requirement that a Fund derive less
than 30% of its gross income from the sale or other disposition of securities
held for less than three months.

In addition to the foregoing requirements, the Board of Trustees has
adopted an additional restriction on the use of futures contracts and options
thereon, requiring that the aggregate market value of the futures contracts
held by a Fund not exceed 50% of the market value of its total assets. Neither
this restriction nor any policy with respect to the above-referenced
restrictions, would be changed by the Board of Trustees without considering the
policies and concerns of the various federal and state regulatory agencies.

12
<PAGE>

Investment Restrictions

The Funds have adopted the following investment restrictions which may not
be changed without approval by a "majority of the outstanding shares" of a Fund
which, as used in this Statement of Additional Information, means the vote of
the lesser of (i) 67% or more of the shares of a Fund present at a meeting, if
the holders of more than 50% of the outstanding shares of a Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of a
Fund.

Each Fund may not:

(1) borrow money, except that each Fund may borrow money for
temporary or emergency purposes, or by engaging in reverse repurchase
transactions, in an amount not exceeding 33 1/3% of the value of its total
assets at the time when the loan is made and may pledge, mortgage or
hypothecate no more than 1/3 of its net assets to secure such borrowings.
Any borrowings representing more than 5% of a Fund's total assets must be
repaid before the Fund may make additional investments;

(2) make loans, except that each Fund may: (i) purchase and hold debt
instruments (including without limitation, bonds, notes, debentures or
other obligations and certificates of deposit, bankers' acceptances and
fixed time deposits) in accordance with its investment objectives and
policies; (ii) enter into repurchase agreements with respect to portfolio
securities; and (iii) lend portfolio securities with a value not in excess
of one-third of the value of its total assets;

(3) 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 repurchase agreements secured thereby) 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. Notwithstanding the foregoing, with respect to a Fund's
permissible futures and options transactions in U.S. Government
securities, positions in options and futures shall not be subject to this
restriction;

(4) purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments but this shall not prevent
a Fund from (i) purchasing or selling options and futures contracts or
from investing in securities or other instruments backed by physical
commodities or (ii) engaging in forward purchases or sales of foreign
currencies or securities;

(5) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent a
Fund from investing in securities or other instruments backed by real
estate or securities of companies engaged in the real estate business).
Investments by a Fund in securities backed by mortgages on real estate or
in marketable securities of companies engaged in such activities are not
hereby precluded;

(6) issue any senior security (as defined in the 1940 Act), except
that (a) a Fund may engage in transactions that may result in the issuance
of senior securities to the extent permitted under applicable regulations
and interpretations of the 1940 Act or an exemptive order; (b) a Fund may
acquire other securities, the acquisition of which may result in the
issuance of a senior security, to the extent permitted under applicable
regulations or interpretations of the 1940 Act; and (c) subject to the
restrictions set forth above, a Fund may borrow money as authorized by the
1940 Act. For purposes of this restriction, collateral arrangements with
respect to a Fund's permissible options and futures transactions,
including deposits of initial and variation margin, are not considered to
be the issuance of a senior security; or

(7) underwrite securities issued by other persons except insofar as a
Fund may technically be deemed to be an underwriter under the Securities
Act of 1933 in selling a portfolio security.

13
<PAGE>

In addition, as a matter of fundamental policy, notwithstanding any other
investment policy or restriction, a Fund may seek to achieve its investment
objective by investing all of its investable assets in another investment
company having substantially the same investment objective and policies as the
Fund. For purposes of investment restriction (5) above, real estate includes
Real Estate Limited Partnerships. For purposes of investment restriction (3)
above, industrial development bonds, where the payment of principal and
interest is the ultimate responsibility of companies within the same industry,
are grouped together as an "industry." Investment restriction (3) above,
however, is not applicable to investments by a Fund in municipal obligations
where the issuer is regarded as a state, city, municipality or other public
authority since such entities are not members of any "industry."

In addition, each Fund is subject to the following nonfundamental
investment restrictions which may be changed without shareholder approval:

(1) Each Fund may not, with respect to 50% of its assets, hold more
than 10% of the outstanding voting securities of any issuer.

(2) Each Fund may not make short sales of securities, other than
short sales "against the box," or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions,
provided that this restriction will not be applied to limit the use of
options, futures contracts and related options, in the manner otherwise
permitted by the investment restrictions, policies and investment program
of a Fund. The Funds have no current intention of making short sales
against the box.

(3) Each Fund may not purchase or sell interests in oil, gas or
mineral leases.

(4) Each Fund may not invest more than 15% of its net assets in
illiquid securities.

(5) Each Fund may not write, purchase or sell any put or call option
or any combination thereof, provided that this shall not prevent (i) the
writing, purchasing or selling of puts, calls or combinations thereof with
respect to portfolio securities or (ii) with respect to a Fund's
permissible futures and options transactions, the writing, purchasing,
ownership, holding or selling of futures and options positions or of puts,
calls or combinations thereof with respect to futures.

(6) Each Fund may invest up to 5% of its total assets in the
securities of any one investment company, but may not own more than 3% of
the securities of any one investment company or invest more than 10% of
its total assets in the securities of other investment companies.

For purposes of the Funds' investment restrictions, the issuer of a
tax-exempt security is deemed to be the entity (public or private)
ultimately responsible for the payment of the principal of and interest on
the security.

In order to permit the sale of its shares in certain states, a Fund
may make commitments more restrictive that the investment policies and
limitations described above and in its Prospectus. Should a Fund determine
that any such commitment is no longer in its best interests, it will
revoke the commitment by terminating sales of its shares in the state
involved.

If a percentage or rating restriction on investment or use of assets
set forth herein or in a Prospectus is adhered to at the time, later
changes in percentage or ratings resulting from any cause other than
actions by a Fund will not be considered a violation. If the value of a
Fund's holdings of illiquid securities at any time exceeds the percentage
limitation applicable at the time of acquisition due to subsequent
fluctuations in value or other reasons, the Board of Trustees will
consider what actions, if any, are appropriate to maintain adequate
liquidity.

Portfolio Transactions and Brokerage Allocation

Specific decisions to purchase or sell securities for a Fund are made by a
portfolio manager who is an employee of the adviser or sub-adviser to such Fund
and who is appointed and supervised by senior officers of such adviser or
sub-adviser. Changes in the Funds' investments are reviewed by the Board of
Trustees.

14
<PAGE>

The Funds' portfolio managers may serve other clients of the advisers in a
similar capacity. Money market instruments are generally purchased in principal
transactions.

The frequency of a Fund's portfolio transactions--the portfolio turnover
rate--will vary from year to year depending upon market conditions. Because a
high turnover rate may increase transaction costs and the possibility of
taxable short-term gains, the advisers will weigh the added costs of short-term
investment against anticipated gains. Each Fund will engage in portfolio
trading if its advisers believe a transaction, net of costs (including
custodian charges), will help it achieve its investment objective.

For the fiscal year ended August 31, 1997, the portfolio turnover rate for
the Intermediate Tax Free Income Fund, Tax Free Income Fund, New York
Intermediate Tax Free Income Fund and New Jersey Tax Free Income Fund was 60%,
48%, 32% and 14%, respectively. For the fiscal year ended August 31, 1998, the
portfolio turnover rate for such Funds was 71%, 47%, 66% and 60%, respectively.
For the fiscal year ended August 31, 1999, the portfolio turnover rate for such
Funds was 62%, 39%, 39% and 24%, respectively.

Under the advisory agreement and the sub-advisory agreements, the adviser
and sub-advisers shall use their best efforts to seek to execute portfolio
transactions at prices which, under the circumstances, result in total costs or
proceeds being the most favorable to the Funds. In assessing the best overall
terms available for any transaction, the adviser and sub-advisers consider all
factors they deem relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer, research services provided to the adviser
or sub-advisers, and the reasonableness of the commissions, if any, both for
the specific transaction and on a continuing basis. The adviser and sub-advisers
are not required to obtain the lowest commission or the best net price for any
Fund on any particular transaction, and are not required to execute any order
in a fashion either preferential to any Fund relative to other accounts they
manage or otherwise materially adverse to such other accounts.

Debt securities are traded principally in the over-the-counter market
through dealers acting on their own account and not as brokers. In the case of
securities traded in the over-the-counter market (where no stated commissions
are paid but the prices include a dealer's markup or markdown), the adviser or
sub-adviser to a Fund normally seeks to deal directly with the primary market
makers unless, in its opinion, best execution is available elsewhere. In the
case of securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. From time to
time, soliciting dealer fees are available to the adviser or sub-adviser on the
tender of a Fund's portfolio securities in so-called tender or exchange offers.
Such soliciting dealer fees are in effect recaptured for the Funds by the
adviser and sub-advisers. At present, no other recapture arrangements are in
effect.

Under the advisory and sub-advisory agreements and as permitted by Section
28(e) of the Securities Exchange Act of 1934, the adviser or sub-advisers may
cause the Funds to pay a broker-dealer which provides brokerage and research
services to the adviser or sub-advisers, the Funds and/or other accounts for
which they exercise investment discretion an amount of commission for effecting
a securities transaction for the Funds in excess of the amount other
broker-dealers would have charged for the transaction if they determine in good
faith that the total commission is reasonable in relation to the value of the
brokerage and research services provided by the executing broker-dealer viewed
in terms of either that particular transaction or their overall
responsibilities to accounts over which they exercise investment discretion.
Not all of such services are useful or of value in advising the Funds. The
adviser and sub-advisers report to the Board of Trustees regarding overall
commissions paid by the Funds and their reasonableness in relation to the
benefits to the Funds. The term "brokerage and research services" includes
advice as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or of
purchasers or sellers of securities, furnishing analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts, and effecting securities transactions and
performing functions incidental thereto such as clearance and settlement.

15
<PAGE>

The management fees that the Funds pay to the adviser will not be reduced
as a consequence of the adviser's or sub-advisers' receipt of brokerage and
research services. To the extent the Funds' portfolio transactions are used to
obtain such services, the brokerage commissions paid by the Funds will exceed
those that might otherwise be paid by an amount which cannot be presently
determined. Such services would be useful and of value to the adviser or
sub-advisers in serving one or more of their other clients and, conversely,
such services obtained by the placement of brokerage business of other clients
would be useful to the adviser and sub-advisers in carrying out their
obligations to the Funds. While such services are not expected to reduce the
expenses of the adviser or sub-advisers, they would, through use of the
services, avoid the additional expenses which would be incurred if they should
attempt to develop comparable information through their own staff.

In certain instances, there may be securities that are suitable for one or
more of the Funds as well as one or more of the adviser's or sub-advisers'
other clients. Investment decisions for the Funds and for other clients are
made with a view to achieving their respective investment objectives. It may
develop that the same investment decision is made for more than one client or
that a particular security is bought or sold for only one client even though it
might be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives
of more than one client. In executing portfolio transactions for a Fund, the
adviser or sub-advisers may, to the extent permitted by applicable laws and
regulations, but shall not be obligated to, aggregate the securities to be sold
or purchased with those of other Funds or their other clients if, in the
adviser's or sub-advisers' reasonable judgment, such aggregation (i) will
result in an overall economic benefit to the Fund, taking into consideration
the advantageous selling or purchase price, brokerage commission and other
expenses, and trading requirements, and (ii) is not inconsistent with the
policies set forth in the Trust's registration statement and the Fund's
Prospectus and Statement of Additional Information. In such event, the adviser
or a sub-adviser will allocate the securities so purchased or sold, and the
expenses incurred in the transaction, in an equitable manner, consistent with
its fiduciary obligations to the Fund and such other clients. It is recognized
that in some cases this system could have a detrimental effect on the price or
volume of the security as far as a Fund is concerned. However, it is believed
that the ability of the Funds to participate in volume transactions will
generally produce better executions for the Funds.

PERFORMANCE INFORMATION

From time to time, a Fund may use hypothetical investment examples and
performance information in advertisements, shareholder reports or other
communications to shareholders. Because such performance information is based
on past investment results, it should not be considered as an indication or
representation of the performance of a Fund in the future. From time to time,
the performance and yield of a Fund may be quoted and compared to those of
other mutual funds with similar investment objectives, unmanaged investment
accounts, including savings accounts, or other similar products and to stock or
other relevant indices or to rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual
funds. For example, the performance of a Fund may be compared to data prepared
by Lipper Analytical Services, Inc. or Morningstar Mutual Funds on Disc, widely
recognized independent services which monitor the performance of mutual funds.
Performance and yield data as reported in national financial publications
including, but not limited to, Money Magazine, Forbes, Barron's, The Wall
Street Journal and The New York Times, or in local or regional publications,
may also be used in comparing the performance and yield of a Fund. A Fund's
performance may be compared with indices such as the Lehman Brothers
Government/Corporate Bond Index, the Lehman Brothers Government Bond Index, the
Lehman Government Bond 1-3 Year Index and the Lehman Aggregate Bond Index; the
S&P 500 Index, the Dow Jones Industrial Average or any other commonly quoted
index of common stock prices; and the Russell 2000 Index and the NASDAQ
Composite Index. Additionally, a Fund may, with proper authorization, reprint
articles written about such Fund and provide them to prospective shareholders.

16
<PAGE>

A Fund may provide period and average annual "total rates of return." The
"total rate of return" refers to the change in the value of an investment in a
Fund over a period (which period shall be stated in any advertisement or
communication with a shareholder) based on any change in net asset value per
share including the value of any shares purchased through the reinvestment of
any dividends or capital gains distributions declared during such period. One-,
five-, and ten-year periods will be shown, unless the Fund has been in
existence for a shorter-period.

Unlike some bank deposits or other investments which pay a fixed yield for
a stated period of time, the yields and the net asset values of shares of a
Fund will vary based on market conditions, the current market value of the
securities held by a Fund and changes in the Fund's expenses. The advisers, the
Administrator, the Distributor and other service providers may voluntarily
waive a portion of their fees on a month-to-month basis. In addition, the
Distributor may assume a portion of a Fund's operating expenses on a month-to-
month basis. These actions would have the effect of increasing the net income
(and therefore the yield and total rate of return) of shares of a Fund during
the period such waivers are in effect. These factors and possible differences
in the methods used to calculate the yields and total rates of return should be
considered when comparing the yields or total rates of return of shares of a
Fund to yields and total rates of return published for other investment
companies and other investment vehicles.

In connection with the conversion of various common trust funds maintained
by Chase into the Vista Select funds (the "CTF Conversion"), which occurred on
December 31, 1997, the Intermediate Tax Free Income Fund was established to
receive the assets of The Intermediate-Term Tax-Exempt Bond Fund of Chemical
Bank, the New Jersey Tax Free Income Fund was established to receive the assets
of The New Jersey Municipal Bond Fund of Chemical Bank, the New York
Intermediate Tax Free Income Fund was established to receive the assets of the
New York Tax-Exempt Income Fund of The Chase Manhattan Bank and the Tax Free
Income Fund was established to receive the assets of The Tax-Exempt Bond Fund
of Chemical Bank and the Tax-Exempt Income Fund of The Chase Manhattan Bank.

Performance results presented for the Intermediate Tax Free Income Fund,
New Jersey Tax Free Income Fund, New York Intermediate Tax Free Income Fund and
Tax Free Income Fund will be based upon the performance of The
Intermediate-Term Tax-Exempt Bond Fund of Chemical Bank, The New Jersey
Municipal Bond Fund of Chemical Bank, the New York Tax-Exempt Income Fund of
The Chase Manhattan Bank and The Tax-Exempt Bond Fund of Chemical Bank,
respectively, for periods prior to the consummation of the CTF Conversion.

Advertising or communications to shareholders may contain the views of the
advisers as to current market, economic, trade and interest rate trends, as
well as legislative, regulatory and monetary developments, and may include
investment strategies and related matters believed to be of relevance to a
Fund.

Advertisements for the Vista funds may include references to the asset
size of other financial products made available by Chase, such as the offshore
assets of other funds.

Total Rate of Return

A Fund's total rate of return for any period will be calculated by (a)
dividing (i) the sum of the net asset value per share on the last day of the
period and the net asset value per share on the last day of the period of
shares purchasable with dividends and capital gains declared during such period
with respect to a share held at the beginning of such period and with respect
to shares purchased with such dividends and capital gains distributions, by
(ii) the public offering price per share on the first day of such period, and
(b) subtracting 1 from the result. The average annual rate of return quotation
will be calculated by (x) adding 1 to the period total rate of return quotation
as calculated above, (y) raising such sum to a power which is equal to 365
divided by the number of days in such period, and (z) subtracting 1 from the
result.

The average annual total rate of return figures for the following Funds,
reflecting the initial investment and assuming the reinvestment of all
distributions (but excluding the effects of any applicable sales charges) for,
where applicable, the one, five and ten year periods ended August 31, 1999,
and, for the New Jersey

17
<PAGE>

Tax Free Income Fund, for the period from commencement of business operations
of such Fund to August 31, 1999, were as follows:

<TABLE>
<CAPTION>
One Five Ten Since Date of
Fund Year Years Years Inception Inception
- ---- ---- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
Intermediate Tax Free Income Fund 1.15% 5.84% 6.98% N/A N/A
New Jersey Tax Free Income Fund 0.37% 5.10% N/A 6.04% 05/01/90
New York Intermediate Tax Free Income Fund 0.38% 5.54% 6.72% N/A N/A
Tax Free Income Fund -0.63% 5.80% 6.89% N/A N/A
</TABLE>

- ----------
Performance presented in the table above and in each table that follows
includes the performance of their respective predecessor funds for periods
prior to the consummation of the CTF Reorganization. Performance presented for
each of these Funds for periods prior to the consummation of the CTF
Reorganization is based on the historical performance of shares of its
predecessor fund, adjusted to reflect historical expenses at the levels
projected (absent reimbursements) for that Fund at the time of the CTF
Reorganization.

The Funds may also from time to time include in advertisements or other
communications a total return figure that is not calculated according to the
formula set forth above in order to compare more accurately the performance of
a Fund with other measures of investment return.

Yield Quotations

Any current "yield" quotation for a class of shares of a Fund shall
consist of an annualized hypothetical yield, carried at least to the nearest
hundredth of one percent, based on a thirty calendar day period and shall be
calculated by (a) raising to the sixth power the sum of 1 plus the quotient
obtained by dividing the Fund's net investment income earned during the period
by the product of the average daily number of shares outstanding during the
period that were entitled to receive dividends and the maximum offering price
per share on the last day of the period, (b) subtracting 1 from the result, and
(c) multiplying the result by 2.

Any taxable equivalent yield quotation of shares of a Fund shall be
calculated as follows. If the entire current yield quotation for such period is
tax-exempt, the tax equivalent yield will be the current yield quotation (as
determined in accordance with the appropriate calculation described above)
divided by 1 minus a stated income tax rate or rates. If a portion of the
current yield quotation is not tax-exempt, the tax equivalent yield will be the
sum of (a) that portion of the yield which is tax-exempt divided by 1 minus a
stated income tax rate or rates and (b) the portion of the yield which is not
tax-exempt.

<TABLE>
<CAPTION>
Thirty-Day Tax Equivalent
Yield Thirty-Day Yield
as of 8/31/99 as of 8/31/99
------------- -------------
<S> <C> <C>
Intermediate Tax Free Income Fund 4.86% 8.05%
New Jersey Tax Free Income Fund 4.75% 8.40%
New York Intermediate Tax Free Income Fund 4.70% 8.77%
Tax Free Income Fund 5.17% 8.56%
</TABLE>

The tax equivalent yields assume a federal income tax rate of 39.6% for
the Intermediate Tax Free Income Fund and Tax Free Income Fund, a combined New
York State, New York City and federal income tax rate of 46.43% for the New
York Intermediate Tax Free Income Fund and a combined New Jersey State and
federal income tax rate of 43.45% for the New Jersey Tax Free Income Fund.

Non-Standardized Performance Results

The table below reflects the net change in the value of an assumed initial
investment of $10,000 in the Funds (including the predecessor common trust
funds) for the ten-year period ending August 31, 1999, or, in the case of the
New Jersey Tax Free Income Fund, from the commencement of operation of the
predecessor

18
<PAGE>

common trust fund on May 1, 1990. The values reflect an assumption that capital
gain distributions and income dividends, if any, have been invested in
additional shares of the same class. From time to time, the Funds may provide
these performance results in addition to the total rate of return quotations
required by the Securities and Exchange Commission. As discussed more fully in
the Prospectuses, neither these performance results, nor total rate of return
quotations, should be considered as representative of the performance of the
Funds in the future. These factors and the possible differences in the methods
used to calculate performance results and total rates of return should be
considered when comparing such performance results and total rate of return
quotations of the Funds with those published for other investment companies and
other investment vehicles.

<TABLE>
<CAPTION>
Period Ended Total
August 31, 1999 Value
--------------- -----
<S> <C>
Intermediate Tax Free Income Fund $19,650
New Jersey Tax Free Income Fund $17,214
New York Intermediate Tax Free Income Fund $19,161
Tax Free Income Fund $19,485
</TABLE>

Certain Information Regarding Unrealized Appreciation

Because each Fund is the successor to one or more common trust funds, the
assets of which it acquired on a tax-free basis at the time the Fund commenced
operations, a Fund's portfolio may include net unrealized appreciation
comparable to that of a mutual fund which has been in existence for the life of
the predecessor common trust fund or funds. As of August 31, 1999 each Fund's
pro forma net unrealized appreciation, and the percentage of each Fund's pro
forma net assets that this appreciation represents, in each case unaudited,
would be as follows:

<TABLE>
<CAPTION>
Percentage
Unrealized of Net
Gain Assets
------------ -----------
<S> <C> <C>
Intermediate Tax Free Income Fund $5,868,954 0.80%
New Jersey Tax Free Income Fund 277,941 0.41
New York Intermediate Tax Free Income Fund 450,137 0.15
Tax Free Income Fund 1,479,703 0.20
</TABLE>

DETERMINATION OF NET ASSET VALUE

As of the date of this Statement of Additional Information, the New York
Stock Exchange is open for trading every weekday except for the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. In addition to
the days listed above (other than Good Friday), Chase is closed for business on
the following holidays: Martin Luther King Day, Columbus Day and Veteran's Day.

Bonds and other fixed income securities (other than short-term
obligations) in a Fund's portfolio are valued on the basis of valuations
furnished by a pricing service, the use of which has been approved by the Board
of Trustees. In making such valuations, the pricing service utilizes both
dealer-supplied valuations and electronic data processing techniques that take
into account appropriate factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
quoted prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities. Short-
term obligations which mature in 60 days or less are valued at amortized cost,
which constitutes fair value as determined by the Board of Trustees. Futures
and option contracts that are traded on commodities or securities exchanges are
normally valued at the settlement price on the exchange on which they are
traded. Portfolio securities (other than short-term obligations) for which
there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.

19
<PAGE>

Interest income on long-term obligations in a Fund's portfolio is
determined on the basis of coupon interest accrued plus amortization of
discount (the difference between acquisition price and stated redemption price
at maturity) and premiums (the excess of purchase price over stated redemption
price at maturity). Interest income on short-term obligations is determined on
the basis of interest and discount accrued less amortization of premium.

PURCHASES AND REDEMPTIONS

The Fund has established certain procedures and restrictions, subject to
change from time to time, for purchase, redemption, and exchange orders,
including procedures for accepting telephone instructions and effecting
automatic investments and redemptions. The Funds' Transfer Agent may defer
acting on a financial institution's instructions until it has received them in
proper form. In addition, the privileges described in the Prospectuses are not
available until a completed and signed account application has been received by
the Transfer Agent.

Subject to compliance with applicable regulations, each Fund has reserved
the right to pay the redemption price of its Shares, either totally or
partially, by a distribution in kind of readily marketable portfolio securities
(instead of cash). The securities so distributed would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder received a distribution in kind, the
shareholder could incur brokerage or other charges in converting the securities
to cash. The Trust has filed an election under Rule 18f-1 committing to pay in
cash all redemptions by a shareholder of record up to amounts specified by the
rule (approximately $250,000).

TAX MATTERS

The following is only a summary of certain additional tax considerations
generally affecting the Funds and their shareholders that are not described in
the respective Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Funds or their shareholders, and the
discussions here and in each Fund's Prospectus are not intended as substitutes
for careful tax planning.

Qualification as a Regulated Investment Company

Each Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As
a regulated investment company, each Fund is not subject to federal income tax
on the portion of its net investment income (i.e., its investment company
taxable income, as that term is defined in the Code, without regard to the
deduction for dividends paid), and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) that it distributes to
shareholders, provided that it distributes at least 90% of its net investment
income and at least 90% of its tax-exempt income (net of expenses allocable
thereto) for the taxable year (the "Distribution Requirement"), and satisfies
certain other requirements of the Code that are described below. Under the
current view of the Internal Revenue Service, if a Fund invests all of its
assets in another open-end management investment company which is classified as
a partnership for federal income tax purposes, such Fund will be deemed to own
a proportionate share of the income of the portfolio into which it contributes
all of its assets for purposes of determining whether such Fund satisfies the
Distribution Requirement and the other requirements necessary to qualify as a
regulated investment company (e.g., Income Requirement (hereinafter defined),
etc.).

In addition to satisfying the Distribution Requirement, a regulated
investment company must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the
sale or other disposition of stock or securities or foreign currencies (to the
extent such currency gains are directly related to the regulated investment
company's principal business of investing in stock or securities) and other
income (including but not limited to gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "Income Requirement").

20
<PAGE>

In addition to satisfying the requirements described above, each Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of a Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in securities
of such issuer and as to which the Fund does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses.

Each Fund may engage in hedging or derivatives transactions involving
foreign currencies, forward contracts, options and futures contracts (including
options, futures and forward contracts on foreign currencies) and short sales.
See "Additional Policies Regarding Derivative and Related Transactions." Such
transactions will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Fund (that
is, may affect whether gains or losses are ordinary or capital), accelerate
recognition of income of the Fund and defer recognition of certain of the Fund's
losses. These rules could therefore affect the character, amount and timing of
distributions to shareholders. In addition, these provisions (1) will require a
Fund to "mark-to-market" certain types of positions in its portfolio (that is,
treat them as if they were closed out) and (2) may cause a Fund to recognize
income without receiving cash with which to pay dividends or make distributions
in amounts necessary to satisfy the Distribution Requirement and avoid the 4%
excise tax (described below). Each Fund intends to monitor its transactions,
will make the appropriate tax elections and will make the appropriate entries in
its books and records when it acquires any option, futures contract, forward
contract or hedged investment in order to mitigate the effect of these rules.

If for any taxable year a Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.

Excise Tax on Regulated Investment Companies

A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")) (Tax-exempt
interest on municipal obligations is not subject to the excise tax). The balance
of such income must be distributed during the next calendar year. For the
foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.

Each Fund intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax. However, investors
should note that a Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.

Fund Distributions

Each Fund anticipates distributing substantially all of its net investment
income for each taxable year. Such distributions will be taxable to shareholders
as ordinary income and treated as dividends for federal income tax purposes, but
they will not qualify for the 70% dividends-received deduction for corporate
shareholders of a Fund.

21
<PAGE>

A Fund may either retain or distribute to shareholders its net capital gain
for each taxable year. Each Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his shares or whether
such gain was recognized by the Fund prior to the date on which the shareholder
acquired his shares.

Under recently enacted legislation, the maximum rate of tax on long-term
capital gains of individuals will generally be reduced from 28% to 20% (10% for
gains otherwise taxed at 15%) for long-term capital gains realized after July
28, 1997. Additionally, beginning after December 31, 2000, the maximum tax rate
for capital assets with a holding period beginning after that date and held for
more than five years will be 18%. Under a literal reading of the legislation,
capital gain dividends paid by a regulated investment company would not appear
eligible for the reduced capital gain rates. However, the legislation authorizes
the Treasury Department to promulgate regulations that would apply the new rates
to capital gain dividends paid by a regulated investment company.

Conversely, if a Fund elects to retain its net capital gain, the Fund will
be taxed thereon (except to the extent of any available capital loss carryovers)
at the 35% corporate tax rate. If a Fund elects to retain its net capital gain,
it is expected that the Fund also will elect to have shareholders of record on
the last day of its taxable year treated as if each received a distribution of
his pro rata share of such gain, with the result that each shareholder will be
required to report his pro rata share of such gain on his tax return as
long-term capital gain, will receive a refundable tax credit for his pro rata
share of tax paid by the Fund on the gain, and will increase the tax basis for
his shares by an amount equal to the deemed distribution less the tax credit.

Each Fund intends to qualify to pay exempt-interest dividends by satisfying
the requirement that at the close of each quarter of the Fund's taxable year at
least 50% of the its total assets consists of tax-exempt municipal obligations.
Distributions from a Fund will constitute exempt-interest dividends to the
extent of its tax-exempt interest income (net of expenses and amortized bond
premium). Exempt-interest dividends distributed to shareholders of a Fund are
excluded from gross income for federal income tax purposes. However,
shareholders required to file a federal income tax return will be required to
report the receipt of exempt-interest dividends on their returns. Moreover,
while exempt-interest dividends are excluded from gross income for federal
income tax purposes, they may be subject to alternative minimum tax ("AMT") in
certain circumstances and may have other collateral tax consequences as
discussed below. Distributions by a Fund of any investment company taxable
income or of any net capital gain will be taxable to shareholders as discussed
above.

AMT is imposed in addition to, but only to the extent it exceeds, the
regular tax and is computed at a maximum marginal rate of 28% for noncorporate
taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income ("AMTI") over an exemption amount. In
addition, under the Superfund Amendments and Reauthorization Act of 1986, a tax
is imposed for taxable years beginning after 1986 and before 1996 at the rate of
0.12% on the excess of a corporate taxpayer's AMTI (determined without regard to
the deduction for this tax and the AMT net operating loss deduction) over $2
million. 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. In addition, exempt-interest dividends derived from all municipal
obligations, regardless of the date of issue, must be included in adjusted
current earnings, which are used in computing an additional corporate preference
item (i.e., 75% of the excess of a corporate taxpayer's adjusted current
earnings over its AMTI (determined without regard to this item and the AMT net
operating loss deduction)) includable in AMTI.

Exempt-interest dividends must be taken into account in computing the
portion, if any, of social security or railroad retirement benefits that must
be included in an individual shareholder's gross income and subject to federal
income tax. Further, a shareholder of a Fund is denied a deduction for interest
on indebt-

22
<PAGE>

edness incurred or continued to purchase or carry shares of the Fund. Moreover,
a shareholder who is (or is related to) a "substantial user" of a facility
financed by industrial development bonds held by a Fund will likely be subject
to tax on dividends paid by the Fund which are derived from interest on such
bonds. Receipt of exempt-interest dividends may result in other collateral
federal income tax consequences to certain taxpayers, including financial
institutions, property and casualty insurance companies and foreign
corporations engaged in a trade or business in the United States. Prospective
investors should consult their own tax advisers as to such consequences.

Distributions by a Fund that do not constitute ordinary income dividends,
exempt-interest dividends or capital gain dividends will be treated as a return
of capital to the extent of (and in reduction of) the shareholder's tax basis
in his shares; any excess will be treated as gain from the sale of his shares,
as discussed below.

Distributions by a Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares
received, determined as of the reinvestment date. In addition, if the net asset
value at the time a shareholder purchases shares of a Fund reflects
undistributed net investment income or recognized capital gain net income, or
unrealized appreciation in the value of the assets of the Fund, distributions
of such amounts will be taxable to the shareholder in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.

Ordinarily, shareholders are required to take distributions by a Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.

A Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has provided
either an incorrect tax identification number or no number at all, (2) who is
subject to backup withholding by the IRS for failure to report the receipt of
interest or dividend income properly, or (3) who has failed to certify to the
Fund that it is not subject to backup withholding or that it is a corporation
or other "exempt recipient."

Sale or Redemption of Shares

A shareholder will recognize gain or loss on the sale or redemption of
shares of a Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Fund within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of a Fund will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be disallowed to the
extent of the amount of exempt-interest dividends received on such shares and
(to the extent not disallowed) will be treated as a long-term capital loss to
the extent of the amount of capital gain dividends received on such shares.

Foreign Shareholders

Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from a Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.

