MSB FUND INC, N-30D, 1999-02-26

MSB FUND INC
N-30D, 1999-02-26

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<PAGE> 1

JANUARY 27, 1999

MESSAGE FROM THE PRESIDENT

Dear Shareholder:

I am very pleased to report that the M.S.B. Fund produced a total return of
31.45% for the year ended December 31, 1998. This performance helped to raise
our three-year average annual return to 27.09%. The five- and ten-year average
annual returns for the periods ending December 31, 1998 were 20.32% and 16.66%,
respectively. If a shareholder had invested $10,000 in the Fund at inception in
1964 and reinvested all capital gains and dividends in the Fund, the
shareholder's investment would have grown to $549,813 on December 31, 1998.

What a difference a decade makes. Here we are on the eve of the 21(st) Century
and most Americans are enjoying the "best of times." Our economy is the world's
strongest and most competitive. United States workers are the most productive,
and U.S. businesses are the planet's most profitable. We create the most jobs,
and we invest more in technology than anyone else. We are also the largest
importer and exporter the world has ever seen.

Things were not always this positive. Ten years ago, for example, some pundits
were forecasting that the United States was about to lose its crown as the
world's premier economy to Japan. They believed the Japanese economic model was
more competitive, more efficient and more durable than ours was. Today,
ironically, Japan is mired in an eight-year deflation. Its unemployment rate is
higher than ours, and the Nikkei Stock Index has tumbled over 50% from its 1989
peak.

Much credit for our nation's economic success goes to those savvy business
leaders who heeded the warning to "innovate, automate, emigrate or evaporate."
Because of our strong economic performance, our economic strategies have been
widely emulated around the world. Currently, over 90% of world gross domestic
product is generated by nations employing one form of capitalism or another.

The key to our continuing economic expansion is keeping inflation subdued. The
well-oiled U.S. economic machine produces its best results when prices remain
stable. Fortunately, we have been living in one of the best low inflation
periods in our economic history. It is hard to believe that the United States
has incurred only seven months of recession since the last quarter of 1982. What
is even more astonishing is that inflation as measured by the Consumer Price
Index (CPI) has declined from over 8% back in 1982 to last year's 1.6%.

How long this disinflation will last is uncertain. The two main culprits,
however, that have caused inflation in the past, high interest rates and high
energy costs, are in check. More importantly, a major force permeating the
economic landscape is technology-induced productivity. Technological
innovations, declining computer costs and more and more workers acquiring
technology skill-sets have all contributed to corporate growth and low
inflation. Technology, which currently accounts for about 25% of business
investment spending, is our nation's most profitable industry and has generated
the most net new jobs.

Recent polls taken earlier this month by Opinion Research Corporation conclude
that Americans are confident about the future. Eighty-three percent of the folks
polled predict that 1999 will be better for them than 1998. Eighty-two percent
believe 1999 will be a better year for the United States than 1998. Longer-term,
eighty-six percent are positive about their own future. In addition, over
seventy percent maintain the economy is growing, and just ten percent conclude
it is faltering.

More and more workers and investors are convinced that the U.S.A. is at the top
of its economic game, and continue to demonstrate their confidence by investing
in equity securities. Of the $5.5 trillion invested in all mutual funds, $2.6
trillion resides in stock mutual funds. Over 70 million Americans own stock
outright or through equity mutual funds, and another 100 plus million indirectly
own stock through non-contributory pension plans and the like.

1
<PAGE> 2

The M.S.B. Fund seeks to capitalize on our country's economic superiority and
growing share of world economic output by maintaining an investment philosophy
of seeking to create shareholder value over time and an investment discipline of
investing only in companies with strong balance sheets that are believed to have
the capability of generating rising earnings and cash-flow.

Sincerely,

Joseph R. Ficalora
Joseph R. Ficalora
President

<PAGE> 3

M.S.B. FUND, INC.

INVESTMENT ACHIEVEMENT
The following information is a statement of the past record of the Fund and
should not be construed as a representation or prediction of future results. The
investment return and principal value of an investment in the Fund will
fluctuate with changing market conditions so that an investor's shares, when
redeemed, may be worth more or less than their original cost.

