EVERGREEN MUNICIPAL TRUST /DE/, N-30D, 1998-07-28

EVERGREEN MUNICIPAL TRUST /DE/
N-30D, 1998-07-28

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<PAGE>

Evergreen

National

Municipal
May 31, 1998
Bond Funds
Annual Report

[LOGO OF EVERGREEN FUNDS(SM)
APPEARS HERE]
<PAGE>

- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------

Letter to Shareholders ............................................... 1

Evergreen High Grade Tax Free Fund

Fund at a Glance ................................................ 2

Portfolio Manager Interview ..................................... 3

Evergreen Short Intermediate
Municipal Fund

Fund at a Glance ................................................ 6

Portfolio Manager Interview ..................................... 7

Evergreen Tax Free Fund

Fund at a Glance ................................................ 9

Portfolio Manager Interview ..................................... 10

Financial Highlights

Evergreen High Grade Tax Free Fund .............................. 13

Evergreen Short Intermediate Municipal
Fund .......................................................... 15

Evergreen Tax Free Fund ......................................... 17

Schedule of Investments

Evergreen High Grade Tax Free Fund .............................. 20

Evergreen Short Intermediate
Municipal Fund ................................................ 24

Evergreen Tax Free Fund ......................................... 27

Statements of Assets and Liabilities ................................. 39

Statements of Operations ............................................. 40

Statements of Changes in Net Assets --

Year ended May 31, 1998 ......................................... 42

Statements of Changes in Net Assets --

Prior Periods ................................................... 43

Combined Notes to Financial
Statements ........................................................... 44

Report of Independent Accountants .................................... 52

Independent Auditors' Report ......................................... 53

Additional Information ............................................... 54

- --------------------------------------------------------------------------------
Evergreen Funds
- --------------------------------------------------------------------------------

Evergreen Funds is one of the nation's fastest growing investment companies with
more than $47 billion in assets under management.

With over 80 mutual funds to choose among and acclaimed service and operations
capabilities, investors enjoy a broader range of quality investment products and
services designed to meet their needs.

The Evergreen Funds employ intensive, research-driven investment strategies
executed by over 90 research analysts and portfolio managers. The fund company
remains dedicated to meeting the needs of investors and their advisors in a
global economy. Look to the Evergreen Funds to provide a distinctive level of
service and excellence in investment management.

This annual report must be preceded or accompanied by a prospectus of an
Evergreen fund contained herein. The prospectus contains more complete
information, including fees and expenses, and should be read carefully before
investing or sending money.

-----------------------------------------------------------------
Mutual Funds: ARE NOT FDIC INSURED May lose value . Are not bank guaranteed
-----------------------------------------------------------------

Evergreen Funds Distributor, Inc.
Evergreen(SM) is a Service Mark of Evergreen Investment Services, Inc.
<PAGE>

Letter to Shareholders
----------------------
July 1998

[PHOTO OF WILLIAM M. ENNIS
MANAGING DIRECTOR APPEARS HERE]

Dear Shareholders:

Tax-advantaged investing can make a real difference, as witnessed by the
performance of the Evergreen National Municipal Bond Funds during
the 12-month period that ended on May 31, 1998.

The three Evergreen National Municipal Bond Funds, whose performance we review
in this report, each delivered generous returns on an absolute basis./1/ When
one considers the after-tax returns for investors in federal income tax brackets
of 31% or higher, however, the real returns are even more impressive, especially
in an environment in which inflation is held to approximately 2% per year.

Excellent Value

Even after such strong returns, the municipal bond market is offering excellent
relative value. At the close of the fiscal period on May 31, for example,
municipal bonds were paying yields equal to approximately 90% of equivalent
quality taxable bonds./2/ On a net, after-tax basis, the income from the
municipal bonds actually exceeded that of comparable taxable bonds. Typically,
municipal bonds are considered an excellent value when they pay 85% of the
income of taxable bonds.

When you consider these yield relationships and the relatively high valuations
in the domestic stock markets, municipal bonds represent one of the best values
in the capital markets today.

Diversification Strategy

Municipal bonds also represent an excellent way to increase the diversification
of one's total investment portfolio, particularly for those investors in the
higher income tax brackets. For those individuals who are concerned about
volatility in the stock market, but who want to avoid the tax consequences of
bond funds, municipal bond funds offer a prudent way to diversify and help
reduce one's overall investment risk. The municipal bond market, which has been
able to absorb a high volume of new bond issues during the past 12 months, also
has demonstrated that it is a strong, vital and mature part of the capital
markets.

Long-term View

While our near-term outlook for the municipal bond market is optimistic, we
encourage shareholders to be mindful that the investment environment is changing
continually. In particular, the economic and currency crisis in Asia could slow
down the growth of the U.S. economy, which could have an impact on municipal
finances. We do not see this possibility as cause for alarm. We do think it is
important, however, to remind shareholders of these possibilities and to remind
them that the most successful investors are those who adhere to a consistent
long-term strategy through changing economic conditions.

At Evergreen Funds, we are committed to providing a strong array of funds with
complementary objectives and strategies to help investors and their financial
advisors assemble personal portfolios that make sense for their needs and risk
tolerances over the long run.

We can also help by providing the information you require about Evergreen Funds.
If you have any questions about the Evergreen National Municipal Bond Funds or
other Evergreen mutual funds, we encourage you to consult your financial advisor
or call us at 800-343-2898.

Thank you for your continued investment in Evergreen Funds.

Sincerely,

/s/ William M. Ennis

William M. Ennis
Managing Director
Evergreen Funds

/1/ Some portion of the Funds' income maybe subject to certain state and local
taxes and, depending on your tax status, the federal alternative minimum
tax.
/2/ Source: Bond Buyer's Index.

1
<PAGE>

EVERGREEN
High Grade Tax Free Fund

Fund at a Glance as of May 31, 1998

It was a favorable period for municipal bond investing. The insured municipal
bonds, which this Fund emphasizes, continued to increase in presence and
importance in the overall market.

Portfolio
Management
------------------------------------------

[PHOTO OF JAMES T. COLBY III APPEARS HERE]

James T. Colby III
Tenure: February 1992

----------------------------
CURRENT INVESTMENT STYLE
----------------------------

[GRAPH APPEARS HERE]

Morningstar's Style Box is based on a portfolio date as of 3/31/98.

The Fixed-Income Style Box placement is based on a fund's average effective
maturity or duration and the average credit rating of the bond portfolio.

Source: 1998 Morningstar, Inc.

- --------------------------------------------------------------------------------
Performance and Returns
- --------------------------------------------------------------------------------

Class A Class B Class Y
Inception Date 2/21/92 1/11/93 2/28/94
................................................................................
Average Annual Returns*
................................................................................
One year with sales charge 3.71% 3.07% N/A
................................................................................
One year w/o sales charge 8.88% 8.07% 9.15%
................................................................................
3 years 4.80% 4.82% 6.78%
................................................................................
5 years 5.04% 5.02% --
................................................................................
Since Inception 6.45% 5.84% 6.05%
................................................................................
Maximum Sales Charge 4.75% 5.00% N/A
Front End CDSC
................................................................................
30-day SEC yield 4.01% 3.47% 4.46%
................................................................................
Taxable equivalent yield** 6.64% 5.75% 7.38%
................................................................................
12-month dividends per share $0.48 $0.40 $0.51
................................................................................
* Adjusted for maximum applicable sales charge

** Assumes maximum 39.6% federal tax rate. Results for investors subject to
lower tax rates would not be as advantageous.

- --------------------------------------------------------------------------------
LONG TERM GROWTH
- --------------------------------------------------------------------------------

[LINE GRAPH APPEARS HERE]

Evergreen High Grade
Consumer Lehman Brothers Tax Free Fund
Date Price Index Insured Bond Index Class A Shares
- -------- ------------ ------------------ --------------------
2/92 10,000 10,000 9,525
5/92 10,079 10,206 9,738
5/93 10,404 11,540 10,964
5/94 10,642 11,781 11,090
5/95 10,981 12,909 12,182
5/96 11,290 13,474 12,638
5/97 11,551 14,429 13,522
5/98 11,746 15,849 14,723

Comparison of a $10,000 investment in Evergreen High Grade Tax Free Fund,
Class A shares, versus a similar investment in the Lehman Brothers Insured Bond
Index (LBIBI) and the Consumer Price Index (CPI).

Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in each class. The investment return and principal value will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than original cost. The Lehman Brothers Insured Bond Index is an unmanaged index
and does not include transaction costs associated with buying and selling
securities nor any management fees. The Consumer Price Index is a commonly used
measure of inflation and does not represent an investment return. It is not
possible to invest directly in an index.

2
<PAGE>

EVERGREEN
High Grade Tax Free Fund

Portfolio Manager Interview

How did the Fund perform during the year?

The Fund had strong performance. For the 12 months that ended May 31, 1998, the
Fund's Class A shares had a total return of 8.88%, while Class B and Y shares
had returns of 8.07% and 9.15%, respectively. These returns are unadjusted for
any applicable sales charges. The returns were very competitive, compared to the
average return of 8.78% for the 52 funds in the Lipper Insured Municipal Bond
Fund category for the same period. Lipper Analytical Services is an independent
mutual fund rating company.

Portfolio
Characteristics
---------------

Total Net Assets $122,324,143
................................................................................
Average Credit Quality AAA
................................................................................
Average Maturity 20.0 years
................................................................................
Average Duration 8.2 years
................................................................................

What was the investment environment like during the 12 months?

It was a favorable period for municipal bond investing. The insured municipal
bonds, which this Fund emphasizes, continued to increase in presence and
importance in the overall market.

The U.S. economy had strong growth that was accompanied by low inflation.
Beginning in late 1997, the overall bond market was aided by the effects of the
economic slowdown in Asia, which helped keep inflation and interest rates low.
During the 12 months, the yield on the 30-year Treasury Bond declined by more
than a full percentage point, from 6.90% to 5.80%. As a general rule, bond
prices tend to increase as interest rates decrease.

The municipal bond market also had a good year, although it did not perform as
well as the Treasury market. The yield on 30-year AAA-rated municipal bonds, as
reflected by the Bond Buyers 40 Index, fell from 5.65% to 5.20%. A major factor
in the underperformance was the large supply of new bond issues and the
anticipated impact of the largest new municipal bond issuance in history in
mid-May, a $3.5 billion offering for the Long Island Power Authority, which
created some short-term volatility. Municipal bond market investors were
concerned that this issuance might cause an over-supply of bonds and hurt bond
prices. In fact, the Long Island Power offering went well, and municipal bonds
recovered smartly in late May. Supply clearly was the story for much of 1997,
which saw the second-largest issuance of new municipal bond debt of this decade.
This large new supply was created both by the need to fund new public projects
and by refinancing by public agencies that are refunding their older debt with
lower-interest-rate bonds.

While the municipal bond market did not perform as well as the overall bond
market during the year, the result now is that there is excellent investment
value in municipal bonds. For example, AAA-rated municipal bonds on May 31 were
offering about 90% of the yield of a 30-year Treasury, but with after-tax
advantages that the taxable bonds do not offer.

- --------------------------------------------------------------------------------
Portfolio Quality
- --------------------------------------------------------------------------------
(as a percentage of portfolio assets)

[PIE CHART APPEARS HERE]

AAA - 82.6%
AA - 11.8%
A - 5.6%

3
<PAGE>

EVERGREEN
High Grade Tax Free Fund

Portfolio Manager Interview

At the close of the fiscal year on May 31, 1998, 87% of Fund assets were
invested in insured municipal bonds. What was the environment like for insured
bonds, in which the Fund principally invests?

Due to increased issuance during the year, yields on insured municipal bonds
have risen in relation to the yields on uninsured bonds. As a result, insured
municipal bonds now are relatively cheaper in price because they have
underperformed general, uninsured municipal bonds. Shareholders of this Fund now
receive a comparably better yield in relation to a general municipal bond fund
than they did a year ago.

To understand how this happened, it is important to note how insured bonds have
come to occupy a larger presence in the municipal bond market. Five years ago,
approximately 25% of outstanding municipal bonds were insured, which means they
receive the equivalent of an AAA rating when their issuers purchase the added
insurance. Currently, approximately 50% of the bonds are insured. The primary
cause of this growth is the intense competition of municipal bond insurers,
which has driven down the cost of insurance and made it increasingly attractive
for bond issuers to pay the insurance premium and receive the benefits of lower
debt service costs.

As a consequence, insured bonds now are extremely liquid because owners
understand they can easily sell their securities whenever they want or need to,
knowing there always will be a buyer at a good price for an insured bond
carrying the equivalent of an AAA rating. This liquidity also means that the
price of insured bonds has become more volatile.

The trend of insured bonds taking a greater presence in the market has been
going on for some time and is likely to continue. At least part of all the very
large new issuances, including that of the Long Island Power Authority, have
offered insured bonds.

What were your principal strategies during the year in terms of interest rate
sensitivity?

The High Grade Tax Free Fund, throughout the year, has had a somewhat longer
duration, or interest rate sensitivity, than the average duration of competing
funds. This is consistent with our view that with no inflationary pressures in
sight, the long-term trend was toward declining interest rates. That proved to
be true during the year. Until January, we had a duration approximately
half-a-year longer than the Fund's peer group. After interest rates hit their
low point in January, we pulled back a little to reduce volatility. The Fund
still is long, but only slightly longer than its peer group average.

As of May 31, 1998, the Fund's duration was 8.15 years, compared to 8.45 years
in June 1997. Average weighted maturity, on May 31, 1998, was 20 years.

- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
(as a percentage of net assets)

[PIE CHART APPEARS HERE]

Industrial Development/Pollution Control - 15.4%
Hospitals - 14.1%
Water & Sewer - 14.0%
Transportation - 11.2%
Electric Power - 10.5%
Housing - 8.7%
Other Investments and other assets and liabilities, net - 7.4%
General Obligation - Local - 6.9%
General Obligation - State - 6.1%
Airports - 5.7%

4
<PAGE>

EVERGREEN
High Grade Tax Free Fund

Portfolio Manager Interview

What strategies did you follow in terms of sector selection for the 12 months?

We looked for opportunities to add incremental yield through sector selection.
This led us to buy housing bonds, some of which may be subject to the
alternative minimum tax, and to invest in the transportation and utilities
sectors. The market provided a number of opportunities both because of the start
of many new public construction projects and programs and because of the
continued deregulation of utilities. Consolidation and deregulation in the
utilities industry has resulted in some price volatility because of uncertainty
about the future of utilities. Confusion presents opportunity.

As of May 31, 1998, water and sewer, transportation, and electric power projects
represented more than 35% of portfolio assets.

What is your outlook?

Our outlook is favorable for the municipal bond market and the Evergreen High
Grade Tax Free Fund. While we do not intend to make short-term interest rate
plays, we still believe the long-term trend of interest rates is to decline, so
the Fund will be slightly longer in duration than its peer group.

The equity markets suffered quite a shock in the fourth quarter of 1997 because
of the Asian crisis. Interest rates came down as investors fled to the quality
of fixed income securities. We don't think we're out of the woods with Asia, and
problems may still appear in Japan, Indonesia and other Asian markets. If this
were to happen, the equity markets could have difficulty and the fixed income
markets could benefit. Demand from Asia still represents enough of a stimulus to
the U.S. economy so that inflationary pressures in the U.S. would decline if
demand from Asia were to decrease. This would take away any fear by the Federal
Reserve of a build-up of inflationary pressures and decrease the temptation to
raise short-term rates in the United States.

The sustained flow of new issues in the municipal bond market is likely to mean
that this market will under-perform the U.S. Treasury market. This will mean,
however, that municipal bonds will continue to offer yields on an after-tax
basis that will be very attractive when compared to Treasuries.

You have managed the Evergreen High Grade Tax Free Fund since 1992. Recently you
became co-manager of the Evergreen Tax Free Fund. What are the differences
between the two funds?

The main difference is in absolute quality. The Evergreen High Grade Tax Free
Fund will always have 65% or more of its assets in insured municipal bonds, and
it always will have an average credit quality of AAA. As of May 31, almost 83%
of assets of the Evergreen High Grade Tax Free Fund were rated AAA, compared to
about 56% of assets rated AAA in the Evergreen Tax Free Fund.

The Evergreen Tax Free Fund is a diversified, longer-maturity fund whose purpose
is to create higher returns and higher yields. It still will emphasize quality
investments, as illustrated by its average credit quality of AA on May 31.
Without sacrificing quality, we will try to find additional yield for
shareholders by selecting bonds from different sectors and quality ratings. Over
the years, there will be times when one fund will have better performance than
the other, depending upon market conditions. Typically, however, one would
expect the Evergreen Tax Free Fund to pay somewhat higher yields than the
Evergreen High Grade Tax Free Fund.

5
<PAGE>

EVERGREEN
Short Intermediate Municipal Fund
Fund at a Glance as of May 31, 1998

Two factors bode particularly well for the municipal market going forward: a
favorable supply/demand backdrop and the fact that yields on municipals are at
their most attractive levels in quite some time.

Portfolio
Management
--------------------------------------------------------
[PHOTO OF RICHARD K. MARRONE APPEARS HERE]
Tenure: December 1, 1997

CURRENT INVESTMENT STYLE

Morningstar's Style Box is based on a portfolio date as of 3/31/98.

The Fixed-Income Style Box placement is based on a fund's average effective
maturity or duration and the average credit rating of the bond portfolio.

Source: 1998 Morningstar, Inc.

PERFORMANCE AND RETURNS

Class A Class B Class Y
Inception Date 1/5/95 1/5/95 7/17/91
................................................................................
Average Annual Returns*
................................................................................
One year with sales charge 1.69% (0.93%) N/A
................................................................................
One year w/o sales charge 5.11% 4.07% 5.11%
................................................................................
3 years 3.17% 2.47% 4.42%
................................................................................
5 years -- -- 3.88%
................................................................................
Since Inception 3.89% 3.16% 4.92%
................................................................................
Maximum Sales Charge 3.25% 5.00% N/A
Front End CDSC
................................................................................
30-day SEC yield 3.51% 2.74% 3.73%
................................................................................
Taxable equivalent yield** 5.81% 4.54% 6.18%
................................................................................
12-month dividends per share $0.41 $0.32 $0.42
................................................................................

* Adjusted for maximum applicable sales charge
** Assumes maximum 39.6% federal tax rate. Results for investors subject to
lower tax rates would not be as advantageous.

LONG TERM GROWTH

[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Lehman Brothers 3 Year Evergreen Short Intermediate
Date Consumer Price Index Municipal Bond Index Municipal Fund Class A Shares
- ---- -------------------- -------------------- -----------------------------
<S> <C> <C> <C>
1/95 10,000 10,000 9,675
5/95 10,126 10,387 9,960
11/95 10,216 10,753 10,256
5/96 10,412 10,881 10,309
11/96 10,552 11,271 10,661
5/97 10,652 11,463 10,754
11/97 10,745 11,814 11,052
5/98 10,832 12,112 11,304
</TABLE>

Comparison of a $10,000 investment in Evergreen Short Intermediate Municipal
Fund, Class A shares, versus a similar investment in the Lehman Brothers 3 Year
Municipal Bond Index (LB3YMBI), and the Consumer Price Index (CPI).

Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in each class. The investment return and principal value will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than original cost. The Lehman Brothers 3 Year Municipal Bond Index is an
unmanaged index and does not include transaction costs associated with buying
and selling securities nor any management fees. The Consumer Price Index is a
commonly used measure of inflation and does not represent an investment return.
It is not possible to invest directly in an index.

6
<PAGE>

EVERGREEN

Short Intermediate Municipal Fund

Portfolio Manager Interview

How did the Fund perform during the fiscal period?

The Evergreen Short Intermediate Municipal Bond Fund Class A shares posted a
total return of 5.11% for the 12 months ended May 31, 1998, unadjusted for
sales charges. This performance modestly underperformed the 5.26% average return
for the 31 short intermediate municipal debt funds tracked by Lipper Analytical
Services.

Portfolio
Characteristics
---------------

Total Net Assets $180,263,640
................................................................................
Average Credit Quality AA+
................................................................................
Average Maturity 4.6 years
................................................................................
Average Duration 3.5 years
................................................................................

What was the environment like for bonds during this period?

The U.S. economy provided a favorable backdrop for fixed income investors during
the fiscal year. Strong economic growth, low unemployment and benign inflation
resonated throughout the U.S., propelling the Consumer Confidence Index to soar
to its highest level in 25 years.

The only threat to U.S. investors was the overseas financial crisis which
originated in Southeast Asia before spreading throughout foreign markets.
Investors feared that devalued foreign currencies and major defaults would
negatively impact earnings of U.S. companies operating in that region.

The net result to U.S. markets, however, was generally positive as devalued
Asian currencies and declining prices on U.S. imports prompted falling interest
rates which boosted bond prices. During the 12 months, the yield on the
benchmark 30-year Treasury bond declined steadily from 6.90% to 5.80%.

PORTFOLIO COMPOSITION
(as a percentage of net assets)

[PIE CHART APPEARS HERE]

Other investments and other assets and liabilities, net -- 23.9%
Escrow -- 12.1%
Hospitals -- 9.5%
Industrial Development -- 8.2%
General Obligation - Local -- 8.2%
General Obligation - State -- 8.0%
Education -- 7.5%
Transportation -- 6.3%
Sales -- 6.0%
Utility -- 6.0%
Housing -- 4.3%

What was your investment strategy within this environment?

The Fund underwent a merger in November 1997 which dramatically increased net
assets, from $46 million to $195 million. Following the merger, our primary
strategy has been to increase the Fund's current yield.

Consistent with this strategy, high grade bonds were sold and replaced with
bonds with higher yields -- due primarily to their structure, i.e., calls and
housing bonds. By pursuing a higher coupon structure, we feel the portfolio will
be better able to provide a stable stream of income as well as a degree of
stability amid a potentially volatile market environment.

7
<PAGE>

EVERGREEN
Short Intermediate Municipal Fund
Portfolio Manager Interview

In addition, we added securities -- such as zero coupon bonds -- which are more
sensitive to interest rate movements. An increased weighting in such securities
will allow the Fund to more fully participate in a municipal market rally.

PORTFOLIO CREDIT QUALITY
(as a percentage of portfolio assets)

[PIE CHART APPEARS HERE]

AAA -- 47.1%
A -- 16.9%
Not Rated -- 13.4%
AA -- 11.9%
BBB -- 10.7%

What is your outlook going forward?

Technically speaking, we feel municipal bonds remain solid. Two factors bode
particularly well for the municipal market going forward: a favorable
supply/demand backdrop and the fact that yields on municipals are at their most
attractive levels in quite some time. These two factors have created a buying
opportunity which should allow municipal bonds to outperform in the coming
months.

Looking ahead, we anticipate interest rates to remain relatively stable as a
result of slower domestic growth, the after-effects of the Asian crisis and
benign inflation. Although the effects until now have been generally positive,
we recognize that the fallout from the Asian crisis can still cause problems and
create volatility in the market. We will be mindful of potential pitfalls and
continue to monitor the market for hidden value and potential opportunities,
while adhering to our income-oriented strategy.

8
<PAGE>

EVERGREEN
Tax Free Fund
Fund at a Glance as of May 31, 1998

We intend to reduce the volatility or fluctuations of returns by keeping
interest rate sensitivity or duration closer to the benchmark index and our peer
group of mutual funds.

Portfolio
Management
-------------------------------------------------------
PHOTO OF JAMES T. COLBY III APPEARS HERE]
Tenure: April 1998

[PHOTO OF GEORGE J. KIMBALL APPEARS HERE]
Tenure: April 1998

CURRENT INVESTMENT STYLE

Morningstar's Style Box is based on a portfolio date as of 3/31/98.

The Fixed-Income Style Box placement is based on a fund's average effective
maturity or duration and the average credit rating of the bond portfolio.

Source: 1998 Morningstar, Inc.

