MAS FUNDS /MA/, 497, 1998-11-05

MAS FUNDS /MA/
497, 1998-11-05

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<PAGE>

MAS Funds
PA Municipal Portfolio

Dear Shareholder:

A Special Meeting of Shareholders of the PA Municipal Portfolio of the MAS
Funds (the "Fund") has been scheduled for November 20, 1998. If you are a
Shareholder of record as of the close of business on October 7, 1998, you are
entitled to vote at the meeting and at any adjournment of the meeting.

The attached Prospectus/Proxy Statement gives you information relating to
the proposal upon which you are being asked to vote. The Board of Trustees
recommends that you approve a reorganization whereby your Portfolio would
transfer all of its assets and all of its liabilities to the Fund's Municipal
Portfolio. Assuming approval by Shareholders, you would receive Institutional
Class Shares of the corresponding Municipal Portfolio equal in value to your PA
Municipal Portfolio shares. MAS Funds is an open-end management investment
company, or mutual fund. Miller Anderson & Sherrerd, LLP is investment adviser
to the fund and is wholly-owned by indirect subsidiaries of Morgan Stanley Dean
Witter & Co. ("MSDW") It is anticipated that the transaction will be tax free
for Shareholders, and the Board of Trustees expects it to result in operational
efficiencies. We encourage you to follow the Trustees' recommendation to
approve the proposal.

Your vote is important to us. Your immediate response will help prevent
the need for additional solicitations. Thank you for taking the time to
consider this important proposal and for your investment in the Portfolio.

Please mark, sign and date the enclosed Proxy Card and return it promptly
in the enclosed, postage-paid envelope.

Sincerely,

James D. Schmid
President
November 2, 1998
<PAGE>

INFORMATION ABOUT YOUR PROXY STATEMENT/PROSPECTUS

Q. Why am I receiving this Proxy Statement/Prospectus?

A. MAS Funds seeks your approval of a reorganization of the Fund's PA Municipal
Portfolio. The Board of Trustees recommends the reorganization because it
believes that it will result in a structure that more appropriately serves
the needs of shareholders.

Q. How will the reorganization work?

A. The PA Municipal Portfolio will transfer all of its assets and all of its
liabilities to the Municipal Portfolio in return for Institutional Class
Shares of the Municipal Portfolio having an equivalent aggregate value.
The net assets of the PA Municipal Portfolio will be transferred at their
current value as of the Effective Time, and the shares provided in return
will have a total value of the transferred net assets, again as of the
Effective Time. Finally, the PA Municipal Portfolio will distribute the
shares received by it to its shareholders in a liquidating distribution.
Shareholders of the PA Municipal Portfolio will thus effectively be
converted into Institutional Class shareholders of the Municipal
Portfolio. If the Plan is carried out as proposed there will be no federal
or state tax consequences to either Portfolio or its shareholders. Please
refer to the proxy statement/prospectus for a detailed explanation of the
proposal and for a fuller description of the PA Municipal and Municipal
Portfolios.

Q. How will this affect my account?

A. Following the reorganization you will be a shareholder of the Municipal
Portfolio. The reorganization will not, however, affect the value of your
account. In addition, you can expect the same management expertise and
shareholder services that you currently receive. The investment advisory
fees of the Municipal and PA Municipal Portfolios are the same.

Q. Why do I need to vote?

A. Your vote is needed to ensure that the proposal can be acted upon. Your
immediate response on the enclosed proxy card will help prevent the need
for any further solicitations for a shareholder vote. We encourage all
shareholders to participate.

Q. How does the Board of Trustees suggest that I vote?

A. After careful consideration, the Board of Trustees of MAS Funds recommends
that you vote "FOR" the item proposed on the enclosed proxy card.

Q. Who is paying for expenses related to the shareholder meeting?

A. The PA Municipal Portfolio and the Municipal Portfolio are paying for the
expenses related to the shareholder meeting.

Q. Where do I mail my proxy card?

A. You may use the enclosed postage-paid envelope or mail your proxy card to:

MAS Funds
One Tower Bridge
West Conshohocken, PA 19428-2899
Attn: Michiko Ishimura

Q. Whom do I call if I have questions?

A. We will be happy to answer your questions about the proxy solicitation.
Please call us at (800) 354-8185 between 8:00 a.m. and 5:30 p.m. Eastern
Time, Monday through Friday.

2
<PAGE>

MAS Funds
c/o Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, Pennsylvania 19428

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 20, 1998

Notice is hereby given that a Special Meeting of Shareholders of the PA
Municipal Portfolio of MAS Funds will be held at the offices of Miller Anderson
& Sherrerd, LLP, One Tower Bridge, West Conshohocken, Pennsylvania on November
20, 1998 at 10:00 a.m. (Eastern Time) for the purposes of considering the
proposals set forth below.

Proposal 1: Approval of an Agreement and Plan of Reorganization and Liquidation
providing for (i) the purchase by the Municipal Portfolio (the
"Municipal Portfolio") of all of the assets and assumption of all
of the liabilities of the PA Municipal Portfolio in exchange for
Institutional Class Shares of the Municipal Portfolio; (ii) the
distribution of the Municipal Portfolio shares so received to
shareholders of the PA Municipal Portfolio; and (iii) the
termination of the PA Municipal Portfolio;

Proposal 2: The transaction of such other business as may properly be brought
before the meeting.

Shareholders of record as of the close of business on October 7, 1998 are
entitled to notice of, and to vote at, this meeting or any adjournment thereof.

Please execute and return promptly the accompanying proxy card. This is
important to ensure a quorum at the meeting. No postage is necessary if you use
the enclosed envelope. You may revoke your proxy at any time before the meeting
by submitting a written notice of revocation or a subsequently executed proxy
or by attending the meeting and voting in person.

John H. Grady, Jr.
Secretary

November 2, 1998
<PAGE>

PROXY STATEMENT/PROSPECTUS
October 30, 1998

Relating to the Acquisition of the Assets and Liabilities of
MAS Funds PA Municipal Portfolio
by and in Exchange for Shares of
MAS Funds Municipal Portfolio

MAS Funds
One Tower Bridge
West Conshohocken, Pennsylvania 19428
1-800-354-8185

This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Board of Trustees ("Board") of the MAS Funds
(the "Fund") in connection with the Special Meeting of Shareholders (the
"Meeting") of the PA Municipal Portfolio to be held on November 20, 1998 at
10:00 a.m. (Eastern Time) at the offices of Miller Anderson & Sherrerd, LLP,
One Tower Bridge, West Conshohocken, PA. At the meeting, shareholders of the PA
Municipal Portfolio will be asked to consider and approve a proposed Agreement
and Plan of Reorganization and Liquidation (the "Reorganization Agreement") by
the Fund, on behalf of its PA Municipal Portfolio and the Municipal Portfolio
(together, the "Portfolios") and the matters contemplated therein. A copy of
the Reorganization Agreement is attached as Exhibit A.
The Reorganization Agreement provides that all of the assets and all of
the liabilities of the PA Municipal Portfolio will be transferred to the
Municipal Portfolio in return for Institutional Class Shares of the Municipal
Portfolio having an equivalent aggregate value. The assets and liabilities of
the PA Municipal Portfolio will be transferred to the Municipal Portfolio at
their current value determined as of the close of business on November 30, 1998
or such later date as is agreed to by the parties (the "Effective Time"). The
shares provided in return will have a total value equal to the total value of
the transferred net assets, again as of the Effective Time. Finally, the PA
Municipal Portfolio will distribute the shares received by it to its
shareholders in a liquidating distribution.
MAS Funds is an open-end management investment company, or mutual fund.
Miller Anderson & Sherrerd, LLP ("Miller Anderson") provides investment
advisory services to the fund and is wholly-owned by indirect subsidiaries of
Morgan Stanley Dean Witter & Co. ("MSDW").
This Proxy Statement/Prospectus sets forth the information that a
shareholder of the PA Municipal Portfolio should know before voting on the
Reorganization, and should be retained for future reference. The following
additional relevant documents have been filed with the Securities and Exchange
Commission ("SEC") and are incorporated by reference in whole or in part:
(i) A Statement of Additional Information, dated October 30, 1998,
relating to this Proxy Statement/Prospectus and the Reorganization is
incorporated by reference into this Proxy Statement/Prospectus. A copy of
such Statement of Additional Information is available upon request and
without charge by writing to MAS Funds, One Tower Bridge, West
Conshohocken, Pennsylvania, 19428 or by calling toll-free 1-800-354-8185.
(ii) The prospectus for MAS Funds relating to the Institutional Class
Shares of the MAS Portfolios, dated January 31, 1998, as revised May 13,
1998 and supplemented October 9, 1998, contains a more detailed discussion
of the investment objectives, policies and risks of the Fund. It is
incorporated by reference into this Proxy Statement/Prospectus insofar as
it relates to the PA Municipal Portfolio and the Municipal Portfolio and
not to any other portfolio of the Fund described therein. A copy is
enclosed with this Proxy Statement/Prospectus.
(iii) A Statement of Additional Information for the Fund, dated January
31, 1998, is incorporated by reference into this Proxy Statement/
Prospectus as it relates to the Portfolios. A copy is available upon
request and without charge by calling 1-800-354-8185.
This Proxy Statement/Prospectus constitutes the proxy statement of the PA
Municipal Portfolio for the Meeting and is expected to be sent to shareholders
on or about November 2, 1998. Only shareholders of record as of the close of
business on October 7, 1998 (the "Record Date") are entitled to notice of, and
to vote at, the Meeting or any adjournment thereof.

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROXY STATEMENT/
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
--------
<S> <C>
SYNOPSIS .................................................................. 3
The Reorganization ....................................................... 3
The Portfolios ........................................................... 3
RISKS ..................................................................... 4
REASONS FOR THE REORGANIZATION ............................................ 5
INFORMATION RELATING TO THE REORGANIZATION ................................ 5
INFORMATION ABOUT THE PORTFOLIOS .......................................... 6
Investment Summary ....................................................... 6
Investment Adviser and Distributor ....................................... 8
Shareholder Information .................................................. 9
ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS ............................... 10
PORTFOLIO TRANSACTIONS .................................................... 10
SHAREHOLDER RIGHTS ........................................................ 10
LEGAL MATTERS ............................................................. 11
VOTING ON THE REORGANIZATION AGREEMENT .................................... 11
OTHER BUSINESS ............................................................ 13
SHAREHOLDER INQUIRIES ..................................................... 14
APPENDIX A ................................................................ A-1
EXHIBIT A -- AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION ......... E-1
</TABLE>

2
<PAGE>

SYNOPSIS

The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus and is qualified by reference to the more
complete information contained herein and in the attached Exhibit A.
Shareholders should read this entire Proxy Statement/Prospectus carefully.

The Reorganization

The Board, including the Trustees who are not "interested persons" within
the meaning of Section 2(a)(19) of the Investment Company Act of 1940 ("1940
Act"), has unanimously approved, subject to shareholder approval, the PA
Municipal Portfolio's entry into the Reorganization Agreement. A copy of the
Reorganization Agreement is attached hereto as Exhibit A. The Reorganization
Agreement provides that all assets and liabilities of the PA Municipal
Portfolio will be transferred to the Municipal Portfolio at their current value
as of the Effective Time, and that the Institutional Class Shares provided in
return will have a total value equal to the total value of the transferred net
assets, again as of the Effective Time. Finally, the Reorganization Agreement
calls for the PA Municipal Portfolio to distribute the shares received by it to
its shareholders in a liquidating distribution. Shareholders of the PA
Municipal Portfolio will thus effectively be converted into Institutional Class
shareholders of the Municipal Portfolio. There will be no federal or state tax
consequences to either Portfolio or its shareholders. No sales charge will be
imposed in connection with these transactions.

The Board, including the Trustees who are not "interested persons," has
concluded that the Reorganization would be in the best interests of both
Portfolios and their shareholders and that the interests of existing
shareholders in the Portfolios would not be diluted as a result of the
transaction contemplated by the Reorganization. The Board recommends that you
vote for the approval of the Reorganization Agreement.

The Portfolios

Investment Objectives and Policies. The investment objectives and policies
of the PA Municipal Portfolio are significantly similar to those of the
corresponding Municipal Portfolio. The PA Municipal Portfolio and the Municipal
Portfolio both invest in a diversified portfolio of fixed-income securities in
order to realize above-average total return over a market cycle of three to
five years, consistent with the conservation of capital and the realization of
current income which is exempt from federal income tax. The PA Municipal
Portfolio also seeks current income exempt from Pennsylvania personal income
tax by investing principally in Pennsylvania municipal securities. The
Pennsylvania municipal securities are also permissible investments for the
Municipal Portfolio.

Risks. The PA Municipal Portfolio and the Municipal Portfolio are both
municipal fixed-income portfolios and are, therefore, subject to similar risks.
The market values of the securities in which the Portfolios invest may vary due
to changes (or perceived changes) in credit quality, interest rate movements or
market developments generally. The PA Municipal Portfolio also is subject to
the risks associated with investment in the securities of a single state,
including the risks of possible tax changes or a deterioration in economic
conditions and differing levels of supply and demand for the municipal
obligations of a single state (i.e., Pennsylvania).

Investment Adviser and Advisory Fees. Miller Anderson & Sherrerd, LLP
("Miller Anderson") is a registered investment adviser and serves as investment
adviser to the Fund. Miller Anderson is wholly owned, indirectly, by
subsidiaries of Morgan Stanley Dean Witter & Co. Miller Anderson also serves as
investment adviser to employee benefit plans, endowment funds, foundations and
other institutional investors, and as investment adviser or sub-adviser to
several other investment companies. Miller Anderson had approximately $66
billion of assets under management as of September 30, 1998 and is located at
One Tower Bridge, West Conshohocken, Pennsylvania 19428.

3
<PAGE>

The following table compares the annual operating expenses, including
advisory fees, of the PA Municipal Portfolio and the Municipal Portfolio:

Annual Operating Expenses*
(As a percentage of average net assets)

PA Municipal Municipal
Portfolio Portfolio
-------------- --------------
Advisory Fees (less waivers) ......... 0.281% 0.352%
12b-1 Fees ........................... NONE NONE
Other Expenses ....................... 0.219% 0.148%
Total Operating Expenses ............. 0.500%** 0.500%**

- ------------
* Net of fee waivers and/or expense reimbursements.
** The "Total Operating Expenses" shown reflect voluntary waivers and/or
reimbursements by the Adviser to the extent necessary to keep Total
Operating Expenses actually deducted from portfolio assets from exceeding
0.50%. Absent such waivers and/or reimbursements by the Adviser, the "Total
Operating Expenses" would be 0.594% for PA Municipal Portfolio and 0.523%
for the Municipal Portfolio.

