MAINSTAY FUNDS, N-30D, 1996-03-07

MAINSTAY FUNDS
N-30D, 1996-03-07

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<PAGE>

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

Chairperson's Letter 2

MainStay California Tax Free Fund Highlights
and Portfolio Managers' Comments 4

Returns & Lipper Rankings 6

Year-by-Year Performance 7

$10,000 Invested in the MainStay California
Tax Free Fund Class A Shares vs. Lehman Brothers
Municipal Bond Index and Inflation 7

$10,000 Invested in the MainStay California
Tax Free Fund Class B Shares vs. Lehman Brothers
Municipal Bond Index and Inflation 7

Diversification of Holdings 8

Quality Breakdown 8

Financial Statements 9

Notes to Financial Statements 14

Report of Independent Accountants 20

The MainStay Funds 22
<PAGE>

- --------------------------------------------------------------------------------
Chairperson's Letter
- --------------------------------------------------------------------------------

[PHOTO OF ALICE T. KANE APPEARS HERE] Alice T. Kane, Chairperson

Report to Shareholders for the Year Ended December 31, 1995

During the year, municipal securities benefited from one of the strongest bond
markets in history. Long-term Treasury bonds returned 30.1%, or more than six
times their average annual total return for the previous 69 years.* While
municipal bond gains were not as dramatic, investors in the MainStay /(R)/
California Tax Free Fund enjoyed the highest annual total returns since the
Fund's inception.

In this context, we are pleased to report to you on the activities and
investment results of the MainStay California Tax Free Fund for the twelve
months ended December 31, 1995. Excluding all sales charges, the Fund earned
15.18% and 14.91% for Class A and Class B shares, respectively, for the period.
Based on the three-year period from December 31, 1992, to December 31, 1995, the
Fund received an overall four-star rating out of 770 funds in the municipal bond
fund category from Morningstar, Inc./+/

Despite these positive results, the Fund's focus on its objective of providing a
high level of current income -- exempt from regular federal income tax and
California state personal income tax, consistent with the preservation of
capital -- caused it to underperform the funds in its peer group, many of which
focus on capital appreciation. For the twelve months ended December 31, 1995,
the average Lipper/++/ California municipal debt fund earned 18.32%.

The possibility of a flat tax and concerns over Orange County's 1994 bankruptcy
filing continued to cloud the municipal market in 1995. Nevertheless, municipal
bonds remain one of the few tax-advantaged investments available to California
residents, many of whom face some of the nation's highest state income taxes.
Since the MainStay California Tax Free Fund seeks income that is substantially
free of federal and California state income tax,/(S)/ we believe the Fund
continues to represent an appropriate alternative for California investors
seeking to keep more of what they earn.

2
<PAGE>

Of course, the Fund's results reflected particularly strong market conditions,
which may or may not be repeated in future years. While positive results are
important to investors, they represent only one expression of MainStay's ongoing
commitment to help our shareholders pursue their investment goals. In 1995, that
commitment helped us attract more assets than in any previous year. As a
MainStay shareholder, you have played an important role in our success, and we
look forward to serving your investment needs for many years to come.

/s/ Alice T. Kane

Alice T. Kane
January 1996

- --------------------
* Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.

+ Morningstar, Inc. ratings reflect historic risk-adjusted performance taking
fees and sales charges into account, and may change monthly. Its ratings of
1 (low) to 5 (high) stars are based on a fund's 3- and 5-year average annual
returns with fee adjustments, and a risk factor relative to 3-month Treasury
bill monthly returns. As of 12/31/95, the Fund's 3-year rating was 4 stars
out of 770 funds in the municipal bond fund category. The Fund did not have
a 5-year operating history as of 12/31/95 and was not eligible for a 5-year
rating. Only 33% of the funds in an investment category may receive 4 or 5
stars. Ratings reflect Class A share performance only. The Fund's Class B
shares, introduced 1/3/95, will not be rated by Morningstar until they have
three years of operating history.

++ See footnote on page 6 for more information on Lipper Analytical Services,
Inc.

(S) A small portion of income may be subject to state and local taxes and the
Alternative Minimum Tax. Capital gains, if any, may also be taxed.

3
<PAGE>

- --------------------------------------------------------------------------------
MainStay California Tax Free Fund
- --------------------------------------------------------------------------------

1995 Fund Highlights

[ ] Highest annual total return in the Fund's history

[ ] Annual total return of 15.18% and 14.91% for Class A and Class B shares,
respectively, excluding sales charges

[ ] Provided dividend income at a consistent level throughout the year

[PHOTO OF JAMES FLOOD AND RAVI AKHOURY APPEARS HERE]

Portfolio Managers -- James Flood
and Ravi Akhoury (left to right)

For the twelve months ended December 31, 1995, the MainStay California Tax Free
Fund provided total returns, excluding sales charges, of 15.18% and 14.91% for
Class A and Class B shares, respectively. These returns represented the highest
annual performance for any year in the history of the Fund and reflected the
outstanding performance investors experienced across all sectors of the bond
markets.

These outstanding returns reflected unusually favorable market conditions which
are unlikely to be repeated in 1996. Despite their strong rally, municipal bonds
underperformed Treasury securities in 1995. This was partially due to concerns
over the possibility of a flat tax, as well as a much higher supply of
municipals than anticipated. At the same time, demand was substantially reduced
as investors poured their money into the equity market.

The Fund's 1995 performance trailed the average Lipper California municipal debt
fund, which returned 18.32% for the year. This was largely due to the Fund's
focus on providing a high level of income, rather than seeking to lock in
capital gains in a declining rate environment. During the first half of the
year, the Fund emphasized high-coupon, short-maturity callable bonds to generate
current income. Unfortunately, these securities do not perform as well as longer
maturity issues when the market rallies sharply and suddenly, as it did more
than once before the end of June. This hurt the Fund's performance relative to
its peers.

During the second half of the year, we repositioned the portfolio with some
longer-maturity, noncallable bonds, which helped increase the Fund's
participation in the

Flat tax
- --------------------------------------------------------------------------------
The basic idea that all income should be taxed at the same rate for all
taxpayers, without deductions, exemptions (such as the tax-exempt dividends paid
by the Fund), or tax credits that may give special advantages to certain
taxpayers. Many variations on this general theme have been proposed.

Supply and demand
- --------------------------------------------------------------------------------
In the bond market, supply is influenced by the amount of new securities issued
and the amount of bonds investors wish to sell. Demand reflects the amount of
bonds investors wish to buy, which may decrease when other markets offer greater
opportunities.

Coupon
- --------------------------------------------------------------------------------
The interest rate a fixed income security pays on an investment at par value
(e.g. $1,000).

4
<PAGE>

- --------------------------------------------------------------------------------
Highlights & Portfolio Managers' Comments
- --------------------------------------------------------------------------------

market rally. In the fourth quarter, the Fund's returns were more closely in
line with those of its Lipper peer group, though still lagging slightly.
Although current circumstances have changed, in 1995 our strategy allowed the
Fund to maintain a consistent level of current income throughout the year, even
as interest rates fell.

A major issue facing the municipal market was tax reform. Several proposals were
discussed by a host of different sponsors, but no real reforms were implemented
in the yet-to-be-resolved 1996 federal budget. We continue to believe that
arguments against a flat tax are sufficiently strong to make its passage very
unlikely. As just one example, state and local government financing costs would
rise astronomically should the tax-favorable treatment of their bonds come to an
end.

The California municipal bond market rebounded sharply in 1995, largely because
it was more depressed than other states in 1994 after Orange County filed for
bankruptcy. This incident was of particular concern to investors not only
because the county was rated Aa, but also because many felt the county had the
ability to meet its debt obligations, but simply lacked the moral conviction to
do so. While some investors did lose money, an agreement was reached to extend
the maturity of certain obligations, so most investors should eventually be made
whole. While the California municipal market is still not back to full fiscal
health, the situation appears to have stabilized.

Due to their relative underperformance in 1995, municipals are now at
historically cheap levels versus Treasury bonds. At the beginning of 1995, a 30-
year AAA-rated municipal bond was yielding close to 80% of a comparable Treasury
bond. At year-end, the yield was closer to 90% of Treasuries. As a result, we
believe prices are extremely attractive relative to available values. We are
currently maintaining a portfolio duration that is neutral to the market and
will, of course, continue to emphasize careful security selection among high-
quality issues.[ ]

Maturity
- --------------------------------------------------------------------------------
The termination date of an obligation or the length of time a fixed-income
security is required to pay interest.

Duration
- --------------------------------------------------------------------------------
A measure of average maturity, which adjusts for the time value of the payments
investors will receive and which takes into account interest payments as well as
principal payments. Duration is a better gauge of interest-rate sensitivity than
average maturity alone.

5
<PAGE>

<TABLE>
<CAPTION>
Fund SEC returns*
- --------------------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 12/31/95
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 9.99% n/a 6.32%
Class B 9.91% n/a 7.05%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Fund Lipper+ rankings and year-end Lipper category returns
- ---------------------------------------------------------------------------------------------------------------------
Life of Fund/Class
1 year 5 years through 12/31/95
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 81 out of 91 funds n/a 33 out of 48 funds
Class B 85 out of 91 funds n/a 85 out of 91 funds
Average Lipper CA muni debt fund 18.32% 8.34% 7.77%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Fund year-end per-share net asset values and distributions for 1995
- -------------------------------------------------------------------------------------------------------------------
NAV 12/31/95 Income Capital Gains
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A $9.95 $0.4989 $0.0000
Class B $9.91 $0.5171 $0.0000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gains and dividend distributions are reinvested. Performance figures
reflect the assumption of certain Fund expenses by the Fund's Administrator
and Adviser. Had these expenses not been assumed, total return figures would
have been lower. This expense limitation may be terminated or revised at any
time.

Class A shares are sold with a maximum initial sales charge of 4.5% and a
12b-1 fee of .25%. Class B shares, first offered on 1/3/95, are sold with no
initial sales charge, but are subject to a maximum Contingent Deferred Sales
Charge (CDSC) of up to 5% if shares are redeemed during the first 6 years of
purchase and an annual 12b-1 fee of up to .50%. Performance figures for this
Class include the historical performance of the respective Class A shares
from inception (10/1/91) through 12/31/94. Performance data for the two
Classes after this date vary based on differences in their expense
structures.

6
<PAGE>

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Year-by-Year Performance*
- --------------------------------------------------------------------------------

[GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
Year ended 12/31 Total Return %
<S> <C>
91 2.7
92 7.79
93 12.71
94 -4.92
95 Class A 15.18
95 Class B 14.91
</TABLE>

- --------------------------------------------------------------------------------
$10,000 invested in MainStay California Tax Free Fund
vs. Lehman Brothers Municipal Bond Index and Inflation
- --------------------------------------------------------------------------------

Class A Shares

[GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
Lehman Brothers California
Year-end Muni Bond Index++ Inflation(s) Tax Free Fund
<S> <C> <C> <C>
10/1/91 $10,000 $10,000 $9,550
91 10,335 10,051 9,748
92 11,246 10,343 10,510
93 12,628 10,627 11,845
94 11,975 10,911 11,267
95 14,065 11,195 12,977
</TABLE>

Class B Shares

[GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
Lehman Brothers California
Year-end Muni Bond Index++ Inflation(s) Tax Free Fund
<S> <C> <C> <C>
10/01/91 $10,000 $10,000 $10,000
91 10,335 10,051 10,207
92 11,246 10,343 11,005
93 12,628 10,627 12,403
94 11,975 10,911 11,798
95 14,065 11,195 13,357
</TABLE>

- --------------------
The Class A graph assumes an initial investment of $10,000 made on 10/1/91
reflecting the effect of the 4.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,550. The Class B graph assumes
an initial investment of $10,000 made on 10/1/91. Returns reflect the
Contingent Deferred Sales Charge (CDSC) of 2.0%, as it would apply for the
period shown. (The $10,000 invested in the Lehman Brothers Municipal Bond
Index begins on 9/30/91.) Results include reinvestment of all distributions
at net asset value and the change in share price for the stated period.

++ The Lehman Brothers Municipal Bond Index (which does not have a sales
charge) includes approximately 15,000 municipal bonds, rated Baa or better
by Moody's, with a maturity of at least two years. Bonds subject to the
Alternative Minimum Tax or with floating or zero coupons are excluded. The
Index is unmanaged and results assume the reinvestment of all income and
capital gains distributions.

(S) Inflation is represented by the Consumer Price Index (CPI) which is a
commonly-used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.

7
<PAGE>

- --------------------------------------------------------------------------------
Diversification of Holdings as of 12/31/95
- --------------------------------------------------------------------------------

[PIE CHART APPEARS HERE]

Revenue Transportation 24.6%
Revenue Utility--Water 16.3%
Revenue Utility--Energy 15.1%
Revenue Pollution Control--
Resource Recovery 9.9%
Revenue Hospital--Healthcare 9.4%
Other 24.7%

- --------------------------------------------------------------------------------
Quality Breakdown as of 12/31/95
- --------------------------------------------------------------------------------

[PIE CHART APPEARS HERE]

AAA 52.9%
AA 12.2%
A 20.3%
BBB 10.3%
Cash & Equivalents 4.3%

Bond ratings provided by Standard & Poor's Corporation.
See the prospectus for details.
Note: actual percentages will vary over time

8
<PAGE>

<TABLE>
<CAPTION>
Principal
Amount Value
-------------------------
<S> <C> <C>

LONG-TERM MUNICIPAL BONDS (95.7%)+
CALIFORNIA (70.5%)
California General Obligation
7.00%, due 8/1/09..................................... $ 250,000 $ 298,125
California Housing Finance Agency Revenue Home
Mortgage, Series C
8.30%, due 8/1/19 (a)................................. 45,000 47,081
California Pollution Control Financing Authority
Revenue
Atlantic Richfield Co. Project
9.125%, due 11/1/04................................... 1,000,000 1,037,160
Pacific Gas & Electric Co.
Series A
8.20%, due 12/1/18.................................... 900,000 964,125
Series B
8.875%, due 1/1/10 (a)................................ 750,000 828,750
California State Veterans
General Obligation, Series AW
7.70%, due 4/1/12 (a)................................. 880,000 949,300
California Statewide Community Development Corp.
7.00%, due 9/1/09..................................... 300,000 327,750
Eden Township Hospital District Revenue
7.40%, due 11/1/19.................................... 770,000 795,025
Foothill-Eastern Transportation Corridor Agency, Toll
Road Revenue, Series A
5.00%, due 1/1/35..................................... 1,100,000 932,250
Los Angeles California Harbor Department Revenue
8.70%, due 9/1/15..................................... 540,000 555,250
Los Angeles County California Metropolitan
Transportation Authority Sales Tax Revenue, Series A
5.00%, due 7/1/25..................................... 1,050,000 998,813
Los Angeles County California Parking Authority
Community Sales Tax Revenue
8.00%, due 7/1/16..................................... 1,000,000 1,077,500
Los Angeles County California Transportation Commission
Sales Tax Revenue, Series A
7.40%, due 7/1/15..................................... 400,000 442,000
Metropolitan Water District of Southern California
Water Revenue, Series A
5.50%, due 7/1/25..................................... 1,000,000 1,005,000
</TABLE>

- -------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Principal
Amount Value
--------------------------
<S> <C> <C>

CALIFORNIA (CONTINUED)
Oakland California Revenue, Series A
7.60%, due 8/1/21.................................... $ 1,050,000 $ 1,155,000
Riverside California Hospital Revenue Riverside
Community Hospital, Series A
6.75%, due 11/1/15................................... 515,000 515,000
Sacramento California Municipal Utilities District
Electric Revenue
6.25%, due 8/15/10................................... 500,000 556,875
San Francisco California City & County Sewer Revenue,
Series B
(zero coupon), due 10/1/08........................... 1,400,000 719,250
San Jose-Santa Clara California Clean Water Financing
Authority Sewer Revenue, Series A
5.375%, due 11/15/20................................. 1,000,000 992,500
South Coast Air Quality Management District Building
Corp. California Revenue Series B
(zero coupon), due 8/1/06............................ 500,000 295,625
Southern California Public Power Authority Mead-
Phoenix Transmission Project Revenue, Series A
4.875%, due 7/1/20................................... 940,000 875,375
-----------
15,367,754
-----------
PUERTO RICO (25.2%)
Puerto Rico Commonwealth Aqueduct & Sewer Authority
Revenue, Series A
7.875%, due 7/1/17................................... 750,000 832,500
Puerto Rico Commonwealth General Obligation
3.00%, due 7/1/06.................................... 1,000,000 826,250
Puerto Rico Commonwealth Highway Authority Revenue,
Series W
5.50%, due 7/1/13.................................... 750,000 779,062
Puerto Rico Electric Power Authority Revenue, Series L
8.375%, due 7/1/07................................... 825,000 895,125
Puerto Rico Industrial Medical & Environmental
Pollution Control Facilities Financing Authority
Revenue Upjohn Company Project
7.50%, due 12/1/23................................... 1,000,000 1,103,750
Puerto Rico Public Building Authority Revenue,
Guaranteed Government Facilities, Series A
6.25%, due 7/1/13.................................... 500,000 567,500
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

9
<PAGE>

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THE MAINSTAY CALIFORNIA TAX FREE FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (CONTINUED)
PUERTO RICO (CONTINUED)
University of Puerto Rico
University Revenue, Series N
(zero coupon), due 6/1/10........................ $ 995,000 $ 472,625
-----------
5,476,812
-----------
Total Long-Term Municipal Bonds
(Cost $20,395,503)............................... 20,844,566
-----------
SHORT-TERM INVESTMENT (1.8%)
California Health Facilities Financing Authority
Revenue
5.90%, due 7/1/09 (b)............................ 400,000 400,000
-----------
Total Short-Term Investment (Cost $400,000)....... 400,000
-----------
Total Investments
(Cost $20,795,503) (c)........................... 97.5% 21,244,566 (d)
Cash and Other Assets, Less Liabilities........... 2.5 543,266
---------- -----------
Net Assets........................................ 100.0% $21,787,832
========== ===========
</TABLE>
- -------
(a) Interest on these securities is subject to alternative minimum tax.
(b) Variable rate security that may be tendered back to the issuer at any time
prior to maturity at par.
(c) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(d) At December 31, 1995 net unrealized appreciation was $449,063, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $646,078 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $197,015.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

10
<PAGE>

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

STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1995

<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (Note 2)
(identified cost $20,795,503).................................... $21,244,566
Cash.............................................................. 87,694
Receivables:
Interest......................................................... 437,496
Fund shares sold................................................. 91,803
Unamortized organization expense
(Note 2)......................................................... 6,559
Other assets...................................................... 20
-----------
Total assets.................................................... 21,868,138
-----------
LIABILITIES:
Payables:
NYLIFE Distributors.............................................. 7,217
Custodian........................................................ 6,445
Transfer agent................................................... 5,529
Adviser.......................................................... 2,299
Trustees......................................................... 216
Accrued expenses.................................................. 33,970
Dividend payable.................................................. 24,630
-----------
Total liabilities............................................... 80,306
-----------
Net assets........................................................ $21,787,832
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized
Class A.......................................................... $ 19,919
Class B.......................................................... 1,980
Additional paid-in capital........................................ 21,424,766
Accumulated undistributed net investment income................... 28,449
Accumulated net realized loss on investments...................... (136,345)
Unrealized appreciation on investments............................ 449,063
-----------
Net assets........................................................ $21,787,832
===========
CLASS A
Net assets applicable to outstanding shares....................... $19,825,084
===========
Shares of beneficial interest outstanding......................... 1,991,937
===========
Net asset value per share outstanding............................. $ 9.95
Maximum sales charge (4.50% of offering price).................... 0.47
-----------
Maximum offering price per share outstanding...................... $ 10.42
===========
CLASS B
Net assets applicable to outstanding shares....................... $ 1,962,748
===========
Shares of beneficial interest outstanding......................... 198,040
===========
Net asset value per share outstanding............................. $ 9.91
===========
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest.......................................................... $1,218,434
----------
Expenses: (Note 2)
Administration (Note 3)........................................... 46,809
Advisory (Note 3)................................................. 46,809
Service (Note 3).................................................. 46,809
Shareholder communication......................................... 32,284
Transfer agent.................................................... 29,219
Custodian......................................................... 19,758
Auditing.......................................................... 14,911
Amortization of organization expense.............................. 8,771
Legal............................................................. 4,624
Registration...................................................... 4,058
Distribution--Class B (Note 3).................................... 1,963
Trustees.......................................................... 828
Miscellaneous..................................................... 10,371
----------
Total expenses before reimbursement.............................. 267,214
Expense reimbursement from Adviser and Administrator (Note 3)...... (33,690)
----------
Net expenses..................................................... 233,524
----------
Net investment income.............................................. 984,910
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from:
Security transactions............................................. 364,797
Futures transactions.............................................. 28,288
----------
Net realized gain on investments................................... 393,085
Net change in unrealized depreciation on investments............... 1,299,698
----------
Net realized and unrealized gain on investments.................... 1,692,783
----------
Net increase in net assets resulting from operations............... $2,677,693
==========
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

11
<PAGE>

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
September 1
Year ended through Year ended
December 31 December 31 August 31
1995 1994* 1994
----------- ----------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income.................. $ 984,910 $ 309,236 $ 908,222
Net realized gain (loss) on
investments........................... 393,085 (369,997) (139,505)
Net change in unrealized appreciation
(depreciation) on investments......... 1,299,698 (482,396) (786,307)
----------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations............. 2,677,693 (543,157) (17,590)
----------- ----------- -----------
Dividends and distributions to
shareholders:
From net investment income:
Class A.............................. (933,088) (312,180) (886,933)
Class B.............................. (50,283) -- --
From net realized gain on investments:
Class A.............................. -- -- (494,612)
----------- ----------- -----------
Total dividends and distributions to
shareholders......................... (983,371) (312,180) (1,381,545)
----------- ----------- -----------
Capital share transactions:
Net proceeds from sale of shares:
Class A.............................. 2,897,464 551,231 6,023,147
Class B.............................. 1,997,817 -- --
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A.............................. 500,698 168,870 707,881
Class B.............................. 41,776 -- --
----------- ----------- -----------
5,437,755 720,101 6,731,028
Cost of shares redeemed:
Class A.............................. (1,874,383) (554,070) (2,578,165)
Class B.............................. (136,962) -- --
----------- ----------- -----------
Increase in net assets derived from
capital share transactions........... 3,426,410 166,031 4,152,863
----------- ----------- -----------
Net increase (decrease) in net assets. 5,120,732 (689,306) 2,753,728
NET ASSETS:
Beginning of period..................... 16,667,100 17,356,406 14,602,678
----------- ----------- -----------
End of period........................... $21,787,832 $16,667,100 $17,356,406
=========== =========== ===========
Accumulated undistributed net investment
income................................. $ 28,449 $ 26,940 $ 29,884
=========== =========== ===========
</TABLE>
- -------
*The Fund changed its fiscal year end from August 31 to December 31.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

12
<PAGE>

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

FINANCIAL HIGHLIGHTS
(SELECTED PER SHARE DATA AND RATIOS)

<TABLE>
<CAPTION>
Class A
------------------------------------------------
Class A Class B September 1 Year Ended
-------- -------- through August 31 October 1, 1991(a)
Year ended December 31 ---------------- through
December 31, 1995 1994* 1994 1993 August 31, 1992
------------------- ----------- ------- ------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period.... $ 9.10 $ 9.10 $ 9.57 $ 10.38 $ 9.90 $ 9.55
--------- -------- ------- ------- ------- -------
Net investment income... 0.50 0.52 0.17 0.53 0.55 0.45
Net realized and
unrealized gain (loss)
on investments......... 0.85 0.81 (0.47) (0.51) 0.64 0.30
--------- -------- ------- ------- ------- -------
Total from investment
operations............. 1.35 1.33 (0.30) 0.02 1.19 0.75
--------- -------- ------- ------- ------- -------
Less dividends and
distributions:
Dividends from net
investment income...... (0.50) (0.52) (0.17) (0.52) (0.59) (0.40)
Distributions from net
realized gain on
investments............ -- -- -- (0.31) (0.12) --
--------- -------- ------- ------- ------- -------
Total dividends and
distributions.......... (0.50) (0.52) (0.17) (0.83) (0.71) (0.40)
--------- -------- ------- ------- ------- -------
Net asset value at end
of period.............. $ 9.95 $ 9.91 $ 9.10 $ 9.57 $ 10.38 $ 9.90
========= ======== ======= ======= ======= =======
Total investment return
(b).................... 15.18% 14.91% (3.11%) 0.12% 12.58% 8.02%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income.. 5.3% 5.1% 5.5%+ 5.4% 5.6% 5.6%+
Net expenses........... 1.24% 1.49% 0.99%+ 0.99% 0.99% 0.99%+
Expenses (before
reimbursement)........ 1.4% 1.7% 1.2%+ 1.1% 1.2% 1.6%+
Portfolio turnover rate. 107% 107% 24% 96% 154% 87%
Net assets at end of
period (in 000's)...... $ 19,825 $1,963 $16,667 $17,356 $14,603 $10,085
</TABLE>
- -------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charges and is not
annualized.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

13
<PAGE>

NOTE 1 -- ORGANIZATION AND BUSINESS:

The Fund currently offers two classes of shares. Class A shares are offered at
net asset value per share plus an initial sales charge. Class B shares, whose
distribution commenced on January 3, 1995, are offered without an initial sales
charge, although a declining contingent deferred sales charge may be imposed on
redemptions made within six years of purchase. Any purchase of Class A shares
of $1,000,000 or more on which the initial sales charge was waived will be sub-
ject to a contingent deferred sales charge on redemptions made within one year
of purchase. Class A shares and Class B shares bear the same voting (except for
issues that relate solely to one class), dividend, liquidation and other rights
and conditions except that the Class B shares are subject to higher distribu-
tion fee rates. Each class of shares bears distribution and/or service fee pay-
ments under a distribution plan pursuant to Rule 12b-1 under the Investment
Company Act of 1940.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:

The following is a summary of significant accounting policies followed by the
Fund:

VALUATION OF FUND SHARES. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets at-
tributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the shares of that class that are out-
standing.

SECURITIES VALUATION. Portfolio securities of the California Tax Free Fund are
stated at value determined (a) by appraising debt securities at prices supplied
by a pricing agent selected by the Adviser, whose prices reflect broker/dealer
supplied valuations and electronic data processing techniques if those prices
are deemed by the Adviser to be representative of market values at the regular
close of business of the New York Stock Exchange, (b) by appraising options and
futures contracts at the last sale price on the market where such options or
futures are principally traded, and (c) by appraising all other securities and
other assets, including debt securities for which prices are supplied by a
pricing agent but are not deemed by the Adviser to be representative of market
values, but excluding money market instruments with a remaining maturity of
sixty days or less and including restricted securities and securities for which
no market quotations are available, at fair value in accordance with procedures
approved by the Trustees. Short-term securities which mature in more than 60
days are valued at current market quotations. Short-term securi-

14
<PAGE>

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

ties which mature in 60 days or less are valued at amortized cost if their term
to maturity at purchase was 60 days or less, or by amortizing the difference
between market value on the 61st day prior to maturity and value on maturity
date if their original term to maturity at purchase exceeded 60 days.

Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities and the regu-
lar close of the New York Stock Exchange will not be reflected in the Fund's
calculation of net asset value unless the Adviser believes that the particular
event would materially affect net asset value, in which case an adjustment
would be made.

FUTURES CONTRACTS. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date, or
to make or receive a cash payment based on the value of a securities index.
During the period the futures contract is open, changes in the value of the
contract are recognized as unrealized gains or losses by "marking to market"
such contract on a daily basis to reflect the market value of the contract at
the end of each day's trading. The Fund agrees to receive from or pay to the
broker an amount of cash equal to the daily fluctuation in the value of the
contract. Such receipts or payments are known as "variation margin". When the
futures contract is closed, the Fund records a realized gain or loss equal to
the difference between the proceeds from (or cost of) the closing transaction
and the Fund's basis in the contract. The California Tax Free Fund has entered
into contracts for the future delivery of debt securities in order to attempt
to protect against the effects of adverse changes in interest rates or to
lengthen or shorten the average maturity or duration of the Fund's portfolio.
This practice is known as hedging.

The use of futures contracts involves, to varying degrees, elements of market
risk. Risks arise from the possible imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets,
and the possible inability of counterparties to meet the terms of their con-
tracts. However, the Fund's activities in futures contracts are conducted
through regulated exchanges which minimize counterparty credit risks.

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The California Tax Free Fund intends to de-
clare and pay dividends monthly.

Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.

15
<PAGE>

SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transac-
tions on the trade date. Realized gains and losses on security transactions are
determined using the identified cost method. Interest income is accrued daily
except when collection is not expected. Premiums on securities purchased by the
Fund are amortized on the constant yield method over the life of the respective
securities or, if applicable, over the period to the first date of call. Dis-
counts are accreted when required by Federal tax regulations.

ORGANIZATION COSTS. Costs incurred in connection with the Fund's initial organ-
ization and registration amounted to $44,749 for the California Tax Free Fund.
Such costs are being amortized over 60 months beginning at the commencement of
operations of the Fund. In the event any of the initial shares of the Fund,
which were purchased by NYLIFE Securities Inc. are redeemed, the Fund will be
reimbursed for any unamortized organizational expenses in the same proportion
as the number of shares redeemed bears to the number of initial shares held at
the time of redemption.

EXPENSES. Expenses with respect to the Trust are allocated to the individual
Funds in proportion to the net assets of the respective Funds when the expenses
are incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under
the Distribution Plan) and realized and unrealized gains and losses on invest-
ments of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and real-
ized and unrealized gains and losses are incurred.

USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the finan-
cial statements. Actual results could differ from those estimates.

CONCENTRATION OF CREDIT RISK. The Fund invests substantially all of its assets
in debt obligations issued by political subdivisions and authorities in the
State of California and the Commonwealth of Puerto Rico. The issuer's ability
to meet its obligations may be affected by economic and political developments
in the State of California and the Commonwealth of Puerto Rico.

NOTE 3 -- FEES AND RELATED PARTY POLICIES:

INVESTMENT ADVISORY AND ADMINISTRATION FEES. MacKay-Shields Financial Corpora-
tion ("MacKay-Shields") acts as investment adviser to the Fund under an Invest-
ment Advisory Agreement. MacKay-Shields is a registered investment adviser and
an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life").

NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned sub-
sidiary of New York Life, is the Administrator for the Fund.

16
<PAGE>

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------

The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an an-
nual rate of 0.25% of the average daily net assets of the Fund.

The Adviser and the Administrator have voluntarily agreed to reimburse the ex-
penses for the California Tax Free Fund to the extent that operating expenses
would exceed on an annualized basis 1.24% and 1.49% for the Class A and Class B
shares respectively, of the average daily net assets. The expense reimbursement
to the Fund for the year ended December 31, 1995 was $33,690.

The Investment Advisory and Administration Agreements for the Fund also provide
that in the event the expenses of the Fund (including the fees for the Adviser
and Administrator, but excluding interest, taxes, organization expenses, liti-
gation and indemnification expenses, distribution fees and other extraordinary
expenses) for any fiscal year exceed the most restrictive limitation of certain
state securities commissions, the Adviser and the Administrator each will re-
duce their fee payable by the Fund by 50% of the amount of such excess up to
the extent of their fees. The expenses of the Fund did not exceed the most re-
strictive expense limitation for the year ended December 31, 1995.

Pursuant to the Class A Plan, the Distributor receives payments from the Fund
at an annual rate of 0.25% of the average daily net assets of the Fund's Class
A shares, which is an expense of the Class A shares of the Fund for distribu-
tion or service activities as designated by the Distributor. Pursuant to the
Class B Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.25% of the lesser of:

(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains distribu-
tions), less the aggregate net asset value of the Fund's Class B shares ex-
changed or redeemed since the Fund's inception upon which a contingent deferred
sales charge has been imposed or upon which such charge has been waived; or (b)
the average daily net assets of the Fund's Class B shares.

The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund.

The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for distri-
bution of the Fund's shares and service activities.

17
<PAGE>

NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.

SALES CHARGES. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $57,181 for the year
ended December 31, 1995.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges for the year ended December 31, 1995 in the amount of $718.

TRUSTEES FEES. Trustees, other than those affiliated with New York Life, Mac-
Kay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.

CAPITAL. At December 31, 1995, NYLIFE Securities and NYLIFE Distributors held
shares of Class A with a net asset value of $99,500 and $4,481,929, respective-
ly.

OTHER. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1995 were $412.

Fees for the cost of legal services provided to the Fund by the Office of Gen-
eral Counsel of New York Life amounted to $1,250 for the year ended December
31, 1995.

NOTE 4 -- FEDERAL INCOME TAX:

At December 31, 1995, for Federal income tax purposes, capital loss
carryforwards of $136,345 are available to the extent provided by regulations
to offset future realized gains of the Fund through 2002. To the extent that
these loss carryforwards are used to offset future capital gains, it is proba-
ble that the capital gains so offset will not be distributed to shareholders.
The Fund utilized $168,365 of capital loss carryforward during the current
year.

NOTE 5 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):

During the year ended December 31, 1995 purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase trans-
actions and short-term securities, were $23,732 and $19,415, respectively.

18
<PAGE>

NOTE 6 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):

<TABLE>
<CAPTION>
September 1
Year Ended through Year Ended
December 31 December 31 August 31
1995 1994* 1994
--------------- ----------- ----------
Class A Class B Class A
------- ------- ----------------------
<S> <C> <C> <C> <C>
Shares sold............................. 304 208 60 600
Shares issued in reinvestment of divi-
dends and distributions................ 52 4 18 72
--- --- --- ---
356 212 78 672
Shares redeemed......................... 196 14 60 265
--- --- --- ---
Net increase............................ 160 198 18 407
=== === === ===
</TABLE>
- -------
*The Fund changed its fiscal year end from August 31 to December 31.

19
<PAGE>

- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------

To the Board of Trustees and Shareholders of
The MainStay Funds

In our opinion, the accompanying statement of assets and liabilities (including
the portfolio of investments) and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all mate-
rial respects, the financial position of the MainStay California Tax Free Fund,
(one of the thirteen funds constituting The MainStay Funds, hereafter referred
to as the "Fund") at December 31, 1995, the results of its operations for the
year then ended and the changes in its net assets and the financial highlights
for each of the periods presented, in conformity with generally accepted ac-
counting principles. These financial statements and financial highlights (here-
after referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these finan-
cial statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which re-
quire that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and dis-
closures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall finan-
cial statement presentation. We believe that our audits, which included confir-
mation of securities at December 31, 1995 by correspondence with the custodian,
provide a reasonable basis for the opinion expressed above.

Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 12, 1996

20
<PAGE>

This page intentionally left blank

21
<PAGE>

- --------------------------------------------------------------------------------
The MainStay Funds
- --------------------------------------------------------------------------------

GROWTH FUNDS
- -----------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[HORIZONTAL BAR Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund GRAPH INDICATING of companies in expanding markets and are willing to accept a higher
RISK/REWARD with strong growth potential level of risk for higher return potential
OF FUND]
- -----------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund GRAPH INDICATING the makeup and returns of the pate in the growth potential of stocks+
RISK/REWARD S&P 500*
OF FUND]
- -----------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Offers broad diversification into You prefer the higher return potential
International Equity Fund GRAPH INDICATING international stock markets with of international equities or want to add
RISK/REWARD an emphasis on risk control diversification to your domestic
OF FUND] investments++
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

GROWTH & INCOME FUNDS
- -----------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[HORIZONTAL BAR Balances current income with growth You seek a combination of income and
Total Return Fund GRAPH INDICATING opportunities by investing in stocks, growth potential and want to manage
RISK/REWARD bonds, and money market instruments risk through diversification
OF FUND]
- -----------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Seeks undervalued stocks with You seek to maximize total return from
Value Fund GRAPH INDICATING attractive dividends and a stimulus securities which may have more poten-
RISK/REWARD for positive change tial than the market currently sees
OF FUND]
- -----------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Invests in convertible securities for You want income from securities that
Convertible Fund GRAPH INDICATING a special blend of long-term growth may offer growth potential if converted
RISK/REWARD potential and dividend income into common stock
OF FUND]
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's Corporation.

+ The original investment is guaranteed provided it is held for 10 years with
all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the guarantee date, the investor loses the
benefit of the guarantee with respect to those shares.

++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes in
U.S. or foreign tax or currency laws, and changes in monetary policies and
economic and political conditions in foreign countries.

(S) While individual securities owned by the Government Fund are guaranteed by
the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.

|| Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share; investment returns
will vary with market conditions.

# A small portion of the Fund's income may be subject to state and local taxes
and the Alternative Minimum Tax. Capital gains, if any, may also be taxed.

22
<PAGE>

INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
[HORIZONTAL BAR Seeks a high level of current income You are seeking to combine high current
Government Fund GRAPH INDICATING consistent with safety of principal income and safety of principal
RISK/REWARD OF primarily from U.S. government
FUND] securities(S)
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield [HORIZONTAL BAR An aggressive high yield bond You want to maximize current income
Corporate Bond Fund GRAPH INDICATING fund that is actively managed for and can accept the higher risk of
RISK/REWARD OF maximum current income securities with high yield potential
FUND]
- ------------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Seeks high current yields and You prefer the higher return potential of
International Bond Fund GRAPH INDICATING competitive total return from non- international bonds or want to add
RISK/REWARD OF U.S. bonds with an emphasis on diversification to your domestic
FUND] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR
GRAPH INDICATING Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund RISK/REWARD OF stability of principal, and liquidity, competitive yields on cash you're plan-
FUND] with free checkwriting|| ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[HORIZONTAL BAR Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund GRAPH INDICATING exempt from regular federal bracket or want to pay less of your
RISK/REWARD OF income tax# investment income to the IRS
FUND]
- ------------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Seeks high current income exempt You're a California resident and want to
California Tax Free Fund GRAPH INDICATING from both federal and California keep more of what you earn by investing
RISK/REWARD OF income taxes consistent with for income that's double tax free#
FUND] preservation of capital#
- ------------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund GRAPH INDICATING from federal, New York State, and and want to keep more of what you earn
RISK/REWARD OF New York City income taxes consis- with income that's double or triple tax
FUND] tent with preservation of capital# free#
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

If you would like to learn more about any of the MainStay Funds not covered by
your current prospectus, please call your Registered Representative. Your
Registered Representative can provide you with additional prospectuses which
contain more complete information including advisory fees, other expenses, and
shares classes. Please read the prospectus carefully before you invest or send
money. Shares must be offered in the investor's state of residence.

23
<PAGE>

- --------------------------------------------------------------------------------
MainStay California
Tax Free Fund
- --------------------------------------------------------------------------------

1995
annual
report

The year in review
fund results
& portfolio highlights

[LOGO OF MAINSTAY(R) FUNDS APPEARS HERE]

- --------------------------------------------------------------------------------
December 31, 1995
- --------------------------------------------------------------------------------

Officers & Trustees

Alice T. Kane Chairperson and Trustee
Walter W. Ubl President and Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Ralph A. Pfeiffer, Jr. Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard A. Topp Vice President
Richard W. Zuccaro Vice President
A. Thomas Smith III Secretary

Dechert Price & Rhoads
Legal Counsel

[LOGO OF MAINSTAY(R) FUNDS APPEARS HERE]

NYLIFE Distributors Inc.
260 Cherry Hill Road
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
NYLIFE Distributors Inc. is an indirect wholly owned
subsidiary of New York Life Insurance Company.

[LOGO OF NEW YORK LIFE APPEARS HERE]

This report is provided for the information of shareholders of the MainStay
California Tax Free Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.

[LOGO OF RECYCLED PAPER APPEARS HERE] MSAN04 (296)
<PAGE>

- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------

Chairperson's Letter 2

MainStay Capital Appreciation Fund Highlights
and Portfolio Managers' Comments 4

Returns & Lipper Rankings 6

Year-by-Year Performance 7

$10,000 Invested in the MainStay Capital Appreciation
Fund Class A Shares vs. S&P 500 and Inflation 7

$10,000 Invested in the MainStay Capital Appreciation
Fund Class B Shares vs. S&P 500 and Inflation 7

Top 25 Equity Holdings 8

10 Largest Purchases 9

10 Largest Sales 9

Diversification by Industry -- Top 5 10

Portfolio Composition 10

Financial Statements 11

Notes to Financial Statements 17

Report of Independent Accountants 22

The MainStay Funds 24
<PAGE>

- --------------------------------------------------------------------------------
CHAIRPERSON'S LETTER
- --------------------------------------------------------------------------------

[PHOTO OF ALICE T. KANE HERE]

ALICE T. KANE, CHAIRPERSON

REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1995

Throughout 1995, equity investors enjoyed a rapidly rising market. A combination
of positive factors -- including low inflation, strong productivity gains,
increasing profits, moderate economic growth, and lower interest rates -- helped
common stocks provide their highest returns since 1975.

In this context, we are pleased to report to you on the activities and
investment results of the MainStay(R) Capital Appreciation Fund for the twelve
months ended December 31, 1995. The Fund took advantage of the year's positive
environment, posting annual total returns of 35.79% and 35.11%, for Class A and
Class B shares, respectively, excluding all sales charges.

The Fund's managers typically look for companies with earnings momentum, above-
average growth in revenues, growth in earnings per share, and other positive
indicators. They also look for something extra -- new products, new management,
or shifting consumer preferences -- that may help propel a stock ahead of its
competitors. With most sectors of the market rising, a disciplined approach to
individual security selection added considerable value. This helped the Fund
outperform the average Lipper* growth fund, which returned 30.77%, and the
average Lipper capital appreciation fund, which returned 30.22% for the year
ended December 31, 1995.

Based on the three- and five-year periods, the Fund's outstanding performance
earned it an overall four-star rating from Morningstar, Inc.,+ placing it among
the top 33% of 1,394 funds in their equity category for the period from December
31, 1990, to December 31, 1995.

2
<PAGE>

/s/ Alice T. Kane

Alice T. Kane

January 1996

- ------------
* See footnote on page 6 for more information on Lipper Analytical Services,
Inc.

+ Morningstar, Inc. is an independent fund performance monitor. Its ratings
reflect historic risk-adjusted performance taking fees and sales charges into
account, and may change monthly. Its ratings of 1 (low) to 5 (high) stars are
based on a fund's 3- and 5-year average annual returns with fee adjustments,
and a risk factor that reflects fund performance relative to 3-month Treasury
bill monthly returns. As of 12/31/95, the Fund's 3- and 5-year ratings for
those periods were 3 and 4 stars out of 1,394 and 950 funds, respectively, in
the equity category. Only 33% of the funds in an investment category may
receive 4 or 5 stars. Ratings reflect Class B share performance only. The
Fund's Class A shares introduced 1/3/95 will not be rated by Morningstar
until they have 3 years of operating history.

3
<PAGE>

- --------------------------------------------------------------------------------
MainStay Capital Appreciation Fund
- --------------------------------------------------------------------------------

1995 Fund Highlights

. Second-highest annual performance in the history of the Fund
. Annual total returns of 35.79% and 35.11% (for Class A and Class B shares,
respectively), excluding all sales charges

[PHOTO OF CAPITAL APPRECIATION TEAM HERE]

Capital Appreciation Team-Eileen Cook,
Rudy Carryl, and Edmund Spelman
(left to right)

For the 12-month period ended December 31, 1995, investors in the MainStay
Capital Appreciation Fund enjoyed robust total returns of 35.79% and 35.11%,
respectively, for Class A and Class B shares, excluding all sales charges.
Although these results were slightly behind the 37.53% return of the S&P 500,*
they were well ahead of the average Lipper growth fund, which earned 30.77% and
the average Lipper capital appreciation fund, which earned 30.22% for the year.

These outstanding returns reflected unusually favorable market conditions which
are unlikely to be repeated in 1996. Throughout the year, low inflation,
low interest rates, and steady but slowing economic growth provided an ideal
environment for growth investing. The major contributors to the Fund's positive
1995 performance came from a broad cross section of issues, including financial
services, healthcare, technology, and selected consumer discretionary stocks.

In managing the Fund, we followed strict diversification disciplines, in sharp
contrast to some managers who allocated large amounts of their portfolios to the
technology sector. Our strategy served us well throughout the year, especially
in the last four months, when commodity-based semiconductor stocks, which had
risen dramatically, underwent a sharp correction. Our top ten performing stocks
for the year were broadly diversified across industries in the growth spectrum,
enabling us to manage downside risk and achieve capital appreciation for our
investors.

Consumer discretionary stocks
- --------------------------------------------------------------------------------
Stocks of companies whose goods or services are nonessential and typically
purchased with excess disposable income.

Diversification
- --------------------------------------------------------------------------------
A technique for reducing risk by purchasing securities of various issuers,
industries, asset classes, or geographical locations.

Correction
- --------------------------------------------------------------------------------
A shift in security prices which brings them more in line with historically
appropriate levels.

- ---------------
* See footnote on page 7 for more information on the S&P 500.

4
<PAGE>

Careful individual security selection and ongoing portfolio review also
contributed to our positive performance. In 1995 our decisions to buy or hold
healthcare issues, especially pharmaceuticals (Amgen and Teva) and medical
devices (Medtronic and Cordis), selected consumer discretionary stocks (HFS and
News Corp.) and technology companies (Computer Associates, Sun Microsystems,
Oracle, and 3Com) helped fuel the portfolio's strong performance. Our choices
among financial service issues, including First Interstate, Travelers, and
SunAmerica, also proved to be a boon to performance as interest rates decreased
and industry consolidation continued. Selected building stocks, such as Lennar,
also did well in the low interest rate environment.

Beginning in mid-September, concern about potential pricing weakness and
possible excess capacity led to a sharp correction of semiconductor stocks. In
the latter part of the year, this gave investors a reason to sell stocks that
had been strong performers. We own three semiconductor stocks: Micron
Technology, Lam Research, and Intel Corp., and are currently reviewing the
investment merits of each. We continue to believe that the fundamental outlook
for many of our other technology stocks remains bright, including 3Com, Oracle
Corp., and Computer Associates. Our rigorous stock selection process will
continue to guide us in evaluating technology issues.

Consumer stocks remain a difficult group and we would not be surprised to see
further consolidation and retail store closings over the next few months. Even
so, our best performing stock for the fourth quarter and the year was HFS, with
a 1995 gain of 208%. This lodging industry franchiser is now branching into real
estate with recent acquisitions of Century 21 and ERA. We continue to focus on
companies with restructuring and margin improvement stories and retailers that
have demonstrated an ability to gain market share without sacrificing
profitability.

Going forward, we believe that as long as low inflation, declining interest
rates, and slow-but-steady economic growth continue, they should provide a
positive backdrop for growth stocks.

Rudy Carryl
Edmund Spelman
Portfolio Managers

Excess Capacity
- --------------------------------------------------------------------------------
Inventory levels that represent a higher level of supply than anticipated
demand.

5
<PAGE>

<TABLE>
<CAPTION>
Fund average annual total returns *

Life of Fund
1 year 5 years through 12/31/95
------ ------- ----------------
<S> <C> <C> <C>
Class A........................................... 35.79% 23.29% 14.22%
Class B........................................... 35.11% 23.17% 14.16%
<CAPTION>
Fund SEC returns*
Life of Fund
1 year 5 years through 12/31/95
------ ------- ----------------
<S> <C> <C> <C>
Class A........................................... 28.32% 21.91% 13.56%
Class B........................................... 30.11% 23.00% 14.16%
<CAPTION>
Fund Lipper+ rankings and year-end Lipper category returns
Life of Fund/Class
1 year 5 years through 12/31/95
------ ------- ------------------
<S> <C> <C> <C>
Class A (cap app category)........................ 49 out of 157 funds n/a 49 out of 157 funds
Class B (cap app category)........................ 54 out of 157 funds 10 out of 12 out of 52 funds
82 funds
Average Lipper capital
appreciation fund................................. 30.22% 16.99% 10.79%
Average Lipper growth fund........................ 30.77% 16.07% 11.86%
<CAPTION>
Fund year-end per-share net asset values and distributions for 1995

NAV 12/31/95 Income Capital Gains
------------ ------- -------------
<S> <C> <C> <C>
Class A........................................... $25.90 $0.0000 $0.0486
Class B........................................... $25.77 $0.0000 $0.0486
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gains and dividend distributions are reinvested.

Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 5.5% and an annual 12b-1 fee of .25%.
Performance figures for this Class include the historical performance of the
Class B shares for periods from inception (5/1/86) up to 12/31/94.
Performance data for the two Classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are sold
with no initial sales charge, but are subject to a maximum Contingent
Deferred Sales Charge (CDSC) of up to 5% if shares are redeemed during the
first 6 years of purchase and an annual 12b-1 fee of up to 1%.

+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales charges.
For the 12-month period ended 12/31/95, the Lipper growth fund category
included 567 funds. The MainStay Capital Appreciation Fund was ranked 129 out
of 567 (A shares) for 1 year; and, 164 out of 567, 15 out of 237, and 25 out
of 146 (B shares) for the 1-year, 5-year, and since inception periods,
respectively. The Fund's Class A shares were first offered to the public
1/3/95; Class B shares 5/1/86.

6
<PAGE>

- --------------------------------------------------------------------------------
Year-by-Year Performance*
- --------------------------------------------------------------------------------

[BAR GRAPH APPEARS HERE]

Year ended 12/31 Total Return %
86 -3.56
87 -2.18
88 2.55
89 26.06
90 4.12
91 68.36
92 11
93 14.01
94 -1.52
95 Class A 35.79
95 Class B 35.11
- -------------------------------------------------------------------------------
$10,000 invested in the MainStay Capital Appreciation
Fund vs. S&P 500 and Inflation
- -------------------------------------------------------------------------------
Class A Shares

[LINE GRAPH APPEARS HERE]

Capital
Appreciation
Year end Fund S & P 500/++/ Inflation/s/

5/1/86 9450 10000 10000
86 9114 10550 10175
87 8915 11097 10626
88 9142 12927 11096
89 11525 17011 11611
90 11999 16481 12230
91 20201 21481 12698
92 22424 23115 13066
93 25566 25435 13425
94 25176 25780 13785
95 34186 35433 14144

Class B Shares

[LINE GRAPH APPEARS HERE]

Capital
Appreciation
Year end Fund S & P 500/++/ Inflation/s/

5/1/86 10000 10000 10000
86 9644 10550 10175
87 9434 11097 10626
88 9674 12927 11096
89 12195 17011 11611
90 12697 16481 12230
91 21377 21481 12698
92 23729 23115 13066
93 27054 25435 13425
94 26642 25780 13785
95 35994 35433 14144

- ----------
The Class A graph assumes an initial investment of $10,000 made on 5/1/86
reflecting the effect of the 5.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,450. The Class B graph assumes
an initial investment of $10,000 made on 5/1/86. Returns shown do not
reflect the Contingent Deferred Sales Charge (CDSC), as it would not apply
for the period shown. All results include reinvestment of distributions at
net asset value and the change in share price for the stated period. Past
performance is no guarantee of future results.

++ "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are
registered trademarks of Standard & Poor's Corporation. The S&P 500 is an
unmanaged index and is considered to be generally representative of the U.S.
stock market. Results assume the reinvestment of all income and capital
gains distributions.

(S) Inflation is represented by the Consumer Price Index (CPI) which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.

7
<PAGE>

- --------------------------------------------------------------------------------
Top 25 Equity Holdings as of 12/31/95
- --------------------------------------------------------------------------------

Holding $ amount

HFS Inc. $28,457,175
3Com Corp. 27,504,088
Amgen, Inc. 22,028,125
Computer Associates International, Inc. 20,005,781
Green Tree Financial Corp 19,865,650
SunAmerica Inc. 19,593,750
Alco Standard Corp 19,472,750
First Interstate Bancorp 18,154,500
United Healthcare Corp. 17,966,650
American International Group, Inc. 17,579,625
Travelers Group Inc. 16,913,375
Intel Corp 16,684,500
Medtronic, Inc. 16,092,000
Cordis Corp. 15,075,000
Columbia/HCA Healthcare Corp. 14,339,920
WorldCom,Inc. 14,140,185
Micron Technology Inc. 14,138,200
Oracle Corp. 14,110,875
Sun Microsystems, Inc. 14,052,500
Household International, Inc. 13,362,250
Bank of New York Co., Inc. 12,879,750
Schering-Plough Corp 12,702,000
Black & Decker Corp. 12,608,925
Lowe's Companies, Inc. 12,562,500
Federal National Mortgage Association 12,536,625

Note: This breakdown is provided for informational purposes only. The Fund's
holdings may change daily. A shareholder owns shares of the Fund but does not
own a direct interest in any of the specific securities listed above. Short-term
securities are excluded. See financial statements for specific type of security
held.

8
<PAGE>

- --------------------------------------------------------------------------------
10 Largest Purchases in 1995
- --------------------------------------------------------------------------------

Holding amount of purchase

First Data Corp $11,323,637
Household International, Inc. 11,276,292
MGIC Investment Corp 11,169,721
Triton Energy Corp. 10,961,377
Nine West Group Inc. 10,943,062
Mylan Laboratories Inc 10,208,691
Black & Decker Corp. 9,585,556
Pharmacia & Upjohn, Inc. 9,543,850
Danka Business Systems Plc 9,321,654
Schering-Plough Corp 9,092,966

10 Largest Sales in 1995

Holding amount of sale

Promus Companies, Inc. $ 9,467,353
Dollar General Corp. 9,360,591
Harley-Davidson, Inc. 8,712,463
PacifiCare Health Systems, Inc. 8,522,639
U.S. Healthcare Inc. 8,369,780
Texas Instruments, Inc. 7,189,896
DSC Communications Corp. 6,591,063
Manpower, Inc. 6,260,852
Loewen Group, Inc. 6,036,830
Callaway Golf Co. 6,032,092

Note: This breakdown is provided for informational purposes only. The Fund's
holdings may change daily. A shareholder owns shares of the Fund but does not
own a direct interest in any of the specific securities listed above. All
securities listed indicate total purchases/sales for the issuer for the year.
Short-term securities are excluded. See financial statements for specific type
of security held.

9
<PAGE>

- --------------------------------------------------------------------------------
Diversification by Industry -- Top 5 as of 12/31/95
- --------------------------------------------------------------------------------

[PIE GRAPH APPEARS HERE]

Technology 11.0%
Drugs 9.6%
Retail 8.0%
Finance 7.3%
Computers & Office 7.2%
All Other Industries 56.9%

- --------------------------------------------------------------------------------
Portfolio Composition as of 12/31/95
- --------------------------------------------------------------------------------

[PIE GRAPH APPEARS HERE]

Common Stocks 92.8%
Cash & Equivalent 0.3%
Preferred Stocks 6.9%

Note: actual percentages will vary over time

10
<PAGE>

<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>

COMMON STOCKS (92.8%)+
AIRLINES (1.1%)
Atlantic Southeast Airlines, Inc..................... 180,000 $ 3,870,000
Southwest Airlines Co................................ 247,300 5,749,725
------------
9,619,725
------------
AUTO PARTS (0.9%)
Lear Seating Corp. (a)............................... 275,700 7,995,300
------------
BANKS (5.3%)
Bank of New York Co., Inc............................ 264,200 12,879,750
Barnett Banks, Inc................................... 186,000 10,974,000
First Interstate Bancorp............................. 133,000 18,154,500
NationsBank Corp..................................... 79,000 5,500,375
------------
47,508,625
------------
BIOTECHNOLOGY (0.8%)
Guidant Corp......................................... 162,000 6,844,500
------------
BROKERAGE (0.8%)
Schwab (Charles) Corp................................ 382,500 7,697,813
------------
BUILDINGS (1.5%)
Lennar Corp.......................................... 175,800 4,416,975
Oakwood Homes Corp................................... 229,100 8,791,712
------------
13,208,687
------------
COMMERCIAL SERVICES (1.0%)
Service Corp. International.......................... 205,000 9,020,000
------------
COMPUTERS & OFFICE EQUIPMENT (7.2%)
Alco Standard Corp................................... 426,800 19,472,750
Danka Business Systems Plc ADR (b)................... 300,200 11,107,400
EMC Corp. (a)........................................ 270,500 4,158,937
Hewlett-Packard Co................................... 139,000 11,641,250
Seagate Technology, Inc. (a)......................... 100,000 4,750,000
Sun Microsystems, Inc. (a)........................... 308,000 14,052,500
------------
65,182,837
------------
CONSUMER DURABLES (1.4%)
Black & Decker Corp.................................. 357,700 12,608,925
------------
CONSUMER FINANCIAL SERVICES (1.2%)
First Data Corp...................................... 163,700 10,947,438
------------
</TABLE>
- -------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>

CONSUMER SERVICES (0.2%)
CUC International Inc. (a)........................... 57,500 $ 1,962,187
------------
DOMESTIC OILS (1.4%)
Triton Energy Corp. (a).............................. 213,500 12,249,562
------------
DRUGS (9.6%)
Amgen, Inc. (a)...................................... 371,000 22,028,125
Elan Corp. Plc ADR (a) (b)........................... 206,200 10,026,475
Genzyme Corp. (a).................................... 173,800 10,840,775
Mylan Laboratories Inc............................... 484,050 11,375,175
Pharmacia & Upjohn, Inc.............................. 250,000 9,687,500
Schering-Plough Corp................................. 232,000 12,702,000
Teva Pharmaceutical Industries Ltd. ADR (b).......... 210,000 9,738,750
------------
86,398,800
------------
ELECTRONICS (1.1%)
Vishay Intertechnology, Inc. (a)..................... 329,250 10,371,375
------------
ENERGY (0.6%)
Abacan Resource Corp. (a)............................ 1,950,000 5,240,625
------------
FINANCE (7.3%)
Federal National Mortgage Association................ 101,000 12,536,625
Green Tree Financial Corp............................ 753,200 19,865,650
Household International, Inc......................... 226,000 13,362,250
Resource Bancshares Mortgage Group, Inc. (a)......... 200,557 2,857,937
Travelers Group Inc.................................. 269,000 16,913,375
------------
65,535,837
------------
FINANCIAL SERVICES (3.4%)
First USA, Inc....................................... 259,500 11,515,313
SunAmerica Inc....................................... 412,500 19,593,750
------------
31,109,063
------------
HEALTH CARE (6.9%)
Columbia/HCA Healthcare Corp......................... 282,560 14,339,920
HealthCare COMPARE Corp. (a)......................... 168,000 7,308,000
HEALTHSOUTH Corp. (a)................................ 302,000 8,795,750
Humana Inc. (a)...................................... 270,000 7,391,250
OrNda HealthCorp. (a)................................ 290,000 6,742,500
United Healthcare Corp............................... 274,300 17,966,650
------------
62,544,070
------------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

11
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>

COMMON STOCKS (CONTINUED)
INSURANCE (3.1%)
American International Group, Inc.................... 190,050 $ 17,579,625
MGIC Investment Corp................................. 192,600 10,448,550
------------
28,028,175
------------
INTERNATIONAL OILS (0.3%)
British Petroleum Company, Plc ADR (b)............... 31,272 3,193,653
------------
MEDIA (1.5%)
Viacom Inc. Class A (a).............................. 25,760 1,181,740
Viacom Inc. Class B (a).............................. 253,980 12,032,303
------------
13,214,043
------------
MEDICAL EQUIPMENT (4.0%)
Cordis Corp. (a)..................................... 150,000 15,075,000
Medtronic, Inc....................................... 288,000 16,092,000
ResMed, Inc. (a)..................................... 10,000 130,000
Waters Corp. (a)..................................... 246,500 4,498,625
------------
35,795,625
------------
PUBLISHING (1.1%)
News Corp. Ltd. ADR (b).............................. 454,600 9,717,075
------------
RESTAURANTS & LODGING (3.2%)
HFS Inc. (a)......................................... 348,100 28,457,175
------------
RETAIL (8.0%)
Bed Bath & Beyond Inc. (a)........................... 124,000 4,812,750
Circuit City Stores, Inc............................. 239,900 6,627,238
Dollar General Corp.................................. 141,356 2,933,137
Gymboree Corp. (a)................................... 180,500 3,722,813
Home Depot, Inc. (The)............................... 231,900 11,102,212
Kohl's Corp. (a)..................................... 148,300 7,785,750
Kroger Co. (The) (a)................................. 292,500 10,968,750
Lowe's Companies, Inc................................ 375,000 12,562,500
Micro Warehouse Inc. (a)............................. 100,000 4,325,000
Office Depot, Inc. (a)............................... 386,000 7,623,500
------------
72,463,650
------------
SOFTWARE (4.3%)
Computer Associates International, Inc............... 351,750 20,005,781
Microsoft Corp. (a).................................. 52,000 4,563,000
Oracle Corp. (a)..................................... 333,000 14,110,875
------------
38,679,656
------------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
-------------------------------------------------------------
<S> <C> <C>

TECHNOLOGY (11.0%)
General Motors Corp. Class E.......................... 175,000 $ 9,100,000
Intel Corp............................................ 294,000 16,684,500
Lam Research Corp. (a)................................ 254,500 11,643,375
Linear Technology Corp................................ 300,000 11,775,000
Micron Technology Inc................................. 356,800 14,138,200
Motorola, Inc......................................... 140,000 7,980,000
3Com Corp. (a)........................................ 589,900 27,504,088
------------
98,825,163
------------
TELECOMMUNICATION EQUIPMENT (0.4%)
General Instrument Corp. (a).......................... 114,800 2,683,450
Scientific-Atlanta, Inc............................... 86,800 1,302,000
------------
3,985,450
------------
TELECOMMUNICATION SERVICES (2.2%)
Tele-Communications International, Inc. Class A (a)... 239,000 5,437,250
WorldCom, Inc. (a).................................... 401,140 14,140,185
------------
19,577,435
------------
TEXTILE & APPAREL (2.0%)
Nine West Group Inc. (a).............................. 262,600 9,847,500
Warnaco Group, Inc. (The) Class A..................... 332,300 8,307,500
------------
18,155,000
------------
Total Common Stocks
(Cost $571,011,616).................................. 836,137,469
------------
PREFERRED STOCK (0.3%)
PUBLISHING (0.3%)
News Corp. Ltd. ADR--Preference
Shares (b)........................................... 146,800 2,825,900
------------
Total Preferred Stock
(Cost $2,270,220).................................... 2,825,900
------------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

12
<PAGE>

<TABLE>
<CAPTION>
Principal
Amount Value
-------------------------------------------------------------
<S> <C> <C>

SHORT-TERM INVESTMENTS (6.7%)
COMMERCIAL PAPER (6.7%)
American General Finance Corp.
5.95%, due 1/4/96................................ $ 10,864,000 $ 10,864,000
Ford Motor Credit Co.
5.80%, due 1/2/96................................ 14,778,000 14,778,000
General Electric Capital Corp.
5.70%, due 1/5/96................................ 24,331,000 24,331,000
Prudential Funding Corp.
5.92%, due 1/3/96................................ 10,312,000 10,312,000
------------
Total Short-Term Investments
(Cost $60,285,000)............................... 60,285,000
------------
Total Investments
(Cost $633,566,836) (c).......................... 99.8% 899,248,369(d)
Cash and Other Assets, Less
Liabilities...................................... 0.2 1,406,460
------------ ------------
Net Assets........................................ 100.0% $900,654,829
============ ============
</TABLE>
- -------
(a) Non-income producing securities.
(b) ADR--American Depository Receipt.
(c) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(d) At December 31, 1995 net unrealized appreciation was $265,681,533, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $278,572,702 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $12,891,169.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

13
<PAGE>

STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1995

<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (Note 2)
(identified cost $633,566,836).................................. $899,248,369
Cash............................................................. 202
Receivables:
Fund shares sold................................................ 2,841,298
Investment securities sold...................................... 1,788,390
Dividends and interest.......................................... 466,750
Other assets..................................................... 594
------------
Total assets................................................... 904,345,603
------------
LIABILITIES:
Payables:
Fund shares redeemed............................................ 2,160,649
NYLIFE Distributors............................................. 785,747
Adviser......................................................... 225,340
Investment securities purchased................................. 165,300
Transfer agent.................................................. 148,000
Custodian....................................................... 14,307
Trustees........................................................ 2,194
Accrued expenses................................................. 149,682
Dividend payable................................................. 39,555
------------
Total liabilities.............................................. 3,690,774
------------
Net assets....................................................... $900,654,829
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized
Class A......................................................... $ 17,155
Class B......................................................... 332,316
Additional paid-in capital....................................... 642,062,480
Accumulated net realized loss on investments..................... (7,438,655)
Net unrealized appreciation on
investments..................................................... 265,681,533
------------
Net assets....................................................... $900,654,829
============
CLASS A
Net assets applicable to outstanding shares...................... $ 44,433,712
============
Shares of beneficial interest outstanding........................ 1,715,515
============
Net asset value per share outstanding............................ $ 25.90
Maximum sales charge (5.50% of offering price)................... 1.51
------------
Maximum offering price per share outstanding..................... $ 27.41
============
CLASS B
Net assets applicable to outstanding shares...................... $856,221,117
============
Shares of beneficial interest outstanding........................ 33,231,646
============
Net asset value per share outstanding............................ $ 25.77
============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a)................................................... $ 4,174,697
Interest........................................................ 4,721,887
------------
Total income................................................... 8,896,584
------------
Expenses: (Note 2)
Distribution--Class B (Note 3).................................. 3,586,103
Administration (Note 3)......................................... 2,155,386
Advisory (Note 3)............................................... 2,155,386
Service (Note 3)................................................ 1,710,435
Transfer agent.................................................. 1,200,369
Shareholder communication....................................... 207,653
Registration.................................................... 116,967
Recordkeeping (Note 3).......................................... 95,042
Legal........................................................... 90,833
Custodian....................................................... 73,683
Trustees........................................................ 24,603
Auditing........................................................ 22,612
Miscellaneous................................................... 11,147
------------
Total expenses................................................. 11,450,219
------------
Net investment loss.............................................. (2,553,635)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments................................. (7,438,705)
Net change in unrealized appreciation on investments............. 206,149,738
------------
Net realized and unrealized gain on investments.................. 198,711,033
------------
Net increase in net assets resulting from operations............. $196,157,398
============
</TABLE>
- -------
(a) Dividends recorded net of foreign withholding taxes of $19,282.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

14
<PAGE>

- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
September 1
Year ended through Year ended
December 31 December 31 August 31
1995 1994* 1994
------------ ------------ ------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss................. $ (2,553,635) $ (763,572) $ (2,311,410)
Net realized gain (loss) on
investments........................ (7,438,705) 1,720,637 6,214,985
Net change in unrealized
appreciation on investments........ 206,149,738 (17,058,505) 17,015,471
------------ ------------ ------------
Net increase (decrease) in net
assets resulting from operations... 196,157,398 (16,101,440) 20,919,046
------------ ------------ ------------
Distributions to shareholders:
From net realized gain on
investments:
Class A........................... (86,358) -- --
Class B........................... (1,608,869) (3,581,497) (8,888,290)
------------ ------------ ------------
Total distributions to
shareholders................... (1,695,227) (3,581,497) (8,888,290)
------------ ------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A........................... 49,152,255 -- --
Class B........................... 330,945,526 75,510,341 247,639,464
Net asset value of shares issued to
shareholders in reinvestment of
distributions:
Class A........................... 72,656 -- --
Class B........................... 1,586,582 3,538,587 8,783,556
------------ ------------ ------------
381,757,019 79,048,928 256,423,020
Cost of shares redeemed:
Class A........................... (10,509,357) -- --
Class B........................... (164,188,120) (32,729,432) (75,257,645)
------------ ------------ ------------
Increase in net assets derived
from capital share transactions. 207,059,542 46,319,496 181,165,375
------------ ------------ ------------
Net increase in net assets...... 401,521,713 26,636,559 193,196,131
NET ASSETS:
Beginning of period.................. 499,133,116 472,496,557 279,300,426
------------ ------------ ------------
End of period........................ $900,654,829 $499,133,116 $472,496,557
============ ============ ============
</TABLE>
- -------
*The Fund changed its fiscal year end from August 31 to December 31.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

15
<PAGE>

FINANCIAL HIGHLIGHTS
(SELECTED PER SHARE DATA AND RATIOS)

<TABLE>
<CAPTION>
Class B
---------------------------------------------------------------------
Class A Class B September 1 Year Ended August 31
--------- -------- through ----------------------------------------------
Year ended December 31
December 31, 1995 1994* 1994 1993 1992 1991
------------------ ----------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period..... $19.11 $19.11 $19.93 $19.47 $14.14 $15.96 $11.35
------- -------- -------- -------- -------- -------- -------
Net investment income
(loss).................. 0.03 (0.08) (0.03)(a) (0.12)(a) (0.12)(a) (0.19)(a) (0.13)(a)
Net realized and
unrealized gain (loss)
on investments.......... 6.81 6.79 (0.65) 1.13 5.64 1.30 5.16
------- -------- -------- -------- -------- -------- -------
Total from investment
operations.............. 6.84 6.71 (0.68) 1.01 5.52 1.11 5.03
------- -------- -------- -------- -------- -------- -------
Less distributions:
From net realized gain on
investments............. (0.05) (0.05) (0.14) (0.55) (0.19) (2.93) (0.42)
------- -------- -------- -------- -------- -------- -------
Net asset value at end of
period.................. $ 25.90 $ 25.77 $ 19.11 $ 19.93 $ 19.47 $ 14.14 $ 15.96
======= ======== ======== ======== ======== ======== =======
Total investment return
(b)..................... 35.79% 35.11% (3.40%) 5.36% 39.25% 6.77% 45.89%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss)............... 0.2% (0.4%) (0.5%)+ (0.6%) (0.7%) (1.2%) (1.0%)
Expenses.............. 1.1% 1.7% 1.8%+ 1.8% 1.8% 2.0% 2.5%
Portfolio turnover rate.. 29% 29% 11% 31% 73% 157% 327%
Net assets at end of
period (in 000's)....... $44,434 $856,221 $499,133 $472,497 $279,300 $128,710 $65,659
</TABLE>
- -------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and is not
annualized.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

16
<PAGE>

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 1 -- ORGANIZATION AND BUSINESS:

The Fund currently offers two classes of shares. Class A shares, whose distri-
bution commenced on January 3, 1995, are offered at net asset value per share
plus an initial sales charge. Class B shares are offered without an initial
sales charge, although a declining contingent deferred sales charge may be im-
posed on redemptions made within six years of purchase. Any purchase of Class A
shares of $1,000,000 or more on which the initial sales charge was waived will
be subject to a contingent deferred sales charge on redemptions made within one
year of purchase. Class A shares and Class B shares bear the same voting (ex-
cept for issues that relate solely to one class), dividend, liquidation and
other rights and conditions except that the Class B shares are subject to
higher distribution fee rates. Each class of shares bears distribution and/or
service fee payments under a distribution plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940.

The Fund's investment objective is to seek long-term growth of capital.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:

The following is a summary of significant accounting policies followed by the
Fund:

SECURITIES VALUATION. Portfolio securities of the Capital Appreciation Fund are
stated at value determined (a) by appraising common and preferred stocks which
are traded on the New York Stock Exchange at the last sale price on that day
or, if no sale occurs, at the mean between the closing bid and asked prices,
(b) by appraising common and preferred stocks traded on other United States na-
tional securities exchanges or foreign securities exchanges as nearly as possi-
ble in the manner described in (a) by reference to their principal exchange,
including the National Association of Securities Dealers National Market Sys-
tem, (c) by appraising over-the-counter securities quoted on the National Asso-
ciation of Securities Dealers NASDAQ system (but not listed on the National
Market System) at the bid price supplied through such

17
<PAGE>

system, (d) by appraising over-the-counter securities not quoted on the NASDAQ
system at prices supplied by the pricing agent or brokers selected by the Ad-
viser, if these prices are deemed to be representative of market values at the
regular close of business of the New York Stock Exchange. Short-term securities
which mature in more than 60 days are valued at current market quotations.
Short-term securities which mature in 60 days or less are valued at amortized
cost if their term to maturity at purchase was 60 days or less, or by amortiz-
ing the difference between market value on the 61st day prior to maturity and
value on maturity date if their original term to maturity at purchase exceeded
60 days.

FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $2,553,635 and $1,608 have been reclassified
from accumulated net investment loss and accumulated net realized loss on in-
vestments, respectively, to additional paid-in capital, due primarily to net
investment losses incurred by the Fund in 1995.

Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Capital Appreciation Fund intends to de-
clare and pay dividends quarterly. Income dividends and capital gain distribu-
tions are determined in accordance with federal income tax regulations which
may differ from generally accepted accounting principles.

USE OF ESTIMATES. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the finan-
cial statements. Actual results could differ from those estimates.

18
<PAGE>

NOTE 3 -- FEES AND RELATED PARTY POLICIES:

NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned sub-
sidiary of New York Life, is the Administrator for the Fund.

The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an an-
nual rate of the average daily net assets of 0.36% and 0.36%, respectively. The
Administrator and the Adviser have voluntarily agreed to reduce their fees to
0.65% on assets in excess of $200 million and 0.50% on assets in excess of $500
million.

19
<PAGE>

The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund.

SALES CHARGES. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $718,806 for the year
ended December 31, 1995.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges for the year ended December 31, 1995 in the amount of $691,725.

OTHER. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1995 were $88,326.

Fees for the cost of legal services provided to the Fund by the Office of Gen-
eral Counsel of New York Life amounted to $38,241 for the year ended December
31, 1995.

Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the year ended December 31, 1995 is shown in
the statement of operations.

NOTE 4 -- FEDERAL INCOME TAX:

At December 31, 1995, for Federal income tax purposes, capital loss
carryforwards of $4,041,812 are available to the extent provided by regulations
to offset future realized gains through 2003. To the extent that these loss
carryforwards are used to offset future capital gains, it is probable that the
capital gains so offset will not be distributed to shareholders. Additionally,
the Fund intends to elect, to the extent provided by the regulations, to treat
$3,396,843 of qualifying capital losses that arose during the year as if they
arose on January 1, 1996.