PERFORMANCE AND RETURNS

Class B
Inception Date 1/19/78
................................................................................
Average Annual Returns*
................................................................................
One year with sales charge 2.72%
................................................................................
One year w/o sales charge 7.72%
................................................................................
3 years 5.18%
................................................................................
5 years 4.91%
................................................................................
10 years 7.25%
................................................................................
Since Inception 7.04%
................................................................................
Maximum Sales Charge 5.00%
CDSC
................................................................................
30-day SEC Yield 3.73%
................................................................................
Taxable equivalent yield** 6.18%
................................................................................
12-month distributions per share $0.46
................................................................................
* Adjusted for maximum applicable sales charge
** Assumes maximum 39.6% federal tax rate. Results for investors subject to
lower tax rates would not be as advantageous.

Note: Class A and C shares were introduced in January 1998, and do not have
historical performance as of this reporting.

LONG TERM GROWTH

[LINE GRAPH APPEARS HERE]

Lehman Brothers Evergreen High Grade
Consumer Municipal Tax Free Fund
Date Price Index Bond Index Class B Shares
- -------- ------------ ------------------ --------------------
5/88 10,000 10,000 10,000
5/89 10,536 11,151 11,181
5/90 10,996 11,968 11,864
5/91 11,540 13,174 12,933
5/92 11,889 14,468 14,113
5/93 12,272 16,199 15,613
5/94 12,553 16,599 15,630
5/95 12,953 18,111 16,869
5/96 13,318 18,939 17,462
5/97 13,626 20,508 18,693
5/98 13,855 22,430 20,136

Comparison of a $10,000 investment in Evergreen Tax Free Fund, Class B shares,
versus a similar investment in the Lehman Brothers Municipal Bond Index (LBMBI),
and the Consumer Price Index (CPI).

Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in each class. The investment return and principal value will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than original cost. The Lehman Brothers Municipal Bond Index is an unmanaged
index and does not include transaction costs associated with buying and selling
securities nor any management fees. The Consumer Price Index is a commonly used
measure of inflation and does not represent an investment return. It is not
possible to invest directly in an index.

<PAGE>

- --------------------------------------------------------------------------------
EVERGREEN
Tax Free Fund
- --------------------------------------------------------------------------------
Portfolio Manager Interview

How did the Fund perform for the fiscal year?

The Evergreen Tax Free Fund, Class B, had a total return of 7.72% for the
12-month period ending May 31, 1998, unadjusted for deferred sales charge.

Portfolio
Characteristics

Total Net Assets $1,375,699,148
................................................................................
Average Credit Quality AA
................................................................................
Average Maturity 19.5 years
................................................................................
Average Duration 7.8 years
................................................................................

What was the investment environment like during the 12 months?

It was a favorable period for municipal bond investing. The U.S. economy had
strong growth that was accompanied by low inflation. Beginning in late 1997, the
overall bond market was aided by the effects of the economic slowdown in Asia,
which helped keep inflation and interest rates low. During the 12 months, the
yield on the 30-year Treasury Bond declined by more than a full percentage
point, from 6.90% to 5.80%. As a general rule, bond prices tend to increase as
interest rates decrease.

The municipal bond market also had a good year, although it did not perform as
well as the Treasury market. The yield on 30-year AAA-rated municipal bonds, as
reflected by the Bond Buyers 40 Index, fell from 5.65% to 5.20%. In addition,
interest rates in the municipal bond market tended to fluctuate more than in the
Treasury market toward the end of the fiscal year. A major factor was the
anticipated impact of the largest new municipal bond issuance in history in
mid-May, a $3.5 billion offering for the Long Island Power Authority, which
created some short-term volatility. Municipal bond market investors were
concerned that this issuance might cause an over-supply of bonds and hurt bond
prices. In fact, the Long Island Power offering went well, and municipal bonds
recovered somewhat in late May. Supply also was a factor in much of 1997, which
saw the second-largest issuance of new municipal bond debt of this decade. This
large supply of new bonds was created both by the need to fund new public
projects and by refinancing by public agencies that were refunding their older
debt with lower-interest-rate bonds

While the municipal bond market did not perform as well as the overall bond
market during the year, the effect now is that there is excellent investment
value in municipal bonds. For example, AAA-rated municipal bonds on May 31 were
offering about 90% of the yield of a 30-year Treasury, but with after-tax
advantages that the taxable bonds do not offer.

- --------------------------------------------------------------------------------
AVERAGE CREDIT QUALITY
- --------------------------------------------------------------------------------
(as a percentage of portfolio assets)

[PIE CHART APPEARS HERE]

AAA -- 55.8%
A -- 16.7%
AA -- 14.0%
BBB -- 11.7%
Not Rated -- 1.1%
BB -- 0.7%

10
<PAGE>

You became co-managers of the Evergreen Tax Free Fund on April 1, 1998. What
have been your principal strategies since taking over the Fund?

Prior to our taking over management, the Fund tended to hold longer-maturity
bonds than many other national municipal bond funds. It also emphasized fairly
high credit quality, typically with 60% or more of net assets invested in
AAA-rated bonds. The Fund maintained an emphasis on non-callable bonds, which
can't be called back by their issuers for a specified period of time, and had a
relatively large position in pre-refunded bonds, or bonds issued to refinance
the debt of older bonds with higher interest rates. Non-callable bonds and
pre-refunded bonds, because they offer income protection, often pay lower yields
than other bonds of comparable quality and maturity.

Since we have assumed management of the Fund, we have tried to position the Fund
for consistent, less volatile performance and we have sought to add incremental
returns through credit quality selection and sector selection. We have, for
example, sold some pre-refunded bonds to gain additional yield for the Fund.

We are not trying to sacrifice the quality of the portfolio, but we have tried
to add incremental yield by moving out of some sectors such as non-callable and
pre-refunded bonds. We believe that with two managers, we are able to canvas all
sectors of the municipal bond market, keep an eye on the Fund holdings, and
respond quickly to changes in the market.

While the Fund's average credit quality on May 31 was AA, the same as it was on
December 31, 1997, we have reduced the AAA-rated position somewhat from 58% of
net assets to about 56%. We have bought some AA-, A-, and BBB-rated bonds, and
occasionally some non-rated securities we think are of comparable quality to
other bonds in the portfolio. By doing this, we have picked up additional yield.

We have emphasized the hospital and transportation sectors for the yield
advantage they tend to offer, while adding to our position in housing bonds,
some of which may be subject to the alternative minimum tax. Again, the purpose
was to gain some additional yield for shareholders.

We have reduced the Fund's interest rate risk somewhat, with duration moving
from 8.5 years on December 31 to 7.8 years on May 31. This is more in line with
the duration of other funds in the same Lipper category of national tax-free
funds.

[PIE CHART APPEARS HERE]

Other investments and other assets and liabilites, net -- 18.5%
Hospitals -- 14.5%
Transportation -- 11.0%
Electric Power -- 10.7%
Industrial Development/Pollution Control -- 9.8%
Housing -- 9.4%
General Obligation - Local -- 8.0%
Water & Sewer -- 6.7%
General Obligation - State -- 5.8%
Pre-refunded -- 5.6%

11
<PAGE>

How would you describe your investment style?

We do not try to make interest rate bets by trying to anticipate the short-term
movement of rates. We intend to reduce the volatility or fluctuations of returns
by keeping interest rate sensitivity or duration closer to the benchmark index
and our peer group of mutual funds. We are value-oriented and
opportunity-oriented, trying to derive incremental returns from analysis of
credits, of sectors, and of the relationship of the relative yields of longer
and shorter-maturity bonds. We believe we can be more successful in providing
good returns for shareholders with this investment style than by trying to guess
the direction of short-term changes in interest rates. You are very likely to be
wrong when you are managing a large portfolio such as that of the Evergreen Tax
Free Fund and you are attempting to anticipate short-term movements in interest
rates. Until we see macro-economic changes taking place, we think the prudent
thing to do is to be neutral in the Fund's interest rate sensitivity and look
for value in credit and sector selection.

What is your outlook?

We still have a favorable view of interest rates, as we expect continued low
inflation in the domestic economy, which should keep rates down. We are,
however, somewhat nervous about the possibility that the Federal Reserve Board
may raise short-term rates to cool down the high growth in gross domestic
product that we have had. Overall, however, our outlook is positive for the
municipal market.

As a result of the relatively strong performance of Treasuries to municipals
during the past year, municipal bonds are now providing approximately 90% of the
yield of a comparable taxable bond. That means that on an after-tax basis, most
individual investors will retain more income from municipal bonds than they
would from government bonds. Historically, any time municipal bonds offered a
yield of between 87% and 90% of Treasuries, it was considered a "buy
opportunity." We have that right now. Municipal bonds offer very good value for
shareholders.

12
<PAGE>

[LOGO APPEARS HERE]
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)

<TABLE>
<CAPTION>
February 21, 1992
Year Ended (Commencement of
Nine Months Eight Months December 31, Class Operations)
Year Ended Ended Year Ended Ended ------------------ through
May 31, 1998 May 31, 1997 (a) August 31, 1996 August 31, 1995 (d) 1994 1993 December 31, 1992
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES

NET ASSET VALUE
BEGINNING OF YEAR $ 10.89 $ 10.72 $ 10.69 $ 9.79 $ 11.16 $ 10.42 $ 10.00
------- ------- ------- ------- ------- -------- -------
................................................................................................................................
INCOME FROM
INVESTMENT
OPERATIONS
................................................................................................................................
Net investment
income 0.47 0.37 0.52 0.34 0.52 0.54 0.51
................................................................................................................................
Net realized and
unrealized gain
(loss) on
investments 0.48 0.17 0.03 0.90 (1.37) 0.81 0.42
------- ------- ------- ------- ------- -------- -------
................................................................................................................................
Total from
investment
operations 0.95 0.54 0.55 1.24 (0.85) 1.35 0.93
------- ------- ------- ------- ------- -------- -------
................................................................................................................................
LESS DISTRIBUTIONS
FROM
................................................................................................................................
Net investment
income (0.48) (0.37) (0.52) (0.34) (0.52) (0.54) (0.51)
................................................................................................................................
Net realized gain on
investments 0 0 0 0 0 (0.07) 0
------- ------- ------- ------- ------- -------- -------
................................................................................................................................
Total distributions (0.48) (0.37) (0.52) (0.34) (0.52) (0.61) (0.51)
------- ------- ------- ------- ------- -------- -------
................................................................................................................................
NET ASSET VALUE END
OF YEAR $ 11.36 $ 10.89 $ 10.72 $ 10.69 $ 9.79 $ 11.16 $ 10.42
------- ------- ------- ------- ------- -------- -------
................................................................................................................................
TOTAL RETURN (C) 8.88% 5.13% 5.21% 12.83% (7.71%) 13.25% 9.48%
................................................................................................................................
RATIOS/SUPPLEMENTAL
DATA
RATIOS TO AVERAGE
NET ASSETS
Expenses 1.09% 1.03%(b) 0.89% 1.06%(b) 1.01% 0.85% 0.49%(b)
................................................................................................................................
Expenses excluding
indirectly paid
expenses 1.09% 1.03%(b) -- -- -- -- --
................................................................................................................................
Expenses excluding
waivers and/or
reimbursements 1.09% 1.11%(b) 1.09% 1.09%(b) 1.02% 1.07% 1.11%(b)
................................................................................................................................
Net investment
income 4.25% 4.60%(b) 4.78% 4.93%(b) 5.04% 4.99% 5.79%(b)
................................................................................................................................
PORTFOLIO TURNOVER
RATE 127% 114% 65% 27% 53% 14% 7%
................................................................................................................................
NET ASSETS END OF
YEAR (THOUSANDS) $64,526 $45,814 $50,569 $58,751 $57,676 $101,352 $90,738
................................................................................................................................
</TABLE>
(a) The Fund changed its fiscal year end from August 31 to May 31.
(b) Annualized.
(c) Excluding applicable sales charges.
(d) The Fund changed its fiscal year end from December 31 to August 31.

See Combined Notes to Financial Statements.

13
<PAGE>

[LOGO APPEARS HERE]
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)

<TABLE>
<CAPTION>
January 11, 1993
(Commencement of
Nine Months Eight Months Class Operations)
Year Ended Ended Year Ended Ended Year Ended through
May 31, 1998 May 31, 1997 (a) August 31, 1996 August 31, 1995 (d) December 31, 1994 December 31, 1993
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES

NET ASSET VALUE
BEGINNING OF YEAR $ 10.89 $ 10.72 $ 10.69 $ 9.79 $ 11.16 $ 10.42
------- ------- ------- ------- ------- -------
............................................................................................................................
INCOME FROM
INVESTMENT
OPERATIONS
............................................................................................................................
Net investment
income 0.39 0.31 0.44 0.29 0.46 0.47
............................................................................................................................
Net realized and
unrealized gain
(loss)
on investments 0.48 0.17 0.03 0.90 (1.37) 0.81
------- ------- ------- ------- ------- -------
............................................................................................................................
Total from
investment
operations 0.87 0.48 0.47 1.19 (0.91) 1.28
------- ------- ------- ------- ------- -------
............................................................................................................................
LESS DISTRIBUTIONS
FROM
............................................................................................................................
Net investment
income (0.40) (0.31) (0.44) (0.29) (0.46) (0.47)
............................................................................................................................
Net realized gain on
investments 0 0 0 0 0 (0.07)
------- ------- ------- ------- ------- -------
............................................................................................................................
Total distributions (0.40) (0.31) (0.44) (0.29) (0.46) (0.54)
------- ------- ------- ------- ------- -------
............................................................................................................................
NET ASSET VALUE END
OF YEAR $ 11.36 $ 10.89 $ 10.72 $ 10.69 $ 9.79 $ 11.16
------- ------- ------- ------- ------- -------
............................................................................................................................
TOTAL RETURN (C) 8.07% 4.55% 4.42% 12.27% (8.24%) 12.52%
............................................................................................................................
RATIOS/SUPPLEMENTAL
DATA
RATIOS TO AVERAGE
NET ASSETS
Expenses 1.84% 1.78%(b) 1.64% 1.81%(b) 1.58% 1.35%(b)
............................................................................................................................
Expenses excluding
indirectly paid
expenses 1.84% 1.78%(b) -- -- -- --
............................................................................................................................
Expenses excluding
waivers and/or
reimbursements 1.84% 1.86%(b) 1.84% 1.84%(b) 1.59% 1.57%(b)
............................................................................................................................
Net investment
income 3.51% 3.85%(b) 4.03% 4.18%(b) 4.47% 4.44%(b)
............................................................................................................................
PORTFOLIO TURNOVER
RATE 127% 114% 65% 27% 53% 14%
............................................................................................................................
NET ASSETS END OF
YEAR (THOUSANDS) $32,822 $31,874 $32,221 $34,206 $32,435 $41,030
............................................................................................................................
</TABLE>

<TABLE>
<CAPTION>
February 28, 1994
(Commencement of
Nine Months Eight Months Class Operations)
Year Ended Ended Year Ended Ended through
May 31, 1998 May 31, 1997 (a) August 31, 1996 August 31, 1995 (d) December 31, 1994
<S> <C> <C> <C> <C> <C>
CLASS Y SHARES

NET ASSET VALUE
BEGINNING OF YEAR $ 10.89 $ 10.72 $ 10.69 $ 9.79 $10.93
------- ------- ------- ------- ------
..............................................................................................................
INCOME FROM INVESTMENT
OPERATIONS
..............................................................................................................
Net investment income 0.51 0.39 0.55 0.36 0.46
..............................................................................................................
Net realized and
unrealized gain (loss)
on investments 0.47 0.17 0.03 0.90 (1.14)
------- ------- ------- ------- ------
..............................................................................................................
Total from investment
operations 0.98 0.56 0.58 1.26 (0.68)
------- ------- ------- ------- ------
..............................................................................................................
LESS DISTRIBUTIONS FROM
NET INVESTMENT INCOME (0.51) (0.39) (0.55) (0.36) (0.46)
------- ------- ------- ------- ------
..............................................................................................................
NET ASSET VALUE END OF
YEAR $ 11.36 $ 10.89 $ 10.72 $ 10.69 $ 9.79
------- ------- ------- ------- ------
..............................................................................................................
TOTAL RETURN 9.15% 5.32% 5.47% 13.02% (6.29%)
..............................................................................................................
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET
ASSETS
Expenses 0.84% 0.78%(b) 0.64% 0.81%(b) 0.76%(b)
..............................................................................................................
Expenses excluding
indirectly paid
expenses 0.84% 0.78%(b) -- -- --
..............................................................................................................
Expenses excluding
waivers and/or
reimbursements 0.84% 0.86%(b) 0.84% 0.84%(b) 0.77%(b)
..............................................................................................................
Net investment income 4.51% 4.85%(b) 5.03% 5.18%(b) 5.46%(b)
..............................................................................................................
PORTFOLIO TURNOVER RATE 127% 114% 65% 27% 53%
..............................................................................................................
NET ASSETS END OF YEAR
(THOUSANDS) $24,976 $24,441 $25,112 $25,079 $4,318
..............................................................................................................
</TABLE>
(a) The Fund changed its fiscal year end from August 31 to May 31.
(b) Annualized.
(c) Excluding applicable sales charges.
(d) The Fund changed its fiscal year end from December 31 to August 31.

See Combined Notes to Financial Statements.

14
<PAGE>

[LOGO APPEARS HERE]
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)

<TABLE>
<CAPTION>
January 5, 1995
(Commencement of
Nine Months Class Operations)
Year Ended Ended Year Ended through
May 31, 1998 May 31, 1997 (a) August 31, 1996 August 31, 1995
<S> <C> <C> <C> <C>
CLASS A SHARES

NET ASSET VALUE
BEGINNING OF YEAR $10.09 $10.08 $ 10.17 $ 9.97
------ ------ ------- ------
............................................................................................
INCOME FROM INVESTMENT
OPERATIONS
............................................................................................
Net investment income 0.41 0.30 0.43 0.30
............................................................................................
Net realized and
unrealized gain (loss)
on investments 0.10 0.01 (0.09) 0.20
------ ------ ------- ------
............................................................................................
Total from investment
operations 0.51 0.31 0.34 0.50
------ ------ ------- ------
............................................................................................
LESS DISTRIBUTIONS FROM
NET INVESTMENT INCOME (0.41) (0.30) (0.43) (0.30)
------ ------ ------- ------
............................................................................................
NET ASSET VALUE END OF
YEAR $10.19 $10.09 $ 10.08 $10.17
------ ------ ------- ------
............................................................................................
TOTAL RETURN (C) 5.11% 3.08% 3.37% 5.09%
............................................................................................
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET
ASSETS
Expenses 0.81% 0.84%(b) 0.80% 0.70%(b)
............................................................................................
Expenses excluding
indirectly paid
expenses 0.81% 0.83%(b) -- --
............................................................................................
Expenses excluding
waivers and/or
reimbursements 0.85% 0.96%(b) 1.11% 1.14%(b)
............................................................................................
Net investment income 4.01% 3.94%(b) 4.05% 4.32%(b)
............................................................................................
PORTFOLIO TURNOVER RATE 78% 34% 29% 80%
............................................................................................
NET ASSETS END OF YEAR
(THOUSANDS) $6,569 $6,072 $27,722 $6,820
............................................................................................
</TABLE>

NET ASSET VALUE
BEGINNING OF YEAR $10.10 $10.08 $10.17 $ 9.97
------ ------ ------ ------
............................................................................................
INCOME FROM INVESTMENT
OPERATIONS
............................................................................................
Net investment income 0.32 0.23 0.34 0.24
............................................................................................
Net realized and
unrealized gain (loss)
on investments 0.09 0.02 (0.09) 0.20
------ ------ ------ ------
............................................................................................
Total from investment
operations 0.41 0.25 0.25 0.44
------ ------ ------ ------
............................................................................................
LESS DISTRIBUTIONS FROM
NET INVESTMENT INCOME (0.32) (0.23) (0.34) (0.24)
------ ------ ------ ------
............................................................................................
NET ASSET VALUE END OF
YEAR $10.19 $10.10 $10.08 $10.17
------ ------ ------ ------
............................................................................................
TOTAL RETURN (C) 4.07% 2.49% 2.44% 4.50%
............................................................................................
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET
ASSETS
Expenses 1.71% 1.73%(b) 1.67% 1.58%(b)
............................................................................................
Expenses excluding
indirectly paid
expenses 1.71% 1.73%(b) -- --
............................................................................................
Expenses excluding
waivers and/or
reimbursements 1.74% 1.86%(b) 2.07% 2.26%(b)
............................................................................................
Net investment income 3.11% 3.04%(b) 3.28% 3.50%(b)
............................................................................................
PORTFOLIO TURNOVER RATE 78% 34% 29% 80%
............................................................................................
NET ASSETS END OF YEAR
(THOUSANDS) $5,790 $6,742 $7,413 $6,050
............................................................................................
</TABLE>
(a) The Fund changed its fiscal year end from August 31 to May 31.
(b) Annualized.
(c) Excluding applicable sales charges.

See Combined Notes to Financial Statements.

15
<PAGE>

[LOGO APPEARS HERE]
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)

<TABLE>
<CAPTION>
July 17, 1991
(Commencement of
Nine Months Year Ended August 31, Class Operations)
Year Ended Ended -------------------------------------------- through
May 31, 1998 May 31, 1997 (a) 1996 1995 1994 1993 1992 (c) August 31, 1991 (c)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS Y SHARES

NET ASSET VALUE
BEGINNING OF YEAR $ 10.10 $ 10.07 $ 10.17 $ 10.21 $ 10.58 $ 10.33 $ 10.00 $10.00
-------- ------- ------- ------- ------- ------- ------- ------
.........................................................................................................................
INCOME FROM INVESTMENT
OPERATIONS
.........................................................................................................................
Net investment income 0.42 0.30 0.43 0.46 0.47 0.49 0.51 0.06
.........................................................................................................................
Net realized and
unrealized gain (loss)
on investments 0.09 0.03 (0.10) (0.04) (0.32) 0.25 0.33 0
-------- ------- ------- ------- ------- ------- ------- ------
.........................................................................................................................
Total from investment
operations 0.51 0.33 0.33 0.42 0.15 0.74 0.84 0.06
-------- ------- ------- ------- ------- ------- ------- ------
.........................................................................................................................
LESS DISTRIBUTIONS FROM
.........................................................................................................................
Net investment income (0.42) (0.30) (0.43) (0.46) (0.47) (0.49) (0.51) (0.06)
.........................................................................................................................
In excess of net
investment income 0 0 0 0 (0.03) 0 0 0
.........................................................................................................................
Net realized gain on
investments 0 0 0 0 (0.02) 0 0 0
-------- ------- ------- ------- ------- ------- ------- ------
.........................................................................................................................
Total distributions (0.42) (0.30) (0.43) (0.46) (0.52) (0.49) (0.51) (0.06)
-------- ------- ------- ------- ------- ------- ------- ------
.........................................................................................................................
NET ASSET VALUE END OF
YEAR $ 10.19 $ 10.10 $ 10.07 $ 10.17 $ 10.21 $ 10.58 $ 10.33 $10.00
-------- ------- ------- ------- ------- ------- ------- ------
.........................................................................................................................
TOTAL RETURN 5.11% 3.36% 3.30% 4.20% 1.40% 7.40% 8.56% 0.62%
.........................................................................................................................
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET
ASSETS
Expenses 0.66% 0.74%(b) 0.70% 0.74% 0.58% 0.40% 0.17% 0.00%(b)
.........................................................................................................................
Expenses excluding
indirectly paid
expenses 0.66% 0.73%(b) -- -- -- -- -- --
.........................................................................................................................
Expenses excluding
waivers and/or
reimbursements 0.70% 0.86%(b) 0.90% 0.86% 0.83% 0.81% 0.86% 1.40%(b)
.........................................................................................................................
Net investment income 4.18% 4.04%(b) 4.27% 4.52% 4.54% 4.73% 4.85% 4.93%(b)
.........................................................................................................................
PORTFOLIO TURNOVER RATE 78% 34% 29% 80% 32% 37% 57% --
.........................................................................................................................
NET ASSETS END OF YEAR
(THOUSANDS) $167,905 $32,293 $34,893 $40,581 $53,417 $66,607 $54,470 $4,025
.........................................................................................................................
</TABLE>
(a) The Fund changed its fiscal year end from August 31 to May 31.
(b) Annualized.
(c) On November 18, 1991, the Fund was changed to a diversified municipal bond
fund with a fluctuating net asset value per share from a non-diversified
money market fund with a stable net asset value per share. The shares out-
standing and the related per share data as of August 31, 1991 are restated
to reflect both a 1 for 2 reverse share split on October 30, 1991 and a 1
for 5 reverse share split on August 19, 1992. Total return calculated after
November 18, 1991 reflects the fluctuation in net asset value per share.

