MUNIHOLDINGS PENNSYLVANIA INSURED FUND, N-2, 1998-12-07

MUNIHOLDINGS PENNSYLVANIA INSURED FUND
N-2, 1998-12-07

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 7, 1998
SECURITIES ACT FILE NO. 333-
INVESTMENT COMPANY ACT FILE NO. 811-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

--------------
FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[_] PRE-EFFECTIVE AMENDMENT NO.
[_] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[_] AMENDMENT NO.
(CHECK APPROPRIATE BOX OR BOXES)

--------------
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

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800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

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(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

--------------
ARTHUR ZEIKEL
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)

--------------
COPIES TO:
MICHAEL J. HENNEWINKEL, ESQ. FRANK P. BRUNO, ESQ.
FUND ASSET MANAGEMENT, L.P. BROWN & WOOD LLP
P.O. BOX 9011 ONE WORLD TRADE CENTER
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10048-0557

--------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement.

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

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [_]

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

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF BEING OFFERING PRICE OFFERING REGISTRATION
SECURITIES BEING REGISTERED REGISTERED(1) PER UNIT(1) PRICE(1) FEE(2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial Interest ($.10 par
value).................................... 66,667 shares $15.00 $1,000,005 $278
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.

--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

MUNIHOLDINGS PENNSYLVANIA INSURED FUND

CROSS REFERENCE SHEET

ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
- --------------------- ---------------------

PART A
1.Outside Front Cover Page............ Outside Front Cover Page
2.Inside Front and Outside Back Cover
Pages............................. Inside Front and Outside Back Cover
Pages; Underwriting
3.Fee Table and Synopsis.............. Prospectus Summary; Fee Table
4.Financial Highlights................ Not Applicable
5.Plan of Distribution................ Prospectus Summary; Net Asset Value;
Underwriting
6.Selling Shareholders................ Not Applicable
7.Use of Proceeds..................... Use of Proceeds; Investment Objective
and Policies
8.General Description of the
Registrant........................ Prospectus Summary; The Fund;
Investment Objective and Policies;
Risks and Special Considerations of
Leverage; Investment Restrictions;
Dividends and Distributions; Automatic
Dividend Reinvestment Plan; Mutual Fund
Investment Option
9.Management.......................... Trustees and Officers; Investment
Advisory and Management Arrangements;
Custodian; Transfer Agent, Dividend
Disbursing Agent and Registrar
10.Capital Stock, Long-Term Debt, and
Other Securities.................. Description of Shares
11.Defaults and Arrears on Senior
Securities........................ Not Applicable
12.Legal Proceedings................... Not Applicable
13.Table of Contents of the Statement
of Additional Information......... Not Applicable

PART B
14.Cover Page.......................... Not Applicable
15.Table of Contents................... Not Applicable
16.General Information and History..... Not Applicable
17.Investment Objective and Policies... Prospectus Summary; Investment
Objective and Policies; Investment
Restrictions
18.Management.......................... Trustees and Officers; Investment
Advisory and Management Arrangements
19.Control Persons and Principal
Holders of Securities............. Investment Advisory and Management
Arrangements
20.Investment Advisory and Other
Services.......................... Investment Advisory and Management
Arrangements; Custodian; Underwriting;
Transfer Agent, Dividend Disbursing
Agent and Registrar; Legal Opinions;
Experts
21.Brokerage Allocation and Other
Practices......................... Portfolio Transactions
22.Tax Status.......................... Taxes; Automatic Dividend Reinvestment
Plan
23.Financial Statements................ Report of Independent Auditors;
Statement of Assets, Liabilities and
Capital
PART C

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE +
+CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT +
+FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS +
+PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING +
+AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT +
+PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED DECEMBER 7, 1998

PROSPECTUS
SHARES
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
COMMON SHARES

-------------
MuniHoldings Pennsylvania Insured Fund (the "Fund") is a newly organized,
non-diversified, closed-end management investment company that seeks to provide
shareholders with current income exempt from Federal and Pennsylvania income
taxes. The Fund seeks to achieve its objective by investing primarily in a
portfolio of long-term, investment grade municipal obligations the interest on
which, in the opinion of bond counsel to the issuer, is exempt from Federal and
Pennsylvania income taxes. The Fund intends to invest in municipal obligations
that are rated investment grade, or if unrated, are considered by the Fund's
investment adviser to be of comparable quality. Under normal circumstances, at
least 80% of the Fund's assets will be invested in municipal obligations with
remaining maturities of one year or more that are covered by insurance
guaranteeing the timely payment of principal at maturity and interest.

Because the Fund is newly organized, its shares have no history of public
trading. Shares of closed-end investment companies frequently trade at a
discount from their net asset value. This risk may be greater for investors
expecting to sell their shares in a relatively short period after completion of
the public offering. The Fund plans to apply to list its shares on the New York
Stock Exchange under the symbol " ." Trading of the Fund's common shares on
the exchange is expected to begin within two weeks of the date of this
prospectus. Before it begins trading, the underwriter does not intend to make a
market in the Fund's shares. Thus, investors may not be able to buy and sell
shares of the Fund during that time.

Within approximately three months after completion of this offering of common
shares, the Fund intends to offer preferred shares representing approximately
40% of the Fund's capital immediately after the issuance of such preferred
shares. There can be no assurance, however, that preferred shares representing
such percentage of the Fund's capital will actually be issued. The use of
preferred shares to leverage the common shares can create special risks.

-------------
This prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep it
for future reference.

-------------
INVESTING IN THE COMMON SHARES INVOLVES CERTAIN RISKS WHICH ARE DESCRIBED IN
THE "RISK FACTORS AND SPECIAL CONSIDERATIONS" SECTION BEGINNING ON PAGE 7 OF
THIS PROSPECTUS.

<TABLE>
<CAPTION>
Per Share Total
--------- ------
<S> <C> <C>
Public Offering Price........................... $ $
Sales Load...................................... None None
Proceeds, before expenses, to Fund.............. $ $
</TABLE>

The Fund's investment adviser or an affiliate will pay the underwriter a
commission in the amount of % of the public offering price per share in
connection with the sale of the common shares.

The underwriter may also purchase up to an additional shares at the
public offering price within 45 days from the date of this prospectus to cover
over-allotments.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

We expect that the common shares will be ready for delivery in New York, New
York on or about , 1999.

-------------
MERRILL LYNCH & CO.

-------------
The date of this prospectus is , 1999.
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY......................................................... 3
RISK FACTORS AND SPECIAL CONSIDERATIONS.................................... 7
FEE TABLE.................................................................. 9
THE FUND................................................................... 10
USE OF PROCEEDS............................................................ 10
INVESTMENT OBJECTIVE AND POLICIES.......................................... 10
RISKS AND SPECIAL CONSIDERATIONS OF LEVERAGE............................... 21
INVESTMENT RESTRICTIONS.................................................... 24
TRUSTEES AND OFFICERS...................................................... 25
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS............................ 28
PORTFOLIO TRANSACTIONS..................................................... 29
DIVIDENDS AND DISTRIBUTIONS................................................ 30
TAXES...................................................................... 31
AUTOMATIC DIVIDEND REINVESTMENT PLAN....................................... 35
MUTUAL FUND INVESTMENT OPTION.............................................. 37
NET ASSET VALUE............................................................ 38
DESCRIPTION OF CAPITAL SHARES.............................................. 38
CUSTODIAN.................................................................. 42
UNDERWRITING............................................................... 42
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR.................... 43
LEGAL OPINIONS............................................................. 43
EXPERTS.................................................................... 43
ADDITIONAL INFORMATION..................................................... 44
REPORT OF INDEPENDENT AUDITORS............................................. 45
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL............................... 46
APPENDIX III--ECONOMIC AND FINANCIAL CONDITIONS IN PENNSYLVANIA............ 47
APPENDIX III--RATINGS OF MUNICIPAL BONDS................................... 58
APPENDIX III--PORTFOLIO INSURANCE.......................................... 65
APPENDIX IV--TAXABLE EQUIVALENT YIELDS FOR 1999............................ 67
</TABLE>

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

INFORMATION ABOUT THE FUND CAN BE REVIEWED AND COPIED AT THE SEC'S PUBLIC
REFERENCE ROOM IN WASHINGTON, D.C. CALL 1-800-SEC-0330 FOR INFORMATION ON THE
OPERATION OF THE PUBLIC REFERENCE ROOM. THIS INFORMATION IS ALSO AVAILABLE ON
THE SEC'S INTERNET SITE AT HTTP://WWW.SEC.GOV AND COPIES MAY BE OBTAINED UPON
PAYMENT OF A DUPLICATING FEE BY WRITING THE PUBLIC REFERENCE SECTION OF THE
SEC, WASHINGTON, D.C. 20549-6009.

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

You should rely only on the information contained in this prospectus. We
have not, and the underwriter has not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition,
results of operations and prospects may have changed since that date.

2
<PAGE>

PROSPECTUS SUMMARY

This summary is qualified in its entirety by reference to the detailed
information included in this prospectus.

THE FUND MuniHoldings Pennsylvania Insured Fund (the "Fund") is a newly
organized, non-diversified, closed-end management investment
company.

THE The Fund is offering common shares at an initial offering price
OFFERING of $ per share. The common shares are being offered by Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as underwriter. The
underwriter may also purchase up to an additional common
shares within 45 days of the date of this prospectus to cover over-
allotments.

INVESTMENT The investment objective of the Fund is to provide shareholders
OBJECTIVE with current income exempt from Federal and Pennsylvania income
AND taxes. The Fund seeks to achieve its objective by investing
POLICIES primarily in a portfolio of long-term, investment grade municipal
obligations the interest on which, in the opinion of bond counsel
to the issuer, is exempt from Federal and Pennsylvania income
taxes.

Investment Grade Municipal Bonds. The Fund intends to invest in
municipal bonds that are rated investment grade by one or more
nationally recognized statistical rating agencies or, if unrated,
are considered by the investment adviser to be of comparable
quality.

Pennsylvania Municipal Bonds. The Fund will generally invest
substantially all (at least 80%) of its assets in Pennsylvania
municipal bonds. However, when the Fund's investment adviser
believes that investment grade Pennsylvania municipal bonds are not
available in sufficient amounts at an appropriate price, the Fund
may invest a lesser amount of its assets in these securities. At
all times, except during periods when the Fund is in the process of
investing its proceeds from a public offering or during temporary
defensive periods, the Fund intends to invest at least 65% of its
assets in Pennsylvania municipal bonds and at least 80% of its
assets in Pennsylvania municipal bonds and other long-term
municipal bonds. These other long-term municipal bonds that the
Fund may buy will be exempt from Federal income tax but not
Pennsylvania income taxes.

The Fund will normally invest at least 80% of its assets in insured
municipal obligations with remaining maturities of one year or
more. Insured municipal obligations are covered by insurance that
guarantees timely interest payments and the repayment of principal
on maturity.

In general, the Fund does not intend its investments to earn a
large amount of income that is not exempt from Federal and
Pennsylvania income taxes.

Indexed and Inverse Floating Rate Securities. The Fund may invest
in securities whose potential returns are directly related to
changes in an underlying index or interest rate, known as indexed
securities. The return on indexed securities will rise when the
underlying index or interest rate rises and fall when the index or
interest rate falls. The Fund may also invest in

3
<PAGE>

securities whose return is inversely related to changes in an
interest rate (inverse floaters). In general, income on inverse
floaters will decrease when short term interest rates increase and
increase when short term interest rates decrease. Investments in
inverse floaters may subject the Fund to the risks of reduced or
eliminated interest payments and losses of principal. In addition,
certain indexed securities and inverse floaters may increase or
decrease in value at a greater rate than the underlying interest
rate, which effectively leverages the Fund's investment. As a
result, the market value of such securities will generally be more
volatile than that of fixed rate, tax exempt securities. Both
indexed securities and inverse floaters are derivative securities
and can be considered speculative.

Options and Futures Transactions. The Fund may seek to hedge its
portfolio against changes in interest rates using options and
financial futures contracts. The Fund's hedging transactions are
designed to reduce volatility, but come at some cost. For example,
the Fund may try to limit its risk of loss from a decline in price
of a portfolio security by purchasing a put option. However, the
Fund must pay for the option, and the price of the security may not
in fact drop. In large part, the success of the Fund's hedging
activities depends on its ability to forecast movements in
securities prices and interest rates. The Fund does not, however,
intend to enter options and futures transactions for speculative
purposes. The Fund is not required to hedge its portfolio and may
not do so.

LEVERAGE Issuance of Preferred Shares. The Fund intends to offer preferred
shares within three months after completion of this offering. The
preferred shares will represent approximately 40% of the Fund's
capital, including the capital raised by issuing the preferred
shares. There can be no assurance, however, that preferred shares
will actually be issued. Issuing preferred shares will result in
the leveraging of the common shares. Although the Board of Trustees
has not yet determined the terms of the preferred shares offering,
the Fund expects that the preferred shares will pay dividends that
will be adjusted over either relatively short-term periods
(generally seven to 28 days) or medium-term periods (up to five
years). The preferred shares dividend rate will be based upon
prevailing interest rates for debt obligations of comparable
maturity. The money raised by the preferred shares offering will be
invested in longer-term obligations in accordance with the Fund's
investment objective. The expenses of the preferred shares, which
will be borne by the Fund, will reduce the net asset value of the
common shares. In addition, at times when the Fund is required to
allocate taxable income to preferred shareholders, the terms of the
preferred shares may require the Fund to make an additional
distribution to them. The amount of this additional distribution
approximately equals the tax liability resulting from the
allocation and the additional distribution (an "Additional
Distribution"). During periods when the Fund has preferred shares
outstanding, the Fund will pay fees to the investment adviser for
its services that are higher than if the Fund did not issue
preferred shares because the fees will be calculated on the basis
of the Fund's average weekly net assets, including proceeds from
the sale of preferred shares.

Potential Benefits of Leverage. Under normal market conditions,
longer term obligations produce higher yields than short and medium
term obligations. The Fund's investment adviser

4
<PAGE>

believes that the interest income the Fund receives from its long
term investments will exceed the amount of interest the Fund must
pay to the preferred shareholders. Thus, the Fund's use of
preferred shares should provide common shareholders with a higher
yield than they would receive if the Fund were not leveraged.

Risks. The use of leverage creates certain risks for common
shareholders, including higher volatility of both the net asset
value and the market value of the common shares. Since any decline
in the value of the Fund's investments will affect only the common
shareholders, in a declining market the use of leverage will cause
the Fund's net asset value to decrease more than it would if the
Fund were not leveraged. This decrease in net asset value will
likely also cause a decline in the market price for common shares.
In addition, fluctuations in the dividend rates paid on, and the
amount of taxable income allocable to, the preferred shares will
affect the yield to common shareholders. There can be no assurance
that the Fund will earn a higher net return on its investments than
the then current dividend rate (and any Additional Distribution) it
pays on the preferred shares. Under certain conditions, the
benefits of leverage to common shareholders will be reduced, and
the Fund's leveraged capital structure could result in a lower rate
of return to common shareholders than if the Fund were not
leveraged.

Distributions. When the Fund issues preferred shares, common
shareholders will receive all of the Fund's net income that remains
after it pays dividends (and any Additional Distribution) on the
preferred shares and generally will be entitled to a pro rata share
of net realized capital gains. If the Fund is liquidated, preferred
shareholders will be entitled to receive liquidating distributions
before any distribution is made to common shareholders. These
liquidating distributions are expected to equal the original
purchase price per share of preferred shares plus any accumulated
and unpaid dividends and Additional Distributions.

Redemption of Preferred Shares. The Fund may redeem the preferred
shares for any reason. The Fund may redeem all or part of the
preferred shares if it believes that the Fund's leveraged capital
structure will cause common shareholders to obtain a lower return
than they would if the common shares were unleveraged for any
significant amount of time.

Voting Rights. Preferred shareholders, voting as a separate class,
will be entitled to elect two of the Fund's Trustees. Common and
preferred shareholders, voting together as a single class, will be
entitled to elect the remaining Trustees. If the Fund fails to pay
dividends to the preferred shareholders for two full years, the
holders of all outstanding shares of preferred shares, voting as a
separate class, would then be entitled to elect a majority of the
Fund's Trustees. The preferred shareholders also will vote
separately on certain other matters as required under the Fund's
Declaration of Trust, the Investment Company Act of 1940, as
amended, and Massachusetts law. Otherwise, common and preferred
shareholders will have equal voting rights (one vote per share) and
will vote together as a single class.

Ratings. Before it offers the preferred shares, the Fund intends to
apply to one or more nationally recognized statistical ratings
organizations for ratings on the preferred shares. The

5
<PAGE>

Fund believes that a rating for the preferred shares will make
it easier to market the stock, which should reduce its
dividend rate.

LISTING Currently, there is no public market for the Fund's common
shares. However, the Fund plans to apply to list the Fund's
common shares on the New York Stock Exchange. Trading of the
Fund's common shares is expected to begin within two weeks of
the date of this prospectus. Before it begins trading, the
underwriter does not intend to make a market in the Fund's
common shares. Thus, investors may not be able to buy and sell
shares of the Fund during that period.

INVESTMENT Fund Asset Management, L.P. is the Fund's investment adviser
ADVISER and provides investment advisory and management services to
the Fund. For its services, the Fund pays the investment
adviser a fee at the annual rate of % of the Fund's average
weekly net assets, including assets acquired from the sale of
preferred shares.

DIVIDENDS The Fund intends to distribute dividends equal to
AND substantially all of its net investment income to common
DISTRIBUTIONS shareholders each month. Once the Fund issues preferred
shares, the monthly distributions to common shareholders will
consist of substantially all net investment income that
remains after the Fund pays dividends (and any Additional
Distribution) on the preferred shares. The Fund expects to
begin paying dividends to common shareholders within
approximately 90 days from the date of this prospectus. The
Fund will distribute net capital gains, if any, at least
annually to common shareholders and, after it issues the
preferred shares, on a pro rata basis to common and preferred
shareholders. When the Fund allocates capital gains or other
taxable income to preferred shareholders, under certain
circumstances, the terms of the preferred shares may require
the Fund to make an Additional Distribution. The Fund may not
declare any cash dividend or other distribution on its common
shares unless the preferred shares has asset coverage of at
least 200%. If the Fund issues preferred shares representing
40% of its total capital, the preferred share's asset coverage
will be approximately 250%. If the Fund's ability to make
distributions on its common shares is limited, the Fund may
not be able to qualify for taxation as a regulated investment
company. This would have adverse tax consequences for common
shareholders.

AUTOMATIC Dividend and capital gains distributions generally are used to
DIVIDEND purchase additional common shares. However, an investor can
REINVESTMENT choose to receive distributions in cash. Since not all
PLAN investors can participate in the automatic dividend
reinvestment plan, you should call your broker or nominee to
confirm that you are eligible to participate in the plan.

MUTUAL Investors who purchase shares in this offering through the
FUND underwriter and later sell their shares have the option,
INVESTMENT subject to certain conditions, to purchase Class D shares of
OPTION certain Merrill Lynch funds with the proceeds from the sale.

6
<PAGE>

RISK FACTORS AND SPECIAL CONSIDERATIONS

Liquidity and Market Price of Shares. The Fund is newly organized and has no
operating history or history of public trading. Before the Fund's common shares
are listed on the New York Stock Exchange, an investment in the Fund may be
illiquid.

Shares of closed-end funds that trade in a secondary market frequently trade
at a market price that is below their net asset value. This is commonly
referred to as "trading at a discount." Investors who sell their shares within
a relatively short period after completion of the public offering are more
likely to be exposed to this risk. The Fund is designed primarily for long-term
investors and should not be considered a vehicle for trading purposes.

Pennsylvania Municipal Bonds. The Fund intends to invest the majority of its
portfolio in Pennsylvania municipal bonds. As a result, the Fund is more
exposed to risks affecting issuers of Pennsylvania municipal bonds than is a
municipal bond fund that invests more widely.

Non-diversification. The Fund is registered as a "non-diversified" investment
company. This means that the Fund may invest a greater percentage of its assets
in a single issuer than a diversified investment company. Even as a non-
diversified fund, the Fund must still meet the diversification requirements of
applicable Federal tax laws. Since the Fund may invest a relatively high
percentage of its assets in a limited number of issuers, the Fund may be more
exposed to any single economic, political or regulatory occurrence than a more
widely-diversified fund.

Rating Categories. The Fund intends to invest in municipal bonds that are
rated investment grade by Standard & Poor's, Moody's Investors Service, Inc.
and Fitch IBCA, Inc. It may also invest in unrated municipal bonds that the
Fund's investment adviser believes are of comparable quality. Obligations rated
in the lowest investment grade category may have certain speculative
characteristics.

Private Activity Bonds. The Fund may invest in certain tax-exempt securities
classified as "private activity bonds." These bonds may subject certain
investors in the Fund to the alternative minimum tax. See "Taxes--General."

Portfolio Insurance and Rating Agencies. The Fund will be subject to certain
investment restrictions imposed by guidelines of the insurance companies that
issue portfolio insurance and to guidelines of one or more nationally
recognized statistical ratings organizations that may issue ratings for the
preferred shares. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed by the
Investment Company Act of 1940, as amended. The Fund does not expect these
requirements or guidelines to prevent the investment adviser from managing the
Fund's portfolio in accordance with the Fund's investment objective and
policies.

Leverage. The Fund plans to offer preferred shares. The preferred stock will
represent approximately 40% of the Fund's capital including capital raised by
issuing the preferred shares. Leverage creates certain risks for common
shareholders, including higher volatility of both the net asset value and the
market value of the common shares. Leverage also creates the risk that the
investment return on the Fund's common shares will be reduced to

7
<PAGE>

the extent the dividends paid on preferred shares and other expenses of the
preferred shares exceed the income earned by the Fund on its investments. If
the Fund is liquidated, preferred shareholders will be entitled to receive
liquidating distributions before any distribution is made to common
shareholders.

Inverse Floating Obligations. The Fund's investments in "inverse floating
obligations" or "residual interest bonds" provide investment leverage because
their market value increases or decreases in response to a market change at a
greater rate than fixed rate, long term tax exempt securities. The market
values of such securities are more volatile than the market values of fixed
rate, tax exempt securities.

Options and Futures Transactions. The Fund may engage in certain options and
futures transactions to reduce its exposure to interest rate movements. If the
Fund incorrectly forecasts market values, interest rates or other factors, the
Fund's performance could suffer. The Fund also may suffer a loss if the other
party to the transaction fails to meet its obligations. The Fund is not
required to use hedging and may not do so.

Antitakeover Provisions. The Fund's Declaration of Trust includes provisions
that could limit the ability of other entities or persons to acquire control of
the Fund or to change the composition of its Board of Trustees. Such provisions
could limit the ability of shareholders to sell their shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of the Fund.

8
<PAGE>

FEE TABLE

<TABLE>
<CAPTION>
NET ASSETS NET ASSETS
WITH WITHOUT
LEVERAGE(A) LEVERAGE
----------- ----------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load (as a percentage of offering
price).............................................. None None
Dividend Reinvestment Plan Fees...................... None None
ANNUAL EXPENSES (as a percentage of net assets
attributable to Common Stock):
Investment Advisory Fees(a)(b)....................... % %
Interest Payments on Borrowed Funds.................. None None
Other Expenses(a)(b)................................. % %
---- ----
Total Annual Expenses(a)(b)........................ % %
==== ====
</TABLE>

<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
EXAMPLE ---- ----- ----- -----
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) total annual expenses
of % (assuming leverage of 40% of the Fund's total
assets) and % (assuming no leverage) and (2) a 5%
annual return throughout the periods:
Assuming Leverage..................................... $-- $-- $-- $--
Assuming No Leverage.................................. $-- $-- $-- $--
</TABLE>
- --------
(a) The Fund intends to utilize leverage only if the Investment Adviser
believes that it would result in higher income to shareholders over time.
See "Risks and Special Considerations of Leverage." Assumes leverage by
issuing preferred shares in an amount of approximately 40% of the Fund's
capital at a dividend rate of %.
(b) See "Investment Advisory and Management Arrangements"--page 28.

The Fee Table is intended to assist investors in understanding the costs and
expenses that a shareholder in the Fund will bear directly or indirectly. The
expenses set forth under "Other Expenses" are based on estimated amounts
through the end of the Fund's first fiscal year on an annualized basis. The
Example set forth above assumes reinvestment of all dividends and
distributions and utilizes a 5% annual rate of return as mandated by the
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND
ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE
ASSUMED FOR PURPOSES OF THE EXAMPLE.

9
<PAGE>

THE FUND

MuniHoldings Pennsylvania Insured Fund (the "Fund") is a newly organized,
non-diversified, closed-end management investment company. The Fund was
organized under the laws of The Commonwealth of Massachusetts on December 3,
1998, and has registered under the 1940 Act. The Fund's principal office is
located at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its
telephone number is (609) 282-2800.

The Fund has been organized as a closed-end investment company. Closed-end
investment companies differ from open-end investment companies (commonly
referred to as "mutual funds") in that closed-end investment companies do not
generally make a continuous offering of their shares or redeem their
securities at the option of the shareholder, whereas open-end companies issue
securities redeemable at net asset value at any time at the option of the
shareholder and typically engage in a continuous offering of their shares.
Accordingly, open-end investment companies are subject to continuous asset in-
flows and out-flows that can complicate portfolio management. Shares of
closed-end investment companies, however, frequently trade at a discount from
their net asset value. This risk may be greater for investors expecting to
sell their shares in a relatively short period after completion of the public
offering.

USE OF PROCEEDS

The net proceeds of this offering will be approximately $ (or
approximately $ assuming the Underwriter exercises the over-allotment
option in full) after payment of organizational and offering expenses
estimated to be approximately $ .

The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies within approximately three months
after completion of the offering of common shares, depending on market
conditions and the availability of appropriate securities. Pending such
investment, it is anticipated that the proceeds will be invested in short-
term, tax-exempt securities. See "Investment Objective and Policies."

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to provide shareholders with current
income exempt from Federal and Pennsylvania income taxes. The Fund will seek
to achieve its objective by investing primarily in a portfolio of long-term,
investment grade municipal obligations issued by or on behalf of the
Commonwealth of Pennsylvania, its political subdivisions, agencies and
instrumentalities and by other qualifying issuers that pay interest that, in
the opinion of bond counsel to the issuer, is exempt from Federal and
Pennsylvania income taxes ("Pennsylvania Municipal Bonds"). The Fund intends
to invest substantially all (at least 80%) of its assets in Pennsylvania
Municipal Bonds, except at times when the Fund's investment adviser, Fund
Asset Management, L.P. (the "Investment Adviser"), considers that Pennsylvania
Municipal Bonds of sufficient quality and quantity are unavailable for
investment at suitable prices by the Fund. To the extent the Investment
Adviser considers that suitable Pennsylvania Municipal Bonds are not available
for investment, the Fund may purchase other long-term municipal obligations
the interest on which is exempt from Federal income taxes but not from
Pennsylvania income taxes ("Municipal Bonds"). The Fund will maintain at least
65% of its assets in Pennsylvania Municipal Bonds and at least 80% of its
assets in Pennsylvania Municipal Bonds and Municipal Bonds, except during
interim periods pending investment of the net proceeds of public offerings of
the Fund's securities and during temporary defensive periods. Under normal
circumstances, at least 80% of the Fund's assets will be invested in

10
<PAGE>

municipal obligations with remaining maturities of one year or more that are
covered by insurance guaranteeing the timely payment of principal at maturity
and interest. The Fund's investment objective is a fundamental policy that may
not be changed without a vote of a majority of the Fund's outstanding voting
securities, as defined below under "Investment Restrictions." There can be no
assurance that the investment objective of the Fund will be realized. At times
the Fund may seek to hedge its portfolio through the use of futures
transactions and options to reduce volatility in the net asset value of its
common shares.

The Fund ordinarily does not intend to realize significant investment income
that is subject to Federal or Pennsylvania income taxes. The Fund may invest
all or a portion of its assets in certain tax-exempt securities classified as
"private activity bonds" (in general, bonds that benefit non-governmental
entities) that may subject certain investors in the Fund to an alternative
minimum tax.

The Fund also may invest in securities not issued by or on behalf of a state
or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in Pennsylvania Municipal Bonds and Municipal
Bonds, to the extent such investments are permitted by the Investment Company
Act of 1940, as amended (the "1940 Act"). Other Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing
interests in one or more long-term Pennsylvania Municipal Bonds or Municipal
Bonds. Certain Non-Municipal Tax-Exempt Securities may be characterized as
derivative instruments. Non-Municipal Tax-Exempt Securities are considered
"Pennsylvania Municipal Bonds" or "Municipal Bonds" for purposes of the Fund's
investment objective and policies.

Investment in common shares of the Fund offers several potential benefits.
The Fund offers investors the opportunity to receive income exempt from
Federal and Pennsylvania income taxes by investing in a professionally managed
portfolio comprised primarily of investment grade insured Pennsylvania
Municipal Bonds. Investment in the Fund also relieves the investor of the
burdensome administrative details involved in managing a portfolio of
Pennsylvania Municipal Bonds. Additionally, the Investment Adviser will seek
to enhance the yield on the common shares by leveraging the Fund's capital
structure through the issuance of preferred shares. The benefits are at least
partially offset by the expenses involved in operating an investment company.
Such expenses primarily consist of the advisory fee and operational costs.
Additionally, the use of leverage involves certain expenses and special risk
considerations. See "Risks and Special Considerations of Leverage."

The investment grade Pennsylvania Municipal Bonds and Municipal Bonds in
which the Fund will primarily invest are those Pennsylvania Municipal Bonds
and Municipal Bonds rated at the date of purchase in the four highest rating
categories of Standard & Poor's ("S&P"), Moody's Investors Services, Inc.
("Moody's") or Fitch IBCA, Inc. ("Fitch"), or, if unrated, are considered to
be of comparable quality by the Investment Adviser. In the case of long-term
debt, the investment grade rating categories are AAA through BBB for S&P, Aaa
through Baa for Moody's and AAA through BBB for Fitch. In the case of short-
term notes, the investment grade rating categories are SP-1+ through SP-3 for
S&P, MIG-1 through MIG-3 for Moody's and F-1+ through F-3 for Fitch. In the
case of tax-exempt commercial paper, the investment grade rating categories
are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moody's and F-1+
through F-3 for Fitch. Obligations ranked in the fourth highest rating
category (BBB, SP-3 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moody's; and
BBB and F-3 for Fitch), while considered "investment grade," may have certain
speculative characteristics. There may be sub-categories or gradations
indicating relative standing within the rating categories set forth above. See

11
<PAGE>

Appendix II to this Prospectus for a description of S&P's, Moody's and Fitch's
ratings of Municipal Bonds. In assessing the quality of Pennsylvania Municipal
Bonds and Municipal Bonds with respect to the foregoing requirements, the
Investment Adviser will take into account the portfolio insurance as well as
the nature of any letters of credit or similar credit enhancements to which
particular Pennsylvania Municipal Bonds and Municipal Bonds are entitled and
the creditworthiness of the insurance company or financial institution that
provided such insurance or credit enhancement. Consequently, if Pennsylvania
Municipal Bonds or Municipal Bonds are covered by insurance policies issued by
insurers whose claims-paying ability is rated AAA by S&P or Fitch or Aaa by
Moody's, the Investment Adviser may consider such municipal obligations to be
equivalent to AAA- or Aaa- rated securities, as the case may be, even though
such Pennsylvania Municipal Bonds or Municipal Bonds would generally be
assigned a lower rating if the rating were based primarily upon the credit
characteristics of the issuers without regard to the insurance feature. The
insured Pennsylvania Municipal Bonds and Municipal Bonds must also comply with
the standards applied by the insurance carriers in determining eligibility for
portfolio insurance.