20
<PAGE>

NOTE 5 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):

NOTE 6 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):

<TABLE>
<CAPTION>
September 1
Year Ended through Year Ended
December 31 December 31 August 31
1995 1994* 1994
--------------- ----------- ----------
Class A Class B Class B
------- ------- ----------------------
<S> <C> <C> <C> <C>
Shares sold............................. 2,135 14,247 3,906 12,760
Shares issued in reinvestment distribu-
tions.................................. 3 61 186 469
----- ------ ----- ------
2,138 14,308 4,092 13,229
Shares redeemed......................... 422 7,192 1,687 3,867
----- ------ ----- ------
Net increase............................ 1,716 7,116 2,405 9,362
===== ====== ===== ======
</TABLE>
- -------
*The Fund changed its fiscal year end from August 31 to December 31.

21
<PAGE>

- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------

To the Board of Trustees and Shareholders of
The MainStay Funds

In our opinion, the accompanying statement of assets and liabilities (including
the portfolio of investments) and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all mate-
rial respects, the financial position of the MainStay Capital Appreciation
Fund, (one of the thirteen funds constituting The MainStay Funds, hereafter re-
ferred to as the "Fund") at December 31, 1995, the results of its operations
for the year then ended and the changes in its net assets and the financial
highlights for each of the periods presented, in conformity with generally ac-
cepted accounting principles. These financial statements and financial high-
lights (hereafter referred to as "financial statements") are the responsibility
of the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these fi-
nancial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1995 by correspondence with the cus-
todian and brokers, provide a reasonable basis for the opinion expressed above.

Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 12, 1996

22
<PAGE>

This page intentionally left blank

23
<PAGE>

- --------------------------------------------------------------------------------
The MainStay Funds
- --------------------------------------------------------------------------------

GROWTH FUNDS
<TABLE>
<CAPTION>
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund [horizontal bar graph of companies in expanding markets and are willing to accept a higher
indicating risk/reward with strong growth potential level of risk for higher return potential
of fund]
- ------------------------------------------------------------------------------------------------------------------------------------

Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund [horizontal bar graph the makeup and returns of the pate in the growth potential of stocks+
indicating risk/reward S&P 500*
of fund]
- ------------------------------------------------------------------------------------------------------------------------------------

Offers broad diversification into You prefer the higher return potential
International Equity Fund [horizontal bar graph international stock markets with of international equities or want to add
indicating risk/reward an emphasis on risk control diversification to your domestic
of fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
GROWTH & INCOME FUNDS
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
Balances current income with growth You seek a combination of income and
Total Return Fund [horizontal bar graph opportunities by investing in stocks, growth potential and want to manage
indicating risk/reward bonds, and money market instruments risk through diversification
of fund]
- ------------------------------------------------------------------------------------------------------------------------------------

Seeks undervalued stocks with You seek to maximize total return from
Value Fund [horizontal bar graph attractive dividends and a stimulus securities which may have more poten-
indicating risk/reward for positive change tial than the market currently sees
of fund]
- ------------------------------------------------------------------------------------------------------------------------------------

Invests in convertible securities for You want income from securities that
Convertible Fund [horizontal bar graph a special blend of long-term growth may offer growth potential if converted
indicating risk/reward potential and dividend income into common stock
of fund]
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

# A small portion of the Fund's income may be subject to state and local taxes
and the Alternative Minimum Tax. Capital gains, if any, may also be taxed.

24
<PAGE>

INCOME FUNDS
<TABLE>
<CAPTION>
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
Seeks a high level of current income You are seeking to combine high current
Government Fund [horizontal bar graph consistent with safety of principal income and safety of principal
indicating risk/reward primarily from U.S. government
of fund] securities(S)
- ------------------------------------------------------------------------------------------------------------------------------------

High Yield [horizontal bar graph An aggressive high yield bond You want to maximize current income
Corporate Bond Fund indicating risk/reward fund that is actively managed for and can accept the higher risk of
of fund] maximum current income securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------

Seeks high current yields and You prefer the higher return potential
International Bond Fund [horizontal bar graph competitive total return from non- of international bonds or want to add
indicating risk/reward U.S. bonds with an emphasis on diversification to your domestic
of fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------

Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund [horizontal bar graph stability of principal, and liquidity, competitive yields on cash you're plan-
indicating risk/reward with free checkwriting/1/ ning to spend or invest in the near
of fund] future
- ------------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
TAX-FREE INCOME FUNDS
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
Seeks a high current income that's You're in a high federal income tax
Tax Free Bond Fund [horizontal bar graph exempt from regular federal bracket or want to pay less of your
indicating risk/reward income tax# investment income to the IRS
of fund]
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a California resident and want to
California Tax Free Fund [horizontal bar graph from both federal and California keep more of what you earn by investing
indicating risk/reward income taxes consistent with for income that's double tax free#
of fund] preservation of capital#
- ------------------------------------------------------------------------------------------------------------------------------------

[horizontal bar graph Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund indicating risk/reward from federal, New York State, and and want to keep more of what you earn
of fund] New York City income taxes consis- with income that's double or triple tax
tent with preservation of capital# free#
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

If you would like to learn more about any of the MainStay Funds not covered by
your current prospectus, please call your Registered Representative. Your
Registered Representative can provide you with additional prospectuses which
contain more complete information including advisory fees, other expenses, and
share classes. Please read the prospectus carefully before you invest or send
money. Shares must be offered in the investor's state of residence.

25
<PAGE>

MainStay Capital
Appreciation Fund

1995 annual report

The year in review
fund results
& portfolio highlights

[Logo of MainStay(R) Funds appears here]

December 31, 1995

Officers & Trustees

Dechert Price & Rhoads
Legal Counsel

[Logo of MainStay(R) Funds appears here]

[Logo of New York Life appears here]

This report is provided for the information of shareholders of the MainStay
Capital Appreciation Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.

[RECYCLE LOGO]

MSAN05 (296)

<PAGE>

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

Chairperson's Letter 2

MainStay Convertible Fund Highlights
and Portfolio Managers' Comments 4

Returns & Lipper Rankings 6

Year-by-Year Performance 7

$10,000 Invested in the MainStay Convertible Fund
Class A Shares vs. S&P 500 and Inflation 7

$10,000 Invested in the MainStay Convertible Fund
Class B Shares vs. S&P 500 and Inflation 7

Top 25 Security Holdings 8

10 Largest Purchases 9

10 Largest Sales 9

Diversification by Industry -- Top 5 10

Portfolio Composition 10

Financial Statements 11

Notes to Financial Statements 23

Report of Independent Accountants 29

The MainStay Funds 30
<PAGE>

- --------------------------------------------------------------------------------
Chairperson's Letter
- --------------------------------------------------------------------------------

[PHOTO OF ALICE T. KANE] Alice T. Kane, Chairperson

Report to Shareholders for the Year Ended December 31, 1995

The year ended December 31, 1995, was an outstanding one for both the stock and
bond markets, with advances fueled by low inflation, strong productivity, solid
profits, and declining interest rates. The S&P 500 Index* provided a spectacular
37.53% total return and long-term Treasuries gained 30.1%. While convertible
securities didn't match the returns of either stocks or bonds, these hybrids
were buoyed by the strength of both markets.

In this context, we are pleased to report to you on the activities and
investment results of the MainStay(R) Convertible Fund for the twelve months
ended December 31, 1995. For this period, the Fund provided total returns of
23.72% and 23.02% for Class A and Class B shares, respectively, excluding all
sales charges. These results placed us well ahead of the average Lipper+
convertible securities fund. Based on the three- and five-year periods, the Fund
received an overall five-star rating out of 2,466 funds in the hybrid category
from Morningstar Inc.++ for the period from December 31, 1990, to December 31,
1995. This is the highest rating available from this independent fund
performance monitor.

To manage the complexities of convertible investing, the Fund uses a disciplined
investment approach with rigorous credit, value, and risk/return criteria.
Despite rapidly rising markets, the Fund managers took a relatively cautious and
somewhat contrarian approach that affected the Fund in various ways throughout
the course of the year. The Convertible Fund's strategies and results are
described on the following pages.

2
<PAGE>

/s/ Alice T. Kane

Alice T. Kane
January 1996

- ----------

* See footnote on page 7 for more information on the S&P 500.

+ See foonote on page 6 for more information on Lipper Analytical Services,
Inc.

++ Morningstar, Inc. ratings reflect historic risk-adjusted performance taking
fees and sales charges into account, and may change monthly. Its ratings of
1 (low) to 5 (high) stars are based on a fund's 3- and 5-year average annual
returns with fee adjustments, and a risk factor that reflects fund
performance relative to 3-month Treasury bill monthly returns. As of
12/31/95, the Fund's 3-and 5-year ratings were 5 and 5 stars out of 2,466
and 1,609 in the hybrid category. Only 10% of the funds in an investment
category may receive 5 stars. Ratings reflect Class B share performance
only. The Fund's Class A shares introduced 1/3/95 will not be rated by
Morningstar until they have 3 years of operating history.

3
<PAGE>

- --------------------------------------------------------------------------------
MainStay Convertible Fund
- --------------------------------------------------------------------------------

1995 Fund Highlights

. Annual total returns of 23.72% and 23.02% for Class A and Class B shares,
respectively, excluding sales charges
. Class A shares outpaced the average Lipper convertible securities fund
. Class B shares outpaced the average Lipper convertible securities fund

[PHOTO APPEARS HERE OF CONVERTIBLE TEAM]
Convertible Team -- Thomas Wynn, Neil Feinberg, and Denis Laplaige (left to
right)

For the 12-month period ended December 31, 1995, the MainStay Convertible Fund
provided total returns of 23.72% and 23.02% for Class A and Class B shares,
respectively, excluding all sales charges. The Fund ended the year well ahead of
the average Lipper convertible securities fund, which returned 20.74%.

These outstanding returns reflected unusually favorable market conditions which
are unlikely to be repeated in 1996. In rapidly rising stock and bond markets as
we had in 1995, careful security selection is a critical factor in
distinguishing leading funds from their peers. Our disciplined bottom-up
approach led to broad sector exposure that benefited the Fund throughout the
year. Overweighted sectors included airlines, energy, and precious metals during
the first quarter, homebuilders during the second quarter, finance and
healthcare in the third quarter, and energy and finance in the fourth. We also
maintained a conservative posture, with cash exceeding 10% of investments
throughout the year.

Our decision not to invest in technology benefited the Fund from mid-September
through the end of the year, as the sector experienced a sharp correction. Our
emphasis on energy issues, which benefited

Bottom-up investing
- --------------------------------------------------------------------------------
Security selection based on the specific fundamental merits of individual
issues. The opposite of "top-down" investing, which starts with general economic
trends, compares market sectors, and uses relative security values to narrow the
range of issues to examine.

Weighting
- --------------------------------------------------------------------------------
The proportion of a portfolio allocated to a specific security or sector,
i.e., a fund is said to be overweighted in a sector when that portion of the
portfolio is larger than the sector's general relationship to the market as a
whole.

Cash position
- --------------------------------------------------------------------------------
The portion of a portfolio held in highly liquid securities (often referred to
as "cash"), either for defensive purposes or to take advantage of investment
opportunities as they may arise.

4
<PAGE>

from the cold weather, contributed positively to performance -- and as interest
rates declined, our significant exposure in the financial sector also
strengthened our returns.

Given the rate at which the markets were rising, the Fund was generally hampered
by its defensive cash position. In the fourth quarter, however, that defensive
position, at approximately 20% cash, helped the Fund on several days when the
market declined. Fortunately, the strength of our security selection outweighed
the negative impact of our defensive posture throughout the year, and was
largely responsible for our competitive performance.

Looking ahead, valuation levels in technology are finally becoming more
compelling, and we are adding selectively and modestly to this group as we find
securities which meet our strict criteria. We have also taken some profits in
the financial sector. We are continuing to seek international opportunities, and
will invest in them when it appears it may be favorable to do so.

At this juncture, we are maintaining a conservative posture and continuing to
adhere to our strict valuation and risk/return disciplines as we pursue the
Fund's objectives of capital appreciation and current income. [ ]

Denis Laplaige
Neil Feinberg
Portfolio Managers

5
<PAGE>

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Returns & Lipper Rankings as of 12/31/95
- --------------------------------------------------------------------------------

Fund average annual total returns *
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Life of Fund
1 year 5 years through 12/31/95
Class A 23.72% 20.60% 10.28%
Class B 23.02% 20.47% 10.22%
- --------------------------------------------------------------------------------
<CAPTION>
Fund SEC returns*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Life of Fund
1 year 5 years through 12/31/95
Class A 16.91% 19.24% 9.64%
Class B 18.02% 20.27% 10.22%
- --------------------------------------------------------------------------------
<CAPTION>
Fund Lipper+ rankings and year-end Lipper category returns
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Life of Fund/Class
1 year 5 years through 12/31/95
Class A 9 out of 34 funds n/a 9 out of 34 funds
Class B 12 out of 34 funds 2 out of 19 funds 2 out of 7 funds

Average Lipper convertible
securities fund 20.74% 15.16% 9.20%
- --------------------------------------------------------------------------------
<CAPTION>
Fund year-end per-share net asset values and distributions for 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
NAV 12/31/95 Income Capital Gains
Class A $13.45 $0.5500 $0.4045
Class B $13.45 $0.4744 $0.4045
- --------------------------------------------------------------------------------
</TABLE>

* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show the
percentage change for each of the required periods. All returns assume capital
gains and dividend distributions are reinvested.

Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 5.5% and an annual 12b-1 fee of .25%.
Performance figures for this Class include the historical performance of the
Class B shares for periods from inception (5/1/86) up to 12/31/94. Performance
data for the two Classes after this date vary based on differences in their
expense structures. Class B shares of the Fund are sold with no initial sales
charge, but are subject to a maximum Contingent Deferred Sales Charge (CDSC)
of up to 5% if shares are redeemed during the first 6 years of purchase and an
annual 12b-1 fee of up to 1%.

+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales charges.
For the 12-month period ended 12/31/95, the Lipper convertible securities fund
category included 34 funds. For the 5-year and since inception periods ended
12/31/95, the Fund's Class B shares placed among the top 11% and 29%,
respectively, of convertible securities funds. Class A shares were not in
existence for these periods. Class A shares were first offered to the public
1/3/95; Class B shares 5/1/86.

6
<PAGE>

- --------------------------------------------------------------------------------
Year-by-Year Performance*
[BAR GRAPH APPEARS HERE]
- --------------------------------------------------------------------------------

Year ended 12/31 Total Return %
86 1.03
87 -8.58
88 9.78
89 6.74
90 -6.70
91 48.47
92 13.11
93 24.47
94 -1.34
95 23.72 Class A
95 23.02 Class B

- --------------------------------------------------------------------------------
$10,000 invested in the MainStay Convertible Fund
vs. S&P 500 and Inflation
- --------------------------------------------------------------------------------

Class A Shares

[LINE GRAPH APPEARS HERE]

Year-end Convertible Fund S&P 500/++/ Inflation/s/
5/1/86 9450 10000 10000
86 9457 10550 10175
87 8728 11097 10626
88 9582 12927 11096
89 10228 17011 11611
90 9543 16481 12230
91 14168 21481 12698
92 16025 23115 13066
93 19946 25435 13425
94 19679 25780 13785
95 24346 35433 14144

Class B Shares

[LINE GRAPH APPEARS HERE]

Year-end Convertible Fund S&P 500/++/ Inflation/s/
5/1/86 10000 10000 10000
86 10103 10550 10175
87 9236 11097 10626
88 10140 12927 11096
89 10823 17011 11611
90 10098 16481 12230
91 14993 21481 12698
92 16958 23115 13066
93 21107 25435 13425
94 20824 25780 13785
95 25619 35433 14144

7
<PAGE>

Holding $ amount

Chubb Corp. (Euro) $20,701,500
AMR Corp. 14,153,813
Delta Air Lines, Inc. 10,343,125
ADT Operations, Inc. 9,300,000
TJX Companies, Inc. 9,093,200
Unifi, Inc. 8,609,938
Hollinger, Inc. 8,194,725
AJL PEPS 7,702,500
Cabot Medical Corp. 7,635,000
RPM, Inc. of Ohio 7,457,125
Michaels Stores, Inc. 7,152,750
Cooper Industries, Inc. 7,099,790
Magma Copper Co. 6,248,125
International Paper Co. 5,956,050
U.S. Home Corp. 5,528,250
Analog Devices, Inc. 5,148,000
Enron Oil & Gas Co. 5,136,000
USF&G Corp. 5,016,000
Occidental Petroleum Corp. 4,872,000
MBL International Finance (Bermuda) Trust 4,640,000
SunAmerica, Inc. 4,495,463
Unisys Corp. 4,407,875
Allegheny Ludlum Corp. 4,112,345
Cablevision Systems Corp. 3,915,825
Pennzoil Co. 3,893,710

Note: This breakdown is provided for informational purposes only. This Fund's
holdings may change daily. A shareholder owns shares of the Fund but does not
own a direct interest in any of the specific securities listed above. Short-
term securities are excluded. Dollar amount represents the aggregate value of
the Fund's long positions and does not include the value of the Fund's short
positions, if any. See financial statements for specific type of security held.

8
<PAGE>

- --------------------------------------------------------------------------------
10 Largest Purchases in 1995
- --------------------------------------------------------------------------------

Holding amount of purchase

AMR Corp. $27,965,427
Chubb Corp. (Euro) 23,870,443
Unifi, Inc. 22,148,800
Cooper Industries, Inc. 15,786,792
Turner Broadcasting Systems, Inc. 13,400,000
CIGNA Corp. 12,154,736
Cablevision Systems Corp. 10,000,000
Michaels Stores, Inc. 9,967,071
Seagate Technology, Inc. 9,937,350
Delta Air Lines, Inc. 9,463,059

- --------------------------------------------------------------------------------
10 Largest Sales in 1995
- --------------------------------------------------------------------------------

Holding amount of sale

AMR Corp. $21,719,412
Unifi, Inc. 14,440,913
Turner Broadcasting Systems, Inc. 12,039,375
Cooper Industries, Inc. 10,821,720
Roche Holdings, Inc. 8,001,730
Occidental Petroleum Corp. 7,927,500
Altera Corp. 7,688,337
U.S. Treasury Bond due 8/15/25 7,362,191
Thermo Electron Corp. 7,167,500
Newmont Mining Corp. 7,116,088

Note: This breakdown is provided for informational purposes only. This Fund's
holdings may change daily. A shareholder owns shares of the Fund but does not
own a direct interest in any of the specific securities listed above. All
securities listed indicate total purchases/sales for the issuer of the year.
Short-term securities are excluded. See financial statements for specific type
of security held.

9
<PAGE>

- --------------------------------------------------------------------------------
Diversification by industry -- Top 5 as of 12/31/95
- --------------------------------------------------------------------------------

[PIE GRAPH APPEARS HERE]

Insurance 10.1%
Airlines 5.5%
Retail 5.5%
Steel, Aluminum & Other Metals 4.9%
Computers & Office Equipment 3.9%
All Other Industries 70.1%

[PIE GRAPH APPEARS HERE]

Convertible Bonds 42.9%
Convertible Preferred Stocks 22.3%
Cash & Equivalents 18.1%
Common Stocks 15.5%
Corporate Bonds 1.2%

Note: Actual percentages will vary over time. Portfolio Diversification by
Industry and Portfolio Composition do not include short positions in common
stocks.

10
<PAGE>

<TABLE>
<CAPTION>
Principal
Amount Value
-------------------------------------------------------------
<S> <C> <C>

CONVERTIBLE SECURITIES (65.2%)+
BONDS (42.9%)
AIRLINES (3.2%)
AMR Corp.
6.125%, due 11/1/24................................. $ 13,775,000 $ 14,153,812
Delta Air Lines, Inc.
3.23%, due 6/15/03.................................. 500,000 475,000
------------
14,628,812
------------
AUTO PARTS (0.1%)
Arvin Industries, Inc.
7.50%, due 9/30/14.................................. 625,000 625,000
------------
BANKS (1.3%)
MBL International Finance
(Bermuda) Trust
3.00%, due 11/30/02................................. 4,000,000 4,640,000
UBS Finance Delaware, Inc.
Series MTN
2.00%, due 12/15/00................................. 1,425,000 1,410,750
------------
6,050,750
------------
BUILDING MATERIALS (0.5%)
Cemex S.A.
4.25%, due 11/1/97 (c).............................. 1,000,000 845,000
Lafarge Corp.
7.00%, due 7/1/13................................... 1,200,000 1,245,000
------------
2,090,000
------------
BUILDINGS (1.9%)
Toll Corp.
4.75%, due 1/15/04 (e).............................. 2,824,000 3,148,760
U.S. Home Corp.
4.875%, due 11/1/05 (e)............................. 5,850,000 5,528,250
------------
8,677,010
------------
CABLE (0.2%)
Comcast Corp.
3.375%, due 9/9/05
5.50%, beginning 9/9/97............................. 1,100,000 1,012,000
------------
CAPITAL GOODS (1.6%)
Cooper Industries, Inc.
7.05%, due 1/1/15 (e)............................... 6,893,000 7,099,790
------------
CELLULAR TELEPHONE (0.4%)
U.S. Cellular Corp.
(zero coupon), due 6/15/15.......................... 5,600,000 1,974,000
------------

<CAPTION>
Principal
Amount Value
-------------------------------------------------------------
<S> <C> <C>

CHEMICALS (3.3%)
Cabot Medical Corp.
7.50%, due 3/1/99................................... $ 7,635,000 $ 7,635,000
RPM, Inc. of Ohio
(zero coupon), due 9/30/12.......................... 17,650,000 7,457,125
------------
15,092,125
------------
COMPUTERS & OFFICE EQUIPMENT (2.4%)
CIE IBM France
5.75%, due 1/1/98................................... FF 6,239,835 1,709,091
Comptronix Corp.
6.75%, due 3/1/02................................... $ 600,000 288,000
Seagate Technology, Inc.
6.75%, due 5/1/12................................... 3,300,000 3,753,750
SoftKey International, Inc.
5.50%, due 11/1/00 (c).............................. 800,000 592,000
Unisys Corp.
8.25%, due 8/1/00 (e)............................... 4,925,000 4,407,875
------------
10,750,716
------------
CONGLOMERATES (0.1%)
GenCorp, Inc.
8.00%, due 8/1/02................................... 258,000 260,580
------------
CONSUMER SERVICES (2.4%)
ADT Operations, Inc.
(zero coupon), due 7/6/10........................... 20,000,000 9,300,000
Laidlaw, Inc. (ADT Ltd.)
6.00%, due 1/15/99 (c).............................. 1,500,000 1,785,000
------------
11,085,000
------------
CONSUMER STAPLES (0.3%)
American Brands, Inc. (Euro)
7.75%, due 6/15/02.................................. 950,000 1,485,800
------------
ELECTRICAL EQUIPMENT (1.8%)
Analog Devices, Inc.
3.50%, due 12/1/00.................................. 4,800,000 5,148,000
C-Cube Microsystems, Inc.
5.875%, due 11/1/05................................. 500,000 1,010,000
Checkpoint Systems, Inc.
5.25%, due 11/1/05 (c).............................. 1,250,000 1,450,000
MagneTek, Inc.
8.00%, due 9/15/01.................................. 600,000 531,000
------------
8,139,000
------------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

<PAGE>

- ------------------------------------------------------------------------------
THE MAINSTAY CONVERTIBLE FUND
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Value
-------------------------------------------------------------
<S> <C> <C>

BONDS (CONTINUED)
ENERGY (1.6%)
Pennzoil Co.
4.75%, due 1/15/03.................................. $ 2,500,000 $ 3,231,250
4.75%, due 10/1/03.................................. 3,884,000 3,893,710
------------
7,124,960
------------
FINANCIAL (1.8%)
Hollinger, Inc.
(zero coupon), due 10/5/13.......................... 27,090,000 8,194,725
------------
HEALTH CARE (0.7%)
Pacific Physician Services, Inc.
5.50%, due 12/15/03................................. 650,000 628,875
Phoenix Shannon, Plc ADR
9.50%, due 11/1/00 (c)(f)........................... 2,500,000 2,462,500
------------
3,091,375
------------
HOUSEHOLD PRODUCTS (0.6%)
Whirlpool Corp.
(zero coupon), due 5/14/11.......................... 6,500,000 2,551,250
------------
INSURANCE (7.9%)
Chubb Corp. (Euro)
6.00%, due 5/15/98.................................. 18,650,000 20,701,500
Equitable Companies, Inc.
6.125%, due 12/15/24 (e)............................ 2,200,000 2,480,500
Fidelity National Financial, Inc.
(zero coupon), due 2/15/09.......................... 3,525,000 1,603,875
Fremont General Corp.
(zero coupon), due 10/12/13......................... 7,085,000 3,471,650
NAC Re Corp.
5.25%, due 12/15/02 (c)............................. 1,450,000 1,444,562
Re Capital Corp.
5.50%, due 8/1/00................................... 1,000,000 1,076,500
USF&G Corp.
(zero coupon), due 3/3/09 (e)....................... 8,800,000 5,016,000
------------
35,794,587
------------
MEDICAL EQUIPMENT (0.2%)
Fisher Scientific International, Inc.
4.75%, due 3/1/03
6.50%, beginning 3/1/96............................. 1,000,000 1,076,250
------------
OIL SERVICES (0.3%)
Valhi (Dresser), Inc.
(zero coupon), due 10/20/07......................... 3,400,000 1,300,500
------------
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
-------------------------------------------------------------
<S> <C> <C>

PAPER & FOREST PRODUCTS (0.4%)
Repap Enterprises, Inc.
8.50%, due 8/1/97................................... $ 2,000,000 $ 1,990,000
------------
POLLUTION & RELATED (0.8%)
Sanifill, Inc.
7.50%, due 6/1/06 (e)............................... 3,150,000 3,724,875
------------
REAL ESTATE (0.2%)
Hong Kong Land Holdings Limited (Euro)
4.00%, due 2/23/01.................................. 900,000 756,000
------------
RECREATION & ENTERTAINMENT (1.2%)
Alliance Gaming Corp.
7.50%, due 9/15/03.................................. 3,150,000 1,417,500
Turner Broadcasting System, Inc.
(zero coupon), due 2/13/07 (c)...................... 3,000,000 1,365,000
WMS Industries, Inc.
5.75%, due 11/30/02 (e)............................. 3,250,000 2,778,750
------------
5,561,250
------------
RESTAURANTS & LODGING (0.3%)
Chock Full O' Nuts Corp.
7.00%, due 4/1/12................................... 1,700,000 1,453,500
------------
RETAIL (2.0%)
Baker (J.), Inc.
7.00%, due 6/1/02................................... 1,450,000 964,250
Big B, Inc.
6.50%, due 3/15/03.................................. 200,000 200,000
Michaels Stores, Inc.
4.75%, due 1/15/03
6.75%, beginning 1/15/96 (e)........................ 9,350,000 7,152,750
Staples, Inc.
4.50%, due 10/1/00 (c).............................. 750,000 745,312
------------
9,062,312
------------
STEEL, ALUMINUM & OTHER METALS (1.0%)
Allegheny Ludlum Corp.
5.875%, due 3/15/02................................. 3,950,000 4,112,345
Coeur D' Alene Mines Corp.
6.375%, due 1/31/04................................. 250,000 233,438
------------
4,345,783
------------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

12
<PAGE>

- -------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- CONTINUED
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Value
-------------------------------------------------------------
<S> <C> <C>

BONDS (CONTINUED)
SUPERMARKETS (0.3%)
Food Lion, Inc.
5.00%, due 6/1/03 (c)............................... $ 1,450,000 $ 1,406,500
------------
TECHNOLOGY (1.3%)
Altera Corp.
5.75%, due 6/15/02 (c).............................. 1,600,000 1,864,000
Conner Peripherals, Inc.
6.75%, due 3/1/01................................... 1,800,000 1,782,000
DOVatron International, Inc.
6.00%, due 10/15/02 (c)............................. 1,750,000 1,811,250
Storage Technology Corp.
8.00%, due 5/31/15.................................. 250,000 244,375
------------
5,701,625
------------
TELECOMMUNICATION SERVICES (0.9%)
Rogers Communications, Inc.
(zero coupon), due 5/20/13.......................... 1,000,000 360,000
2.00%, due 11/26/05................................. 500,000 270,000
WinStar Communications, Inc.
(zero coupon), due 10/15/05
14.00%, beginning 10/15/00 (c)(k)................... 2,300 3,657,000
------------
4,287,000
------------
TEXTILE & APPAREL (1.9%)
Unifi, Inc.
6.00%, due 3/15/02 (e).............................. 8,675,000 8,609,938
------------
Total Convertible Bonds
(Cost $190,820,581)................................. 195,003,013
------------
<CAPTION>
Shares
-------------
<S> <C> <C>
PREFERRED STOCKS (22.3%)
AIRLINES (2.3%)
Delta Air Lines, Inc.
$3.50, Series C (e)................................. 174,200 10,343,125
------------
AUTO PARTS (0.0%) (b)
MascoTech, Inc.
$1.20............................................... 14,400 180,000
------------
BANKS (1.8%)
Ahmanson (H.F.) & Co.
6.00%, Series D..................................... 24,500 1,448,562
Banc One Corp.
$3.50, Series C..................................... 22,500 1,476,563
</TABLE>
<TABLE>
<CAPTION>

Shares Value
<S> <C> <C>

------------------------------------------------------------
BANKS (CONTINUED)
Barnett Banks, Inc.
$4.50, Series A..................................... 13,000 $ 1,449,500
First Fidelity Bancorp
$2.15, Series B..................................... 8,000 466,000
National City Corp.
8.00%............................................... 3,500 275,625
Rochester Community Savings Bank Financial, Inc.
7.00%, Series B..................................... 12,000 445,500
Union Planters Corp.
8.00%, Series E..................................... 45,800 1,814,825
Washington Mutual Savings Bank
$6.00, Series D..................................... 7,000 801,500
------------
8,178,075
------------
BUILDINGS (0.0%) (b)
UDC Homes, Inc.
$1.68, Series C (a)(d)(g)........................... 18,799 4,700
------------
CABLE (0.9%)
Cablevision Systems Corp.
8.50%, Series I..................................... 143,700 3,915,825
------------
CHEMICALS (0.1%)
Arcadian Corp.
9.50%, Series A..................................... 18,500 333,000
------------
CONGLOMERATES (0.7%)
Corning Delaware L.P.
6.00% (e)........................................... 54,500 2,745,437
Kaman Corp.
6.50%, Series 2..................................... 13,000 625,625
------------
3,371,062
------------
DOMESTIC OIL & GAS (1.1%)
Enron Oil & Gas Co.
6.25%............................................... 214,000 5,136,000
------------
DOMESTIC OILS (3.1%)
Atlantic Richfield Co.
9.00%............................................... 81,900 1,924,650
Occidental Petroleum Corp.
$3.875 (c).......................................... 87,000 4,872,000
Parker & Parsley Capital LLC
6.25% (c)........................................... 69,500 3,266,500
Snyder Oil Corp.
$1.50............................................... 142,000 2,804,500
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

13
<PAGE>
- ------------------------------------------------------------------------------
THE MAINSTAY CONVERTIBLE FUND
- ------------------------------------------------------------------------------

Shares Value
<S> <C> <C>

------------------------------------------------------------
PREFERRED STOCKS (CONTINUED)
DOMESTIC OILS (CONTINUED)
Valero Energy Corp.
$3.125 (e).......................................... 25,000 $ 1,287,500
------------
14,155,150
------------
ENERGY (0.2%)
Ashland, Inc.
$3.125.............................................. 15,000 883,125
------------
FINANCIAL (0.2%)
St. Paul Capital LLC
6.00%............................................... 14,000 787,500
------------
FINANCIAL SERVICES (1.1%)
Aon Corp.
6.25%............................................... 5,000 315,000
SunAmerica, Inc.
$2.78, Series D..................................... 93,900 4,495,462
------------
4,810,462
------------
FOOD, BEVERAGES & TOBACCO (0.5%)
Chiquita Brands International, Inc.
$2.875, Series A (e)................................ 52,500 2,369,063
------------
HEALTH CARE (0.1%)
FHP International Corp.
5.00%, Series A..................................... 25,000 665,625
------------
HOUSEHOLD PRODUCTS (1.7%)
AJL PEPS
$1.44 (a)(j)........................................ 395,000 7,702,500
------------
INSURANCE (1.2%)
American General Finance Corp.
$3.00, Series A..................................... 32,000 1,676,000
Conseco, Inc.
6.50%, Series D (e)................................. 61,000 3,233,000
Kemper Corp.
5.75%, Series E (c)................................. 6,500 339,625
------------
5,248,625
------------
PAPER & FOREST PRODUCTS (1.5%)
International Paper Co.
5.25% (c)........................................... 134,600 5,956,050
James River Corp. of Virginia
9.00%, Series P..................................... 10,000 233,750
</TABLE>
<TABLE>
<CAPTION>

Shares Value
<S> <C> <C>

------------------------------------------------------------
PAPER & FOREST PRODUCTS (CONTINUED)
Sonoco Products Co.
$2.25, Series A..................................... 9,000 $ 514,125
------------
6,703,925
------------
REAL ESTATE (0.3%)
Security Capital Pacific Trust
$1.75, Series A..................................... 54,700 1,340,150
------------
RECREATION & ENTERTANMENT (0.6%)
Time Warner Financing Trust
$1.24............................................... 85,400 2,668,750
------------
RETAIL (2.0%)
TJX Companies, Inc.
$3.125, Series C.................................... 203,200 9,093,200
Venture Stores, Inc.
$3.25............................................... 7,300 73,000
------------
9,166,200
------------
STEEL, ALUMINUM & OTHER METALS (2.4%)
Bethlehem Steel Corp.
$3.50 (c)........................................... 7,000 312,375
Magma Copper Co.
5.625%, Series D (e)................................ 65,000 6,248,125
WHX Corp.
$3.75, Series B..................................... 26,400 1,122,000
6.50%, Series A..................................... 75,400 3,317,600
------------
11,000,100
------------
TELECOMMUNICATION SERVICES (0.2%)
Mobile Telecommunication
Technologies Corp.
$2.25 (c)........................................... 31,500 1,011,938
------------
TELEPHONE UTILITIES (0.1%)
LCI International, Inc.
5.00%............................................... 5,500 294,250
------------
TRANSPORTATION (0.2%)
Arkansas Best Corp.
$2.875, Series A.................................... 24,000 738,000
------------
Total Preferred Stocks
(Cost $93,848,183).................................. 101,007,150
------------
Total Convertible Securities
(Cost $284,668,764)................................. 296,010,163
------------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

14
<PAGE>
- ------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- CONTINUED
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Value
-------------------------------------------------------------
<S> <C> <C>

CORPORATE BONDS (1.2%)
COMPUTERS & OFFICE EQUIPMENT (0.3%)
Businessland, Inc.
5.50%, due 3/1/07................................... $ 1,965,000 $ 1,139,700
------------
FOOD, BEVERAGES & TOBACCO (0.1%)
Brooke Partners L.P.
14.50%, due 4/1/98.................................. 800,000 664,000
------------
INSURANCE (0.3%)
Statesman Group, Inc.
6.25%, due 5/1/03................................... 1,500,000 1,533,750
------------
MEDIA (0.5%)
Spanish Broadcasting System, Inc.
7.50%, due 6/15/02
12.50%, beginning 6/15/97........................... 2,200,000 2,123,000
------------
Total Corporate Bonds
(Cost $4,799,975)................................... 5,460,450
------------
<CAPTION>
Shares
-------------
<S> <C> <C>
COMMON STOCKS (15.4%)
AEROSPACE (0.1%)
Boeing Co. .......................................... 5,000 391,875
------------
BANKS (0.6%)
Citicorp............................................. 16,305 1,096,511
North Fork Bancorporation, Inc....................... 20,000 505,000
UJB Financial Corp................................... 30,800 1,101,100
------------
2,702,611
------------
BUILDING MATERIALS (0.2%)
Masco Corp........................................... 12,000 376,500
USG Corp. (a)........................................ 16,000 480,000
------------
856,500
------------
BUILDINGS (0.0%) (b)
Sundance Homes, Inc. (a)............................. 40,000 62,500
------------
CAPITAL GOODS (0.1%)
Cypress Semiconductor Corp. (a)...................... 19,500 248,625
Symmetricom, Inc. (a)................................ 15,300 210,375
------------
459,000
------------
<CAPTION>

Shares Value
<S> <C> <C>

------------------------------------------------------------
CASINOS (0.1%)
Showboat, Inc........................................ 22,800 $ 601,350
------------
COMPUTERS & OFFICE EQUIPMENT (1.2%)
Cheyenne Software, Inc. (a).......................... 9,600 250,800
Diebold, Inc......................................... 20,000 1,107,500
Electro Scientific Industries, Inc. (a).............. 39,200 1,146,600
Maxis, Inc. (a)...................................... 20,000 760,000
Micron Electronics, Inc. (a)......................... 52,000 559,000
Proxima Corp. (a).................................... 7,200 159,300
SCI Systems, Inc. (a)................................ 4,100 127,100
Seagate Technology, Inc. (a)......................... 20,000 950,000
Sequent Computer Systems, Inc. (a)................... 40,000 580,000
------------
5,640,300
------------
CONGLOMERATES (0.5%)
Hanson, Plc ADR (f).................................. 134,400 2,049,600
------------
CONSUMER SERVICES (0.2%)
Manpower, Inc........................................ 30,000 843,750
Prepaid Legal Services, Inc. (a)..................... 25,000 259,375
------------
1,103,125
------------
CONSUMER STAPLES (0.1%)
American Brands, Inc................................. 10,000 446,250
------------
DOMESTIC OIL & GAS (0.6%)
Anadarko Petroleum Corp. ............................ 10,000 541,250
Enron Oil & Gas Co. ................................. 21,000 504,000
Lyondell Petrochemical Co............................ 76,100 1,740,787
------------
2,786,037
------------
DRUGS (0.7%)
Allergan, Inc. ...................................... 15,000 487,500
Biochem Pharma, Inc. (a)............................. 15,000 601,875
HEALTH SOUTH Corp. (a)............................... 10,000 291,250
Living Centers of America, Inc. (a).................. 22,400 784,000
Neurogen Corp. (a)................................... 15,500 416,562
SmithKline Beecham, Plc ADR (f)...................... 10,000 555,000
------------
3,136,187
------------
ELECTRIC EQUIPMENT (0.7%)
Analog Devices, Inc. (a)............................. 20,000 707,500
ANTEC Corp. (a)...................................... 49,400 889,200
Avnet, Inc. ......................................... 30,000 1,342,500
Linear Technology Corp............................... 7,000 274,750
------------
3,213,950
------------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

15
<PAGE>

- -------------------------------------------------------------------------------
THE MAINSTAY CONVERTIBLE FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>

Shares Value
<S> <C> <C>

------------------------------------------------------------
COMMON STOCKS (CONTINUED)
ENERGY (0.4%)
Seagull Energy Corp. (a)............................. 71,000 $ 1,579,750
------------
FINANCE (0.1%)
Transport Holdings, Inc., Class A (a)................ 44 1,793
Travelers Group, Inc................................. 8,990 565,246
------------
567,039
------------
FOOD (0.4%)
Flowers Industries, Inc.............................. 118,500 1,436,812
Nabisco Holdings Corp., Class A...................... 9,000 293,625
------------
1,730,437
------------
GAS UTILITY (0.0%) (b)
United Gas Holdings Corp. (a)(d)..................... 29,712 50,510
------------
HEALTH CARE (0.8%)
Cardinal Health, Inc. (a)............................ 23,000 1,259,250
Caremark International, Inc.......................... 53,300 966,062
OrNda HealthCorp (a)................................. 32,900 764,925
Tenet Healthcare Corp. (a)........................... 25,000 518,750
Wellcare Management Group, Inc. (a).................. 4,800 103,200
------------
3,612,187
------------
INSURANCE (0.7%)
Aetna Life and Casualty Co........................... 25,000 1,731,250
Equitable Companies, Inc............................. 24,000 576,000
First Colony Corp.................................... 33,200 842,450
------------
3,149,700
------------
INTERNATIONAL OILS (0.3%)
Ultramar Corp........................................ 18,000 463,500
YPF Sociedad Anonima, Plc ADR (f).................... 30,000 648,750
------------
1,112,250
------------
LEISURE (0.0%) (b)
CML Group, Inc....................................... 10,500 53,813
------------
MACHINERY (0.0%) (b)
Genus, Inc. (a)...................................... 20,000 150,000
------------
MEDIA (0.1%)
Clear Channel Communications, Inc. (a)............... 5,500 242,688
------------
</TABLE>

Shares Value
<S> <C> <C>

------------------------------------------------------------
MEDICAL EQUIPMENT (0.2%)
Sofamor Danek Group, Inc. (a)........................ 20,000 $ 567,500
Sola International, Inc. (a)......................... 20,000 505,000
------------
1,072,500
------------
MINING (0.3%)
Battle Mountain Gold Co. ............................ 116,100 972,338
Homestake Mining Co. ................................ 14,000 218,750
------------
1,191,088
------------
OIL SERVICES (0.2%)
Marine Drilling Companies, Inc. (a).................. 65,000 333,125
McDermott International, Inc......................... 30,000 660,000
------------
993,125
------------
PAPER & FOREST PRODUCTS (0.1%)
Longview Fibre Co.................................... 13,000 211,250
Temple-Inland, Inc................................... 5,000 220,625
Weyerhaeuser Co. .................................... 5,100 220,575
------------
652,450
------------
POLLUTION & RELATED (0.2%)
Pure Tech International, Inc. (a).................... 38,500 93,844
Western Waste Industries (a)......................... 25,000 684,375
------------
778,219
------------
PUBLISHING (0.0%) (b)
Harland (John H.) Co................................. 5,000 104,375
------------
RAILROADS (0.1%)
Conrail, Inc......................................... 7,000 490,000
------------
REAL ESTATE (0.5%)
American Health Properties, Inc. .................... 25,000 537,500
American Health Properties, Inc. (l)................. 2,500 37,500
Meditrust Corp....................................... 50,000 1,743,750
------------
2,318,750
------------
RECREATION & ENTERTAINMENT (0.0%) (b)
Hasbro, Inc.......................................... 5,900 182,900
------------
RETAIL (1.5%)
Barnes & Noble, Inc. (a)............................. 20,000 580,000
Circuit City Stores, Inc............................. 5,900 162,987
Dillard Department Stores, Inc., Class A............. 20,000 570,000
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

16
<PAGE>
- ------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- CONTINUED
- ------------------------------------------------------------------------------

Shares Value
<S> <C> <C>

------------------------------------------------------------
COMMON STOCKS (CONTINUED)
RETAIL (CONTINUED)
Federated Department Stores, Inc. (a)................ 15,000 $ 408,750
Florsheim Shoe Co. (a)............................... 2,166 8,122
General Nutrition Companies, Inc. (a)................ 15,600 358,800
Home Depot, Inc. (a)................................. 7,096 339,721
Home Shopping Network, Inc. (a)...................... 150,000 1,350,000
Kmart Corp........................................... 66,200 479,950
Melville Corp........................................ 20,900 642,675
Michaels Stores, Inc. (a)............................ 29,000 398,750
Service Merchandise Co. (a).......................... 6,700 33,500
Stop & Shop Co., Inc. (a)............................ 12,000 286,500
Tandy Corp........................................... 4,387 182,061
Limited, Inc. (The).................................. 55,000 955,625
------------
6,757,441
------------
STEEL, ALUMINUM & OTHER METALS (1.5%)
Algoma Steel, Inc. (a)............................... 17,100 64,125
Allegheny Ludlum Corp. (a)........................... 5,000 92,500
Asarco, Inc.......................................... 13,000 416,000
J&L Specialty Steel, Inc............................. 102,000 1,912,500
Kaiser Aluminum Corp. (a)............................ 37,953 493,389
MAXXAM, Inc. (a)..................................... 20,000 705,000
Newmont Mining Corp.................................. 38,745 1,753,211
Santa Fe Pacific Gold Corp........................... 65,000 788,125
WHX Corp. (a)........................................ 40,000 435,000
Worthington Industries, Inc.......................... 5,000 104,063
------------
6,763,913
------------
TECHNOLOGY (0.3%)
Aura Systems, Inc. (a)............................... 52,900 297,563
General Motors Corp., Class E........................ 5,000 260,000
Micron Technology, Inc............................... 15,000 594,375
Storage Technology Corp. (a)......................... 15,000 358,125
------------
1,510,063
------------
TELECOMMUNICATION EQUIPMENT (0.2%)
InterVoice, Inc. (a)................................. 24,400 463,600
Philips Electronics N.V.--N.Y. ADR (f)............... 10,000 358,750
------------
822,350
------------
TELECOMMUNICATION SERVICES (1.5%)
Airtouch Communications, Inc. (a).................... 75,000 2,118,750
Rogers Communications, Inc., Class B (a)............. 238,000 2,659,949
</TABLE>
<TABLE>
<CAPTION>

Shares Value
<S> <C> <C>

------------------------------------------------------------
TELECOMMUNICATION SERVICES (CONTINUED)
TCI Group, Series A (a).............................. 86,000 $ 1,709,250
Tele-Communications
Liberty Media Group, Series A (a)................... 7,750 208,281
------------
6,696,230
------------
TEXTILE & APPAREL (0.3%)
Burlington Industries, Inc. (a)...................... 77,000 1,010,625
Fieldcrest Cannon, Inc. (a).......................... 6,300 104,738
------------
1,115,363
------------
TRANSPORTATION (0.6%)
Arkansas Best Corp................................... 11,500 90,563
Pittston Services Group, Inc......................... 72,000 2,259,000
Union Pacific Corp................................... 5,000 330,000
------------
2,679,563
------------
Total Common Stocks
(Cost $67,671,836).................................. 69,825,989
------------
WARRANTS (0.1%)
MEDIA (0.1%)
Spanish Broadcasting System, Inc.
expire 6/30/99 (a).................................. 2,200 374,000
------------
OIL SERVICES (0.0%) (B)
BJ Services Co.
expire 4/13/00 (a).................................. 18,046 137,601
------------
Total Warrants
(Cost $89,241)...................................... 511,601
------------
<CAPTION>
Principal
Amount
----------
<S> <C> <C>
SHORT-TERM INVESTMENTS (17.5%)
COMMERCIAL PAPER (17.5%)
American Express, Inc.
5.659%, due 1/8/96.................................. $ 12,285,000 12,285,000
Beneficial Corp.
5.691%, due 1/3/96.................................. 11,794,000 11,794,000
5.937%, due 1/4/96.................................. 6,000,000 6,000,000
Ford Motor Credit Co.
5.661%, due 1/2/96.................................. 13,657,000 13,657,000
General Electric Capital Corp.
5.808%, due 1/4/96.................................. 10,000,000 10,000,000
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

17
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY CONVERTIBLE FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Value
--------------------------------------------------------------
<S> <C> <C>

SHORT-TERM INVESTMENTS (CONTINUED)
COMMERCIAL PAPER (CONTINUED)
Smith Barney, Inc.
5.833%, due 1/2/96............................... $ 5,000,000 $ 5,000,000
Texaco, Inc.
5.958%, due 1/5/96............................... 20,864,000 20,864,000
------------
Total Short-Term Investments
(Cost $79,600,000)............................... 79,600,000
------------
Total Investments
(Cost $436,829,816) (h).......................... 99.4% 451,408,203(i)
Cash and Other Assets, Less
Liabilities...................................... 0.6 2,888,731
------------ ------------
Net Assets........................................ 100.0% $454,296,934
============ ============
<CAPTION>
Shares
-------------
<S> <C> <C>
SHORT POSITIONS (-15.3%)
COMMON STOCKS (-15.3%)
AIRLINES (-3.6%)
AMR Corp. (a)..................................... (128,300) $ (9,526,275)
Delta Air Lines, Inc.............................. (91,500) (6,759,563)
------------
(16,285,838)
------------
BANKS (-0.2%)
Banc One Corp..................................... (30,000) (1,132,500)
------------
BUILDINGS (-0.7%)
Toll Brothers, Inc. (a)........................... (55,300) (1,271,900)
U.S. Home Corp. (a)............................... (58,500) (1,703,813)
------------
(2,975,713)
------------
CAPITAL GOODS (-0.3%)
Cooper Industries, Inc............................ (38,100) (1,400,175)
------------
CELLULAR TELEPHONE (-0.1%)
U.S. Cellular Corp. (a)........................... (19,400) (649,900)
------------
CHEMICALS (-0.0%) (b)
RPM, Inc. of Ohio................................. (12,500) (206,250)
------------
</TABLE>

Shares Value
------------------------------------------------------------
<S> <C> <C>

COMPUTERS & OFFICE EQUIPMENT (-0.7%)
International Business Machines Corp............... (15,000) $ (1,376,250)
Seagate Technology, Inc. (a)....................... (36,000) (1,710,000)
------------
(3,086,250)
------------
CONGLOMERATES (-0.2%)
Corning, Inc....................................... (33,500) (1,072,000)
------------
CONSUMER SERVICES (-0.2%)
ADT Limited (a).................................... (60,000) (900,000)
------------
DOMESTIC OIL & GAS (-0.1%)
Enron Oil & Gas Co................................. (18,000) (432,000)
------------
DOMESTIC OILS (-0.4%)
Occidental Petroleum Corp.......................... (77,400) (1,654,425)
Parker & Parsley Petroluem Co...................... (3,200) (70,400)
------------
(1,724,825)
------------
ELECTRICAL EQUIPMENT (-0.3%)
C-Cube Microsystems, Inc. (a)...................... (18,800) (1,175,000)
------------
ENERGY (-1.0%)
Chevron Corp....................................... (88,500) (4,646,250)
------------
FOOD, BEVERAGES & TOBACCO (0.0%) (b)
Chiquita Brands International, Inc................. (7,000) (96,250)
------------
HOUSEHOLD PRODUCTS (-1.2%)
Amway Japan Limited ((Yen))........................ (48,000) (2,023,392)
Amway Japan Limited ADR (f)........................ (113,000) (2,358,875)
Whirlpool Corp..................................... (17,000) (905,250)
------------
(5,287,517)
------------
INSURANCE (-4.3%)
American General Finance Corp...................... (6,000) (209,250)
Chubb Corp......................................... (147,700) (14,289,975)
Conseco, Inc....................................... (47,100) (2,949,637)
Fremont General Corp............................... (27,000) (992,250)
USF&G Corp......................................... (65,000) (1,096,875)
------------
(19,537,987)
------------
PAPER & FOREST PRODUCTS (-0.1%)
James River Corp. of Virginia...................... (9,200) (221,950)
Repap Enterprises, Inc. (a)........................ (15,000) (66,563)
------------
(288,513)
------------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

18
<PAGE>
- ------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- CONTINUED
- ------------------------------------------------------------------------------

Shares Value
------------------------------------------------------------
<S> <C> <C>

COMMON STOCKS (CONTINUED)
POLLUTION & RELATED (-0.1%)
Sanifill, Inc. (a)................................. (20,300) $ (677,512)
------------
REAL ESTATE (-0.1%)
Security Capital Pacific Trust..................... (15,300) (302,175)
------------
RETAIL (-0.4%)
Michaels Stores, Inc. (a).......................... (5,000) (68,750)
Staples, Inc. (a).................................. (4,600) (112,125)
TJX Companies, Inc. ............................... (75,000) (1,415,625)
------------
(1,596,500)
------------
STEEL, ALUMINUM & OTHER METALS (-0.9%)
Coeur D' Alene Mines Corp. ........................ (5,000) (85,625)
Magma Copper Co. (a)............................... (151,200) (4,214,700)
------------
(4,300,325)
------------
TECHNOLOGY (-0.2%)
Altera Corp. (a)................................... (21,500) (1,069,625)
------------
TELECOMMUNICATION SERVICES (-0.2%)
Cablevision Systems Corp., Class A (a)............. (10,000) (542,500)
Mobile Telecommunication
Technologies Corp. (a)............................ (15,000) (320,625)
------------
(863,125)
------------
Total Short Positions
(Proceeds $65,317,050)............................ $(69,706,230)
============
</TABLE>
- -------
(a) Non-income producing securities.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Fair valued security. (See Note 2)
(e) Partially segregated as margin against common stock short position.
(f) ADR--American Depository Receipt.
(g) Issuer in bankruptcy.
(h) The cost for Federal income tax purposes is $438,365,523.
(i) At December 31, 1995 net unrealized appreciation for securities was
$13,042,680, based on cost for Federal income tax purposes. This consisted
of aggregate gross unrealized appreciation for all investments on which
there was an excess of market value over cost of $30,695,447 and aggregate
gross unrealized depreciation for all investments on which there was an
excess of cost over market value of $17,652,767.
(j) PEPS--Premium Exchangeable Participating Shares--each PEPS is exchangable
for 1.25 American Depository Shares of Amway Japan on 2/15/99.
(k) 2,300 Units--each unit reflects two Senior Discounted Notes, plus 1
Convertible Senior Discounted Note.
(l) Depository Shares--each share represents one-tenth of Psychiatric Group
preferred stock.

Forward foreign currency contracts open at December 31, 1995:

<TABLE>
<CAPTION>
Contracts In Delivery Gross Unrealized
to Deliver Exchange For Date Appreciation
---------- ------------ -------- ----------------
<S> <C> <C> <C>
FF 4,821,000 $1,000,000 2/5/96 $ 14,211
(Yen)345,047,500 3,500,000 6/12/96 155,058
--------
Net Appreciation.................................... $169,269
========
</TABLE>
- -------
(FF) Security denominated in French Franc.
(Yen) Security denominated in Japanese Yen.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

19
<PAGE>
- ------------------------------------------------------------------------------
THE MAINSTAY CONVERTIBLE FUND
- ------------------------------------------------------------------------------

STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1995

<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (Note 2)
(identified cost $436,829,816)................................. $451,408,203
Deposit with broker............................................. 64,162,537
Receivables:
Investment securities sold..................................... 16,093,544
Fund shares sold............................................... 3,930,244
Dividends and interest......................................... 3,628,466
Unrealized appreciation on forward foreign currency contracts... 169,269
Other assets.................................................... 224
------------
Total assets.................................................. 539,392,487
------------
LIABILITIES:
Securities sold short (proceeds $65,317,050).................... 69,706,230
Payables:
Investment securities purchased................................ 12,576,595
NYLIFE Distributors............................................ 361,766
Fund shares redeemed........................................... 265,312
Adviser........................................................ 133,567
Custodian...................................................... 83,714
Transfer agent................................................. 82,917
Trustees....................................................... 2,397
Accrued expenses................................................ 181,977
Dividend payable................................................ 1,701,078
------------
Total liabilities............................................. 85,095,553
------------
Net assets...................................................... $454,296,934
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized
Class A........................................................ $ 19,950
Class B........................................................ 317,900
Additional paid-in capital...................................... 438,023,656
Accumulated undistributed net investment income................. 1,412,984
Accumulated undistributed net realized gain on investments...... 4,353,158
Accumulated net realized loss on foreign currency transactions.. (169,269)
Net unrealized appreciation on investments...................... 10,189,207
Net unrealized appreciation on translation of assets and
liabilities in foreign currencies.............................. 149,348
------------
Net assets...................................................... $454,296,934
============
CLASS A
Net assets applicable to outstanding shares..................... $ 26,835,969
============
Shares of beneficial interest outstanding....................... 1,994,969
============
Net asset value per share outstanding........................... $ 13.45
Maximum sales charge (5.50% of offering price).................. 0.78
------------
Maximum offering price per share outstanding.................... $ 14.23
============
CLASS B
Net assets applicable to outstanding shares..................... $427,460,965
============
Shares of beneficial interest outstanding....................... 31,790,037
============
Net asset value per share outstanding........................... $ 13.45
============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a).................................................... $ 4,781,635
Interest......................................................... 13,513,736
-----------
Total income.................................................... 18,295,371
-----------
Expenses: (Note 2)
Distribution--Class B (Note 3)................................... 1,738,211
Administration (Note 3).......................................... 1,027,604
Advisory (Note 3)................................................ 1,027,604
Service (Note 3)................................................. 713,614
Dividends on securities sold short............................... 562,409
Transfer agent................................................... 504,763
Registration..................................................... 100,905
Shareholder communication........................................ 64,829
Recordkeeping (Note 3)........................................... 57,184
Custodian........................................................ 51,867
Legal............................................................ 33,801
Auditing......................................................... 14,560
Trustees......................................................... 11,309
Miscellaneous.................................................... 4,984
-----------
Total expenses.................................................. 5,913,644
-----------
Net investment income............................................. 12,381,727
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized gain(loss) from:
Security transactions............................................ 18,176,793
Securities sold short............................................ 708,783
Foreign currency transactions.................................... (34,489)
-----------
Net realized gain on investments and foreign currency
transactions..................................................... 18,851,087
-----------
Net change in unrealized appreciation (depreciation) on
investments:
Security transactions............................................ 25,839,539
Securities sold short............................................ (4,375,360)
Translation of assets and liabilities in foreign currencies...... 133,823
-----------
Net unrealized gain on investments and foreign currency........... 21,598,002
-----------
Net realized and unrealized gain on investments and foreign
currency transactions............................................ 40,449,089
-----------
Net increase in net assets resulting from operations.............. $52,830,816
===========
</TABLE>
- -------
(a) Dividends recorded net of foreign withholding taxes of $5,353.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

20
<PAGE>

- ------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
September 1
Year ended through Year ended
December 31 December 31 August 31
1995 1994* 1994
------------ ------------ ------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income............... $ 12,381,727 $ 2,765,093 $ 3,583,220
Net realized gain (loss) on
investments........................ 18,176,793 (86,769) 8,006,191
Net realized gain on short sale
transactions....................... 708,783 -- --
Net realized loss on foreign
currency transactions.............. (34,489) (22,641) (47,945)
Net change in unrealized
appreciation (depreciation) on
security transactions.............. 25,839,539 (9,830,360) (4,330,957)
Net change in unrealized
appreciation (depreciation) on
securities sold short.............. (4,375,360) (13,820) --
Net change in unrealized
appreciation (depreciation) on
translation of assets and
liabilities in foreign currencies.. 133,823 16,939 (1,414)
------------ ------------ ------------
Net increase (decrease) in net
assets resulting from operations... 52,830,816 (7,171,558) 7,209,095
------------ ------------ ------------
Dividends and distributions to
shareholders:
From net investment income:
Class A............................. (511,874) -- --
Class B............................. (10,670,355) (2,974,993) (3,590,323)
From net realized gain on
investments:
Class A............................. (778,196) -- --
Class B............................. (12,402,053) (6,123,826) (8,748,441)
------------ ------------ ------------
Total dividends and distributions
to shareholders................... (24,362,478) (9,098,819) (12,338,764)
------------ ------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A............................. 26,364,588 -- --
Class B............................. 235,388,770 35,828,791 113,215,613
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A............................. 1,134,619 -- --
Class B............................. 21,090,194 8,764,430 11,592,495
------------ ------------ ------------
283,978,171 44,593,221 124,808,108
Cost of shares redeemed:
Class A............................. (1,093,624) -- --
Class B............................. (37,359,550) (8,426,685) (18,214,033)
------------ ------------ ------------
Increase in net assets derived from
capital share transactions........ 245,524,997 36,166,536 106,594,075
------------ ------------ ------------
Net increase in net assets......... 273,993,335 19,896,159 101,464,406
NET ASSETS:
Beginning of period.................. 180,303,599 160,407,440 58,943,034
------------ ------------ ------------
End of period........................ $454,296,934 $180,303,599 $160,407,440
============ ============ ============
Accumulated undistributed net
investment income................... $ 1,412,984 $ -- $ 232,541
============ ============ ============
</TABLE>
- -------
* The Fund changed its fiscal year end from August 31 to December 31.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

21
<PAGE>

- ------------------------------------------------------------------------------
THE MAINSTAY CONVERTIBLE FUND
- ------------------------------------------------------------------------------

FINANCIAL HIGHLIGHTS
(SELECTED PER SHARE DATA AND RATIOS)

<TABLE>
<CAPTION>
Class A Class B Class B
--------- -------- ------------------------------------------------
September 1
through Year ended August 31
Year ended December 31 -----------------------------------
December 31, 1995 1994* 1994 1993 1992 1991
--------------------- ----------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period.... $ 11.67 $ 11.67 $ 12.83 $ 13.92 $ 11.46 $ 10.10 $ 8.02
------- -------- -------- -------- ------- ------- -------
Net investment income... 0.59 0.51 0.19 0.50 0.92 0.32 0.24
Net realized and
unrealized gain (loss)
on investments......... 2.14 2.14 (0.71) 0.70 2.45 1.32 2.08
Net realized and
unrealized loss on
foreign currency
transactions........... (0.00)(b) (0.00)(b) -- (0.01) -- -- --
------- -------- -------- -------- ------- ------- -------
Total from investment
operations............. 2.73 2.65 (0.52) 1.19 3.37 1.64 2.32
------- -------- -------- -------- ------- ------- -------
Less dividends and
distributions:
From net investment
income................. (0.55) (0.47) (0.21) (0.49) (0.42) (0.28) (0.24)
From net realized gain
on investments......... (0.40) (0.40) (0.43) (1.79) (0.49) -- --
------- -------- -------- -------- ------- ------- -------
Total dividends......... (0.95) (0.87) (0.64) (2.28) (0.91) (0.28) (0.24)
------- -------- -------- -------- ------- ------- -------
Net asset value at end
of period.............. $ 13.45 $ 13.45 $ 11.67 $ 12.83 $ 13.92 $ 11.46 $ 10.10
======= ======== ======== ======== ======= ======= =======
Total investment return
(a).................... 23.72% 23.02% (4.09%) 8.95% 30.80% 16.43% 29.58%
Ratios (to average net
assets)/ Supplemental
Data:
Net investment income.. 4.9% 4.3% 4.8%+ 3.5% 3.4% 2.9% 2.8%
Expenses............... 1.5% 2.1% 1.9%+ 1.9% 1.9% 2.3% 2.7%
Portfolio turnover rate. 243% 243% 77% 269% 370% 291% 283%
Net assets at end of
period (in 000's)...... $26,836 $427,461 $180,304 $160,407 $58,943 $28,899 $20,029
</TABLE>
- -------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized
(a) Total return is calculated exclusive of sales charges and is not
annualized.
(b) Less than one cent per share.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

22
<PAGE>

- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

NOTE 1 -- ORGANIZATION AND BUSINESS:

The MainStay Funds were organized on January 9, 1986 as a Massachusetts
Business Trust. The Trust is registered under the Investment Company Act of
1940, as amended, (the "Act") as an open-end management investment company and
comprises thirteen portfolios. These financial statements and notes relate only
to the Convertible Fund (the "Fund").

The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Any purchase of
Class A shares of $1,000,000 or more on which the initial sales charge was
waived will be subject to a contingent deferred sales charge on redemptions
made within one year of purchase. Class A shares and Class B shares bear the
same voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and conditions except that the Class B shares are
subject to higher distribution fee rates. Each class of shares bears
distribution and/or service fee payments under a distribution plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940.

The Fund's investment objective is to seek capital appreciation together with
current income.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:

The following is a summary of significant accounting policies followed by the
Fund:

SECURITIES VALUATION. Portfolio securities of the Convertible Fund are stated
at value determined (a) by appraising common and preferred stocks which are
traded on the New York Stock Exchange at the last sale price on that day or, if
no sale occurs, at the mean between the closing bid and asked prices, (b) by
appraising common and preferred stocks traded on other United States national
securities exchanges or foreign securities exchanges as nearly as possible in
the manner described in (a) by reference to their principal exchange, including
the National Association of Securities Dealers National Market System, (c) by
appraising over-the-counter securities quoted on the National Association of
Securities Dealers NASDAQ system (but not listed on the National Market System)
at the bid price supplied through such

23
<PAGE>
- ------------------------------------------------------------------------------
THE MAINSTAY CONVERTIBLE FUND
- ------------------------------------------------------------------------------

system, (d) by appraising over-the-counter securities not quoted on the NASDAQ
system at prices supplied by the pricing agent or brokers selected by the
Adviser, if these prices are deemed to be representative of market values at
the regular close of business of the New York Stock Exchange, (e) by appraising
debt securities at prices supplied by a pricing agent selected by the Adviser,
whose prices reflect broker/dealer supplied valuations and electronic data
processing techniques if those prices are deemed by the Adviser to be
representative of market values at the regular close of business of the New
York Stock Exchange (f) by appraising options and futures contracts at the last
sale price on the market where such options or futures are principally traded,
and (g) by appraising all other securities and other assets, including debt
securities for which prices are supplied by a pricing agent but are not deemed
by the Adviser to be representative of market values, but excluding money
market instruments with a remaining maturity of sixty days or less and
including restricted securities and securities for which no market quotations
are available, at fair value in accordance with procedures approved by the
Trustees. Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or
less are valued at amortize cost if their term to maturity at purchase was 60
days or less, or by amortizing the difference between market value on the 61st
day prior to maturity and value at maturity date if their original term to
maturity at purchase exceeded 60 days.

Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities (foreign mar-
kets and over-the-counter markets) and the regular close of the New York Stock
Exchange will not be reflected in the Fund's calculation of net asset value un-
less the Adviser believes that the particular event would materially affect net
asset value, in which case an adjustment would be made.

FORWARD CONTRACTS. A forward contract is an agreement to buy or sell currencies
of different countries on a specified future date at a specified rate. During
the period the forward contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" such con-
tract on a daily basis to reflect the market value of the contract at the end
of each day's trading. When the forward contract is closed, the Fund records a
realized gain or loss equal to the difference between the proceeds from (or
cost of) the closing transaction and the Fund's basis in the contract. The Con-
vertible Fund enters into forward foreign currency exchange contracts in order
to hedge its foreign currency denominated investments, receivables and payables
against adverse movements in future foreign currency exchange rates.

The use of forward contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the statement of assets and liabili-
ties. The contract or notional amounts reflect the extent of the Fund's in-
volvement in these financial instruments. Risks arise from the possible move-
ments in the foreign exchange rates underlying these instruments. The
unrealized appreciation/depreciation on forward contracts reflects the Fund's
exposure at year end to credit loss in the event of a counterparty's failure to
perform its obligations.

24
<PAGE>

- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
- ------------------------------------------------------------------------------

SECURITIES SOLD SHORT. The Fund may engage in short sales as a method of hedg-
ing declines in the value of securities owned. When the Fund enters into a
short sale, it must segregate the security sold short, or securities equivalent
in kind and amount to the securities sold, as collateral for its obligation to
deliver the security upon conclusion of the sale. A gain, limited to the price
at which the Fund sold the security short, or a loss, unlimited as to dollar
amount, will be recognized upon termination of a short sale if the market price
on the date the short position is closed out is less or greater, respectively,
than the proceeds originally received. Any such gain or loss may be offset,
completely or in part, by the change in the value of the hedged investments.

FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $134,780 and $78,706 have been reclassified
from accumulated net realized loss on foreign currency transactions and accumu-
lated undistributed net realized gain on investments, respectively, to accumu-
lated undistributed net investment income, due to shareholder dividends and
distributions.

Investment income received by a Fund from foreign sources may be subject to
foreign income taxes withheld at the source.

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Convertible Fund intends to declare and
pay dividends quarterly. Income dividends and capital gain distributions are
determined in accordance with Federal income tax regulations which may differ
from generally accepted accounting principles.

SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transac-
tions on the trade date. Realized gains and losses on security transactions are
determined using the identified cost method. Dividend income is recognized on
the ex-dividend date and interest income is accrued daily except when collec-
tion is not expected. Discounts on securities purchased for the Fund are ac-
creted on the constant yield method over the life of the respective securities
or, if applicable, over the period to the first date of call.

Income from payment-in-kind securities is recorded daily based on the effective
interest method of accrual.

25
<PAGE>

- ------------------------------------------------------------------------------
THE MAINSTAY CONVERTIBLE FUND
- ------------------------------------------------------------------------------

incurred under the Distribution Plan) and realized and unrealized gains and
losses on investments of the Fund are allocated to separate classes of shares
based upon their relative net asset value on the date the income is earned or
expenses and realized and unrealized gains and losses are incurred. Dividends
on short positions are recorded as expenses of the Fund on ex-dividend date.

NOTE 3 -- FEES AND RELATED PARTY POLICIES:

NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned sub-
sidiary of New York Life, is the Administrator for the Fund.

26
<PAGE>

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

shares of the Fund for distribution or service activities as designated by the
Distributor. Pursuant to the Class B Plan, the Fund's Class B shares are sub-
ject to the payment of a monthly distribution fee, which is an expense of the
Class B shares of the Fund, at the annual rate of 0.75% of the lesser of:

The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund.

SALES CHARGES. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $529,361 for the year
ended December 31, 1995.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges for the year ended December 31, 1995 in the amount of $277,587.

OTHER. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1995 were $44,194.

Fees for the cost of legal services provided to the Fund by the Office of Gen-
eral Counsel of New York Life amounted to $13,843 for the year ended December
31, 1995.

27
<PAGE>

- ------------------------------------------------------------------------------
THE MAINSTAY CONVERTIBLE FUND
- ------------------------------------------------------------------------------

Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the year ended December 31, 1995 is shown on
the statement of operations.

NOTE 4 -- DEPOSIT WITH BROKER:

Deposit with broker comprises cash of $63,182,458 and (Yen)101,100,000 (cost
$1,000,000, value at December 31, 1995 $980,079). Cash deposited with broker is
partially restricted as collateral for securities sold short.

NOTE 5 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):

NOTE 6 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):

<TABLE>
<CAPTION>
September 1
Year Ended through Year Ended
December 31 December 31 August 31
1995 1994* 1994
--------------- ----------- ----------
Class A Class B Class B
------- ------- ----------------------
<S> <C> <C> <C> <C>
Shares sold............................. 1,991 17,601 2,881 8,730
Shares issued in reinvestment of divi-
dends and distributions................ 85 1,583 748 922
----- ------ ----- -----
2,076 19,184 3,629 9,652
Shares redeemed......................... 81 2,840 683 1,387
----- ------ ----- -----
Net increase............................ 1,995 16,344 2,946 8,265
===== ====== ===== =====
</TABLE>
- -------
*The Fund changed its fiscal year end from August 31 to December 31.

28
<PAGE>

- ------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- ------------------------------------------------------------------------------

To the Board of Trustees and Shareholders of The MainStay Funds

In our opinion, the accompanying statement of assets and liabilities (including
the portfolio of investments) and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all mate-
rial respects, the financial position of the MainStay Convertible Fund, (one of
the thirteen funds constituting The MainStay Funds, hereafter referred to as
the "Fund") at December 31, 1995, the results of its operations for the year
then ended and the changes in its net assets and the financial highlights for
each of the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter re-
ferred to as "financial statements") are the responsibility of the Fund's man-
agement; our responsibility is to express an opinion on these financial state-
ments based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which re-
quire that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and dis-
closures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall finan-
cial statement presentation. We believe that our audits, which included confir-
mation of securities at December 31, 1995 by correspondence with the custodian
and brokers and the application of alternative procedures where confirmations
from brokers were not received, provide a reasonable basis for the opinion ex-
pressed above.

Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 12, 1996

29
<PAGE>

- --------------------------------------------------------------------------------
The MainStay Funds
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
GROWTH FUNDS
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Capital Appreciation Fund [Horizontal bar graph Invests primarily in common stocks You want your investments to grow
indicating risk/ of companies in expanding markets and are willing to accept a higher
reward of fund] with strong growth potential level of risk for higher return
potential
- -----------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund [Horizontal bar graph Invests in a portfolio that tracks You seek a conservative way to
indicating risk/ the makeup and returns of this participate in the growth potential
reward of fund] S&P 500* of stocks+
- -----------------------------------------------------------------------------------------------------------------------------------
International Equity Fund [Horizontal bar graph Offers broad diversification into You prefer the higher return potential
indicating risk/ international stock markets with of international equities or want to
reward of fund] an emphasis on risk control add diversification to your domestic
investments++
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

<TABLE>
<CAPTION>
GROWTH AND INCOME FUNDS

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Total Return Fund [Horizontal bar graph Balances current income with growth You seek a combination of income and
indicating risk/ opportunities by investing in stocks, growth potential and want to manage
reward of fund] bonds, and money market instruments risk through diversification

- -----------------------------------------------------------------------------------------------------------------------------------
Value Fund [Horizontal bar graph Seeks undervalued stocks with You seek to maximize total return from
indicating risk/ attractive dividends and a stimulus securities which may have more poten-
reward of fund] for positive change tial than the market currently sees.
- -----------------------------------------------------------------------------------------------------------------------------------
Convertible Fund [Horizontal bar graph Invests in convertible securities for You want income from securities that
indicating risk/ a special blend of long-term growth may offer growth potential if converted
reward of fund] potential and dividend income income common stock

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

</TABLE>

ll Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share; investment returns
will vary with market conditions.

# A small portion of the Fund's income may be subject to state and local taxes
and the Alternative Minimum Tax. Capital gains, if any, may also be taxed.

30
<PAGE>

<TABLE>
INCOME FUNDS
<CAPTION>
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Government Fund [Horizontal bar graph Seeks a high level of current income You are seeking to combine high current
indicating risk/ consistent with safety of principal income and safety of principal
reward of fund] primarily from U.S. government
securities(S)
- -----------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate [Horizontal bar graph An aggressive high yield bond fund You want to maximize current income
Bond Fund indicating risk/ that is actively managed for and can accept the higher risk of
reward of fund] maximum current income securities with high yield potential
- -----------------------------------------------------------------------------------------------------------------------------------
International Bond Fund [Horizontal bar graph Seeks high current yields and You prefer the higher return potential
indicating risk/ competitive total return from non- of international equities or want to
reward of fund] U.S. bonds with an emphasis on add diversification to your domestic
risk control investments++
- -----------------------------------------------------------------------------------------------------------------------------------
Money Market Fund [Horizontal bar graph Seeks to provide current income, You are averse to risk or want to earn
indicating risk/ stability of principal, and liquid- competitive yields on cash you're plan-
reward of fund] ity with free checkwriting.|| ning to spend or invest in the near
future
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

<TABLE>
TAX-FREE INCOME FUNDS
<CAPTION>
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Tax Free Bond Fund [Horizontal bar graph Seeks high current income that's You're in a high federal income tax
indicating risk/ exempt from regular federal income bracket or want to pay less of your
reward of fund] tax# investment income to the IRS
- -----------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund [Horizontal bar graph Seeks high current income exempt You're a California resident and want
indicating risk/ from both federal and California to keep more of what you earn by
reward of fund] income taxes consistent with investing for income that double tax
preservation of capital# free#
- -----------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Bond [Horizontal bar graph Seeks high current income exempt You're a New York State or City resi-
indicating risk/ from federal, New York State, and dent and want to keep more of what you
reward of fund] New York City income taxes consis- earn with income that's double or
tent with preservation of capital# triple tax free#
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

If you would like to learn more about any of the MainStay Funds not covered by
your current prospectus, please call your Registered Representative. Your
Registered Representative can provide you with additional prospectuses which
contain more complete information including advisory fees, other expenses, and
share classes. Please read the prospectus carefully before you invest or send
money. Shares must be offered in the investor's state of residence.