Example

This example is intended to help you compare the cost of investing in the
PA Municipal Portfolio with the cost of investing in the Municipal Portfolio.

The example assumes that you invest $1,000 in each Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example assumes that your investment has a 5% return each year and
that each Portfolio's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
PA Municipal Portfolio .......... $5 $16 $28 $63
Municipal Portfolio ............. $5 $16 $28 $63
</TABLE>

Shareholder Information. The purchase and redemption procedures and
exchange privileges of the PA Municipal Portfolio are identical to those of the
Municipal Portfolio.

o Purchase and Redemption Procedures. Shares of each of the Portfolios are
offered at net asset value. You may purchase or redeem shares directly
through the Distributor or through participating dealers. The minimum
initial investment is $5,000,000 for Institutional Class Shares. The
minimum subsequent investment is $1,000 and there is no minimum for
automatic reinvestment of dividends and distributions. The Fund reserves
the right, in its sole discretion, to waive the minimum initial and
additional investment amounts.

o Exchange Privileges. Each Portfolio's Institutional Class Shares may be
exchanged for shares of the Fund's other portfolios offering Institutional
Class Shares based on the respective net asset values of the shares
involved. The officers of the Fund reserve the right not to accept an
exchange request when, in their opinion, the exchange privilege is being
used as a tool for market timing.

Tax Consequences. The consummation of the Reorganization is subject to the
receipt of an opinion of counsel to the Adviser to the effect that the
Reorganization will qualify as a tax-free reorganization for federal income tax
purposes.

RISKS

The PA Municipal Portfolio and the Municipal Portfolio are both municipal
fixed-income portfolios and are, therefore, subject to similar risks. The
market values of the securities in which the Portfolios invest may vary due to
changes (or perceived changes) in credit quality, interest rate movements or
market developments generally. In addition, high yield securities are often
issued by smaller, less credit worthy companies or by highly leveraged firms,
which are generally less able than more established or less leveraged firms to
make scheduled payments of interest and principal.

4
<PAGE>

The PA Municipal Portfolio may be subject to greater credit risks than
would be present in a nationally diversified portfolio of municipal securities,
such as in the Municipal Portfolio. The risks associated with investment in the
securities of a single state include possible tax changes or a deterioration in
economic conditions and differing levels of supply and demand for the municipal
obligations of a single state (i.e., Pennsylvania).

REASONS FOR THE REORGANIZATION

The Reorganization has been proposed principally for two reasons. First,
changes in Pennsylvania tax laws have eliminated one of the benefits of
investing in the PA Municipal Portfolio. The personal property tax was recently
eliminated. As a result, the after-tax yield advantage of Pennsylvania tax
exempt securities has been reduced by approximately 0.25% for many of the PA
Municipal Portfolio's shareholders (0.25% represents the net amount after
accounting for the impact of federal taxes, while the gross amount of the
reduction was 0.40%). In addition, Miller Anderson has found that there is a
limited supply of Pennsylvania tax-exempt securities in the market sectors it
finds most attractive.

In electing to approve and recommend the Reorganization Agreement to
shareholders of PA Municipal Portfolio, the Trustees determined that the
proposed transaction would benefit shareholders of both Portfolios. The
Trustees also determined that the interests of the Portfolios' existing
shareholders would not be diluted as a result of the merger.

In addition to considering the terms and conditions of the Reorganization
Agreement, the Trustees considered the following benefits of the proposed
transaction:

o Tax Law Changes: The Trustees considered the effect that Pennsylvania tax law
changes would have on the Portfolio's after tax total returns.

o Diversification: The Trustees considered the fact that the investors would
generally benefit from better diversification by investing in the Municipal
Portfolio.

o Size; Efficiency: The Trustees considered the fact that the transaction will
result in PA Municipal Portfolio shareholders owning shares in a larger
Portfolio which may experience lower expenses (before any voluntary waivers
are applied).

o Objectives and Policies: The Trustees considered the compatibility of the
Portfolios' investment objectives and policies.

o Tax Treatment: The Trustees considered the fact that Morgan, Lewis & Bockius
believes that the Reorganization will be tax-free to the Portfolios'
shareholders.

The cost of the shareholders' meeting necessary in order to carry out the
transaction will be borne by the Portfolios. These costs, however, will be
relatively low due to the small number of PA Municipal Portfolio shareholders,
and the fact that Miller Anderson personnel will conduct the proxy
solicitation, rather than using a third-party solicitation/tabulation service
provider. Approximately one-half of the PA Municipal Portfolio's beneficial
owners are Miller Anderson employees and/or their immediate family members.

Based on the factors described above, the Trustees, including the Trustees
who are not "interested persons" of the Fund, within the meaning of Section
2(a)(19) of the 1940 Act, determined that participation in the Reorganization
is in the best interests of each Portfolio's shareholders and will not result
in a dilution of interests of either Portfolio's shareholders. Accordingly, the
Trustees recommend that shareholders approve the Reorganization.

INFORMATION RELATING TO THE REORGANIZATION

Description of the Reorganization. The following summary is qualified in
its entirety by reference to the Reorganization Agreement found in Exhibit A.

The Reorganization Agreement provides that all of the assets and all of
the liabilities of the PA Municipal Portfolio will be transferred to the
Municipal Portfolio at the Effective Time. In exchange for the transfer of
these assets, the Municipal Portfolio will simultaneously issue to the PA
Municipal Portfolio a number of full and fractional Institutional Class Shares
equal in value to the net asset value of the PA Municipal Portfolio immediately
prior to the Effective Time.

Following the transfer of assets and liabilities in exchange for Municipal
Portfolio shares, the PA Municipal Portfolio will distribute pro rata the
Municipal Portfolio shares received to its shareholders in a liquidating
distribution. Each shareholder of the PA Municipal Portfolio owning shares at
the Effective Time will receive Municipal Portfolio

5
<PAGE>

shares of equal value. Such liquidation and distribution will be accomplished
by the establishment of accounts in the names of the PA Municipal Portfolio's
shareholders on the share records of the Municipal Portfolio's transfer agent.
Each account will represent the respective pro rata number of full and
fractional shares of the Municipal Portfolio due to the shareholders of the PA
Municipal Portfolio. The Municipal Portfolio does not issue share certificates
to shareholders. Shares of the Municipal Portfolio will have no preemptive or
conversion rights. After the Reorganization, the PA Municipal Portfolio will
cease operations.

As provided in the Reorganization Agreement, the PA Municipal Portfolio
will bear its own expenses associated with the Reorganization. The
Reorganization is subject to a number of conditions, including the approval of
the Reorganization Agreement by shareholders of the PA Municipal Portfolio; the
receipt of certain legal opinions described in Sections 6, 7 and 8 of the
Reorganization Agreement (including an opinion of counsel that the Municipal
Portfolios' shares issued in accordance with the terms of the Reorganization
Agreement will be validly issued, fully paid and non-assessable); the receipt
of certain certificates from the parties concerning aggregate asset values; and
the parties' performance in all material respects of the agreements and
undertakings in the Reorganization Agreement. Assuming satisfaction of the
conditions in the Reorganization Agreement, the Effective Time of the
Reorganization will be November 30, 1998 or such later date as is agreed to by
the parties.

The Reorganization Agreement and the Reorganization may be abandoned
without penalty at any time prior to the Effective Time of the Reorganization
by resolution of the Board or at the discretion of any duly authorized officer
of the Fund if circumstances should develop that, in the opinion of the Fund's
Board or officers, make it inadvisable to proceed with the Reorganization.

Federal Income Taxes. The Reorganization is intended to qualify for
federal income tax purposes as a tax-free reorganization under Section
368(a)(1)(F) of the Internal Revenue Code of 1986, as amended. If it qualifies,
shareholders of the Fund will not recognize gain or loss in the transaction;
the tax basis of the Municipal Portfolio shares received will be the same as
the tax basis of the PA Municipal Portfolio shares surrendered; and the holding
period of the Municipal Portfolio shares received will include the holding
period of the PA Municipal Portfolio shares surrendered, provided that the
shares surrendered were capital assets in the hands of the PA Municipal
Portfolio shareholders at the time of the transaction. As a condition to the
closing of the Reorganization, the Fund will receive an opinion from counsel to
that effect. The Adviser, on behalf of Fund, has not sought a tax ruling from
the Internal Revenue Service. The opinion of counsel is not binding on the
Internal Revenue Service and does not preclude the Internal Revenue Service
from adopting a contrary position. Shareholders should consult their own tax
advisers concerning the potential tax consequences of the Reorganization to
them, including state and local tax consequences. The Adviser does not
anticipate that securities held by the combined Portfolios will be sold in
significant amounts to comply with the Municipal Portfolio's investment
policies or strategies.
<PAGE>
Capitalization. The following table sets forth as of March 31, 1998 (i)
the capitalization of each Portfolio; and (ii) the pro forma combined
capitalization of the Municipal Portfolio assuming the Reorganization has been
approved.

<TABLE>
<CAPTION>
Net Asset Value
Portfolio Net Assets Per Share Shares Outstanding
- --------- -------------- ---------------- -------------------
<S> <C> <C> <C>
PA Municipal Portfolio ................ $ 28,035,483 $ 11.85 2,365,547
Municipal Portfolio ................... $ 90,031,878 $ 11.78 7,639,910
Pro Forma Municipal Portfolio ......... $118,067,361 $ 11.78 10,019,514
</TABLE>

INFORMATION ABOUT THE PORTFOLIOS

Investment Summary
Investments, Risks and Performance

This section tells you about and compares for each Portfolio:

o Its investment goal

o Its main investment strategies

o The risks of investing in the Portfolio

There is more information about the Portfolios' investment practices in
the Statement of Additional Information ("SAI") which legally is a part of this
Proxy Statement/Prospectus. For details about how to get an SAI and other
reports and information, see the back cover of this Proxy Statement/Prospectus.

6
<PAGE>

Investment Objectives and Policies

The investment objectives and policies of the PA Municipal Portfolio are
significantly similar to those of the corresponding Municipal Portfolio. The PA
Municipal Portfolio and the Municipal Portfolio both invest in a diversified
portfolio of fixed-income securities in order to realize above-average total
return over a market cycle of three to five years, consistent with the
conservation of capital and the realization of current income which is exempt
from federal income tax. The PA Municipal Portfolio also seeks current income
exempt from Pennsylvania personal income tax by concentrating its investments
in Pennsylvania municipal securities. The Pennsylvania municipal securities are
also permissible investments for the Municipal Portfolio.

The PA Municipal Portfolio generally invests at least 80% of its assets in
municipal securities and at least 65% of its assets in Pennsylvania municipal
securities. The Municipal Portfolio invests its assets so that at least 80% of
the income it distributes to shareholders will be exempt from federal regular
income tax. Among other things, the Municipal Portfolio may invest in municipal
securities of any state or states. As a result, the Municipal Portfolio may
have greater diversification, and be less exposed to financial or economic
changes affecting a single state, than PA Municipal Portfolio. On September 25,
1998 shareholders of the Municipal Portfolio voted to change its investment
policy from generally investing at least 80% of its assets in municipal
securities to investing its assets so that at least 80% of the income it
distributes to shareholders will be exempt from regular income tax. As a result
of this change, the Municipal Portfolio may now seek opportunities to invest in
certain types of securities that have the potential to enhance the Portfolio's
total return without materially increasing the portion of the Portfolio's
income distribution that is subject to federal income tax.

Each Portfolio generally invests at least 80% of its assets in investment
grade securities and may invest up to 20% in high yield securities. Each
Portfolio also may use derivatives as part of its investment strategy. Each
Portfolio's policy on the use of derivatives is identical.

Performance

The table below provides the average annual total return for each
Portfolio for selected time periods. Additional information about each
Portfolio is contained in the Statement of Additional Information relating to
this Proxy Statement/Prospectus, and in the Prospectus relating to the
Portfolios. How the Portfolios have performed in the past does not necessarily
indicate how the Portfolios will perform in the future.

Average Annual Total Return for Periods Ended September 30, 1998

PA Municipal Portfolio Municipal Portfolio
Institutional Class Institutional Class
------------------------ --------------------
1 Year ................... 6.8% 7.2%
5 Year ................... 6.5% 6.6%
Since Inception* ......... 8.0% 7.8%

- ------------
* Both the PA Municipal Portfolio Institutional Class and the Municipal
Portfolio Institutional Class commenced operations October 1, 1992.

7
<PAGE>

Portfolio Management

The Portfolios have the same portfolio managers, who share primary
responsibility for managing the Portfolios' assets. The portfolio managers of
each Portfolio are Kenneth B. Dunn, Steven K. Kreider and Scott F. Richard.

Fees and Expenses of the Portfolios

Neither the PA Municipal Portfolio nor the Municipal Portfolio charge any
sales loads or similar fees when you purchase or redeem shares. The following
table compares the annual operating expenses, including advisory fees, of the
PA Municipal Portfolio and the Municipal Portfolio:

Annual Operating Expenses*
(as a percentage of average net assets)

Example

This example is intended to help you compare the cost of investing in the
PA Municipal Portfolio with the cost of investing in the Municipal Portfolio.

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
PA Municipal Portfolio .......... $5 $16 $28 $63
Municipal Portfolio ............. $5 $16 $28 $63
</TABLE>
<PAGE>

Investment Adviser and Distributor

Investment Adviser

The Fund's investment adviser, Miller Anderson & Sherrerd, LLP, is a
Pennsylvania limited liability partnership founded in 1969 and is located at
One Tower Bridge, West Conshohocken, Pennsylvania 19428. Miller Anderson is
wholly-owned, indirectly, by subsidiaries of Morgan Stanley Dean Witter & Co.
The Adviser provides investment services to employee benefit plans, endowment
funds, foundations and other institutional investors and, as of September 30,
1998, had approximately $66 billion in assets under management.