The Fund's investments may also include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial
institution, typically a commercial bank. The VRDOs in which the Fund will
invest are tax-exempt obligations, in the opinion of counsel to the issuer,
that contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest on a short
notice period not to exceed seven days. Participating VRDOs provide the Fund
with a specified undivided interest (up to 100%) in the underlying obligation
and the right to demand payment of the unpaid principal balance plus accrued
interest on the Participating VRDOs from the financial institution on a
specified number of days' notice, not to exceed seven days. There is, however,
the possibility that because of default or insolvency, the demand feature of
VRDOs or Participating VRDOs may not be honored. The Fund has been advised by
its counsel that the Fund should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations.

The average maturity of the Fund's portfolio securities will vary based upon
the Investment Adviser's assessment of economic and market conditions. The net
asset value of the common shares of a closed-end investment company, such as
the Fund, which invests primarily in fixed-income securities, changes as the
general levels of interest rates fluctuate. When interest rates decline, the
value of a fixed-income portfolio can be expected to rise. Conversely, when
interest rates rise, the value of a fixed-income portfolio can be expected to
decline. Prices of longer-term securities generally fluctuate more in response
to interest rate changes than do short-term or medium-term securities. These
changes in net asset value are likely to be greater in the case of a fund
having a leveraged capital structure, as proposed for the Fund. See "Risks and
Special Considerations of Leverage."

The Fund intends to invest primarily in long-term Pennsylvania Municipal
Bonds and Municipal Bonds with a maturity of more than ten years. Also, the
Fund may invest in intermediate-term Pennsylvania Municipal Bonds and
Municipal Bonds with a maturity of between three years and ten years. The Fund
may invest in short-term, tax-exempt securities, short-term U.S. Government
securities, repurchase agreements or cash. Such short-term securities or cash
will not exceed 20% of its total assets except during interim periods pending
investment of the net proceeds of public offerings of the Fund's securities or
in anticipation of the repurchase or redemption of the Fund's securities and
temporary periods when, in the opinion of the Investment Adviser, prevailing
market or economic conditions warrant. The Fund does not ordinarily intend to
realize significant interest income that is subject to Federal or Pennsylvania
income taxes.

12
<PAGE>

The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that it may invest in securities of a single issuer.
However, the Fund's investments will be limited so as to qualify the Fund for
special tax treatment afforded regulated investment companies under the
Federal tax laws. See "Taxes." To qualify, among other requirements, the Fund
will limit its investments so that, at the close of each quarter of the
taxable year, (i) not more than 25% of the market value of the Fund's total
assets will be invested in the securities (other than U.S. Government
securities) of a single issuer, and (ii) with respect to 50% of the market
value of its total assets, not more than 5% of the market value of its total
assets will be invested in the securities (other than U.S. Government
securities) of a single issuer. A fund that elects to be classified as
"diversified" under the 1940 Act must satisfy the foregoing 5% requirement
with respect to 75% of its total assets. To the extent that the Fund assumes
large positions in the securities of a small number of issuers, the Fund's
yield may fluctuate to a greater extent than that of a diversified company as
a result of changes in the financial condition or in the market's assessment
of the issuers.

PORTFOLIO INSURANCE

Under normal circumstances, at least 80% of the Fund's assets will be
invested in Pennsylvania Municipal Bonds and Municipal Bonds either (i)
insured under an insurance policy purchased by the Fund or (ii) insured under
an insurance policy obtained by the issuer thereof or any other party. The
Fund will seek to limit its investments to municipal bonds insured under
insurance policies issued by insurance carriers that have total admitted
assets (unaudited) of at least $75,000,000 and capital and surplus (unaudited)
of at least $50,000,000 and insurance claims-paying ability ratings of AAA
from S&P or Fitch or Aaa from Moody's. There can be no assurance that
insurance from insurance carriers meeting these criteria will be at all times
available. See Appendix III to this Prospectus for a brief description of
S&P's, Fitch's and Moody's insurance claims-paying ability ratings. Currently,
it is anticipated that a majority of the insured Pennsylvania Municipal Bonds
and Municipal Bonds in the Fund's portfolio will be insured by the following
insurance companies that satisfy the foregoing criteria: AMBAC Indemnity
Corporation, Financial Guaranty Insurance Company, Financial Security
Assurance and Municipal Bond Investors Assurance Corporation. The Fund also
may purchase Pennsylvania Municipal Bonds and Municipal Bonds covered by
insurance issued by any other insurance company that satisfies the foregoing
criteria. It is anticipated that initially a majority of insured Pennsylvania
Municipal Bonds and Municipal Bonds held by the Fund will be insured under
policies obtained by parties other than the Fund.

The Fund may purchase, but has no obligation to purchase, separate insurance
policies (the "Policies") from insurance companies meeting the criteria set
forth above that guarantee the payment of principal and interest on specified
eligible Pennsylvania Municipal Bonds and Municipal Bonds purchased by the
Fund. A Pennsylvania Municipal Bond and a Municipal Bond will be eligible for
coverage if it meets certain requirements of the insurance company set forth
in a Policy. In the event interest or principal on an insured Pennsylvania
Municipal Bond and Municipal Bond is not paid when due, the insurer will be
obligated under its Policy to make such payment not later than 30 days after
it has been notified by, and provided with documentation from, the Fund that
such nonpayment has occurred.

The Policies will be effective only as to insured Pennsylvania Municipal
Bonds and Municipal Bonds beneficially owned by the Fund. In the event of a
sale of any Pennsylvania Municipal Bonds and Municipal Bonds held by the Fund,
the issuer of the relevant Policy will be liable only for those payments of
interest and principal that are then due and owing. The Policies will not
guarantee the market value of the insured Pennsylvania Municipal Bonds and
Municipal Bonds or the value of the shares of the Fund.

13
<PAGE>

The insurer will not have the right to withdraw coverage on securities
insured by their Policies and held by the Fund so long as such securities
remain in the Fund's portfolio. In addition, the insurer may not cancel its
Policies for any reason except failure to pay premiums when due. The Board of
Trustees of the Fund will reserve the right to terminate any of the Policies
if it determines that the benefits to the Fund of having its portfolio insured
under such policy are not justified by the expense involved.

The premiums for the Policies are paid by the Fund and the yield on the
Fund's portfolio is reduced thereby. The Investment Adviser estimates that the
cost of the annual premiums for the Policies currently ranges from
approximately of 1% to of 1% of the principal amount of the
Pennsylvania Municipal Bonds and Municipal Bonds covered by such Policies. The
estimate is based on the expected composition of the Fund's portfolio of
Pennsylvania Municipal Bonds and Municipal Bonds. Additional information
regarding the Policies is set forth in Appendix III to this Prospectus. In
instances in which the Fund purchases Pennsylvania Municipal Bonds and
Municipal Bonds insured under policies obtained by parties other than the
Fund, the Fund does not pay the premiums for such policies; rather, the cost
of such policies may be reflected in the purchase price of the Pennsylvania
Municipal Bonds and Municipal Bonds.

It is the intention of the Investment Adviser to retain any insured
securities that are in default or in significant risk of default and to place
a value on the insurance, which ordinarily will be the difference between the
market value of the defaulted security and the market value of similar
securities that are not in default. In certain circumstances, however, the
Investment Adviser may determine that an alternate value for the insurance,
such as the difference between the market value of the defaulted security and
its par value, is more appropriate. The Investment Adviser's ability to manage
the portfolio may be limited to the extent the Fund holds defaulted
securities, which may limit its ability in certain circumstances to purchase
other Pennsylvania Municipal Bonds and Municipal Bonds. See "Net Asset Value"
below for a more complete description of the Fund's method of valuing
defaulted securities and securities that have a significant risk of default.

There can be no assurance that insurance with the terms and issued by
insurance carriers meeting the criteria described above will continue to be
available to the Fund. In the event the Board of Trustees determines that such
insurance is unavailable or that the cost of such insurance outweighs the
benefits to the Fund, the Fund may modify the criteria for insurance carriers
or the terms of the insurance, or discontinue its policy of maintaining
insurance for all or any of the Pennsylvania Municipal Bonds and Municipal
Bonds held in the Fund's portfolio. Although the Investment Adviser
periodically reviews the financial condition of each insurer, there can be no
assurance that the insurers will be able to honor their obligations under all
circumstances.

The portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured Pennsylvania Municipal Bonds or
Municipal Bonds will not receive timely scheduled payments of principal or
interest). However, the insured Pennsylvania Municipal Bonds or Municipal
Bonds are subject to market risk (i.e., fluctuations in market value as a
result of changes in prevailing interest rates).

DESCRIPTION OF PENNSYLVANIA MUNICIPAL BONDS AND MUNICIPAL BONDS

Pennsylvania Municipal Bonds and Municipal Bonds include debt obligations
issued to obtain funds for various public purposes, including construction of
a wide range of public facilities, refunding of outstanding obligations and
obtaining funds for general operating expenses and loans to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to finance
various privately operated facilities, including certain local facilities for
water supply, gas,

14
<PAGE>

electricity, sewage or solid waste disposal. For purposes of this prospectus,
such obligations are Municipal Bonds if the interest paid thereon is exempt
from Federal income tax and are Pennsylvania Municipal Bonds if the interest
thereon is exempt from Federal and Pennsylvania income taxes, even though such
bonds may be industrial development bonds ("IDBs") or "private activity bonds"
as discussed below. Also, for purposes of this prospectus, Non-Municipal Tax-
Exempt securities as discussed above will be considered Pennsylvania Municipal
Bonds or Municipal Bonds.

The two principal classifications of Pennsylvania Municipal Bonds and
Municipal Bonds are "general obligation" bonds and "revenue" bonds, which
latter category includes IDBs and, for bonds issued after August 15, 1986,
private activity bonds. General obligation bonds are secured by the issuer's
pledge of faith, credit and taxing power for the repayment of principal and
the payment of interest. Revenue or special obligation bonds are payable only
from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise tax or other specific
revenue source such as from the user of the facility being financed. IDBs are
in most cases revenue bonds and do not generally constitute the pledge of the
credit or taxing power of the issuer of such bonds. The repayment of principal
and the payment of interest on such industrial development bonds depends
solely on the ability of the user of the facility financed by the bonds to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment. Pennsylvania Municipal
Bonds and Municipal Bonds may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of such
bonds becomes a moral commitment but not a legal obligation of the state or
municipality in question.

The Fund may purchase Pennsylvania Municipal Bonds and Municipal Bonds
classified as "private activity bonds" (in general, bonds that benefit non-
governmental entities). Interest received on certain tax-exempt securities
that are classified as "private activity bonds" may subject certain investors
in the Fund to an alternative minimum tax. There is no limitation on the
percentage of the Fund's assets that may be invested in Pennsylvania Municipal
Bonds and Municipal Bonds that may subject certain investors to an alternative
minimum tax. See "Taxes--General." Also included within the general category
of Pennsylvania Municipal Bonds and Municipal Bonds are participation
certificates issued by government authorities or entities to finance the
acquisition or construction of equipment, land and/or facilities. The
certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively referred to
as "lease obligations") relating to such equipment, land or facilities.
Although lease obligations do not constitute general obligations of the issuer
for which the issuer's unlimited taxing power is pledged, a lease obligation
frequently is backed by the issuer's covenant to budget for, appropriate and
make the payments due under the lease obligation. However, certain lease
obligations contain "non-appropriation" clauses, which provide that the issuer
has no obligation to make lease or installment purchase payments in future
years unless money is appropriated for such purpose on a yearly basis.
Although "non-appropriation" lease obligations are secured by the lease
property, disposition of the property in the event of foreclosure might prove
difficult. These securities represent a relatively new type of financing that
has not yet developed the depth of marketability associated with more
conventional securities.

Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation that may be enacted in the future may affect
the availability of Pennsylvania Municipal Bonds and Municipal Bonds for
investment by the Fund.

15
<PAGE>

SPECIAL CONSIDERATIONS RELATING TO PENNSYLVANIA MUNICIPAL BONDS

The Fund ordinarily will invest substantially all of its assets in
Pennsylvania Municipal Bonds, and therefore it is more susceptible to factors
adversely affecting issuers of Pennsylvania Municipal Bonds than is a
municipal bond mutual fund that is not concentrated in issuers of Pennsylvania
Municipal Bonds to this degree. Many different social, environmental and
economic factors may affect the financial condition of Pennsylvania and its
political subdivisions. From time to time Pennsylvania and certain of its
political subdivisions have encountered financial difficulties which adversely
affected their respective credit standings. Other factors which may negatively
affect economic conditions in Pennsylvania include adverse changes in
employment rates, Federal revenue sharing or laws with respect to tax-exempt
financing. The Investment Adviser does not believe that the current economic
conditions in Pennsylvania or other factors described above will have a
significant adverse effect on the Fund's ability to invest in high quality
Pennsylvania Municipal Bonds. See Appendix I, "Economic and Financial
Conditions in Pennsylvania."

OTHER INVESTMENT POLICIES

The Fund has adopted certain other policies as set forth below:

Borrowings. The Fund is authorized to borrow money in amounts of up to 5% of
the value of its total assets at the time of such borrowings; provided,
however, that the Fund is authorized to borrow moneys in amounts of up to 33
1/3% of the value of its total assets at the time of such borrowings to
finance the repurchase of its own common shares pursuant to tender offers or
otherwise to redeem or repurchase preferred shares or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known,
as with the issuance of preferred shares, as "leveraging") create an
opportunity for greater total return since the Fund will not be required to
sell portfolio securities to repurchase or redeem shares but, at the same
time, increase exposure to capital risk. In addition, borrowed funds are
subject to interest costs that may offset or exceed the return earned on the
borrowed funds.

When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell Pennsylvania Municipal Bonds and Municipal Bonds on a delayed
delivery basis or on a when-issued basis at fixed purchase or sale terms.
These transactions arise when securities are purchased or sold by the Fund
with payment and delivery taking place in the future. The purchase will be
recorded on the date the Fund enters into the commitment, and the value of the
obligation will thereafter be reflected in the calculation of the Fund's net
asset value. The value of the obligation on the delivery day may be more or
less than its purchase price. A separate account of the Fund will be
established with its custodian consisting of cash, cash equivalents or liquid
securities having a market value at all times at least equal to the amount of
the commitment.

Indexed and Inverse Floating Obligations. The Fund may invest in
Pennsylvania Municipal Bonds and Municipal Bonds yielding a return based on a
particular index of value or interest rates. For example, the Fund may invest
in Pennsylvania Municipal Bonds and Municipal Bonds that pay interest based on
an index of Municipal Bond interest rates. The principal amount payable upon
maturity of certain Pennsylvania Municipal Bonds and Municipal Bonds also may
be based on the value of an index. To the extent the Fund invests in these
types of Municipal Bonds, the Fund's return on such Pennsylvania Municipal
Bonds and Municipal Bonds will be subject to risk with respect to the value of
the particular index. Also, the Fund may invest in so-called "inverse floating
obligations" or "residual interest bonds" on which the interest rates
typically vary inversely with a short-term floating rate (which may be reset
periodically by a dutch auction, a remarketing agent, or by

16
<PAGE>

reference to a short-term tax-exempt interest rate index). The Fund may
purchase synthetically-created inverse floating rate bonds evidenced by
custodial or trust receipts. Generally, interest rates on inverse floating
rate bonds will decrease when short-term rates increase, and will increase
when short-term rates decrease. Such securities have the effect of providing a
degree of investment leverage, since they may increase or decrease in value in
response to changes in market interest rates at a rate that is a multiple
(typically two) of the rate at which fixed-rate, long-term, tax-exempt
securities increase or decrease in response to such changes. As a result, the
market values of such securities generally will be more volatile than the
market values of fixed-rate tax-exempt securities. To seek to limit the
volatility of these securities, the Fund may purchase inverse floating
obligations with shorter-term maturities or limitations on the extent to which
the interest rate may vary. The Investment Adviser believes that indexed and
inverse floating obligations represent a flexible portfolio management
instrument for the Fund that allows the Investment Adviser to vary the degree
of investment leverage relatively efficiently under different market
conditions.

Call Rights. The Fund may purchase a Pennsylvania Municipal Bond or
Municipal Bond issuer's right to call all or a portion of such Pennsylvania
Municipal Bond or Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Pennsylvania Municipal Bonds or
Municipal Bonds, subject to certain conditions. A Call Right that is not
exercised prior to the maturity of the related Pennsylvania Municipal Bond or
Municipal Bond will expire without value. The economic effect of holding both
the Call Right and the related Pennsylvania Municipal Bond or Municipal Bond
is identical to holding a Pennsylvania Municipal Bond or Municipal Bond as a
non-callable security.

Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security at
a mutually agreed-upon time and price, thereby determining the yield during
the term of the agreement. The Fund may not invest in repurchase agreements
maturing in more than seven days if such investments, together with all other
illiquid investments, would exceed 15% of the Fund's net assets. In the event
of default by the seller under a repurchase agreement, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the underlying securities.

In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest.

OPTIONS AND FUTURES TRANSACTIONS

The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain
financial futures contracts ("financial futures contracts") and options
thereon. While the Fund's use of hedging strategies is intended to reduce the
volatility of the net asset value of the common shares, the net asset value of
the common shares will fluctuate. There can be no assurance that the Fund's
hedging transactions will be effective. In addition, because of the
anticipated leveraged nature of the common shares, hedging transactions will
result in a larger impact on the net asset value of the common shares

17
<PAGE>

than would be the case if the common shares were not leveraged. Furthermore,
the Fund has no obligation to enter into hedging transactions and may only
engage in hedging activities from time to time and may not necessarily be
engaging in hedging activities when movements in interest rates occur.

Certain Federal income tax requirements may limit the Fund's ability to
engage in hedging transactions. Gains from transactions in options and futures
contracts distributed to shareholders will be taxable as ordinary income or,
in certain circumstances, as long-term capital gains to shareholders. See
"Taxes--Tax Treatment of Options and Futures Transactions." In addition, in
order to obtain ratings of the preferred shares from one or more nationally
recognized statistical ratings organizations ("NRSROs"), the Fund may be
required to limit its use of hedging techniques in accordance with the
specified guidelines of such organizations.

The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the Fund's use of such transactions
and risks associated with these transactions. The investment policies with
respect to the hedging transactions of the Fund are not fundamental policies
and may be modified by the Board of Trustees of the Fund without the approval
of the Fund's shareholders.

Writing Covered Call Options. The Fund may write (i.e., sell) covered call
options with respect to Pennsylvania Municipal Bonds and Municipal Bonds it
owns, thereby giving the holder of the option the right to buy the underlying
security covered by the option from the Fund at the stated exercise price
until the option expires. The Fund writes only covered call options, which
means that so long as the Fund is obligated as the writer of a call option, it
will own the underlying securities subject to the option. The Fund may not
write covered call options on underlying securities in an amount exceeding 15%
of the market value of its total assets.

The Fund will receive a premium from writing a call option, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Fund limits
its opportunity to profit from an increase in the market value of the
underlying security above the exercise price of the option for as long as the
Fund's obligation as a writer continues. Covered call options may serve as a
partial hedge against a decline in the price of the underlying security. The
Fund may engage in closing transactions in order to terminate outstanding
options that it has written.

Purchase of Options. The Fund may purchase put options in connection with
its hedging activities. By buying a put the Fund has a right to sell the
underlying security at the exercise price, thus limiting the Fund's risk of
loss through a decline in the market value of the security until the put
expires. The amount of any appreciation in the value of the underlying
security will be partially offset by the amount of the premium paid for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction; profit or loss from the sale
will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Fund may purchase
call options on securities held in its portfolio on which it has written call
options or on securities that it intends to purchase. The Fund will not
purchase options on securities if, as a result of such purchase, the aggregate
cost of all outstanding options on securities held by the Fund would exceed 5%
of the market value of the Fund's total assets.

Financial Futures Contracts and Options. The Fund is authorized to purchase
and sell certain financial futures contracts and options thereon solely for
the purpose of hedging its investments in Pennsylvania Municipal

18
<PAGE>

Bonds and Municipal Bonds against declines in value and to hedge against
increases in the cost of securities it intends to purchase. A financial
futures contract obligates the seller of a contract to deliver and the
purchaser of a contract to take delivery of the type of financial instrument
covered by the contract or, in the case of index-based futures contracts, to
make and accept a cash settlement, at a specific future time for a specified
price. A sale of financial futures contracts may provide a hedge against a
decline in the value of portfolio securities because such depreciation may be
offset, in whole or in part, by an increase in the value of the position in
the financial futures contracts. A purchase of financial futures contracts may
provide a hedge against an increase in the cost of securities intended to be
purchased because such appreciation may be offset, in whole or in part, by an
increase in the value of the position in the futures contracts.

The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker equal to approximately
5% of the contract amount must be deposited with the broker. This amount is
known as initial margin. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the financial
futures contract fluctuates making the long and short positions in the
financial futures contract more or less valuable.

The Fund may purchase and sell financial futures contracts based on The Bond
Buyer Municipal Bond Index, a price-weighted measure of the market value of 40
large tax-exempt issues, and purchase and sell put and call options on such
financial futures contracts for the purpose of hedging Pennsylvania Municipal
Bonds and Municipal Bonds that the Fund holds or anticipates purchasing
against adverse changes in interest rates. The Fund also may purchase and sell
financial futures contracts on U.S. Government securities and purchase and
sell put and call options on such financial futures contracts for such hedging
purposes. With respect to U.S. Government securities, currently there are
financial futures contracts based on long-term U.S. Treasury bonds, U.S.
Treasury notes, GNMA Certificates and three-month U.S. Treasury bills.

Subject to policies adopted by the Board of Trustees, the Fund also may
engage in transactions in other financial futures contracts, such as financial
futures contracts on other municipal bond indices that may become available,
if the Investment Adviser should determine that there is normally sufficient
correlation between the prices of such financial futures contracts and the
Pennsylvania Municipal Bonds and Municipal Bonds in which the Fund invests to
make such hedging appropriate.

Over-The-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC options").
In general, exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates.
OTC options transactions are two-party contracts with prices and terms
negotiated by the buyer and seller. See "Restrictions on OTC Options" below
for information as to restrictions on the use of OTC options.

Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. Certain OTC options and assets used to cover OTC options written
by the Fund may be considered to be illiquid. The illiquidity of such options
or assets may prevent a successful sale of such options or assets, result in a
delay of sale, or reduce the amount of proceeds that might otherwise be
realized.

19
<PAGE>

Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of financial futures contracts and movements in the price of the
security that is the subject of the hedge. If the price of the financial
futures contract moves more or less than the price of the security that is the
subject of the hedge, the Fund will experience a gain or loss that will not be
completely offset by movements in the price of such security. There is a risk
of imperfect correlation where the securities underlying financial futures
contracts have different maturities, ratings, geographic compositions or other
characteristics than the security being hedged. In addition, the correlation
may be affected by additions to or deletions from the index that serves as a
basis for a financial futures contract. Finally, in the case of financial
futures contracts on U.S. Government securities and options on such financial
futures contracts, the anticipated correlation of price movements between the
U.S. Government securities underlying the futures or options and Pennsylvania
Municipal Bonds and Municipal Bonds may be adversely affected by economic,
political, legislative or other developments that have a disparate impact on
the respective markets for such securities.

Under regulations of the Commodity Futures Trading Commission ("CFTC"), the
futures trading activities described herein will not result in the Fund being
deemed a "commodity pool," as defined under such regulations, provided that
the Fund adheres to certain restrictions. In particular, the Fund may purchase
and sell financial futures contracts and options thereon (i) for bona fide
hedging purposes, without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) for non-hedging purposes if,
immediately thereafter, the sum of the amount of initial margin deposits on
the Fund's existing futures positions and option premiums entered into for
non-hedging purposes does not exceed 5% of the market value of the liquidation
value of the Fund's portfolio, after taking into account unrealized profits
and unrealized losses on any such transactions. Margin deposits may consist of
cash or securities acceptable to the broker and the relevant contract market.

When the Fund purchases a financial futures contract, or writes a put option
or purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., commercial paper and daily tender adjustable notes) or
liquid securities in a segregated account with the Fund's custodian so that
the amount so segregated plus the amount of initial and variation margin held
in the account of its broker equals the market value of the financial futures
contract, thereby ensuring that the use of such financial futures contract is
unleveraged.

Certain risks are involved in options and futures transactions. The
Investment Adviser believes, however, that, because the Fund will engage in
options and futures transactions only for hedging purposes, the Fund's options
and futures portfolio strategies will not subject the Fund to those risks
associated with speculation in options and futures transactions.

The volume of trading in the exchange markets with respect to Pennsylvania
Municipal Bond or Municipal Bond options may be limited, and it is impossible
to predict the amount of trading interest that may exist in such options. In
addition, there can be no assurance that viable exchange markets will continue
to be available.

The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no
assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an options or futures transaction.
The inability to close options and futures positions also could have an
adverse impact on the Fund's ability to effectively hedge its portfolio. There
is also the risk of loss by the Fund of margin deposits or collateral in the
event of bankruptcy of a broker with which the Fund has an open position in an
option or financial futures contract.

20
<PAGE>

The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by
commodity exchanges that limit the amount of fluctuation in a financial
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. Prices
have in the past moved beyond the daily limit on a number of consecutive
trading days.

If it is not possible to close a financial futures position entered into by
the Fund, the Fund would continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily variation margin requirements at a time when it may
be disadvantageous to do so.

The successful use of these transactions also depends on the ability of the
Investment Adviser to forecast correctly the direction and extent of interest
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a financial futures contract is held by the
Fund or move in a direction opposite to that anticipated, the Fund may realize
a loss on the hedging transaction that is not fully or partially offset by an
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction. Furthermore, the Fund will only engage in hedging transactions
from time to time and may not necessarily be engaged in hedging transactions
when movements in interest rates occur.

RISKS AND SPECIAL CONSIDERATIONS OF LEVERAGE

EFFECTS OF LEVERAGE

Within approximately three months after the completion of this offering, the
Fund intends to offer shares of preferred shares representing approximately
40% of the Fund's capital immediately after the issuance of such preferred
shares. There can be no assurance, however, that preferred shares representing
such percentage of the Fund's capital will actually be issued. Issuing the
preferred shares will result in the leveraging of the common shares. Although
the Fund's Board of Trustees has not yet determined the terms of the preferred
shares offering, the Fund anticipates that the preferred shares will pay
dividends that will be adjusted over either relatively short-term periods
(generally seven to 28 days) or medium-term periods (up to five years). The
dividend rate will be based upon prevailing interest rates for debt
obligations of comparable maturity. The proceeds of the preferred shares
offering will be invested in longer-term obligations in accordance with the
Fund's investment objective. The expenses of the preferred shares, which will
be borne by the Fund, will reduce the net asset value of the common shares.
Additionally, under certain circumstances, when the Fund is required to
allocate taxable income to holders of preferred shares, the Fund anticipates
that the terms of the preferred shares will require the Fund to make an
additional distribution to such holders in an amount approximately equal to
the tax liability resulting from such allocation and such additional
distribution (an "Additional Distribution"). Because under normal market
conditions, obligations with longer maturities produce higher yields than
short-term and medium-term obligations, the Investment Adviser believes that
the spread inherent in the difference between the short-term and medium-term
rates (and any Additional Distribution) paid by the Fund as dividends on the
preferred shares and the longer-term rates received by the Fund may provide
holders of common shares with a potentially higher yield.

The use of leverage, however, involves certain risks to the holders of
common shares. For example, issuance of the preferred shares may result in
higher volatility of the net asset value of the common shares and potentially

21
<PAGE>

more volatility in the market value of the common shares. In addition, changes
in the short-term and medium-term dividend rates on, and the amount of taxable
income allocable to, the preferred shares will affect the yield to holders of
common shares. Leverage will allow holders of common shares to realize a
higher current rate of return than if the Fund were not leveraged as long as
the Fund, while accounting for its costs and operating expenses, is able to
realize a higher net return on its investment portfolio than the then current
dividend rate (and any Additional Distribution) of the preferred shares.
Similarly, since a pro rata portion of the Fund's net realized capital gains
are generally payable to holders of common shares, the effect of leverage will
be to increase the amount of such gains distributed to holders of common
shares. However, short-term, medium-term and long-term interest rates change
from time to time as do their relationships to each other (i.e., the slope of
the yield curve) depending upon such factors as supply and demand forces,
monetary and tax policies and investor expectations. Changes in any or all of
such factors could cause the relationship between short-term, medium-term and
long-term rates to change (i.e., to flatten or to invert the slope of the
yield curve) so that short-term and medium-term rates may substantially
increase relative to the long-term obligations in which the Fund may be
invested. To the extent that the current dividend rate (and any Additional
Distribution) on the preferred shares approaches the net return on the Fund's
investment portfolio, the benefit of leverage to holders of common shares will
be decreased. If the current dividend rate (and any Additional Distribution)
on the preferred shares were to exceed the net return on the Fund's portfolio,
holders of common shares would receive a lower rate of return than if the Fund
were not leveraged. Similarly, since both the cost of issuing the preferred
shares and any decline in the value of the Fund's investments (including
investments purchased with the proceeds from any preferred share offering)
will be borne entirely by holders of common shares, the effect of leverage in
a declining market would result in a greater decrease in net asset value to
holders of common shares than if the Fund were not leveraged. If the Fund is
liquidated, holders of preferred shares will be entitled to receive
liquidating distributions before any distribution is made to holders of common
shares.

In an extreme case, a decline in net asset value could affect the Fund's
ability to pay dividends on the common shares. Failure to make such dividend
payments could adversely affect the Fund's qualification as a regulated
investment company under Federal tax laws. See "Taxes." However, the Fund
intends to take all measures necessary to make common shares dividend
payments. If the Fund's current investment income is ever insufficient to meet
dividend payments on either the common shares or the preferred shares, the
Fund may have to liquidate certain of its investments. In addition, the Fund
will have the authority to redeem the preferred shares for any reason and may
redeem all or part of the preferred shares under the following circumstances:

. if the Fund anticipates that the leveraged capital structure will result
in a lower rate of return for any significant amount of time to holders
of the common shares than that obtainable if the common shares were not
leveraged,

. if the asset coverage for the preferred shares declines below 200% either
as a result of a decline in the value of the Fund's portfolio investments
or as a result of the repurchase of common shares in tender offers, or

. in order to maintain the asset coverage guidelines established by the
NRSROs that have rated the preferred shares.