The total return of the Fund for various periods is compared with the
Standard & Poor's 500 Composite Stock Price Index (S&P 500) and the Dow Jones
Industrial Average (DJIA), which are groups of unmanaged securities, and with
the Lipper Growth & Income Funds Average, which includes for the one, three,
five and ten years ended December 31, 1998, 768, 471, 310, and 148 mutual funds,
respectively, and is a broad equity fund measurement. The S&P 500 and DJIA do
not include a reduction of total return for expenses. These results should be
considered in light of the makeup of each index, the investment objectives and
portfolio composition of the Fund and the periods indicated.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-------------------------------------
PERIODS ENDING 12/31/98*
-------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
M.S.B. Fund, Inc..... 31.45% 27.09% 20.32% 16.66%
Lipper Growth &
Income Funds
Average............ 15.59% 21.43% 18.53% 15.76%
Standard & Poor's 500
Composite Stock
Price Index........ 28.58% 28.23% 24.06% 19.21%
Dow Jones Industrial
Average............ 18.13% 23.83% 22.25% 18.76%
</TABLE>

* Assumes reinvestment of all dividends and distributions and the deduction of
all applicable fees and expenses. Data for the Lipper Growth & Income Funds
Average, the S&P 500 and DJIA are from Lipper Analytical Services Corporation.
The S&P 500 and DJIA do not include a reduction in total return for expenses.

The following graph shows that an investment of $10,000 in the Fund on
December 31, 1988 would have been worth $46,708 on December 31, 1998, assuming
all dividends and distributions have been reinvested. A similar investment in
the S&P 500, over the same period, would have grown to $57,862.

M.S.B. FUND, INC.
CUMULATIVE TOTAL RETURN
[LINE GRAPH]

M.S.B. FUND, INC.

TOTAL RETURN COMPARISON

[BAR GRAPH]

YEAR MSB S&P

1989 28.06% 31.60%
1990 -7.38% -3.10%
1991 16.97% 30.40%
1992 10.66% 7.60%
1993 20.64% 10.10%
1994 -1.68% 1.30%
1995 24.97% 37.53%
1996 21.16% 22.95%
1997 28.88% 33.36%
1998 31.45% 28.58%

3
<PAGE> 4

INVESTMENT RESULTS, OUTLOOK AND STRATEGIES

M.S.B. FUND, INC.

The M.S.B. Fund's net asset value per share on December 31, 1998 was $21.49
versus $17.73 on December 31, 1997. Shareholders received per share
distributions from dividend income of $0.0070, short-term capital gains of
$0.2061 and long-term capital gains of $1.5890 during the year. The Fund's total
return of 31.45% for the one-year period ending December 31, 1998 marks the
fourth consecutive year of total returns greater than 20%. This compares
favorably to the one-year total returns of 15.59% for the Lipper Growth & Income
Funds Average and 11.19% for the Lipper All Equity Funds Average for the year
ending December 31, 1998. Total return assumes the reinvestment of all dividends
and capital gains and the deduction of all applicable fees and expenses.

During the 7-year period beginning December 31, 1991 and ending December 31,
1998, coinciding with the tenure of the current portfolio management team, the
M.S.B. Fund has provided a cumulative total return of 236.68%. This compares
favorably to the 7-year cumulative return of 178.33% for the Lipper Growth &
Income Funds Average and 136.89% for the Lipper All Equity Funds Average. The
Fund's average annual total return for the 7-year period ending December 31,
1998 was 18.94% versus 15.75% for the Lipper Growth & Income Funds Average and
13.11% for the Lipper All Equity Funds Average.

The M.S.B. Fund's strong performance relative to its direct comparison, the
Lipper Growth & Income Funds Average, was due in large part to solid returns
provided by the large capitalization stocks that the Fund emphasizes. As the
stock market declined during the summer and into the fall, investors gravitated
to the large capitalization issues that would likely experience fewer
disruptions from the adverse economic conditions outside the United States. Due
to the fact that the investment philosophy adhered to by the Fund's portfolio
management team favors large capitalization companies with predictable cash
flows, the Fund benefited from the significant portion of its assets deployed in
this market sector.