31
<PAGE>

MainStay
Convertible Fund

1995
annual report

The year in review
fund results
& portfolio highlights

[Logo of MainStay(R) Funds appears here]

December 31, 1995

Officers & Trustees

Dechert Price & Rhoads
Legal Counsel

[Logo of MainStay(R) Funds appears here]

[Logo of New York Life appears here]

This report is provided for the information of shareholders of the MainStay
Capital Convertible Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.

[RECYCLE LOGO]

MSAN06 (296)

<PAGE>

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
<S> <C>
Chairperson's Letter 2

MainStay Equity Index Fund
Highlights & Portfolio Managers' Comments 4

Returns & Lipper Rankings 6

Year-by-Year Performance 7

$10,000 Invested in the MainStay Equity Index
Fund vs. S&P 500 and Inflation 7

Top 25 Equity Holdings 8

Diversification by Industry -- Top 5 9

Portfolio Composition 9

Financial Statements 10

Notes to Financial Statements 22

Report of Independent Accountants 27

The MainStay Funds 28
</TABLE>

<PAGE>

- --------------------------------------------------------------------------------
Chairperson's Letter
- --------------------------------------------------------------------------------

[PHOTO OF ALICE T. KANE APPEARS HERE] Alice T. Kane, Chairperson

Report to Shareholders for the Year Ended December 31, 1995

We are pleased to report to you on the activities and investment results of the
MainStay/(R)/ Equity Index Fund for the twelve months ended December 31, 1995.

During the bull market of 1995, the Equity Index Fund had its best year ever,
earning a total return of 35.91%, excluding all sales charges. The Fund seeks to
track the makeup and performance of the Standard & Poor's 500 Composite Stock
Price Index.* Since the Index itself is unmanaged and does not incur fees, it
provided a somewhat higher total return for the year, earning 37.53%.

At MainStay, we believe the Equity Index Fund represents an appropriate choice
for investors seeking broad exposure to the growth potential of large
capitalization equity issues. The relative size, strength, and multinational
scope of many S&P 500 companies helped Equity Index Fund shareholders outperform
the average Lipper/+/ equity fund, which returned 24.81% for the year ended
December 31, 1995. Within its own Lipper category of S&P 500 Index objective
funds, the Fund lagged the average which returned 36.84%.

We are pleased to announce that effective January 1, 1996, NYLIFE Distributors
Inc. will voluntarily waive a portion of the Fund's administrative fee. As long
as the waiver is in effect, the Fund's total expenses, including Rule 12b-1
fees, will not exceed .80% of the value of the Fund's average daily net assets
for the year. Since lower fees may mean higher returns, we believe this waiver
may have a positive effect for Fund investors seeking to benefit from the long-
term growth potential of equities.

2
<PAGE>

Of course, the Fund's results reflected particularly strong market conditions,
which may or may not be repeated in future years. While positive results are
important to investors, they represent only one expression of MainStay's ongoing
commitment to help our shareholders pursue their investment goals. In 1995, that
commitment helped us attract more assets than in any previous year. As a
MainStay shareholder, you have played an important role in our success and we
look forward to serving your investment needs for many years to come.

/s/ Alice T. Kane

Alice T. Kane
January 1996

- --------------------
* See footnote on page 7 for more information on the S&P 500.

+ See footnote on page 6 for more information on Lipper Analytical Services,
Inc.

3
<PAGE>

- --------------------------------------------------------------------------------
MainStay Equity Index Fund
- --------------------------------------------------------------------------------

1995 Fund Highlights

[ ] Highest one-year return since the Fund's inception

[ ] Total return of 35.91% for the year, excluding all sales charges

[PHOTO OF HOLLY V. COX AND JAMES A. MEHLING APPEARS HERE]

Portfolio Managers--Holly V. Cox and James A. Mehling, CFA

The stock market roared ahead throughout 1995, fueled by slow economic growth,
low interest rates, and strong corporate profits. While the average Lipper
equity fund gained 24.81% for the year, the MainStay Equity Index Fund managed
to substantially outpace this performance with a 35.91% return, excluding all
sales charges, for the year ended December 31, 1995. These outstanding results
reflected unusually favorable market conditions, which are unlikely to be
repeated in 1996.

The Equity Index Fund seeks to track the makeup and performance of the S&P 500
Index, which outperformed many other broad stock market measures during the
year. Since technology stocks were among the big winners in 1995, one notable
exception was the technology-laden NASDAQ Composite Index.

The performance of the S&P 500 Index surpassed so many market measures because
it contains a relatively greater proportion of large capitalization stocks.
These stocks, many of which represent the large blue-chip multinational
corporations in America, were among the best performing securities in the world
last year. They propelled the S&P 500 Index to a spectacular 37.53% annual
return. While the Fund closely tracked the Index, after accounting for fees, the
MainStay Equity Index Fund lagged behind the average Lipper S&P 500 Index
objective fund, which returned 36.84%.

Many mutual funds benefited from large weightings in the technology sector.
Index funds, on the other hand, do not attempt to enhance performance by
overweighting particular stocks or market sectors. Instead, diversification
across a broad spectrum of industries allowed the Equity Index Fund to reap
rewards not only from technology stocks, but in many other top-performing

Capitalization
- --------------------------------------------------------------------------------
Standard & Poor's defines capitalization as the market value of outstanding
common shares.

Index
- --------------------------------------------------------------------------------
An unmanaged group of securities used as a general indicator of performance
within a market or market sector.

4
<PAGE>

sectors, such as utilities and consumer cyclicals, which received less attention
from active fund managers.

In managing the Fund, we do not build up large cash positions, but seek to
remain fully invested at all times. This strategy allowed the Fund to
participate as fully as possible in the rising market we experienced in 1995.

During 1995, only four of the Standard & Poor's industry groups -- trucking,
steel, paper containers, and specialty retail stores -- posted negative total
returns. Since their weights in the S&P 500 Index were minimal, the effect on
the Fund's total return was slight. Oil stocks, which returned a positive 9.52%
for the year, and paper and forest products, which earned 7.39%, actually held
back the Fund's performance because of their higher weightings in the Index.

Early in the year, IBM's takeover of Lotus served as a prelude to a sustained
period of merger and acquisition activity. To accommodate the resulting shifts
in relative market capitalizations of S&P 500 issues, we had to closely monitor
the Index and make frequent adjustments to the portfolio.

While past performance is no guarantee of future results, indexing to the S&P
500 has proven to be a successful investment strategy in recent years, as well
as over the longer run. In 1994, the MainStay Equity Index Fund's total return
beat 72% of all 2,258 equity funds tracked by Lipper. In 1995, the Fund fared
even better, beating almost 84% of all 3,131 equity funds. In general, for the
ten years ended December 31, 1995, funds seeking to track the S&P 500 Index beat
roughly 80% of actively managed funds.*

We believe index investing continues to provide attractive opportunities for
long-term investors seeking broad exposure to large capitalization stocks in the
U.S. [ ]

Weighting
- --------------------------------------------------------------------------------
The proportion of a portfolio or index allocated to a specific security or
sector. A fund is said to be overweighted in a sector when that portion of the
portfolio is larger than the sector's weighting in the index.

- --------------------
* Source: Lipper Analytical Services, Inc. For the 5-year period ended 12/31/95,
the Fund's total return beat 52% of all equity funds. See page 6 note + for
more information.

5
<PAGE>

Fund average annual total returns *
- -------------------------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 12/31/95
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Index Fund 35.91% 15.17% 15.08%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

Fund SEC returns*
- -------------------------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 12/31/95
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Index Fund 31.83% 14.47% 14.38%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

Fund Lipper+ rankings and year-end Lipper category returns
- -------------------------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 12/31/95
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Index Fund 41 out of 43 funds 14 out of 14 funds 13 out of 13 funds

(index objective category) (index objective category) (index objective category)

Average Lipper
S&P 500 Index
objective fund 36.84% 16.00% 15.99%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

Fund year-end per-share net asset values and distributions for 1995
- -------------------------------------------------------------------------------------------------------------------------
NAV 12/31/95 Income Capital Gains
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Index Fund $19.15 $0.2700 $0.2709
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

- --------------------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for applicable sales charge. In compliance with SEC
guidelines, SEC returns include the maximum sales charge and show the
percentage change for each of the required periods. All returns assume capital
gains and dividend distributions are reinvested. MainStay Equity Index Fund
first offered to the public 12/20/90 is offered as Class A shares only. As of
1/3/95 shares are subject to an initial sales charge of up to 3% and an annual
12b-1 fee of .25%.

+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales charges.
For the 12-month period ended 12/31/95, the Lipper equity fund category
included 3,131 funds and the MainStay Equity Index Fund was ranked 501 out of
3,131; 531 out of 1,113; and, 521 out of 1,089 funds for the 1-year, 5-year,
and since inceptions periods, respectively. For the same 12-month period, the
Lipper S&P 500 Index objective fund category included 43 funds.

6
<PAGE>

- --------------------------------------------------------------------------------
Year-by-Year Performance*
- --------------------------------------------------------------------------------

[BAR GRAPH APPEARS HERE]

<TABLE>
<S> <C>
Years
ended Total
12/31 Return %
91 28.01
92 6.23
93 9.01
94 0.47
95 35.91

</TABLE>

- --------------------------------------------------------------------------------
$10,000 invested in The MainStay Equity Index Fund
vs. S&P 500 and Inflation
- --------------------------------------------------------------------------------

[LINE GRAPH APPEARS HERE]

Year-end S&P 500++ Inflation/(s)/ Equity Index Fund
<S> <C> <C> <C>
12/20/90 10,000 10,000 9700
91 13,157 10,306 12,430
92 14,158 10,605 13,200
93 15,578 10,897 14,391
94 15,790 11,188 14,463
95 21,702 11,480 19,657
</TABLE>
- --------------------
This graph assumes an initial investment of $10,000 made on 12/20/90
reflecting the effect of the current maximum sales charge of 3.0%, thereby
reducing the amount of the investment to $9,700. Results include
reinvestment of all distributions at net asset value and the change in share
price for the stated period. Past performance is no guarantee of future
results.

++ Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are
registered trademarks of Standard & Poor's Corporation. The S&P 500 is an
unmanaged index and is considered to be generally representative of the U.S.
stock market. Results assume the reinvestment of all income and capital
gains distributions. The MainStay Funds are neither sponsored by nor
affiliated with Standard & Poor's Corporation.

7
<PAGE>

<TABLE>
<CAPTION>
Holding $ amount
<S> <C>
General Electric Company $2,539,584

AT&T Corp. 2,134,613

Exxon Corp. 2,071,472

Coca-Cola Company 1,953,369

Merck & Co., Inc. 1,685,961

Philip Morris Companies, Inc. 1,579,315

Royal Dutch Petroleum Company 1,563,665

Procter & Gamble Company 1,185,323

Johnson & Johnson 1,146,604

International Business Machines Corp 1,082,191

Microsoft Corp. 1,079,325

Wal-Mart Stores, Inc. 1,071,270

Intel Corp. 985,747

American International Group, Inc. 918,525

Mobil Corp. 917,728

PepsiCo, Inc. 915,624

BellSouth Corp. 908,193

Bristol-Myers Squibb Company 902,117

Hewlett-Packard Company 893,613

GTE Corp. 887,172

Pfizer Inc 826,938

General Motors Corp. 823,475

Du Pont (E.I.) De Nemours & Company 815,301

Amoco Corp. 751,237

SBC Communications, Inc. 737,495
</TABLE>

8
<PAGE>

- --------------------------------------------------------------------------------
Diversification by Industry- Top 5 as of 12/31/95
- --------------------------------------------------------------------------------

[PIE CHART APPEARS HERE]

ALL OTHER INDUSTRIES 73.7%
UTILITIES - TELEPHONE 7.5%
BANKS 5.6%
PETROLEUM - INTERNATIONAL 5.2%
HEALTHCARE - DRUGS 4.6%
HEALTHCARE - GENERAL 3.4%

[PIE CHART APPEARS HERE]

COMMON STOCKS 87.9%
CASH & EQUIVALENTS 12.1%

Note: actual percentages will vary over time

9
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY EQUITY INDEX FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Shares Value
-----------------------
<S> <C> <C>
COMMON STOCKS (87.9%)+
AIR TRANSPORTATION (0.3%)
AMR Corp. (a)............................................ 1,677 $ 124,517
Delta Air Lines, Inc..................................... 1,082 79,933
Pittston Services Group.................................. 923 28,959
Southwest Airlines Co.................................... 3,000 69,750
USAir Group, Inc. (a).................................... 1,283 17,000
----------
320,159
----------
AIRCRAFT (1.3%)
Boeing Company (The)..................................... 7,290 571,354
Lockheed Martin Corp..................................... 4,159 328,561
McDonnell Douglas Corp................................... 2,375 218,500
Northrop Grumman Corp.................................... 1,076 68,864
United Technologies Corp................................. 2,521 239,180
----------
1,426,459
----------
ALUMINUM (0.4%)
Alcan Aluminum Limited................................... 4,687 145,883
Aluminum Co. of America.................................. 3,798 200,819
Reynolds Metals Company.................................. 1,306 73,952
----------
420,654
----------
APPAREL (0.4%)
Brown Group, Inc......................................... 373 5,315
Fruit Of The Loom Inc. Class A (a)....................... 1,600 39,000
Liz Claiborne, Inc....................................... 1,593 44,206
Nike, Inc................................................ 2,950 205,394
Reebok International Ltd................................. 1,811 51,161
Russell Corp............................................. 929 25,780
Stride Rite Corp......................................... 984 7,380
VF Corp.................................................. 1,414 74,588
----------
452,824
----------
BANKS (5.6%)
Banc One Corp............................................ 8,296 313,174
Bank of Boston Corp...................................... 2,311 106,884
Bank of New York Company, Inc. (The)..................... 4,000 195,000
BankAmerica Corp......................................... 7,829 506,928
Bankers Trust New York Corp.............................. 1,693 112,584
Barnett Banks, Inc....................................... 1,960 115,640
Boatmen's Bancshares, Inc................................ 2,656 108,564
Chase Manhattan Corp. (The).............................. 3,736 226,495
Chemical Banking Corp.................................... 5,272 309,730
</TABLE>
- -------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Shares Value
-----------------------
<S> <C> <C>
BANKS (CONTINUED)
Citicorp................................................. 8,381 $ 563,622
Comerica Inc............................................. 2,300 92,287
CoreStates Financial Corp................................ 3,004 113,777
First Bank System, Inc................................... 2,800 138,950
First Chicago Corp....................................... 6,624 261,648
First Fidelity Bancorp................................... 1,767 133,188
First Interstate Bancorp................................. 1,574 214,851
First Union Corp. ....................................... 3,562 198,136
Fleet Financial Group, Inc............................... 5,421 220,906
KeyCorp.................................................. 4,700 170,375
MBNA Corp................................................ 3,194 117,779
Mellon Bank Corp......................................... 3,151 169,366
Morgan (J.P.) & Company, Inc............................. 3,878 311,209
NationsBank Corp......................................... 5,673 394,983
Norwest Corp............................................. 6,790 224,070
PNC Bank Corp............................................ 4,904 158,154
Republic New York Corp................................... 1,200 74,550
Suntrust Banks, Inc...................................... 2,427 166,249
U.S. Bancorp (Portland, OR).............................. 1,963 66,006
Wachovia Corp............................................ 3,600 164,700
Wells Fargo & Company.................................... 991 214,056
----------
6,163,861
----------
BEVERAGES (3.3%)
Anheuser-Busch Companies, Inc............................ 5,376 359,520
Brown-Forman Corp........................................ 1,494 54,531
Coca-Cola Company (The).................................. 26,308 1,953,369
Coors (Adolph) Co........................................ 921 20,377
PepsiCo, Inc............................................. 16,387 915,624
Seagram Company Ltd...................................... 7,805 270,248
----------
3,573,669
----------
BROADCASTING (1.2%)
Capital Cities/ABC, Inc.................................. 3,120 384,930
Comcast Corp. Class A.................................... 5,040 91,665
Tele-Communications TCI Group, Class A (a)............... 13,792 274,116
Tellabs, Inc. (a)........................................ 1,800 66,600
U.S. West Media Group (a)................................ 9,961 189,259
Viacom Inc. Class B (a).................................. 7,417 351,380
----------
1,357,950
----------
BUSINESS EQUIPMENT & SERVICES (1.4%)
Block (H & R), Inc....................................... 2,181 88,331
Browning-Ferris Industries, Inc.......................... 4,492 132,514
Ceridian Corp. (a)....................................... 1,466 60,473
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

10
<PAGE>

<TABLE>
<CAPTION>
Shares Value
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
BUSINESS EQUIPMENT & SERVICES (CONTINUED)
Deluxe Corp.............................................. 1,694 $ 49,126
Donnelley (R.R.) & Sons Company.......................... 3,163 124,543
Dun & Bradstreet Corp. (The)............................. 3,615 234,071
Federal Express Corp. (a)................................ 1,193 88,133
Harland (John H.) Co. (The).............................. 514 10,730
Interpublic Group of Cos., Inc........................... 1,674 72,610
Moore Corp. Ltd.......................................... 2,124 39,559
National Service Industries, Inc......................... 1,081 34,997
Ogden Corp............................................... 966 20,648
Pitney Bowes Inc......................................... 3,064 144,008
Ryder System, Inc........................................ 1,673 41,407
Safety-Kleen Corp........................................ 1,200 18,750
Service Corp. International.............................. 2,042 89,848
WMX Technologies, Inc.................................... 10,204 304,844
----------
1,554,592
----------
CAPITAL EQUIPMENT (0.8%)
Caterpillar Inc.......................................... 4,234 248,747
Cincinnati Milacron Inc.................................. 701 18,401
Cummins Engine Company, Inc.............................. 946 35,002
Fluor Corp............................................... 1,689 111,474
Foster Wheeler Corp...................................... 816 34,680
General Signal Corp...................................... 1,060 34,317
Giddings & Lewis Inc..................................... 706 11,649
Harnischfeger Industries, Inc............................ 998 33,184
Illinois Tool Works Inc.................................. 2,394 141,246
Ingersoll-Rand Company................................... 2,276 79,945
Paccar Inc............................................... 903 38,039
Parker Hannifin Corp..................................... 1,518 51,992
Snap-On, Inc............................................. 965 43,666
Timken Company (The)..................................... 704 26,928
Trinova Corp............................................. 499 14,284
----------
923,554
----------
CHEMICALS--PETROLEUM (1.8%)
Dow Chemical Company (The)............................... 5,667 398,815
Du Pont (E.I.) De Nemours & Company...................... 11,668 815,301
Goodrich (B.F.) Company.................................. 492 33,517
Grace (W.R.) & Co........................................ 1,908 112,811
Hercules Inc............................................. 2,307 130,057
Monsanto Company......................................... 2,417 296,083
Rohm & Haas Company...................................... 1,424 91,670
Union Carbide Corp....................................... 2,884 108,150
----------
1,986,404
----------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
-----------------------
<S> <C> <C>
CHEMICALS--SPECIALTY (0.8%)
Air Products & Chemicals, Inc............................ 2,397 $ 126,442
Avery Dennison Corp...................................... 1,209 60,601
Eastman Chemical Co...................................... 1,739 108,905
Ecolab, Inc.............................................. 1,314 39,420
Engelhard Corp........................................... 3,037 66,055
Great Lakes Chemical Corp................................ 1,365 98,280
Morton International, Inc................................ 3,137 112,540
Nalco Chemical Company................................... 1,462 44,043
Pall Corp................................................ 2,469 66,354
Praxair, Inc............................................. 2,869 96,470
Sigma-Aldrich Corp....................................... 1,100 54,450
----------
873,560
----------
COMMUNICATIONS EQUIPMENT (0.5%)
Andrew Corp. (a)......................................... 859 32,857
DSC Communications Corp. (a)............................. 2,444 90,123
General Dynamics Corp.................................... 1,306 77,217
Harris Corp.............................................. 925 50,528
Northern Telecom Limited................................. 5,375 231,125
Scientific-Atlanta, Inc.................................. 1,638 24,570
----------
506,420
----------
COMPUTERS--MAIN & MINI (2.9%)
Amdahl Corp. (a)......................................... 2,396 20,366
Cisco Systems, Inc. (a).................................. 5,700 425,363
Cray Research, Inc. (a).................................. 495 12,251
Data General Corp. (a)................................... 811 11,151
Digital Equipment Corp. (a).............................. 3,166 203,020
Hewlett-Packard Company.................................. 10,670 893,613
Honeywell Inc............................................ 2,788 135,566
International Business Machines Corp..................... 11,795 1,082,191
Tandem Computers Inc. (a)................................ 2,391 25,404
Unisys Corp. (a)......................................... 3,576 20,115
Xerox Corp............................................... 2,226 304,962
----------
3,134,002
----------
COMPUTERS--MICRO (0.5%)
Apple Computer Inc....................................... 2,409 76,787
Compaq Computer Corp. (a)................................ 5,449 261,552
Sun Microsystems Inc. (a)................................ 3,944 179,945
----------
518,284
----------
COMPUTERS--PERIPHERALS (2.4%)
Autodesk, Inc............................................ 978 33,497
Cabletron Systems, Inc. (a).............................. 1,500 121,500
Computer Associates International Inc.................... 5,042 286,764
First Data Corp.......................................... 5,000 334,375
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

11
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY EQUITY INDEX FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Shares Value
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
COMPUTERS--PERIPHERALS (CONTINUED)
Intergraph Corp. (a)..................................... 977 $ 15,388
Microsoft Corp. (a)...................................... 12,300 1,079,325
Novell Inc. (a).......................................... 7,762 110,608
Oracle Corp. (a)......................................... 9,085 384,977
Silicon Graphics, Inc. (a)............................... 3,300 90,750
3Com Corp. (a)........................................... 3,300 153,862
----------
2,611,046
----------
CONSTRUCTION MATERIALS (0.3%)
Black & Decker Corp...................................... 1,694 59,713
Crane Co................................................. 504 18,585
PPG Industries Inc....................................... 4,260 194,895
Sherwin-Williams Company................................. 1,705 69,479
Stanley Works (The)...................................... 972 50,058
----------
392,730
----------
CONSUMER ELECTRONICS (0.0%) (B)
Zenith Electronics Corp. (a)............................. 418 2,874
----------
CONSUMER SERVICES (0.1%)
CUC International Inc. (a)............................... 3,600 122,850
----------
CONTAINERS (0.1%)
Ball Corp................................................ 496 13,640
Bemis Company, Inc....................................... 1,086 27,829
Crown Cork & Seal Company, Inc. (a)...................... 1,805 75,359
----------
116,828
----------
COSMETICS & TOILETRIES (0.7%)
Alberto-Culver Company................................... 500 17,187
Avon Products, Inc....................................... 1,466 110,500
Gillette Company......................................... 9,254 482,365
International Flavors & Fragrances, Inc.................. 2,369 113,712
----------
723,764
----------
DEFENSE (0.6%)
EG & G, Inc.............................................. 1,198 29,052
Loral Corp............................................... 3,616 127,916
Raytheon Company......................................... 5,160 243,810
Rockwell International Corp.............................. 4,580 242,167
----------
642,945
----------
ELECTRICAL COMPONENTS (0.1%)
LSI Logic Corp. (a)...................................... 2,700 88,425
----------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
-----------------------
<S> <C> <C>
ELECTRICAL EQUIPMENT (3.2%)
Cooper Industries, Inc................................... 2,297 $ 84,415
Dover Corp............................................... 2,402 88,574
Emerson Electric Co...................................... 4,589 375,151
General Electric Company................................. 35,272 2,539,584
Grainger (W.W.), Inc..................................... 1,088 72,080
Johnson Controls, Inc.................................... 927 63,731
Tyco International Ltd................................... 3,150 112,219
Westinghouse Electric Corp............................... 8,101 133,666
----------
3,469,420
----------
ELECTRONIC COMPONENTS (2.4%)
Advanced Micro Devices, Inc. (a)......................... 2,206 36,399
AMP Inc.................................................. 4,556 174,837
Applied Materials, Inc. (a).............................. 3,700 145,688
Intel Corp............................................... 17,370 985,747
Micron Technology Inc.................................... 4,400 174,350
Motorola, Inc............................................ 12,312 701,784
National Semiconductor Corp. (a)......................... 2,581 57,427
Raychem Corp............................................. 929 52,837
Teledyne, Inc. (a)....................................... 1,196 30,647
Texas Instruments, Inc................................... 3,884 200,997
Thomas & Betts Corp...................................... 376 27,730
----------
2,588,443
----------
ELECTRONIC INSTRUMENTS (0.1%)
Perkin-Elmer Corp. (The)................................. 967 36,504
Tektronix, Inc........................................... 703 34,535
----------
71,039
----------
ENVIRONMENTAL CONTROL (0.0%) (B)
Laidlaw, Inc. Class B.................................... 6,100 62,525
----------
FARM MACHINERY (0.2%)
Deere & Company.......................................... 5,431 191,443
Navistar International Corp. (a)......................... 1,588 16,674
Varity Corp. (a)......................................... 1,026 38,090
----------
246,207
----------
FINANCE COMPANIES (0.6%)
Beneficial Corp.......................................... 1,186 55,297
Household International Inc.............................. 1,940 114,702
National City Corp....................................... 3,200 106,000
Travelers Group Inc...................................... 6,683 420,194
----------
696,193
----------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

12
<PAGE>

<TABLE>
<CAPTION>
Shares Value
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FOOD & RELATED (2.5%)
Archer Daniels Midland Company........................... 11,478 $ 206,604
Campbell Soup Company.................................... 5,284 317,040
ConAgra, Inc............................................. 5,325 219,656
CPC International, Inc................................... 3,117 213,904
Fleming Companies, Inc................................... 919 18,954
General Mills, Inc....................................... 3,281 189,478
Heinz (H.J.) Company..................................... 7,783 257,812
Hershey Foods Corp....................................... 1,710 111,150
Kellogg Company.......................................... 4,552 351,642
Quaker Oats Company...................................... 2,738 94,461
Ralston Purina Group..................................... 2,174 135,603
Sara Lee Corp............................................ 10,185 324,647
SuperValu Inc............................................ 1,465 46,148
Sysco Corp............................................... 3,968 128,960
Wrigley (Wm.) Jr. Company................................ 2,405 126,262
----------
2,742,321
----------
FOOD PROCESSING (0.1%)
Pioneer Hi-Bred International, Inc....................... 1,800 100,125
----------
FOREST & PAPER PRODUCTS (1.4%)
Boise Cascade Corp....................................... 922 31,924
Champion International Corp.............................. 1,916 80,472
Crown Vantage, Inc. (a).................................. 148 2,109
Federal Paper Board Company, Inc......................... 931 48,296
Georgia-Pacific Corp..................................... 1,805 123,868
International Paper Company.............................. 5,438 205,964
James River Corp. of Virginia............................ 1,689 40,747
Kimberly-Clark Corp...................................... 5,425 448,945
Louisiana-Pacific Corp................................... 2,386 57,861
Mead Corp................................................ 1,103 57,632
Potlatch Corp............................................ 601 24,040
Stone Container Corp..................................... 1,882 27,054
Temple-Inland Inc........................................ 1,194 52,685
Union Camp Corp.......................................... 1,429 68,056
Westvaco Corp............................................ 2,183 60,578
Weyerhaeuser Company..................................... 4,311 186,451
Willamette Industries, Inc............................... 1,200 67,500
----------
1,584,182
----------
FURNITURE & FURNISHINGS (0.3%)
Armstrong World Industries, Inc.......................... 921 57,102
Masco Corp............................................... 3,221 101,059
Newell Co................................................ 3,262 84,404
Owens-Corning Fiberglas Corp. (a)........................ 1,163 52,190
----------
294,755
----------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
-----------------------
<S> <C> <C>
GOLD & PRECIOUS METALS (0.2%)
Echo Bay Mines Ltd....................................... 2,481 $ 25,741
Homestake Mining Company................................. 2,885 45,078
Placer Dome Inc.......................................... 5,018 121,059
----------
191,878
----------
HEALTH CARE--DRUGS (4.6%)
Abbott Laboratories...................................... 16,454 686,954
Allergan Inc............................................. 1,324 43,030
Alza Corp. (a)........................................... 1,673 41,407
Amgen Inc. (a)........................................... 5,560 330,125
Baxter International Inc................................. 5,979 250,371
Lilly (Eli) & Company.................................... 11,628 654,075
Merck & Co., Inc......................................... 25,642 1,685,961
Millipore Corp........................................... 998 41,043
Pfizer Inc............................................... 13,126 826,938
Schering-Plough Corp..................................... 7,788 426,393
----------
4,986,297
----------
HEALTH CARE--GENERAL (3.4%)
American Home Products Corp.............................. 6,490 629,530
Bausch & Lomb Inc........................................ 1,304 51,671
Becton, Dickinson & Company.............................. 1,377 103,275
Biomet Inc. (a).......................................... 2,500 44,688
Bristol-Myers Squibb Company............................. 10,505 902,117
Johnson & Johnson........................................ 13,391 1,146,604
Mallinckrodt Group, Inc.................................. 1,677 61,001
Pharmacia & Upjohn, Inc.................................. 11,693 453,104
St. Jude Medical, Inc. (a)............................... 1,565 67,295
Warner-Lambert Company................................... 2,780 270,007
----------
3,729,292
----------
HOMEBUILDERS, MOBILE HOMES (0.1%)
Centex Corp.............................................. 505 17,549
Fleetwood Enterprises, Inc............................... 1,073 27,630
Kaufman & Broad Home Corp................................ 714 10,621
Pulte Corp............................................... 497 16,711
----------
72,511
----------
HOSPITAL SUPPLY & MANAGEMENT (1.0%)
Bard (C.R.), Inc......................................... 1,089 35,120
Beverly Enterprises, Inc. (a)............................ 1,671 17,754
Columbia/HCA Healthcare Corp............................. 9,258 469,843
Community Psychiatric Centers (a)........................ 968 11,858
Humana Inc. (a).......................................... 2,800 76,650
Manor Care, Inc.......................................... 1,300 45,500
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

13
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY EQUITY INDEX FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Shares Value
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HOSPITAL SUPPLY & MANAGEMENT (CONTINUED)
Medtronic, Inc. ......................................... 4,824 $ 269,541
Shared Medical Systems Corp. ............................ 485 26,372
Tenet Healthcare Corp. (a)............................... 4,185 86,839
United States Surgical Corp. ............................ 1,194 25,522
----------
1,064,999
----------
HOTELS & GAMING (0.2%)
Bally Entertainment Corp. (a)............................ 1,072 15,008
Harrah's Entertainment, Inc. (a)......................... 2,200 53,350
Hilton Hotels Corp. ..................................... 1,077 66,235
Marriott International, Inc. ............................ 2,666 101,975
----------
236,568
----------
HOUSEHOLD--GENERAL PRODUCTS (2.1%)
American Greetings Corp. ................................ 1,536 42,432
Clorox Company (The)..................................... 1,193 85,449
Colgate-Palmolive Company................................ 3,071 215,738
Corning Inc. ............................................ 4,680 149,760
Jostens, Inc. ........................................... 1,071 25,972
Premark International, Inc. ............................. 1,316 66,622
Procter & Gamble Company (The)........................... 14,281 1,185,323
Rubbermaid, Inc. ........................................ 3,372 85,986
Unilever, N.V. .......................................... 3,271 460,393
----------
2,317,675
----------
HOUSEHOLD--MAJOR APPLIANCES (0.1%)
Briggs & Stratton Corp. ................................. 532 23,076
Maytag Corp. ............................................ 2,381 48,215
Whirlpool Corp. ......................................... 1,530 81,472
----------
152,763
----------
INSURANCE--LIFE (1.0%)
American General Corp. .................................. 4,370 152,404
Jefferson-Pilot Corp. ................................... 1,627 75,679
Loews Corp. ............................................. 2,300 180,262
Providian Corp. ......................................... 2,022 82,397
Torchmark Corp. ......................................... 1,519 68,735
United Healthcare Corp. ................................. 3,600 235,800
U.S. Healthcare, Inc. ................................... 3,300 153,450
UNUM Corp. .............................................. 1,600 88,000
USLIFE Corp. ............................................ 677 20,225
----------
1,056,952
----------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
-----------------------
<S> <C> <C>
INSURANCE--PROPERTY & CASUALTY (2.4%)
Aetna Life & Casualty Company............................ 2,390 $ 165,507
Allstate Corp. (The)..................................... 9,537 392,209
American International Group, Inc. ...................... 9,930 918,525
Chubb Corp. (The)........................................ 1,803 174,440
CIGNA Corp. ............................................. 1,466 151,364
General Re Corp. ........................................ 1,697 263,035
ITT Hartford Group, Inc. (a)............................. 2,303 111,408
Lincoln National Corp. .................................. 2,245 120,669
SAFECO Corp. ............................................ 2,626 90,597
St. Paul Companies, Inc. (The)........................... 1,764 98,123
Transamerica Corp. ...................................... 1,482 108,001
USF&G Corp. ............................................. 2,396 40,432
----------
2,634,310
----------
LEISURE TIME INDUSTRY (0.8%)
Brunswick Corp. ......................................... 1,922 46,128
Handleman Co. ........................................... 711 4,088
Hasbro Inc. ............................................. 1,802 55,862
Mattel, Inc. ............................................ 4,600 141,450
Outboard Marine Corp. ................................... 378 7,702
Walt Disney Company (The)................................ 10,951 646,109
----------
901,339
----------
MEDICAL SUPPLIES (0.1%)
Boston Scientific Corp. (a).............................. 3,200 156,800
----------
METALS--DIVERSIFIED (0.1%)
Freeport -McMoRan Copper & Gold Inc...................... 4,400 123,750
----------
MINING (0.5%)
Asarco, Inc. ............................................ 931 29,792
Barrick Gold Corp. ...................................... 7,400 195,175
Cyprus Amax Minerals Co. ................................ 1,828 47,756
INCO Limited............................................. 2,386 79,334
Nacco Industries, Inc. .................................. 221 12,266
Newmont Mining Corp. .................................... 1,754 79,369
Phelps Dodge Corp. ...................................... 1,462 91,009
Santa Fe Pacific Gold Corp. ............................. 2,456 29,779
----------
564,480
----------
MOTION PICTURES (0.0%) (B)
King World Productions, Inc. (a)......................... 822 31,955
----------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

14
<PAGE>

<TABLE>
<CAPTION>
Shares Value
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MOTOR VEHICLE PARTS (0.3%)
Dana Corp. .............................................. 2,046 $ 59,846
Eaton Corp. ............................................. 1,728 92,664
Echlin Inc. ............................................. 1,301 47,486
Genuine Parts Company.................................... 2,673 109,593
----------
309,589
----------
MOTOR VEHICLES (1.8%)
Chrysler Corp. .......................................... 8,095 448,261
Ford Motor Company....................................... 22,504 652,616
General Motors Corp. .................................... 15,574 823,475
----------
1,924,352
----------
MULTIPLE INDUSTRY (1.5%)
Alco Standard Corp. ..................................... 2,348 107,128
AlliedSignal, Inc. ...................................... 5,992 284,620
Dial Corp. (The)......................................... 1,850 54,806
FMC Corp. (a)............................................ 818 55,317
Harcourt General, Inc. .................................. 1,599 66,958
ITT Corp. (New) (a)...................................... 2,303 122,059
ITT Industries, Inc. .................................... 2,303 55,272
Minnesota Mining & Manufacturing Company................. 8,650 573,063
Textron Inc. ............................................ 1,703 114,952
TRW Inc. ................................................ 1,413 109,507
Whitman Corp. ........................................... 2,282 53,057
----------
1,596,739
----------
PETROLEUM--DOMESTIC (2.3%)
Amerada Hess Corp. ...................................... 1,915 101,495
Amoco Corp. ............................................. 10,452 751,237
Ashland Inc. ............................................ 1,306 45,873
Atlantic Richfield Company............................... 3,267 361,820
Burlington Resources, Inc. .............................. 2,700 105,975
Coastal Corp. ........................................... 2,174 80,981
Kerr-McGee Corp. ........................................ 1,178 74,803
Louisiana Land & Exploration Company (The)............... 699 29,970
Noram Energy Corp. ...................................... 2,618 23,235
Occidental Petroleum Corp. .............................. 6,671 142,593
Oryx Energy Company (a).................................. 2,026 27,098
Pennzoil Company......................................... 1,028 43,433
Phillips Petroleum Company............................... 5,505 187,858
Santa Fe Energy Resources, Inc. (a)...................... 1,808 17,402
Sun Company, Inc. ....................................... 1,580 43,253
Tenneco, Inc. ........................................... 3,821 189,617
Unocal Corp. ............................................ 5,058 147,314
USX-Marathon Group....................................... 6,097 118,892
----------
2,492,849
----------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
-----------------------
<S> <C> <C>
PETROLEUM--INTERNATIONAL (5.2%)
Chevron Corp. ........................................... 13,762 $ 722,505
Exxon Corp. ............................................. 25,853 2,071,472
Mobil Corp. ............................................. 8,194 917,728
Royal Dutch Petroleum Company............................ 11,080 1,563,665
Texaco Inc. ............................................. 5,502 431,907
----------
5,707,277
----------
PETROLEUM--SERVICES (0.7%)
Baker Hughes Inc. ....................................... 2,890 70,444
Dresser Industries, Inc. ................................ 3,881 94,599
Halliburton Company...................................... 2,487 125,904
Helmerich & Payne, Inc. ................................. 491 14,607
McDermott International, Inc. ........................... 1,187 26,114
Rowan Companies, Inc. (a)................................ 1,677 16,560
Schlumberger Limited..................................... 5,059 350,336
Western Atlas, Inc. (a).................................. 1,131 57,116
----------
755,680
----------
PHOTOGRAPHIC EQUIPMENT (0.5%)
Eastman Kodak Company.................................... 7,157 479,519
Polaroid Corp. .......................................... 1,076 50,975
----------
530,494
----------
PUBLISHING (0.9%)
Dow Jones & Company, Inc. ............................... 1,968 78,474
Gannett Company, Inc. ................................... 2,904 178,233
Knight-Ridder Inc. ...................................... 994 62,125
McGraw-Hill Companies, Inc. ............................. 1,080 94,095
Meredith Corp. .......................................... 538 22,529
New York Times Company (The)............................. 2,083 61,709
Time Warner, Inc. ....................................... 7,998 302,924
Times Mirror Company..................................... 2,465 83,502
Tribune Company.......................................... 1,419 86,736
----------
970,327
----------
RAILROAD (1.0%)
Burlington Northern Santa Fe Corp. ...................... 2,909 226,902
Conrail, Inc. ........................................... 1,686 118,020
CSX Corp. ............................................... 4,346 198,286
Norfolk Southern Corp. .................................. 2,793 221,695
Union Pacific Corp. ..................................... 4,307 284,262
----------
1,049,165
----------
RESTAURANTS (0.7%)
Darden Restaurants, Inc. (a)............................. 3,281 38,962
Luby's Cafeterias, Inc. ................................. 496 11,036
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

15
<PAGE>

THE MAINSTAY EQUITY INDEX FUND

<TABLE>
<CAPTION>
Shares Value
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
RESTAURANTS (CONTINUED)
McDonald's Corp.......................................... 14,444 $ 651,786
Ryan's Family Steak Houses, Inc. (a)..................... 1,190 8,330
Shoney's, Inc. (a)....................................... 929 9,522
Wendy's International, Inc............................... 2,162 45,942
----------
765,578
----------
RETAIL--FOOD STORES (0.7%)
Albertson's, Inc......................................... 5,338 175,487
American Stores Co....................................... 3,128 83,674
Bruno's, Inc............................................. 39 419
Giant Food, Inc.......................................... 1,306 41,139
Great Atlantic & Pacific Tea Company, Inc................ 922 21,206
Kroger Company (The) (a)................................. 2,571 96,413
Longs Drug Stores Corp................................... 381 18,240
Rite Aid Corp............................................ 1,705 58,396
Walgreen Company......................................... 5,240 156,545
Winn-Dixie Stores, Inc................................... 3,156 116,378
----------
767,897
----------
RETAIL--GENERAL MERCHANDISE (2.2%)
Dayton Hudson Corp....................................... 1,465 109,875
Dillard Department Stores, Inc........................... 2,393 68,200
Federated Department Stores, Inc. (a).................... 4,600 126,500
Kmart Corp............................................... 9,644 69,919
May Department Stores Company............................ 5,143 217,292
Mercantile Stores Company, Inc........................... 819 37,879
Nordstrom, Inc........................................... 1,691 68,486
Penney (J.C.) Company, Inc............................... 4,812 229,172
Price/Costco, Inc. (a)................................... 4,061 61,930
Sears, Roebuck & Company................................. 8,205 319,995
TJX Companies, Inc. (The)................................ 1,564 29,520
Wal-Mart Stores, Inc..................................... 47,878 1,071,270
Woolworth Corp........................................... 2,771 36,023
----------
2,446,061
----------
RETAIL--SPECIALTY STORES (1.1%)
Charming Shoppes, Inc.................................... 2,170 6,239
Circuit City Stores, Inc................................. 1,920 53,040
Gap, Inc. (The).......................................... 3,102 130,284
Home Depot, Inc. (The)................................... 9,926 475,207
Limited, Inc. (The)...................................... 7,476 129,895
Lowe's Companies, Inc.................................... 3,238 108,473
Melville Corp............................................ 2,276 69,987
Pep Boys-Manny, Moe & Jack............................... 1,307 33,492
Tandy Corp............................................... 1,314 54,531
Toys "R" Us (a).......................................... 6,112 132,936
----------
1,194,084
----------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
-----------------------
<S> <C> <C>
SAVINGS & LOANS (1.1%)
Ahmanson (H.F.) & Company................................ 2,403 $ 63,680
Federal Home Loan Mortgage Corp.......................... 3,818 318,803
Federal National Mortgage Association.................... 5,668 703,540
Golden West Financial Corp............................... 1,315 72,654
Great Western Financial Corp............................. 2,770 70,635
----------
1,229,312
----------
SECURITY & COMMISSION BROKERS (1.0%)
Alexander & Alexander Services, Inc...................... 1,029 19,551
American Express Company................................. 10,178 421,115
Dean Witter Discover & Company........................... 3,598 169,106
Marsh & McLennan Companies, Inc.......................... 1,467 130,196
Merrill Lynch & Co., Inc................................. 3,744 190,944
Morgan Stanley Group Inc................................. 1,700 137,063
Salomon Inc.............................................. 2,299 81,614
----------
1,149,589
----------
STEEL (0.2%)
Armco Inc. (a)........................................... 2,273 13,354
Bethlehem Steel Corp. (a)................................ 2,411 33,754
Inland Steel Industries, Inc. (a)........................ 1,015 25,502
Nucor Corp............................................... 1,734 99,055
USX-U.S. Steel Group Inc................................. 1,591 48,923
Worthington Industries, Inc.............................. 1,834 38,170
----------
258,758
----------
TEXTILE (0.0%) (B)
Springs Industries, Inc.................................. 374 15,474
----------
TIMESHARING & SOFTWARE (0.3%)
Automatic Data Processing, Inc........................... 3,094 229,730
Computer Sciences Corp. (a).............................. 1,213 85,213
----------
314,943
----------
TIRE & RUBBER PRODUCTS (0.2%)
Cooper Tire & Rubber Company............................. 1,694 41,715
Goodyear Tire & Rubber Company........................... 3,101 140,708
----------
182,423
----------
TOBACCO (1.7%)
American Brands, Inc..................................... 3,907 174,350
Philip Morris Companies, Inc............................. 17,451 1,579,315
Schweitzer-Mauduit International, Inc. (a)............... 307 7,099
UST Inc.................................................. 4,023 134,268
----------
1,895,032
----------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

16
<PAGE>

PORTFOLIO OF INVESTMENTS -- CONTINUED

<TABLE>
<CAPTION>
Shares Value
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TRUCKING & SHIPPING (0.1%)
Consolidated Freightways, Inc. .......................... 815 $ 21,598
Roadway Services, Inc. .................................. 925 45,209
Yellow Corp. ............................................ 499 6,175
----------
72,982
----------
UTILITIES--ELECTRIC (3.3%)
American Electric Power Company, Inc. ................... 3,862 156,411
Baltimore Gas & Electric Company......................... 3,149 89,747
Carolina Power & Light Company........................... 3,273 112,919
Central & South West Corp. .............................. 4,071 113,479
CINergy Corp. ........................................... 3,118 95,489
Consolidated Edison Company of New York.................. 4,911 157,152
Detroit Edison Company................................... 3,109 107,261
Dominion Resources Inc. ................................. 3,526 145,448
Duke Power Company....................................... 4,310 204,186
Entergy Corp. ........................................... 4,709 137,738
FPL Group, Inc. ......................................... 3,724 172,700
General Public Utilities Corp. .......................... 2,400 81,600
Houston Industries Inc. ................................. 5,536 134,248
Niagara Mohawk Power Corp. .............................. 3,088 29,722
Northern States Power Company............................ 1,415 69,512
Ohio Edison Company...................................... 3,122 73,367
Pacific Gas & Electric Company........................... 8,993 255,176
PacifiCorp............................................... 5,957 126,586
Peco Energy Company...................................... 4,579 137,942
PP&L Resources, Inc. .................................... 3,100 77,500
Public Service Enterprise Group Inc. .................... 5,246 160,659
SCEcorp. ................................................ 9,370 166,317
Southern Company (The)................................... 14,006 344,898
Texas Utilities Company.................................. 4,671 192,095
Unicom Corp. ............................................ 4,561 149,373
Union Electric Company................................... 2,170 90,597
----------
3,582,122
----------
UTILITIES--GAS & PIPELINE (0.7%)
Columbia Gas System, Inc. (a)............................ 984 43,173
Consolidated Natural Gas Company......................... 1,915 86,893
Eastern Enterprises...................................... 385 13,571
Enron Corp. ............................................. 5,308 202,368
Enserch Corp. ........................................... 1,421 23,091
Nicor Inc. .............................................. 1,196 32,890
Oneok, Inc. ............................................. 495 11,323
Pacific Enterprises...................................... 1,680 47,460
Panhandle Eastern Corp. ................................. 3,091 86,162
Peoples Energy Corp. .................................... 715 22,701
</TABLE>
<TABLE>
<CAPTION>
Shares Value
--------------------------
<S> <C> <C>
UTILITIES--GAS & PIPELINE (CONTINUED)
Sonat Inc. ........................................ 1,732 $ 61,703
Williams Companies, Inc. (The)..................... 2,152 94,419
----------
725,754
----------
UTILITIES--TELEPHONE (7.5%)
AT&T Corp. ........................................ 32,967 2,134,613
Airtouch Communications (a)........................ 10,400 293,800
Alltel Corp. ...................................... 3,800 112,100
Ameritech Corp. ................................... 11,618 685,462
Bell Atlantic Corp. ............................... 9,106 608,964
BellSouth Corp. ................................... 20,878 908,193
GTE Corp. ......................................... 20,163 887,172
MCI Communications Corp. .......................... 14,320 374,110
NYNEX Corp. ....................................... 8,922 481,788
Pacific Telesis Group.............................. 9,006 302,826
SBC Communications, Inc. .......................... 12,826 737,495
Sprint Corp. ...................................... 7,385 294,477
US West, Inc. ..................................... 9,961 356,106
----------
8,177,106
----------
Total Common Stocks
(Cost $68,673,329)................................ 96,104,220 (c)
----------
PREFERRED STOCK (0.0%) (B)
ELECTRONIC COMPONENTS (0.0%) (B)
Teledyne, Inc.
$1.20, Series E................................... 28 402
----------
Total Preferred Stock
(Cost $412)....................................... 402
----------
<CAPTION>
Principal
Amount
---------
<S> <C> <C>
SHORT-TERM INVESTMENTS (11.2%)
COMMERCIAL PAPER (8.1%)
Banco Itau S.A., Cayman Islands
5.95%, due 1/22/96 (d)............................ $ 4,050,000 4,035,943
Dynamic Funding Corp.
6.05%, due 1/4/96 (d)............................. 430,000 429,783
Epson America Inc.
6.05%, due 1/4/96 (d)............................. 410,000 409,793
Shinhan Bank
5.95%, due 1/22/96 (d)............................ 3,850,000 3,836,638
5.95%, due 1/22/96 (d)............................ 200,000 199,306
----------
Total Commercial Paper
(Cost $8,911,463)................................. 8,911,463
----------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

17
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY EQUITY INDEX FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------
<S> <C> <C>

SHORT-TERM INVESTMENTS (CONTINUED)
U.S. GOVERNMENT & FEDERAL AGENCY (3.1%)
Federal National Mortgage Association
5.45%, due 1/17/96 (d)........................... $1,040,000 $ 1,037,572
5.45%, due 1/18/96 (d)........................... 750,000 748,069
United States Treasury Bills
4.81%, due 3/7/96 (d)............................ 1,570,000 1,555,346
------------
Total U.S. Government &
Federal Agency
(Cost $3,341,773)................................ 3,340,987
------------
Total Short-Term Investments
(Cost $12,253,236)............................... 12,252,450
------------
Total Investments
(Cost $80,926,977) (e)........................... 99.1% 108,357,072 (f)
Cash and Other Assets,
Less Liabilities................................. 0.9 950,597
---------- ------------
Net Assets........................................ 100.0% $109,307,669
========== ============
<CAPTION>
Contracts Unrealized
Long Appreciation
------------------------------
<S> <C> <C>
FUTURES CONTRACTS (0.3%)
Standard & Poor's 500 March 1996.................. 39 289,525
------------
Total Futures Contracts
(Settlement Value $12,059,775)................... $ 289,525 (g)
============
</TABLE>
- -------
(a) Non-income producing securities.
(b) Less than one tenth of a percent.
(c) The combined market value of common stocks and Standard & Poor's 500 Index
futures contracts represents 99.0% of net assets.
(d) Partially segregated as collateral for futures contracts.
(e) The cost for Federal income tax purposes is $80,953,798.
(f) At December 31, 1995 net unrealized appreciation was $27,403,274, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $28,678,425 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $1,275,151.
(g) Represents the difference between the value of the contracts at the time
they were opened and the value at December 31, 1995.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

18
<PAGE>

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

STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1995

<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (Note 2)
(identified cost $80,926,977)................................... $108,357,072
Cash............................................................. 54,001
Receivables:
Fund shares sold................................................ 1,034,426
Dividends and interest.......................................... 187,236
Unamortized organization expense
(Note 2)........................................................ 62,025
Other assets..................................................... 71
Variation margin receivable on futures contracts................. 13,550
------------
Total assets................................................... 109,708,381
------------
LIABILITIES:
Payables:
Investment securities purchased................................. 154,275
NYLIFE Distributors............................................. 58,711
NYLIFE Inc. .................................................... 33,000
Fund shares redeemed............................................ 28,069
Transfer agent.................................................. 12,590
Management...................................................... 9,033
Custodian....................................................... 7,011
Accrued expenses................................................. 98,023
------------
Total liabilities.............................................. 400,712
------------
Net Assets....................................................... $109,307,669
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per
share) unlimited number of shares authorized.................... $ 57,084
Additional paid-in capital....................................... 77,787,420
Accumulated undistributed net investment income.................. 1,369,359
Accumulated undistributed net realized gain on investments....... 2,374,186
Net unrealized appreciation on investments....................... 27,719,620
------------
Net assets applicable to outstanding shares...................... $109,307,669
============
Shares of beneficial interest outstanding........................ 5,708,350
============
Net asset value per share outstanding............................ $ 19.15
Maximum sales charge (3.00% of offering price)................... 0.59
------------
Maximum offering price per share outstanding..................... $ 19.74
============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a)..................................................... $ 1,876,494
Interest.......................................................... 393,863
-----------
Total income..................................................... 2,270,357
-----------
Expenses: (Note 2)
Administration (Note 3)........................................... 324,287
Distribution (Note 3)............................................. 202,680
Shareholder communication......................................... 95,285
Transfer agent.................................................... 86,095
Management (Note 3)............................................... 81,072
Custodian......................................................... 28,571
Registration...................................................... 27,130
Auditing.......................................................... 24,999
Amortization of organization costs................................ 12,479
Legal............................................................. 10,703
Trustees.......................................................... 2,551
Miscellaneous..................................................... 6,565
-----------
Total expenses................................................... 902,417
-----------
Net investment income.............................................. 1,367,940
-----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from:
Security transactions............................................. 1,131,809
Futures transactions.............................................. 1,242,377
-----------
Net realized gain on investments................................... 2,374,186
-----------
Net change in unrealized appreciation on investments:
Security transactions............................................. 20,109,579
Futures transactions.............................................. 287,550
-----------
Net unrealized gain on investments................................. 20,397,129
-----------
Net realized and unrealized gain on investments.................... 22,771,315
-----------
Net increase in net assets resulting from operations............... $24,139,255
===========
</TABLE>
- -------
(a) Dividends recorded net of foreign withholding taxes of $12,250.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

19
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY EQUITY INDEX FUND
- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
September 1
Year ended through Year ended
December 31 December 31 August 31
1995 1994* 1994
------------ ----------- ------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income................ $ 1,367,940 $ 413,868 $ 1,169,530
Net realized gain on investments..... 2,374,186 179,042 1,339,547
Net change in unrealized appreciation
on investments...................... 20,397,129 (2,275,572) 273,918
------------ ----------- ------------
Net increase (decrease) in net assets
resulting from operations........... 24,139,255 (1,682,662) 2,782,995
------------ ----------- ------------
Dividends and distributions to share-
holders:
From net investment income........... (1,179,184) -- (1,110,192)
From net realized gain on invest-
ments............................... (1,183,983) -- (794,575)
------------ ----------- ------------
Total dividends and distributions to
shareholders....................... (2,363,167) -- (1,904,767)
------------ ----------- ------------
Capital share transactions:
Net proceeds from sale of shares..... 31,920,582 2,620,801 10,248,650
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions......... 2,322,832 -- 1,863,247
------------ ----------- ------------
34,243,414 2,620,801 12,111,897
Cost of shares redeemed.............. (8,272,732) (2,205,419) (13,083,219)
------------ ----------- ------------
Increase (decrease) in net assets
derived from capital share transac-
tions.............................. 25,970,682 415,382 (971,322)
------------ ----------- ------------
Net increase (decrease) in net as-
sets............................... 47,746,770 (1,267,280) (93,094)
NET ASSETS:
Beginning of period................... 61,560,899 62,828,179 62,921,273
------------ ----------- ------------
End of period......................... $109,307,669 $61,560,899 $ 62,828,179
============ =========== ============
Accumulated undistributed net invest-
ment income.......................... $ 1,369,359 $ 1,180,603 $ 766,735
============ =========== ============
</TABLE>
- -------
* The Fund changed its fiscal year end from August 31 to December 31.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

20
<PAGE>

FINANCIAL HIGHLIGHTS
(SELECTED PER SHARE DATA AND RATIOS)

<TABLE>
<CAPTION>
December 20
September 1 1990(a)
Year ended through Year Ended August 31 through
December 31 December 31 ------------------------- August 31
1995 1994* 1994 1993 1992 1991
----------- ----------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at be-
ginning of period...... $ 14.09 $ 14.48 $ 13.84 $ 12.15 $ 11.41 $ 9.45
-------- ------- ------- ------- ------- -------
Net investment income... 0.24 0.09 0.27 0.22 0.18 0.11
Net realized and
unrealized gain (loss)
on investments......... 4.82 (0.48) 0.37 1.47 0.56 1.85
-------- ------- ------- ------- ------- -------
Total from investment
operations............. 5.06 (0.39) 0.64 1.69 0.74 1.96
-------- ------- ------- ------- ------- -------
Less dividends and dis-
tributions:
From net investment in-
come................... (0.27) -- (0.25) (0.18) (0.17) --
From net realized gain
on investments......... (0.27) -- (0.18) (0.02) (0.04) --
-------- ------- ------- ------- ------- -------
Total dividends and dis-
tributions............. (0.54) -- (0.43) (0.20) (0.21) --
-------- ------- ------- ------- ------- -------
Reverse Share Split..... 0.54 -- 0.43 0.20 0.21 --
-------- ------- ------- ------- ------- -------
Net asset value at end
of period.............. $ 19.15 $ 14.09 $ 14.48 $ 13.84 $ 12.15 $ 11.41
======== ======= ======= ======= ======= =======
Total investment return
(b).................... 35.91% (2.68%) 4.59% 13.91% 6.49% 20.74%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income.. 1.7% 2.0%+ 1.9% 1.9% 1.8% 1.9%+
Expenses............... 1.1% 0.9%+ 0.9% 0.9% 1.2% 1.4%+
Portfolio turnover rate. 4% 2% 12% 4% 3% 1%
Net assets at end of pe-
riod (in 000's)........ $109,308 $61,561 $62,828 $62,921 $41,742 $23,534
</TABLE>
- -------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charge and is not annualized.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

21
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY EQUITY INDEX FUND
- --------------------------------------------------------------------------------

NOTE 1 -- ORGANIZATION AND BUSINESS:

The MainStay Funds were organized on January 9, 1986 as a Massachusetts Busi-
ness Trust. The Trust is registered under the Investment Company Act of 1940,
as amended, (the "Act") as an open-end management investment company and com-
prises thirteen portfolios. These financial statements and notes relate only to
the Equity Index Fund (the "Fund"). The Fund's objective is to provide invest-
ment results that correspond to the total return performance of publicly traded
common stocks represented by the Standard & Poor's 500 Composite Stock Price
Index.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:

The following is a summary of significant accounting policies followed by the
Fund:

VALUATION OF FUND SHARES. The net asset value per share is calculated on each
day the New York Stock Exchange (the "Exchange") is open for trading as of
close of regular trading on the Exchange. The net asset value per share is de-
termined by taking the assets attributable to the shares, subtracting the lia-
bilities attributable to the shares, and dividing the result by the shares that
are outstanding.

SECURITIES VALUATION. Portfolio securities of the Equity Index Fund are stated
at value determined (a) by appraising common and preferred stocks which are
traded on the New York Stock Exchange at the last sale price on that day or, if
no sale occurs, at the mean between the closing bid and asked prices, (b) by
appraising common and preferred stocks traded on other United States national
securities exchanges as nearly as possible in the manner described in (a) by
reference to their principal exchange, including the National Association of
Securities Dealers National Market System, (c) by appraising over-the-counter
securities quoted on the National Association of Securities Dealers NASDAQ sys-
tem (but not listed on the National Market System) at the bid price supplied
through such system, (d) by appraising over-the-counter securities not quoted
on the NASDAQ system at prices supplied by the pricing agent or brokers se-
lected by the Adviser, if these prices are deemed to be representative of mar-
ket values at the regular close of business of the New York Stock Exchange.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost if their term to maturity at purchase was 60 days or
less, or by amortizing the difference between market value on the 61st day
prior to maturity and value on maturity date if their original term to maturity
at purchase exceeded 60 days.

22
<PAGE>

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

recognized as unrealized gains or losses by "marking to market" such contract
on a daily basis to reflect the market value of the contract at the end of each
day's trading. The Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in the value of the contract. Such re-
ceipts or payments are known as "variation margin". When the futures contract
is closed, the Fund records a realized gain or loss equal to the difference be-
tween the proceeds from (or cost of) the closing transaction and the Fund's ba-
sis in the contract. The Equity Index Fund invests in stock index futures con-
tracts to gain full exposure to changes in stock market prices to fulfill its
investment objective.

The use of futures contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the statement of assets and liabili-
ties. The contract or notional amounts and variation margin reflect the extent
of the Fund's involvement in long futures positions. Risks arise from the pos-
sible imperfect correlation in movements in the price of futures contracts, in-
terest rates and the underlying hedged assets, and the possible inability of
counterparties to meet the terms of their contracts. However, the Fund's activ-
ities in futures contracts are conducted through regulated exchanges which min-
imize counterparty credit risks.

FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $21,323 have been reclassified from addi-
tional paid-in capital to accumulated undistributed net realized gain on in-
vestments.

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on theex-dividend date. The Equity Index Fund intends to declare and
pay dividends annually.

The Fund went ex-dividend on January 2, 1996 and also underwent a reverse share
split on that day. The reverse share split rate was 0.9715 per share outstand-
ing, calculated on fund shares outstanding immediately after reinvestment of
dividends.

Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.

ORGANIZATION COSTS. Costs incurred in connection with the Fund's initial organ-
ization and registration totalled $124,798. Such costs are being amortized over
ten years beginning at the commencement of

23
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY EQUITY INDEX FUND
- --------------------------------------------------------------------------------

operations of the Fund. This period corresponds to the guarantee period of the
original offering (See Note 6).

In the event NYLIFE Securities Inc. redeems any of the shares initially pur-
chased, the proceeds of such redemption will be reduced by the proportionate
amount of the unamortized deferred organizational expenses which the number of
shares redeemed by it bears to the total number of initial shares purchased by
it.

NOTE 3 -- FEES AND RELATED PARTY POLICIES:

INVESTMENT MANAGEMENT AND ADMINISTRATION FEES. Monitor Capital Advisors, Inc.
("Monitor") acts as investment manager to the Fund under an Investment Manage-
ment Agreement. Monitor is a registered investment adviser and an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life").

NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned sub-
sidiary of New York Life, is the Administrator for the Fund.

The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an ap-
proximate annual rate of the average daily net assets of 0.10% and 0.40%, re-
spectively.

The Investment Management and Administration Agreements for the Fund also pro-
vide that in the event the expenses of the Fund (including the fees for the Ad-
viser and Administrator, but excluding interest, taxes, organization expenses,
litigation and indemnification expenses, distribution fees and other extraordi-
nary expenses) for any fiscal year exceed the most restrictive limitation of
certain state securities commissions, the Adviser and the Administrator each
will reduce their fee payable by the Fund by 50% of the amount of such excess
up to the extent of their fees. The expenses of the Fund did not exceed the
most restrictive expense limitation for the year ended December 31, 1995.

24
<PAGE>

DISTRIBUTION FEES. The Trust, on behalf of the Fund, has a Distribution Agree-
ment with NYLIFE Distributors (the "Distributor"). The Fund has adopted a Dis-
tribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1 un-
der the 1940 Act.

Pursuant to the Plan, the Distributor receives payments from the Fund at an an-
nual rate of 0.25% of the average daily net assets of the Fund's shares, which
is an expense of the Fund for distribution or service activities as designated
by the Distributor.

SALES CHARGE. The Fund was advised that the amount of sales charge retained by
NYLIFE Distributors was $308,486 for the year ended December 31, 1995.

CAPITAL. At December 31, 1995, NYLIFE Securities owned shares of the Fund with
a net asset value of $186,000.

OTHER. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1995 were $6,100.

Fees for the cost of legal services provided to the Fund by the Office of Gen-
eral Counsel of New York Life amounted to $4,923 for the year ended December
31, 1995.

NOTE 4 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):

25
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY EQUITY INDEX FUND
- --------------------------------------------------------------------------------

NOTE 5 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):

<TABLE>
<CAPTION>
September 1
Year Ended through Year Ended
December 31 December 31 August 31
1995 1994* 1994
----------- ----------- ----------
<S> <C> <C> <C>
Shares sold................................. 1,845 186 739
Shares issued in reinvestment of dividends
and distributions.......................... 171 -- 137
----- --- ----
2,016 186 876
Shares redeemed............................. 502 156 942
Reduction of shares due to reverse stock
split...................................... 174 -- 141
----- --- ----
Net increase (decrease)..................... 1,340 30 (207)
===== === ====
</TABLE>
- -------
*The Fund changed its fiscal year end from August 31 to December 31.

NOTE 6 -- GUARANTEE:

NYLIFE provides a guarantee to the effect that if, 10 years from the date of
purchase (the "Guarantee Date"), the net asset value of a unit equal to the net
asset value of a Fund share purchased, plus the value of all cumulative rein-
vested dividends and distributions attributable to such share paid during that
10-year period ("Guaranteed Share"), is less than the public offering price
initially paid for the share ("Guaranteed Amount"), NYLIFE will pay to the
transfer agent for disbursement to shareholders an amount equal to the differ-
ence between the net asset value of each such Guaranteed Share outstanding and
held by shareholders as of the close of business on the Guarantee Date and the
Guaranteed Amount for each such share. The Fund is not a party to the guaran-
tee.

26
<PAGE>

- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------

To the Board of Trustees and Shareholders of
The MainStay Funds

In our opinion, the accompanying statement of assets and liabilities (including
the portfolio of investments) and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all mate-
rial respects, the financial position of the MainStay Equity Index Fund, (one
of the thirteen funds constituting The MainStay Funds, hereafter referred to as
the "Fund") at December 31, 1995, the results of its operations for the year
then ended and the changes in its net assets and the financial highlights for
each of the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter re-
ferred to as "financial statements") are the responsibility of the Fund's man-
agement; our responsibility is to express an opinion on these financial state-
ments based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which re-
quire that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and dis-
closures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall finan-
cial statement presentation. We believe that our audits, which included confir-
mation of securities at December 31, 1995 by correspondence with the custodian
and brokers, provide a reasonable basis for the opinion expressed above.

Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 12, 1996

27
<PAGE>

- --------------------------------------------------------------------------------
The MainStay Funds
- --------------------------------------------------------------------------------

GROWTH FUNDS
- ----------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal Bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund Graph Indicating of companies in expanding markets and are willing to accept a higher
Risk/Reward with strong growth potential level of risk for higher return potential
of Fund]
- ----------------------------------------------------------------------------------------------------------------------------------
[Horizontal Bar Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund Graph Indicating the makeup and returns of the pate in the growth potential of stocks+
Risk/Reward S&P 500*
of Fund]
- ----------------------------------------------------------------------------------------------------------------------------------
[Horizontal Bar Offers broad diversification into You prefer the higher return potential
International Equity Fund Graph Indicating international stock markets with of international equities or want to add
Risk/Reward an emphasis on risk control diversification to your domestic
of Fund] investments++
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
GROWTH & INCOME FUNDS
- ----------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal Bar Balances current income with growth You seek a combination of income and
Total Return Fund Graph Indicating opportunities by investing in stocks, growth potential and want to manage
Risk/Reward bonds, and money market instruments risk through diversification
of Fund]
- ----------------------------------------------------------------------------------------------------------------------------------
[Horizontal Bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund Graph Indicating attractive dividends and a stimulus securities which may have more poten-
Risk/Reward for positive change tial than the market currently sees
of Fund]
- ----------------------------------------------------------------------------------------------------------------------------------
[Horizontal Bar Invests in convertible securities for You want income from securities that
Convertible Fund Graph Indicating a special blend of long-term growth may offer growth potential if converted
Risk/Reward potential and dividend income into common stock
of Fund]
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

| Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share; investment returns
will vary with market conditions.

# A small portion of the Fund's income may be subject to state and local taxes
and the Alternative Minimum Tax. Capital gains, if any, may also be taxed.

28
<PAGE>

INCOME FUNDS
- ----------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal Bar Seeks a high level of current income You are seeking to combine high current
Government Fund Graph Indicating consistent with safety of principal income and safety of principal
Risk/Reward primarily from U.S. government
of Fund] securities(S)
- ----------------------------------------------------------------------------------------------------------------------------------
High Yield [Horizontal Bar An aggressive high yield bond You want to maximize current income
Corporate Bond Fund Graph Indicating fund that is actively managed for and can accept the higher risk of
Risk/Reward maximum current income securities with high yield potential
of Fund]
- ----------------------------------------------------------------------------------------------------------------------------------
[Horizontal Bar Seeks high current yields and You prefer the higher return potential of
International Bond Fund Graph Indicating competitive total return from non- international bonds or want to add
Risk/Reward U.S. bonds with an emphasis on diversification to your domestic
of Fund] risk control investments++
- ----------------------------------------------------------------------------------------------------------------------------------
[Horizontal Bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund Graph Indicating stability of principal, and liquidity, competitive yields on cash you're plan-
Risk/Reward with free checkwriting|| ning to spend or invest in the near future
of Fund]
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
TAX-FREE INCOME FUNDS
- ----------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal Bar Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund Graph Indicating exempt from regular federal bracket or want to pay less of your
Risk/Reward income tax# investment income to the IRS
of Fund]
- ----------------------------------------------------------------------------------------------------------------------------------
[Horizontal Bar Seeks high current income exempt You're a California resident and want to
California Tax Free Fund Graph Indicating from both federal and California keep more of what you earn by investing
Risk/Reward income taxes consistent with for income that's double tax free#
of Fund] preservation of capital#
- ----------------------------------------------------------------------------------------------------------------------------------
[Horizontal Bar Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund Graph Indicating from federal, New York State, and and want to keep more of what you earn
Risk/Reward New York City income taxes consis- with income that's double or triple tax
of Fund] tent with preservation of capital# free#
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

If you would like to learn more about any of the MainStay Funds not covered by
your current prospectus, please call your Registered Representative. Your
Registered Representative can provide you with additional prospectuses which
contain more complete information including advisory fees, other expenses, and
share classes. Please read the prospectus carefully before you invest or send
money. Shares must be offered in the investor's state of residence.

29
<PAGE>

This page intentionally left blank
<PAGE>

- --------------------------------------------------------------------------------
MainStay Equity
Index Fund
- --------------------------------------------------------------------------------

1995
annual
report

The year in review
fund results
& portfolio highlights

[LOGO OF MAINSTAY(R) FUNDS APPEARS HERE]

- --------------------------------------------------------------------------------
December 31, 1995
- --------------------------------------------------------------------------------

Officers & Trustees

Dechert Price & Rhoads
Legal Counsel

[LOGO OF MAINSTAY(R) FUNDS APPEARS HERE]

[LOGO OF NEW YORK LIFE APPEARS HERE]

This report is provided for the information of shareholders of the MainStay
Equity Index Fund. It may be given to others only when preceded or accompanied
by an effective MainStay Funds prospectus. This report does not offer to sell
any securities or solicit orders to buy them.

[LOGO OF RECYCLED PAPER APPEARS HERE] MSAN07 (296)
<PAGE>

- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------

Chairperson's Letter 2

MainStay Government Fund Highlights
and Portfolio Managers' Comments 4

Returns & Lipper Rankings 6

Year-by-Year Performance 7

$10,000 Invested in the MainStay Government Fund
Class A Shares vs. Lehman Brothers Government Index
and Inflation 7

$10,000 Invested in the MainStay Government Fund
Class B Shares vs. Lehman Brothers Government Index
and Inflation 7

Portfolio Composition 8

Financial Statements 9

Notes to Financial Statements 13

Report of Independent Accountants 19

The MainStay Funds 20
<PAGE>

- --------------------------------------------------------------------------------
CHAIRPERSON'S LETTER
- --------------------------------------------------------------------------------

[PHOTO OF ALICE T. KANE APPEARS HERE]

Alice T. Kane, Chairperson

Report to Shareholders for the Year Ended December 31, 1995

Bond investors had reason to celebrate in 1995, with long- and intermediate-term
government bonds posting their strongest returns in a decade.* The MainStay/(R)/
Government Fund capitalized on these positive results, providing investors with
the highest annual total returns in the history of the Fund.

In this context, we are pleased to report to you on the activities and
investment results of the MainStay Government Fund for the twelve months ended
December 31, 1995. For the year, the Fund provided total returns of 16.38% and
15.69% for Class A and Class B shares, respectively, excluding all sales
charges. These returns were somewhat behind the average Lipper/+/ U.S.
government bond fund, which returned 17.34% for the year.

At the beginning of the year, economic growth looked robust and it was feared
that inflation might accelerate. Fortunately, economic growth slowed, inflation
declined, and the government exercised fiscal restraint in what many economists
described as a "soft landing." Together, these forces drove interest rates down
and bond prices up. The 30-year Treasury bond, which topped 7.9% in January,
ended the year yielding 5.95% -- its lowest yield in over two years.

In this unusual environment, the Fund sought to closely match the market in
terms of portfolio duration, while emphasizing high quality and strategic
security selection. Although the mortgage-backed securities market did not
perform as well as anticipated, overall, the Fund managed to reflect the
positive trends of the government securities market, while trailing slightly.

2
<PAGE>

Additional details are provided in the portfolio managers' comments and other
sections of this annual report. At MainStay, we continue to view government
securities as an appropriate choice for investors seeking current income,
consistent with safety of principal.++

/s/ Alice T. Kane

Alice T. Kane
January 1996

--------------------
* Source: Ibbotson Associates, Chicago. Used with
permission. All rights reserved.

+ See footnote on page 6 for more information on
Lipper Analytical Services, Inc.

++ Fund shares are not guaranteed by the U.S.
government or any other agency. Investment
return and principal value will fluctuate with
market conditions.