Fund Administration

Miller Anderson serves as the Fund's Administrator under an Administration
Agreement dated November 18, 1993. Chase Global Funds Services Company
("CGFSC"), a subsidiary of The Chase Manhattan Bank ("Chase"), 73 Tremont
Street, Boston, MA 02108-3913, provides accounting and other services pursuant
to a subadministration agreement with Miller Anderson. CGFSC also serves as
transfer and dividend disbursing agent for Miller Anderson. Chase serves as
custodian for the Portfolios.

Distribution of Portfolio Shares

MAS Fund Distribution, Inc., a wholly-owned subsidiary of the Adviser, One
Tower Bridge, P.O. Box 868, West Conshohocken, Pennsylvania 19428-0868, serves
as the Fund's distributor under a Distribution Agreement with the Fund.

8
<PAGE>

Shareholder Information

Pricing of Portfolio Shares. The Portfolios sell and redeem shares at Net
Asset Value ("NAV"). NAV per share is computed by dividing the total value of
the investments and other assets of the portfolio, less any liabilities, by the
total outstanding shares of the portfolio. Each Portfolio's NAV per share is
determined as of one hour after the close of the bond markets (normally 4:00
p.m. Eastern Time) on each day the Portfolio is open for business.

Purchase of Shares. Institutional Class Shares of the Portfolios are
available to clients of the Adviser with combined investments of $5,000,000 and
Shareholder Organizations who have a contractual arrangement with the Fund or
the Fund's Distributor, including institutions such as trusts, foundations or
broker-dealers purchasing for the accounts of others. Institutional Class
Shares are offered directly to investors without a sales commission at the net
asset value per share next determined after receipt of the purchase order.
Purchase orders may be transmitted by mail or by wire.

Additional investments of Institutional Class Shares at net asset value
may be made at any time (minimum additional investment is $1,000). Additional
investment orders may be transmitted by mail or by wire.

The Fund reserves the right, in its sole discretion, to suspend the
offering of Institutional Class Shares of any of its portfolios or to reject
any purchase orders when, in the judgment of management, such suspension or
rejection is in the best interest of the Fund. The Fund also reserves the
right, in its sole discretion, to waive the minimum initial and subsequent
investment amounts.

Redemption of Shares. Shares of each Portfolio may be redeemed without
charge by mail or, if authorized, by telephone. The shares will be redeemed at
the next determined NAV. Any redemption proceeds may be more or less than the
purchase price of the shares, depending on, among other things, the market
value of the investment securities held by the Portfolio.

If the Board determines that it would be detrimental to the best interests
of the remaining shareholders to make payment wholly or partly in cash,
redemption proceeds may be paid in whole or in part by a distribution in-kind
of readily marketable securities held by a portfolio in lieu of cash in
conformity with applicable rules of the SEC. Investors may incur brokerage
charges on the sale of portfolio securities received in such payments of
redemptions.

Exchange Privileges. Each portfolio's Institutional Class Shares may be
exchanged without charge for shares of the Fund's other portfolios offering
Institutional Class Shares based on the respective NAV of the shares involved.
The officers of the Fund reserve the right not to accept any request for an
exchange when, in their opinion, the exchange privilege is being used as a tool
for market timing. The Fund reserves the right to modify or terminate the
exchange privilege at any time upon 60 days' notice to shareholders.
<PAGE>

Dividends and Distributions. The PA Municipal and Municipal Portfolios
normally distribute substantially all of their net investment income on a
monthly basis. All dividends and distributions are automatically paid in
additional shares of the portfolio unless the shareholder elects otherwise.
Such election must be made in writing to the Fund. Undistributed net investment
income is included in the portfolio's net assets for the purpose of calculating
net asset value per share. Therefore, on the ex-dividend date, the net asset
value per share excludes the dividend (i.e., is reduced by the per share amount
of the dividend).

Taxes. Each of the Portfolios intends to pay "exempt-interest" dividends
to shareholders which are excluded from a shareholder's gross income for
federal income tax purposes. Exempt-interest dividends received by shareholders
from such portfolios may be subject to state and local taxes, although some
states allow a shareholder to exclude that portion of a portfolio's tax-exempt
income which is accountable to municipal securities issued within the
shareholder's state of residence.

Since each of the Portfolios may invest in private activity municipal
securities, investment in either of the Portfolios may not be an appropriate
investment for persons who are "substantial users" (or persons who are related
to "substantial users") of facilities financed through industrial development
bonds or private activity bonds.

To the extent, if any, that distributions paid to shareholders of either
Portfolio are derived from taxable interest or capital gains, such
distributions will be subject to federal income tax. Additionally, such
distributions are not eligible for the dividends received deduction for
corporations.

Furthermore, the PA Municipal Portfolio invests at least 65% of its assets
in Pennsylvania municipal securities. The income of the PA Municipal Portfolio
that is derived from such securities and U.S. Governments will not be subject
to the Pennsylvania personal income tax or to the Philadelphia School District
investment net income tax. Distributions by the PA Municipal Portfolio to a
Pennsylvania resident that are attributable to most other sources may be
subject to the Pennsylvania personal income tax and (for residents of
Philadelphia) to the Philadelphia School District investment net income tax.

Further discussion of tax considerations affecting shareholders of the
Portfolios is found in the Statement of Additional Information.

9
<PAGE>

ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS

You may obtain additional information about the PA Municipal Portfolio and
Municipal Portfolio in the following ways:

Prospectus. The Portfolios have a Prospectus that contains information
about the operation and management of the Portfolios. The current prospectus,
dated January 31, 1998, as revised May 13, 1998 and supplemented October 9,
1998, is incorporated herein by reference and accompanies this Proxy
Statement/Prospectus.

Statement of Additional Information. In addition to the prospectus, the
Portfolios have a Statement of Additional Information ("SAI"), that contains
additional, more detailed information about the Portfolios. The current SAI,
dated January 31, 1998 is available upon request and without charge by calling
1-800-354-8185. You may obtain the SAI, annual and semi-annual reports without
charge by contacting MAS at the toll-free number above.

Shareholder Reports. The financial statements of the Portfolios contained
in the MAS Funds Annual Report to shareholders for the fiscal year ended
September 30, 1997 have been audited by PricewaterhouseCoopers LLP, its
independent accountants. These financial statements, as well as interim
financial statements dated as of March 31, 1998 and pro forma financial
statements reflecting the Municipal Portfolio after the Reorganization, are
incorporated by reference into this Proxy Statement/Prospectus insofar as they
relate to the Portfolios, and not to any other portfolios that are a part of
MAS Funds and described therein. A copy of MAS Fund's Annual Report, which
includes discussions of the performance of the Portfolios, and the most recent
Semi-Annual Report succeeding such Annual Report, may be obtained by writing
MAS Funds at One Tower Bridge, West Conshohocken, Pennsylvania 19428 or by
calling 1-800-354-8185. In addition, these discussions are reproduced in
Appendix A to the Proxy Statement/Prospectus.

Information about MAS Funds, including the prospectus, SAI, shareholder
reports and proxy materials of each Portfolio, may be obtained from the SEC in
any of the following ways: (1) in person: you may review and copy documents in
the SEC's Public Reference Room in Washington D.C. at the address noted below,
or in the SEC's Regional Offices located in Chicago, at Norwest Atrium Center,
500 West Madison St., Chicago, IL 60661-2511, or New York at Seven World Trade
Center, Suite 1300, New York, NY 10048. (for information call 1-800-SEC-0330);
(2) on-line: you may retrieve information from the SEC's web site at
"http://www.sec.gov"; or (3) mail: you may request documents, upon payment of a
duplicating fee, by writing to SEC, Public Reference Section, Washington, D.C.
20549-6009. To aid you in obtaining this information, MAS Funds' 1940 Act
registration number is 811-3980.
<PAGE>

PORTFOLIO TRANSACTIONS

The Portfolios' policies regarding portfolio transactions are
substantially identical. Please refer to the Portfolios' prospectus for more
information.

SHAREHOLDER RIGHTS

General. The Fund was established as a business trust under Pennsylvania
law by a Declaration of Trust dated February 15, 1984, as amended and restated
as of November 11, 1993. The Fund is also governed by its Bylaws and by
applicable Pennsylvania law.

Shares. The Fund is authorized to issue an unlimited number of shares of
beneficial interest, without par value, from an unlimited number of series
(portfolios) of shares. Currently, the Fund consists of thirty-three portfolios
and three classes of shares, the Institutional Class, the Adviser Class and the
Investment Class shares. The three classes differ with respect to distribution
costs, as set forth in the Fund prospectus. The Portfolios currently have only
Institutional Class Shares outstanding. The shares of each MAS Portfolio have
no preference as to conversion, exchange, dividends, retirement or other
features, and have no preemptive rights.

Shareholder Voting. Shareholders of each Portfolio have identical voting
rights. Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares. The shares of the Fund have
non-cumulative voting rights, which means the holder of more than 50% of the
shares voting for the election of Trustees can elect 100% of the Trustees if
the holder chooses to do so. At shareholder meetings, the holders of 40% of a
portfolio's shares entitled to vote at the meeting generally constitute a
quorum. Shareholders of a class have exclusive voting rights regarding any
matter submitted to shareholders that relates solely to that class of shares,
and separate voting rights on any other matter submitted to shareholders in
which the interests of the shareholders of that class differ from the interests
of holders of any other class.

10
<PAGE>

Shareholder Meetings. Annual meetings of shareholders will not be held,
but special meetings of shareholders may be held under certain circumstances. A
meeting will be held to vote on the removal of a Trustee(s) of the Fund if
requested in writing by the holders of not less than 10% of the outstanding
shares of the Fund. The Fund will assist in shareholder communications in such
matters to the extent required by law.

Election and Term of Trustees. The Fund's affairs are supervised by the
Trustees under the laws governing business trusts in the Commonwealth of
Pennsylvania. Trustees of the Fund are elected by a majority vote of a quorum
cast by written ballot at the regular meeting of shareholders, if any, or at a
special meeting held for that purpose. Trustees hold office until their
successors are duly elected and qualified or until their death, removal or
resignation. Shareholders may remove a Trustee by vote of a majority of the
votes entitled to be cast for the election of directors and may elect a
successor to fill a resulting vacancy. A Trustee elected thereby serves for the
balance of the term of the removed Trustee.

Shareholder Liability. The shareholders of the Fund generally are not
personally liable for the acts, omissions or obligations of the Trustees or the
Fund.

Liability of Trustees. The Trustees shall not be personally liable for any
obligation of the Fund. The Fund will indemnify its Trustees and officers
against all liabilities and expenses except for liabilities arising from such
person's self-dealing, willful misconduct or recklessness.

LEGAL MATTERS

Morgan, Lewis & Bockius LLP, 1800 M Street, N.W., Washington, D.C. 20036,
serves as counsel to MAS Funds.

THE BOARD OF TRUSTEES OF MAS FUNDS RECOMMENDS THAT YOU
VOTE FOR APPROVAL OF THE REORGANIZATION AGREEMENT.
---

VOTING ON THE REORGANIZATION AGREEMENT

General Information. This Proxy Statement/Prospectus is furnished in
connection with the solicitation of proxies by the Board of Trustees of the
Fund in connection with the Meeting. It is expected that the solicitation of
proxies will be primarily by mail. Officers of the Fund and Miller Anderson may
also solicit proxies by telephone, telegraph, facsimile or in person. The cost
of solicitation will be borne, directly or indirectly, by the Portfolios.

Vote Required to Approve Reorganization Agreement. Shareholders of the MAS
Funds PA Municipal Portfolio on the Record Date will be entitled to one vote
per share then held and a fractional vote for each fractional share then held.
Approval of the Reorganization Agreement requires the affirmative vote of a
majority of the outstanding voting securities present at the meeting, in person
or by proxy. The vote of a "majority of the outstanding securities" means the
vote of 67% or more of the voting securities present, if the holders of more
than 50% of the outstanding voting securities are present in person or by
proxy, or the vote of more than 50% of the outstanding voting securities,
whichever is less. Any shareholder giving a proxy may revoke it at any time
before it is exercised by submitting to the Secretary of the Fund a written
notice of revocation or a subsequently executed proxy, or by attending the
Meeting and voting in person.

Shares represented by a properly executed proxy will be voted in
accordance with the instructions thereon, or if no specification is made, the
shares will be voted "FOR" the approval of the Reorganization Agreement. For
purposes of determining the presence of a quorum for transacting business at
the Meeting, abstentions and broker "non-votes" (that is, proxies from brokers
or nominees indicating that such persons have not received instructions from
the beneficial owners or other persons entitled to vote shares on a particular
matter) will be treated as shares that are present at the Meeting but which
have not been voted. For this reason, abstentions and broker non-votes will
have the effect of a vote against approval of the Reorganization Agreement.

If sufficient votes in favor of the Proposal are not received by the time
scheduled for the meeting, the persons named as proxies may propose one or more
adjournments of the Meeting for a reasonable period of time to permit further
solicitation of proxies. Any such adjournment will require the affirmative vote
of a majority of the votes cast in person or by proxy at the session of the
Meeting to be adjourned. The persons named as proxies will vote for an
adjournment any proxies which they are entitled to vote in favor of the
Proposal. They will vote as against any proxies required to be voted against
the Proposal. The costs of any additional solicitation and of any adjourned
session will be borne by the Portfolios.

11
<PAGE>

Outstanding Shares. Only shareholders of record on the Record Date are
entitled to notice of and to vote at the Meeting and any adjournment thereof.
At the close of business on the Record Date there were outstanding and entitled
to vote:

1,886,354.801 shares of the PA Municipal Portfolio of MAS Funds

Beneficial Owners

The following table sets forth certain information as of October 7, 1998,
concerning each person who owned, of record or beneficially, 5% or more of the
shares of the PA Municipal Portfolio and/or the Municipal Portfolio. While
Miller Anderson may be deemed to "beneficially own" more than 25% of the shares
of the Portfolio because its investment advisory relationships may permit it to
dispose of shares or advise Shareholders to dispose of shares, Miller Anderson
does not vote shares of MAS Funds for any of its clients. Therefore, Miller
Anderson disclams any control over the Portfolios.