Redemption of the preferred shares or insufficient investment income to make
dividend payments, may reduce the net asset value of the common shares and
require the Fund to liquidate a portion of its investments at a time when it
may be disadvantageous, in the absence of such extraordinary circumstances, to
do so.

As discussed under "Investment Advisory and Management Arrangements," during
periods when the Fund has preferred shares outstanding, the fees paid the
Investment Adviser for investment advisory and management

22
<PAGE>

services will be higher than if the Fund did not issue preferred shares
because the fees paid will be calculated on the basis of the Fund's average
weekly net assets, including proceeds from the sale of preferred shares.

Assuming the use of leverage by issuing preferred shares (paying dividends
at a rate that generally will be adjusted every 28 days) in an amount
representing approximately 40% of the Fund's capital at an annual dividend
rate of % payable on such preferred shares based on market rates as of the
date of this prospectus, the annual return that the Fund's portfolio must
experience (net of expenses) in order to cover such dividend payments would be
%.

The following table is designed to illustrate the effect on the return to a
holder of the Fund's common shares of the leverage obtained by the issuance of
preferred shares representing approximately 40% of the Fund's capital,
assuming hypothetical annual returns on the Fund's portfolio of minus 10% to
plus 10%. As the table shows, leverage generally increases the return to
shareholders when portfolio return is positive and decreases the return when
portfolio return is negative. The figures appearing in the table are
hypothetical and actual returns may be greater or less than those appearing in
the table.

<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return
(net of expenses).................................. (10)% (5)% 0 % 5% 10%
Corresponding Common Shares Return.................. % % % % %
</TABLE>

Leveraging the common shares cannot be fully achieved until preferred shares
are issued and the proceeds of such offering have been invested in long-term
Pennsylvania Municipal Bonds and Municipal Bonds.

PORTFOLIO MANAGEMENT AND OTHER CONSIDERATIONS

If short-term or medium-term rates increase or other changes in market
conditions occur to the point where the Fund's leverage could adversely affect
holders of common shares as noted above (or in anticipation of such changes),
the Fund may attempt to shorten the average maturity of its investment
portfolio in order to offset the negative impact of leverage. The Fund also
may attempt to reduce the degree to which it is leveraged by redeeming
preferred shares pursuant to the Fund's Certificate of Designation, which
establishes the rights and preferences of the preferred shares, or otherwise
by purchasing preferred shares. Purchases and redemptions of preferred shares,
whether on the open market or in negotiated transactions, are subject to
limitations under the 1940 Act. In determining whether or not it is in the
best interest of the Fund and its shareholders to redeem or repurchase
outstanding preferred shares, the Trustees will take into account a variety of
factors, including the following:

. market conditions,

. the ratio of preferred shares to common shares, and

. the expenses associated with such redemption or repurchase.

If market conditions subsequently change, the Fund may sell previously
unissued preferred shares or preferred shares that the Fund had issued but
later repurchased or redeemed.

The Fund intends to apply for ratings of the preferred shares from one or
more NRSROs. In order to obtain these ratings, the Fund may be required to
maintain portfolio holdings that meet the specified guidelines of such
organizations. These guidelines may impose asset coverage requirements that
are more stringent than those imposed by the 1940 Act. The Fund does not
anticipate that these guidelines will impede the Investment Adviser

23
<PAGE>

from managing the Fund's portfolio in accordance with the Fund's investment
objective and policies. Ratings on the preferred shares issued by the Fund
should not be confused with ratings on the obligations held by the Fund.

Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless, immediately after such issuance, the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding
preferred shares (expected to equal the original purchase price of the
outstanding preferred shares plus any accumulated and unpaid dividends thereon
and any accumulated and unpaid Additional Distribution). In addition, the Fund
is not permitted to declare any cash dividend or other distribution on its
common shares unless, at the time of such declaration, the net asset value of
the Fund's portfolio (determined after deducting the amount of such dividend
or distribution) is at least 200% of such liquidation value. Under the Fund's
proposed capital structure, assuming the sale of preferred shares representing
approximately 40% of the Fund's capital, the net asset value of the Fund's
portfolio is expected to be approximately 250% of the liquidation value of the
Fund's preferred shares. To the extent possible, the Fund intends to purchase
or redeem preferred shares from time to time to maintain coverage of preferred
shares of at least 200%.

INVESTMENT RESTRICTIONS

The following are fundamental investment restrictions of the Fund and, prior
to issuance of the preferred shares, may not be changed without the approval
of the holders of a majority of the Fund's outstanding common shares (which
for this purpose and under the 1940 Act means the lesser of (i) 67% of the
common shares represented at a meeting at which more than 50% of the
outstanding common shares are represented or (ii) more than 50% of the
outstanding shares). Subsequent to the issuance of the preferred shares, the
following investment restrictions may not be changed without the approval of a
majority of the outstanding common shares and of the outstanding preferred
shares, voting together as a class, and the approval of a majority of the
outstanding preferred shares, voting separately as a class. The Fund may not:

1. Make investments for the purpose of exercising control or management.

2. Purchase or sell real estate, commodities or commodity contracts;
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by entities that invest in real estate or
interest therein, and the Fund may purchase and sell financial futures
contracts and options thereon.

3. Issue senior securities or borrow money except as permitted by Section
18 of the 1940 Act.

4. Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933, as amended, in
selling portfolio securities.

5. Make loans to other persons, except that the Fund may purchase
Pennsylvania Municipal Bonds, Municipal Bonds and other debt securities and
enter into repurchase agreements in accordance with its investment
objective, policies and limitations.

6. Invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in a single industry;
provided that, for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.

Additional investment restrictions adopted by the Fund, which may be changed
by the Board of Trustees without shareholder approval, provide that the Fund
may not:

a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of

24
<PAGE>

other investment companies except if immediately thereafter not more than
(i) 3% of the total outstanding voting shares of such company is owned by
the Fund, (ii) 5% of the Fund's total assets, taken at market value, would
be invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding shares of any one closed-end investment company.

b. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in investment restriction
(3) above or except as may be necessary in connection with transactions in
financial futures contracts and options thereon.

c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).

d. Make short sales of securities or maintain a short position or invest
in put, call, straddle or spread options, except that the Fund may write,
purchase and sell options and futures on Pennsylvania Municipal Bonds,
Municipal Bonds, U.S. Government obligations and related indices or
otherwise in connection with bona fide hedging activities and may purchase
and sell Call Rights to require mandatory tender for the purchase of
related Pennsylvania Municipal Bonds and Municipal Bonds.

If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentages resulting from changing values will not be
considered a violation.

The Investment Adviser of the Fund and Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") are owned and controlled by Merrill Lynch & Co.
("ML & Co."). Because of the affiliation of Merrill Lynch with the Investment
Adviser, the Fund is prohibited from engaging in certain transactions
involving Merrill Lynch except pursuant to an exemptive order or otherwise in
compliance with the provisions of the 1940 Act and the rules and regulations
thereunder. Included among such restricted transactions will be purchases from
or sales to Merrill Lynch of securities in transactions in which it acts as
principal. An exemptive order has been obtained that permits the Fund to
effect principal transactions with Merrill Lynch in high quality, short-term,
tax-exempt securities subject to conditions set forth in such order. The Fund
may consider in the future requesting an order permitting other principal
transactions with Merrill Lynch, but there can be no assurance that such
application will be made and, if made, that such order would be granted.

TRUSTEES AND OFFICERS

Information about the Trustees, executive officers and portfolio managers of
the Fund, including their ages and their principal occupations during the last
five years is set forth below. Unless otherwise noted, the address of each
Trustee, executive officer and portfolio manager is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.

[To be provided by amendment]

25
<PAGE>

[To be provided by amendment]

26
<PAGE>

[To be provided by amendment]
- --------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Trustee or officer is a director, trustee or officer of one or more
additional investment companies for which the Investment Adviser or its
affiliate, MLAM, acts as investment adviser or manager.

In the event that the Fund issues preferred shares, in connection with the
election of the Fund's Trustees, holders of shares of preferred shares, voting
as a separate class, will be entitled to elect two of the Fund's Trustees, and
the remaining Trustees will be elected by all holders of capital shares,
voting as a single class. See "Description of Capital Shares."

COMPENSATION OF TRUSTEES

Pursuant to an Investment Advisory Agreement with the Fund, the Investment
Adviser pays all compensation of officers and employees of the Fund as well as
the fees of all Trustees who are affiliated persons of ML & Co. or its
subsidiaries.

The Fund pays each Trustee not affiliated with the Investment Adviser (each,
a "non-affiliated Trustee") a fee of $ per year plus $ per meeting
attended, and pays all Trustee's out-of-pocket expenses relating to attendance
at meetings. The Fund also compensates members of the Board's audit and
nominating committee (the "Committee"), which consists of all of the non-
affiliated Trustees, an annual fee of $ . The Chairman of the Committee
receives an additional annual fee of $ .

The following table sets forth compensation to be paid by the Fund to the
non-affiliated Trustees projected through the end of the Fund's first full
fiscal year, and for the calendar year ended December 31, 1997 the aggregate
compensation paid by all investment companies advised by the Investment
Adviser and its affiliate, MLAM ("FAM/MLAM Advised Funds"), to the non-
affiliated Trustees.

<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FAM/MLAM ADVISED
COMPENSATION ACCRUED AS PART OF FUNDS PAID TO
NAME OF TRUSTEE FROM FUND FUND EXPENSE TRUSTEES
- --------------- ------------ ------------------- ------------------
<S> <C> <C> <C>
(/1/)................. $ None $
(/1/)................. $ None $
(/1/)................. $ None $
(/1/)................. $ None $
(/1/)................. $ None $
</TABLE>
- --------
(1) The Trustees serve on the boards of MLAM/FAM Advised Funds as follows:
( registered investment companies consisting of portfolios);
( registered investment companies consisting of portfolios);
( registered investment companies consisting of portfolios);
( registered investment companies consisting of portfolios); and
( registered investment companies consisting of portfolios).

27
<PAGE>

INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS

The Investment Adviser, which is owned and controlled by ML & Co., a
financial services holding company and the parent of Merrill Lynch, provides
the Fund with investment advisory and management services. The Merrill Lynch
Asset Management Group (which includes the Investment Adviser) acts as the
investment adviser to more than 100 registered investment companies and offers
investment advisory services to individuals and institutional accounts. As of
1998, the Asset Management Group had a total of approximately $
billion in investment company and other portfolio assets under management
(approximately $ billion of which was invested in municipal securities).
This amount includes assets managed for certain affiliates of the Investment
Adviser. The Investment Adviser is a limited partnership, the partners of
which are ML & Co. and Princeton Services, Inc. The principal business address
of the Investment Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey
08536.

The Investment Advisory Agreement provides that, subject to the direction of
the Board of Trustees of the Fund, the Investment Adviser is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Trustees.

The Investment Adviser provides the portfolio management for the Fund. Such
portfolio management will consider analyses from various sources (including
brokerage firms with which the Fund does business), make the necessary
investment decisions, and place orders for transactions accordingly. The
Investment Adviser will also be responsible for the performance of certain
administrative and management services for the Fund. and are the
portfolio managers of the Fund and are primarily responsible for the Fund's
day-to-day management.

For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay a monthly fee at an annual rate of of
1% of the Fund's average weekly net assets (i.e., the average weekly value of
the total assets of the Fund, including proceeds from the issuance of
preferred shares, minus the sum of accrued liabilities of the Fund and
accumulated dividends on the preferred shares). For purposes of this
calculation, average weekly net assets are determined at the end of each month
on the basis of the average net assets of the Fund for each week during the
month. The assets for each weekly period are determined by averaging the net
assets at the last business day of a week with the net assets at the last
business day of the prior week.

The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the
Fund, as well as the compensation of all Trustees of the Fund who are
affiliated persons of the Investment Adviser or any of its affiliates. The
Fund pays all other expenses incurred in the operation of the Fund, including,
among other things, expenses for legal and auditing services, taxes, costs of
printing proxies, listing fees, if any, share certificates and shareholder
reports, charges of the custodian and the transfer and dividend disbursing
agent and registrar, fees and expenses with respect to the issuance of
preferred shares, Securities and Exchange Commission fees, fees and expenses
of non-affiliated Trustees, accounting and pricing costs, insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
mailing and other expenses properly payable by the Fund. Accounting services
are provided to the Fund by the Investment Adviser, and the Fund reimburses
the Investment Adviser for its costs in connection with such services.

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<PAGE>

Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for a period of two years from the date of
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Board of Trustees of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Trustees who are
not parties to such contract or interested persons (as defined in the 1940
Act) of any such party. Such contract is not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the shareholders of the Fund.

Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for an
advisory client when other clients are selling the same security. If purchases
or sales of securities by the Investment Adviser for the Fund or other funds
for which it acts as investment adviser or for advisory clients arise for
consideration at or about the same time, transactions in such securities will
be made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. Transactions effected by the Investment Adviser (or
its affiliates) on behalf of more than one of its clients during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, causing an adverse effect on price.

CODE OF ETHICS

The Board of Trustees of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act that incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes significantly restrict
the personal investing activities of all employees of the Investment Adviser
and, as described below, impose additional, more onerous, restrictions on Fund
investment personnel.

The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as U.S.
Government securities). The preclearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation applicable
to the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading securities. In addition, no employee may purchase or sell any
security that at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" that prohibit trading by investment personnel of
the Fund within periods of trading by the Fund in the same (or equivalent)
security (15 or 30 days depending upon the transaction).

PORTFOLIO TRANSACTIONS

Subject to policies established by the Board of Trustees of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Investment Adviser generally seeks reasonably competitive commission
rates, the Fund does not necessarily pay the lowest commission or spread
available.

29
<PAGE>

The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to providing the
best price and execution, securities firms that provide supplemental
investment research to the Investment Adviser, including Merrill Lynch, may
receive orders for transactions by the Fund. Research information provided to
the Investment Adviser by securities firms is supplemental. It does not
replace or reduce the level of services performed by the Investment Adviser
and the expenses of the Investment Adviser will not be reduced because it
receives supplemental research information.

The Fund invests in securities traded in the over-the-counter markets, and
the Fund intends to deal directly with dealers who make markets in the
securities involved, except in those circumstances where better prices and
execution are available elsewhere. Under the 1940 Act, except as permitted by
exemptive order, persons affiliated with the Fund, including Merrill Lynch,
are prohibited from dealing with the Fund as principal in the purchase and
sale of securities. Since transactions in the over-the-counter market usually
involve transactions with dealers acting as principals for their own accounts,
the Fund does not deal with Merrill Lynch and its affiliates in connection
with such transactions except that, pursuant to exemptive orders obtained by
the Investment Adviser, the Fund may engage in principal transactions with
Merrill Lynch in high quality, short-term, tax-exempt securities. See
"Investment Restrictions." However, affiliated persons of the Fund, including
Merrill Lynch, serve as its brokers in certain over-the-counter transactions
conducted on an agency basis.

The Fund also may purchase tax-exempt debt instruments in individually
negotiated transactions with the issuers. Because an active trading market may
not exist for such securities, the prices that the Fund may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.

PORTFOLIO TURNOVER

The Fund may dispose of securities without regard to the time they have been
held when such action, for defensive or other reasons, if it appears advisable
to the Investment Adviser. While it is not possible to predict turnover rates
with any certainty, presently it is anticipated that the Fund's annual
portfolio turnover rate, under normal circumstances, should be less than 100%.
(The portfolio turnover rate is calculated by dividing the lesser of purchases
or sales of portfolio securities for the particular fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
particular fiscal year. For purposes of determining this rate, all securities
whose maturities at the time of acquisition are one year or less are
excluded.) A high portfolio turnover rate bears certain tax consequences and
results in greater transaction costs, which are borne directly by the Fund.

DIVIDENDS AND DISTRIBUTIONS

The Fund intends to distribute all its net investment income. Dividends from
such net investment income will be declared and paid monthly to holders of
common shares. It is expected that the Fund will commence paying dividends to
holders of common shares within approximately 90 days of the date of this
prospectus. From and after issuance of the preferred shares, monthly
distributions to holders of common shares normally will consist of
substantially all net investment income remaining after the payment of
dividends (and any Additional Distribution) on the preferred shares. All net
realized capital gains, if any, will be distributed pro rata at least annually
to holders of common shares and any preferred shares. While any preferred
shares are outstanding, the Fund may not declare any cash dividend or other
distribution on its common shares, unless at the time of such declaration, (i)
all accumulated preferred share dividends, including any Additional
Distribution, have been paid,

30
<PAGE>

and (ii) the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or other distribution) is at least 200%
of the liquidation value of the outstanding preferred shares (expected to
equal the original purchase price of the outstanding preferred shares plus any
accumulated and unpaid dividends thereon and any accumulated but unpaid
Additional Distribution). If the Fund's ability to make distributions on its
common shares is limited, such limitation could under certain circumstances
impair the ability of the Fund to maintain its qualification for taxation as a
regulated investment company, which would have adverse tax consequences for
holders of common shares. See "Taxes."

See "Automatic Dividend Reinvestment Plan" for information concerning the
manner in which dividends and distributions to holders of common shares may be
automatically reinvested in common shares of the Fund. Dividends and
distributions may be taxable to shareholders under certain circumstances as
discussed below, whether they are reinvested in shares of the Fund or received
in cash.

TAXES

GENERAL

The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as it so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income
and 90% of its tax-exempt net income (see below), the Fund (but not its
shareholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Fund
intends to distribute substantially all of such income.

The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.

The Fund intends to qualify to pay "exempt-interest dividends" as defined in
Section 852(b)(5) of the Code. Under such section if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be
qualified to pay exempt-interest dividends to its shareholders. Exempt-
interest dividends are dividends or any part thereof paid by the Fund that are
attributable to interest on tax-exempt obligations and designated by the Fund
as exempt-interest dividends in a written notice mailed to the Fund's
shareholders within 60 days after the close of its taxable year. To the extent
that the dividends distributed to the Fund's shareholders are derived from
interest income exempt from tax under Code Section 103(a) and are properly
designated as exempt-interest dividends, they will be excludable from a
shareholder's gross income for Federal income tax purposes. Exempt-interest
dividends are included, however, in determining the portion, if any, of a
person's social security and railroad retirement benefits subject to Federal
income taxes. Each shareholder is advised to consult a tax adviser with
respect to whether exempt-interest dividends retain the exclusion under Code
Section 103(a) if such shareholder

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<PAGE>

would be treated as a "substantial user" or "related person" under Code
Section 147(a) with respect to property financed with the proceeds of an issue
of "industrial development bonds" or "private activity bonds," if any, held by
the Fund.

The portion of dividends paid from interest received by the Fund from
Pennsylvania Municipal Bonds also will be exempt from Pennsylvania personal
income tax. However, distributions attributable to capital gains derived by
the Fund as well as distributions derived from income from investments other
than Pennsylvania Municipal Bonds will be taxable for purposes of the
Pennsylvania personal income tax. In the case of residents of the City of
Philadelphia, distributions which are derived from interest received by the
Fund from Pennsylvania Municipal Bonds or which are designated as capital gain
dividends for Federal income tax purposes will be exempt from the Philadelphia
School District investment income tax. Interest on indebtedness incurred or
continued to purchase or carry shares of a RIC paying exempt interest
dividends, such as the Fund, will not be deductible by the investor for
Federal or Pennsylvania income tax purposes to the extent attributable to
exempt interest dividends.

Shareholders subject to income taxation by states other than Pennsylvania
will realize a lower after tax rate of return than Pennsylvania shareholders
since the dividends distributed by the Fund generally will not be exempt, to
any significant degree, from income taxation by such other states. The Fund
will inform shareholders annually regarding the portion of the Fund's
distributions which constitutes exempt-interest dividends and the portion
which is exempt from Pennsylvania personal income taxes.

As a result of a pronouncement by the Pennsylvania Department of Revenue, an
investment in the Fund by a corporate shareholder will apparently qualify as
an exempt asset for purposes of the single asset apportionment fraction
available in computing the Pennsylvania capital stock/foreign franchise tax to
the extent that the portfolio securities of the Fund comprise investments in
Pennsylvania and/or United States Government Securities that would be exempt
assets if owned directly by the corporation. To the extent exempt-interest
dividends are excluded from taxable income for Federal corporate income tax
purposes (determined before net operating loss carryovers and special
deductions), they will not be subject to the Pennsylvania corporate net income
tax. An investment in or distributions from investment income and capital
gains of the Fund, including exempt-interest dividends, may be subject to
state taxes in states other than Pennsylvania (and, possibly, in Pennsylvania)
and to local taxes imposed by municipalities in states other than Pennsylvania
(and, possibly, municipalities in Pennsylvania). Accordingly, investors in the
Fund should consult their tax advisors with respect to the application of such
taxes to an investment in the Fund, to the receipt of Fund dividends and to
their Pennsylvania tax situation in general.

Shares of the Fund will be exempt from Pennsylvania county personal property
taxes to the extent the Fund's portfolio securities consist of Pennsylvania
Municipal Bonds on the annual assessment date.

To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions
will be considered taxable ordinary income for Federal income tax purposes.
Distributions, if any, from an excess of net long-term capital gains over net
short-term capital losses derived from the sale of securities or from certain
transactions in futures or options ("capital gain dividends") are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the shareholder has owned Fund shares. Certain categories of
capital gains are taxable at different rates. Generally not later than 60 days
after the close of its taxable year, the Fund will provide its shareholders
with a written notice designating the amounts of any exempt-interest
dividends, ordinary income dividends or capital gain dividends, as well as any
amount of capital gain dividends in the different categories of capital gain
referred to above. Distributions by the Fund, whether from

32
<PAGE>

exempt-income, ordinary income or capital gains, are not eligible for the
dividends received deduction allowed to corporations under the Code.

All or a portion of the Fund's gain from the sale or redemption of tax-
exempt obligations purchased at a market discount will be treated as ordinary
income rather than capital gain. This rule may increase the amount of ordinary
income dividends received by shareholders. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed to the extent of any exempt-interest
dividends received by the shareholder. In addition, any such loss that is not
disallowed under the rule stated above will be treated as long-term capital
loss to the extent of any capital gain dividends received by the shareholder.
If the Fund pays a dividend in January that was declared in the previous
October, November or December to shareholders of record on a specified date in
one of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on December 31 of the
year in which such dividend was declared.

The Internal Revenue Service (the "Service") has taken the position in a
revenue ruling that if a RIC has more than one class of shares, it may
designate distributions made to each class in any year as consisting of no
more than such class's proportionate share of particular types of income,
including exempt-interest income and net long-term capital gains. A class's
proportionate share of a particular type of income is determined according to
the percentage of total dividends paid by the RIC during such year that was
paid to such class. Consequently, when common shares and one or more series of
preferred shares are outstanding, the Fund intends to designate distributions
made to the classes as consisting of particular types of income in accordance
with the classes' proportionate shares of such income. Thus, the Fund will
designate dividends paid as exempt-interest dividends in a manner that
allocates such dividends among the holders of common shares and series of
preferred shares in proportion to the total dividends paid to each class
during the taxable year, or otherwise as required by applicable law. Capital
gain dividends will similarly be allocated among the classes in proportion to
the total dividends paid to each class during the taxable year, or otherwise
as required by applicable law. When capital gain or other taxable income is
allocated to holders of preferred shares pursuant to the allocation rules
described above, the terms of the preferred shares may require the Fund to
make an additional distribution to or otherwise compensate such holders for
the tax liability resulting from such allocation.

The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax will
apply to interest received on certain "private activity bonds" issued after
August 7, 1986. Private activity bonds are bonds that, although tax-exempt,
are used for purposes other than those generally performed by governmental
units and that benefit non-governmental entities (e.g., bonds used for
industrial development or housing purposes). Income received on such bonds is
classified as an item of "tax preference" that could subject certain investors
in such bonds, including shareholders of the Fund, to an increased alternative
minimum tax. The Fund intends to purchase such "private activity bonds" and
will report to shareholders within 60 days after calendar year-end the portion
of its dividends declared during the year that constitutes an item of tax
preference for alternative minimum tax purposes. The Code further provides
that corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings," which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay an alternative minimum tax on
exempt-interest dividends paid by the Fund.

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<PAGE>

The Fund may invest in instruments the return on which includes
nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special
tax rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such nontraditional
instruments could be recharacterized as taxable ordinary income.

If at any time when preferred shares are outstanding the Fund does not meet
the asset coverage requirements of the 1940 Act, the Fund will be required to
suspend distributions to holders of common shares until the asset coverage is
restored. See "Dividends and Distributions." This may prevent the Fund from
distributing at least 90% of its net investment income and may, therefore,
jeopardize the Fund's qualification for taxation as a RIC. Upon any failure to
meet the asset coverage requirements of the 1940 Act, the Fund, in its sole
discretion, may redeem preferred shares in order to maintain or restore the
requisite asset coverage and avoid the adverse consequences to the Fund and
its shareholders of failing to qualify as a RIC. There can be no assurance,
however, that any such action would achieve such objectives.

As noted above, the Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted
for this purpose if it qualifies for the dividends paid deduction under the
Code. Some types of preferred shares that the Fund currently contemplates
issuing may raise an issue as to whether distributions on such preferred
shares are "preferential" under the Code and, therefore, not eligible for the
dividends paid deduction. The Fund intends to issue preferred shares that
counsel advises will not result in the payment of a preferential dividend and
may seek a private letter ruling from the Service to that effect. If the Fund
ultimately relies solely on a legal opinion when it issues such preferred
shares, there is no assurance that the Service would agree that dividends on
the preferred shares are not preferential. If the Service successfully
disallowed the dividends paid deduction for dividends on the preferred shares,
the Fund could be disqualified as a RIC. In this case, dividends on the common
shares would not be exempt from Federal income taxes. Additionally, the Fund
would be subject to the alternative minimum tax.

The value of shares acquired pursuant to the Fund's dividend reinvestment
plan will generally be excluded from gross income to the extent that the cash
amount reinvested would be excluded from gross income. If, when the Fund's
shares are trading at a premium over net asset value, the Fund issues shares
pursuant to the dividend reinvestment plan that have a greater fair market
value than the amount of cash reinvested, it is possible that all or a portion
of such discount (which may not exceed 5% of the fair market value of the
Fund's shares) could be viewed as a taxable distribution. If the discount is
viewed as a taxable distribution, it is also possible that the taxable
character of this discount would be allocable to all of the shareholders,
including shareholders who do not participate in the dividend reinvestment
plan. Thus, shareholders who do not participate in the dividend reinvestment
plan, as well as dividend reinvestment plan participants, might be required to
report as ordinary income a portion of their distributions equal to their
allocable share of the discount.

Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.

Under certain Code provisions, some taxpayers may be subject to 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,

34
<PAGE>

shareholders subject to backup withholding are those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that such investor is not otherwise subject to backup withholding.

The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.

TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS

The Fund may purchase or sell municipal bond index financial futures
contracts and interest rate financial futures contracts on U.S. Government
securities. The Fund may also purchase and write call and put options on such
financial futures contracts. In general, unless an election is available to
the Fund or an exception applies, such options and financial futures contracts
that are "Section 1256 contracts" will be "marked to market" for Federal
income tax purposes at the end of each taxable year, i.e., each such option or
financial futures contract will be treated as sold for its fair market value
on the last day of the taxable year, and any gain or loss attributable to
Section 1256 contracts will be 60% long-term and 40% short-term capital gain
or loss. Application of these rules to Section 1256 contracts held by the Fund
may alter the timing and character of distributions to shareholders. The mark-
to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest rates with respect to its investments.

Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in
certain sales of securities and certain closing transactions in financial
futures contracts or the related options.

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

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations and Pennsylvania tax laws
presently in effect. For the complete provisions, reference should be made to
the pertinent Code sections, the Treasury Regulations promulgated thereunder
and Pennsylvania tax laws. The Code and the Treasury Regulations, as well as
the Pennsylvania tax laws, are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.

Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, state, local or foreign taxes.

AUTOMATIC DIVIDEND REINVESTMENT PLAN

Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"),
unless a holder of common shares otherwise elects, all dividend and capital
gains distributions will be automatically reinvested by
, as agent for shareholders in administering the Plan (the "Plan Agent"),
in additional common shares of the Fund. Holders of common shares who elect
not to participate in the Plan will receive all distributions in cash paid by
check mailed directly to the shareholder of record (or, if the shares are held
in street or other nominee name, then to such nominee) by , as
dividend paying agent. Such participants may elect not to participate in the
Plan and to receive all distributions of

35
<PAGE>

dividends and capital gains in cash by sending written instructions to
, as dividend paying agent, at the address set forth below. Participation
in the Plan is completely voluntary and may be terminated or resumed at any
time without penalty by written notice if received by the Plan Agent not less
than ten days prior to any dividend record date; otherwise, such termination
or resumption will be effective with respect to any subsequently declared
dividend or distribution.

Whenever the Fund declares an income dividend or a capital gains
distribution (collectively, referred to as "dividends") payable either in
shares or in cash, non-participants in the Plan will receive cash, and
participants in the Plan will receive the equivalent in common shares. The
shares will be acquired by the Plan Agent for the participant's account,
depending upon the circumstances described below, either (i) through receipt
of additional unissued but authorized common shares from the Fund ("newly
issued shares") or (ii) by purchase of outstanding common shares on the open
market ("open-market purchases") on the New York Stock Exchange (the "NYSE")
or elsewhere. If on the payment date for the dividend, the net asset value per
share of the common shares is equal to or less than the market price per
common shares plus estimated brokerage commissions (such condition being
referred to herein as "market premium"), the Plan Agent will invest the
dividend amount in newly issued shares on behalf of the participant. The
number of newly issued shares of common shares to be credited to the
participant's account will be determined by dividing the dollar amount of the
dividend by the net asset value per share on the date the shares are issued,
provided that the maximum discount from the then current market price per
share on the date of issuance may not exceed 5%. If on the dividend payment
date the net asset value per share is greater than the market value (such
condition being referred to herein as "market discount"), the Plan Agent will
invest the dividend amount in shares acquired on behalf of the participant in
open-market purchases. Prior to the time the common shares commence trading on
the NYSE, participants in the Plan will receive any dividends in newly issued
shares.

In the event of a market discount on the dividend payment date, the Plan
Agent will have until the last business day before the next date on which the
shares trade on an "ex-dividend" basis or in no event more than 30 days after
the dividend payment date (the "last purchase date") to invest the dividend
amount in shares acquired in open-market purchases. It is contemplated that
the Fund will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a common share exceeds the net
asset value per share, the average per share purchase prices paid by the Plan
Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the dividend had been paid in newly issued
shares on the dividend payment date. Because of the foregoing difficulty with
respect to open-market purchases, the Plan provides that if the Plan Agent is
unable to invest the full dividend amount in open-market purchases during the
purchase period or if the market discount shifts to a market premium during
the purchase period, the Plan Agent will cease making open-market purchases
and will invest the uninvested portion of the dividend amount in newly issued
shares at the close of business on the last purchase date.