3
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY GOVERNMENT FUND
- --------------------------------------------------------------------------------

1995 Fund Highlights

. Highest annual total returns in the Fund's history

. Annual total returns of 16.38% and 15.69% for Class A and Class B shares,
respectively, excluding sales charges

. Focus on high quality, current income, and safety of principal

. Seek opportunities through strategic security selection

[PHOTO OF GOVERNMENT TEAM APPEARS HERE]

Government Team -- Christopher Harms, Edward Munshower, and
Ravi Akhoury (left to right)

For the year ended December 31, 1995, the MainStay Government Fund provided
annual total returns of 16.38% and 15.69% for Class A and Class B shares,
respectively, excluding all sales charges. These results represented the Fund's
best year ever since its inception nearly ten years ago. These outstanding
returns reflected unusually favorable market conditions which are unlikely to be
repeated in 1996. Even with these positive results, the Fund trailed its peer
group, with the average Lipper U.S. government bond fund returning 17.34% for
the year.

In 1995, interest rates declined across the maturity spectrum much more
dramatically than most investors had anticipated. Low inflation, a slowing
economy, and some degree of optimism that a balanced budget could become a
reality in our lifetime, were the principal forces behind lower interest rates.
The declines were largest on the longer end of the maturity spectrum, but the
Federal Reserve (the Fed) also lowered short-term rates modestly in July and
again in December. Lower rates helped the bond market enjoy its best returns in
the past decade and the third best year since records have been kept.

Portfolio duration was a guiding factor in our management strategy. Throughout
the year, we tried to maintain a neutral position, closely

Maturity Spectrum
- --------------------------------------------------------------------------------
Fixed-income securities may carry a variety of maturities, from as short as
overnight to as long as 30 years. When the interest rates available from this
spectrum of short-, intermediate-, and long-term securities are plotted on a
graph, the resulting line is known as a "yield curve."

Duration
- --------------------------------------------------------------------------------
A measure of average maturity, which adjusts for the time value of the payments
investors will receive and takes into account interest payments as well as
principal payments. Duration is a better gauge of interest-rate sensitivity than
average maturity alone.

4
<PAGE>

- --------------------------------------------------------------------------------
HIGHLIGHTS & PORTFOLIO MANAGERS' COMMENTS
- --------------------------------------------------------------------------------

aligned with the market as a whole. This shift from our shorter, more defensive
position in 1994, was a major positive contributor to the Fund's performance in
1995. It allowed the Fund to keep pace with the strong bond rally throughout
most of the year.

Next to our duration strategy, security selection among Treasuries added the
most value to our portfolio. Throughout the year, we focused on high quality
securities with careful attention to current income and safety of principal. In
the second quarter, we increased our position in mortgage-related securities,
which failed to keep pace with Treasury returns as interest rates fell. Despite
their underperformance, we still believe these mortgage-backed securities
represent excellent value.

The outlook for 1996 remains uncertain. If the economy weakens more than
anticipated, interest rates could decline even further, especially if the Fed
seeks to stimulate growth before the presidential election. On the other hand, a
breakdown in the budget talks, domestic or international political scandals, or
a sudden resurgence of economic growth could send rates higher and bond prices
lower.

Given these variables, at year-end we continue to maintain our neutral duration
stance, focus on investment-grade securities, and manage the Government Fund to
pursue current income, consistent with safety of principal. [_]

Ravi Akhoury
Edward Munshower
Portfolio Managers

Neutral Duration
- --------------------------------------------------------------------------------
The duration of a portfolio which closely matches the duration of outstanding
securities in the bond market as a whole. The strategy of maintaining a neutral
duration may be used to participate in the general movements of the bond market,
without favoring one type of security over another.

Investment-grade
- --------------------------------------------------------------------------------
Generally, securities rated among the top four rating categories by independent
rating agencies such as Moody's and Standard & Poor's are considered
"investment-grade." Investment-grade securities generally represent higher
quality and may involve less risk than those designated as noninvestment-grade.

5
<PAGE>

- --------------------------------------------------------------------------------
RETURNS & LIPPER RANKINGS as of 12/31/95
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Fund average annual total returns*
- ----------------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 12/31/95
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 16.38% 7.10% 7.28%
Class B 15.69% 6.98% 7.21%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fund SEC returns*
- ----------------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 12/31/95
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 11.14% 6.12% 6.77%
Class B 10.69% 6.67% 7.21%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fund Lipper+ rankings and year-end Lipper category returns
- ----------------------------------------------------------------------------------------------------------------
Life of Fund/Class
1 year 5 years through 12/31/95
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 99 out of 174 funds n/a 99 out of 174 funds
Class B 117 out of 174 funds 62 out of 71 funds 32 out of 39 funds
Average Lipper U.S.
government bond fund 17.34% 8.33% 7.99%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fund year-end per-share net asset values and distributions for 1995
- ----------------------------------------------------------------------------------------------------------------
NAV 12/31/95 Income Capital Gains
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A $8.41 $0.5825 $0.0000
Class B $8.41 $0.5345 $0.0000
- ----------------------------------------------------------------------------------------------------------------
</TABLE>

Class A shares, first offered to the public on 1/3/95, are sold with a maximum
initial sales charge of 4.5% and an annual 12b-1 fee of .25%. Performance
figures for this Class include the historical performance of the Class B
shares for periods from inception (5/1/86) up to 12/31/94. Performance data
for the two Classes after this date vary based on differences in their expense
structures. Class B shares of the Fund are sold with no initial sales charge,
but are subject to a maximum Contingent Deferred Sales Charge (CDSC) of up to
5% if shares are redeemed during the first 6 years of purchase and an annual
12b-1 fee of up to 1%.

6
<PAGE>

- --------------------------------------------------------------------------------
YEAR-BY-YEAR PERFORMANCE*
- --------------------------------------------------------------------------------

[BAR GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
Year ended Total
12/31 Return %
<S> <C>
86 5.92
87 3.53
88 6.40
89 12.17
90 6.92
91 13.40
92 3.81
93 5.88
94 -2.85
95 Class A 16.38
95 Class B 15.69
</TABLE>

- --------------------------------------------------------------------------------
$10,000 invested in the MainStay Government Fund
vs. Lehman Brothers Government Index and Inflation
- --------------------------------------------------------------------------------

Class A Shares

[LINE GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
Government
Year-end Lehman Gov. Ind.++ Inflation(s) Fund
<S> <C> <C> <C>
5/1/86 10,000 10,000 9,550
12/31/86 10,567 10,175 10,115
87 10,799 10,626 10,472
88 11,559 11,096 11,142
89 13,203 11,611 12,499
90 14,354 12,320 13,364
91 16,552 12,698 15,155
92 17,748 13,066 15,733
93 19,640 13,425 16,658
94 18,977 13,785 16,184
95 22,458 14,144 18,835
</TABLE>

Class B Shares

[LINE GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
Government
Year-end Lehman Gov. Ind.++ Inflation(s) Fund
<S> <C> <C> <C>
5/1/86 10,000 10,000 10,000
12/31/86 10,567 10,175 10,591
87 10,799 10,626 10,965
88 11,559 11,096 11,667
89 13,203 11,611 13,088
90 14,354 12,320 13,994
91 16,552 12,698 15,869
92 17,748 13,066 16,475
93 19,640 13,425 17,443
94 18,977 13,785 16,946
95 22,458 14,144 19,606
</TABLE>
--------------------
The Class A graph assumes an initial investment of $10,000 made on 5/1/86
reflecting the effect of the 4.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,550. The Class B graph assumes
an initial investment of $10,000 made on 5/1/86. Returns shown do not
reflect the Contingent Deferred Sales Charge (CDSC), as it would not apply
for the period shown. All results include reinvestment of distributions at
net asset value and the change in share price for the stated period. Past
performance is no guarantee of future results.

++ The Lehman Brothers Government Index includes issues of the U.S. government
and agencies thereof, as well as fixed-rate debt issues that are rated
investment-grade by Moody's, Standard & Poor's, or Fitch, in that order,
with at least one year to maturity. The Index is unmanaged and results
assume the reinvestment of all income and capital gains distributions.

7
<PAGE>

- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION as of 12/31/95
- --------------------------------------------------------------------------------

[PIE CHART APPEARS HERE]

<TABLE>

<S> <C>
U.S. Treasury Notes 55.00%
U.S. Treasury Bonds 17.40%
Government National Mortgage Association 11.80%
Federal National Mortgage Association 9.10%
Federal Home Loan Mortgage Corporation 7.20%
Cash & Equivalents -0.50%
</TABLE>

Note: actual percentages will vary over time

8
<PAGE>

<TABLE>
<CAPTION>
Principal
Amount Value
----------------------------
<S> <C> <C>
LONG-TERM U.S. GOVERNMENT & FEDERAL AGENCIES (100.5%)+
FEDERAL HOME LOAN MORTGAGE CORPORATION (MORTGAGE PASS-
THROUGH SECURITY) (2.9%)
6.00%, due 8/1/24-4/1/25...................... $ 29,546,465 $ 28,618,410
--------------
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD (MORTGAGE PASS-
THROUGH SECURITIES) (4.3%)
6.00%, due 2/20/26 TBA (a).................... 17,450,000 16,882,875
7.00%, due 2/13/26 TBA (a).................... 26,015,000 26,210,113
--------------
43,092,988
--------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (2.0%)
8.50%, due 2/1/05............................. 18,390,000 20,120,131
--------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(COLLATERALIZED MORTGAGE OBLIGATIONS) (2.6%)
Series 1993-76 Class B
6.00%, due 6/25/08............................ 10,264,587 9,716,047
Series 1993-89 Class D
7.00%, due 6/25/23............................ 17,013,000 16,409,549
--------------
26,125,596
--------------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (MORTGAGE PASS-
THROUGH SECURITY) (4.5%)
7.00%, due 2/15/11 TBA (a).................... 44,735,000 45,510,705
--------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (MORTGAGE PASS-
THROUGH SECURITIES) (11.8%)
5.50%, due 2/22/26 ARM
TBA (a)(c)................................... 50,275,000 50,275,000
7.50%, due 2/20/26 TBA (a).................... 14,415,000 14,806,944
8.00%, due 2/20/26 TBA (a).................... 51,185,000 53,232,400
--------------
118,314,344
--------------
UNITED STATES TREASURY BONDS (17.4%)
6.875%, due 8/15/25........................... 63,985,000 72,162,923
7.625%, due 2/15/25........................... 73,845,000 90,298,404
11.25%, due 2/15/15........................... 7,350,000 11,765,733
--------------
174,227,060
--------------
</TABLE>

- -------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Principal
Amount Value
-------------------------------------------------------------
<S> <C> <C>

UNITED STATES TREASURY NOTES (55.0%)
4.75%, due 2/15/97........................... $ 36,240,000 $ 36,024,734
5.625%, due 6/30/97.......................... 23,435,000 23,581,469
5.625%, due 11/30/00......................... 20,685,000 20,872,406
6.375%, due 8/15/02.......................... 47,300,000 49,598,307
7.75%, due 12/31/99.......................... 38,505,000 41,784,086
7.875%, due 11/15/99......................... 74,550,000 81,050,015
7.875%, due 11/15/04......................... 42,950,000 49,714,625
8.125%, due 2/15/98 (b)...................... 143,625,000 151,883,437
8.75%, due 10/15/97.......................... 91,750,000 97,240,320
--------------
551,749,399
--------------
Total Long-Term U.S. Government & Federal
Agencies
(Cost $980,122,251).......................... 1,007,758,633
--------------
SHORT-TERM U.S. GOVERNMENT (18.3%)
UNITED STATES TREASURY NOTE (18.3%)
4.625%, due 2/15/96 (b)...................... 183,575,000 183,459,348
--------------
Total Short-Term U.S. Government (Cost
$183,447,182)................................ 183,459,348
--------------
Total Investments
(Cost $1,163,569,433) (d).................... 118.8% 1,191,217,981 (e)
Liabilities in Excess of Cash
and Other Assets............................. (18.8) (188,250,198)
------------ --------------
Net Assets.................................... 100.0% $1,002,967,783
============ ==============
</TABLE>
- -------
(a) TBA: Securities purchased on a forward commitment basis with an approximate
principal amount and maturity date. The actual principal amount and the
maturity will be determined upon settlement.
(b) Segregated or partially segregated as collateral for TBA.
(c) ARM--Adjustable Rate Mortgage. Resets annually.
(d) The cost for Federal income tax purposes is $1,164,478,851.
(e) At December 31, 1995 net unrealized appreciation was $26,739,130 based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $26,739,130.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

9
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY GOVERNMENT FUND
- --------------------------------------------------------------------------------

STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1995

<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (Note 2)
(identified cost $1,163,569,433).............................. $1,191,217,981
Cash........................................................... 6,612
Receivables:
Interest...................................................... 19,624,924
Fund shares sold.............................................. 701,738
Investment securities sold.................................... 448,628
Other assets................................................... 1,288
--------------
Total assets................................................. 1,212,001,171
--------------
LIABILITIES:
Payables:
Investment securities purchased............................... 204,990,098
NYLIFE Distributors........................................... 975,175
Fund shares redeemed.......................................... 423,847
Adviser....................................................... 254,693
Transfer agent................................................ 117,552
Trustees...................................................... 16,483
Custodian..................................................... 14,038
Accrued expenses............................................... 142,625
Dividend payable............................................... 2,098,877
--------------
Total liabilities............................................ 209,033,388
--------------
Net assets..................................................... $1,002,967,783
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized
Class A....................................................... $ 15,197
Class B....................................................... 1,177,769
Additional paid-in capital..................................... 1,107,711,937
Accumulated distribution in excess of net investment income.... (530,280)
Accumulated net realized loss on investments................... (133,055,388)
Net unrealized appreciation on investments..................... 27,648,548
--------------
Net assets..................................................... $1,002,967,783
==============
CLASS A
Net assets applicable to outstanding shares.................... $ 12,783,549
==============
Shares of beneficial interest outstanding...................... 1,519,718
==============
Net asset value per share outstanding.......................... $ 8.41
Maximum sales charge (4.50% of offering price)................. 0.40
--------------
Maximum offering price per share outstanding................... $ 8.81
==============
CLASS B
Net assets applicable to outstanding shares.................... $ 990,184,234
==============
Shares of beneficial interest outstanding...................... 117,776,914
==============
Net asset value per share outstanding.......................... $ 8.41
==============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest......................................................... $ 84,851,609
------------
Expenses: (Note 2)
Distribution--Class B (Note 3)................................... 6,402,601
Administration (Note 3).......................................... 3,056,716
Advisory (Note 3)................................................ 3,056,716
Service (Note 3)................................................. 2,551,611
Transfer agent................................................... 1,033,695
Shareholder communication........................................ 287,884
Legal............................................................ 162,785
Recordkeeping (Note 3)........................................... 128,798
Custodian........................................................ 100,272
Trustees......................................................... 51,079
Registration..................................................... 44,179
Auditing......................................................... 36,038
Miscellaneous.................................................... 37,154
------------
Total expenses.................................................. 16,949,528
------------
Net investment income............................................. 67,902,081
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments.................................. 30,263,895
Net change in unrealized depreciation on investments.............. 50,910,905
------------
Net realized and unrealized gain on investments................... 81,174,800
------------
Net increase in net assets resulting from operations.............. $149,076,881
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
10
<PAGE>

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

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
Year September 1
ended through Year ended
December 31 December 31 August 31
1995 1994* 1994
-------------- -------------- --------------
<S> <C> <C> <C>
DECREASE IN NET ASSETS:
Operations:
Net investment income......... $ 67,902,081 $ 25,314,384 $ 85,024,766
Net realized gain (loss) on
investments.................. 30,263,895 (27,971,164) (100,108,288)
Net change in unrealized
depreciation on investments.. 50,910,905 (11,076,021) (5,486,039)
-------------- -------------- --------------
Net increase (decrease) in net
assets resulting from
operations................... 149,076,881 (13,732,801) (20,569,561)
-------------- -------------- --------------
Dividends and distributions to
shareholders:
From net investment income:
Class A....................... (587,166) -- --
Class B....................... (65,467,814) (24,195,969) (80,312,882)
In excess of net investment
income:
Class A....................... (4,714) -- --
Class B....................... (525,566) -- (1,894,361)
Return of capital:
Class B....................... -- -- (1,326,710)
-------------- -------------- --------------
Total dividends and
distributions to
shareholders................ (66,585,260) (24,195,969) (83,533,953)
-------------- -------------- --------------
Capital share transactions:
Net proceeds from sale of
shares:
Class A....................... 18,152,317 -- --
Class B....................... 68,492,581 31,525,854 245,947,975
Net asset value of shares
issued to shareholders in
reinvestment of dividends and
distributions:
Class A....................... 395,104 -- --
Class B....................... 46,973,420 16,936,434 58,006,410
-------------- -------------- --------------
134,013,422 48,462,288 303,954,385
Cost of shares redeemed:
Class A....................... (6,301,705) -- --
Class B....................... (231,727,262) (105,627,511) (291,262,843)
-------------- -------------- --------------
Increase (decrease) in net
assets derived from capital
share transactions.......... (104,015,545) (57,165,223) 12,691,542
-------------- -------------- --------------
Net decrease in net assets... (21,523,924) (95,093,993) (91,411,972)
NET ASSETS:
Beginning of period............ 1,024,491,707 1,119,585,700 1,210,997,672
-------------- -------------- --------------
End of period.................. $1,002,967,783 $1,024,491,707 $1,119,585,700
============== ============== ==============
Accumulated distribution in
excess of net investment
income........................ $ (530,280) $ (1,176,711) $ (1,894,361)
============== ============== ==============
</TABLE>
- -------
*The Fund changed its fiscal year end from August 31 to December 31.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY GOVERNMENT FUND
- --------------------------------------------------------------------------------

FINANCIAL HIGHLIGHTS
(SELECTED PER SHARE DATA AND RATIOS)

<TABLE>
<CAPTION>
Class A Class B Class B
-------- --------- ---------------------------------------------------------
September 1
through Year Ended August 31
Year Ended December 31 -------------------------------------------
December 31, 1995 1994* 1994 1993 1992 1991
---------------------- ----------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period.... $ 7.76 $ 7.76 $ 8.04 $ 8.77 $ 8.88 $ 8.82 $ 8.48
-------- --------- ---------- ---------- ---------- -------- --------
Net investment income... 0.58 0.54 0.19 0.57 0.68 0.73 0.81
Net realized and
unrealized gain (loss)
on investments......... 0.65 0.65 (0.29) (0.71) (0.09) 0.07 0.35
-------- --------- ---------- ---------- ---------- -------- --------
Total from investment
operations............. 1.23 1.19 (0.10) (0.14) 0.59 0.80 1.16
-------- --------- ---------- ---------- ---------- -------- --------
Less dividends and
distributions:
From net investment
income................. (0.58) (0.54) (0.18) (0.57) (0.70) (0.74) (0.82)
In excess of net
investment income...... (0.00)(b) (0.00)(b) -- (0.01) -- -- --
Return of capital....... -- -- -- (0.01) -- -- --
-------- --------- ---------- ---------- ---------- -------- --------
Total dividends and
distributions.......... (0.58) (0.54) (0.18) (0.59) (0.70) (0.74) (0.82)
-------- --------- ---------- ---------- ---------- -------- --------
Net asset value at end
of period.............. $ 8.41 $ 8.41 $ 7.76 $ 8.04 $ 8.77 $ 8.88 $ 8.82
======== ========= ========== ========== ========== ======== ========
Total investment return
(a).................... 16.38% 15.69% (1.24%) (1.63%) 6.92% 9.46% 14.33%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income.. 7.3% 6.7% 7.1%+ 7.1% 7.8% 8.3% 9.5%
Expenses............... 1.0% 1.7% 1.7%+ 1.7% 1.7% 1.8% 1.8%
Portfolio turnover rate. 540% 540% 143% 491% 629% 613% 318%
Net assets at end of
period (in 000's)...... $ 12,784 $ 990,184 $1,024,492 $1,119,586 $1,210,998 $957,010 $622,550
</TABLE>
- -------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized
(a) Total return is calculated exclusive of sales charges and is not
annualized.
(b) Less than one cent per share.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 1 -- ORGANIZATION AND BUSINESS:

The Fund's investment objective is to seek a high level of current income, con-
sistent with safety of principal, by investing primarily in U.S. Government se-
curities.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:

The following is a summary of significant accounting policies followed by the
Fund:

SECURITIES VALUATION. Portfolio securities of the Government Fund are stated at
value determined (a) by appraising debt securities at prices supplied by a
pricing agent selected by the Adviser, whose prices reflect broker/dealer sup-
plied valuations and electronic data processing techniques if those prices are
deemed by the Adviser to be representative of market values at the regular
close of business of the New York Stock Exchange, (b) by appraising options and
futures contracts at the last sale price on the market where such options or
futures are principally traded, and (c) by appraising all other securities and
other assets, including debt securities for which prices are supplied by a
pricing agent but are not deemed by

13
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY GOVERNMENT FUND
- --------------------------------------------------------------------------------

the Adviser to be representative of market values, but excluding money market
instruments with a remaining maturity of sixty days or less and including re-
stricted securities and securities for which no market quotations are avail-
able, at fair value in accordance with procedures approved by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost if their term to maturity at purchase was 60 days or
less, or by amortizing the difference between market value on the 61st day
prior to maturity and value on maturity date if their original term to maturity
at purchase exceeded 60 days.

MORTGAGE DOLLAR ROLLS. The Fund enters into mortgage dollar roll transactions
("MDRs") in which it sells mortgage backed securities ("MBS") from its portfo-
lio to a counterparty from whom it simultaneously agrees to buy a similar secu-
rity on a delayed delivery basis. The MDR transactions of the Fund are classi-
fied as purchase and sale transactions. The securities sold in connection with
the MDR are removed from the portfolio and a realized gain or loss is recog-
nized. The securities the Fund has agreed to acquire are included at market
value in the portfolio of investments and liability for such purchase commit-
ments is included as payables for investments purchased.

FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $670,390 and $1,788,702 have been reclassi-
fied from accumulated undistributed net investment income and accumulated net
realized loss on investments, respectively, to additional paid-in capital due
to paydown reclasses and shareholder dividends and distributions.

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Government Fund intends to declare and
pay dividends monthly. Income dividends and capital gain distributions are de-
termined in accordance with Federal income tax regulations which may differ
from generally accepted accounting principles.

14
<PAGE>

include gains and losses from repayments of principal on mortgage backed secu-
rities. Interest income is accrued daily except when collection is not expect-
ed. Discounts on securities purchased for the Fund are accreted on the constant
yield method over the life of the respective securities.

NOTE 3 -- FEES AND RELATED PARTY POLICIES:

NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned sub-
sidiary of New York Life, is the Administrator for the Fund.

The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an ap-
proximate annual rate of 0.30% of the average daily net assets of the Fund.

The Administrator and Adviser have voluntarily agreed to reduce their combined
fees on assets exceeding $1 billion to 0.55%.

15
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY GOVERNMENT FUND
- --------------------------------------------------------------------------------

of such excess up to the extent of their fees. The expenses of the Fund did not
exceed the most restrictive expense limitation for the year ended December 31,
1995.

The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund.

SALES CHARGES. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $95,975 for the year
ended December 31, 1995.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges for the year ended December 31, 1995 in the amount of $1,119,438.

16
<PAGE>

OTHER. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1995 were $26,981.

Fees for the cost of legal services provided to the Fund by the Office of Gen-
eral Counsel of New York Life amounted to $75,739 for the year ended December
31, 1995.

Fees for recordkeeping services provided to the Fund are charged to the Fund.
The fee for the year ended December 31, 1995 is shown on the statement of oper-
ations.

NOTE 4 -- FEDERAL INCOME TAX:

At December 31, 1995, for Federal income tax purposes, capital loss
carryforwards of $132,145,970, net of losses of $909,418 which have been de-
ferred for Federal income tax purposes, are available, as shown in the table
below, to the extent provided by regulations to offset future realized gains of
the Fund through 2002. To the extent that these carryforwards are used to off-
set future capital gains, it is probable that the capital gains so offset will
not be distributed to shareholders. The Fund utilized $11,847,755 of capital
loss carryforward during the year.

<TABLE>
<CAPTION>
Capital Loss Amount
Available Through (000's)
----------------- --------
<S> <C>
1997................................... $ 9,269
1998................................... 12,043
2001................................... 4,831
2002................................... 106,003
--------
$132,146
========
</TABLE>

NOTE 5 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):

During the year ended December 31, 1995 purchases and sales of U.S. Government
securities, other than securities subject to repurchase transactions and short-
term securities, were $5,258,579 and $5,382,603, respectively.

17
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY GOVERNMENT FUND
- --------------------------------------------------------------------------------

NOTE 6 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):

<TABLE>
<CAPTION>
September 1
Year Ended through Year Ended
December 31 December 31 August 31
1995 1994* 1994
--------------- ----------- ----------
Class A Class B Class B
------- ------- ----------------------
<S> <C> <C> <C> <C>
Shares sold............................ 2,246 8,414 4,008 29,003
Shares issued in reinvestment of divi-
dends and distributions............... 48 5,761 2,169 6,948
----- ------- ------ ------
2,294 14,175 6,177 35,951
Shares redeemed........................ 774 28,453 13,454 34,748
----- ------- ------ ------
Net increase (decrease)................ 1,520 (14,278) (7,277) 1,203
===== ======= ====== ======
</TABLE>
- -------
*The Fund changed its fiscal year end from August 31 to December 31.

18
<PAGE>

- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------

To the Board of Trustees and Shareholders of
The MainStay Funds

In our opinion, the accompanying statement of assets and liabilities (including
the portfolio of investments) and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all mate-
rial respects, the financial position of the MainStay Government Fund, (one of
the thirteen funds constituting The MainStay Funds, hereafter referred to as
the "Fund") at December 31, 1995, the results of its operations for the year
then ended and the changes in its net assets and the financial highlights for
each of the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter re-
ferred to as "financial statements") are the responsibility of the Fund's man-
agement; our responsibility is to express an opinion on these financial state-
ments based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which re-
quire that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and dis-
closures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall finan-
cial statement presentation. We believe that our audits, which included confir-
mation of securities at December 31, 1995 by correspondence with the custodian
and brokers and the application of alternative auditing procedures where con-
firmations from brokers were not received, provide a reasonable basis for the
opinion expressed above.

Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 12, 1996

19
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY FUNDS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[HORIZONTAL BAR Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund GRAPH INDICATING of companies in expanding markets and are willing to accept a higher
RISK/REWARD with strong growth potential level of risk for higher return potential
OF FUND]
- ------------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund GRAPH INDICATING the makeup and returns of the pate in the growth potential of stocks
RISK/REWARD S&P 500* with the protection of a princpal
OF FUND] guarantee/+/
- ------------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Offers broad diversification into You prefer the higher return potential
International Equity Fund GRAPH INDICATING international stock markets with of international equities or want to add
RISK/REWARD an emphasis on risk control diversification to your domestic
OF FUND] investments/++/
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
GROWTH & INCOME FUNDS
- -----------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[HORIZONTAL BAR Balances current income with growth You seek a combination of income and
Total Return Fund GRAPH INDICATING opportunities by investing in stocks, growth potential and want to manage
RISK/REWARD bonds, and money market instruments risk through diversification
OF FUND]
- -----------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Seeks undervalued stocks with You seek to maximize total return from
Value Fund GRAPH INDICATING attractive dividends and a stimulus securities which may have more poten-
RISK/REWARD for positive change tial than the market currently sees
OF FUND]
- -----------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Invests in convertible securities for You want income from securities that
Convertible Fund GRAPH INDICATING a special blend of long-term growth may offer growth potential if converted
RISK/REWARD potential and dividend income into common stock
OF FUND]
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

# A small portion of the Fund's income may be subject to state and local taxes
and the Alternative Minimum Tax. Capital gains, if any, may also be taxed.

20
<PAGE>

<TABLE>
INCOME FUNDS
- ---------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[HORIZONTAL BAR Seeks a high level of current income You are seeking to combine high current
Government Fund GRAPH INDICATING consistent with safety of principal income and safety of principal
RISK/REWARD OF primarily from U.S. government
FUND] securities/(S)/
- ---------------------------------------------------------------------------------------------------------------------------------
High Yield [HORIZONTAL BAR An aggressive high yield bond You want to maximize current income
Corporate Bond Fund GRAPH INDICATING fund that is actively managed for and can accept the higher risk of
RISK/REWARD OF maximum current income securities with high yield potential
FUND]
- ---------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Seeks high current yields and You prefer the higher return potential
International Bond Fund GRAPH INDICATING competitive total return from non- of international bonds or want to add
RISK/REWARD OF U.S. bonds with an emphasis on diversification to your domestic
FUND] risk control investments/++/
- ---------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund GRAPH INDICATING stability of principal, and liquidity, competitive yields on cash you're plan-
RISK/REWARD OF with free checkwriting/||/ ning to spend or invest in the near future
FUND]
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
TAX-FREE INCOME FUNDS
- ---------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[HORIZONTAL BAR Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund GRAPH INDICATING exempt from regular federal bracket or want to pay less of your
RISK/REWARD OF income tax/#/ investment income to the IRS
FUND]
- ---------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Seeks high current income exempt You're a California resident and want to
California Tax Free Fund GRAPH INDICATING from both federal and California keep more of what you earn by investing
RISK/REWARD OF income taxes consistent with for income that's double tax free/#/
FUND] preservation of capital/#/
- ---------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund GRAPH INDICATING from federal, New York State, and and want to keep more of what you earn
RISK/REWARD OF New York City income taxes consis- with income that's double or triple tax
FUND] tent with preservation of capital/#/ free/#/
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

If you would like to learn more about any of the MainStay Funds not covered
by your current prospectus, please call your Registered Representative. Your
Registered Representative can provide you with additional prospectuses which
contain more complete information including advisory fees, other expenses,
and share classes. Please read the prospectus carefully before you invest or
send money. Shares must be offered in the investor's state of residence.

21
<PAGE>

This page intentionally left blank
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY
GOVERNMENT FUND
- --------------------------------------------------------------------------------

1995
annual
report

The year in review
fund results
& portfolio highlights

[LOGO OF MAINSTAY(R) FUNDS APPEARS HERE]

- --------------------------------------------------------------------------------
DECEMBER 31, 1995
- --------------------------------------------------------------------------------

OFFICERS & TRUSTEES

Dechert Price & Rhoads
Legal Counsel

[LOGO OF MAINSTAY(R) FUNDS APPEARS HERE]

[LOGO OF NEW YORK LIFE APPEARS HERE]

This report is provided for the information of shareholders of the MainStay
Government Fund. It may be given to others only when preceded or accompanied by
an effective MainStay Funds prospectus. This report does not offer to sell any
securities or solicit orders to buy them.

[LOGO OF RECYCLED PAPER APPEARS HERE] MSAN08 (296)

<PAGE>

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

Chairperson's Letter 2

MainStay High Yield Corporate Bond Fund
Highlights and Portfolio Managers' Comments 4

Returns & Lipper Rankings 6

Year-by-Year Performance 7

$10,000 Invested in the MainStay High Yield Corporate
Bond Fund Class A Shares vs. S&P 500 and Inflation 7

$10,000 Invested in the MainStay High Yield Corporate
Bond Fund Class B Shares vs. S&P 500 and Inflation 7

Top 25 Security Holdings 8

Diversification by Industry -- Top 5 9

Quality Breakdown 9

Financial Statements 11

Notes to Financial Statements 22

Report of Independent Accountants 29

The MainStay Funds 30
<PAGE>

- --------------------------------------------------------------------------------
Chairperson's Letter
- --------------------------------------------------------------------------------

[PHOTO OF ALICE T. KANE APPEARS HERE]

Alice T. Kane, Chairperson
Report to Shareholders for the Year Ended December 31, 1995

In 1995, the bond markets enjoyed one of their strongest years in recent
history, with gains fueled by low inflation, modest economic growth, and
declining interest rates across the maturity spectrum. Bonds rated below
investment-grade returned 19.9%, outpacing intermediate-term Treasuries, which
returned 19.0% for their best year in a decade.

In this context, we are pleased to report to you on the activities and
investment results of the MainStay/(R)/ High Yield Corporate Bond Fund for the
twelve months ended December 31, 1995. The Fund's total returns for the period
were 20.28% and 19.71% for Class A and Class B shares, respectively, excluding
all sales charges. These returns closely tracked the general performance of the
high yield market and were substantially ahead of the average Lipper* high
current yield fund, which returned 16.44% for the year. Based on the three- and
five-year periods, the Fund received an overall five-star rating out of 2,466
funds in the hybrid category from Morningstar, Inc./+/ for the period from
December 31, 1990, to December 31, 1995. This is the highest rating available
from this independent fund performance monitor.

Throughout the year, the Fund's managers continued to seek above-average
companies in above-average industries. Since relatively few credits met our
rigorous investment standards, we maintained a high proportion of the Fund's
assets in cash. Fortunately, our careful security selection helped us stay well
ahead of the average Lipper high current yield fund.

2
<PAGE>

/s/ Alice T. Kane

Alice T. Kane
January 1996

- --------------------
* See footnote on page 6 for more information on Lipper Analytical Services,
Inc.

+ Morningstar, Inc. is an independent fund performance monitor. Its ratings
reflect historic risk-adjusted performance taking fees and sales charges into
account, and may change monthly. Its ratings of 1 (low) to 5 (high) stars are
based on a fund's 3- and 5-year average annual returns with fee adjustments,
and a risk factor that reflects fund performance relative to 3-month Treasury
bill monthly returns. As of 12/31/95, the Fund's 3- and 5-year ratings for
those periods were 5 and 5 stars out of 2,466 and 1,609 funds in the hybrid
category. Only 10% of the funds in an investment category may receive 5 stars.
Ratings reflect Class B share performance only. The Fund's Class A shares
introduced 1/3/95 will not be rated by Morningstar until they have 3 years of
operating history.

3
<PAGE>

- --------------------------------------------------------------------------------
MainStay High Yield Corporate Bond Fund
- --------------------------------------------------------------------------------

1995 Fund Highlights

[ ] Annual total returns of 20.28% and 19.71% for Class A and Class B shares,
respectively, excluding all sales charges

[ ] Class A shares ranked among the top 10% of 120 funds in the Lipper high
current yield fund category for the 12 months ended 12/31/95

[ ] Class B shares ranked among the top 13% of 120 funds in the Lipper high
current yield fund category for the 12 months ended 12/31/95

[PHOTO OF DENNIS LAPLAIGE, STEVE TANANBAUM AND THOMAS HAJDUKIEWICZ APPEARS HERE]

High Yield Team - Denis Laplaige, Steve Tananbaum, and Thomas Hajdukiewicz
(left to right)

For the year ended December 31, 1995, the MainStay High Yield Corporate Bond
Fund returned 20.28% and 19.71% for Class A and Class B shares, respectively,
excluding all sales charges. These returns not only exceeded the average Lipper
high current yield fund, which returned 16.44%, but placed the Fund in the top
10% and 13% of 120 funds in its Lipper category for Class A and Class B shares,
respectively. These outstanding returns reflected unusually favorable market
conditions which are unlikely to be repeated in 1996.

In managing the Fund, we continued to pursue significant yield while seeking to
protect interest and manage risk to principal. At the same time, we adhered to
rigorous investment disciplines to maximize opportunities for capital
appreciation in a declining interest rate environment. Strategic security
selection led to strong performance, particularly in cable, casinos, and
communications (including media

Yield
- --------------------------------------------------------------------------------
The income per share (or current value of a security) paid to investors over a
specified period of time as a percentage of the cost of the security. Mutual
fund yields are expressed as a percent of the fund's current price per share.

4
<PAGE>

and broadcasting). Our decision to avoid the weak retail and restaurant sectors
also helped us outperform our peers, despite maintaining a strong cash position
that ranged as high as 20% during the year.

In the first quarter, the market was particularly receptive to quickly
deleveraging issuers such as Spanish Broadcasting and Videotron Holdings. In the
second quarter, Trump Taj Mahal performed well. In the third quarter, we reduced
our casino holdings, but continued to benefit from broadcasting and cable
issues. As the year progressed, we identified several trends that grew even more
pronounced in the fourth quarter. Cash flow from investors grew stronger,
default rates inched higher, and as the economy weakened, we saw significant
credit deterioration in retailing, restaurants, and the apparel and textile
industries. Yield spreads relative to Treasuries narrowed in the fourth quarter,
and we believe they may widen back to historic levels in 1996. We also believe
that 1995 was the peak in corporate credit quality.

Looking ahead, our risk-controlled contrarian approach may lead us to seek out
values in restaurants and retailing, as we continue to emphasize cable and
communications issues. With a weakening economy, however, we will diligently
seek opportunities in undervalued issues with fundamental indicators that
positive changes may lie ahead. We continue to focus on above-average companies
in above-average industries, since such issuers are most likely to weather our
turbulent economic times. [ ]

Denis Laplaige
Steve Tananbaum
Portfolio Managers

Cash Position
- --------------------------------------------------------------------------------
The portion of a portfolio held in highly liquid securities (often referred to
as "cash"), either for defensive purposes or to take advantage of investment
opportunities as they may arise.

Deleveraging Issue
- --------------------------------------------------------------------------------
A bond from a company that is strengthening its balance sheet by reducing its
level of outstanding debt.

Yield Spread
- --------------------------------------------------------------------------------
The difference in yield between securities in different market sectors, such as
high yield securities and Treasury issues -- or between different securities in
a single sector, such as short-term and intermediate-term Treasury issues.

5
<PAGE>

<TABLE>
<CAPTION>
Fund average annual total returns *
- ------------------------------------------------------------------------------------------------------------------------------------

Life of Fund
1 year 5 years through 12/31/95
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
Class A 20.28% 19.03% 10.26%
Class B 19.71% 18.92% 10.21%
- ------------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
Fund SEC returns*
- ------------------------------------------------------------------------------------------------------------------------------------

Life of Fund
1 year 5 years through 12/31/95
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
Class A 14.87% 17.94% 9.74%
Class B 14.71% 18.72% 10.21%
- ------------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
Fund Lipper+ rankings and year-end Lipper category returns
- ------------------------------------------------------------------------------------------------------------------------------------

Life of Fund/Class

1 year 5 years through 12/31/95
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
Class A 11 out of 120 funds n/a 11 out of 120 funds
Class B 15 out of 120 funds 11 out of 61 funds 10 out of 36 funds
Average Lipper
high current yield fund 16.44% 16.58% 8.92%
- ------------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
Fund year-end per-share net asset values and distributions for 1995
- ------------------------------------------------------------------------------------------------------------------------------------

NAV 12/31/95 Income Capital Gains
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
Class A $7.92 $0.8540 $0.1217
Class B $7.92 $0.8165 $0.1217
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales charges.
For the 12-month period ended 12/31/95, the Lipper high current yield fund
category included 120 funds. For the 5-year and since inception periods ended
12/31/95, the Fund's Class B shares placed among the top 19% and 28%,
respectively, of Lipper high current yield funds. Class A shares were not in
existence for these periods. The Fund's Class A shares were first offered to
the public 1/3/95, Class B shares 5/1/86.

6
<PAGE>

- --------------------------------------------------------------------------------
YEAR-BY-YEAR PERFORMANCE*
- --------------------------------------------------------------------------------

[BAR GRAPH APPEARS HERE]
<TABLE>
<S> <C>
Year
ended Total
12/31 Return %
86 5.01
87 0.20
88 16.89
89 -5.04
90 -7.85
91 32.27
92 21.63
93 21.65
94 1.50
95 Class A 20.28
95 Class B 19.71
</TABLE>
- --------------------------------------------------------------------------------
$10,000 INVESTED IN THE MAINSTAY HIGH YIELD CORPORATE
BOND FUND VS. S&P 500 AND INFLATION
- --------------------------------------------------------------------------------

Class A Shares
[LINE GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
High Yield
Corporate
Year end S&P 500/++/ Inflation/(s)/ Bond Fund
<S> <C> <C> <C>
5/1/86 10,000 10,000 9,550
86 10,550 10,175 10,028
87 11,097 10,626 10,047
88 12,927 11,096 11,743
89 17,011 11,611 11,151
90 16,481 12,320 10,276
91 21,481 12,698 13,593
92 23,115 13,066 16,535
93 25,435 13,425 20,115
94 25,780 13,785 20,416
95 35,433 14,144 24,557
</TABLE>

Class B Shares

[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
High Yield
Corporate
Year end S&P 500/++/ Inflation/(s)/ Bond Fund
<S> <C> <C> <C>
5/1/86 10,000 10,000 10,000
86 10,550 10,175 10,500
87 11,097 10,626 10,520
88 12,927 11,096 12,297
89 17,011 11,611 11,677
90 16,481 12,320 10,760
91 21,481 12,698 14,233
92 23,115 13,066 17,314
93 25,435 13,425 21,063
94 25,780 13,785 21,378
95 35,433 14,144 25,592
</TABLE>

- --------------------
The Class A graph assumes an initial investment of $10,000 made on 5/1/86
reflecting the effect of the 4.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,550. The Class B graph assumes
an initial investment of $10,000 made on 5/1/86. Returns shown do not
reflect the Contingent Deferred Sales Charge (CDSC), as it would not apply
for the period shown. All results include reinvestment of distributions at
net asset value and the change in share price for the stated period. Past
performance is no guarantee of future results.

7
<PAGE>

- --------------------------------------------------------------------------------
TOP 25 SECURITY HOLDINGS AS OF 12/31/95
- --------------------------------------------------------------------------------

Holding $ amount
<S> <C>
Trizec Finance Ltd. $33,517,500

United International Holdings, Inc. 30,293,200

Family Restaurant, Inc. 28,037,000

Affinity Group, Inc. 25,363,750

Spanish Broadcasting System, Inc. 24,906,650

Rogers Communications, Inc., Class B 24,021,959

General Media, Inc. 23,025,000

Horseshoe Gaming, LLC, Series WW 22,536,750

Casino Magic Finance Corp. 22,390,525

Hollinger, Inc. 21,852,600

All-American Bottling Corp. 21,074,300

Great Dane Holdings, Inc. 20,905,375

NVR, Inc. 20,734,787

International Semi-Technology Co. 19,928,437

Olympia & York Maiden Lane Finance Corp. 19,643,697

Hollywood Casino Corp. 18,888,750

American Restaurant Group, Inc. 18,801,900

Newflo Corp., Series B 16,936,400

Affiliated Newspaper Investments, Inc. 16,912,500

Peoples Telephone Co., Inc. 15,580,000

Sullivan Graphics, Inc. 15,015,000

Bankers Life Holdings Corp., Series B 14,690,000

Liggett Group, Inc., Series B 14,648,670

Hosiery Corp. of America 14,539,000

Petro PSC Properties L.P. 14,259,500
</TABLE>

Note: This breakdown is provided for informational purposes only, this Fund's
holdings may change daily. A shareholder owns shares of the Fund but does
not own a direct interest in any of the specific securities listed above.
Excludes short-term securities. See financial statements for specific
type of security held.

8
<PAGE>

- --------------------------------------------------------------------------------
DIVERSIFICATION BY INDUSTRY -- Top 5 as of 12/31/95
- --------------------------------------------------------------------------------

[PIE CHART APPEARS HERE]

<TABLE>
<S> <C>
Casinos 7.5%
Media 7.4%
Food, Beverage & Tobacco 6.2%
Telecommunication Services 6.1%
Real Estate 3.8%
Other 69.0%
</TABLE>

- --------------------------------------------------------------------------------
QUALITY BREAKDOWN as of 12/31/95
- --------------------------------------------------------------------------------

[PIE CHART APPEARS HERE]

<TABLE>
<S> <C>
AAA 20.2%
BB 9.6%
B 51.2%
CCC 7.2%
Other 9.7%
Cash & Equivalents 2.1%
</TABLE>

Note: actual percentages will vary over time

9
<PAGE>

This page intentionally left blank

10
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 1995
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------------------------------------
<S> <C> <C>

LONG-TERM BONDS (66.9%)+
CONVERTIBLE BONDS (0.8%)
AIRLINES (0.5%)
Continental Airlines, Inc.
6.00%, due 2/1/02 (c)(g)........................... $ 8,119,692 $ 8,119,692
--------------
BUILDINGS (0.2%)
U.S. Home Corp.
4.875%, due 11/1/05................................ 2,572,000 2,430,540
--------------
RETAIL (0.1%)
Michaels Stores, Inc.
4.75%, due 1/15/03 6.75%, beginning 1/15/96........ 2,060,000 1,575,900
--------------
Total Convertible Bonds
(Cost $10,979,274)................................. 12,126,132
--------------
CORPORATE BONDS (59.5%)
ADVERTISING (0.9%)
Sullivan Graphics, Inc.
12.75%, due 8/1/05 (c)............................. 15,400,000 15,015,000
--------------
AEROSPACE (1.5%)
K&F Industries, Inc.
11.875%, due 12/1/03............................... 7,175,000 7,713,125
13.75%, due 8/1/01................................. 428,000 444,050
Sequa Corp.
8.75%, due 12/15/01................................ 1,742,000 1,654,900
9.375%, due 12/15/03............................... 14,150,000 13,159,500
9.625%, due 10/15/99............................... 1,000,000 990,000
--------------
23,961,575
--------------
AIRLINES (0.8%)
Atlas Air, Inc.
12.25%, due 12/1/02................................ 6,135,000 6,257,700
NWA Trust, Series D
13.875%, due 6/21/08............................... 6,000,000 7,140,000
--------------
13,397,700
--------------
</TABLE>
- -------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Principal
Amount Value
--------------------------------------------------------------
<S> <C> <C>

APPLIANCES & FURNITURE (0.6%)
Central Rents, Inc.
12.875%, due 12/15/03............................. $ 10,500,000 $ 10,657,500
--------------
BUILDING MATERIALS (1.3%)
Associated Materials, Inc.
11.50%, due 8/15/03............................... 9,550,000 7,544,500
Miles Homes Services, Inc.
12.00%, due 4/1/01................................ 1,000,000 740,000
Triangle Pacific Corp.
10.50%, due 8/1/03................................ 1,500,000 1,590,000
Waxman Industries, Inc.
12.25%, due 9/1/98................................ 2,500,000 2,400,000
Series B
(zero coupon), due 6/1/04 12.75%, beginning
6/1/99............................................ 23,712,000 8,773,440
--------------
21,047,940
--------------
BUILDINGS (2.0%)
NVR, Inc.
11.00%, due 4/15/03............................... 20,606,000 20,734,787
Peters (JM) Co.
12.75%, due 5/1/02................................ 14,850,000 13,513,500
--------------
34,248,287
--------------
CABLE (0.7%)
Jones Intercable, Inc.
11.50%, due 7/15/04............................... 10,053,000 11,158,830
--------------
CASINOS (7.2%)
Capital Gaming International, Inc.
11.50%, due 2/1/01 (i)............................ 1,500,000 705,000
Casino America, Inc.
11.50%, due 11/15/01.............................. 3,500,000 3,237,500
Casino Magic Finance Corp.
11.50%, due 10/15/01.............................. 25,885,000 22,390,525
El Comandante Capital Corp.
11.75%, due 12/15/03.............................. 13,325,000 11,859,250
Hemmeter Enterprises, Inc.
12.00%, due 12/15/00 (g)(h)(i).................... 12,401,816 4,712,690
Hollywood Casino Corp.
12.75%, due 11/1/03............................... 20,700,000 18,888,750
Horseshoe Gaming LLC, Series WW
12.75%, due 9/30/00 (c)........................... 22,650,000 22,536,750
PRT Funding Corp.
11.625%, due 4/15/04.............................. 2,510,000 1,857,400
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
- --------------------------------------------------------------------------------
THE MAINSTAY HIGH YIELD CORPORATE BOND FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Value
--------------------------------------------------------------
<S> <C> <C>

CORPORATE BONDS (CONTINUED)
CASINOS (CONTINUED)
President Riverboat Casinos, Inc.
13.00%, due 9/15/01............................... $ 15,425,000 $ 12,957,000
Resorts International Hotel
Financing, Inc.
11.00%, due 9/15/03............................... 10,975,000 10,371,375
Treasure Bay Gaming & Resorts
12.25%, due 11/15/00 (a)(c)(h)(i)................. 3,950,000 790,000
12.25%, due 11/15/00 (a)(c)(h)(i)(m1)............. 32,800 6,560,000
Trump Castle Funding, Inc.
7.00%, due 11/15/05 (g)........................... 189 136
Trump Taj Mahal Funding, Inc.
Series A
11.35%, due 11/15/99 (p).......................... 2,300,625 2,214,352
--------------
119,080,728
--------------
CELLULAR TELEPHONE (1.2%)
Celcaribe S.A.
(zero coupon), due 3/15/04
13.50%, beginning 3/15/98 (c)..................... 2,700,000 1,822,500
(zero coupon), due 3/15/04
13.50%, beginning 3/15/98 (c)(m2) 192 1,747,200
PriCellular Wireless Corp.
(zero coupon), due 10/1/03 12.25%, beginning
10/1/98........................................... 9,650,000 7,454,625
Series B
(zero coupon), due 11/15/01 14.00%, beginning
5/15/98........................................... 9,355,000 8,232,400
--------------
19,256,725
--------------
CHILD CARE SERVICES (0.5%)
La Petite Holdings Corp.
9.625%, due 8/1/01................................ 8,900,000 7,898,750
--------------
COMPUTERS & OFFICE EQUIPMENT (1.2%)
International Semi-Technology Corp.
(zero coupon), due 8/15/03
11.50%, beginning 8/15/00......................... 36,650,000 19,928,437
--------------
CONGLOMERATES (0.5%)
Jordan Industries, Inc.
(zero coupon), due 8/1/05
11.75%, beginning 8/1/98.......................... 10,000,000 5,800,000
Spreckels Industries, Inc.
11.50%, due 9/1/00................................ 1,750,000 1,723,750
--------------
7,523,750
--------------
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
--------------------------------------------------------------
<S> <C> <C>

CONSUMER DURABLES (1.1%)
Selmer Co., Inc.
11.00%, due 5/15/05............................... $ 12,575,000 $ 12,386,375
United Stationers Supply, Inc.
12.75%, due 5/1/05 (c)............................ 5,000,000 5,450,000
--------------
17,836,375
--------------
CONSUMER FINANCIAL SERVICES (0.7%)
Figgie International, Inc.
9.875%, due 10/1/99............................... 11,750,000 11,750,000
--------------
CONTAINERS (2.0%)
Envirodyne Industries, Inc.
10.25%, due 12/1/01............................... 13,350,000 9,879,000
Series B
12.00%, due 6/15/00............................... 10,000,000 9,745,000
Gaylord Container Corp.
(zero coupon), due 5/15/05 12.75%, beginning
5/15/96........................................... 14,170,000 13,957,450
--------------
33,581,450
--------------
DEFENSE ELECTRONICS (0.3%)
Tracor, Inc.
10.875%, due 8/15/01.............................. 4,000,000 4,140,000
--------------
DOMESTIC OIL & GAS (2.1%)
Dual Drilling Co.
9.875%, due 1/15/04............................... 6,500,000 6,191,250
Mesa Capital Corp.
12.75%, due 6/30/96............................... 11,000 10,175
12.75%, due 6/30/98............................... 1,083,000 958,455
Petro PSC Properties L.P.
12.50%, due 6/1/02................................ 15,010,000 14,259,500
TransAmerican Refining Corp.
Series 2
16.50%, due 2/15/02
16.00%, beginning 8/15/98......................... 13,000,000 12,350,000
--------------
33,769,380
--------------
ENERGY (0.7%)
Nuevo Energy Co.
12.50%, due 6/15/02............................... 10,000,000 10,875,000
--------------
FOOD, BEVERAGES & TOBACCO (5.6%)
All-American Bottling Corp.
13.00%, due 8/15/01............................... 24,940,000 21,074,300
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- CONTINUED
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Value
--------------------------------------------------------------
<S> <C> <C>

CORPORATE BONDS (CONTINUED)
FOOD, BEVERAGES & TOBACCO (CONTINUED)
American Restaurant Group, Inc.
10.25%, due 9/30/00 (c)........................... $ 10,000,000 $ 3,099,961
12.00%, due 9/15/98............................... 9,755,000 7,608,900
12.00%, due 9/15/98............................... 24,105,000 18,801,900
BGLS, Inc.
13.75%, due 3/1/97 (e)............................ 1,648,000 1,648,000
Brooke Partners L.P.
13.75%, due 3/1/97................................ 3,569,000 3,533,310
14.50%, due 4/1/98................................ 10,345,000 8,586,350
Empresas La Moderna S.A.
10.25%, due 11/12/97.............................. 8,500,000 8,330,000
Liggett Group, Inc.
Series B
11.50%, due 2/1/99................................ 17,649,000 14,648,670
Series C
19.75%, due 2/1/99................................ 308,000 289,520
SC International Services, Inc.
13.00%, due 10/1/05............................... 3,700,000 3,959,000
--------------
91,579,911
--------------
HOUSEHOLD PRODUCTS (0.2%)
Chattem, Inc.
Series B
12.75%, due 6/15/04............................... 4,367,000 3,930,300
--------------
INDUSTRIAL (2.7%)
Atlantis Plastics, Inc.
11.00%, due 2/15/03............................... 4,170,000 3,627,900
Great Dane Holdings, Inc.
12.75%, due 8/1/01................................ 22,910,000 20,905,375
Interlake Corp.
12.00%, due 11/15/01.............................. 3,500,000 3,535,000
Newflo Corp.
Series B
13.25%, due 11/15/02.............................. 16,285,000 16,936,400
--------------
45,004,675
--------------
INSURANCE (1.2%)
Bankers Life Holdings Corp.
Series B
13.00%, due 11/1/02............................... 13,000,000 14,690,000
Life Partners Group, Inc.
12.75%, due 7/15/02............................... 4,380,000 4,839,900
--------------
19,529,900
--------------
MACHINERY (1.0%)
Monarch Marking Systems, Inc.
12.50%, due 7/1/03................................ 5,000,000 5,275,000
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
--------------------------------------------------------------
<S> <C> <C>

MACHINERY (CONTINUED)
Thermadyne Holdings Corp.
10.75%, due 11/1/03............................... $ 10,855,000 $ 10,882,137
--------------
16,157,137
--------------
MEDIA (6.3%)
Affiliated Newspaper Investments, Inc.
(zero coupon), due 7/1/06 13.25%, beginning
7/1/99............................................ 27,500,000 16,912,500
CPY Acquisition Corp.
14.00%, due 1/1/99 (a)(e)(h)(i)................... 565,413 5,654
Garden State Newspapers, Inc.
12.00%, due 7/1/04................................ 8,065,000 8,105,325
General Media, Inc.
10.625%, due 12/31/00............................. 30,700,000 23,025,000
Maxwell Communications Corp., Plc Facility A
(a)(c)(h)(i)(j)................................... 9,973,584 910,090
SCI Television, Inc.
12.00%, due 10/15/95 (e)(q)....................... 6,822,456 34,112
Spanish Broadcasting System, Inc.
7.50%, due 6/15/02 12.50%, beginning 6/15/97...... 25,810,000 24,906,650
Telemundo Group, Inc.
10.25%, due 12/30/01.............................. 127,450 126,175
United International Holdings, Inc.
(zero coupon), due 11/15/99....................... 48,860,000 30,293,200
--------------
104,318,706
--------------
PAPER & FOREST PRODUCTS (0.9%)
Crown Paper Co.
11.00%, due 9/1/05................................ 13,950,000 12,206,250
Indah Kiat International Finance Co.
12.50%, due 6/15/06............................... 3,250,000 3,250,000
--------------
15,456,250
--------------
POLLUTION & RELATED (1.2%)
ICF Kaiser International, Inc.
12.00%, due 12/31/03 (m3)......................... 10,174 9,563,560
Norcal Waste Systems, Inc.
12.50%, due 11/15/05 (c).......................... 11,000,000 11,165,000
--------------
20,728,560
--------------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
- --------------------------------------------------------------------------------
THE MAINSTAY HIGH YIELD CORPORATE BOND FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Value
--------------------------------------------------------------
<S> <C> <C>

CORPORATE BONDS (CONTINUED)
REAL ESTATE (1.6%)
Olympia & York Maiden
Lane Finance Corp.
7.332%, due 3/20/99 (c)(d)........................ $ 28,887,789 $ 19,643,697
10.375%, due 12/31/95 (c)(e)(q)................... 4,000 1,880
Saul B.F. Real Estate Investment Trust
11.625%, due 4/1/02............................... 6,000,000 6,120,000
--------------
25,765,577
--------------
RECREATION & ENTERTAINMENT (1.9%)
Affinity Group, Inc.
11.50%, due 10/15/03.............................. 24,625,000 25,363,750
Premier Parks, Inc.
12.00%, due 8/15/03............................... 2,500,000 2,587,500
Six Flags Theme Parks, Series A
(zero coupon), due 6/15/05 12.25%, beginning
6/15/98........................................... 5,000,000 3,900,000
--------------
31,851,250
--------------
RESTAURANTS & LODGING (2.0%)
Family Restaurant, Inc.
9.75%, due 2/1/02................................. 48,760,000 28,037,000
Host Marriott Corp.
Acquisition Properties
9.00%, due 12/15/07 (c)........................... 5,000,000 5,050,000
--------------
33,087,000
--------------
RETAIL (2.0%)
Brylane L.P., Series B
10.00%, due 9/1/03................................ 4,025,000 3,562,125
Hechinger Co.
9.45%, due 11/15/12............................... 2,000,000 1,410,000
Hills Stores Co.
10.25%, due 9/30/03............................... 6,500,000 5,785,000
IHF Holdings, Inc.
Series B
(zero coupon), due 11/15/04 15.00%, beginning
11/15/99.......................................... 12,500,000 7,875,000
Waban, Inc.
11.00%, due 5/15/04............................... 13,250,000 13,581,250
--------------
32,213,375
--------------
STEEL, ALUMINUM & OTHER METALS (0.8%)
Algoma Steel, Inc.
12.375%, due 7/15/05.............................. 13,800,000 12,420,000
--------------
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
--------------------------------------------------------------
<S> <C> <C>

SUPERMARKET (0.3%)
Pueblo Xtra International, Inc.
9.50%, due 8/1/03................................. $ 5,250,000 $ 5,026,875
--------------
TELECOMMUNICATION EQUIPMENT (1.7%)
EchoStar Communications Corp.
(zero coupon), due 6/1/04 12.875%, beginning
6/1/99............................................ 15,865,000 10,708,875
PageMart Nationwide, Inc.
(zero coupon), due 2/1/05 15.00%, beginning
2/1/00............................................ 14,550,000 9,457,500
Telex Communications, Inc.
12.00%, due 7/15/04............................... 8,250,000 8,476,875
--------------
28,643,250
--------------
TELECOMMUNICATION SERVICES (2.7%)
Centennial Cellular Corp.
8.875%, due 11/1/01............................... 4,700,000 4,629,500
10.125%, due 5/15/05.............................. 7,350,000 7,735,875
Dial Call Communications, Inc.
(zero coupon), due 12/15/05 10.25%, beginning
12/15/98.......................................... 5,310,000 2,814,300
Nextel Communications, Inc.
(zero coupon), due 8/15/04 9.75%, beginning
2/15/99........................................... 17,640,000 9,569,700
Peoples Telephone Co., Inc.
12.25%, due 7/15/02............................... 19,475,000 15,580,000
WinStar Communications, Inc.
(zero coupon), due 10/15/05
14.00%, beginning 10/15/00 (c)(m5) 2,000 3,180,000
--------------
43,509,375
--------------
TEXTILE & APPAREL (1.4%)
CMI Industries, Inc.
9.50%, due 10/1/03................................ 9,975,000 8,079,750
Hosiery Corp. of America, Inc.
13.75%, due 8/1/02................................ 13,400,000 14,539,000
--------------
22,618,750
--------------
UTILITY (0.7%)
Consolidated Hydro, Inc.
(zero coupon), due 7/15/03 12.00%, beginning
7/15/98........................................... 27,875,000 11,986,250
--------------
Total Corporate Bonds
(Cost $974,590,165)............................... 978,954,568
--------------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- CONTINUED
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------------------------------------
<S> <C> <C>

FOREIGN BOND (0.0%) (b)
MEDIA (0.0%) (b)
Maxwell Communications Corp., Plc
Facility B (a)(c)(h)(i)(j).................. (Pounds) 1,131,066 $ 159,753
--------------
Total Foreign Bond
(Cost $30,652).............................. 159,753
--------------
LOAN PARTICIPATIONS (1.6%)
AIRLINES (0.5%)
GPA Group, Plc CCF...........................
7.209%, due 9/1/97 (c)(d)(j)................ $ 8,971,929 8,688,647
--------------
SUPERMARKETS (1.1%)
Somerfield, Plc
Facility A
8.439%, due 6/30/98 (c)(d)(j)............... (Pounds)10,475,801 14,106,966
Facility B
8.442%, due 6/30/98 (c)(d)(j)............... 3,184,752 4,288,664
--------------
18,395,630
--------------
Total Loan Participations
(Cost $24,949,871).......................... 27,084,277
--------------
YANKEE BONDS (5.0%)
CABLE (0.8%)
Australis Media Ltd.
(zero coupon), due 5/15/03 14.00%, beginning
5/15/00 (m6)................................ $ 15,200 10,982,000
Fundy Cable Ltd.
11.00%, due 11/15/05........................ 2,000,000 2,090,000
--------------
13,072,000
--------------
CELLULAR TELEPHONE (0.1%)
Comunicacion Celular S.A.
(zero coupon), due 11/15/03 13.125%, begin-
ning 11/15/00 (c)(m7)....................... 2,590 1,469,825
--------------
FINANCIAL (1.3%)
Hollinger, Inc.
(zero coupon), due 10/5/13.................. 72,240,000 21,852,600
--------------
REAL ESTATE (2.1%)
Trizec Finance Ltd.
10.875%, due 10/15/05....................... 32,700,000 33,517,500
--------------
TELECOMMUNICATION SERVICES (0.5%)
Clearnet Communications, Inc.
(zero coupon), due 12/15/05 14.75%, due
12/15/00 (m4)............................... 1,618 8,413,600
--------------
TRANSPORTATION (0.2%)
TNT Transport, Plc
11.50%, due 4/15/04......................... 3,550,000 3,700,875
--------------
Total Yankee Bonds
(Cost $78,074,317).......................... 82,026,400
--------------
Total Long-Term Bonds
(Cost $1,088,624,279)....................... 1,100,351,130
--------------
</TABLE>

Shares Value
-------------------------------------------------------------
<S> <C> <C>

COMMON STOCKS (6.8%)
BUILDINGS (0.2%)
NVR, Inc. (a)...................................... 379,300 $ 3,793,000
--------------
CASINOS (0.2%)
Aztar Corp. (a).................................... 400,000 3,150,000
Showboat, Inc...................................... 30,800 812,350
--------------
3,962,350
--------------
CELLULAR TELEPHONE (0.1%)
Celcaribe S.A. (a)................................. 439,020 658,530
--------------
CHEMICALS (0.1%)
FMC Corp. (a)...................................... 26,000 1,758,250
--------------
COMPUTERS & OFFICE EQUIPMENT (0.0%) (b)
Unisys Corp. (a)................................... 40,000 225,000
--------------
CONGLOMERATES (0.4%)
Hanson, Plc ADR (n)................................ 350,000 5,337,500
Triarc Companies, Inc. (a)......................... 125,200 1,377,200
--------------
6,714,700
--------------
CONTAINERS (0.2%)
Stone Container Corp. ............................. 240,700 3,460,063
--------------
DOMESTIC OIL AND GAS (0.0%) (b)
Mesa, Inc. (a)..................................... 43,890 164,588
--------------
DOMESTIC OILS (0.2%)
Parker and Parsley Petroleum Co.................... 148,300 3,262,600
--------------
FOOD, BEVERAGES & TOBACCO (0.6%)
Dr. Pepper Bottling Holdings, Inc.
Class A (a)....................................... 300,000 1,500,000
RJR Nabisco Holdings Corp.......................... 252,000 7,780,500
--------------
9,280,500
--------------
GAS UTILITIES (0.1%)
UGI Corp........................................... 37,000 767,750
United Gas Holdings Corp. (a)(e)................... 98,050 166,685
--------------
934,435
--------------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
- --------------------------------------------------------------------------------
THE MAINSTAY HIGH YIELD CORPORATE BOND FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Shares Value
--------------------------------------------------------------
<S> <C> <C>

COMMON STOCKS (CONTINUED)
INDUSTRIAL (0.0%) (b)
Insilco Corp. (a)................................... 221 $ 7,044
--------------
INSURANCE (0.8%)
Aetna Life & Casualty Co............................ 97,200 6,731,100
Allstate Corp....................................... 75,000 3,084,375
Fremont General Corp................................ 103 3,785
London Insurance Group, Inc. ....................... 134,500 2,723,021
--------------
12,542,281
--------------
MACHINERY (0.0%) (b)
Bucyrus-Erie Co. (a)................................ 128 1,040
--------------
MEDIA (0.7%)
Affiliated Newspaper
Investments, Inc. (a).............................. 28,000 840,000
PanAmSat Corp. (a).................................. 60,000 1,323,750
United International Holdings, Inc. Class A (a)..... 522,800 7,711,300
U.S. West Media Group, Inc. (a)..................... 50,000 950,000
--------------
10,825,050
--------------
PAPER & FOREST PRODUCTS (0.2%)
Champion International Corp. ....................... 78,300 3,288,600
--------------
REAL ESTATE (0.1%)
American Health Properties, Inc..................... 26,300 565,450
American Health Properties, Inc. (o)................ 5,130 76,950
Santa Anita Realty Enterprises, Inc................. 70,400 836,000
--------------
1,478,400
--------------
RECREATION & ENTERTAINMENT (0.3%)
Royal Caribbean Cruises Ltd......................... 192,900 4,243,800
Turner Broadcasting System, Inc.
Class B............................................ 12,500 325,000
--------------
4,568,800
--------------
RETAIL (0.7%)
Limited, Inc. (The)................................. 250,000 4,343,750
Loehmann's Holdings, Inc., Series A (a)............. 43,750 43,750
Stop & Shop Companies, Inc. (a)..................... 116,600 2,696,375
Talbots, Inc........................................ 118,700 3,412,625
U.S. Industries, Inc. (a)........................... 12,500 229,687
Value City Department Stores, Inc. (a).............. 132,400 893,700
--------------
11,619,887
--------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
-------------------------------------------------------------
<S> <C> <C>

STEEL, ALUMINUM & OTHER METALS (0.0%) (b)
Algoma Steel, Inc. (a)............................. 34,400 $ 129,000
--------------
SUPERMARKET (0.0%) (b)
Grand Union Co. (a)................................ 51,999 389,993
--------------
TELECOMMUNICATION EQUIPMENT (0.0%) (b)
PageMart Nationwide, Inc. (a)...................... 45,500 420,875
--------------
TELECOMMUNICATION SERVICES (1.9%)
Airtouch Communications, Inc. (a).................. 171,300 4,839,225
Pyramid Communication, Inc.
Class B (a)....................................... 9,942 994,187
Rogers Cantel Mobile
Communications, Inc., Class B (a)................. 75,000 1,987,500
Rogers Communications, Inc.
Class B (a)....................................... 2,131,900 24,021,959
--------------
31,842,871
--------------
TEXTILE & APPAREL (0.0%) (b)
Hosiery Corp. of America, Inc. (a)................. 12,400 62,000
--------------
Total Common Stocks
(Cost $107,080,243)............................... 111,389,857
--------------
PREFERRED STOCKS (3.3%)
AUTO PARTS (0.2%)
Harvard Industries, Inc.
14.25% (g)........................................ 112,083 2,977,205
--------------
BANKS (0.0%) (b)
River Bank America, N.Y.
15.00%, Series A.................................. 30,000 750,000
--------------
BUILDINGS (0.2%)
UDC Homes, Inc.
$1.68, Series C (a)(e)(h)......................... 108,500 27,125
U.S. Home Corp.
5.00% (a)......................................... 100,000 2,875,000
--------------
2,902,125
--------------
CABLE (0.7%)
Cablevision Systems Corp.
8.50%, Series I................................... 8,000 216,000
11.75%, Series G (g).............................. 115,600 12,022,400
--------------
12,238,400
--------------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- CONTINUED
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>

PREFERRED STOCKS (CONTINUED)
DOMESTIC OIL & GAS (0.0%) (b)
TransAmerican Energy Corp.
$19.00, Series A................................ 150 $ 15,000
--------------
DOMESTIC OILS (0.7%)
Parker and Parsley Capital LLC
6.25% (c)....................................... 191,700 9,009,900
--------------
FOOD, BEVERAGES & TOBACCO (0.0%) (b)
Seven Up Holdings Co.
16.00% (a)...................................... 4,491 129,542
--------------
INSURANCE (0.3%)
Conseco, Inc.
6.50%, Series D................................. 100,000 5,300,000
--------------
RETAIL (0.0%) (b)
Loehmann's Holdings, Inc.
$0.056, Series A (g)............................ 36,441 9,110
--------------
STEEL, ALUMINUM & OTHER METALS (0.2%)
BCP/Essex Holdings, Inc.
15.00%, Series B (c)(g)......................... 128,129 3,315,340
--------------
TELECOMMUNICATION SERVICES (1.0%)
K-III Communications Corp.
11.625%, Series B (g)........................... 74,139 7,376,815
Pyramid Communication, Inc.
Series C (a).................................... 344,888 9,484,426
--------------
16,861,241
--------------
TRANSPORTATION (0.0%) (b)
Arkansas Best Corp.
$2.875, Series A................................ 100 3,100
--------------
Total Preferred Stocks
(Cost $50,271,879).............................. 53,510,963
--------------
WARRANTS (0.7%)
APPLIANCES & FURNITURE (0.0%) (b)
Central Rents, Inc.
expire 2004 (a)................................. 10,500 525,000
--------------
BUILDING MATERIALS (0.0%) (b)
Miles Homes, Inc.
expire 4/1/97 (a)............................... 12,000 5,250
Waxman Industries, Inc.
expire 6/1/04 (a)............................... 413,000 51,625
--------------
56,875
--------------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
--------------------------------------------------------------
<S> <C> <C>

CASINOS (0.1%)
Belle Casino, Inc. (a)............................. 5,500 $ 55
Boomtown, Inc. (a)................................. 7,350 7,350
Casino America, Inc.
expire 11/15/96 (a)............................... 20,393 204
Casino Magic Corp.
expire 10/14/96 (a)............................... 12,000 12
HDA Management Corp.
expire 1998 (a)................................... 6,450 290,250
Horseshoe Gaming LLC
expire 4/10/96 (a)................................ 11,325,000 566,250
Louisiana Casino, Inc.
expire 1998 (a)................................... 12,000 84,000
Presidential Riverboat Casinos, Inc.
expire 9/23/96 (a)................................ 33,000 330
--------------
948,451
--------------
CONGLOMERATES (0.0%) (b)
IFA Capital, Inc. (a).............................. 8,000 800,000
--------------
DOMESTIC OIL & GAS (0.2%)
Petro PSC Properties L.P.
expire 6/1/97 (a)................................. 14,010 476,340
TransAmerican Refining Corp.
expire 2/15/02 (a)................................ 1,244,665 2,800,496
UGI Corp.
expire 3/31/98 (a)................................ 34,580 5,187
--------------
3,282,023
--------------
FOOD, BEVERAGES & TOBACCO (0.0%) (b)
American Restaurant Group, Inc.
expire 7/31/00 (a)(c)............................. 39,363 39
Browne Bottling Co.
expire 8/15/03 (a)................................ 6,079 151,975
--------------
152,014
--------------
HOUSEHOLD PRODUCTS (0.0%) (b)
Chattem, Inc.
expire 8/17/99 (a)................................ 9,500 9,500
--------------
MEDIA (0.4%)
Commodore Media, Inc.
expire 2000 (a)(c)................................ 4,000 420,000
General Media, Inc.
expire 12/31/96 (a)............................... 29,135 291,350
Spanish Broadcasting System, Inc.
expire 6/30/99 (a)................................ 30,250 5,142,500
United International Holdings, Inc. (a)............ 19,834 575,186
--------------
6,429,036
--------------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
- --------------------------------------------------------------------------------
THE MAINSTAY HIGH YIELD CORPORATE BOND FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Shares Value
---------------------------------------------------------------
<S> <C> <C>