23
<PAGE>

If the income from a Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, dividends paid to a foreign
shareholder from net investment income will be subject to U.S. withholding tax
at the rate of 30% (or lower treaty rate) upon the gross amount of the dividend.
Such a foreign shareholder would generally be exempt from U.S. federal income
tax on gains realized on the sale of shares of the Fund and capital gain
dividends and amounts retained by the Fund that are designated as undistributed
capital gains.

If the income from a Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.

In the case of foreign noncorporate shareholders, a Fund may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of its
foreign status.

The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund,
including the applicability of foreign taxes.

State and Local Tax Matters

Depending on the residence of the shareholder for tax purposes,
distributions may also be subject to state and local taxes or withholding taxes.
Most states provide that a RIC may pass through (without restriction) to its
shareholders state and local income tax exemptions available to direct owners of
certain types of U.S. government securities (such as U.S. Treasury obligations).
Thus, for residents of these states, distributions derived from a Fund's
investment in certain types of U.S. government securities should be free from
state and local income taxes to the extent that the interest income from such
investments would have been exempt from state and local income taxes if such
securities had been held directly by the respective shareholders themselves.
Certain states, however, do not allow a RIC to pass through to its shareholders
the state and local income tax exemptions available to direct owners of certain
types of U.S. government securities unless the RIC holds at least a required
amount of U.S. government securities. Accordingly, for residents of these
states, distributions derived from a Fund's investment in certain types of U.S.
government securities may not be entitled to the exemptions from state and local
income taxes that would be available if the shareholders had purchased U.S.
government securities directly. Shareholders' dividends attributable to a Fund's
income from repurchase agreements generally are subject to state and local
income taxes, although states and regulations vary in their treatment of such
income. The exemption from state and local income taxes does not preclude states
from asserting other taxes on the ownership of U.S. government securities. To
the extent that a Fund invests to a substantial degree in U.S. government
securities which are subject to favorable state and local tax treatment,
shareholders of such Fund will be notified as to the extent to which
distributions from the Fund are attributable to interest on such securities.
Rules of state and local taxation of ordinary income dividends and capital gain
dividends from RICs may differ from the rules for U.S. federal income taxation
in other respects. Shareholders are urged to consult their tax advisers as to
the consequences of these and other state and local tax rules affecting
investment in a Fund.

Effect of Future Legislation

The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.

24
<PAGE>

MFST

MANAGEMENT OF THE TRUST AND THE FUNDS

Trustees and Officers

The Trustees and the Trust officers and their principal occupations for at
least the past five years are set forth below. Their titles may have varied
during that period.

Fergus Reid, III--Chairman of the Trust. Chairman and Chief Executive
Officer, Lumelite Corporation, since September 1985; Trustee, Morgan Stanley
Funds. Age: 67. Address: 202 June Road, Stamford, CT 06903.

*H. Richard Vartabedian--Trustee and President of the Trust. Investment
Management Consultant; formerly, Senior Investment Officer, Division Executive
of the Investment Management Division of The Chase Manhattan Bank, N.A.,
1980-1991. Age: 63. Address: P.O. Box 296, Beach Road, Hendrick's Head,
Southport, ME 04576.

William J. Armstrong--Trustee. Vice President and Treasurer, Ingersoll-Rand
Company (Woodcliff Lake, New Jersey). Age: 58. Address: 49 Aspen Way, Upper
Saddle River, NJ 07458.

John R.H. Blum--Trustee. Attorney in private practice; formerly a Partner
in the law firm of Richards, O'Neil & Allegaert; Commissioner of
Agriculture--State of Connecticut, 1992-1995. Age: 70. Address: 322 Main Street,
Lakeville,CT 06039.

Stuart W. Cragin, Jr.--Trustee. Retired; formerly President, Fairfield
Testing Laboratory, Inc. He has previously served in a variety of marketing,
manufacturing and general management positions with Union Camp Corp., Trinity
Paper & Plastics Corp., and Conover Industries. Age: 66. Address: 108 Valley
Road, Cos Cob, CT 06807.

Roland R. Eppley, Jr.--Trustee. Retired; formerly President and Chief
Executive Officer, Eastern States Bankcard Association Inc. (1971-1988);
Director, Janel Hydraulics, Inc.; formerly Director of The Hanover Funds, Inc.
Age: 67. Address: 105 Coventry Place, Palm Beach Gardens, FL 33418.

Joseph J. Harkins--Trustee. Retired; Commercial Sector Executive and
Executive Vice President of The Chase Manhattan Bank, N.A. from 1985 through
1989. He has been employed by Chase in numerous capacities and offices since
1954. Director of Blessings Corporation, Jefferson Insurance Company of New
York, Monticello Insurance Company and National. Age: 68. Address: 257
Plantation Circle South, Ponte Vedra Beach, FL 32082.

*Sarah E. Jones--Trustee. President and Chief Operating Officer of Chase
Manhattan Funds Corp.; formerly Managing Director for the Global Asset
Management and Private Banking Division of The Chase Manhattan Bank. Age: 47.
Address: One Chase Manhattan Plaza, Third Floor, New York, NY 10081.

W.D. MacCallan--Trustee. Director of The Adams Express Co. and Petroleum &
Resources Corp.; formerly Chairman of the Board and Chief Executive Officer of
The Adams Express Co. and Petroleum & Resources Corp.; formerly Director of The
Hanover Funds, Inc. and The Hanover Investment Funds, Inc. Age: 72. Address:
624 East 45th Street, Savannah, GA 31405.

W. Perry Neff--Trustee. Independent Financial Consultant; Director of
North America Life Assurance Co., Petroleum & Resources Corp. and The Adams
Express Co.; formerly Director and Chairman of The Hanover Funds, Inc.;
Formerly Director, Chairman and President of The Hanover Investment Funds, Inc.
Age: 72. Address: RR 1 Box 102, Weston, VT 05181.

25
<PAGE>

*Leonard M. Spalding, Jr.--Trustee. Executive Vice President and Chief
Executive Officer for Chase Mutual Funds Corp.; President and Chief Executive
Officer of Vista Capital Management in 1993; and formerly Chief Investment
Executive of The Chase Manhattan Private Bank. Age: 64. Address: One Chase
Manhattan Plaza, Third Floor, New York, NY 10081.

Richard E. Ten Haken--Trustee; Chairman of the Audit Committee. Formerly
District Superintendent of Schools, Monroe No. 2 and Orleans Counties, New
York; Chairman of the Board and President, New York State Teachers' Retirement
System. Age: 65. Address: 4 Barnfield Road, Pittsford, NY 14534.

Irving L. Thode--Trustee. Retired; formerly Vice President of Quotron
Systems. He has previously served in a number of executive positions with
Control Data Corp., including President of its Latin American Operations, and
General Manager of its Data Services business. Age: 68. Address: 80 Perkins
Road, Greenwich, CT 06830.

Martin R. Dean--Treasurer and Assistant Secretary. Associate Director,
Accounting Services, BISYS Fund Services; formerly Senior Manager, KPMG Peat
Marwick (1987-1994). Age: 34. Address: 3435 Stelzer Road, Columbus, OH 43219.

Lisa Hurley--Secretary. Senior Vice President and General Counsel, BISYS
Fund Services; formerly Counsel to Moore Capital Management and General Counsel
to Global Asset Management and Northstar Investments Management. Age: 44.
Address: 90 Park Avenue, New York, NY 10016.

Vicky M. Hayes--Assistant Secretary. Vice President and Global Marketing
Manager, Vista Fund Distributors, Inc.; formerly Assistant Vice President,
Alliance Capital Management and held various positions with J. & W. Seligman &
Co. Age: 37. Address: One Chase Manhattan Plaza, 3rd Fl., New York, NY 10081.

Alaina Metz--Assistant Secretary. Chief Administrative Officer, BISYS Fund
Services; formerly Supervisor, Blue Sky Department, Alliance Capital Management
L.P. Age: 31. Address: 3435 Stelzer Road, Columbus, OH 43219.

- ----------
*Asterisks indicate those Trustees that are "interested persons" (as defined in
the 1940 Act). Mr. Reid is not an interested person of the Trust's investment
advisers or principal underwriter, but may be deemed an interested person of
the Trust solely by reason of being an officer of the Trust.

26
<PAGE>

The Board of Trustees of the Trust presently has an Audit Committee. The
members of the Audit Committee are Messrs. Ten Haken (Chairman), Armstrong,
Eppley, MacCallan and Thode. The function of the Audit Committee is to recommend
independent auditors and monitor accounting and financial matters. The Audit
Committee met two times during the fiscal period ended August 31, 1999.

The Board of Trustees of the Trust has established an Investment
Committee. The members of the Investment Committee are Messrs. Vartabedian
(Chairman), Reid and Spalding. The function of the Investment Committee is to
review the investment management process of the Trust.

The Trustees and officers of the Trust appearing in the table above also
serve in the same capacities with respect to Mutual Fund Trust, Mutual Fund
Variable Annuity Trust, Mutual Fund Group, Mutual Fund Select Group, Capital
Growth Portfolio, Growth and Income Portfolio and International Equity
Portfolio (these entities, together with the Trust, are referred to below as
the "Vista Funds").

Remuneration of Trustees and Certain Executive Officers:

Each Trustee is reimbursed for expenses incurred in attending each meeting
of the Board of Trustees or any committee thereof. Each Trustee who is not an
affiliate of the advisers is compensated for his or her services according to a
fee schedule which recognizes the fact that each Trustee also serves as a
Trustee of other investment companies advised by the advisers. Each Trustee
receives a fee, allocated among all investment companies for which the Trustee
serves, which consists of an annual retainer component and a meeting component.

<TABLE>
<CAPTION>
Select Select Select
Intermediate Select New York Intermediate New Jersey
Tax Free Income Tax Free Income Tax Free Income Tax Free Income
Fund Fund Fund Fund
---- ---- ---- ----
<S> <C> <C> <C> <C>
Fergus Reid, III, Trustee $2,509 $2,629 $998 $241
H. Richard Vartabedian, Trustee 1,883 1,973 749 181
William J. Armstrong, Trustee 1,255 1,316 499 121
John R.H. Blum, Trustee 1,348 1,411 536 126
Stuart W. Cragin, Jr., Trustee 1,296 1,357 515 125
Roland R. Eppley, Jr., Trustee 1,255 1,316 499 121
Joseph J. Harkins, Trustee 1,296 1,357 515 125
Sarah E. Jones, Trustee -- -- -- --
W.D. MacCallan, Trustee 1,255 1,316 499 121
W. Perry Neff, Trustee 1,257 1,317 500 121
Leonard M. Spalding, Jr., Trustee 1,255 1,316 499 121
Richard E. Ten Haken, Trustee 1,287 1,348 512 121
Irving L. Thode, Trustee 1,255 1,316 499 121
</TABLE>

<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits Accrued from
by the Fund Complex (1) Fund Complex (2)
----------------------- ----------------
<S> <C> <C>
Fergus Reid, III, Trustee $108,490 $160,000
H. Richard Vartabedian, Trustee 69,858 120,000
William J. Armstrong, Trustee 35,695 80,000
John R.H. Blum, Trustee 70,084 87,500
Stuart W. Cragin, Jr., Trustee 42,785 82,500
Roland R. Eppley, Trustee 52,102 80,000
Joseph J. Harkins, Trustee 60,009 82,500
Sarah E. Jones, Trustee -- --
W.D. MacCallan, Trustee 73,291 80,000
</TABLE>

27
<PAGE>

<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits Accrued from
by the Fund Complex (1) Fund Complex (2)
----------------------- ----------------
<S> <C> <C>
W. Perry Neff, Trustee 70,365 80,000
Leonard M. Spalding, Jr.,
Trustee 25,509 80,000
Richard E. Ten Haken, Trustee 55,162 83,750
Irving L. Thode, Trustee 50,414 80,000
</TABLE>

- ----------

(1) Data reflects total benefits accrued by Mutual Fund Group, Mutual Fund
Select Group, Capital Growth Portfolio, Growth and Income Portfolio and
International Equity Portfolio for the fiscal year ended October 31, 1999
and by the Trust, Mutual Fund Trust, and Mutual Fund Variable Annuity
Trust for the fiscal year ended August 31, 1999.

(2) Data reflects total estimated compensation earned during the period January
1, 1999 to December 31, 1999 for service as a Trustee to the Trust, Mutual
Fund Group, Mutual Fund Trust, Mutual Fund Variable Annuity Trust, Mutual
Fund Select Group, Capital Growth Portfolio, Growth and Income Portfolio
and International Equity Portfolio.

As of August 31, 1999, the Trustees and officers as a group owned less
than 1% of each Fund's outstanding shares, all of which were acquired for
investment purposes. For the fiscal year ended August 31, 1999, the Trust paid
its disinterested Trustees fees and expenses for all the meetings of the Board
and any committees attended in the aggregate amount of approximately $47,000,
which amount was then apportioned among the Funds comprising the Trust.

28
<PAGE>

Vista Funds Retirement Plan for Eligible Trustees

The Trustees have instituted a Retirement Plan for Eligible Trustees (the
"Plan") pursuant to which each Trustee (who is not an employee of any of the
Funds advised by the advisers, the advisers, administrator or distributor or any
of their affiliates) may be entitled to certain benefits upon retirement from
the Board of Trustees. Pursuant to the Plan, the normal retirement date is the
date on which the eligible Trustee has attained age 65 and has completed at
least five years of continuous service with one or more of the investment
companies advised by the adviser or sub-adviser (collectively, the "Covered
Funds"). Each Eligible Trustee is entitled to receive from the Covered Funds an
annual benefit commencing on the first day of the calendar quarter coincident
with or following his date of retirement equal to the sum of 8% of the highest
annual compensation received from the Covered Funds multiplied by the number of
such Trustee's years of service (not in excess of 10 years) completed with
respect to any of the Covered Funds and (ii) 4% of the highest annual
compensation received from the Covered Funds for each year of service in excess
of 10 years, provided that no Trustee's annual benefit will exceed the highest
annual compensation received by that Trustee from the Covered Funds. Such
benefit is payable to each eligible Trustee in monthly installments for the life
of the Trustee.

Set forth below in the table are the estimated annual benefits payable to
an eligible Trustee upon retirement assuming various compensation and years of
service classifications. As of October 31, 1999, the estimated credited years
of service for Messrs. Reid, Vartabedian, Armstrong, Blum, Cragin, Eppley,
Harkins, Neff, MacCallan, Spalding, Ten Haken, Thode and Ms. Jones are 15, 7,
12, 15, 6, 10, 9, 9, 15, 1, 14, 6 and 0, respectively.

<TABLE>
Highest Annual Compensation Paid by All Vista Funds
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$80,000 $100,000 $120,000 $140,000 $160,000

<CAPTION>
Years of
Service Estimated Annual Benefits Upon Retirement
- ---------- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
16 $80,000 $100,000 $120,000 $140,000 $160,000
14 76,800 96,000 115,200 134,400 153,600
12 70,400 88,000 105,600 123,200 140,800
10 64,000 80,000 96,000 112,000 128,000
8 51,200 64,000 76,800 89,600 102,400
6 38,400 48,000 57,600 67,200 76,800
4 25,600 32,000 38,400 44,800 51,200
</TABLE>

The Trustees have also instituted a Deferred Compensation Plan for Eligible
Trustees (the "Deferred Compensation Plan") pursuant to which each Trustee (who
is not an employee of any of the Covered Funds, the advisers, administrator or
distributor or any of their affiliates) may enter into agreements with the
Covered Funds whereby payment of the Trustee's fees are deferred until the
payment date elected by the Trustee (or the Trustee's termination of service).
The deferred amounts are invested in shares of Vista funds selected by the
Trustee. The deferred amounts are paid out in a lump sum or over a period of
several years as elected by the Trustee at the time of deferral. If a deferring
Trustee dies prior to the distribution of amounts held in the deferral account,
the balance of the deferral account will be distributed to the Trustee's
designated beneficiary in a single lump sum payment as soon as practicable after
such deferring Trustee's death.

Messrs. Eppley, Ten Haken, Thode and Vartabedian have each executed a
deferred compensation agreement for the 1999 calendar year and as of October
31, 1999 they had contributed $52,400, $27,700, $58,950 and $98,250,
respectively.

The Declaration of Trust provides that the Trust will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices

29
<PAGE>

or with respect to any matter unless it is finally adjudicated that they did
not act in good faith in the reasonable belief that their actions were in the
best interest of the Trust. In the case of settlement, such indemnification
will not be provided unless it has been determined by a court or other body
approving the settlement or other disposition, or by a reasonable determination
based upon a review of readily available facts, by vote of a majority of
disinterested Trustees or in a written opinion of independent counsel, that
such officers or Trustees have not engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of their duties.

Adviser and Sub-Advisers

Chase acts as investment adviser to the Funds pursuant to an Investment
Advisory Agreement (the "Advisory Agreement"). Subject to such policies as the
Board of Trustees may determine, Chase is responsible for investment decisions
for the Funds. Pursuant to the terms of the Advisory Agreement, Chase provides
the Funds with such investment advice and supervision as it deems necessary for
the proper supervision of the Funds' investments. The advisers continuously
provide investment programs and determine from time to time what securities
shall be purchased, sold or exchanged and what portion of the Funds' assets
shall be held uninvested. The advisers to the Funds furnish, at their own
expense, all services, facilities and personnel necessary in connection with
managing the investments and effecting portfolio transactions for the Funds.
The Advisory Agreement for the Funds will continue in effect from year to year
only if such continuance is specifically approved at least annually by the
Board of Trustees or by vote of a majority of a Fund's outstanding voting
securities and by a majority of the Trustees who are not parties to the
Advisory Agreement or interested persons of any such party, at a meeting called
for the purpose of voting on such Advisory Agreement.

Under the Advisory Agreement, the adviser may utilize the specialized
portfolio skills of all its various affiliates, thereby providing the Funds
with greater opportunities and flexibility in accessing investment expertise.

Pursuant to the terms of the Advisory Agreement and the sub-advisers'
agreements with the adviser, the adviser and sub-advisers are permitted to
render services to others. Each advisory agreement is terminable without
penalty by the Trust on behalf of the Funds on not more than 60 days', nor less
than 30 days', written notice when authorized either by a majority vote of a
Fund's shareholders or by a vote of a majority of the Board of Trustees of the
Trust, or by the adviser or sub-adviser on not more than 60 days', nor less
than 30 days', written notice, and will automatically terminate in the event of
its "assignment" (as defined in the 1940 Act). The advisory agreements provide
that the adviser or sub-adviser under such agreement shall not be liable for
any error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in the execution of portfolio
transactions for the respective Fund, except for willful misfeasance, bad faith
or gross negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties thereunder.

In the event the operating expenses of the Funds, including all investment
advisory, administration and sub-administration fees, but excluding brokerage
commissions and fees, taxes, interest and extraordinary expenses such as
litigation, for any fiscal year exceed the most restrictive expense limitation
applicable to the Funds imposed by the securities laws or regulations thereunder
of any state in which the shares of the Funds are qualified for sale, as such
limitations may be raised or lowered from time to time, the adviser shall reduce
its advisory fee (which fee is described below) to the extent of its share of
such excess expenses. The amount of any such reduction to be borne by the
adviser shall be deducted from the monthly advisory fee otherwise payable with
respect to the Funds during such fiscal year; and if such amounts should exceed
the monthly fee, the adviser shall pay to a Fund its share of such excess
expenses no later than the last day of the first month of the next succeeding
fiscal year.

Under the Advisory Agreement, Chase may delegate a portion of its
responsibilities to a sub-adviser. In addition, the Advisory Agreement provides
that Chase may render services through its own employees or the employees of one
or more affiliated companies that are qualified to act as an investment adviser
of the Fund and are under the common control of Chase as long as all such
persons are functioning as part of an organized group of persons, managed by
authorized officers of Chase.

30
<PAGE>

Chase, on behalf of the Funds, has entered into an investment sub-advisory
agreement with Chase Asset Management, Inc. ("CAM"). With respect to the
day-to-day management of the Funds, under the sub-advisory agreement, the
sub-adviser makes decisions concerning, and places all orders for, purchases
and sales of securities and helps maintain the records relating to such
purchases and sales. The sub-adviser may, in its discretion, provide such
services through its own employees or the employees of one or more affiliated
companies that are qualified to act as an investment adviser to the Company
under applicable laws and are under the common control of Chase; provided that
(i) all persons, when providing services under the sub-advisory agreement, are
functioning as part of an organized group of persons, and (ii) such organized
group of persons is managed at all times by authorized officers of the
sub-adviser. This arrangement will not result in the payment of additional fees
by the Funds.

Chase, a wholly-owned subsidiary of The Chase Manhattan Corporation, a
registered bank holding company, is a commercial bank offering a wide range of
banking and investment services to customers throughout the United States and
around the world. Also included among the Chase accounts are commingled trust
funds and a broad spectrum of individual trust and investment management
portfolios. These accounts have varying investment objectives.

CAM is a wholly-owned operating subsidiary of the Adviser. CAM is
registered with the Securities and Exchange Commission as an investment adviser
and provides discretionary investment advisory services to institutional
clients, and the same individuals who serve as portfolio managers for CAM also
serve as portfolio managers for Chase.

In consideration of the services provided by the adviser pursuant to the
Advisory Agreement, the adviser is entitled to receive from each Fund an
investment advisory fee computed daily and paid monthly based on a rate equal
to a percentage of such Fund's average daily net assets specified in the
relevant Prospectuses. However, the adviser may voluntarily agree to waive a
portion of the fees payable to it on a month-to-month basis. For its services
under its sub-advisory agreement, CAM will be entitled to receive with respect
to each such Fund, such compensation, payable by the adviser out of its
advisory fee, as is described in the relevant Prospectuses.

For the fiscal years ended August 31, 1997, 1998 and 1999, the Advisor
earned advisory fees, and voluntarily waived the amounts in parentheses as
follows:

<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
August 31, 1997 August 31, 1998 August 31, 1999
---------------------------- ---------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Select Intermediate Tax
Free Income Fund $1,244,674 $ (1,244,674) $1,982,640 $ (1,982,640) $2,200,196 (2,200,196)
Select Tax Free
Income Fund 1,327,759 (1,327,759) 2,147,587 (2,147,587) 2,293,913 (2,293,913)
Select New York
Intermediate Tax Free
Income Fund 443,980 (443,980) 767,510 (767,510) 879,846 (879,846)
Select New Jersey Tax
Free Income Fund 120,131 (120,131) 201,511 (201,511) 209,497 (209,497)
</TABLE>

Administrator

Pursuant to an Administration Agreement (the "Administration Agreement"),
Chase serves as administrator of the Funds. Chase provides certain
administrative services to the Funds, including, among other responsibilities,
coordinating the negotiation of contracts and fees with, and the monitoring of
performance and billing of, the Funds' independent contractors and agents;
preparation for signature by an officer of the Trust of all documents required
to be filed for compliance by the Trust with applicable laws and regulations
excluding those of the securities laws of various states; arranging for the
computation of performance data, including net asset

31
<PAGE>

value and yield; responding to shareholder inquiries; and arranging for the
maintenance of books and records of the Funds and providing, at its own
expense, office facilities, equipment and personnel necessary to carry out its
duties. Chase in its capacity as administrator does not have any responsibility
or authority for the management of the Funds, the determination of investment
policy, or for any matter pertaining to the distribution of Fund shares.

Under the Administration Agreement Chase is permitted to render
administrative services to others. The Administration Agreement will continue
in effect from year to year with respect to each Fund only if such continuance
is specifically approved at least annually by the Board of Trustees or by vote
of a majority of such Fund's outstanding voting securities and, in either case,
by a majority of the Trustees who are not parties to the Administration
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party. The Administration Agreement is terminable without penalty by the Trust
on behalf of each Fund on 60 days' written notice when authorized either by a
majority vote of such Fund's shareholders or by vote of a majority of the Board
of Trustees, including a majority of the Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Trust, or by Chase on 60 days'
written notice, and will automatically terminate in the event of its
"assignment" (as defined in the 1940 Act). The Administration Agreement also
provides that neither Chase nor its personnel shall be liable for any error of
judgment or mistake of law or for any act or omission in the administration of
the Funds, except for willful misfeasance, bad faith or gross negligence in the
performance of its or their duties or by reason of reckless disregard of its or
their obligations and duties under the Administration Agreement.

In addition, the Administration Agreement provides that, in the event the
operating expenses of any Fund, including all investment advisory,
administration and sub-administration fees, but excluding brokerage commissions
and fees, taxes, interest and extraordinary expenses such as litigation, for
any fiscal year exceed the most restrictive expense limitation applicable to
that Fund imposed by the securities laws or regulations thereunder of any state
in which the shares of such Fund are qualified for sale, as such limitations
may be raised or lowered from time to time, Chase shall reduce its
administration fee (which fee is described below) to the extent of its share of
such excess expenses. The amount of any such reduction to be borne by Chase
shall be deducted from the monthly administration fee otherwise payable to
Chase during such fiscal years; and if such amounts should exceed the monthly
fee, Chase shall pay to such Fund its share of such excess expenses no later
than the last day of the first month of the next succeeding fiscal year.

In consideration of the services provided by Chase pursuant to the
Administration Agreement, Chase receives from each Fund a fee computed daily
and paid monthly at an annual rate equal to 0.10% of each of the Fund's average
daily net assets, on an annualized basis for the Fund's then-current fiscal
year. Chase may voluntarily waive a portion of the fees payable to it with
respect to each Fund on a month-to-month basis.

For the fiscal years ended August 31, 1997, 1998 and 1999, the
Administrator earned administration fees, and voluntarily waived the amounts in
parentheses:

<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
August 31, 1997 August 31, 1998 August 31, 1999
-------------------------- ------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Select Intermediate Tax
Free Income Fund $414,891 $(414,891) $663,008 $(663,008) $733,399 $(733,399)
Select Tax Free Income
Fund 442,586 (442,586) 718,084 (718,084) 764,638 (764,638)
Select New York
Intermediate Tax Free
Income Fund 147,993 (147,993) 256,686 (256,686) 293,282 (293,282)
Select New Jersey Tax
Free Income Fund 40,032 (40,032) 67,376 (67,376) 69,832 (69,832)
</TABLE>

Distribution and Sub-Administration Agreement

The Trust has entered into a Distribution and Sub-Administration Agreement
(the "Distribution Agreement") with the Distributor, pursuant to which the
Distributor acts as the Funds' exclusive underwriter, provides certain
administration services and promotes and arranges for the sale of Shares. The
Distributor is

32
<PAGE>

a wholly-owned subsidiary of BISYS Fund Services, Inc. The Distribution
Agreement provides that the Distributor will bear the expenses of printing,
distributing and filing prospectuses and statements of additional information
and reports used for sales purposes, and of preparing and printing sales
literature and advertisements not paid for by the Distribution Plans. The Trust
pays for all of the expenses for qualification of the shares of each Fund for
sale in connection with the public offering of such shares, and all legal
expenses in connection therewith. In addition, pursuant to the Distribution
Agreement, the Distributor provides certain sub-administration services to the
Trust, including providing officers, clerical staff and office space.

The Distribution Agreement is currently in effect and will continue in
effect with respect to each Fund only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
such Fund's outstanding voting securities and, in either case, by a majority of
the Trustees who are not parties to the Distribution Agreement or "interested
persons" (as defined in the 1940 Act) of any such party. The Distribution
Agreement is terminable without penalty by the Trust on behalf of each Fund on
60 days' written notice when authorized either by a majority vote of such
Fund's shareholders or by vote of a majority of the Board of Trustees of the
Trust, including a majority of the Trustees who are not "interested persons"
(as defined in the 1940 Act) of the Trust, or by the Distributor on 60 days'
written notice, and will automatically terminate in the event of its
"assignment" (as defined in the 1940 Act). The Distribution Agreement also
provides that neither the Distributor nor its personnel shall be liable for any
act or omission in the course of, or connected with, rendering services under
the Distribution Agreement, except for willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations or duties.

In the event the operating expenses of any Fund, including all investment
advisory, administration and sub-administration fees, but excluding brokerage
commissions and fees, taxes, interest and extraordinary expenses such as
litigation, for any fiscal year exceed the most restrictive expense limitation
applicable to that Fund imposed by the securities laws or regulations
thereunder of any state in which the shares of such Fund are qualified for
sale, as such limitations may be raised or lowered from time to time, the
Distributor shall reduce its sub-administration fee with respect to such Fund
(which fee is described below) to the extent of its share of such excess
expenses. The amount of any such reduction to be borne by the Distributor shall
be deducted from the monthly sub-administration fee otherwise payable with
respect to such Fund during such fiscal year; and if such amounts should exceed
the monthly fee, the Distributor shall pay to such Fund its share of such
excess expenses no later than the last day of the first month of the next
succeeding fiscal year.

In consideration of the sub-administration services provided by the
Distributor pursuant to the Distribution Agreement, the Distributor receives an
annual fee, payable monthly, of 0.05% of the net assets of each Fund. The
Distributor may voluntarily agree to from time to time waive a portion of the
fees payable to it under the Distribution Agreement with respect to each Fund
on a month-to-month basis.

For the fiscal years ended August 31, 1997, 1998 and 1999, the Distributor
earned sub-administration fees, and voluntarily waived the amounts in
parentheses:

<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
August 31, 1997 August 31, 1998 August 31, 1999
-------------------------- ------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Select Intermediate Tax
Free Income Fund $207,446 $ (207,446) $328,312 $ (328,312) $366,699 $ (336,565)
Select Tax Free Income
Fund 221,293 (221,293) 355,710 (355,710) 382,319 (351,277)
Select New York
Intermediate Tax Free
Income Fund 73,997 (73,997) 127,069 (127,069) 146,641 (134,589)
Select New Jersey Tax
Free Income Fund 19,983 (19,983) 33,379 (33,379) 34,916 (34,916)
</TABLE>

33
<PAGE>

Transfer Agent and Custodian

The Trust has also entered into a Transfer Agency Agreement with DST
Systems, Inc. ("DST") pursuant to which DST acts as transfer agent for the
Trust. DST's address is 210 West 10th Street, Kansas City, MO 64105.

Pursuant to a Custodian Agreement, Chase acts as the custodian of the
assets of each Fund for which Chase receives such compensation as is from time
to time agreed upon by the Trust and Chase. As custodian, Chase provides
oversight and record keeping for the assets held in the portfolios of each
Fund. Chase is located at 3 Metrotech Center, Brooklyn, NY 11245. For
additional information, see the Prospectuses.

INDEPENDENT ACCOUNTANTS

The financial statements incorporated herein by reference from the Trust's
Annual Reports to Shareholders for the fiscal year ended August 31, 1999, and
the related financial highlights which appear in the Prospectuses, have been
incorporated herein and included in the Prospectuses in reliance on the reports
of PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, independent accountants of the Funds, given on the authority of said
firm as experts in accounting and auditing. PricewaterhouseCoopers LLP provides
the Funds with audit services, tax return preparation and assistance and
consultation with respect to the preparation of filings with the Securities and
Exchange Commission.

CERTAIN REGULATORY MATTERS

Banking laws, including the Glass-Steagall Act as currently interpreted,
prohibit bank holding companies and their affiliates from sponsoring,
organizing, controlling, or distributing shares of, mutual funds, and generally
prohibit banks from issuing, underwriting, selling or distributing securities.
These laws do not prohibit banks or their affiliates from acting as investment
adviser, administrator or custodian to mutual funds or from purchasing mutual
fund shares as agent for a customer. Chase and the Trust believe that Chase
(including its affiliates) may perform the services to be performed by it as
described in the Prospectus and this Statement of Additional Information
without violating such laws. If future changes in these laws or interpretations
required Chase to alter or discontinue any of these services, it is expected
that the Board of Trustees would recommend alternative arrangements and that
investors would not suffer adverse financial consequences. State securities
laws may differ from the interpretations of banking law described above and
banks may be required to register as dealers pursuant to state law.