The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by shareholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form
in the name of the participant and each shareholder's proxy will include those
shares purchased or received pursuant to the Plan. The Plan Agent will forward
all proxy solicitation materials to participants and vote proxies for shares
held pursuant to the Plan in accordance with the instructions of the
participants.

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<PAGE>

In the case of shareholders such as banks, brokers or nominees that hold
shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the record shareholders as representing the total amount registered
in the record shareholder's name and held for the account of beneficial owners
who are to participate in the Plan.

There will be no brokerage charges with respect to shares issued directly by
the Fund as a result of dividends or capital gains distributions payable
either in shares or in cash. However, each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan Agent's open-
market purchases in connection with the reinvestment of dividends.

The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends. See "Taxes."

Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus
commissions of the Fund's shares is above the net asset value, participants in
the Plan will receive shares of the Fund at less than they could otherwise
purchase them and will have shares with a cash value greater than the value of
any cash distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem its
shares, the price on resale may be more or less than the net asset value. See
"Taxes" for a discussion of tax consequences of the Plan.

Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by
the participants.

All correspondence concerning the Plan should be directed to the Plan Agent
at .

MUTUAL FUND INVESTMENT OPTION

Purchasers of common shares of the Fund through Merrill Lynch in this
offering will have an investment option consisting of the right to reinvest
the net proceeds from a sale of such shares (the "Original Shares") in Class D
initial sales charge shares of certain Merrill Lynch-sponsored open-end mutual
funds ("Eligible Class D Shares") at their net asset value, without the
imposition of the initial sales charge, if the conditions set forth below are
satisfied. First, the sale of the Original Shares must be made through Merrill
Lynch, and the net proceeds therefrom must be immediately reinvested in
Eligible Class D Shares. Second, the Original Shares must have been either
acquired in this offering or be shares representing reinvested dividends from
common shares acquired in this offering. Third, the Original Shares must have
been continuously maintained in a Merrill Lynch securities account. Fourth,
there must be a minimum purchase of $250 to be eligible for the investment
option. Class D shares of the mutual funds are subject to an account
maintenance fee at an annual rate of up to 0.25% of the average daily net
asset value of such mutual fund. The Eligible Class D Shares may be redeemed
at any time at the next determined net asset value, subject in certain cases
to a redemption fee. Prior to the time the common shares commence trading on
the NYSE, the distributor for the mutual funds will advise Merrill Lynch
Financial Consultants as to those mutual funds that offer the investment
option described above.

37
<PAGE>

NET ASSET VALUE

Net asset value per common share is determined as of 15 minutes after the
close of business on the NYSE (generally, the NYSE closes at 4:00 p.m.,
Eastern time) on the last business day in each week. For purposes of
determining the net asset value of a common share, the value of the securities
held by the Fund plus any cash or other assets (including interest accrued but
not yet received) minus all liabilities (including accrued expenses) and the
aggregate liquidation value of the outstanding preferred shares is divided by
the total number of common shares outstanding at such time. Expenses,
including the fees payable to the Investment Adviser, are accrued daily.

The Pennsylvania Municipal Bonds and Municipal Bonds in which the Fund
invests are traded primarily in the over-the-counter markets. In determining
net asset value, the Fund utilizes the valuations of portfolio securities
furnished by a pricing service approved by the Board of Trustees. The pricing
service typically values portfolio securities at the bid price or the yield
equivalent when quotations are readily available. Pennsylvania Municipal Bonds
and Municipal Bonds for which quotations are not readily available are valued
at fair market value on a consistent basis as determined by the pricing
service using a matrix system to determine valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Fund
under the general supervision of the Board of Trustees. The Board of Trustees
has determined in good faith that the use of a pricing service is a fair
method of determining the valuation of portfolio securities. Positions in
futures contracts are valued at closing prices for such contracts established
by the exchange on which they are traded, or if market quotations are not
readily available, are valued at fair value on a consistent basis using
methods determined in good faith by the Board of Trustees.

The Fund determines and makes available for publication the net asset value
of its common shares weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities
are published in Barron's, the Monday edition of The Wall Street Journal, and
the Monday and Saturday editions of The New York Times.

DESCRIPTION OF CAPITAL SHARES

The Fund is authorized to issue an unlimited number of shares of beneficial
interest, par value $.10 per share. The Board of Trustees may authorize
separate classes of shares together with such designations and powers,
preferences and rights, qualifications, limitations and restrictions as may be
determined from time to time by the Trustees. Pursuant to such authority, the
Trustees have authorized the issuance of an unlimited number of common shares
together with 1,000,000 preferred shares. Within approximately three months
after completion of the offering of the common shares described herein, the
Fund intends to offer preferred shares representing approximately 40% of the
Fund's capital immediately after the issuance of such preferred shares. There
is no assurance that such preferred shares will be issued.

The Fund is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust of the Fund contains an express
disclaimer of shareholder liability for acts or obligations of the Fund and
provides for indemnification and reimbursement of expenses out of the Fund's
property for any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to

38
<PAGE>

circumstances in which the Fund itself would be unable to meet its
obligations. Given the nature of the Fund's assets and operations, the
possibility of the Fund being unable to meet its obligations is remote and, in
the opinion of Massachusetts counsel to the Fund, the risk to Fund
shareholders is remote.

The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to any shareholder, nor is any
Trustee, officer, employee of agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his or
her own bad faith, willful misfeasance, gross negligence, or reckless
disregard of their duties. It also provides that all third persons shall look
solely to the Fund property for satisfaction of claims arising in connection
with the affairs of the Fund. With the exceptions stated, the Declaration of
Trust provides that a Trustee, officer, employee or agent is entitled to be
indemnified against all liability in connection with the affairs of the Fund.

COMMON SHARES

Common shares, when issued and outstanding, will be fully paid and non-
assessable. Shareholders are entitled to share pro rata in the net assets of
the Fund available for distribution to shareholders upon liquidation of the
Fund. Shareholders are entitled to one vote for each share held.

So long as any shares of the Fund's preferred shares are outstanding,
holders of common shares will not be entitled to receive any net income of or
other distributions from the Fund unless all accumulated dividends on
preferred shares have been paid and unless asset coverage (as defined in the
1940 Act) with respect to preferred shares would be at least 200% after giving
effect to such distributions. See "Preferred Shares" below.

The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders.

The Investment Adviser provided the initial capital for the Fund by
purchasing 6,667 common shares of the Fund for $100,005. As of the date of
this prospectus, the Investment Adviser owned 100% of the outstanding common
shares of the Fund. The Investment Adviser may be deemed to control the Fund
until such time as it owns less than 25% of the outstanding shares of the
Fund.

PREFERRED SHARES

It is anticipated that the Fund's preferred shares will be issued in one or
more series, with rights as determined by the Board of Trustees, by action of
the Board of Trustees without the approval of the holders of common shares.
Under the 1940 Act, the Fund is permitted to have outstanding more than one
series of preferred stock so long as no single series has a priority over
another series as to the distribution of assets of the Fund or the payment of
dividends. Holders of common shares have no preemptive right to purchase any
preferred shares that might be issued. It is anticipated that the net asset
value per the preferred shares will equal its original purchase price per
share plus accumulated dividends per share.

The Fund's Board of Trustees has declared its intention to authorize an
offering of preferred shares (representing approximately 40% of the Fund's
capital immediately after the issuance of such preferred shares) within
approximately three months after completion of the offering of common shares,
subject to market conditions and to the Board's continuing to believe that
leveraging the Fund's capital structure through the issuance of preferred
shares is likely to achieve the benefits to the holders of common shares
described in the

39
<PAGE>

prospectus. Although the terms of the preferred shares, including its dividend
rate, voting rights, liquidation preference and redemption provisions will be
determined by the Board of Trustees (subject to applicable law and the Fund's
Declaration of Trust), the initial series of preferred shares will be
structured to carry either a relatively short-term dividend rate, in which
case periodic redetermination of the dividend rate will be made at relatively
short intervals (generally seven or 28 days), or a medium-term dividend rate,
in which case periodic redetermination of the dividend rate will be made at
intervals of up to five years. In either case, such redetermination of the
dividend rate will be made through an auction or remarketing procedure.
Additionally, under certain circumstances, when the Fund is required to
allocate taxable income to holders of the preferred shares, it is anticipated
that the terms of the preferred shares will require the Fund to make an
Additional Distribution (as defined in "Risks and Special Considerations of
Leverage--Effects of Leverage") to such holders. The Board also has indicated
that it is likely that the liquidation preference, voting rights and
redemption provisions of the preferred shares will be as stated below. The
Fund's Declaration of Trust, as amended, together with any Certificate of
Designation, is referred to below as the "Charter."

Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of preferred
shares will be entitled to receive a preferential liquidating distribution
(expected to equal the original purchase price per share plus an amount equal
to accumulated and unpaid dividends whether or not earned or declared and any
accumulated and unpaid Additional Distribution) before any distribution of
assets is made to holders of common shares. After payment of the full amount
of the liquidating distribution to which they are entitled, the preferred
shareholders will not be entitled to any further participation in any
distribution of assets by the Fund. A consolidation or merger of the Fund with
or into any other corporation or corporations or a sale of all or
substantially all of the assets of the Fund will not be deemed to be a
liquidation, dissolution or winding up of the Fund.

Voting Rights. Except as otherwise indicated in this prospectus and except
as otherwise required by applicable law, holders of preferred shares will have
equal voting rights with holders of common shares (one vote per share) and
will vote together with holders of common shares as a single class.

In connection with the election of the Fund's trustees, holders of preferred
shares, voting as a separate class, will be entitled to elect two of the
Fund's trustees, and the remaining trustees will be elected by all holders of
capital shares, voting as a single class. So long as any preferred shares are
outstanding, the Fund will have not less than five trustees. If at any time
dividends on the Fund's preferred shares shall be unpaid in an amount equal to
two full years' dividends thereon, the holders of all outstanding preferred
shares, voting as a separate class, will be entitled to elect a majority of
the Fund's trustees until all dividends in default have been paid or declared
and set apart for payment.

The affirmative vote of the holders of a majority of the outstanding
preferred shares, voting as a separate class, will be required to (i)
authorize, create or issue any class or series of shares ranking prior to any
series of preferred shares with respect to payment of dividends or the
distribution of assets on liquidation or (ii) amend, alter or repeal the
provisions of the Charter, whether by merger, consolidation or otherwise, so
as to adversely affect any of the contract rights expressly set forth in the
Charter of holders of preferred shares.

Redemption Provisions. It is anticipated that preferred shares will
generally be redeemable at the option of the Fund at a price equal to their
liquidation preference plus accumulated but unpaid dividends to the date of
redemption plus, under certain circumstances, a redemption premium. Preferred
shares will also be subject to

40
<PAGE>

mandatory redemption at a price equal to their liquidation preference plus
accumulated but unpaid dividends to the date of redemption upon the occurrence
of certain specified events, such as the failure of the Fund to maintain asset
coverage requirements for the preferred shares specified by the rating
agencies that issue ratings on the preferred shares.

CERTAIN PROVISIONS OF THE DECLARATION OF TRUST

The Fund's Declaration of Trust includes provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Trustees and could
have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. A trustee may be removed
from office with or without cause, but only by vote of the holders of at least
66 2/3% of the votes entitled to be voted on the matter. A trustee elected by
all the holders of capital shares may be removed only by action of such
holders, and a trustee elected by the holders of preferred shares may be
removed only by action of such holders.

In addition, the Declaration of Trust requires the favorable vote of the
holders of at least 66 2/3% of the Fund's capital shares then entitled to be
voted, voting as a single class, to approve, adopt or authorize the following:

. a merger or consolidation or statutory share exchange of the Fund with
other corporations,

. a sale of all or substantially all of the Fund's assets (other than in the
regular course of the Fund's investment activities), or

. a liquidation or dissolution of the Fund, unless such action has been
approved, adopted or authorized by the affirmative vote of two-thirds of
the total number of Trustees fixed in accordance with the by-laws, in
which case the affirmative vote of a majority of the Fund's capital
shares is required. Following the proposed issuance of the preferred
shares, it is anticipated that the approval, adoption or authorization of
the foregoing would also require the favorable vote of a majority of the
Fund's preferred shares then entitled to be voted, voting as a separate
class.

In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Declaration of Trust. The amendment would
have to be declared advisable by the Board of Trustees prior to its submission
to shareholders. Such an amendment would require the favorable vote of the
holders of at least 66 2/3% of the Fund's outstanding capital shares
(including any preferred shares) entitled to be voted on the matter, voting as
a single class (or a majority of such shares if the amendment was previously
approved, adopted or authorized by two-thirds of the total number of Trustees
fixed in accordance with the by-laws), and, assuming preferred shares are
issued, the affirmative vote of a majority of outstanding preferred shares of
the Fund, voting as a separate class. Such a vote also would satisfy a
separate requirement in the 1940 Act that the change be approved by the
shareholders. Shareholders of an open-end investment company may require the
company to redeem their common shares at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset
value, less such redemption charge, if any, as might be in effect at the time
of a redemption. All redemptions will be made in cash. If the Fund is
converted to an open-end investment company, it could be required to liquidate
portfolio securities to meet requests for redemption, and the common shares
would no longer be listed on a stock exchange.

Conversion to an open-end investment company would also require redemption
of all outstanding preferred shares and would require changes in certain of
the Fund's investment policies and restrictions, such as those relating to the
issuance of senior securities, the borrowing of money and the purchase of
illiquid securities.

41
<PAGE>

The Board of Trustees has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under
Massachusetts law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Charter on file with the Securities
and Exchange Commission for the full text of these provisions.

CUSTODIAN

The Fund's securities and cash are held under a custodial agreement with
.

UNDERWRITING

Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed, subject to the terms and conditions of a Purchase Agreement with the
Fund and the Investment Adviser, to purchase common shares from the
Fund. The Underwriter is committed to purchase all of such shares if any are
purchased.

The Underwriter has advised the Fund that it proposes initially to offer the
common shares to the public at the public offering price set forth on the
cover page of this prospectus. There is no sales charge or underwriting
discount charged to investors on purchases of common shares in the offering.
The Investment Adviser or an affiliate has agreed to pay the Underwriter from
its own assets a commission in connection with the sale of common shares in
the offering in the amount of $ per share. Such payment is equal to %
of the initial public offering price per share. The Underwriter also has
advised the Fund that from this amount the Underwriter may pay a concession to
certain dealers not in excess of $ per share on sales by such dealers.
After the initial public offering, the public offering price and other selling
terms may be changed. Investors must pay for common shares purchased in the
offering on or before , 1999.

The Fund has granted the Underwriter an option, exercisable for 45 days
after the date hereof, to purchase up to additional common shares to
cover over-allotments, if any, at the initial offering price.

The Underwriter may engage in certain transactions that stabilize the price
of the common shares. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the common shares.

If the Underwriter creates a short position in the common shares in
connection with the offering, i.e., if it sells more common shares than are
set forth on the cover page of this prospectus, the Underwriter may reduce
that short position by purchasing common shares in the open market. The
Underwriter also may elect to reduce any short position by exercising all or
part of the over-allotment option described above.

The Underwriter also may impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases common shares in the
open market to reduce the Underwriter's short position or to stabilize the
price of the common shares, it may reclaim the amount of the selling
concession from the selling group members who sold those common shares as part
of the offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a

42
<PAGE>

penalty bid might also have an effect on the price of a security to the extent
that it were to discourage resales of the security.

Neither the Fund nor the Underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the shares of common stock. In addition,
neither the Fund nor the Underwriter makes any representation that the
Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.

Prior to this offering, there has been no public market for the common
shares. The Fund plans to apply to list its common shares on the NYSE.
However, during an initial period which is not expected to exceed two weeks
from the date of this prospectus, the Fund's common shares will not be listed
on any securities exchange. Additionally, before it begins trading, the
Underwriter does not intend to make a market in the Fund's common shares,
although a limited market may develop. Thus, it is anticipated that investors
may not be able to buy and sell shares of the Fund during such period. In
order to meet the requirements for listing, the Underwriter has undertaken to
sell lots of 100 or more shares to a minimum of 2,000 beneficial owners.

The Fund anticipates that the Underwriter may from time to time act as a
broker in connection with the execution of its portfolio transactions. The
Fund has obtained an exemptive order permitting it to engage in certain
principal transactions with the Underwriter involving high quality, short-
term, tax-exempt securities subject to certain conditions. See "Investment
Restrictions" and "Portfolio Transactions."

The Underwriter is an affiliate of the Investment Adviser of the Fund.

The Fund and the Investment Adviser have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act of
1933.

TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR

The transfer agent, dividend disbursing agent and registrar for the common
shares of the Fund is .

LEGAL OPINIONS

Certain legal matters in connection with the common shares offered hereby
will be passed upon for the Fund and the Underwriter by Brown & Wood LLP, New
York, New York. Brown & Wood LLP will rely as to matters of Massachusetts law
on the opinion of Bingham Dana LLP, Boston, Massachusetts.

EXPERTS

The statement of assets, liabilities and capital of the Fund as of ,
1999 included in this prospectus and Registration Statement has been audited
by , independent auditors, as set forth in their report thereon
appearing elsewhere herein, and is included in reliance upon such report given
upon authority of such firm as experts in accounting and auditing. The
selection of independent auditors is subject to ratification by shareholders
of the Fund.

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<PAGE>

ADDITIONAL INFORMATION

The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required
to file reports, proxy statements and other information with the Securities
and Exchange Commission (the "Commission"). Any such reports, proxy statements
and other information can be inspected and copies at the public reference
facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: Regional Office, at Seven World Trade Center, Suite 1300, New
York, New York 10048; Pacific Regional Office, at 5670 Wilshire Boulevard,
11th Floor, Los Angeles, California 90036; and Midwest Regional Office, at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained from the public
reference section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Commission maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Fund, that file
electronically with the Commission. Reports, proxy statements and other
information concerning the Fund can also be inspected at the offices of the
New York Stock Exchange, 20 Broad Street, New York, New York 10005.

Additional information regarding the Fund is contained in the Registration
Statement on Form N-2, including amendments, exhibits and schedules thereto,
relating to such shares filed by the Fund with the Commission in Washington,
D.C. This prospectus does not contain all of the information set forth in the
Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the fund and the shares
offered hereby, reference is made to the Registration Statement. Statements
contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the
Commission upon the payment of certain fees prescribed by the Commission.

YEAR 2000 ISSUES

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

44
<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Board of Trustees and Shareholder of
MuniHoldings Pennsylvania Insured Fund

We have audited the accompanying statement of assets, liabilities and capital
of MuniHoldings Pennsylvania Insured Fund as of , 1999. This statement
of assets, liabilities and capital is the responsibility of the Fund's
management. Our responsibility is to express an opinion on this statement of
assets, liabilities and capital based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of assets, liabilities
and capital is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the statement
of assets, liabilities and capital. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall statement of assets, liabilities and capital
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the statement of assets, liabilities and capital referred to
above presents fairly, in all material respects, the financial position of
MuniHoldings Pennsylvania Insured Fund at , 1999, in conformity with
generally accepted accounting principles.

45
<PAGE>

MUNIHOLDINGS PENNSYLVANIA INSURED FUND

STATEMENT OF ASSETS, LIABILITIES AND CAPITAL

, 1999

<TABLE>
<S> <C>
ASSETS
Cash................................................................ $100,005
Offering costs (Note 1).............................................
Deferred organization costs (Note 1)................................
--------
Total assets......................................................
--------
LIABILITIES
Liabilities and accrued expenses (Note 1)...........................
--------
NET ASSETS............................................................ $100,005
========
CAPITAL
Common Shares, par value $.10 per share; unlimited shares
authorized; 6,667 shares issued and outstanding (Note 1)........... $ 667
Paid-in Capital in excess of par.................................... 99,338
--------
Total Capital-Equivalent to $15.00 net asset value per Common Share
(Note 1)........................................................... $100,005
========
</TABLE>

NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL

NOTE 1. ORGANIZATION

The Fund was organized under the laws of the Commonwealth of Massachusetts
on December 3, 1998 as a closed-end, non-diversified management investment
company and has had no operations other than the sale to Fund Asset
Management, L.P. (the "Investment Adviser") of an aggregate of 6,667 shares
for $100,005 on , 1999. The General Partner of the Investment Adviser is
an indirectly wholly owned subsidiary of Merrill Lynch & Co., Inc.

Deferred organization costs will be amortized on a straight-line basis over
a period not exceeding five years beginning with the commencement of
operations of the Fund. Direct costs relating to the public offering of the
Fund's shares will be charged to capital at the time of issuance of shares. In
accordance with Statement of Position 98-5, unamortized organization costs
existing at , 1999 (the start of the Fund's new fiscal year), will be
charged to expense at that date. At the present time, management believes that
this charge will not have any material impact on the operations of the Fund.

NOTE 2. MANAGEMENT ARRANGEMENTS

The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
monthly fee at an annual rate of of 1% of the Fund's average weekly net
assets, including proceeds from the issuance of preferred shares. The
Investment Adviser or an affiliate will pay Merrill Lynch, Pierce, Fenner &
Smith Incorporated a commission in the amount of % of the price to the
public per share in connection with the initial public offering of the Fund's
Common Shares.

NOTE 3. FEDERAL INCOME TAXES

The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code
of 1986, as amended) will not be subject to Federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders.

46
<PAGE>

APPENDIX I

ECONOMIC AND FINANCIAL CONDITIONS IN PENNSYLVANIA

The following information is a brief summary of factors affecting the
economy of the Commonwealth of Pennsylvania and does not purport to be a
complete description of such factors. Other factors will affect issuers. The
summary is based upon one or more of the most recent publicly available
offering statements relating to debt offerings of Pennsylvania issuers;
however, it has not been updated. The Fund has not independently verified the
information.

Many factors affect the financial condition of the Commonwealth of
Pennsylvania (also referred to herein as the "Commonwealth") and its political
subdivisions, such as social, environmental and economic conditions, many of
which are not within the control of such entities. Pennsylvania and certain of
its counties, cities and school districts and public bodies (most notably the
City of Philadelphia, sometimes referred to herein as the "City") have from
time to time in the past encountered financial difficulties which have
adversely affected their respective credit standings. Such difficulties could
affect outstanding obligations of such entities, including obligations held by
the Fund.

The General Fund, the Commonwealth's largest fund, receives all tax
revenues, non-tax revenues and Federal grants and entitlements that are not
specified by law to be deposited elsewhere. The majority of the Commonwealth's
operating and administrative expenses are payable from the General Fund. Debt
service on all bonded indebtedness of the Commonwealth, except that issued for
highway purposes or for the benefit of other special revenue funds, is payable
from the General Fund.

The period from fiscal year 1993 through fiscal 1997 was a time of steady,
modest economic growth and low rates of inflation. These economic conditions,
together with tax reductions in the several years following the tax rate
increases and tax base expansions enacted in fiscal 1991 for the General Fund,
produced tax revenue gains averaging 4.1% per year during the period. Total
revenues during the same period increased at a 4.7% average rate.
Intergovernmental revenue recorded the largest percentage gain during this
period, averaging 8.1% (due, in part, to an accounting change). Expenditures
and other uses during the fiscal 1993 through fiscal 1997 period rose at a
3.8% rate, led by and average 13.8% annual increase for protection of persons
and property program costs. This high rate of increase reflects the costs to
acquire, staff and operate expanded prison facilities to house a larger prison
population. Public health and welfare program costs expanded an average 5.4%
annually during this period, the second largest rate of increase for program
categories.

The fund balance at June 30, 1997 totaled $1,364.9 million, a $729.7 million
increase over the $635.2 million balance at June 30, 1996.

The unappropriated balance of Commonwealth revenues increased during the
1997 fiscal year by $432.9 million to $591.4 million (prior to reserves for
transfer to the Tax Stabilization Reserve Fund) at the close of the fiscal
year. Higher than estimated revenues and slightly lower expenditures than
budgeted caused the increase. Transfers to the Tax Stabilization Reserve Fund
for fiscal 1997 operations will be $88.7 million representing the normal
fifteen percent of the ending unappropriated balance, plus an additional $100
million authorized by the General Assembly when it enacted the fiscal 1998
budget.

47
<PAGE>

Commonwealth revenues (prior to tax refunds) during the fiscal year totaled
$17,320.6 million, $576.1 million (3.4%) above the estimate made at the time
the budget was enacted. Revenue from taxes was the largest contributor to
higher than estimated receipts. Tax revenue in fiscal 1997 grew 6.1% over tax
revenues in fiscal 1996. This rate of increase was not adjusted for legislated
tax reductions that affected receipts during both of those fiscal years and
therefore understates the actual underlying rate of growth of tax revenue
during fiscal 1997. Non-tax revenues were $19.8 million (5.8%) over estimate
mostly due to higher than anticipated interest earnings.

Expenditures from Commonwealth revenues (excluding pooled financing
expenditures) during fiscal 1997 totaled $16,347.7 million and were close to
the estimate made in February 1997 with the presentation of the Governor's
fiscal 1998 budget request. Total expenditures represent an increase over
fiscal 1996 expenditures of 1.7%. Lapses of appropriation authority during the
fiscal year totaled $200.6 million compared to an estimate of $100 million.
The higher amount of appropriation lapses was used to support $79.8 million in
fiscal 1997 supplemental appropriations over the February 1997 estimate.
Supplemental appropriations for fiscal 1997 totaled $169.3 million.

For GAAP purposes, assets increased $563.4 million and liabilities declined
$166.3 million to produce a $729.7 million increase in the fund balance at
June 30, 1997. Total revenues and other sources rose 3.5% for fiscal 1997. An
increase of 5.5% in tax revenue aided by an improving state economy was
partially offset by a $175.2 million decline in intergovernmental revenues.
Expenditures and other uses increased by 1% for this fiscal year.

Operations during the 1998 fiscal year increased the unappropriated balance
of Commonwealth revenues during that period by $86.4 million to $488.7 million
at June 30, 1998 (prior to reserves for transfer to the Tax Stabilization
Reserve Fund). Higher than estimated revenues, offset in part by increased
reserves for tax refunds, and slightly lower expenditures than budgeted were
responsible for the increase. Transfers to the Tax Stabilization Reserve Fund
for fiscal 1998 operations will total $223.3 million consisting of $73.3
million representing the required transfer of fifteen percent of the ending
unappropriated surplus balance, plus an additional $150 million authorized by
the General Assembly when it enacted the fiscal 1999 budget. With these
transfers, the balance in the Tax Stabilization Reserve Fund will exceed $664
million and represent 3.7% of fiscal 1998 revenues.

Commonwealth revenues (prior to tax refunds) during the fiscal year totaled
$18.123.2 million, $676.1 million (3.9%) above the estimate made at the time
the budget was enacted. Tax revenue received in fiscal 1998 grew 4.8% over tax
revenues received during fiscal 1997. This rate of increase includes the
effect of legislated tax reductions that affected receipts during both fiscal
years and therefore understates the actual underlying rate of growth of tax
revenue during fiscal 1998. Receipts from the personal income tax produced the
largest single component of higher revenues during fiscal 1998.

Expenditures from all fiscal 1998 appropriations of Commonwealth revenues
totaled $17,229.8 million (excluding pooled financing expenditures and net of
current year lapses). This amount represents an increase of 4.5% over fiscal
1997 appropriation expenditures. Lapses of appropriation authority during the
fiscal year totaled $161.8 million including $58.8 million from fiscal 1998
appropriations. These appropriation lapses were used to fund $120.5 million of
supplemental fiscal 1998 appropriations.

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Reserves established during fiscal 1998 for tax refunds totaled $910
million. This amount is a $370 million increase over tax refund reserves for
fiscal 1997 representing an increase of 68.5%. The fiscal 1998 amount includes
a one-time addition intended to fund all fiscal 1998 tax refund liabilities,
including that portion to be paid during fiscal 1999. In prior fiscal years,
tax refunds generally were budgeted for the year in which the disbursement was
anticipated to occur. This change in the recognition of tax refund liabilities
on a budgetary basis is expected to reduce the difference between the
budgetary basis unappropriated balance and the GAAP basis unreserved and
undesignated balance (when computed) for the 1998 fiscal year.

The budget for fiscal 1999 was enacted in April 1998 at which time the
official revenue estimate for the 1999 fiscal year was established at
$18,456.6 million. Only Commonwealth funds are included in the official
revenue estimate. The official revenue estimate is based on an economic
forecast for national gross domestic product, on a year-over-year basis, to
slow from an estimated annualized 3.9% rate in the fourth quarter of 1997 to a
projected 1.8% annualized growth rate by the second quarter of 1999. The
forecast of slowing economic activity is based on the expectation that
consumers will reduce their pace of spending, particularly on motor vehicles,
housing and other durable goods. Business is also expected to trim its
spending on fixed investments. Foreign demand for domestic goods is expected
to decline in reaction to economic difficulties in Asia and Latin America,
while an economic recovery in Europe is expected to proceed slowly. The
underlying growth rate, excluding any effect of scheduled or proposed tax
changes, for the General Fund fiscal 1999 official revenue estimate is 3.0%
over actual fiscal 1998 revenues. When adjusted to include the estimated
effect of enacted tax changes, fiscal 1999 Commonwealth revenues are projected
to increase by 1.66% over actual Commonwealth revenues for fiscal 1998.

Tax reductions anticipated to be included in the enacted 1999 fiscal year
budget totaled an estimated $241.0 million for fiscal 1999. Of the anticipated
reductions, legislation representing tax reductions totaling $15 million has
not yet been passed by the General Assembly. All estimates for fiscal 1999
assume enactment of those tax reductions currently pending before the General
Assembly. The major components of the enacted tax reductions and their
estimated fiscal 1999 cost are: (a) reduce the capital stock and franchise tax
rate from 12.75 mills to 11.99 mills ($72.5 million); (b) increase the
eligibility income limit for qualification for personal income tax forgiveness
($57.1 million); (c) eliminate personal income tax on gains from the sale of
an individual's residence ($30 million); (d) extend the time period from three
to ten years over which net operating loss deductions may be taken for the
corporate net income tax ($17.8 million); (e) expand various sales tax
exemptions ($40.4 million); and (f) reduce various other miscellaneous items
($23.2 million). The major tax changes were enacted with January 1, 1998
effective dates. Consequently, the first year's cost of these changes may be
above the expected annualized cost.