The past four years have certainly been a wonderful time to be invested in the
equity markets. As mentioned here over the past few years, equity prices have
benefited from steady economic growth coupled with a favorable interest rate
environment and the absence of inflationary pressures. During this past year, we
have experienced some of the highest economic growth, lowest inflation and
lowest interest rates in the last five years. However, corporate profit growth
has slowed over the course of the year and the declining interest rate
environment may have run its course. As a result, it may be difficult for stock
prices to continue to produce returns of the magnitude we have experienced over
these past four years.

Volatility was certainly a significant factor during the last year. After a
strong start in the first half of the year, the stock market sharply reversed
course during the summer giving up nearly all of its gains, only to rebound
forcefully during the last three months of the year to close at record levels.
As the new year begins, we are faced with two additional issues likely to affect
the financial markets in the near future, namely the impeachment of our
President and economic unrest in Latin America. It would not be surprising if
the recent increase in volatility were to continue for some time.

In light of this recent activity, we continue to remain true to our investment
discipline. We focus on individual businesses, studying how they manage their
capital to produce the most profitable returns that are consistent and
sustainable over time. As in prior years, the M.S.B. Fund's investment
management team maintained its strategy of accumulating shares in high quality
companies with stable cash flow and earnings growth, minimal capital expenditure
requirements, strong balance sheets and solid management at reasonable prices.
As our discipline would suggest, we are often able to identify more attractive
opportunities for investment during market declines, such as the one we
experienced this past summer and are likely to experience at various times in
the future.

4
<PAGE> 5

During 1998, our focus continued to be on large capitalization issues with the
additions of American Express, Berkshire Hathaway, Campbell Soup, Electronic
Data Systems, Gillette, M&T Bank and Merck. We also eliminated a number of
securities whose market prices reflected their full potential in our opinion or
whose fundamentals changed so that continued ownership by the Fund was not
warranted. These companies included Anheuser-Busch, Clayton Homes, Dover,
Genuine Parts, Hubbell, Illinois Central, Nordson, Vlassic Foods (a spin-off of
Campbell Soup), Wells Fargo and Wendy's International.

5
<PAGE> 6

M.S.B. FUND, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------

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

COMMON STOCK-96.55%:

<TABLE>
<CAPTION>
SHARES VALUE
- --------- -----------
(NOTE 1)
<C> <S> <C>
ADVERTISING-3.39%
Interpublic Group of Cos.,
28,000 Inc. ........................... $ 2,233,000
BANKS-3.16%
4,000 M & T Bank Corporation............ 2,075,750
BEVERAGES--SOFT DRINKS-2.80%
27,500 Coca-Cola Company................. 1,839,062
CHEMICALS--SPECIALTY-3.02%
International Flavors & Fragrances
45,000 Inc............................. 1,988,437
COMPUTER SOFTWARE &
SERVICES-10.54%
Automatic Data Processing,
25,000 Inc. ........................... 2,004,688
43,000 Electronic Data Systems Corp. .... 2,160,750
20,000+ Microsoft Corp.................... 2,773,750
-----------
6,939,188
COMPUTER SYSTEMS-2.80%
27,000 Hewlett-Packard Co. .............. 1,844,438
DISTRIBUTOR--CONSUMER
PRODUCTS-2.92%
70,000 Sysco Corp. ...................... 1,920,625
ELECTRICAL EQUIPMENT-2.85%
30,000 Emerson Electric Co. ............. 1,876,875
ELECTRONICS &
SEMICONDUCTORS-3.60%
20,000 Intel Corp. ...................... 2,371,250
ENTERTAINMENT-2.74%
60,000 Walt Disney Co. .................. 1,800,000
</TABLE>