Chase and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of securities purchased on behalf of any
of the Funds, including outstanding loans to such issuers which may be repaid
in whole or in part with the proceeds of securities so purchased. Chase and its
affiliates deal, trade and invest for their own accounts in U.S. Government
obligations, municipal obligations and commercial paper and are among the
leading dealers of various types of U.S. Government obligations and municipal
obligations. Chase and its affiliates may sell U.S. Government obligations and
municipal obligations to, and purchase them from, other investment companies
sponsored by the Funds' distributor or affiliates of the distributor. Chase
will not invest any Fund assets in any U.S. Government obligations, municipal
obligations or commercial paper purchased from itself or any affiliate,
although under certain circumstances such securities may be purchased from
other members of an underwriting syndicate in which Chase or an affiliate is a
non-principal member. This restriction my limit the amount or type of U.S.
Government obligations, municipal obligations or commercial paper available to
be purchased by any Fund. Chase has informed the Funds that in making its
investment decision, it does not obtain or use material inside information in
the possession of any other division or department of Chase, including the
division that performs services for the Trust as custodian, or in the
possession of any affiliate of Chase. Shareholders of the Funds should be aware
that, subject to applicable legal or regulatory restrictions, Chase and its
affiliates may exchange among themselves certain information about the
shareholder and his account. Transactions with affiliated broker-dealers will
only be executed on an agency basis in accordance with applicable federal
regulations.

34
<PAGE>

GENERAL INFORMATION

Description of Shares, Voting Rights and Liabilities

Mutual Fund Select Trust is an open-end, management investment company
organized as Massachusetts business trust under the laws of the Commonwealth of
Massachusetts on October 1, 1996. Because each of the Funds comprising the
Trust are "non-diversified", more than 5% of any of the assets of each Fund may
be invested in the obligations of any single issuer, which may make the value
of the shares in such a Fund more susceptible to certain risks than shares of a
diversified mutual fund. The fiscal year-end of the Funds in the Trust is
August 31.

The Trust currently consists of 4 series of shares of beneficial interest,
par value $.001 per share. The Trust has reserved the right to create and issue
additional series or classes. Each share of a series or class represents an
equal proportionate interest in that series or class with each other share of
that series or class. The shares of each series or class participate equally in
the earnings, dividends and assets of the particular series or class. Expenses
of the Trust which are not attributable to a specific series or class are
allocated among all the series in a manner believed by management of the Trust
to be fair and equitable. Shares have no pre-emptive or conversion rights.
Shares when issued are fully paid and non-assessable, except as set forth
below. Shareholders are entitled to one vote for each share held. Shares of
each series or class generally vote together, except when required under
federal securities laws to vote separately on matters that may affect a
particular class, such as the approval of distribution plans for a particular
class.

Each Fund currently issues a single class of shares but may, in the
future, offer other classes of shares. The categories of investors that are
eligible to purchase shares may be different for each class of Fund shares.
Other classes of Fund shares may be subject to differences in sales charge
arrangements, ongoing distribution and service fee levels, and levels of
certain other expenses, which will affect the relative performance of the
different classes.

Any person entitled to receive compensation for selling or servicing
shares of a Fund may receive different levels of compensation for selling one
particular class of shares rather than another.

The Trust is not required to hold annual meetings of shareholders but will
hold special meetings of shareholders of a series or class when, in the
judgment of the Trustees, it is necessary or desirable to submit matters for a
shareholder vote. Shareholders have, under certain circumstances, the right to
communicate with other shareholders in connection with requesting a meeting of
shareholders for the purpose of removing one or more Trustees. Shareholders
also have, in certain circumstances, the right to remove one or more Trustees
without a meeting. No material amendment may be made to the Trust's Declaration
of Trust without the affirmative vote of the holders of a majority of the
outstanding shares of each portfolio affected by the amendment. Shares have no
preemptive or conversion rights. Shares, when issued, are fully paid and non-
assessable, except as set forth below. Any series or class may be terminated
(i) upon the merger or consolidation with, or the sale or disposition of all or
substantially all of its assets to, another entity, if approved by the vote of
the holders of two-thirds of its outstanding shares, except that if the Board
of Trustees recommends such merger, consolidation or sale or disposition of
assets, the approval by vote of the holders of a majority of the series' or
class' outstanding shares will be sufficient, or (ii) by the vote of the
holders of a majority of its outstanding shares, or (iii) by the Board of
Trustees by written notice to the series' or class' shareholders. Unless each
series and class is so terminated, the Trust will continue indefinitely.

Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
provides for indemnification and reimbursement of expenses out of the Trust
property for any shareholder held personally liable for the obligations

35
<PAGE>

of the Trust. The Trust's Declaration of Trust also provides that the Trust
shall maintain appropriate insurance (for example, fidelity bonding and errors
and omissions insurance) for the protection of the Trust, its shareholders,
Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.

The Trust's Declaration of Trust further provides that obligations of the
Trust are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or failure
to act, errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.

The Board of Trustees has adopted a code of ethics addressing personal
securities transactions by investment personnel and access persons and other
related matters. The code has been designated to address potential conflicts of
interest that can arise in connection with personal trading activities of such
persons. Persons subject to the code are generally permitted to engage in
personal securities transactions, subject to certain prohibitions,
pre-clearance requirements and blackout periods.

Principal Holders

As of November 22, 1999, the following owned of record, directly or
indirectly, 5% or more of the outstanding shares of the Funds.

<TABLE>
<S> <C>
Select Intermediate Tax Free Income
Balsa & Co. .......................................................... 87.69%
PO Box 1768
Grand Central Station
New York, NY 10163-1768
Penlin & Co. ......................................................... 10.03%
C/O The Chase Manhattan Bank
Attn: Mutual FDS/T-C
PO Box 1412
Rochester, NY 14603-1412
Select New Jersey Tax Free Income
Balsa & Co. .......................................................... 94.94%
PO Box 1768
Grand Central Station
New York, NY 10163-1768
Select New York Intermediate Tax Free Income
Penlin & Co. ......................................................... 45.01%
C/O The Chase Manhattan Bank
Attn: Mutual FDS/T-C
PO Box 1412
Rochester, NY 14603-1412
Balsa & Company ...................................................... 38.77%
PO Box 1768
Grand Central Station
New York, NY 10163-1768
</TABLE>

36
<PAGE>

<TABLE>
<S> <C>
Liva & Company .................................................... 9.78%
C/O Chase Manhattan Bank N/A
Attn: Mutual Fund Operations
PO Box 1412
Rochester, NY 14603-1412
Select Tax Free Income
Balsa & Co. ....................................................... 79.28%
PO Box 1768
Grand Central Station
New York, NY 10163-1768
Penlin & Co ....................................................... 16.04%
C/O The Chase Manhattan Bank
Attn: Mutual FDS/T-C
PO Box 1412
Rochester, NY 14603-1412
</TABLE>

Financial Statements

The Annual Report to Shareholders of each Fund, including the report of
independent accountants, financial highlights and financial statements for the
fiscal year-ended August 31, 1999 contained therein, are incorporated by
reference.

Specimen Computations of Offering Prices Per Share

<TABLE>
<S> <C>
Select Intermediate Tax Free Income Fund
Net Asset Value and Redemption Price per Share of Beneficial Interest at August 31, 1999 ..... $10.42

Select Tax Free Income Fund
Net Asset Value and Redemption Price per Share of Beneficial Interest at August 31, 1999 ..... $ 6.19

Select New York Intermediate Tax Free Income Fund
Net Asset Value and Redemption Price per Share of Beneficial Interest at August 31, 1999 ..... $ 6.91

Select New Jersey Tax Free Income Fund
Net Asset Value and Redemption Price per Share of Beneficial Interest at August 31, 1999 ..... $ 9.61
</TABLE>

37
<PAGE>

APPENDIX A

DESCRIPTION OF CERTAIN OBLIGATIONS
ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES OR INSTRUMENTALITIES

Federal Farm Credit System Notes and Bonds--are bonds issued by a
cooperatively owned nationwide system of banks and associations supervised by
the Farm Credit Administration, an independent agency of the U.S. Government.
These bonds are not guaranteed by the U.S. Government.

Maritime Administration Bonds--are bonds issued and provided by the
Department of Transportation of the U.S. Government and are guaranteed by the
U.S. Government.

FNMA Bonds--are bonds guaranteed by the Federal National Mortgage
Association. These bonds are not guaranteed by the U.S. Government.

FHA Debentures--are debentures issued by the Federal Housing
Administration of the U.S. Government and are guaranteed by the U.S.
Government.

FHA Insured Notes--are bonds issued by the Farmers Home Administration of
the U.S. Government and are guaranteed by the U.S. Government.

GNMA Certificates--are mortgage-backed securities which represent a partial
ownership interest in a pool of mortgage loans issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration and therefore
guaranteed by the U.S. Government. As a consequence of the fees paid to GNMA and
the issuer of GNMA Certificates, the coupon rate of interest of GNMA
Certificates is lower than the interest paid on the VA-guaranteed or FHA-insured
mortgages underlying the Certificates. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures may result in the return of the greater part of principal invested
far in advance of the maturity of the mortgages in the pool. Foreclosures impose
no risk to principal investment because of the GNMA guarantee. As the prepayment
rate of individual mortgage pools will vary widely, it is not possible to
accurately predict the average life of a particular issue of GNMA Certificates.
The yield which will be earned on GNMA Certificates may vary form their coupon
rates for the following reasons: (i) Certificates may be issued at a premium or
discount, rather than at par; (ii) Certificates may trade in the secondary
market at a premium or discount after issuance; (iii) interest is earned and
compounded monthly which has the effect of raising the effective yield earned on
the Certificates; and (iv) the actual yield of each Certificate is affected by
the prepayment of mortgages included in the mortgage pool underlying the
Certificates. Principal which is so prepaid will be reinvested, although
possibly at a lower rate. In addition, prepayment of mortgages included in the
mortgage pool underlying a GNMA Certificate purchased at a premium could result
in a loss to a Fund. Due to the large amount of GNMA Certificates outstanding
and active participation in the secondary market by securities dealers and
investors, GNMA Certificates are highly liquid instruments. Prices of GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate. If
agency securities are purchased at a premium above principal, the premium is not
guaranteed by the issuing agency and a decline in the market value to par may
result in a loss of the premium, which may be particularly likely in the event
of a prepayment. When and if available, U.S. Government obligations may be
purchased at a discount from face value.

FHLMC Certificates and FNMA Certificates--are mortgage-backed bonds issued
by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage
Association, respectively, and are guaranteed by the U.S. Government.

GSA Participation Certificates--are participation certificates issued by
the General Services Administration of the U.S. Government and are guaranteed
by the U.S. Government.

A-1
<PAGE>

New Communities Debentures--are debentures issued in accordance with the
provisions of Title IV of the Housing and Urban Development Act of 1968, as
supplemented and extended by Title VII of the Housing and Urban Development Act
of 1970, the payment of which is guaranteed by the U.S. Government.

Public Housing Bonds--are bonds issued by public housing and urban renewal
agencies in connection with programs administered by the Department of Housing
and Urban Development of the U.S. Government, the payment of which is secured
by the U.S. Government.

Penn Central Transportation Certificates--are certificates issued by Penn
Central Transportation and guaranteed by the U.S. Government.

SBA Debentures--are debentures fully guaranteed as to principal and
interest by the Small Business Administration of the U.S. Government.

Washington Metropolitan Area Transit Authority Bonds--are bonds issued by
the Washington Metropolitan Area Transit Authority. Some of the bonds issued
prior to 1993 are guaranteed by the U.S. Government.

FHLMC Bonds--are bonds issued and guaranteed by the Federal Home Loan
Mortgage Corporation. These bonds are not guaranteed by the U.S. Government.

Federal Home Loan Bank Notes and Bonds--are notes and bonds issued by the
Federal Home Loan Bank System and are not guaranteed by the U.S. Government.

Student Loan Marketing Association ("Sallie Mae") Notes and Bonds--are
notes and bonds issued by the Student Loan Marketing Association and are not
guaranteed by the U.S. Government.

D.C. Armory Board Bonds--are bonds issued by the District of Columbia
Armory Board and are guaranteed by the U.S. Government.

Export-Import Bank Certificates--are certificates of beneficial interest
and participation certificates issued and guaranteed by the Export-Import Bank
of the U.S. and are guaranteed by the U.S. Government.

In the case of securities not backed by the "full faith and credit" of the
U.S. Government, the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment, and may not be able to
assert a claim against the U.S. Government itself in the event the agency or
instrumentality does not meet its commitments.

Investments may also be made in obligations of U.S. Government agencies or
instrumentalities other than those listed above.

A-2
<PAGE>

APPENDIX B

DESCRIPTION OF RATINGS*

The ratings of Moody's and Standard & Poor's represent their opinions as
to the quality of various Municipal Obligations. It should be emphasized,
however, that ratings are not absolute standards of quality. Consequently,
Municipal Obligations with the same maturity, coupon and rating may have
different yields while Municipal Obligations of the same maturity and coupon
with different ratings may have the same yield.

Description of Moody's
four highest municipal bond ratings:

Aaa--Bonds which 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 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 which 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 which make the long-term risks appear somewhat larger than in Aaa
securities.

A--Bonds which 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 which suggest a susceptibility to impairment sometime in the future.

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

Description of Moody's three highest ratings
of state and municipal notes:

Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk,
long-term secular trends for example, may be less important over the short run.
A short-term rating may also be assigned on an issue having a demand
feature-variable rate demand obligation or commercial paper programs; such
ratings will be designated as "VMIG." Short-term ratings on issues with demand
features are differentiated by the use of the VMIG symbol to reflect such
characteristics as payment upon periodic demand rather than fixed maturity dates
and payment relying on external liquidity. Symbols used are as follows:

MIG-1/VMIG-1--Notes bearing this designation 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.

MIG-2/VMIG-2--Notes bearing this designation are of high quality, with
margins of protection ample although not so large as in the preceding group.

MIG-3/VMIG-3--Notes bearing this designation are of favorable quality,
where all security elements are accounted for but there is lacking the
undeniable strength of the preceding grade, liquidity and cash flow protection
may be narrow and market access for refinancing is likely to be less well
established.

- ----------
* As described by the rating agencies. Ratings are generally given to
securities at the time of issuance. While the rating agencies may from time to
time revise such ratings, they undertake no obligation to do so.

B-1
<PAGE>

Description of Standard & Poor's four highest municipal bond ratings:

- ----------
AAA--Bonds rated AAA have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

- ----------
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.

- ----------
A--Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated categories.

- ----------
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

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

Description of Standard & Poor's
ratings of municipal notes and tax-exempt demand bonds:

A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive
a note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assessment.

--Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).

--Source of Payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).

Note rating symbols are as follows:

SP-1--Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given
a plus (+) designation.

SP-2--Satisfactory capacity to pay principal and interest.

SP-3--Speculative capacity to pay principal and interest.

Standard & Poor's assigns "dual" ratings to all long-term debt issues that
have as part of their provisions a demand or double feature.

The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/B-1+"). For the newer "demand notes," S&P's note
rating symbols, combined with the commercial paper symbols, are used (for
example, "SP-1+/A-1+").

Description of Standard & Poor's
two highest commercial paper ratings:

A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.

B-2
<PAGE>

B-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation.

A-2--Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.

Description of Moody's
two highest commercial paper ratings:

Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1, Prime-2 and Prime-3.

Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: (1)
leading market positions in well-established industries; (2) high rates of
return on funds employed; (3) conservative capitalization structures with
moderate reliance on debt and ample asset protection; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash generation;
and (5) well-established access to a range of financial markets and assured
sources of alternate liquidity.

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

Description of Fitch's ratings of municipal notes
and tax-exempt demand bonds

Municipal Bond Ratings

The ratings represent Fitch's assessment of the issuer's ability to meet
the obligations of a specific debt issue or class of debt. The ratings take
into consideration special features of the issuer, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's financial strength and
credit quality.

AAA--Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.

AA--Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1.

A--Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.

BBB--Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in

B-3
<PAGE>

economic conditions and circumstances, however, are more likely to have adverse
consequences on these bonds, and therefore impair timely payment. The
likelihood that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.

Plus and minus signs are used by Fitch to indicate the relative position
of a credit within a rating category. Plus and minus signs, however, are not
used in the AAA category.

Short-Term Ratings

Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.

Although the credit analysis is similar to Fitch's bond rating analysis,
the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.

F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.

F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F-1+.

F-2--Good Credit Quality. Issues carrying this rating have satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.

F-3--Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate,
although near term adverse changes could cause these securities to be rated
below investment grade.

B-4
<PAGE>

APPENDIX C

SPECIAL INVESTMENT CONSIDERATIONS RELATING TO
NEW YORK MUNICIPAL OBLIGATIONS

Some of the significant financial considerations relating to the
investments of the Select New York Intermediate Tax Free Income Fund in New
York municipal securities are summarized below. The following information
constitutes only a brief summary, does not purport to be a complete description
and is largely based on information drawn from official statements relating to
securities offerings of New York municipal obligations available as of the date
of this Statement of Additional Information. The accuracy and completeness of
the information contained in such offering statements has not been
independently verified.

New York State

New York State Financing Activities. There are a number of methods by which
New York State (the "State") may incur debt. Under the State Constitution, the
State may not, with limited exceptions for emergencies, undertake long-term
general obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
New York State Legislature (the "Legislature") and approved by the voters. There
is no limitation on the amount of long-term general obligation debt that may be
so authorized and subsequently incurred by the State. With the exception of
general obligation housing bonds (which must be paid in equal annual
installments or installments that result in substantially level or declining
debt service payments, within 50 years after issuance, commencing no more than
three years after issuance), general obligation bonds must be paid in equal
annual installments or installments that result in substantially level or
declining debt service payments, within 40 years after issuance, beginning not
more than one year after issuance of such bonds.

The State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes ("TRANs"), and (ii) in anticipation of the receipt of
proceeds from the sale of duly authorized but unissued bonds, by issuing bond
anticipation notes ("BANs"). TRANs must mature within one year from their dates
of issuance and may not be refunded or refinanced beyond such period. BANS may
only be issued for the purposes and within the amounts for which bonds may be
issued pursuant to voter authorizations. Such BANs must be paid from the
proceeds of the sale of bonds in anticipation of which they were issued or from
other sources within two years of the date of issuance or, in the case of BANs
for housing purposes, within five years of the date of issuance.

The State may also, pursuant to specific constitutional authorization,
directly guarantee certain public authority obligations. The State Constitution
provides for the State guarantee of the repayment of certain borrowings for
designated projects of the New York State Thruway Authority, the Job
Development Authority and the Port Authority of New York and New Jersey. The
State has never been called upon to make any direct payments pursuant to such
guarantees. The State-guaranteed bonds of the Port Authority of New York and
New Jersey were fully retired on December 31, 1996. State-guaranteed bonds
issued by the Thruway Authority were fully retired on July 1, 1995.

In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since the Governor
took office in 1995. As a result of the structural imbalances in JDA's capital
structure, and defaults in its loan portfolio and loan guarantee program
incurred between 1991 and 1996, JDA would have experienced a debt service cash
flow shortfall had it not completed its recent refinancing. JDA anticipates
that it will transact additional refinancings in 1999, 2000 and 2003 to
complete its long-term plan of finance and further alleviate cash flow
imbalances which are likely to occur in future years. The State does not
anticipate that it will be called upon to make any payments pursuant to the
State guarantee in the 1997-98 fiscal year. JDA recently resumed its lending
activities under a revised set of lending programs and underwriting guidelines.

C-1
<PAGE>

The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financing, which involve obligations
of public authorities or municipalities that are State-supported but not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the New York Local Government
Assistance Corporation ("LGAC") to restructure the way the State makes certain
local aid payments.

The State participates in the issuance of Certificates of Participation
("COPs") in a pool of leases entered into by the State's Office of General
Services on behalf of several State departments and agencies interested in
acquiring operational equipment, or in certain cases, real property.
Legislation enacted in 1986 established restrictions upon and centralized State
control, through the Comptroller and the Director of the Budget, over the
issuance of COPs representing the State's contractual obligation, subject to
annual appropriation by the Legislature and availability of money, to make
installment or lease-purchase payments for the State's acquisition of such
equipment or real property.

The State also employs moral obligation financing. Moral obligation
financing generally involves the issuance of debt by a public authority to
finance a revenue-producing project or other activity. The debt is secured by
project revenues and statutory provisions requiring the State, subject to
appropriation by the Legislature, to make up any deficiencies which may occur
in the issuer's debt service reserve fund. There has never been a default on
any moral obligation debt of any public authority although there can be no
assurance that such a default will not occur in the future.

Payments of debt service on State general obligation and State-guaranteed
bonds and notes are legally enforceable obligations of the State. The State has
never defaulted on any of its general obligation indebtedness or its obligations
under lease-purchase or contractual-obligation financing arrangements and has
never been called upon to make any direct payments pursuant to its guarantees
although there can be no assurance that such a default or call will not occur in
the future.

The proposed 1997-98 through 2002-2003 Capital Program and Financing Plan
was released with the 1998-99 Executive Budget on January 20, 1998. As part of
the Plan, changes were proposed to the State's 1997-98 borrowing plan,
including: delay of the issuance of COPs to finance welfare information systems
through 1998-99 to permit a thorough assessment of needs; and the elimination of
issuances for the CEFAP to reflect the proposed conversion of that bond-financed
program pay-as-you-go financing.

In addition to the arrangements described above, State law provides for
the creation of State municipal assistance corporations, which are public
authorities established to aid financially troubled localities. The Municipal
Assistance Corporation for The City of New York ("MAC") was created to provide
financing assistance to New York City (the "City"). To enable MAC to pay debt
service on its obligations, MAC receives, subject to annual appropriation by
the Legislature, receipts from the 4% New York State Sales Tax for the benefit
of New York City, the State-imposed stock transfer tax and, subject to certain
prior liens, certain local assistance payments otherwise payable to the City.
The legislation creating MAC also includes a moral obligation provision. Under
its enabling legislation, MAC's authority to issue bonds and notes (other than
refunding bonds and notes) expired on December 31, 1984. In 1995, the State
created the Municipal Assistance Corporation for the City of Troy ("Troy MAC").
The bonds issued by Troy MAC, however, do not include moral obligation
provisions.

The 1998-99 State Financial Plan. The State's 1998-99 fiscal year
commenced on April 1, 1998 and ends on March 31, 1999. The debt component of
the State's budget for the 1998-99 fiscal year was adopted by the Legislature
on March 30, 1998, and the remainder of the budget was adopted by the
Legislature on

C-2
<PAGE>

April 18, 1998. The State Financial Plan for the 1998-99 fiscal year (the
"State Financial Plan") was released on June 25, 1998 and was based on the
State's budget as enacted by the Legislature and signed into law by the
Governor. The State Financial Plan is updated in July, October and January. The
State Financial Plan was projected to be balanced on a cash basis; however
there can be no assurance that the State Financial Plan will continue to be in
balance. Total General Fund receipts and transfers from other funds were
projected to be $37.56 billion, while total General Fund disbursements and
transfers to other funds were projected to be $36.78 billion. After adjustments
for comparability, the adopted 1998-99 budget projected a year-over-year
increase in General Fund disbursements of 7.1 percent. General Fund
disbursements in 1998-99 were projected to grow by $2.43 billion over 1997-98
levels, or $690 million more than proposed in the Governor's Executive Budget,
as amended. The change in General Fund disbursements from the Executive Budget
to the enacted budget reflects legislative additions (net of the value of the
Governor's vetoes), actions taken at the end of the regular legislative session
and spending that was originally anticipated to occur in 1997-98 but is now
expected to occur in 1998-99. The 1998-99 increase in General fund spending has
primarily taken the form of additional local assistance ($1.88 billion). The
largest annual increases are for educational programs, Medicaid, other health
and social welfare programs and community projects grants.

Resources used to fund these additional expenditures include increased
revenues projected for 1998-99, increased resources produced in the 1997-98
fiscal year that are to be utilized in 1998-99 reestimates of social service,
fringe benefit and other spending, and certain non-recurring resources.

The State's enacted budget includes several new multi-year tax reduction
initiatives, including acceleration of State-funded property and local income
tax relief for senior citizens under the School Tax Relief Program ("STAR"),
expansion of the child care income tax credit for middle-income families, a
phased-in reduction of the general business tax and reduction of several other
taxes and fees, including an accelerated phase-out of assessments on medical
providers. The enacted budget also provides for significant increases in
spending for public schools, special education programs and the State and City
university systems. It also allocates $50 million for a new Debt Reduction
Reserve Fund ("DRRF") that may eventually be used to pay debt service costs on
or to prepay outstanding State-supported bonds.

The 1998-99 State Financial Plan projects a closing balance in the General
Fund of $1.42 billion that is comprised of a reserve of $761 million available
for future needs, a balance of $400 million in the Tax Stabilization Reserve
Fund ("TSRF"), a balance of $158 million in the Community Projects Fund ("CPF")
and a balance of $100 million in the Contingency Reserve Fund ("CRF"). The TSRF
can be used in the event of an unanticipated General Fund cash operating
deficit, as provided under the State Constitution and State Finance Law. The
CPF is used to finance various legislative and executive initiatives. The CRF
provides resources to help finance any extraordinary litigation costs during
the fiscal year.

Many complex political, social and economic forces influence the State's
economy and finances, which may in turn affect the State's Financial Plan.
These forces may affect the State unpredictably from fiscal year to fiscal year
and are influenced by governments, institutions and organizations that are not
subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic
forecasts, however, have frequently failed to predict accurately the timing and
magnitude of changes in the national and the State economies.

The State Financial Plan included actions that would have an effect on the
budget outlook for State fiscal year 1998-99 and beyond. The DOB estimated that
the 1998-99 State Financial Plan contained actions that provide non-recurring
resources or savings totaling approximately $64 million, the largest of which
is a retroactive reimbursement of federal welfare claims. The balance is
composed of various other actions, primarily the transfer of unused special
revenue fund balances to the General Fund.

Despite recent budgetary surpluses recorded by the State, State actions
affecting the level of receipts and disbursements, the relative strength of the
State and regional economy, actions of the federal government and other factors
have created structural budget gaps for the State. These gaps resulted from a
significant disparity between recurring revenues and the costs of maintaining
or increasing the level of sup-

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port for State programs. To address a potential imbalance in any given fiscal
year, the State is required to take actions to increase receipts and/or reduce
disbursements as it enacts the budget for that year, and under the State
Constitution, the Governor is required to propose a balanced budget each year.
There can be no assurance, however, that the Legislature will enact the
Governor's proposals or that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future fiscal years. For example, the fiscal effects of tax
reductions adopted in the last several fiscal years (including 1998-99) are
projected to grow more substantially beyond the 1998-99 fiscal year, with the
incremental annual cost of all currently enacted tax reductions estimated at
over $4 billion by the time they are fully effective in State fiscal year
2002-03. These actions will place pressure on future budget balance in New York
State.

The State Division of Budget ("DOB") believes that its projections of
receipts and disbursements relating to the current State Financial Plan, and
the assumptions on which they are based, are reasonable. Actual results,
however, could differ materially and adversely from the projections set forth
in this Annual Information Statement, and those projections may be changed
materially and adversely from time to time. In the past, the State has taken
management actions and made use of internal sources to address potential State
Financial Plan shortfalls, and DOB believes it could take similar actions
should variances occur in its projections for the current fiscal year.

Outyear Projections of Receipts and Disbursements. In recent years, the
State has closed projected budget gaps of $5.0 billion (1995-96), $3.9 billion
(1996-97), $2.3 billion (1997-98) and less than $1 billion (1998-99). The
State, as a part of the 1998-99 Executive Budget projections submitted to the
Legislature in February 1998, projected a 1999-00 General Fund budget gap of
approximately $1.7 billion and a 2000-01 gap of $3.7 billion. As a result of
changes made in the 1998-99 enacted budget, the 1999-00 gap is now expected to
be roughly $1.3 billion, or about $400 million less than previously projected,
after application of reserves created as part of the 1998-99 budget process.
Such reserves would not be available against subsequent year imbalances.

Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of
higher-than-projected tax receipts and in lower-than-expected entitlement
spending. However, the State's projections in 1999-00 currently assume actions
to achieve $600 million in lower disbursements and $250 million in additional
receipts from the settlement of State claims against the tobacco industry.
Consistent with past practice, the projections do not include any costs
associated with new collective bargaining agreements after the expiration of the
current round of contracts at the end of the 1998-99 fiscal year. Sustained
growth in the State's economy and continued declines in welfare case load and
health care costs would also produce additional savings in the State Financial
Plan. Finally, various federal actions, including the potential benefit effect
on State Tax receipts from changes to the federal tax treatment of capital
gains, would potentially provide significant benefits to the State over the next
several years. The State expects that the 1999-00 Financial Plan will achieve
savings from initiatives by State agencies to deliver services more efficiently,
workforce management efforts, maximization of federal and non- General Fund
spending offsets, and other actions necessary to bring projected disbursements
and receipts into balance.

The State will formally update its outyear projections of receipts and
disbursements for the 2000-01 and 2001-02 fiscal years as a part of the 1999-00
Executive Budget process, as required by law. The revised expectations for
years 2000-01 and 2001-02 will reflect the cumulative impact of tax reductions
and spending commitments enacted over the last several years as well as new
1999-00 Executive Budget recommendations. The STAR program, which dedicates a
portion of personal income tax receipts to fund school tax reductions, has a
significant impact on General Fund receipts. STAR is projected to reduce
personal income tax revenues available to the General Fund by an estimated $1.3
billion in 2000-01. Disbursement projections for the outyears currently assume
additional outlays for school aid, Medicaid, welfare reform, mental health
community reinvestment and other multi-year spending commitments in law.

Uncertainties with regard to the economy, as well as the outcome of
certain litigation now pending against the State, could produce adverse effects
on the State's projections of receipts and disbursements.

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For example, changes to current levels of interest rates or deteriorating world
economic conditions could have an adverse effect on the State economy and
produce results in the current fiscal year that are worse than predicted.
Similarly, adverse judgments in legal proceedings against the State could
exceed amounts reserved in the 1998-99 Financial Plan for payment of such
judgments and produce additional unbudgeted costs to the State.

In recent years, the State has failed to adopt a budget prior to the
beginning of its fiscal year. A delay in the adoption of the State's budget
beyond the statutory April 1 deadline could delay the projected receipt by the
City of State aid, and there can be no assurance that State budgets in future
fiscal years will be adopted by the April 1 statutory deadline.

Year 2000 Compliance. New York State is currently addressing "Year 2000"
data processing compliance issues. The Year 2000 compliance issue ("Y2K")
arises because most computer software programs allocate two digits to the data
field for "year"on the assumption that the first two digits will be "19". Y2K
could impact both the ability to enter data into computer programs and the
ability of such programs to correctly process data.

In 1996, the State created the Office for Technology ("OFT") to help
address statewide technology issues, including the Year 2000 issue. OFT has
estimated that investments of at least $140 million will be required to bring
approximately 350 State mission-critical and high-priority computer systems not
otherwise scheduled for replacement into Year 2000 compliance, and the State is
planning to spend $100 million in the 1998-99 fiscal year for this purpose. The
enacted budget also continues funding for major systems scheduled for
replacement, including the State payroll, civil service, tax and finance and
welfare management systems, for which Year 2000 compliance is included as a
part of the project.

OFT is monitoring compliance on a quarterly basis and is providing
assistance and assigning resources to accelerate compliance for mission
critical systems, with most compliance testing expected to be completed by
mid-1999. There can be no guarantee, however, that all of the State's
mission-critical and high-priority computer systems will be Year 2000 compliant
and that there will not be an adverse impact upon State operations or State
finances as a result.

Government Funds Comprising the State Financial Plan. Four governmental
fund types comprise the State Financial Plan: the General fund, the Special
Revenue Funds, the Capital Projects funds and the Debt Service funds.

The General Fund. The General Fund is the principal operating fund of the
State and is used to account for all financial transactions, except those
required to be accounted for in another fund. It is the State's largest fund
and receives almost all State taxes and other resources not dedicated to
particular purposes. General Fund moneys are also transferred to other funds,
primarily to support certain capital projects and debt service payments in
other fund types. In the State's 1998-99 fiscal year, the General Fund was
expected by the State to account for approximately 47.6 percent of all
governmental funds disbursements and 70.1 percent of total State Funds
disbursements.