See Combined Notes to Financial Statements.

16
<PAGE>

[LOGO APPEARS HERE]
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)

<TABLE>
<CAPTION>
January 20, 1998
(Commencement
of Class Operations)
through
May 31, 1998
<S> <C>
CLASS A SHARES

NET ASSET VALUE BEGINNING OF PERIOD $ 7.91
----------
.........................................................................
INCOME FROM INVESTMENT OPERATIONS
.........................................................................
Net investment income 0.13 (c)
.........................................................................
Net realized and unrealized loss on investments (0.13)
----------
.........................................................................
Total from investment operations 0
----------
.........................................................................
LESS DISTRIBUTIONS FROM NET INVESTMENT INCOME (0.13)
----------
.........................................................................
NET ASSET VALUE END OF PERIOD $ 7.78
----------
.........................................................................
TOTAL RETURN (B) 0.04%
.........................................................................
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS
Expenses 0.93%(a)
.........................................................................
Expenses excluding indirectly paid expenses 0.93%(a)
.........................................................................
Net investment income 4.69%(a)
.........................................................................
PORTFOLIO TURNOVER RATE 77%
.........................................................................
NET ASSETS END OF PERIOD (THOUSANDS) $1,243,327
.........................................................................
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) Calculation based on average shares outstanding.

See Combined Notes to Financial Statements.

17
<PAGE>

[LOGO APPEARS HERE]
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
Five Months Year Ended December 31,
Ended ----------------------------------------------
May 31, 1998 (a) 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
CLASS B SHARES

NET ASSET VALUE
BEGINNING OF PERIOD $ 7.82 $ 7.71 $ 7.86 $ 7.10 $ 8.12
-------- ---------- ---------- ---------- ----------
...........................................................................................
INCOME FROM INVESTMENT
OPERATIONS
...........................................................................................
Net investment income 0.12 (d) 0.38 0.41 0.41 0.37
...........................................................................................
Net realized and
unrealized gain (loss)
on investments
and futures contracts (0.03) 0.23 (0.17) 0.74 (0.96)
-------- ---------- ---------- ---------- ----------
...........................................................................................
Total from investment
operations 0.09 0.61 0.24 1.15 (0.59)
-------- ---------- ---------- ---------- ----------
..........................................................................................
LESS DISTRIBUTIONS FROM
..........................................................................................
Net investment income (0.13) (0.40) (0.39) (0.39) (0.37)
..........................................................................................
In excess of net
investment income 0 0 0 0 (0.06)
..........................................................................................
In excess of net
realized gain on
investments 0 0 0 0 0
-------- ---------- ---------- ---------- ----------
..........................................................................................
Net realized gain on
investments 0 (0.10) 0 0 0
..........................................................................................
Total distributions (0.13) (0.50) (0.39) (0.39) (0.43)
-------- ---------- ---------- ---------- ----------
..........................................................................................
NET ASSET VALUE END OF
PERIOD $ 7.78 $ 7.82 $ 7.71 $ 7.86 $ 7.10
-------- ---------- ---------- ---------- ----------
..........................................................................................
TOTAL RETURN (C) 1.15% 8.15% 3.15% 16.61% (7.34%)
..........................................................................................
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET
ASSETS
Expenses 1.26%(b) 0.96% 0.87% 0.95% 1.55%
..........................................................................................
Expenses excluding
indirectly paid
expenses 1.25%(b) 0.96% 0.86% 0.94% --
..........................................................................................
Net investment income 4.32%(b) 4.97% 5.34% 5.41% 4.92%
..........................................................................................
PORTFOLIO TURNOVER RATE 77% 126% 69% 56% 84%
..........................................................................................
NET ASSETS END OF PERIOD
(THOUSANDS) $124,664 $1,375,730 $1,557,886 $1,204,468 $1,197,727
..........................................................................................
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES

NET ASSET VALUE
BEGINNING OF PERIOD $ 8.04 $ 8.07 $ 7.90 $ 8.06 $ 8.18 $ 8.09
---------- ---------- ---------- ---------- -------- --------
.................................................................................................
INCOME FROM INVESTMENT
OPERATIONS
.................................................................................................
Net investment income 0.39 0.46 0.46 0.52 (d) 0.57 0.55
.................................................................................................
Net realized and
unrealized gain (loss)
on investments and
futures contracts 0.48 0.12 0.36 (0.01) 0.15 0.30
---------- ---------- ---------- ---------- -------- --------
.................................................................................................
Total from investment
operations 0.87 0.58 0.82 0.51 0.72 0.85
---------- ---------- ---------- ---------- -------- --------
.................................................................................................
LESS DISTRIBUTIONS FROM
.................................................................................................
Net investment income (0.39) (0.46) (0.46) (0.52) (0.60) (0.63)
.................................................................................................
In excess of net
investment income (0.06) (0.04) (0.07) (0.03) 0 0
.................................................................................................
In excess of net
realized gain on
investments (0.01) 0 0 0 0 0
---------- ---------- ---------- ---------- -------- --------
.................................................................................................
Net realized gain on
investments (0.33) (0.11) (0.12) (0.12) (0.24) (0.13)
.................................................................................................
Total distributions (0.79) (0.61) (0.65) (0.67) (0.84) (0.76)
---------- ---------- ---------- ---------- -------- --------
.................................................................................................
NET ASSET VALUE END OF
PERIOD $ 8.12 $ 8.04 $ 8.07 $ 7.90 $ 8.06 $ 8.18
---------- ---------- ---------- ---------- -------- --------
.................................................................................................
TOTAL RETURN (C) 11.15% 7.55% 10.80% 6.66% 9.11% 10.89%
.................................................................................................
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET
ASSETS
Expenses 1.66% 1.38% 1.75% 1.18% 1.23% 1.79%
.................................................................................................
Expenses excluding
indirectly paid
expenses -- -- -- -- -- --
.................................................................................................
Net investment income 4.72% 5.71% 5.78% 6.54% 6.94% 6.74%
.................................................................................................
PORTFOLIO TURNOVER RATE 76% 78% 77% 64% 69% 61%
.................................................................................................
NET ASSETS END OF PERIOD
(THOUSANDS) $1,548,503 $1,453,199 $1,146,185 $1,060,826 $901,912 $903,132
.................................................................................................
</TABLE>
(a) The Fund changed in its fiscal year end from December 31 to May 31 during
the period.
(b) Annualized.
(c) Excluding applicable sales charges.
(d) Calculation based on average shares outstanding.

See Combined Notes to Financial Statements.

18
<PAGE>

[LOGO APPEARS HERE]
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)

<TABLE>
<CAPTION>
January 26, 1998
(Commencement
of Class Operations)
through
May 31, 1998
<S> <C>
CLASS C SHARES

NET ASSET VALUE BEGINNING OF PERIOD $ 7.85
------
.........................................................................
INCOME FROM INVESTMENT OPERATIONS
.........................................................................
Net investment income 0.11 (c)
.........................................................................
Net realized and unrealized loss on investments (0.07)
------
.........................................................................
Total from investment operations 0.04
------
.........................................................................
LESS DISTRIBUTIONS FROM NET INVESTMENT INCOME (0.11)
.........................................................................
------
NET ASSET VALUE END OF PERIOD $ 7.78
------
.........................................................................
TOTAL RETURN (B) 0.46%
.........................................................................
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS
Expenses 1.68%(a)
.........................................................................
Expenses excluding indirectly paid expenses 1.68%(a)
.........................................................................
Net investment income 3.94%(a)
.........................................................................
PORTFOLIO TURNOVER RATE 77%
.........................................................................
NET ASSETS END OF PERIOD (THOUSANDS) $7,708
.........................................................................
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) Calculation based on average shares outstanding.

See Combined Notes to Financial Statements.

19
<PAGE>

[LOGO APPEARS HERE]
SCHEDULE OF INVESTMENTS
May 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - 98.9%
ALABAMA - 2.8%
Jefferson County, Alabama,
Sewer Revenue, Series D:
$2,000,000 5.75%, 2/1/22, (FGIC)............................... $ 2,115,940
1,215,000 5.75%, 2/1/27....................................... 1,285,434
------------
3,401,374
------------
ALASKA - 1.7%
1,000,000 Alaska Housing Finance Corp. Revenue Bond, Series A
1
5.30%, 12/1/12, (MBIA)............................. 1,022,490
1,000,000 Valdez, Alaska,
Marine Terminal Revenue Refunding, Pipeline
Incorporated Project, Series B
5.50%, 10/1/28..................................... 1,011,350
------------
2,033,840
------------
ARIZONA - 0.9%
1,000,000 Creighton, Arizona,
Elementary School District No. 14 of Maricopa
County, School Improvements (Project of 1990),
Series C 1991
6.50%, 7/1/07, (FGIC)............................... 1,153,450
------------
CALIFORNIA - 5.5%
1,000,000 California State, Department of Water Resources,
Central Valley Project Water Systems, Series Q
5.375%, 12/1/27, (MBIA)............................. 1,016,640
1,000,000 California State, Public Works Lease, California
State University Project, Series A
5.375%, 10/1/17, (AMBAC)............................ 1,024,240
1,000,000 Orange County, California,
Public Finance Authority
5.75%, 12/1/10, (AMBAC)............................. 1,086,590
2,000,000 San Francisco, California,
City & County International Airport, Revenue Bond,
Second Series Issue 10 A
5.70%, 5/1/26, (MBIA)............................... 2,087,700
500,000 San Mateo County, California,
Joint Powers Finance Authority, Lease Revenue,
Capital Projects Program, 1993 Series A
6.50%, 7/1/16, (MBIA)............................... 591,555
1,000,000 Southern California, Public Power Authority, Mead
Adelanto Project, Series A
5.00%, 7/1/17, (AMBAC).............................. 987,840
------------
6,794,565
------------
COLORADO - 1.8%
1,000,000 Arapahoe County, Colorado,
Public Highway Authority, Capital Improvements
Trust Fund Revenue, (E-470 Project)
6.15%, 8/31/26, (MBIA).............................. 1,111,550
1,000,000 Colorado, Public Highway Authority,
(E-470 Project), Senior Series A
5.75%, 9/1/14....................................... 1,101,520
------------
2,213,070
------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
DISTRICT OF COLUMBIA - 1.7%
$2,000,000 District of Columbia, Housing Revenue,
Carnegie Endowment for International Peace
5.75%, 11/15/26..................................... $ 2,075,800
------------
FLORIDA - 2.8%
1,000,000 Florida State, Board of Education Capital Outlay,
Series A
5.00%, 6/1/27....................................... 979,010
1,250,000 Florida State, Housing Finance Corporation Revenue,
Homeowner Mortgage, Series 2
5.35%, 1/1/21, (MBIA)............................... 1,252,062
1,000,000 Orange County, Florida,
Health Facilities Authority Revenue, Orlando
Regional Healthcare Systems, Series 1996C
6.25%, 10/1/16, (MBIA).............................. 1,155,020
------------
3,386,092
------------
GEORGIA - 2.7%
1,000,000 Cherokee County, Georgia,
Water & Sewer Revenue, Franciscan Health
Partnership
5.00%, 8/1/27, (FGIC)............................... 974,460
2,000,000 Georgia State, Municipal Electric Authority, Power
Revenue, Special Obligation Bond, Series Y
6.50%, 1/1/17, (MBIA)............................... 2,364,340
------------
3,338,800
------------
HAWAII - 0.9%
1,000,000 Hawaii State, Airport System Revenue, Second Series
of 1990
7.50%, 7/1/20, (FGIC)............................... 1,077,970
------------
IDAHO - 0.6%
760,000 Idaho State, Housing Agency, Single Family Mortgage,
Mezzanine,
Series C-1
6.30%, 7/1/11....................................... 806,862
------------
ILLINOIS - 15.0%
2,150,000 City of Chicago, Illinois,
General Obligation, Series 1995
6.125%, 1/1/16, (AMBAC)............................. 2,360,163
3,005,000 City of Chicago, Illinois,
Water Refunding Revenue,
Series 1993
6.50%, 11/1/15, (FGIC).............................. 3,559,993
Illinois State, Development Finance Authority
Pollution Control Refunding Revenue, (Commonwealth
Edison Co. Project):
2,000,000 Series 1991
7.25%, 6/1/11, (MBIA)............................... 2,186,820
3,000,000 Series 1994D
6.75%, 3/1/15, (AMBAC).............................. 3,382,950
1,500,000 Illinois State, Health Facilities Authority Revenue,
Loyola University Health Systems, Series A
6.00%, 7/1/13, (MBIA)............................... 1,679,580
</TABLE>

20
<PAGE>

[LOGO APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
May 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
ILLINOIS - CONTINUED
$1,750,000 Illinois State, Health Facilities Authority, Health
Facilities Refunding Revenue, Series 1992AA
6.50%, 6/1/12, (MBIA)............................... $ 2,048,865
1,000,000 Illinois State, Regional Transportation Authority
Revenue
6.00%, 6/1/15....................................... 1,124,690
1,000,000 Illinois State, Sales Tax Revenue
5.50%, 6/15/20...................................... 1,016,400
1,000,000 Illinois State, Metropolitan Pier & Exposition
Authority, Dedicated State Tax Revenue, McCormick
Plantation Expansion, Series A
5.25%, 6/15/27...................................... 994,070
------------
18,353,531
------------
INDIANA - 3.4%
1,500,000 Indiana State, Middle School Building Corp.,
Lawrence Township of Marion County, First Mortgage
Bond
6.875%, 7/5/11, (MBIA).............................. 1,820,475
1,000,000 Indiana State, Municipal Power Agency, Power Supply
System, 1993 Series B
6.00%, 1/1/13, (MBIA)............................... 1,127,050
1,000,000 Indiana State, Transportation Finance Authority,
Highway Revenue,
Series 1992A
6.80%, 12/1/16, (MBIA).............................. 1,213,190
------------
4,160,715
------------
MAINE - 1.0%
1,000,000 Maine State, Turnpike Authority, Turnpike Revenue,
Series 1994
7.125%, 7/1/08, (MBIA).............................. 1,205,250
------------
MASSACHUSETTS - 5.9%
1,000,000 Massachusetts State, General Obligation, Series A
6.50%, 11/1/14, (AMBAC)............................. 1,187,800
500,000 Massachusetts State, Housing Finance Agency, Housing
Project Revenue, Series A
6.15%, 10/1/15, (AMBAC)............................. 527,000
1,000,000 Massachusetts State, Industrial Finance Agency,
Parking Facilities, Avon Associates LLC, Series A
5.375%, 4/1/20, (MBIA).............................. 1,007,030
Massachusetts State, Port Authority Revenue, Series
A:
2,000,000 5.00%, 7/1/27....................................... 1,937,340
500,000 5.75%, 7/1/12....................................... 550,910
2,000,000 University of Massachusetts, Building Authority
Revenue, Series A
5.50%, 5/1/15, (MBIA)............................... 2,077,020
------------
7,287,100
------------
MICHIGAN - 3.1%
2,500,000 Detroit, Michigan,
Water Supply Systems Revenue, Senior Lien, Series A
6.00%, 7/1/14, (MBIA)............................... 2,815,475
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
MICHIGAN - CONTINUED
$1,000,000 Michigan State, Hospital Finance Authority Revenue,
Henry Ford Health, Series A
5.25%, 11/15/25..................................... $ 995,650
------------
3,811,125
------------
MINNESOTA - 0.4%
475,000 Minnesota, Housing Finance Agency, Single Family
Mortgage, Series H
6.70%, 1/1/18....................................... 509,328
------------
MISSOURI - 1.0%
1,100,000 Sikeston, Missouri,
Electricity Revenue
6.00%, 6/1/13, (MBIA)............................... 1,245,090
------------
NEBRASKA - 1.6%
2,000,000 Nebraska, Investment Finance Authority, Single
Family Housing Revenue, Series F
5.60%, 9/1/20, (GNMA)............................... 2,004,620
------------
NEVADA - 0.8%
1,000,000 Clark County, Nevada,
School District, Building and Renovations, Series B
5.25%, 6/15/17, (FGIC).............................. 1,010,080
------------
NEW MEXICO - 2.3%
500,000 City of Albuquerque, New Mexico,
Airport Revenue, Series 1995 A
6.35%, 7/1/07, (AMBAC).............................. 542,590
2,100,000 Farmington, New Mexico,
Pollution Control Revenue, Public Service Company
of San Juan,
Series C
5.70%, 12/1/16, (AMBAC)............................. 2,225,349
------------
2,767,939
------------
NEW YORK - 10.4%
Long Island, New York,
Power Authority, Electric Systems Revenue, Series
A:
1,000,000 5.50%, 12/1/29...................................... 1,010,050
2,500,000 5.75%, 12/1/24...................................... 2,621,175
New York & New Jersey,
Port Authority:
500,000 97th Series
6.50%, 7/15/19, (FGIC).............................. 544,260
1,000,000 104th Series
5.20%, 7/15/21, (AMBAC)............................. 995,940
New York City, Municipal Water Finance Authority,
Series B:
1,000,000 5.50%, 6/15/27, (MBIA).............................. 1,031,110
2,000,000 5.75%, 6/15/29, (MBIA).............................. 2,093,140
700,000 New York City, Municipal Water Finance Authority,
Water & Sewer Systems Revenue
5.75%, 6/15/26, (MBIA).............................. 737,282
1,500,000 New York State, Housing Finance Agency Revenue,
Series 1994 B
6.35%, 8/15/23, (AMBAC)............................. 1,618,875
</TABLE>

21
<PAGE>

[LOGO APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
May 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
NEW YORK - CONTINUED
$1,000,000 New York State, Local Government Assistance
Corporation
5.50%, 4/1/21....................................... $ 1,018,160
1,000,000 New York State, Mortgage Agency Revenue, Homeowner
Mortgage, Series 70
5.375%, 10/1/17..................................... 1,005,540
------------
12,675,532
------------
NORTH DAKOTA - 2.7%
3,000,000 Mercer County, North Dakota,
Pollution Control Revenue, (Basin Electric Power,
Cooperative-Antelope Valley) Second Series
6.05%, 1/1/19, (AMBAC).............................. 3,253,440
------------
OHIO - 1.5%
1,000,000 Ohio State, Board of Education, Kings Local School
District, City of Warren, School Improvements,
Series 1995
7.50%, 12/1/16, (FGIC).............................. 1,306,000
455,000 Ohio State, Housing Finance Agency, Residential
Mortgage Revenue, 1995 Series A-2
6.625%, 3/1/26, (GNMA).............................. 487,856
------------
1,793,856
------------
PENNSYLVANIA - 0.9%
1,000,000 York County, Pennsylvania,
Solid Waste And Refuse Authority, Solid Waste
Systems Revenue
5.50%, 12/1/12, (FGIC).............................. 1,079,070
------------
SOUTH CAROLINA - 3.9%
2,300,000 Greenville, South Carolina,
Hospital Systems, Hospital Facilities Revenue,
Series A
5.75%, 5/1/14....................................... 2,418,841
2,150,000 South Carolina State, Port Authority Revenue, Series
1991
6.625%, 7/1/11, (AMBAC)............................. 2,317,098
------------
4,735,939
------------
TENNESSEE - 2.7%
1,200,000 Bristol, Tennessee,
Health & Educational Facility, Bristol Memorial
Hospital, Series 1993
6.75%, 9/1/07, (FGIC)............................... 1,398,492
1,700,000 Knox County, Tennessee,
Health, Educational & Housing Facility Board,
Hospital Facility Revenue, (Fort Sanders Alliance),
Series 1993
6.25%, 1/1/13, (MBIA)............................... 1,954,439
------------
3,352,931
------------
TEXAS - 3.7%
1,500,000 City of Austin, Texas,
Airport System Revenue, Prior Lien, Series 1995A
6.125%, 11/15/25, (MBIA)............................ 1,616,565
1,000,000 City of Houston, Texas,
Water Conveyance System Contract, COP, Series 1993
H
7.50%, 12/15/14, (AMBAC)............................ 1,296,390
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
TEXAS - CONTINUED
$1,500,000 Hays, Texas,
Consolidated Independent School District
5.875%, 8/15/22..................................... $ 1,611,285
------------
4,524,240
------------
UTAH - 0.9%
1,000,000 Salt Lake City, Utah,
Salt Lake County Airport Revenue, Series 1993A
6.00%, 12/1/12, (FGIC).............................. 1,076,890
------------
VIRGINIA - 1.9%
2,000,000 Hanover County, Virginia,
Industrial Development Authority, Memorial Regional
Medical Center Project, Series 1995
6.375%, 8/15/18, (MBIA)............................. 2,345,960
------------
WASHINGTON - 3.1%
2,500,000 City of Tacoma, Washington,
Electric Systems Refunding Revenue, Series 1994
6.25%, 1/1/15, (FGIC)............................... 2,737,325
1,000,000 Seattle, Washington,
Port Revenue, Series A
5.50%, 10/1/22, (FGIC).............................. 1,031,760
------------
3,769,085
------------
WEST VIRGINIA - 0.4%
500,000 West Virginia State, Housing Development, Series A
6.05%, 5/1/27....................................... 530,120
------------
WISCONSIN - 9.0%
4,500,000 City of Superior, Wisconsin,
Limited Obligation Refunding Revenue, Midwest
Energy Resource Co. Project, Series E-1991
6.90%, 8/1/21, (FGIC)............................... 5,594,085
1,000,000 Wisconsin State, Health and Educational Facilities,
Children's Hospital of Wisconsin Incorporated
5.00%, 2/15/18, (AMBAC)............................. 974,240
1,000,000 Wisconsin State, Transportation Revenue, Series B
5.50%, 7/1/22....................................... 1,009,770
2,000,000 Wisconsin, Health & Educational Facilities Authority
Revenue, Wausau Hospitals Inc., Series 1991B
6.625%, 8/15/11, (AMBAC)............................ 2,167,240
1,250,000 Wisconsin, Housing Economic Development, Series B
5.60%, 3/1/28....................................... 1,263,137
------------
11,008,472
------------
PUERTO RICO - 1.9%
1,000,000 Commonwealth of Puerto Rico,
General Obligation
6.50%, 7/1/10, (MBIA)............................... 1,180,760
500,000 Puerto Rico, Electic Power Authority, Power
Refunding Revenue, Series Y
6.50%, 7/1/06, (MBIA)............................... 572,990
</TABLE>

22
<PAGE>

[LOGO APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
May 31, 1998

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
PUERTO RICO - CONTINUED
$ 495,000 Puerto Rico, Housing, Bank & Finance Agency, Single
Family Mortgage Revenue
6.10%, 10/1/15,
(GNMA, FNMA & FHLMC)................................ $ 521,547
------------
2,275,297
------------
Total Long-Term Municipal Obligations (cost
$114,223,657)...................................... 121,057,433
------------
</TABLE>

SUMMARY OF ABBREVIATIONS:
AMBAC Insured by American Municipal Bond Assurance Corporation
COP Certificate of Participation
FGIC Insured by Federal Guaranty Insurance Company
FHLMC Insured by Federal Home Loan Mortgage Corporation
FNMA Insured by Federal National Mortgage Association
GNMA Insured by Government National Mortgage Association
MBIA Insured by Municipal Bond Investors Assurance