Reserves for tax refunds for fiscal 1999 total $603.9 million. This amount
includes $33.1 million of tax refunds anticipated to be due to the enacted
fiscal 1999 tax changes and included in the estimated cost of those changes.
Reserves for tax refunds for fiscal 1999 are $306.1 million below the reserve
established for fiscal 1998. The fiscal 1998 amount (described above) includes
a one-time addition intended to fund all fiscal 1998 tax refund liabilities,
including that portion to be paid during fiscal 1999. Without the necessity to
pay fiscal 1998 tax refund liabilities from fiscal 1999 reserves, the fiscal
1999 reserve need only be in an amount equal to the estimated fiscal 1999
estimate for tax refund liabilities.

Appropriations enacted for fiscal 1999 are 4.1% ($705.1 million) above the
appropriations enacted for fiscal 1998 (including supplemental
appropriations). Major increases in expenditures budgeted for fiscal 1999
include:

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(a) $249.5 million in direct support of local school district education costs
(local school districts will also benefit from an estimate $104 million of
reduced contributions by school districts to their worker's retirement cost
from a reduced employer contribution rate); (b) $60.4 million for higher
education, including scholarship grants; (c) $56.5 million to fund the
correctional system, including $21 million to operate a new correctional
facility; (d) $121.1 million for long-term care medical assistance costs; (e)
$14.4 million for technology and Year 2000 investments; (f) $55.9 million to
fund the first year's cost of a July 1, 1998 annuitant cost of living increase
for state and school district employees; and (g) $20 million to replace bond
funding for equipment loans for volunteer fire and rescue companies. The
balance of the increase is spread over many departments and program
operations.

The enacted fiscal 1999 budget assumes the drawn down of the $265.4 million
beginning budgetary balance by $141.1 million to an estimated closing balance,
prior to transfer of the required portion to the Tax Stabilization Reserve
Fund, of $124.3 million. The amount of the anticipated drawn down does not
consider the availability of appropriation lapses normally occurring during a
fiscal year that are used to fund supplemental appropriations or increase
unappropriated surplus.

Pennsylvania has historically been identified as a heavy industry state
although that reputation has changed over the last thirty years as the coal,
steel and railroad industries declined and the Commonwealth's business
environment readjusted to reflect a more diversified industrial base. This
economic readjustment was a direct result of a long-term shift in jobs,
investment and workers away from the northeast part of the nation. Currently,
the major sources of growth in Pennsylvania are in the service sector,
including trade, medical and the health services, education and financial
institutions.

Nonagricultural employment in Pennsylvania over the ten year period that
ended in 1997 increased at an annual rate of 0.76%. This compares to a 0.17%
rate for the Middle Atlantic region and a 1.69% rate for the United States as
a whole during the period 1988 through 1997. For the five years ended with
1997, employment in the Commonwealth has increased 5.4%. The growth in
employment during this period is higher than the 4.8% growth in the Middle
Atlantic region. The unemployment rate in Pennsylvania for June 1998 stood at
a seasonably adjusted rate of 4.3%. The seasonably adjusted national
unemployment rate for June 1998 was 4.5%.

The current Constitutional provisions pertaining to Commonwealth debt permit
the issuance of the following types of debt: (i) debt to suppress insurrection
or rehabilitate areas affected by disaster, (ii) electorate-approved debt,
(iii) debt for capital projects subject to an aggregate debt limit of 1.75
times the annual average tax revenues of the preceding five fiscal years and
(iv) tax anticipation notes payable in the fiscal year of issuance. All debt
except tax anticipation notes must be amortized in substantial and regular
amounts.

Debt service on all bonded indebtedness of Pennsylvania, except that issued
for highway purposes or the benefit of other special revenue funds, is payable
from Pennsylvania's General Fund, which receives all Commonwealth revenues
that are not specified by law to be deposited elsewhere. As of June 30, 1998,
the Commonwealth had $4,724.5 million of general obligation debt outstanding.

Other state-related obligations include "moral obligations." Moral
obligation indebtedness may be issued by the Pennsylvania Housing Finance
Agency (the "PHFA"), a state-created agency which provides financing for
housing for lower and moderate income families, and The Hospitals and Higher
Education Facilities Authority of Philadelphia, a municipal authority
organized by the City of Philadelphia to, among other things, acquire and
prepare various sites for use as intermediate care facilities for the mentally
retarded. PHFA's bonds,

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but not its notes, are partially secured by a capital reserve fund required to
be maintained by PHFA in an amount equal to the maximum annual debt service on
its outstanding bonds in any succeeding calendar year. PHFA is not permitted
to borrow additional funds as long as any deficiency exists in the capital
reserve fund.

The Commonwealth, through several of its departments and agencies, has
entered into various agreements to lease, as lessee, certain real property and
equipment, and to make lease payments for the use of such property and
equipment. Some of those leases and their respective lease payments are, with
the Commonwealth's approval, pledged as security for debt obligations issued
by certain public authorities or other entities within the state. All lease
payments due from Commonwealth departments and agencies are subject to and
dependent upon an annual spending authorization approved through the
Commonwealth's annual budget process. The Commonwealth is not required by law
to appropriate or otherwise provide monies from which the lease payments are
to be made. The obligations to be paid from such lease payments are not bonded
debt of the Commonwealth.

Certain Commonwealth-created organizations have statutory authorization to
issue debt for which Commonwealth appropriations to pay debt service thereon
are not required. The debt of these agencies is funded by assets of, or
revenues derived from, the various projects financed and is not a statutory or
moral obligation of the Commonwealth. Some of these agencies, however, are
indirectly dependent on Commonwealth operating appropriations. The
Commonwealth may choose to take action to financially assist these
organizations. In addition, the Commonwealth may choose to take action to
financially assist these organizations. The Commonwealth also maintains
pension plans covering all state employees, public school employees and
employees of certain state-related organizations. For their fiscal years ended
in 1997 the State Employees' Retirement System had no accrued unfunded surplus
or liability and the Public School Employees' Retirement System had a total
unfunded actuarial accrued surplus of $1,633 million.

The City of Philadelphia is the largest city in the Commonwealth with an
estimated population of 1,585,577 according to the 1990 Census. Legislation
providing for the establishment of Pennsylvania Intergovernmental Cooperation
Authority (the "PICA") to assist Philadelphia in remedying fiscal emergencies
was enacted by the Pennsylvania General Assembly and approved by the Governor
in June 1991. PICA is designed to provide assistance through the issuance of
funding debt and to make factual findings and recommendations to Philadelphia
concerning its budgetary and fiscal affairs. At this time, Philadelphia is
operating under a five year fiscal plan approved by PICA on June 9, 1998.

PICA has issued $1.76 billion of its Special Tax Revenue Bonds. This
financial assistance has included the refunding of certain city general
obligation bonds, funding of capital projects and the liquidation of the
cumulative General Fund balance deficit as of June 30, 1992 of $224.9 million.
The audited General Fund balance of Philadelphia as of June 30, 1997 shows a
surplus of approximately $128.8 million.

No further bonds are to be issued by PICA for the purpose of financing a
capital project or deficit as the authority for such bond sales expired
December 31, 1994. PICA's authority to issue debt for the purpose of financing
a cash flow deficit expired on December 31, 1996. Its ability to refund
existing outstanding debt is unrestricted. PICA had $1,055 million in Special
Revenue bonds outstanding as of June 30, 1998.

There is various litigation pending against the Commonwealth, its officers
and employees. In 1978, the Pennsylvania General Assembly approved a limited
waiver of sovereign immunity. Damages for any loss are limited to $250,000 for
each person and $1 million for each accident. The Supreme Court held that this
limitation is constitutional. Approximately 3,500 suits against the
Commonwealth are pending.

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The following are among the cases with respect to which the Office of
Attorney General and the Office of General Counsel have determined that an
adverse decision may have a material effect on government operations of the
Commonwealth:

Baby Neal v. Commonwealth, et al.

In 1990, the American Civil Liberties Union and other various named
plaintiffs filed an action against the Commonwealth, the City of Philadelphia
and others in federal court seeking an order that, among other things, would
require the Commonwealth to provide additional funding for child welfare
services. No figures for the amount of funding sought are available. A similar
lawsuit filed in the Commonwealth Court of Pennsylvania was resolved through a
court approved settlement which provides, among other things, for more
Commonwealth funding for such services in fiscal year 1991 and a commitment to
pay Pennsylvania counties $30 million over five years. The Commonwealth sought
dismissal of the federal action based, among other things, on the settlement
of the Commonwealth Court case. In December 1994, the Third Circuit Court of
Appeals reversed the District Court's denial of the plaintiff's motion for
class certification in the federal action with respect to the interests of 16
minor plaintiffs. As a result, the District Court has recently certified the
class and the parties have resumed discovery. In July 1998, the plaintiffs
entered into a settlement agreement with the City of Philadelphia and related
parties and submitted the agreement to the district court for approval. The
plaintiffs have indicated that they intend to proceed with their claims
against the Commonwealth and other non-settling parties. The Commonwealth
intends to defend.

County of Allegheny v. Commonwealth of Pennsylvania

On December 7, 1987, the Supreme Court of Pennsylvania held that the
statutory scheme for county funding of the judicial system is in conflict with
the Pennsylvania Constitution. However, judgment was stayed in order to afford
the General Assembly an opportunity to enact appropriate funding legislation
consistent with its opinion. On December 7, 1992, the State Association of
County Commissioners filed a new action in mandamus seeking to compel the
Commonwealth to comply with the Supreme Court's decision in County of
Allegheny. The Court issued the writ on July 26, 1996, and appointed a special
master to devise and submit a plan for implementation. Following the issuance
of the writ, the President Pro Tempore of the Senate and the Speaker of the
House filed a petition seeking reconsideration from the Court. On January 28,
1997, the Supreme Court granted an extension of time within which the special
master must file his report and announced the establishment of a committee
comprised of members of the Executive Department, the Legislative Department
and the special master, to develop an implementation plan. On July 26, 1997,
the "Interim Report of the Master" was filed setting forth a state funding
proposal. Numerous objections to the report were filed, but the Court has
taken no action on them.

On April 22, 1998, the Pennsylvania General Assembly enacted legislation
appropriating approximately $12 million to the Supreme Court for the purpose
of funding county court administrators. The appropriation was designed to
enable the Commonwealth to implement Phase I of the special master's plan.
However, the legislation also provides that no funds from the appropriation
may be expended until legislation has been approved by the General Assembly
providing for the payment of Commonwealth compensation of county court
administrators. Because no such legislation has yet been enacted, the $12
million appropriated to the Judicial Department cannot be used.

On May 11, 1998, the Administrative Governing Board of the First Judicial
District (comprising the Court of Common Pleas of Philadelphia, the
Philadelphia Municipal Court, and the Traffic Court of Philadelphia) filed

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an action in mandamus in the Commonwealth Court of Pennsylvania against the
City of Philadelphia and several City officials, claiming that the City
government had failed to provide adequate funds for the operation of the
courts of the First Judicial District. The petitioners have demanded that the
court order the City of Philadelphia to disburse all funds reasonably
necessary for the continued operation of the courts during fiscal year 1998-99
in an amount totaling at least $110 million. The case is captioned Alex
Bonavitacola, et al. v. Edward G. Rendell, et al.

Also on May 11, 1998, the City of Philadelphia and related respondents in
Bonavitacola filed a complaint joining the Commonwealth of Pennsylvania, the
General Assembly and its elected leadership as additional respondents. In
their complaint, the City respondents assert that under the Supreme Court's
order issued July 26, 1996 in Pa. State Ass'n of County Commissioners v.
Commonwealth of Pennsylvania, the General Assembly was obligated to enact a
funding scheme for a unified court system no later than January 1, 1998.
Because the General Assembly has not done so, the City respondents allege, the
Commonwealth has failed to comply with the Supreme Court's order. Thus, the
City respondents have requested Commonwealth Court to require the General
Assembly to comply with the Supreme Court's mandamus order and to order the
Commonwealth to pay whatever sums are necessary to fund the cost of operating
the courts in fiscal 1998-99. The First Judicial District Governing Board
joined in the City respondents' request as an alternative to its demanded
relief against the City defendants.

On July 15, 1998, the Supreme Court of Pennsylvania assumed extraordinary
jurisdiction over the case and directed Commonwealth Court, on an expedited
basis, to prepare proposed findings of fact and conclusions of law. Acting
pursuant to the Supreme Court's June 15, 1998 order, President Judge James
Gardner Colins of Commonwealth Court on June 17, 1998 issued findings of fact,
conclusions of law and a proposed order. In his proposed order, President
Judge Colins recommended that the Supreme Court order the President of the
Philadelphia Council immediately to introduce legislation to fund the courts
of the First Judicial District for fiscal year 1998-99 and to take all
necessary steps to ensure its passage. President Judge Colins also recommended
that the Supreme Court order the General Assembly to pass legislation, prior
to June 30, 1999, to fund the entire state judicial system. By order entered
June 23, 1998, Commonwealth Court forwarded its findings of fact and
conclusions of law and proposed order to the Supreme Court for final
disposition. The Commonwealth and the General Assembly have objected to
President Judge Colins' proposed order.

Subsequent to Commonwealth Court's issuance of its findings of fact,
conclusions of law and proposed order, the City Council and Mayor of
Philadelphia acceded (at least temporarily) to President Judge Colins'
proposed mandate that the City fund the First Judicial District's courts for
fiscal year 1998-99, thus obviating the First Judicial District's request for
emergency relief. However, the First Judicial District petitioners and the
City of Philadelphia respondents continue to press their demands that the
General Assembly be required to enact legislation providing for state funding
of the courts. In addition, the County of Allegheny has petitioned the Supreme
Court for leave to intervene in the Bonavitacola case to secure the same
relief against the Commonwealth -- an order requiring Commonwealth to fund its
courts. The Bonavitacola case remains pending before the Supreme Court for
disposition.

Bank Shares Tax Litigation

On November 30, 1989, the Fidelity Bank, N.A. ("Fidelity") filed an action
in challenging the constitutional validity of a 1989 amendment increasing the
bank shares tax and related legislation. The Commonwealth Court ruled in favor
of the Commonwealth finding no constitutional deficiencies in the tax

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increase, but invalidating one element of the legislation which provided a
credit to new banks (the "new bank tax credit"). Fidelity, the Commonwealth
and certain investment intervener banks appealed to the Pennsylvania Supreme
Court. However, pursuant to a Settlement Agreement dated as of April 21, 1995,
the Commonwealth agreed to enter a credit in favor of Fidelity in the amount
of $4,100,000 in settlement of the constitutional and non-constitutional
issues. The credit represents approximately 5% of the potential claim of
Fidelity, had the constitutional issues been resolved in its favor.

Pursuant to a separate Settlement Agreement dated as of April 21, 1995, the
Commonwealth also settled with the intervening banks with respect to issues
concerning the new bank tax credit.

Notwithstanding the foregoing settlements, other banks have filed petitions
challenging the validity of the 1989 tax increase. One of these banks, Royal
Bank of Pennsylvania, has filed a Stipulation of Facts and is in effect
proceeding forward on behalf of the other banks. The issues in these cases
include those which were adjudicated by Fidelity, although not brought to
resolution by the Pennsylvania Supreme Court. By decision dated January 8,
1998, a panel of the Commonwealth Court ruled in favor of the Commonwealth,
finding no constitutional violation. Royal Bank filed exceptions which were
denied by the Commonwealth Court on July 30, 1998. On August 18, 1998, Royal
Bank filed a notice of appeal with the Pennsylvania Supreme Court.

Pennsylvania Association of Rural and Small Schools (PARSS) v. Casey

In January 1991, an association of rural and small schools and several
parties filed a lawsuit against then Governor Robert P. Casey and former
Secretary of Education, Donald M. Carroll challenging the constitutionality of
the Commonwealth system for funding local school districts. The litigation
consists of two parallel cases, one in the Commonwealth Court of Pennsylvania
and one in the United States District Court for the Middle District of
Pennsylvania. The federal court case has been indefinitely stayed pending
resolution of the state court case. On July 9, 1998, Commonwealth Court Judge
Dan Pellegrini issued an opinion and decree nisi dismissing the petitioners'
claims in its entirety, holding that Pennsylvania's system for funding public
schools is constitutional under both the education clause and the equal
protection clause of the Pennsylvania Constitution.

On July 20, 1998, the petitioners filed a motion for post-trial relief,
taking exception to many of Judge Pellegrini's findings of fact and
conclusions of law, and again asking the Common wealth Court to declare
Pennsylvania's public school funding system to be unconstitutional. The court
was scheduled to hear oral argument on the petitioner's motion on September
14, 1998. Also, the petitioners on July 21, 1998 filed an application asking
the Supreme Court of Pennsylvania to assume extraordinary, plenary
jurisdiction over the case to decide one legal issue -- whether the
petitioners' constitutional claims are justiciable in the courts of the
Commonwealth. The petitioners have asked the court to consider the issue in
conjunction with a separate appeal pending in another case, Marrerro v.
Commonwealth of Pennsylvania, involving the same provisions of the
Constitution and a similar issue of justiciability. The Commonwealth opposes
the petitioners' request that the Supreme Court assume extraordinary
jurisdiction in PARSS.

Austin v. Department of Corrections, et al.

In November 1990, the American Civil Liberties Union filed a class action
lawsuit in the United States District Court for the Eastern District of
Pennsylvania on behalf of inmate populations in various Pennsylvania
correctional institutions, challenging the conditions of confinement and
seeking injunctive relief. On January 17, 1995, the Court approved a
Settlement Agreement between the parties, pursuant to which the Commonwealth

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paid $1.3 million in attorney's fees to the plaintiffs' attorneys, with an
additional $100,000 paid upon dismissal of a preliminary injunction relating
to certain health issues. Monitoring provisions outlined in the Agreement
expired on January 6, 1998.

Envirotest/Synterra Partners

On December 15, 1995, Envirotest Systems Corporation, Envirotest Partners
("Envirotest") and the Commonwealth of Pennsylvania entered into a Settlement
Agreement pursuant to which the parties settled all claims which Envirotest
might have against the Commonwealth arising from the suspension of an
emissions testing program. Under the Settlement Agreement, Envirotest is to
receive $145 million, with interest at 6% per annum, in payments of $25
million in 1995 and $40 million each in 1996, 1997 and 1998. An additional $11
million may be required to be paid in 1998 depending on the results of
property liquidations by Envirotest. Pursuant to a Consent to Assignment
entered into in November 1996, Envirotest has assigned its right, title and
interest in the base settlement.

Pennsylvania Human Relations Commission v. School District of Philadelphia,
et al. v. Commonwealth of Pennsylvania, et al.

On November 3, 1995, the Commonwealth of Pennsylvania and the Governor of
Pennsylvania, along with the City of Philadelphia and the Mayor of
Philadelphia, were joined as addition respondents in an enforcement action
commenced in Commonwealth Court in 1973 by the Pennsylvania Human Relations
Commission against the School District of Philadelphia pursuant to the
Pennsylvania Human Relations Act. The enforcement action was pursued to remedy
unintentional conditions of segregation in the public schools of Philadelphia.
The Commonwealth and the City were joined in the "remedial phase" of the
proceeding "to determine their liability, if any, to pay additional costs
necessary to remedy the unlawful conditions found to exist in the Philadelphia
public schools."

On February 28, 1996, the School District of Philadelphia filed a third-
party complaint against the Commonwealth of Pennsylvania asking Commonwealth
Court to require the Commonwealth to "supply such funding as is necessary for
full compliance with the November 28, 1994 and other remedial orders of the
Commonwealth Court." In addition, a group of interveners on March 4, 1996
filed a third-party complaint against the Commonwealth of Pennsylvania and the
City of Philadelphia requesting Commonwealth Court to declare that "it is the
obligation of the Commonwealth and the City to supply the additional funds
identified as necessary for the District to comply with the orders of the
Commonwealth Court," and to require the Commonwealth and the City to supply
such additional funding as is necessary for the District to comply with the
orders.

On April 30, 1996, Commonwealth Court Judge Doris A. Smith overruled the
Commonwealth's and City's preliminary objections seeking dismissal of the
claims against them. The Commonwealth and the City thereafter filed answers to
the complaints, asserting numerous defenses. The Commonwealth also asserted a
cross-claim against the City of Philadelphia claiming that if any party is
liable, sole liability rests with the City; in the alternative, the
Commonwealth argued that if it is held to be liable, it has a right of
indemnity of contribution against the City.

Trial commenced on May 30, 1996. During the course of the trial, upon motion
of the Commonwealth, the Pennsylvania Supreme Court on July 3, 1996 assumed
extraordinary plenary jurisdiction and directed Judge Smith to concluded the
proceedings within 60 days and to file with the Supreme Court findings of
fact, conclusions of law and a final opinion.

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On August 20, 1996, Judge Smith issued an Opinion and Order pursuant to
which judgment was entered in favor of the School District of Philadelphia and
the interveners and against the Commonwealth of Pennsylvania and the Governor
of Pennsylvania. Judgment was also entered in favor of the City of
Philadelphia and the Mayor of Philadelphia with respect to the intervener's
claim and on the cross-claim filed by the Commonwealth and Governor. The Judge
ordered the Commonwealth and Governor to submit a plan to the Court within
thirty days detailing the means by which the Commonwealth will effectuate the
transfer of additional funds payable to the School District of Philadelphia to
enable it to comply with the remedial order during fiscal year 1996-1997 and
any future years during which the School District establishes its fiscal
incapacity to fund the remedial programs. Judge Smith specifically found that
"[b]ecause of the lack of adequate funds to comply with the remedial order,
the School District is entitled to additional resources for 1996-1997 of $45.1
million."

On August 30, 1996, the Commonwealth filed exceptions to the Findings of
Fact, Conclusions of Law and Opinion and Order of Judge Smith along with a
Motion to Vacate the purported Order and a Notice of Appeal and Jurisdictional
Statement.

On September 10, 1996, the Pennsylvania Supreme Court issued an order
granting the Commonwealth's Motion to Vacate and directed its Prothonotary to
establish a briefing schedule and date for oral argument. It also issued a
further order limiting the issues to be addressed and stated that the
Commonwealth Court is divested of jurisdiction of the matter and all further
proceedings in the Commonwealth Court are stayed pending further order of the
Supreme Court. The Supreme Court retained jurisdiction in the matter. On
January 28, 1997, the Supreme Court issued an Order directing the parties to
brief certain specific issues relative to the lower court proceedings. The
Supreme Court heard oral argument on February 3, 1998 and took the matter
under advisement.

Ridge v. State Employees' Retirement Board

On December 29, 1993, Joseph H. Ridge, a former judge of the Allegheny Court
of Common Pleas, filed in the Commonwealth Court a Petition for Review in the
Nature of Complaint in Mandamus and for a Declaratory Judgment against the
State Employees' Retirement Board alleging that the use of gender distinct
actuarial factors for benefits based upon his pre-August 1, 1983 service
violates the equal protection and equal rights clauses of the Pennsylvania
Constitution. The lawsuit requests that the petitioner's benefits to be
"topped up" to equal those that a similarly situate female would be receiving.
A decision adverse to the Retirement Board could be applicable to other
members of the State Employees' Retirement System and Public School Employees'
Retirement System. The Commonwealth Court granted the Retirement Board's
preliminary objection to Judge Ridge's claims for punitive damages, attorney's
fees and compensatory damages (other than a reclaculation of his pension
benefits should he prevail). On November 20, 1996, the Commonwealth Court
heard oral arguments en banc on Judge Ridge's motion for judgment of the
pleadings. On February 13, 1997, the Commonwealth Court denied Judge Ridge's
motion for judgment on the pleadings. On June 30, 1998, the Commonwealth Court
ordered Judge Ridge to show cause why his claim should not be dismissed for
want of prosecution, returnable July 20, 1998.

Yesenia Marrerro, et al. v. Commonwealth, et al.

On February 24, 1997, five residents of the City of Philadelphia, on their
own behalf, and on behalf of their school-age children, joined by the City of
Philadelphia, the School District of Philadelphia, and two non-profit
organizations, filed in the Commonwealth Court a civil action for declaratory
judgment against the

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Commonwealth of Pennsylvania, the General Assembly of Pennsylvania, the
presiding officers of the General Assembly, the Governor of Pennsylvania, the
State Board of Education, the Department of Education, and the Secretary of
Education, claiming that the statutory education financing system is
unconstitutional as applied to the School District of Philadelphia and the
system of funding public education violates the constitutional mandate to
provide a thorough and efficient system of education in the City of
Philadelphia. The lawsuit also alleges that the scheme for financing public
education precludes the Commonwealth from providing the constitutionally
required "thorough and efficient system of public education" in the
circumstances faced by the School District of Philadelphia, and that the
defendants have failed to provide the School District of Philadelphia with
resources and other assistance necessary to provide all of its students with
the quality of education to which they are constitutionally entitled. Among
other things, the petitioners seek a declaration that the legislature must
amend the present or enact new education legislation so as to assure that
education funding for the School District of Philadelphia accounts and makes
adequate provision for the greater and special educational challenges and
needs of students in the School District in order to address their
disadvantage. The respondents filed preliminary objections seeking dismissal
of the action. On March 2, 1998, Commonwealth Court sustained the respondents'
preliminary objections and dismissed the case on the grounds that the issues
presented are not justiciable. An appeal to the Supreme Court of Pennsylvania
is pending and briefing is complete, but the Court has not scheduled oral
argument.

As of August 1, 1998, Pennsylvania general obligation bonds were rate AA- by
Standard & Poor's, AA by Fitch and Aa3 by Moody's. There can be no assurance
that the economic conditions on which these ratings are based will continue or
that particular bond issues will not be adversely affected by changes in
economic or political conditions.

57
<PAGE>

APPENDIX II

RATINGS OF MUNICIPAL BONDS

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS

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

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

A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.

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

Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.

B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.

Caa
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.

Ca
Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.

C
Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.

58
<PAGE>

Short-term Notes: The three ratings of Moody's for short-term notes are MIG
1/VMIG 1, MIG 2/VMIG 2, and MIG 3/VMIG 3; MIG 1/VMIG 1 denotes "best quality,
enjoying strong protection from established cash flows"; MIG 2/VMIG 2 denotes
"high quality" with "ample margins of protection"; MIG 3/VMIG 3 instruments
are of "favorable quality . . . but . . . lacking the undeniable strength of
the preceding grades."

DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS

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

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

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

Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes to the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.

Issuers rated Not Prime do not fall within any of the Prime rating
categories.

DESCRIPTION OF STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES,
INC. ("STANDARD & POOR'S"), MUNICIPAL DEBT RATINGS

A Standard & Poor's municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations or a specific program.
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation.

The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.

The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on circumstances.

59
<PAGE>

The ratings are based, in varying degrees, on the following considerations:

I. Likelihood of payment--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;

II. Nature of and provisions of the obligation;

III. Protection afforded to, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.

AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to meet its financial commitment on the obligation is
extremely strong.

AA Debt rated "AA" differs from the highest rated issues only in small
degree. The Obligor's capacity to meet its financial commitment on the
obligation is very strong.

A Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.

BBB Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.

BB Debt rated "BB," "B," "CCC," "CC" and "C" are regarded as having
B significant speculative characteristics. "BB" indicates the least
CCC degree of speculation and "C" the highest degree of speculation. While
CC such debt will likely have some quality and protective
C characteristics, these may be outweighed by large uncertainties or
major risk exposures to adverse conditions.

D Debt rated "D" is in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition
or the taking of similar action if payments on an obligation are
jeopardized.

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

DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS

A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A-1"
for the highest-quality obligations to "D" for the lowest. These categories
are as follows:

A-1
This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.

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

60
<PAGE>

A-3
Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.

B Issues rated "B" are regarded as having only speculative capacity for
timely payment.

C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.

D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired unless
Standard & Poor's believes that such payments will be made during such
grace period.

A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.

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

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

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

Note rating symbols are as follows:

SP- Strong capacity to pay principal and interest. An issue determined to
1 possess a very strong capacity to pay debt service is given a plus (+)
designation.

SP- Satisfactory capacity to pay principal and interest with some
2 vulnerability to adverse financial and economic changes over the term of
the notes.

SP- Speculative capacity to pay principal and interest.
3
DESCRIPTION OF FITCH IBCA, INC.'S ("FITCH") INVESTMENT GRADE BOND RATINGS

Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.

The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.

Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.

61
<PAGE>

Bonds carrying the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.

Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.

Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.

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

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

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

BBB Bonds considered to be investment grade and of satisfactory-credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.

Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.

NR
Indicates that Fitch does not rate the specific issue.

Conditional
A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.

Suspended
A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.

Withdrawn
A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.

62
<PAGE>

FitchAlert
Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised
or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.

Ratings Outlook: An outlook is used to describe the most likely direction of
any rating change over the intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.

DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS

Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.

Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.

BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives
can be identified which could assist the obligor in satisfying
its debt service requirements.

B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest
reflects the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of
the issue.

CCC
Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.

CC
Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.

C
Bonds are in imminent default in payment of interest or
principal.

DDD DD D
Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis
of their ultimate recovery value in liquidation or reorganization
of the obligor. "DDD" represents the highest potential for
recovery on these bonds, and "D" represents the lowest potential
for recovery.

63
<PAGE>

DESCRIPTION OF FITCH'S SHORT-TERM RATINGS

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

The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.

Fitch short-term ratings are as follows:

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

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

F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+"
and "F-1" ratings.

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

F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.

D Default. Issues assigned this rating are in actual or imminent
payment default.

LOC The symbol "LOC" indicates that the rating is based on a letter
of credit issued by a commercial bank.

64
<PAGE>

APPENDIX III

PORTFOLIO INSURANCE

Set forth below is further information with respect to the insurance
policies (the "Policies") that the Fund may obtain from several insurance
companies with respect to insured Pennsylvania Municipal Bonds and Municipal
Bonds held by the Fund. The Fund has no obligation to obtain any such
Policies, and the terms of any Policies actually obtained may vary
significantly from the terms discussed below.

In determining eligibility for insurance, insurance companies will apply
their own standards. These standards correspond generally to the standards
such companies normally use in establishing the insurability of new issues of
Pennsylvania Municipal Bonds and Municipal Bonds and are not necessarily the
criteria that would be used in regard to the purchase of such bonds by the
Fund. The Policies do not insure (i) municipal securities ineligible for
insurance and (ii) municipal securities no longer owned by the Fund.

The Policies do not guarantee the market value of the insured Pennsylvania
Municipal Bonds and Municipal Bonds or the value of the shares of the Fund. In
addition, if the provider of an original issuance insurance policy is unable
to meet is obligations under such policy or if the rating assigned to the
insurance claims-paying ability of any such insurer deteriorates, the
insurance company will not have any obligation to insure any issue held by the
Fund that is adversely affected by either of the above described events. In
addition to the payment of premiums, the Policies may require that the Fund
notify the insurance company as to all Pennsylvania Municipal Bonds and
Municipal Bonds in the Fund's portfolio and permit the insurance company to
audit their records. The insurance premiums will be payable monthly by the
Fund in accordance with a premium schedule to be furnished by the insurance
company at the time the Policies are issued. Premiums are based upon the
amounts covered and the composition of the portfolio.