WARRANTS (CONTINUED)
RECREATION & ENTERTAINMENT (0.0%) (b)
Sam Houston Race Park
expire 7/15/99 (a)............................ 12,000 $ 12
--------------
TELECOMMUNICATION SERVICES (0.0%) (b)
Dial Call Communications, Inc.
expire 1997 (a)............................... 3,500 3
Dial Page, Inc.
expire 12/15/98 (a)........................... 3,087 31
--------------
34
--------------
Total Warrants
(Cost $6,496,269)............................. 12,202,945
--------------
<CAPTION>
Notional
Amount
------------
<S> <C> <C>
PURCHASED PUT OPTION (0.0%) (b)
FOOD, BEVERAGES & TOBACCO (0.0%)(b)
Underlying security, RJR Nabisco, Inc.
8.75%, due 8/15/05
expire 8/26/96 (f)............................ $ 29,500,000 619,500
--------------
Total Purchased Put Option
(Cost $590,000)............................... 619,500
--------------
<CAPTION>
Principal
Amount
------------
<S> <C> <C>
SHORT-TERM
INVESTMENTS (20.2%)
U.S. GOVERNMENT (20.2%)
United States Treasury Notes
8.875%, due 2/15/96........................... $100,000,000 100,422,000
9.25%, due 1/15/96............................ 230,650,000 230,975,217
--------------
331,397,217
--------------
Total Short-Term Investments
(Cost $332,251,636)........................... 331,397,217
--------------
Total Investments
(Cost $1,585,314,306) (k)..................... 97.9% 1,609,471,612 (l)
Cash and Other Assets, Less Liabilities 2.1 34,616,051
------------ --------------
Net Assets..................................... 100.0% $1,644,087,663
============ ==============
<CAPTION>
Shares
------------
<S> <C> <C>
SHORT POSITION (-0.2%)
COMMON STOCK (-0.2%)
INSURANCE (-0.2%)
Conseco, Inc................................... (45,000) $ (2,818,125)
--------------
Total Short Position
(Proceeds $2,442,882)......................... $ (2,818,125)
==============
</TABLE>
- -------
(a) Non-Income producing securities.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Floating rate. Rate shown is the rate in effect at December 31, 1995.
(e) Fair valued securities. Aggregate at 0.09% of net assets.
(f) Purchased put option is based on spread between the risk/duration of RJR
Nabisco, Inc., 8.75%, due 8/15/05, multiplied by the yield on the RJR
Nabisco bond less the yield on the U.S. Treasury Note 6.50%, due 8/15/05,
less 3%, multiplied by the notional principal.
(g) PIK ("Payment in Kind") interest payment is made with additional
securities.
(h) Issuer in Bankruptcy.
(i) Issue in default.
(j) Multiple tranche facilities.
(k) The cost for Federal income tax purposes is $1,587,770,395.
(l) At December 31, 1995, net unrealized appreciation was $21,701,217 based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $67,058,334 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $45,357,117.
(m1) 32,800 Units--each unit reflects $1,000 principal amount of First Mortage
Notes, plus 5 warrants to acquire common stock at a future date.
(m2) 192 Units--each unit reflects ten $1,000 principal amount of Senior
Secured Note Trust Certificates, plus 1,626 Ordinary Share Trust
Certificates.
(m3) 10,174 Units--each unit reflects $1,000 principal amount of 12.00% Senior
Subordinated Notes, plus warrants to acquire 4.8 shares of common stock at
$5.00 per share at a future date.
(m4) 1,618 Units--each unit reflects ten $1,000 principal amount of Senior
Discounted Notes, plus 33 warrants to acquire common stock at a future
date.
(m5) 2,000 Units--each unit reflects two $3,000 principal amount of Senior
Discounted Notes, plus 1 Convertible Senior Subordinate Discounted Note.
(m6) 15,200 Units--each unit reflects $1,000 principal amount of Senior
Subordinate Discounted Notes, plus 1 warrant to acquire 58 shares of
common stock at a future date.
(m7) 2,590 Units--each unit reflects $1,000 Senior Deferred Coupon Bonds, plus
1 warrant to acquire 12,860 shares of common stock at a future date.
(n) ADR--American Depository Receipt.
(o) Depository Shares--each share represents one-tenth of Psychiatric Group
preferred stock.
(p) CIK ("Cash in Kind") interest payment is made with cash or additional
securities.
(q) The company defaulted on the payment of principal to its creditors on
maturity date.
Forward foreign currency contracts open at December 31, 1995:
<TABLE>
<CAPTION>
Gross Unrealized
Contracts In Delivery Appreciation/
to Deliver Exchange For Date Depreciation
---------- ------------ -------- ----------------
<S> <C> <C> <C>
C$30,162,365 $36,542,135 1/22/96 $(413,755)
(Pounds)14,000,000 21,700,000 4/16/96 224,697
---------
Net Depreciation.................................... $(189,058)
=========
</TABLE>
- -------
(C$) Security denominated in Canadian Dollars.
(Pounds)Security denominated in Canadian Dollars.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE>
- --------------------------------------------------------------------------------

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

STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1995

<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (Note 2)
(identified cost $1,585,314,306)............................. $1,609,471,612
Cash.......................................................... 94,235
Receivables:
Dividends and interest....................................... 41,855,649
Investment securities sold................................... 14,322,655
Fund shares sold............................................. 3,119,620
Unrealized appreciation on forward foreign currency contracts. 224,697
Other assets.................................................. 1,288
--------------
Total assets................................................ 1,669,089,756
--------------
LIABILITIES:
Securities sold short (proceeds 2,442,882).................... 2,818,125
Payables:
NYLIFE Distributors.......................................... 1,191,870
Investment securities purchased.............................. 1,009,259
Fund shares redeemed......................................... 773,654
Adviser...................................................... 391,741
Transfer agent............................................... 198,644
Custodian.................................................... 28,735
Trustees..................................................... 10,365
Unrealized depreciation on forward foreign currency contracts. 413,755
Accrued expenses.............................................. 623,209
Dividend payable.............................................. 17,542,736
--------------
Total liabilities........................................... 25,002,093
--------------
Net assets.................................................... $1,644,087,663
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized
Class A...................................................... $ 54,081
Class B...................................................... 2,022,753
Additional paid-in capital.................................... 1,624,637,979
Accumulated distributions in excess of net investment income.. (3,007,934)
Accumulated distributions in excess of net realized gain on
investments.................................................. (3,212,221)
Net unrealized appreciation on investments.................... 23,782,063
Net unrealized depreciation on translation of assets and
liabilities in foreign currencies............................ (189,058)
--------------
Net assets.................................................... $1,644,087,663
==============
CLASS A
Net assets applicable to outstanding shares................... $ 42,850,089
==============
Shares of beneficial interest outstanding..................... 5,408,140
==============
Net asset value per share outstanding......................... $ 7.92
Maximum sales charge (4.50% of offering price)................ 0.37
--------------
Maximum offering price per share outstanding.................. $ 8.29
==============
CLASS B
Net assets applicable to outstanding shares................... $1,601,237,574
==============
Shares of beneficial interest outstanding..................... 202,275,307
==============
Net asset value per share outstanding......................... $ 7.92
==============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a)................................................... $ 5,834,391
Interest........................................................ 148,226,380
------------
Total income................................................... 154,060,771
------------
Expenses: (Note 2)
Distribution--Class B (Note 3).................................. 8,099,567
Administration (Note 3)......................................... 3,930,939
Advisory (Note 3)............................................... 3,930,939
Service (Note 3)................................................ 3,459,945
Transfer agent.................................................. 1,225,278
Legal........................................................... 408,469
Shareholder communication....................................... 326,464
Custodian....................................................... 181,949
Registration.................................................... 169,889
Recordkeeping (Note 3).......................................... 164,329
Trustees........................................................ 56,131
Auditing........................................................ 38,525
Dividends on securities sold short.............................. 900
Miscellaneous................................................... 40,940
------------
Total expenses................................................. 22,034,264
------------
Net investment income............................................ 132,026,507
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions........................................... 41,451,967
Securities sold short........................................... (220,429)
Option transactions............................................. (923,221)
Foreign currency transactions................................... 13,599
------------
Net realized gain on investments and foreign currency
transactions.................................................... 40,321,916
------------
Net change in unrealized appreciation (depreciation) on
investments:
Security transactions........................................... 68,351,513
Securities sold short........................................... (375,243)
Option transactions............................................. 364,260
Translation of assets and liabilities in foreign currencies..... (189,058)
------------
Net unrealized gain on investments and foreign currency.......... 68,151,472
------------
Net realized and unrealized gain on investments and foreign
currency transactions........................................... 108,473,388
------------
Net increase in net assets resulting from operations............. $240,499,895
============
</TABLE>
- -------
(a) Dividends recorded net of foreign withholding taxes of $39,183.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE>
- --------------------------------------------------------------------------------
THE MAINSTAY HIGH YIELD CORPORATE BOND FUND
- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
September 1
Year ended through Year ended
December 31 December 31 August 31
1995 1994* 1994
-------------- -------------- --------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income......... $ 132,026,507 $ 34,115,213 $ 85,320,005
Net realized gain (loss) on
investments.................. 40,308,317 (17,146,559) 22,384,068
Net realized gain (loss) on
foreign currency
transactions................. 13,599 172,205 (190,470)
Net change in unrealized
appreciation (depreciation)
on securities transactions... 68,715,773 (22,883,223) (39,066,464)
Net change in unrealized
depreciation on securities
sold short................... (375,243) -- --
Net change in unrealized
depreciation on translation
of assets and liabilities in
foreign currencies........... (189,058) -- --
-------------- -------------- --------------
Net increase (decrease) in net
assets resulting from
operations................... 240,499,895 (5,742,364) 68,447,139
-------------- -------------- --------------
Dividends and distributions to
shareholders:
From net investment income:
Class A....................... (2,874,284) -- --
Class B....................... (141,411,911) (33,164,828) (82,828,394)
From net realized gain on
investments and foreign
currency transactions:
Class A....................... (551,204) -- --
Class B....................... (20,770,265) -- (19,048,877)
In excess of net investment
income:
Class A....................... (59,920) -- --
Class B....................... (2,948,014) -- --
In excess of net realized gain
on investments and foreign
currency transactions:
Class A....................... (83,042) -- --
Class B....................... (3,129,179) -- --
-------------- -------------- --------------
Total dividends and
distributions to
shareholders................ (171,827,819) (33,164,828) (101,877,271)
-------------- -------------- --------------
Capital share transactions:
Net proceeds from sale of
shares:
Class A....................... 49,974,931 -- --
Class B....................... 493,045,911 119,994,090 429,451,287
Net asset value of shares
issued to shareholders in
reinvestment of dividends and
distributions:
Class A....................... 2,657,250 -- --
Class B....................... 116,525,515 22,271,425 71,030,532
-------------- -------------- --------------
662,203,607 142,265,515 500,481,819
Cost of shares redeemed:
Class A....................... (10,194,187) -- --
Class B....................... (205,507,147) (64,705,958) (185,328,762)
-------------- -------------- --------------
Increase in net assets
derived from capital share
transactions................ 446,502,273 77,559,557 315,153,057
-------------- -------------- --------------
Net increase in net assets... 515,174,349 38,652,365 281,722,925
NET ASSETS:
Beginning of period............ 1,128,913,314 1,090,260,949 808,538,024
-------------- -------------- --------------
End of period.................. $1,644,087,663 $1,128,913,314 $1,090,260,949
============== ============== ==============
Accumulated undistributed net
investment income/(excess
distribution)................. $ (3,007,934) $ 2,343,759 $ 1,393,374
============== ============== ==============
</TABLE>
- -------
* The Fund changed its fiscal year end from August 31 to December 31.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE>
- --------------------------------------------------------------------------------

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

FINANCIAL HIGHLIGHTS
(SELECTED PER SHARE DATA AND RATIOS)

<TABLE>
<CAPTION>
Class A Class B Class B
------- ---------- ------------------------------------------------------
September 1
through Year ended August 31
Year ended December 31 ----------------------------------------
December 31, 1995 1994* 1994 1993 1992 1991
---------------------- ----------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period..... $ 7.44 $ 7.44 $ 7.70 $ 7.93 $ 7.41 $ 6.66 $ 6.54
------- ---------- ---------- ---------- -------- -------- --------
Net investment income.... 0.84 0.81 0.23 0.69 0.70 0.79 0.89
Net realized and
unrealized gain (loss)
on investments.......... 0.61 0.61 (0.27) (0.08) 0.54 0.75 0.15
Net realized and
unrealized gain (loss)
on foreign currency
transactions............ (0.00)(b) (0.00)(b) -- -- -- -- --
------- ---------- ---------- ---------- -------- -------- --------
Total from investment
operations.............. 1.45 1.42 (0.04) 0.61 1.24 1.54 1.04
------- ---------- ---------- ---------- -------- -------- --------
Less dividends and
distributions:
From net investment
income.................. (0.84) (0.81) (0.22) (0.67) (0.72) (0.79) (0.92)
In excess of net
investment income....... (0.01) (0.01) -- -- -- -- --
From net realized gain on
investments............. (0.10) (0.10) -- (0.17) -- -- --
In excess of net realized
gain on investments..... (0.02) (0.02) -- -- -- -- --
------- ---------- ---------- ---------- -------- -------- --------
Total dividends and
distributions........... (0.97) (0.94) (0.22) (0.84) (0.72) (0.79) (0.92)
------- ---------- ---------- ---------- -------- -------- --------
Net asset value at end of
period.................. $ 7.92 $ 7.92 $ 7.44 $ 7.70 $ 7.93 $ 7.41 $ 6.66
======= ========== ========== ========== ======== ======== ========
Total investment return
(a)..................... 20.28% 19.71% (0.48%) 7.95% 18.58% 24.55% 18.25%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income... 10.2% 9.5% 9.1%+ 8.7% 9.9% 11.0% 14.4%
Expenses................ 1.0% 1.6% 1.6%+ 1.6% 1.7% 1.9% 2.1%
Portfolio turnover rate.. 137% 137% 45% 190% 207% 226% 214%
Net assets at end of
period (in 000's)....... $42,850 $1,601,238 $1,128,913 $1,090,261 $808,538 $447,819 $262,103
</TABLE>
- -------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized
(a) Total return is calculated exclusive of sales charges and is not
annualized.
(b) Less than one cent per share.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE>
- --------------------------------------------------------------------------------
THE MAINSTAY HIGH YIELD CORPORATE BOND FUND
- --------------------------------------------------------------------------------

NOTE 1 -- ORGANIZATION AND BUSINESS:

The Fund's primary objective is to maximize current income through investment
in a diversified portfolio of high yield debt securities which are ordinarily
rated in the lower rating categories of recognized rating agencies.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:

The following is a summary of significant accounting policies followed by the
Fund:

SECURITIES VALUATION. Portfolio securities of the High Yield Corporate Bond
Fund are stated at value determined (a) by appraising common and preferred
stocks which are traded on the New York Stock Exchange at the last sale price
on that day or, if no sale occurs, at the mean between the closing bid and
asked prices, (b) by appraising common and preferred stocks traded on other
United States national securities exchanges or foreign securities exchanges as
nearly as possible in the manner described in (a) by reference to their princi-
pal exchange, including the National Association of Securities Dealers National

22
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

Market System, (c) by appraising over-the-counter securities quoted on the Na-
tional Association of Securities Dealers NASDAQ system (but not listed on the
National Market System) at the bid price supplied through such system, (d) by
appraising over-the-counter securities not quoted on the NASDAQ system at
prices supplied by the pricing agent or brokers selected by the Adviser, if
these prices are deemed to be representative of market values at the regular
close of business of the New York Stock Exchange, (e) by appraising debt secu-
rities at prices supplied by a pricing agent selected by the Adviser, whose
prices reflect broker/dealer supplied valuations and electronic data processing
techniques if those prices are deemed by the Adviser to be representative of
market values at the regular close of business of the New York Stock Exchange
(f) by appraising options and futures contracts at the last sale price on the
market where such options or futures are principally traded, and (g) by ap-
praising all other securities and other assets, including debt securities for
which prices are supplied by a pricing agent but are not deemed by the Adviser
to be representative of market values, but excluding money market instruments
with a remaining maturity of sixty days or less and including restricted secu-
rities and securities for which no market quotations are available, at fair
value in accordance with procedures approved by the Trustees. Short-term secu-
rities which mature in more than 60 days are valued at current market quota-
tions. Short-term securities which mature in 60 days or less are valued at am-
ortized cost if their term to maturity at purchase was 60 days or less, or by
amortizing the difference between market value on the 61st day prior to matu-
rity and market value on maturity date if their original term to maturity at
purchase exceeded 60 days.

FORWARD CONTRACTS. A forward contract is an agreement to buy or sell currencies
of different countries on a specified future date at a specified rate. During
the period the forward contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" such con-
tract on a daily basis to reflect the market value of the contract at the end
of each day's trading. When the forward contract is closed, the Fund records a
realized gain or loss equal to the difference between the proceeds from (or
cost of) the closing transaction and the Fund's basis in the contract. The High
Yield Corporate Bond Fund enters into forward foreign currency exchange con-
tracts in order to protect against adverse changes in the level of foreign cur-
rency exchange rates. This practice is known as hedging.

23
<PAGE>
- --------------------------------------------------------------------------------
THE MAINSTAY HIGH YIELD CORPORATE BOND FUND
- --------------------------------------------------------------------------------

foreign exchange rates underlying these instruments. The unrealized apprecia-
tion/ depreciation on forward contracts reflects the Fund's exposure at year
end to credit loss in the event of a counterparty's failure to perform its ob-
ligations.

COMMITMENTS AND CONTINGENCIES. As of December 31, 1995, the Fund had unfunded
loan commitments pursuant to the following loan agreements:
<TABLE>
<CAPTION>
Unfunded
Borrower Commitment
-------- --------------
<S> <C>
GPA Group, Plc ................................................. $ 470,813
Somerfields Group, Plc.......................................... 1,992,222
----------
$2,463,035
==========
</TABLE>

FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT RISK. The Fund invests in
Loan Participations. When the Fund purchases a Participation, the Fund typi-
cally enters into a contractual relationship with the lender or third party
selling such Participation ("Selling Participant"), but not with the Borrower.
As a result, the Fund assumes the credit risk of the Borrower, the Selling Par-
ticipant and any other persons interpositioned between the Fund and the Bor-
rower ("Intermediate Participants"). The Fund may not directly benefit from the
collateral supporting the Senior Loan in which it has purchased the Participa-
tion. The Fund may be considered to have a concentration of credit risk in the
banking industry, since the Fund will only acquire Participations if the Sell-
ing Participant and each Intermediate Participant is a financial institution.

FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $622,475 and $9,915,929 have been reclassi-
fied from accumulated net realized gain on investments to additional paid-in
capital and accumulated net investment loss due to shareholder distributions.

Investment income received by a Fund from foreign sources may be subject to
foreign income taxes withheld at the source.

24
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The High Yield Corporate Bond Fund intends to
declare and pay dividends monthly. Income dividends and capital gain distribu-
tions are determined in accordance with Federal income tax regulations which
may differ from generally accepted accounting principles.

SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transac-
tions on the trade date. Realized gains and losses on security transactions are
determined using the identified cost method. Dividend income is recognized on
the ex-dividend date and interest income is accrued daily except when collec-
tion is not expected. Discounts on securities purchased for the Fund are ac-
creted on the constant yield method over the life of the respective securities
or, if applicable, over the period to the first date of call.

Income from payment-in-kind securities is recorded daily based on the effective
interest method of accrual.

The High Yield Corporate Bond Fund invests primarily in high yield bonds. These
bonds may involve special risks not commonly associated with investment in
higher rated debt securities. High yield bonds may be more susceptible to real
or perceived adverse economic and competitive industry conditions than higher
grade bonds. Also, the secondary market on which high yield bonds are traded
may be less liquid than the market for higher grade bonds.

USE OF ESTIMATES. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.

NOTE 3 -- FEES AND RELATED PARTY POLICIES:

25
<PAGE>
- --------------------------------------------------------------------------------
THE MAINSTAY HIGH YIELD CORPORATE BOND FUND
- --------------------------------------------------------------------------------

NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned sub-
sidiary of New York Life, is the Administrator for the Fund.

The Administrator and Adviser have voluntarily agreed to reduce their combined
fees to 0.55% on assets exceeding $500 million.

The Investment Advisory and Administration Agreements for the Fund also provide
that in the event the expenses of the Fund (including the fees for the Adviser
and Administrator, but excluding interest, taxes, organization expenses, liti-
gation and indemnification expenses, distribution fees and other extraordinary
expenses) for any fiscal year exceed the most restrictive limitation of certain
state securities commissions, the Adviser and the Administrator will each re-
duce their fee payable by the Fund by 50% of the amount of such excess up to
the extent of their fees. The expenses of the Fund did not exceed the most re-
strictive expense limitation for the year ended December 31, 1995.

DISTRIBUTION FEES. The Trust, on behalf of the Fund, has a Distribution Agree-
ment with NYLIFE Distributors Inc. (the "Distributor"). The Fund, with respect
to each class of shares, has adopted a Distribution Plan (the "Plan") in accor-
dance with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the
Class A Plan, the Distributor receives payments from a Fund at an annual rate
of 0.25% of the average daily net assets of the Fund's Class A shares, which is
an expense of the Class A shares of the Fund for distribution or service activ-
ities as designated by the Distributor. Pursuant to the Class B Plan, the
Fund's Class B shares are subject to the payment of Distributor a monthly dis-
tribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the lesser of:

The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund.

26
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------

NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years, its expenditures
may be less than the distribution fee.

SALES CHARGES. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $782,534 for the year
ended December 31, 1995.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges for the year ended December 31, 1995 in the amount of $1,183,376.

OTHER. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1995 were $66,046.

Fees for the cost of legal services provided to the Fund by the Office of Gen-
eral Counsel of New York Life amounted to $84,927 for the year ended December
31, 1995.

In connection with the placement of portfolio transactions for the year ended
December 31, 1995, NYLIFE Securities was paid commissions of $1,970.

Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the year ended December 31, 1995 is shown on
the statement of operations.

NOTE 4 -- FEDERAL INCOME TAX:

The Fund intends to elect, to the extent provided by the regulations, to treat
$692,686 of qualifying capital losses that arose during the year as if they
arose on January 1, 1996. Additionally, the Fund utilized $3,101,850 of capital
loss carryforward during the current year.

27
<PAGE>
- --------------------------------------------------------------------------------
THE MAINSTAY HIGH YIELD CORPORATE BOND FUND
- --------------------------------------------------------------------------------

NOTE 5 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):

NOTE 6 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):

<TABLE>
<CAPTION>
September 1
Year Ended through Year Ended
December 31 December 31 August 31
1995 1994* 1994
--------------- ----------- ----------
Class A Class B Class B
------- ------- ----------------------
<S> <C> <C> <C> <C>
Shares sold............................. 6,348 61,789 15,749 53,885
Shares issued in reinvestment of divi-
dends and distributions................ 334 14,700 2,952 8,976
----- ------ ------ ------
6,682 76,489 18,701 62,861
Shares redeemed......................... 1,274 25,907 8,537 23,277
----- ------ ------ ------
Net increase............................ 5,408 50,582 10,164 39,584
===== ====== ====== ======
</TABLE>
- -------
*The Fund changed its fiscal year end from August 31 to December 31.

28
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of
The MainStay Funds

In our opinion, the accompanying statement of assets and liabilities (including
the portfolio of investments) and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all mate-
rial respects, the financial position of the MainStay High Yield Corporate Bond
Fund, (one of the thirteen funds constituting The MainStay Funds, hereafter re-
ferred to as the "Fund") at December 31, 1995, the results of its operations
for the year then ended and the changes in its net assets and the financial
highlights for each of the periods presented, in conformity with generally ac-
cepted accounting principles. These financial statements and financial high-
lights (hereafter referred to as "financial statements") are the responsibility
of the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these fi-
nancial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1995 by correspondence with the cus-
todian and brokers and the application of alternative auditing procedures where
confirmations from brokers were not received, provide a reasonable basis for
the opinion expressed above.

Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 12, 1996

29
<PAGE>

- --------------------------------------------------------------------------------
The MainStay Funds
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
[horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of with strong growth potential level of risk for higher return potential
fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund risk/reward of the makeup and returns of the pate in the growth potential of stocks+
fund] S&P 500*
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating Offers broad diversification into You prefer the higher return potential
International Equity Fund risk/reward of international stock markets with of international equities or want to add
fund] an emphasis on risk control diversification to your domestic
investments++
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

<TABLE>
<CAPTION>
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
[horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of bonds, and money market instruments risk through diversification
fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating Seeks undervalued stocks with You seek to maximize total return from
Value Fund risk/reward of attractive dividends and a stimulus securities which may have more poten-
fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating Invests in convertible securities for You want income from securities that
Convertible Fund risk/reward of a special blend of long-term growth may offer growth potential if converted
fund] potential and dividend income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

# A small portion of the Fund's income may be subject to state and local taxes
and the Alternative Minimum Tax. Capital gains, if any, may also be taxed.

30
<PAGE>

<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
[horizontal bar Seeks a high level of current income You are seeking to combine high current
Government Fund graph indicating consistent with safety of principal income and safety of principal
risk/reward of primarily from U.S. government
funds] securities(S)
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
High Yield graph indicating An aggressive high yield bond You want to maximize current income
Corporate Bond Fund risk/reward of fund that is actively managed for and can accept the higher risk of
funds] maximum current income securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating Seeks high current yields and You prefer the higher return potential of
International Bond Fund risk/reward of competitive total return from non- international bonds or want to add
funds] U.S. bonds with an emphasis on diversification to your domestic
risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund risk/reward of stability of principal, and liquidity, competitive yields on cash you're plan-
funds] with free checkwriting|| ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

<TABLE>
<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
[horizontal bar Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund graph indicating exempt from regular federal bracket or want to pay less of your
risk/reward of income tax# investment income to the IRS
funds]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating Seeks high current income exempt You're a California resident and want to
California Tax Free Fund risk/reward of from both federal and California keep more of what you earn by investing
funds] income taxes consistent with for income that's double tax free#
preservation of capital#
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund risk/reward of from federal, New York State, and and want to keep more of what you earn
funds] New York City income taxes consis- with income that's double or triple tax
tent with preservation of capital# free#
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

If you would like to learn more about any of the MainStay Funds not covered by
your current prospectus, please call your Registered Representative. Your
Registered Representative can provide you with additional prospectuses which
contain more complete information including advisory fees, other expenses, and
share classes. Please read the prospectus carefully before you invest or send
money. Shares must be offered in the investor's state of residence.

31
<PAGE>

- --------------------------------------------------------------------------------
MainStay High Yield
Corporate Bond Fund
- --------------------------------------------------------------------------------

1995
annual
report

The year in review
fund results
& portfolio highlights

[LOGO OF MAINSTAY(R) FUNDS APPEARS HERE]

- --------------------------------------------------------------------------------
December 31, 1995
- --------------------------------------------------------------------------------

Officers & Trustees

Dechert Price & Rhoads
Legal Counsel

[LOGO OF MAINSTAY(R) FUNDS APPEARS HERE]

[LOGO OF NEW YORK LIFE APPEARS HERE]

This report is provided for the information of shareholders of the MainStay High
Yield Corporate Bond Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.

[LOGO OF RECYCLED PAPER APPEARS HERE] MSAN09 (296)

<PAGE>

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

Chairperson's Letter 2

MainStay International Bond Fund Highlights
and Portfolio Manager's Comments 4

Returns & Lipper Rankings 6

Year-by-Year Performance 7

$10,000 Invested in the MainStay International Bond
Fund Class A Shares vs. Salomon Brothers Non-U.S.
Dollar World Government Bond Index 7

$10,000 Invested in the MainStay International Bond
Fund Class B Shares vs. Salomon Brothers Non-U.S.
Dollar World Government Bond Index 7

Top 25 Security Holdings 8

10 Largest Purchases 9

10 Largest Sales 9

Quality Breakdown 10

Financial Statements 11

Notes to Financial Statements 17

Report of Independent Accountants 24

The MainStay Funds 26
<PAGE>

- --------------------------------------------------------------------------------
Chairperson's Letter
- --------------------------------------------------------------------------------

[PHOTO OF ALICE T. KANE APPEARS HERE]

Alice T. Kane, Chairperson

Report to Shareholders for the Year Ended December 31, 1995

With a faltering global economy in 1995, interest rates headed lower in Europe
and nearly sank to zero in Japan. The dollar, which had been in a downward
spiral for some time, finally bottomed out and showed unmistakable signs of
recovery. This environment was positive for many global bond investors,
particularly those allocated in the right countries and currencies.

In this context, we are pleased to report to you on the activities and
investment results of the MainStay(R) International Bond Fund for the twelve
months ended December 31, 1995. The Fund completed its first full calendar year
with total returns of 18.68% and 17.96% for Class A and Class B shares,
respectively, excluding all sales charges. This placed the Fund's Class A shares
slightly ahead of the average Lipper* general world income fund, which returned
18.05%.

Recognizing where to invest and when to hedge currencies played an important
role in the Fund's strong performance. Participation in some of the world's
strongest bond markets helped boost performance, and currency hedging in the
second quarter helped the Fund lock in gains and avoid profit erosion.

The Fund's management strategies, country diversification, and quality breakdown
are discussed on the following pages. At MainStay, we continue to believe that
international bond investing may represent an appropriate strategy for investors
seeking competitive overall returns with an acceptable level of risk+ and broad
geographic diversification.

2
<PAGE>

/s/Alice T. Kane
Alice T. Kane
January 1996

* See footnote on page 6 for more information on Lipper Analytical Services,
Inc.

+ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes in
U.S. or foreign tax or currency laws, and changes in monetary policies and
economic and political conditions in foreign countries.

3
<PAGE>

MainStay International Bond Fund

1995 Fund Highlights

. Annual total returns of 18.68% and 17.96% for Class A and Class B shares,
respectively, excluding all sales charges
. Class A shares outpaced the average Lipper general world income fund
. Overweighted in the top five bond markets of 1995

[PHOTO OF MICHAEL PERELSTEIN APPEARS HERE] Portfolio Manager--
Michael Perelstein

For the year ended December 31, 1995, the MainStay International Bond Fund
returned 18.68% and 17.96% for Class A and Class B shares, respectively,
excluding all sales charges. The Fund's results compared favorably with the
average Lipper general world income fund, which returned 18.05% for the year.

During the same period, the Salomon Brothers Non-U.S. Dollar World Government
Bond Index* returned 19.23%. While the Fund lagged this unmanaged index for the
year, in the fourth quarter, both share classes outpaced this index by more than
two-to-one.

The International Bond Fund's strong and consistent performance in 1995 was
attributable to solid country allocation and currency management decisions.
Starting the year with only modest currency hedging, the Fund captured gains
associated with the sharp appreciation of foreign currencies against the U.S.
dollar in the first four months of the year. Indeed, in March and April of 1995,
many foreign currencies appreciated to all-time highs against the U.S. dollar.
Beginning in the second quarter, we substantially raised our currency-hedging
posture to lock in these extraordinary currency gains and help protect the
portfolio from declining foreign currencies. These decisions paid off handsomely
in the second half of 1995, when many currencies began to weaken. The Japanese
yen was particularly weak in the second half of the year, as Japanese

Country Allocation
- --------------------------------------------------------------------------------
The amount of assets a Fund devotes to the various countries in which its
managers invest.

Currency Management/Hedging
- --------------------------------------------------------------------------------
The process of managing or "hedging" the risks associated with owning securities
denominated in different currencies, the relative values of which may change at
any time. There can be no assurance that currency hedging will be beneficial to
investors.

- ---------------
* See footnote on page 7 for more information on The Salomon Brothers Non-U.S.
Dollar World Government Bond Index.

4
<PAGE>

- --------------------------------------------------------------------------------
Highlights & Portfolio Manager's Comments
- --------------------------------------------------------------------------------

interest rates dropped to nearly zero percent at the short end and 2.5% at the
long end of the maturity spectrum.

Country allocation also contributed substantially to our performance. During the
year we emphasized high-yielding bond markets in Europe and in the dollar block
(i.e. Canada and Australia), and avoided low-yielding Japanese bonds and
politically- and inflation-sensitive U.K. bonds. Although our low exposure in
Japan was costly in the second quarter when the yen rallied, overall, these
strategies worked well. They were particularly effective in the second half of
the year, as Japanese capital flowed offshore in pursuit of higher yield. Our
portfolios were overweighted in the top five bond markets of 1995: Sweden,
Canada, Australia, Spain, and Denmark. Each returned at least 19% in local
terms, and the three highest yielding in Europe returned 30% or more in U.S.
dollar terms -- led by Sweden, with an extraordinary 35% return. By year-end,
Japan proved to be the worst-performing market and the U.K. was a conspicuous
laggard, so our underweighting these countries also added to our strong
performance.

As we begin 1996, we remain upbeat about the return prospects in international
bond markets on a hedged basis. European bond markets entered the bull market
with a three- to six-month lag behind the U.S., and are thus not as extended as
the U.S. bond market. With surprisingly weak economic indicators forcing
European central banks to aggressively cut interest rates, the economic
environment in Europe is ideal for bond investors. Our portfolio is thus heavily
weighted in European bonds, with a particular emphasis on the higher-yielding
markets, including some star performers of 1995, as well as Italy and Ireland.
We also continue to favor the Canadian and Australian bond markets, which offer
a substantial yield-pickup on U.S. bonds without any incremental inflation risk.
Finally, despite being the world's second largest bond market, Japan's low
yields are not attractive at this time.

The major threat we foresee for international bond investors in 1996 is currency
risk. Anticipating further declines in overvalued foreign currencies against the
U.S. dollar, we are seeking to help protect the portfolio with active currency
hedging, particularly in Europe.

Weighting
- --------------------------------------------------------------------------------
The proportion of a portfolio allocated to a specific market sector or country,
i.e. a fund is said to be overweighted in a country when that portion of the
portfolio is larger than the country's total bonds relative to the international
bond markets as a whole.

5
<PAGE>

<TABLE>
<CAPTION>
Fund average annual total returns *
- --------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 12/31/95
<S> <C> <C> <C>
Class A 18.68% n/a 14.26%
Class B 17.96% n/a 13.72%
- --------------------------------------------------------------------------------------------------------
<CAPTION>
Fund SEC returns*
- --------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 12/31/95
<S> <C> <C> <C>
Class A 13.34% n/a 10.28%
Class B 12.96% n/a 10.75%
- --------------------------------------------------------------------------------------------------------
<CAPTION>
Fund Lipper+ rankings and year-end Lipper category returns
- --------------------------------------------------------------------------------------------------------
Life of Fund/Class
1 year 5 years through 12/31/95
<S> <C> <C> <C>
Class A 55 out of 135 funds n/a 55 out of 135 funds
Class B 67 out of 135 funds n/a 65 out of 120 funds
Average Lipper general world
income fund 18.05% 8.09% 13.25%
- --------------------------------------------------------------------------------------------------------
<CAPTION>
Fund year-end per-share net asset values and distributions for 1995
- --------------------------------------------------------------------------------------------------------
NAV 12/31/95 Income Capital Gains
<S> <C> <C> <C>
Class A $10.43 $1.1465 $0.1290
Class B $10.45 $1.0634 $0.1290
- --------------------------------------------------------------------------------------------------------
</TABLE>
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gains and dividend distributions are reinvested. Performance figures
reflect the assumption of certain Fund expenses by the Fund's Administrator
and Adviser. Had these expenses not been assumed, total return figures would
have been lower. This expense limitation may be terminated or revised at any
time.

Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 4.5% and an annual 12b-1 fee of .25%.
Performance figures for this Class include the historical performance of the
Class B shares for periods from inception (9/12/94) up to 12/31/94.
Performance data for the two Classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are sold
with no initial sales charge, but are subject to a maximum Contingent
Deferred Sales Charge (CDSC) of up to 5% if shares are redeemed during the
first 6 years of purchase and an annual 12b-1 fee of up to 1%.

6
<PAGE>

- --------------------------------------------------------------------------------
Year-by-Year Performance*
- --------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]

Year ended 12/31 Total Return %
94 0.20%
95 Class A 18.68%
95 Class B 17.96%

- --------------------------------------------------------------------------------
$10,000 invested in the MainStay International Bond Fund vs. Salomon Brothers
Non-U.S. Dollar World Government Bond Index
- --------------------------------------------------------------------------------

Class A Shares

[LINE GRAPH APPEARS HERE]

Solomon
Brothers International
Index++ Bond Fund
---------- -------------
9/12/94 $10,000 $ 9,550
9/94 $10,198 $ 9,597
12/94 $10,256 $ 9,569
3/95 $11,737 $10,324
6/95 $12,311 $10,625
9/95 $12,012 $10,820
12/95 $12,261 $11,356

Class B Shares

[LINE GRAPH APPEARS HERE]

Solomon
Brothers International
Index++ Bond Fund
---------- -------------
9/12/94 $10,000 $10,000
9/94 $10,198 $10,050
12/94 $10,256 $10,020
3/95 $11,737 $10,809
6/95 $12,311 $11,091
9/95 $12,012 $11,273
12/95 $12,261 $11,419

---------------
The Class A graph assumes an initial investment of $10,000 made on 9/12/94
reflecting the effect of the 4.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,550. The Class B graph assumes
an initial investment of $10,000 made on 9/12/94. Returns reflect the
Contingent Deferred Sales Charge (CDSC) of 4.0%, as it would apply for the
period shown. (The $10,000 invested in the Salomon Brothers Non-U.S. Dollar
World Government Bond Index begins on 8/31/94.) Results include
reinvestment of all distributions at net asset value and the change in
share price for the stated period. Past performance is no guarantee of
future results.

++ The Salomon Brothers Non-U.S. Dollar World Government Bond Index is an
unmanaged index generally considered to be representative of the world bond
market.

7
<PAGE>

<TABLE>
<CAPTION>
Holding $ amount
<S> <C>
Kingdom of Denmark long-term government bond, due 11/15/98 $998,529
Bundesschatzanweisungen a German long-term government bond, due 2/20/97 846,149
Province of Ontario long-term government bond, due 12/8/03 755,608
Buoni Poliennali del Tesoro an Italian long-term government bond, due 3/1/01 678,640
International Bank of Reconstruction & Development a global long-term bond, due 4/12/05 668,110
France Obligations Assimilables du Tresor long-term government bond, due 11/25/02 663,983
Australian Government long-term government bond, due 2/15/06 613,079
Treuhandanstalt a German long-term government bond, due 12/2/02 611,817
New South Wales Treasury Corp. an Australian long-term government bond, due 2/1/98 595,862
Republic of Austria long-term government bond, due 1/24/05 586,304
Treuhand-Obligationen a German long-term government bond, due 9/24/98 572,101
France Obligations Assimilables du Tresor long-term government bond, due 2/27/04 513,050
Certificati di Credito del Tesoro an Italian long-term government bond, due 10/1/01 504,000
Banque Nationale de Paris a French long-term government bond, due 11/4/99 494,957
Province of British Columbia a Canadian long-term government bond, due 8/23/05 493,932
France Obligations Assimilables du Tresor long-term government bond, due 3/28/00 492,644
Treuhand-Obligationen a German long-term government bond, due 11/25/99 454,790
Swedish Government long-term government bond, due 4/20/09 420,685
Swedish Government long-term government bond, due 1/23/97 402,012
Buoni Poliennali del Tesoro an Italian long-term government bond, due 4/1/99 380,035
Canadian Government long-term government bond, due 9/1/00 372,626
Kingdom of Denmark long-term government bond, due 12/15/04 368,437
France Obligations Assimilables du Tresor long-term government bond, due 4/25/05 368,374
Spanish Government long-term government bond, due 1/15/02 368,234
Spanish Government long-term government bond, due 3/25/00 360,453
</TABLE>

Note: This breakdown is provided for informational purposes only. This Fund's
holdings may change daily. A shareholder owns shares of the Fund but does not
own a direct interest in any of the specific securities listed above. All
securities listed indicate total purchases/sales for the issuer for the year.
Excludes short-term securities. See financial statements for specific type of
security held.

8
<PAGE>

- --------------------------------------------------------------------------------
10 Largest Purchases in 1995
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Holding amount of purchase
<S> <C>
New South Wales Treasury Corp. Australian long-term government bond, due 2/1/98 $1,267,567
Bundesschatzanweisungen German long-term government bond, due 2/20/97 866,137
International Bank of Reconstruction & Development a global long-term bond, due 4/12/05 798,721
Province of Ontario long-term government bond, due 1/10/01 795,472
Province of Ontario long-term government bond, due 12/8/03 754,489
Certificati di Credito del Tesoro Italian long-term government bond, due 1/20/98 691,411
France Obligations Assimilables du Tresor long-term government bond, due 11/25/02 675,604
Certificati di Credito del Tesoro Italian long-term government bond, due 10/1/01 656,830
Buoni Poliennali del Tesoro Italian long-term government bond, due 3/1/01 622,566
Kingdom of Denmark long-term government bond, due 11/15/98 604,639
</TABLE>
- --------------------------------------------------------------------------------
10 Largest Sales in 1995
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Holding amount of sale
<S> <C>
Australian Government long-term government bond, due 9/15/04 $ 936,347
Treuhand-Obligationen German long-term government bond, due 6/25/98 807,452
Province of Ontario Canadian long-term government bond, due 1/10/01 803,205
Certificati di Credito del Tesoro Italian long-term government bond, due 1/20/98 731,878
Buoni Poliennali del Tesoro Italian long-term government bond, due 9/1/97 718,274
Treuhandanstalt German long-term government bond, due 9/9/04 715,800
Bundesschatzanweisungen German long-term government bond, due 7/22/02 690,354
Australian Government long-term government bond, due 3/15/97 637,791
New South Wales Treasury Corp. Australian long-term government bond, due 2/1/98 631,622
Republic of Deutschland German long-term government bond, due 1/22/01 594,120
</TABLE>

Note: This breakdown is provided for informational purposes only. This Fund's
holdings may change daily. A shareholder owns shares of the Fund but does not
own a direct interest in any of the specific securities listed above. All
securities listed indicate total purchases/sales for the issuer for the year.
Excludes short-term securities. See financial statements for specific type of
security held.

9
<PAGE>

- --------------------------------------------------------------------------------
Quality Breakdown* as of 12/31/95
- --------------------------------------------------------------------------------

[PIE CHART APPEARS HERE]

AAA 35.0%
AA 36.1%
A 10.3%
Cash & Equivalents 18.6%

Note: actual percentages will vary over time
*Bond quality ratings provided by Standard & Poor's.
See the prospectus for details.

10
<PAGE>

PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 1995

<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------
LONG-TERM GOVERNMENT BONDS (81.4%)+
<S> <C> <C>

AUSTRALIA (6.4%)
Australian Government
Series 808
8.75%, due 8/15/08................................. A$ 170,000 $ 130,548
Series 206
10.00%, due 2/15/06................................ 735,000 613,079
Series 1101
12.00%, due 11/15/01............................... 260,000 230,288
New South Wales Treasury Corp.
Series Euro
7.50%, due 2/1/98.................................. 800,000 595,862
-----------
1,569,777
-----------
AUSTRIA (4.3%)
Republic of Austria
Series 3
5.75%, due 3/22/99................................. AS 2,100,000 215,624
Series 93-1
7.00%, due 1/20/03................................. 2,500,000 260,792
Series 95-1
7.50%, due 1/24/05................................. 5,500,000 586,304
-----------
1,062,720
-----------
BELGIUM (3.0%)
Kingdom of Belgium
Series 15
6.75%, due 5/25/97................................. BF 5,000,000 176,458
Series 12
8.00%, due 12/24/12................................ 5,000,000 178,106
Series 10
8.75%, due 6/25/02................................. 5,000,000 193,788
Series 3
10.00%, due 8/2/00................................. 5,000,000 200,856
-----------
749,208
-----------
CANADA (8.6%)
Canadian Government
Series A76
9.00%, due 6/1/25.................................. C$ 150,000 128,135
9.75%, due 6/1/01.................................. 395,000 329,863
Series A33
11.50%, due 9/1/00................................. 425,000 372,626
Province of British Columbia
8.00%, due 8/23/05................................. 640,000 493,932
</TABLE>

- -------
+ Percentages indicated are based on Fund net assets.

<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>

CANADA (CONTINUED)
Province of Ontario
7.75%, due 12/8/03................................ C$ 1,000,000 $ 755,608
Series GH
10.875%, due 1/10/01.............................. 55,000 47,185
-----------
2,127,349
-----------
DENMARK (6.8%)
Kingdom of Denmark
7.00%, due 12/15/04............................... DK 2,050,000 368,437
7.00%, due 11/10/24............................... 1,000,000 160,959
8.00%, due 11/15/01............................... 800,000 154,535
9.00%, due 11/15/98............................... 5,080,000 998,529
-----------
1,682,460
-----------
FRANCE (12.0%)
France Bons du Tresor Negociables
5.75%, due 11/12/98............................... FF 1,220,000 252,488
8.50%, due 11/12/97............................... 1,500,000 324,821
France Obligations Assimilables du Tresor
6.00%, due 10/25/25............................... 440,000 74,677
7.50%, due 4/25/05................................ 1,700,000 368,374
8.25%, due 2/27/04................................ 2,262,000 513,050
8.50%, due 3/28/00................................ 2,190,000 492,644
8.50%, due 11/25/02............................... 2,900,000 663,983
8.50%, due 12/26/12............................... 1,190,000 278,059
-----------
2,968,096
-----------
GERMANY (14.0%)
Bundesschatzanweisungen
6.50%, due 2/20/97................................ DM 1,175,000 846,149
International Bank of Reconstruction & Development
7.125%, due 4/12/05............................... 900,000 668,110
Republic of Deutschland
6.25%, due 1/4/24................................. 475,000 309,138
Treuhand-Obligationen
5.625%, due 9/24/98............................... 790,000 572,101
7.00%, due 11/25/99............................... 600,000 454,790
Treuhandanstalt
7.375%, due 12/2/02............................... 800,000 611,817
-----------
3,462,105
-----------
IRELAND (3.2%)
Irish Government
6.25%, due 4/1/99................................. IP 95,000 150,969
8.25%, due 8/18/15................................ 58,000 98,770
8.75%, due 7/27/97................................ 95,000 158,582
8.75%, due 9/30/12................................ 95,000 168,936
9.25%, due 7/11/03................................ 125,000 223,285
-----------
800,542
-----------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

11
<PAGE>

THE MAINSTAY INTERNATIONAL BOND FUND

<TABLE>
<CAPTION>
Principal
Amount Value
--------------------------
LONG-TERM GOVERNMENT BONDS (CONTINUED)
<S> <C> <C>

ITALY (10.3%)
Buoni Poliennali del Tesoro
8.50%, due 8/1/97.................................. IL 170,000,000 $ 104,744
8.50%, due 4/1/99.................................. 630,000,000 380,035
8.50%, due 1/1/04.................................. 485,000,000 272,793
9.00%, due 10/1/98................................. 250,000,000 153,893
9.00%, due 11/1/23................................. 165,000,000 86,351
11.00%, due 6/1/03................................. 545,000,000 352,451
12.50%, due 3/1/01................................. 1,000,000,000 678,640
Certificati di Credito del Tesoro
11.20%, due 10/1/01................................ 800,000,000 504,000
-----------
2,532,907
-----------
NETHERLANDS (0.9%)
Netherlands Government
6.25%, due 2/15/97................................. NG 55,000 35,272
7.75%, due 1/15/00................................. 85,000 58,461
7.75%, due 3/1/05.................................. 80,000 55,896
8.25%, due 9/15/07................................. 105,000 75,983
-----------
225,612
-----------
SPAIN (5.4%)
Spanish Government
8.30%, due 12/15/98................................ SP 4,000,000 32,247
10.25%, due 11/30/98............................... 17,000,000 143,676
10.50%, due 10/30/03............................... 28,500,000 245,098
11.30%, due 1/15/02................................ 41,490,000 368,234
11.90%, due 7/15/96................................ 22,090,000 184,418
12.25%, due 3/25/00................................ 40,000,000 360,453
-----------
1,334,126
-----------
SWEDEN (6.5%)
Banque Nationale de Paris
Series EMTN
11.00%, due 11/4/99................................ SK 3,050,000 494,957
Swedish Government
Series 1034
9.00%, due 4/20/09................................. 2,700,000 420,685
Series 1033
10.25%, due 5/5/03................................. 700,000 116,521
Series 1020
10.75%, due 1/23/97................................ 2,600,000 402,012
Series 1030
13.00%, due 6/15/01................................ 900,000 163,455
-----------
1,597,630
-----------
Total Long-Term Government Bonds (Cost $18,703,277). 20,112,532
-----------
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
-------------------------------
<S> <C> <C>

SHORT-TERM INVESTMENT (4.5%)
COMMERCIAL PAPER (4.5%)
UNITED STATES (4.5%)
Hasbro Corp.
5.70%, due 1/2/96.............................. $ 1,100,000 $ 1,099,826
-----------
Total Short-Term Investment
(Cost $1,099,826).............................. 1,099,826
-----------
Total Investments
(Cost $19,803,103) (a)......................... 85.9% 21,212,358 (b)
Cash and Other Assets,
Less Liabilities............................... 14.1 3,493,631
-------------- -----------
Net Assets...................................... 100.0% $24,705,989
============== ===========
</TABLE>

- -------
(a) The cost for Federal income tax purposes is $19,833,944.
(b) At December 31, 1995 net unrealized appreciation for securities was
$1,378,414, based on cost for Federal income tax purposes. This consisted
of aggregate gross unrealized appreciation for all investments on which
there was an excess of market value over cost of $1,394,063 and aggregate
gross unrealized depreciation for all investments on which there was an
excess of cost over market value of $15,649.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

12
<PAGE>

PORTFOLIO OF INVESTMENTS -- CONTINUED

<TABLE>
<CAPTION>
Contract In Delivery Gross Unrealized
To Deliver Exchange For Date Appreciation
- --------------- --------------- -------- ----------------
<S> <C> <C> <C>

BF 19,125,000 DM 929,481 1/30/96 $ 553
DM 3,203,100 $ 2,250,000 1/5/96 10,351
DM 817,673 IL 928,000,000 1/23/96 9,903
DM 734,859 FF 2,555,000 2/2/96 7,694
DM 1,673,504 $ 1,205,000 2/5/96 31,937
DM 571,539 DK 2,225,000 2/9/96 1,300
DM 176,572 $ 128,500 3/25/96 4,598
DM 6,175,000 $ 4,379,433 4/18/96 41,230
DM 5,185,000 $ 3,697,102 5/3/96 51,725
DM 502,787 $ 355,000 6/10/96 845
DM 927,349 $ 655,000 6/20/96 1,463
(Yen)64,706,400 $ 645,000 7/2/96 1,430
(Pounds)671,500 DM 1,495,169 1/3/96 2,764
$ 470,000 DM 683,427 1/5/96 7,861
$ 415,000 A$ 563,859 2/26/96 3,246
$ 355,000 A$ 479,783 4/2/96 337
--------
177,237
--------
<CAPTION>
Contract In Delivery Gross Unrealized
To Deliver Exchange For Date Depreciation
- --------------- --------------- -------- ----------------
<S> <C> <C> <C>

A$ 2,149,000 $ 1,590,260 2/26/96 3,776
C$ 535,000 $ 387,681 3/14/96 4,519
DK 9,485,000 DM 2,437,677 2/9/96 4,665
DM 1,507,518 (Pounds)671,500 1/3/96 11,397
DM 4,099,063 $ 2,815,000 1/5/96 51,119
DM 1,949,182 $ 1,330,000 2/21/96 36,082
DM 205,430 SK 942,800 3/5/96 2,520
DM 752,206 $ 520,000 3/25/96 7,831
DM 1,484,050 (Pounds)670,000 4/2/96 3,891
FF 4,521,103 DM 1,296,442 2/2/96 16,348
IP 484,000 (Pounds)495,931 1/3/96 5,878
IP 479,651 (Pounds)495,000 4/2/96 2,180
IL 1,095,000 DM 954,373 1/23/96 19,003
(Pounds)495,931 IP 479,995 1/3/96 541
SP 82,000,000 DM 934,154 1/22/96 19,705
$ 759,487 (Yen)77,050,000 2/5/96 8,327
--------
197,782
--------
Net Depreciation.................................... $ 20,545
========
</TABLE>

(d) Foreign cash held at December 31, 1995:

<TABLE>
<CAPTION>
Currency Cost Value
- --------------- ---------- ----------
<S> <C> <C>
A$ 79,836 $ 59,087 $ 59,390
AS 2,697,115 275,468 267,821
BF 2,046,512 70,523 69,538
C$ 428,452 314,138 314,138
DK 1,489,452 272,852 268,757
DM 352,771 244,444 246,469
FF 140,309 28,481 28,690
IP 4,849 7,817 7,771
IL1,280,010,286 804,306 806,407
(Yen)11,588,400 115,710 112,338
MP 3 1 0(e)
NG 13,286 8,127 8,288
(Pounds) 1 2 1
SP 6,487,702 52,799 53,478
SK 3,808,213 571,060 574,618
---------- ----------
$2,824,815 $2,817,704
========== ==========
</TABLE>

(e) Less than one dollar.
(f) The following abbreviations are used throughout the portfolio.
A$--Australian Dollar
AS--Austrian Schilling
BF--Belgian Franc
C$--Canadian Dollar
DK--Danish Krone
DM--Deutsche Mark
FF--French Franc
IP--Irish Punt
IL--Italian Lira
Yen--Japanese Yen
MP--Mexican Peso
NG--Netherland Guilder
Pounds--Pound Sterling
SP--Spanish Peseta
SK--Swedish Krona
$--U.S. Dollar

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

13
<PAGE>

THE MAINSTAY INTERNATIONAL BOND FUND

STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1995

<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (Note 2)
(identified cost $19,803,103)................................... $21,212,358
Cash denominated in foreign currencies
(identified cost $2,824,815).................................... 2,817,704
Cash............................................................. 355,652
Receivables:
Fund shares sold................................................ 845,883
Interest........................................................ 690,686
Unrealized appreciation on foreign currency contracts............ 177,237
Unamortized organization expense (Note 1)........................ 45,126
Other assets..................................................... 21
-----------
Total assets................................................... 26,144,667
-----------
LIABILITIES:
Payables:
Investment securities purchased................................. 503,931
NYLIFE Distributors............................................. 15,998
Organization.................................................... 6,527
Transfer agent.................................................. 6,276
Adviser......................................................... 5,090
Custodian....................................................... 4,000
Trustees........................................................ 161
Accrued expenses................................................. 34,680
Dividend payable................................................. 664,233
Unrealized depreciation on foreign currency contracts............ 197,782
-----------
Total liabilities.............................................. 1,438,678
-----------
Net assets....................................................... $24,705,989
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized
Class A......................................................... $ 11,016
Class B......................................................... 12,638
Additional paid-in capital....................................... 24,092,089
Accumulated distribution in excess of net realized gain on
investments..................................................... (28,222)
Accumulated distribution in excess of net realized gain on
foreign currency transactions................................... (767,888)
Net unrealized appreciation on investments....................... 1,409,255
Net unrealized depreciation on translation of assets and
liabilities in foreign currencies............................... (22,899)
-----------
Net assets....................................................... $24,705,989
===========
CLASS A
Net assets applicable to outstanding shares...................... $11,494,439
===========
Shares of beneficial interest outstanding........................ 1,101,568
===========
Net asset value per share outstanding............................ $ 10.43
Maximum sales charge (4.50% of offering price)................... 0.49
-----------
Maximum offering price per share outstanding..................... $ 10.92
===========
CLASS B
Net assets applicable to outstanding shares...................... $13,211,550
===========
Shares of beneficial interest outstanding........................ 1,263,826
===========
Net asset value per share outstanding............................ $ 10.45
===========
</TABLE>

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest (a)..................................................... $1,641,123
----------
Expenses: (Note 2)
Advisory (Note 3)................................................ 94,562
Distribution--Class B (Note 3)................................... 70,098
Administration (Note 3).......................................... 52,535
Service (Note 3)................................................. 52,535
Transfer agent................................................... 36,830
Auditing......................................................... 30,000
Registration..................................................... 28,865
Custodian........................................................ 22,164
Legal............................................................ 17,221
Amortization of organization expense............................. 14,066
Shareholder communication........................................ 13,894
Recordkeeping (Note 3)........................................... 12,000
Trustees......................................................... 845
Miscellaneous.................................................... 7,523
----------
Total expenses before reimbursement............................. 453,138
Expense reimbursement from Administrator and Adviser (Note 3)..... (63,041)
----------
Net expenses.................................................... 390,097
----------
Net investment income............................................. 1,251,026
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized gain from:
Security transactions............................................ 375,199
Foreign currency transactions.................................... 231,524
----------
Net realized gain on investments and foreign currency
transactions..................................................... 606,723
----------
Net change in unrealized appreciation on investments:
Security transactions............................................ 1,599,712
Translation of assets and liabilities in foreign currencies...... 7,928
----------
Net unrealized gain on investments and foreign currencies......... 1,607,640
----------
Net realized and unrealized gain on investments and foreign
currency transactions............................................ 2,214,363
----------
Net increase in net assets resulting from operations.............. $3,465,389
==========
</TABLE>

- -------
(a) Interest recorded net of foreign withholding taxes of $31,766.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

14
<PAGE>

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
September 13*
Year ended through
December 31 December 31
1995 1994
------------ -------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income............................. $ 1,251,026 $ 193,261
Net realized gain on investments.................. 375,199 2,805
Net realized gain (loss) on foreign currency
transactions..................................... 231,524 (9,314)
Net change in unrealized appreciation
(depreciation) on investments.................... 1,599,712 (190,457)
Net change in unrealized appreciation
(depreciation) on translation of assets and
liabilities in foreign currencies................ 7,928 (30,827)
------------ -----------
Net increase (decrease) in net assets resulting
from operations.................................. 3,465,389 (34,532)
------------ -----------
Dividends and distributions to shareholders:
From net investment income:
Class A........................................... (646,470) --
Class B........................................... (598,457) (192,851)
From net realized gain on investments and foreign
currency transactions:
Class A........................................... (302,837) --
Class B........................................... (303,886) --
In excess of net realized gain on investments and
foreign currency transactions:
Class A........................................... (413,406) --
Class B........................................... (382,704) --
------------ -----------
Total dividends and distributions to
shareholders.................................... (2,647,760) (192,851)
------------ -----------
Capital share transactions:
Net proceeds from sale of shares:
Class A........................................... 10,769,762 --
Class B........................................... 6,263,522 7,547,835
Net asset value of shares issued to shareholders
in reinvestment of dividends and distributions:
Class A........................................... 209,585 --
Class B........................................... 1,152,182 85,354
------------ -----------
18,395,051 7,633,189
Cost of shares redeemed:
Class A........................................... (30,768) --
Class B........................................... (11,631,056) (250,673)
------------ -----------
Increase in net assets derived from capital share
transactions.................................... 6,733,227 7,382,516
------------ -----------
Net increase in net assets....................... 7,550,856 7,155,133
NET ASSETS:
Beginning of period................................ 17,155,133 10,000,000
------------ -----------
End of period...................................... $ 24,705,989 $17,155,133
============ ===========
Accumulated distribution in excess of net
investment income................................. $ -- $ (6,099)
============ ===========
</TABLE>

- -------
*Commencement of Operations.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

15
<PAGE>

THE MAINSTAY INTERNATIONAL BOND FUND

FINANCIAL HIGHLIGHTS
(SELECTED PER SHARE DATA AND RATIOS)

<TABLE>
<CAPTION>
Class B
-------------
Class A Class B September 13*
-------- -------- through
Year ended December 31
December 31, 1995 1994
------------------ -------------
<S> <C> <C> <C>
Net asset value at beginning of period....... $ 9.90 $ 9.90 $ 10.00
-------- -------- -------
Net investment income........................ 1.15 1.06 0.12
Net realized and unrealized gain (loss) on
investments................................. 0.59 0.61 (0.08)
Net realized and unrealized gain (loss) on
foreign currency transactions............... 0.07 0.07 (0.02)
-------- -------- -------
Total from investment operations............. 1.81 1.74 0.02
-------- -------- -------
Less dividends and distributions:
From net investment income................... (0.61) (0.56) (0.12)
From net realized gain on investments and
foreign currency transactions............... (0.28) (0.28) --
In excess of net realized gain on investments
and foreign currency transactions........... (0.39) (0.35) --
-------- -------- -------
Total dividends and distributions............ (1.28) (1.19) (0.12)
-------- -------- -------
Net asset value at end of period............. $ 10.43 $ 10.45 $ 9.90
======== ======== =======
Total investment return (a).................. 18.68% 17.96% 0.20%
Ratios (to average net assets)/Supplemental
Data:
Net investment income....................... 5.6% 4.9% 4.8%+
Net expenses................................ 1.5% 2.2% 2.8%+
Expenses (before reimbursement)............. 1.8% 2.5% 3.1%+
Portfolio turnover rate...................... 103% 103% 4%
Net assets at end of period (in 000's)....... $ 11,494 $ 13,212 $17,155
</TABLE>

- -------
* Commencement of Operations.
+ Annualized
(a) Total return is calculated exclusive of sales charges and is not
annualized.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

16
<PAGE>

NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- ORGANIZATION AND BUSINESS:

The Fund's investment objective is to seek competitive overall return commensu-
rate with an acceptable level of risk by investing primarily in a portfolio of
non-U.S. (primarily government) debt securities.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:

The following is a summary of significant accounting policies followed by the
Fund:

SECURITIES VALUATION. Portfolio securities of the International Bond Fund are
stated at value determined (a) by appraising debt securities at prices supplied
by a pricing agent selected by the Adviser, whose prices reflect broker/dealer
supplied valuations and electronic data processing techniques if those prices
are deemed by the Adviser to be representative of market values at the regular
close of business of the New York Stock Exchange, and (b) by appraising all
other securities and other assets, including debt securities for which prices
are supplied by a pricing agent but are not deemed by the Adviser to be repre-
sentative of market values, but excluding money market instruments with a re-
maining maturity of sixty days or less

17
<PAGE>

THE MAINSTAY INTERNATIONAL BOND FUND

and including restricted securities and securities for which no market quota-
tions are available, at fair value in accordance with procedures approved by
the Trustees. Short-term securities which mature in more than 60 days are val-
ued at current market quotations. Short-term securities which mature in 60 days
or less are valued at amortized cost if their term to maturity at purchase was
60 days or less, or by amortizing the difference between market value on the
61st day prior to maturity and value on maturity date if their original term to
maturity at purchase exceeded 60 days.

Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities (foreign ex-
changes and over-the-counter markets) and the regular close of the New York
Stock Exchange will not be reflected in the Fund's calculation of net asset
value unless the Adviser believes that the particular event would materially
affect net asset value, in which case an adjustment would be made.

FORWARD CURRENCY CONTRACTS. A forward currency contract is an agreement to buy
or sell currencies of different countries on a specified future date at a spec-
ified rate. During the period the forward contract is open, changes in the
value of the contract are recognized as unrealized gains or losses by "marking
to market" such contract on a daily basis to reflect the market value of the
contract at the end of each day's trading. When the forward contract is closed,
the Fund records a realized gain or loss equal to the difference between the
proceeds from (or cost of) the closing transaction and the Fund's basis in the
contract. The International Bond Fund enters into forward foreign currency ex-
change contracts in order to hedge its foreign currency denominated investments
and receivables and payables against adverse movements in future foreign ex-
change rates.

The use of forward contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the statement of assets and liabili-
ties. The contract or notional amounts reflect the extent of the Fund's in-
volvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. The
unrealized appreciation on forward contracts reflects the Fund's exposure at
year end to credit loss in the event of a counterparty's failure to perform its
obligations.

ORGANIZATION COSTS. Costs incurred in connection with the Fund's initial organ-
ization and registration totalled approximately $61,000 and are being amortized
over 60 months beginning at the commencement of operations.

18
<PAGE>

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

uted net realized gain on foreign currency transactions to accumulated net in-
vestment loss due to the tax treatment of foreign currency gains.

Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The International Bond Fund intends to de-
clare and pay dividends monthly.

Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.

SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transac-
tions on the trade date. Realized gains and losses on security transactions are
determined using the identified cost method. Interest income is accrued daily
except when collection is not expected. Discounts on securities purchased for
the Fund are accreted on the constant yield method over the life of the respec-
tive securities, or, if applicable, over the period to the first date of call.

FOREIGN CURRENCY INVESTING. The books and records of the Fund are kept in U.S.
dollars. Foreign currency amounts are translated into U.S. dollars at the mean
between the buying and selling rates last quoted by any major U.S. bank at the
following dates:

(i) market value of investment securities, other assets and liabilities--at the
valuation date,

(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.

The assets and liabilities of the International Bond Fund are presented at the
exchange rates and market values at the close of the year. The changes in net
assets arising from fluctuations in exchange rates and the changes in net as-
sets resulting from changes in market prices are not separately presented. How-
ever, gains and losses from certain foreign currency transactions are treated
as ordinary income for Federal income tax purposes.

19
<PAGE>

THE MAINSTAY INTERNATIONAL BOND FUND

Net realized gain (loss) on foreign currency transactions represents net gains
and losses on forward currency contracts, net currency gains or losses realized
as a result of differences between the amounts of securities sale proceeds or
purchase cost, dividends, interest and withholding taxes as recorded on the
Fund's books, and the U.S. dollar equivalent amount actually received or paid.
Net currency gains or losses from valuing such foreign currency denominated as-
sets and liabilities at year-end exchange rates are reflected in unrealized
foreign exchange gains.

There are certain risks involved in investing in foreign securities that are in
addition to the usual risks inherent in domestic instruments. These risks in-
clude those resulting from future adverse political and economic developments
and possible imposition of currency exchange blockages or other foreign govern-
mental laws or restrictions.

NOTE 3 -- FEES AND RELATED PARTY POLICIES:

NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned sub-
sidiary of New York Life, is the Administrator for the Fund.

The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an an-
nual rate of the average daily net assets of 0.25% and 0.15%, respectively. The
Adviser and Administrator each agreed that a portion of its fees, totalling
$63,041 for the year ended December 31, 1995, would not be imposed, pursuant to
the applicable contracts, until such time as the Fund reaches $50 million in
net assets. Had the net assets reached $50 million, the Adviser and Administra-
tor would have been paid 0.45% and 0.25%, respectively.

20
<PAGE>

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

the Adviser and the Administrator each will reduce their fee payable by the
Fund by 50% of the amount of such excess up to the extent of their fees. The
expenses of the Fund did not exceed the most restrictive expense limitation for
the year ended December 31, 1995.

The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund.

SALES CHARGES. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $10,984 for the year
ended December 31, 1995.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges for the year ended December 31, 1995 in the amount of $6,472.

21
<PAGE>

THE MAINSTAY INTERNATIONAL BOND FUND

CAPITAL. At December 31, 1995 NYLIFE Distributors held shares of Class A of the
Fund with a net asset value of $10,559,000.

OTHER. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1995 were $1,928.

Fees for the cost of legal services provided to the Fund by the Office of Gen-
eral Counsel of New York Life amounted to $1,215 for the year ended December
31, 1995.

Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the year ended December 31, 1995 is shown on
the statement of operations.

NOTE 4 -- FEDERAL INCOME TAX:

The Fund intends to elect, to the extent provided by the regulations, to treat
$796,575 of qualifying losses on foreign exchange transactions that arose dur-
ing the year as if they arose on January 1, 1996.

NOTE 5 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):

22
<PAGE>

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

NOTE 6 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):

<TABLE>
<CAPTION>
September 13*
Year Ended through
December 31 December 31
1995 1994
--------------- -------------
Class A Class B Class B
------- ------- -------------
<S> <C> <C> <C>
Shares sold...................................... 1,084 588 1,750
Shares issued in reinvestment of dividends and
distributions................................... 20 110 9
----- ----- -----
1,104 698 1,759
Shares redeemed.................................. 2 1,168 25
----- ----- -----
Net increase (decrease).......................... 1,102 (470) 1,734
===== ===== =====
</TABLE>

- -------
*Commencement of Operations.

23
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Trustees and
Shareholders of The MainStay Funds

In our opinion, the accompanying statement of assets and liabilities (including
the portfolio of investments) and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all mate-
rial respects, the financial position of the MainStay International Bond Fund,
(one of the thirteen funds constituting The MainStay Funds, hereafter referred
to as the "Fund") at December 31, 1995, the results of its operations for the
year then ended and the changes in its net assets and the financial highlights
for each of the periods presented, in conformity with generally accepted ac-
counting principles. These financial statements and financial highlights (here-
after referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these finan-
cial statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which re-
quire that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and dis-
closures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall finan-
cial statement presentation. We believe that our audits, which included confir-
mation of securities at December 31, 1995 by correspondence with the custodian
and brokers and the application of alternative auditing procedures where con-
firmations from brokers were not received, provide a reasonable basis for the
opinion expressed above.

Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 12, 1996

24
<PAGE>

This page intentionally left blank

25
<PAGE>

- --------------------------------------------------------------------------------
The MainStay Funds
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund GRAPH INDICATING the makeup and returns of the pate in the growth potential of stocks+
RISK/REWARD OF FUND] S&P 500*
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Offers broad diversification into You prefer the higher return potential
International Equity Fund GRAPH INDICATING international stock markets with of international equities or want to add
RISK/REWARD OF FUND] an emphasis on risk control diversification to your domestic
investments++
- ------------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[HORIZONTAL BAR Balances current income with growth You seek a combination of income and
Total Return Fund GRAPH INDICATING opportunities by investing in stocks, growth potential and want to manage
RISK/REWARD OF FUND] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Seeks undervalued stocks with You seek to maximize total return from
Value Fund GRAPH INDICATING attractive dividends and a stimulus securities which may have more poten-
RISK/REWARD OF FUND] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Invests in convertible securities for You want income from securities that
Convertible Fund GRAPH INDICATING a special blend of long-term growth may offer growth potential if converted
RISK/REWARD OF FUND] potential and dividend income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

# A small portion of the Fund's income may be subject to state and local taxes
and the Alternative Minimum Tax. Capital gains, if any, may also be taxed.

26
<PAGE>

INCOME FUNDS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------

High Yield [HORIZONTAL BAR An aggressive high yield bond You want to maximize current income
Corporate Bond Fund GRAPH INDICATING fund that is actively managed for and can accept the higher risk of
RISK/REWARD OF FUND] maximum current income securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Seeks high current yields and You prefer the higher return potential
International Bond Fund GRAPH INDICATING competitive total return from non- of international bonds or want to add
RISK/REWARD OF FUND] U.S. bonds with an emphasis on diversification to your domestic
risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund GRAPH INDICATING stability of principal, and liquidity, competitive yields on cash you're plan-
RISK/REWARD OF FUND] with free checkwriting|| ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Seeks high current income exempt You're a California resident and want to
California Tax Free Fund GRAPH INDICATING from both federal and California keep more of what you earn by investing
RISK/REWARD OF FUND] income taxes consistent with for income that's double tax free#
preservation of capital#
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund GRAPH INDICATING from federal, New York State, and and want to keep more of what you earn
RISK/REWARD OF FUND] New York City income taxes consis- with income that's double or triple tax
tent with preservation of capital# free#
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

If you would like to learn more about any of the MainStay Funds not covered by
your current prospectus, please call your Registered Representative. Your
Registered Representative can provide you with additional prospectuses which
contain more complete information including advisory fees, other expenses, and
share classes. Please read the prospectus carefully before you invest or send
money. Shares must be offered in the investor's state of residence.

27
<PAGE>

- ----------------------------------------------------------------------
MainStay International
Bond Fund
- ----------------------------------------------------------------------

1995
annual report

The year in review
fund results
& portfolio highlights

[LOGO OF MAINSTAY(R) FUNDS APPEARS HERE]

- ----------------------------------------------------------------------
December 31, 1995
- ----------------------------------------------------------------------

Officers & Trustees

Dechert Price & Rhoads
Legal Counsel

[LOGO OF MAINSTAY(R) FUNDS APPEARS HERE]

[LOGO OF NEW YORK LIFE APPEARS HERE]

This report is provided for the information of shareholders of the MainStay
International Bond Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.

[LOGO OF RECYCLED PAPER APPEARS HERE] MSAN10 (296)

<PAGE>

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

<S> <C>
Chairperson's Letter 2

MainStay International Equity Fund
Highlights & Portfolio Managers' Comments 4

Returns & Lipper Rankings 6

Year-by-Year Performance 7

$10,000 Invested in the MainStay International Equity
Fund Class A Shares vs. Morgan Stanley EAFE Index 7

$10,000 Invested in the MainStay International Equity
Fund Class B Shares vs. Morgan Stanley EAFE Index 7

Top 25 Equity Holdings 8

10 Largest Purchases 9

10 Largest Sales 9

Diversification by Country -- Top 5 10

Portfolio Composition 10

Financial Statements 11

Notes to Financial Statements 21

Report of Independent Accountants 27

The MainStay Funds 28
</TABLE>
<PAGE>

- --------------------------------------------------------------------------------
Chairperson's Letter
- --------------------------------------------------------------------------------

[Photo of Alice T. Kane appears here] Alice T. Kane, Chairperson

Report to Shareholders for the Year Ended December 31, 1995

During the year, international stock markets tended to be more volatile and less
predictable than the U.S. market. On average, European stocks rose 12.3%. Asian
markets were mixed. The important Japanese Nikkei average reached its low in
July, then rallied in the second half of the year, to provide a one-year total
return of less than 1%. Latin America provided the lowest returns in 1995, with
Mexico, Brazil, and Colombia posting double-digit losses.

In this context, we are pleased to report to you on the activities and
investment results of the MainStay International Equity Fund for the twelve
months ended December 31, 1995. For the year, the Fund returned 5.25% and 4.27%
for Class A and Class B shares, respectively, excluding all sales charges.
Although the Fund outperformed its Lipper* peer group in the third and fourth
quarters, earlier weaknesses, particularly in the second quarter, caused the
Fund's overall performance for the year to trail the average Lipper
international fund, which returned 9.42%.

The Fund managers believe that country selection is the primary factor
influencing international equity performance. Unfortunately, our strong
commitment to Japanese equities proved untimely in the first half of the year,
as natural disasters and bank reversals rocked the Japanese market. On the other
hand, our decision not to abandon Japanese equities paid off in the third
quarter. The Fund was able to benefit when the dollar gained 13.9% against the
Japanese yen with the use of forward foreign currency exchange contracts to
hedge against fluctuations in currency. Our European country and security
selection also contributed positively to our performance, particularly among
interest-rate sensitive issues, as the dollar strengthened and rates declined.

2
<PAGE>

Details on the portfolio's performance, makeup, and diversification can be
found on the following pages. We continue to view international equities as an
appropriate choice for investors seeking long-term growth of capital with broad
geographic diversification.+

/s/ Alice T. Kane

Alice T. Kane
January 1996

- ----------
* See footnote on page 6 for more information on Lipper Analytical Services,
Inc.

3
<PAGE>

- --------------------------------------------------------------------------------
MainStay International Equity Fund
- --------------------------------------------------------------------------------

1995 Fund Highlights

. Annual total returns of 5.25% and 4.27% for Class A and Class B shares,
respectively, excluding all sales charges
. Performance suffered setbacks due to Japanese exposure during the first half
of the year
. Performance benefited from interest-sensitive investments in a declining rate
environment

[Photo of Shigemi Takagi and Michael Perelstein appears here]

Portfolio Managers - Shigemi Takagi
and Michael Perelstein (left to right)

For the year ended December 31, 1995, the MainStay International Equity Fund
returned 5.25% and 4.27% for Class A and Class B shares, respectively, excluding
all sales charges. During the same period, the average Lipper international fund
returned 9.42% and the Morgan Stanley Capital International Europe, Australia,
and Far East (Free) Index (EAFE)* returned 11.20%.

While these overall results may appear somewhat disappointing, excluding all
sales charges, the Fund outperformed its Lipper peer group in the second half of
the year and surpassed the EAFE Index in the fourth quarter.