The General Fund was projected to be balanced on a cash basis for the
1998-99 fiscal year, however there can be no assurance that the General Fund
will remain balanced for the entire fiscal year. Total receipts were projected
to be $37.56 billion, an increase of $3.01 billion from the $34.55 billion
recorded in 1997-98. The disbursement total projected for fiscal year 1998-99
included $34.36 billion in tax receipts, $1.40 billion in miscellaneous
receipts and $1.80 billion in transfers from other funds.

The transfer of a portion of the surplus recorded in 1997-98 to 1998-99
exaggerates the "real" growth in State receipts from year to year by depressing
reported 1997-98 figures and inflating 1998-99 projections. Conversely, the
incremental cost of tax reductions newly effective in 1998-99 and the impact of
statutes earmarking certain tax receipts to other funds work to depress
apparent growth below the underlying growth in receipts attributable to
expansion of the State's economy. On an adjusted basis, State tax revenues in
the 1998-99 fiscal year were projected to grow at approximately 7.5 percent,
following an adjusted growth of

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roughly nine percent in the 1997-98 fiscal year. Fund disbursements were
projected to be $36.78 billion, an increase of $2.43 billion over the total
amount disbursed and transferred in the 1997-98 fiscal year.

Special Revenue Funds: Special Revenue Funds are used to account for the
proceeds of specific revenue sources such as federal grants that are legally
restricted, either by the Legislature or outside parties, to expenditures for
specified purposes. Although activity in this fund type was expected to
comprise approximately 41 percent of total governmental funds receipts and
disbursements in the 1998-99 fiscal year, about three-quarters of that activity
relates to federally-funded programs.

Total disbursements for programs supported by Special Revenue Funds were
projected at $29.97 billion, an increase of $2.32 billion or 8.4 percent from
1997-98. Federal grants account for approximately three-quarters of all
spending in the Special Revenue fund type. Disbursements from federal funds
were estimated at $21.78 billion, an increase of $1.12 billion or 5.4 percent.
The single largest program in this Fund group is Medicaid, which was projected
at $13.65 billion, an increase of $465 million or 3.5 percent above last year.
Federal support for welfare programs was projected at $2.53 billion, similar to
1997-98. The remaining growth in federal funds was due primarily to the new
Child Health Plus program, estimated at $197 million in 1998-99. This program
will expand health insurance coverage to children of indigent families.

State special revenue spending was projected to be $8.19 billion, an
increase of $1.20 billion or 17.2 percent from last year's levels. Most of this
projected increase in spending was due to the $704 million cost of the first
phase of the STAR program, as well as $231 million in additional operating
assistance for mass transportation and $113 million for the State share of the
new Child Health Plus program.

Capital Projects Funds: Capital Projects Funds account for the financial
resources used in the acquisition, construction or rehabilitation of major
State capital facilities and for capital assistance grants to certain local
governments or public authorities. This fund type consists of the Capital
Projects Fund, which is supported by tax dollars transferred from the General
Fund and various other capital funds established to distinguish specific
capital construction purposes supported by other revenues. In the 1998-99
fiscal year, activity in these funds was expected to comprise 5.5 percent of
total governmental receipts and disbursements.

Capital Projects Funds spending in fiscal year 1998-99 was projected at
$4.14 billion, an increase of $575 million or 16.1 percent from last year. The
major components of this expected growth were transportation and environmental
programs, including continued increased spending for 1996 Clean Water/Clean Air
Bond Act projects and higher projected disbursements from the Environmental
Protection Fund (EPF). Another significant component of this projected increase
is in the area of public protection, primarily for facility rehabilitation and
construction of additional prison capacity.

Debt Service Funds: Debt Service Funds are used to account for the payment
of principal of, and interest on, long-term debt of the State and to meet
commitments under lease-purchase and other contractual-obligation financing
arrangements. These Funds were expected to comprise 3.8 percent of total
governmental fund receipts and disbursements in the 1998-99 fiscal year.
Receipts in these Funds in excess of debt service requirements are transferred
to the General Fund and Special Revenue Funds, pursuant to law.

The Debt Service Fund type consists of the General Debt Service Fund,
which is supported primarily by tax dollars transferred from the General Fund,
and other funds established to accumulate moneys for the payment of debt
service. Total disbursements from the Debt Service Fund type were estimated at
$3.36 billion in 1998-99, an increase of $275 million or 8.9 percent from
1997-98 levels. Of the increase, $102 million was dedicated to transportation
purposes, including debt service on bonds issued for State and local highway
and bridge programs financed through the New York State Thruway Authority and
supported by the Dedicated Highway and Bridge Trust Fund. Another $45 million
was for education purposes, including State and City University programs
financed through the Dormitory Authority of the State of New York (DASNY). The
remainder was for a variety of programs in such areas as mental health and
corrections and for general obligation financings.

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Prior Fiscal years. New York State's financial operations have improved
during recent fiscal years. During the period 1989-90 through 1991-92, the
State incurred General Fund operating deficits that were closed with receipts
from the issuance of TRANs. A national recession, followed by the lingering
economic slowdown in the New York and regional economy, resulted in repeated
shortfalls in receipts and three budget deficits during those years. During its
last six fiscal years, however, the State has recorded balanced budgets on a
cash basis, with positive fund balances as described below. There can be no
assurance, however, that such trends will continue.

Fiscal Year 1997-98. The State ended its 1997-98 fiscal year on March 31,
1998 in balance on a cash basis, with a General Fund cash surplus as reported
by DOB of approximately $2.04 billion. The cash surplus was derived primarily
from higher-than-anticipated receipts and lower spending on welfare, Medicaid
and other entitlement programs.

The General Fund had a closing balance of $638 million, an increase of
$205 million from the prior fiscal year. The balance was held in three accounts
within the General Fund: the TSRF, the CRF and the CPF. The TSRF closing
balance was $400 million, following a required deposit of $15 million (repaying
a transfer made in 1991-92) and an extraordinary deposit of $68 million made
from the 1997-98 surplus. The CRF closing balance was $68 million, following a
$27 million deposit from the surplus. The CPF, which finances legislative
initiatives, closed the fiscal year with a balance of $170 million, an increase
of $95 million. The General Fund closing balance did not include $2.39 billion
in the tax refund reserve account, of which $521 million was made available as
a result of the LGAC financing program and was required to be on deposit on
March 31, 1998.

General Fund receipts and transfers from other funds for the 1997-98
fiscal year (including net tax refund reserve account activity) totaled $34.55
billion, an annual increase of $1.51 billion, or 4.57 percent over 1996-97.
General Fund disbursements and transfers to other funds were $34.35 billion, an
annual increase of $1.45 billion or 4.41 percent.

Fiscal year 1996-97. The State ended its 1996-97 fiscal year on March 31,
1997 in balance on a cash basis, with a General Fund cash surplus as reported
by DOB of approximately $1.42 billion. The cash surplus was derived primarily
from higher-than-expected revenues and lower-than-expected spending for social
services programs.

The General Fund closing fund balance was $433 million, an increase of
$146 million from the 1995-96 fiscal year. Of that amount, $317 million was in
the TSRF, after a required deposit of $15 million and an additional deposit of
$65 million in 1996-97. In addition, $41 million was deposited in the CRF. The
remaining $75 million reflected amounts then on deposit in the Community
Projects Fund. The General Fund closing fund balance did not include $1.86
billion in the tax refund reserve account, of which $521 million was made
available as a result of the LGAC financing program and was required to be on
deposit as of March 31, 1997.

General Fund receipts and transfers from other funds for the 1996-97
fiscal year totaled $33.04 billion, an increase of 0.7 percent from the
previous fiscal year (including net tax refund reserve account activity).
General Fund disbursements and transfers to other funds totaled $32.90 billion
for the 1996-97 fiscal year, an increase of 0.7 percent from the 1995-96 fiscal
year.

Fiscal Year 1995-96. The State ended its 1995-96 fiscal year on March 31,
1996 with a General Fund cash surplus of $445 million, as reported by DOB . The
cash surplus was derived from higher-than expected receipts, savings generated
through agency cost controls and lower-than-expected welfare spending. The DOB
reported that revenues exceeded projections by $270 million, while spending for
social service programs was lower than forecast by $120 million and all other
spending was lower by $55 million. From the resulting benefit of $445 million,
a $65 million voluntary deposit was made into the TSRF, and $380 million was
used to reduce 1996-97 Financial Plan liabilities by accelerating 1996-97
payments, deferring 1995-96 revenues, and making a deposit to the tax refund
reserve account.

The General Fund closing Fund balance was $287 million, an increase of
$129 million from 1994-95 levels. The $129 million change in Fund balance is
attributable to a $65 million voluntary deposit to the TSRF,

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a $15 million required deposit to the TSRF, a $40 million deposit to the CRF
and a $9 million deposit to the Revenue Accumulation Fund. The closing Fund
balance included $237 million on deposit in the TSRF. In addition, $41 million
was on deposit in the CRF. The remaining $9 million reflected amounts then on
deposit in the Revenue Accumulation Fund. That Fund was created to hold certain
tax receipts temporarily before their deposit to other accounts. The General
fund closing balance did not include $678 million in the tax refund reserve
account of which $521 million was made available as a result of the LGAC
financing program and was refinanced to be on deposit as of March 31, 1996.

General Fund receipts and transfers from other funds (including net refund
reserve account activity) totaled $32.81 billion, which is a decrease of 1.1
percent from 1994-95 levels. This decrease reflects the impact of tax
reductions enacted and effective in both 1994 and 1995. General Fund
disbursements and transfers totaled $32.68 billion for the 1995-96 fiscal year,
which is a decrease of 2.2 percent from 1994-95 levels.

Cash-Basis Results for the Non-General Funds Over the Last 3 Years.
Activity in the three other governmental funds has remained relatively stable
over the last three fiscal years, with federally-funded programs comprising
approximately two-thirds of these funds. The most significant change in the
structure of these funds has been the redirection of a portion of
transportation-related revenues from the General Fund to two new dedicated
funds in the Special Revenue and Capital Projects fund types. These revenues
are used to support the capital programs of the Department of Transportation
and the MTA.

In the Special Revenue Funds, disbursements increased from $26.26 billion
to $27.65 billion over the last three years, primarily as a result of increased
costs for the federal share of Medicaid. Other activity reflected dedication of
taxes to a new fund for mass transportation, new lottery games, and new fees
for criminal justice programs.

Disbursements in the Capital Projects Funds declined from $3.97 billion to
$3.56 billion over the last three years, as spending for miscellaneous capital
programs decreased, partially offset by increases for mental hygiene, health
and environmental programs. The composition of this Fund type's receipts also
changed as the dedicated transportation taxes began to be deposited, general
obligation bond proceeds declined substantially, federal grants remained
stable, and reimbursements from public authority bonds (primarily
transportation related) increased.

Activity in the Debt Service Funds reflected increased use of bonds during
the three-year period for improvements to the State's capital facilities and
the continued costs of the LGAC fiscal reform program. The increases were
moderated by the refunding savings achieved by the State over the last several
years using strict present value savings criteria. The growth in LGAC debt
service was offset by reduced short-term borrowing costs reflected in the
General Fund.

GAAP-Basis Results. State law requires the State to update its projected
financial results on a GAAP-basis on or before September first of each year.

Projected GAAP-Basis Results for Fiscal Year 1998-99. The State based its
GAAP projections on the cash estimates in the First Quarterly Update to the
Financial Plan and the actual results for the 1997-98 fiscal year as reported
by the State Comptroller on July 28, 1998.

On March 31, 1998, the State recorded, on a GAAP-basis, its first-ever,
accumulated positive balance in its General Fund. This "accumulated surplus"
was $567 million. The improvement in the State's GAAP position is attributable,
in part, to the cash surplus recorded at the end of the State's 1997-98 fiscal
year. Much of that surplus is reserved for future requirements, but a portion
is being used to meet spending needs in 1998-99. Thus, the State expects some
deterioration in its GAAP position, but expects to maintain a positive GAAP
balance through the end of the current fiscal year.

The 1998-99 GAAP-basis General Fund Financial Plan shows expected tax
revenues of $33.1 billion and miscellaneous revenues of $2.6 billion to finance
expenditures of $36.1 billion and net financing uses of $156 million. The
General Fund accumulated surplus is projected to be $27 million at the end of
1998-99.

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GAAP-Basis Results for Fiscal Year 1997-98. The State completed its
1997-98 fiscal year with a combined Governmental Funds operating surplus of
$1.80 billion, which included an operating surplus in the General Fund of $1.56
billion, in Capital Projects Funds of $232 million and in Special Revenue Funds
of $49 million, offset in part by an operating deficit of $43 million in Debt
Service Funds.

General Fund. The State reported a General Fund operating surplus of $1.56
billion for the 1997-98 fiscal year, as compared to an operating surplus of
$1.93 billion for the 1996-97 fiscal year. As a result, the State reported an
accumulated surplus of $567 million in the General Fund for the first time
since it began reporting its operations on a GAAP-basis. The 1997-98 fiscal
year operating surplus reflects several major factors, including the cash-basis
operating surplus resulting from the higher-than-anticipated personal income
tax receipts, an increase in taxes receivable of $681 million, an increase in
other assets of $195 million and a decrease in pension liabilities of $144
million. This was partially offset by an increase in payables to local
governments of $270 million and tax refunds payable of $147 million.

Revenues increased $617 million (1.8 percent) over the prior fiscal year,
with increases in personal income, consumption and use and business taxes.
Decreases were reported for other taxes, federal grants and miscellaneous
revenues. Personal income taxes grew $746 million, an increase of nearly 4.2
percent. The increase in personal income taxes resulted from strong employment
and wage growth and the strong performance by the financial markets during
1997. Consumption and use taxes increased $334 million or 5.0 percent as a
result of increased consumer confidence. Business taxes grew $28 million, an
increase of 0.5 percent. Other taxes fell primarily because revenue for estate
and gift taxes decreased. Miscellaneous revenues decreased $380 million, or 12.
7 percent, due to a decline in receipts from the Medical Malpractice Insurance
Association and medical provider assessments.

Expenditures increased $137 million (0.4 percent) from the prior fiscal
year, with the largest increases occurring in State aid for education and social
services spending. Education expenditures grew $391 million (3.6 percent) due
mainly to an increase in spending for municipal and community colleges. Social
services expenditures increased $233 million (2.6 percent) due mainly to program
growth. Increases in other State aid spending were offset by a decline in
general purpose aid of $235 million (27.8 percent) due to statutory changes in
the payment schedule. Increases in personal and non-personal service costs were
offset by a decrease in pension contribution of $660 million, a result of the
refinancing of the State's pension amortization that occurred in 1997.

Net other financing sources decreased $841 million (68.2 percent) due to
the nonrecurring use of bond proceeds ($769 million) provided by DASNY to pay
the outstanding pension amortization liability incurred in 1997.

Special Revenue, Debt Service and Capital Projects Funds. An operating
surplus of $49 million was reported for the Special Revenue Funds for the
1997-98 fiscal year, which increased the accumulated fund balance to $581
million. Revenues rose by $884 million over the prior fiscal year (3.3 percent)
as a result of increases in tax and federal grant revenues. Expenditures
increased by $795 million (3.3 percent) as a result of increased costs for local
assistance grants. Net other financing uses decreased $105 million (3.3
percent).

Debt Service Funds ended the 1997-98 fiscal year with an operating deficit
of $43 million and, as a result, the accumulated fund balance declined to $1.86
billion. Revenues increased $246 million (10.6 percent) as a result of
increases in dedicated taxes. Debt service expenditures increased $341 million
(14.4 percent). Net other financing sources increased $89 million (401.3
percent) due primarily to savings achieved through advance refundings of
outstanding bonds.

An operating surplus of $232 million was reported in the Capital Projects
Funds for the State's 1997-98 fiscal year and, as a result, the accumulated
deficit in this fund type decreased to $381 million. Revenues increased $180
million (8.6 percent) primarily as a result of a $54 million increase in
dedicated tax revenues and an increase of $101 million in federal grants for
transportation and local waste water treatment projects.

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Net other financing sources increased by $100 million primarily as a result of
a decrease in transfers to certain public benefit corporations engaged in
housing programs.

GAAP-Basis Results for Fiscal Year 1996-97. The State completed its
1996-97 fiscal year with a combined governmental funds operating surplus of
$2.1 billion, which included an operating surplus in the General Fund of $1.9
billion, in the Capital Projects Funds of $98 million and in the Special
Revenue Funds of $65 million, offset in part by an operating deficit of $37
million in the Debt Service Funds.

General Fund. The State reported a General Fund operating surplus of $1.93
billion for the 1996-97 fiscal year, as compared to an operating surplus of
$380 million for the prior fiscal year. The 1996-97 fiscal year GAAP operating
surplus reflects several major factors, including the cash basis operating
surplus, the benefit of bond proceeds which reduced the State's pension
liability, an increase in taxes receivable of $493 million, and a reduction in
tax refund liabilities of $196 million. This was offset by an increased payable
to local governments of $244 million.

Revenues increased $1.91 billion (nearly 6.0 percent) over the prior
fiscal year with increases in all revenue categories. Personal income taxes
grew $620 million, an increase of nearly 3.6 percent, despite the
implementation of scheduled tax cuts. The increase in personal income taxes was
caused by moderate employment and wage growth and the strong financial markets
during 1996. Consumption and use taxes increased $179 million or 2.7 percent as
a result of increased consumer confidence. Business taxes grew $268 million, an
increase of 5.6 percent, primarily as a result of the strong financial markets
during 1996. Other taxes increased primarily because revenues from estate and
gift taxes increased. Miscellaneous revenues increased $743 million, a 33.1
percent increase, because of legislated increases in receipts from the Medical
Local Practice Insurance Association and from medical provider assessments.

Expenditures increased $830 million (2.6 percent) from the prior fiscal
with the largest increase occurring in pension contributions and State aid for
education spending. Pension contribution expenditures increased $514 million
(198.2 percent), primarily because the State paid off its 1984-85 and 1985-86
pension amortization liability. Education expenditures grew $351 million (3.4
percent), due mainly to an increase in spending for support for public schools
and physically handicapped children, offset by a reduction in spending for
municipal and community colleges. Modest increases in other State aid spending
was offset by a decline in social services expenditures of $157 million (1.7
percent). Social services spending continues to decline because of cost
containment strategies and declining caseloads.

Net other financing sources increased $475 million (62.6 percent), due
mainly to bond proceeds provided by the Documentary Authority of the State of
New York (DASNY) to pay the outstanding pension amortization, offset by
elimination of prior year LGAC proceeds.

Special Revenue, Debt Service and Capital Projects Funds. An operating
surplus of $65 million was reported for the Special Revenue Funds for the
1996-97 fiscal year, increasing the accumulated fund balance to $532 million.
Revenues increased $583 million over the prior fiscal year (2.2 percent) as a
result of increases in tax and lottery revenues. Expenditures increased $384
million (1.6 percent) as a result of increased costs for departmental
operations. Net other financing sources decreased $275 million (8.0 percent),
primarily because of declines in amounts transferred to other funds.

Debt Service Funds ended the 1996-97 fiscal year with an operating deficit
of $37 million and, as a result, the accumulated fund balance declined to $1.90
billion. Revenues increased $102 million (4.6 percent) because of increases in
both dedicated taxes and mental hygiene patient fees. Debt service expenditures
increased $47 million (2.0 percent). Net other financing sources decreased $277
million (92.6 percent) due primarily to an increase in payments on advance
refundings.

An operating surplus of $98 million was reported in the Capital Projects
Funds for the State's 1996-97 fiscal year, and, as a result, the accumulated
fund deficit decreased to $614 million. Revenues increased $100 million (5.0
percent) primarily because a larger share of the real estate transfer tax was
shifted to the Environmental Protection Fund and federal grant revenues
increased for transportation and local waste

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water treatment projects. Expenditures decreased $359 million (10.0 percent)
because of declines in capital grants for education, housing and regional
development programs and capital construction spending. Net other financing
sources decreased by $637 million as a result of a decrease in proceeds from
financing arrangements.

GAAP-Basis Results for Fiscal Year 1995-96. The State completed its
1995-96 fiscal year with a combined Governmental Funds operating surplus of
$432 million, which included an operating surplus in the General Fund of $380
million, in the Capital Projects Funds of $276 million and in the Debt Service
Funds of $185 million, offset in part by an operating deficit of $409 million
in the Special Revenue Funds.

General Fund. The State reported a General Fund operating surplus of $380
million for the 1995-96 fiscal year, as compared to an operating deficit of
$1.43 billion for the prior fiscal year. The 1995-96 fiscal year surplus
reflects several major factors, including the cash-basis surplus and the
benefit of $529 million in LGAC Bond Annual Information Statement June 26, 1998
proceeds which were used to fund various local assistance programs. This was
offset in part by a $437 million increase in tax refund liability primarily
resulting from the effects of ongoing tax reductions and (to a lesser extent)
changes in accrual measurement policies, and increases in various other
expenditure accruals.

Revenues increased $530 million (nearly 1.7 percent) over the prior fiscal
year with an increase in personal income taxes and miscellaneous revenues
offset by decreases in business and other taxes. Personal income taxes grew
$715 million, an increase of 4.3 percent. The increase in personal income taxes
was caused by moderate employment and wage growth and the strong financial
markets during 1995. Business taxes declined $295 million or 5.8 percent,
resulting primarily from changes in the tax law that modified the distribution
of taxes between the General Fund and other fund types, and reduced business
tax liability. Miscellaneous revenues increased primarily because of an
increase in receipts from medical provider assessments.

Expenditures decreased $716 million (2.2 percent) from the prior fiscal
year with the largest decrease Occurring in State aid for social services
program and State operations spending. Social services expenditures decreased
$739 million (7.5 percent) due mainly to implementation of cost containment
strategies by the State and local governments, and reduced caseloads. General
purpose and health and environment expenditures grew $139 million (20.2
percent) and $121 million (33.3 percent), respectively. Health and environment
spending increased as a result of increases enacted in 1995-96. In State
operations, personal service costs and fringe benefits declined $241 million
(3.8 percent) and $55 million (3.6 percent), respectively, due to staffing
reductions. The decline in non-personal service costs of $170 million (8.6
percent) was caused by a decline in the litigation accrual. Pension
contributions increased $103 million (66.4 percent) as a result of the return
to the aggregate cost method used to determine employer contributions.

Net other financing sources nearly tripled, increasing $561 million, due
primarily to an increase in bonds issued by LGAC, a transfer from the Mass
Transportation Operating Assistance Fund and transfers from public benefit
corporations.

Special Revenue, Debt Service and Capital Projects Funds. An operating
deficit of $409 million was reported for Special Revenue Funds for the 1995-96
fiscal year which deceased the accumulated fund balance to $532 million.
Revenues increased $1.45 billion over the prior fiscal year (5.8 percent) as a
result of increases in federal grants and lottery revenues. Expenditures
increased $ 1.21 billion (5.4 percent) as a result of increased costs for
social services programs and an increase in the distribution of lottery
proceeds to school districts. Other financing uses increased $693 million (25.1
percent) primarily because of an increase in federal reimbursements transferred
to other funds.

Debt Service Funds ended the 1995-96 fiscal year with an operating surplus
of over $185 million and, as a result, the accumulated fund balance increased
to $1.94 billion. Revenues increased $10 million (0.5 percent) because of
increases in both dedicated taxes and mental hygiene patient fees. Debt service
expenditures increased $201 million (9.5 percent). Net other financing sources
increased threefold to $299 million, due primarily to increases in patient
reimbursement revenues.

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An operating surplus of $276 million was reported in the Capital Projects
Funds for the State's 1995-96 fiscal year and, as a result, the accumulated
deficit fund balance in this fund type decreased to $712 million. Revenues
increased $260 million (14.9 percent) primarily because a larger share of the
petroleum business tax was shifted from the General Fund to the Dedicated
Highway and Bridge Trust Fund, and due to an increase in federal grant revenues
for transportation and local waste water treatment projects. Capital Projects
Funds expenditures increased $194 million (5.7 percent) in State fiscal year
1995-96 because of increased expenditures for education and health and
environmental projects. Net other financing sources increased by $577 million
as a result of an increased in proceeds from financing arrangements.

Due to changing economic conditions and information, public statements or
reports regarding the State Financial Plan and its constituent funds may be
released by the Governor, members of the Legislature, and their respective
staffs, as well as others involved in the budget process from time to time.
Those statements or reports may contain predictions, projections or other items
of information relating to the State's financial condition, including potential
operating results for the current fiscal year and projected baseline gaps for
future fiscal years, that may vary materially and adversely from the
information provided herein.

State Financial Plan Considerations. The economic and financial condition
of the State may be affected by various financial, social, economic and
political factors. These factors can be very complex, may vary from fiscal year
to fiscal year, and are frequently the result of actions taken not only by the
State and its agencies and instrumentalities, but also by entities, such as the
federal government, that are not under the control of the State. For example,
various proposals relating to federal tax and spending policies that are
currently being publicly discussed and debated could, if enacted, have a
significant impact on the State's financial condition in the current and future
fiscal years. Because of the uncertainty and unpredictability of the changes,
their impact cannot, as a practical matter, be included in the assumptions
underlying the State's projections at this time.

The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of State
and national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, the extent
of corporate and governmental restructuring, federal fiscal and monetary
policies, the level of interest rates, and the condition of the world economy,
which could have an adverse effect on the State. There can be no assurance that
the State economy will not experience results in the current fiscal year that
are worse than predicted, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.

Projections of total State receipts in the State Financial Plan are based
on the State tax structure in effect during the fiscal year and on assumptions
relating to basic economic factors and their historical relationships to State
tax receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or
revenue sources is generally made by estimating the change in yield of such tax
or revenue source caused by economic and other factors, rather than by
estimating the total yield of such tax or revenue source from its estimated tax
base. The forecasting methodology, however, ensures that State fiscal year
estimates for taxes that are based on a computation of annual liability, such
as the business and personal income taxes, are consistent with estimates of
total liability under such taxes.

Projections of total State disbursements are based on assumptions relating
to economic and demographic factors, levels of disbursements for various
services provided by local governments (where the cost is partially reimbursed
by the State), and the results of various administrative and statutory
mechanisms in controlling disbursements for State operations. Factors that may
affect the level of disbursements in the fiscal year include uncertainties
relating to the economy of the nation and the State, the policies of the
federal government, and changes in the demand for and use of State services.

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National and State Economic Outlooks. The information below summarizes the
national and State economic situation and outlook upon which projections of
receipts and certain disbursements were made for the 1998-99 Financial Plan.

U.S. Economy. The national economy grew strongly during the first quarter
of 1998 but slowed sharply in the second quarter, with the real growth rate
falling from 5.5 percent to 1.8 percent. Although continued moderation is
expected during the second half of the year, the annual growth rate for 1998 is
projected to be 3.4 percent. However, the slowing of growth within the domestic
economy, the contraction of export markets in many parts of the world and the
lack of inflationary pressure has encouraged the Federal Reserve Board ("FRB")
to commence a policy of gradually decreasing short-term interest rates. Nominal
GDP is expected to grow about 4.6 percent in 1998, more than a percentage point
slower than in 1997. Inflation, as measured by the Consumer Price Index, is
expected to be 1.7 percent in 1998. The annual rate of job growth is expected
to be 2.5 percent in 1998. The rate of growth of wages in 1998 will be 6.7
percent. In line with the general slowdown of the overall economy that has
occurred during the year, personal income growth is projected to decline from
5.6 percent in 1997 to 5.0 percent in 1998.

The current outlook for the nation has deteriorated modestly from the
Budget Division's July forecast, with weaker real and nominal growth now
anticipated and a general weakening of the business profits picture for the
balance of the fiscal year. There are, however, uncertainties inherent in any
economic forecast. Consumer or business spending could be weaker than expected,
due, perhaps to further significant declines in corporate profits or equity
values. Additionally, the international economic and financial disruptions
currently being felt around the globe could worsen or take longer than
anticipated to subside. The result could be a sharp, additional reduction in
domestic economic growth. Indeed, several private sector forecasters have
indicated a heightened risk of a national recession beginning in 1999. Under
that scenario, the FRB would be likely to lower short-term interest rates
faster and further than expected in an effort to reignite the nation's economic
engines. Alternatively, but less likely, the pace of US economic growth could
be faster if productivity or consumer spending becomes stronger than
anticipated, or if the economies of many of the countries of Asia and Latin
America recover more quickly than expected. If such growth, or a rapid rise in
labor, health or energy costs, awakens long-dormant inflationary pressures, the
FRB may reverse its current position and raise interest rates.

New York Economy. The healthy growth that has characterized the New York
economy continued during the first three-quarters of 1998. According to
seasonally-adjusted employment data from the State Labor Department, New York
has added over 90,000 private-sector jobs since December 1997 and over 370,000
since December 1994. The service sector accounted for 60,000 of the 1998
increase and trade added about 15,000. The unemployment rate was 5.5 percent in
September and remains above the national rate, as it has since 1991. The
State's current rate, however, is 0.9 percentage points below the level in
September 1997.

Compared with the July forecast, the DOB's current employment, income and
wage outlook is slightly higher for 1998. The forecast calls for employment to
increase about 2.0 percent in 1998. Personal income should increase about 5.0
percent in 1998 based on wage growth of around 6.2 percent.

The forecast for New York is subject to the same uncertainties as the
national forecast, as well as some specific to New York. The securities industry
is more important to the New York economy than to the national economy and,
therefore, a large change in financial market performance during the forecast
horizon could result in wage and employment levels that are significantly
different from those embodied in the forecast.

New York is the third most populous state in the nation and has a
relatively high level of personal wealth. The State's economy is diverse, with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment and a very small share of the nation's
farming and mining activity. The State's location and its excellent air
transport facilities and natural harbors have made it an important link in
international commerce. Travel and tourism constitute an important part of the
economy.

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Like the rest of the nation, New York has a declining proportion of its work
force engaged in manufacturing and an increasing proportion engaged in service
industries. The following paragraphs summarize the state of major sectors of
the New York economy:

Services: The services sector, which includes entertainment, personal
services, such as health care and auto repairs, and business-related
services, such as information processing, law and accounting, is the
State's leading economic sector. The services sector accounts for more
than three of every ten nonagricultural jobs in New York and has a
noticeably higher proportion of total jobs than does the rest of the
nation.

Manufacturing: Manufacturing employment continues to decline in
importance in New York, as in most other states, and New York's economy is
less reliant on this sector than is the nation. The principal
manufacturing industries in recent years produced printing and publishing
materials, instruments and related products, machinery, apparel and
finished fabric products, electronic and other electric equipment, food
and related products, chemicals and allied products, and fabricated metal
products.

Trade: Wholesale and retail trade is the second largest sector in terms
of nonagricultural jobs in New York but is considerably smaller when
measured by income share. Trade consists of wholesale businesses and
retail businesses, such as department stores and eating and drinking
establishments.

Finance, Insurance and Real Estate: New York City is the nation's
leading center of banking and finance and, as a result, this is a far more
important sector in the State than in the nation as a whole. Although this
sector accounts for under one-tenth of all nonagricultural jobs in the
State, it contributes over one-sixth of all non-farm labor and
proprietors' income.

Agriculture: Farming is an important part of the economy of large
regions of the State, although it constitutes a very minor part of total
State output. Principal agricultural products of the State include milk
and dairy products, greenhouse and nursery products, apples and other
fruits, and fresh vegetables. New York ranks among the nation's leaders in
the production of these commodities.

Government: Federal, State and local government together are the third
largest sector in terms of nonagricultural jobs, with the bulk of the
employment accounted for by local governments. Public education is the
source of nearly one-half of total state and local government employment.

Relative to the nation, the State has a smaller share of manufacturing and
construction and a larger share of service-related industries. The State's
finance, insurance, and real estate share, as measured by income, is
particularly large relative to the nation. The State is likely to be less
affected than the nation as a whole during an economic recession that is
concentrated in manufacturing and construction, but likely to be more affected
during a recession that is concentrated in the service-producing sector.