Shares Value
<C> <S> <C> <C>
MUTUAL FUND SHARES - 0.1% (COST $80,229)
80,229 Federated Municipal Obligations Fund................. $ 80,229
------------
TOTAL INVESTMENTS -
(COST $114,303,886).................. 99.0% 121,137,662
OTHER ASSETS AND
LIABILITIES - NET.................... 1.0 1,186,481
----- ------------
NET ASSETS - ......................... 100.0% $122,324,143
===== ============
</TABLE>

See Combined Notes to Financial Statements

23
<PAGE>

[LOGO APPEARS HERE]
SCHEDULE OF INVESTMENTS
May 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - 94.7%
ALABAMA - 3.9%
$ 7,000,000 Huntsville, Alabama,
Warrants, Series A
4.50%, 12/1/00 (a)................................. $ 7,006,580
------------
ARIZONA - 4.8%
2,000,000 Arizona State, Transportation Board, Excise Tax
Revenue,
Maricopa County Regional Area Road Fund,
Subordinated Lien
6.80%, 7/1/98, (MBIA).............................. 2,005,100
5,000,000 Arizona State, Transportation Board, Highway
Revenue
6.70%, 7/1/98...................................... 5,012,450
1,600,000 Pima County, Arizona,
General Obligation, Series 1992
6.55%, 7/1/01...................................... 1,717,376
------------
8,734,926
------------
CALIFORNIA - 7.2%
California State, General Obligation:
5,000,000 6.35%, 11/1/04, (FGIC)............................. 5,608,400
900,000 7.00%, 8/1/02, (FGIC).............................. 999,090
5,080,000 Sacramento, California,
School Insurance Authority Revenue, Liability
Program,
Series D
5.70%, 6/1/03...................................... 5,272,481
1,025,000 Stockton, California,
Health Facilities Revenue, Series A
5.00%, 12/1/01..................................... 1,047,345
------------
12,927,316
------------
COLORADO - 6.1%
16,520,000 Arapahoe County, Colorado,
Capital Improvement Highway,
(Eff. Yield 4.69%) (b)
0.00%, 8/31/11..................................... 7,933,069
140,000 Colorado State, Student Obligation Board Authority,
Student Loan Revenue, Series B
6.125%, 12/1/98.................................... 141,334
1,500,000 Denver, Colorado,
City and County Airport Revenue, Series C
6.35%, 11/15/01.................................... 1,597,875
1,300,000 Weld County, Colorado,
Industrial Development Revenue, Monfort Inc.
6.75%, 12/15/01.................................... 1,395,693
------------
11,067,971
------------
DISTRICT OF COLUMBIA - 3.5%
6,000,000 District of Columbia,
General Obligation, Series A
5.75%, 6/1/03, (MBIA).............................. 6,374,160
------------
FLORIDA - 19.8%
3,700,000 Broward County, Florida
Resource Recovery Revenue, Wheelabrator
Technologies,
7.95%, 12/1/08..................................... 3,983,642
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
FLORIDA - CONTINUED
$ 1,000,000 Dade County, Florida,
School District
7.00%, 7/1/98...................................... $ 1,002,700
Florida Health Care Facilities Revenue, Halifax
Hospital Medical Center,
Series A:
1,080,000 4.40%, 4/1/04...................................... 1,074,017
1,240,000 4.50%, 4/1/05...................................... 1,232,721
1,300,000 4.50%, 4/1/06...................................... 1,283,035
Florida State, Board of Education, Capital Outlay:
3,000,000 6.75%, 6/1/00...................................... 3,165,780
4,000,000 Public Education, Series B
5.30%, 6/1/98...................................... 4,000,320
1,000,000 Florida State, Board of Regents, University Systems
Improvements Revenue
5.90%, 7/1/98, (AMBAC)............................. 1,001,770
3,000,000 Florida State, Turnpike Authority, Turnpike
Revenue, Series A
9.50%, 7/1/98, (AMBAC)............................. 3,014,670
4,600,000 Jacksonville, Florida,
Industrial Development Revenue Refunding, TTX
Company Project
5.40%, 3/1/01...................................... 4,755,572
Leon County, Florida,
Educational Facilities Authority, Southgate, ETM:
680,000 9.00%, 9/1/99...................................... 723,228
740,000 9.00%, 9/1/00...................................... 820,201
810,000 9.00%, 9/1/01...................................... 931,856
880,000 9.00%, 9/1/02...................................... 1,046,725
960,000 9.00%, 9/1/03...................................... 1,177,728
3,675,000 Orange County, Florida,
Health Facilities Authority Revenue, Series 3
5.20%, 10/1/04..................................... 3,875,361
1,550,000 Palm Beach County, Florida,
Solid Waste Authority Revenue, Refunding and
Improvements
5.50%, 12/1/02, (MBIA)............................. 1,641,714
1,000,000 Sarasota, Florida, General Obligation
6.85%, 8/1/00...................................... 1,059,690
------------
35,790,730
------------
ILLINOIS - 3.8%
1,000,000 Central Lake County, Illinois,
Joint Action Water Agency, Interim Water Revenue,
Series A
7.00%, 5/1/19, (AMBAC)............................. 1,074,630
Illinois State, Development Finance Authority
Revenue:
2,765,000 5.00%, 7/1/06...................................... 2,744,926
1,000,000 Refunding Community Rehab Providers, Series A
5.35%, 7/1/00...................................... 1,023,330
2,000,000 Illinois State, Sales Tax Revenue, Series I
6.95%, 6/15/98..................................... 2,002,640
------------
6,845,526
------------
</TABLE>

24
<PAGE>

[LOGO APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
May 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
MAINE - 1.7%
$ 3,000,000 Baileyville, Maine,
Pollution Control Revenue, Georgia-Pacific
Corporation Project
4.75%, 6/1/05...................................... $ 3,017,760
------------
MASSACHUSETTS - 2.8%
1,000,000 Massachusetts State, Health and Educational
Facilities Revenue
4.55%, 1/1/21...................................... 1,012,340
Massachusetts State, Industrial Development
Revenue:
420,000 Series 1986G
5.30%, 12/1/06..................................... 426,812
520,000 Series 1986I
5.30%, 12/1/06..................................... 528,435
910,000 Series 1996A
5.35%, 11/1/07..................................... 946,591
1,085,000 Series 1996B
5.35%, 11/1/07..................................... 1,128,628
1,000,000 New England Education Loan Marketing Corp., Student
Loan Revenue, Series 1993B
5.40%, 6/1/00...................................... 1,021,690
------------
5,064,496
------------
MINNESOTA - 0.6%
1,015,000 City of Minneapolis, Minnesota, Housing and
Redevelopment Authority of the City of St. Paul,
Single Family Mortgage,
Series 1996A
5.125%, 6/1/32..................................... 1,017,659
------------
MISSOURI - 0.4%
710,000 North Kansas City, Missouri,
School District, General Obligation, Direct
Deposit Program, Series 1996
6.70%, 3/1/00...................................... 742,994
------------
NEBRASKA - 0.6%
1,000,000 Nebraska Higher Education Loan Program, Student
Loan Revenue, Senior Subordinated Lien, Series A
6.65%, 6/1/08 (MBIA)............................... 1,123,630
------------
NEW JERSEY - 6.7%
New Jersey State Economic Development Authority:
First Mortgage, Franciscan Oaks Project:
1,545,000 5.20%, 10/1/04..................................... 1,580,025
825,000 5.40%, 10/1/06..................................... 848,356
1,075,000 5.50%, 10/1/07..................................... 1,112,206
Refunding First Mortgage,
Keswick Pines:
100,000 4.50%, 1/1/99...................................... 100,174
480,000 4.70%, 1/1/00...................................... 481,363
175,000 4.85%, 1/1/01...................................... 175,922
805,000 5.00%, 1/1/02...................................... 811,271
845,000 5.10%, 1/1/03...................................... 854,253
465,000 5.15%, 1/1/04...................................... 471,054
500,000 5.25%, 1/1/05...................................... 507,480
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
NEW JERSEY - CONTINUED
New Jersey State Economic Development Authority -
continued:
Refunding First Mortgage,
Keswick Pines - continued:
$ 975,000 5.35%, 1/1/06...................................... $ 991,360
925,000 5.45%, 1/1/07...................................... 945,304
3,000,000 New Jersey State Turnpike Authority, Turnpike
Revenue, Series C
6.50%, 1/1/06...................................... 3,191,850
------------
12,070,618
------------
NEW MEXICO - 3.8%
6,680,000 Alamogordo, New Mexico,
Hospital Revenue, Gerald Champion Memorial
Hospital Project
5.00%, 1/1/08...................................... 6,771,182
------------
NEW YORK - 3.2%
New York, New York:
145,000 Prerefunded, ETM, Series L
5.25%, 8/1/00...................................... 148,992
855,000 Unrefunded Balance, Series L
5.25%, 8/1/00...................................... 874,827
1,450,000 New York, New York,
General Obligation, Series L
5.00%, 8/1/01...................................... 1,483,162
2,000,000 New York, New York,
Industrial Development Agency, Special Facility,
Terminal One Group Association Project
6.00%, 1/1/07...................................... 2,162,380
New York State, Power Authority Revenue, General
Purpose Bonds:
80,000 Prerefunded, ETM, Series Z
5.85%, 1/1/00...................................... 82,366
920,000 Unrefunded Balance, Series Z
5.85%, 1/1/00...................................... 947,204
------------
5,698,931
------------
OHIO - 0.5%
940,000 Cincinnati, Ohio,
The Student Loan Funding Corp., Student Loan
Revenue,
Series 1993A
5.50%, 12/1/01..................................... 975,720
------------
OKLAHOMA - 2.5%
4,450,000 Oklahoma State, Housing Development Authority
Revenue, Lease Purchase Program, Series A
4.75%, 12/1/02..................................... 4,455,340
------------
PENNSYLVANIA - 2.1%
1,000,000 Lancaster County, Pennsylvania,
Hospital Authority Revenue (The Lancaster General
Hospital Project), Series 1992
5.60%, 7/1/00, (AMBAC)............................. 1,032,330
1,950,000 Philadelphia, Pennsylvania,
Water and Sewer Revenue,
16th Series
7.50%, 8/1/10...................................... 2,183,201
</TABLE>

25
<PAGE>

[LOGO APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
May 31, 1998

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
PENNSYLVANIA - CONTINUED
$ 500,000 State of Pennsylvania,
General Obligation, Series 1971
6.00%, 12/15/98...................................... $ 502,080
-----------
3,717,611
-----------
SOUTH DAKOTA - 0.6%
1,000,000 South Dakota State, Housing Development,
Homeownership Mortgage, Series J
4.60%, 5/1/02, (FNMA)................................ 1,008,970
-----------
TEXAS - 4.1%
1,000,000 Austin, Texas,
Utility Systems Revenue, Series A
9.50%, 5/15/15....................................... 1,103,620
2,500,000 Houston, Texas,
Airport Systems Revenue, Subordinated Lien, Series A
6.75%, 7/1/08........................................ 2,707,750
1,315,000 North Texas, Health Facilities Development Corp.,
Limited Regional Health Care Systems Incorporated
Project
4.40%, 9/1/01........................................ 1,326,835
1,185,000 Texas State, Department of Housing and Community
Affairs, Single Family Mortgage Revenue,
Series 1996E
4.45%, 3/1/99, (MBIA)................................ 1,189,408
1,000,000 Victoria County, Texas,
Hospital Revenue, Citizens
Medical Center
5.50%, 1/1/01........................................ 1,034,260
-----------
7,361,873
-----------
UTAH - 6.3%
3,000,000 Utah State, Board of Regents, Student Loan, Series F
7.05%, 11/1/03....................................... 3,220,110
Utah State, Intermountain Power Agency:
2,500,000 Power Supply, Series C
6.00%, 7/1/00, (MBIA)................................ 2,600,150
5,000,000 Special Obligation, Series B
6.50%, 7/1/04, (MBIA)................................ 5,592,050
-----------
11,412,310
-----------
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
VERMONT - 2.7%
$ 4,385,000 Vermont State, General Obligation
6.00%, 12/1/06, (AMBAC)............................ $ 4,891,511
------------
WASHINGTON - 2.5%
2,950,000 Washington State, General Obligation Revenue, Motor
Vehicle Fuel Tax, Series R-92D
5.60%, 9/1/01...................................... 3,090,715
1,360,000 Washington State, Public Power Supply, Series B
5.00%, 7/1/01...................................... 1,390,369
------------
4,481,084
------------
WEST VIRGINIA - 1.9%
3,500,000 Pleasants County, West Virginia, Pollution Control
Revenue, County Commission Monongahela Power,
Series D
4.70%, 11/1/07..................................... 3,511,515
------------
WISCONSIN - 0.6%
1,000,000 Milwaukee, Wisconsin,
Metropolitan Sewage District General Obligation,
Series 1989A
7.00%, 9/1/01...................................... 1,089,050
------------
U.S. VIRGIN ISLANDS - 2.0%
3,500,000 Virgin Islands, Public Finance Authority, Series C
5.00%, 10/1/03..................................... 3,572,030
------------
Total Long-Term Municipal Obligations (cost
$167,688,783)..................................... 170,731,493
------------
</TABLE>

<TABLE>
<CAPTION>
Shares
<C> <S> <C> <C>
MUTUAL FUND SHARES - 0.9% (COST $1,595,000)
1,595,000 Federated Municipal Obligations Fund ............... 1,595,000
------------
TOTAL INVESTMENTS -
(COST $169,283,783)......................... 95.6% 172,326,493
OTHER ASSETS AND LIABILITIES - NET........... 4.4 7,937,147
----- ------------
NET ASSETS - ................................ 100.0% $180,263,640
===== ============
</TABLE>
(a) Securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been
determined to be liquid under guidelines established by the Board of
Trustees.
(b) Effective yield (calculated at date of purchase) is the annual yield
at which the bond accretes until its maturity date.

SUMMARY OF ABBREVIATIONS:
AMBAC Insured by American Municipal Bond Assurance Corporation
ETM Escrowed to Maturity
FGIC Insured by Federal Guaranty Insurance Company
FNMA Insured by Federal National Mortgage Association
MBIA Insured by Municipal Bond Investors Assurance Corporation

See Combined Notes to Financial Statements

26
<PAGE>

[LOGO APPEARS HERE]
SCHEDULE OF INVESTMENTS
May 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - 100.8%
ALABAMA - 2.3%
$ 2,035,000 Alabama State Agricultural
and Mechanic University
6.50%, 11/1/25, (MBIA).......................... $ 2,299,143
Alabama State Housing Finance Authority:
215,000 Single Family Revenue
10.75%, 6/1/13................................... 231,469
2,035,000 Collateralized Home Mortgage,
Series D1
6.00%, 10/1/16................................... 2,165,057
655,000 Birmingham, Alabama,
Airport Authority, Airport Revenue
5.625%, 7/1/26, (MBIA)........................... 680,984
3,895,000 Jefferson County, Alabama,
Board of Education, Capital Outlay, Series A
5.80%, 2/15/20, (FSA)............................ 4,132,283
20,000,000 Jefferson County, Alabama,
Sewer Revenue, Series D
5.75%, 2/1/27, (FGIC)............................ 21,176,800
1,700,000 Mobile, Alabama,
Industrial Development Board, Solid Waste
Disposal Revenue, Mobile Energy Service Company
Project
6.95%, 1/1/20.................................... 1,105,000
--------------
31,790,736
--------------
ALASKA - 2.4%
15,000,000 Alaska State Energy Authority, Utilities Revenue,
Linked Bulls/Bears Floaters
6.60%, 7/1/15, (FGIC) (c)........................ 17,544,300
Alaska State Housing Finance Corporation,
Collateralized Home Mortgage:
95,000 8.75%, 12/1/16................................... 97,602
130,000 Series A
8.00%, 12/1/13................................... 130,000
15,000,000 Valdez, Alaska,
Marine Terminal Revenue, Pipeline Incorporated
Project,
Series C
5.65%, 12/1/28................................... 15,367,650
--------------
33,139,552
--------------
ARIZONA - 1.3%
850,000 Chandler, Arizona,
Water and Sewer Revenue
6.75%, 7/1/06, (FGIC)............................ 915,833
Maricopa County, Arizona, Elementary School
District:
2,000,000 #008, Osborn Refunding
7.50%, 7/1/07, (MBIA)............................ 2,445,520
3,750,000 #068, Series A
6.75%, 7/1/14, (AMBAC)........................... 4,263,863
6,000,000 #069
8.125%, 1/1/10................................... 7,899,720
370,000 Pima County, Arizona,
Industrial Development Authority, Health Care
Corporation Revenue
8.00%, 7/1/13, (MBIA)............................ 378,606
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
ARIZONA - CONTINUED
$ 2,030,000 Pima County, Arizona,
Unified School District #001, Tuscon Refunding
7.50%, 7/1/03, (FGIC)............................ $ 2,328,836
--------------
18,232,378
--------------
ARKANSAS - 0.1%
1,535,000 Arkansas State Development Finance Authority,
Single Family Mortgage Revenue
8.00%, 8/15/11................................... 1,653,594
--------------
CALIFORNIA - 6.2%
600,000 Anaheim, California,
Public Financing Authority, Lease Revenue,
Public Improvements Project, Series C
6.00%, 9/1/16, (FSA)............................. 675,858
California State Housing
Finance Agency Revenue:
1,990,000 Home Mortgage, Series H
6.25%, 8/1/27.................................... 2,133,519
7,000,000 Multifamily Housing, Series B
5.40%, 8/1/18, (MBIA)............................ 7,024,710
California State Public Works Board, Lease
Revenue:
California State University
Projects, Series A:
8,775,000 5.50%, 10/1/14................................... 9,128,282
10,000,000 5.50%, 10/1/15................................... 10,361,700
5,000,000 California State University Trustees,
Series A
5.25%, 10/1/16................................... 5,070,500
9,195,000 Community College Projects,
Series B
5.625%, 3/1/16, (AMBAC).......................... 9,643,440
3,700,000 Correctional State Prison,
Series E
5.50%, 6/1/15.................................... 3,914,230
2,500,000 California State, General Obligation, Series BH
5.50%, 12/1/18.................................. 2,537,625
4,000,000 California Statewide Communities Development
Authority Revenue, Irvine Apartments
5.25%, 5/15/25.................................. 3,996,800
200,000 Los Angeles County, California,
Public Works Financing Authority, Lease Revenue,
Multiple Capital Facilities Project, Series B
5.125%, 12/1/17, (AMBAC)........................ 200,698
1,090,000 Lucia Mar, California,
Unified School District, Capital Appreciation,
Series A
(Eff. Yield 5.35%) (b)
0.00%, 8/1/10, (FGIC)........................... 614,498
2,750,000 Palm Desert, California,
Financing Authority, Tax
Allocation Revenue,
Project Area #1
5.625%, 4/1/23, (MBIA).......................... 2,856,040
</TABLE>

27
<PAGE>

[LOGO APPEARS HERE]
SCHEDULE OF INVESTMENTS (continued)
May 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
CALIFORNIA - CONTINUED
$ 550,000 Poway, California,
Community Facilities District, Special Tax,
Parkway Business Center
6.75%, 8/15/15.................................. $ 599,528
Riverside County, California,
Asset Leasing Corporation,
Leasehold Revenue, Riverside
County Hospital Project:
1,750,000 (Eff. Yield 5.80%) (b)
0.00%, 6/1/15, (MBIA)............................ 732,848
1,395,000 (Eff. Yield 5.85%) (b)
0.00%, 6/1/16, (MBIA)............................ 550,160
3,765,000 San Francisco, California,
International Airport Revenue, Series Issue 10-A
5.70%, 5/1/26................................... 3,907,392
5,700,000 San Joaquin Hills, California,
Transportation Authority, Toll Revenue, Capital
Appreciation, Series A (Eff. Yield 5.43%) (b)
0.00%, 1/15/15.................................. 2,453,451
4,555,000 San Mateo County, California,
Transportation District, Series A 5.75%, 6/1/18,
(MBIA).......................................... 4,977,977
1,295,000 Santa Maria, California,
Water and Waste Water Revenue, Capital
Appreciation, Subordinated Series A (Eff. Yield
5.45%) (b)
0.00%, 8/1/12................................... 644,547
Southern California Public
Power Authority:
3,000,000 Power Project Revenue, Mead Adelanto Project,
Series A
5.00%, 7/1/17, (AMBAC).......................... 2,970,630
10,000,000 Transmission Project Revenue,
(Eff. Yield 5.93%) (b)
0.00%, 7/1/15, (FGIC)............................ 4,304,300
Victor Valley, California,
Joint Unified High School District, Capital
Appreciation:
2,635,000 (Eff. Yield 6.20%) (b)
0.00%, 9/1/10, (MBIA)............................ 1,479,711
3,780,000 (Eff. Yield 6.25%) (b)
0.00%, 9/1/11, (MBIA)............................ 1,999,015
4,450,000 (Eff. Yield 6.35%) (b)
0.00%, 9/1/13, (MBIA)............................ 2,081,131
--------------
84,858,590
--------------
COLORADO - 6.6%
4,000,000 Araphoe County, Colorado,
Single Family Mortgage Revenue, Capital
Appreciation, Series A
(Eff. Yield 6.00%) (b)
0.00%, 9/1/10.................................... 2,205,920
1,880,000 Colorado State Health
Facilities Authority Revenue, Sisters Charity
Health Care,
Series A
6.25%, 5/15/09, (MBIA)........................... 2,142,091
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
COLORADO - CONTINUED
$ 2,275,000 Colorado State Housing
Finance Authority Revenue,
Series A-2
6.60%, 5/1/28.................................... $ 2,528,207
Colorado State, East 470
Public Highway Authority Revenue, Capital
Appreciation:
2,000,000 Senior Series A
5.75%, 9/1/14.................................... 2,202,820
4,000,000 Senior Series B:
(Eff. Yield 5.35%) (b)
0.00%, 9/1/14.................................... 1,754,520
5,000,000 (Eff. Yield 5.40%) (b)
0.00%, 9/1/15.................................... 2,067,200
9,795,000 (Eff. Yield 5.30%) (b)
0.00%, 9/1/13.................................... 4,553,598
Denver, Colorado,
City and County Airport Revenue:
8,200,000 Series D
7.75%, 11/15/13.................................. 10,381,118
Prerefunded Balance:
140,000 Series A
8.00%, 11/15/25.................................. 157,154
865,000 Series B
7.25%, 11/15/12.................................. 983,523
Unrefunded Balance:
Series A:
720,000 7.25%, 11/15/25.................................. 823,399
5,480,000 7.50%, 11/15/23.................................. 6,293,451
1,300,000 8.00%, 11/15/25.................................. 1,429,998
7,080,000 8.50%, 11/15/23.................................. 7,844,498
18,060,000 8.75%, 11/15/23.................................. 20,752,566
3,385,000 Series B
7.25%, 11/15/12.................................. 3,767,099
9,700,000 Series D
7.75%, 11/15/21.................................. 10,820,059
El Paso County, Colorado,
School District #11, Colorado Springs:
2,310,000 6.50%, 12/1/12................................... 2,754,097
2,000,000 7.10%, 12/1/13................................... 2,516,480
1,000,000 7.10%, 12/1/16................................... 1,268,580
2,250,000 Larimer County, Colorado,
School District
7.00%, 12/15/16, (MBIA).......................... 3,003,885
--------------
90,250,263
--------------
CONNECTICUT - 0.3%
2,000,000 Connecticut State Housing
Finance Authority Revenue
5.375%, 11/15/18................................. 2,004,560
1,600,000 Connecticut State Special Tax Obligation, Series
B
6.50%, 10/1/12................................... 1,892,000
--------------
3,896,560
--------------
DELAWARE - 0.1%
1,600,000 Delaware State Health
Facilities Authority Revenue, Medical Center of
Delaware
7.00%, 10/1/15, (MBIA)........................... 1,686,352
--------------
</TABLE>