The year began under very difficult conditions. In the early months,
international markets tumbled along with the U.S. dollar, which made it
difficult for international manufacturers to compete with those in the United
States. Although most European markets were down in local terms in the first
quarter, U.S. investors benefited from positive currency trends. Our best
decision in the first three months was to increase investments in France, which
rose 0.6% for the quarter, and move out of Germany, which fell 8.5% for the same
period.

Japan, the largest international equity market, was depressed during the first
half of the year by a string of bad news, including the Kobe earthquake, the
collapse of Barings Bank's huge stock futures position, and poison gas attacks
on innocent citizens. Our exposure to Japanese stocks had a negative impact

- ----------
* See footnote on page 7 for more information on The Morgan Stanley Capital
International Europe, Australia, and Far East (Free) Index
(The EAFE Index).

4
<PAGE>

on performance in the first half of 1995, as did our underweighted positions in
two of the best performing international markets, Switzerland and the U.K.

Fortunately, negative conditions early in the year foretold excellent investment
opportunities. International markets soon rebounded, led by Europe in the second
quarter and then Japan, which recovered in the second half of the year. Market
upturns were encouraged by a more stable dollar, and by a declining trend in
interest rates worldwide.

Our portfolio performance recovered along with the markets in the second half of
the year. Our best decisions in 1995 were to emphasize interest-sensitive
securities in markets such as Spain (up 28% in U.S. dollar terms), Belgium (up
26%), and Hong Kong (up 23%). At the same time, we avoided blowups in markets
such as Finland where stocks, including a leader such as Nokia, plummeted late
in the year. Our decision to seek protection against a declining Japanese yen
helped minimize losses when the yen slid substantially during the summer months.

In 1996, we believe international equities offer substantial investment
opportunities. Foreign equity markets lagged the U.S. market in 1995 and may now
be poised to partake in the global equity bull market. The upbeat outlook for
international equities is enhanced by the declines in interest rates abroad,
which have been even more pronounced than in the U.S.

Going into 1996, the Fund has a diversified exposure in both Asia and Europe.
Our European investments include Austria, Belgium, Denmark, France, Italy, and
Spain -- all of which include many banks, insurers, and utility companies that
may benefit from declining interest rates. We have also raised our exposure to
energy and natural resources, with energy holdings in Norway (Norsk Hydro) and
the Netherlands (Royal Dutch) and natural resource exposure in Australia (mining
and metals) and New Zealand (forest products). We are also emphasizing the
highest growth markets of the world, located in Southeast Asia, with our
investments in Singapore and Hong Kong. Japanese interest rates are at
incredibly low levels, which could make the Japanese equity market the big
positive surprise of 1996.

Also in 1996, we expect continued foreign currency erosion and are actively
seeking to help protect the Fund from declines in the value of the Japanese yen
and European currencies. We continue to emphasize a disciplined process to
international investing, which focuses on country selection, currency risk
management, diversification, and high quality stocks.[]

Weighting
- ---------

The proportion of a portfolio allocated to a specific market sector or country.
A Fund is said to be underweighted in a country when that portion of the
portfolio is smaller than the country's total equities relative to the
international equity markets as a whole.

Bull Market
- -----------
A period during which security values in a specific market are generally rising.
Often contrasted with a "bear market," or period in which security values are
generally declining.

Exposure
- --------
The amount invested in a specific security, market, country, or currency.
Participation in positive as well as negative events affecting a security or
sector generally increases with the level of exposure.

Currency Erosion
- ----------------
The risk that one currency's value will decline relative to the value of others,
decreasing the value of investments denominated in the original currency. While
steps can be taken that may help protect against currency risk, there can be no
assurance that currency hedging will be beneficial to investors.

5
<PAGE>

Fund average annual total returns *

<TABLE>
<CAPTION>
Life of Fund
1 year 5 years through 12/31/95
<S> <C> <C> <C>
Class A 5.25% n/a 2.17%
Class B 4.27% n/a 1.44%

Fund SEC returns*
Life of Fund
1 year 5 years through 12/31/95

Class A (0.53%) n/a (2.18%)
Class B (0.73%) n/a (1.64%)

Fund Lipper+ rankings and year-end Lipper category returns
Life of Fund/Class
1 year 5 years through 12/31/95

Class A 210 out of 254 funds n/a 210 out of 254 funds
Class B 224 out of 254 funds n/a 151 out of 223 funds

Average Lipper
international fund 9.42% 10.16% 4.08%

Fund year-end per-share net asset values and distributions for 1995
NAV 12/31/95 Income Capital Gains

Class A $10.05 $0.2334 $0.0000
Class B $ 9.97 $0.2171 $0.0000
</TABLE>

- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gains and dividend distributions are reinvested.

Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 5.5% and an annual 12b-1 fee of .25%.
Performance figures for this Class include the historical performance of the
Class B shares for periods from inception (9/12/94) up to 12/31/94.
Performance data for the two Classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are sold
with no initial sales charge, but are subject to a maximum Contingent
Deferred Sales Charge (CDSC) of up to 5% if shares are redeemed during the
first 6 years of purchase and an annual 12b-1 fee of up to 1%.

6
<PAGE>

- --------------------------------------------------------------------------------
Year-by-Year Performance*
- --------------------------------------------------------------------------------

[BAR GRAPH APPEARS HERE]

Total
Return
%

Year ended 12/31

1994 1995 Class A 1995 Class B
---- ------------ ------------
- -2.30 5.25 4.27

- --------------------------------------------------------------------------------
$10,000 invested in the MainStay International Equity
Fund vs. Morgan Stanley EAFE Index
- --------------------------------------------------------------------------------

Class A Shares

[LINE GRAPH APPEARS HERE]

Quarter/Year-end
International
EAFE Index/++/ Equity Fund
---------- -------------
9/12/94 $10000 $9450
9/94 9687 9337
12/94 9595 9233
3/95 9781 9053
6/95 9869 8713
9/95 10279 9252
12/95 10701 9718

Class B Shares

[LINE GRAPH APPEARS HERE]

Quarter/Year-end
International
EAFE Index/++/ Equity Fund
---------- -------------
9/12/94 $10000 $10000
9/94 9687 9880
12/94 9595 9770
3/95 9781 9560
6/95 9860 9180
9/95 10279 9730
12/95 10701 9787

- ----------
The Class A graph assumes an initial investment of $10,000 made on 9/12/94
reflecting the effect of the 5.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,450. The Class B graph assumes
an initial investment of $10,000 made on 9/12/94. Returns reflect the
Contingent Deferred Sales Charge (CDSC) of 4.0%, as it would apply for the
period shown. (The $10,000 invested in the EAFE Index begins on 8/31/94.)
Results include reinvestment of all distributions at net asset value and the
change in share price for the stated period. Past performance is no
guarantee of future results.

++ The Morgan Stanley Capital International Europe, Australia, Far East (Free)
Index -- The EAFE Index -- is an unmanaged, capitalization-weighted index
containing 1,000 equity securities of companies located outside the U.S.

7
<PAGE>

Holding $ amount

<S> <C>
Toyota Motor Corp. $594,436

Norsk Hydro AS 522,077

Toppan Printing Co., Ltd. 514,170

Industrial Bank of Japan, Ltd. 485,476

Sumitomo Bank, Ltd. 467,057

Assicurazioni Generali SPA 451,768

Fuji Bank, Ltd. 442,046

L'Air Liquide 426,529

Dai-Ichi Kangyo Bank, Ltd. 413,255

Mitsubishi Heavy Industries, Ltd. 390,930

L'Oreal 375,308

Reed International Plc 341,828

Royal Dutch Petroleum Co. 321,687

Takeda Chemical Industries, Ltd. 313,116

Ito-Yokado Co., Ltd. 308,269

Kirin Brewery Co., Ltd. 307,494

Itochu Corp. 303,180

Asahi Glass Co., Ltd. 300,999

Teijin, Ltd. 296,869

Mitsubishi Corp. 295,473

Hitachi, Ltd. 292,371

LVMH-Moet Hennessy Louis Vuitton 283,659

Telecom Corp. of New Zealand Ltd. 283,481

Bank of Tokyo 280,738

Electrabel, SA 280,675
</TABLE>

Note: This breakdown is provided for informational purposes only. This Fund's
holdings may change daily. A shareholder owns shares of the Fund but
does not own a direct interest in any of the specific securities
listed above. Excludes short-term securities. See financial
statements for specific type of security held.

8
<PAGE>

- --------------------------------------------------------------------------------
10 Largest Purchases in 1995
- --------------------------------------------------------------------------------

Holding amount of purchase

<S> <C>
Mitsubishi Heavy Industries, Ltd. $617,795

Itochu Corp. 586,074

Norsk Hydro AS 511,714

L'Air Liquide 488,563

Assicurazioni Generali SPA 417,855

L'Oreal 398,136

Toyota Motor Corp. 388,931

Mitsubishi Corp. 374,548

Industrial Bank of Japan, Ltd. 368,860

Toppan Printing Co., Ltd. 349,625

- --------------------------------------------------------------------------------
10 Largest Sales in 1995
- --------------------------------------------------------------------------------

Holding amount of sale

Mitsubishi Heavy Industries, Ltd. $557,275

Itochu Corp. 342,202

Mitsubishi Electric Corp. 223,691

Nippon Oil Co. 217,208

Industrial Bank of Japan, Ltd. 183,619

Teijin, Ltd. 159,681

Sharp Corp. 156,045

Mitsui Engineering & Shipbuilding Co., Ltd. 155,093

Toyota Motor Corp. 138,270

L'Air Liquide 129,146
</TABLE>

Note: This breakdown is provided for informational purposes only. This Fund's
holdings may change daily. A shareholder owns shares of the Fund but
does not own a direct interest in any of the specific securities
listed above. All securities listed above indicate total
purchases/sales for the issuer for the year. Excludes
short-term securities. See financial statements for
specific type of security held.

9
<PAGE>

- --------------------------------------------------------------------------------
Diversification by Country -- Top 5 as of 12/31/95
- --------------------------------------------------------------------------------

[PIE CHART APPEARS HERE]

Japan 37.8%
France 10.1%
United Kingdom 8.8%
Italy 5.1%
Belgium 3.5%
All Other Countries 34.7%

[PIE CHART APPEARS HERE]

Common Stock 91.9%
Preferred Stock 0.1%
Cash & Equivalents 8.0%

Note: actual percentages will vary over time

10
<PAGE>

<TABLE>
<CAPTION>
Shares Value
----------------------
<S> <C> <C>

COMMON STOCKS (91.9%)+
AUSTRALIA (3.0%)
Amcor, Ltd. (forest products & paper).................. 10,000 $ 70,667
Boral, Ltd. (building materials & components).......... 7,200 18,210
Brambles Industries, Ltd. (business & public services). 4,500 50,211
Broken Hill Proprietary Co., Ltd. (energy sources)..... 18,510 261,611
Coles Myer, Ltd. (merchandising)....................... 20,268 63,171
CRA, Ltd. (metals-nonferrous).......................... 9,568 140,496
CSR, Ltd. (multi-industry)............................. 16,200 52,782
Foster's Brewing Group, Ltd. (beverages & tobacco)..... 13,080 21,503
M.I.M. Holdings, Ltd. (metals-nonferrous).............. 10,100 13,974
National Australian Bank, Ltd. (banking)............... 17,000 153,014
News Corp., Ltd. (broadcasting & publishing)........... 16,937 90,460
Pacific Dunlop, Ltd. (multi-industry).................. 10,200 23,900
Santos, Ltd. (energy sources).......................... 5,800 16,956
Westpac Banking Corp., Ltd. (banking).................. 16,100 71,379
WMC Ltd. (metals-nonferrous)........................... 12,800 82,266
-----------
1,130,600
-----------
AUSTRIA (2.6%)
Austrian Airlines Oesterreichische Luftverkehrs AG
(transportation-airlines) (a)......................... 150 24,950
Bank Austria AG (banking).............................. 3,150 254,620
Creditanstalt-Bankverein Stamm (banking)............... 2,350 130,448
EA-Generali AG (insurance)............................. 500 149,946
Oesterreichische Brau-Beteiligungs AG (beverages &
tobacco).............................................. 500 22,790
OMV AG (energy sources)................................ 1,750 152,056
Verbundgesellschaft-Oesterreichische
Elektrizitatswirtschafts AG Class A (utilities-
electrical & gas)..................................... 2,150 129,381
Wienerberger Baustoffindustrie AG (building materials &
components)........................................... 720 142,995
-----------
1,007,186
-----------
BELGIUM (3.5%)
Bekaert, SA (industrial components).................... 40 32,961
Cimenteries CBR Cementbedrijven (building materials &
components)........................................... 80 32,281
Delhaize-Le Lion, SA (merchandising)................... 700 29,019
Electrabel, SA (utilities-electrical & gas)............ 1,180 280,675
</TABLE>

- -------
+ Percentages indicated are based on Fund net assets.

<TABLE>
<CAPTION>
Shares Value
----------------------
<S> <C> <C>

BELGIUM (CONTINUED)
Fortis AG (insurance)................................... 1,450 $ 176,390
Fortis AG-VVPR (insurance).............................. 18 2,193
Generale de Banque, SA (banking)........................ 590 209,002
Groupe Bruxelles Lambert, SA (multi-industry)........... 460 63,852
NV Union Miniere, SA (metals-nonferrous) (a)............ 440 29,454
Petrofina, SA (energy sources).......................... 680 208,189
Reunies Electrobel & Tractebel, SA (multi-industry)..... 480 198,171
Solvay, SA Class A (chemicals).......................... 140 75,639
-----------
1,337,826
-----------
DENMARK (2.1%)
Carlsberg AS Class A (beverages & tobacco).............. 750 41,954
Carlsberg AS Class B (beverages & tobacco).............. 600 33,563
Dampskibsselskabet AF 1912 AS Class B (transportation-
shipping).............................................. 5 95,637
Dampskibsselskabet Svendborg AS Class B (transportation-
shipping).............................................. 3 82,825
Danisco AS (food & household products).................. 1,500 72,540
Den Danske Bank (banking)............................... 1,200 82,933
FLS Industries AS Class B (machinery & engineering)..... 300 23,278
Novo Nordisk AS Class B (health & personal care)........ 700 95,998
Sophus Berendsen AS Class B (multi-industry)............ 600 67,668
Tele Danmark AS Class B (telecommunications)............ 2,600 142,156
Unidanmark AS Class A (banking)......................... 1,200 59,547
-----------
798,099
-----------
FRANCE (10.1%)
Alcatel Alsthom (electrical & electronics).............. 1,721 148,579
AXA Groupe (insurance).................................. 3,525 237,865
Carrefour Supermarche (merchandising)................... 450 273,383
Compagnie de Saint Gobain (misc.-
materials & commodities)............................... 1,773 196,501
Compagnie de Suez, SA (banking)......................... 2,532 104,586
Compagnie Financiere de Paribas, SA Class A (banking)... 1,399 76,810
Compagnie Francaise de Petroleum Total, SA Class B
(energy sources)....................................... 3,505 236,874
Compagnie Generale des Eaux (business & public
services).............................................. 1,676 167,553
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

11
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Shares Value
----------------------
<S> <C> <C>

COMMON STOCKS (CONTINUED)
FRANCE (CONTINUED)
Elf Aquitaine (energy sources).......................... 2,863 $ 211,225
Eridania Beghin-Say, SA (food & household products)..... 450 77,295
Groupe Danone (food & household products)............... 991 163,735
Havas (business & public services)...................... 1,081 85,876
LaFarge Coppee (building materials & components)........ 2,194 141,545
L'Air Liquide (chemicals)............................... 2,572 426,529
L'Oreal (health & personal care)........................ 1,400 375,308
LVMH-Moet Hennessy Louis Vuitton (beverages & tobacco).. 1,360 283,659
Lyonnaise des Eaux, SA (multi-industry)................. 478 46,086
Michelin (CGDE) Class B (tire & rubber)................. 780 31,150
Pernod-Ricard (beverages & tobacco)..................... 980 55,769
Pinault-Printemps, SA (building materials & components). 270 53,940
PSA Peugeot Citroen, SA (automobiles)................... 520 68,690
Rhone-Poulenc Class A (chemicals)....................... 3,738 80,181
Societe Generale (banking).............................. 2,230 275,878
Spie Batignolles, SA (machinery & engineering) (a)...... 940 32,177
Thomson CSF, SA (aerospace & military technology)....... 1,215 27,105
-----------
3,878,299
-----------
GERMANY (3.3%)
Allianz AG Holding (insurance).......................... 100 195,350
BASF AG (chemicals)..................................... 300 66,968
Bayer AG (chemicals).................................... 300 79,335
Daimler Benz Aktiengesellschaft AG (automobiles)........ 200 100,889
Deutsche Bank AG (banking).............................. 2,750 130,595
Dresdner Bank AG (banking).............................. 2,450 65,560
Karstadt AG (merchandising)............................. 50 20,436
Linde AG (machinery & engineering)...................... 50 29,240
Mannesmann AG (machinery & engineering)................. 150 47,863
Muenchener Rueckversicherungs-Gesellschaft AG
(insurance)............................................ 54 117,713
Preussag AG (multi-industry)............................ 50 14,009
RWE AG (utilities-electrical & gas)..................... 150 54,497
Siemens AG (electrical & electronics)................... 250 137,115
Thyssen AG (metals-steel) (a)........................... 150 27,311
VEBA AG (utilities-electrical & gas).................... 2,250 95,736
Viag AG (multi-industry)................................ 100 40,174
Volkswagen AG (automobiles)............................. 100 33,509
-----------
1,256,300
-----------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
----------------------
<S> <C> <C>

HONG KONG (3.0%)
Cheung Kong (Holdings) Ltd. (real estate)............... 30,000 $ 182,749
China Light & Power Co. Ltd. (utilities-electrical &
gas)................................................... 20,500 94,388
Hang Seng Bank Ltd. (banking)........................... 17,600 157,632
Hong Kong Telecommunications Ltd. (telecommunications).. 107,200 191,331
Hutchison Whampoa Ltd. (multi-industry)................. 36,000 219,299
Sun Hung Kai Properties Ltd. (real estate).............. 23,000 188,149
Swire Pacific Ltd. Class A (multi-industry)............. 14,500 112,521
-----------
1,146,069
-----------
ITALY (5.1%)
Assicurazioni Generali SPA (insurance).................. 18,650 451,768
Banca Commerciale Italiana SPA (banking)................ 27,000 57,664
Benetton Group SPA (textiles & apparel)................. 2,500 29,752
Credito Italiano SPA (banking).......................... 38,000 44,289
Edison SPA (energy sources)............................. 11,000 47,401
Fiat SPA (automobiles).................................. 65,000 211,302
Fiat SPA di Risp (automobiles).......................... 18,000 31,809
Istituto Bancario San Paolo di Torina SPA (banking)..... 22,500 133,245
Italgas SPA (utilities-electrical & gas)................ 14,000 42,601
Mediobanca SPA (financial services)..................... 23,500 162,781
Montedison SPA (multi-industry) (a)..................... 92,000 61,670
Olivetti Group (data processing & reproduction) (a)..... 70,000 56,139
Parmalat Finanziaria SPA (food & household products).... 21,000 18,231
Pirelli SPA (industrial components)..................... 20,000 25,830
Riunione Adriatica di Sicurta SPA (insurance)........... 5,750 65,368
Sirti SPA (construction & housing)...................... 9,500 53,386
Telecom Italia di Risp (telecommunications)............. 27,000 33,033
Telecom Italia SPA (telecommunications)................. 120,000 186,732
Telecom Italia Mobile di Risp (telecommunications) (a).. 20,000 21,042
Telecom Italia Mobile SPA (telecommunications) (a)...... 118,000 207,780
-----------
1,941,823
-----------
JAPAN (37.8%)
Ajinomoto Co., Inc. (food & household products)......... 10,000 111,481
Asahi Bank, Ltd. (banking).............................. 16,000 201,635
Asahi Chemical Industry Co., Ltd. (chemicals)........... 36,000 275,697
Asahi Glass Co., Ltd. (misc.-materials & components).... 27,000 300,999
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

12
<PAGE>

<TABLE>
<CAPTION>
Shares Value
----------------------
<S> <C> <C>

COMMON STOCKS (CONTINUED)
JAPAN (CONTINUED)
Bank of Tokyo (banking)................................. 16,000 $ 280,738
Bridgestone Corp. (industrial components)............... 7,000 111,287
Canon, Inc. (recreation & other consumer goods)......... 7,000 126,894
Chiba Bank, Ltd. (banking).............................. 3,000 27,046
Dai-Ichi Kangyo Bank, Ltd. (banking).................... 21,000 413,255
Dai Nippon Printing Co., Ltd. (business & public
services).............................................. 14,000 237,503
Daiei, Inc. (merchandising)............................. 8,000 96,940
Daiwa House Industry Co., Ltd. (construction & housing). 1,000 16,480
Fanuc Co., Ltd. (electronic components & instruments)... 2,000 86,664
Fuji Bank, Ltd. (banking)............................... 20,000 442,046
Fuji Photo Film Co., Ltd. (recreation & other consumer
goods)................................................. 3,000 86,664
Fujitsu, Ltd. (data processing & reproduction).......... 23,000 256,406
Furukawa Electric Co., Ltd. (industrial components)..... 33,000 161,551
Hankyu Corp. (transportation-road &
rail) (a).............................................. 16,000 87,634
Hitachi, Ltd. (electrical & electronics)................ 29,000 292,371
Honda Motor Co., Ltd. (automobiles)..................... 4,000 82,593
Industrial Bank of Japan, Ltd. (banking)................ 16,000 485,476
Ito-Yokado Co., Ltd. (merchandising).................... 5,000 308,269
Itochu Corp. (wholesale & international trade).......... 45,000 303,180
Japan Air Lines Co., Ltd. (transportation-airlines) (a). 24,000 159,369
Japan Energy Corp. (energy sources)..................... 52,000 174,414
Joyo Bank, Ltd. (banking)............................... 8,000 64,368
Kajima Corp. (construction & housing)................... 9,000 88,991
Kansai Electric Power Co., Inc. (utilities-electrical &
gas)................................................... 7,000 169,645
Kao Corp. (food & household products)................... 12,000 148,900
Kawasaki Steel Corp. (metals-steel)..................... 6,000 20,939
Kinki Nippon Railway Co., Ltd. (transportation-road &
rail).................................................. 23,000 173,910
Kirin Brewery Co., Ltd. (beverages & tobacco)........... 26,000 307,494
Kobe Steel, Ltd. (metals-steel) (a)..................... 20,000 61,848
Komatsu, Ltd. (machinery & engineering)................. 14,000 115,359
Kubota Corp. (machinery & engineering).................. 7,000 45,126
Marubeni Corp. (wholesale & international trade)........ 5,000 27,095
Marui Co., Ltd. (merchandising)......................... 1,000 20,842
Matsushita Electric Industrial Co., Ltd. (appliances &
household durables).................................... 16,000 260,575
</TABLE>

<TABLE>
<CAPTION>
Shares Value
----------------------
<S> <C> <C>

JAPAN (CONTINUED)
Mitsubishi Chemical Corp. (chemicals)................... 34,000 $ 165,457
Mitsubishi Corp. (multi-industry)....................... 24,000 295,473
Mitsubishi Electric Corp. (electrical & electronics).... 15,000 108,040
Mitsubishi Estate Co., Ltd. (construction & housing).... 9,000 112,547
Mitsubishi Heavy Industries, Ltd. (machinery &
engineering)........................................... 49,000 390,930
Mitsubishi Trust & Banking Corp. (financial services)... 11,000 183,411
Mitsui Engineering & Shipbuilding Co., Ltd. (machinery &
engineering) (a)....................................... 44,000 122,416
Mitsui Fudosan Co., Ltd. (construction & housing)....... 2,000 24,623
Mitsui Marine & Fire Insurance Co., Ltd. (insurance).... 2,000 14,270
Mitsui Trust & Banking Co., Ltd. (financial services)... 7,000 76,680
Mitsukoshi, Ltd. (merchandising)........................ 4,000 37,613
NEC Corp. (electrical & electronics).................... 14,000 171,002
New Oji Paper Co., Ltd. (forest products & paper)....... 11,000 99,596
Nippon Express Co., Ltd. (transportation-road & rail)... 9,000 86,723
Nippon Paper Industries Co. (forest products & paper)... 13,000 90,358
Nippon Steel Corp. (metals-steel)....................... 48,000 164,720
Nippon Yusen Kabushiki Kaish (transportation-shipping).. 5,000 29,034
Nippondenso Co., Ltd. (industrial components)........... 3,000 56,128
Nissan Motor Co., Ltd. (automobiles).................... 22,000 169,122
NKK Corp. (metals-steel) (a)............................ 11,000 29,644
Nomura Securities Co., Ltd. (financial services)........ 11,000 239,927
Obayashi Corp. (construction & housing)................. 16,000 127,185
Osaka Gas Co., Ltd. (utilities-electrical & gas)........ 6,000 20,765
Sakura Bank, Ltd. (banking)............................. 22,000 279,381
Sankyo Co., Ltd. (health & personal care)............... 1,000 22,490
Sanyo Electric Co., Ltd. (appliances & household
durables).............................................. 19,000 109,591
Sekisui Chemical Co. (building materials & components).. 2,000 29,470
Sekisui House, Ltd. (construction & housing)............ 2,000 25,592
Seven-Eleven of Japan Co., Ltd. (merchandising)......... 3,000 211,717
Sharp Corp. (appliances & household durables)........... 5,000 79,976
Shimizu Corp. (construction & housing).................. 9,000 91,608
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

13
<PAGE>

<TABLE>
<CAPTION>
Shares Value
----------------------
<S> <C> <C>

COMMON STOCKS (CONTINUED)
JAPAN (CONTINUED)
Shiseido Co., Ltd. (health & personal care)............. 2,000 $ 23,847
Shizuoka Bank, Ltd. (banking)........................... 1,000 12,602
Sony Corp. (appliances & household durables)............ 4,000 240,023
Sumitomo Bank, Ltd. (banking)........................... 22,000 467,057
Sumitomo Chemical Co., Ltd. (chemicals)................. 6,000 29,954
Sumitomo Corp. (wholesale & international trade)........ 3,000 30,536
Sumitomo Electric Industries, Ltd. (industrial
components)............................................ 2,000 24,041
Sumitomo Marine & Fire Insurance Co., Ltd. (insurance).. 6,000 49,323
Sumitomo Metal Industries, Ltd. (metals-steel).......... 29,000 87,992
Sumitomo Metal Mining Co., Ltd. (metals-nonferrous)..... 5,000 44,980
Taisei Corp. (construction & housing)................... 23,000 153,621
Taisho Pharmaceutical Co., Ltd. (health & personal
care).................................................. 1,000 19,776
Takeda Chemical Industries, Ltd. (health & personal
care).................................................. 19,000 313,116
Teijin, Ltd. (chemicals)................................ 58,000 296,869
Tobu Railway Co., Ltd. (transportation-road & rail)..... 4,000 25,049
Tohoku Electric Power Co., Inc. (utilities-electrical &
gas)................................................... 2,000 48,276
Tokai Bank, Ltd. (banking).............................. 17,000 237,309
Tokio Marine & Fire Insurance Co., Ltd. (insurance)..... 3,000 39,261
Tokyo Dome Corp. (leisure & tourism).................... 1,000 17,158
Tokyo Electric Power Co., Inc. (utilities-electrical &
gas)................................................... 8,080 216,184
Tokyo Gas Co., Ltd. (utilities-electrical & gas)........ 37,000 130,559
Tokyu Corp. (transportation-road & rail)................ 10,000 70,669
Toppan Printing Co., Ltd. (business & public services).. 39,000 514,170
Tostem Corp. (building materials & components).......... 3,000 99,751
Toto, Ltd. (building materials & components)............ 1,000 13,959
Toyoda Automatic Loom Works, Ltd. (machinery &
engineering)........................................... 1,000 17,934
Toyota Motor Corp. (automobiles)........................ 28,000 594,436
Yamaichi Securities Co., Ltd. (financial services)...... 29,000 225,744
Yamanouchi Pharmaceutical Co., Ltd. (health & personal
care).................................................. 2,000 43,041
</TABLE>

<TABLE>
<CAPTION>
Shares Value
----------------------
<S> <C> <C>

JAPAN (CONTINUED)
Yamazaki Baking Co., Ltd. (food & household products)... 1,000 $ 18,613
Yasuda Trust & Banking Co., Ltd. (financial services)... 3,000 17,769
-----------
14,420,792
-----------
NETHERLANDS (1.9%)
Elsevier NV (broadcasting & publishing)................. 3,900 52,065
Internationale Nederlanden Groep NV (insurance)......... 1,300 86,938
Koninklijke PTT Nederland NV (forest products & paper).. 2,500 90,924
Philips Electronics NV (appliances & household
durables).............................................. 1,600 57,892
Royal Dutch Petroleum Co. (energy sources).............. 2,300 321,687
Unilever NV (food & household products)................. 700 98,472
Wolters Kluwer CVA (broadcasting & publishing).......... 300 28,409
-----------
736,387
-----------
NEW ZEALAND (1.8%)
Brierley Investments Ltd. (multi-industry).............. 94,000 74,358
Carter Holt Harvey Ltd. (forest products & paper)....... 69,200 149,291
Fletcher Challenge Ltd. (forest products & paper)....... 52,100 120,234
Lion Nathan Ltd. (beverages & tobacco).................. 24,300 57,985
Telecom Corp. of New Zealand Ltd. (telecommunications).. 65,700 283,481
-----------
685,349
-----------
NORWAY (2.6%)
Bergesen d.y. AS Class A (transportation-shipping)...... 2,400 47,865
Bergesen d.y. AS Class B (transportation-shipping)...... 1,400 27,478
Dyno Industrier AS (chemicals).......................... 1,200 28,111
Hafslund Nycomed AS Class A (health & personal care).... 2,700 70,728
Hafslund Nycomed AS Class B (health & personal care).... 1,700 43,187
Kvaerner AS Class B (machinery & engineering)........... 1,100 36,911
Norsk Hydro AS (energy sources)......................... 12,400 522,077
Norske Skogindustrier AS Class A (forest products &
paper)................................................. 3,400 100,098
Orkla Borregaard AS Class A (multi-industry)............ 2,300 114,675
-----------
991,130
-----------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

14
<PAGE>

<TABLE>
<CAPTION>
Shares Value
----------------------
<S> <C> <C>

COMMON STOCKS (CONTINUED)
SINGAPORE (3.3%)
City Developments, Ltd. (real estate)................... 17,000 $ 123,792
DBS Land, Ltd. (real estate)............................ 26,000 87,864
Development Bank of Singapore, Ltd. Foreign Registered
(banking).............................................. 12,000 149,314
Fraser & Neave, Ltd. (beverages & tobacco).............. 7,000 89,080
Keppel Corp., Ltd. (machinery & engineering)............ 13,000 115,804
Oversea-Chinese Banking Corp., Ltd. Foreign Registered
(banking).............................................. 16,000 200,217
Singapore Airlines, Ltd. Foreign Registered
(transportation-airlines).............................. 23,000 214,639
Singapore Press Holdings, Ltd. Foreign Registered
(broadcasting & publishing)............................ 6,000 106,047
Straits Steamship Land, Ltd. (multi-industry)........... 14,000 47,311
United Overseas Bank, Ltd. Foreign Registered (banking). 13,000 124,994
-----------
1,259,062
-----------
SPAIN (3.0%)
Acerinox, SA (metals-steel)............................. 286 28,927
Autopistas Concesionaria Espanola, SA (business & public
services).............................................. 3,690 41,975
Banco Bilbao Vizcaya, SA (banking)...................... 3,250 117,071
Banco Central Hispanoamericano, SA (banking)............ 1,810 36,703
Banco Santander, SA (banking)........................... 2,150 107,930
Corporacion Bancaria de Espana, SA (banking)............ 1,980 81,606
Corporacion Mapfre CIA Internacional de Reaseguros, SA
(insurance)............................................ 590 33,022
Empresa Nacional de Electricidad, SA (utilities-
electrical & gas)...................................... 3,350 189,709
Fomento de Construcciones y Contratas, SA (construction
& housing)............................................. 240 18,398
Gas Natural SDG, SA (utilities-electrical & gas)........ 490 76,338
Iberdrola, SA (utilities-electrical & gas).............. 12,530 114,646
Repsol, SA (energy sources)............................. 4,040 132,374
Telefonica de Espana (telecommunications)............... 11,900 164,794
-----------
1,143,493
-----------
UNITED KINGDOM (8.8%)
Abbey National Plc (banking)............................ 3,580 35,351
Barclays Plc (banking).................................. 19,429 222,923
Bass British Plc (beverages & tobacco).................. 2,350 26,233
BAT Industries Plc (beverages & tobacco)................ 20,728 182,635
BOC Group Plc (chemicals)............................... 1,797 25,138
</TABLE>

<TABLE>
<CAPTION>
Shares Value
----------------------
<S> <C> <C>

UNITED KINGDOM (CONTINUED)
Boots Co. Plc (merchandising)........................... 2,524 $ 22,964
British Airways Plc (transportation-airlines)........... 1,980 14,326
British Gas Plc (energy sources)........................ 35,310 139,249
British Petroleum Co. Plc (energy sources).............. 28,060 234,821
British Telecommunications Plc (telecommunications)..... 37,780 207,647
BTR Plc (multi-industry)................................ 43,327 221,317
Cable & Wireless Plc (telecommunications)............... 5,660 40,424
Commercial Union Plc (insurance)........................ 1,974 19,247
Forte Plc (leisure & tourism)........................... 2,285 11,725
General Electric Co. Plc (electrical & electronics)..... 27,400 151,022
GKN Plc (machinery & engineering)....................... 1,092 13,207
Glaxo Wellcome Plc (health & personal care)............. 18,230 258,981
Grand Metropolitan Plc (multi-industry)................. 5,514 39,723
Great Universal Stores Plc (merchandising).............. 1,050 11,167
Guinness Plc (beverages & tobacco)...................... 4,010 29,511
Hanson Trust Plc (multi-industry)....................... 8,500 25,404
HSBC Holdings Plc (GBP par) (financial services)........ 1,763 27,537
Imperial Chemical Industries Plc (chemicals)............ 1,150 13,623
Kingfisher Plc (merchandising).......................... 1,566 13,178
Lloyds TSB Group Plc (banking).......................... 41,236 212,237
Marks & Spencer Plc (merchandising)..................... 38,290 267,521
MEPC Plc (real estate).................................. 980 6,010
National Power Plc (utilities-electrical & gas)......... 2,320 16,191
Peninsular & Oriental Steam Navigation Co. Deferred
Stock (transportation-shipping)........................ 1,531 11,315
Prudential Corp. Plc (insurance)........................ 5,490 35,374
Rank Organisation Plc (leisure & tourism)............... 2,290 16,568
Redland Plc (building materials & components)........... 1,864 11,258
Reed International Plc (broadcasting & publishing)...... 22,420 341,828
Reuters Holdings Plc (broadcasting & publishing)........ 2,430 22,260
RMC Group Plc (building materials & components)......... 990 15,232
RTZ Corp. Plc (metals-nonferrous)....................... 2,280 33,134
Sainsbury Plc (merchandising)........................... 3,870 23,614
Scottish Power Plc (utilities-electrical & gas)......... 23,010 132,184
Thorn Emi Plc (appliances & household durables)......... 1,630 38,391
Unilever Plc (food & household products)................ 8,730 179,322
Vodafone Group Plc (multi-industry)..................... 5,198 18,602
-----------
3,368,394
-----------
Total Common Stocks
(Cost $34,237,403)..................................... 35,100,809
-----------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

15
<PAGE>

<TABLE>
<CAPTION>
Shares Value
---------------------------
<S> <C> <C>

PREFERRED STOCK (0.1%)
AUSTRIA (0.1%)
Creditanstalt-Bankverein Vorzug (banking)........... 750 $ 38,579
-----------
Total Preferred Stock
(Cost $43,803)..................................... 38,579
-----------
<CAPTION>
Principal
Amount
---------
<S> <C> <C>

SHORT-TERM INVESTMENTS (6.5%)
COMMERCIAL PAPER (6.5%)
Hasbro Corp.
5.70%, due 1/2/96.................................. $1,800,000 1,799,715
Toyota Motor Corp.
5.75%, due 1/3/96.................................. 700,000 699,777
-----------
Total Short-Term Investments
(Cost $2,499,492).................................. 2,499,492
-----------
Total Investments
(Cost $36,780,698) (b)............................. 98.5% 37,638,880 (c)
Cash and Other Assets,
Less Liabilities................................... 1.5 557,323
---------- -----------
Net Assets.......................................... 100.0% $38,196,203
========== ===========
</TABLE>

- -------
(a) Non-income producing securities.
(b) The cost for Federal income tax purposes is $36,834,933.
(c) At December 31, 1995 net unrealized appreciation for securities was
$803,947, based on cost for Federal income tax purposes. This consisted of
aggregate gross unrealized appreciation for all investments on which there
was an excess of market value over cost of $1,721,993 and aggregate gross
unrealized depreciation for all investments on which there was an excess of
cost over market value of $918,046.
(d) Forward Foreign Currency Contracts Open at December 31, 1995:

<TABLE>
<CAPTION>
Contract In Delivery Gross Unrealized
To Deliver Exchange For Date Appreciation
- ---------------- --------------- -------- ----------------
<S> <C> <C> <C>

BF 35,312,405 DM 1,717,659 1/30/96 $ 2,048
DM 3,723,350 $ 2,641,070 1/5/96 37,655
DM 1,970,673 IL2,245,000,000 1/23/96 29,159
DM 1,795,568 FF 6,245,000 2/2/96 19,222
DM 557,411 DK 2,170,000 2/9/96 1,268
DM 4,835,959 $ 3,434,645 4/18/96 37,177
DM 2,425,000 $ 1,727,868 5/3/96 22,943
IL 1,495,000,000 DM 1,340,398 1/23/96 255
IL 616,800,000 DM 549,321 4/23/96 2,984
(Yen)909,400,000 $ 9,007,974 2/5/96 142,233
(Yen) 89,875,000 $ 903,296 2/5/96 27,104
(Yen)109,348,000 $ 1,090,000 7/2/96 2,417
N$ 1,075,770 $ 706,781 2/7/96 5,766
(Pounds) 697,000 DM 1,551,947 1/3/96 2,869
$ 1,500,000 DM 2,181,150 1/5/96 25,089
$ 1,090,000 A$ 1,480,978 2/26/96 8,526
$ 740,000 A$ 1,000,111 4/2/96 702
--------
367,417
--------
<CAPTION>
Contract In Delivery Gross Unrealized
To Deliver Exchange For Date Depreciation
- ---------------- --------------- -------- ----------------
<S> <C> <C> <C>

A$ 1,610,000 $ 1,191,400 2/26/96 2,829
DK 4,035,000 DM 1,037,008 2/9/96 1,985
DM 1,564,765 (Pounds)697,000 1/3/96 11,829
DM 5,382,406 $ 3,695,987 1/5/96 67,460
DM 610,000 $ 412,343 2/5/96 15,244
DM 3,078,763 $ 2,100,756 2/21/96 56,992
DM 1,511,645 $ 1,045,000 3/25/96 15,736
DM 1,550,500 (Pounds)700,000 4/2/96 4,066
FF 9,595,000 DM 2,747,434 2/2/96 37,475
IL 750,000,000 DM 653,680 1/23/96 13,016
--------
226,632
--------
Net Appreciation..................................... $140,785
========
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

16
<PAGE>

(e) Foreign cash held at December 31, 1995:

<TABLE>
<CAPTION>
Currency Cost Value
- --------------- ---------- ----------
<S> <C> <C>
A$ 19,973 $ 14,988 $ 14,858
AS 27,744 2,769 2,755
BF 186,556 6,514 9,184
DK 13,897 2,491 2,507
DM 1,312,508 912,440 910,797
FF 901 184 184
HK 97,240 12,575 12,576
IL 257,117 161 1,661
(Yen) 236,514 2,318 2,293
MP 3 1 1
NG 881 545 549
N$ 20,276 13,182 13,257
(Pounds)246,886 383,108 384,418
S$ 8,452 6,007 5,975
SP 1,040,530 8,628 8,577
---------- ----------
$1,365,911 $1,369,592
========== ==========
</TABLE>

(f) The following abbreviations are used in footnotes (d) and (e):
A$--Australian Dollar
AS--Austrian Schilling
BF--Belgian Franc
DK--Danish Krone
DM--Deutsche Mark
FF--French Franc
HK--Hong Kong Dollar
IL--Italian Lira
(Yen)--Japanese Yen
MP--Mexican Peso
NG--Netherland Guilder
N$--New Zealand Dollar
(Pounds)--Pound Sterling
S$--Singapore Dollar
SP--Spanish Peseta
$--U.S. Dollar

The table below sets forth the diversification of International Equity Fund in-
vestments by industry.

<TABLE>
<CAPTION>
Value Percent +
-----------------------

<S> <C> <C>
COMMON STOCKS, PREFERRED STOCK
& SHORT-TERM INVESTMENTS
Aerospace & Military Technology....................... $ 27,105 0.1%
Appliances & Household Durables....................... 786,447 2.1
Automobiles........................................... 1,992,126 5.2
Banking............................................... 6,245,042 16.3
Beverages & Tobacco................................... 1,152,175 3.0
Broadcasting & Publishing............................. 641,069 1.7
Building Materials & Components....................... 558,642 1.5
Business & Public Services............................ 1,097,288 2.9
Chemicals............................................. 1,563,503 4.0
Construction & Housing................................ 712,432 1.9
Data Processing & Reproduction........................ 312,546 0.8
Electrical & Electronics.............................. 1,008,128 2.6
Electronic Components & Instruments................... 86,664 0.2
Energy Sources........................................ 2,658,934 7.0
Financial Services.................................... 933,847 2.4
Food & Household Products............................. 888,588 2.3
Forest Products & Paper............................... 721,168 1.9
Health & Personal Care................................ 1,266,473 3.3
Industrial Components................................. 411,798 1.1
Insurance............................................. 1,674,027 4.4
Leisure & Tourism..................................... 45,452 0.1
Machinery & Engineering............................... 990,243 2.6
Merchandising......................................... 1,399,835 3.7
Metals-Nonferrous..................................... 344,304 0.9
Metals-Steel.......................................... 421,382 1.1
Miscellaneous-Materials & Commodities................. 196,501 0.5
Miscellaneous-Materials & Components.................. 300,999 0.8
Multi-Industry........................................ 1,736,995 4.5
Real Estate........................................... 588,564 1.5
Recreation & Other Consumer Goods..................... 2,013,275 5.3
Telecommunications.................................... 1,478,421 3.9
Textiles & Apparel.................................... 29,752 0.1
Tire & Rubber......................................... 31,150 0.1
Transportation-Airlines............................... 413,284 1.1
Transportation-Road & Rail............................ 443,985 1.2
Transportation-Shipping............................... 294,152 0.8
Utilities-Electrical & Gas............................ 1,811,773 4.7
Wholesale & International Trade....................... 360,811 0.9
----------- -----
37,638,880 98.5
Cash and Other Assets,
Less Liabilities..................................... 557,323 1.5
----------- -----
Net Assets............................................ $38,196,203 100.0%
=========== =====
</TABLE>

- -------
+ Percentages indicated are based on Fund net assets.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

17
<PAGE>

STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1995

<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (Note 2)
(identified cost $36,780,698)................................... $37,638,880
Cash denominated in foreign currencies
(identified cost $1,365,911).................................... 1,369,592
Cash............................................................. 423,973
Receivables:
Fund shares sold................................................ 167,670
Dividends and interest.......................................... 49,486
Unrealized appreciation on foreign currency contracts............ 367,417
Unamortized organization expense (Note 1)........................ 45,126
Other assets..................................................... 24
-----------
Total assets................................................... 40,062,168
-----------
LIABILITIES:
Payables:
Investment securities purchased................................. 1,245,163
NYLIFE Distributors............................................. 36,461
Adviser......................................................... 18,690
Organization.................................................... 12,299
Transfer agent.................................................. 12,200
Fund shares redeemed............................................ 10,944
Custodian....................................................... 7,000
Trustees........................................................ 260
Accrued expenses................................................. 43,044
Dividend payable................................................. 253,272
Unrealized depreciation on foreign currency contracts............ 226,632
-----------
Total liabilities.............................................. 1,865,965
-----------
Net assets....................................................... $38,196,203
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized
Class A......................................................... $ 12,798
Class B......................................................... 25,405
Additional paid-in capital....................................... 37,301,030
Accumulated undistributed net investment income.................. 139,764
Accumulated distribution in excess of net realized gain on
investments..................................................... (136,995)
Accumulated distribution in excess of net realized gain on
foreign currency transactions................................... (144,733)
Net unrealized appreciation on investments....................... 858,182
Net unrealized appreciation on translation of assets and
liabilities in foreign currencies............................... 140,752
-----------
Net assets....................................................... $38,196,203
===========
CLASS A
Net assets applicable to outstanding shares...................... $12,855,624
===========
Shares of beneficial interest outstanding........................ 1,279,772
===========
Net asset value per share outstanding............................ $ 10.05
Maximum sales charge (5.50% of offering price)................... 0.58
-----------
Maximum offering price per share outstanding..................... $ 10.63
===========
CLASS B
Net assets applicable to outstanding shares...................... $25,340,579
===========
Shares of beneficial interest outstanding........................ 2,540,481
===========
Net asset value per share outstanding............................ $ 9.97
===========
</TABLE>

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a)..................................................... $ 350,196
Interest.......................................................... 199,815
----------
Total income..................................................... 550,011
----------
Expenses: (Note 2)
Advisory (Note 3)................................................. 166,703
Distribution--Class B (Note 3).................................... 126,455
Administration (Note 3)........................................... 111,135
Transfer agent.................................................... 76,891
Service (Note 3).................................................. 69,037
Custodian......................................................... 35,386
Registration...................................................... 34,892
Auditing.......................................................... 30,000
Legal............................................................. 22,846
Shareholder communication......................................... 19,310
Amortization of organization expense.............................. 14,066
Recordkeeping (Note 3)............................................ 12,668
Trustees.......................................................... 1,026
Miscellaneous..................................................... 16,969
----------
Total expenses................................................... 737,384
----------
Net investment loss................................................ (187,373)
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions............................................. (115,889)
Foreign currency transactions..................................... 1,119,827
----------
Net realized gain on investments and foreign currency transactions. 1,003,938
----------
Net change in unrealized appreciation (depreciation) on
investments:
Security transactions............................................. 1,026,063
Translation of assets and liabilities in foreign currencies....... 89,231
----------
Net unrealized gain on investments and foreign currencies.......... 1,115,294
----------
Net realized and unrealized gain on investments and foreign
currency transactions............................................. 2,119,232
----------
Net increase in net assets resulting from operations............... $1,931,859
==========
</TABLE>

- -------
(a) Dividends recorded net of foreign withholding taxes of $46,818.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

18
<PAGE>

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
September 13*
Year ended through
December 31 December 31
1995 1994
----------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss................................. $ (187,373) $ (71,067)
Net realized loss on investments.................... (115,889) (21,106)
Net realized gain (loss) on foreign currency
transactions....................................... 1,119,827 (81,299)
Net change in unrealized appreciation/(depreciation)
on investments..................................... 1,026,063 (167,881)
Net change in unrealized appreciation on translation
of assets and liabilities in foreign currencies.... 89,231 51,521
----------- -----------
Net increase (decrease) in net assets resulting from
operations......................................... 1,931,859 (289,832)
----------- -----------
Dividends and distributions to shareholders:
From net investment income:
Class A............................................. (197,012) --
Class B............................................. (357,222) --
In excess of net realized gain on investments and
foreign currency transactions:
Class A............................................. (100,145) --
Class B............................................. (181,583) --
----------- -----------
Total dividends and distributions to shareholders.. (835,962) --
----------- -----------
Capital share transactions:
Net proceeds from sale of shares:
Class A............................................. 12,687,452 --
Class B............................................. 16,939,110 11,209,117
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A............................................. 63,636 --
Class B............................................. 519,055 --
----------- -----------
30,209,253 11,209,117
Cost of shares redeemed:
Class A............................................. (284,551) --
Class B............................................. (13,373,866) (369,815)
----------- -----------
Increase in net assets derived from capital share
transactions...................................... 16,550,836 10,839,302
----------- -----------
Net increase in net assets......................... 17,646,733 10,549,470
NET ASSETS:
Beginning of period.................................. 20,549,470 10,000,000
----------- -----------
End of period........................................ $38,196,203 $20,549,470
=========== ===========
Accumulated undistributed net investment income...... $ 139,764 $ --
=========== ===========
</TABLE>

- -------
* Commencement of Operations.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

19
<PAGE>

FINANCIAL HIGHLIGHTS
(SELECTED PER SHARE DATA AND RATIOS)

<TABLE>
<CAPTION>
Class B
-------------
Class A Class B September 13*
-------- -------- through
Year ended December 31
December 31, 1995 1994
------------------- -------------
<S> <C> <C> <C>
Net asset value at beginning of period..... $ 9.77 $ 9.77 $ 10.00
-------- -------- -------
Net investment income (loss)............... 0.27 0.26 (0.04)
Net realized and unrealized gain (loss) on
investments............................... 0.10 0.07 (0.16)
Net realized and unrealized gain (loss) on
foreign currency transactions............. 0.14 0.09 (0.03)
-------- -------- -------
Total from investment operations........... 0.51 0.42 (0.23)
-------- -------- -------
Less dividends and distributions:
From net investment income................. (0.15) (0.15) --
In excess of net realized gain on
investments and foreign currency
transactions.............................. (0.08) (0.07) --
-------- -------- -------
Total dividends and distributions to
shareholders.............................. (0.23) (0.22) --
-------- -------- -------
Net asset value at end of period........... $ 10.05 $ 9.97 $ 9.77
======== ======== =======
Total investment return (a)................ 5.25% 4.27% (2.30%)
Ratios (to average net assets)/Supplemental
Data:
Net investment loss....................... (0.2%) (1.0%) (1.6%)+
Expenses.................................. 2.2% 3.0% 3.9% +
Portfolio turnover rate.................... 25% 25% 9%
Net assets at end of period (in 000's)..... $ 12,856 $ 25,341 $20,549
</TABLE>

- -------
* Commencement of Operations.
+ Annualized
(a) Total return is calculated exclusive of sales charges and is not
annualized.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

20
<PAGE>

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 1 -- ORGANIZATION AND BUSINESS:

The Fund's investment objective is to seek long-term growth of capital commen-
surate with an acceptable level of risk by investing in a portfolio consisting
primarily of non-U.S. equity securities.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:

The following is a summary of significant accounting policies followed by the
Fund:

SECURITIES VALUATION. Portfolio securities of the International Equity Fund are
stated at value determined (a) by appraising common and preferred stocks which
are traded on the New York Stock Exchange at the last sale price on that day
or, if no sale occurs, at the mean between the closing bid and asked prices,
(b) by appraising common and preferred stocks traded on other United States na-
tional securities exchanges or foreign securities exchanges as nearly as possi-
ble in the manner described in (a) by reference to their principal exchange,
including the National Association of Securities Dealers National Market Sys-
tem, (c) by appraising over-the-counter securities quoted on the National Asso-
ciation of Securities Deal-

21
<PAGE>

ers NASDAQ system (but not listed on the National Market System) at the bid
price supplied through such system, (d) by appraising over-the-counter securi-
ties not quoted on the NASDAQ system at prices supplied by the pricing agent or
brokers selected by the Adviser, if these prices are deemed to be representa-
tive of market values at the regular close of business of the New York Stock
Exchange. Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or
less are valued at amortized cost if their term to maturity at purchase was 60
days or less, or by amortizing the difference between market value on the 61st
day prior to maturity and value on maturity date if their original term to ma-
turity at purchase exceeded 60 days.

FORWARD CURRENCY CONTRACTS. A forward currency contract is an agreement to buy
or sell currencies of different countries on a specified future date at a spec-
ified rate. During the period the forward contract is open, changes in the
value of the contract are recognized as unrealized gains or losses by "marking
to market" such contract on a daily basis to reflect the market value of the
contract at the end of each day's trading. When the forward contract is closed,
the Fund records a realized gain or loss equal to the difference between the
proceeds from (or cost of) the closing transaction and the Fund's basis in the
contract. The International Equity Fund enters into forward foreign currency
exchange contracts in order to hedge its foreign currency denominated invest-
ments and receivables and payables against adverse movements in future foreign
exchange rates.

The use of forward contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the statement of assets and liabili-
ties. The contract or notional amounts reflect the extent of the Fund's in-
volvement in these financial instruments. Risks arise from the possible move-
ments in the foreign exchange rates underlying these instruments. The
unrealized appreciation on forward contracts reflects the Fund's exposure at
year end to credit loss in the event of a counterparty's failure to perform its
obligations.

22
<PAGE>

FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $1,163,099 and $101,461 have been reclassi-
fied from accumulated undistributed net realized gain on foreign currency
transactions to accumulated net investment loss and additional paid in capital,
respectively, due to the tax treatment of foreign currency gains.

Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The International Equity Fund intends to de-
clare and pay dividends quarterly.

Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.

SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transac-
tions on the trade date. Realized gains and losses on security transactions are
determined using the identified cost method. Dividend income is recognized on
the ex-dividend date and interest income is accrued daily. Discounts on securi-
ties purchased for the Fund are accreted on the constant yield method over the
life of the respective securities.

(i) market value of investment securities, other assets and liabilities -- at
the valuation date,

(ii) purchases and sales of investment securities, income and expenses -- at
the date of such transactions.

The assets and liabilities of the International Equity Fund are presented at
the exchange rates and market values at the close of the year. The changes in
net assets arising from fluctuations in exchange rates and

23
<PAGE>

the changes in net assets resulting from changes in market prices are not sepa-
rately presented. However, gains and losses from certain foreign currency
transactions are treated as ordinary income for Federal income tax purposes.

NOTE 3 -- FEES AND RELATED PARTY POLICIES:

NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned sub-
sidiary of New York Life, is the Administrator for the Fund.

24
<PAGE>

of such excess up to the extent of their fees. The expenses of the Fund did not
exceed the most restrictive expense limitation for the year ended December 31,
1995.

The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund.

SALES CHARGES. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $63,684 for the year
ended December 31, 1995.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges for the year ended December 31, 1995 in the amount of $22,447.

25
<PAGE>

CAPITAL. At December 31, 1995 NYLIFE Distributors held shares of Class A of the
Fund with a net asset value of $10,050,000.

OTHER. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1995 were $7,506.

Fees for the cost of legal services provided to the Fund by the Office of Gen-
eral Counsel of New York Life amounted to $1,474 for the year ended December
31, 1995.

Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the year ended December 31, 1995 is shown on
the statement of operations.

NOTE 4 -- FEDERAL INCOME TAX:

At December 31, 1995, for Federal income tax purposes, capital loss
carryforwards of $28,037 are available to the extent provided by regulations to
offset future realized gains through 2003. To the extent that these loss
carryforwards are used to offset future capital gains, it is probable that the
capital gains so offset will not be distributed to shareholders. Additionally,
the Fund intends to elect, to the extent provided by the regulations, to treat
$54,724 of qualifying capital losses that arose during the year as if they
arose on January 1, 1996.

NOTE 5 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):

NOTE 6 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):

<TABLE>
<CAPTION>
September 13*
Year Ended through
December 31 December 31
1995 1994
--------------- -------------
Class A Class B Class B
------- ------- -------------
<S> <C> <C> <C>
Shares sold...................................... 1,304 1,761 2,140
Shares issued in reinvestment of dividends and
distributions................................... 6 52 --
----- ----- -----
1,310 1,813 2,140
Shares redeemed.................................. 30 1,376 37
----- ----- -----
Net increase..................................... 1,280 437 2,103
===== ===== =====
</TABLE>

- -------
*Commencement of Operations.

26
<PAGE>

- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------

To the Board of Trustees and Shareholders of
The MainStay Funds

In our opinion, the accompanying statement of assets and liabilities (including
the portfolio of investments) and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all mate-
rial respects, the financial position of the MainStay International Equity
Fund, (one of the thirteen funds constituting The MainStay Funds, hereafter re-
ferred to as the "Fund") at December 31, 1995, the results of its operations
for the year then ended and the changes in its net assets and the financial
highlights for each of the periods presented, in conformity with generally ac-
cepted accounting principles. These financial statements and financial high-
lights (hereafter referred to as "financial statements") are the responsibility
of the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these fi-
nancial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1995 by correspondence with the cus-
todian and brokers and the application of alternative auditing procedures where
confirmations from brokers were not received, provide a reasonable basis for
the opinion expressed above.

Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 12, 1996

27
<PAGE>

- --------------------------------------------------------------------------------
The MainStay Funds
- --------------------------------------------------------------------------------

GROWTH FUNDS

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ---- ----------- -------------- ----------------------
<S> <C> <C> <C>
Capital Appreciation Fund [horizontal bar graph Invests primarily in common stocks You want your investments to grow
indicating risk/reward of companies in expanding markets and are willing to accept a higher
of fund] with strong growth potential level of risk for higher return potential

Equity Index Fund [horizontal bar graph Invests in a portfolio that tracks You seek a conservative way to partici-
indicating risk/reward the makeup and returns of the pate in the growth potential of stocks+
of fund] S&P 500*

International Equity Fund [horizontal bar graph Offers broad diversification into You prefer the higher return potential
indicating risk/reward international stock markets with of international equities or want to add
of fund] an emphasis on risk control diversification to your domestic
investments++
</TABLE>

GROWTH & INCOME FUNDS

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ---- ----------- -------------- ----------------------
<S> <C> <C> <C>
Total Return Fund [horizontal bar graph Balances current income with growth You seek a combination of income and
indicating risk/reward opportunities by investing in stocks, growth potential and want to manage
of fund] bonds, and money market instruments risk through diversification

Value Fund [horizontal bar graph Seeks undervalued stocks with You seek to maximize total return from
indicating risk/reward attractive dividends and a stimulus securities which may have more poten-
of fund] for positive change tial than the market currently sees

Convertible Fund [horizontal bar graph Invests in convertible securities for You want income from securities that
indicating risk/reward a special blend of long-term growth may offer growth potential if converted
of fund] potential and dividend income into common stock
</TABLE>

+ The original investment is guaranteed provided it is held for 10 years with
all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the guarantee date, the investor loses the benefit
of the guarantee with respect to those shares.

# A small portion of the Fund's income may be subject to state and local taxes
and the Alternative Minimum Tax. Capital gains, if any, may also be taxed.

<PAGE>

INCOME FUNDS

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ---- ----------- -------------- ----------------------
<S> <C> <C> <C>
Government Fund [horizontal bar graph Seeks a high level of current income You are seeking to combine high current
indicating risk/reward consistent with safety of principal income and safety of principal
of fund] primarily from U.S. government
securities(S)

International Bond Fund [horizontal bar graph Seeks high current yields and You prefer the higher return potential of
indicating risk/reward competitive total return from non- international bonds or want to add
of fund] U.S. bonds with an emphasis on diversification to your domestic
risk control investments++

Money Market Fund [horizontal bar graph Seeks to provide current income, You are averse to risk or want to earn
indicating risk/reward stability of principal, and liquidity, competitive yields on cash you're plan-
of fund] with free checkwriting|| ning to spend or invest in the near future
</TABLE>

TAX-FREE INCOME FUNDS

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ---- ----------- -------------- ----------------------
<S> <C> <C> <C>
Tax Free Bond Fund [horizontal bar graph Seeks high current income that's You're in a high federal income tax
indicating risk/reward exempt from regular federal bracket or want to pay less of your
of fund] income tax# investment income to the IRS

California Tax Free Fund [horizontal bar graph Seeks high current income exempt You're a California resident and want to
indicating risk/reward from both federal and California keep more of what you earn by investing
of fund] income taxes consistent with for income that's double tax free#
preservation of capital#

New York Tax Free Fund [horizontal bar graph Seeks high current income exempt You're a New York State or City resident
indicating risk/reward from federal, New York State, and and want to keep more of what you earn
of fund] New York City income taxes consis- with income that's double or triple tax
tent with preservation of capital# free#
</TABLE>

If you would like to learn more about any of the MainStay Funds not covered by
your current prospectus, please call your Registered Representative. Your
Registered Representative can provide you with additional prospectuses which
contain more complete information including advisory fees, other expenses and
share classes. Please read the prospectus carefully before you invest or send
money. Shares must be offered in the investor's state of residence.

<PAGE>

This page intentionally left blank

<PAGE>

- ----------------------------------------------------------------
MainStay International
Equity Fund
- ----------------------------------------------------------------

1995 annual report
The year in review
fund results
& portfolio highlights

[LOGO OF MAINSTAY(R) FUNDS APPEARS HERE]

- ----------------------------------------------------------------
December 31, 1995
- ----------------------------------------------------------------

Officers & Trustees

Dechert Price & Rhoads
Legal Counsel

[LOGO OF MAINSTAY(R) FUNDS APPEARS HERE]

[LOGO OF NEW YORK LIFE APPEARS HERE]

This report is provided for the information of shareholders of the MainStay
International Equity Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.

[LOGO OF RECYCLED PAPER APPEARS HERE] MSAN11 (296)

<PAGE>

- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------

Chairperson's Letter 2
MainStay Money Market Fund
Portfolio Managers' Comments 4
Yields & Lipper Rankings 5
Financial Statements 6
Notes to Financial Statements 12
Report of Independent Accountants 15
The MainStay Funds 16
<PAGE>

- --------------------------------------------------------------------------------
CHAIRPERSON'S LETTER
- --------------------------------------------------------------------------------

[PHOTO OF ALICE T. KANE APPEARS HERE]

Alice T. Kane, Chairperson

Report to Shareholders for the Year Ended December 31, 1995

We are pleased to report to you on the activities and investment results of the
MainStay/(R)/ Money Market Fund for the twelve months ended December 31, 1995.
For the seven-day period ending December 27, 1995, the Money Market Fund had a
yield of 5.25% for both Class A and Class B shares.

Throughout the year, the Fund was continually managed with emphasis on high
quality, liquidity, and capital preservation. Special attention was given to
judicious security selection, particularly among Japanese banks.

The Federal Reserve lowered short-term interest rates modestly in July and
December. In this shifting environment, the Fund's portfolio managers carefully
selected investments to capitalize on market opportunities while seeking to
minimize investment risk. Though investments in the MainStay Money Market Fund
are neither insured nor guaranteed by the U.S. government and there is no
assurance that the Fund will be able to maintain a stable net asset value of
$1.00 per share, we continue to believe the MainStay Money Market Fund
represents an appropriate choice for investors seeking quality, liquidity, and
preservation of capital.

2
<PAGE>

The portfolio's management and makeup are discussed on the following pages.
While positive money market returns are important to investors, they represent
only one expression of MainStay's ongoing commitment to help our shareholders
pursue their investment goals. In 1995, that commitment helped us attract more
assets than in any previous year. As a MainStay shareholder, you have played an
important role in our success, and we look forward to serving your investment
needs for many years to come.

/s/ Alice T. Kane

Alice T. Kane
January 1996

3
<PAGE>

- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS' COMMENTS
- --------------------------------------------------------------------------------

For the seven-day period ended December 27, 1995, the MainStay Money Market Fund
provided a yield of 5.25% for both Class A and Class B shares.

[PHOTO OF MONEY MARKET TEAM APPEARS HERE]

Money Market Team - Ravi Akhoury, Frank Salem, and Jessica Terc
(left to right)

During the year, a variety of factors influenced interest rate movements across
the maturity spectrum. Longer maturity issues appeared to anticipate easing by
the Federal Reserve and progress on the budget front. In July and December, the
Federal Reserve made modest cuts in short-term rates. Interestingly, 5-year
intermediate-term rates dropped to a level virtually even with short-term rates,
flattening a portion of the yield curve, and increasing the attractiveness of
short-term securities.

Strategically, the Money Market Fund continued to emphasize high quality, liquid
securities that offered high current yield consistent with preservation of
capital. During the year, we remained cautious in our security selection,
particularly in light of difficulties at Barings Bank.

We have tried to remain conservative in identifying investment opportunities,
always seeking as high a level of current income as we consider consistent with
the preservation of capital and liquidity. [ ]

Ravi Akhoury, Frank Salem
Portfolio Managers

Yield Curve
- --------------------------------------------------------------------------------
When the interest rates available from various short-, intermediate-, and long-
term securities are plotted on a graph, the resulting line is known as a "yield
curve."

Flattened Yield Curve
- --------------------------------------------------------------------------------
Generally, short-term rates are lower than intermediate- or long-term rates.
When short- and intermediate-term rates are equal, the portions of the yield
curve that reflect these maturities will be flat.

4
<PAGE>

- --------------------------------------------------------------------------------
YIELDS & LIPPER RANKINGS as of 12/31/95
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Fund SEC yields*
- -----------------------------------------------------------------------------------------------------------------------
7-day effective yield
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Class A 5.25%
Class B 5.25%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Fund Lipper+ rankings and year-end Lipper category returns
- -----------------------------------------------------------------------------------------------------------------------
Life of Fund/Class
1 year 5 years through 12/31/95
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 101 out of 256 funds n/a 101 out of 256 funds
Class B 101 out of 256 funds 63 out of 173 funds 50 out of 111 funds
Average Lipper money market fund 5.37% 4.11% 5.58%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

- --------------------
* Past performance is no guarantee of future results. Investments in the
MainStay Money Market Fund are neither insured nor guaranteed by the U.S.
government and there is no assurance that the Fund will be able to maintain a
stable net asset value of $1.00 per share. The Administrator and Adviser have
agreed to assume a portion of the expenses for the Money Market Fund; had
these expenses not been assumed, the average 7-day yield would have been
5.05%. Yield is based on the latest 7-day period ending 12/27/95. This expense
limitation may be terminated or revised at any time.

5
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY MONEY MARKET FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal Amortized
Amount Cost
-------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (100.0%)+
ASSET-BACKED SECURITY (0.2%)
Ford Credit Auto Lease Trust
Series 1995-1 Class A1
6.00%, due 5/15/96 (c)(d)............................. $ 509,411 $ 509,351
------------
BANK NOTES (2.4%)
First Systems Bank-Fargo, North Dakota
5.93%, due 6/3/96 (c)(d).............................. 2,500,000 2,500,239
Fleet National Bank-Providence,
Rhode Island
5.87%, due 10/30/96 (c)(d)............................ 5,000,000 5,000,000
------------
7,500,239
------------
CERTIFICATES OF DEPOSIT (9.2%)
Bayerische Vereinsbank AG
6.00%, due 7/24/96 (d)................................ 7,000,000 7,000,000
First National Bank of Maryland
5.90%, due 10/23/96 (c)(d)............................ 8,000,000 8,000,000
Industrial Bank of Japan Ltd.
5.86%, due 1/11/96 (d)................................ 3,000,000 2,999,688
5.87%, due 1/8/96 (d)................................. 4,000,000 3,999,720
Mercantile Safe Deposit & Trust Co.
5.72%, due 12/23/96 (c)(d)............................ 2,000,000 2,000,994
Mitsubishi Bank
6.13%, due 1/4/96 (d)................................. 5,000,000 5,000,004
------------
29,000,406
------------
MEDIUM-TERM NOTES (14.6%)
American Express Centurion Bank
5.93%, due 2/16/96 (c)(d)............................. 5,000,000 4,999,696
AT&T Capital Corp.
6.30%, due 7/25/96 (d)................................ 1,765,000 1,769,746
6.99%, due 10/4/96 (d)................................ 2,375,000 2,395,030
Corestates Capital Corp.
6.10%, due 5/15/96 (c)(d)............................. 750,000 750,000
First National Bank of Minneapolis
9.33%, due 2/26/96 (d)................................ 4,000,000 4,020,377
First Security Bank of Idaho
6.88%, due 10/4/96 (d)................................ 8,440,000 8,513,849
General Electric Capital Corp.
5.71%, due 6/6/96 (c)(d).............................. 6,000,000 6,000,000
Household Finance Corp.
9.38%, due 2/15/96 (d)................................ 2,000,000 2,007,298
International Lease Finance Corp.
6.80%, due 9/30/96 (d)................................ 4,260,000 4,289,629

<CAPTION>
Principal Amortized
Amount Cost
-------------------------
<S> <C> <C>
MEDIUM-TERM NOTES (CONTINUED)
Kingdom of Spain
9.35%, due 5/27/96 (d)................................ $2,000,000 $ 2,026,280
Norwest Corp.
4.86%, due 6/28/96 (d)................................ 3,100,000 3,085,087
Toyota Motor Credit Corp.
5.20%, due 1/12/96 (c)(d)............................. 1,000,000 999,969
Xerox Credit Corp.
5.30%, due 3/29/96 (c)(d)............................. 5,000,000 5,000,000
------------
45,856,961
------------
COMMERCIAL PAPER (73.6%)
ABN-AMRO North America Finance Inc.
5.68%, due 2/16/96.................................... 3,500,000 3,474,598
Banca CRT Financial Corp.
5.52%, due 5/15/96.................................... 2,600,000 2,546,180
5.65%, due 1/26/96.................................... 3,500,000 3,486,267
5.67%, due 3/1/96..................................... 2,000,000 1,981,100
5.69%, due 2/26/96.................................... 2,200,000 2,180,528
5.79%, due 1/25/96.................................... 5,000,000 4,980,700
Banco Boavista S.A.
5.63%, due 4/15/96.................................... 1,000,000 983,579
Banco Nacional de Comercio Exterior
5.85%, due 1/16/96.................................... 3,000,000 2,992,688
Banco Real S.A., Grand Cayman
5.63%, due 4/12/96.................................... 1,000,000 984,063
Bancomer S.A.
5.37%, due 9/13/96.................................... 4,000,000 3,847,253
5.39%, due 7/11/96.................................... 8,000,000 7,770,027
5.42%, due 7/11/96.................................... 3,000,000 2,913,280
Bank of Scotland
5.32%, due 6/11/96.................................... 9,000,000 8,784,540
Barton Capital Corp.
5.95%, due 1/9/96 (b)................................. 2,500,000 2,496,694
6.00%, due 1/9/96 (b)................................. 6,000,000 5,992,000
BEAL Cayman Ltd.
5.59%, due 3/14/96.................................... 5,000,000 4,943,324
BIL North America Inc.
5.65%, due 2/1/96..................................... 2,000,000 1,990,269
5.74%, due 1/29/96.................................... 1,500,000 1,493,303
Caisse Centrale des Banques Populaires
5.61%, due 3/18/96.................................... 6,000,000 5,928,005
5.75%, due 1/8/96..................................... 8,000,000 7,991,056
Cargill Financial Services Corp.
5.65%, due 2/5/96 (b)................................. 4,000,000 3,978,028
Cargill Inc.
5.75%, due 1/8/96..................................... 900,000 898,994
</TABLE>
- -------
+ Percentages indicated are based on Fund net assets.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

6
<PAGE>

<TABLE>
<CAPTION>
Principal Amortized
Amount Cost
-------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (CONTINUED)
COMMERCIAL PAPER (CONTINUED)
Coles Myer Finance Ltd.
5.70%, due 2/6/96..................................... $2,000,000 $ 1,988,600
5.71%, due 2/2/96..................................... 5,000,000 4,974,622
5.71%, due 2/6/96..................................... 3,500,000 3,480,015
5.74%, due 2/2/96..................................... 4,000,000 3,979,591
Compagnie Bancaire
5.52%, due 4/11/96.................................... 6,000,000 5,907,080
5.62%, due 1/10/96.................................... 4,500,000 4,493,678
Corporacion Andina de Fomento
5.75%, due 1/18/96.................................... 850,000 847,692
COSCO (Cayman) Co. Ltd.
5.75%, due 2/9/96..................................... 1,500,000 1,490,656
Credito Italiano (DE) Inc.
5.66%, due 1/29/96.................................... 6,000,000 5,973,587
Diamond Asset Funding Corp.
5.97%, due 1/31/96 (b)................................ 9,000,000 8,955,225
Echlin Inc.
5.75%, due 1/29/96.................................... 6,000,000 5,973,167
Explorer Pipeline Co.
5.65%, due 2/23/96 (b)................................ 3,990,000 3,956,811
Idaho Power Co.
5.85%, due 1/9/96..................................... 3,000,000 2,996,100
Island Finance Puerto Rico Inc.
5.71%, due 1/30/96.................................... 7,200,000 7,166,882
5.72%, due 1/22/96.................................... 4,500,000 4,484,985
Kingdom of Sweden
5.61%, due 4/4/96..................................... 3,500,000 3,448,731
5.65%, due 3/8/96..................................... 7,300,000 7,223,238
Morgan Stanley Group Inc.
5.70%, due 2/9/96..................................... 1,500,000 1,490,738
NICOR Inc.
5.63%, due 2/9/96..................................... 9,660,000 9,601,082

<CAPTION>
Principal Amortized
Amount Cost
----------------------------
<S> <C> <C>
COMMERCIAL PAPER (CONTINUED)
Pemex Capital Inc.
5.65%, due 1/23/96................................. $4,000,000 $ 3,986,189
5.70%, due 2/16/96................................. 6,400,000 6,353,387
5.90%, due 1/17/96................................. 2,500,000 2,493,444
Petroleo Brasileiro S.A.-Petrobras
5.72%, due 1/3/96.................................. 5,000,000 4,998,411
5.74%, due 1/3/96.................................. 3,700,000 3,698,820
Shinhan Bank
5.82%, due 2/12/96................................. 2,900,000 2,880,309
Songs Fuel Co.
5.57%, due 3/15/96................................. 3,000,000 2,965,652
5.80%, due 1/31/96................................. 9,000,000 8,956,500
Svenska Handelsbanken Inc.
5.60%, due 1/16/96................................. 1,500,000 1,496,500
5.62%, due 1/16/96................................. 9,000,000 8,978,925
5.64%, due 3/29/96................................. 2,500,000 2,465,533
5.75%, due 1/26/96................................. 1,000,000 996,007
Unibanco-Uniao de Bancos Brasilieros S.A., Grand
Cayman
5.66%, due 4/15/96................................. 4,000,000 3,933,967
USL Capital Corp.
5.73%, due 1/26/96................................. 6,500,000 6,474,280
------------
231,746,880
------------
Total Short-Term Investments
(Amortized Cost $314,613,837) (e).................. 100.0% 314,613,837
Cash and Other Assets,
Less Liabilities................................... 0.0(a) 109,247
---------- ------------
Net Assets.......................................... 100.0% $314,723,084
========== ============
</TABLE>
- -------
(a) Less than one tenth of a percent.
(b) May be sold to institutional investors only.
(c) Floating rate. Rate shown is the rate in effect at December 31, 1995.
(d) Coupon interest bearing security.
(e) The cost stated also represents the aggregate cost for Federal income tax
purposes.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

7
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY MONEY MARKET FUND
- --------------------------------------------------------------------------------

The table below sets forth the diversification of Money Market Fund investments
by industry.