<TABLE>
<CAPTION>
PA Municipal Portfolio

Percentage of Percentage of
PA Municipal Portfolio Municipal Portfolio
Shares Owned Before Shares Owned After
Name & Address Reorganization Reorganization
- ----------------------------------- ------------------------ --------------------
<S> <C> <C>
R.O.S. ROBERTS JT WRDS
Attn: Ralph J. Roberts
c/o Comcast Corporation
1500 Market Street, 35th Floor
Philadelphia, PA 19102 ............ 17.72% 3.79%

SOUTHWEST NATIONAL BANK OF PA
Trust and Financial Mgmt. Services
Attn: Michael J. Earle
P.O. Box 760
Greensburg, PA 15601-0760 ......... 15.14% 3.24%

JOHN J. F. SHERRERD
621 Carisbrooke Road
Bryn Mawr, PA 19090 ............... 11.06% 2.48%

SANFORD C. BERNSTEIN & CO. INC.
FBO the Cook Organization Ltd.
Attention: Carmine Carrella
One North Lexington Avenue
White Plains, NY 10601 ............ 6.45% 1.38%

A. MORRIS WILLIAMS JR. &
RUTH W. WILLIAMS
120 Righters Mill Road
Gladwyne, PA 19035-1531 ........... 5.98% 1.28%

DANA DORTONE
219 Iven Avenue
St. Davids, PA 19087 .............. 5.30% 1.13%

MILLER PARTNERS, L.P.
115 Maple Hill Road
Gladwyne, PA 19035-1305 ........... 5.28% 1.13%
</TABLE>

12
<PAGE>

<TABLE>
<CAPTION>
Municipal Portfolio

Percentage of Percentage of
Shares Owned Before Shares Owned After
Name & Address Reorganization Reorganization
- ------------------------------------- --------------------- -------------------
<S> <C> <C>
CHARLES SCHWAB & CO., INC.
Special Custody Account FBQ Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104 ............. 11.85% 9.31%

ROBERT A. FOX
c/o R.A.F. Industries
165 Township Line Road
Suite 2100
Jenkintown, PA 19046 ................ 8.65% 6.79%

WACHOVIA BANK, N.A.
TTEE U/A 6/20/95
w/Sylvia M. Thompson for Grantor
P.O. Box 3073
301 N. Main Street MC: NC31057
Winston-Salem, NC 27150 ............. 8.62% 6.77%

JR TRUEMAN QUALIFIED
SUBCHAPTER'S TRUST
Attn: Barbara Trueman
5490 Hayden Road
Amlin, OH 43002 ..................... 8.45% 6.63%

BALSA & CO. (REINVEST)
c/o Chase Manhattan Bank
P.O. Box 1768
Grand Central Station
New York, NY 10163-1768 ............. 6.29% 4.94%

BATRUS & CO.
c/o Bankers Trust Company
P.O. Box 9005
Church Street Station
New York, NY 10008 .................. 5.78% 4.54%
</TABLE>

* Record and Beneficial Ownership.
+ Less than 1%.

As of October 7, 1998 the Directors and officers of the Fund as a group
owned less than 1% of the total outstanding shares of each Portfolio.

Expenses. In order to obtain the necessary quorum at the Meeting,
additional solicitation may be made by mail, telephone, telegraph, facsimile or
personal interview by representatives of Miller Anderson or the Fund. All costs
of solicitation (including the printing and mailing of this proxy statement,
meeting notice and form of proxy, as well as any necessary supplementary
solicitations) will be paid by the Portfolios. Persons holding shares as
nominees will, upon request, be reimbursed for their reasonable expenses in
sending soliciting material to their principals.

OTHER BUSINESS

The Board knows of no other business to be brought before the Meeting.
However, if any other matters properly come before the Meeting, proxies which
do not contain specific restrictions to the contrary will be voted on such
matters in accordance with the judgment of the persons named as proxy.

13
<PAGE>

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed the Fund in writing at the address
on the cover page of this Proxy Statement/Prospectus or by telephoning
1-800-354-8185.

Shareholders who do not expect to be present at the meeting are requested
to date and sign the enclosed proxy and return it in the enclosed envelope. No
postage is required if mailed in the United States.

The Order of the Board of Trustees,

John H. Grady, Jr.
Secretary
MAS Funds

<PAGE>

APPENDIX A
MAS Funds
Statement of Net Assets (Unaudited)

MAS FUNDS/FIXED INCOME

Municipal Portfolio

The Municipal Portfolio invests in long- and short-term debt obligations issued
by state and local governments or their agencies and in other fixed-income
securities. The Portfolio is actively managed by Miller Anderson & Sherrerd's
municipal investment management team, which manages the Portfolio's
interest-rate exposure and composition by making strategic shifts in portfolio
structure and conducting extensive valuation analysis of individual sectors and
securities. The goal of MAS's fixed-income management for taxable investors is
to provide a positive after-tax total return, to provide protection against
deflation and to reduce the risk of an investor's overall investment portfolio,
particularly through reduction of exposure to changes in tax rates.

MAS's research shows that there have been many times when taxable investors
would have been better served by investments in taxable bonds. Thus, MAS views
the municipal market as just one of many alternatives for helping clients
achieve their goal of maximizing after-tax returns within a given level of risk.
Sector commitments within the Portfolio are varied based on the prospects for
the municipal market relative to the taxable markets. Normally, at least 80% of
the Portfolio will be invested in municipal securities.

MAS's investment process consists of two major stages. First, MAS establishes a
forecast for inflation and economic activity in order to make judgments about
the most desirable duration and maturity targets for the portfolio. Next, MAS
examines the relative value offered by different bond sectors and determines the
mix of securities that will provide the most attractive performance. Security
selection involves adjustment of promised yields for tax considerations, credit
risk, and call risk. Capital gains are realized only when the prospective
returns of bonds purchased with the proceeds from the sales will offset the tax
on the gains and still provide excess value to the overall portfolio.

The Portfolio's performance over the past year was heavily influenced by changes
in the shape of the municipal yield curve. The 10-year portion of the curve had
the best performance, with yields falling about 45 basis points, compared to
about 20 basis points for the 20-year portion of the curve and 30 basis points
for the 5-year portion of the curve. As a result, the Portfolio's positions in
15 to 20-year non-callable zero-coupon municipal bonds performed well relative
to 5-year securities, but lagged duration-equivalent 10-year bonds. In addition,
strategic management of interest-rate risk made a positive impact on
performance. Interest-rate exposure was greater than the index when interest
rates fell in the first fiscal quarter. Interest rate exposure was reduced to
neutral in the late Spring. Management of municipal market exposure also boosted
performance. Futures were used to reduce the Portfolio's sensitivity to

<PAGE>

municipal yield changes during the third fiscal quarter. These futures were
liquidated after the municipal market cheapened due to a heavy supply of new
issues in the final fiscal quarter. Finally, a small allocation to high-yield,
taxable corporate bonds, the best-performing sector of the fixed-income market
over the period, also added to the Portfolio's return.

At fiscal year-end, MAS believes that the recent cheapening of municipal bonds
has returned a fair valuation to the municipal markets. Accordingly, the
Portfolio's exposure to municipal securities has been increased by removing
futures hedges. Since MAS perceives the municipal yield curve to be relatively
flat, i.e., investors are not being adequately compensated for purchasing
long-term municipals, recent purchases have been concentrated in
shorter-maturity issues.

MAS views the municipal market as just one of many alternatives
for helping clients achieve their goal of maximizing after-tax
returns within a given level of risk.

A-2
<PAGE>

MUNICIPAL

Growth of a $1 Million Investment
Since Inception

<TABLE>
<CAPTION>
Fiscal years
ending September 30 LEHMAN 5 YEAR MUNICIPAL MAS FUNDS MUNICIPAL LEHMAN 10 YEAR MUNICIPAL
Dollars (000)
<S> <C> <C> <C>
*10/1/92 1000 1000 1000
12/31/92 1014 1016 1020
3/31/93 1041 1061 1059
6/30/93 1065 1103 1094
'93 9/30/93 1090 1142 1134
12/31/93 1103 1162 1150
3/31/94 1072 1077 1089
6/30/94 1083 1083 1105
'94 9/30/94 1094 1089 1113
12/31/94 1089 1189 1095
3/31/95 1133 1186 1171
6/30/95 1163 1180 1202
'95 9/30/95 1191 1235 1244
12/31/95 1216 1306 1283
3/31/96 1216 1300 1275
6/30/96 1222 1317 1279
'96 9/30/96 1243 1351 1304
12/31/96 1267 1379 1341
3/31/97 1267 1383 1341
6/30/97 1298 1426 1385
'97 9/30/97 1325 1466 1428
</TABLE>

A-3
<PAGE>

AVERAGE ANNUAL RETURNS
Ended 9/30/97*

<TABLE>
<CAPTION>
MAS LEHMAN 5 YEAR LEHMAN 10 YEAR
MUNICIPAL MUNICIPAL INDEX MUNICIPAL INDEX
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE YEAR 8.47% 6.67% 9.50%
SINCE INCEPTION 7.95% 5.80% 7.39%
</TABLE>

MAS Funds returns are net of all fees. Returns represent past performance and
are not indicative of future results.

The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.

The Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary to keep total annual operating expenses
for the Municipal Portfolio from exceeding 0.50% of average daily net assets.
Returns presented include the effects of these waivers and reimbursements. If
such waivers and reimbursements had not been made, the actual returns would have
been lower.

The Portfolio was initially focused on long-term securities. On April 15, 1996,
the Portfolio's investment policies were changed by shareholder vote to
emphasize fixed-income securities of shorter duration. Therefore, it is
reasonable to expect that its performance pattern will be altered.

* The Municipal Portfolio commenced operations on 10/1/92. All returns are
compared to the Lehman 5 Year Municipal Index and the Lehman 10 Year
Municipal Index, both unmanaged market indices.

A-4
<PAGE>

MAS FUNDS/FIXED INCOME

PA Municipal Portfolio

The PA Municipal Portfolio invests in long- and short-term municipal debt
securities exempt from Pennsylvania income tax and in other fixed-income
securities when appropriate. The Portfolio is actively managed by Miller
Anderson & Sherrerd's municipal investment management team, which manages the
Portfolio's interest-rate exposure and composition by making strategic shifts in
portfolio structure and conducting extensive valuation analysis of individual
sectors and securities. The goal of MAS's fixed-income management for taxable
investors is to provide investors with a positive after-tax total return, to
provide protection against deflation, and to reduce the risk of an investor's
overall investment portfolio, particularly through reduction of exposure to
changes in tax rates.

MAS's research shows that there have been many times when taxable investors
would have been better served by investments in taxable bonds. Thus, MAS views
the municipal market as just one of many alternatives for helping clients
achieve their goal of maximizing after-tax returns within a given level of risk.
Sector commitments within the Portfolio are varied based on prospects for the
municipal market relative to the taxable markets. Normally, at least 80% of the
Portfolio will be invested in municipal securities, with at least 65% invested
in Pennsylvania municipal securities.

MAS's investment process consists of two major stages. First, MAS establishes a
forecast for inflation and economic activity and makes judgments about the most
desirable duration and maturity targets for the Portfolio. Next, relative value

A-5
<PAGE>

offered by different bond sectors is examined to determine the mix of securities
that will provide the most attractive performance. Security selection involves
adjustment of promised yields for tax considerations, credit risk, and call
risk. Capital gains are realized only when the prospective returns of bonds
purchased with the proceeds from the sales will offset the tax on the gains and
still provide excess value to the overall portfolio.

A-6
<PAGE>

PA MUNICIPAL

Growth of a $1 Million Investment
Since Inception

<TABLE>
<CAPTION>
Fiscal years
ending September 30 LEHMAN 5 YEAR MUNICIPAL MAS FUNDS PA MUNICIPAL LEHMAN 10 YEAR MUNICIPAL
Dollars (000)
<S> <C> <C> <C>
*10/1/92 1000 1000 1000
12/31/92 1014 1032 1020
3/31/93 1041 1075 1059
6/30/93 1065 1122 1094
'93 9/30/93 1090 1158 1134
12/31/93 1103 1185 1150
3/31/94 1072 1095 1089
6/30/94 1083 1099 1105
'94 9/30/94 1094 1111 1113
12/31/94 1089 1104 1095
3/31/95 1133 1202 1171
6/30/95 1163 1203 1202
'95 9/30/95 1191 1264 1244
12/31/95 1216 1337 1283
3/31/96 1216 1328 1275
6/30/96 1222 1350 1279
'96 9/30/96 1243 1378 1304
12/31/96 1267 1407 1341
3/31/97 1267 1409 1341
6/30/97 1298 1450 1385
'97 9/30/97 1325 1488 1428
</TABLE>

A-7
<PAGE>

AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>

MAS LEHMAN 5 YEAR LEHMAN 10 YEAR
INDEX PA MUNICIPAL MUNICIPAL INDEX MUNICIPAL
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE YEAR 8.01% 6.67% 9.50%
SINCE INCEPTION 8.28% 5.80% 7.39%
</TABLE>

MAS Funds returns are net of all fees. Returns represent past performance and
are not indicative of future results.

The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.

The Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary to keep total annual operating expenses
for the PA Municipal Portfolio from exceeding 0.50% of average daily net assets.
Returns presented include the effects of these waivers and reimbursements. If
such waivers and reimbursements had not been made, the actual returns would have
been lower.

* The PA Municipal Portfolio commenced operations on 10/1/92. All returns are
compared to the Lehman 5 Year Municipal Index and the Lehman 10 Year
Municipal Index, both unmanaged market indices.

A-8

<PAGE>

EXHIBIT A

AGREEMENT AND PLAN
OF REORGANIZATION AND LIQUIDATION

AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION dated as of
____________ (the "Agreement"), by and between the MAS Funds Municipal
Portfolio (the "Acquiring Fund") and the MAS Funds PA Municipal Portfolio (the
"Acquired Fund").