In the calendar years 1987 through 1996, the State's rate of economic
growth was somewhat slower than that of the nation. In particular, during the
1990-91 recession and post-recession period, the economy of the State, and that
of the rest of the Northeast, was more heavily damaged than that of the nation
as a whole and has been slower to recover. The total employment growth rate in
the State has been below the national average since 1987. The unemployment rate
in the State dipped below the national rate in the second half of 1981 and
remained lower until 1991; since then, it has been higher. According to data
published by the US Bureau of Economic Analysis, total personal income in the
State has risen more slowly than the national average since 1988.

State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
Because the City is a regional employment center for a multi-state region,
State personal income measured on a residence basis understates the relative
importance of the State to the national economy and the size of the base to
which State taxation applies.

Financial Plan Updates. The State is required to issue Financial Plan
updates to the cash-basis State Financial Plan in July, October, and January,
respectively. These quarterly updates reflect analysis of actual

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<PAGE>

receipts and disbursements for each respective period and revised estimates of
receipts and disbursements for the then current fiscal year.

The July Update. The State published first update to the cash basis 1998-99
State Financial Plan on July 30, 1998 (the "July Update"). In the update, the
State continued to project that the State Financial Plan for 1998-99 would
remain in balance. The State made several revisions to the receipt estimates in
the financial Plan formulated with the enacted budget, which had the net effect
of increasing projected General fund receipts for 1998-99 to a total of $37.81
billion, up $250 million from its original projection. The State made no change
to the disbursement projections in the 1998-99 financial Plan, which it
estimated at $36.78 billion for the 1998-99 fiscal year. The additional receipts
boosted the State's projected reserve for future needs to $1.01 billion, an
increase of $250 million from the June projections. The projected closing
balance in the General fund of $1.67 billion reflected the reserve for future
needs of $1.10 billion, a balance of $400 million in the Tax Stabilization
Reserve fund, a balance of $100 million in the Contingency Reserve fund (after a
deposit of 432 million during the current fiscal year) and $158 million in the
Community Projects fund.

The Mid-Year Update. The State issued its second update to the cash-basis
1998-99 State Financial Plan (the "Mid-Year Update") on October 30, 1997. The
State ended the first six months of the 1998-99 fiscal year with a General Fund
cash balance of $5.02 billion, some $143 million higher than projected in the
cash flow accompanying te July Update to the Financial Plan.

Receipts: Total receipts, including transfers from other funds, grew to
419.7 billion, through September approximately 452 million higher than
expected. This increase is comprised of additional tax revenues (approximately
422 million) and transfers from other funds ($30 million).

Disbursements: Total spending through the first six months of the fiscal
year was $16.27 billion, or $91 million lower than projected. This variance
results primarily from higher spending in Grants to Local Government ($27
million), offset by lower spending in State Operations ($124 million). These
variances are timing-related and should not affect total disbursements for the
fiscal year.

General Fund Receipts: Total receipts for 1998-99 are projected to reach
$37.84 billion, an increase of $29 million from the amount projected in July.
Of the $37.84 billion in total receipts, taxes are projected at over $34.5
billion, miscellaneous receipts at over 41.47 billion and transfers from other
funds at over $1.86 billion. Anticipated tax receipts have been reduced
slightly, but expected miscellaneous receipts and transfers from other funds
have been increased by enough to produce the net $29 million increase in
overall collections.

Personal Income Tax: Total income tax receipts are projected to reach
$21.44 billion, $29 million above the amount expected in July, and nearly $3.7
billion above the amount reported for 1997-98. The net increase from the July
forecast is attributable to modest upward revisions in estimated 1997 liability
as partially offset by slightly weaker expectations for collections on current
year liability for the balance of the current year. The current estimate
reflects an anticipated deterioration in the growth of financial sector bonuses
and the resultant impact on withholding.

While gross collections under this tax are expected to grow approximately
10 percent from 1997-98, the exceptional year-to-year change in the estimate of
receipts from this source is still significantly attributable to the movement
of the General Fund surplus available at the end of 1997-98 into the current
fiscal year. The approximately $2.4 billion impact on the year-over-year change
that results from the surplus swing is only partially offset by the planned
diversion of slightly over $700 million in income tax receipts to the School
Tax Relief (STAR) Fund in the current year to fund statewide school property
tax relief for senior citizens.

User Taxes and Fees: Receipts from user taxes and fees are expected to
total $7.21 billion, down $3 million fro the amount projected in July, and
approximately $170 million above the amount reported for 1997-98. The reduction
in estimated collections from the July forecast is largely the result of lower
anticipated sales and use tax collections as partially offset by modestly
higher forecasts of receipts from the cigarette, beverage and motor fuel taxes
and from motor vehicle fees.

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The modest downward revision in anticipated sales tax receipts is largely
attributable to small reductions in the expected consumption of taxable goods
over the balance of the fiscal year. The small upward revisions in the
remaining sources noted above largely reflect collection experience through the
first half of the year.

Business Taxes: Business tax collections, reflecting collection experience
in September and reduced expectations for profits in the balance of the year,
are expected to reach $4.79 billion, some $157 million below the amount
anticipated in the July plan. The revised estimate for 1998-99 is some $257
million below the amount recorded for the 1997-99 fiscal year.

The largest revision in this category from the July forecast is a $88
million reduction in anticipated receipts from the bank tax, reflecting both a
lower 1997 liability base than estimated in July as well as lower expected bank
earnings in the current year. Receipts expected under the State's general
business tax, the insurance tax and the corporation and utility tax were also
revised down, reflecting year-to-date collection experience, a weakening
profits outlook and, in the case of the utility levy, continued moderate
weather.

Other Taxes: Receipts from other taxes are projected at $1,072 million, an
increase of $53 million from the July forecast, largely on the basis of
higher-than-projected estate tax receipts in September. Despite the new, higher
forecast, the revised estimate for the current fiscal year represents a
year-over-year net decline of $22 million from actual results in 1997-98.

Miscellaneous Receipts and Transfers from other Funds: Miscellaneous
receipts are projected to reach $1.47 billion, an increase of some $70 million
from the amount anticipated in July, largely as a result of higher investment
income received during the first six months of the year and expected for the
balance of 1998-99. The revised estimate for the current year is still some
$124 million below the amount recorded in the category in the preceding fiscal
year.

Transfers from other funds are expected to be over $1.86 billion,
including $1.54 billion as the portion of sales tax receipts that flows to the
General Fund after meeting the debt service requirements of the LGAC. Total
receipts in this category are expected to be some $37 million higher than
projected in July, largely as a result of a $49 million increase in the
estimate of real estate transfer tax receipts available to be transferred to
the General Fund. The upward revision largely reflects the burst of commercial
sales in the New York City real estate market. The estimate of receipts
available to be transferred from LGAC has been reduced by nearly $12 million,
mirroring the reduction expected in the estimate of sales tax received directly
in the General Fund. The estimate of available transfers from other funds is
now some $156 million below the amount transferred in 1997-99.

General Fund Disbursements. The State is making no revisions to its July
disbursement estimates, with projected General Fund disbursements for the year
still expected to total $36.78 billion. The State believes year-to-date
disbursements and the trends underlying its yearly spending estimates remain
consistent with the July update and it does not anticipate any changes that
would alter total projected disbursements for the year.

Grants to Local Governments: The State continues to project disbursements
of $25.14 billion for the year, an increase of $1.88 billion over 1997-99. An
$830 million increase in cash disbursements for school aid over the prior year
is responsible for nearly half the year-over-year growth in this category.
Other significant increases include Medicaid ($144 million), handicapped
education programs ($108 million) and children and families programs ($66
million).

School aid is the largest program in terms of total spending in this
category, with disbursements of $9.7 billion expected in 1998-99. It is
followed by Medicaid ($5.6 billion), welfare $1.6 billion), services for
children and families ($927 million) and general purpose aid to local
governments ($837 million).

State Operations: This category accounts for the costs of running State
agencies. The State estimates $6.7 billion in spending for State Operations,
$511 million higher than 1997-98. This year-to-year

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growth reflects the continuing phase-in of wage increase under existing
collective bargaining agreements, the impact of binding arbitration
settlements, and the costs of funding an extra payroll in 1998-99.

General State Charges: spending in this category, which accounts primarily
for fringe benefits of State employees, is projected to total $2.22 billion in
1998-99, a modest decrease from 1997-99.

Debt Service: Short and long-term debt service is projected at $2.14
billion, an increase of $111 million over 1997-98. For the first time, the
State plans to make a $50 million deposit to the Debt Reduction Reserve Fund.

Capital Projects and All other Transfers: Spending in this category is
estimated at $592 million, a decrease of $61 million over 1997-98, reflecting
the non-recurring nature of certain items included in the prior fiscal year.

Fund Balance. The Financial Plan now projects a closing balance in the
General Fund of $1.7 billion. The balance is comprised of the $1.04 billion
reserve for future needs, $400 million in the Tax Stabilization Reserve Fund,
$100 million in the Contingency Reserve Fund (after a planned deposit of $32
million in 1998-99) and $158 million in the Community Projects Funds.

Other Governmental Funds. Total spending from All Governmental Funds is
projected at $71.54 billion, unchanged from the July estimate. Spending is
projected at $34.07 billion for the General Fund (excluding transfers), $29.98
billion for the Special Revenue Funds, $4.14 billion for the Capital Projects
Funds, and $3.36 billion for the Debt Service Funds.

State Funds spending is estimated to total $48.58 billion. Consistent with
the General Fund and All Governmental Funds, the State is making no change to
the State Funds disbursement estimate in the July update. The State believes
year-to-date disbursements and the trends underlying its yearly spending
estimates remain consistent with the July update and its does not foresee any
changes that would significantly alter total projected disbursements for either
All Funds or State Funds for the year.

Relevant News. On August 22, 1996, the President signed the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996 (the "1996
Welfare Act"). This new law made significant changes to welfare and other
benefit programs. Major changes included conversion of AFDC into the TANF block
grant to states, new work requirements and durational limits on recipients of
TANF and limits on assistance provided to immigrants. City expenditures as a
result of welfare reform are estimated in the Financial Plan at $49 million in
fiscal year 1998, $45 million in fiscal year 1999, $38 million in fiscal year
2000 and $44 million in fiscal year 2001. In addition, the City's naturalization
initiative, CITIZENSHIP NYC, will assist immigrants made ineligible under
Federal law to regain eligibility for benefits, by helping them through the
application process for citizenship. The Financial Plan assumes that 75% of
those immigrants who otherwise would have lost benefits will become citizens,
resulting in projected savings to the City in public assistance expenditures of
$6 million in fiscal year 1999, $24 million in fiscal year 2000 and $25 million
in fiscal year 2001. Federal legislation enacted August 5, 1997, reinstated
eligibility for even more immigrants currently on the rolls than projected. The
outyear estimates made by OMB are preliminary and depend on a variety of
factors, which are impossible to predict, including the implementation of
workfare and child care programs modified by newly enacted State law, the impact
of possible litigation challenging the law, and the impact of adverse economic
developments on welfare and other benefit programs. In accordance with the
Federal welfare reform law, the Governor submitted a State plan to the Federal
government and such plan was deemed complete as of December 2, 1996. New York
State's welfare reform, bringing the State into compliance with the 1996 Welfare
Act and making changes to the Home Relief program, was signed into law on August
20, 1997. The Governor submitted an amended State plan to the Federal
government, reflecting these changes, on September 20, 1997. Implementation of
the changes at the State level will in part determine the possible costs or
savings to the City. It is expected that OMB's preliminary estimates of
potential costs will change, based on new policies to be developed by the State
and City with respect to benefits no longer funded as Federal entitlements.

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On September 11, 1997, the State Comptroller released a report entitled
"The 1997-98 Budget: Fiscal Review and Analysis" in which he identified several
risks to the State Financial Plan and estimated that the State faces a
potential imbalance in receipts and disbursements of approximately $1.5 billion
for the State's 1998-99 fiscal year and approximately $3.4 billion for the
State's 1999-00 fiscal year. The 1998-99 fiscal year estimate by the State
Comptroller is within the range discussed by the Division of the Budget in the
section entitled "Outyear Projections of Receipts and Disbursements" in the
Annual Information Statement of August 15, 1997. Any increase in the 1997-98
reserve for future needs would reduce this imbalance further and, based upon
results to date, such an outcome is considered possible. In addition, the
Comptroller identified risks in future years from an economic slowdown and from
spending and revenue actions enacted as a part of the 1997-98 budget that will
add pressure to future budget balance. The Governor is required to submit a
balanced budget each year to the State Legislature.

On August 11, 1997 President Clinton exercised his line item veto powers
to cancel a provision in the Federal Balanced Budget Act of 1997 that would
have deemed New York State's health care provider taxes to be approved by the
federal government. New York and several other states have used hospital rate
assessments and other provider tax mechanisms to finance various Medicaid and
health insurance programs since the early 1980s. The State's process of
taxation and redistribution of health care dollars was sanctioned by federal
legislation in 1987 and 1991. However, the federal Health Care Financing
Administration (HCFA) regulations governing the use of provider taxes require
the State to seek waivers from HCFA that would grant explicit approval of the
provider taxing system now in place. The State filed the majority of these
waivers with HCFA in 1995 but has yet to receive final approval.

The Balanced Budget Act of 1997 provision passed by Congress was intended
to rectify the uncertainty created by continued inaction on the State's waiver
requests. A federal disallowance of the State's provider tax system could
jeopardize up to $2.6 billion in Medicaid reimbursement received through
December 31, 1998. The President's veto message valued any potential
disallowance at $200 million. The 1997-98 Financial Plan does not anticipate
any provider tax disallowance.

On October 9, 1997 the President offered a corrective amendment to the
HCFA regulations governing such taxes. The Governor has stated that this
proposal does not appear to address all of the State's concerns, and
negotiations are ongoing between the State and HCFA. In addition, the City of
New York and other affected parties in the health care industry have filed a
lawsuit challenging the constitutionality of the President's line item veto.

On July 31, 1997, the New York State Tax Appeals Tribunal delivered a
decision involving the computation of itemized deductions and personal income
taxes of certain high income taxpayers. By law, the State cannot appeal the
Tribunal's decision. The decision will lower income tax liability attributable
to such taxpayers for the 1997 and earlier open tax years, as well as on a
prospective basis.

Ratings Agencies. On October 6, 1998, Moody's Investors Service, Inc.
("Moody's") confirmed its New York State general obligation bond rating of
single-A2. On April 20, 1998, New York's general obligation bond ratings were
the lowest of any state, except Louisiana. Moody's had rated New York State at
A2, Standard & Poor's ("S&P") had given it an A and Fitch IBCA ("Fitch") had
assigned it an A-plus.

On August 28, 1997, S&P revised its ratings on the State's general
obligation bonds to A from A-, and, in addition, revised its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. S&P rated the State's general obligation bonds AA- from August 1987 to
March 1990 and A+ from November 1982 to August 1987. In March 1990, S&P lowered
its rating of all of the State's general obligation bonds from AA- to A. On
January 13, 1992, S&P lowered its rating on the State's general obligation
bonds from A to A-, and, in addition, reduced its ratings on the State's moral
obligation, lease purchase, guaranteed and contractual obligation debt. On
April 26, 1993 S&P revised the rating outlook assessment to stable. On February
14, 1994, S&P revised its outlook on the State's general obligation bonds to
positive and, on August 5, 1996, confirmed its A- rating.

On February 10, 1997, Moody's confirmed its A2 rating on the State's
general obligation long-term indebtedness. On June 6, 1990, Moody's changed its
ratings on all of the State's outstanding general obli-

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<PAGE>

gation bonds from A1 to A, the rating having been A1 since May 27, 1986. On
November 12, 1990, Moody's confirmed the A rating. On January 6, 1992, Moody's
reduced its ratings on outstanding limited-liability State lease purchase and
contractual obligations from A to Baa1.

Authorities. The fiscal stability of the State is related in part to the
fiscal stability of its public authorities, which generally have responsibility
for financing, constructing and operating revenue-producing public benefit
facilities. Public authorities are not subject to the constitutional
restrictions on the incurrence of debt which apply to the State itself, and may
issue bonds and notes within the amounts of, and as otherwise restricted by,
their legislative authorization. The State's access to the public credit
markets could be impaired, and the market price of its outstanding debt may be
materially adversely affected, if any of its public authorities were to default
on their respective obligations. As of September 30, 1996 there were 17 public
authorities that had outstanding debt of $100 million or more each, and the
aggregate outstanding debt, including refunding bonds, of all state public
authorities was $75.4 billion.

There are numerous public authorities, with various responsibilities,
including those which finance, construct and/or operate revenue producing
public facilities. Public authority operating expenses and debt service costs
are generally paid by revenues generated by the projects financed or operated,
such as tolls charged for the use of highways, bridges or tunnels, rentals
charged for housing units and charges for occupancy at medical care facilities.

In addition, State legislation authorizes several financing techniques for
public authorities. Also, there are statutory arrangements providing for State
local assistance payments otherwise payable to localities to be made under
certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local
assistance payments have been paid to public authorities under these
arrangements, if local assistance payments are so diverted, the affected
localities could seek additional State assistance.

Some authorities also receive monies from State appropriations to pay for
the operating costs of certain of their programs. As described below, the MTA
receives the bulk of this money in order to carry out mass transit and commuter
services.

The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The New York
State HFA, the New York State Urban Development Corporation and certain other
Authorities have in the past required and continue to require substantial
amounts of assistance from the State to meet debt service costs or to pay
operating expenses. Further assistance, possibly in increasing amounts, may be
required for these, or other, Authorities in the future. In addition, certain
other statutory arrangements provide for State local assistance payments
otherwise payable to localities to be made under certain circumstances to
certain Authorities. The State has no obligation to provide additional
assistance to localities whose local assistance payments have been paid to
Authorities under these arrangements. However, in the event that such local
assistance payments are so diverted, the affected localities could seek
additional State funds.

Metropolitan Transportation Authority. The MTA oversees the operation of
the City's subway and bus lines by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit Operating Authority
(collectively, the "TA"). The MTA operates certain commuter rail and bus lines
in the New York Metropolitan area through MTA's subsidiaries, the Long Island
Rail Road Company, the Metro-North Commuter Railroad Company and the
Metropolitan Suburban Bus Authority. In addition, the Staten Island Rapid
Transit Operating Authority, an MTA subsidiary, operates a rapid transit line
on Staten Island. Through its affiliated agency, the Triborough Bridge and
Tunnel Authority (the "TBTA"), the MTA operates certain intrastate toll bridges
and tunnels. Because fare revenues are not sufficient to finance the mass
transit portion of these operations, the MTA has depended, and will continue to
depend for operating support upon a system of State, local government and TBTA
support, and, to the extent available, Federal operating assistance, including
loans, grants and operating subsidies. If current revenue projections are not
realized and/or operating

C-19
<PAGE>

expenses exceed current projections, the TA or commuter railroads may be
required to seek additional State assistance, raise fares or take other
actions.

Since 1980, the State has enacted several taxes--including a surcharge on
the profits of banks, insurance corporations and general business corporations
doing business in the 12-county Metropolitan Transportation Region served by
the MTA and a special one-quarter of 1 percent regional sales and use tax--
that provide revenues for mass transit purposes, including assistance to the
MTA. In addition, since 1987, State law has required that the proceeds of a one
quarter of 1% mortgage recording tax paid on certain mortgages in the
Metropolitan Transportation Region be deposited in a special MTA fund for
operating or capital expenses. Further, in 1993 the State dedicated a portion
of the State petroleum business tax to fund operating or capital assistance to
the MTA. For the 1997-98 fiscal year, total State assistance to the MTA is
projected to total approximately $1.2 billion, an increase of $76 million over
the 1996-97 fiscal year.

State legislation accompanying the 1996-97 adopted State budget authorized
the MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance
a portion of a new $12.17 billion MTA capital plan for the 1995 through 1999
calendar years (the "1995-99 Capital Program"). In July 1997, the Capital
Program Review Board approved the 1995-99 Capital Program. This plan supersedes
the overlapping portion of the MTA's 1992-96 Capital Program. This is the
fourth capital plan since the Legislature authorized procedures for the
adoption, approval and amendment of MTA capital programs and is designed to
upgrade the performance of the MTA's transportation systems by investing in new
rolling stock, maintaining replacement schedules for existing assets and
bringing the MTA system into a state of good repair. The 1995-99 Capital
Program assumes the issuance of an estimated $5.1 billion in bonds under this
$6.5 billion aggregate bonding authority. The remainder of the plan is
projected to be financed through assistance from the State, the federal
government, and the City of New York, and from various other revenues generated
from actions taken by the MTA.

There can be no assurance that all the necessary governmental actions for
future capital programs will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the 1995-99 Capital
Program, or parts thereof, will not be delayed or reduced. If the 1995-99
Capital Program is delayed or reduced, ridership and fare revenues may decline,
which could, among other things, impair the MTA's ability to meet its operating
expenses without additional assistance.

Localities. Certain localities outside the City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The potential impact on the State of any
future requests by localities for additional assistance is not included in the
projections of the State's receipts and disbursements for the State's 1998-99
fiscal year.

Fiscal difficulties experienced by the City of Yonkers resulted in the
re-establishment of the Financial Control Board for the City of Yonkers by the
State in 1984. That Board is charged with oversight of the fiscal affairs of
Yonkers. Future actions taken by the State to assist Yonkers could result in
increased State expenditures for extraordinary local assistance.

Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the City of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding.

Eighteen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities.

Municipal Indebtedness. Municipalities and school districts have engaged in
substantial short-term and long-term borrowings. In 1995, the total indebtedness
of all localities in the State other than the City was approximately $19.0
billion. A small portion (approximately $102.3 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
State enabling legislation. State law

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<PAGE>

requires the Comptroller to review and make recommendations concerning the
budgets of those local government units other than the City authorized by State
law to issue debt to finance deficits during the period that such deficit
financing is outstanding. Eighteen localities had outstanding indebtedness for
deficit financing at the close of their fiscal year ending in 1995.

From time to time, federal expenditure reductions could reduce, or in some
cases eliminate, federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities.
If the State, the City or any of the Authorities were to suffer serious
financial difficulties jeopardizing their respective access to the public
credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities also face anticipated
and potential problems resulting from certain pending litigation, judicial
decisions and long-range economic trends. Long-range potential problems of
declining urban population, increasing expenditures and other economic trends
could adversely affect certain localities and require increasing State
assistance in the future.

Litigation. Certain litigation pending against the State or its officers or
employees could have a substantial or long-term adverse effect on State
finances. Among the more significant of these cases are those that involve: (i)
employee welfare benefit plans where plaintiffs are seeking a declaratory
judgment nullifying on the ground of federal preemption provisions of Section
2807-c of the Public Health Law and implementing regulations which impose a bad
debt and charity care allowance on all hospital bills and a 13 percent surcharge
on inpatient bills paid by employee welfare benefit plans; (ii) several
challenges to provisions of Chapter 81 of the Laws of 1995 which alter the
nursing home Medicaid reimbursement methodology; (iii) the validity of
agreements and treaties by which various Indian tribes transferred title to the
State of certain land in central and upstate New York; (iv) challenges to the
practice of using patients' Social Security benefits for the costs of care of
patients of State Office of Mental Health facilities; (v) an action against
State and City officials alleging that the present level of shelter allowance
for public assistance recipients is inadequate under statutory standards to
maintain proper housing; (vi) alleged responsibility of State officials to
assist in remedying racial segregation in the City of Yonkers; (vii) alleged
responsibility of the State Department of Environmental Conservation for a
plaintiff's inability to complete construction of a cogeneration facility in a
timely fashion and the damages suffered thereby; (viii) challenges to the
promulgation of the State's proposed procedure to determine the eligibility for
and nature of home care services for Medicaid recipients; (ix) a challenge to
the constitutionality of petroleum business tax assessments authorized by Tax
Law SS 301; (x) an action for reimbursement from the State for certain costs
arising out of the provision of preschool services and programs for children
with handicapping conditions, pursuant to Sections 4410 (10) and (11) of the
Education Law; (xi) a challenge to the constitutionality of the Clean
Water/Clean Air Bond Act of 1996 and its implementing regulations; (xii) two
challenges to regulations promulgated by the Superintendent of Insurance that
established excess medical malpractice premium rates for the 1986-87 through
1996-97 fiscal years; and (xiii) an action to compel the State to enforce sales
and excise taxes imposed on tobacco products and motor fuel sold to non-Indian
customers on Indian reservations.

Adverse developments in the proceedings described above or the initiation
of new proceedings could affect the ability of the State to maintain balanced
1997-98 and 1998-99 State Financial Plans. In its Notes to its General Purpose
Financial Statements for the fiscal year ended March 31, 1997, the State
reports its estimated liability for awards and anticipated unfavorable
judgments at $364 million. There can be no assurance that an adverse decision
in any of the above cited proceedings would not exceed the amount that the
1997-98 and 1998-99 State Financial Plans reserve for the payment of judgments
and, therefore, could affect the ability of the State to maintain balanced
plans.

New York City

The fiscal health of the State may also be particularly affected by the
fiscal health of the City, which continues to require significant financial
assistance from the State. Although the City has maintained balanced budgets in
each of its last seventeen fiscal years and is projected to achieve balances
operating result for the 1998-99 fiscal year, there can be no assurance that
the gap closing actions proposed in the Financial

C-21
<PAGE>

Plan can be successfully implemented or that the City will maintain a balanced
budget in future years without additional state aid, revenue increases or
expenditure reductions. Additional tax increases and reductions in essential
City services could also adversely affect the City's economic base. The City
depends on State aid both to enable the City to balance its budget and to meet
its cash requirements. There can be no assurance that there will not be
reductions in State aid to the City from amounts currently projected; that
State budgets will be adopted by the April 1st Statutory deadline or interim
appropriations enacted; or that any such reductions or delays will not have
adverse effects on the City's cash flow or revenues. The State could also be
affected by the ability of the City to market its securities successfully in
the public credit markets. The City has achieved balanced operating results for
each of its fiscal years since 1981 as reported in accordance with the
then-applicable GAAP standards. Current law requires the City to prepare
four-year annual financial plans, which are reviewed and revised on a quarterly
basis and includes capital, revenue, and expense projections and outlines
proposed gap-closing for the years with projected budget gaps. An annual
financial report for its most recent completed fiscal year is prepared at the
end of October of each year. The City's current financial plan projects a
surplus in the 1999 fiscal year, before discretionary transfers and budget gaps
for each of the 2000, 2001 and 2002 fiscal years.

In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among these actions, the State
established the Municipal Assistance Corporation for the City of New York
("MAC") to provide financing assistance to the City. The State also enacted the
New York State Financial Emergency Act for The City of New York (the "Financial
Emergency Act") which, among other things, established the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs. The State also established the Office of the State Deputy Comptroller
for the City of New York ("OSDC") to assist the Control Board in exercising its
powers and responsibilities and a "Control Period" from 1975 to 1986 during
which the City was subject to certain statutorily-prescribed fiscal-monitoring
arrangements. Although the Control Board terminated the Control Period in 1986
when certain statutory conditions were met, thus suspending certain Control
Board powers, the Control Board, MAC and OSDC continue to exercise various
fiscal-monitoring functions over the City, and upon the occurrence or
"substantial likelihood and imminence" of the occurrence of certain events,
including, but not limited to a City operating budget deficit of more than $100
million, the Control Board is required by law to reimpose a Control Period.

Currently, the City and its "Covered Organizations" (i.e., those which
receive or may receive money from the City directly, indirectly or contingently)
operate under a four-year financial plan (the "City Financial Plan"), which the
City prepares annually and updates periodically and which includes the City's
capital revenue and expense projections and outlines proposed gap-closing
programs for years with projected budget gaps. The City's projections set forth
in the City Financial Plan are based on various assumptions and contingencies,
some of which are uncertain and may not materialize. Unforeseen developments and
changes in major assumptions could significantly affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow and
financing requirements.

Although the City has balanced its budget since 1981, estimates of the
City's revenues and expenditures, which are based on numerous assumptions, are
subject to various uncertainties. If, for example, expected federal or State aid
is not forthcoming, if unforeseen developments in the economy significantly
reduce revenues derived from economically sensitive taxes or necessitate
increased expenditures for public assistance, if the City should negotiate wage
increases for its employees greater than the amounts provided for in the City's
financial plan or if other uncertainties materialize that reduce expected
revenues or increase projected expenditures, then, to avoid operating deficits,
the City may be required to implement additional actions, including increases in
taxes and reductions in essential City services. The City might also seek
additional assistance from the State. Unforeseen developments and changes in
major assumptions could significantly affect the City's ability to balance its
budget as required by State law and to meet its annual cash flow and financing
requirements.

The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's financial plans which analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service

C-22
<PAGE>

requirements for, and financial plan compliance by, the City and its Covered
Organizations. According to recent staff reports, while economic recovery in
New York City has been slower than in other regions of the country, a surge in
Wall Street profitability resulted in increased tax revenues and generated a
substantial surplus for the City in fiscal year 1996-97. Although several
sectors of the City's economy have expanded recently, especially tourism and
business and professional services, City tax revenues remain heavily dependent
on the continued profitability of the securities industries and the course of
the national economy. These reports have also indicated that recent City
budgets have been balanced in part through the use of non-recurring resources;
that the City Financial Plan tends to rely on actions outside its direct
control; that the City has not yet brought its long-term expenditure growth in
line with recurring revenue growth; and that the City is therefore likely to
continue to face substantial gaps between forecast revenues and expenditures in
future years that must be closed with reduced expenditures and/or increased
revenues. In addition to these monitoring agencies, the Independent Budget
Office ("IBO") has been established pursuant to the City Charter to provide
analysis to elected officials and the public on relevant fiscal and budgetary
issues affecting the City.

The 1999-2002 Financial Plan. For the 1997 fiscal year, the City had an
operating surplus, before discretionary transfers, and achieved balanced
operating results, after discretionary transfers, in accordance with GAAP. The
1997 fiscal year is the seventeenth year that the City has achieved an
operating surplus, before discretionary transfers, and balanced operating
results, after discretionary transfers.

The most recent quarterly modification to the City's financial plan for
the 1998 fiscal year, submitted to the Control Board on June 23, 1998 (the
"1998 Modification"), projects a balanced budget in accordance with GAAP for
the 1998 fiscal year.

One June 26, 1998, the City released the Financial Plan for the 1999-2002
fiscal years, which relates to the City and certain entities which receive
funds from the City. The Financial Plan reflects changes since the June 1997
Financial Plan, including changes as a result of the City's expense and capital
budgets for the 1999 fiscal year, which were adopted in June, 1998, and changes
subsequent to the adopted budget. The Financial Plan projects revenues and
expenditures for the 1999 fiscal year balanced in accordance with GAAP, and
projects gaps of $1.9 billion, $2.7 billion and $2.3 billion for the 2000
through 2002 fiscal years, respectively, after implementation of a gap closing
program to reduce agency expenditures by approximately $380 million in each of
fiscal years 2000 through 2002.

Changes since the June 1997 Financial Plan include: (i) an increase in
projected tax revenue of $1.1 billion, $955 million, $897 million and $1.7
billion in the 1999 through 2002 fiscal years, respectively; (ii) a reduction
in assumed State aid of between $134 million and $142 million in each of the
1999 through 2002 fiscal years, reflecting the adopted budget for the State's
1998 fiscal year; (iii) a delay in the assumed collection of $350 million of
projected rent payments for the City's airports in the 1999 fiscal year to
fiscal years 2000 through 2002; (iv) a reduction in projected debt service
expenditures totaling $419 million, $204 million and $226 million in the 1999
through 2001 fiscal years, respectively; (v) an increase in the Board of
Education (the "BOE") spending of $345 million, $41 million, $73 million and
$208 million in the 1999 through 2002 fiscal years, respectively; (vi) an
increase in expenditures for the City's proposed drug initiatives totaling
between $167 million and $193 million in each of the 1999 through 2002 fiscal
years; (vii) other agency net spending initiatives totaling $679 million, $487
million, $492 million and $896 million in fiscal years 1999 through 2002,
respectively; and (viii) increased pension costs of $127 million in the 1999
fiscal year and reduced pension costs of $254 million in fiscal years from
additional agency actions totaling $1.1 billion, $936 million, $910 million and
$962 million in fiscal years 1999 through 2002, respectively, including the
approximately $380 million gap closing program for each of fiscal years 2000
and 2002.