<TABLE>
<CAPTION>
Amortized
Cost Percent +
-------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS
Auto Manufacturing...................................... $ 999,969 0.3%
Auto Parts.............................................. 5,973,167 1.9
Banks #................................................. 199,018,832 63.2
Brokerage............................................... 1,490,738 0.5
Computers & Office Equipment............................ 5,000,000 1.6
Conglomerates........................................... 6,000,000 1.9
Consumer Financial Services............................. 2,516,650 0.8
Finance................................................. 28,975,461 9.2
Food.................................................... 4,877,022 1.6
Foreign Government...................................... 12,698,249 4.0
Oil Services............................................ 3,956,811 1.3
Retail.................................................. 14,422,828 4.6
Utilities............................................... 14,918,252 4.7
Utilities-Gas........................................... 9,601,082 3.1
Utilities-Telephone..................................... 4,164,776 1.3
------------ -----
314,613,837 100.0
Cash and Other Assets,
Less Liabilities....................................... 109,247 0.0(a)
------------ -----
Net Assets.............................................. $314,723,084 100.0%
============ =====
</TABLE>
- -------
+ Percentages indicated are based on Fund net assets.
# The Fund will invest more than 25% of the market value of its total assets
in the securities of banks and bank holding companies, including
certificates of deposit, bankers' acceptances and securities guaranteed by
banks and bank holding companies.
(a) Less than one tenth of a percent.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

8
<PAGE>

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

STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1995

<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (Note 2)
(amortized cost $314,613,837)................................... $314,613,837
Cash............................................................. 67,885
Receivables:
Interest........................................................ 1,517,141
Fund shares sold................................................ 441,272
Other assets..................................................... 264
------------
Total assets................................................... 316,640,399
------------
LIABILITIES:
Payables:
Fund shares redeemed............................................ 309,500
Transfer agent.................................................. 100,300
NYLIFE Distributors............................................. 23,414
Adviser......................................................... 19,165
Custodian....................................................... 6,150
Trustees........................................................ 2,324
Accrued expenses................................................. 72,666
Dividend payable................................................. 1,383,796
------------
Total liabilities.............................................. 1,917,315
------------
Net assets....................................................... $314,723,084
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized
Class A......................................................... $ 348,804
Class B......................................................... 2,798,560
Additional paid-in capital....................................... 311,589,063
Accumulated net realized loss on investments..................... (13,343)
------------
Net assets....................................................... $314,723,084
============
CLASS A
Net assets applicable to outstanding shares...................... $ 34,880,382
============
Shares of beneficial interest outstanding........................ 34,880,382
============
Net asset value per share outstanding............................ $ 1.00
============
CLASS B
Net assets applicable to outstanding shares...................... $279,842,702
============
Shares of beneficial interest outstanding........................ 279,856,045
============
Net asset value per share outstanding............................ $ 1.00
============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest......................................................... $16,332,442
-----------
Expenses: (Note 2)
Transfer agent................................................... 738,116
Administration (Note 3).......................................... 674,279
Advisory (Note 3)................................................ 674,279
Shareholder communication........................................ 117,451
Registration..................................................... 93,479
Recordkeeping (Note 3)........................................... 53,064
Legal............................................................ 36,890
Custodian........................................................ 35,828
Auditing......................................................... 15,604
Trustees......................................................... 11,028
Miscellaneous.................................................... 5,121
-----------
Total expenses before reimbursement............................. 2,455,139
Expense reimbursement from Administrator and Adviser (Note 3)..... (565,950)
-----------
Net expenses.................................................... 1,889,189
-----------
Net investment income............................................. 14,443,253
-----------
REALIZED LOSS ON INVESTMENTS:
Net realized loss on investments.................................. (4,137)
-----------
Net increase in net assets resulting from operations.............. $14,439,116
===========
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

9
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY MONEY MARKET FUND
- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
September 1
Year ended through Year ended
December 31 December 31 August 31
1995 1994* 1994
------------- ------------- -------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income............ $ 14,443,253 $ 3,202,450 $ 5,254,640
Net realized loss on investments. (4,137) (154) (9,052)
------------- ------------- -------------
Net increase in net assets
resulting from operations....... 14,439,116 3,202,296 5,245,588
------------- ------------- -------------
Dividends to shareholders:
From net investment income:
Class A.......................... (1,363,704) -- --
Class B.......................... (13,079,549) (3,202,450) (5,254,640)
------------- ------------- -------------
Total dividends to shareholders. (14,443,253) (3,202,450) (5,254,640)
------------- ------------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A.......................... 88,180,222 -- --
Class B.......................... 421,595,747 144,136,050 368,377,734
Net asset value of shares issued
to shareholders in reinvestment
of dividends:
Class A.......................... 1,157,312 -- --
Class B.......................... 12,087,359 2,731,679 4,605,079
------------- ------------- -------------
523,020,640 146,867,729 372,982,813
Cost of shares redeemed:
Class A.......................... (54,457,152) -- --
Class B.......................... (375,748,656) (117,432,156) (330,403,881)
------------- ------------- -------------
Increase in net assets derived
from capital share
transactions................... 92,814,832 29,435,573 42,578,932
------------- ------------- -------------
Net increase in net assets...... 92,810,695 29,435,419 42,569,880
NET ASSETS:
Beginning of period............... 221,912,389 192,476,970 149,907,090
------------- ------------- -------------
End of period..................... $ 314,723,084 $ 221,912,389 $ 192,476,970
============= ============= =============
</TABLE>
- -------
* The Fund changed its fiscal year end from August 31 to December 31.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

10
<PAGE>

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

FINANCIAL HIGHLIGHTS
(SELECTED PER SHARE DATA AND RATIOS)

<TABLE>
<CAPTION>
Class B
---------------------------------------------------
Class A Class B September 1
-------- --------- through Year ended August 31
Year ended December 31 --------------------------------------
December 31, 1995 1994* 1994 1993 1992 1991
------------------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- --------- -------- -------- -------- -------- --------
Net investment income... 0.05 0.05 0.02 0.03 0.03 0.04 0.06
-------- --------- -------- -------- -------- -------- --------
Less dividends from net
investment income...... (0.05) (0.05) (0.02) (0.03) (0.03) (0.04) (0.06)
-------- --------- -------- -------- -------- -------- --------
Net asset value at end
of period.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ========= ======== ======== ======== ======== ========
Total investment
return (a)............. 5.51% 5.51% 1.54% 3.08% 2.71% 3.80% 6.63%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income.. 5.4% 5.4% 4.6%+ 3.1% 2.7% 4.0% 6.5%
Net expenses........... 0.7% 0.7% 0.7%+ 0.7% 0.7% 0.7% 0.7%
Expenses (before
reimbursement)........ 0.9% 0.9% 0.9%+ 1.0% 0.9% 1.0% 0.9%
Net assets at end of
period (in 000's)...... $ 34,880 $ 279,843 $221,912 $192,477 $149,907 $182,567 $246,954
</TABLE>
- -------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized
(a) Total return is not annualized.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

11
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY MONEY MARKET FUND
- --------------------------------------------------------------------------------

NOTE 1 -- ORGANIZATION AND BUSINESS:

The Fund currently offers two classes of shares. Class A shares, whose distri-
bution commenced on January 3, 1995, and Class B shares bear the same voting
(except for issues that relate solely to one class), dividend, liquidation and
other rights and conditions.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:

The following is a summary of significant accounting policies followed by the
Fund:

VALUATION OF FUND SHARES. The Fund seeks to maintain a net asset value of $1.00
per share, although there is no assurance that it will be able to do so on a
continuous basis, and it has adopted certain investment, portfolio and dividend
and distribution policies designed to enable it to do so.

SECURITIES VALUATION. Securities are valued at amortized cost, which approxi-
mates market value. The amortized cost method involves valuing a security at
its cost on the date of purchase and thereafter assuming a constant amortiza-
tion to maturity of the difference between such cost and the value on maturity
date.

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are recorded on the ex-
dividend date. Dividends are declared daily and paid monthly.

Income dividends are determined in accordance with Federal income tax regula-
tions which may differ from generally accepted accounting principles.

SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transac-
tions on the trade date. Interest income is accrued daily and discounts on se-
curities purchased for the Fund are accreted on the constant yield method over
the life of the respective securities.

12
<PAGE>

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

EXPENSES. Expenses with respect to the Trust are allocated to the individual
Funds in proportion to the net assets of the respective Funds when the expenses
are incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses and realized and unrealized gains and
losses on investments of the Fund are allocated to separate classes of shares
based upon their relative net asset value on the date the income is earned or
expenses and realized and unrealized gains and losses are incurred.

NOTE 3 -- FEES AND RELATED PARTY POLICIES:

NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned sub-
sidiary of New York Life, is the Administrator for the Fund.

The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an an-
nual rate of the average daily net assets of 0.25% up to $300 million, 0.225%
on assets from $300 to $700 million, 0.20% on assets from $700 million to $1.0
billion and 0.175% on assets in excess of $1.0 billion.

The Adviser and Administrator have voluntarily agreed to assume the expenses of
the Fund to the extent that such expenses would exceed on an annualized basis
0.70% of the average daily net assets of the Fund. Such excess assumed for the
year ended December 31, 1995 was $565,950.

The Investment Advisory and Administration Agreements for the Fund also provide
that in the event the expenses of the Fund (including the fees for the Adviser
and Administrator, but excluding interest, taxes, organization expenses, liti-
gation and indemnification expenses and other extraordinary expenses) for any
fiscal year exceed the most restrictive limitation of certain state securities
commissions, the Adviser and the Administrator each will reduce their fee pay-
able by the Fund by 50% of the amount of such excess up to the extent of their
fees. The expenses of the Fund did not exceed the most restrictive expense lim-
itation for the year ended December 31, 1995.

13
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY MONEY MARKET FUND
- --------------------------------------------------------------------------------

CONTINGENT DEFERRED SALES CHARGE. Even though the Fund does not assess a con-
tingent deferred sales charge upon redemption of Class B shares of the Fund,
the applicable contingent deferred sales charge will be assessed when shares
are redeemed from the Fund if the shareholder previously exchanged his or her
investment into the Fund from another Fund in the Trust. The Fund was advised
that NYLIFE Distributors received from shareholders the proceeds from contin-
gent deferred sales charges for the year ended December 31, 1995 in the amount
of $635,470.

OTHER. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1995 were $30,451.

Fees for the cost of legal services provided to the Fund by the Office of Gen-
eral Counsel of New York Life amounted to $15,986 for the year ended December
31, 1995.

Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the year ended December 31, 1995 is shown on
the statement of operations.

NOTE 4 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):

<TABLE>
<CAPTION>
September 1
Year Ended through Year Ended
December 31 December 31 August 31
1995 1994* 1994
--------------- ----------- ----------
Class A Class B Class B
------- ------- ----------------------
<S> <C> <C> <C> <C>
Shares sold............................. 88,180 421,596 144,136 368,378
Shares issued in reinvestment of divi-
dends and distributions................ 1,157 12,087 2,732 4,605
------ ------- ------- -------
89,337 433,683 146,868 372,983
Shares redeemed......................... 54,457 375,749 117,432 330,404
------ ------- ------- -------
Net increase............................ 34,880 57,934 29,436 42,579
====== ======= ======= =======
</TABLE>
- -------
*The Fund changed its fiscal year end from August 31 to December 31.

14
<PAGE>

- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------

To the Board of Trustees and Shareholders of
The MainStay Funds

In our opinion, the accompanying statement of assets and liabilities (including
the portfolio of investments) and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all mate-
rial respects, the financial position of the MainStay Money Market Fund, (one
of the thirteen funds constituting The MainStay Funds, hereafter referred to as
the "Fund") at December 31, 1995, the results of its operations for the year
then ended and the changes in its net assets and the financial highlights for
each of the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter re-
ferred to as "financial statements") are the responsibility of the Fund's man-
agement; our responsibility is to express an opinion on these financial state-
ments based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which re-
quire that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and dis-
closures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall finan-
cial statement presentation. We believe that our audits, which included confir-
mation of securities at December 31, 1995 by correspondence with the custodian,
provide a reasonable basis for the opinion expressed above.

Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 12, 1996

15
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY FUNDS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------

[horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of fund] with strong growth potential level of risk for higher return potential
- ------------------------------------------------------------------------------------------------------------------------------------

[horizontal bar Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund graph indicating the makeup and returns of the pate in the growth potential of stocks/+/
risk/reward of fund] S&P 500*
- ------------------------------------------------------------------------------------------------------------------------------------

[horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph indicating international stock markets with of international equities or want to add
risk/reward of fund] an emphasis on risk control diversification to your domestic
investments/++/
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

<TABLE>
<CAPTION>
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------

[horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------

[horizontal bar Invests in convertible securities for You want income from securities that
Convertible Fund graph indicating a special blend of long-term growth may offer growth potential if converted
risk/reward of fund] potential and dividend income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

# A small portion of the Fund's income may be subject to state and local taxes
and the Alternative Minimum Tax. Capital gains, if any, may also be taxed.
<PAGE>

<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
[horizonal bar Seeks a high level of current income You are seeking to combine high current
Government Fund graph indicating consistent with safety of principal income and safety of principal
risk/reward of fund] primarily from U.S. government
securities/(S)/
- ------------------------------------------------------------------------------------------------------------------------------------

High Yield [horizonal bar An aggressive high yield bond You want to maximize current income
Corporate Bond Fund graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of fund] maximum current income securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------

[horizonal bar Seeks high current yields and You prefer the higher return potential of
International Bond Fund graph indicating competitive total return from non- international bonds or want to add
risk/reward of fund] U.S. bonds with an emphasis on diversification to your domestic
risk control investments/++/
- ------------------------------------------------------------------------------------------------------------------------------------

[horizonal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of fund] with free checkwriting/||/ ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

<TABLE>
<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
[horizonal bar Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund graph indicating exempt from regular federal bracket or want to pay less of your
risk/reward of fund] income tax/#/ investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------

[horizonal bar Seeks high current income exempt You're a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by investing
risk/reward of fund] income taxes consistent with for income that's double tax free/#/
preservation of capital/#/
- ------------------------------------------------------------------------------------------------------------------------------------

[horizonal bar Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of fund] New York City income taxes consis- with income that's double or triple tax
tent with preservation of capital/#/ free/#/
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

If you would like to learn more about any of the MainStay Funds not covered by
your current prospectus, please call your Registered Representative. Your
Registered Representative can provide you with additional prospectuses which
contain more complete information including advisory fees, other expenses, and
share classes. Please read the prospectus carefully before you invest or send
money. Shares must be offered in the investor's state of residence.

17
<PAGE>

This page intentionally left blank
<PAGE>

- --------------------------------------------------------------------------------
MainStay Money
Market Fund
- --------------------------------------------------------------------------------

1995
annual
report

The year in review
fund results
& portfolio highlights

[LOGO OF MAINSTAY (R) FUNDS APPEARS HERE]

- --------------------------------------------------------------------------------
December 31, 1995
- --------------------------------------------------------------------------------

Officers & Trustees

Dechert Price & Rhoads
Legal Counsel

[LOGO OF MAINSTAY (R) FUNDS APPEARS HERE]

[LOGO OF NEW YORK LIFE APPEARS HERE]

This report is provided for the information of shareholders of the MainStay High
Money Market. It may be given to others only when preceded or accompanied by an
effective MainStay Funds prospectus. This report does not offer to sell any
securities or solicit orders to buy them.

MSAN09 (296)

[LOGO OF RECYCLED PAPER APPEARS HERE]

<PAGE>

MainStay New York Tax Free Fund Highlights
and Portfolio Managers' Comments 4

Returns & Lipper Rankings 6

Year-by-Year Performance 7

$10,000 Invested in the MainStay New York
Tax Free Fund Class A Shares vs. Lehman Brothers
Municipal Bond Index and Inflation 7

$10,000 Invested in the MainStay New York
Tax Free Fund Class B Shares vs. Lehman Brothers
Municipal Bond Index and Inflation 7

Diversification of Holdings 8

Quality Breakdown 8

Financial Statements 9

Notes to Financial Statements 13

Report of Independent Accountants 19

The MainStay Funds 20
</TABLE>

<PAGE>

- --------------------------------------------------------------------------------
Chairperson's Letter
- --------------------------------------------------------------------------------

[PHOTO OF ALICE T. KANE APPEARS HERE] Alice T. Kane, Chairperson

Report to Shareholders for the Year Ended December 31, 1995

During 1995, municipal securities benefited from one of the strongest bond
markets in history. Long-term Treasury bonds returned 30.1%, or more than six
times their average annual total return for the previous 69 years.* While
municipal bond gains were not as dramatic, investors in the MainStay New York
Tax Free Fund enjoyed the highest annual total returns since the Fund's
inception.

In this context, we are pleased to report to you on the activities and
investment results of the MainStay New York Tax Free Fund for the twelve months
ended December 31, 1995. Excluding all sales charges, the Fund earned 15.97% and
15.67% for Class A and Class B shares, respectively, for the twelve months ended
December 31, 1995. Based on the three-year period from December 31, 1992, to
December 31, 1995, the Fund received an overall four-star rating out of 770
funds in the municipal bond fund category from Morningstar, Inc./+/

Despite these positive results, the Fund's focus on its objective of providing a
high level of current income -- exempt from regular federal income tax and New
York State and City personal income tax, consistent with the preservation of
capital -- contributed to its underperformance relative to its peers, many of
which focus on capital appreciation. For the twelve months ended December 31,
1995, the average Lipper/++/ New York municipal debt fund earned 16.73%.

The possibility of a flat tax and concerns over Orange County, California's 1994
bankruptcy filing continued to cloud the municipal market in 1995. Nevertheless,
municipal bonds remain one of the few tax-advantaged investments available to
New York residents, many of whom face some of the nation's highest state and
local income taxes. Since the MainStay New York Tax Free Fund seeks income that
is substantially free of federal and New York State and City income tax,/(S)/ we
believe the Fund continues to represent an appropriate alternative for New York
investors seeking to keep more of what they earn.

2
<PAGE>

/s/ Alice T. Kane

Alice T. Kane
January 1996

+ Morningstar, Inc. ratings reflect historic risk-adjusted performance taking
fees and sales charges into account, and may change monthly. Its ratings of
1 (low) to 5 (high) stars are based on a fund's 3- and 5-year average annual
returns with fee adjustments, and a risk factor that reflects fund
performance relative to 3-month Treasury bill monthly returns. As of
12/31/95, the Fund's 3-year rating was 4 stars out of 770 funds in the
municipal bond fund category. The Fund did not have a 5-year operating
history as of 12/31/95 and was not eligible for a 5-year rating. Only 33% of
the funds in an investment category may receive 4 or 5 stars. Ratings
reflect Class A share performance only. The Fund's Class B shares introduced
1/3/95 will not be rated by Morningstar until they have 3 years of operating
history.

++ See footnote on page 6 for more information on Lipper Analytical Services,
Inc.

(S) A small portion of income may be subject to state and local taxes and the
Alternative Minimum Tax. Capital gains, if any, may also be taxed.

3
<PAGE>

- --------------------------------------------------------------------------------
MainStay New York Tax Free Fund
- --------------------------------------------------------------------------------

1995 Fund Highlights

[ ] Highest annual total return in the Fund's history

[ ] Annual total returns of 15.97% and 15.67% for Class A and Class B shares,
respectively, excluding sales charges

[ ] Provided dividend income at a consistent level throughout the year

[PHOTO OF JAMES FLOOD AND RAVI AKHOURY APPEARS HERE]

Portfolio Managers--James Flood and Ravi Akhoury (left to right)

For the twelve months ended December 31, 1995, the MainStay New York Tax Free
Fund provided total returns, excluding sales charges, of 15.97% and 15.67% for
Class A and Class B shares, respectively. These returns represented the highest
annual performance for any year in the history of the Fund and reflected the
outstanding performance investors experienced across all sectors of the bond
markets.

The Fund's 1995 performance trailed the average Lipper New York municipal debt
fund, which returned 16.73% for the year. This was largely due to the Fund's
strict focus on providing a high level of income, rather than seeking to lock in
capital gains in a declining rate environment.

Flat tax
- --------------------------------------------------------------------------------
The basic idea that all income should be taxed at the same rate for all
taxpayers, without deductions, exemptions (such as the tax-exempt dividends
paid by the Fund), or tax credits that may give special advantages to certain
taxpayers. Many variations on this general theme have been proposed.

Supply and demand
- --------------------------------------------------------------------------------
In the bond market, supply is influenced by the amount of
new securities issued and the amount of bonds investors wish to sell. Demand
reflects the amount of bonds investors wish to buy, which may decrease when
other markets offer greater opportunities.

4
<PAGE>

During the first half of the year, the Fund emphasized high-coupon, short-
maturity callable bonds to generate current income. Unfortunately, these
securities do not perform as well as longer maturity issues when the market
rallies sharply and suddenly, as it did more than once before the end of June.
This hurt the Fund's performance relative to its peers.

During the second half of the year, we repositioned the portfolio with some
longer-maturity noncallable bonds, which helped increase the Fund's
participation in the market rally. In the fourth quarter, the Fund's returns for
both Class A and Class B shares outpaced the Fund's Lipper peer group by a small
margin. Although current circumstances differ, in 1995, the Fund managers'
strategy helped maintain a consistent level of current income, even as interest
rates fell.

The New York market performed in line with the national tax-exempt market in
1995, while the state appeared to make progress on the economic front. The
state's governor recently submitted one of the most fiscally conservative
budgets the state legislature has seen in decades. Despite some occasional
setbacks, New York City also appears to be moving in the direction of greater
fiscal responsibility.

Due to their relative underperformance in 1995, municipals are now at
historically cheap levels versus Treasury bonds. At the beginning of 1995, a 30-
year AAA-rated municipal bond was yielding close to 80% of a comparable Treasury
bond. At year-end, the yield was closer to 90% of Treasuries. As a result, we
believe prices are extremely attractive relative to potential values. We are
currently maintaining a portfolio duration that is neutral to the market and
will, of course, continue to emphasize careful security selection among high
quality issues. [ ]

Coupon
- --------------------------------------------------------------------------------
The interest rate a fixed income security pays on an investment at par value
(e.g. $1,000).

5
<PAGE>

Class B 15.67% n/a 7.78%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Fund SEC returns*
- ---------------------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 12/31/95
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 10.76% n/a 6.69%

Class B 10.67% n/a 7.41%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>

Class B 67 out of 88 funds n/a 67 out of 88 funds

Average Lipper NY muni
debt fund 16.73% 8.69% 7.87%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>

Class B $10.02 $0.5880 $0.0000
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>

- --------------------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show the
percentage change for each of the required periods. All returns assume capital
gains and dividend distributions are reinvested. Performance figures reflect
the absorption of certain Fund expenses by the Fund's Administrator and
Adviser. Had these expenses not been absorbed, total return figures would have
been lower. This expense limitation may be terminated or revised at any time.

Class A shares are sold with a maximum initial sales charge of 4.5% and a 12b-
1 fee of .25%. Class B shares, first offered on 1/3/95, are sold with no
initial sales charge, but are subject to a maximum Contingent Deferred Sales
Charge (CDSC) of up to 5% if shares are redeemed during the first 6 years of
purchase and an annual 12b-1 fee of up to .50%. Performance figures for this
Class include the historical performance of the respective Class A shares from
inception (10/1/91) through 12/31/94. Performance data for the two Classes
after this date vary based on differences in their expense structures.

6
<PAGE>

- --------------------------------------------------------------------------------
Year-by-Year Performance*
- --------------------------------------------------------------------------------

[BAR GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
Year ended
12/31 Total Return %
<S> <C>
91 2.08%
92 8.98%
93 12.11%
94 -4.71%
95 Class A 15.97%
95 Class B 15.67%
</TABLE>

- --------------------------------------------------------------------------------
$10,000 invested in MainStay New York Tax Free Fund
vs. Lehman Brothers Municipal Bond Index and Inflation
- --------------------------------------------------------------------------------

Class A Shares

[LINE GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
Lehman Brothers New York
Year-end Muni Bond Index++ Inflation(s) Tax Free Fund
<S> <C> <C> <C>
10/1/91 $10,000 $10,000 $ 9,550
91 10,335 10,051 9,749
92 11,246 10,343 10,628
93 12,628 10,627 11,916
94 11,975 10,911 11,353
95 14,065 11,195 13,167
</TABLE>
Class B Shares

[LINE GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
Lehman Brothers New York
Year-end Muni Bond Index++ Inflation(s) Tax Free Fund
<S> <C> <C> <C>
10/1/91 $10,000 $10,000 $10,000
91 10,335 10,051 10,208
92 11,246 10,343 11,128
93 12,628 10,627 12,477
94 11,975 10,911 11,888
95 14,065 11,195 13,551
</TABLE>

- --------------------
The Class A graph assumes an initial investment of $10,000 made on 10/1/91
reflecting the effect of the 4.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,550. The Class B share graph
assumes an initial investment of $10,000 made on 10/1/91. Returns reflect
the Contingent Deferred Sales Charge (CDSC) of 2.0%, as it would apply for
the period shown. (The $10,000 invested in the Lehman Brothers Municipal
Bond Index begins on 9/30/91.) Results include reinvestment of all
distributions at net asset value and the change in share price for the
stated period.

7
<PAGE>

[PIE CHART APPEARS HERE]

<TABLE>

<S> <C>
Revenue Transportation 22.5%
Revenue Education 15.1%
Revenue Hospital/Nursing Home/Healthcare 13.5%
Revenue Utility - Gas 9.1%
Gen. Obligation - Special Tax 8.6%
Other 31.2%
</TABLE>

- --------------------------------------------------------------------------------
Quality Breakdown as of 12/31/95
- --------------------------------------------------------------------------------

[PIE CHART APPEARS HERE]

<TABLE>
<S> <C>
AAA 42.4%
A 30.0%
BBB 25.3%
Cash & Equivalents 2.3%
</TABLE>
Bond ratings provided by Standard & Poor's Corporation.
See the prospectus for details.
Note: actual percentages will vary over time

8
<PAGE>

<TABLE>
<CAPTION>
Principal
Amount Value
-------------------------
<S> <C> <C>

LONG-TERM MUNICIPAL BONDS (97.7%)+
NEW YORK (73.9%)
Buffalo & Fort Erie New York Public Bridge Authority
Toll Bridge System Revenue
5.75%, due 1/1/25...................................... $ 700,000 $ 716,625
Metropolitan Transportation Authority Commuter
Facilities Service Contract Series L
7.50%, due 7/1/17...................................... 775,000 844,750
Monroe County New York Authority
Airport Revenue, Greater
Rochester International
7.25%, due 1/1/19 (a).................................. 750,000 825,000
New York City General Obligation
Series C
7.50%, due 8/1/20...................................... 300,000 330,000
Series F
8.20%, due 11/15/04.................................... 400,000 465,000
New York State Dormitory Authority Revenue, City
University System
Series A
5.625%, due 7/1/16..................................... 700,000 703,500
New York State Dormitory Authority Revenue, Court
Facilities Lease
Series A
5.25%, due 5/15/21..................................... 900,000 833,625
New York State Dormitory Authority Revenue,
Manhattanville College
(zero coupon), due 7/1/19.............................. 2,175,000 606,281
(zero coupon), due 7/1/21.............................. 1,175,000 293,750
Series C
5.00%, due 7/1/17...................................... 1,000,000 912,500
New York State Energy Research & Development Authority
Electric Facilities Revenue, Con Edison
7.75%, due 1/1/24 (a).................................. 500,000 538,750
New York State Energy Research & Development Authority
Gas Facilities Revenue, Brooklyn Union Gas
8.75%, due 7/1/15...................................... 1,250,000 1,294,313
9.00%, due 5/15/15..................................... 500,000 509,780
New York State Local Government Assistance Corp., Series
A
7.00%, due 4/1/12...................................... 775,000 868,969
New York State Medical Care Facilities Finance Agency
Revenue
7.50%, due 2/15/21..................................... 755,000 855,981
7.875%, due 8/15/20.................................... 800,000 911,000
</TABLE>
- -------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------
<S> <C> <C>
NEW YORK (CONTINUED)
New York State Medical Care Facilities Finance
Agency Revenue, St. Francis Hospital of Roslyn,
Project A
7.625%, due 11/1/21............................... $ 835,000 $ 913,281
New York State Urban Development Corp. Correctional
Facilities Revenue
5.25%, due 1/1/18................................. 700,000 692,125
Triborough Bridge & Tunnel Authority of New York
General Purpose Revenue
Series A
4.75%, due 1/1/19................................. 500,000 458,750
Series L
8.125%, due 1/1/12................................ 1,000,000 1,092,500
-----------
14,666,480
-----------
PUERTO RICO (23.8%)
Puerto Rico Commonwealth Aqueduct & Sewer Authority
Revenue, Series A
7.875%, due 7/1/17................................ 600,000 666,000
7.90%, due 7/1/07................................. 475,000 527,844
Puerto Rico Commonwealth
General Obligation
3.00%, due 7/1/06................................. 1,000,000 826,250
Puerto Rico Commonwealth Highway Authority Revenue,
Series W
5.50%, due 7/1/13................................. 750,000 779,062
Puerto Rico Electric Power Authority Revenue,
Series L
8.375%, due 7/1/07................................ 800,000 868,000
Puerto Rico Public Building Authority Revenue,
Guaranteed Government Facilities, Series A
6.25%, due 7/1/13................................. 500,000 567,500
University of Puerto Rico
University Revenue, Series N
(zero coupon), due 6/1/10......................... 1,000,000 475,000
-----------
4,709,656
-----------
Total Investments
(Cost $18,560,697) (b)............................ 97.7% 19,376,136 (c)
Cash and Other Assets, Less Liabilities............ 2.3 460,126
---------- -----------
Net Assets......................................... 100.0% $19,836,262
========== ===========
</TABLE>
- -------
(a) Interest on these securities is subject to alternative minimum tax.
(b) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(c) At December 31, 1995 net unrealized appreciation was $815,439, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $836,553 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $21,114.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY NEW YORK TAX FREE FUND
- --------------------------------------------------------------------------------

STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1995

<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (Note 2)
(identified cost $18,560,697).................................... $19,376,136
Cash.............................................................. 52,431
Receivables:
Interest......................................................... 474,519
Fund shares sold................................................. 81,144
Unamortized organization expense
(Note 2)......................................................... 6,404
Other assets...................................................... 19
-----------
Total assets.................................................... 19,990,653
-----------
LIABILITIES:
Payables:
Fund shares redeemed............................................. 66,702
NYLIFE Distributors.............................................. 6,739
Custodian........................................................ 2,485
Adviser.......................................................... 2,267
Transfer agent................................................... 2,142
Trustees......................................................... 246
Accrued expenses.................................................. 34,314
Dividend payable.................................................. 39,496
-----------
Total liabilities............................................... 154,391
-----------
Net assets........................................................ $19,836,262
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized
Class A.......................................................... $ 18,026
Class B.......................................................... 1,585
Additional paid-in capital........................................ 19,310,536
Accumulated undistributed net investment income................... 17,943
Accumulated net realized loss on investments...................... (327,267)
Unrealized appreciation on investments............................ 815,439
-----------
Net assets........................................................ $19,836,262
===========
CLASS A
Net assets applicable to outstanding shares....................... $18,247,939
===========
Shares of beneficial interest outstanding......................... 1,802,635
===========
Net asset value per share outstanding............................. $ 10.12
Maximum sales charge (4.50% of offering price).................... 0.48
-----------
Maximum offering price per share outstanding...................... $ 10.60
===========
CLASS B
Net assets applicable to outstanding shares....................... $ 1,588,323
===========
Shares of beneficial interest outstanding......................... 158,459
===========
Net asset value per share outstanding............................. $ 10.02
===========
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest.......................................................... $1,209,217
----------
Expenses: (Note 2)
Administration (Note 3)........................................... 45,723
Advisory (Note 3)................................................. 45,723
Service (Note 3).................................................. 45,723
Shareholder communication......................................... 32,841
Transfer agent.................................................... 26,001
Custodian......................................................... 17,482
Auditing.......................................................... 14,911
Amortization of organization expense.............................. 8,526
Legal............................................................. 4,585
Registration...................................................... 1,947
Distribution--Class B (Note 3).................................... 1,441
Trustees.......................................................... 850
Miscellaneous..................................................... 10,145
----------
Total expenses before reimbursement.............................. 255,898
Expense reimbursement from Adviser and Administrator (Note 3)...... (28,483)
----------
Net expenses..................................................... 227,415
----------
Net investment income.............................................. 981,802
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from:
Security transactions............................................. 420,661
Futures transactions.............................................. 5,469
----------
Net realized gain on investments................................... 426,130
Net change in unrealized depreciation on investments............... 1,308,574
----------
Net realized and unrealized gain on investments.................... 1,734,704
----------
Net increase in net assets resulting from operations............... $2,716,506
==========
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

10
<PAGE>

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

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
September 1
Year ended through Year ended
December 31 December 31 August 31
1995 1994* 1994
----------- ----------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income.................. $ 981,802 $ 350,907 $ 998,376
Net realized gain (loss) on invest-
ments................................. 426,130 (222,968) (463,960)
Net change in unrealized appreciation
(depreciation) on investments......... 1,308,574 (510,353) (584,293)
----------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations............. 2,716,506 (382,414) (49,877)
----------- ----------- -----------
Dividends and distributions to share-
holders:
From net investment income:
Class A.............................. (936,551) (326,718) (1,008,094)
Class B.............................. (46,485) -- --
From net realized gain on investments:
Class A.............................. -- -- (414,778)
----------- ----------- -----------
Total dividends and distributions to
shareholders....................... (983,036) (326,718) (1,422,872)
----------- ----------- -----------
Capital share transactions:
Net proceeds from sale of shares:
Class A.............................. 933,639 569,808 5,305,792
Class B.............................. 1,529,472 -- --
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A.............................. 363,729 133,972 559,131
Class B.............................. 29,496 -- --
----------- ----------- -----------
2,856,336 703,780 5,864,923
Cost of shares redeemed:
Class A.............................. (1,843,250) (751,131) (2,194,580)
Class B.............................. (15,993) -- --
----------- ----------- -----------
Increase (decrease) in net assets
derived from capital share
transactions......................... 997,093 (47,351) 3,670,343
----------- ----------- -----------
Net increase (decrease) in net assets. 2,730,563 (756,483) 2,197,594
NET ASSETS:
Beginning of period..................... 17,105,699 17,862,182 15,664,588
----------- ----------- -----------
End of period........................... $19,836,262 $17,105,699 $17,862,182
=========== =========== ===========
Accumulated undistributed net investment
income/(excess distribution)........... $ 17,943 $ 19,177 $ (5,012)
=========== =========== ===========
</TABLE>
- -------
*The Fund changed its fiscal year end from August 31 to December 31.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

11
<PAGE>

FINANCIAL HIGHLIGHTS
(SELECTED PER SHARE DATA AND RATIOS)

<TABLE>
<CAPTION>
Class A
-------------------------------------------------
Class A Class B September 1 Year Ended
-------- -------- through August 31 October 1, 1991(a)
Year ended December 31 ----------------- through
December 31, 1995 1994* 1994 1993 August 31, 1992
------------------- ----------- ------- ------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period.... $ 9.20 $ 9.20 $ 9.58 $ 10.43 $ 9.95 $ 9.55
--------- -------- ------- ------- ------- -------
Net investment income... 0.52 0.59 0.19 0.56 0.60 0.49
Net realized and
unrealized gain (loss)
on investments......... 0.91 0.82 (0.39) (0.59) 0.54 0.34
--------- -------- ------- ------- ------- -------
Total from investment
operations............. 1.43 1.41 (0.20) (0.03) 1.14 0.83
--------- -------- ------- ------- ------- -------
Less dividends and
distributions:
Dividends from net
investment income...... (0.51) (0.59) (0.18) (0.57) (0.65) (0.43)
Distributions from net
realized gain on
investments............ -- -- -- (0.25) (0.01) --
--------- -------- ------- ------- ------- -------
Total dividends and
distributions.......... (0.51) (0.59) (0.18) (0.82) (0.66) (0.43)
--------- -------- ------- ------- ------- -------
Net asset value at end
of period.............. $ 10.12 $ 10.02 $ 9.20 $ 9.58 $ 10.43 $ 9.95
========= ======== ======= ======= ======= =======
Total investment return
(b).................... 15.97% 15.67% (2.11%) (0.35%) 11.88% 8.95%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income.. 5.4% 5.1% 6.1%+ 5.7% 6.0% 5.9%+
Net expenses........... 1.24% 1.49% 0.99%+ 0.99% 0.98% 0.99%+
Expenses (before
reimbursement)........ 1.4% 1.6% 1.2%+ 1.1% 1.2% 1.5%+
Portfolio turnover rate. 114% 114% 39% 169% 131% 23%
Net assets at end of
period (in 000's)...... $18,248 $1,588 $17,106 $17,862 $15,665 $10,605
</TABLE>
- -------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charges and is not
annualized.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

12
<PAGE>

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 1 -- ORGANIZATION AND BUSINESS:

The Fund currently offers two classes of shares. Class A shares are offered at
net asset value per share plus an initial sales charge. Class B shares whose
distribution commenced on January 3, 1995, are offered without an initial sales
charge, although a declining contingent deferred sales charge may be imposed on
redemptions made within six years of purchase. Any purchase of Class A shares
of $1,000,000 or more on which the initial sales charge was waived will be sub-
ject to a contingent deferred sales charge on redemptions made within one year
of purchase. Class A shares and Class B shares bear the same voting (except for
issues that relate solely to one class), dividend, liquidation and other rights
and conditions except that the Class B shares are subject to higher distribu-
tion fee rates. Each class of shares bears distribution and/or service fee pay-
ments under a distribution plan pursuant to Rule 12b-1 under the Investment
Company Act of 1940.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:

The following is a summary of significant accounting policies followed by the
Fund:

SECURITIES VALUATION. Portfolio securities of the New York Tax Free Fund are
stated at value determined (a) by appraising debt securities at prices supplied
by a pricing agent selected by the Adviser, whose prices reflect broker/dealer
supplied valuations and electronic data processing techniques if those prices
are deemed by the Adviser to be representative of market values at the regular
close of business of the New York Stock Exchange, (b) by appraising options and
futures contracts at the last sale price on the market where such options or
futures are principally traded, and (c) by appraising all other securities and
other assets, including debt securities for which prices are supplied by a
pricing agent but are not deemed by the Adviser to be representative of market
values, but excluding money market instruments with a remaining maturity of
sixty days or less and including restricted securities and securities for which
no market

13
<PAGE>

quotations are available, at fair value in accordance with procedures approved
by the Trustees. Short-term securities which mature in more than 60 days are
valued at current market quotations. Short-term securities which mature in 60
days or less are valued at amortized cost if their term to maturity at purchase
was 60 days or less, or by amortizing the difference between market value on
the 61st day prior to maturity and value on maturity date if their original
term to maturity at purchase exceeded 60 days.

FUTURES CONTRACTS. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date, or
to make or receive a cash payment based on the value of a securities index.
During the period the futures contract is open, changes in the value of the
contract are recognized as unrealized gains or losses by "marking to market"
such contract on a daily basis to reflect the market value of the contract at
the end of each day's trading. The Fund agrees to receive from or pay to the
broker an amount of cash equal to the daily fluctuation in the value of the
contract. Such receipts or payments are known as "variation margin". When the
futures contract is closed, the Fund records a realized gain or loss equal to
the difference between the proceeds from (or cost of) the closing transaction
and the Fund's basis in the contract. The New York Tax Free Fund has entered
into contracts for the future delivery of debt securities in order to attempt
to protect against the effects of adverse changes in interest rates or to
lengthen or shorten the average maturity or duration of the Fund's portfolio.
This practice is known as hedging.

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The New York Tax Free Fund intends to declare
and pay dividends monthly.

14
<PAGE>

Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.

ORGANIZATION COSTS. Costs incurred in connection with the Fund's initial organ-
ization and registration amounted to $43,769 for the New York Tax Free Fund.
Such costs are being amortized over 60 months beginning at the commencement of
operations of the Fund. In the event any of the initial shares of the Fund,
which were purchased by NYLIFE Securities Inc. are redeemed, the Fund will be
reimbursed for any unamortized organizational expenses in the same proportion
as the number of shares redeemed bears to the number of initial shares held at
the time of redemption.

CONCENTRATION OF CREDIT RISK. The Fund invests substantially all of its assets
in debt obligations issued by political subdivisions and authorities in the
State of New York and the Commonwealth of Puerto Rico. The issuer's ability to
meet its obligations may be affected by economic and political developments
within the State of New York and the Commonwealth of Puerto Rico.

15
<PAGE>

NOTE 3 -- FEES AND RELATED PARTY POLICIES:

NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned sub-
sidiary of New York Life, is the Administrator for the Fund.

The Adviser and the Administrator have voluntarily agreed to reimburse the ex-
penses for the New York Tax Free Fund to the extent that operating expenses
would exceed on an annualized basis 1.24% and 1.49% for the Class A and Class
B, shares respectively, of the average daily net assets. The expense reimburse-
ment to the New York Tax Free Fund for the year ended December 31, 1995 was
$28,483.

16
<PAGE>

The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund.

SALES CHARGES. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $35,722 for the year
ended December 31, 1995.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges for the year ended December 31, 1995 in the amount of $212.

CAPITAL. At December 31, 1995, NYLIFE Securities and NYLIFE Distributors held
shares of Class A with a net asset value of $101,200 and $6,844,011, respec-
tively.

OTHER. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1995 were $306.

Fees for the cost of legal services provided to the Fund by the Office of Gen-
eral Counsel of New York Life amounted to $1,265 for the year ended December
31, 1995.

17
<PAGE>

NOTE 4 -- FEDERAL INCOME TAX:

At December 31, 1995, for Federal income tax purposes, capital loss
carryforwards of $327,267 are available to the extent provided by regulations
to offset future realized gains of the Fund through 2002. To the extent that
these loss carryforwards are used to offset future capital gains, it is proba-
ble that the capital gains so offset will not be distributed to shareholders.
The Fund utilized $356,144 of capital loss carryforward during the current
year.

NOTE 5 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):

NOTE 6 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):

<TABLE>
<CAPTION>
September 1
Year Ended through Year Ended
December 31 December 31 August 31
1995 1994* 1994
--------------- ----------- ----------
Class A Class B Class A
------- ------- ----------------------
<S> <C> <C> <C> <C>
Shares sold............................. 97 157 61 528
Shares issued in reinvestment of divi-
dends and distributions................ 38 3 15 56
--- --- --- ---
135 160 76 584
Shares redeemed......................... 191 2 81 222
--- --- --- ---
Net increase (decrease)................. (56) 158 (5) 362
=== === === ===
</TABLE>
- -------
*The Fund changed its fiscal year end from August 31 to December 31.

18
<PAGE>

- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------

To the board of Trustees and Shareholders of
The MainStay Funds

In our opinion, the accompanying statement of assets and liabilities (including
the portfolio of investments) and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all mate-
rial respects, the financial position of the MainStay New York Tax Free Fund,
(one of the thirteen funds constituting The MainStay Funds, hereafter referred
to as the "Fund") at December 31, 1995, the results of its operations for the
year then ended and the changes in its net assets and the financial highlights
for each of the periods presented, in conformity with generally accepted ac-
counting principles. These financial statements and financial highlights (here-
after referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these finan-
cial statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which re-
quire that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and dis-
closures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall finan-
cial statement presentation. We believe that our audits, which included confir-
mation of securities at December 31, 1995 by correspondence with the custodian,
provide a reasonable basis for the opinion expressed above.

Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 12, 1996

19
<PAGE>

- --------------------------------------------------------------------------------
The MainStay Funds
- --------------------------------------------------------------------------------

GROWTH FUNDS
- ----------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[HORIZONTAL BAR Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund GRAPH INDICATING of companies in expanding markets and are willing to accept a higher
RISK/REWARD with strong growth potential level of risk for higher return potential
OF FUND]
- ----------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund GRAPH INDICATING the makeup and returns of the pate in the growth potential of stocks+
RISK/REWARD S&P 500*
OF FUND]
- ----------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Offers broad diversification into You prefer the higher return potential
International Equity Fund GRAPH INDICATING international stock markets with of international equities or want to add
RISK/REWARD an emphasis on risk control diversification to your domestic
OF FUND] investments++
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

GROWTH & INCOME FUNDS
- ----------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[HORIZONTAL BAR Balances current income with growth You seek a combination of income and
Total Return Fund GRAPH INDICATING opportunities by investing in stocks, growth potential and want to manage
RISK/REWARD bonds, and money market instruments risk through diversification
OF FUND]
- ----------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Seeks undervalued stocks with You seek to maximize total return from
Value Fund GRAPH INDICATING attractive dividends and a stimulus securities which may have more poten-
RISK/REWARD for positive change tial than the market currently sees
OF FUND]
- ----------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Invests in convertible securities for You want income from securities that
Convertible Fund GRAPH INDICATING a special blend of long-term growth may offer growth potential if converted
RISK/REWARD potential and dividend income into common stock
OF FUND]
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

# A small portion of the Fund's income may be subject to state and local taxes
and the Alternative Minimum Tax. Capital gains, if any, may also be taxed.

20
<PAGE>

INCOME FUNDS
- ----------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[HORIZONTAL BAR Seeks a high level of current income You are seeking to combine high current
Government Fund GRAPH INDICATING consistent with safety of principal income and safety of principal
RISK/REWARD primarily from U.S. government
OF FUND] securities(S)
- ----------------------------------------------------------------------------------------------------------------------------------
High Yield [HORIZONTAL BAR An aggressive high yield bond You want to maximize current income
Corporate Bond Fund GRAPH INDICATING fund that is actively managed for and can accept the higher risk of
RISK/REWARD maximum current income securities with high yield potential
OF FUND]
- ----------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Seeks high current yields and You prefer the higher return potential of
International Bond Fund GRAPH INDICATING competitive total return from non- international bonds or want to add
RISK/REWARD U.S. bonds with an emphasis on diversification to your domestic
OF FUND] risk control investments++
- ----------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund GRAPH INDICATING stability of principal, and liquidity, competitive yields on cash you're plan-
RISK/REWARD with free checkwriting|| ning to spend or invest in the near future
OF FUND]
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

TAX-FREE INCOME FUNDS
- ----------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[HORIZONTAL BAR Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund GRAPH INDICATING exempt from regular federal bracket or want to pay less of your
RISK/REWARD income tax# investment income to the IRS
OF FUND]
- ----------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Seeks high current income exempt You're a California resident and want to
California Tax Free Fund GRAPH INDICATING from both federal and California keep more of what you earn by investing
RISK/REWARD income taxes consistent with for income that's double tax free#
OF FUND] preservation of capital#
- ----------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund GRAPH INDICATING from federal, New York State, and and want to keep more of what you earn
RISK/REWARD New York City income taxes consis- with income that's double or triple tax
OF FUND] tent with preservation of capital# free#
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

If you would like to learn more about any of the MainStay Funds not covered by
your current prospectus, please call your Registered Representative. Your
Registered Representative can provide you with additional prospectuses which
contain more complete information including advisory fees, other expenses, and
share classes. Please read the prospectus carefully before you invest or send
money. Shares must be offered in the investor's state of residence.

21
<PAGE>

This page intentionally left blank
<PAGE>

- --------------------------------------------------------------------------------
MainStay New York
Tax Free Fund
- --------------------------------------------------------------------------------

1995
annual
report

The year in review
fund results
& portfolio highlights

[LOGO OF MAINSTAY(R) FUNDS APPEARS HERE]

- --------------------------------------------------------------------------------
December 31, 1995
- --------------------------------------------------------------------------------

Officers & Trustees

Dechert Price & Rhoads
Legal Counsel

[LOGO OF MAINSTAY(R) FUNDS APPEARS HERE]

[LOGO OF NEW YORK LIFE APPEARS HERE]

This report is provided for the information of shareholders of the MainStay New
York Tax Free Fund. It may be given to others only when preceded or accompanied
by an effective MainStay Funds prospectus. This report does not offer to sell
any securities or solicit orders to buy them.

[LOGO OF RECYCLED PAPER APPEARS HERE] MSAN13 (296)
<PAGE>

- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Chairperson's Letter 2

MainStay Tax Free Bond Fund Highlights
and Portfolio Managers' Comments 4

Returns & Lipper Rankings 6

Year-by-Year Performance 7

$10,000 Invested in the MainStay
Tax Free Bond Fund Class A Shares
vs. Lehman Brothers Municipal Bond Index
and Inflation 7

$10,000 Invested in the MainStay
Tax Free Bond Fund Class B Shares
vs. Lehman Brothers Municipal Bond Index
and Inflation 7

Top 25 Security Holdings 8

Diversification by State -- Top 5 9

Quality Breakdown 9

Financial Statements 11

Notes to Financial Statements 19

Report of Independent Accountants 25

The MainStay Funds 26
</TABLE>
<PAGE>

- --------------------------------------------------------------------------------
Chairperson's Letter
- --------------------------------------------------------------------------------

[PHOTO OF ALICE T. KANE APPEARS HERE]

Alice T. Kane, Chairperson

Report to Shareholders for the Year Ended December 31, 1995

During 1995, municipal securities benefited from one of the strongest bond
markets in history. Long-term Treasury bonds returned 30.1%, or more than six
times their average annual total return for the previous 69 years.* While
municipal bond gains were not as dramatic, investors in the MainStay(R) Tax Free
Bond Fund enjoyed the highest annual total returns since the Fund's inception.

In this context, we are pleased to report to you on the activities and
investment results of the MainStay Tax Free Bond Fund for the twelve months
ended December 31, 1995. Excluding all sales charges, the Fund earned 15.00% and
14.86% for Class A and Class B shares, respectively, for this twelve-month
period.

Despite these positive results, the Fund's objective of providing a high level
of current income -- free from regular federal income tax, consistent with
preservation of capital -- held back its performance relative to its peers, many
of which focus on capital appreciation. The Fund underperformed its peer group,
as many managers sought capital appreciation opportunities in a declining rate
environment. For the twelve-month period ended December 31, 1995, the average
Lipper/+/ general municipal debt fund earned 16.84%.

The possibility of a flat tax and concerns over Orange County, California's 1994
bankruptcy filing continued to cloud the municipal market in 1995. Nevertheless,
municipal bonds remain one of the few tax-advantaged tools available to tax-
conscious investors. Since the MainStay Tax Free Bond Fund seeks income that is
substantially free of federal income tax,/++/ we believe the Fund continues to
represent an appropriate alternative for investors seeking to keep more of what
they earn.

2
<PAGE>

/s/ Alice T. Kane

Alice T. Kane
January 1996

+ See footnote on page 6 for more information on Lipper Analytical Services,
Inc.

++ A small portion of income may be subject to state and local taxes and the
Alternative Minimum Tax. Capital gains, if any, may also be taxed.

3
<PAGE>

- --------------------------------------------------------------------------------
MainStay Tax Free Bond Fund
- --------------------------------------------------------------------------------

1995 Fund Highlights

[ ] Highest annual total return in the Fund's history

[ ] Annual total returns of 15.00% and 14.86% for Class A and Class B shares,
respectively, excluding sales charges

[ ] Provided current income at a consistent level throughout the year

[PHOTO OF JAMES FLOOD AND RAVI AKHOURY APPEARS HERE]

Portfolio Managers - James Flood
and Ravi Akhoury (left to right)

For the twelve months ended December 31, 1995, the MainStay Tax Free Bond Fund
provided total returns, excluding sales charges, of 15.00% and 14.86% for Class
A and Class B shares, respectively. These returns represented the highest annual
total return for any year in the history of the Fund. The Fund's returns
reflected unusually favorable conditions across all sectors of the bond markets
which are unlikely to be repeated in 1996.

Despite their strong rally, municipal bonds underperformed Treasury securities
in 1995. This was partially due to concerns over the possibility of a flat tax,
as well as a much higher supply of municipals than anticipated. At the same
time, demand was substantially reduced as investors poured their money into the
equity market.

The Fund's 1995 performance trailed the average Lipper general municipal debt
fund, which returned 16.84% for the year. During the first half of the year, the
Fund emphasized high-coupon, short-maturity callable bonds to generate current
income. Unfortunately, these securities do not perform as well as longer
maturity issues when the market rallies sharply and suddenly, as it did more
than once before the end of June. This negatively impacted the Fund's
performance.

4
<PAGE>

During the second half of the year, we repositioned the portfolio with some
longer-maturity noncallable bonds, which helped increase the Fund's
participation in the market rally. In the fourth quarter, the Fund's returns for
both Class A and Class B shares outpaced those of its Lipper peer group by a
small margin. Throughout the year, the manager's strategy helped maintain a
consistent level of dividend income to investors, even as interest rates fell.

At the beginning of the year, the municipal market had still not fully recovered
from the Orange County, California bankruptcy filing in 1994. This incident was
of particular concern to investors not only because the county was rated Aa, but
also because many felt the county had the ability to meet its debt obligations,
but simply lacked the moral conviction to do so. While some investors did lose
money, an agreement was reached to extend the maturity of certain obligations,
so most investors should eventually be made whole. As a result, what first
looked like a major problem was resolved with a limited downside.

Another major issue facing the municipal market was tax reform. Several
proposals were discussed by a host of different sponsors, but no real reforms
were implemented in the yet-to-be-resolved federal 1996 budget. We continue to
believe that arguments against a flat tax are sufficiently strong to make its
passage unlikely. As just one example, state and local government financing
costs would rise astronomically should the tax-favorable treatment of their
bonds come to an end.

Due to their relative underperformance in 1995, municipals are now at
historically cheap levels versus Treasury bonds. At the beginning of 1995, a 30-
year AAA-rated municipal bond was yielding close to 80% of a comparable Treasury
bond. At year-end, the yield was closer to 90% of the same Treasury bond. As a
result, we believe valuation levels are extremely attractive. We are currently
maintaining a portfolio duration that is neutral to the market and will, of
course, continue to emphasize careful security selection among high quality
issues.[ ]

Coupon
- --------------------------------------------------------------------------------
The interest rate a fixed income security pays on an investment at par value
(e.g. $1,000).

5
<PAGE>

<TABLE>
<CAPTION>
Fund average annual total returns*
- -----------------------------------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 12/31/95
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 15.00% 7.48% 6.68%
Class B 14.86% 7.46% 6.67%
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Fund SEC returns*
- ------------------------------------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 12/31/95
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 9.83% 6.50% 6.18%
Class B 9.86% 7.15% 6.67%
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Fund Lipper/+/ rankings and year-end Lipper category returns
- -----------------------------------------------------------------------------------------------------------------------------------
Life of Fund/Class
1 year 5 years through 12/31/95
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 186 out of 225 funds n/a 186 out of 225 funds
Class B 187 out of 225 funds 90 out of 98 funds 57 out of 60 funds
Average Lipper muni bond fund 16.84% 8.47% 8.20%
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Fund year-end per-share net asset values and distributions for 1995
- -----------------------------------------------------------------------------------------------------------------------------------
NAV 12/31/95 Income Capital Gains
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A $10.02 $0.5293 $0.0000
Class B $10.03 $0.5082 $0.0000
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show the
percentage change for each of the required periods. All returns assume capital
gains and dividend distributions are reinvested.

6
<PAGE>

- --------------------------------------------------------------------------------
Year-by-Year Performance*
- --------------------------------------------------------------------------------

[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Year ended 12/31 Total Return %
---------------- --------------
<S> <C>
86 6.01
87 0.58
88 8.77
89 7.38
90 4.68
91 10.89
92 8.41
93 10.39
94 -6.02
95 Class A 15.00
95 Class B 14.86
</TABLE>
- --------------------------------------------------------------------------------
$10,000 invested in the MainStay Tax Free Bond Fund vs.
Lehman Brothers Municipal Bond Index and Inflation
- --------------------------------------------------------------------------------

Class A Shares

[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>

Lehman
Brothers Muni Tax Free
Year-end Bond Index++ Inflation(s) Bond Fund
-------- ------------- --------- ---------
<S> <C> <C> <C>
5/1/86 10000 10000 9550
86 10826 10175 10123
87 10990 10626 10182
88 12107 11096 11074
89 13413 11611 11891
90 14390 12320 12448
91 16137 12698 13803
92 17560 13066 14965
93 19717 13425 16520
94 18698 13785 15525
95 21962 14144 17855
</TABLE>

Class B Shares

[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Lehman
Brothers Muni Tax Free
Year-end Bond Index++ Inflation(s) Bond Fund
-------- ------------- --------- ---------
<S> <C> <C> <C>
5/1/86 10000 10000 10000
86 10826 10175 10600
87 10990 10626 10662
88 12107 11096 11596
89 13413 11611 12452
90 14390 12320 13034
91 16137 12698 14454
92 17560 13066 15670
93 19717 13425 17299
94 18698 13785 16257
95 21962 14144 18673
</TABLE>
- --------------------
The Class A graph assumes an initial investment of $10,000 made on 5/1/86
reflecting the effect of the 4.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,550. The Class B graph assumes
an initial investment of $10,000 made on 5/1/86. Returns shown do not
reflect the Contingent Deferred Sales Charge (CDSC), as it would not apply
for the period shown. All results include reinvestment of distributions at
net asset value and the change in share price for the stated period. Past
performance is no guarantee of future results.

7
<PAGE>

<TABLE>
<CAPTION>
Holding $ amount
<S> <C>
Los Angeles County Metropolitan Transportation Authority Sales Tax Revenue,
Series A due 7/1/25 $18,359,125

Georgia Municipal Electric Authority Power Revenue, Series A due 1/1/15 15,979,894

New York State Energy Research & Development Authority, Electric Facilities
Pollution Control Revenue, Brooklyn Union Gas Co. Project due 7/1/15 13,978,575

Texas Water Resources Finance Authority Revenue due 8/15/08 13,376,475

Illinois Development Finance Authority Pollution Control Revenue, Illinois
Power Co., Series A due 4/1/17 13,155,000

Michigan State Hospital Finance Authority Revenue, Genesys Health System,
Series A due 10/1/27 11,958,437

Matagora County Texas Pollution Control Revenue, Houston Lighting & Power,
Series D due 10/1/19 10,675,625

Eden Township California Hospital District Hospital Revenue due 11/1/19 10,634,750

San Antonio Texas Electric & Gas Revenue, Series B due 2/1/16 9,612,500

Orlando Florida Commission Utilities Water & Electric Revenue, Series D due 10/1/23 9,437,500

New York State Urban Development Corp. Correctional Facilities Revenue,
Series A due 1/1/21 9,312,500

St. Paul Minnesota Housing & Redevelopment Authority HealthEast Hospital
Revenue Project, Series B due 11/1/08 9,185,400

California State General Obligation due 9/1/06 9,140,000

New York State Energy Research & Development Authority, Electric Facilities
Pollution Control Revenue, Con Edison due 1/1/24 9,077,938

Austin Texas Utility System Revenue, Series A due 11/15/11 8,464,500

Delaware River Port Authority of Pennsylvania & New Jersey Revenue due 1/1/26 7,518,750

Illinois Health Facilities Authority Revenue, Hinsdale Hospital, Series A
due 11/15/15 7,308,563

Matagora County Texas Pollution Control Revenue, Houston Lighting & Power,
Series E due 12/1/18 7,246,400

Clark County Nevada Airport Revenue due 7/1/18 7,174,375

Southern California Public Power Authority Transmission Project Revenue,
Series A due 1/1/20 7,143,750

Emmaus Pennsylvania General Authority Revenue, Series E due 5/15/18 7,078,875

Illinois Health Facilities Authority Revenue, Hinsdale Hospital, Series C
due 11/15/19 6,845,887

Puerto Rico Commonwealth General Obligation due 7/1/06 6,610,000

Ouachita Parish Louisiana Hospital Service Glenwood Regional Medical Center
due 7/1/21 6,487,500

Monroe County New York Airport Authority Revenue, Greater Rochester
International due 1/1/19 6,380,000
</TABLE>

Note: This breakdown is provided for informational purposes only. This Fund's
holdings may change daily. A shareholder owns shares of the Fund but does
not own a direct interest in any of the specific securities listed above.
Excludes short-term securities. See financial statements for specific
type of security held.

8
<PAGE>

- --------------------------------------------------------------------------------
Diversification by State -- Top 5 as of 12/31/95
- --------------------------------------------------------------------------------

[PIE CHART APPEARS HERE]

<TABLE>
<S> <C>
New York 23.9% Diversification
California 12.8% Pie
Texas 11.3%
Illinois 8.0%
Florida 4.8%
Other 39.2%
</TABLE>
- --------------------------------------------------------------------------------
Quality Breakdown as of 12/31/95
- --------------------------------------------------------------------------------

[PIE CHART APPEARS HERE]

<TABLE>
<S> <C>
AAA 45.9% Portfolio Pie
AA 12.1%
A 13.5%
BBB 24.8%
Cash & Equivalent 3.7%
</TABLE>

Note: actual percentages will vary over time
Bond ratings provided by Standard & Poor's. See the prospectus for details.

9
<PAGE>

This page intentionally left blank

10
<PAGE>

- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Value
--------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (96.1%)+
ALABAMA (0.7%)
Birmingham Alabama Airport Authority Revenue, Series A
7.375%, due 7/1/10 (a)............................... $ 3,600,000 $ 4,009,500
------------
ARIZONA (0.2%)
Salt River Project Agriculture Improvement & Power
District, Electric Revenue Series C
5.75%, due 1/1/20.................................... 1,000,000 1,000,840
------------
CALIFORNIA (12.8%)
California Pollution Control Financing Authority
Revenue, Pacific Gas &
Electric Co., Series A
8.20%, due 12/1/18................................... 1,100,000 1,178,375
California State General Obligation
6.50%, due 9/1/06.................................... 8,000,000 9,140,000
Eden Township California Hospital
District Hospital Revenue
7.40%, due 11/1/19................................... 10,300,000 10,634,750
Foothill-Eastern Transportation Corridor Agency, Toll
Road Revenue, Series A
5.00%, due 1/1/35.................................... 4,150,000 3,517,125
Los Angeles County Metropolitan Transportation
Authority Sales Tax Revenue, Series A
5.00%, due 7/1/25.................................... 19,300,000 18,359,125
Transportation Sales Tax Revenue
7.40%, due 7/1/15.................................... 600,000 663,000
Series A
8.00%, due 7/1/16.................................... 600,000 646,500
Los Angeles Department of Water & Power, Water Revenue
8.00%, due 5/15/28................................... 1,000,000 1,098,750
Metropolitan Water District of Southern California
Water Revenue, Series A
5.50%, due 7/1/25.................................... 395,000 396,975
Oakland California Revenue, Series A
7.60%, due 8/1/21.................................... 5,500,000 6,050,000
Riverside California Hospital Revenue Riverside
Community Hospital, Series A
6.75%, due 11/1/15................................... 1,000,000 1,000,000
San Francisco Sewer Revenue, Series B
(zero coupon), due 10/1/08........................... 1,500,000 770,625
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
--------------------------
<S> <C> <C>
CALIFORNIA (CONTINUED)
South Coast Air Quality Management District Building
Corp., California Revenue, Series B
(zero coupon), due 8/1/06............................ $ 2,700,000 $ 1,596,375
(zero coupon), due 8/1/07............................ 3,400,000 1,878,500
Southern California Public Power Authority
Transmission Project Revenue, Series A
5.00%, due 1/1/20.................................... 7,500,000 7,143,750
Mead-Adelanto Transmission Project Revenue, Series A
4.875%, due 7/1/20................................... 2,500,000 2,328,125
Mead-Phoenix Transmission Project Revenue, Series A
4.875%, due 7/1/20................................... 5,000,000 4,656,250
------------
71,058,225
------------
COLORADO (1.0%)
Arapahoe County School District No. 5 Cherry Creek,
Series B
5.15%, due 12/15/15.................................. 1,000,000 976,250
Arapahoe County Transportation Federal Highway Revenue
7.00%, due 8/31/26................................... 4,000,000 4,305,000
------------
5,281,250
------------
DELAWARE (0.8%)
Delaware State Economic Development Authority Revenue,
Delmarva Power & Light Co. Project, Series B
7.15%, due 7/1/18.................................... 3,000,000 3,348,750
Sussex County Delaware Wastewater Revenue
5.50%, due 6/15/25................................... 1,000,000 1,007,500
------------
4,356,250
------------
DISTRICT OF COLUMBIA (2.9%)
District of Columbia Georgetown University
7.40%, due 4/1/18.................................... 4,380,000 4,823,475
Series A
7.40%, due 4/1/18.................................... 2,815,000 3,124,650
Metropolitan Washington Airports Authority Revenue,
Series A
7.25%, due 10/1/10 (a)............................... 4,000,000 4,480,000
7.60%, due 10/1/14 (a)............................... 3,400,000 3,774,000
------------
16,202,125
------------
</TABLE>
- -------
+ Percentages indicated are based on Fund net assets.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

11
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY TAX FREE BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Value
--------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (CONTINUED)
FLORIDA (4.8%)
Bay County Medical Center Revenue 8.00%, due 10/1/19.. $ 4,000,000 $ 4,495,000
Dade County Florida GTD Entitlement Revenue
(zero coupon), due 8/1/18............................ 14,835,000 3,671,663
Florida Municipal Power Agency Revenue Stanton II
Project
4.50%, due 10/1/27................................... 5,000,000 4,337,500
Florida State Board of Education Administration
Capital Outlay, Series A
5.00%, due 6/1/24.................................... 4,740,000 4,526,700
Orlando Commission Utilities Water & Electric Revenue,
Series D
5.00%, due 10/1/23................................... 10,000,000 9,437,500
------------
26,468,363
------------
GEORGIA (2.9%)
Georgia Municipal Electric Authority Power Revenue,
Series A
8.00%, due 1/1/15.................................... 14,745,000 15,979,894
------------
HAWAII (0.8%)
Hawaii State Department Budget & Finance Special
Purpose Revenue, Hawaiian Electric Co., Inc., Series
C
7.375%, due 12/1/20 (a).............................. 3,965,000 4,460,625
------------
ILLINOIS (8.0%)
Chicago Illinois Gas Supply Revenue Peoples Gas, Light
& Coke Co., Series A
8.10%, due 5/1/20 (a)................................ 2,000,000 2,272,500
Illinois Development Finance Authority Pollution
Control Revenue
Illinois Power Co.
Series C
7.625%, due 12/1/16 (a).............................. 3,500,000 3,723,125
Series A
8.30%, due 4/1/17 ................................... 12,000,000 13,155,000
Illinois Health Facilities Authority Revenue
Glenoaks Hospital, Series E
9.50%, due 11/15/19.................................. 925,000 1,083,406
Hinsdale Hospital
Series A
9.00%, due 11/15/15.................................. 6,390,000 7,308,563
Series B
9.00%, due 11/15/15.................................. 1,905,000 2,178,844
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
--------------------------
<S> <C> <C>
ILLINOIS (CONTINUED)
Illinois Health Facilities Authority Revenue
Hinsdale Hospital
Series C
9.50%, due 11/15/19.................................. $ 5,870,000 $ 6,845,887
Methodist Medical Center, Series A
8.00%, due 10/1/14................................... 1,000,000 1,006,590
Proctor Community Hospital
7.375%, due 1/1/23................................... 3,700,000 3,820,250
Rockford Memorial Hospital, Series B
6.00%, due 8/15/21................................... 1,045,000 1,065,900
Illinois Regional Transportation Authority Sales Tax
Revenue, Series C
7.10%, due 6/1/25.................................... 1,500,000 1,695,000
------------
44,155,065
------------
INDIANA (1.5%)
Indiana Health Facility Financing Authority Jackson
County Schneck Memorial Hospital
7.50%, due 2/15/12................................... 2,600,000 2,782,000
Indiana State Finance Authority
Toll Road Revenue
6.00%, due 7/1/15.................................... 5,500,000 5,609,945
------------
8,391,945
------------
KENTUCKY (1.0%)
Carroll County Kentucky Pollution Control Revenue,
Series A
7.45%, due 9/15/16................................... 1,000,000 1,155,000
Trimble County Kentucky Pollution Control Revenue,
Series A
7.625%, due 11/1/20 (a).............................. 3,670,000 4,160,863
------------
5,315,863
------------
LOUISIANA (2.2%)
Louisiana State Offshore Terminal Authority, Deepwater
Port Revenue Series E
7.60%, due 9/1/10.................................... 4,980,000 5,540,250
Ouachita Parish Louisiana Hospital Service Glenwood
Regional Medical Center
7.50%, due 7/1/21.................................... 6,000,000 6,487,500
------------
12,027,750
------------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

12
<PAGE>

- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Value
-------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (CONTINUED)
MASSACHUSETTS (0.9%)
Massachusetts State Health & Educational Facilities
Revenue
Harvard University, Series P
5.375%, due 11/1/32.................................. $ 2,000,000 $ 2,000,000
University Hospital, Series C
7.25%, due 7/1/19.................................... 2,500,000 2,815,625
------------
4,815,625
------------
MICHIGAN (4.5%)
Flint Michigan Hospital Building Authority Revenue,
Hurley Medical Center
Series B
8.125%, due 7/1/06................................... 2,100,000 2,169,720
Lake Orion Community School District
5.50%, due 5/1/20.................................... 6,000,000 6,030,000
Michigan State Hospital Finance Authority Revenue,
Genesys Health System
Series A
7.50%, due 10/1/27................................... 11,255,000 11,958,437
Midland Water Revenue
7.20%, due 4/1/10.................................... 1,000,000 1,093,750
Monroe County Michigan Pollution Control Revenue,
Detroit Edison Company
Series A
7.50%, due 12/1/19 (a)............................... 3,225,000 3,607,969
------------
24,859,876
------------
MINNESOTA (1.7%)
Saint Paul Housing & Redevelopment Authority
HealthEast Hospital Revenue Project, Series B
9.625%, due 11/1/08.................................. 8,505,000 9,185,400
------------
NEVADA (1.3%)
Clark County Airport Revenue
8.125%, due 7/1/18 (a)............................... 6,500,000 7,174,375
------------
NEW YORK (23.9%)
Buffalo & Fort Erie New York Public Bridge Authority
Toll Bridge System Revenue 5.75%, due 1/1/25......... 300,000 307,125
Metropolitan Transportation Authority Facilities
Revenue
Series 5
7.00%, due 7/1/12.................................... 2,265,000 2,471,681
Series L
7.50%, due 7/1/17.................................... 3,225,000 3,515,250
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
-------------------------
<S> <C> <C>
NEW YORK (CONTINUED)
Monroe County New York
Airport Authority Revenue
Greater Rochester International
7.25%, due 1/1/19 (a)................................ $ 5,800,000 $ 6,380,000
New York City General Obligation
Series B
7.00%, due 6/1/15.................................... 5,800,000 6,119,000
Series A
7.75%, due 8/15/07................................... 2,000,000 2,252,500
7.75%, due 8/15/15................................... 2,900,000 3,291,500
7.75%, due 8/15/16................................... 2,000,000 2,270,000
Series D
8.00%, due 8/1/04.................................... 1,500,000 1,721,250
Series F
8.20%, due 11/15/04.................................. 4,600,000 5,347,500
New York State Dormitory
Authority Revenue
Series A
5.25%, due 5/15/21................................... 4,100,000 3,797,625
5.50%, due 5/15/23................................... 4,000,000 3,830,000
5.625%, due 7/1/16................................... 5,000,000 5,231,250
5.625%, due 7/1/16................................... 1,300,000 1,306,500
7.375%, due 7/1/30................................... 2,880,000 3,258,000
7.50%, due 5/15/13................................... 4,250,000 5,105,313
Series B
7.50%, due 5/15/11................................... 4,250,000 5,110,625
New York State Energy
Research & Development
Authority, Electric Facilities
Pollution Control Revenue
Brooklyn Union Gas Co. Project
8.75%, due 7/1/15.................................... 13,500,000 13,978,575
Con Edison
7.75%, due 1/1/24 (a)................................ 8,425,000 9,077,938
New York State Environmental
Facilities Corp. State Water
Pollution Control Revenue
Series B
5.20% due 5/15/14.................................... 3,000,000 3,022,500
Series A
7.50%, due 6/15/12................................... 3,050,000 3,465,562
New York State Local
Government Assistance
Series C
5.50%, due 4/1/22.................................... 6,175,000 6,128,688
Series A
7.00%, due 4/1/12.................................... 2,225,000 2,494,781
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