WHEREAS, MAS Funds ("MAS") was organized under Pennsylvania law as a
business trust under a Declaration of Trust dated February 15, 1984, as amended
and restated; MAS Funds is an open-end management investment company registered
under the 1940 Act; and the Acquiring and Acquired Funds are duly organized and
validly existing series of MAS Funds;

NOW, THEREFORE, in consideration of the mutual premises herein contained,
the parties hereto agree to effect (i) the transfer of all of the assets of the
Acquired Fund solely in exchange for (a) the assumption by the Acquiring Fund
of all of the liabilities of the Acquired Fund and (b) beneficial shares of the
Acquiring Fund (Institutional Class Shares) followed by the distribution, at
the Effective Time (as defined in Section 9 of this Agreement), of such
beneficial shares of the Acquiring Fund to the holders of beneficial shares of
the Acquired Fund on the terms and conditions hereinafter set forth in
liquidation of the Acquired Fund. For convenience: the beneficial shares of the
Acquiring Fund that are given in exchange for the assets of the Acquired Fund
are referred to hereinafter as the "Acquiring Fund Shares"; and the beneficial
shares of the Acquired Fund that are held by the holders of such shares at the
Effective Time are referred to hereinafter as the "Acquired Fund Shares." The
parties hereto covenant and agree as follows:

1. Plan of Reorganization. At the Effective Time, the Acquired Fund will
assign, deliver and otherwise transfer all of its assets and good and
marketable title thereto, free and clear of all liens, encumbrances and adverse
claims except as provided in this Agreement, and assign all of its liabilities
as are set forth in a statement of assets and liabilities, to be prepared as of
the Effective Time (the "Statement of Assets and Liabilities") to the Acquiring
Fund and the Acquiring Fund shall acquire all such assets, and shall assume all
such liabilities of the Acquired Fund, in exchange for delivery to the Acquired
Fund by the Acquiring Fund of a number of its Acquiring Fund Shares (both full
and fractional) equivalent in value to the Acquired Fund Shares of the Acquired
Fund outstanding immediately prior to the Effective Time. The assets and stated
liabilities of the Acquired Fund, as set forth in a statement of assets and
liabilities shall be exclusively assigned to and assumed by the Acquiring Fund.
All debts, liabilities, obligations and duties of the Acquired Fund, to the
extent that they exist at or after the Effective Time and are stated in a
statement of assets and liabilities, shall after the Effective Time attach to
the Acquiring Fund and may be enforced against the Acquiring Fund to the same
extent as if the same had been incurred by the Acquiring Fund.

2. Transfer of Assets. The assets of the Acquired Fund to be acquired by
the Acquiring Fund shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable) as set forth in a statement of assets and liabilities, as well as
any claims or rights of action or rights to register shares under applicable
securities laws, any books or records of such Acquired Fund and other property
owned by such Acquired Fund at the Effective Time.

3. Liquidation and Dissolution of the Acquired Fund. At the Effective
Time, the Acquired Fund will liquidate and the Acquiring Fund Shares (both full
and fractional) received by the Acquired Fund will be distributed to the
shareholders of record of the Acquired Fund as of the Effective Time in
exchange for Acquired Fund Shares and in complete liquidation of the Acquired
Fund. Each shareholder of the Acquired Fund will receive a number of Acquiring
Fund Shares equal in value to the Acquired Fund Shares held by that
shareholder. Such liquidation and distribution will be accompanied by the
establishment of an open account on the share records of the Acquiring Fund in
the name of each shareholder of record of the Acquired Fund and representing
the respective number of Acquiring Fund Shares due such shareholder. As soon as
practicable after the Effective Time, but not later than December 31, 1998, MAS
shall take all steps as shall be necessary and proper to effect a complete
termination of the Acquired Fund.

4. Representations and Warranties of the Acquiring Fund. The Acquiring
Fund represents and warrants to the Acquired Fund as follows:

(a) Shares to be Issued upon Reorganization. The Acquiring Fund Shares to
be issued in connection with the Reorganization have been duly authorized
and upon consummation of the Reorganization will be validly issued, fully
paid and nonassessable.

E-1
<PAGE>

(b) Liabilities. There are no liabilities of the Acquiring Fund, whether
or not determined or determinable, other than liabilities disclosed or
provided for in the Acquiring Fund's statement of assets and liabilities,
if any, and liabilities incurred in the ordinary course of business prior
to the Effective Time or otherwise previously disclosed to the Acquired
Fund, none of which has been materially adverse to the business, assets or
results of operations of the Acquiring Fund.

(c) Litigation. Except as previously disclosed to the Acquired Fund,
there are no claims, actions, suits or proceedings pending or, to the
actual knowledge of the Acquiring Fund, threatened which would materially
adversely affect any of the Acquiring Fund or its assets or business or
which would prevent or hinder in any material respect consummation of the
transactions contemplated hereby.

(d) Taxes. As of the Effective Time, all Federal and other tax returns
and reports of the Acquiring Fund required by law to have been filed shall
have been filed, and all other taxes shall have been paid so far as due,
or provision shall have been made for the payment thereof, and to the best
of the Acquiring Fund's knowledge, no such return is currently under audit
and no assessment has been asserted with respect to any of such returns.

5. Representations and Warranties of the Acquired Fund. The Acquired Fund
represents and warrants to the Acquiring Fund as follows:

(a) Marketable Title to Assets. The Acquired Fund will have, at the
Effective Time, good and marketable title to, and full right, power and
authority to sell, assign, transfer and deliver, the assets to be
transferred to the Acquiring Fund. Upon delivery and payment for such
assets, the Acquiring Fund will have good and marketable title to such
assets without restriction on the transfer thereof free and clear of all
liens, encumbrances and adverse claims.

(b) Liabilities. There are no liabilities of the Acquired Fund, whether
or not determined or determinable, other than liabilities disclosed or
provided for in the Acquired Fund's statement of assets and liabilities,
and liabilities incurred in the ordinary course of business prior to the
Effective Time or otherwise previously disclosed to the Acquiring Fund,
none of which has been materially adverse to the business, assets or
results of operations of the Acquired Fund.

(c) Litigation. Except as previously disclosed to the Acquiring Fund,
there are no claims, actions, suits or proceedings pending or, to the
knowledge of the Acquired Fund, threatened which would materially
adversely affect the Acquired Fund or its assets or business or which
would prevent or hinder in any material respect consummation of the
transactions contemplated hereby.

(d) Taxes. As of the Effective Time, all Federal and other tax returns
and reports of the Acquired Fund required by law to have been filed shall
have been filed, and all other taxes shall have been paid so far as due,
or provision shall have been made for the payment thereof, and to the best
of the Acquired Fund's knowledge, no such return is currently under audit
and no assessment has been asserted with respect to any of such returns.

6. Condition Precedent to Obligations of the Acquiring Fund. All
representations and warranties of the Acquired Fund contained in this Agreement
shall be true and correct in all material respects as of the date hereof and,
except as they may be affected by the transactions contemplated by this
Agreement, as of the Effective Time, with the same force and effect as if made
on and as of the Effective Time.

7. Condition Precedent to Obligations of the Acquired Fund. All
representations and warranties of the Acquiring Fund contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Effective Time, with the same force and effect as if
made on and as of the Effective Time.

8. Further Conditions Precedent to Obligations of the Acquired Fund and
the Acquiring Fund. The obligations of the Acquired Fund and the Acquiring Fund
to effectuate this Agreement shall be subject to the satisfaction of each of
the following conditions:

(a) Such authority from the Securities and Exchange Commission (the
"SEC") as may be necessary to permit the parties to carry out the
transactions contemplated by this Agreement shall have been received.

E-2
<PAGE>

(b) The Registration Statement on Form N-1A of the Acquiring Fund shall
be effective under the Securities Act of 1933 (the "1933 Act"), and, to
the best knowledge of the Acquiring Fund, no investigation or proceeding
for that purpose shall have been instituted or be pending, threatened or
contemplated under the 1933 Act.

(c) The Acquiring Fund has filed all documents and paid all fees required
to permit their shares to be offered to the public in all states of the
United States, the Commonwealth of Puerto Rico and the District of
Columbia (except where such qualifications are not required) so as to
permit the transfer contemplated by this Agreement to be consummated.

(d) The Acquired Fund and the Acquiring Fund shall have received on or
before the Effective Time an opinion of counsel satisfactory to the
Acquired Fund and the Acquiring Fund substantially to the effect that for
Federal income tax purposes:

(1) No gain or loss will be recognized to the Acquired Fund upon the
transfer of its assets in exchange solely for the Acquiring Fund Shares
and the assumption by the Acquiring Fund of the Acquired Fund's stated
liabilities;

(2) No gain or loss will be recognized to the Acquiring Fund on its
receipt of the Acquired Fund's assets in exchange for the Acquiring Fund
Shares and the assumption by the Acquiring Fund of the Acquired Fund's
liabilities;

(3) The basis of an Acquired Fund's assets in the Acquiring Fund's
hands will be the same as the basis of those assets in the Acquired
Fund's hands immediately before the conversion;

(4) The Acquiring Fund's holding period for the assets transferred to
the Acquiring Fund by the Acquired Fund will include the holding period
of those assets in the Acquired Fund's hands immediately before the
conversion;

(5) No gain or loss will be recognized to the Acquired Fund on the
distribution of the Acquiring Fund Shares to the Acquired Fund's
shareholders in exchange for their Acquired Fund Shares;

(6) No gain or loss will be recognized to the Acquired Fund's
shareholders as a result of the Acquired Fund's distribution of
Acquiring Fund Shares to the Acquired Fund's shareholders in exchange
for the Acquired Fund's shareholders' Acquired Fund Shares;

(7) The basis of the Acquiring Fund Shares received by the Acquired
Fund's shareholders will be the same as the adjusted basis of that
Acquired Fund's shareholders' Acquired Fund Shares surrendered in
exchange therefor; and

(8) The holding period of the Acquiring Fund Shares received by the
Acquired Fund's shareholders will include the Acquired Fund's
shareholders' holding period for the Acquired Fund's shareholders'
Acquired Fund Shares surrendered in exchange therefor, provided that
said Acquired Fund Shares were held as capital assets on the date of the
conversion.

(e) A vote approving this Agreement and the Reorganization contemplated
hereby shall have been adopted by at least a majority of the outstanding
shares of the Acquired Fund entitled to vote at an annual or special
meeting.

(f) The Board of Trustees of MAS, at a meeting duly called for such
purpose, shall have authorized the issuance by the Acquiring Fund of
Acquiring Fund Shares at the Effective Time in exchange for the assets of
the Acquired Fund pursuant to the terms and provisions of this Agreement.

9. Effective Time of the Reorganization. The exchange of the Acquired
Fund's assets for Acquiring Fund Shares shall be effective as of close of
business on November 30, 1998, or at such other time and date as fixed by the
mutual consent of the parties (the "Effective Time").

10. Termination. This Agreement and the transactions contemplated hereby
may be terminated and abandoned with respect to the Acquiring Fund and/or the
Acquired Fund without penalty by resolution of the Board of Trustees of MAS
Funds or at the discretion of any duly authorized officer of MAS Funds, at any
time prior to the Effective Time, if circumstances should develop that, in the
opinion of such Board or officer, make proceeding with the Agreement
inadvisable.

E-3
<PAGE>

11. Amendment and Waiver. This Agreement may be amended, modified or
supplemented in such manner as may be mutually agreed upon in writing by the
parties; PROVIDED, that no such amendment may have the effect of changing the
provisions for determining the number or value of Acquiring Fund Shares to be
paid to the Acquired Fund's shareholders under this Agreement to the detriment
of the Acquired Fund's shareholders without their further approval.
Furthermore, either party may waive any breach by the other party or the
failure to satisfy any of the conditions to its obligations (such waiver to be
in writing and authorized by the President or any Vice President of the waiving
party with or without the approval of such party's shareholders).

12. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the Commonwealth of Pennsylvania.

13. Fees and Expenses.

(a) The Acquiring Fund and the Acquired Fund represents and warrants to
the other that there are no brokers or finders entitled to receive any
payments in connection with the transactions provided for herein.

(b) Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by each Fund will be
borne by such Fund. Such expenses include, without limitation, (i)
expenses incurred in connection with the entering into and the carrying
out of the provisions of this Agreement; (ii) expenses associated with the
preparation and filing of the Proxy Statement under the Securities
Exchange Act of 1934; (iii) registration or qualification fees and
expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to
be issued in connection herewith in each state in which the Acquired
Fund's shareholders are resident as of the date of the mailing of the
Proxy Statement to such shareholders; (iv) postage; (v) printing; (vi)
accounting fees; (vii) legal fees; and (viii) solicitation costs of the
transaction. The Acquiring Fund shall pay its own Federal and state
registration fees.

14. Headings, Counterparts, Assignment.

(a) The article and paragraph headings contained in this Agreement are
for reference purposes only and shall not effect in any way the meaning or
interpretation of this Agreement.

(b) This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.

(c) This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, but no
assignment or transfer hereof or of any rights or obligations hereunder
shall be made by any party without the written consent of the other party.
Nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, firm or corporation other than the parties
hereto and their respective successors and assigns any rights or remedies
under or by reason of this Agreement.

15. Entire Agreement. The Acquiring Fund and the Acquired Fund agree that
neither party has made any representation, warranty or covenant not set forth
herein and that this Agreement constitutes the entire agreement between the
parties. The representations, warranties and covenants contained herein or in
any document delivered pursuant hereto or in connection herewith shall survive
the consummation of the transactions contemplated hereunder.

16. Further Assurances. The Acquiring Fund and the Acquired Fund shall
take such further action as may be necessary or desirable and proper to
consummate the transactions contemplated hereby.

17. Binding Nature of Agreement. As provided in the MAS Funds Declaration
of Trust, as amended and supplemented to date, on file with the Pennsylvania
Corporation Bureau of the Department of State, this Agreement was executed by
the undersigned officers of MAS Funds, on behalf of the Acquiring Fund and the
Acquired Fund, as officers and not individually, and the obligations of this
Agreement are not binding upon the undersigned officers individually, but are
binding only upon the assets and property of the corporation or trust.
Moreover, no series of a trust shall be liable for the obligations of any other
series of that trust.

E-4
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.

MAS Funds, on behalf of its series, PA Municipal Portfolio

By ---------------------------------------

Name: ------------------------------------

Title: -------------------------------------

MAS Funds, on behalf of its series, Municipal Portfolio

By ---------------------------------------

Name: ------------------------------------

Title: -------------------------------------

E-5
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 30, 1998

MAS Funds

PA Municipal Portfolio
One Tower Bridge
West Conshohocken, PA 19428
1-800-354-8185

This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Proxy Statement/Prospectus dated October 30, 1998
for the Special Meeting of Shareholders (the "Meeting") of the PA Municipal
Portfolio (the "Portfolio"), to be held on November 20, 1998. Copies of the
Proxy Statement/Prospectus may be obtained at no charge by calling Miller
Anderson & Sherrerd, LLP at 1-800-354-8185.