The 1998 Modification and the 1999-2002 Financial Plan include proposed
discretionary transfers in the 1998 fiscal year of approximately $2.0 billion
to pay certain debt service costs and subsidies due in the 1999 fiscal year,
and a proposed discretionary transfer in the 1999 fiscal year of $465 million
to pay debt service due in fiscal year 2000. In addition, the Financial Plan
reflects enacted and proposed tax reduction programs totaling $975 million,
$1.172 billion and $1.259 billion in fiscal years 2000 through 2002, respec-

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<PAGE>

tively, including the elimination of the City sales tax on all clothing as of
December 1, 1999, the expiration of the 12.5% personal income tax surcharge on
December 31, 1998, the extension of current tax reductions for owners of
cooperative and condominium apartments starting in fiscal year 2000 and a
personal income tax credit for child care and for resident holders of
Subchapter S corporations starting in fiscal year 2000, which are subject to
State legislative approval, and reduction of the commercial rent tax commencing
in fiscal year 2000.

The Financial Plan assumes (i) approval by the Governor and the State
Legislature of the extension of the 14% personal income tax surcharge, which is
scheduled to expire on December 31, 1999, and which is projected to provide
revenue of $172 million, $500 million and $514 million in the 2000, 2001 and
2002 fiscal years, respectively, and the expiration of the 12.5% personal
income tax surcharge on December 31, 1998, the expiration of which is projected
to reduce revenue by $201 million, $546 million, $568 million and $593 million
in the 1999 through 2002 fiscal years, respectively; (ii) collection of the
projected rent payments for the City's airports, totaling $15 million, $365
million, $155 million and $185 million in the 1999 through 2002 fiscal years,
respectively, which may depend on the successful completion of negotiations
with The Port Authority of New York and New Jersey (the "Port Authority") or
the enforcement of the City's rights under the existing leases through pending
legal actions; and (iii) State and Federal approval of the State and Federal
gap-closing actions assumed in the Financial Plan. The Financial Plan provides
no additional wage increases for City employees after their contracts expire in
fiscal years 2000 and 2001. In addition, the economic and financial condition
of the City may be affected by various financial, social, economic and
political factors which could have a material effect on the City.

On June 5, 1998, the City Council adopted a budget which re-allocated
expenditures from those provided in the Executive Budget in the amount of $409
million. The re-allocated expenditures, which include $116 million from the
Budget Stabilization Account, $82 million from debt service, $45 million from
pension contributions, $54 million from social services spending and $112
million from other spending, were re-allocated to uses set forth in the City
Council's adopted budget. Such uses include a revised tax reduction program at
a revenue cost in the 1999 fiscal year of $45 million, additional expenditures
for various programs of $199 million and provision of $165 million to retire
high interest debt. The revised tax reduction program in the City Council's
adopted budget assumes the expiration of the 12.5% personal income tax
surcharge, rather than the implementation of the personal income tax reduction
program proposed in the Executive Budget.

On June 5, 1998, in accordance with the City Charter, the Mayor certified
to the City Council revised estimates of the City's revenues (other than
property tax) for fiscal year 1999. Consistent with this certification, the
property tax levy was estimated by the Mayor to require an increase to realize
sufficient revenue from this source to produce a balanced budget within
generally accepted accounting principles. On June 8, 1998, the City Council
adopted a property tax levy that was $237.7 million lower than the levy
estimated to be required by the Mayor. The City Council, however, maintained
that the revenue to be derived from the levy it adopted would be sufficient to
achieve a balanced budget because the property tax reserve for uncollectibles
could be reduced. Property tax bills for fiscal year 1999 were mailed by the
City's Department of Finance at the rates adopted by the City Council for
fiscal year 1998, subject to later adjustment. The City Charter provides for
this procedure in the event, as is the case this year, that budget adoption has
not been completed by June 5.

On June 10, 1998, the Mayor vetoed $196 million of spending added in the
expense budget adopted by the City Council and $315 million added in the
capital budget adopted by the City Council. On June 16, 1998, the City Council
voted to override the Mayor's vetoes. For a description of the respective roles
of the Mayor and the City Council in the budget adoption process, see "Section
III: Government and Financial Controls--City Financial Management, Budgeting
and Controls."

Collective Bargaining Agreements. The Financial Plan reflects the costs of
the settlements and arbitration awards with the United Federation of Teachers
("UFT"), a coalition of unions headed by District

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<PAGE>

Council 37 of the American Federation of State, County and Municipal Employees
("District Council 37") and other bargaining units, which together represent
approximately 97% of the City's workforce, and assumes that the City will reach
agreement with its remaining municipal unions under terms which are generally
consistent with such settlements and arbitration awards. These contracts are
approximately five years in length and have a total cumulative net increase of
13%. Assuming the City reaches similar settlements with its remaining municipal
unions, the cost of all settlements for all City-funded employees, as reflected
in the Financial Plan, would total $459 million and $1.2 billion in the 1998
and 1999 fiscal years, respectively, and exceed $2 billion in every fiscal year
after the 1999 fiscal year. See "Section VII: 1999-2002 Financial Plan
- --Assumptions--Expenditure Assumptions--1. Personal Service Costs". The
Financial Plan provides no additional wage increases for City employees after
their contracts expire in fiscal years 2000 and 2001.

Assumptions. The Financial Plan assumes (i) approval by the Governor and
the State Legislature of the extension of the 14% personal income tax surcharge,
which is scheduled to expire on December 31, 1999 and the extension of which is
projected to provide revenue of $168 million, $507 million, and $530 million in
the 2000, 2001, and 2002 fiscal years, respectively, and of the extension of the
12.5% personal income tax surcharge, which is scheduled to expire on December
31, 1998 the extension of which is projected to provide revenue of $187 million,
$531 million and $554 million, and $579 million in the 1999 through 2002 fiscal
years, respectively; (ii) collection of the projected rent payments for the
City's airports, totaling $365 million, $175 million, $170 million, and $70
million in the 1999 through 2002 fiscal years, respectively, which may depend on
the successful completion of negotiations with the Port Authority or the
enforcement of the City's rights under the existing leases through pending legal
actions; and (iii) State approval of the repeal of the Wicks law relating to
contracting requirements for City construction projects and the additional State
funding assumed in the Financial Plan, and State and Federal approval of the
State and Federal gap-closing actions proposed by the City in the Financial
Plan. It is expected that the Financial Plan will engender public debate which
will continue through the time the budget is scheduled to be adopted in June
1998, and that there will be alternative proposals to reduce taxes (including
the 12.5% personal income tax surcharge) and increase in spending. Accordingly,
the Financial Plan may be changed by the time the budget for the 1999 fiscal
year is adopted. Moreover, the Financial Plan provides no additional wage
increases for City employees after their contracts expire in fiscal years 2000
and 2001. In addition, the economic and financial condition of the City may be
affected by various financial, social, economic and political factors which
could have a material effect on the City.

The City's Financial Plan is based on numerous additional assumptions,
including the condition of the City's and the region's economy and a modest
employment recovery and the concomitant receipt of economically sensitive tax
revenues in the amounts projected. The Financial Plan is subject to various
other uncertainties and contingencies relating to, among other factors, the
extent, if any, to which wage increases for City employees exceed the annual
wage costs assumed for the 1998 through 2002 fiscal years; continuation of
projected interest earnings assumptions for pension fund assets and current
assumptions with respect to wages for City employees affecting the City's
required pension fund contributions; the willingness and ability of the State,
in the context of the State's current financial condition, to provide the aid
contemplated by the City Financial Plan and to take various other actions to
assist the City; the ability of HHC, BOE and other such agencies to maintain
balanced budgets; the willingness of the Federal government to provide the
amount of Federal aid contemplated in the City Financial Plan; the impact on the
City revenues and expenditures of Federal and State welfare reform and any
future legislation affecting Medicare or other entitlement programs; adoption of
the City's budgets by the City Council in substantially the forms submitted by
the Mayor; the ability of the City to implement proposed reductions in City
personnel and other cost reduction initiatives, and the success with which the
City controls expenditures; the impact of conditions in the real estate market
on real estate tax revenues; the City's ability to market its securities
successfully in the public credit markets; and unanticipated expenditures that
may be incurred as a result of the need to maintain the City's infrastructure.
Certain of these assumptions have been questioned by the City Comptroller and
other public officials.

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<PAGE>

The Governor presented his 1998-1999 Executive Budget to the Legislature
on January 20, 1998. In recent years, however, the State has failed to adopt a
budget prior to the beginning of the fiscal year. A prolonged delay in the
adoption of the State's budget beyond the statutory April 1 deadline without
interim appropriations could delay the projected receipt of State aid, and
there can be no assurance that State budgets in future fiscal years will be
adopted by the April 1 statutory deadline.

City Employees. Substantially all of the City's full-time employees are
members of labor unions. The Financial Emergency Act requires that all
collective bargaining agreements entered into by the City and the Covered
Organizations be consistent with the City's current financial plan, except for
certain awards arrived at through impasse procedures. During a Control Period,
and subject to the foregoing exception, the Control Board would be required to
disapprove collective bargaining agreements that are inconsistent with the
City's current financial plan.

Under applicable law, the City may not make unilateral changes in wages,
hours or working conditions under any of the following circumstances: (i)
during the period of negotiations between the City and a union representing
municipal employees concerning a collective bargaining agreement; (ii) if an
impasse panel is appointed, then during the period commencing on the date on
which such panel is appointed and ending sixty days thereafter or thirty days
after it submits its report, whichever is sooner, subject to extension under
certain circumstances to permit completion of panel proceedings; or (iii)
during the pendency of an appeal to the Board of Collective Bargaining.
Although State law prohibits strikes by municipal employees, strikes and work
stoppages by employees of the City and the Covered Organizations have occurred.

The 1998-2002 Financial Plan projects that the authorized number of
City-funded employees whose salaries are paid directly from City funds, as
opposed to federal or State funds or water and sewer funds, will decrease from
an estimated level of 204,685 on June 30, 1998 to an estimated level of 203,987
by June 30, 2002, before implementation of the gap closing program outlined in
the City Financial Plan.

Contracts with all of the City's municipal unions expired in the 1995 and
1996 fiscal years. The City has reached settlements with unions representing
approximately 86% of the City's work force. The City Financial Plan reflects
the costs of the settlements and assumes similar increases for all other
City-funded employees. The terms of wage settlements could be determined
through the impasse procedure in the New York City Collective Bargaining Law,
which can impose a binding settlement.

The City's pension expenditures for the 1998 fiscal year are expected to
approximate $1.5 billion. In each of fiscal years 1999 through 2002, these
expenditures are expected to approximate $1.4 billion, $1.4 billion, $1.4
billion, and $1.3 billion, respectively. Certain of the systems may provide
pension benefits of 50% to 55% of "final pay" after 20 to 25 years of service
without additional benefits for subsequent years of service. For the 1997
fiscal year, the City's total annual pension costs, including the City's
pension costs not associated with the five major actuarial systems, plus
Federal Social Security tax payments by the City for the year, were
approximately 19.04% of total payroll costs. In addition, contributions are
also made by certain component units of the City and government units directly
to the three cost sharing multiple employer actuarial systems. The State
Constitution provides that pension rights of public employees are contractual
and shall not be diminished or impaired.

Reports on the City Financial Plan. From time to time, the Control Board
staff, MAC, OSDC, the City Comptroller and others issue reports and make public
statements regarding the City's financial condition, commenting on, among other
matters, the City's financial plans, projected revenues and expenditures and
actions by the City to eliminate projected operating deficits. Some of these
reports and statements have warned that the City may have underestimated
certain expenditures and overestimated certain revenues and have suggested that
the City may not have adequately provided for future contingencies. Certain of
these reports have analyzed the City's future economic and social conditions
and have questioned whether the City has the capacity to generate sufficient
revenues in the future to meet the costs of its expenditure increases and to
provide necessary services. It is reasonable to expect that reports and
statements will continue to be issued and to engender public comment, and it is
expected that the staff of the Control Board will issue a report on the
1998-2002 Financial Plan in the near future.

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On February 26, 1998, the City Comptroller issued a report on the 1998
fiscal year and the preliminary budget for the 1999 fiscal year, as reflected
in the 1997-2001 Financial Plan. With respect to the 1998 fiscal year, the
report identified a possible surplus of between $71 million and $293 million
above the level projected in the City's plan. The report stated that the
additional surplus reflects the possibility of the receipt of an additional
$225 million of tax revenues, and that the size of the possible surplus depends
primarily on whether the sale of the New York Coliseum for $200 million is
completed. With respect to the 1999 fiscal year, the report identified a
possible gap of $153 million or a possible surplus of $269 million, depending
upon whether the State approves the extension of 12.5% personal income tax
surcharge and the amount of surplus for the 1998 fiscal year available for debt
service in the 1999 fiscal year.

The potential risks identified in the City Comptroller's report for the
1999 fiscal year include: (i) assumed payments from the Port Authority relating
to the City's claims for back rentals and an increase in future rentals, part of
which are the subject of the arbitration, totaling $335 million; (ii) State
approval of the 12.5% personal income tax surcharge beyond December 1, 1998,
which would generate $188 million in the 1999 fiscal year and which the Speaker
of the City Counsel has opposed; and (iii) the receipt of an additional $450
million of State and Federal aid assumed in the financial plan. The potential
risks are offset by potential additional resources for the 1999 fiscal year,
including the potential for an additional $150 million of State educational aid,
$150 million of additional debt service savings, $176 million in tax revenues if
the proposed sales tax reduction on clothing is not approved, $294 million of
higher than projected tax revenues and the availability in the 1999 fiscal year
of an additional $71 million to $293 million surplus from the 1998 fiscal year.
The report also noted that the City Comptroller will begin writing off
outstanding education-aid receivables that are 10 years past due, which are
estimated to be approximately $4 million in the 1998 fiscal year and $39 million
in the 1999 fiscal year, and which total $914 million for fiscal years 1989
through 1997. In addition, the report noted that City-funded expenditures for
the 1998 fiscal year are expected to exceed the ceiling established in the May
1996 agreement between the City and MAC, which would permit MAC to recover from
the City in the 1999 fiscal year an amount equal to such excess spending, up to
$125 million. Finally, the report noted that, while the City is in a relatively
strong financial position, its reliance on State and Federal aid to close its
budget gap for the 1999 fiscal year raises concerns, and that the City's
spending will again be under pressure in the event of an economic downturn. The
City Comptroller also noted (in a separate report on the City's capital debt)
that debt burden measures, such as annual debt service as a percentage of tax
revenues, debt per capita, and debt assessed value of real property, are
approaching historically high post-fiscal crises levels, which calls for
restraint in the City's capital program, while the City's infrastructure
requires additional resources.

Also on February 26, 1998, the staff of OSDC issued a report on the
Financial Plan. With respect to the 1998 fiscal year, the OSCD report noted that
the City's revenues could be $200 million greater than projected in the
Financial Plan. While noting a potential delay in the receipt of proceeds from
the sale of the New York Coliseum, the report projects that it is not likely
that those resources will be needed in the 1998 fiscal year. The report
projected potential budget gaps of $462 million, $2.6 billion, $2.7 billion, and
$2.3 billion for the 1999 through 2002 fiscal years, respectively, which include
the gaps projected in the Financial Plan for fiscal years 2000 through 2002 and
the additional net risks identified in the report totaling $762 million, $1.012
billion, $913 million, and $774 million for the 1999 through 2002 fiscal years,
respectively, which are reduced by the potential for greater than forecast
revenues and lower than forecast pension costs for fiscal years 2000 through
2002. The largest risks identified in the report relate to (i) the receipt of
projected Port Authority lease payments which are the subject of arbitration and
lease negotiations; (ii) City gap-closing proposals for additional State and
Federal assistance; and (iii) State approval of a three-year extension of the
City's 12.5% personal income tax surcharge. Additional risks identified in the
report include unfunded expenditures for project READ totaling $125 million for
each of the 2000 through 2002 fiscal years and the potential for additional
funding needs for the City's labor reserve, which total $104 million in the 1999
fiscal year and exceed $200 million in each of the 2000 through 2002 years, to
pay for collective bargaining increases for the Covered Organizations, which the
Plan assumes the Covered Organizations will pay instead of the City. The report
noted that these risks could be reduced if the Tax Reduction Program proposed in
the Financial Plan

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is not approved by the City Counsel and the State. The report also noted that:
(i) HHC faces potential budget gaps starting in the 1999 fiscal year and
reflecting the expected loss of revenues associated with the implementation of
Medicaid mandatory managed care; (ii) the Financial Plan assumes that the State
will extend the 14% personal income tax surcharge; (iii) the City faces
potential liability for State education aid owed from prior years which the
City could be required to write off if a plan is not reached to fund these
claims; and (iv) the City might be required to reimburse MAC up to $125 million
on the 1999 fiscal year if the City spending limits set forth in the May 1996
agreement with MAC are exceeded in the 1998 fiscal year. However, the report
noted that actual fiscal year 1998 spending will not be determined until
October 1998, and in the interim, City and MAC officials are discussing
solutions to the reimbursement problem.

The OSDC report noted also that, while the City's financial outlook has
improved because of actions taken by the City, Federal, and State governments
and record securities industry performance, the staff remained concerned about
the City's dependence on the securities industry and whether the City will be
able to sustain a relatively high level of spending. The report noted that
City-funded spending is projected to grow by 7.2% in fiscal year 1998 and by
4.5% in fiscal year 1999, while revenues are projected to grow by only 1.8% in
fiscal year 1999. Moreover, the report noted that while the budget gaps for
fiscal years 2000 through 2002 have been reduced, they are still large by
historical standards, and the budget makes no provisions for wage increases
after the expiration of current contacts, which, at the projected inflation
rate, would increase costs by $375 million in fiscal year 2001 and by $725
million in fiscal year 2002. Finally, the report noted that the Asian financial
and economic crises could intensify and create greater impact on financial
markets in the U.S. economy than currently anticipated, or that the Federal
Reserve Board could raise interest rates, which could adversely affect the
financial markets and the City's financial condition.

On January 13, 1998, the IBO released a report setting forth its forecast
for the City's revenues and expenditures for the 1998 through 2001 fiscal
years, assuming continuation of current spending policies and tax laws. In the
report, the IBO forecasts that the City will end the 1998 fiscal year with a
surplus of $120 million, in addition to $514 million in the Budget
Stabilization Account. Additionally, the report forecasts that the City will
face gaps of $1.4 billion, $2.6 billion, and $2.8 billion in the 1999 through
2001 fiscal years, respectively, resulting from 4.8% annual growth in spending
form 1998 through 2001, compared with 2.2% annual revenue growth. The report
noted that slow revenue growth is attributable to a variety of factors,
including a gradual deceleration in economic growth through the first half of
calendar year 1999, the impact of recently enacted tax cuts and constraints on
increases in the real property tax, as well as uncertain back rent payments
from the Port Authority, while future costs for existing programs will increase
to reflect inflation and scheduled pay increases for the City employees during
the term of existing labor agreements. The report also noted that debt service
and education spending will increase rapidly, while spending for social
services rise more slowly due to lower projected caseloads.

Finally, the report noted that the new welfare law's most significant
fiscal impact is likely to occur in the years 2002 and beyond, reflecting the
full impact of the lifetime limit on welfare participation which only begins to
be felt in 2002 when the first recipients reach the five-year limit and are
assumed to be covered by Home Relief. In addition, the report noted that, given
the constitutional requirement to care for the needy, the 1996 Welfare Act
might well prompt a migration of benefit-seekers into the City, thereby
increasing City welfare expenditures in the long run. The report concluded that
the impact of the 1996 Welfare Act on the City will ultimately depend on the
decisions of State and City officials, the performance of the local economy and
the behavior of thousands of individuals in response to the new system.

Previous Reports. On September 18, 1997, the City Comptroller issued a
report commenting on developments with respect to the 1998 fiscal year. The
report noted that the City's adopted budget, which is reflected in the City
Financial Plan, had assumed additional State resources of $612 million in the
1998 fiscal year, and that the approved State budget provided resources of only
$216 million for gap-closing purposes. The report further noted that, while the
City will receive $322 million more in education aid in the 1998 fiscal year
than assumed in the City's adopted budget, it is unlikely that the funding will
be entirely available for gap-closing purposes. In addition, the report noted
that the City's financial statements currently contain

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approximately $643 million in uncollected State education aid receivables from
prior years as a result of the failure of the State to appropriate funds to pay
these claims, and that the staff of BOE has indicated that an additional $302
million in prior year claims is available for accrual. The report stated that
the City Comptroller maintains the position that no further accrual of prior
year aid will take place, including $75 million in aid assumed in the City's
adopted budget for the 1998 fiscal year, unless the State makes significant
progress to retire the outstanding prior year receivables. On October 28, 1997,
the City Comptroller issued a subsequent report commenting on recent
developments. With respect to the 1997 fiscal year, the report noted that the
City ended the 1997 fiscal year with an operating surplus of $1.367 billion,
before certain expenditures and discretionary transfers, of which $1.362
billion was used for expenditures due in the 1998 fiscal year. With respect to
tax revenues for the 1998 fiscal year, the report noted that total tax revenues
in the first quarter of the 1998 fiscal year were $244.3 million above
projections in the City Financial Plan, excluding audit collections which were
$31.2 million less than projected. The report stated that the increased tax
revenues included $110.3 million of greater than projected general property tax
receipts, which resulted, in part, from a prepayment discount program, and
increased revenues from the personal income, banking corporation, general
corporation and unincorporated business taxes. The report noted that Wall
Street profits exceeded expectations in the first half of the 1997 calendar
year. However, the report noted that the stock market in the last two weeks of
October has declined as a result of currency turmoil in Southeast Asia. The
report noted that, while tax revenues in the 1998 fiscal year should not be
significantly affected by the recent stock market decline, since there is a lag
between activity on Wall Street and City tax revenues, if the current stock
market decline persists, tax revenue forecasts for subsequent years will have
to be revised downward. The report noted that the City was not affected by the
October 1987 stock market crash until the 1990 fiscal year, when revenues from
the City's business and real estate taxes fell by 20% over the 1989 fiscal
year. The report also noted that expenditures for short-term and long-term debt
issued during the first half of the 1998 fiscal year are estimated to be
between approximately $53.9 million and $58.8 million below levels anticipated
in the City's adopted budget for the 1998 fiscal year, approximately $20
million below anticipated levels in the 1999 fiscal year and approximately $30
million below anticipated levels in each of fiscal years 2000 and 2001 due to
less borrowing and lower interest rates than assumed.

On August 25, 1997, the IBO issued a report relating to recent
developments regarding welfare reform. The report noted that Federal
legislation adopted in August 1997, modified certain aspects of the 1996
Welfare Act, by reducing SSI eligibility restrictions for certain legal aliens
residing in the country as of August 22, 1996, resulting in the continuation of
Federal benefits, by providing funding to the states to move welfare recipients
from public assistance and into jobs and by providing continued Medicaid
Coverage for those children who lose SSI due to stricter eligibility criteria.
In addition, the report noted that the State had enacted the Welfare Reform Act
of 1997 which, among other things, requires the City to achieve work quotas and
other work requirements and requires all able-bodied recipients to work after
receiving assistance for two years. The report noted that this provision could
require the City to spend substantial funds over the next several years for
workfare and day care in addition to the funding reflected in the City
Financial Plan. The report also noted that the State Welfare Reform Act of 1997
established a Food Assistance Program designed to replace Federal food stamp
benefits for certain classes of legal aliens denied eligibility for such
benefits by the 1996 Welfare Act. The report noted that if the City elects to
participate in the Food Assistance Program, it will be responsible for 50% of
the costs for the elderly and disabled. The IBO has stated that it will release
an updated report to provide a detailed analysis of these developments and
their likely impact on the City.

On July 16, 1997, the City Comptroller issued a report on the City
Financial Plan. With respect to the 1998 fiscal year, the report identified a
possible $112 million surplus or a possible total net budget gap of up to $440
million, depending primarily on whether the tax reduction program proposed in
the City Financial Plan is implemented and the 14% personal income tax
surcharge is extended beyond December 31, 1997. The risks identified in the
report for the 1998 fiscal year include (i) $178 million related to BOE,
resulting primarily from unidentified expenditure reductions and prior year
State aid receivables; (ii) State aid totaling $115 million which is assumed in
the City Financial Plan but not provided for in the Governor's Executive
Budget; (iii) State approval of the extension of the 14% personal income tax
surcharge beyond December 31, 1997,

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which would generate $169 million in the 1998 fiscal year; (iv) City proposals
for State aid totaling $271 million, including the acceleration of $142 million
of State revenue sharing payments from the 1999 fiscal year to the 1998 fiscal
year, which are subject to approval by the Governor and/or the State
Legislature; and (v) the assumed sale of the Coliseum for $200 million, which
may be delayed. The report noted that these risks could be partially offset by
between $597 million and $765 million in potentially available resources,
including $200 million of higher projected tax revenues, $150 million of
possible additional State education aid and the possibility that the proposed
sales tax reduction will not be enacted, which would result in $157 million of
additional tax revenues in the 1998 fiscal year. With respect to the 1998
fiscal year, the report stated that the City has budgeted $200 million in the
General Reserve and included in the City Financial Plan a $300 million surplus
to be used in the 1999 fiscal year, making the potential $440 million budget
gap manageable. However, the report also expressed concern as to the
sustainability of profits in the securities industry.

With respect to the 1999 and subsequent fiscal years, the report identified
total net budget gaps of between $1.9 billion and $2.8 billion, $2.6 billion and
$4.0 billion, and $2.4 billion and $3.8 billion for the 1999 through 2001 fiscal
years, respectively, which include the gaps set forth in the City Financial
Plan. The potential risks and potential available resources identified in the
report for the 1999 through 2001 fiscal years include most of the risks and
resources identified for the 1998 fiscal year, except that the additional risks
for the 1999 through 2001 fiscal years include (i) assumed payments from the
Port Authority relating to the City's claim for back rentals and an increase in
future rentals, part of which are the subject of arbitration, totaling $350
million, $140 million and $135 million in the 1999-2001 fiscal years,
respectively; and (ii) State approval of the extension of the 12.5% personal
income tax surcharge beyond December 31, 1998, which would generate $190
million, $527 million and $554 million in the 1999 through 2001 fiscal years,
respectively.

On July 15, 1997, the staff of the Control Board issued a report commenting
on the City Financial Plan. The report stated that, while the City should end
the 1998 fiscal year with its budget in balance, the City Financial Plan still
contains large gaps beginning in the 1999 fiscal year, reflecting revenues which
are not projected to grow during the Financial Plan Period and expenditures
which are projected to grow at about the rate of inflation. The report
identified net risks totaling $485 million, $930 million, $1.2 billion and $1.4
billion for 1998 through 2001 fiscal years, respectively, in addition to the
gaps projected in the City Financial Plan for fiscal years 1999 through 2001.
The principal risks identified in the report included (i) potential tax revenues
shortfalls totaling $150 million, $300 million and $400 million for the 1999
through 2001 fiscal years, respectively, based on historical average trends;
(ii) BOE's structural gap, uncertain State funding of BOE and implementation by
BOE of various unspecified actions, totaling $163 million, $209 million, $218
million and $218 million in the 1998 through 2001 fiscal years, respectively;
(iii) the proposed sale of certain assets in the 1998 fiscal year totaling $248
million, which could be delayed; (iv) assumed additional State actions totaling
$271 million, $121 million, $125 million and $129 million in the 1998 through
2001 fiscal years, respectively; (v) revenues from the extension of the 12.5%
personal income tax surcharge beyond December 31, 1998, totaling $188 million,
$527 million and $554 million in the 1999 through 2001 fiscal years,
respectively, which requires State legislation; and (vi) the receipt of $350
million, $140 million and $135 million from the Port Authority in the 1999
through 2001 fiscal years, respectively, which is the subject of arbitration.
Taking into account the risks identified in the report and the gaps projected in
the City Financial Plan, the report projected a gap of $485 million for the 1998
fiscal year, which could be offset by available reserves, and gaps $2.7 billion,
$4.1 billion and $4.0 billion for the 1999 through 2001 fiscal years,
respectively. The report also noted that (i) if the securities industry or
economy slows down to a greater extent than projected, the City could face
sudden and unpredictable changes to its forecast; (ii) the City's entitlement
reduction assumptions require a decline of historic proportions in the number of
eligible welfare recipients; (iii) the City has not yet shown how the City's
projected debt service, which would consume 20% of tax revenues by the 1999
fiscal year, can be accommodated on a recurring basis; (iv) the City is
deferring recommended capital maintenance; and (v) continuing growth in
enrollment at BOE has helped create projected gaps of over $100 million annually
at BOE. However, the report noted that if proposed tax reductions are not
approved, additional revenue will be realized, ranging from $272 million in the
1998 fiscal year to $481 million in the 2001 fiscal year.

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On July 2, 1997, the staff of the OSDC issued a report on the City
Financial Plan. The report projected a potential surplus for the 1998 fiscal
year of $190 million, due primarily to the potential for greater than forecast
tax revenues, and projected budget gaps for the 1999 through 2001 fiscal years
which are slightly less than the gaps set forth in the City Financial Plan for
such years. The report also identified risks of $518 million, $1.1 billion, $1.3
billion and $1.4 billion for the 1998 through 2001 fiscal years, respectively.
The additional risks identified in the report relate to: (i) the receipt of Port
Authority lease payments totaling $350 million, $140 million and $135 million in
the 1999 through 2001 fiscal years, respectively; (ii) City proposals for State
aid totaling $271 million, $121 million, $125 million and $129 million in the
1998 through 2001 fiscal years, respectively, including the acceleration of $142
million of State revenue sharing payments from the 1999 fiscal year to the 1998
fiscal year, which are subject to approval by the Governor and/or the State
Legislature; (iii) the receipt of $200 million in the 1998 fiscal year in
connection with the proposed sale of the New York Coliseum; (iv) the receipt of
$47 million in the 1998 fiscal year from the sale of certain other assets; (v)
uncertain State education aid and expenditure reductions relating to BOE
totaling $325 million in each of the 1999 through 2001 fiscal years; (vi) State
approval of a three-year extension to the City's 12.5% personal income tax
surcharge, which is scheduled to expire on December 31, 1998 and which would
generate revenues of $230 million, $525 million and $550 million in the 1999
through 2001 fiscal years, respectively; and (vii) the potential for additional
funding needs for the City's labor reserve totaling $104 million, $225 million
and $231 million in the 1999 through 2001 fiscal years, respectively, to pay for
collective bargaining increases for the Covered Organizations, which the City
Financial Plan assumes will be paid for by the Covered Organizations, rather
than the City. The report also noted that the City Financial Plan assumes that
the State will extend the 14% personal income tax that is scheduled to expire in
December 1997, which would generate revenues of $200 million in the 1998 fiscal
year and $500 million annually in subsequent fiscal years, and that the City
Financial Plan makes no provision for wage increases after the expiration of
current contracts in fiscal year 2000, which would add $430 million to the 2001
fiscal year budget gap if employees receive wage increases at the projected rate
of inflation. The report noted that the City Financial Plan includes an annual
General Reserve of $200 million and sets aside an additional $300 million in the
1998 fiscal year to reduce the budget gap for the 1999 fiscal year if such funds
are not needed in the 1998 fiscal year. With respect to the gap-closing program
for the 1999 through 2001 fiscal years, the report noted that the City has
broadly outlined a program that relies heavily on unspecified agency actions,
savings from reinvention and other unspecified initiatives and uncertain State
aid and entitlement program reductions which depend on the cooperation of
others.