The insurance companies used by the Fund will have insurance claims-paying
ability ratings of AAA from Standard & Poor's ("S&P") or Fitch IBCA, Inc.
("Fitch") or Aaa from Moody's Investors Service, Inc. ("Moody's").

An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P or
Fitch. Capacity to honor insurance contracts is considered by S&P and Fitch to
be extremely strong and highly likely to remain so over a long period of time.
A Moody's insurance claims-paying ability rating is an opinion of the ability
of an insurance company to repay punctually senior policyholder obligations
and claims. An insurer with an insurance claims-paying ability rating of Aaa
is considered by Moody's to be of the best quality. In the opinion of Moody's,
the policy obligations of an insurance company with an insurance claims-paying
ability rating of Aaa carry the smallest degree of credit risk and, while the
financial strength of these companies is likely to change, such changes as can
be visualized are most unlikely to impair the company's fundamentally strong
position. A Fitch insurance claims-paying ability rating provides an
assessment of an insurance company's financial strength and, therefore, its
ability to pay policy and contract claims under the terms indicated. An
insurer with an insurance claims-paying ability rating of AAA has the highest
rating assigned by Fitch. The ability to pay claims is adjudged by Fitch to be
extremely strong for insurance companies with this highest rating. In the
opinion of Fitch, foreseeable business and economic risk factors should not
have any material adverse impact on the ability of these insurers to pay
claims. In Fitch's opinion, profitability, overall balance sheet strength,
capitalization and

65
<PAGE>

liquidity are all at very secure levels and are unlikely to be affected by
potential adverse underwriting, investment or cyclical events.

An insurance claims-paying ability rating of S&P, Fitch or Moody's does not
constitute an opinion on any specific contract in that such an opinion can
only be rendered upon the review of the specific insurance contract.
Furthermore, an insurance claims-paying ability rating does not take into
account deductibles, surrender or cancellation penalties or the timeliness of
payment; nor does it address the ability of a company to meet nonpolicy
obligations (i.e., debt contracts).

The assignment of ratings by S&P, Fitch or Moody's to debt issues that are
fully or partially supported by insurance policies, contracts or guarantees is
a separate process from the determination of claims-paying ability ratings.
The likelihood of a timely flow of funds from the insurer to the trustee for
the bondholders is a key element in the rating determination for such debt
issues.

66
<PAGE>

APPENDIX IV

TAXABLE EQUIVALENT YIELDS FOR 1999

<TABLE>
<CAPTION>
TAXABLE INCOME* A TAX-EXEMPT YIELD OF
- ---------------------------- -----------------------------------
SINGLE 1999 FEDERAL
RETURN JOINT RETURN TAX BRACKET 5.00% 5.50% 6.00% 6.50% 7.00% 7.50%
------ ----------------- ------------ ----- ----- ----- ----- ----- -----
IS EQUAL TO A TAXABLE YIELD OF
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 25,751-
$ 62,450 $ 43,051-$104,050 28.00% % % % % % %
$ 62,451-
$130,250 $104,051-$158,550 31.00% % % % % % %
$130,251-
$283,150 $158,551-$283,150 36.00% % % % % % %
Over
$283,150 Over $283,150 39.60% % % % % % %
</TABLE>
- --------
* An investor's marginal tax rate may exceed the rates shown in the above
table due to the reduction, or possible elimination, of the personal
exemption deduction for high-income taxpayers and an overall limit on
itemized deductions. Income also may be subject to certain state and local
taxes. For investors who pay alternative minimum tax, tax-exempt yields may
be equivalent to lower taxable yields than those shown above. The tax rates
shown above do not apply to corporate taxpayers. The tax characteristics of
the Fund are described more fully elsewhere in this prospectus. Consult your
tax adviser for further details. This chart is for illustrative purposes
only and cannot be taken as an indication of anticipated Fund performance.

67
<PAGE>

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

Through and including , 1999 (the 90th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting underwriters and with respect to their unsold
allotments or subscriptions.

MUNIHOLDINGS PENNSYLVANIA INSURED FUND

COMMON SHARES

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

PROSPECTUS

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

MERRILL LYNCH & CO.

, 1999

CODE

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART C

OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(1) Financial Statements

Report of Independent Auditors

Statement of Assets, Liabilities and Capital as of , 1999

(2) Exhibits:

(a)--Declaration of Trust(a)
(b)--By-Laws(a)
(c)--Not applicable
(d)(1)--Portions of the Declaration of Trust and By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant(b)
(d)(2)--Form of specimen certificate for Common Shares of the
Registrant(c)
(e)--Form of Automatic Dividend Reinvestment Plan*
(f)--Not applicable
(g)--Form of Investment Advisory Agreement between the Fund and Fund
Asset Management, L.P.*
(h)(1)--Form of Purchase Agreement between the Fund and Merrill Lynch,
Pierce, Fenner & Smith Incorporated*
(h)(2)--Merrill Lynch Standard Dealer Agreement*
(i)--Not applicable
(j)--Form of Custodian Contract between the Fund and *
(k)--Form of Registrar, Transfer Agency and Service Agreement between
the Fund and *
(l)--Opinion and Consent of Brown & Wood LLP*
(m)--Not applicable
(n)--Consent of , independent auditors for the Fund*
(o)--Not applicable
(p)--Certificate of Fund Asset Management, L.P.*
(q)--Not applicable
(r)--Not applicable
- --------
(a) Reference is made to Section 3.4, Article V, Article VI (sections 1, 2, 4,
5 and 7), Article VIII, Article IX and Article X of the Registrant's
Declaration of Trust, filed as Exhibit (a) to this Registration Statement;
and to Article II, Article III (sections 1, 2, 3, 5 and 17), Article VI,
Article VII, Article XII, Article XIII and Article XIV of the Registrant's
By-Laws, filed as Exhibit (b) to this Registration Statement.
* To be provided by amendment.

ITEM 25. MARKETING ARRANGEMENTS.

See Exhibits (h)(1) and (h)(2).

C-1
<PAGE>

ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:

<TABLE>
<S> <C>
Registration fees..................................................... $ *
New York Stock Exchange listing fee................................... *
Printing (other than share certificates).............................. *
Engraving and printing share certificates............................. *
Legal fees and expenses............................................... *
Accounting fees and expenses.......................................... *
NASD fees............................................................. *
Miscellaneous......................................................... *
-----
Total............................................................... $ *
=====
</TABLE>
- --------
* To be provided by amendment

ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

The information in the prospectus under the captions "Investment Advisory
and Management Arrangements" and "Description of Capital Shares--Common
Shares" and in Note 1 to the Statement of Assets, Liabilities and Capital is
incorporated herein by reference.

ITEM 28. NUMBER OF HOLDERS OF SECURITIES.

There will be one record holder of the common shares, par value $0.10 per
share, as of the effective date of this Registration Statement.

ITEM 29. INDEMNIFICATION.

Section 5.3 of the Registrant's Declaration of Trust provides as follows:

"The Trust shall indemnify each of its Trustees, officers, employees, and
agents (including persons who serve at its request as directors, officers
or trustees of another organization in which it has any interest as a
shareholder, creditor or otherwise) against all liabilities and expenses
(including amounts paid in satisfaction of judgments, in compromise, as
fines and penalties, and as counsel fees) reasonably incurred by him in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he may be involved or with
which he may be threatened, while in office or thereafter, by reason of his
being or having been such a trustee, officer, employee or agent, except
with respect to any matter as to which he shall have been adjudicated to
have acted in bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties; provided, however, that as to any matter disposed
of by a compromise payment by such person, pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless the Trust shall have received a written
opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence
or reckless disregard of duty, or the matter of good faith and reasonable
belief as to the best interests of the Trust, had been adjudicated, it
would have been adjudicated in favor of such person. The rights accruing to
any person under these provisions shall not exclude any other right to
which he may be lawfully entitled; provided that no person may satisfy any
right of indemnity or reimbursement granted herein or in Section 5.1 or to
which he may be otherwise entitled except out of the property of the Trust,
and no Shareholder shall be personally liable to any person with respect to
any claim for indemnity or reimbursement or otherwise. The Trustees may
make advance payments in connection with indemnification under this Section
5.3, provided that the indemnified person shall have given a written
undertaking to reimburse the Trust in the event it is subsequently
determined that he is not entitled to such indemnification."

C-2
<PAGE>

The Registrant's By-Laws provide that insofar as the conditional advancing
of indemnification moneys pursuant to Section 5.3 of the Declaration of Trust
for actions based upon the Investment Company Act of 1940 may be concerned,
such payments will be made only on the following conditions: (i) the advances
must be limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only upon receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds the amount to which it is ultimately determined he is
entitled to receive from the Registrant by reason of indemnification; and
(iii) (a) such promise must be secured by a surety bond, other suitable
insurance or an equivalent form of security which assures that any repayments
may be obtained by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient of the
advance, or (b) a majority of a quorum of the Registrant's disinterested, non-
party Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that the recipient
of the advance ultimately will be found entitled to indemnification.

In Section 8 of the Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 (the "1933 Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or
Prospectus.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act") may be provided to trustees, officers and
controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Fund of expenses incurred or paid by a trustee, officer or controlling
person of the Fund in connection with any successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Fund will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

Reference is made to Section Six of the Purchase Agreement, a form of which
will be filed as Exhibit (h)(1) hereto, for provisions relating to the
indemnification of the underwriter.

ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.

Fund Asset Management, L.P. (the "Investment Adviser") acts as investment
adviser for the following open-end registered investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield
Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch
World Income Fund, Inc., and The Municipal Fund Accumulation Program, Inc.,
and for the following closed-end registered investment companies: Apex
Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund,
Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund,
Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings
California Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc.,
MuniHoldings California Insured Fund III, Inc., MuniHoldings Florida Insured
Fund, MuniHoldings Florida Insured Fund II, MuniHolding Florida Insured Fund
III, MuniHoldings Insured Fund, Inc., MuniHoldings

C-3
<PAGE>

New Jersey Insured Fund, Inc., MuniHoldings New Jersey Insured Fund II, Inc.,
MuniHoldings New York Fund, Inc., MuniHoldings New York Insured Fund, Inc.,
MuniHoldings New York Insured Fund II, Inc., MuniInsured Fund, Inc., MuniVest
Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan
Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc.,
MuniYield California Insured Fund, Inc., MuniYield California Insured Fund II,
Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund,
Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield
New York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality
Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio,
Inc. and Worldwide DollarVest Fund, Inc.

Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the
Investment Adviser, acts as the investment adviser for the following open-end
registered investment companies: Merrill Lynch Adjustable Rate Securities
Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset
Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch
Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Convertible Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Global Bond Fund for Investment
and Retirement, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Growth Fund, Inc., Merrill Lynch Global Holdings, Merrill Lynch Global
Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch
Global Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Index Funds, Inc., Merrill Lynch
Intermediate Government Bond Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Real Estate Fund, Inc.,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.
Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch
Utility Income Fund, Inc., Merrill Lynch Variable Series Funds, Inc. and
Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a division of MLAM);
and for the following closed-end registered investment companies: Merrill
Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc. MLAM also acts as sub-adviser to Merrill Lynch World Strategy
Portfolio and Merrill Lynch Basic Value Equity Portfolio, two investment
portfolios of EQ Advisors Trust.

The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02110-2646.
The address of the Investment Adviser, FAM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. is also P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of Princeton Funds
Distributor, Inc. ("PFD") and of Merrill Lynch Funds Distributor ("MLFD") is
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co.,
Inc. ("ML&Co.") is World Financial Center, 250 Vesey Street, New York, New
York 10281. The address of Financial Data Services, Inc. ("FDS") is 4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484.

Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged for the past two years for his or her or its own account or in
the capacity of director, officer, employee, partner or trustee. In addition,
Mr. Zeikel is President, Mr. Richard is Treasurer and Mr. Glenn is Executive
Vice President of all or substantially all of the investment companies
described in the preceding paragraphs and also hold the same positions with
all or substantially all of the investment companies advised by MLAM as they
do with those advised by the Investment Adviser. Messrs. Giordano, Harvey,
Kirstein and Monagle are officers of one or more of such companies.

C-4
<PAGE>

<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ---------------------------------------
<C> <C> <S>
ML & Co. ............. Limited Partner Financial Services Holding Company; Limited
Partner of MLAM
Princeton Services.... General Partner General Partner of MLAM
Arthur Zeikel......... Chairman Chairman of MLAM; President of MLAM and FAM
from 1977 to 1997; Chairman and Director of
Princeton Services; President of Princeton
Services from 1993 to 1997; Executive Vice
President of ML & Co.
Jeffrey M. Peek....... President President of MLAM; President and Director of
Princeton Services; Executive Vice President
of ML & Co.
Terry K. Glenn........ Executive Vice President Executive Vice President of MLAM; Executive
Vice President and Director of Princeton
Services; President and Director of PFD;
Director of FDS; President of Princeton
Administrators, L.P.
Mark De Sario......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Linda L. Federici..... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Vincent R. Giordano... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Elizabeth A. Griffin.. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Norman R. Harvey...... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Michael J. Senior Vice President, Senior Vice President, General Counsel and
Hennewinkel.......... General Counsel and Secretary of MLAM; Senior Vice President of
Secretary Princeton Services
Philip L. Kirstein.... Senior Vice President Senior Vice President of MLAM; Senior Vice
President, Director and Secretary of
Princeton Services
Ronald M. Kloss....... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Debra W. Senior Vice President Senior Vice President of MLAM; Senior Vice
Landsman-Yaros....... President of Princeton Services; Vice
President of PFD
Stephen M. M. Miller.. Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice President
of Princeton Services
Joseph T. Monagle, Senior Vice President Senior Vice President of MLAM; Senior Vice
Jr................... President of Princeton Services
Michael L. Quinn...... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
</TABLE>

C-5
<PAGE>

<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ---------------------------------------
<C> <C> <S>
Brian A. Murdock...... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Director of
PFD
Gerald M. Richard..... Senior Vice President Senior Vice President and Treasurer of MLAM;
and Treasurer Senior Vice President and Treasurer of
Princeton Services; Vice President and
Treasurer of PFD
Gregory D. Upah....... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Ronald L. Welburn..... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
</TABLE>

ITEM 31. LOCATION OF ACCOUNT AND RECORDS.

All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder are maintained at the offices of the registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.

ITEM 32. MANAGEMENT SERVICES.

Not applicable.

ITEM 33. UNDERTAKINGS.

(a) Registrant undertakes to suspend the offering of the common shares
covered hereby until it amends its prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per common share declines more than 10% from its net asset value per
common share as of the effective date of this Registration Statement, or (2)
its net asset value per common share increases to an amount greater than its
net proceeds as stated in the prospectus contained herein.

(b) Registrant undertakes that:

(1) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 497(h) under the
1933 Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.

(2) For the purpose of determining any liability under the 1933 Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

C-6
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Plainsboro, and State of New
Jersey, on the 7th day of December 1998.

MUNIHOLDINGS PENNSYLVANIA INSURED
FUND (Registrant)

/s/ Alice A. Pellegrino
By__________________________________
(ALICE A. PELLEGRINO, PRESIDENT)

Each person whose signature appears below hereby authorizes Alice A.
Pellegrino, William E. Zitelli, Jr. or Lori A. Martin, or any of them, as
attorney-in-fact, to sign on his or her behalf, individually and in each
capacity stated below, any amendment to this Registration Statement (including
post-effective amendments) and to file the same, with all exhibits thereto,
with the Securities and Exchange Commission.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person in the
capacities and on the dates indicated.

SIGNATURES TITLE DATE

/s/ Alice A. Pellegrino President and December 7,
- ------------------------------------- Trustee 1998
(ALICE A. PELLEGRINO)

/s/ William E. Zitelli, Jr. Treasurer and December 7,
- ------------------------------------- Trustee 1998
(WILLIAM E. ZITELLI, JR.)

/s/ Lori A. Martin Secretary and December 7,
- ------------------------------------- Trustee 1998
(LORI A. MARTIN)

C-7
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT NAME
------- ------------
<C> <S>
(a)(1) --Declaration of Trust
(b) --By-Laws
</TABLE>

<PAGE>

EXHIBIT (a)(1)

DECLARATION OF TRUST

MUNIHOLDINGS PENNSYLVANIA INSURED FUND

THE DECLARATION OF TRUST of MuniHoldings Pennsylvania Insured Fund is made
the 3rd day of December, 1998, by the parties signatory hereto, as trustees
(such persons, so long as they shall continue in office in accordance with the
terms of this Declaration of Trust, and all other persons who at the time in
question have been duly elected or appointed as trustees in accordance with the
provisions of this Declaration of Trust and are then in office, being
hereinafter called the "Trustees").

W I T N E S S E T H :
- - - - - - - - - -

WHEREAS, the Trustees desire to form a trust fund under the law of
Massachusetts for the investment and reinvestment of funds contributed thereto;
and

WHEREAS, it is proposed that the beneficial interest in the trust assets be
divided into transferable shares of beneficial interest as hereinafter provided;

NOW, THEREFORE, the Trustees hereby declare that they will hold in trust
all money and property contributed to the trust fund to manage and dispose of
the same for the benefit of the holders from time to time of the shares of
beneficial interest issued hereunder and subject to the provisions hereof, to
wit:

ARTICLE I.

1.1 Name. The name of the trust created hereby (the "Trust") shall be
----
MuniHoldings Pennsylvania Insured Fund and so far as may be practicable the
Trustees shall conduct the Trust's activities, execute all documents and sue or
be sued under that name, which name (and the word "Trust" wherever hereinafter
used) shall refer to the Trustees as Trustees, and not individually, and shall
not refer to the officers, agents, employees or Shareholders of the Trust.
However, should the Trustees determine that the use of such name is not
advisable, they may select such other name for the Trust as they deem proper and
the Trust may hold its property and conduct its activities under such other
name. Any name change shall become effective upon the execution by a majority
of the then Trustees of an instrument setting forth the new name. Any such
instrument shall have the status of an amendment to this Declaration.

1.2 Definitions. As used in this Declaration, the following terms shall
-----------
have the following meanings:

The terms "Affiliated Person", "Assignment", "Commission", "Interested
----------------- ---------- ---------- ----------
Person", "Majority Shareholder Vote" (the 67% or more than 50% requirement of
- ------ -------------------------
the third sentence of Section 2(a)(42) of the 1940 Act, whichever may be
applicable) and "Principal Underwriter" shall have the meanings given them in
---------------------
the 1940 Act.
<PAGE>

"Certificate of Designation" means a certificate signed by the Secretary or
--------------------------
an Assistant Secretary of the Trust setting forth the resolution or resolutions
providing for the issuance of Preferred Shares as described in Article VI
hereof.

"Common Shareholders" means a record owner of outstanding Common Shares.
-------------------

"Common Shares" means the common shares of beneficial interest in the Trust
-------------
as described in Article VI hereof and includes fractions of Common Shares as
well as whole Common Shares.

"Declaration" shall mean this Declaration as amended from time to time.
-----------
References in this Declaration to "Declaration", "hereof" "herein" and
----------- ------ ------
"hereunder" shall be deemed to refer to the Declaration rather than the article
- ----------
or section in which such words appear.

"Fundamental Policies" shall mean the investment restrictions set forth in
--------------------
the Prospectus and designated as fundamental policies therein.

The "1940 Act" refers to the Investment Company Act of 1940, as amended
--------
from time to time, and shall include the rules and regulations and any relevant
order of exemption promulgated thereunder by the Commission.

"Person" shall mean and include individuals, corporations, partnerships,
------
trusts, associations, joint ventures and other entities, whether or not legal
entities, and governments and agencies and political subdivisions thereof.

"Preferred Shareholders" means a record owner of outstanding Preferred
----------------------
Shares.

"Preferred Shares" means the preferred shares of beneficial interest in the
----------------
Trust as described in Article VI hereof and includes fractions of Preferred
Shares as well as whole Preferred Shares.

"Prospectus" shall mean the currently effective Prospectus of the Trust
----------
under the Securities Act of 1933, as amended.

"Registration Statement" means the Registration Statement of the Trust
----------------------
under the Securities Act of 1933 as such Registration Statement may be amended
and filed with the Commission from time to time.

"Shareholders" shall mean as of any particular time all holders of record
------------
of outstanding Shares at such time.

"Shares" shall mean the equal proportionate transferable units of interest
------
into which the beneficial interest in the Trust shall be divided from time to
time and includes fractions of Shares as well as whole Shares. As provided in
Article VI hereof, the Trust may issue separate classes of Shares; all
references to Shares shall be deemed to be Shares of a single class or all
classes as the context may require.

2
<PAGE>

"Trustees" shall mean the signatories to this Declaration, so long as they
--------
shall continue in office in accordance with the terms hereof, and all other
persons who at the time in question have been duly elected or appointed and have
qualified as trustees in accordance with the provisions hereof and are then in
office, are herein referred to as the "Trustees", and reference in this
Declaration to a Trustee or Trustees shall refer to such person or persons in
their capacity as trustees hereunder.

"Trust Property" shall mean as of any particular time any and all property,
--------------
real or personal, tangible or intangible, which at such time is owned or held by
or for the account of the Trust or the Trustees.

ARTICLE II.

Trustees
--------

2.1 Number and Qualification. The number of Trustees shall be fixed from
------------------------
time to time by written instrument signed by a majority of the Trustees then in
office, provided, however, that the number of Trustees shall in no event be less
than three or more than fifteen (except prior to the first public offering of
Shares of the Trust). Any vacancy created by an increase in Trustees may, to
the extent permitted by the 1940 Act, be filled by the appointment of an
individual having the qualifications described in this Article made by a written
instrument signed by a majority of the Trustees then in office. Any such
appointment shall not become effective, however, until the individual named in
the written instrument of appointment shall have accepted in writing such
appointment and agreed in writing to be bound by the terms of this Declaration.
No reduction in the number of Trustees shall have the effect of removing any
Trustee from office prior to the expiration of this term. Whenever a vacancy in
the number of Trustees shall occur, until such vacancy is filled as provided in
Section 2.3 hereof, the Trustees in office, regardless of their number, shall
have all the powers granted to the Trustees and shall discharge all the duties
imposed upon the Trustees by this Declaration. A Trustee shall be an individual
at least 21 years of age who is not under legal disability. Trustees need not
own Shares.

2.2 Term of Office of Trustees. The term of office of all of the Trustees
--------------------------
named herein, or elected or appointed prior to the first annual meeting of
Shareholders, shall expire on the date of the first annual meeting of
Shareholders or special meeting in lieu thereof. Beginning with the Trustees
elected at the first annual meeting of Shareholders, the term of each Trustee
shall expire at the next annual meeting of Shareholders following the election
or appointment of such Trustee and upon the election and qualification of his
successor. The Trustees shall be elected by the affirmative vote of the holders
of a majority of the Shares present in person or by proxy at an annual meeting
of Shareholders or special meeting in lieu thereof called for that purpose,
except as provided in Section 2.3 of this Article; provided, however, that the
-------- -------
Preferred Shareholders voting as a class at an annual meeting of the
Shareholders or special meeting in lieu thereof called for such purpose, shall
elect at least two (2) Trustees at all times, and, provided, further, that the
-------- -------
Preferred Shareholders voting as a class shall elect at least a majority of the
Trustees, which number of Trustees shall be increased appropriately in order to
effectuate such rights after giving effect to resignations of Trustees, (i) if
at any time the dividends on the Preferred Shares shall be unpaid in an amount
equal to two (2) full years' dividends on the

3
<PAGE>

Preferred Shares, with such representation to continue until all dividends in
arrears shall have been paid or otherwise provided for, or (ii) pursuant to the
designations and powers, preferences and rights and the qualifications,
limitations and restrictions of the Preferred Shares as determined in accordance
with Section 6.1 hereof. Each Trustee elected shall hold office until his
successor shall have been elected and shall have qualified or until such time as
may otherwise be provided in the By-Laws adopted or amended pursuant to Section
2.7 hereof; except that (a) any Trustee may resign his trust (without need for
prior or subsequent accounting) by an instrument in writing signed by him or her
and delivered to the other Trustees, which shall take effect upon such delivery
or upon such later date as is specified therein; (b) any Trustee may be removed
(provided the aggregate number of Trustees after such removal shall not be less
than the number required by Section 2.1 hereof) with cause, at any time by
written instrument, signed by the remaining Trustees, specifying the date when
such removal shall become effective, provided, however, that the Trustees
-------- -------
elected by one class of Shares shall have no power to so remove any Trustee
elected by another class of Shares; (c) any Trustee who requests in writing to
be retired or who has become incapacitated by illness or injury may be retired
by written instrument signed by a majority of the other Trustees, specifying the
date of his retirement; and (d) a Trustee may be removed at any meeting of
Shareholders by a vote of two thirds of the outstanding Shares of the class or
classes of Shares of beneficial interest that elected such Trustee. Upon the
resignation or removal of a Trustee, or his otherwise ceasing to be Trustee, he
shall execute and deliver such documents as the remaining Trustees shall require
for the purpose of conveying to the Trust or the remaining Trustees any Trust
property held in the name of the resigning or removed Trustee. Upon the
incapacity or death of any Trustee, his legal representative shall execute and
deliver on his behalf such documents as the remaining Trustees shall require as
provided in the preceding sentence.

2.3 Resignation and Appointment of Trustees. In case of the declination,
---------------------------------------
death, resignation, retirement, removal or inability of any of the Trustees, or
in case a vacancy shall, by reason of an increase in number, or for any other
reason, exist, the remaining Trustees or, prior to the public offering of Shares
of the Trust, if only one Trustee shall then remain in office, the remaining
Trustee, shall fill such vacancy by appointing such other person as they or he,
in their or his discretion, shall see fit. Such appointment shall be evidenced
by a written instrument signed by a majority of the remaining Trustees or by the
remaining Trustee, as the case may be. Any such appointment shall not become
effective, however, until the person named in the written instrument or
appointment shall have accepted in writing such appointment and agreed in
writing to be bound by the terms of the Declaration. Within twelve months of
such appointment, the Trustees shall cause notice of such appointment to be
mailed to each Shareholder at his address as recorded on the books of the Trust.
An appointment of a Trustee may be made by the Trustees then in office and
notice thereof mailed to Shareholders aforesaid in anticipation of a vacancy to
occur by reason of retirement, resignation or increase in number of Trustees
effective at a later date, provided that said appointment shall become effective
only at or after the effective date of said retirement, resignation or increase
in number of Trustees. The power of appointment is subject to the provisions of
section 16(a) of the 1940 Act.

2.4 Vacancies. The death, declination, resignation, retirement, removal
---------
or incapacity of the Trustees, or any one of them, shall not operate to annul
the Trust or to revoke any existing agency created pursuant to the terms of this
Declaration. Whenever a vacancy in the number of Trustees shall occur, until
such vacancy is filled as provided in Section 2.3, the Trustees in

4
<PAGE>

office, regardless of their number, shall have all the powers granted to the
Trustees and shall discharge all the duties imposed upon the Trustees by the
Declaration subject to the rights of the holders of the Preferred Shares to
elect a Trustee to fill such vacancy in accordance with the terms and provisions
hereof. A written instrument certifying the existence of such vacancy signed by
a majority of the Trustees shall be conclusive evidence of the existence of such
vacancy.

2.5 Meetings. Meetings of the Trustees shall be held from time to time
--------
upon the call of the Chairman, if any, the President, the Secretary or any two
Trustees. Regular meetings of the Trustees may be held without call or notice
at a time and place fixed by the By-Laws or by resolution of the Trustees.
Notice of any other meeting shall be mailed or otherwise given not less than 48
hours before the meeting but may be waived in writing by any Trustee either
before or after such meeting. The attendance of a Trustee at a meeting shall
constitute a waiver of notice of such meeting except where a Trustee attends a
meeting for the express purpose of objecting to the transaction of any business
on the ground that the meeting has not been lawfully called or convened. The
Trustees may act with or without a meeting. A quorum for all meetings of the
Trustees shall be a majority of the Trustees. Unless provided otherwise in this
Declaration, any action of the Trustees may be taken at a meeting by vote of a
majority of the Trustees present (a quorum being present) or without a meeting
by written consents of a majority of the Trustees.

Any committee of the Trustees, including an executive committee, if any,
may act with or without a meeting. A quorum for all meetings of any such
committee shall be a majority of the members thereof. Unless provided otherwise
in this Declaration, any action of any such committee may be taken at a meeting
by vote of a majority of the members present (a quorum being present) or without
a meeting by written consent of a majority of the members.

With respect to actions of the Trustees and any committee of the Trustees,
Trustees who are Interested Persons of the Trust within the meaning of Section
1.2 hereof or otherwise interested in any action to be taken may be counted for
quorum purposes under this Section and shall be entitled to vote to the extent
permitted by the 1940 Act.

All or any one or more Trustees may participate in a meeting of the
Trustees or any committee thereof by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other and participation in a meeting pursuant to such
communication systems shall constitute presence in person at such meeting.

2.6 Officers. The Trustees shall annually elect a President, a Secretary
--------
and a Treasurer and may elect a Chairman. The Trustees may elect or appoint or
authorize the Chairman, if any, or President to appoint such other officers or
agents with such powers as the Trustees may deem to be advisable. The Chairman
and President shall be and the Secretary and Treasurer may, but need not, be a
Trustee.

2.7 By-Laws. The Trustees may adopt and from time to time amend or repeal
-------
the By-Laws for the conduct of the business of the Trust.

5
<PAGE>

ARTICLE III.

Powers of Trustees
------------------

3.1 General. The Trustees shall have exclusive and absolute control over
-------
the Trust Property and over the business of the Trust to the same extent as if
the Trustees were the sole owners of the Trust Property and business in their
own right, but with such powers of delegation as may be permitted by this
Declaration. The Trustees may perform such acts as in their sole discretion are
proper for conducting the business of the Trust. The enumeration of any
specific power herein shall not be construed as limiting the aforesaid power.
Such powers of the Trustees may be exercised without order of or resort to any
court.

3.2 Investments. The Trustees shall have power, subject to the
-----------
Fundamental Policies, to:

(1) conduct, operate and carry on the business of an investment
company;

(2) subscribe for, invest in, reinvest in, purchase or otherwise
acquire, hold, pledge, sell, assign, transfer, exchange, distribute or
otherwise deal in or dispose of negotiable or non-negotiable instruments,
obligations, evidences of indebtedness, certificates of deposit or
indebtedness, commercial paper, repurchase agreements, reverse repurchase
agreements, options, futures contracts, options on futures contracts and
other investments, including, without limitation, those issued, guaranteed
or sponsored by any state, territory or possession of the United Sates and
the District of Columbia and their political subdivisions, agencies and
instrumentalities, or by the United States Government or its agencies or
instrumentalities, or international instrumentalities, or by any bank,
savings institution, corporation or other business entity organized under
the laws of the United States and, to the extent provided in the Prospectus
and Registration Statement and not prohibited by the Fundamental Policies,
organized under foreign laws; and to exercise any and all rights, powers
and privileges of ownership or interest in respect of any and all such
investments of every kind and description, including, without limitation,
the right to consent and otherwise act with respect thereto, with power to
designate one or more persons, firms, associations or corporations to
exercise any of said rights, powers and privileges in respect of any of
said instruments; and the Trustees shall be deemed to have the foregoing
powers with respect to any additional securities in which the Trust may
invest should the investment policies set forth in the Prospectus and
Registration Statement or the Fundamental Policies be amended.