Unless otherwise indicated, capitalized terms used herein and not
otherwise defined have the same meanings as are given to them in the Proxy
Statement/Prospectus.

Further information about shares of the Portfolio and the Municipal
Portfolio (together with the Portfolio, the "Portfolios") is contained in and
incorporated by reference to the Portfolios' Statement of Additional
Information dated January 31, 1998, a copy of which is included herewith. The
audited financial statements and related independent accountants' report for
the Portfolios contained in the 1997 Annual Report to Shareholders dated
September 30, 1997 are hereby incorporated herein by reference. The unaudited
financial statements for the Portfolio contained in the 1998 Semi-Annual Report
to Shareholders dated March 31, 1998 also are incorporated herein by reference.
No other parts of the Annual Report or the subsequent Semi-Annual Report are
incorporated by reference herein.

The date of this Statement of Additional Information is October 30, 1998.
<PAGE>

<TABLE>
<CAPTION>
Face Amount Value
(000) (000)
--------------------------------------- --------------------------------------
Ratings PA Pro Forma PA Pro Forma
(Standard Municipal Municipal Combined Municipal Municipal Combined
March 31, 1998 & Poor's) Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Municipal Bonds (84.8%)
Adelanto, CA School
District (FGIC)
Zero Coupon, 9/1/18 .......... AAA $4,350 $ -- $4,350 $ 1,507 $ -- $ 1,507
Aldine, TX Independent
School District (PSFG)
Zero Coupon, 2/15/07 ......... AAA 750 -- 750 497 -- 497
Aliquippa School District,
PA
Zero Coupon, 6/1/12 .......... A -- 685 685 -- 328 328
Allegheny County, PA
(AMBAC)
Zero Coupon, 5/1/03 .......... AAA -- 325 325 -- 261 261
Allegheny County, PA
Sanitation Authority,
Series B, (MBIA)
Zero Coupon, 6/1/10 .......... AAA 1,500 -- 1,500 838 -- 838
Arkansas State Development
Finance Authority Home
Mortgage Revenue Bonds,
Series B-1,
4.90%, 7/1/29 ................ AAA 725 275 1,000 731 277 1,008
Benicia, CA School District
(MBIA)
Zero Coupon, 8/1/11 .......... AAA 3,480 -- 3,480 1,806 -- 1,806
Berks County, PA (FGIC)
Zero Coupon 11/15/20 ......... AAA -- 1,000 1,000 -- 305 305
Zero Coupon 5/15/19 .......... AAA -- 1,250 1,250 -- 417 417
Berks County, PA Solid
Waste Authority (FGIC)
6.00%, 4/1/11 ................ AAA -- 250 250 -- 268 268
Bradford, PA Area School
District (FGIC)
4.60%, 10/1/10 ............... AAA -- 250 250 -- 245 245
Bucks County, PA Water &
Sewer Authority Revenue
Bonds (FGIC)
+Series B, 5.50%,
2/1/08 ....................... Aaa -- 185 185 -- 191 191
Zero Coupon, 12/1/05 ......... AAA -- 375 375 -- 266 266
California Housing &
Finance Agency Revenue
Bonds (MBIA)
5.30%, 8/1/14 ................ AAA 175 -- 175 179 -- 179
California School Finance
Authority Lease Revenue
Bonds, Series A (MBIA)
6.70%, 7/1/02 ................ AAA 1,305 -- 1,305 1,376 -- 1,376
California State Department
of Veterans Affairs Home
Purchase Revenue Bonds,
Series A, TBA (AMBAC)
4.90%, 12/1/18 ............... AAA 1,675 -- 1,675 1,672 -- 1,672
California State
Zero Coupon, 3/1/04 .......... A+ 375 -- 375 291 -- 291
Casino Reinvestment
Development Authority,
Series A (FSA)
5.00%, 10/1/03 ............... AAA 1,300 -- 1,300 1,347 -- 1,347
</TABLE>

2
<PAGE>

<TABLE>
<CAPTION>
Face Amount Value
(000) (000)
--------------------------------------- --------------------------------------
Ratings PA Pro Forma PA Pro Forma
(Standard Municipal Municipal Combined Municipal Municipal Combined
March 31, 1998 & Poor's) Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Center Township, PA Sewer
Authority Revenue Bonds,
Series A (MBIA)
Zero Coupon, 4/15/17 ......... AAA $ -- $615 $ 615 $ -- $229 $ 229
Zero Coupon, 4/15/19 ......... AAA 855 -- 855 286 -- 286
6.00%, 4/15/03 ............... AAA -- 500 500 -- 539 539
Charleston County, SC,
Resource Recovery Rev-
enue Bonds (AMBAC)
5.15%, 1/1/09 ................ AAA 1,000 -- 1,000 1,024 -- 1,024
Chartiera Valley, PA (FGIC)
Zero Coupon, 2/1/06 .......... AAA -- 425 425 -- 298 298
Chicago, IL Wastewater
Transmission Revenue
Bonds (FGIC)
5.125%, 1/1/03 ............... AAA 1,300 -- 1,300 1,350 -- 1,350
Cleveland, OH Airport
Special Revenue Bonds,
TBA
5.50%, 12/1/08 ............... BB-- 750 -- 750 743 -- 743
Cleveland, OH City School
District (AMBAC)
4.80%, 6/1/03 ................ AAA 1,300 -- 1,300 1,334 -- 1,334
Clinton County, PA
Industrial Development
Authority
6.25%, 11/15/06 .............. BB-- -- 150 150 -- 156 156
Colorado Health Facilities
Revenue Bonds, Series A
Zero Coupon, 7/15/20 ......... AAA 1,000 -- 1,000 305 -- 305
Delaware County, PA
Industrial Development
Authority Revenue
Bonds, Series A
6.50%, 1/1/08 ................ A 450 200 650 506 225 731
Elizabeth Forward, PA
School District
Series B
Zero Coupon, 9/1/08
(AMBAC) ...................... AAA 425 -- 425 262 -- 262
Zero Coupon, 9/1/11
(MBIA) ....................... AAA 850 400 1,250 440 207 647
Fort Bend, TX Independent
School District (PSFG)
Zero Coupon, 2/15/07 ......... AAA 1,250 -- 1,250 828 -- 828
Zero Coupon, 2/15/08 ......... AAA 940 -- 940 591 -- 591
Georgia State Housing &
Financing Authority,
Series A A2
5.875%, 12/1/19 .............. AA+ 160 105 265 166 109 275
Girard Area, PA School
District (FGIC)
Zero Coupon 10/1/18 .......... AAA -- 700 700 -- 241 241
Zero Coupon 10/1/19 .......... AAA -- 250 250 -- 82 82
Grand Prairie, TX
Independent School
District (PSFG)
Zero Coupon, 8/15/07 ......... AAA 750 -- 750 486 -- 486
Hamilton Southeastern, IN
(AMBAC)
Zero Coupon, 1/1/15 .......... AAA 1,000 -- 1,000 417 -- 417
</TABLE>

3
<PAGE>

<TABLE>
<CAPTION>
Face Amount Value
(000) (000)
--------------------------------------- --------------------------------------
Ratings PA Pro Forma PA Pro Forma
(Standard Municipal Municipal Combined Municipal Municipal Combined
March 31, 1998 & Poor's) Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Harris County, TX Toll
Road, Series A (MBIA)
Zero Coupon, 8/15/07 ......... AA+ $ 475 $ -- $ 475 $ 308 $ -- $ 308
Hawaii State Housing
Finance & Development
Corp., Single Family
Mortgage Revenue Bonds,
Series A
4.90%, 7/1/28 ................ AA 350 125 475 352 126 478
+Hillsborough County, FL
Housing & Finance
Authority, Single Family
Mortgage Revenue Bonds
4.50%, 4/1/30 ................ Aaa 725 275 1,000 736 279 1,015
Houston TX Housing
Finance & Development
Corp., Single Family
Mortgage Revenue Bonds,
Series B-1
8.00%, 6/1/14 ................ A 325 175 500 357 192 549
Houston, TX Independent
School District (PSFG)
Zero Coupon, 8/15/12 ......... AAA 550 -- 550 266 -- 266
Huron, MI School District
(AMBAC)
Zero Coupon, 5/1/18 .......... AAA -- 1,500 1,500 -- 531 531
Hurst Euless Bedford, TX
Independent School
District (PSFG)
Zero Coupon, 8/15/17 ......... AAA 965 -- 965 349 -- 349
Zero Coupon, 8/15/18 ......... AAA 1,100 -- 1,100 377 -- 377
+Idaho Housing & Finance
Association, Single
Family Mortgage Revenue
Bonds, Series F,
5.70%, 7/1/27 ................ Aaa 245 -- 245 252 -- 252
Series H-2, 5.40%, 7/1/27
(FHA) ....................... Aaa 500 250 750 510 255 765
Illinois Development
Finance Authority Rev-
enue Bonds (FGIC)
Zero Coupon, 12/1/09 ......... AAA 2,000 -- 2,000 1,150 -- 1,150
Indiana Transportation
Finance Authority High-
way Revenue Bonds
(AMBAC)
Zero Coupon, 12/1/16 ......... AAA 1,695 -- 1,695 637 -- 637
+Indiana State Housing
Finance Authority Rev-
enue Bonds, Series A2
(AMBAC)
5.55%, 1/1/21 ................ Aaa 500 -- 500 516 -- 516
Indianapolis Airport Author-
ity Revenue Bonds
7.10%, 1/15/17 ............... BBB 375 -- 375 422 -- 422
Intermountain Power
Agency, UT,
Series A, Zero Coupon,
7/1/17 ....................... A+ 1,750 -- 1,750 641 -- 641
Series B, 6.50%, 7/1/09
(MBIA) ...................... AAA 875 300 1,175 1,017 349 1,366
Series C, 4.80%, 7/1/03
(FSA) ....................... AAA 1,300 -- 1,300 1,331 -- 1,331
</TABLE>

4
<PAGE>

<TABLE>
<CAPTION>
Face Amount Value
(000) (000)
--------------------------------------- --------------------------------------
Ratings PA Pro Forma PA Pro Forma
(Standard Municipal Municipal Combined Municipal Municipal Combined
March 31, 1998 & Poor's) Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Iowa Finance Authority
Single Family Revenue
Bonds, Series G
4.95%, 1/1/21 ............... AAA $ 500 $200 $ 700 $505 $202 $ 707
Jacksonville, FL Electric
Authority Revenue
Bonds Zero Coupon,
10/1/11 ..................... AA 325 -- 325 169 -- 169
Jefferson Parish, LA
School Board Sales &
Use Tax Revenue
Bonds,
TBA (FSA)
Zero Coupon, 9/1/06 ......... AAA 1,000 -- 1,000 676 -- 676
Kane & De Kalb
Counties, IL Unit
School District
(AMBAC)
Zero Coupon, 12/1/09 ........ AAA 525 200 725 302 115 417
Kansas City, KA Utility
Systems Revenue
Bonds (AMBAC)
Zero Coupon, 3/1/06 .......... AAA 130 -- 130 91 -- 91
Zero Coupon, 3/1/06 .......... AAA 95 -- 95 67 -- 67
+Keller, TX Independent
School District (PSFG)
Zero Coupon, 8/15/12 ......... Aaa 800 -- 800 387 -- 387
Kentucky State Turnpike
Authority (FGIC)
Zero Coupon, 1/1/10 .......... AAA 450 -- 450 258 -- 258
La Joya, TX Independent
School District (PSFG)
Zero Coupon, 8/1/12 .......... AAA 645 -- 645 312 -- 312
Lehigh County, PA General
Purpose Authority
Revenue Bonds, Horizons
Health Systems, Inc.,
Series B, 8.25%, 7/1/13 ...... N/R -- 250 250 -- 263 263
+Series C, 4.90%, 7/1/11 .....
(MBIA) ....................... Aaa 920 275 1,195 912 273 1,185
Little Rock, AK Airport
Passenger Facility
Revenue Bonds
(AMBAC) 5.65%, 5/1/16......... AAA 220 -- 220 233 -- 233
Maricopa County, AZ
Unified School District --
Chandler (FGIC)
Zero Coupon, 7/1/07 .......... AAA 250 -- 250 163 -- 163
Maryland Transportation
Authority (FGIC)
Zero Coupon 7/1/08 ........... AAA 250 -- 250 157 -- 157
Mercer County, NJ Revenue
Bonds
Zero Coupon, 4/1/06 .......... AA-- 350 -- 350 246 -- 246
Metropolitan Government
Nashville & Davidson
County, TN Health &
Education Facilities Board
Revenue Bonds, Series A
5.25%, 5/1/03 ................ AA 900 335 1,235 942 350 1,292
</TABLE>