SHARES VALUE
- --------- -----------
(NOTE 1)
<C> <S> <C>
FINANCIAL SERVICES-9.68%
20,000 American Express Company.......... $ 2,045,000
28,000 Fannie Mae........................ 2,072,000
35,000 Freddie Mac....................... 2,255,312
-----------
6,372,312
FOODS-2.80%
33,500 Campbell Soup Co. ................ 1,842,500
FOOTWEAR-1.85%
30,000 Nike, Inc. ....................... 1,216,875
HEALTH CARE--DIVERSIFIED-2.99%
23,500 Johnson & Johnson................. 1,971,062
HEALTH CARE--
PHARMACEUTICALS-5.97%
41,000 Abbott Laboratories............... 2,009,000
13,000 Merck & Co., Inc. ................ 1,919,938
-----------
3,928,938
HOUSEHOLD PRODUCTS-2.84%
16,000 Clorox Co. ....................... 1,869,000
INSURANCE-3.72%
35+ Berkshire Hathaway, Inc. ......... 2,450,000
OFFICE EQUIPMENT AND
SUPPLIES-3.01%
30,000 Pitney Bowes, Inc. ............... 1,981,875
PERSONAL CARE-3.08%
42,000 Gillette Co. ..................... 2,029,125
PUBLISHING--NEWSPAPERS-3.02%
30,000 Gannett Company, Inc. ............ 1,985,625
RESTAURANTS-3.14%
27,000 McDonald's Corp. ................. 2,068,875
</TABLE>

- --------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
6
<PAGE> 7
M.S.B. FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
COMMON STOCK (CONTINUED):
SHARES VALUE
- --------- -----------
(NOTE 1)
<C> <S> <C>
RETAIL--DRUG CHAINS-2.67%
30,000 Walgreen Company.................. $ 1,756,875
RETAIL--FOOD CHAINS-3.39%
35,000 Albertson's, Inc. ................ 2,229,063
RETAIL--GENERAL
MERCHANDISE-3.22%
26,000 Wal-Mart Stores, Inc. ............ 2,117,375
RETAIL--SPECIALTY STORES-4.10%
48,000 Gap, Inc. ........................ 2,700,000
TOBACCO-3.25%
40,000 Philip Morris Companies, Inc. .... 2,140,000
-----------
Total Common Stock
(Cost $36,665,270).............. $63,548,125
</TABLE>

<TABLE>
<CAPTION>
COMMERCIAL PAPER-3.40%:
PRINCIPAL
AMOUNT VALUE
- ---------- -----------
(NOTE 1)
<C> <S> <C> <C>
$1,000,000 Ford Motor Credit Corp.,
4.25%, due 01/04/99.....
$ 1,000,000
1,240,000 American Express Credit
Corp.
5.00%, due 01/05/99.....
1,240,000
-----------
Total Commercial Paper
(Cost $2,240,000)....... 2,240,000
-----------
Total Investments
(Cost $38,905,270*)..... 99.95% 65,788,125
Other assets in excess of
liabilities............. 0.05% 35,449
------ -----------
Net Assets................ 100.00% $65,823,574
====== ===========
</TABLE>

* Aggregate cost for Federal income tax purposes is identical. At December 31,
1998, the net unrealized appreciation for tax purposes for all securities of
$26,882,855 consists of gross unrealized appreciation of $27,345,897 and gross
unrealized depreciation of $463,042.

+ Non-income producing security.

- --------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
7
<PAGE> 8

M.S.B. FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
ASSETS:
Investment in securities, at value (Cost $38,905,270)....... $65,788,125
Cash........................................................ 986
Receivable for fund shares sold............................. 37,595
Dividends and interest receivable........................... 68,758
Prepaid expenses............................................ 42,799
-----------
Total assets.............................................. 65,938,263
LIABILITIES:
Accrued expenses payable.................................... 89,874
Dividend payable............................................ 20,265
Payable for fund shares redeemed............................ 4,550
-----------
Total liabilities......................................... 114,689
-----------
NET ASSETS, applicable to 3,063,416 shares of Class A $.001
par value stock, 5,000,000 shares authorized.............. $65,823,574
===========
NET ASSETS:
Par value of capital shares................................. $ 3,063
Additional paid in capital.................................. 38,937,656
Net unrealized appreciation on investments.................. 26,882,855
-----------
NET ASSETS.................................................. $65,823,574
===========
NET ASSET VALUE, offering and redemption price per share
($65,823,574 / 3,063,416 shares).......................... $ 21.49
===========
</TABLE>