The report concluded that while 1997 was an unexpectedly good fiscal year
for City revenues, the City projects that the rate of spending for the 1998
fiscal year will grow substantially faster than the rate of revenues,
reflecting increasing costs for labor, debt service, Medicaid and education,
and that the gaps for the subsequent fiscal years continue to present a
daunting challenge. With respect to the economy, the report noted that the
major risks to the City's economic and revenue forecasts continue to relate to
the pace of both the national economy and activity on Wall Street, that the
potential exists for a national recession over the next four years, and that
Wall Street volatility can have a negative effect, as was apparent in 1994 when
the Federal Reserve repeatedly raised interest rates and the profits of
securities firms fell. Other concerns identified in the report include: (i) $76
million in retroactive claims for State education aid included in the City
Financial Plan for the 1998 fiscal year which may not be realized; (ii) a
potential risk of $698 million in State education aid owed to the City by the
State for prior years, all or a portion of which the City could be forced to
write-off if further delays occur in the State agreeing to fund these claims;
and (iii) the potential adverse impact on HHC over the long-term of the planned
expansion of managed care which emphasizes out-patient services with fixed
monthly fees, uncertainty covering projected savings from a proposal that most
Medicaid recipients be required to enroll in managed care, which is subject to
approval by the Federal Government, and the possibility that the recent Federal
budget agreement could substantially reduce aid to hospitals which serve a
large number of medically indigent patients.

On May 27, 1997, the IBO released a report analyzing the financial plan
published on May 8, 1997 (the "May Financial Plan"). In its report, the IBO
estimated gaps of $27 million, $91 million, $2.1 billion, $2.9

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billion and $2.9 billion for the 1997 through 2001 fiscal years, respectively,
which include the gaps set forth in the May Financial Plan for fiscal years
1999 through 2001. The gaps estimated in the IBO report reflect (i) uncertainty
concerning the size and timing of projected airport rents of $270 million and
$215 million in the 1998 and 1999 fiscal years, respectively, which are the
subject of an ongoing dispute between the Port Authority and the City; and (ii)
additional funding needs for the City's labor reserve totaling $104 million,
$224 million and $231 million in the 1999 through 2001 fiscal years,
respectively, to pay for collective bargaining increases for the Covered
Organizations, which the May Financial Plan assumes will be paid for by the
Covered Organizations, rather than the City. These reduced revenues and
increased expenditures identified in the IBO report are substantially offset by
tax revenue forecasts which exceed those in the May Financial Plan. However,
the report noted that the May Financial Plan assumes continued strong revenue
growth and that, in the event of an economic downturn, the City will be
required to increase taxes in a slow economy or reduce spending when it is most
needed. With respect to the tax reductions proposed in the May Financial Plan,
the IBO stated that the principal question is whether the City will be able to
afford the tax reductions. In addition, the report discussed various issues
with implications for the City's 1998 budget. These issues include the reliance
in the budget on a number of State legislative actions, including (i) $294
million from legislation the City has requested to increase State aid; (ii)
$128 million in savings attributable to both a larger City share of Federal
welfare grant funds and State reforms to Medicaid; and (iii) $115 million to
restore expenditure reductions proposed in the Governor's Executive Budget. The
report also noted that the City's claim for $900 million of State reimbursement
of prior year education expenditures remains unresolved, that proposals
affecting the MTA, including proposals to eliminate two-fare zones for bus and
subway riders, will result in a significant reduction in revenues for the MTA,
and that the implementation of changes in the City's computer system, resulting
from the inability of the current computer system to recognize the year 2000,
could cost the City up to $150 million to $200 million over the next three
years. In a subsequent report released on June 16, 1997, the IBO noted that in
the City Financial Plan the City had deferred to fiscal years 1999 through 2001
the assumed receipt of back airport rents, and that the tax revenue forecasts
for the 1998 fiscal year in the City Financial Plan are closer than the
forecasts in the May Financial Plan to the IBO's forecast of City tax revenues
in its May report.

On October 31, 1996, the IBO released a report assessing the costs that
could be incurred by the City in response to the 1996 Welfare Act, which, among
other things, replaces the AFDC entitlement program with TANF, imposes a
five-year time limit on TANF assistance, requires 50% of states' TANF caseload
to be employed by 2002, and restricts assistance to legal aliens. The report
noted that if the requirement that all recipients work after two years of
receiving benefits is enforced, these additional costs could be substantial
starting in 1999, reflecting costs for worker training and supervision of new
workers and increased child care costs. The report further noted that, if
economic performance weakened, resulting in an increased number of public
assistance cases, potential costs to the City could substantially increase.
States are required to develop plans during 1997 to implement the new law. The
report noted that decisions to be made by the State which will have a
significant impact on the City budget include the allocation of block grant
funds between the State and New York local governments such as the City and the
division between the State and its local governments of welfare costs not
funded by the Federal government.

Seasonal Financing. The City since 1981 has fully satisfied its seasonal
financing needs in the public credit markets, repaying all short-term
obligations within their fiscal year of issuance. The City has issued $1.075
billion of short-term obligations for the fiscal year 1998 to finance the
City's projected cash flow needs for the 1998 fiscal year. The City issued $2.4
billion of short-term obligations in fiscal year 1997. Seasonal financing
requirements for the 1996 fiscal year increased to $2.4 billion from $2.2
billion and $1.75 billion in the 1995 and 1994 fiscal years, respectively.
Seasonal financing requirements were $1.4 billion in the 1993 fiscal year. The
delay in the adoption of the State's budget in certain past fiscal years has
required the City to issue short-term notes in amounts exceeding those expected
early in such fiscal years.

Litigation. The City is a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional violations,
alleged torts, alleged breaches of contracts and other violations of law and
condemnation pro-

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ceedings. While the ultimate outcome and fiscal impact, if any, on the
proceedings and claims are not currently predictable, adverse determinations in
certain of them might have a material adverse effect upon the City's ability to
carry out the City Financial Plan. The City is a party to numerous lawsuits and
is the subject of numerous claims and investigations. The City has estimated
that its potential future liability on account of outstanding claims against it
as of June 30, 1997 amounted to approximately $3.5 billion. This estimate was
made by categorizing the various claims and applying a statistical model, based
primarily on actual settlements by type of claim during the preceding ten
fiscal years, and by supplementing the estimated liability with information
supplied by the City's Corporation Counsel.

Ratings Agencies. On August 6, 1998, as well as July 2, June 8 and May 27,
Fitch rated New York City's tax-exempt general obligation bonds as "A-". Fitch
qualified that rating, stating that concerns still remained over significant
projected outyear budget funding challenges coupled with sizable reliance on
the securities industry. On July 2, 1998, Moody's revised its rating on the New
York City General Obligation Bonds to Aaa from Baa1.

On July 16, 1998, S&P increased New York City's bond rating to A-, up one
notch from BBB+, but analysts at the agency also cautioned that New York still
had room for improvement and that they were worried about the City's rising
long-term debt and the Council's plan to cut taxes by $200 million this year
and $500 million in future years. On July 7, 1998, S&P had assigned its
triple-B-plus rating to New York City general obligation bonds, stating that
the ratings had been placed on CreditWatch with positive implications.

On February 3, 1998, S&P raised its credit outlook for New York City's
outstanding general obligation bonds from stable to positive but maintained its
BBB-plus rating. The City has held this rating since July 10, 1995, when S&P
lowered its rating from A-to BBB+ and removed City bonds from CreditWatch. S&P
stated that "structural budgetary balance remains elusive because of persistent
softness in the City's economy, highlighted by weak job growth and a growing
dependence on the historically volatile financial services sector." Other
factors identified by S&P's in lowering its rating on City bonds included a
trend of using one-time measures, including debt refinancings, to close
projected budget gaps, dependence on unratified labor savings to help balance
the City Financial Plan, optimistic projections of additional federal and State
aid or mandate relief, a history of cash flow difficulties caused by State
budget delays and continued high debt levels. In 1975, S&P suspended its A
rating of City bonds. This suspension remained in effect until March 1981, at
which time the City received an investment grade rating of BBB from S&P. On July
2, 1985, S&P revised its rating of City bonds upward to BBB+ and on November 19,
1987, to A-. On July 10, 1995, S&P revised its rating of City bonds downward to
BBB+, as discussed above. On November 25, 1996, S&P issued a report which stated
that, if the City reached its debt limit without the ability to issue bonds
through other means, it would cause a deterioration in the City's infrastructure
and significant cutbacks in the capital plan which would eventually impact the
City's economy and revenues, and could have eventual negative credit
implications.

On February 24, 1998 Moody's raised its rating for City general obligation
bonds from Baa1 to A3, based on improvement in its financial condition and
economy. Previously, on July 17, 1997, Moody's had changed its outlook on City
bonds to positive from stable. On March 1, 1996, Moody's stated that the rating
for the City's Baa1 general obligation bonds remains under review for a
possible downgrade pending the outcome of the adoption of the City's budget for
the 1997 fiscal year and in light of the status of the debate on public
assistance and Medicaid reform; the enactment of a State budget, upon which
major assumptions regarding State aid are dependent, which may be extensively
delayed; and the seasoning of the City's economy with regard to its strength
and direction in the face of a potential national economic slowdown. Moody's
ratings of City bonds were revised in November 1981 from B (in effect since
1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in May 1988 to
A and again in February 1991 to Baa1.

On February 3, 1998, Fitch Investors Service, Inc. ("Fitch") set its
rating of City general obligation bonds at A-, which it has maintained since
July 15, 1993. On February 28, 1996, Fitch placed the City's general obligation
bonds on FitchAlert with negative implications. On November 5, 1996, Fitch
removed the City's general obligation bonds from FitchAlert although Fitch
stated that the outlook remains negative. Since

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then Fitch has revised the outlook to stable. There is no assurance that such
ratings will continue for any given period of time or that they will not be
revised downward or withdrawn entirely. Any such downward revision or
withdrawal could have an adverse effect on the market prices of the City's
general obligation bonds.

On October 9, 1995, Standard & Poor's issued a report which concluded that
proposals to replace the graduated Federal income tax system with a "flat" tax
could be detrimental to the creditworthiness of certain municipal bonds. The
report noted that the elimination of Federal income tax deductions currently
available, including residential mortgage interest, property taxes and state and
local income taxes, could have a severe impact on funding methods under which
municipalities operate. With respect to property taxes, the report noted that
the total valuation of a municipality's tax base is affected by the
affordability of real estate and that elimination of mortgage interest deduction
would result in a significant reduction in affordability and, thus, in the
demand for, and the valuation of, real estate. The report noted that rapid
losses in property valuations would be felt by many municipalities, hurting
their revenue raising abilities. In addition, the report noted that the loss of
the current deduction for real property and state and local income taxes from
Federal income tax liability would make rate increases more difficult and
increase pressures to lower existing rates, and that the cost of borrowing for
municipalities could increase if the tax-exempt status of municipal bond
interest is worth less to investors. Finally, the report noted that tax
anticipation notes issued in anticipation of property taxes could be hurt by the
imposition of a flat tax, if uncertainty is introduced with regard to their
repayment revenues, until property values fully reflect the loss of mortgage and
property tax deductions.

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APPENDIX D

SPECIAL INVESTMENT CONSIDERATIONS RELATING TO
NEW JERSEY MUNICIPAL OBLIGATIONS

Some of the significant financial considerations relating to the
investments of the New Jersey Tax Free Income Fund in New Jersey municipal
securities are summarized below. The following information constitutes only a
brief summary, does not purport to be a complete description and is largely
based on information drawn from official statements relating to securities
offerings of New Jersey municipal obligations available as of the date of this
Statement of Additional Information. The accuracy and completeness of the
information contained in such offering statements has not been independently
verified.

State Finance/Economic Information. New Jersey is the ninth largest state
in population and the fifth smallest in land area. With an average of 1,077
people per square mile, it is the most densely populated of all the states. New
Jersey's economic base is diversified, consisting of a variety of manufacturing,
construction and service industries, supplemented by rural areas with selective
commercial agriculture.

Business investment expenditures and consumer spending have increased
substantially in New Jersey. While growth is likely to be slower than in the
nation, the locational advantages that have served New Jersey well for many
years will still be there. Structural changes that have been going on for years
can be expected to continue, with job creation expected to be concentrated most
heavily in the service industries.

New Jersey's Budget and Appropriation System. New Jersey operates on a
fiscal year ending on June 30. The General Fund is the fund into which all New
Jersey revenues not otherwise restricted by statute are deposited and from which
appropriations are made. The largest part of the total financial operations of
New Jersey is accounted for in the General Fund, which includes revenues
received from taxes and unrestricted by statute, most federal revenues, and
certain miscellaneous revenue items. The Appropriation Acts enacted by the New
Jersey Legislature and approved by the Governor provide the basic framework for
the operation of the General Fund.

The undesignated General Fund balance was $569.2 at year end for fiscal
year 1995, $442.0 million for fiscal year 1996 and $280.5 million for fiscal
year 1997. For fiscal year 1998, the balance in the undesignated General Fund
is estimated to be $143.9 million, subject to change upon completion of the
year-end audit. The estimated balance for fiscal year 1999 is $198.9 million,
based on the amounts contained in the fiscal year 1999 Appropriations Act. The
fund balances are available for appropriation in succeeding fiscal years.

Should revenues be less than the amount anticipated in the budget for a
fiscal year, the Governor may by statutory authority prevent any expenditure
under any appropriation. No supplemental appropriation may be enacted after
adoption of an appropriations act except where there are sufficient revenues on
hand or anticipated to meet such appropriation. In the past when actual
revenues have been less than the amount anticipated in the budget, the Governor
has exercised plenary powers leading to, among other actions, a hiring freeze
for all New Jersey departments and discontinuation of programs for which
appropriations were budgeted but not yet spent.

General Obligation Bonds. New Jersey finances capital projects primarily
through the sale of its general obligation bonds. These bonds are backed by the
full faith and credit of New Jersey. Tax revenues and certain other fees are
pledged to meet the principal and interest payments required to pay the debt
fully.

The aggregate outstanding general obligation bonded indebtedness of New
Jersey as of June 30, 1998 was $3.5729 billion. The appropriation for the debt
service obligation on outstanding indebtedness is $501.1 million for fiscal
year 1998.

In addition to payment from bond proceeds, capital construction can also
be funded by appropriation of current revenues on a pay-as-you-go basis. In
fiscal year 1999 the amount appropriated to this purpose is $615.6 million.

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Tax and Revenue Anticipation Notes. In fiscal year 1992 New Jersey
initiated a program under which it issued tax and revenue anticipation notes to
aid in providing effective cash flow management to fund imbalances which occur
in the collection and disbursement of the General Fund and Property Tax Relief
Fund revenues. Such tax and revenue anticipation notes do not constitute a
general obligation of New Jersey or a debt or liability within the meaning of
the New Jersey Constitution. Such notes constitute special obligations of New
Jersey payable solely from moneys on deposit in the General Fund and Property
Tax Relief Fund and are legally available for such payment.

"Moral Obligation" Financing. The authorizing legislation for certain New
Jersey entities provides for specific budgetary procedures with respect to
certain obligations issued by such entities. Pursuant to such legislation, a
designated official is required to certify any deficiency in a debt service
reserve fund maintained to meet payments of principal of and interest on the
obligations, and a New Jersey appropriation in the amount of the deficiency is
to be made. However, the New Jersey Legislature is not legally bound to make
such an appropriation. Bonds issued pursuant to authorizing legislation of this
type are sometimes referred to as "moral obligation" bonds. There is no
statutory limitation on the amount of "moral obligation" bonds which may be
issued by eligible New Jersey entities.

The following table sets forth the "moral obligation" bonded indebtedness
issued by New Jersey entities as of June 30,1998.

<TABLE>
<CAPTION>
Maximum Annual
Debt Service
Subject to
Outstanding Moral Obligation
----------- ----------------
<S> <C> <C>
New Jersey Housing and Mortgage
Finance Agency $372,859,400.58 $35,677,988.61
South Jersey Port Corporation 76,675,000.00 7,002,815.00
Higher Education Assistance Authority 208,550,000.00 38,897,070.00
--------------- --------------
$658,084,400.58 $81,577,873.61
=============== ==============
</TABLE>

New Jersey Housing and Mortgage Finance Agency. Neither the New Jersey
Housing and Mortgage Finance Agency nor its predecessors, the New Jersey
Housing Finance Agency and the New Jersey Mortgage Finance Agency, have had a
deficiency in a debt service reserve fund which required New Jersey to
appropriate funds to meet its "moral obligation." It is anticipated that this
agency's revenues will continue to be sufficient to cover debt service on its
bonds.

South Jersey Port Corporation. New Jersey has previously provided the
South Jersey Port Corporation (the "Corporation") with funds to cover all debt
service and property tax requirements, when earned revenues are anticipated to
be insufficient to cover these obligations. For calendar years 1990 through
1998, New Jersey has made appropriations totalling $47,785,848.25 which covered
deficiencies in revenues of the Corporation, for debt service and property tax
payments.

Higher Education Assistance Authority. The Higher Education Assistance
Authority ("HEAA") has not had a revenue deficiency which required New Jersey
to appropriate funds to meet its "moral obligation." It is anticipated that the
HEAA's revenues will be sufficient to cover debt service on its bonds.

Obligations Guaranteed by New Jersey. The New Jersey Sports and Exposition
Authority ("NJSEA") has issued New Jersey guaranteed bonds of which
$111,910,000 are outstanding as of June 30, 1998. To date, the NJSEA has not
had a revenue deficiency requiring New Jersey to make debt service payments
pursuant to its guarantee. It is anticipated that the NJSEA's revenues will
continue to be sufficient to pay debt service on these bonds without recourse
to New Jersey's guarantee.

Obligations Supported by New Jersey Revenue Subject to Annual
Appropriation. New Jersey has entered into a number of leases and contracts
described below (collectively, the "Agreements") with several governmental
authorities to secure the financing of various New Jersey projects. Under the
terms of the

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Agreements, New Jersey has agreed to make payments equal to the debt service
on, and other costs related to, the obligations sold to finance the projects.
New Jersey's obligation to make payments under the Agreements is subject to and
dependent upon annual appropriations being made by the New Jersey Legislature
for such purposes. The New Jersey Legislature has no legal obligation to enact
such appropriations, but has done so to date for all such obligations.

New Jersey Economic Development Authority. Pursuant to legislation, the
New Jersey Economic Development Authority ("EDA") has been authorized to issue
Economic Recovery Bonds, State Pension Funding Bonds and Market Transition
Facility Bonds. The Economic Recovery Bonds have been issued pursuant to
legislation enacted during 1992 to finance various economic development
purposes. Pursuant to that legislation, the EDA and the New Jersey Treasurer
entered into an agreement through which the EDA has agreed to undertake the
financing of certain projects and the New Jersey Treasurer has agreed to credit
to the Economic Recovery Fund from the General Fund amounts equivalent to
payments due to New Jersey under an agreement with the Port Authority of New
York and New Jersey subject to appropriation by the New Jersey Legislature.

The State Pension Funding Bonds have been issued pursuant to legislation
enacted in June 1997 to pay a portion of New Jersey's unfunded accrued pension
liability for its retirement system, which together with amounts derived from
the revaluation of pension assets pursuant to companion legislation enacted at
the same time, will be sufficient to fully fund the unfunded accrued pension
liability.

The Market Transition Facility Bonds have been issued pursuant to
legislation enacted in June 1994 to pay the current and anticipated liabilities
and expenses of the Market Transition Facility, which issued private passenger
automobile insurance policies for drivers who could not be insured by private
insurance companies on a voluntary basis.

In addition, New Jersey has entered into a number of leases with the EDA
relating to the financing of certain real property, office buildings and
equipment for (i) the New Jersey Performing Arts Center; (ii) Liberty State
Park in the City of Jersey City; (iii) various office buildings located in
Trenton known as the Trenton Office Complex; (iv) a facility located in
Trenton; and (v) certain energy saving equipment installed in various New
Jersey office buildings. The rental payments required to be made by New Jersey
under these lease agreements are, if received, sufficient to pay debt service
on the bonds issued by the EDA to finance the acquisition and construction of
such projects and other amounts payable to the EDA, including certain
administrative expenses of the EDA.

New Jersey Building Authority. Legislation enacted in 1981 established the
New Jersey Building Authority ("NJBA") to undertake the acquisition,
construction, renovation and rehabilitation of various New Jersey office
buildings, historic buildings and correctional facilities. The NJBA finances
the cost of such projects through the issuance of bonds, the payment of debt
service on which is made pursuant to a lease between the NJBA and New Jersey.

New Jersey Educational Facilities Authority. The New Jersey Educational
Facilities Authority issues bonds pursuant to three separate legislative
programs, enacted in 1993 and 1997, to finance (i) the purchase of equipment to
be leased to institutions of higher learning; (ii) grants to New Jersey's
public and private institutions of higher education for the development,
construction and improvement of instructional, laboratory, communication and
research facilities; and, (iii) grants to public and private institutions of
higher education to develop a technology infrastructure within and among the
State's institutions of higher education.

New Jersey Sports and Exposition Authority. Legislation enacted in 1992
authorizes the New Jersey Sports and Exposition Authority (the "NJSEA") to
issue bonds for various purposes payable from a contract between the NJSEA and
the New Jersey Treasurer (the "NJSEA State Contract"). Pursuant to the NJSEA
State Contract, the NJSEA undertakes certain projects and the New Jersey
Treasurer credits to the NJSEA amounts from the General Fund sufficient to pay
debt service and other costs related to the bonds.

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<PAGE>

State Transportation System Bonds. In July 1994, New Jersey created the
New Jersey Transportation Trust Fund Authority (the "TTFA"), an instrumentality
of New Jersey pursuant to the New Jersey Transportation Trust Fund Authority
Act of 1984, as amended (the "TTFA Act") for the purpose of funding a portion
of New Jersey's share of the cost of improvements to its transportation system.
Pursuant to the TTFA Act, the principal amount of the TTFA's bonds, notes or
other obligations which may be issued in any fiscal year generally may not
exceed $700 million plus amounts carried over from prior fiscal years. The debt
issued by the TTFA are special obligations of the TTFA payable from a contract
among the TTFA, the New Jersey Treasurer and the Commissioner of
Transportation.

New Jersey Transit Corporation Hudson-Bergen Light Rail Transit System.
The TTFA has entered into a Standby Deficiency Agreement (the "Standby
Deficiency Agreement") with the trustee for grant anticipation notes (see
"GANS") issued by New Jersey Transit Corporation ("NJT") for the financing of
the construction of the Hudson-Bergen Light Rail Transit System. The GANS are
primarily payable from federal grant monies. To the extent that the GANS are
not paid by NJT from federal grant monies, the GANS are payable by the TTFA
pursuant to the Standby Deficiency Agreement. To date, federal grant payments
have been sufficient such that the TTFA has not been required to make payments
pursuant to the Standby Deficiency Agreement.

State of New Jersey Certificates of Participation. Beginning in April
1984, New Jersey, acting through the Director of the Division of Purchase and
Property, has entered into a series of lease purchase agreements which provide
for the acquisition of equipment, services and real property to be used by
various departments and agencies of New Jersey. Certificates of Participation
in such lease purchase agreements have been issued. A Certificate of
Participation represents a proportionate interest of the owner thereof in the
lease payments to be made by New Jersey under the terms of the lease purchase
agreement.

New Jersey Supported School and County College Bonds. Legislation provides
for future appropriations for New Jersey Aid to local school districts equal to
debt service on bonds issued by such local school districts for construction
and renovation of school facilities (P.L. 1968, c. 177; P.L. 1971, c. 10; and
P.L. 1978, c. 74) and for New Jersey Aid to counties equal to debt service on
bonds issued by counties for construction of county college facilities (P.L.
1971, c 12, as amended). The New Jersey Legislature has no legal obligations to
make such appropriations, but has done so to date for all obligations issued
under these laws.

Community Mental Health Loan Program. The EDA issues revenue bonds from
time to time on behalf of non-profit community mental health service providers.
The payment of debt service on these revenue bonds as well as the payment of
certain other provider expenses is made by New Jersey pursuant to service
contracts between the State Department of Human Services and these providers.
The contracts have one year terms, subject to annual renewal.

Line of Credit for Equipment Purchases. New Jersey finances the
acquisition of certain equipment, services and real property to be used by
various New Jersey departments through a line of credit.

State Pension Funding Bonds. Legislation enacted in June 1997 authorizes
the EDA to issue bonds to pay a portion of New Jersey's unfunded accrued
pension liability for New Jersey's retirement systems (the "Unfunded Accrued
Pension Liability"), which together with amounts derived from the revaluation
of pension assets pursuant to companion legislation enacted at the same time,
will be sufficient to fully fund the Unfunded Accrued Pension Liability. The
Unfunded Accrued Pension Liability represents pension benefits earned in prior
years which, pursuant to standard actuarial practices, are not yet fully
funded. On June 30, 1997, the EDA issued $2,803,042,498.56 aggregate principal
amount of State Pension Funding Bonds, Series 1997A-1997C. The EDA and the New
Jersey Treasurer have entered into an agreement which provides for the payment
to the EDA of monies sufficient to pay debt service on the bonds. Such payments
are subject to and dependent upon appropriations being made by the New Jersey
Legislature.

Municipal Finance. New Jersey's local finance system is regulated by
various statutes designed to assure that all local governments and their
issuing authorities remain on a sound financial basis. Regulatory

D-4
<PAGE>

and remedial statutes are enforced by the Division of Local Government Services
(the "Division") in the New Jersey State Department of Community Affairs.

Counties and Municipalities. The Local Budget Law (N.J.S.A.40A:4-1 et seq.)
imposes specific budgetary procedures upon counties and municipalities ("local
units"). Every local unit must adopt an operating budget which is balanced on a
cash basis, and items of revenue and appropriation must be examined by the
Director of the Division of Local Government Services in the Department of
Community Affairs (the "Director"). The accounts of each local unit must be
independently audited by a registered municipal accountant. New Jersey law
provides that budgets must be submitted in a form promulgated by the Division
and further provides for limitations on estimates of tax collection and for
reserves in the event of any shortfalls in collections by the local unit. The
Division reviews all municipal and county annual budgets prior to adoption for
compliance with the Local Budget Law. The Director is empowered to require
changes for compliance with law as a condition of approval; to disapprove
budgets not in accordance with law; and, to prepare the budget of a local unit,
within the limits of the adopted budget of the previous year with suitable
adjustments for legal compliance, if the local unit fails to adopt a budget in
accordance with law. This process insures that every municipality and county
annually adopts a budget balanced on a cash basis, within limitations on
appropriations or tax levies, respectively, and making adequate provision for
principal of and interest on indebtedness falling due in the fiscal year,
deferred charges and other statutory expenditure requirements. The Director also
oversees changes to local budgets after adoption as permitted by law, and
enforces regulations pertaining to execution of adopted budgets and financial
administration. In addition to the exercise of regulatory and oversight
functions, the Division offers expert technical assistance to local units in all
aspects of financial administration, including revenue collection and cash
management procedures, contracting procedures, debt management and
administrative analysis.

The Local Government Cap Law (N.J.S.A. 40A:4-45.1 et seq.) (the "Cap Law")
generally limits the year-to-year increase of the total appropriations of any
municipality and the tax levy of any county to either 5 percent or an index rate
determined annually by the Director, whichever is less. However, where the index
percentage rate exceeds 5 percent, the Cap Law permits the governing body of any
municipality or county to approve the use of a higher percentage rate up to the
index rate. Further, where the index percentage rate is less than 5 percent, the
Cap Law also permits the governing body of any municipality or county to approve
the use of a higher percentage rate up to 5 percent. Regardless of the rate
utilized, certain exceptions exist to the Cap Law's limitation on increases in
appropriations. The principal exceptions to these limitations are municipal and
county appropriations to pay debt service requirements; to comply with certain
other New Jersey or federal mandates; appropriations of private and public
dedicated funds; amounts approved by referendum; and, in the case of
municipalities only, to fund the preceding year's cash deficit or to reserve for
shortfalls in tax collections, and amounts required pursuant to contractual
obligations for specified services. The Cap Law was re-enacted in 1990 with
amendments and made a permanent part of the municipal finance system.

New Jersey law also regulates the issuance of debt by local units. The
Local Budget Law limits the amount of tax anticipation notes that may be issued
by local units and requires the repayment of such notes within 120 days of the
end of the fiscal year (six months in the case of the counties) in which issued.
The Local Bond Law (N.J.S.A. 40A:2-1 et seq.) governs the issuance of bonds and
notes by the local units. No local unit is permitted to issue bonds for the
payment of current expenses (other than Fiscal Year Adjustment Bonds described
more fully below). Local units may not issue bonds to pay outstanding bonds,
except for refunding purposes, and then only with the approval of the Local
Finance Board. Local units may issue bond anticipation notes for temporary
periods not exceeding in the aggregate approximately ten years from the date of
first issue. The debt that any local unit may authorize is limited to a
percentage of its equalized valuation basis, which is the average of the
equalized value of all taxable real property and improvements within the
geographic boundaries of the local unit, as annually determined by the Director
of the Division of Taxation, for each of the three most recent years. In the
calculation of debt capacity, the Local Bond Law and certain other statutes
permit the deduction of certain classes of debt ("statutory deductions") from
all authorized debt of the local unit ("gross capital debt") in computing
whether a local unit has exceeded its statutory

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<PAGE>

debt limit. Statutory deductions from gross capital debt consist of bonds or
notes (i) authorized for school purposes by a regional school district or by a
municipality or a school district with boundaries coextensive with such
municipality to the extent permitted under certain percentage limitations set
forth in the School Bond Law (as hereinafter defined); (ii) authorized for
purposes which are self liquidating, but only to the extent permitted by the
Local Bond Law; (iii) authorized by a public body other than a local unit the
principal of and interest on which is guaranteed by the local unit, but only to
the extent permitted by law; (iv) that are bond anticipation notes; (v) for
which provision for payment has been made; or, (vi) authorized for any other
purpose for which a deduction is permitted by law. Authorized net capital debt
(gross capital debt minus statutory deductions) is limited to 3.5 percent of
the equalized valuation basis in the case of municipalities and 2 percent of
the equalized valuation basis in the case of counties. The debt limit of a
county or municipality, with certain exceptions, may be exceeded only with the
approval of the Local Finance Board.

Chapter 75 of the Pamphlet Laws of 1991, signed into law on March 28,
1991, of New Jersey required certain municipalities and permits all other
municipalities to adopt the New Jersey fiscal year in place of the existing
calendar fiscal year. Municipalities that change fiscal years must adopt a six
month transition year budget funded by Fiscal Year Adjustment Bonds. Notes
issued in anticipation of Fiscal Year Adjustment Bonds, including renewals, can
only be issued for up to one year unless the Local Finance Board permits the
municipality to renew them for a further period of time. The Local Finance
Board must confirm the actual deficit experienced by the municipality. The
municipality may then issue Fiscal Year Adjustment Bonds to finance the deficit
on a permanent basis.

School Districts. New Jersey's school districts operate under the same
comprehensive review and regulation as do its counties and municipalities.
Certain exceptions and differences are provided, but New Jersey supervision of
school finance closely parallels that of local governments.

All New Jersey school districts are coterminous with the boundaries of one
or more municipalities. They are characterized by the manner in which the board
of education, the governing body of the school district, takes office. Type I
school districts, most commonly found in cities, have a board of education
appointed by the mayor or the chief executive officer of the municipality
constituting the school district. In a Type II school district, the board of
education is elected by the voters of the district. Nearly all regional and
consolidated school districts are Type II school districts.

The New Jersey Department of Education has been empowered with the
necessary and effective authority to abolish an existing school board and
create a State-operated school district where the existing school board has
failed or is unable to take the corrective actions necessary to provide a
thorough and efficient system of education in that school district pursuant to
N.J.S.A. 18A:7A-15 et seq. (the "School Intervention Act"). The State-operated
school district, under the direction of a New Jersey appointed superintendent,
has all of the powers and authority of the local board of education and of the
local district superintendent. Pursuant to the authority granted under the
School Intervention Act, on October 4, 1989, the New Jersey Board of Education
ordered the creation of a State-operated school district in the City of Jersey
City. Similarly, on August 7, 1991, the New Jersey Board of Education ordered
the creation of a State- operated school district in the City of Paterson, and
on July 5, 1995 ordered the creation of a State-operated school district in the
City of Newark.