28
<PAGE>

[LOGO APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
May 31, 1998

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
DISTRICT OF COLUMBIA - 1.0%
$ 3,765,000 District of Columbia Hospital
Revenue, Medatlantic
Healthcare Group, Series A
6.00%, 8/15/11, (MBIA)........................... $ 4,174,557
1,500,000 District of Columbia Revenue,
American Association for the
Advancement of Science
5.25%, 1/1/16, (AMBAC)........................... 1,520,160
8,000,000 District of Columbia,
Housing Revenue,
Carnegie Endowment for
International Peace
5.75%, 11/15/26.................................. 8,446,800
--------------
14,141,517
--------------
FLORIDA - 3.0%
10,000,000 Florida State Board of Education,
Capital Outlay, Public Education, Series B
5.75%, 6/1/17.................................... 10,564,400
Gainesville, Florida,
Utilities Systems Revenue,
Series B:
1,000,000 5.50%, 10/1/13................................... 1,044,000
435,000 7.50%, 10/1/08................................... 538,821
695,000 7.50%, 10/1/09................................... 872,573
490,000 Hillsborough County, Florida,
Housing Finance Agency, Single Family Mortgage
Revenue,
Series A
7.30%, 4/1/22.................................... 513,010
3,580,000 Jacksonville, Florida,
Transportation Authority Revenue
9.20%, 1/1/15.................................... 5,079,304
300,000 Lee County, Florida,
Solid Waste Systems Revenue, Series B
7.00%, 10/1/11................................... 332,718
8,000,000 Miami-Dade County, Florida,
Special Obligation, Subordinated Series A
(Eff. Yield 5.50%) (b)
0.00%, 10/1/16................................... 3,113,120
2,000,000 Orange County, Florida,
Health Facilities Authority Revenue, Orlando
Regional Healthcare, Series A
6.25%, 10/1/18, (MBIA)........................... 2,322,520
495,000 Orange County, Florida,
Housing Finance Authority Revenue, Single Family
Mortgage, Series B
6.85%, 10/1/27, (GNMA/FNMA)...................... 536,872
Orlando-Orange County, Florida, Expressway
Authority:
3,000,000 8.25%, 7/1/14.................................... 4,109,370
2,960,000 8.25%, 7/1/15, (FGIC)............................ 4,077,519
Palm Beach County, Florida,
Health Facilities Authority Revenue:
2,910,000 John F. Kennedy Hospital
9.50%, 8/1/13.................................... 3,868,670
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
FLORIDA - CONTINUED
Palm Beach County, Florida,
Health Facilities Authority Revenue - continued:
$ 1,250,000 Waterford Project
5.50%, 10/1/15................................... $ 1,254,325
1,000,000 Sarasota County, Florida,
Utililities Systems Revenue
6.50%, 10/1/22................................... 1,144,950
Sunrise, Florida,
Utilities Systems Revenue, Capital Appreciation,
Series A:
1,000,000 (Eff. Yield 5.65%) (b)
0.00%, 10/1/09................................... 592,190
1,000,000 (Eff. Yield 5.75%) (b)
0.00%, 10/1/10................................... 560,030
500,000 Tampa, Florida,
Allegheny Health Systems Revenue
6.50%, 12/1/23................................... 572,405
500,000 Tarpon Springs, Florida,
Health Facilities Authority, Hospital Revenue,
Tarpon Springs Hospital
8.75%, 5/1/12.................................... 511,500
--------------
41,608,297
--------------
GEORGIA - 4.1%
3,000,000 Forsyth County, Georgia,
School District, General Obligation
6.75%, 7/1/16.................................... 3,616,080
5,000,000 Fulton County, Georgia,
Development Authority Special Facilities
Revenue, Delta Airlines Incorporated Project
5.45%, 5/1/23.................................... 5,002,150
Georgia State Municipal Electric
Authority, Power Revenue, Series B:
3,000,000 6.25%, 1/1/17, (FGIC)............................ 3,426,720
9,800,000 6.375%, 1/1/16................................... 11,490,304
Georgia State, General Obligation:
10,000,000 Series B
6.80%, 3/1/11.................................... 11,982,900
10,700,000 Series C
5.25%, 4/1/11.................................... 11,247,947
1,500,000 Series D
6.70%, 8/1/10.................................... 1,787,355
4,255,000 Metropolitan Atlanta Rapid
Transit Authority, Georgia, Sales Tax Revenue,
Series P
6.25%, 7/1/11, (AMBAC)........................... 4,906,440
2,370,000 Private Colleges and University Facilities
Authority Revenue, Georgia, Mercer University
Project
6.40%, 11/1/11, (MBIA)........................... 2,774,725
--------------
56,234,621
--------------
</TABLE>

29
<PAGE>

[LOGO APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
May 31, 1998

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
HAWAII - 0.9%
Hawaii State Department of
Budget and Finance, Hawaiian Electric Company,
Incorporated:
Series A:
$ 2,000,000 4.95%, 4/1/12.................................... $ 2,003,320
2,000,000 5.65%, 10/1/27, (MBIA)........................... 2,080,840
8,000,000 Series C
7.375%, 12/1/20, (MBIA).......................... 8,696,000
--------------
12,780,160
--------------
IDAHO - 0.1%
905,000 Idaho State Housing Finance
Authority, Single Family Mortgage Bonds, Series
D-1
8.00%, 1/1/20.................................... 1,019,066
--------------
ILLINOIS - 3.8%
5,000,000 Chicago, Illinois,
Public Building Commerce, Building Revenue,
Series A
5.75%, 12/1/18, (MBIA)........................... 5,244,850
2,000,000 Chicago, Illinois,
Single Family Mortgage Revenue, Series B
6.95%, 9/1/28.................................... 2,248,020
4,000,000 Illinois State Development
Finance Authority, Pollution Control Revenue,
Commonwealth Edison Company Project, Series D
6.75%, 3/1/15, (AMBAC)........................... 4,524,840
3,000,000 Illinois State Educational
Facilities Authority Revenue
5.25%, 9/1/24.................................... 2,904,570
9,000,000 Illinois State, Sales Tax,
Series P
6.50%, 6/15/22................................... 10,750,770
2,965,000 Kankakee, Illinois,
Sewer Revenue
6.875%, 5/1/11, (FGIC)........................... 3,335,595
3,000,000 Metropolitan Fair and Exposition Authority,
Illinois, Series A
5.00%, 6/1/15.................................... 2,959,050
10,000,000 Northern Illinois University Revenues, Auxiliary
Facilities Systems
5.75%, 4/1/22, (FGIC)............................ 10,589,900
4,950,000 Quincy, Illinois,
Blessing Hospital Revenue
6.00%, 11/15/18.................................. 5,176,314
4,485,000 Regional Transportation Authority, Illinois,
Transportation Revenue
6.00%, 6/1/18, (FGIC)............................ 5,036,117
--------------
52,770,026
--------------
INDIANA - 0.6%
6,800,000 Indiana State Housing Finance Authority, Single
Family Mortgage Revenue, Series A3
5.375%, 1/1/23, (FNMA/GNMA)..................... 6,763,348
1,640,000 St. Joseph County, Indiana, Educational
Facilities Revenue, University of Notre Dame
6.50%, 3/1/26.................................... 1,996,274
--------------
8,759,622
--------------
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
KANSAS - 1.0%
$ 2,000,000 Burlington, Kansas,
Pollution Control Revenue, Kansas Gas and
Electric Company Project
7.00%, 6/1/31, (MBIA)............................ $ 2,190,160
10,500,000 Kansas State Department of Transportation,
Highway Revenue, Series A
5.375%, 3/1/12................................... 10,824,240
--------------
13,014,400
--------------
KENTUCKY - 1.6%
8,000,000 Carroll County, Kentucky,
Pollution Control Revenue, Kentucky Utility
Company,
Series A
7.45%, 9/15/16................................... 9,102,240
6,000,000 Jefferson County, Kentucky,
Hospital Revenue, Linked ACEs/INFLOs
6.436%, 10/1/14, (MBIA) (c)...................... 6,543,120
3,455,000 Kentucky State Housing Corporation, Housing
Revenue, Series C
7.90%, 1/1/21.................................... 3,621,635
2,725,000 Trimble County, Kentucky,
Pollution Control Revenue, Louisville Gas and
Electric Company
7.625%, 11/1/20.................................. 2,978,125
--------------
22,245,120
--------------
LOUISIANA - 1.0%
1,395,000 Louisiana State Public Facilities Authority,
Health and Education Revenue, Series D
7.90%, 12/1/15................................... 1,448,582
New Orleans, Louisiana,
Capital Appreciation:
6,960,000 (Eff. Yield 6.05%) (b)
0.00%, 9/1/14, (AMBAC)........................... 3,057,667
2,800,000 (Eff. Yield 7.10%) (b)
0.00%, 9/1/15, (AMBAC)........................... 1,165,472
3,755,000 (Eff. Yield 7.15%) (b)
0.00%, 9/1/17, (AMBAC)........................... 1,396,071
5,175,000 Orleans Parish, Louisiana,
School Board Revenue
9.05%, 2/1/10, (MBIA)............................ 7,188,334
--------------
14,256,126
--------------
MAINE - 0.3%
4,000,000 Maine State Housing Authority, Mortgage Purchase,
Series C2
6.05%, 11/15/28.................................. 4,172,360
--------------
MARYLAND - 0.0%
115,000 Maryland State Community Development
Administration, Multifamily Housing Revenue
8.75%, 5/15/12................................... 115,431
--------------
MASSACHUSETTS - 6.7%
450,000 Lawrence, Massachusetts,
General Obligation
6.25%, 2/15/09, (AMBAC).......................... 494,631
</TABLE>

30
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SCHEDULE OF INVESTMENTS(continued)
May 31, 1998

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
MASSACHUSETTS - CONTINUED
Massachusetts Bay Transportation Authority,
General Transportation Systems:
Series A:
$ 7,950,000 6.25%, 3/1/12..................................... $ 9,132,960
7,710,000 7.00%, 3/1/11, (MBIA)............................. 9,427,094
1,950,000 7.00%, 3/1/21, (MBIA)............................. 2,400,333
2,125,000 Series B
6.20%, 3/1/16..................................... 2,436,142
Massachusetts State Health and Educational
Facilities Authority:
9,000,000 Jordan Hospital, Series D
5.25%, 10/1/23.................................... 8,718,300
600,000 McLeans Hospital Issue, Series C
6.50%, 7/1/10..................................... 654,894
3,000,000 Milford Whitinsville Regional Hospital, Series C
5.25%, 7/15/18.................................... 2,912,580
600,000 Milton Hospital, Series B
7.25%, 7/1/05..................................... 645,276
Massachusetts State Housing Finance Agency
Revenue, Series A:
10,470,000 Housing Development
5.375%, 6/1/16, (MBIA)............................ 10,551,666
1,490,000 Residential Housing
8.40%, 8/1/21..................................... 1,525,507
Massachusetts State Industrial Finance Agency:
1,500,000 Parking Facilities Revenue, Avon Associates LLC,
Series A
5.375%, 4/1/20, (MBIA)............................ 1,508,640
8,500,000 Solid Waste Disposal Revenue, Senior Lien,
Massachusetts Recycling Association
9.00%, 8/1/16 (d)................................. 3,187,500
14,000,000 Massachusetts State Municipal Wholesale Electric
Company, Linked PARs/INFLOs
5.45%, 7/1/18 (c)................................. 14,194,740
2,000,000 Massachusetts State Special Obligation Revenue,
Consolidated Loan, Series A
5.50%, 6/1/12..................................... 2,143,200
10,000,000 Massachusetts State Turnpike Authority,
Metropolitan Highway Systems Revenue, Senior
Series A
5.00%, 1/1/37, (MBIA)............................. 9,671,700
610,000 Massachusetts State Water Pollution Abatement
Trust, Pool Loan Program, Series 2
6.125%, 2/1/08.................................... 689,739
11,140,000 Massachusetts State, General Obligation,
Consolidated Loan, Series C
5.625%, 8/1/13.................................... 11,783,781
-------------
92,078,683
-------------
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG TERM MUNICIPAL OBLIGATIONS - CONTINUED
MICHIGAN - 3.7%
Michigan State Building Authority Revenue,
Facilities Program, Series II:
$ 1,000,000 (Eff. Yield 5.20%) (b)
0.00%, 10/15/10, (AMBAC).......................... $ 558,340
1,000,000 (Eff. Yield 5.25%) (b)
0.00%, 10/15/11, (AMBAC).......................... 525,750
1,000,000 (Eff. Yield 5.30%) (b)
0.00%, 10/15/12, (AMBAC).......................... 489,950
Michigan State Hospital Finance Authority Revenue:
Genesys Regional Medical Center, Series A:
2,000,000 5.375%, 10/1/13................................... 2,001,540
4,250,000 5.50%, 10/1/18.................................... 4,237,590
11,970,000 Henry Ford Health Systems,
Series A
5.25%, 11/15/20................................... 11,963,776
7,500,000 Oakwood Hospital Obligation Group, Series A
5.625%, 11/1/18................................... 7,721,325
10,000,000 Monroe County, Michigan,
Economic Development Corporation,
Detroit Edison Company
6.95%, 9/1/22, (FGIC)............................. 12,825,700
11,000,000 Royal Oak, Michigan,
Hospital Finance Authority Revenue
5.25%, 1/1/20..................................... 10,859,640
-------------
51,183,611
-------------
MINNESOTA - 0.1%
Minnesota State Housing Finance Agency, Single
Family Mortgage:
595,000 Series A
8.20%, 8/1/19..................................... 608,054
1,280,000 Series D
8.00%, 1/1/23..................................... 1,339,661
-------------
1,947,715
-------------
MISSISSIPI - 0.1%
1,000,000 Harrison County, Mississippi, Wastewater Treatment
Management District Revenue
8.50%, 2/1/13..................................... 1,409,890
-------------
MISSOURI - 0.7%
4,650,000 Bridgeton, Missouri,
Industrial Development Authority Revenue, Senior
Housing Revenue, The Sarah Community Project
5.80%, 5/1/18..................................... 4,605,546
1,500,000 Joplin, Missouri,
Industrial Development Authority Revenue,
Catholic Health Initiatives, Series A
5.125%, 12/1/15................................... 1,495,530
</TABLE>

31
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SCHEDULE OF INVESTMENTS(continued)
May 31, 1998

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
MISSOURI - CONTINUED
$ 940,000 Missouri State Housing Development Commission,
Mortgage Revenue, Single Family, Series B
6.45%, 9/1/27.................................... $ 1,012,126
Sikeston, Missouri,
Electric Revenue:
300,000 6.00%, 6/1/13, (MBIA)............................ 336,765
200,000 6.00%, 6/1/14, (MBIA)............................ 224,422
1,250,000 West Plains, Missouri,
Industrial Development Authority, Ozarks Medical
Center
5.65%, 11/15/22.................................. 1,252,575
--------------
8,926,964
--------------
MONTANA - 0.9%
11,000,000 Forsyth, Montana,
Pollution Control Revenue, Montana Power
Company,
Series A
6.125%, 5/1/23, (AMBAC).......................... 11,836,110
--------------
NEBRASKA - 1.1%
15,000,000 Nebraska State Investment Finance Authority,
Single Family Housing Revenue, Series F
5.60%, 9/1/20,
(GNMA/FNMA/FHLMC)................................ 15,108,150
--------------
NEVADA - 1.9%
4,905,000 Clark County, Nevada,
Airport Revenue, Series A
5.50%, 7/1/15, (MBIA)............................ 5,060,489
6,000,000 Clark County, Nevada,
General Obligation, Series A
7.50%, 6/1/09, (AMBAC)........................... 7,504,500
10,000,000 Clark County, Nevada,
Passenger Facilities Revenue, Las Vegas McCarran
International Airport, Series A
6.00%, 7/1/22, (AMBAC)........................... 10,856,200
3,000,000 Clark County, Nevada,
School District, Series A
6.75%, 3/1/07, (MBIA)............................ 3,218,820
--------------
26,640,009
--------------
NEW HAMPSHIRE - 1.8%
3,155,000 New Hampshire State Higher Education and Health
Facilities Authority, Frisbie Memorial Hospital
Revenue
6.125%, 10/1/13.................................. 3,293,505
20,615,000 New Hampshire State Turnpike Systems Revenue
5.75%, 4/1/20.................................... 21,487,839
--------------
24,781,344
--------------
NEW JERSEY - 0.6%
1,000,000 Gloucester County, New Jersey,
Improvement Authority, Gloucester Company LP,
Series A
8.125%, 7/1/10................................... 1,004,240
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
NEW JERSEY - CONTINUED
$ 1,000,000 New Jersey State Health Care Facilities Financing
Authority, Jersey Shore Medical Center
6.125%, 7/1/12, (AMBAC).......................... $ 1,088,920
5,000,000 New Jersey State Transportation Trust Fund
Authority, Transportation Systems Revenue,
Series A
5.50%, 6/15/13................................... 5,232,800
1,055,000 Salem County, New Jersey,
Pollution Control Finance Authority, Waste
Disposal Revenue
6.50%, 11/15/21.................................. 1,133,123
--------------
8,459,083
--------------
NEW MEXICO - 1.5%
1,500,000 Albuquerque, New Mexico,
Hospital System Revenue,
Series A
6.375%, 8/1/07, (MBIA)........................... 1,632,165
2,950,000 Albuquerque, New Mexico,
Joint Water and Sewer System Revenue, Series A,
(Eff. Yield 6.90%) (b)
0.00%, 7/1/08, (FGIC)............................ 1,850,712
Farmington, New Mexico,
Pollution Control Revenue:
10,000,000 Public Service Company of San Juan, Series C
5.70%, 12/1/16, (AMBAC).......................... 10,570,400
5,000,000 Southern California Edison Company, Series A
5.875%, 6/1/23, (MBIA)........................... 5,327,200
1,000,000 University of New Mexico, University Revenues,
Series A
6.00%, 6/1/21.................................... 1,127,100
--------------
20,507,577
--------------
NEW YORK - 13.3%
7,000,000 Housing, New York,
Corporate Revenue, Series A,
(Eff. Yield 6.17%) (b)
0.00%, 11/1/10................................... 6,474,370
Long Island Power Authority, New York, Electric
Systems Revenue, Series A:
5,000,000 5.25%, 12/1/26................................... 4,935,400
7,450,000 5.50%, 12/1/29................................... 7,518,912
10,000,000 5.75%, 12/1/24................................... 10,479,800
Metropolitan Transportation Authority, New York,
Transportation Facilities Revenue:
10,000,000 Series A
5.70%, 7/1/17, (MBIA)............................ 10,594,400
11,600,000 Service Contract:
Series 7
5.625%, 7/1/16................................... 11,922,132
5,000,000 Series R
5.50%, 7/1/17.................................... 5,077,400
</TABLE>

32
<PAGE>

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SCHEDULE OF INVESTMENTS(continued)
May 31, 1998

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
NEW YORK - CONTINUED
New York City, New York,
General Obligation:
Capital Appreciation:
$ 8,000,000 (Eff. Yield 4.83%) (b)
0.00%, 8/1/09, (MBIA)............................. $ 4,784,560
Series G:
4,750,000 5.00%, 8/1/14..................................... 4,676,423
4,760,000 (Eff. Yield 4.75%) (b)
0.00%, 8/1/08, (MBIA)............................. 2,998,562
Refunded Balance:
400,000 5.75%, 8/1/10, (FGIC)............................. 421,520
2,500,000 Series G
6.75%, 2/1/09, (FGIC)............................. 2,917,975
Unrefunded Balance, Series A:
615,000 7.75%, 8/15/08.................................... 684,224
335,000 7.75%, 8/15/14.................................... 372,496
520,000 7.75%, 8/15/15.................................... 576,883
New York City, New York, Municipal Water Finance
Authority, Water and Sewer Systems Revenue,
Series B:
7,300,000 5.75%, 6/15/26, (MBIA)............................ 7,780,770
30,000,000 5.75%, 6/15/29.................................... 31,768,500
New York State Dormitory Authority Revenue:
4,480,000 City University Educational Facilities
7.00%, 7/1/09, (FGIC)............................. 5,434,061
5,000,000 Mental Health Services Facilities, Series A
5.75%, 8/15/22.................................... 5,246,150
Series C:
2,400,000 7.375%, 5/15/10................................... 2,946,552
10,500,000 7.50%, 5/15/11.................................... 13,150,620
New York State Dormitory Authority Revenue,
Secured Hospital:
Interfaith Medical Center, Series D:
2,500,000 5.25%, 2/15/16.................................... 2,479,575
4,695,000 5.30%, 2/15/19.................................... 4,619,129
2,000,000 Wyckoff Heights, Series H
5.30%, 8/15/21.................................... 1,971,040
545,000 New York State Environmental Facilities
Corporation, Pollution Control Revenue, State
Water Revolving Fund, Unrefunded Balance,
Series E 6.875%, 6/15/10......................... 596,693
5,000,000 New York State Local Government Assistance
Revenue, Series D
5.375%, 4/1/14.................................... 5,081,200
New York State Medical Care Facilities, Finance
Agency Revenue:
2,900,000 6.375%, 8/15/14, (FGIC)........................... 3,219,783
2,255,000 6.375%, 11/15/19, (AMBAC)......................... 2,496,533
1,250,000 Health Center Projects, Series A
6.375%, 11/15/19.................................. 1,372,325
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
NEW YORK - CONTINUED
New York State Mortgage Agency Revenue, Homeowner
Mortgage:
$ 4,500,000 Series 27
6.90%, 4/1/15.................................... $ 4,899,510
6,400,000 Series 69
5.50%, 10/1/28................................... 6,432,960
1,125,000 New York State Power Authority Revenue, General
Purpose Revenue
7.00%, 1/1/18.................................... 1,360,418
6,000,000 New York State Thruway Authority, Service
Contract, Local Highway and Bridge Revenue
5.20%, 4/1/09.................................... 6,177,540
575,000 New York State Urban Development Corporation
Revenue, Correctional Facilities, Series A
6.50%, 1/1/09.................................... 652,545
500,000 Niagara Falls, New York,
Public Improvement
7.50%, 3/1/14, (MBIA)............................ 643,395
--------------
182,764,356
--------------
NORTH DAKOTA - 0.4%
5,000,000 North Dakota State Housing Financial Agency
Revenue, Series C
5.55%, 7/1/29.................................... 5,026,200
--------------
OHIO - 2.3%
2,000,000 Adams County, Ohio,
Valley Local School District
7.00%, 12/1/15................................... 2,489,840
2,000,000 Butler County, Ohio,
Transportation Improvement District Revenue,
Series A
6.00%, 4/1/12, (FSA)............................. 2,198,760
10,100,000 Cleveland, Ohio,
Airport Special Revenue, Continental Airlines
Incorporated Project
5.375%, 9/15/27.................................. 9,762,660
Cleveland, Ohio,
Public Power Systems Revenue, First Mortgage,
Series A:
7,000,000 7.00%, 11/15/16, (MBIA).......................... 8,100,540
1,000,000 7.00%, 11/15/24, (MBIA).......................... 1,172,040
1,285,000 Columbus, Ohio,
General Obligation
12.375%, 2/15/06................................. 1,942,059
2,500,000 Montgomery County, Ohio,
Hospital Revenue, Kettering Medical Center
6.25%, 4/1/20, (MBIA)............................ 2,920,000
1,000,000 Ohio State Higher Educational Facility Commission
6.125%, 11/15/17, (MBIA)......................... 1,085,030
2,000,000 Ohio State Solid Waste Disposal Revenue, USG
Corporation Project
5.65%, 3/1/33.................................... 2,017,820
--------------
31,688,749
--------------
</TABLE>