- --------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
8
<PAGE> 9

M.S.B. FUND, INC.
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-------------------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends................................................. $643,966
Interest.................................................. 107,055 $ 751,021
--------
EXPENSES:
Investment advisory fee................................... 418,487
Administration fees....................................... 80,400
Directors' fees and expenses.............................. 56,907
Transfer agent............................................ 49,800
Legal..................................................... 43,680
Printing.................................................. 34,734
Insurance................................................. 25,496
Audit..................................................... 23,000
Custody................................................... 18,280
Registration.............................................. 12,718
Miscellaneous............................................. 9,563 773,065
--------
Fee waivers............................................... (35,697)
-----------
Net expenses.............................................. 737,368
-----------
Net investment income.................................. 13,653
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain........................................... 5,141,955
Net change in unrealized appreciation....................... 10,527,553
-----------
Net realized and unrealized gain............................ 15,669,508
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $15,683,161
===========
</TABLE>

- --------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
9
<PAGE> 10

M.S.B. FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income..................................... $ 13,653 $ 187,962
Net realized gain on investments.......................... 5,141,955 2,574,612
Net change in unrealized appreciation on investments...... 10,527,553 8,335,101
----------- -----------
Net increase in net assets resulting from operations........ 15,683,161 11,097,675
Distributions to shareholders:
From net investment income................................ (13,653) (187,962)
In excess of net investment income........................ (5,934) (5,787)
From net realized gain on investments..................... (5,142,223) (2,574,403)
----------- -----------
Total distributions to shareholders......................... (5,161,810) (2,768,152)
Net increase from capital share transactions (See Note 4)... 6,034,747 3,580,058
----------- -----------
Total increase in net assets................................ 16,556,098 11,909,581
NET ASSETS:
Beginning of year......................................... 49,267,476 37,357,895
----------- -----------
End of year............................................... $65,823,574 $49,267,476
=========== ===========
</TABLE>

- --------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
10
<PAGE> 11

M.S.B. FUND, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Selected Data for Each Share of Capital Stock
Outstanding throughout Each Year

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, beginning of year............. $17.73 $14.60 $13.63 $13.39 $16.79
INCOME FROM OPERATIONS:
Net investment income........................ 0.01 0.07 0.11 0.08 0.16
Net realized and unrealized gain (loss) on
investments............................... 5.55 4.10 2.76 3.17 (0.44)
------- ------- ------- ------- -------
Total from investment operations.......... 5.56 4.17 2.87 3.25 (0.28)
DISTRIBUTIONS:
From net investment income................... (0.01) (0.07) (0.14) (0.08) (0.18)
From net realized gains on investments....... (1.79) (0.97) (1.76) (2.93) (2.94)
------- ------- ------- ------- -------
Total distributions....................... (1.80) (1.04) (1.90) (3.01) (3.12)
------- ------- ------- ------- -------
NET ASSET VALUE, end of year................... $21.49 $17.73 $14.60 $13.63 $13.39
======= ======= ======= ======= =======
Total return................................... 31.45% 28.88% 21.16% 24.97% (1.70%)
Ratio of expenses to average net assets(1)..... 1.32% 1.41% 1.41% 1.69% 1.28%
Ratio of net investment income to average net
assets....................................... 0.02% 0.43% 0.71% 0.57% 0.97%
Portfolio turnover rate........................ 32% 23% 45% 68% 62%
Average commission rate per share(2)........... $0.0448 $0.0475 $0.0443 -- --
NET ASSETS, end of year (000's)................ $65,824 $49,267 $37,358 $32,509 $35,022
</TABLE>

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

(1) Without fee waivers for the years ended December 31, 1998, 1997, 1996, 1995,
and 1994, the ratios of expenses to average net assets would have been
1.39%, 1.55%, 1.61%, 1.86%, and 1.39%, respectively.