5
<PAGE>

<TABLE>
<CAPTION>
Face Amount Value
(000) (000)
------------------------------------- ------------------------------------
Ratings PA Pro Forma PA Pro Forma
(Standard Municipal Municipal Combined Municipal Municipal Combined
March 31, 1998 & Poor's) Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- --------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Metropolitan Pier &
Exposition Authority, IL,
Series A, (AMBAC),
4.90%, 12/15/03 ................ AAA $1,275 $ -- $1,275 $1,316 $ -- $1,316
Michigan State Housing
Development Authority,
Series B, 5.50% 12/1/26 ........ AA+ 485 -- 485 500 -- 500
Michigan State Trunk Line,
Series A (AMBAC)
Zero Coupon 10/1/05 ............ AAA 750 -- 750 537 -- 537
Zero Coupon 10/1/12 ............ AAA 1,500 -- 1,500 729 -- 729
Midland, TX Independent
School District (PSFG)
Zero Coupon, 8/15/06 ........... AAA 750 -- 750 511 -- 511
Millcreek Township, PA
(FGIC)
Zero Coupon, 8/15/05 ........... AAA 325 375 700 234 270 504
Minnesota State Housing &
Agency, Single Family
Mortgage Revenue Bonds,
Series E
5.05%, 7/1/24 .................. AA+ 1,300 550 1,850 1,321 559 1,880
Mississippi Housing Finance
Corp.,
Zero Coupon, 9/15/16 ........... AA-- 5,250 -- 5,250 2,017 -- 2,017
Mobile, AL Industrial
Development Board Solid
Waste Disposal Revenue
Bonds
6.95%, 1/1/20 .................. BBB-- 180 80 260 202 90 292
Montour, PA School District
(MBIA)
Zero Coupon, 1/1/13 ............ AAA -- 300 300 -- 143 143
Nebraska Investment
Finance Authority
Revenue Bonds,
Series B, 5.60%, 3/1/20 ........ AAA 465 -- 465 481 -- 481
Series D, 5.80%, 3/1/20 ........ AAA 470 260 730 485 268 753
Nebraska Public Power
District Revenue Bonds,
5.40%, 1/1/03 .................. A+ 200 -- 200 210 -- 210
+Nevada Housing Division
Senior, Series A-2, 5.50%,
10/1/27 ........................ Aaa 340 -- 340 349 -- 349
+Nevada Housing Division,
Series C (FHA), 5.65%,
4/1/27 ......................... Aaa 490 245 735 506 253 759
New Jersey Economic
Development Authority
Zero Coupon, 3/15/09 ........... A+ 275 -- 275 163 -- 163
New Jersey State
Zero Coupon, 2/15/06 ........... AA+ 500 -- 500 351 -- 351
New Mexico Mortgage
Finance Authority, Series
H 5.35%, 7/1/15 ................ AAA 485 -- 485 500 -- 500
New York City, NY General
Obligation, Series G
(MBIA) 5.00%, 8/1/12 ........... AAA 1,000 -- 1,000 996 -- 996
</TABLE>

6
<PAGE>

<TABLE>
<CAPTION>
Face Amount Value
(000) (000)
--------------------------------------- --------------------------------------
Ratings PA Pro Forma PA Pro Forma
(Standard Municipal Municipal Combined Municipal Municipal Combined
March 31, 1998 & Poor's) Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
New York City, NY
Industrial Development
Agency Revenue Bonds
(FSA) 6.00%, 11/1/15 ......... AAA $1,575 $ 775 $2,350 $ 1,683 $ 828 $ 2,511
#New York City, NY
General Obligation
Inverse Bonds 20.509%,
10/1/03 ...................... BBB+ 250 100 350 414 165 579
New York State Dormitory
Authority
5.10%, 5/15/01 ............... BBB+ 250 -- 250 257 -- 257
5.125%, 7/1/11 (FGIC) ........ AAA 1,000 -- 1,000 1,014 -- 1,014
+New York State Mortgage
Agency Revenue Bonds,
Series 65 5.00%, 4/1/20 ...... Aa2 1,300 550 1,850 1,318 558 1,876
Noblesville, TN High School
Building Corp. (AMBAC)
Zero Coupon, 2/15/17 ......... AAA 900 -- 900 333 -- 333
Zero Coupon, 2/15/19 ......... AAA 1,850 -- 1,850 615 -- 615
Norris, CA School District
(MBIA)
Zero Coupon, 5/1/15 .......... AAA 785 -- 785 328 -- 328
Zero Coupon, 5/1/16 .......... AAA 400 -- 400 158 -- 158
North Carolina Eastern
Municipal Power Agency
Revenue Bonds Series B,
6.125%, 1/1/09 ............... BBB 350 -- 350 378 -- 378
Series C, 5.125%, 1/1/03...... BBB 450 150 600 460 153 613
North Carolina Housing &
Finance Agency Revenue
Bonds Series FF, 5.50%,
9/1/22 ....................... AA 455 -- 455 468 -- 468
Series JJ, 5.125%, 1/1/03..... AA 495 270 765 512 279 791
Series RR, 5.00%, 9/1/22...... AA 1,300 550 1,850 1,305 552 1,857
+North Hempstead, NY
General Obligation, Series
B (FGIC) 5.00%, 3/1/12 ....... Aaa 890 -- 890 891 -- 891
North Slope Borough, AK
General Obligation, Series
B (CGIC)
Zero coupon, 6/30/04 ......... AAA 575 285 860 435 216 651
Northern Illinois University
Revenue Bond (FGIC)
Zero Coupon, 4/1/15 .......... AAA 675 -- 675 280 -- 280
Northwestern, PA School
District (AMBAC)
Zero Coupon, 1/15/09 ......... AAA -- 450 450 -- 272 272
Okomos, MI Public School
District (MBIA)
Zero Coupon, 5/1/15 .......... AAA 900 -- 900 375 -- 375
Oley Valley, PA School
District (AMBAC)
Zero Coupon, 5/15/09 ......... AAA 760 760 1,520 452 452 904
Orange County, FL Housing
& Finance Authority,
Single Family Mortgage
Revenue Bonds, Series B
5.10%, 9/1/27 ................ AAA $1,300 $ 550 $1,850 $ 1,322 $ 559 $ 1,881
Parkland, PA School District
(FGIC) 4.60%, 9/1/10 ......... AAA -- 250 250 -- 245 245
Penn Hills Township, PA
Zero Coupon, 6/1/12 .......... N/R 1,165 450 1,615 528 204 732
</TABLE>

7
<PAGE>

<TABLE>
<CAPTION>
Face Amount Value
(000) (000)
--------------------------------------- --------------------------------------
Ratings PA Pro Forma PA Pro Forma
(Standard Municipal Municipal Combined Municipal Municipal Combined
March 31, 1998 & Poor's) Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Penn Hills Township, PA,
Series B
Zero Coupon, 12/1/13 ......... N/R $ -- $500 $ 500 $ -- $208 $ 208
Pennsylvania Convention
Center Authority
6.25%, 9/1/04 ................ BBB -- 250 250 -- 267 267
6.70%, 9/1/16 (FGIC) ......... AAA -- 500 500 -- 593 593
Pennsylvania Housing &
Finance Authority Series
47, 5.20%, 4/1/27 ............ AA+ -- 375 375 -- 381 381
Series 48, 5.375%,
10/1/16 ..................... AA+ -- 300 300 -- 307 307
Series 50A, 5.35%,
10/1/08 ..................... AA+ -- 220 220 -- 227 227
Series 51, 5.65%, 4/1/20 ..... AA+ -- 250 250 -- 258 258
Series 52B, 5.55%,
10/1/12 ..................... AA+ -- 500 500 -- 513 513
Series 59A, 4.95%, 4/1/25 AA+ -- 550 550 -- 554 554
Pennsylvania State, Cer-
tificate of Participation,
Series A 5.00%, 7/1/03 ....... AAA -- 500 500 -- 513 513
Pennsylvania State General
Obligation (AMBAC)
Zero coupon, 7/1/05 .......... AAA -- 375 375 -- 271 271
#0.00%, 4/15/03 .............. AAA 775 300 1,075 935 362 1,297
+Philadelphia, PA Hospitals,
10.875%, 7/1/08 .............. Aaa -- 140 140 -- 180 180
Philadelphia, PA Airport
Revenue Bonds (FGIC)
5.50%, 6/15/01 ............... AAA 1,340 550 1,890 1,391 571 1,962
Philadelphia, PA Authority
for Industrial
Development Revenue
Bonds, Series A
6.50%, 10/1/27 ............... N/R 220 100 320 237 107 344
Philadelphia, PA Gas Works
5.80%, 7/1/01 ................ BBB 350 200 550 366 209 575
Philadelphia, PA General
Obligation, Series A
(FGIC) 5.125%, 5/15/03 ....... AAA -- 100 100 -- 104 104
5.40%, 11/15/03 .............. AAA 600 -- 600 632 -- 632
Philadelphia, PA Hospitals &
Higher Education
Facilities Authority
Revenue Bonds 6.15%,
7/1/05 ....................... BBB+ 125 50 175 134 54 188
Philadelphia, PA Municipal
Authority (FGIC)
4.90%, 4/1/03 ................ AAA 500 -- 500 513 -- 513
Philadelphia, PA School
District, Series A (MBIA)
5.20%, 7/1/03 ................ AAA -- 200 200 -- 208 208
Series B (AMBAC)
5.00%, 4/1/03 ................ AAA -- 550 550 -- 567 567
Philadelphia, PA Water &
Wastewater Revenue
Bonds (FGIC)
5.15%, 6/15/04 ............... AAA 1,300 550 1,850 1,359 575 1,934
5.20%, 6/15/05 ............... AAA -- 500 500 -- 522 522
Pittsburgh, PA General
Obligation (AMBAC)
Zero Coupon, 9/1/04 .......... AAA -- 350 350 -- 264 264
6.50%, 4/1/11 ................ AAA -- 275 275 -- 307 307
</TABLE>

8
<PAGE>

<TABLE>
<CAPTION>
Face Amount Value
(000) (000)
--------------------------------------- --------------------------------------
Ratings PA Pro Forma PA Pro Forma
(Standard Municipal Municipal Combined Municipal Municipal Combined
March 31, 1998 & Poor's) Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------------------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Pittsburgh, PA Water &
Sewer (FGIC)
Zero Coupon, 9/1/05 ......... AAA $ -- $375 $ 375 $ -- $269 $ 269
Port Authority, NY & NJ
Special Obligation
Revenue Bonds
7.00%, 10/1/07 .............. N/R 450 250 700 510 283 793
Robinson Township, PA
6.90%, 5/15/18 .............. AAA -- 115 115 -- 134 134
+Saline County, KS,
Zero Coupon, 12/1/15 ........ Aaa 750 -- 750 303 -- 303
San Antonio, TX Electric &
Gas Revenue Bond
(AMBAC)
Zero Coupon, 2/1/05 ......... AAA 200 -- 200 147 -- 147
San Antonio, TX General
Obligation, TBA
6.00%, 8/1/06 ............... AA 500 175 675 550 192 742
San Bernardino County, CA
Series A (MBIA)
7.40%, 7/1/16 ............... AAA 1,150 450 1,600 1,197 468 1,665
Savannah, GA Economic
Development Authority
Revenue Bonds
7.40%, 4/1/26 ............... N/R 270 40 310 304 45 349
Schuylkill County, PA
Redevelopment Authority
(FGIC) 7.125%, 6/1/13 ....... AAA 750 -- 750 823 -- 823
Scranton, PA Health &
Welfare Authority
6.625%, 7/1/09 .............. AAA -- 125 125 -- 139 139
Skokie, IL Park District,
Series B, (AMBAC)
Zero Coupon, 12/1/12 ........ AAA 1,750 -- 1,750 836 -- 836
Southeastern Area Schools,
PA Revenue Bonds Series
A, Zero Coupon, 10/1/06 ..... A -- 200 200 -- 135 135
Series B, Zero Coupon,
10/1/06 .................... A -- 390 390 -- 263 263
Steel Valley, PA Allegheny
County
Zero Coupon, 11/1/17 ........ A 650 -- 650 231 -- 231
Steel Valley, PA School
District
Zero Coupon, 11/1/11 ........ A 740 430 1,170 375 218 593
Stroud Township, PA Sewer
Authority (CGIC)
Zero Coupon, 11/15/05 ....... AAA -- 375 375 -- 267 267
+Tyler, TX Health Facilities
Development Corp.,
Series A, 5.25%, 7/1/02 ..... Baa2 425 -- 425 434 -- 434
Upper Darby Township, PA
(AMBAC)
Zero Coupon, 7/15/11 ........ AAA -- 525 525 -- 274 274
Utah State Housing Finance
Agency Series A-2
5.50%, 7/1/27 ............... AAA 400 -- 400 411 -- 411
Washington County, West PA
Power Co. 4.95%, 3/1/03 ..... A -- 150 150 -- 154 154
Washington State Public
Power Supply (MBIA)
7.00%, 7/1/07 ............... AA- 375 -- 375 438 -- 438
Zero Coupon, 7/1/10 ......... AAA 475 -- 475 260 -- 260
</TABLE>

9
<PAGE>

<TABLE>
<CAPTION>
Face Amount Value
(000) (000)
--------------------------------------- --------------------------------------
Ratings PA Pro Forma PA Pro Forma
(Standard Municipal Municipal Combined Municipal Municipal Combined
March 31, 1998 & Poor's) Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
++Westmoreland County, PA
(AMBAC)
Zero Coupon, 8/1/14 .......... AAA $ -- $1,475 $1,475 $ -- $ 644 $ 644
Wisconsin Housing &
Economic Development
Authority Home Owner-
ship Revenue Bonds
Series E, 5.125%, 9/1/26...... AA 1,300 550 1,850 1,314 556 1,870
Series H, 4.875%, 3/1/24...... AA 1,350 -- 1,350 1,358 -- 1,358
Yough, PA School District
(MBIA)
Zero Coupon, 10/1/13 ......... AAA -- 1,445 1,445 -- 661 661
------- ------- --------
Group Total ................... 73,615 26,469 100,084
------- ------- --------
Asset Backed Corporates
(0.4%)
ALPS, Series 96-1D
12.75%, 6/15/06 .............. BB-- 349 150 499 350 150 500
------- ------- --------
Industrials (0.9%)
Comcast Corp.
9.37%, 5/15/05 ............... BB+ 225 75 300 241 80 321
Grand Casinos, Inc.,
10.125%, 12/1/03 ............. BB 250 -- 250 272 -- 272
Host Marriott Travel Plaza
9.50%, 5/15/05 ............... BB-- 175 75 250 186 80 266
Viacom, Inc. 8.00%, 7/7/06..... BB-- 250 -- 250 256 -- 256
------- ------- --------
Group Total ................... 955 160 1,115
------- ------- --------
Transportation (0.2%)
*Jet Equipment Trust,
Series 95-5A C 10.69%,
5/1/15 ....................... BBB 100 100 200 130 130 260
------- ------- --------
Yankee (2.3%)
Koren Development Bank
7.375%, 9/17/04 .............. BB+ 825 285 1,110 748 259 1,007
*Rae Laffan Liquefied
Natural Gas Co.
8.294%, 3/15/14 .............. BBB+ 400 -- 400 414 -- 414
*Republic of Panama
7.875%, 2/13/02 .............. BB+ 310 145 455 311 145 456
Rogers Cablesystems Ltd.
10.00%, 3/15/05 .............. BB+ 125 50 175 140 56 196
*Samsung Electronics Co.
7.45%, 10/1/02 ............... B+ 750 -- 750 673 -- 673
------- ------- --------
Group Total ................... 2,286 460 2,746
------- ------- --------
Total Fixed Income
Securities (Cost $71,355,
$25,019 and $96,374,
respectively) ................ 77,336 27,369 104,705
------- ------- --------
CASH EQUIVALENTS
(16.6%)