33
<PAGE>

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SCHEDULE OF INVESTMENTS(continued)
May 31, 1998

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
PENNSYLVANIA - 6.1%
$ 2,500,000 Allegheny County, Pennsylvania,
Sewer Revenue,
(Eff. Yield 6.10%) (b)
0.00%, 6/1/15, (FGIC)............................ $ 1,052,150
4,000,000 Beaver County, Pennsylvania,
Pollution Control Revenue, Ohio Edison Company,
Series A
7.00%, 6/1/21, (FGIC)............................ 4,369,640
2,000,000 Lebanon County, Pennsylvania,
Good Samaritan Hospital Authority, Project
Revenue
6.00%, 11/15/18.................................. 2,080,720
2,000,000 McKeesport, Pennsylvania,
Area School District, Capital Appreciation,
Series B
(Eff. Yield 6.25%) (b)
0.00%, 10/1/15, (FSA)............................ 831,780
2,060,000 Millcreek Township, Pennsylvania,
School District, Capital Appreciation, Series A
(Eff. Yield 6.38%) (b)
0.00%, 9/15/09, (FGIC)........................... 1,218,366
900,000 Montgomery County, Pennsylvania, Industrial
Development and Pollution Control, Philadelphia
Electric Company
7.60%, 4/1/21.................................... 982,044
7,500,000 Northumberland County, Pennsylvania, Commonwealth
Lease Revenue, Capital Appreciation
(Eff. Yield 7.10%) (b)
0.00%, 10/15/10, (MBIA).......................... 4,212,975
2,650,000 Penn Hills Township, Pennsylvania, General
Obligation, Series B
(Eff. Yield 6.79%) (b)
0.00%, 6/1/13, (AMBAC)........................... 1,253,026
Pennsylvania State Higher Educational Facilities
Authority Revenue:
Allegheny General Hospital:
4,000,000 Series A
7.125%, 9/1/07................................... 4,354,600
7,000,000 Series I
5.70%, 6/15/15................................... 7,311,150
Pennsylvania State Housing Finance Agency:
5,545,000 Residential Development,
Section 8, Series A
7.60%, 7/1/13.................................... 5,964,479
4,000,000 Single Family Mortgage, Series T
7.75%, 10/1/09................................... 4,160,960
1,750,000 Pennsylvania State Industrial Development
Authority Revenue, Economic Development
6.00%, 1/1/12, (AMBAC)........................... 1,893,308
Philadelphia, Pennsylvania,
Hospital and Higher Education Facilities
Authority Revenue:
3,000,000 Albert Einstein Medical Center
7.00%, 10/1/21................................... 3,233,430
1,000,000 Community College, Series B
6.50%, 5/1/07, (MBIA)............................ 1,137,100
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
PENNSYLVANIA - CONTINUED
Philadelphia, Pennsylvania,
Hospital and Higher Education Facilities
Authority
Revenue - continued:
$ 2,500,000 Temple University Hospital
5.50%, 11/15/15.................................. $ 2,534,500
7,360,000 Philadelphia, Pennsylvania,
Municipal Authority Revenue, Municipal Services
Building Lease, Capital Appreciation
(Eff. Yield 7.50%) (b)
0.00%, 3/15/14, (FSA)............................ 3,309,792
Philadelphia, Pennsylvania,
Water and Wastewater Revenue:
10,600,000 5.00%, 6/15/16, (FSA)............................ 10,511,808
4,610,000 5.50%, 8/1/14, (MBIA)............................ 4,768,215
5,000,000 5.60%, 8/1/18, (MBIA)............................ 5,181,900
4,000,000 Pittsburgh, Pennsylvania,
School District, General Obligation, Capital
Appreciation, Series C
(Eff. Yield 7.00%) (b)
0.00%, 8/1/09, (AMBAC)........................... 2,379,240
6,350,000 Sayre, Pennsylvania,
Health Care Facilities Authority, Guthrie
Healthcare, Series A
7.10%, 3/1/17.................................... 6,859,524
Shaler, Pennsylvania,
Area School District, Capital Appreciation,
Series A:
2,000,000 (Eff. Yield 5.55%) (b)
0.00%, 11/15/17, (FGIC).......................... 735,760
2,000,000 (Eff. Yield 5.60%) (b)
0.00%, 11/15/18, (FGIC).......................... 697,500
2,000,000 (Eff. Yield 5.60%) (b)
0.00%, 11/15/19, (FGIC).......................... 658,320
2,550,000 Washington County, Pennsylvania, Hospital
Authority Revenue, Shadyside Hospital Project
5.75%, 12/15/14, (AMBAC)......................... 2,666,688
--------------
84,358,975
--------------
RHODE ISLAND - 0.4%
5,710,000 Rhode Island State Health and Educational
Building Corporation, Hospital Financing
Revenue, Roger Williams General Hospital
9.50%, 7/1/16.................................... 5,734,325
--------------
SOUTH CAROLINA - 0.7%
1,610,000 South Carolina State Housing Finance and
Development Authority, Homeownership Mortgage
Purchase, Series B
7.90%, 7/1/32, (FHA)............................. 1,686,652
7,500,000 York County, South Carolina,
Industrial Development Revenue, Exempt
Facilities, Hoechst Celanese Corporation
5.70%, 1/1/24.................................... 7,684,875
--------------
9,371,527
--------------
</TABLE>

34
<PAGE>

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SCHEDULE OF INVESTMENTS(continued)
May 31, 1998

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
TENNESSEE - 3.0%
$ 7,465,000 Bristol, Tennessee,
Health and Educational Facilities Authority,
Bristol Memorial Hospital
6.75%, 9/1/10, (FGIC)............................ $ 8,882,827
Knox County, Tennessee,
Health and Educational Facilities Authority,
Fort Sanders Alliance:
9,000,000 Series B
7.25%, 1/1/10.................................... 11,037,690
4,500,000 Series C
5.25%, 1/1/15.................................... 4,630,185
10,000,000 Metro Government, Nashville
and Davidson Counties, Tennessee, Step Bond,
(Eff. Yield 4.92%) (b)
0.00%, 1/1/12, (FGIC)............................ 12,330,800
3,855,000 Tennessee State Housing Development Authority,
Home Ownership Program, Issue H
7.825%, 7/1/15................................... 3,972,809
--------------
40,854,311
--------------
TEXAS - 10.1%
10,000,000 Alliance, Texas,
Airport Authority, Texas Special Facilities
Revenue, Federal Express Corporation Project
6.375%, 4/1/21................................... 10,814,200
Austin, Texas,
Utility Systems Revenue:
5,000,000 5.75%, 5/15/24, (FGIC)........................... 5,195,350
500,000 (Eff. Yield 6.80%) (b)
0.00%, 11/15/11.................................. 258,740
2,000,000 Series B
5.70%, 11/15/21, (MBIA).......................... 2,109,880
Bexar, Texas,
Metropolitan Water District Waterworks Systems
Revenue:
2,000,000 5.875%, 5/1/22................................... 2,113,140
25,000 Unrefunded Balance
6.625%, 5/1/14, (AMBAC).......................... 27,154
30,000 Brazos County, Texas,
Health Facilities Development Revenue,
Franciscan Service Corporation, Series B
5.375%, 1/1/22, (MBIA)........................... 30,298
3,425,000 Brazos County, Texas,
Housing Finance Corporation, Single Family
Mortgage Revenue
5.80%, 9/1/25, (GNMA/FNMA)....................... 3,544,978
2,400,000 Brownsville, Texas,
Utilities Systems Revenue
6.25%, 9/1/14, (MBIA)............................ 2,810,112
Fort Bend County, Texas,
Levee Improvement, District #011:
1,245,000 6.90%, 9/1/18, (MBIA)............................ 1,424,168
1,000,000 6.90%, 9/1/19, (MBIA)............................ 1,143,910
1,165,000 6.90%, 9/1/20, (MBIA)............................ 1,332,655
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
TEXAS - CONTINUED
$10,000,000 Gulf Coast, Texas,
Industrial Development Authority, Waste Disposal
Revenue, Valero Refining Project
5.60%, 12/1/31................................... $ 10,022,100
7,000,000 Harris County, Texas,
Flood Control District, Series B
(Eff. Yield 7.20%) (b)
0.00%, 10/1/06................................... 4,173,120
3,270,000 Harris County, Texas,
General Obligation, Permanent Improvement
5.75%, 10/1/13................................... 3,592,520
Harris County, Texas,
Health Facilities Development Corporation
Revenue, School Health Care Systems, Series B:
5,000,000 5.75%, 7/1/27.................................... 5,231,450
10,000,000 5.75%, 7/1/27, (MBIA)............................ 10,566,700
Harris County, Texas,
Health Facilities Development Corporation,
Hospital Revenue:
5,000,000 6.60%, 6/1/14.................................... 5,679,450
2,480,000 Hermann Hospital Project
6.375%, 10/1/17.................................. 2,788,537
Memorial Hospital Systems Project:
2,525,000 7.125%, 6/1/15................................... 2,818,935
Series A:
3,215,000 6.00%, 6/1/09.................................... 3,581,253
1,990,000 6.00%, 6/1/12.................................... 2,215,905
4,000,000 Harris County, Texas,
Senior Lien, Series A
6.375%, 8/15/24.................................. 4,520,320
4,000,000 Harris County, Texas,
Toll Road, Subordinate Lien, Series A
7.00%, 8/15/10................................... 4,908,640
4,565,000 Houston, Texas,
Airport Systems Revenue, Senior Lien
8.20%, 7/1/17.................................... 4,694,007
Houston, Texas,
Water and Sewer Systems Revenue:
2,700,000 Junior Lien, Series C
(Eff. Yield 6.85%) (b)
0.00%, 12/1/10................................... 1,482,057
3,000,000 Series C
(Eff. Yield 6.90%) (b)
0.00%, 12/1/11................................... 1,549,080
Keller, Texas,
Independent School District, Capital
Appreciation:
2,675,000 (Eff. Yield 4.55%) (b)
0.00%, 8/15/07................................... 1,752,312
3,300,000 (Eff. Yield 4.60%) (b)
0.00%, 8/15/08................................... 2,054,547
3,590,000 (Eff. Yield 4.70%) (b)
0.00%, 8/15/09................................... 2,122,157
</TABLE>

35
<PAGE>

[LOGO APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
May 31, 1998

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
TEXAS - CONTINUED
$ 1,090,000 Montgomery County, Texas,
General Obligation, Capital Appreciation,
(Eff. Yield 5.30%) (b)
0.00%, 3/1/10, (MBIA)............................. $ 620,929
2,000,000 Port Arthur, Texas,
Navigation District Revenue, Capital
Appreciation,
(Eff. Yield 4.90%) (b)
0.00%, 3/1/09, (AMBAC)............................ 1,207,760
2,000,000 Port Corpus Christi, Texas,
Industrial Development Revenue, Valero Energy
Corporation
5.125%, 4/1/09.................................... 1,996,520
1,085,000 Rio Grande Valley, Texas,
Health Facilities Corporation, Hospital Revenue,
Baptist Medical Project
8.00%, 8/1/17..................................... 1,113,319
5,315,000 Socorro, Texas,
Independent School District, General Obligation
5.75%, 2/15/26.................................... 5,797,070
2,565,000 Tarrant County, Texas,
Health Facilities Development Revenue, Texas
Health Resources Systems, Series A
5.75%, 2/15/15, (MBIA)............................ 2,792,900
6,415,000 Tarrant County, Texas,
Housing Finance Corporation Revenue, Single
Family Mortgage, Series A,
(Eff. Yield 11.00%) (b)
0.00%, 9/15/16, (MBIA)............................ 2,518,337
5,000,000 Texas State, General Obligation,
Linked RIBs/SAVRs
6.20%, 9/30/11 (c)................................ 5,781,800
Texas State, Municipal Power Agency Revenue:
175,000 5.25%, 9/1/12, (MBIA)............................. 176,682
130,000 6.10%, 9/1/09..................................... 147,654
1,125,000 Capital Appreciation
(Eff. Yield 7.35%) (b)
0.00%, 9/1/08, (AMBAC)............................ 698,265
9,000,000 Titus County, Texas,
Water District #1, Southwest Electric Power
8.20%, 8/1/11..................................... 10,163,610
1,475,000 University of Texas, University Revenues,
Unrefunded Balance, Series B
6.75%, 8/15/13.................................... 1,602,941
-------------
139,175,462
-------------
UTAH - 0.4%
3,500,000 Utah State Building Ownership Authority, Lease
Revenue, State Facilities Master Lease Program,
Series A
5.75%, 5/15/18, (AMBAC)........................... 3,665,970
175,000 Utah State Housing Finance Agency, Single Family
Mortgage, Series C2
7.95%, 7/1/10..................................... 184,233
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
UTAH - CONTINUED
Utah State Intermountain Power Agency Revenue:
$ 750,000 Series A (Eff. Yield 8.43%) (b)
0.00%, 7/1/07...................................... $ 493,620
6,500,000 Series C (Eff. Yield 6.80%) (b)
0.00%, 7/1/20...................................... 1,126,840
-------------
5,470,663
-------------
VERMONT - 0.4%
3,000,000 Vermont State Educational and Health Building
Financing Agency Revenue, Middlebury College
Project
6.00%, 11/1/22..................................... 3,204,840
1,485,000 Vermont State Housing Finance Agency, Single
Family, Series 1
8.15%, 5/1/25...................................... 1,546,420
-------------
4,751,260
-------------
VIRGINIA - 2.2%
8,500,000 Loudoun County, Virginia,
Industrial Development Authority, Residential Care
Facility Revenue, Falcons Landing Project, Series
A
8.75%, 11/1/04..................................... 10,821,095
Virginia State Housing Development Authority,
Multifamily Housing:
3,245,000 Series E
5.60%, 11/1/17..................................... 3,334,335
10,000,000 Subseries B
5.50%, 1/1/22...................................... 10,085,500
Winchester, Virginia,
Industrial Development, Hospital Revenue,
Winchester Medical Center:
2,300,000 6.15%, 1/1/15, (AMBAC)............................. 2,335,926
3,200,000 6.30%, 1/1/15, (AMBAC)............................. 3,246,592
-------------
29,823,448
-------------
WASHINGTON - 1.3%
Chelan County, Washington,
Public Utility District #1, Capital Appreciation,
Series A:
3,000,000 (Eff. Yield 5.55%) (b)
0.00%, 6/1/09...................................... 1,784,790
12,685,000 (Eff. Yield 5.80%) (b)
0.00%, 6/1/14...................................... 5,617,425
2,000,000 King County, Washington,
School District #415, General Obligation
5.875%, 6/1/16, (FSA).............................. 2,134,740
1,000,000 Tacoma, Washington,
Electric Systems Revenue
6.25%, 1/1/15, (FGIC).............................. 1,082,220
1,300,000 Washington State Health Care Facilities Authority,
Multi-Care Medical Center of Tacoma
7.875%, 8/15/11, (FGIC)............................ 1,336,218
Washington State Public Power Supply System:
3,000,000 Nuclear Project #2, Series A
5.00%, 7/1/12, (FSA)............................... 3,009,630
</TABLE>

36
<PAGE>

[LOGO APPEARS HERE]
SCHEDULE OF INVESTMENTS (continued)
May 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
LONG-TERM MUNICIPAL OBLIGATIONS - CONTINUED
WASHINGTON - CONTINUED
Washington State Public Power Supply System -
continued:
$ 4,000,000 Nuclear Project #3
(Eff. Yield 10.09%) (b)
0.00%, 7/1/12.................................... $ 1,960,880
1,000,000 Washington State, General Obligation, Series A
6.75%, 2/1/15.................................... 1,212,810
--------------
18,138,713
--------------
WISCONSIN - 0.1%
585,000 Wisconsin State Housing and Economic Development
Authority, Home Ownership
8.00%, 3/1/21.................................... 613,296
--------------
PUERTO RICO - 4.3%
Commonwealth of Puerto Rico,
Electric Power Authority Revenue:
3,400,000 Series DD
5.25%, 7/1/14, (FSA)............................. 3,515,668
2,795,000 Series EE
5.25%, 7/1/14, (MBIA)............................ 2,890,086
Commonwealth of Puerto Rico, General Obligation:
3,000,000 6.45%, 7/1/17.................................... 3,410,910
2,000,000 Capital Appreciation
(Eff. Yield 5.53%) (b)
0.00%, 7/1/14, (MBIA)............................ 908,680
Linked BPO:
12,300,000 7.00%, 7/1/10, (MBIA) (c)........................ 15,174,756
5,000,000 7.00%, 7/1/10, (AMBAC) (c)....................... 6,168,600
Commonwealth of Puerto Rico, Highway and
Transportation Authority Revenue:
10,000,000 Series A (Eff. Yield 4.95%) (b)
0.00%, 7/1/15, (AMBAC)........................... 4,333,200
Series Y:
400,000 5.25%, 7/1/15, (FSA)............................. 411,796
7,200,000 5.50%, 7/1/26.................................... 7,375,464
5,000,000 Series Z
6.00%, 7/1/18, (FSA)............................. 5,684,350
2,080,000 Commonwealth of Puerto Rico, Industrial, Tourist,
Educational, Medical, Environmental Control
Facilities, Finance Authority
6.25%, 7/1/24.................................... 2,287,314
Commonwealth of Puerto Rico, Public Buildings
Authority Revenue:
250,000 Government Facilities
5.00%, 7/1/12, (MBIA)............................ 255,445
6,250,000 Guaranteed Public Education and Health
Facilities, Step Bond,
Series M
(Eff. Yield 5.74%) (b)
3.75%, 7/1/16.................................... 6,258,500
--------------
58,674,769
--------------
Total Long-Term Municipal Obligations (cost
$1,323,750,072)................................. 1,385,949,961
--------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
SHORT-TERM MUNICIPAL OBLIGATIONS - 0.4%
CALIFORNIA - 0.1%
$ 290,000 California State Health Facilities Financing
Revenue, Variable Rate Refunding, St. Joseph
Health, Series A
3.65%, 6/1/13 (a)............................... $ 290,000
920,000 Irvine Ranch, California,
Water District Revenue, Consolidated Bonds
3.70%, 10/1/10 (a).............................. 920,000
59,000 Tustin, California,
Improvement Bond Act 1915
3.70%, 9/2/13 (a)............................... 59,000
---------------
1,269,000
---------------
FLORIDA - 0.0%
55,000 Dade County, Florida,
Health Facilities Authority, Hospital Revenue,
Miami Childrens Hospital Project
4.00%, 9/1/20 (a)............................... 55,000
40,000 Dade County, Florida,
Water and Sewer Systems Revenue
3.90%, 10/5/22 (a).............................. 40,000
---------------
95,000
---------------
MASSACHUSETTS - 0.0%
Massachusetts State Health and Educational
Facilities Authority, Capital Assets Program,
Series D:
325,000 3.70%, 1/1/35 (a)............................... 325,000
10,000 3.70%, 5/1/35 (a)............................... 10,000
---------------
335,000
---------------
MISSOURI - 0.1%
Kansas City, Missouri,
Industrial Development Authority, Hospital
Revenue:
200,000 3.95%, 10/15/15 (a)............................. 200,000
575,000 Insured Research Health Services Systems
3.95%, 4/15/15 (a).............................. 575,000
50,000 Missouri State Health and Educational Facilities
Authority Revenue
3.85%, 12/1/19 (a).............................. 50,000
---------------
825,000
---------------
NEW YORK - 0.2%
2,000,000 Long Island Power Authority, New York, Electric
Systems Revenue, Series 5
3.95%, 5/1/33 (a)............................... 2,000,000
410,000 New York City, New York, Municipal Water Finance
Authority Revenue
3.95%, 6/15/24 (a).............................. 410,000
---------------
2,410,000
---------------
TEXAS - 0.0%
355,000 Coastal Bend, Texas,
Health Facilities Development, Incarnate World
Health Systems Revenue
3.85%, 8/15/27 (a).............................. 355,000
---------------
</TABLE>

37
<PAGE>

[LOGO APPEARS HERE]
SCHEDULE OF INVESTMENTS (continued)
May 31, 1998

<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
SHORT-TERM MUNICIPAL OBLIGATIONS - CONTINUED
WYOMING - 0.0%
$300,000 Uinta County, Wyoming, Pollution Control Revenue
3.95%, 4/1/10 (a).................................. $ 300,000
--------------
Total Short-Term Municipal Obligations (cost
$5,589,000)....................................... 5,589,000
--------------
TOTAL INVESTMENTS -
(COST $1,329,339,072)....................... 101.2% 1,391,538,961
OTHER ASSETS AND LIABILITIES -
NET......................................... (1.2) (15,839,813)
----- --------------
NET ASSETS - ................................ 100.0% $1,375,699,148
===== ==============
</TABLE>
(a) Security is a variable or floating rate instrument with periodic
demand features. The Fund is entitled to full payment of principal
and accrued interest upon surrendering the security to the issuing
agent.
(b) Effective yield (calculated at date of purchase) is the annual yield
at which the bond accretes until its maturity date.
(c) At the discretion of the portfolio manager, these securities may be
separated into securities with interest or principal payments that
are linked to another rate or index and therefore would be considered
derivative securities.
(d) Security which has defaulted on payment of interest and/or principal.
The Fund has stopped accruing income on that so identified.

SUMMARY OF ABBREVIATIONS:
ACEs Auction Rate Securities
AMBAC Insured by American Municipal Bond Assurance Corporation
BPO Bond Payment Obligation
FGIC Insured by Federal Guaranty Insurance Company
FHA Insured by Federal Housing Authority
FHLMC Insured by Federal Home Loan Mortgage Corporation
FNMA Insured by Federal National Mortgage Association
FSA Insured by Financial Security Assurance Corporation
GNMA Insured by Government National Mortgage Association
INFLOs Inverse Floating Rate Securities
MBIA Insured by Municipal Bond Investors Assurance Corporation
PARs Periodic Auction Reset Securities
RIBs Residual Interest Bonds
SAVRs Select Auction Variable Rate Securities

See Combined Notes to Financial Statements.

38
<PAGE>

[LOGO APPEARS HERE]
STATEMENTS OF ASSETS AND LIABILITIES
May 31, 1998

<TABLE>
<CAPTION>
HIGH GRADE SHORT INTERMEDIATE TAX FREE
FUND FUND FUND
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments at market value
(identified cost -
$114,303,886, $169,283,783
and $1,329,339,072,
respectively)................. $121,137,662 $172,326,493 $1,391,538,961
Cash........................... 0 533 53,980
Receivable for investments
sold.......................... 2,682,622 5,241,448 45,176,072
Interest receivable............ 2,185,583 3,301,404 20,498,029
Receivable for Fund shares
sold.......................... 2,129 20,989 43,404
Prepaid expenses and other
assets........................ 8,195 44,257 233,185
- --------------------------------------------------------------------------------
Total assets................. 126,016,191 180,935,124 1,457,543,631
- --------------------------------------------------------------------------------
LIABILITIES
Payable for investments
purchased..................... 2,959,339 0 75,878,996
Payable for Fund shares
redeemed...................... 351,743 3,900 1,988,982
Dividends payable.............. 176,595 503,899 2,650,481
Distribution fee payable....... 63,591 7,178 669,150
Due to related parties......... 54,771 71,796 517,909
Accrued Trustees' fees and
expenses...................... 6,747 14,268 46,201
Accrued expenses and other
liabilities................... 79,262 70,443 92,764
- --------------------------------------------------------------------------------
Total liabilities............ 3,692,048 671,484 81,844,483
- --------------------------------------------------------------------------------
NET ASSETS..................... $122,324,143 $180,263,640 $1,375,699,148
- --------------------------------------------------------------------------------
NET ASSETS REPRESENTED BY
Paid-in capital................ $113,676,120 $176,749,878 $1,292,764,058
Undistributed net investment
income........................ 98,606 0 385,382
Accumulated net realized gain
on investments and futures
contracts..................... 1,715,641 471,052 20,349,819
Net unrealized appreciation on
investments................... 6,833,776 3,042,710 62,199,889
- --------------------------------------------------------------------------------
TOTAL NET ASSETS............. $122,324,143 $180,263,640 $1,375,699,148
- --------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Class A........................ $ 64,526,357 $ 6,568,707 $1,243,327,218
Class B........................ 32,821,501 5,790,267 124,663,980
Class C........................ 0 0 7,707,950
Class Y........................ 24,976,285 167,904,666 0
- --------------------------------------------------------------------------------
$122,324,143 $180,263,640 $1,375,699,148
- --------------------------------------------------------------------------------
SHARES OUTSTANDING
Class A........................ 5,678,221 644,684 159,872,745
Class B........................ 2,888,261 568,072 16,030,234
Class C........................ 0 0 991,117
Class Y........................ 2,197,899 16,472,867 0
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
Class A........................ $ 11.36 $ 10.19 $ 7.78
- --------------------------------------------------------------------------------
Class A -- Offering price
(based on sales charge of
4.75%, 3.25% and 4.75%,
respectively)................. $ 11.93 $ 10.53 $ 8.17
- --------------------------------------------------------------------------------
Class B........................ $ 11.36 $ 10.19 $ 7.78
- --------------------------------------------------------------------------------
Class C........................ -- -- $ 7.78
- --------------------------------------------------------------------------------
Class Y........................ $ 11.36 $ 10.19 --
- --------------------------------------------------------------------------------
</TABLE>

See Combined Notes to Financial Statements.