(2) Computed by dividing the total amount of brokerage commissions paid by the
total shares of investment securities purchased and sold during the year for
which commissions were charged, as required by the Securities and Exchange
Commission for fiscal years beginning after September 1, 1995.

See Accompanying Notes to Financial Statements.
11
<PAGE> 12

M.S.B. FUND, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
The M.S.B. Fund, Inc. (the "Fund") is registered under the Investment Company
Act of 1940, as amended, as a diversified open-end management investment
company. The current investment objective of the Fund is to achieve capital
appreciation for its shareholders. The objective of income is secondary. The
Board of Directors has approved a change in the investment objective of the Fund
effective May 1, 1999. As of May 1, 1999, the investment objective of the Fund
is to achieve long-term growth of capital for its shareholders.

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A--Security Valuation--Securities traded on national exchanges are valued at the
closing prices or, in the case of over-the-counter securities, at the mean
between closing bid and asked prices. Short-term instruments maturing within 60
days of the valuation date are valued at amortized cost.

B--Security Transactions and Related Investment Income--Security transactions
are accounted for on the trade date, dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. The
specific identification method is used in the determination of realized gains
and losses on the sale of securities.

C--Federal Income Taxes--No provision has been made for Federal income tax,
since it is the intention of the Fund to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its ordinary taxable income and net capital gains to its
shareholders.

D--Management Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

NOTE 2--FEES

Shay Assets Management, Inc. (the "Investment Adviser") is the investment
adviser to the Fund. The Investment Adviser is a wholly-owned subsidiary of Shay
Investment Services, Inc. ("SISI"), which is controlled by Rodger D. Shay, a
Vice President of the Fund.

The Investment Adviser receives fees from the Fund, computed at an annual rate
of 0.75% of the first $100,000,000 of the Fund's average daily net assets and
0.50% of average daily net assets in excess of $100,000,000. The fee payable to
the Investment Adviser is reduced (but not below zero) to the extent expenses
(exclusive of professional fees, such as legal and audit fees, directors' fees
and expenses, and distribution expenses, if any, payable under Rule 12b-1)
exceed 1.10% of the Fund's average daily net assets for any fiscal year during
the term of the Fund's agreement with the Investment Adviser. This limitation
resulted in the Investment Adviser waiving approximately 3% of its fee for the
year ended December 31, 1998. The waiver amounted to $11,097.

Shay Financial Services, Inc. (the "Distributor") is the distributor for the
Fund. The Distributor is a wholly-owned subsidiary of SISI, which is controlled
by Rodger D. Shay, a Vice President of the Fund. The Distributor receives no
compensation for its distribution services.

PFPC Inc. ("PFPC") is the Fund's administrator and transfer agent and PNC Bank,
NA ("PNC") is the Fund's custodian. As of December 31, 1998, PFPC Trust Co. will
be the Fund's custodian. PFPC, PNC and PFPC Trust Co. are all affiliates of PNC
Bank Corp.

12
<PAGE> 13
M.S.B. FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998

As compensation for its administrative services, the Fund pays PFPC a minimum
monthly fee of $6,700 (exclusive of out-of-pocket expenses). PFPC waived
approximately 25% of its administrative fee for the year ended December 31,
1998. The waiver amounted to $20,100.

As compensation for its services as transfer agent, the Fund pays PFPC a minimum
monthly fee of $1,500 (exclusive of out-of-pocket expenses). PFPC waived
approximately 9% of its transfer agent fee for the year ended December 31, 1998.
The waiver amounted to $4,500.

As compensation for its custodial services, the Fund pays the custodian a
minimum monthly fee of $500 (exclusive of out-of-pocket expenses).