The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.

3.3 Legal Title. Legal title to all the Trust Property shall be vested in
-----------
the Trustees as joint tenants except that the Trustees shall have power to cause
legal title to any Trust Property to be held by or in the name of one or more of
the Trustees, or in the name of the Trust, or in the name of any other Person as
nominee, on such terms as the Trustees may determine, provided that the interest
of the Trust therein is appropriately protected.

6
<PAGE>

The right, title and interest of the Trustees in the Trust Property shall
vest automatically in each person who may hereafter become a Trustee upon his
due election and qualification. Upon the resignation, removal or death of a
Trustee he shall automatically cease to have any right, title or interest in any
of the Trust Property, and the right, title and interest of such Trustee in the
Trust Property shall vest automatically in the remaining Trustees. Such vesting
and cessation of title shall be effective whether or not conveyancing documents
have been executed and delivered.

3.4 Issuance and Repurchase of Securities. The Trustees shall have the
-------------------------------------
power to issue, sell, repurchase, retire, cancel, acquire, hold, resell,
reissue, dispose of, transfer, and otherwise deal in, Shares, including shares
in fractional denominations, and, subject to the more detailed provisions set
forth in Articles VI, VIII and X, to apply to any such repurchase, retirement,
cancellation or acquisition of Shares any funds or property of the Trust whether
capital or surplus or otherwise, to the full extent now or hereafter permitted
by the laws of the Commonwealth of Massachusetts governing business
corporations.

3.5 Borrow Money. Subject to the Fundamental Policies, the Trustees shall
------------
have power to borrow money or otherwise obtain credit and to secure the same by
mortgaging, pledging or otherwise subjecting as security the assets of the
Trust, including the lending of portfolio securities, and to endorse, guarantee,
or undertake the performance of any obligation, contract or engagement of any
other person, firm, association or corporation.

3.6 Delegation; Committees. The Trustees shall have power, consistent
----------------------
with their continuing exclusive authority over the management of the Trust and
the Trust Property, to delegate from time to time to such of their number or to
officers, employees or agents of the Trust the doing of such things and the
execution of such instruments either in the name of the Trust or the names of
the Trustees or otherwise as the Trustees may deem expedient, to the same extent
as such delegation is permitted to directors of a Massachusetts business
corporation and as permitted by the 1940 Act.

3.7 Collection and Payment. The Trustees shall have power to collect all
----------------------
property due to the Trust; to pay all claims including taxes, against the Trust
Property; to prosecute, defend, compromise or abandon any claim relating to the
Trust Property; to foreclose any security interest securing any obligation, by
virtue of which any property is owed to the Trust; and to enter into releases,
agreements and other instruments.

3.8 Expenses. The Trustees shall have power to incur and pay any expenses
--------
which in the opinion of the Trustees are necessary or incidental to carry out
any of the purposes of this Declaration, and to pay reasonable compensation from
the funds of the Trust to themselves as Trustees. The Trustees shall fix the
compensation of all officers, employees and Trustees. The Trustees may pay
themselves such compensation for special services, including legal,
underwriting, syndicating and brokerage services, as they in good faith may deem
reasonable and reimbursement for expenses reasonably incurred by themselves on
behalf of the Trust.

3.9 Miscellaneous Powers. The Trustees shall have the power to: (a)
--------------------
employ or contract with such Persons as the Trustees may deem desirable for the
transaction of the business of the Trust; (b) enter into joint ventures,
partnerships and any other combinations or

7
<PAGE>

associations; (c) purchase, and pay for out of Trust Property, insurance
policies insuring the Shareholders, Trustees, officers, employees, agents,
investment advisers, distributors, selected dealers or independent contractors
of the Trust against all claims arising by reason of holding any such position
or by reason of any action taken or omitted by any such Person in such capacity,
whether or not constituting negligence, or whether or not the Trust would have
the power to indemnify such Person against such liability; (d) establish
pension, profitsharing, share purchase, and other retirement, incentive and
benefit plans for any Trustees, officers, employees and agents of the Trust; (e)
make donations, irrespective of benefit to the Trust, for charitable, religious,
educational, scientific, civic or similar purposes; (f) to the extent permitted
by law, indemnify any Person with whom the Trust has dealings, including any
advisor, administrator, manager, distributor and selected dealers, to such
extent as the Trustees shall determine; (g) guarantee indebtedness or
contractual obligations of others; (h) determine and change the fiscal year of
the Trust and the method by which its accounts shall be kept; and (i) adopt a
seal for the Trust, but the absence of such seal shall not impair the validity
of any instrument executed on behalf of the Trust.

3.10 Further Powers. The Trustees shall have power to conduct the
--------------
business of the Trust and carry on its operations in any and all of its branches
and maintain offices both within and without the Commonwealth of Massachusetts,
in any and all states of the United States of America, in the District of
Columbia, and in any and all commonwealths, territories, dependencies, colonies,
possessions, agencies or instrumentalities of the United States of America and
of foreign governments, and to do all such other things and execute all such
instruments as they deem necessary, proper or desirable in order to promote the
interests of the Trust although such things are not herein specifically
mentioned. Any determination as to what is in the interests of the Trust made
by the Trustees in good faith shall be conclusive. In construing the provisions
of this Declaration, the presumption shall be in favor of a grant of power to
the Trustees. The Trustees will not be required to obtain any court order to
deal with the Trust Property.

ARTICLE IV.

Management and Distribution Arrangements
----------------------------------------

4.1 Management Arrangements. Subject to a Majority Shareholder Vote, as
-----------------------
required by the 1940 Act, the Trustees may in their discretion from time to time
enter into advisory or management contracts whereby the other party to such
contract shall undertake to furnish the Trustees such advisory and management
services as the Trustees shall from time to time consider desirable and all upon
such terms and conditions as the Trustees may in their discretion determine.
Notwithstanding any provisions of this Declaration, the Trustees may authorize
any adviser or manager (subject to such general or specific instructions as the
Trustees may from time to time adopt) to effect purchases, sales, loans or
exchanges of portfolio securities of the Trust on behalf of the Trustees or may
authorize any officer, employee or Trustee to effect such purchases, sales,
loans or exchanges pursuant to recommendations of any such adviser or manager
(and all without further action by the Trustees). Any such purchases, sales,
loans and exchanges shall be deemed to have been authorized by all of the
Trustees.

8
<PAGE>

4.2 Distribution Arrangements. The Trustees may in their discretion from
-------------------------
time to time enter into a contract, providing for the sale of the Shares of the
Trust to net the Trust not less than the par value per share, whereby the Trust
may either agree to sell the Shares to the other party to the contract or
appoint such other party its sales agent for such Shares. In either case, the
contract shall be on such terms and conditions as the Trustees may in their
discretion determine not inconsistent with the provisions of this Article IV or
the By-Laws; and such contract may also provide for the repurchase or sale of
Shares by such other party as principal or as agent of the Trust and may provide
that such other party may enter into selected dealer agreements with registered
securities dealers to further the purpose of the distribution or repurchase of
the Shares.

4.3 Parties to Contract. Any contract of the character described in
-------------------
Section 4.1 and 4.2 of this Article IV or in Article VII hereof may be entered
into with any corporation, firm, trust or association, although one or more of
the Trustees or officers of the Trust may be an officer, director, Trustee,
shareholder, or member of such other party to the contract, and no such contract
shall be invalidated or rendered voidable by reason of the existence of any such
relationship, nor shall any person holding such relationship be liable merely by
reason of such relationship for any loss or expense to the Trust under or by
reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when entered into was
reasonable and fair and not inconsistent with the provisions of this Article IV
or the By-Laws. The same person (including a firm, corporation, trust, or
association) may be the other party to contracts entered into pursuant to
Sections 4.1 and 4.2 above or Article VII, and any individual may be financially
interested or otherwise affiliated with persons who are parties to any or all of
the contracts mentioned in this Section 4.3.

4.4 Provisions and Amendments. Any contract entered into pursuant to
-------------------------
Section 4.1 and 4.2 of this Article IV shall be consistent with and subject to
the requirements of Section 15 of the 1940 Act with respect to its continuance
in effect, its termination, and the method of authorization and approval of such
contract or renewal thereof, and no amendment to any contract, entered into
pursuant to Section 4.1 shall be effective unless assented to by a Majority
Shareholder Vote.

ARTICLE V.

Limitations of Liability of Shareholders Trustees and Others
------------------------------------------------------------

5.1 No Personal Liability of Shareholders, Trustees, etc. No Shareholder
------------------------------------------------------
shall be subject to any personal liability whatsoever to any Person in
connection with Trust Property or the acts, obligations or affairs of the Trust.
No Trustee, officer, employee or agent of the Trust shall be subject to any
personal liability whatsoever to any Person, other than the Trust or its
Shareholders, in connection with Trust Property or the affairs of the Trust,
save only that arising from his bad faith, willful misfeasance, gross negligence
or reckless disregard of his duty to such Person; and all such Persons shall
look solely to the Trust Property for satisfaction of claims of any nature
arising in connection with the affairs of the Trust. If any Shareholder,
Trustee, officer, employee, or agent, as such, of the Trust, is made a party to
any suit or proceeding to enforce any such liability, he shall not on account
thereof, be held to any personal liability. The Trust shall indemnify and hold
each Shareholder harmless from and against all claims and

9
<PAGE>

liabilities, to which such Shareholder may become subject by reason of his being
or having been a Shareholder, and shall reimburse such Shareholder for all legal
and other expenses reasonably incurred by him in connection with any such claim
or liability. The rights accruing to a Shareholder under this Section 5.1 shall
not exclude any other right to which such Shareholder may be lawfully entitled,
nor shall anything herein contained restrict the right of the Trust to indemnify
or reimburse a Shareholder in any appropriate situation even though not
specifically provided herein.

5.2 Non-Liability of Trustees, etc. No Trustee, officer employee or agent
-------------------------------
of the Trust shall be liable to the Trust, its Shareholders, or to any
shareholder, Trustee, officer, employee, or agent thereof for any action or
failure to act (including without limitation the failure to compel in any way
any former or acting Trustee to redress any breach of trust) except for his own
bad faith, willful misfeasance, gross negligence or reckless disregard of his
duties.

5.3 Mandatory Indemnification. The Trust shall indemnify each of its
-------------------------
Trustees, officers, employees, and agents (including persons who serve at its
requests as directors, officers or trustees of another organization in which it
has any interest, as a shareholder, creditor or otherwise) against all
liabilities and expenses (including amounts paid in satisfaction of judgments,
in compromise, as fines and penalties, and as counsel fees) reasonably incurred
by him in connection with the defense or disposition of any action, suit or
other proceeding, whether civil or criminal, in which he may be involved or with
which he may be threatened, while in office or thereafter, by reason of his
being or having been such a Trustee, officer, employee or agent, except with
respect to any matter as to which he shall have been adjudicated to have acted
in bad faith, willful misfeasance, gross negligence or reckless disregard of his
duties; provided, however, that as to any matter disposed of by a compromise
payment by such person, pursuant to a consent decree or otherwise, no
indemnification either for said payment or for any other expenses shall be
provided unless the Trust shall have received a written opinion from independent
legal counsel approved by the Trustees to the effect that if either the matter
of willful misfeasance, gross negligence or reckless disregard of duty, or the
matter of good faith and reasonable belief as to the best interests of the
Trust, had been adjudicated, it would have been adjudicated in favor of such
person. The rights accruing to any Person under these provisions shall not
exclude any other right to which he may be lawfully entitled; provided that no
Person may satisfy any right of indemnity or reimbursement granted herein or in
Section 5.l or to which he may be otherwise entitled except out of the property
of the Trust, and no Shareholder shall be personally liable to any Person with
respect to any claim for indemnity or reimbursement or otherwise. The Trustees
may make advance payments in connection with indemnification under this Section
5.3, provided that the indemnified person shall have given a written undertaking
to reimburse the Trust in the event it is subsequently determined that he is not
entitled to such indemnification.

5.4 No Bond Required of Trustees. No Trustee shall, as such, be obligated
----------------------------
to give any bond or surety or other security for the performance of any of his
duties hereunder.

5.5 No Duty of Investigation; Notice in Trust Instruments, etc. No
----------------------------------------------------------
purchaser, lender, transfer agent or other person dealing with the Trustees or
any officer, employee or agent of the Trust shall be bound to make any inquiry
concerning the validity of any transaction purporting to be made by the Trustees
or by said officer, employee or agent or be liable for the application of

10
<PAGE>

money or property paid, loaned, or delivered to or on the order of the Trustees
or of said officer, employee or agent. Every obligation, contract, instrument,
certificate, Share, other security of the Trust or undertaking, and every other
act or thing whatsoever executed in connection with the Trust shall be
conclusively taken to have been executed or done by the executors thereof only
in their capacity as Trustees under this Declaration or in their capacity as
officers, employees or agents of the Trust. Every written obligation, contract,
instrument, certificate, Share, other security of the Trust or undertaking made
or issued by the Trustees or by any officers, employees or agents of the Trust,
in their capacity as such, shall contain an appropriate recital to the effect
that the Shareholders, Trustees, officers, employees and agents of the Trust
shall not personally be bound by or liable thereunder, nor shall resort be had
to their private property for the satisfaction of any obligation or claim
thereunder and appropriate references shall be made therein to the Declaration,
and may contain any further recital which they may deem appropriate, but the
omission of such recital shall not operate to impose personal liability on any
of the Trustees, Shareholders, officers, employees or agents of the Trust. The
Trustees may maintain insurance for the protection of the Trust Property, its
Shareholders, Trustees, officers, employees and agents in such amount as the
Trustees shall deem adequate to cover possible tort liability, and such other
insurance as the Trustees in their sole judgment shall deem advisable.

5.6 Reliance on Experts, etc. Each Trustee and officer or employee of the
------------------------
Trust shall, in the performance of his duties, be fully and completely justified
and protected with regard to any act or any failure to act resulting from
reliance in good faith upon the books of account or other records of the Trust,
upon an opinion of counsel, or upon reports made to the Trust by any of its
officers or employees or by any investment adviser, distributor, selected
dealers, accountants, appraisers or other experts or consultants elected with
reasonable care by the Trustees, officers or employees of the Trust, regardless
of whether such counsel or expert may also be a Trustee.

ARTICLE VI.

Shares of Beneficial Interest
-----------------------------

6.1. Beneficial Interest. The interest of the beneficiaries hereunder
-------------------
shall be divided into transferable shares of beneficial interest of $0.10 par
value. The Trustees of the Trust may authorize separate classes of shares
together with such designations and powers, preferences and rights,
qualifications, limitations and restrictions as may be determined from time to
time by the Trustees. The number of such shares of beneficial interest
authorized hereunder is unlimited. All Shares issued hereunder including,
without limitation, Shares issued in connection with a dividend in Shares or a
split in shares, shall be fully paid and nonassessable.

Pursuant to the powers vested in the Trustees by this Section 6.1, the
Trustees hereby authorize the issuance of an unlimited number of common shares
of beneficial interest, par value $0.10 per share (the "Common Shares"),
together with [1,000,000] preferred shares of beneficial interest, par value of
$0.10 per share (the "Preferred Shares").

The designations and powers, preferences and rights, and the
qualifications, limitations and restrictions of the Common Shares are as set
forth in this Declaration of Trust.

11
<PAGE>

The designations and powers, preferences and rights, and the
qualifications, limitations and restrictions of the Preferred Shares are as
follows:

The Preferred Shares shall be issued from time to time in one or more
series with such distinctive serial designations and (i) may have such voting
powers, full or limited; (ii) may be subject to redemption at such time or times
and at such price or prices; (iii) may be entitled to receive dividends (which
may be cumulative or noncumulative) at such rate or rates, on such conditions,
and at such times, and payable in preference to, or in such relation to, the
dividends payable on any other class or classes of shares; (iv) may have such
preferences or other rights upon the dissolution of, or upon any distribution of
the assets of, the Trust; (v) may be made convertible into, or exchangeable for,
shares of any other class or classes of shares of the Trust, at such price or
prices or at such rates of exchange and with such adjustments; (vi) shall have
such other relative, participating, optional or other special rights,
qualifications, limitations or restrictions thereof, all as shall hereafter be
stated and expressed in the resolution or resolutions providing for the issue of
such Preferred Shares from time to time adopted by the Trustees pursuant to
authority so to do which is hereby expressly vested in the Board; and are as
further set out in this Declaration of Trust. A certificate signed by the
Secretary or an Assistant Secretary of the Trust setting forth the resolution or
resolutions providing for such issuance of Preferred Shares and reciting that
such resolution was or such resolutions were duly adopted by the Trustees (the
"Certificate of Designation") shall be conclusive evidence of the action
providing for the issuance of such Preferred Shares when lodged among the
records of the Trust.

6.2. Rights of Shareholders. The ownership of the Trust Property of every
----------------------
description and the right to conduct any business hereinbefore described are
vested exclusively in the Trustees, and the Shareholders shall have no interest
therein other than the beneficial interest conferred by their Shares, and they
shall have no right to call for any partition or division of any property,
profits, rights or interests of the Trust nor can they be called upon to share
or assume any losses of the Trust or suffer an assessment of any kind by virtue
of their ownership of Shares. The Shares shall be personal property giving only
the rights in this Declaration specifically set forth. The Shares shall not
entitle the holder to preference, preemptive, appraisal, conversion or exchange
rights, except for rights of appraisal specified in Section 10.4 and except as
the Trustees may determine with respect to any class or series of Shares.

6.3. Trust Only. It is the intention of the Trustees to create only the
----------
relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to
create a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in this Declaration shall be construed to make the Shareholders, either
by themselves or with the Trustees, partners or members of a joint stock
association.

6.4. Issuance of Shares. The Trustees, in their discretion, may from time
------------------
to time without a vote of the Shareholders issue Shares, in addition to the then
issued and outstanding Shares and Shares held in the treasury, to such party or
parties and for such amount not less than par value and type of consideration,
including cash or property, at such time or times, and on such terms as the
Trustees may deem best, and may in such manner acquire other assets (including
the acquisition of assets subject to, and in connection with the assumption of,
liabilities) and businesses. In connection with any issuance of Shares, the
Trustees may issue

12
<PAGE>

fractional Shares. The Trustees may from time to time divide or combine the
Shares into a greater or lesser number without thereby changing the
proportionate beneficial interests in the Trust. Contributions to the Trust may
be accepted for, and Shares shall be redeemed as, whole Shares and/or 1/1,000ths
of a Share or multiples thereof.

6.5. Register of Shares. A register shall be kept at the Trust or a
------------------
transfer agent duly appointed by the Trustees under the direction of the
Trustees which shall contain the names and addresses of the Shareholders and the
number of Shares held by them respectively and a record of all transfers
thereof. Such register shall be conclusive as to who are the holders of the
Shares and who shall be entitled to receive dividends or distributions or
otherwise to exercise or enjoy the rights of Shareholders. No Shareholder shall
be entitled to receive payment of any dividend or distribution, nor to have
notice given to him as herein provided, until he has given his address to a
transfer agent or such other officer or agent of the Trustees as shall keep the
said register for entry thereon. It is not contemplated that certificates will
be issued for the Shares; however, the Trustees, in their discretion, may
authorize the issuance of share certificates and promulgate appropriate rules
and regulations as to their use.

6.6. Transfer Agent and Registrar. The Trustee shall have power to employ
----------------------------
a transfer agent or transfer agents, and a registrar or registrars. The
transfer agent or transfer agents may keep the said register and record therein
the original issues and transfers, if any, of the said Shares. Any such
transfer agent and registrar shall perform the duties usually performed by
transfer agents and registrars of certificates of stock in a corporation, except
as modified by the Trustees.

6.7. Transfer of Shares. Shares shall be transferable on the records of
------------------
the Trust only by the record holder thereof or by his agent thereto duly
authorized in writing, upon delivery to the Trustees or a transfer agent of the
Trust of a duly executed instrument of transfer, together with such evidence of
the genuineness of each such execution and authorization and of other matters as
may reasonably be required. Upon such delivery the transfer shall be recorded
on the register of the Trust. Until such record is made, the Shareholder of
record shall be deemed to be the holder of such Shares for all purposes hereof
and neither the Trustees nor any transfer agent or registrar nor any officer,
employee or agent of the Trust shall be affected by any notice of the proposed
transfer.

Any person becoming entitled to any Shares in consequence of the
death, bankruptcy, or incompetence of any Shareholder, or otherwise by operation
of law, shall be recorded on the register of Shares as the holder of such Shares
upon production of the proper evidence thereof to the Trustees or a transfer
agent of the Trust, but until such record is made, the Shareholder of record
shall be deemed to be the holder of such Shares for all purposes hereof and
neither the Trustees nor any transfer agent or registrar nor any officer or
agent of the Trust shall be affected by any notice of such death, bankruptcy or
incompetence, or other operation of law.

6.8. Notices. Any and all notices to which any Shareholder hereunder may
-------
be entitled and any and all communications shall be deemed duly served or given
if mailed, postage prepaid, addressed to any Shareholder of record at his last
known address as recorded on the register of the Trust.

13
<PAGE>

ARTICLE VII.

Custodian
---------

7.1. Appointment and Duties. The Trustees shall at all times employ
----------------------
custodian or custodians, meeting the qualifications for custodians for portfolio
securities of investment companies contained in the 1940 Act, as custodian with
authority as its agent, but subject to such restrictions, limitations and other
requirements, if any, as may be contained in the By-Laws of the Trust and the
1940 Act:

(1) to hold the securities owned by the Trust and deliver the same
upon written order;

(2) to receive and receipt for any moneys due to the Trust and deposit
the same in its own banking department or elsewhere as the Trustees may
direct;

(3) to disburse such funds upon orders or vouchers;

(4) if authorized by the Trustees, to keep the books and accounts of
the Trust and furnish clerical and accounting services; and

(5) if authorized to do so by the Trustees, to compute the net income
of the Trust;

all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian. If so directed by a Majority Shareholder Vote, the custodian
shall deliver and pay over all property of the Trust held by it as specified in
such vote.

The Trustees may also authorize the custodian to employ one or more sub-
custodians from time to time to perform such of the acts and services of the
custodian and upon such terms and conditions, as may be agreed upon between the
custodian and such sub-custodian and approved by the Trustees, provided that in
every case such sub-custodian shall meet the qualifications for custodians
contained in the 1940 Act.

7.2. Central Certificate System. Subject to such rules, regulations and
--------------------------
orders as the Commission may adopt, the Trustees may direct the custodian to
deposit all or any part of the securities owned by the Trust in a system for the
central handling of securities established by a national securities exchange or
a national securities association registered with the Commission under the
Securities Exchange Act of 1934, or such other person as may be permitted by the
Commission, or otherwise in accordance with the 1940 Act, pursuant to which
system all securities of any particular class or series of any issuer deposited
within the system are treated as fungible and may be transferred or pledged by
bookkeeping entry without physical delivery of such securities, provided that
all such deposits shall be subject to withdrawal only upon the order of the
Trust.

14
<PAGE>

ARTICLE VIII.

Determination of Net Asset Value, Net Income and Distributions
--------------------------------------------------------------

8.1. Net Asset Value. The net asset value of each outstanding Share of
---------------
the Trust shall be determined at such time or times on such days as the Trustees
may determine, in accordance with the 1940 Act. The method of determination of
net asset value of Shares of each class shall be determined by the Trustees and
shall be as set forth in the Prospectus and Registration Statement with any
expenses being borne solely by a class of Shares being reflected in the net
asset value of such Shares. The power and duty to make the daily calculations
may be delegated by the Trustees to the adviser, administrator, manager,
custodian, transfer agent or such other person as the Trustees may determine.
The Trustees may suspend the daily determination of net asset value to the
extent permitted by the 1940 Act.

8.2. Distributions to Shareholders. The Trustees shall from time to time
-----------------------------
distribute ratably among the Shareholders such proportion of the net profits,
surplus (including paid-in surplus), capital, or assets held by the Trustees as
they deem proper with any expenses being borne solely by a class of Shares being
reflected in the net profits or other assets being distributed to such class.
Such distribution may be made in cash or property (including without limitation
any type of obligations of the Trust or any assets thereof), and the Trustees
may distribute ratably among the Shareholders additional Shares issuable
hereunder in such manner, at such times, and on such terms as the Trustees may
deem proper. Such distributions may be among the Shareholders of record at the
time of declaring a distribution or among the Shareholders of record at such
later date as the Trustees shall determine. The Trustees may always retain from
the net profits such amounts as they may deem necessary to pay the debts or
expenses of the Trust or to meet obligations of the Trust, or as they deem
desirable to use in the conduct of its affairs or to retain for future
requirements or extensions of the business. The Trustees may adopt and offer to
Shareholders such dividend reinvestment plans, cash dividend payout plans or
related plans as the Trustees shall deem appropriate.

Inasmuch as the computation of net income and gains for federal income tax
purposes may vary from the computation thereof on the books, the above
provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust to avoid or reduce liability for taxes.

8.3. Power to Modify Foregoing Procedures. Notwithstanding any of the
------------------------------------
foregoing provisions of this Article VIII, the Trustees may prescribe, in their
absolute discretion, such other bases and times for determining the per share
net asset value of the Trust's Shares or net income, or the declaration and
payment of dividends and distributions as they deem necessary or desirable or to
enable the Trust to comply with any provision of the 1940 Act, including any
rule or regulation adopted pursuant to the 1940 Act by the Commission or any
securities association registered under the Securities Exchange Act of 1934, all
as in effect now or hereafter amended or modified.

15
<PAGE>

ARTICLE IX.

Shareholders
------------

9.1. Voting Powers. The Shareholders shall have power to vote only (i)
-------------
for the election of Trustees as provided in Section 2.2 hereof, (ii) for the
removal of Trustees as provided in Section 2.2 hereof, (iii) with respect to any
investment advisory or management contract as provided in Section 4.1, (iv) with
respect to the termination of the Trust as provided in Section 10.2, (v) with
respect to any amendment of the Declaration to the extent and as provided in
Section 10.3, (vi) with respect to any merger, consolidation or sale of assets
as provided in Section 10.4, (vii) with respect to any conversion to an "open-
end" company as provided in Section 10.5, (viii) with respect to incorporation
or reorganization of the Trust to the extent and as provided in Section 10.6,
(ix) to the same extent as the stockholders of a Massachusetts business
corporation as to whether or not a court action, proceeding or claim should or
should not be brought or maintained derivatively or as a class action on behalf
of the Trust or the Shareholders, (x) with respect to such additional matters
relating to the Trust as may be required by law, the Declaration, the By-Laws or
any registration of the Trust with the Commission (or any successor agency) or
any state, or as and when the Trustees may consider necessary or desirable, and
(xi) with respect to those matters set forth in the designations and powers,
preferences and rights and the qualifications, limitations and restrictions of
the Preferred Shares, as determined in accordance with Section 6.1 hereof. Each
whole Share shall be entitled to one vote as to any matter on which it is
entitled to vote and each fractional Share shall be entitled to a proportionate
fractional vote, except that Shares held in the treasury of the Trust as of the
record date, as determined in accordance with the By-Laws, shall not be voted.
There shall be no cumulative voting in the election of Trustees. Until Shares
are issued, the Trustees may exercise all rights of Shareholders and may take
any action required by law, the Declaration or the By-Laws to be taken by
Shareholders. The By-Laws may include further provisions for Shareholders'
votes and meetings and related matters.

9.2. Meetings of Shareholders.
------------------------

(a) Annual Meetings. Annual meetings of the Shareholders shall be
---------------
held at such place within or without the Commonwealth of Massachusetts on
such day and at such time as the Trustees shall designate.

(b) Special Meetings. Special meetings of the Shareholders may be
----------------
called at any time by a majority of the Trustees and shall be called by any
Trustee upon written request of Shareholders holding in the aggregate not
less than 10% of the outstanding Shares having voting rights, such request
specifying the purpose or purposes for which such meeting is to be called.
Any such meeting shall be held within or without the Commonwealth of
Massachusetts on such day and at such time as the Trustees shall designate.

The holders of a majority of the outstanding Shares present in person or by
proxy shall constitute a quorum at any annual or special meeting for the
transaction of any business, except as may otherwise be required by the 1940
Act, the laws of the Commonwealth of Massachusetts or other applicable law or by
this Declaration or the By-Laws of the Trust. If a quorum is present at a
meeting, the affirmative vote of a majority of the Shares represented at the
meeting

16
<PAGE>

constitutes the action of the Shareholders, unless the 1940 Act, the laws of the
Commonwealth of Massachusetts or other applicable law, the Declaration or the
By-Laws of the Trust requires a greater number of affirmative votes. If the
Shares shall be divided into classes with a class having exclusive voting rights
with respect to certain matters, the aforesaid quorum and voting requirements
with respect to action to be taken by the Shareholders of the class on such
matters shall be applicable only to the Shares of such class.

9.3. Notice of Meetings. Notice of all meetings of the Shareholders,
------------------
stating the time, place and purposes of the meeting, shall be given by the
Trustees by mail to each Shareholder at his registered address, mailed at least
10 days and not more than 60 days before the meeting. Only the business stated
in the notice of the meeting shall be considered at such meeting. Any adjourned
meeting may be held as adjourned without further notice.

9.4. Record Date for Meetings. For the purpose of determining the
------------------------
Shareholders who are entitled to notice of and to vote at any meeting, or to
participate in any distribution, or for the purposes of any other action, the
Trustees may from time to time close the transfer books for such period, not
exceeding 30 days, as the Trustees may determine; or without closing the
transfer books the Trustees may fix a date not more than 60 days prior to the
date of any meeting of Shareholders or daily dividends or other action as a
record date for the determination of the Persons to be treated as Shareholders
of record for such purposes, except for dividend payments which shall be
governed by Section 8.2 hereof.

9.5. Proxies, etc. At any meeting of Shareholders, any holder of Shares
------------
entitled to vote thereat may vote by proxy, provided that no proxy shall be
voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary may
direct, for verification prior to the time at which such vote shall be taken.
Pursuant to a resolution of a majority of the Trustees, proxies may be solicited
in the name of one or more Trustees or one or more of the officers of the Trust.
Only Shareholders of record shall be entitled to vote. Each full Share shall be
entitled to one vote and fractional Shares shall be entitled to a vote of such
fraction. When any Share is held jointly by several persons, any one of them
may vote at any meeting in person or by proxy in respect of such Share, but if
more than one of them shall be present at such meeting in person by proxy, and
such joint owners or their proxies so present disagree as to any vote to be
cast, such vote shall not be received in respect of such Share. A proxy
purporting to be executed by or on behalf of a Shareholder shall be deemed valid
unless challenged at or prior to its exercise, and the burden of proving
invalidity shall rest on the challenger. If the holder of any such Share is a
minor or a person of unsound mind, and subject to guardianship or to the legal
control of any other person as regards the charge or management of such Share,
he may vote by his guardian or such other person appointed or having such
control, and such vote may be given in person or by proxy.