39
<PAGE>

[LOGO APPEARS HERE]
STATEMENTS OF OPERATIONS
Year Ended May 31, 1998

<TABLE>
<CAPTION>
HIGH GRADE SHORT INTERMEDIATE TAX FREE
FUND FUND FUND*
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest......................... $5,803,319 $6,033,898 $ 32,763,015
- ---------------------------------------------------------------------------------
EXPENSES
Management fee................... 542,365 622,594 2,410,469
Distribution Plan expenses....... 453,025 69,129 1,890,260
Transfer agent fees.............. 113,941 63,449 609,383
Registration and filing fees..... 68,469 83,299 22,517
Custodian fees................... 53,943 43,379 197,886
Shareholder reports expense...... 51,945 21,253 321,516
Administrative services fees..... 34,207 0 109,569
Professional fees................ 23,428 26,408 38,723
Trustees' fees and expenses...... 3,867 9,605 39,437
Other............................ 21,602 8,024 214,504
Fee waivers and/or expense
reimbursements.................. 0 (45,432) 0
- ---------------------------------------------------------------------------------
Total expenses.................. 1,366,792 901,708 5,854,264
Less: Indirectly paid expenses... (200) (850) (34,699)
- ---------------------------------------------------------------------------------
Net expenses.................... 1,366,592 900,858 5,819,565
- ---------------------------------------------------------------------------------
NET INVESTMENT INCOME............ 4,436,727 5,133,040 26,943,450
- ---------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND CLOSED
FUTURES CONTRACTS
Net realized gain (loss) on:
Investments..................... 3,360,972 1,471,537 17,108,116
Closed futures contracts........ 0 0 (731,997)
- ---------------------------------------------------------------------------------
Net realized gain on investments
and closed futures contracts.... 3,360,972 1,471,537 16,376,119
Net change in unrealized
appreciation (depreciation) on
investments..................... 1,019,154 (795,050) (25,411,876)
- ---------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and closed
futures contracts............... 4,380,126 676,487 (9,035,757)
- ---------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....... $8,816,853 $5,809,527 $ 17,907,693
- ---------------------------------------------------------------------------------
</TABLE>
*Five months ended May 31, 1998. During the period, Tax Free Fund changed its
fiscal year end from December 31 to May 31.

See Combined Notes to Financial Statements.

40
<PAGE>

[LOGO APPEARS HERE]
STATEMENT OF OPERATIONS
Year Ended December 31, 1997

<TABLE>
<CAPTION>
TAX FREE
FUND
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest........................................................ $ 84,530,908
- --------------------------------------------------------------------------------
EXPENSES
Management fee.................................................. 6,029,348
Distribution Plan expenses...................................... 5,338,174
Transfer agent fees............................................. 1,342,638
Custodian fees.................................................. 453,948
Administrative services fees.................................... 215,018
Trustees' fees and expenses..................................... 124,253
Other........................................................... 193,385
- --------------------------------------------------------------------------------
Total expenses................................................. 13,696,764
Less: Indirectly paid expenses.................................. (20,193)
- --------------------------------------------------------------------------------
Net expenses................................................... 13,676,571
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME........................................... 70,854,337
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
CLOSED FUTURES CONTRACTS
Realized gain (loss) on:
Investments.................................................... 44,775,459
Closed futures contracts....................................... (7,678,397)
- --------------------------------------------------------------------------------
Net realized gain on investments and closed futures contracts... 37,097,062
Net change in unrealized appreciation (depreciation) on
investments.................................................... 2,027,467
- --------------------------------------------------------------------------------
Net realized and unrealized gain on investments and closed
futures contracts.............................................. 39,124,529
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............ $109,978,866
- --------------------------------------------------------------------------------
</TABLE>

See Combined Notes to Financial Statements.

41
<PAGE>

[LOGO APPEARS HERE]
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended May 31, 1998

<TABLE>
<CAPTION>
HIGH GRADE SHORT INTERMEDIATE TAX FREE
FUND FUND FUND*
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS
Net investment income....... $ 4,436,727 $ 5,133,040 $ 26,943,450
Net realized gain on
investments and closed
futures contracts.......... 3,360,972 1,471,537 16,376,119
Net change in unrealized
appreciation
(depreciation) on
investments................ 1,019,154 (795,050) (25,411,876)
- -------------------------------------------------------------------------------
Net increase in net assets
resulting from
operations................ 8,816,853 5,809,527 17,907,693
- -------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM
Net investment income
Class A.................... (2,198,256) (225,168) (21,756,580)
Class B.................... (1,156,701) (197,697) (5,153,488)
Class C.................... 0 0 (109,908)
Class Y.................... (1,132,786) (4,710,175) 0
- -------------------------------------------------------------------------------
Total distributions to
shareholders.............. (4,487,743) (5,133,040) (27,019,976)
- -------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold... 14,810,240 22,513,095 21,942,896
Proceeds from shares issued
in connection with the
acquisition of:
Blanchard Flexible Tax-
Free Bond Fund............ 22,403,925 0 0
Common Trust Fund -
Intermediate Tax Exempt
Bond Fund................. 0 148,714,787 0
Evergreen Short
Intermediate Municipal
Fund - California......... 0 14,473,407 0
Evergreen Tax Free Income
Fund...................... 0 0 100,118,341
Proceeds from reinvestment
of distributions........... 2,594,120 1,482,137 12,966,083
Payment for shares
redeemed................... (23,942,474) (52,702,874) (125,945,502)
- -------------------------------------------------------------------------------
Net increase in net assets
resulting from capital
share transactions........ 15,865,811 134,480,552 9,081,818
- -------------------------------------------------------------------------------
Total increase (decrease)
in net assets............ 20,194,921 135,157,039 (30,465)
NET ASSETS
Beginning of year........... 102,129,222 45,106,601 1,375,729,613
- -------------------------------------------------------------------------------
END OF YEAR................. $122,324,143 $180,263,640 $1,375,699,148
- -------------------------------------------------------------------------------
Undistributed net investment
income..................... $ 98,606 $ 0 $ 385,382
- -------------------------------------------------------------------------------
</TABLE>
*Five months ended May 31, 1998. During the period, Tax Free Fund changed its
fiscal year end from December 31 to May 31.

See Combined Notes to Financial Statements.

42
<PAGE>

[LOGO APPEARS HERE]
STATEMENTS OF CHANGES IN NET ASSETS
Prior Periods

<TABLE>
<CAPTION>
HIGH GRADE FUND SHORT INTERMEDIATE FUND TAX FREE FUND
------------------------------ ------------------------------ ------------------------------
Nine Months Nine Months Year Ended December 31,
Ended Year Ended Ended Year Ended ------------------------------
May 31, 1997* August 31, 1996 May 31, 1997* August 31, 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income... $ 3,542,168 $ 5,304,418 $ 1,936,277 $ 2,353,029 $ 70,854,337 $ 84,167,379
Net realized gain on
investments and closed
futures contracts...... 640,025 1,622,360 18,940 161,202 37,097,062 15,476,735
Net change in unrealized
appreciation
(depreciation) on
investments............ 982,691 (1,135,792) 139,624 (564,810) 2,027,467 (48,955,108)
- -------------------------------------------------------------------------------------------------------------------------
Net increase in net
assets resulting from
operations............ 5,164,884 5,790,986 2,094,841 1,949,421 109,978,866 50,689,006
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM
Net investment income
Class A................ (1,696,428) (2,655,984) (755,942) (541,615) 0 0
Class B................ (934,247) (1,385,989) (159,979) (229,080) (73,811,844) (79,617,449)
Class Y................ (929,415) (1,262,445) (1,020,356) (1,582,334) 0 0
In excess of net
investment income
Class B................ 0 0 0 0 (160,951) 0
Net realized gain on
investments
Class B................ 0 0 0 0 (17,063,591) 0
- -------------------------------------------------------------------------------------------------------------------------
Total distributions to
shareholders.......... (3,560,090) (5,304,418) (1,936,277) (2,353,029) (91,036,386) (79,617,449)
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE
TRANSACTIONS
Proceeds from shares
sold................... 9,286,983 16,695,647 9,393,392 37,737,994 39,118,274 107,614,922
Proceeds from shares
issued in connection
with the acquisition of
Keystone Tax Exempt
Trust.................. 0 0 0 0 0 658,278,376
Proceeds from
reinvestment of
distributions.......... 2,003,093 3,093,850 973,716 1,651,747 53,790,716 41,011,255
Payment for shares
redeemed............... (18,667,515) (30,410,409) (35,446,549) (22,410,625) (294,007,649) (424,558,360)
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets
resulting from capital
share transactions.... (7,377,439) (10,620,912) (25,079,441) 16,979,116 (201,098,659) 382,346,193
- -------------------------------------------------------------------------------------------------------------------------
Total increase
(decrease) in net
assets............... (5,772,645) (10,134,344) (24,920,877) 16,575,508 (182,156,179) 353,417,750
NET ASSETS
Beginning of period..... 107,901,867 118,036,211 70,027,478 53,451,970 1,557,885,792 1,204,468,042
- -------------------------------------------------------------------------------------------------------------------------
END OF PERIOD........... $102,129,222 $107,901,867 $ 45,106,601 $ 70,027,478 $1,375,729,613 $1,557,885,792
- -------------------------------------------------------------------------------------------------------------------------
Undistributed net
investment income ..... $ 124,532 $ 115,656 $ 0 $ 0 $ 467,027 $ 2,957,507
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*During the period, the Fund changed its fiscal year end from August 31 to May
31.

See Combined Notes to Financial Statements.

43
<PAGE>

[LOGO APPEARS HERE]
COMBINED NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION

The Evergreen National Municipal Bond Funds consist of Evergreen High Grade Tax
Free Fund ("High Grade Fund"), Evergreen Short Intermediate Municipal Fund
("Short Intermediate Fund") and Evergreen Tax Free Fund ("Tax Free Fund"),
(collectively, the "Funds"). Each Fund is a diversified series of Evergreen Mu-
nicipal Trust (the "Trust"), a Delaware business trust organized on September
17, 1997. The Trust is an open end management investment company registered un-
der the Investment Company Act of 1940, as amended (the "1940 Act").

The Funds offer Class A, Class B, Class C or Class Y shares. Class A shares are
sold with a maximum front-end sales charge of 4.75% for both the High Grade
Fund and Tax Free Fund and a maximum front-end sales charge of 3.25% for the
Short Intermediate Fund. Class B and Class C shares are sold without a front-
end sales charge, but pay a higher ongoing distribution fee than Class A. Class
B shares are sold subject to a contingent deferred sales charge that is payable
upon redemption and decreases depending on how long the shares have been held.
Class B shares of Tax Free Fund purchased after January 1, 1997 will automati-
cally convert to Class A shares after seven years. Class B shares of Tax Free
Fund purchased prior to January 1, 1997 retain their existing conversion
rights. For the High Grade Fund and Short Intermediate Fund, all Class B shares
will automatically convert to Class A shares after seven years. Class C shares
are sold subject to a contingent deferred sales charge payable on shares re-
deemed within one year after the month of purchase. Class Y shares are sold at
net asset value and are not subject to contingent deferred sales charges or
distribution fees. Class Y shares are sold only to investment advisory clients
of First Union Corporation ("First Union") and its affiliates, certain institu-
tional investors or Class Y shareholders of record of certain other funds man-
aged by First Union and its affiliates as of December 30, 1994.

Effective January 9, 1998, the Tax Free Fund added two classes of shares desig-
nated as Class A and Class C and designated the existing class of shares as
Class B. Shareholders of this Fund who, at the close of business on January 16,
1998, held Class B shares purchased before January 1, 1995 and certain other
non-commissionable Class B shares had such shares converted to Class A shares
having an aggregate value equal to that of the shareholder's Class B shares
prior to the conversion.

2. SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently fol-
lowed by the Funds in the preparation of their financial statements. The poli-
cies are in conformity with generally accepted accounting principles, which re-
quire management to make estimates and assumptions that affect amounts reported
herein. Actual results could differ from these estimates.

A. VALUATION OF SECURITIES
An independent pricing service values each Fund's municipal bonds at fair value
using a variety of factors which may include yield, liquidity, interest rate
risk, credit quality, coupon, maturity and type of issue. Securities for which
valuations are not available from an independent pricing service, including re-
stricted securities, are valued at fair value as determined in good faith ac-
cording to procedures established by the Board of Trustees.

Short-term investments with remaining maturities of 60 days or less are carried
at amortized cost, which approximates market value.

B. FUTURES CONTRACTS
In order to gain exposure to or protect against changes in security values, the
Tax Free Fund may buy and sell futures contracts.

The initial margin deposited with a broker when entering into a futures trans-
action is subsequently adjusted by daily payments or receipts as the value of
the contract changes. Such changes are recorded as unrealized gains or losses.
Realized gains or losses are recognized on closing the contract.

44
<PAGE>

[LOGO APPEARS HERE]
COMBINED NOTES TO FINANCIAL STATEMENTS(continued)

Risks of entering into futures contracts include (i) the possibility of an il-
liquid market for the contract, (ii) the possibility that a change in the value
of the contract may not correlate with changes in the value of the underlying
instrument or index, and (iii) the credit risk that the other party will not
fulfill their obligations under the contract. Futures contracts also involve
elements of market risk in excess of the amount reflected in the statement of
assets and liabilities.

C. DERIVATIVE SECURITIES
The Tax Free Fund may invest in derivative securities. A derivative security is
any investment that derives its value from an underlying security, asset or
market index. Greater market fluctuations may result if these securities are
leveraged. The Fund invests in these types of securities when it is consistent
with its investment objectives.

D. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes accretion
of discounts and amortization of premiums.

E. FEDERAL TAXES
The Funds have qualified and intend to continue to qualify as regulated invest-
ment companies under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Funds will not incur any federal tax liability since they
are expected to distribute all of their net investment company taxable income,
net tax-exempt income and net capital gains, if any, to their shareholders. The
Funds also intend to avoid any excise tax liability by making the required dis-
tributions under the Code. Accordingly, no provision for federal taxes is re-
quired. To the extent that realized capital gains can be offset by capital loss
carryforwards, it is each Fund's policy not to distribute such gains.

F. DISTRIBUTIONS
Distributions from net investment income for the Funds are declared daily and
paid monthly. Distributions from net realized capital gains, if any, are paid
at least annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.

Income and capital gains distributions to shareholders are determined in accor-
dance with income tax regulations, which may differ from generally accepted ac-
counting principles. The significant differences between financial statement
amounts available for distributions and distributions made in accordance with
income tax regulations are primarily due to differing treatment of market dis-
count on securities.

G. CLASS ALLOCATIONS
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the rela-
tive net assets of each class. Currently, class specific expenses are limited
to expenses incurred under the Distribution Plans for each class.

45
<PAGE>

[LOGO APPEARS HERE]
COMBINED NOTES TO FINANCIAL STATEMENTS(continued)

3. CAPITAL SHARE TRANSACTIONS

Each Fund has an unlimited number of shares of beneficial interest with a par
value of $0.001 authorized. Shares of beneficial interest of the Funds are cur-
rently divided into Class A, Class B, Class C or Class Y. Transactions in
shares of the Funds were as follows:

High Grade Fund

<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
May 31, 1998 May 31, 1997 August 31, 1996
----------------------- ----------------------- ------------------------
Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Shares sold............. 352,430 $ 3,971,088 138,267 $ 1,503,579 728,801 $ 7,875,800
Shares issued in
acquisition of:
Blanchard Flexible Tax-
Free Bond Fund........ 1,966,629 22,403,925 0 0 0 0
Shares issued in
reinvestment of
distributions.......... 122,837 1,383,168 91,672 998,917 144,023 1,571,241
Shares redeemed......... (971,142) (10,944,155) (737,802) (8,010,676) (1,652,697) (17,891,048)
- ----------------------------------------------------------------------------------------------------
Net increase
(decrease)............. 1,470,754 $ 16,814,026 (507,863) $ (5,508,180) (779,873) $ (8,444,007)
- ----------------------------------------------------------------------------------------------------
CLASS B
Shares sold............. 414,162 $ 4,656,253 418,834 $ 4,553,869 420,508 $ 4,595,803
Shares issued in
reinvestment of
distributions.......... 61,515 692,436 50,410 549,306 75,686 825,507
Shares redeemed......... (514,611) (5,780,674) (546,605) (5,937,166) (691,236) (7,495,373)
- ----------------------------------------------------------------------------------------------------
Net decrease............ (38,934) $ (431,985) (77,361) $ (833,991) (195,042) $ (2,074,063)
- ----------------------------------------------------------------------------------------------------
CLASS Y
Shares sold............. 548,341 $ 6,182,899 296,083 $ 3,229,535 387,417 $ 4,224,044
Shares issued in
reinvestment of
distributions.......... 46,065 518,516 41,755 454,870 63,909 697,102
Shares redeemed......... (641,096) (7,217,645) (434,833) (4,719,673) (455,583) (5,023,988)
- ----------------------------------------------------------------------------------------------------
Net decrease............ (46,690) $ (516,230) (96,995) $ (1,035,268) (4,257) $ (102,842)
- ----------------------------------------------------------------------------------------------------
</TABLE>

Short Intermediate Fund

<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
May 31, 1998 May 31, 1997 August 31, 1996
------------------------ ------------------------ -----------------------
Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Shares sold............. 383,419 $ 3,907,614 182,673 $ 1,860,992 2,806,176 $28,333,550
Shares issued in
acquisition of:
Evergreen Short
Intermediate Municipal
Fund -California...... 736 7,495 0 0 0 0
Shares issued in
reinvestment of
distributions.......... 15,389 156,458 17,182 174,056 24,978 253,579
Shares redeemed......... (356,623) (3,624,581) (2,348,922) (23,711,903) (750,660) (7,689,314)
- -----------------------------------------------------------------------------------------------------
Net increase
(decrease)............. 42,921 $ 446,986 (2,149,067) $(21,676,855) 2,080,494 $20,897,815
- -----------------------------------------------------------------------------------------------------
CLASS B
Shares sold............. 107,260 $ 1,092,900 144,261 $ 1,461,443 291,382 $ 2,967,713
Shares issued in
acquisition of:
Evergreen Short
Intermediate Municipal
Fund -California...... 6,897 70,307 0 0 0 0
Shares issued in
reinvestment of
distributions.......... 14,126 143,788 11,819 119,733 16,079 163,265
Shares redeemed......... (227,503) (2,313,782) (224,553) (2,272,638) (166,441) (1,686,967)
- -----------------------------------------------------------------------------------------------------
Net increase
(decrease)............. (99,220) $ (1,006,787) (68,473) $ (691,462) 141,020 $ 1,444,011
- -----------------------------------------------------------------------------------------------------
CLASS Y
Shares sold............. 1,719,348 $ 17,512,581 600,756 $ 6,070,957 635,204 $ 6,436,731
Shares issued in
acquisition of:
Common Trust Fund -
Intermediate Tax
Exempt Bond Fund...... 14,616,570 148,714,787 0 0 0 0
Evergreen Short
Intermediate Municipal
Fund -California...... 1,412,138 14,395,605 0 0 0 0
Shares issued in
reinvestment of
distributions.......... 116,093 1,181,891 67,156 679,927 121,645 1,234,903
Shares redeemed......... (4,588,604) (46,764,511) (934,601) (9,462,008) (1,283,965) (13,034,344)
- -----------------------------------------------------------------------------------------------------
Net increase
(decrease)............. 13,275,545 $135,040,353 (266,689) $ (2,711,124) (527,116) $(5,362,710)
- -----------------------------------------------------------------------------------------------------
</TABLE>

46
<PAGE>

[LOGO APPEARS HERE]
COMBINED NOTES TO FINANCIAL STATEMENTS(continued)

Tax Free Fund

<TABLE>
<CAPTION>
January 20, 1998
(Commencement of Class
Operations) through
May 31, 1998
---------------------------
Shares Amount
- ------------------------------------------------------------------------------
<S> <C> <C>
CLASS A
Shares sold...................................... 404,689 $ 3,409,126
Shares issued in connection with the acquisition
of Evergreen Tax Free Income Fund............... 8,443,496 66,261,386
Automatic conversion of Class B shares........... 162,305,257 1,285,292,084
Shares issued in reinvestment of distributions... 1,526,223 11,889,303
Shares redeemed.................................. (12,806,920) (100,036,093)
- ------------------------------------------------------------------------------
Net increase..................................... 159,872,745 $1,266,815,806
- ------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Five Months Ended Year Ended Year Ended
May 31, 1998 December 31, 1997 December 31, 1996
----------------------------- -------------------------- --------------------------
Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Shares sold............. 2,346,134 $ 18,452,022 5,057,416 $ 39,118,274 14,063,760 $ 107,614,922
Shares issued in
connection with the
acquisition of:
Evergreen Tax Free
Income Fund........... 3,247,599 25,484,520 0 0 0 0
Keystone Tax Exempt
Trust................. 0 0 0 0 84,656,452 658,278,376
Automatic conversion of
shares to
Class A shares......... (162,305,257) (1,285,292,084) 0 0 0 0
Shares issued in
reinvestment of
distributions.......... 130,151 1,014,991 6,963,866 53,790,716 5,361,695 41,011,255
Shares redeemed......... (3,205,499) (25,180,245) (38,141,778) (294,007,649) (55,439,349) (424,558,360)
- ---------------------------------------------------------------------------------------------------------------
Net increase
(decrease)............. (159,786,872) $(1,265,520,796) (26,120,496) $(201,098,659) 48,642,558 $ 382,346,193
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
January 26, 1998
(Commencement of Class
Operations) through
May 31, 1998
-----------------------
Shares Amount
- ------------------------------------------------------------------------------
<S> <C> <C>
CLASS C
Shares sold.......................................... 10,499 $ 81,748
Shares issued in connection with the acquisition of
Evergreen Tax Free Income Fund...................... 1,066,879 8,372,435
Shares issued in reinvestment of distributions....... 7,950 61,789
Shares redeemed...................................... (94,211) (729,164)
- ------------------------------------------------------------------------------
Net increase......................................... 991,117 $ 7,786,808
- ------------------------------------------------------------------------------
</TABLE>

4. SECURITIES TRANSACTIONS

Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) were as follows for the year ended May 31, 1998:

<TABLE>
<CAPTION>
Cost of Proceeds
Purchases from Sales
-----------------------------
<S> <C> <C>
High Grade Fund................... $ 132,695,487 $ 137,499,692
Short Intermediate Fund........... 96,219,310 128,542,087
Tax Free Fund*.................... 1,094,397,210 1,069,097,913
</TABLE>
-------
* For the five months ended May 31, 1998.