</TABLE>
<PAGE>

<TABLE>
<CAPTION>
Shares
--------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Instruments
(4.3%)
Dreyfus Basic Municipal
Money Market Fund ......... 2,113,255 -- 2,113,255 2,113 -- 2,113
Dreyfus PA Municipal
Money Market Fund ......... -- 408,571 408,571 -- 409 409
Vanguard Municipal Bond
Money Market Fund ......... 2,115,174 -- 2,115,174 2,115 -- 2,115
Vanguard PA Tax-Free
Money Market Fund ......... -- 418,826 418,826 -- 419 419
----- --- -----
Group Total ................ 4,228 828 5,056
----- --- -----
</TABLE>

10
<PAGE>

<TABLE>
<CAPTION>
Face Amount Value
(000) (000)
------------------------------------- ------------------------------------
Ratings PA Pro Forma PA Pro Forma
(Standard Municipal Municipal Combined Municipal Municipal Combined
March 31, 1998 & Poor's) Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- -------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Municipals (10.1%)
##Abilene, TX Health
Facilities Development
Corp., (MBIA)
3.70%, 9/19/25 ................ AAA $1,600 $ -- $1,600 $ 1,600 $ -- $ 1,600
##Chelsen, MA Lease,
Series A (FSA)
3.80%, 6/6/23 ................. AAA 1,600 -- 1,600 1,600 -- 1,600
##Henrico County, VA
Industrial Development
Authority (FSA)
3.65%, 8/23/27 ................ AAA 1,600 -- 1,600 1,600 -- 1,600
##Kansas State Development
Finance Authority, Series
E 3.75%, 3/15/24 .............. AAA 1,000 -- 1,000 1,000 -- 1,000
##Pennsylvania Housing &
Finance Agency
3.62%, 10/3/23 ................ AA+ 1,000 -- 1,000 1,000 -- 1,000
##Pennsylvania State Higher
Education Assistance
Agency, Student Loan
SAVRS (AMBAC)
3.70%, 3/1/22 ................. AAA 1,000 -- 1,000 1,000 -- 1,000
##Wake County, NC Indus-
trial Facilities & Pollution
Control Revenue
(AMBAC) 3.78%, 5/1/24 ......... AAA 1,500 -- 1,500 1,500 -- 1,500
##Wichita, KS Hospital
Bonds, Series III-A
(MBIA) 3.66%, 10/20/17 ........ AAA 1,600 -- 1,600 1,600 -- 1,600
##York County, PA Hospital
Authority Revenue Bonds
(AMBAC) 3.65%, 7/1/21.......... AAA 1,000 -- 1,000 1,000 -- 1,000
------- ------ -------
Group Total .................... 11,900 -- 11,900
------- ------ -------
U.S. Treasury Security
(1.3%)
++U.S. Treasury Bond
8.75%, 8/15/20 ................ Tsy 1,175 -- 1,175 1,566 -- 1,566
------- ------ -------
Repurchase Agreements
(0.9%)
Chase Securities, Inc. 5.75%,
dated 3/31/98, due 4/1/98,
collateralized by various
U.S. Government Obliga-
tions, due 4/1/98-11/15/99 777 257 1,034 777 257 1,034
------- ------ -------
Total Cash Equivalents (Cost
$18,372, $1,085 and
$19,457, respectively)......... 18,471 1,085 19,556
------- ------ -------
</TABLE>

11
<PAGE>

<TABLE>
<CAPTION>
Value
(000)
----------------
Municipal
Portfolio
----------------
<S> <C>
Total Investments (105.2%) (Cost $89,727, $26,104 and
$115,831, respectively).................................... $ 95,807
------------
Other Assets and Liabilities (--5.2%)
Cash ...................................................... 5
Interest Receivable ....................................... 729
Receivable for Daily Variation Margin on Futures
Contracts ............................................... --
Receivable for Fund Shares Sold ........................... 5
Unrealized Gain on Swap Agreements ........................ 58
Other Assets .............................................. 3
Payable for Investments Purchased ......................... (6,461)
Payable for Fund Shares Redeemed .......................... (1)
Payable for Administrative Fees ........................... (6)
Payable for Investment Advisory Fees ...................... (71)
Payable for Trustees' Deferred Compensation Plan .......... (2)
Payable for Daily Variation Margin on Futures Contracts (3)
Other Liabilities ......................................... (31)
------------
(5,775)
------------
NET ASSETS (100%) .......................................... $ 90,032
============
INSTITUTIONAL CLASS
Net Assets
Outstanding shares of beneficial interest
(unlimited authorization, no par value) ................... 7,639,910
------------
NET ASSET VALUE PER SHARE .................................. $ 11.78
============
Net Assets Consist of:
Paid in Capital ............................................ $ 84,308
Undistributed Net Investment Income (Loss) ................. 61
Undistributed Realized Net Gain (Loss) ..................... (445)
Unrealized Appreciation (Depreciation) on:
Investing Securities ...................................... 6,080
Futures and Swaps ......................................... 28
------------
Net Assets ................................................. $ 90,032
============

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Value
(000)
---------------------------------------------------
PA Pro Forma
Municipal Combined
Portfolio Adjustments Portfolio
---------------- --------------- ----------------
<S> <C> <C> <C>
Total Investments (105.2%) (Cost $89,727, $26,104 and
$115,831, respectively).................................... $ 28,454 $ 124,261
---------- -----------
Other Assets and Liabilities (--5.2%)
Cash ...................................................... -- 5
Interest Receivable ....................................... 310 1,039
Receivable for Daily Variation Margin on Futures
Contracts ............................................... 1 1
Receivable for Fund Shares Sold ........................... -- 5
Unrealized Gain on Swap Agreements ........................ 26 84
Other Assets .............................................. 1 4
Payable for Investments Purchased ......................... (703) (7,164)
Payable for Fund Shares Redeemed .......................... (2) (3)
Payable for Administrative Fees ........................... (2) (8)
Payable for Investment Advisory Fees ...................... (17) (88)
Payable for Trustees' Deferred Compensation Plan .......... (1) (3)
Payable for Daily Variation Margin on Futures Contracts -- (3)
Other Liabilities ......................................... (32) (63)
---------- -----------
(419) (6,194)
---------- -----------
NET ASSETS (100%) .......................................... $ 28,035 $ 118,067
========== ===========
INSTITUTIONAL CLASS
Net Assets
Outstanding shares of beneficial interest
(unlimited authorization, no par value) ................... 2,365,547 14,057(A) 10,019,514
---------- ------ -----------
NET ASSET VALUE PER SHARE .................................. $ 11.85 $ 11.78
========== ===========
Net Assets Consist of:
Paid in Capital ............................................ $ 25,754 $ 110,062
Undistributed Net Investment Income (Loss) ................. 23 84
Undistributed Realized Net Gain (Loss) ..................... (112) (557)
Unrealized Appreciation (Depreciation) on:
Investing Securities ...................................... 2,350 8,430
Futures and Swaps ......................................... 20 48
---------- -----------
Net Assets ................................................. $ 28,035 $ 118,067
========== ===========
</TABLE>

- ------------
(A) See Capitalization Section
++ A portion of these securities was pledged to cover margin requirements
for futures contracts.
* 144A security. Certain conditions for public sale may exist.
+ Moody's Investor Service, Inc. rating. Security is not rated by Standard
& Poor's Corporation.
# Step Bond-Coupon increases in increments to maturity. Rate disclosed is
as of March 31, 1998. Maturity disclosed is the ultimate maturity.
## Variable or Floating rate security -- rating disclosed is as of March
31, 1998.
AMBA American Municipal Bond Assurance Corp.
CGIC Capital Guaranty Insurance Corp.
FGIC Financial Guaranty Insurance Corp.
FHA Federal Housing Administration
FSA Financial Security Assurance
MBIA Municipal Bond Insurance Association
PSFG Permanent School Fund Guaranteed
N/R Not rated by Moody's Investor Service, Inc., Standard & Poor's
Corporation or Fitch.
TBA Security is subject to delayed delivery.

12
<PAGE>

Projected Pro Forma Combined Statement of Operations
March 31, 1998 (Unaudited)

<TABLE>
<CAPTION>
PA Pro Forma
Municipal Municipal Municipal
Portfolio Portfolio Portfolio
(000) (000) Adjustments (000)
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Investment Income
Interest .......................................... $3,910 $1,444 $5,354
------- ------ ------
Expenses
Investment Advisory Services ...................... $ 282 $ 102 $ 384
Less: Waived Fees ................................. (28) 254 (27) 75 13 (42) 342
Administrative Fee ................................ 60 22 82
Custodian Fee ..................................... 5 5 10
Audit Fee ......................................... 18 18 23
Legal Fee ......................................... 1 1 2
Other Expenses .................................... 41 18 (13) 59
--------- --------- ---------
Total Expenses ................................. 379 139 518
--------- --------- ---------
Expense Offset .................................... (3) (3) (6)
--------- --------- ---------
Net Expenses ..................................... 376 136 512
--------- --------- ---------
Net Investment Income ........................... 3,534 1,308 4,842
------- ------ ------
Realized Net Gain (Loss)
Investment Securities ............................. (109) (72) (181)
Futures ........................................... (126) 44 (82)
--------- --------- ---------
Realized Net Gain (Loss) ......................... (235) (28) (263)
--------- --------- ---------
Change in Unrealized Appreciation (Depreciation)
Investment Securities ............................. 3,923 1,331 5,254
Futures and Swaps ................................. (407) (177) (584)
--------- --------- ---------
Unrealized Appreciation (Depreciation) ........... 3,516 1,154 4,670
--------- --------- ---------
Net Gain (Loss) ................................. 3,281 1,126 4,407
--------- --------- ---------
Net Increase (Decrease) in Net Assets Resulting from
Operations ........................................ $6,815 $2,434 $9,249
========= ========= =========
</TABLE>

See notes to pro forma combined financial statements.

13
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of each fund as of March
31, 1998, and the pro forma combined capitalization of both funds as if the
reorganization had occurred on such date. The table reflects pro forma exchange
ratios of approximately 1.006 shares being issued for each share of your fund.
If the reorganization is consummated, the actual exchange ratios on the
reorganization date may vary from the exchange ratios indicated. This is due to
changes in the market value of the portfolio securities of both the Municipal
Portfolio and your fund between March 31, 1998 and the reorganization date,
changes in the amount of undistributed net investment income and net realized
capital gains of the Municipal Portfolio and your fund during that period
resulting from income and distributions, and changes in the accrued liabilities
of the Municipal Portfolio and your fund during the same period.

<TABLE>
<CAPTION>
March 31, 1998
-------------------------------------------------------
PA Pro Forma
Municipal Municipal Municipal
Portfolio Portfolio Portfolio
---------------- ---------------- -----------------
<S> <C> <C> <C>
Net Assets ........................ $ 90,031,878 $ 28,035,483 $ 118,067,361
Net Asset Value Per Share ......... $ 11.78 $ 11.85 $ 11.78
Shares Outstanding ................ 7,639,910 2,365,547 10,019,514
</TABLE>

It is impossible to predict how many shares of the Municipal Portfolio
will actually be received and distributed by your fund on the reorganization
date. The table should not be relied upon to determine the amount of the
Municipal Portfolio shares that will actually be received and distributed.

Notes to Pro Forma Combined Financial Statements -- (Unaudited)

Each of the Municipal Portfolio and PA Municipal Portfolio had in place an
identical management fee agreement and a voluntary expense limitation of .50%
of net assets. Accordingly, the pro forma adjustments only represent the
elimination of duplicate expenses (i.e., audit fees) and an offsetting
reduction in the fee waiver required as a result of the voluntary expense
limitation.

Pro forma information is intended to provide shareholders of MAS Funds
with information about the impact of the proposed merger by indicating how the
merger might have affected the information had the merger been consummated as
of March 31, 1998.

The pro forma combined statements of net assets and results of operations
as of March 31, 1998, have been prepared to reflect the merger of the Municipal
Portfolio and PA Municipal Portfolio.

14
<PAGE>

PROXY
MAS FUNDS
PA MUNICIPAL PORTFOLIO
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS, NOVEMBER 20, 1998

The undersigned Shareholder(s) of the PA Municipal Portfolio (the
"Portfolio") of MAS Funds (the "Fund") hereby appoint(s) Lorraine Truten, James
A. Gallo, and Richard J. Shoch, and each of them (each with full power of
substitution), as the proxy or proxies of the undersigned to attend the Special
Meeting of Shareholders of the Fund to be held on November 20, 1998 and any
adjournments thereof (the "Meeting"), to vote all of the shares of the
Portfolio that the signer would be entitled to vote if personally present at
the Meeting on the proposal set forth below and, in accordance with their own
discretion, on any other matters properly brought before the Meeting. Said
proxies are directed to vote or refrain from voting pursuant to the Proxy
Statement as checked below upon the following matters:

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE FUND AND WILL
BE VOTED "FOR" THE PROPOSAL UNLESS OTHERWISE INDICATED.

Please vote by filling in the appropriate box below, as shown, using blue or
black ink or dark pencil. Do not use red ink.

Proposal: Approval of the Agreement and Plan of Reorganization and Liquidation
between PA Municipal Portfolio and
Municipal Portfolio.

/ / FOR / / AGAINST / / ABSTAIN

IN ACCORDANCE WITH THEIR OWN DISCRETION, THE PROXIES ARE AUTHORIZED TO
VOTE ON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.

All properly executed proxies will be voted as directed herein by the
signing Shareholder(s). If no direction is given when the duly executed proxy
is returned, such shares will be voted in accordance with the recommendations
of the Board of Trustees FOR the Proposal.

The undersigned acknowledges receipt with this proxy of a copy of the
Notice of Special Meeting of Shareholders and the Proxy Statement of the Board
of Trustees.

Please date, sign and return promptly.

Dated: ____________________ , 1998

Your signature(s) on this proxy should be
exactly as your name or names appear on this
proxy. If the shares are held jointly, each
holder should sign. If signing is by
attorney, executor, administrator, trustee or
guardian, please print your full title below
your signature.

---------------------------------------------
Signature