9.6. Reports. The Trustees shall cause to be prepared at least annually a
-------
report of operations containing a balance sheet and statement of income and
undistributed income of the Trust prepared in conformity with generally accepted
accounting principles and an opinion of an independent public accountant on such
financial statements. Copies of such reports shall be mailed to all
Shareholders of record within the time required by the 1940 Act, and in any
event within a reasonable period preceding the annual meeting of Shareholders.
The Trustees shall, in addition, furnish to the Shareholders at least semi-
annually interim reports containing an

17
<PAGE>

unaudited balance sheet of the Trust as of the end of such period and an
unaudited statement of income and surplus for the period from the beginning of
the current fiscal year to the end of such period.

9.7. Inspection of Records. The records of the Trust shall be open to
---------------------
inspection by Shareholders to the same extent as is permitted shareholders of a
Massachusetts business corporation.

9.8. Shareholder Action by Written Consent. Any action which may be taken
-------------------------------------
by Shareholders may be taken without a meeting if a majority of Shareholders
entitled to vote on the matter (or such larger proportion thereof as shall be
required by any express provision of this Declaration) consent to the action in
writing and the written consents are filed with the records of the meetings of
Shareholders. Such consent shall be treated for all purposes as a voice taken
at a meeting of Shareholders.

ARTICLE X.

Duration; Termination of Trust; Amendment; Mergers, etc.
------------------------------- ------------------------

10.1. Duration. Subject to possible termination in accordance with the
--------
provisions of Section 10.2 hereof, the Trust created hereby shall continue
without limitation of time.

10.2. Termination of Trust.
--------------------

(a) The Trust may be terminated by the affirmative vote of the
holders of not less than two-thirds of the Shares at any meeting of Shareholders
or if such termination has been approved by the affirmative vote of at least
two-thirds of the Trustees, in which case the affirmative vote of the holders of
not less than a majority of such Shares. Upon the termination of the Trust

(i) The Trust shall carry on no business except for the purpose
of winding up its affairs.

(ii) The Trustees shall proceed to wind up the affairs of the
Trust and all of the powers of the Trustees under this Declaration shall
continue until the affairs of the Trust shall have been wound up, including
the power to fulfill or discharge the contracts of the Trust, collect its
assets, sell, convey, assign, exchange, transfer or otherwise dispose of
all or any part of the remaining Trust Property to one or more persons at
public or private sale for consideration which may consist in whole or in
part of cash, securities or other property of any kind, discharge or pay
its liabilities, and do all other acts appropriate to liquidate its
business.

(iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and refunding
agreements, as they deem necessary for their protection, the Trustees may
distribute the remaining Trust Property, in cash or in kind or partly each,
among the Shareholders of each class, according to their respective rights
taking into account the proper allocation of expenses being borne solely by
any class of Shares.

18
<PAGE>

(b) After termination of the Trust and distribution to the Shareholders
as herein provided, a majority of the Trustees shall execute and lodge among the
records of the Trust an instrument in writing setting forth the fact of such
termination, and the Trustees shall thereupon be discharged from all further
liabilities and duties hereunder, and the rights and interests of all
Shareholders shall thereupon cease.

10.3. Amendment Procedure.
-------------------

(a) Except as provided in paragraph (b) of this Section 10.3, this
Declaration may be amended by a vote of a majority of the Shares at a meeting of
Shareholders, or by an instrument in writing, without a meeting signed by a
majority of the Trustees and consented to by the holders of not less than a
majority of such Shares. The Trustees may also amend this Declaration without
the vote or consent of Shareholders (i) to change the name of the Trust, (ii) to
supply any omission, or cure, correct or supplement any ambiguous, defective or
inconsistent provision hereof, (iii) if they deem it necessary to conform this
Declaration to the requirements of applicable federal or state laws or
regulations or the requirements of the Internal Revenue Code, or to eliminate or
reduce any federal, state or local taxes which are or may be payable by the
Trust or the Shareholders, but the Trustees shall not be liable for failing to
do so, (iv) to make any changes deemed necessary to effectuate the designations
and powers, preferences and rights, and the qualifications, limitations and
restrictions adopted by the Trustees with respect to the Preferred Shares
pursuant to Section 6.1 hereof, or (v) for any other purpose which does not
adversely affect the rights of any Shareholder with respect to which the
amendment is or purports to be applicable.

(b) No amendment may be made, under Section 10.3 (a) above, which would
change any rights with respect to any Shares of the Trust by reducing the amount
payable thereon upon liquidation of the trust or by diminishing or eliminating
any voting rights pertaining thereto, except with the vote or consent of the
holders of two-thirds of the Shares of the Trust so affected outstanding and
entitled to vote. Nothing contained in this Declaration shall permit the
amendment of this Declaration to impair the exemption from personal liability of
the Shareholders, Trustees, officers, employees and agents of the Trust or to
permit assessments upon Shareholders.

(c) A certification in recordable form signed by a majority of the
Trustees or by the Secretary or any Assistant Secretary of the Trust setting
forth an amendment and reciting that it was duly adopted by the Shareholders or
by the Trustees as aforesaid or a copy of the Declaration, as amended, in
recordable form, and executed by a majority of the Trustees or certified by the
Secretary or any Assistant Secretary of the Trust, shall be conclusive evidence
of such amendment when lodged among the records of the Trust.

Notwithstanding any other provision hereof, until such time as a
Registration Statement under the Securities Act of 1933, as amended, covering
the first public offering of Shares of the Trust shall have become effective,
this Declaration may be terminated or amended in any respect by the affirmative
vote of a majority of the trustees or by an instrument signed by a majority of
the Trustees.

19
<PAGE>

10.4 Merger, Consolidation and Sale of Assets. Notwithstanding any other
----------------------------------------
provisions of this Declaration or the By-Laws of the Trust, a favorable vote of
the holders of at least two-thirds of the outstanding Shares of the Trust
entitled to be voted on the matter shall be required to approve, adopt or
authorize (i) a merger or consolidation or share exchange of the Trust with any
other entity, or (ii) a sale or exchange of all or substantially all of the
assets of the Trust (other than in the regular course of its investment
activities), unless such action has previously been approved, adopted or
authorized by the affirmative vote of at least two-thirds of the total number of
Trustees fixed in accordance with this Declaration, in which case the
affirmative vote of the holders of a majority of the outstanding Shares of the
Trust entitled to vote thereon shall be required. In respect of any such
merger, consolidation, sale or exchange of assets, any Shareholder shall be
entitled to rights of appraisal of his Shares to the same extent as a
Shareholder of a Massachusetts business corporation in respect of a merger,
consolidation, sale or exchange of assets of a Massachusetts business
corporation, and such right shall be his exclusive remedy in respect of his
dissent from any such action.

10.5 Conversion to Open-End Company. Notwithstanding any other provisions
------------------------------
of this Declaration or the By-Laws of the Trust, a favorable vote of the holders
of two-thirds of the outstanding Shares of the Trust entitled to be voted on
the matter shall be required to approve, adopt or authorize any amendment to
this Declaration that makes the Common Shares a "redeemable security" as that
term is defined in section 2(a)(32) the 1940 Act) unless such action has
previously been approved, adopted or authorized by the affirmative vote of at
least two-thirds of the total number of Trustees fixed in accordance with this
Declaration, in which case the affirmative vote of the holders of a majority of
the outstanding Shares of the Trust entitled to vote thereon shall be required.

10.6 Incorporation. With the approval of the holders of a majority of the
-------------
Shares, the Trustees may cause to be organized or assist in organizing a
corporation or corporations under the laws of any jurisdiction or any other
trust, partnership, association or other organization to take over all of the
Trust Property or to carry on any business in which the Trust shall directly or
indirectly have any interest, and to sell, convey and transfer the Trust
Property to any such corporation, trust, association or organization in exchange
for the Shares or securities thereof or otherwise, and to lend money to,
subscribe for the Shares or securities of, and enter into any contracts with any
such corporation, trust, partnership, association or organization, or any
corporation, partnership, trust, association or organization in which the Trust
holds or is about to acquire shares or any other interest. The Trustees may
also cause merger or consolidation between the Trust or any successor thereto
and any such corporation, trust, partnership, association or other organization
if and to the extent permitted by law, as provided under the law then in effect.
Nothing contained herein shall be construed as requiring approval of
Shareholders for the Trustees to organize or assist in organizing one or more
corporations, trusts, partnerships, associations or other organizations and
selling, conveying or transferring a portion of the Trust Property to such
organizations or entities.

20
<PAGE>

ARTICLE XI.

Miscellaneous
-------------

11.1 Filing. This Declaration, any amendment hereto or any Certificate of
------
Designation shall be filed in the office of the Secretary of the Commonwealth of
Massachusetts and in such other places as may be required under the laws of
Massachusetts and may also be filed or recorded in such other places as the
Trustees deem appropriate. Each amendment so filed shall be accompanied by a
certificate signed and acknowledged by a Trustee or the Secretary or any
Assistant Secretary stating that such action was duly taken in a manner provided
herein. Unless an amendment or certificate or Certificate of Designation sets
forth some later time for the effectiveness thereof, such amendment or
certificate or Certificate of Designation shall be effective upon its filing. A
restated Declaration, containing the original Declaration and all amendments
theretofore made, may be executed from time to time by a majority of the
Trustees and shall, upon filing with the Secretary of the Commonwealth of
Massachusetts, be conclusive evidence of all amendments contained therein and
may thereafter be referred to in lieu of the original Declaration and the
various amendments thereto.

11.2 Resident Agent. The Trust shall maintain a resident agent in the
--------------
Commonwealth of Massachusetts, which agent shall initially be CT Corporation
System, 2 Oliver Street, Boston, Massachusetts 02109. The Trustees may
designate a successor resident agent, provided, however, that such appointment
shall not become effective until written notice thereof is delivered to the
office of the Secretary of the Commonwealth.

11.3 Governing Law. This Declaration is executed by the Trustees and
-------------
delivered in the Commonwealth of Massachusetts and with reference to the laws
thereof, and the rights of all parties and the validity and construction of
every provision hereof shall be subject to and construed according to the laws
of said State and reference shall be specifically made to the business
corporation law of the Commonwealth of Massachusetts as to the construction of
matters not specifically covered herein or as to which an ambiguity exists.

11.4 Counterparts. This Declaration may be simultaneously executed in
------------
several counterparts, each of which shall be deemed to be an original, and such
counterparts, together, shall constitute one and the same instrument, which
shall be sufficiently evidenced by any such original counterpart.

11.5 Reliance by Third Parties. Any certificate executed by an individual
-------------------------
who, according to the records of the Trust, or of any recording office in which
this Declaration may be recorded, appears to be a Trustee hereunder, or
Secretary or Assistant Secretary of the Trust, certifying to: (a) the number or
identity of Trustees or Shareholders, (b) the due authorization of the execution
of any instrument or writing, (c) the form of any vote passed at a meeting of
Trustees or Shareholders, (d) the fact that the number of Trustees or
Shareholders present at any meeting or executing any written instrument
satisfies the requirements of this Declaration, (e) the form of any By-Laws
adopted by or the identity of any officers elected by the Trustees, or (f) the
existence of any fact or facts which in any manner relate to the affairs of the
Trust, shall be conclusive evidence as to the matters so certified in favor of
any person dealing with the Trustees and their successors.

21
<PAGE>

11.6 Provisions in Conflict With Law or Regulations.
----------------------------------------------

(a) The provisions of this Declaration are severable, and if the
Trustees shall determine, with the advice of counsel, that any of such
provisions is in conflict with the 1940 Act, the regulated investment company
provisions of the Internal Revenue Code or with other applicable laws and
regulations, the conflicting provision shall be deemed never to have constituted
a part of this Declaration; provided, however, that such determination shall not
affect any of the remaining provisions of this Declaration or render invalid or
improper any action taken or omitted prior to such determination.

(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of this
Declaration in any jurisdiction.

The principal office of the Trust is 800 Scudders Mill Road, Plainsboro, NJ
08536.

22
<PAGE>

IN WITNESS WHEREOF, the undersigned have caused these presents to be
executed as of the day and year first above written.

/s/ Alice A. Pellegrino
-----------------------
Alice A. Pellegrino
800 Scudders Mill Road
Plainsboro, NJ 08536

/s/ William E. Zitelli, Jr.
---------------------------
William E. Zitelli, Jr.
800 Scudders Mill Road
Plainsboro, NJ 08536

/s/ Lori A. Martin
------------------
Lori A. Martin
800 Scudders Mill Road
Plainsboro, NJ 08536

<PAGE>

EXHIBIT (b)

MUNIHOLDINGS PENNSYLVANIA INSURED FUND
---------------------------------------

BY-LAWS
-------

These By-Laws are made and adopted pursuant to Section 2.7 of the
Declaration of Trust establishing MUNIHOLDINGS PENNSYLVANIA INSURED FUND, dated
December 3, 1998, as from time to time amended (hereinafter called the
"Declaration"). All words and terms capitalized in these By-Laws shall have the
meaning or meanings set forth for such words or terms in the Declaration.

ARTICLE I
---------

Shareholder Meetings
--------------------

Section 1.1. Chairman. The Chairman, if any, shall act as chairman at all
--------
meetings of the Shareholders; in his absence, the President shall act as
chairman; and in the absence of the Chairman and President, the Trustee or
Trustees present at each meeting may elect a temporary chairman for the meeting,
who may be one of themselves.

Section 1.2. Proxies; Voting. Shareholders may vote either in person or
---------------
by duly executed proxy and each full share represented at the meeting shall have
one vote, all as provided in Article IX of the Declaration. No proxy shall be
valid after eleven (11) months from the date of its execution, unless a longer
period is expressly stated in such proxy.

Section 1.3. Closing of Transfer Books and Fixing Record Dates. For the
-------------------------------------------------
purpose of determining the Shareholders who are entitled to notice of or to vote
or act at any meeting, including any adjournment thereof, or who are entitled to
participate in any distribution, or for the purposes of any other action, the
Trustees may from time to time close the transfer books or
<PAGE>

fix a record date in the manner provided in Section 9.4 of the Declaration. If
the Trustees do not prior to any meeting of Shareholders so fix a record date or
close the transfer books, then the date of mailing notice of the meeting or the
date upon which the dividend resolution is adopted, as the case may be, shall be
the record date.

Section 1.4. Inspectors of Election. In advance of any meeting of
----------------------
Shareholders, the Trustees may appoint Inspectors of Election to act at the
meeting or any adjournment thereof. If Inspectors of Election are not so
appointed, the Chairman, if any, of any meeting of Shareholders may, and on the
request of any Shareholder or his proxy shall, appoint Inspectors of Election of
the meeting. The number of Inspectors shall be either one or three. If
appointed at the meeting on the request of one or more Shareholders or proxies,
a majority of Shares present shall determine whether one or three Inspectors are
to be appointed, but failure to allow such determination by the Shareholders
shall not affect the validity of the appointment of Inspectors of Election. In
case any person appointed as Inspector fails to appear or fails or refuses to
act, the vacancy may be filled by appointment made by the Trustees in advance of
the convening of the meeting or at the meeting by the person acting as chairman.
The Inspectors of Election shall determine the number of Shares outstanding, the
Shares represented at the meeting, the existence of a quorum, the authenticity,
validity and effect of proxies, shall receive votes, ballots or consents, shall
hear and determine all challenges and questions in any way arising in connection
with the right to vote, shall count and tabulate all votes or consents,
determine the results, and do such other acts as may be proper to conduct the
election or vote with fairness to all Shareholders. If there are three
Inspectors of Election, the decision, act or certificate of a majority is
effective in all respects as the decision, act or certificate of all. On
request of the Chairman, if any, of the meeting, or of any Shareholder or his
proxy, the Inspectors of Election shall make a report in
<PAGE>

writing of any challenge or question or matter determined by them and shall
execute a certificate of any facts found by them.

Section 1.5. Records at Shareholder Meetings. At each meeting of the
-------------------------------
Shareholders there shall be open for inspection the minutes of the last previous
Shareholder Meeting of the Trust and a list of the Shareholders of the Trust,
certified to be true and correct by the Secretary or other proper agent of the
Trust, as of the record date of the meeting or the date of closing of transfer
books, as the case may be. Such list of Shareholders shall contain the name of
each Shareholder in alphabetical order and the address of and number of Shares
owned by such Shareholder. Shareholders shall have such other rights and
procedures of inspection of the books and records of the Trust as are granted to
shareholders of a Massachusetts business corporation.

ARTICLE II
----------

Trustees
--------

Section 2.1. Annual and Regular Meetings. The Trustees shall hold an
---------------------------
annual meeting for the election of officers and the transaction of other
business which may come before such meeting, on such date as shall be fixed by
the Trustees from time to time. Regular meetings of the Trustees may be held
without call or notice at such place or places and times as the Trustees may by
resolution provide from time to time.

Section 2.2. Special Meetings. Special Meetings of the Trustees shall
----------------
be held upon the call of the Chairman, if any, the President, the Secretary or
any two Trustees, at such time, on such day, and at such place, as shall be
designated in the notice of the meeting.

Section 2.3. Notice. Notice of a meeting shall be given by mail or by
------
telegram (which term shall include a cablegram) or delivered personally. If
notice is given by mail, it shall be mailed not later than 48 hours preceding
the meeting and if given by telegram or personally, such
<PAGE>

telegram shall be sent or delivery made not later than 48 hours preceding the
meeting. Notice by telephone shall constitute personal delivery for these
purposes. Notice of a meeting of Trustees may be waived before or after any
meeting by signed written waiver. Neither the business to be transacted at, nor
the purpose of, any meeting of the Board of Trustees need be stated in the
notice or waiver of notice of such meeting, and no notice need be given of
action proposed to be taken by unanimous written consent. The attendance of a
Trustee at a meeting shall constitute a waiver of notice of such meeting except
where a Trustee attends a meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting has not been lawfully
called or convened.

Section 2.4. Chairman; Records. The Chairman, if any, shall act as
-----------------
chairman at all meetings of the Trustees; in his absence, the President shall
act as chairman; and, in the absence of the Chairman and the President, the
Trustees present shall elect one of their number to act as temporary chairman.
The results of all actions taken at a meeting of the Trustees, or by unanimous
written consent of the Trustees, shall be recorded by the Secretary.

Section 2.5. Retirement. Notwithstanding the provisions of Article II,
----------
Section 2.2 of the Declaration, each Trustee's term of office shall expire as of
December 31 of the year in which such Trustee reaches seventy-two years of age.

ARTICLE III
-----------

Officers
--------

Section 3.1. Officers of the Trust. The officers of the Trust shall
---------------------
consist of a Chairman, if any, a President, a Secretary, a Treasurer and such
other officers or assistant officers, including Vice Presidents, as may be
elected by the Trustees. Any two or more of the offices may be held by the same
person, except that the same person may not be both President
<PAGE>

and Secretary. The Trustees may designate a Vice President as an Executive Vice
President and may designate the order in which the other Vice Presidents may
act. The Chairman and the President shall be Trustees, but no other officer of
the Trust need be a Trustee.

Section 3.2. Election and Tenure. At the initial organizational meeting
-------------------
and thereafter at each annual meeting of the Trustees, the Trustees shall elect
the Chairman, if any, President, Secretary, Treasurer and such other officers as
the Trustees shall deem necessary or appropriate in order to carry out the
business of the Trust. Such officers shall hold office until the next annual
meeting of the Trustees and until their successors have been duly elected and
qualified. The Trustees may fill any vacancy in office or add any additional
officers at any time.

Section 3.3. Removal of Officer. Any officer may be removed at any time,
------------------
with or without cause, by action of a majority of the Trustees. This provision
shall not prevent the making of a contract of employment for a definite term
with any officer and shall have no effect upon any cause of action which any
officer may have as a result of removal in breach of a contract of employment.
Any officer may resign at any time by notice in writing signed by such officer
and delivered or mailed to the Chairman, if any, President, or Secretary, and
such resignation shall take effect immediately upon receipt by the Chairman, if
any, President, or Secretary, or at a later date according to the terms of such
notice in writing.

Section 3.4. Bonds and Surety. Any officer may be required by the
----------------
Trustees to be bonded for the faithful performance of his duties in such amount
and with such sureties as the Trustees may determine.

Section 3.5. Chairman, President, and Vice Presidents. The Chairman, if
----------------------------------------
any, shall, if present, preside at all meetings of the Shareholders and of the
Trustees and shall exercise and perform such other powers and duties as may from
time to time be assigned to him by the
<PAGE>

Trustees. Subject to such supervisory powers, if any, as may be given by the
Trustees to the Chairman, if any, the President shall be the chief executive
officer of the Trust and, subject to the control of the Trustees, shall have
general supervision, direction and control of the business of the Trust and of
its employees and shall exercise such general powers of management as are
usually vested in the office of President of a corporation. In the absence of
the Chairman, if any, the President shall preside at all meetings of the
Shareholders and the Trustees. The President shall be, ex-officio, a member of
all standing committees, except as otherwise provided in the resolutions or
instruments creating any such committees. Subject to direction of the Trustees,
the Chairman, if any, and the President shall each have power in the name and on
behalf of the Trust to execute any and all loan documents, contracts,
agreements, deeds, mortgages, and other instruments in writing, and to employ
and discharge employees and agents of the Trust. Unless otherwise directed by
the Trustees, the Chairman, if any, and the President shall each have full
authority and power, on behalf of all of the Trustees, to attend and to act and
to vote, on behalf of the Trust at any meetings of business organizations in
which the Trust holds an interest, or to confer such powers upon any other
persons, by executing any proxies duly authorizing such persons. The Chairman,
if any, and the President shall have such further authorities and duties as the
Trustees shall from time to time determine. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Trustees
or, if more than one and not ranked, the Vice President designated by the
Trustees, shall perform all of the duties of the President, and when so acting
shall have all the powers of and be subject to all of the restrictions upon the
President. Subject to the direction of the Trustees, and of the President, each
Vice President shall have the power in the name and on behalf of the Trust to
execute any and all loan documents, contracts, agreements, deeds, mortgages and
other instruments in writing, and, in
<PAGE>

addition, shall have such other duties and powers as shall be designated from
time to time by the Trustees or by the President.

Section 3.6. Secretary. The Secretary shall keep the minutes of all
---------
meetings of, and record all votes of, Shareholders, Trustees and the Executive
Committee, if any. He shall be custodian of the seal of the Trust, if any, and
he (and any other person so authorized by the Trustees) shall affix the seal or,
if permitted, a facsimile thereof, to any instrument executed by the Trust which
would be sealed by a Massachusetts corporation executing the same or a similar
instrument and shall attest the seal and the signature or signatures of the
officer or officers executing such instrument on behalf of the Trust. The
Secretary shall also perform any other duties commonly incident to such office
in a Massachusetts business corporation, and shall have such other authorities
and duties as the Trustees shall from time to time determine.

Section 3.7. Treasurer. Except as otherwise directed by the Trustees, the
---------
Treasurer shall have the general supervision of the monies, funds, securities,
notes receivable and other valuable papers and documents of the Trust, and shall
have and exercise under the supervision of the Trustees and of the President all
powers and duties normally incident to his office. He may endorse for deposit
or collection all notes, checks and other instruments payable to the Trust or to
its order. He shall deposit all funds of the Trust in such depositories as the
Trustees shall designate. He shall be responsible for such disbursement of the
funds of the Trust as may be ordered by the Trustees or the President. He shall
keep accurate account of the books of the Trust's transactions which shall be
the property of the Trust, and which together with all other property of the
Trust in his possession, shall be subject at all times to the inspection and
control of the Trustees. Unless the Trustees shall otherwise determine, the
Treasurer shall be the principal accounting officer of the Trust and shall also
be the principal financial officer of the
<PAGE>

Trust. He shall have such other duties and authorities as the Trustees shall
from time to time determine. Notwithstanding anything to the contrary herein
contained, the Trustees may authorize any adviser, administrator, manager or
transfer agent to maintain bank accounts and deposit and disburse funds of the
Trust.

Section 3.8. Other Officers and Duties. The Trustees may elect such other
-------------------------
officers and assistant officers as they shall from time to time determine to be
necessary or desirable in order to conduct the business of the Trust. Assistant
officers shall act generally in the absence of the officer whom they assist and
shall assist that officer in the duties of his office. Each officer, employee
and agent of the Trust shall have such other duties and authority as may be
conferred upon him by the Trustees or delegated to him by the President.

ARTICLE IV
----------

Miscellaneous
-------------

Section 4.1. Custodians. In accordance with Section 7.1 of the
----------
Declaration, the funds of the Trust shall be deposited with such custodian or
custodians as the Trustees shall designate and shall be drawn out on checks,
drafts or other orders signed by such officer, officers, agent or agents
(including any adviser, administrator or manager), as the Trustees may from time
to time authorize.

Section 4.2. Signatures. All contracts and other instruments shall be
----------
executed on behalf of the Trust by such officer, officers, agent or agents, as
provided in these By-Laws or as the Trustees may from time to time by resolution
provide.

Section 4.3. Seal. The seal of the Trust, if any, may be affixed to any
----
document, and the seal and its attestation may be lithographed, engraved or
otherwise printed on any document
<PAGE>

with the same force and effect as if it had been imprinted and attested manually
in the same manner and with the same effect as if done by a Massachusetts
business corporation.

ARTICLE V
---------

Share Certificates and Share Transfers
--------------------------------------

Section 5.1. Share Certificates. Each holder of Shares of the Trust
------------------
shall be entitled upon request to have a certificate or certificates, in such
form as shall be approved by the Trustees, representing the number of Shares
owned by him, provided, however, that certificates for fractional shares shall
not be delivered in any case. The certificates representing Shares shall be
signed by or in the name of the Trust by the President or a Vice President and
by the Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer and sealed with the seal of the Trust. Any or all of the signatures on
the seal on the certificate may be a facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate shall be issued, it may be issued by the Trust
with the same effect as if such officer, transfer agent or registrar were still
in office at the date of issue.

Section 5.2. Transfer Agents, Registrars and the Like. As provided in
----------------------------------------
Section 6.6 of the Declaration, the Trustees shall have authority to employ and
compensate such transfer agents and registrars with respect to the Shares of the
Trust as the Trustees shall deem necessary or desirable. In addition, the
Trustees shall have power to employ and compensate such dividend disbursing
agents, warrant agents and agents for the reinvestment of dividends as they
shall deem necessary or desirable. Any of such agents shall have such power and
authority as is delegated to any of them by the Trustees.
<PAGE>

Section 5.3. Transfer of Shares. The Shares of the Trust shall be
------------------
transferable on the books of the Trust only upon delivery to the Trustees or a
transfer agent of the Trust of proper documentation as provided in Section 6.7
of the Declaration, and on surrender of the certificate or certificates, if
issued, for such Shares properly endorsed or accompanied by a duly executed
stock transfer power and the payment of all taxes thereon. The Trust, or its
transfer agents, shall be authorized to refuse any transfer unless and until
presentation of such evidence as may be reasonably required to show that the
requested transfer is proper.

Section 5.4. Registered Shareholders. The Trust may deem and treat the
-----------------------
holder of record of any Share as the absolute owner thereof for all purposes and
shall not be required to take any notice of any right or claim of right of any
other person.

Section 5.5. Regulations. The Trustees may make such additional rules and
-----------
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of Shares of the Trust.

Section 5.6. Lost, Destroyed or Mutilated Certificates. The holder of any
-----------------------------------------
certificate representing Shares of the Trust shall immediately notify the Trust
of any loss, destruction or mutilation of such certificate, and the Trust may
issue a new certificate in the place of any certificate theretofore issued by it
which the owner thereof shall allege to have been lost or destroyed or which
shall have been mutilated, and the Trustees may, in their discretion, require
such owner or his legal representatives to give the Trust a bond in such sum,
limited or unlimited, and in such form and with such surety or sureties, as the
Trustees in their absolute discretion shall determine, to indemnify the Trust
against any claim that may be made against it on account of the alleged loss or
destruction of any such certificate, or issuance of a new certificate. Anything
herein to the contrary notwithstanding, the Trustees in their absolute
<PAGE>

discretion, may refuse to issue any such new certificates, except pursuant to
legal proceedings under the laws of the Commonwealth of Massachusetts.

ARTICLE VI
----------

Advancement of Indemnification Moneys
-------------------------------------

Section 6.1. Conditions to Advancement. Insofar as the conditional
-------------------------
advancing of indemnification moneys to Trustees, officers, employees or agents
of the Trust pursuant to Section 5.3 of the Declaration for actions based upon
the Investment Company Act of 1940 may be concerned, such payments will be made
only on the following conditions: (i) the advances must be limited to amounts
used, or to be used, for the preparation or presentation of a defense to the
action, including costs connected with the preparation of a settlement; (ii)
advances may be made only upon receipt of a written promise by, or on behalf of,
the recipient to repay that amount of the advance which exceeds the amount to
which it is ultimately determined that he is entitled to receive from the Trust
by reason of indemnification; and (iii) (a) such promise must be secured by a
surety bond, other suitable insurance or an equivalent form of security which
assures that any repayments may be obtained by the Trust without delay or
litigation, which bond, insurance or other form of security must be provided by
the recipient of the advance, or (b) a majority of a quorum of the Trust's
disinterested, non-party Trustees, or an independent legal counsel in a written
opinion, shall determine, based upon a review of readily available facts, that
the recipient of the advance ultimately will be found entitled to
indemnification.
<PAGE>

ARTICLE VII
-----------

Amendment of By-Laws
--------------------

Section 7.1. Amendment and Repeal of By-Laws. In accordance with
-------------------------------
Section 2.7 of the Declaration, the Trustees shall have the power to alter,
amend or repeal the By-Laws or adopt new By-laws at any time. Action by the
Trustees with respect to the By-Laws shall be taken by an affirmative vote of a
majority of the Trustees. The Trustees shall in no event adopt By-Laws which are
in conflict with the Declaration, and any apparent inconsistency shall be
construed in favor of the related provisions in the Declaration.

The Declaration establishing MuniHoldings Pennsylvania Insured Fund, a copy
of which, together with all amendments thereto, is on file in the office of the
Secretary of the Commonwealth of Massachusetts, provides that the name
"MuniHoldings Pennsylvania Insured Fund" refers to the Trustees under the
Declaration collectively as Trustees, but not as individuals or personally; and
no Trustee, shareholder, officer, employee or agent of MuniHoldings Pennsylvania
Insured Fund shall be held to any personal liability, nor shall resort be had to
their private property for the satisfaction of any obligation or claim or
otherwise in connection with the affairs of said MuniHoldings Pennsylvania
Insured Fund but the "Trust Property" only shall be liable.