NOTE 3--CAPITAL STOCK

At December 31, 1998, there were 5,000,000 shares of $.001 par value capital
stock authorized. Transactions in capital stock for the years ended December 31,
1998 and 1997, respectively, were as follows:

<TABLE>
<CAPTION>
SHARES AMOUNT
(000) ($000)
----------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares sold................................................. 280 233 $ 5,638 $ 3,785
Shares issued in reinvestment of dividends.................. 195 132 4,169 2,253
---- ---- ------- -------
475 365 9,807 6,038
Shares redeemed............................................. (191) (145) (3,772) (2,458)
---- ---- ------- -------
Net increase................................................ 284 220 $ 6,035 $ 3,580
==== ==== ======= =======
</TABLE>

NOTE 4--PURCHASES AND SALES OF SECURITIES

The cost of purchases and the proceeds from sales of investments, exclusive of
short-term investments, for the year ended December 31, 1998, were $17,076,642
and $17,629,791, respectively.

NOTE 5--SHAREHOLDER VOTING RESULTS (UNAUDITED)

The Annual Meeting of Stockholders of the M.S.B. Fund, Inc. was held on April
23, 1998, at which the stockholders voted on two proposals. Each proposal and
the results of the voting are set forth below.

A--Election of Directors--The first proposal concerned the election of three
directors to serve a term of office of three years each.

<TABLE>
<CAPTION>
EXPIRATION
OF TERM FOR
---------- ---
<S> <C> <C>
Malcolm J. Delaney.......................................... 2001 1,622,224
David Freer, Jr............................................. 2001 1,635,638
William A. McKenna, Jr...................................... 2001 1,635,301
</TABLE>

In addition, Messrs. Timothy A. Dempsey, Harry P. Doherty, Joseph R. Ficalora,
Michael J. Gagliardi, David F. Holland, Norman W. Sinclair, and Ian D. Smith
continue as members of the Board of Directors.

B--Ratification of Independent Auditors--The second proposal concerned the
ratification of the selection of KPMG LLP as Independent Auditors of the Fund
for the fiscal year ending December 31,1998. The results of voting for the
proposal were 1,637,655 for, 12,238 against, and 4,209 abstaining.

13
<PAGE> 14

INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors
M.S.B. Fund, Inc.:

We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of M.S.B. Fund, Inc. as of December 31, 1998 and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.

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

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of M.S.B
Fund, Inc. as of December 31, 1998 and the results of its operations for the
year then ended, and the changes in its net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended, in conformity with generally accepted
accounting principles.

KPMG LLP

PHILADELPHIA, PENNSYLVANIA
FEBRUARY 5, 1999

14
<PAGE> 15

M.S.B.
FUND, INC.

OFFICERS

Joseph R. Ficalora
President

Michael J. Gagliardi
First Vice President

Norman W. Sinclair
Second Vice President

Rodger D. Shay
Vice President and Assistant
Secretary

Edward E. Sammons, Jr.
Vice President and Secretary

John J. McCabe
Vice President

Mark F. Trautman
Vice President

Jay F. Nusblatt
Treasurer

BOARD OF DIRECTORS

Malcolm J. Delaney

Timothy A. Dempsey

Harry P. Doherty

Joseph R. Ficalora

David Freer, Jr.

Michael J. Gagliardi

David F. Holland

William A. McKenna, Jr.

Norman W. Sinclair

Ian D. Smith
<PAGE> 16

M.S.B.
FUND, INC.

M.S.B. FUND, INC.
c/o Shay Financial Services, Inc.
230 West Monroe Street
Chicago, Illinois 60606
Telephone 800-661-3938

INVESTMENT ADVISER
Shay Assets Management, Inc.
200 Park Avenue
45th Floor
New York, New York 10166

DISTRIBUTOR
Shay Financial Services, Inc.
230 West Monroe Street
Chicago, Illinois 60606

ADMINISTRATOR, TRANSFER AGENT,
REGISTRAR AND DIVIDEND PAYING AGENT
PFPC Inc.
103 Bellevue Parkway
Wilmington, DE 19809

CUSTODIAN
PFPC Trust Co.
17th & Chestnut Streets
Philadelphia, Pennsylvania 19101

LEGAL COUNSEL
Hughes Hubbard & Reed LLP
One Battery Park Plaza
New York, New York 10004

INDEPENDENT AUDITORS
KPMG LLP
1600 Market Street
Philadelphia, Pennsylvania 19103

M.S.B
FUND, INC.

ANNUAL REPORT
- -------------
DECEMBER 31, 1998