47
<PAGE>

[LOGO APPEARS HERE]
COMBINED NOTES TO FINANCIAL STATEMENTS(continued)

On May 31, 1998, the composition of unrealized appreciation and depreciation of
investment securities based on the aggregate cost of investments for federal
income tax purposes was as follows:

<TABLE>
<CAPTION>
Gross Gross Net Unrealized
Tax Unrealized Unrealized Appreciation
Cost Appreciation Depreciation (Depreciation)
-----------------------------------------------------
<S> <C> <C> <C> <C>
High Grade
Fund.......... $ 114,303,886 $ 6,840,040 $ (6,264) $ 6,833,776
Short
Intermediate
Fund.......... 169,283,783 3,097,271 (54,561) 3,042,710
Tax Free Fund.. 1,329,387,025 70,695,360 (8,543,424) 62,151,936
</TABLE>

As of May 31, 1998, the High Grade Fund had a capital loss carryover for fed-
eral income tax purposes of approximately $57,000 which expires as follows:
$56,000 - 2001 and $1,000 - 2005.

5. DISTRIBUTION PLANS

Evergreen Distributor, Inc. ("EDI"), a wholly-owned subsidiary of The BISYS
Group Inc. ("BISYS"), serves as principal underwriter to each of the Funds.

Each Fund has adopted Distribution Plans for each class of shares, except Class
Y, as allowed by Rule 12b-1 of the 1940 Act. Distribution plans permit a fund
to reimburse its principal underwriter for costs related to selling shares of
the fund and for various other services. These costs, which consist primarily
of commissions and service fees to broker-dealers who sell shares of the fund,
are paid by the fund through expenses called "Distribution Plan expenses". Each
class, except Class Y, currently pays a service fee equal to 0.25% of the aver-
age daily net assets of the class. These expenses are currently limited to
0.25% annually of the average daily net assets of the Class A shares of the
High Grade and Tax Free Funds and limited to 0.10% annually of the average
daily net assets of the Class A shares of Short Intermediate Fund. In addition,
Class B and Class C also pay distribution fees equal to 0.75% of the average
daily net assets of the class. Distribution Plan expenses are calculated daily
and paid monthly.

During the year ended May 31, 1998, amounts paid or accrued to EDI pursuant to
each Fund's Class A, Class B and Class C Distribution Plans were as follows:

<TABLE>
<CAPTION>
Distribution fees accrued
---------------------------
Class A Class B Class C
---------------------------
<S> <C> <C> <C>
High Grade Fund.................... $ 127,730 $325,295 $ --
Short Intermediate Fund............ 5,615 63,514 --
Tax Free Fund*..................... 1,157,033 705,348 27,879
</TABLE>
-------
* For the five months ended May 31, 1998.

The principal underwriter may pay distribution fees greater than the allowable
annual amounts the Funds are permitted to pay under the Distribution Plans. The
Funds may reimburse the principal underwriter for such excess amounts in later
years with annual interest at the prime rate plus 1.00%. With respect to Class
B and Class C shares of Tax Free Fund, EDI intends but is not obligated to con-
tinue to pay distribution costs that exceed the current annual payments from
the Fund. EDI intends to seek full payment of such distribution costs from the
Fund at such time in the future as, and to the extent that, payment thereof by
the Class B and Class C shares would be within permitted limits.

Each of the Distribution Plans may be terminated at any time by vote of the In-
dependent Trustees or by vote of a majority of the outstanding voting shares of
the respective class. However, for the Tax Free Fund, after the termination of
any Distribution Plan and subject to the discretion of the Independent Trust-
ees, payments to EDI may continue as compensation for services which had been
provided while the Distribution Plan was in effect.

48
<PAGE>

[LOGO APPEARS HERE]
COMBINED NOTES TO FINANCIAL STATEMENTS(continued)

6. INVESTMENT MANAGEMENT AGREEMENT AND OTHER AFFILIATED TRANSACTIONS

The Capital Management Group ("CMG") of First Union National Bank of North Car-
olina ("FUNB"), a subsidiary of First Union, serves as the investment adviser
to the High Grade Fund and is paid a management fee that is computed daily and
paid monthly. The Fund pays CMG an annual fee for its services equal to 0.50%
of the average daily net assets of the Fund.

Evergreen Asset Management Corp. ("Evergreen Asset"), a wholly-owned subsidiary
of First Union, is the investment adviser for the Short Intermediate Fund and
is paid a management fee that is computed daily and paid monthly at an annual
rate of 0.50% of the Fund's average daily net assets. Out of its fee, Evergreen
Asset pays EIS for its services as administrator, BISYS for its services as
sub-administrator and Lieber & Company, an affiliate of First Union, for its
services as sub-adviser.

During the year ended May 31, 1998, the investment adviser for the Short Inter-
mediate Fund waived its management fees in the amount of $45,432.

Keystone Investment Management Company ("Keystone"), a subsidiary of First
Union, is the investment adviser for the Tax Free Fund and is paid a management
fee that is calculated daily and paid monthly. The management fee is calculated
at an annual rate of 2.00% of Tax Free Fund's gross investment income plus an
amount determined by applying percentage rates, starting at 0.50% and declining
to 0.25% per annum as net assets increase, to the average daily net assets of
the Fund.

For each of the Funds, Evergreen Investment Services, Inc. ("EIS"), a subsidi-
ary of First Union, is the administrator and BISYS serves as the sub-adminis-
trator for each Fund. As sub-administrator to the Funds, BISYS provides the of-
ficers of the Funds. Officers of the Funds and affiliated Trustees receive no
compensation directly from the Funds.

The administrator and sub-administrator for the High Grade Fund is entitled to
an annual fee based on the average daily net assets of the funds administered
by EIS for which First Union or its investment advisory subsidiaries are also
the investment advisers. The administration fee is calculated by applying per-
centage rates, which start at 0.05% and decline to 0.01% per annum as net as-
sets increase, to the average daily net asset value of the Fund. The sub-admin-
istration fee is calculated by applying percentage rates, which start at 0.01%
and decline to 0.004% per annum as net assets increase, to the average daily
net assets of the Fund.

As administrator for Tax Free Fund, EIS also provides facilities, equipment and
personnel on behalf of the investment adviser and is reimbursed by the Fund for
its services. For the Tax Free Fund, the sub-administration fee is paid by Key-
stone and is not a fund expense.

During the year ended May 31, 1998, High Grade Fund and Tax Free Fund paid or
accrued to EIS $28,013 and $109,569, respectively, for certain administrative
services.

Evergreen Service Company ("ESC"), a wholly-owned subsidiary of Keystone,
serves as the transfer and dividend disbursing agent for each Fund.

At May 31, 1998, FUNB owned directly or beneficially 75% of the outstanding
shares of the Short Intermediate Fund.

7. EXPENSE OFFSET ARRANGEMENT

The Funds have entered into an expense offset arrangement with their custodian.
The assets deposited with the custodian under this expense offset arrangement
could have been invested in income-producing assets.

49
<PAGE>

[LOGO APPEARS HERE]

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

8. ACQUISITIONS

On February 29, 1996, Tax Free Fund acquired substantially all the assets and
assumed certain liabilities of Keystone Tax Exempt Trust in exchange for shares
of Tax Free Fund.

On July 31, 1997, Short Intermediate Fund acquired substantially all the assets
and assumed certain liabilities of Evergreen Short Intermediate Municipal
Fund - California in exchange for Class A, Class B and Class Y shares of Short
Intermediate Fund.

On November 21, 1997, Short Intermediate Fund acquired substantially all the
assets and assumed certain liabilities of Common Trust Fund - Intermediate Tax
Exempt Bond Fund in exchange for Class Y shares of Short Intermediate Fund.

Effective on the close of business on January 23, 1998, Tax Free Fund acquired
substantially all the assets and assumed certain liabilities of Evergreen Tax
Free Income Fund in an exchange for Class A, Class B and Class C shares of Tax
Free Fund.

Also, effective on February 28, 1998, High Grade Fund acquired substantially
all of the assets and assumed certain liabilities of Blanchard Flexible Tax-
Free Bond Fund in an exchange for Class A shares of High Grade Fund.

These acquisitions were accomplished by a tax-free exchange of the respective
shares of each Fund. The value of net assets acquired, number of shares issued,
unrealized appreciation acquired and the aggregate net assets of each Fund im-
mediately after the acquisition are as follows:

<TABLE>
<CAPTION>
Unrealized
Value of Net Number of Appreciation Net Assets
Acquiring Fund Acquired Fund Assets Acquired Shares Issued (Depreciation) After Acquisition
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
High Grade Fund........ Blanchard Flexible Tax-Free Bond Fund $ 22,403,925 1,966,629 $ 1,611,908 $ 127,402,909
Short Intermediate Evergreen Short Intermediate $ 14,473,407 1,419,771 $ 203,594 $ 59,045,106
Fund.................. Municipal Fund - California
Short Intermediate Common Trust Fund - Intermediate $148,714,787 14,616,570 $ 3,195,888 $ 194,719,999
Fund.................. Tax Exempt Bond Fund
Tax Free Fund.......... Evergreen Tax Free Income Fund $100,118,341 12,757,974 $ 6,341,257 $1,467,541,556
Tax Free Fund.......... Keystone Tax Exempt Trust $658,278,376 84,656,452 $40,609,975 $1,800,970,092
</TABLE>

9. DEFERRED TRUSTEES' FEES

Each Independent Trustee of the Funds may defer any or all compensation related
to performance of their duties as Trustees. The Trustees' deferred balances are
allocated to deferral accounts, which are included in the accrued expenses for
each Fund. The investment performance of the deferral accounts are based on the
investment performance of certain Evergreen Funds. Any gains earned or losses
incurred in the deferral accounts are reported in each Fund's Trustees' fees
and expenses. Trustees will be paid either in one lump sum or in quarterly in-
stallments for up to ten years at their election, not earlier than either the
year in which the Trustee ceases to be a member of the Board of Trustees or
January 1, 2000.

10. FINANCING AGREEMENT

On October 31, 1996, a financing agreement among certain of the Evergreen
Funds, State Street Bank and Trust ("State Street") and a group of banks (col-
lectively, the "Banks") became effective. Under this agreement, the Banks pro-
vided an unsecured credit facility in the aggregate amount of $225 million
($112.5 million committed and $112.5 million uncommitted) allocated evenly
among the Banks. Borrowings under this facility bore interest at 0.75% per an-
num above the Federal Funds rate. A commitment fee of 0.10% per annum was in-
curred on the unused portion of the committed facility, which was allocated to
all participating funds. State Street served as agent for the Banks, and as
agent was entitled to a fee of $15,000 which was allocated to all of the par-
ticipating Funds. This agreement was terminated on October 31, 1997.

50
<PAGE>

[LOGO APPEARS HERE]

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

On October 31, 1997, a temporary financing agreement between the participating
Funds and First Union became effective. Under this agreement, First Union pro-
vided a fully committed unsecured credit facility in the aggregate amount of
$300 million. Borrowings under this facility bore interest at 1.00% per annum
above the Federal Funds rate. State Street served as administrative agent under
this agreement, but received no compensation for its services. This agreement
was terminated on December 22, 1997.

On December 22, 1997, a financing agreement among all of the Evergreen Funds,
State Street and a group of Banks became effective. Under this agreement, the
Banks provide an unsecured credit facility in the aggregate amount of $400 mil-
lion ($275 million committed and $125 million uncommitted). The credit facility
is allocated, under the terms of the financing agreement, among the Banks. The
credit facility is to be accessed by the Funds for temporary or emergency pur-
poses only and is subject to each Fund's borrowing restrictions. Borrowings un-
der this facility bear interest at 0.50% per annum above the Federal Funds
rate. A commitment fee of 0.065% per annum will be incurred on the unused por-
tion of the committed facility, which will be allocated to all Funds. For its
assistance in arranging this financing agreement, the Capital Market Group of
First Union was paid a one-time arrangement fee of $27,500. State Street serves
as administrative agent for the Banks, and as administrative agent is entitled
to a fee of $20,000 per annum which is allocated to all of the Funds.

During the year ended May 31, 1998, the Funds had no borrowings under these
agreements.

51
<PAGE>

[LOGO APPEARS HERE]
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF EVERGREEN HIGH GRADE TAX FREE FUND
AND EVERGREEN SHORT INTERMEDIATE MUNICIPAL FUND

In our opinion, the accompanying statements of assets and liabilities, includ-
ing the schedules of investments, and the related statements of operations and
of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Evergreen High Grade Tax Free Fund
and Evergreen Short Intermediate Municipal Fund (the "Funds"), two of the funds
of Evergreen Municipal Trust, at May 31, 1998, the results of each of their op-
erations for the year then ended, the changes in each of their net assets for
the year then ended, and for the nine months ended May 31, 1997, and for Ever-
green Short Intermediate Municipal Fund the year ended August 31, 1996, and the
financial highlights for each of the periods indicated for Evergreen Short In-
termediate Municipal Fund, and for the year then ended, and for the nine months
ended May 31, 1997 for Evergreen High Grade Tax Free Fund, in conformity with
generally accepted accounting principles. These financial statements and finan-
cial highlights (hereafter referred to as "financial statements") are the re-
sponsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our au-
dits of these financial statements in accordance with generally accepted audit-
ing standards which require that we plan and perform the audit to obtain rea-
sonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the account-
ing principles used and significant estimates made by management, and evaluat-
ing the overall financial statement presentation. We believe that our audits,
which included confirmation of securities at May 31, 1998 by correspondence
with the custodian and the application of alternative auditing procedures where
securities purchased had not been received, provide a reasonable basis for the
opinion expressed above. The financial statements of Evergreen High Grade Tax
Free Fund for the year ended, and indicated periods prior to, August 31, 1996
were audited by other independent accountants whose report dated October 16,
1996 expressed an unqualified opinion.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036

July 6, 1998

52
<PAGE>

[LOGO APPEARS HERE]
INDEPENDENT AUDITORS' REPORT

The Trustees and Shareholders Evergreen Municipal Trust

We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Evergreen Tax Free Fund (the "Fund") of the Ev-
ergreen Municipal Trust as of May 31, 1998, and the related statements of oper-
ations for the five months ended May 31, 1998 and for the year ended December
31, 1997, statements of changes in net assets for the five months ended May 31,
1998 and for each of the years in the two-year period ended December 31, 1997
and the financial highlights for the five months ended May 31, 1998 and for
each of the years in the ten-year period ended December 31, 1997. These finan-
cial statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial high-
lights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of May 31, 1998 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall fi-
nancial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Evergreen Tax Free Fund, as of May 31, 1998, the results of its operations,
changes in its net assets, and financial highlights for each of the years or
periods specified in the first paragraph above in conformity with generally
accepted accounting principles.

KPMG Peat Marwick LLP

Boston, Massachusetts
July 3, 1998

53
<PAGE>

[LOGO APPEARS HERE]
ADDITIONAL INFORMATION (UNAUDITED)

On December 15, 1997, a special meeting of shareholders for the High Grade Fund
and Short Intermediate Fund was held to consider a number of proposals with the
following number of shares represented at the meeting. On October 16, 1997, the
record date for the meeting, the Funds had the following shares outstanding:

<TABLE>
<CAPTION>
High Grade Short Intermediate
Fund Fund
------------------------------
<S> <C> <C>
Record Date Shares Outstanding................... 9,192,809 5,647,015
Shares represented at meeting.................... 5,326,815 3,676,372
Percentage of record date shares represented at
meeting......................................... 57.95% 65.10%
PROPOSAL 1 - THE PROPOSED REORGANIZATION OF
THE FUND AS A SERIES OF THE EVERGREEN
MUNICIPAL TRUST, A DELAWARE BUSINESS TRUST:
Shares voted "For".......................... 5,014,531 3,347,370
Shares voted "Against"...................... 60,035 164,400
Shares voted "Abstain"...................... 252,249 164,602
PROPOSAL 2 - RECLASSIFICATION AS NON-
FUNDAMENTAL INVESTMENT OBJECTIVE OF THIS
FUND WHOSE INVESTMENT OBJECTIVE IS
CURRENTLY CLASSIFIED AS FUNDAMENTAL:
Shares voted "For".......................... 4,953,494 3,221,627
Shares voted "Against"...................... 112,250 293,131
Shares voted "Abstain"...................... 261,071 161,614
PROPOSAL 3 - CHANGES TO FUNDAMENTAL
INVESTMENT RESTRICTIONS:
To amend the Fundamental restriction
concerning diversification of investments:
Shares voted "For".......................... 4,954,447 3,235,144
Shares voted "Against"...................... 96,913 258,827
Shares voted "Abstain"...................... 275,455 182,401
To amend the Fundamental restriction
concerning concentration of a Fund's assets
in a particular industry:
Shares voted "For".......................... 4,954,447 3,235,144
Shares voted "Against"...................... 96,913 258,827
Shares voted "Abstain"...................... 275,455 182,401
To amend the Fundamental restriction
concerning the issuance of senior
securities:
Shares voted "For".......................... 4,949,301 3,235,007
Shares voted "Against"...................... 102,059 258,964
Shares voted "Abstain"...................... 275,455 182,401
To amend the Fundamental restriction
concerning borrowing:
Shares voted "For".......................... 4,954,447 3,235,007
Shares voted "Against"...................... 96,913 258,964
Shares voted "Abstain"...................... 275,455 182,401
To amend the Fundamental restriction
concerning underwriting:
Shares voted "For".......................... 4,954,447 3,235,144
Shares voted "Against"...................... 96,913 258,827
Shares voted "Abstain"...................... 275,455 182,401
To amend the Fundamental restriction
concerning investments in real estate:
Shares voted "For".......................... 4,949,301 3,235,007
Shares voted "Against"...................... 102,059 258,964
Shares voted "Abstain"...................... 275,455 182,401
To amend the Fundamental restriction
concerning commodities:
Shares voted "For".......................... 4,949,301 3,235,007
Shares voted "Against"...................... 102,059 258,964
Shares voted "Abstain"...................... 275,455 182,401
To amend the Fundamental restriction
concerning lending:
Shares voted "For".......................... 4,954,447 3,235,007
Shares voted "Against"...................... 96,913 258,964
Shares voted "Abstain"...................... 275,455 182,401
To amend the Fundamental restriction
concerning investment in federally tax
exempt securities:
Shares voted "For".......................... 4,954,447 3,235,144
Shares voted "Against"...................... 96,913 258,827
Shares voted "Abstain"...................... 275,455 182,401
To amend the Fundamental restriction
concerning unseasoned issuers:
Shares voted "For".......................... N/A 3,238,335
Shares voted "Against"...................... N/A 255,636
Shares voted "Abstain"...................... N/A 182,401
To amend the Fundamental restriction
concerning control or management:
Shares voted "For".......................... N/A 3,238,335
Shares voted "Against"...................... N/A 255,636
Shares voted "Abstain"...................... N/A 182,401
</TABLE>

54
<PAGE>

[LOGO APPEARS HERE]
ADDITIONAL INFORMATION (UNAUDITED) (continued)

<TABLE>
<CAPTION>
High Grade Short Intermediate
Fund Fund
-----------------------------
<S> <C> <C>
To amend the Fundamental restriction
concerning short sales:
Shares voted "For".......................... 4,954,447 3,238,335
Shares voted "Against"...................... 96,913 255,636
Shares voted "Abstain"...................... 275,455 182,401
To amend the Fundamental restriction
concerning other investment companies:
Shares voted "For".......................... 4,954,447 N/A
Shares voted "Against"...................... 96,913 N/A
Shares voted "Abstain"...................... 275,455 N/A
To amend the Fundamental restriction
concerning other investment companies:
Shares voted "For".......................... 4,954,447 N/A
Shares voted "Against"...................... 96,913 N/A
Shares voted "Abstain"...................... 275,455 N/A
To amend the Fundamental restriction
concerning oil, gas or other mineral
exploration or development program:
Shares voted "For".......................... 4,954,447 3,237,053
Shares voted "Against"...................... 96,913 256,918
Shares voted "Abstain"...................... 275,455 182,401
To amend the Fundamental restriction
concerning restricted securities:
Shares voted "For".......................... 4,954,447 N/A
Shares voted "Against"...................... 96,913 N/A
Shares voted "Abstain"...................... 275,455 N/A
To amend the Fundamental restriction
concerning investment in taxable
securities:
Shares voted "For".......................... 4,954,447 N/A
Shares voted "Against"...................... 96,913 N/A
Shares voted "Abstain"...................... 275,455 N/A
To amend the Fundamental restriction
concerning margin purchases:
Shares voted "For".......................... N/A 3,238,335
Shares voted "Against"...................... N/A 255,636
Shares voted "Abstain"...................... N/A 182,401
To amend the Fundamental restriction
concerning officers' and directors'
ownership of shares:
Shares voted "For".......................... N/A 3,238,335
Shares voted "Against"...................... N/A 255,636
Shares voted "Abstain"...................... N/A 182,401
To amend the Fundamental restriction
concerning warrants:
Shares voted "For".......................... N/A 3,238,335
Shares voted "Against"...................... N/A 255,636
Shares voted "Abstain"...................... N/A 182,401
To amend the Fundamental restriction
concerning options:
Shares voted "For".......................... N/A 3,238,335
Shares voted "Against"...................... N/A 255,636
Shares voted "Abstain"...................... N/A 182,401
To amend the Fundamental restriction
concerning investment in municipal
securities:
Shares voted "For".......................... N/A 3,238,335
Shares voted "Against"...................... N/A 255,636
Shares voted "Abstain"...................... N/A 182,401
</TABLE>

55
<PAGE>

[LOGO APPEARS HERE]
FEDERAL INCOME TAX STATUS OF DIVIDENDS (UNAUDITED)

For the fiscal period ended May 31, 1998, the following percentages
represent the portion of dividends from net investment income which
are exempt from federal income tax, other than alternative minimum
tax:

<TABLE>
<S> <C>
High Grade Fund........................................... 99.11%
Short Intermediate Fund................................... 99.62%
Tax Free Fund............................................. 99.66%
</TABLE>

56
<PAGE>

Evergreen Funds

Money Market
Treasury Money Market Fund
Money Market Fund
Municipal Money Market Fund
Pennsylvania Municipal Money Market Fund

Tax Exempt
Short Intermediate Municipal Fund
High Grade Tax Free Fund
Tax Free Fund
California Tax Free Fund
Connecticut Municipal Bond Fund
Florida Municipal Bond Fund
Florida High Income Municipal Bond Fund
Georgia Municipal Bond Fund
Maryland Municipal Bond Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New Jersey Tax Free Income Fund
New York Tax Free Fund
North Carolina Municipal Bond Fund
Pennsylvania Tax Free Fund
South Carolina Municipal Bond Fund
Virginia Municipal Bond Fund

Income
Capital Preservation and Income Fund
Short Intermediate Bond Fund
Intermediate Term Government Securities Fund
Intermediate Term Bond Fund
U.S. Government Fund
Diversified Bond Fund
Strategic Income Fund
High Yield Bond Fund

Balanced
American Retirement Fund
Balanced Fund
Tax Strategic Foundation Fund
Foundation Fund

Growth & Income
Utility Fund
Income and Growth Fund
Fund for Total Return
Value Fund
Blue Chip Fund
Growth and Income Fund
Small Cap Equity Income Fund

Domestic Growth
Evergreen Fund
Omega Fund
Small Company Growth Fund
Strategic Growth Fund
Aggressive Growth Fund
Micro Cap Fund

Global International
Global Leaders Fund
International Growth Fund
International Equity Fund
Global Opportunities Fund
Natural Resources Fund
Precious Metals Fund
Emerging Markets Growth Fund
Latin America Fund

Express Line
800-346-3858

Investor Services
800-343-2898

Retirement Plan Services
800-247-4075

www.evergreenfunds.com

17607 543689 RV0 7/98

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