School Budgets. In every school district having a board of school
estimate, the board of school estimate examines the budget request and fixes
the appropriate amounts for the next year's operating budget after a public
hearing at which the taxpayers and other interested persons shall have an
opportunity to raise objections and to be heard with respect to the budget.
This board certifies the budget to the municipal governing bodies and to the
local board of education. If the local board of education disagrees, it must
appeal to the New Jersey Commissioner of Education (the "Commissioner") to
request changes.

In a Type II school district without a board of school estimate, the
elected board of education develops the budget proposal and, after public
hearing, submits it to the voters of such district for approval. Previously
authorized debt service is not subject to referendum in the annual budget
process. If approved, the budget

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goes into effect. If defeated, the governing body of each municipality in the
school district has until May 19 in any year to determine the amount necessary
to be appropriated for each item appearing in such budget. Should the governing
body fail to certify any amount determined by the board of education to be
necessary, the board of education may appeal the action to the Commissioner.

The State laws governing the distribution of State aid to local school
districts limit the annual increase of a school district's net current expense
budget. The Commissioner certifies the allowable amount of increase for each
school district but may grant a higher level of increase in certain limited
instances. A school district may also submit a proposal to the voters to raise
amounts above the allowable amount of increase. If defeated, such a proposal is
subject to further review or appeal to the Commissioner only if the
Commissioner determines that additional funds are required to provide a
thorough and efficient education.

In State-operated school districts the New Jersey District Superintendent
has the responsibility for the development of the budget subject to appeal by
the governing body of the municipality to the Commissioner and the Director of
the Division of Local Government Services in the New Jersey Department of
Community Affairs. Based upon his review, the Director is required to certify
the amount of revenues which can be raised locally to support the budget of the
State-operated district. Any difference between the amount which the Director
certifies and the total amount of local revenues required by the budget
approved by the Commissioner is to be paid by New Jersey in the fiscal year in
which the expenditures are made subject to the availability of appropriations.

School District Bonds. School district bonds and temporary notes are
issued in conformity with N.J.S.A 18A:24-1 et seq. (the "School Bond Law"),
which closely parallels the Local Bond Law (for further information relating to
the Local Bond Law, see "MUNICIPAL FlNANCE-Counties and Municipalities"
herein). Although school districts are exempted from the 5 percent down payment
provision generally applied to bonds issued by municipalities and counties,
they are subject to debt limits (which vary depending on the type of school
system provided) and to New Jersey regulation of their borrowing. The debt
limitation on school district bonds depends upon the classification of the
school district, but may be as high as 4 percent of the average equalized
valuation basis of the constituent municipality. In certain cases involving
school districts in cities with populations exceeding 150,000, the debt limit
is 8 percent of the average equalized valuation basis of the constituent
municipality, and in cities with populations in excess of 80,000 the debt limit
is 6 percent of the aforesaid average equalized valuation.

School bonds are authorized by (i) an ordinance adopted by the governing
body of a municipality within a Type I school district; (ii) adoption of a
proposal by resolution by the board of education of a Type II school district
having a board of school estimate; (iii) adoption of a proposal by resolution
by the board of education and approval of the proposal by the legal voters of
any other Type II school district; or, (iv) adoption of a proposal by
resolution by a capital project control board for projects in a State operated
school district. If school bonds will exceed the school district borrowing
capacity, a school district (other than a regional school district) may use the
balance of the municipal borrowing capacity. If the total amount of debt
exceeds the school district's borrowing capacity, the Commissioner and the
Local Finance Board must approve the proposed authorization before it is
submitted to the voters. All authorizations of debt in a Type II school
district without a board of school estimate require an approving referendum,
except where, after hearing, the Commissioner and the New Jersey Board of
Education determine that the issuance of such debt is necessary to meet the
constitutional obligation to provide a thorough and efficient system of public
schools. When such obligations are issued, they are issued by, and in the name
of, the school district.

In Type I and II school districts with a board of school estimate, that
board examines the capital proposal of the board of education and certifies the
amount of bonds to be authorized. When it is necessary to exceed the borrowing
capacity of the municipality, the approval of a majority of the legally
qualified voters of the municipality is required, together with the approval of
the Commissioner and the Local Finance Board. When such bonds are issued for a
Type I school district, they are issued by the municipality and identified as
school bonds. When bonds are issued by a Type II school district having a board
of school estimate, they are issued by, and in the name of, the school
district.

D-7
<PAGE>

All authorizations of debt must be reported to the Division of Local
Government Services by a supplemental debt statement prior to final approval.

School District Lease Purchase Financings. In 1982, school districts were
given an alterative to the traditional method of bond financing capital
improvements pursuant to N.J.S.A. 18A:20-4.2(f) (the "Lease Purchase Law"). The
Lease Purchase Law permits school districts to acquire a site and school
building through a lease purchase agreement with a private lessor corporation.
The lease purchase agreement does not require voter approval. The rent payments
attributable to the lease purchase agreement are subject to annual
appropriation by the school district and are required, to be included in the
annual current expense budget of the school district. Furthermore, the rent
payments attributable to the lease purchase agreement do not constitute debt of
the school district and therefore do not impact on the school district's debt
limitation. Lease purchase agreements in excess of five years require the
approval of the Commissioner and the Local Finance Board.

Qualified Bonds. In 1976, legislation was enacted (P.L. 1976, c. 38 and c.
39) which provides for the issuance by municipalities and school districts of
"qualified bonds." Whenever a local board of education or the governing body of
a municipality determines to issue bonds, it may file an application with the
Local Finance Board, and, in the case of a local board of education, the
Commissioner, to qualify bonds pursuant to P.L. 1976, c. 38 or c. 39. Upon
approval of such an application, the New Jersey Treasurer shall, in the case of
qualified bonds for school districts, withhold from the school aid payable to
such municipality or school district and, in the case of qualified bonds for
municipalities, withhold from the amount of business personal property tax
replacement revenues, gross receipts tax revenues, municipal purposes tax
assistance fund distributions, New Jersey urban aid, New Jersey revenue sharing
and any other funds appropriated as New Jersey aid and not otherwise dedicated
to specific municipal programs, payable to such municipalities, an amount
sufficient to cover debt service on such bonds. These "qualified bonds" are not
direct, guaranteed or moral obligations of New Jersey, and debt service on such
bonds will be provided by New Jersey only if the above mentioned appropriations
are made by New Jersey. Total outstanding indebtedness for "qualified bonds"
consisted of $327,981,850 by various school districts as of June 30,1998 and
$932,410,709 by various municipalities as of June 30, 1998.

New Jersey School Bond Reserve Act. The New Jersey School Bond Reserve Act
(N.J.S.A. 18A:56-17 et seq.) establishes a school bond reserve within the
constitutionally dedicated Fund for the Support of Free Public Schools. Under
this law the reserve is maintained at an amount equal to 1.5 percent of the
aggregate outstanding bonded indebtedness of counties, municipalities or school
districts for school purposes (exclusive of bonds whose debt service is
provided by New Jersey appropriations), but not in excess of monies available
in such Fund. If a municipality, county or school district is unable to meet
payment of the principal of or interest on any of its school bonds, the trustee
of the school bond reserve will purchase such bonds at the face amount thereof
or pay the holders thereof the interest due or to become due. There has never
been an occasion to call upon this Fund. New Jersey provides support of certain
bonds of counties, municipalities and school districts through various
statutes.

Local Financing Authorities. The Local Authorities Fiscal Control Law
(N.J.S.A. 40A:5A-1 et seq.) provides for state supervision of the fiscal
operations and debt issuance practices of independent local authorities and
special taxing districts by the New Jersey Department of Community Affairs. The
Local Authorities Fiscal Control Law applies to all autonomous public bodies
created by counties or municipalities, which are empowered to issue bonds, to
impose facility or service charges, or to levy taxes in their districts. This
encompasses most autonomous local authorities (sewerage, municipal utilities,
parking, pollution control, improvement, etc.) and special taxing districts
(fire, water, etc.). Authorities which are subject to differing New Jersey or
federal financial restrictions are exempted, but only to the extent of that
difference.

Financial control responsibilities over local authorities and special
districts are assigned to the Local Finance Board and the Director of the
Division of Local Government Services. The Local Finance Board exercises
approval power over creation of new authorities and special districts as well
as their dissolution. The

D-8
<PAGE>

Local Finance Board reviews, conducts public hearings and issues findings and
recommendations on any proposed project financing of an authority or district,
and on any proposed financing agreement between a municipality or county and an
authority or special district. The Local Finance Board prescribes minimum audit
requirements to be followed by authorities and special districts in the conduct
of their annual audits. The Director of the Division of Local Government
Services reviews and approves annual budgets of authorities and special
districts.

Litigation. At any given time, there are various numbers of claims and
cases pending against the State of New Jersey, New Jersey agencies and
employees, seeking recovery of monetary damages that are primarily paid out of
the fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A. 59:1-1 et
seq.). New Jersey does not formally estimate its reserve representing potential
exposure for these claims and cases. New Jersey is unable to estimate its
exposure for these claims and cases.

New Jersey routinely receives notices of claim seeking substantial sums of
money. The majority of those claims have historically proven to be of
substantially less value than the amount originally claimed. Under the New
Jersey Tort Claims Act, any tort litigation against New Jersey must be preceded
by a notice of claim, which affords New Jersey the opportunity for a six-month
investigation prior to the filing of any suit against it. At any given time,
there are various numbers of claims and cases pending against the University of
Medicine and Dentistry and its employees, seeking recovery of monetary damages
that are primarily paid out of the Self Insurance Reserve Fund created pursuant
to the New Jersey Tort Claims Act. An independent study estimated an aggregate
potential exposure of $85,300,000 for tort and medical malpractice claims
pending as of December 31, 1997. In addition, at any given time, there are
various numbers of contract and other claims against the University of Medicine
and Dentistry, seeking recovery of monetary damages or other relief which, if
granted, would require the expenditure of funds. New Jersey is unable to
estimate its exposure for these claims.

Other lawsuits presently pending or threatened in which New Jersey has the
potential for either a significant loss of revenue or a significant
unanticipated expenditures include the following:

Interfaith Community Organization v. Shinn, a suit filed by a coalition of
churches and church leaders in Hudson County against the Governor, the
Commissioners of the Department of Environmental Protection and the Department
of Health, concerning chromium contamination in Liberty State Park in Jersey
City.

American Trucking Associations, Inc. and Tri-State Motor Transit Co. v.
State of New Jersey, challenging the constitutionality of annual hazardous and
solid waste licensure fees collected by the Department of Environmental
Protection, seeking permanent injunction enjoining future collection of fees
and refund of all renewal fees, fines and penalties collected.

Buena Regional Commercial Township et al. v. New Jersey Department of
Education et al. This lawsuit was filed on behalf of 17 rural school districts
seeking the same type of relief as has been mandated to be provided to the poor
urban school districts in Abbot v. Burke, which included, without limitation,
sufficient funds to allow the school districts to spend at the average of
wealthy suburban school districts, to implement additional programs and to
upgrade school facilities. The Buena school districts are seeking to be treated
as special needs districts and to receive parity funding the Abbot school
districts as a remedial measure. They also are seeking additional funding as
may be necessary to provide an educational equivalent to that being provided in
the Abbot districts.

Berner Stabaus, et al. v. State of New Jersey, et al. Plaintiffs, 25
middle income school districts, have filed a complaint alleging that New
Jersey's system of funding for their schools is violative of the constitutional
rights of equal protection and a thorough and efficient education.

Affiliated FM Insurance Company v. State of New Jersey, an action by
certain members of the New Jersey Property-Liability Insurance Guaranty
Association challenging the constitutionality of assessments used for the
Market Transition Fund and seeking repayment of assessments paid since 1990. On
July 28, 1997, the court denied plaintiff's application for emergent relief,
denied New Jersey's motion for summary dis-

D-9
<PAGE>

position and granted plaintiff's motion to accelerate. The Appellate Division
has affirmed the assessment. Appellant's petition for certification to the New
Jersey Supreme Court has been denied.

C. F. v. Terhune (formally Fauver), a class action in federal district
court by prisoners with serious mental disorders who are confined within the
facilities of the New Jersey Department of Corrections seeking injunctive
relief in the form of changes to the manner in which the mental health services
are provided to inmates.

Cleary v. Waldman, the plaintiffs claim that the Medicare Catastrophic
Coverage Act, providing funds to spouses of institutionalized individuals
sufficient funds to live in the community, requires that a certain system be
used to provide the funds and another system is being used instead. Estimate of
exposure if the court were to find for the plaintiffs are in the area of $50
million per year from both New Jersey and Federal sources combined. Plaintiffs'
motion for a preliminary injunction was denied and is being appealed.
Subsequently, plaintiffs filed for class certification which was granted.

United Hospitals v. State of New Jersey, 18 New Jersey hospitals are
challenging the Medicaid reimbursements made since February 1995 claiming that
New Jersey failed to comply with certain federal requirements, the
reimbursements regulations are arbitrary, capricious and unreasonable, rates
were incorrectly calculated, the hospitals were denied due process, the
Medicaid reimbursement provisions violate the New Jersey Constitution, and
Medicaid State Plan was violated by the New Jersey Department of Human Services
implementation of hospital rates in 1995 and 1996.

Trump Hotels & Casino Resorts, Inc. v. Mirage Resorts, Inc., the plaintiff
is suing Mirage Resorts and New Jersey in an attempt to enjoin their efforts to
build a highway and tunnel funded by Mirage Resorts and $55 million in bonds
collateralized by future casino obligations, claiming that the project violates
the New Jersey Constitution provision that requires all revenues the state
receives from gaming operations to benefit the elderly and disabled. The
plaintiff also claims (i) the failure to disclose this constitutional infirmity
is a material omission within the meaning of Rule 10b-5 of the Securities and
Exchange Act of 1934, and (ii) the defendants have sought to avoid the
requirements of the Clean Water Act, Clean Air Act, Federal Highway Act and the
New Jersey Coastal Area Facility Review Act. On May 1, 1997, the federal
district court granted the defendants' motion to dismiss, and the Third Circuit
has affirmed the District Courts determinations. In a related action, State of
New Jersey v. Trump Hotels & Casino Resorts, Inc., New Jersey filed a
declaratory judgment action seeking a declaration that New Jersey statutory
provisions existed that permitted use of certain funds to be used for other
purposes than the elderly or disabled. Declaratory judgment was entered in
favor of New Jersey on May 14, 1997, and the Appellate Division affirmed the
decision on April 8, 1998.

United Alliance v. State of New Jersey, plaintiffs allege that the Casino
Reinvestment Development Authority funding mechanisms are illegal, including
the gross receipts tax the parking tax and the Atlantic City fund. This matter
has been placed on the inactive list. Five additional cases have been filed in
opposition to the road and tunnel project which also contain related
challenges: Merolla and Brandy v. Casino Reinvestment Development Authority,
Middlesex County v. Casino Reinvestment Development Authority, Gallagher v.
Casino Reinvestment Development Authority and George Harms v. State of New
Jersey. Summary judgment has been granted in favor of the New Jersey or its
agencies in Merolla, Middlesex and Gallagher but the plaintiffs have filed an
appeal.

Blecker v. State of New Jersey, a class action filed on behalf of
providers of Medicare Part B services to Qualified Medicare Beneficiaries
seeking reimbursement for Medicare co-insurance and deductibles not paid by the
New Jersey Medicaid program from 1988 to February 10, 1995. Plaintiffs claim a
breach of contract and violation of federal civil rights laws. On August 11,
1997, New Jersey filed a motion to dismiss the matter, and, on September 15,
1997, it filed a motion for summary judgment. Both motions were granted on
April 3, 1998, and the plaintiff has filed an appeal.

Camden County Energy Recovery Associates v. New Jersey Department of
Environmental Protection, the plaintiff owns and operates a resource facility
in Camden County and has filed suit seeking to have

D-10
<PAGE>

the solid waste reprocurement process halted to clarify bid specification. The
court did not halt the bid process but did require clarifications. Co-defendant
Pollution Control Financing Authority of Camden County counterclaimed, seeking
reformation of the contract between it and the plaintiff, and cross-claimed
against New Jersey for contribution and indemnification.

Communications Workers of America, et al. v. James A. DiEleuterio, Jr., et
al., appellants filed an appeal from the decision of the New Jersey Treasurer
to award a contract for the design, construction, and operation and maintenance
of the New Jersey motor vehicle inspection system. New Jersey estimates that
unless the new inspection system is operational by December 12, 1999, New
Jersey may be exposed to significant federal sanctions, including the loss of
federal transportation funds and the federal imposition of stricter pollution
standards that will restrict economic development in New Jersey.

Sojourner A. et al. v. Dept. of Human Services, plaintiffs filed a
complaint and motion for preliminary injunction, seeking damages and
declaratory and injunctive relief overturning, on New Jersey Constitutional
grounds, the "family cap" provisions of the New Jersey Work First New Jersey
Act N.J.S.A. 44:10-1 et seq.

Ratings. Standard & Poor's Rating Group, Moody's Investors Service and
Fitch Investors Service, Inc. have assigned long-term ratings of AA+, Aa1 and
AA+, respectively, to New Jersey General Obligation Bonds. There is no
assurance that the ratings of New Jersey General Obligation Bonds will continue
for any given period of time or that they will not be revised downward or
withdrawn entirely. Any such downward revision or withdrawal could have an
adverse effect on the market prices of New Jersey's General Obligation Bonds.

The various political subdivisions of New Jersey are rated independently
from New Jersey by S&P and/or Moody's, if they are rated. These ratings are
based upon information supplied to the rating agency by the political
subdivision. There is no assurance that such ratings will continue for any
given period of time or that they will not be revised downward or withdrawn
entirely. Any such downward revision or withdrawal could have an adverse effect
on the market prices of bonds issued by the political subdivision.

D-11
<PAGE>

PART C

MUTUAL FUND SELECT TRUST
PART C. OTHER INFORMATION

ITEM 24. Financial Statements and Exhibits

(a) Financial statements

In Part A: Financial Highlights

In Part B: Financial Statements and the Reports thereon
for the Funds filed herein are incorporated by
reference into Part B as part of the 1997
Annual Reports to Shareholders for such Funds
as filed with the Securities and Exchange
Commission by Mutual Fund Select Trust on Form
N-30D on October 28, 1998, accession number
0000950146-98-001762, which are incorporated
into Part B by reference.

In Part C: None.

(b) Exhibits:

Exhibit
Number
- -------
1 Declaration of Trust (1)
2 By-laws. (1)
3 None.
4 None.
5(a) Form of Proposed Investment Advisory Agreement. (1)
5(b) Form of Proposed Sub-Advisory Agreement between The Chase Manhattan
Bank and Chase Asset Management, Inc.(1)
5(c) Form of Proposed Investment Subadvisory Agreement between The Chase
Manhattan Bank and Chase Asset Management (London) Limited (1)
6 Form of Proposed Distribution and Sub-Administration Agreement (1)
7(a) Form of Retirement Plan for Eligible Trustees.(2)
7(b) Form of Deferred Compensation Plan for Eligible Trustees. (2)
8 Form of Proposed Custodian Agreement. (1)
9(a) Form of Proposed Transfer Agency Agreement. (1)
9(b) Form of Proposed Administration Agreement. (1)

C-1
<PAGE>

10 Opinion re: Legality of Securities being Registered. (4)
11 Consent of Price Waterhouse LLP (5)
12 None.
13 Form of Share Purchase Agreement. (3)
14 None.
15 None.
16 Schedule for Computation for Each Performance Quotation. (4)
18 Not Applicable
24 Powers of Attorney (4)
27 Financial Data Schedules (4)

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

(1) Filed as an exhibit to the Registration Statement on Form N-1A of the
Registrant (File No. 333-13319) as filed with the Securities and Exchange
Commission on October 2, 1996.
(2) Incorporated by reference to Amendment No. 6 to the Registration Statement
on Form N-1A of Mutual Fund Group (File No. 33-14196) as filed with the
Securities and Exchange Commission on March 23, 1990.
(3) Filed as an exhibit to Pre-Effective Amendment No. 1 as filed with the
Securities and Exchange Commission on November 15, 1996.
(4) Filed as an exhibit to Pre-Effective Amendment No. 2 as filed with the
Securities and Exchange Commission on December 19, 1996.
(5) Filed herewith.

ITEM 25. Persons Controlled by or Under Common
Control with Registrant

Not applicable

C-2

<PAGE>

ITEM 26. Number of Holders of Securities

Number of Record Holders
Title of Series as of November 30, 1998
--------------- ------------------------

VISTA(SM) SELECT INTERMEDIATE TAX FREE INCOME FUND 51
VISTA(SM) SELECT TAX FREE INCOME FUND 48
VISTA(SM) SELECT NEW YORK INTERMEDIATE TAX FREE INCOME FUND 9
VISTA(SM) SELECT NEW JERSEY TAX FREE INCOME FUND 9

ITEM 27. Indemnification

Reference is hereby made to Article V of the Registrant's Declaration
of Trust.

The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser, administrator and distributor are insured under
an errors and omissions liability insurance policy. The Registrant and its
officers are also insured under the fidelity bond required by Rule 17g-1 under
the Investment Company Act of 1940.

Under the terms of the Registrant's Declaration of Trust, the
Registrant may indemnify any person who was or is a Trustee, officer or employee
of the Registrant to the maximum extent permitted by law; provided, however,
that any such indemnification (unless ordered by a court) shall be made by the
Registrant only as authorized in the specific case upon a determination that
indemnification of such persons is proper in the circumstances. Such
determination shall be made (i) by the Trustees, by a majority vote of a quorum
which consists of Trustees who are neither in Section 2(a)(19) of the Investment
Company Act of 1940, nor parties to the proceeding, or (ii) if the required
quorum is not obtainable or, if a quorum of such Trustees so directs, by
independent legal counsel in a written opinion. No indemnification will be
provided by the Registrant to any Trustee or officer of the Registrant for any
liability to the Registrant or shareholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of duty.

Insofar as the conditional advancing of indemnification monies for
actions based upon the Investment Company Act of 1940 may be concerned, such
payments will be made only on the following conditions: (i) the advances must be
limited to amounts used, or to be used, for the preparation or presentation of a
defense to the action, including costs connected with the preparation of a
settlement; (ii) advances may be made only upon receipt of a written promise by,
or on behalf of, the recipient to repay that amount of the advance which exceeds
that amount to which it is ultimately determined that he is entitled to receive
from the Registrant by reason of indemnification; and (iii) (a) such promise
must be secured by a surety bond, other suitable

C-3

<PAGE>
insurance or an equivalent form of security which assures that any repayments
may be obtained by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient of the
advance, or (b) a majority of a quorum of the Registrant's disinterested,
non-party Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that the recipient of
the advance ultimately will be found entitled to indemnification.

Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of it counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

ITEM 28(a). Business and Other Connections of Investment Adviser

The Chase Manhattan Bank (the "Adviser") is a commercial bank
providing a wide range of banking and investment services.

To the knowledge of the Registrant, none of the Directors or
executive officers of the Adviser, except those described below, are or have
been, at any time during the past two years, engaged in any other business,
profession, vocation or employment of a substantial nature, except that certain
Directors and executive officers of the Adviser also hold or have held various
positions with bank and non-bank affiliates of the Adviser, including its
parent, The Chase Manhattan Corporation. Each Director listed below is also a
Director of The Chase Manhattan Corporation.

<TABLE>
<CAPTION>
Principal Occupation or Other
Position with Employment of a Substantial
Name the Adviser Nature During Past Two Years
- ---- ----------- ----------------------------
<S> <C> <C>
Thomas G. Labreque President and Chief Operating Officer Chairman, Chief Executive Officer
and Director and a Director of The Chase
Manhattan Corporation and a
Director of AMAX, Inc.

M. Anthony Burns Director Chairman of the Board, President
and Chief Executive Officer of
Ryder System, Inc.

</TABLE>

C-4

<PAGE>

H. Laurance Fuller Director Chairman, President, Chief
Executive Officer and Director of
Amoco Corporation and Director of
Abbott Laboratories

Henry B. Schacht Director Chairman and Chief Executive
Officer of Cummins Engine
Company, Inc. and a Director of
each of American Telephone and
Telegraph Company and CBS Inc.

</TABLE>

C-5

<PAGE>

William H. Gray III Director President and Chief Executive
Officer of the United Negro College
Fund, Inc

Frank A. Bennack, Jr. Director President and Chief Executive Officer
The Hearst Corporation

Susan V. Berresford Director President, The Ford Foundation

Melvin R. Goodes Director Chairman of the Board and Chief Executive
Officer, The Warner-Lambert Company

George V. Grune Director Retired Chairman and Chief Executive
Officer, The Reader's Digest Association,
Inc.; Chairman, The DeWitt Wallace-
Reader's Digest Fund; The Lila-Wallace
Reader's Digest Fund

William B. Harrison, Jr. Vice Chairman of the Board

Harold S. Hook Director Chairman and Chief Executive Officer,
General Corporation

Helen L. Kaplan Director Of Counsel, Skadden, Arps, Slate, Meagher
& Flom

Walter V. Shipley Chairman of the Board and
Chief Executive Officer

Andrew C. Sigler Director Chairman of the Board and Chief
Executive Officer, Champion International
Corporation

John R. Stafford Director Chairman, President and Chief Executive
Officer, American Home Products
Corporation

Marina v. N. Whitman Director Professor of Business Administration and
Public Policy, University of Michigan

</TABLE>
<PAGE>

Item 28(b)

Chase Asset Management ("CAM") is an Investment Advisor providing investment
services to institutional clients.

To the knowledge of the Registrant, none of the Directors or executive
officers of the CAM, except those described below, are or have been, at any time
during the past two years, engaged in any other business, profession, vocation
or employment of a substantial nature, except that certain Directors and
executive officers of the CAM also hold or have held various positions with bank
and non-bank affiliates of the Advisor, including its parent, The Chase
Manhattan Corporation.

Principal Occupation or Other
Position with Employment of a Substantial
Name the Sub-Advisor Nature During Past Two Years
- ---- --------------- ----------------------------

James Zeigon Chairman and Director Director of Chase Asset
Management (London) Limited

Steven Prostano Executive Vice President Chief Operating Officer and
and Chief Operating Officer Director of Chase Asset
Management (London) Limited

Mark Richardson President and Chief Investment Chief Investment Officer
Officer and Director of Chase Asset
Management (London) Limited

<PAGE>

ITEM 29. Principal Underwriters

(a) Vista Fund Distributors, Inc., a wholly-owned subsidiary of
The BISYS Group, Inc. is the underwriter for Mutual Fund Group, Mutual Fund
Trust and Mutual Fund Select Group.

(b) The following are the Directors and officers of Vista Fund
Distributors, Inc. The principal business address of each of these persons, is
listed below.

<TABLE>
<CAPTION>
Position and Offices Position and Offices
Name and Address with Distributor with the Registrant
- ---------------- -------------------- --------------------
<S> <C> <C>

Lynn J. Mangum Chairman None
150 Clove Street
Little Falls, NJ 07424

Robert J. McMullan Director and Exec. Vice President None
150 Clove Street
Little Falls, NJ 07424

Lee W. Schultheis President None
101 Park Avenue, 16th Floor
New York, NY 10178

George O. Martinez Senior Vice President None
3435 Stelzer Road
Columbus, OH 43219

Irimga McKay Vice President None
1230 Columbia Street
5th Floor, Suite 500
San Diego, CA 92101

Michael Burns Vice President/Compliance None
3435 Stelzer Road
Columbus, OH 43219

William Blundin Vice President None
125 West 55th Avenue
11th Floor
New York, NY 10019

Dennis Sheehan Vice President None
150 Clove Street
Little Falls, NJ 07424

Annamaria Porcaro Assistant Secretary None
150 Clove Street
Little Falls, NJ 97424

Robert Tuch Assistant Secretary None
3435 Stelzer Road
Columbus, OH 43219

Stephen Mintos Executive Vice President/COO None
3435 Stelzer Road
Columbus, OH 43219

Dale Smith Vice President/CFO None
3435 Stelzer Road
Columbus, OH 43219

William J. Tomko Vice President None
3435 Stelzer Road
Columbus, OH 43219
</TABLE>

C-6

<PAGE>
ITEM 30. Location of Accounts and Records

The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:

Name Address
---- -------
Vista Fund Distributors, Inc. One Chase Manhattan Plaza, Third Floor,
New York, NY 10081

DST Systems, Inc. 210 W. 10th Street,
Kansas City, MO 64105

The Chase Manhattan Bank 270 Park Avenue,
New York, NY 10017

Chase Asset Mangement, Inc. 1211 Avenue of the
Americas,
New York, NY 10036

The Chase Manhattan Bank One Chase Square,
Rochester, NY 14363

ITEM 31. Management Services

Not applicable

ITEM 32. Undertakings

(1) Registrant undertakes that its trustees shall promptly
call a meeting of shareholders of the Trust for the purpose of voting upon the
question of removal of any such trustee or trustees when requested in writing so
to do by the record holders of not less than 10 per centum of the outstanding
shares of the Trust. In addition, the Registrant shall, in certain
circumstances, give such shareholders assistance in communicating with other
shareholders of a fund as required by Section 16(c) of the Investment Company
Act of 1940.

(2) The Registrant, on behalf of the Funds, undertakes,
provided the information required by Item 5A is contained in the latest annual
report to shareholders, to furnish to each person to whom a prospectus has been
delivered, upon their request and without charge, a copy of the Registrant's
latest annual report to shareholders.

(3) Registrant undertakes to file a post-effective amendment,
using reasonably current financial statements which need not be certified,
within four to six months from the date of commencement of investment operations
for each of Vista Select Intermediate Tax Free Income Fund, Vista Select Tax
Free Income Fund, Vista Select New York Tax Free Income Fund and Vista Select
New Jersey Tax Free Income Fund.

C-7

<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has certified that it meets all of the
requirements for effectiveness pursuant to Rule 485(b) under the Securities Act
of 1933 and has duly caused this Pre-Effective Amendment to its Registration
Statement on Form N-1A to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York and the State of New York on the 1st
day of December, 1999.

MUTUAL FUND SELECT GROUP

By /s/ H. Richard Vartabedian
--------------------------
H. Richard Vartabedian
President

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.

* Chairman and Trustee December 1, 1999
- ------------------------------
Fergus Reid, III

/s/ H. Richard Vartabedian President December 1, 1999
- ------------------------------ and Trustee
H. Richard Vartabedian

/s/ Martin R. Dean Treasurer and December 1, 1999
- ------------------------------ Principal Financial
Martin R. Dean Officer

* Trustee December 1, 1999
- ------------------------------
Richard E. Ten Haken

* Trustee December 1, 1999
- ------------------------------
William J. Armstrong

* Trustee December 1, 1999
- ------------------------------
John R.H. Blum

* Trustee December 1, 1999
- ------------------------------
Joseph J. Harkins

* Trustee December 1, 1999
- ------------------------------
Stuart W. Cragin, Jr.

* Trustee December 1, 1999
- ------------------------------
Irving L. Thode

* Trustee December 1, 1999
- ------------------------------
W. Perry Neff

* Trustee December 1, 1999
- ------------------------------
Roland R. Eppley, Jr.

* Trustee December 1, 1999
- ------------------------------
W.D. MacCallan

* Trustee December 1, 1999
- --------------------------------
Sarah E. Jones

* Trustee December 1, 1999
- --------------------------------
Leonard M. Spalding

/s/ H. Richard Vartebedian Attorney-in-Fact December 1, 1999
- --------------------------------
H. Richard Vartebedian

C-8

Consent of Independent Accountants

We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 4 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated October 11, 1999, relating to the financial
statements and financial highlights appearing in the August 31, 1999 Annual
Report to Shareholders of Chase Vista Select Tax Free Income Fund, Chase Vista
Select Intermediate Tax Free Income Fund, Chase Vista Select New York
Intermediate Tax Free Income Fund and Chase Vista Select New Jersey Tax Free
Income Fund (separately managed portfolios of Mutual Fund Select Trust), which
are also incorporated by reference into the Registration Statement. We also
consent to the references to us under the heading "Financial Highlights" in the
Prospectus and under the heading "Independent Accountants" in the Statement of
Additional Information.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
December 1, 1999