13
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY TAX FREE BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Value
-------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (CONTINUED)
NEW YORK (CONTINUED)
New York State Medical Care Facilities Finance Agency
Revenue
7.50%, due 2/15/21................................... $ 600,000 $ 680,250
7.875%, due 8/15/20.................................. 1,215,000 1,383,581
Hospital & Nursing Home, Series A
8.00%, due 2/15/28................................... 3,000,000 3,333,750
St. Francis Hospital, Project A
7.625% due 11/1/21................................... 2,300,000 2,515,625
New York State Power Authority Revenue & General
Purpose, Series T
5.00%, due 1/1/19.................................... 2,900,000 2,755,000
New York State Thruway Authority
General Revenue, Series A
5.50%, due 1/1/23.................................... 2,000,000 2,002,500
New York State Urban Development Corp. Correctional
Facilities Revenue
5.25%, due 1/1/18.................................... 300,000 296,625
5.50%, due 1/1/13.................................... 1,500,000 1,488,750
5.70%, due 4/1/20.................................... 3,000,000 3,041,250
Series A
5.25%, due 1/1/21.................................... 10,000,000 9,312,500
Port Authority of New York & New Jersey Consolidated
Series 72
7.35%, due 10/1/27................................... 4,000,000 4,700,000
Triborough Bridge & Tunnel Authority of New York,
General Purpose Revenue Series A
4.75%, due 1/1/19.................................... 1,080,000 990,900
------------
131,983,894
------------
OHIO (0.4%)
Ohio State Air Quality Development Authority,
Pollution Control Revenue Cleveland County Project
8.00%, due 12/1/13................................... 2,000,000 2,430,000
------------
OKLAHOMA (0.7%)
Tulsa Industrial Authority Regional Medical Center
Hospital Revenue, Series A
7.625%, due 6/1/17................................... 3,645,000 4,141,631
------------
PENNSYLVANIA (4.0%)
Allegheny County Pennsylvania Hospital Development
Authority Revenue, Saint Margaret Memorial Hospital
Project A
9.80%, due 7/1/10.................................... 1,500,000 1,548,930
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
-------------------------
<S> <C> <C>
PENNSYLVANIA (CONTINUED)
Delaware River Port Authority of Pennsylvania & New
Jersey Revenue
5.50%, due 1/1/26.................................... $ 7,500,000 $ 7,518,750
Emmaus Pennsylvania General Authority Revenue, Series
E
7.90%, due 5/15/18................................... 6,450,000 7,078,875
Pennsylvania Higher Education
Thomas Jefferson University, Series A
6.00%, due 7/1/19.................................... 1,750,000 1,800,312
Pottsville City Hospital Authority Revenue Warne
Clinic
7.00%, due 7/1/14.................................... 4,000,000 4,090,000
------------
22,036,867
------------
PUERTO RICO (1.9%)
Puerto Rico Commonwealth Aqueduct & Sewer Authority
Revenue
5.00%, due 7/1/15.................................... 2,000,000 1,902,500
Puerto Rico Commonwealth
General Obligation
3.00%, due 7/1/06.................................... 8,000,000 6,610,000
8.375%, due 7/1/07................................... 375,000 406,875
University of Puerto Rico
University Revenue, Series N
(zero coupon), due 6/1/10............................ 3,380,000 1,605,500
------------
10,524,875
------------
TENNESSEE (1.1%)
Metropolitan Government Nashville & Davidson County
Tennessee Water & Sewer Revenue
7.00%, due 1/1/14.................................... 6,000,000 6,178,740
------------
TEXAS (11.3%)
Austin Texas Utility System Revenue Series A
(zero coupon), due 11/15/11.......................... 19,800,000 8,464,500
Brazos River Authority Texas Revenue Houston Lighting
& Power
Project C
8.10%, due 5/1/19.................................... 2,050,000 2,242,188
Project A
8.25%, due 5/1/19.................................... 2,500,000 2,734,375
Houston Water & Sewer Revenue
Junior Lien, Series C
(zero coupon), due 12/1/10........................... 12,700,000 5,762,625
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

14
<PAGE>

- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Value
--------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (CONTINUED)
TEXAS (CONTINUED)
Matagorda County Texas Pollution Control Revenue,
Houston Lighting & Power
Series E
7.20%, due 12/1/18................................... $ 6,470,000 $ 7,246,400
Series D
7.60%, due 10/1/19 (a)............................... 9,500,000 10,675,625
San Antonio Texas Electric & Gas Revenue
5.00%, due 2/1/14.................................... 2,750,000 2,664,062
Series B
5.00%, due 2/1/16.................................... 10,000,000 9,612,500
Texas Water Resources
Finance Authority Revenue
7.625%, due 8/15/08.................................. 11,970,000 13,376,475
------------
62,778,750
------------
UTAH (3.1%)
Intermountain Power Agency of Utah Power Supply
Revenue
Series F
5.00%, due 7/1/13.................................... 4,450,000 4,322,062
Series A
5.00%, due 7/1/21.................................... 3,400,000 3,106,750
Second Crossover Series
5.75%, due 7/1/20.................................... 5,500,000 5,506,215
Series D
8.625%, due 7/1/21................................... 2,030,000 2,217,775
International Power Agency of Utah Special Obligation
First Crossover Series
7.875%, due 7/1/14................................... 2,000,000 2,076,560
------------
17,229,362
------------
VIRGINIA (0.9%)
Upper Occoquan Regional Sewerage Authority Revenue
4.75%, due 7/1/29.................................... 5,500,000 5,011,875
------------
WEST VIRGINIA (0.8%)
West Virginia School Building
Authority Revenue, Series B
6.75%, due 7/1/17.................................... 1,000,000 1,067,500
West Virginia State Building Commission Lease Revenue,
West Virginia Regional Jail & Correction, Series A
7.00%, due 7/1/15.................................... 3,000,000 3,281,250
------------
4,348,750
------------
Total Long-Term Municipal Bonds
(Cost $513,334,345).................................. 531,407,715
------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
-------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (0.2%)
INDIANA (0.1%)
Jasper County Indiana
Pollution Control Revenue
Series A
5.90%, due 8/1/10 (b)............................ $ 600,000 $ 600,000
------------
LOUISIANA (0.0%) (C)
Ascension Parish Louisiana
Pollution Control Revenue
5.90%, due 12/1/05 (b)........................... 200,000 200,000
------------
PENNSYLVANIA (0.1%)
Schuylkill County Industrial
Development Authority Revenue
5.90%, due 12/1/11 (b)........................... 400,000 400,000
------------
Total Short-Term Investments
(Cost $1,200,000)................................ 1,200,000
------------
Total Investments
(Cost $514,534,345) (d).......................... 96.3% 532,607,715 (e)
Cash and Other Assets, Less Liabilities........... 3.7 20,458,654
----------- ------------
Net Assets........................................ 100.0% $553,066,369
=========== ============
</TABLE>
- -------
(a) Interest on these securities is subject to alternative minimum tax.
(b) Variable rate security that may be tendered back to the issuer at any time
prior to maturity at par.
(c) Less than one tenth of a percent.
(d) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(e) At December 31, 1995 net unrealized appreciation was $18,073,370, based on
cost for Federal tax purposes. This consisted of aggregate gross unrealized
appreciation for all investments on which there was an excess of market
value over cost of $20,326,371 and aggregate gross unrealized depreciation
for all investments on which there was an excess of cost over market value
of $2,253,001.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

15
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY TAX FREE BOND FUND
- --------------------------------------------------------------------------------

STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1995

<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (Note 2)
(identified cost $514,534,345).................................. $532,607,715
Cash............................................................. 98,603
Receivables:
Investment securities sold...................................... 25,208,105
Interest........................................................ 10,945,642
Fund shares sold................................................ 242,533
Other assets..................................................... 560
------------
Total assets................................................... 569,103,158
------------
LIABILITIES:
Payables:
Investment securities purchased................................. 14,094,348
Fund shares redeemed............................................ 363,211
NYLIFE Distributors............................................. 361,787
Adviser......................................................... 140,484
Transfer agent.................................................. 44,559
Custodian....................................................... 15,233
Trustees........................................................ 7,708
Accrued expenses................................................. 70,461
Dividend payable................................................. 938,998
------------
Total liabilities.............................................. 16,036,789
------------
Net assets....................................................... $553,066,369
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized
Class A......................................................... $ 9,728
Class B......................................................... 541,549
Additional paid-in capital....................................... 552,747,386
Accumulated distributions in excess of net investment income..... (45,290)
Accumulated net realized loss on investments..................... (18,260,374)
Net unrealized appreciation on investments....................... 18,073,370
------------
Net assets....................................................... $553,066,369
============
CLASS A
Net assets applicable to outstanding shares...................... $ 9,752,311
============
Shares of beneficial interest outstanding........................ 972,846
============
Net asset value per share outstanding............................ $ 10.02
Maximum sales charge (4.50% of offering price)................... 0.47
------------
Maximum offering price per share outstanding..................... $ 10.49
============
CLASS B
Net assets applicable to outstanding shares...................... $543,314,058
============
Shares of beneficial interest outstanding........................ 54,154,876
============
Net asset value per share outstanding............................ $ 10.03
============
</TABLE>

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest......................................................... $34,622,600
-----------
Expenses: (Note 2)
Administration (Note 3).......................................... 1,610,982
Advisory (Note 3)................................................ 1,610,982
Service (Note 3)................................................. 1,342,485
Distribution--Class B (Note 3)................................... 1,175,464
Transfer agent................................................... 308,243
Shareholder communication........................................ 125,505
Legal............................................................ 84,300
Recordkeeping (Note 3)........................................... 79,801
Custodian........................................................ 56,251
Registration..................................................... 35,732
Trustees......................................................... 25,410
Auditing......................................................... 22,973
Miscellaneous.................................................... 46,447
-----------
Total expenses.................................................. 6,524,575
-----------
Net investment income............................................. 28,098,025
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions............................................ 11,083,134
Futures transactions............................................. (7,845,882)
-----------
Net realized gain on investments.................................. 3,237,252
Net change in unrealized depreciation on investments.............. 42,963,850
-----------
Net realized and unrealized gain on investments................... 46,201,102
-----------
Net increase in net assets resulting from operations.............. $74,299,127
===========
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
September 1
Year ended through Year ended
December 31 December 31 August 31
1995 1994* 1994
------------ ------------ ------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income............... $ 28,098,025 $ 9,780,492 $ 28,224,056
Net realized gain (loss) on
investments........................ 3,237,252 (12,726,339) (7,594,631)
Net change in unrealized
appreciation (depreciation) on
investments........................ 42,963,850 (16,468,643) (25,163,832)
------------ ------------ ------------
Net increase (decrease) in net
assets resulting from operations... 74,299,127 (19,414,490) (4,534,407)
------------ ------------ ------------
Dividends and distributions to
shareholders:
From net investment income:
Class A............................. (420,574) -- --
Class B............................. (27,677,470) (9,403,609) (28,053,524)
From net realized gain on
investments:
Class B............................. -- -- (3,880,963)
------------ ------------ ------------
Total dividends and distributions
to shareholders................... (28,098,044) (9,403,609) (31,934,487)
------------ ------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A............................. 9,868,992 -- --
Class B............................. 57,450,885 22,879,474 165,597,878
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A............................. 364,579 -- --
Class B............................. 17,430,060 5,985,020 20,984,547
------------ ------------ ------------
85,114,516 28,864,494 186,582,425
Cost of shares redeemed:
Class A............................. (1,090,878) -- --
Class B............................. (90,939,204) (38,421,988) (74,717,922)
------------ ------------ ------------
Increase (decrease) in net assets
derived from capital share
transactions...................... (6,915,566) (9,557,494) 111,864,503
------------ ------------ ------------
Net increase (decrease) in net
assets............................ 39,285,517 (38,375,593) 75,395,609
NET ASSETS:
Beginning of period.................. 513,780,852 552,156,445 476,760,836
------------ ------------ ------------
End of period........................ $553,066,369 $513,780,852 $552,156,445
============ ============ ============
Accumulated distributions in excess
of net investment income............ $ (45,290) $ (32,725) $ (409,608)
============ ============ ============
</TABLE>
- -------
*The Fund changed its fiscal year end from August 31 to December 31.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

17
<PAGE>

<TABLE>
<CAPTION>
Class B
----------------------------------------------------
Class A Class B September 1
-------- --------- through Year ended August 31
Year ended December 31 ---------------------------------------
December 31, 1995 1994* 1994 1993 1992 1991
------------------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at be-
ginning of period...... $ 9.20 $ 9.20 $ 9.71 $ 10.39 $ 10.21 $ 9.82 $ 9.40
------- --------- -------- -------- -------- -------- --------
Net investment income... 0.52 0.51 0.17 0.51 0.57 0.59 0.59
Net realized and
unrealized gain (loss)
on investments......... 0.83 0.83 (0.51) (0.58) 0.47 0.40 0.43
------- --------- -------- -------- -------- -------- --------
Total from investment
operations............. 1.35 1.34 (0. 34) (0.07) 1.04 0.99 1.02
------- --------- -------- -------- -------- -------- --------
Less dividends and dis-
tributions:
From net investment in-
come................... (0.53) (0.51) (0.17) (0.53) (0.60) (0.60) (0.60)
From net realized gain
on investments......... -- -- -- (0.08) (0.26) -- --
------- --------- -------- -------- -------- -------- --------
Total dividends and dis-
tributions............. (0.53) (0.51) (0.17) (0.61) (0.86) (0.60) (0.60)
------- --------- -------- -------- -------- -------- --------
Net asset value at end
of period.............. $ 10.02 $ 10.03 $ 9.20 $ 9.71 $ 10.39 $ 10.21 $ 9.82
======= ========= ======== ======== ======== ======== ========
Total investment return
(a).................... 15.00% 14.86% (3.53%) (0.69%) 10.81% 10.42% 11.21%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income.. 5.5% 5.2% 5.6%+ 5.4% 5.6% 5.9% 6.1%
Expenses............... 1.0% 1.2% 1.2%+ 1.2% 1.2% 1.3% 1.4%
Portfolio turnover rate. 110% 110% 37% 92% 138% 97% 52%
Net assets at end of pe-
riod (in 000's)........ $ 9,752 $ 543,314 $513,781 $552,156 $476,761 $292,936 $174,625
</TABLE>
- -------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized
(a) Total return is calculated exclusive of sales charges and is not
annualized.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

18
<PAGE>

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 1 -- ORGANIZATION AND BUSINESS:

The Fund's investment objective is to provide a high level of current income
free from regular Federal income tax, consistent with preservation of capital.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:

The following is a summary of significant accounting policies followed by the
Fund:

SECURITIES VALUATION. Portfolio securities of the Tax Free Bond Fund are stated
at value determined (a) by appraising debt securities at prices supplied by a
pricing agent selected by the Adviser, whose prices reflect broker/dealer sup-
plied valuations and electronic data processing techniques if those prices are
deemed by the Adviser to be representative of market values at the regular
close of business of the New York Stock Exchange, (b) by appraising options and
futures contracts at the last sale price on the market where such options or
futures are principally traded, and (c) by appraising all other securities and
other assets, including debt securities for which prices are supplied by a
pricing agent but are not deemed by

19
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY TAX FREE BOND FUND
- --------------------------------------------------------------------------------

FUTURES CONTRACTS. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date, or
to make or receive a cash payment based on the value of a securities index.
During the period the futures contract is open, changes in the value of the
contract are recognized as unrealized gains or losses by "marking to market"
such contract on a daily basis to reflect the market value of the contract at
the end of each day's trading. The Fund agrees to receive from or pay to the
broker an amount of cash equal to the daily fluctuation in the value of the
contract. Such receipts or payments are known as "variation margin". When the
futures contract is closed, the Fund records a realized gain or loss equal to
the difference between the proceeds from (or cost of) the closing transaction
and the Fund's basis in the contract. The Tax Free Bond Fund has entered into
contracts for the future delivery of debt securities in order to attempt to
protect against the effects of adverse changes in interest rates or to lengthen
or shorten the average maturity or duration of the Fund's portfolio. This prac-
tice is known as hedging.

FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income or excise tax provision is
required. Permanent book-tax differences of $1,296 and $12,546 have been re-
classified to additional paid-in capital and accumulated net investment income,
respectively, from accumulated net realized loss on investments, due to share-
holder dividends.

20
<PAGE>

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Tax Free Bond Fund intends to declare and
pay dividends monthly.

Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.

NOTE 3 -- FEES AND RELATED PARTY POLICIES:

NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned sub-
sidiary of New York Life, is the Administrator for the Fund.

The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an an-
nual rate of 0.30% of the average daily net assets of the Fund.

21
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY TAX FREE BOND FUND
- --------------------------------------------------------------------------------

The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund.

SALES CHARGES. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $62,656 for the year
ended December 31, 1995.

22
<PAGE>

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges for the year ended December 31, 1995 in the amount of $675,151.

OTHER. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1995 were $8,152.

Fees for the cost of legal services provided to the Fund by the Office of Gen-
eral Counsel of New York Life amounted to $37,422 for the year ended December
31, 1995.

Fees for recordkeeping services provided to the Trust by NYLIFE Distributors
are charged to the Fund. The fee for the year ended December 31, 1995 is shown
on the statement of operations.

NOTE 4 -- FEDERAL INCOME TAX:

At December 31, 1995, for Federal income tax purposes, capital loss
carryforwards of $18,260,374 are available to the extent provided by regula-
tions to offset future realized gains through 2003. To the extent that these
loss carryforwards are used to offset future capital gains, it is probable that
the capital gains so offset will not be distributed to shareholders.

NOTE 5 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):

23
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY TAX FREE BOND FUND
- --------------------------------------------------------------------------------

NOTE 6 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):

<TABLE>
<CAPTION>
September 1
Year Ended through Year Ended
December 31 December 31 August 31
1995 1994* 1994
--------------- ----------- ----------
Class A Class B Class B
------- ------- ----------------------
<S> <C> <C> <C> <C>
Shares sold............................. 1,047 5,918 2,461 16,383
Shares issued in reinvestment of divi-
dends and distributions................ 38 1,794 645 2,099
----- ------ ------ ------
1,085 7,712 3,106 18,482
Shares redeemed......................... 112 9,416 4,109 7,488
----- ------ ------ ------
Net increase (decrease)................. 973 (1,704) (1,003) 10,994
===== ====== ====== ======
</TABLE>
- -------
*The Fund changed its fiscal year end from August 31 to December 31.

24
<PAGE>

- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------

To the Board of Trustees and Shareholders of
The MainStay Funds

In our opinion, the accompanying statement of assets and liabilities (including
the portfolio of investments) and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all mate-
rial respects, the financial position of the MainStay Tax Free Bond Fund, (one
of the thirteen funds constituting The MainStay Funds, hereafter referred to as
the "Fund") at December 31, 1995, the results of its operations for the year
then ended and the changes in its net assets and the financial highlights for
each of the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter re-
ferred to as "financial statements") are the responsibility of the Fund's man-
agement; our responsibility is to express an opinion on these financial state-
ments based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which re-
quire that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and dis-
closures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall finan-
cial statement presentation. We believe that our audits, which included confir-
mation of securities at December 31, 1995 by correspondence with the custodian
and brokers, provide a reasonable basis for the opinion expressed above.

Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 12, 1996

25
<PAGE>

- --------------------------------------------------------------------------------
The MainStay Funds
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund GRAPH INDICATING the makeup and returns of the pate in the growth potential of stocks+
RISK/REWARD S&P 500*
OF FUND]
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Offers broad diversification into You prefer the higher return potential
International Equity Fund GRAPH INDICATING international stock markets with of international equities or want to
RISK/REWARD an emphasis on risk control add diversification to your domestic
OF FUND] investments++
- ------------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Seeks undervalued stocks with You seek to maximize total return from
Value Fund GRAPH INDICATING attractive dividends and a stimulus securities which may have more poten-
RISK/REWARD for positive change tial than the market currently sees
OF FUND]
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Invests in convertible securities for You want income from securities that
Convertible Fund GRAPH INDICATING a special blend of long-term growth may offer growth potential if converted
RISK/REWARD potential and dividend income into common stock
OF FUND]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

# A small portion of the Fund's income may be subject to state and local taxes
and the Alternative Minimum Tax. Capital gains, if any, may also be taxed.

26
<PAGE>

<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[HORIZONTAL BAR Seeks a high level of current income You are seeking to combine high current
Government Fund GRAPH INDICATING consistent with safety of principal income and safety of principal
RISK/REWARD OF primarily from U.S. government
FUND] securities(S)
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield [HORIZONTAL BAR An aggressive high yield bond You want to maximize current income
Corporate Bond Fund GRAPH INDICATING fund that is actively managed for and can accept the higher risk of
RISK/REWARD OF maximum current income securities with high yield potential
FUND]
- ------------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Seeks high current yields and You prefer the higher return potential of
International Bond Fund GRAPH INDICATING competitive total return from non- international bonds or want to add
RISK/REWARD OF U.S. bonds with an emphasis on diversification to your domestic
FUND] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[HORIZONTAL BAR Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund GRAPH INDICATING stability of principal, and liquidity, competitive yields on cash you're plan-
RISK/REWARD OF with free checkwriting|| ning to spend or invest in the near future
FUND]
- ------------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

If you would like to learn more about any of the MainStay Funds not covered
by your current prospectus, please call your Registered Representative. Your
Registered Representative can provide you with additional prospectuses which
contain more complete information including advisory fees, other expenses, and
share classes. Please read the prospectus carefully before you invest or send
money. Shares must be offered in the investor's state of residence.

27
<PAGE>

- --------------------------------------------------------------------------------
MainStay Tax Free
Bond Fund
- --------------------------------------------------------------------------------

1995
annual
report

The year in review
fund results
& portfolio highlights

[LOGO OF MAINSTAY(R) FUNDS APPEARS HERE]
- --------------------------------------------------------------------------------
December 31, 1995
- --------------------------------------------------------------------------------

Officers & Trustees

Dechert Price & Rhoads
Legal Counsel

[LOGO OF MAINSTAY(R) FUNDS APPEARS HERE]

[LOGO OF NEW YORK LIFE APPEARS HERE]

This report is provided for the information of shareholders of the MainStay Tax
Free Bond Fund. It may be given to others only when preceded or accompanied by
an effective MainStay Funds prospectus. This report does not offer to sell any
securities or solicit orders to buy them.

[LOGO OF RECYCLED PAPER APPEARS HERE] MSAN16 (296)
<PAGE>

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

Chairperson's Letter 2

MainStay Total Return Fund Highlights

and Portfolio Managers' Comments 4

Returns & Lipper Rankings 6

Year-by-Year Performance 7

$10,000 Invested in the MainStay Total Return Fund
Class A Shares vs. S&P 500 and Inflation 7

$10,000 Invested in the MainStay Total Return Fund

Class B Shares vs. S&P 500 and Inflation 7

Top 25 Security Holdings 8

10 Largest Purchases 9

10 Largest Sales 9

Diversification by Industry -- Top 5 10

Portfolio Composition 10

Financial Statements 11

Notes to Financial Statements 18

Report of Independent Accountants 24

The MainStay Funds 26
<PAGE>

- --------------------------------------------------------------------------------
Chairperson's Letter
- --------------------------------------------------------------------------------

[PHOTO OF ALICE T. KANE APPEARS HERE]

Alice T. Kane, Chairperson

Report to Shareholders for the Year Ended December 31, 1995

For stock and bond investors alike, 1995 was an outstanding year. The stock
market provided its highest returns in two decades, with the S&P 500 Index*
rising 37.53%. Long-term Treasury bonds rose almost as much, ending the year up
30.1%. Intermediate-term Treasuries also turned in a banner year at 19.0% --
their highest annual total return in ten years. These results stemmed from a
combination of positive fundamentals, which included low inflation, strong
productivity, solid profits, moderate economic growth, and lower interest rates
across the maturity spectrum.

In this context, we are pleased to report to you on the activities and
investment results of the MainStay(R) Total Return Fund for the twelve months
ended December 31, 1995. For the year, the Fund provided returns of 28.66% and
27.96% for Class A and Class B shares, respectively, excluding all sales
charges. This placed the Fund's Class A shares in the top 14%, and Class B
shares in the top 19%, of 220 balanced funds tracked by Lipper Analytical
Services, Inc. for the same twelve-month period.+

The Fund benefited from careful adherence to diversification limits in the
equity portion of the portfolio, which was well positioned to take advantage of
growth opportunities in 1995. In the fixed-income portion of the portfolio,
maintaining a duration that was neutral to the market helped the Fund
participate as fully as possible in the bond market rally. Details on the
portfolio's management, makeup, and quality can be found on the following pages.

2
<PAGE>

Of course, the Fund's results reflected particularly strong market conditions,
which may or may not be repeated in future years. While positive returns are
important to investors, they represent only one expression of MainStay's ongoing
commitment to help our shareholders pursue their investment goals. In 1995, that
commitment helped us attract more assets than in any previous year. As a
MainStay shareholder, you have played an important role in our success, and we
look forward to serving your investment needs for many years to come.

- ---------------
* See footnote on page 7 for more information on the S&P 500.
+ See footnote on page 6 for more information on Lipper Analytical Services,
Inc.

/s/ Alice T. Kane

Alice T. Kane
January 1996

3
<PAGE>

- --------------------------------------------------------------------------------
MainStay Total Return Fund
- --------------------------------------------------------------------------------

1995 Fund Highlights

. Second highest annual total returns in the history of the Fund
. Annual total returns of 28.66% and 27.96% for Class A and Class B shares,
respectively, excluding all sales charges
. Class A shares ranked in the top 14% and Class B shares in the top 19% of 220
Lipper balanced funds for the 12 months ended 12/31/95

[PHOTO OF TOTAL RETURN TEAM APPEARS HERE]

Total Return Team--Edmund Spelman,
Rudy Carryl, Eileen Cook, Christopher Harms, Ravi Akhoury (left to right)

For the calendar year 1995, the MainStay Total Return Fund posted total returns
of 28.66% and 27.96% for Class A and Class B shares, respectively, excluding all
sales charges. Over the same period, both share classes outperformed the average
Lipper balanced fund's return of 25.17%. These outstanding returns reflected
unusually favorable market conditions which are unlikely to be repeated in 1996.

The Total Return Fund is a growth and income fund with its equity component
managed as a growth portfolio. Growth stocks generally outperformed value stocks
last year, partially because growth stocks are less tied to the economy than are
many of the cyclical value sectors and securities. The environment was
characterized by a slowing economy, which was good for growth but not for value.
Competitively, this gave us an advantage in the Total Return Fund (except during
the fourth quarter), because many of its peer funds have more value-oriented
equity components.

During 1995, the bond component of the Fund contributed positively to returns as
interest rates declined and bond prices rallied. Our decision to maintain a
duration position closely in line with the market allowed us to participate
strongly in the rally. We focused on high-quality issues throughout the year,
with careful security selection in

Growth Stocks
- --------------------------------------------------------------------------------
Stocks that are participating in expanding markets or have faster increasing
revenues or earnings per share than most other equities.

Value Stocks
- --------------------------------------------------------------------------------
Stocks that are currently out of favor, but have features that the adviser
believes are likely to make them increase in value over time.

Duration
- --------------------------------------------------------------------------------
A measure of average maturity, which adjusts for the time value of the payments
investors will receive, and which takes into account interest payments as well
as principal payments. Duration is a better gauge of interest-rate sensitivity
than average maturity alone.

4
<PAGE>

Treasuries, agencies, and seasoned mortgage pass-through securities. Our
decision to underweight corporate bonds proved beneficial, as corporates and
mortgage-related securities in general underperformed Treasuries. At this
juncture, we continue to maintain a neutral position with respect to interest
rate movements.

The equity component of the Fund enjoyed handsome returns from stocks in a broad
variety of industries. Our selections in finance, healthcare, technology, and
even some selected consumer discretionary stocks contributed positively to
performance. We were vigilant in sticking to our diversification limits by
industry and issue. This helped the Fund when our semiconductor technology
holdings, which skyrocketed until September, corrected sharply from mid-
September through year-end. Meanwhile, other technology stocks in the Fund
continued to climb, reaching new highs. Nevertheless, as value stocks
outperformed growth stocks in the fourth quarter, the Total Return Fund lagged
the average Lipper balanced fund for the last three months of the year.

Looking ahead, we currently intend to add to the healthcare sector, where we
find the fundamentals compelling in pharmaceuticals, medical devices, and HMOs.
Selected consumer stocks may continue to do well, but our holdings in the group
may be further reduced. Financials can benefit from even lower rates, but we
will monitor the consumer credit situation closely, especially if the economy
weakens more than expected. Finally, we continue to review the commodity-based
cyclical technology holdings such as semiconductor stocks to determine whether
they meet our strict investment criteria going forward. Nevertheless, we believe
some areas in technology will continue to produce substantial earnings gains
with the potential for stock price appreciation.

We believe that if low inflation, slow economic growth, and low interest rates
continue into 1996, the environment should continue to be favorable for total
return investing.

Ravi Akhoury
Rudy Carryl
Edmund Spelman
Portfolio Managers

5
<PAGE>

- --------------------------------------------------------------------------------
Returns & Lipper Rankings as of 12/31/95
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund average annual total returns *
- ----------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 12/31/95
<S> <C> <C> <C>
Class A 28.66% 14.49% 12.51%
Class B 27.96% 14.37% 12.44%
- ----------------------------------------------------------------------------------------------------
<CAPTION>
Fund SEC returns*
- ----------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 12/31/95
<S> <C> <C> <C>
Class A 21.59% 13.20% 11.72%
Class B 22.96% 14.13% 12.44%
- ----------------------------------------------------------------------------------------------------
<CAPTION>
Fund Lipper+ rankings and year-end Lipper category returns
- ----------------------------------------------------------------------------------------------------
Life of Fund/Class
1 year 5 years through 12/31/95
<S> <C> <C> <C>
Class A 30 out of 220 funds n/a 30 out of 220 funds
Class B 41 out of 220 funds 13 out of 62 funds 20 out of 45 funds
Average Lipper balanced fund 25.17% 13.05% 11.94%
- ----------------------------------------------------------------------------------------------------
<CAPTION>
Fund year-end per-share net asset values and distributions for 1995
- ----------------------------------------------------------------------------------------------------
NAV 12/31/95 Income Capital Gains
<S> <C> <C> <C>
Class A $18.53 $0.4226 $0.0000
Class B $18.53 $0.3279 $0.0000
- ----------------------------------------------------------------------------------------------------
</TABLE>

* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gains and dividend distributions are reinvested.

Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 5.5% and an annual 12b-1 fee of .25%.
Performance figures for this Class include the historical performance of the
Class B shares for periods from inception (12/28/87) up to 12/31/94.
Performance data for the two Classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are sold
with no initial sales charge, but are subject to a maximum Contingent
Deferred Sales Charge (CDSC) of up to 5% if shares are redeemed during the
first 6 years of purchase and an annual 12b-1 fee of up to 1%.

+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales charges.
For the 12-month period ended 12/31/95, the Lipper balanced fund category
included 220 funds. For the 5-year and since inception periods ended
12/31/95, the Fund's Class B shares placed among the top 21% and 44%,
respectively, of all balanced funds. Class A shares were not in existence for
these periods. The Fund's Class A shares were first offered to the public
1/3/95; Class B shares 12/28/87.

6
<PAGE>

Year ended 12/31 Total Return %

87 0.50
88 7.65
89 14.99
90 5.06
91 36.84
92 3.62
93 10.50
94 -2.41
95 Class A 28.66
95 Class B 27.96

- --------------------------------------------------------------------------------
$10,000 invested in the MainStay Total Return Fund
vs. S&P 500 and Inflation
- --------------------------------------------------------------------------------

Class A Shares

[LINE GRAPH APPEARS HERE]

Year-end Total Return Fund S&P 500++ Inflation(S)
12/28/87 9450 10000 10000
88 10223 11754 10442
89 11756 15467 10927
90 12351 14985 11594
91 16900 19531 11950
92 17512 21017 12296
93 19350 23126 12634
94 18885 23440 12972
95 24297 32217 13310

Class B Shares

[LINE GRAPH APPEARS HERE]

Year-end Total Return Fund S&P 500++ Inflation(S)
12/28/87 10000 10000 10000
88 10818 11754 10442
89 12440 15467 10927
90 13070 14985 11594
91 17884 19531 11950
92 18531 21017 12296
93 20477 23126 12634
94 19984 23440 12972
95 25571 32217 13310

---------------
The Class A graph assumes an initial investment of $10,000 made on 12/28/87
reflecting the effect of the 5.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,450. The Class B graph assumes
an initial investment of $10,000 made on 12/28/87. Returns shown do not
reflect the Contingent Deferred Sales Charge (CDSC), as it would not apply
for the period shown. All results include reinvestment of distributions at
net asset value and the change in share price for the stated period. Past
performance is no guarantee of future results.

++ "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are
registered trademarks of Standard & Poor's Corporation. Results assume the
reinvestment of all income and capital gains distributions.

7
<PAGE>

- --------------------------------------------------------------------------------
Top 25 Security Holdings as of 12/31/95
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Holding $ amount
<S> <C>
U.S. Treasury Note due 6/30/97 $46,227,125
U.S. Treasury Note due 2/15/98 25,776,563
Government National Mortgage Association (Mortgage Pass-Through Security) due 2/20/26 21,938,800
U.S. Treasury Note due 11/30/00 21,361,800
HFS, Inc. 18,712,575
U.S. Treasury Note due 11/15/04 17,784,987
3Com Corp. 17,764,125
Federal National Mortgage Association (Mortgage Pass-Through Security) due 2/15/11 16,018,018
Government National Mortgage Association ARM (Mortgage Pass-Through Security) due 2/22/26 15,475,000
Computer Associates International, Inc. 14,759,062
Amgen, Inc. 14,487,500
U.S. Treasury Bond due 8/15/25 13,905,897
First Interstate Bancorp 13,650,000
Green Tree Financial Corp. 13,293,000
U.S. Treasury Bond due 2/15/25 13,175,778
Medtronic, Inc. 13,074,750
SunAmerica Inc. 12,696,750
Federal Home Loan Mortgage Corporation Gold (Mortgage Pass-Through Security) due 2/20/26 11,876,063
United Healthcare Corp. 11,822,750
Alco Standard Corp. 11,803,188
Intel Corp. 11,690,500
Federal Home Loan Mortgage Corporation Gold (Mortgage Pass-Through Security) due 2/13/26 11,409,937
Travelers Group, Inc. 10,898,312
American International Group, Inc. 10,545,000
Cordis Corp. 9,949,500
</TABLE>

Note: This breakdown is provided for informational purposes only. This Fund's
holdings may change daily. A shareholder owns shares of the Fund but does not
own a direct interest in any of the specific securities listed above. Excludes
short-term securities. See financial statements for specific type of security
held.

8
<PAGE>

- --------------------------------------------------------------------------------
10 Largest Purchases in 1995
- --------------------------------------------------------------------------------

Holding amount of purchase

Household International Inc. $6,940,798
First Data Corp. 6,871,484
MGIC Investment Corp. 6,740,383
Triton Energy Corp. 6,682,422
Nine West Group, Inc. 6,629,257
Schering-Plough Corp. 6,089,994
Mylan Laboratories, Inc. 6,083,716
Motorola, Inc. 5,929,936
Genzyme Corp. 5,818,855
Pharmacia & Upjohn, Inc. 5,743,936

- --------------------------------------------------------------------------------
10 Largest Sales in 1995
- --------------------------------------------------------------------------------

Holding amount of sale

Promus Companies, Inc. $6,469,778
Dollar General Corp. 6,409,629
U.S. Healthcare Inc. 6,023,440
PacifiCare Health Systems, Inc. Class B 5,871,458
Texas Instruments Inc. 5,682,897
Harley-Davidson, Inc. 5,608,046
Micron Technology Inc. 5,551,628
DSC Communications Corp. 5,249,063
Manpower, Inc. 4,628,755
Callaway Golf Co. 4,353,107

Note: This breakdown is provided for informational purposes only. This Fund's
holdings may change daily. A shareholder owns shares of the Fund but does not
own a direct interest in any of the specific securities listed above. All
securities listed indicate total purchases/ sales for the issuer for the year.
Excludes short-term securities. See financial statements for specific type of
security held.

9
<PAGE>

-------------------------------------------------
Diversification by industry--Top 5 as of 12/31/95
-------------------------------------------------

U.S. Government Obligations & Agencies 38.8%
[PIE CHART Technology 8.5%
APPEARS HERE] Pharmaceuticals 6.2%
Finance 6.3%
Retail 4.6%
All Other Industries 35.6%

-------------------------------------------------
Portfolio Composition as of 12/31/95
-------------------------------------------------

Common Stocks 60.2%
[PIE CHART Bonds & Notes 0.3%
APPEARS HERE] Convertible Preferred Stocks 38.1%
Cash & Equivalents 1.4%

Note: actual percentages will vary over time

10
<PAGE>

<TABLE>
<CAPTION>
Principal
Amount Value
------------------------
<S> <C> <C>

LONG-TERM BONDS (38.1%)+
ASSET-BACKED SECURITIES (3.8%)

AUTO LEASES (0.4%)
Ford Credit Auto Lease Trust
Series 1995-1 Class A2
6.35%, due 10/15/98.................................. $ 3,075,000 $ 3,100,000
------------
AUTO LOANS (1.1%)
Ford Credit Grantor Trust
Series 1995-B Class A
5.90%, due 10/15/00.................................. 3,686,520 3,702,741
NationsBank Auto Grantor Trust
Series 1995-A Class A
5.85%, due 6/15/02................................... 4,893,695 4,912,046
Union Acceptance Corp.
Series 1995-B Class A
6.575%, due 7/10/02.................................. 1,403,307 1,421,284
------------
10,036,071
------------
CREDIT CARD RECEIVABLES (1.2%)
American Express Master Trust
Series 1992-1 Class A
6.05%, due 6/15/98................................... 1,890,000 1,905,687
Chemical Master Credit Card Trust 1
Series 1995-3 Class A
6.23%, due 4/15/05................................... 4,865,000 4,970,279
Standard Credit Card Master Trust
Series 1995-4 Class A
5.975%, due 2/15/00 (d).............................. 3,630,000 3,630,000
------------
10,505,966
------------
HOME EQUITY LOANS (1.1%)
Contitrade Services Home Equity Loan Trust
Series 1991-1 Class A
8.80%, due 1/15/06................................... 2,112,230 2,181,532
EQCC Home Equity Loan Trust
Series 1995-3 Class A1
6.25%, due 10/15/03.................................. 2,465,521 2,473,410
Green Tree Home Improvement Loan Trust
Series 1995-D Class A1
6.05%, due 9/15/25................................... 2,679,317 2,686,016
Series 1995-C Class A1
6.20%, due 7/15/20................................... 2,036,396 2,042,770
------------
9,383,728
------------
Total Asset-Backed Securities
(Cost $32,758,499)................................... 33,025,765
------------
</TABLE>
- -------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------
<S> <C> <C>

CORPORATE BONDS (2.2%)
BANKS (1.2%)
First Union Corp.
7.50%, due 4/15/35................................... $ 1,750,000 $ 1,939,403
Regions Financial Corp.
7.75%, due 9/15/24................................... 5,520,000 6,213,257
Southtrust Bank Birmingham, Alabama
7.69%, due 5/15/25................................... 2,125,000 2,386,885
------------
10,539,545
------------
BROKERAGE (0.2%)
Smith Barney Holdings Inc.
7.98%, due 3/1/00.................................... 1,400,000 1,501,094
------------
FINANCE (0.8%)
Associates Corp. of North America
7.75%, due 2/15/05................................... 5,125,000 5,708,020
General Motors Acceptance Corp.
9.625%, due 12/15/01................................. 1,365,000 1,605,731
------------
7,313,751
------------
Total Corporate Bonds
(Cost $18,564,018)................................... 19,354,390
------------
U.S. GOVERNMENT & FEDERAL AGENCIES (29.6%)

FEDERAL AGENCY (0.2%)
Tennessee Valley Authority
8.25%, due 4/15/42................................... 1,800,000 2,138,076
------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (0.8%)
7.09%, due 6/1/05.................................... 3,750,000 3,886,838
8.19%, due 10/6/04................................... 2,500,000 2,691,850
------------
6,578,688
------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (MORTGAGE
PASS-THROUGH SECURITY) (0.9%)
6.00%, due 8/1/24.................................... 8,472,775 8,206,645
------------
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD (MORTGAGE
PASS-THROUGH SECURITIES) (2.7%)
6.00%, due 2/20/26 TBA (b)........................... 12,275,000 11,876,063
7.00%, due 2/13/26 TBA (b)........................... 11,325,000 11,409,937
------------
23,286,000
------------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

11
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY TOTAL RETURN FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Value
------------------------
<S> <C> <C>
U.S. GOVERNMENT & FEDERAL
AGENCIES (CONTINUED)

FEDERAL NATIONAL MORTGAGE
ASSOCIATION (1.7%)
6.25%, due 8/12/03................................. $ 2,685,000 $ 2,671,494
7.85%, due 9/10/04................................. 2,575,000 2,744,049
8.50%, due 2/1/05.................................. 8,645,000 9,458,322
------------
14,873,865
------------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (COLLATERALIZED
MORTGAGE OBLIGATIONS) (0.6%)
Series 1993-76 Class B
6.00%, due 6/25/08................................. 2,888,627 2,734,259
Series 1993-89 Class D
7.00%, due 6/25/23................................. 2,725,000 2,628,344
------------
5,362,603
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (MEDIUM-TERM NOTE) (0.2%)
7.21%, due 8/18/05................................. 1,815,000 1,892,373
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (MORTGAGE PASS-THROUGH
SECURITY) (1.8%)
7.00%, due 2/15/11 TBA (b)......................... 15,745,000 16,018,018
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (MORTGAGE PASS-THROUGH
SECURITIES) (4.8%)
5.50%, due 2/22/26 ARM TBA (b)(f).................. 15,475,000 15,475,000
7.50%, due 2/20/26 TBA (b)......................... 4,950,000 5,084,591
8.00%, due 2/20/26 TBA (b)......................... 21,095,000 21,938,800
------------
42,498,391
------------
UNITED STATES TREASURY BONDS (3.1%)
6.875%, due 8/15/25................................ 12,330,000 13,905,897
7.625%, due 2/15/25................................ 10,775,000 13,175,778
------------
27,081,675
------------
UNITED STATES TREASURY NOTES (12.8%)
5.625%, due 6/30/97 (c)............................ 45,940,000 46,227,125
5.625%, due 11/30/00............................... 21,170,000 21,361,800
6.375%, due 8/15/02................................ 1,475,000 1,546,670
7.875%, due 11/15/04............................... 15,365,000 17,784,987
8.125%, due 2/15/98 (c)............................ 24,375,000 25,776,563
------------
112,697,145
------------
Total U.S. Government & Federal Agencies
(Cost $254,836,704)................................ 260,633,479
------------
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
------------------------
<S> <C> <C>

YANKEE BONDS (2.5%)
African Development Bank
6.875%, due 10/15/15................................. $ 2,215,000 $ 2,277,729
BCH Cayman Islands
8.25%, due 6/15/04................................... 2,205,000 2,423,427
Celulosa Arauco y Constitucion S.A.
6.75%, due 12/15/03.................................. 2,710,000 2,722,575
China International Trust &
Investing Corp.
9.00%, due 10/15/06.................................. 2,455,000 2,781,441
Dresdner Bank-New York
7.25%, due 9/15/15................................... 3,525,000 3,760,928
Grand Metropolitan Investment Corp.
7.45%, due 4/15/35................................... 3,030,000 3,386,237
Republic of Italy
6.875%, due 9/27/23.................................. 2,590,000 2,527,037
Wharf Capital International Ltd.
8.875%, due 11/1/04.................................. 2,080,000 2,233,691
------------
Total Yankee Bonds
(Cost $21,080,514)................................... 22,113,065
------------
Total Long-Term Bonds
(Cost $327,239,735).................................. 335,126,699
------------
<CAPTION>
Shares
-----------
<S> <C> <C>
COMMON STOCKS (60.2%)
AIRLINES (0.7%)
Atlantic Southeast Airlines, Inc...................... 131,500 2,827,250
Southwest Airlines Co................................. 163,500 3,801,375
------------
6,628,625
------------
AUTO PARTS (0.6%)
Lear Seating Corp. (a)................................ 175,000 5,075,000
------------
BANKS (3.6%)
Bank of New York Co., Inc............................. 158,000 7,702,500
Barnett Banks, Inc.................................... 108,000 6,372,000
First Interstate Bancorp.............................. 100,000 13,650,000
NationsBank Corp...................................... 63,000 4,386,375
------------
32,110,875
------------
BROKERAGE (0.8%)
Schwab (Charles) Corp................................. 373,500 7,516,687
------------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

12
<PAGE>

Shares Value
------------------------
<S> <C> <C>

COMMON STOCKS (CONTINUED)

BUILDINGS (1.3%)
Lennar Corp........................................... 137,000 $ 3,442,125
Oakwood Homes Corp.................................... 202,900 7,786,287
------------
11,228,412
------------
COMMERCIAL SERVICES (0.6%)
Service Corp. International........................... 117,000 5,148,000
------------
COMPUTERS & OFFICE EQUIPMENT (4.6%)
Alco Standard Corp.................................... 258,700 11,803,188
Danka Business Systems Plc ADR (e).................... 145,000 5,365,000
EMC Corp. (a)......................................... 200,000 3,075,000
Hewlett-Packard Co.................................... 93,000 7,788,750
Seagate Technology, Inc. (a).......................... 60,500 2,873,750
Sun Microsystems, Inc. (a)............................ 204,000 9,307,500
------------
40,213,188
------------
CONSUMER DURABLES (0.8%)
Black & Decker Corp................................... 194,900 6,870,225
------------
CONSUMER FINANCIAL SERVICES (0.8%)
First Data Corp....................................... 99,600 6,660,750
------------
CONSUMER SERVICES (0.2%)
CUC International, Inc. (a)........................... 42,000 1,433,250
------------
DRUGS (6.3%)
Amgen, Inc. (a)....................................... 244,000 14,487,500
Elan Corp. Plc ADR (a)(e)............................. 138,000 6,710,250
Genzyme Corp. (a)..................................... 111,600 6,961,050
Mylan Laboratories, Inc............................... 294,050 6,910,175
Pharmacia & Upjohn, Inc............................... 150,000 5,812,500
Schering-Plough Corp.................................. 155,000 8,486,250
Teva Pharmaceutical Industries
Ltd. ADR (e)......................................... 124,000 5,750,500
------------
55,118,225
------------
ELECTRONICS (1.0%)
General Instrument Corp. (a).......................... 76,400 1,785,850
Vishay Intertechnology, Inc. (a)...................... 227,272 7,159,068
------------
8,944,918
------------
</TABLE>

Shares Value
------------------------
<S> <C> <C>

FINANCE (5.4%)
Federal National Mortgage Association................. 72,500 $ 8,999,063
Green Tree Financial Corp............................. 504,000 13,293,000
Household International Inc........................... 141,400 8,360,275
MGIC Investment Corp.................................. 116,500 6,320,125
Travelers Group, Inc.................................. 173,333 10,898,312
------------
47,870,775
------------
FINANCIAL SERVICES (2.3%)
First USA, Inc........................................ 168,000 7,455,000
SunAmerica Inc........................................ 267,300 12,696,750
------------
20,151,750
------------
HEALTH CARE (3.3%)
Columbia/HCA Healthcare Corp.......................... 182,776 9,275,882
HealthCare COMPARE Corp. (a).......................... 104,000 4,524,000
Humana, Inc. (a)...................................... 131,000 3,586,125
United Healthcare Corp................................ 180,500 11,822,750
------------
29,208,757
------------
HOSPITAL MANAGEMENT & SERVICES (1.1%)
HEALTHSOUTH Corp. (a)................................. 186,000 5,417,250
OrNda HealthCorp (a).................................. 195,300 4,540,725
------------
9,957,975
------------
INSURANCE (1.2%)
American International Group, Inc..................... 114,000 10,545,000
------------
MEDIA (1.1%)
Viacom Inc. Class A (a)............................... 20,416 936,584
Viacom Inc. Class B (a)............................... 181,189 8,583,829
------------
9,520,413
------------
MEDICAL EQUIPMENT (2.9%)
Cordis Corp. (a)...................................... 99,000 9,949,500
Medtronic, Inc........................................ 234,000 13,074,750
Waters Corp. (a)...................................... 150,000 2,737,500
------------
25,761,750
------------
OIL & GAS EXPLORATION (0.8%)
Triton Energy Corp. (a)............................... 128,600 7,378,425
------------
PUBLISHING (0.7%)
News Corp. Ltd. ADR (e)............................... 283,000 6,049,125
------------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

13
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY TOTAL RETURN FUND
- --------------------------------------------------------------------------------

Shares Value
------------------------
<S> <C> <C>

COMMON STOCKS (CONTINUED)

RESTAURANTS & LODGING (2.1%)
HFS, Inc. (a).......................................... 228,900 $ 18,712,575
------------
RETAIL (4.6%)
Bed, Bath & Beyond, Inc. (a)........................... 75,000 2,910,937
Circuit City Stores, Inc............................... 144,000 3,978,000
Gymboree Corp. (a)..................................... 125,000 2,578,125
Home Depot, Inc. (The)................................. 135,500 6,487,063
Kohl's Corp. (a)....................................... 107,000 5,617,500
Kroger Co. (The) (a)................................... 179,000 6,712,500
Lowe's Companies, Inc.................................. 232,000 7,772,000
Office Depot, Inc. (a)................................. 247,050 4,879,238
------------
40,935,363
------------
SOFTWARE (2.1%)
Computer Associates International, Inc................. 259,500 14,759,062
Microsoft Corp. (a).................................... 39,000 3,422,250
------------
18,181,312
------------
TECHNOLOGY (8.5%)
General Motors Corp. Class E........................... 102,500 5,330,000
Intel Corp. ........................................... 206,000 11,690,500
Lam Research Corp. (a)................................. 178,500 8,166,375
Linear Technology Corp................................. 218,000 8,556,500
Micron Technology Inc.................................. 217,300 8,610,513
Motorola, Inc.......................................... 98,500 5,614,500
Oracle Corp. (a)....................................... 207,000 8,771,625
3Com Corp. (a)......................................... 381,000 17,764,125
------------
74,504,138
------------
TELECOMMUNICATION EQUIPMENT (0.1%)
Scientific-Atlanta, Inc................................ 63,900 958,500
------------
TELECOMMUNICATION SERVICES (1.4%)
Tele-Communications International, Inc. Class A (a).... 156,000 3,549,000
WorldCom, Inc. (a)..................................... 244,264 8,610,306
------------
12,159,306
------------
TEXTILE & APPAREL (1.3%)
Nine West Group, Inc. (a).............................. 159,700 5,988,750
Warnaco Group, Inc. (The) Class A...................... 213,000 5,325,000
------------
11,313,750
------------
Total Common Stocks
(Cost $337,429,497)................................... 530,157,069
------------
</TABLE>
<TABLE>
<CAPTION>

Shares Value
-----------------------------
<S> <C> <C>
PREFERRED STOCK (0.3%)

PUBLISHING (0.3%)
News Corp. Ltd. ADR-Preference
Shares (e)....................................... 116,500 $ 2,242,625
------------
Total Preferred Stock
(Cost $1,777,622)................................ 2,242,625
------------
<CAPTION>
Principal
Amount
-----------
<S> <C> <C>
SHORT-TERM INVESTMENTS (9.9%)

COMMERCIAL PAPER (0.7%)
Smith Barney Inc.
5.55%, due 1/2/96................................ $ 6,290,000 6,290,000
------------
Total Commercial Paper
(Cost $6,290,000)................................ 6,290,000
------------
U.S. GOVERNMENT (9.2%)
United States Treasury Note
4.625%, due 2/15/96 (c).......................... 81,350,000 81,298,750
------------
Total U.S. Government
(Cost $81,295,108)............................... 81,298,750
------------
Total Short-Term Investments
(Cost $87,585,108)............................... 87,588,750
------------
Total Investments
(Cost $754,031,962) (g).......................... 108.5% 955,115,143 (h)
Liabilities in Excess of
Cash and Other Assets............................ (8.5) (75,027,729)
----------- ------------
Net Assets........................................ 100.0% $880,087,414
=========== ============
</TABLE>
- -------
(a) Non-income producing securities.
(b) TBA: Securities purchased on a forward commitment basis with an approximate
principal amount and maturity date. The actual principal amount and
maturity date will be determined upon settlement.
(c) Partially segregated as collateral for TBA.
(d) Floating rate. Rate shown is the rate in effect at December 31, 1995.
(e) ADR--American Depository Receipt.
(f) ARM--Adjustable Rate Mortgage. Resets annually.
(g) The cost for Federal income tax purposes is $754,159,402.
(h) At December 31, 1995 net unrealized appreciation was $200,955,741, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $209,293,133 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $8,337,392.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

14
<PAGE>

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

STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1995

<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (Note 2)
(identified cost $754,031,962)................................... $955,115,143
Cash.............................................................. 17,286
Receivables:
Investment securities sold....................................... 29,353,321
Dividends and interest........................................... 6,333,567
Fund shares sold................................................. 1,353,654
Other assets...................................................... 724
------------
Total assets.................................................... 992,173,695
------------
LIABILITIES:
Payables:
Investment securities purchased.................................. 110,458,296
NYLIFE Distributors.............................................. 799,232
Adviser.......................................................... 230,635
Fund shares redeemed............................................. 195,438
Transfer agent................................................... 172,432
Custodian........................................................ 16,753
Trustees......................................................... 6,702
Accrued expenses.................................................. 128,385
Dividend payable.................................................. 78,408
------------
Total liabilities............................................... 112,086,281
------------
Net assets........................................................ $880,087,414
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized
Class A.......................................................... $ 10,367
Class B.......................................................... 464,590
Additional paid-in capital........................................ 675,285,075
Accumulated undistributed net realized gain on investments........ 3,244,201
Net unrealized appreciation on investments........................ 201,083,181
------------
Net assets........................................................ $880,087,414
============
CLASS A
Net assets applicable to outstanding shares....................... $ 19,206,414
============
Shares of beneficial interest outstanding......................... 1,036,716
============
Net asset value per share outstanding............................. $ 18.53
Maximum sales charge (5.50% of offering price).................... 1.08
------------
Maximum offering price per share outstanding...................... $ 19.61
============
CLASS B
Net assets applicable to outstanding shares....................... $860,881,000
============
Shares of beneficial interest outstanding......................... 46,458,958
============
Net asset value per share outstanding............................. $ 18.53
============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a).................................................... $ 2,928,361
Interest......................................................... 24,983,040
------------
Total income.................................................... 27,911,401
------------
Expenses: (Note 2)
Distribution--Class B (Note 3)................................... 4,264,488
Administration (Note 3).......................................... 2,396,247
Advisory (Note 3)................................................ 2,396,247
Service (Note 3)................................................. 1,913,540
Transfer agent................................................... 1,150,935
Shareholder communication........................................ 242,217
Legal............................................................ 110,547
Recordkeeping (Note 3)........................................... 103,032
Custodian........................................................ 95,815
Registration..................................................... 61,802
Trustees......................................................... 32,130
Auditing......................................................... 26,606
Miscellaneous.................................................... 23,645
------------
Total expenses.................................................. 12,817,251
------------
Net investment income............................................. 15,094,150
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments.................................. 21,992,458
Net change in unrealized appreciation on investments.............. 147,650,614
------------
Net realized and unrealized gain on investments................... 169,643,072
------------
Net increase in net assets resulting from operations.............. $184,737,222
============
</TABLE>
- -------
(a) Dividends recorded net of foreign withholding taxes of $15,263.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

15
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY TOTAL RETURN FUND
- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
September 1
Year ended through Year ended
December 31 December 31 August 31
1995 1994* 1994
------------ ------------ ------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income............... $ 15,094,150 $ 5,226,644 $ 14,164,182
Net realized gain (loss) on
investments........................ 21,992,458 (7,575,587) (11,527,481)
Net change in unrealized
appreciation on investments........ 147,650,614 (14,619,656) 10,928,454
------------ ------------ ------------
Net increase (decrease) in net
assets resulting from operations... 184,737,222 (16,968,599) 13,565,155
------------ ------------ ------------
Dividends and distributions to
shareholders:
From net investment income:
Class A............................. (256,021) -- --
Class B............................. (14,721,467) (4,991,269) (13,932,677)
From net realized gain on
investments:
Class B............................. -- -- (4,497,654)
In excess of net investment income:
Class B............................. -- -- (88,472)
------------ ------------ ------------
Total dividends and distributions
to shareholders................... (14,977,488) (4,991,269) (18,518,803)
------------ ------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A............................. 18,317,094 -- --
Class B............................. 129,891,503 55,115,916 213,155,272
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A............................. 252,728 -- --
Class B............................. 14,355,622 4,869,818 18,082,566
------------ ------------ ------------
162,816,947 59,985,734 231,237,838
Cost of shares redeemed:
Class A............................. (1,287,141) -- --
Class B............................. (99,927,014) (28,920,165) (73,624,131)
------------ ------------ ------------
Increase in net assets derived from
capital share transactions........ 61,602,792 31,065,569 157,613,707
------------ ------------ ------------
Net increase in net assets......... 231,362,526 9,105,701 152,660,059

NET ASSETS:
Beginning of period.................. 648,724,888 639,619,187 486,959,128
------------ ------------ ------------
End of period........................ $880,087,414 $648,724,888 $639,619,187
============ ============ ============
Accumulated undistributed net
investment income/(excess
distribution)....................... $ -- $ 114,569 $ (88,472)
============ ============ ============
</TABLE>
- -------
*The Fund changed its fiscal year end from August 31 to December 31.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

16
<PAGE>

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

FINANCIAL HIGHLIGHTS
(SELECTED PER SHARE DATA AND RATIOS)

<TABLE>
<CAPTION>
Class B
---------------------------------------------------
Class A Class B September 1 Year ended August 31
-------- --------- through --------------------------------------
Year ended December 31
December 31, 1995 1994* 1994 1993 1992 1991
------------------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period.... $ 14.76 $ 14.76 $ 15.28 $ 15.42 $ 13.37 $ 13.89 $ 11.07
-------- --------- -------- -------- -------- -------- --------
Net investment income... 0.42 0.33 0.11 0.38 0.33 0.22 0.26
Net realized and
unrealized gain (loss)
on investments......... 3.77 3.77 (0.52) (0.02) 2.31 0.32 2.83
-------- --------- -------- -------- -------- -------- --------
Total from investment
operations............. 4.19 4.10 (0.41) 0.36 2.64 0.54 3.09
-------- --------- -------- -------- -------- -------- --------
Less dividends and
distributions:
From net investment
income................. (0.42) (0.33) (0.11) (0.37) (0.36) (0.23) (0.27)
From net realized gain
on investments......... -- -- -- (0.13) (0.23) (0.83) --
-------- --------- -------- -------- -------- -------- --------
Total dividends and
distributions.......... (0.42) (0.33) (0.11) (0.50) (0.59) (1.06) (0.27)
-------- --------- -------- -------- -------- -------- --------
Net asset value at end
of period.............. $ 18.53 $ 18.53 $ 14.76 $ 15.28 $ 15.42 $ 13.37 $ 13.89
======== ========= ======== ======== ======== ======== ========
Total investment return
(a).................... 28.66% 27.96% (2.65%) 2.41% 20.09% 3.96% 28.42%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income.. 2.5% 2.0% 2.5%+ 2.5% 2.4% 1.7% 2.1%
Expenses............... 1.1% 1.7% 1.7%+ 1.7% 1.8% 2.0% 2.4%
Portfolio turnover rate. 228% 228% 74% 273% 340% 316% 213%
Net assets at end of
period (in 000's)...... $ 19,206 $ 860,881 $648,725 $639,619 $486,959 $292,002 $116,072
</TABLE>
- -------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized
(a) Total return is calculated exclusive of sales charges and is not
annualized.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

17
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY TOTAL RETURN FUND
- --------------------------------------------------------------------------------

NOTE 1 -- ORGANIZATION AND BUSINESS:

The Fund's investment objective is to realize current income consistent with
reasonable opportunity for future growth of capital and income.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:

The following is a summary of significant accounting policies followed by the
Fund:

SECURITIES VALUATION. Portfolio securities of the Total Return Fund are stated
at value determined (a) by appraising common and preferred stocks which are
traded on the New York Stock Exchange at the last sale price on that day or, if
no sale occurs, at the mean between the closing bid and asked prices, (b) by
appraising common and preferred stocks traded on other United States national
securities exchanges or foreign securities exchanges as nearly as possible in
the manner described in (a) by reference to their principal exchange, including
the National Association of Securities Dealers National Market System, (c) by
appraising over-the-counter securities quoted on the National Association of
Securities Dealers

18
<PAGE>

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NASDAQ system (but not listed on the National Market System) at the bid price
supplied through such system, (d) by appraising over-the-counter securities not
quoted on the NASDAQ system at prices supplied by the pricing agent or brokers
selected by the Adviser, if these prices are deemed to be representative of
market values at the regular close of business of the New York Stock Exchange,
(e) by appraising debt securities at prices supplied by a pricing agent se-
lected by the Adviser, whose prices reflect broker/dealer supplied valuations
and electronic data processing techniques if those prices are deemed by the Ad-
viser to be representative of market values at the regular close of business of
the New York Stock Exchange and (f) by appraising all other securities and
other assets, including debt securities for which prices are supplied by a
pricing agent but are not deemed by the Adviser to be representative of market
values, but excluding money market instruments with a remaining maturity of
sixty days or less and including restricted securities and securities for which
no market quotations are available, at fair value in accordance with procedures
approved by the Trustees. Short-term securities which mature in more than 60
days are valued at current market quotations. Short-term securities which ma-
ture in 60 days or less are valued at amortized cost if their term to maturity
at purchase was 60 days or less, or by amortizing the difference between market
value on the 61st day prior to maturity and value on maturity date if their
original term to maturity at purchase exceeded 60 days.

Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Total Return Fund intends to declare and
pay dividends quarterly.

Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.

19
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY TOTAL RETURN FUND
- --------------------------------------------------------------------------------

SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transac-
tions on the trade date. Realized gains and losses on security transactions are
determined using the identified cost method and include gains and losses from
repayments of principal on mortgage backed securities. Dividend income is rec-
ognized on the ex-dividend date and interest income is accrued daily except
when collection is not expected. Discounts on securities purchased for the Fund
are accreted on the constant yield method over the life of the respective secu-
rities or, if applicable, over the period to the first date of call.

NOTE 3 -- FEES AND RELATED PARTY POLICIES:

NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned sub-
sidiary of New York Life, is the Administrator for the Fund.

20
<PAGE>

The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund.

SALES CHARGES. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $233,202 for the year
ended December 31, 1995.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges for the year ended December 31, 1995 in the amount of $725,396.

21
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY TOTAL RETURN FUND
- --------------------------------------------------------------------------------

OTHER. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1995 were $45,582.

Fees for the cost of legal services provided to the Fund by the Office of Gen-
eral Counsel of New York Life amounted to $47,984 for the year ended December
31, 1995.

Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the year ended December 31, 1995 is shown on
the statement of operations.

NOTE 4 -- FEDERAL INCOME TAX:

The Fund utilized $12,498,586, the remaining balance of its capital loss
carryforward, during the current year.

NOTE 5 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):

During the year ended December 31, 1995 purchases and sales of U.S. Government
securities, other than short-term securities, were $1,326,421 and $1,303,818,
respectively. Purchases and sales of securities, other than U.S. Government se-
curities, securities subject to repurchase transactions and short-term securi-
ties, were $431,031 and $361,522, respectively.

22
<PAGE>

NOTE 6 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):

<TABLE>
<CAPTION>
September 1
Year Ended through Year Ended
December 31 December 31 August 31
1995 1994* 1994
--------------- ----------- ----------
Class A Class B Class B
------- ------- ----------------------
<S> <C> <C> <C> <C>
Shares sold............................. 1,098 7,677 3,690 13,921
Shares issued in reinvestment of divi-
dends and distributions................ 14 837 332 1,192
----- ----- ----- ------
1,112 8,514 4,022 15,113
Shares redeemed......................... 75 6,008 1,942 4,828
----- ----- ----- ------
Net increase............................ 1,037 2,506 2,080 10,285
===== ===== ===== ======
</TABLE>
- -------
*The Fund changed its fiscal year end from August 31 to December 31.

23
<PAGE>

- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------

To the Board of Trustees and Shareholders of
The MainStay Funds

In our opinion, the accompanying statement of assets and liabilities (including
the portfolio of investments) and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all mate-
rial respects, the financial position of the MainStay Total Return Fund, (one
of the thirteen funds constituting The MainStay Funds, hereafter referred to as
the "Fund") at December 31, 1995, the results of its operations for the year
then ended and the changes in its net assets and the financial highlights for
each of the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter re-
ferred to as "financial statements") are the responsibility of the Fund's man-
agement; our responsibility is to express an opinion on these financial state-
ments based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which re-
quire that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and dis-
closures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall finan-
cial statement presentation. We believe that our audits, which included confir-
mation of securities at December 31, 1995 by correspondence with the custodian
and brokers, provide a reasonable basis for the opinion expressed above.

Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 12, 1996

24
<PAGE>

This page intentionally left blank

25
<PAGE>

- --------------------------------------------------------------------------------
The MainStay Funds
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
GROWTH FUNDS
- -----------------------------------------------------------------------------------------------------------------------------------

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ----------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
[HORIZONTAL BAR Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund GRAPH INDICATING of companies in expanding markets and are willing to accept a higher
RIKS/REWARD OF FUND] with strong growth potential level of risk for higher return potential

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

[HORIZONTAL BAR Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund GRAPH INDICATING the makeup and returns of the pate in the growth potential of stocks+
RIKS/REWARD OF FUND] S&P 500*
- ----------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Offers broad diversification into You prefer the higher return potential
International Equity Fund GRAPH INDICATING international stock markets with of international equities or want to add
RIKS/REWARD OF FUND] an emphasis on risk control diversification to your domestic
investments++
- ----------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
Growth & Income Funds
- ----------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
[HORIZONTAL BAR Balances current income with growth You seek a combination of income and
Total Return Fund GRAPH INDICATING opportunities by investing in stocks, growth potential and want to manage
RIKS/REWARD OF FUND] bonds, and money market instruments risk through diversification
- ----------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Seeks undervalued stocks with You seek to maximize total return from
Value Fund GRAPH INDICATING attractive dividends and a stimulus securities which may have more poten-
RIKS/REWARD OF FUND] for positive change tial than the market currently sees
- ----------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Invests in convertible securities for You want income from securities that
Convertible Fund GRAPH INDICATING a special blend of long-term growth may offer growth potential if converted
RIKS/REWARD OF FUND] potential and dividend income into common stock
- ----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

# A small portion of the Fund's income may be subject to state and local taxes
and the Alternative Minimum Tax. Capital gains, if any, may also be taxed.

26
<PAGE>

<TABLE>
<CAPTION>
INCOME FUNDS
- -----------------------------------------------------------------------------------------------------------------------------------

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- -----------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C>
[HORIZONTAL BAR Seeks a high level of current income You are seeking to combine high current
Government Fund GRAPH INDICATING consistent with safety of principal income and safety of principal
RISK/REWARD OF primarily from U.S. government
FUND] securities(S)
- -----------------------------------------------------------------------------------------------------------------------------------

High Yield [HORIZONTAL BAR An aggressive high yield bond You want to maximize current income
Corporate Bond Fund GRAPH INDICATING fund that is actively managed for and can accept the higher risk of
RISK/REWARD OF maximum current income securities with high yield potential
FUND]
- -----------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Seeks high current yields and You prefer the higher return potential of
International Bond Fund GRAPH INDICATING competitive total return from non- international bonds or want to add
RISK/REWARD OF U.S. bonds with an emphasis on diversification to your domestic
FUND] risk control investments++
- -----------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund GRAPH INDICATING stability of principal, and liquidity, competitive yields on cash you're plan-
RISK/REWARD OF with free checkwriting| ning to spend or invest in the near future
FUND]
- ------------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C>
[HORIZONTAL BAR Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund GRAPH INDICATING exempt from regular federal bracket or want to pay less of your
RISK/REWARD OF income tax# investment income to the IRS
FUND]
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Seeks high current income exempt You're a California resident and want to
California Tax Free Fund GRAPH INDICATING from both federal and California keep more of what you earn by investing
RISK/REWARD OF income taxes consistent with for income that's double tax free#
FUND] preservation of capital#
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund GRAPH INDICATING from federal, New York State, and and want to keep more of what you earn
RISK/REWARD OF New York City income taxes consis- with income that's double or triple tax
FUND] tent with preservation of capital# free#
- -----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

If you would like to learn more about any of the MainStay Funds not covered
by your current prospectus, please call your Registered Representative. Your
Registered Representative can provide you with additional prospectuses which
contain more complete information including advisory fees, other expenses, and
share classes. Please read the prospectus carefully before you invest or send
money. Shares must be offered in the investor's state of residence.

27
<PAGE>

MainStay Total
Return Fund

1995 annual report

The year in review
fund results
& portfolio highlights

[Logo of MainStay (R) Funds Appears Here]

December 31, 1995

Officers & Trustees

Alice T. Kane Chairperson and Trustee
Walter W. Ubl President and Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E.Nickelson Trustee
Ralph A. Pfeiffer, Jr. Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard A. Topp Vice President
Richard W. Zuccaro Vice President
A. Thomas Smith III Secretary

Dechert Price & Rhoads
Legal Counsel

[Logo of MainStay(R) Funds Appears Here]

[Logo of New York Live Appears Here]

This report is provided for the information of shareholders of the MainStay
Total Return Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.

[RECYCLE LOGO] [MAINSTAY LOGO]

MSAN15 (296)

<PAGE>

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

Chairperson's Letter 2

MainStay Value Fund Highlights
and Portfolio Managers' Comments 4

Returns & Lipper Rankings 6

Year-by-Year Performance 7

$10,000 Invested in the MainStay Value Fund
Class A Shares vs. S&P 500 and Inflation 7

$10,000 Invested in the MainStay Value Fund
Class B Shares vs. S&P 500 and Inflation 7

Top 25 Equity Holdings 8

10 Largest Purchases 9

10 Largest Sales 9

Diversification by Industry -- Top 5 10

Portfolio Composition 10

Financial Statements 11

Notes to Financial Statements 17

Report of Independent Accountants 22

The MainStay Funds 24
<PAGE>

- --------------------------------------------------------------------------------
Chairperson's Letter
- --------------------------------------------------------------------------------

[PHOTO OF ALICE T. KANE APPEARS HERE]

Alice T. Kane, Chairperson

Report to Shareholders for the Year Ended December 31, 1995

Calendar year 1995 was an outstanding year for equities in general, fueled by a
combination of low inflation, strong productivity, solid profits, moderate
economic growth, and declining interest rates across the maturity spectrum. The
S&P 500 Composite Stock Price Index,* which is considered to be generally
representative of the U.S. stock market, increased 37.53% in 1995.

In this context, we are pleased to report to you on the activities and
investment results of the MainStay(R) Value Fund for the twelve months ended
December 31, 1995. The Fund recorded its second highest annual total returns
since its inception on May 1, 1986. During 1995, the Fund returned 28.74% and
28.01% for Class A and Class B shares, respectively, excluding all sales
charges. The Fund was slightly behind the average Lipper/+/ growth and income
fund, which returned 30.83% for the year. Based on the three- and five-year
periods, the Value Fund received an overall four-star rating out of 1,394 funds
in the equity category from Morningstar, Inc./++/ for the period from December
31, 1990, to December 31, 1995. This placed the Fund among the top 33% of all
equity funds they monitor.

Throughout much of the year, growth stocks outperformed value issues.
Nevertheless, the Fund's fundamental, bottom-up stock selection and careful
portfolio review helped the Fund achieve its double-digit returns. Fertilizer
and farm-related issues, defense stocks, and selected banking and transportation
issues provided positive contributions to performance. In the first quarter, our
consumer nondurable holdings helped push the Fund ahead of the average Lipper
growth and income fund. During the second and third quarters, our energy and
retail holdings weakened our results. In the fourth quarter, strong performance
among selected HMOs helped the Fund outperform its Lipper peers.

2
<PAGE>

The Fund's managers use a disciplined approach to value investing, individually
evaluating hundreds of stocks to find companies with features that could propel
undervalued issues into the limelight. Details on the Fund's management and
makeup are provided on the following pages.

/s/ Alice T. Kane

Alice T. Kane
January 1996

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

* See page 7 for more information on the S&P 500.

+ See page 6 for more information on Lipper Analytical Services, Inc.

++ Morningstar, Inc. is an independent fund performance monitor. Its ratings
reflect historic risk-adjusted performance taking fees and sales charges into
account, and may change monthly. Its ratings of 1 (low) to 5 (high) stars are
based on a fund's 3- and 5-year average annual returns with fee adjustments,
and a risk factor that reflects fund performance relative to 3-month Treasury
bill monthly returns. As of 12/31/95, the Fund's 3- and 5-year ratings for
those periods were 4 and 4 stars out of 1,394 and 950 funds in the equity
category. Only 33% of the funds in an investment category may receive 4 or 5
stars. Ratings reflect Class B share performance only. The Fund's Class A
shares introduced 1/3/95 will not be rated by Morningstar until they have 3
years of operating history.

3
<PAGE>

- --------------------------------------------------------------------------------
MainStay Value Fund
- --------------------------------------------------------------------------------

1995 Fund Highlights

[ ] Second highest annual total returns in the history of the Fund

[ ] Annual total returns of 28.74% and 28.01% for Class A and Class B shares,
respectively, excluding all sales charges

For the year ended December 31, 1995, the Value Fund returned 28.74% and 28.01%
for Class A and B shares, respectively, excluding all sales charges. These
results represented the second highest annual returns in the Fund's history.
These outstanding returns reflected unusually favorable market conditions which
are unlikely to be repeated in 1996.

[PHOTO OF VALUE TEAM APPEARS HERE]

Value Team--Jeffrey Simon, Judy Secunda, Matthew Shefler, Thomas Kolefas, and
Denis Laplaige (left to right)

Although performance was strong in absolute terms, growth stocks outperformed
value stocks during much of 1995. As a result, despite the Value Fund
outperforming its Lipper peer group in the first and fourth quarters of 1995, it
lagged the average Lipper growth and income fund and the S&P 500, which had
returns of 30.83% and 37.53%, respectively, for the year.

A slowing economy, combined with low inflation and declining interest rates,
made 1995 a challenging year for value investors. This environment was favorable
for defense stocks, utilities, and technology issues that replaced labor with
knowledge-based systems. It also was favorable for financials, especially banks,
and consumer nondurables, as well as niche sectors, such as fertilizers, oil
service, and airlines, where supply and demand came into balance. The
environment was unfavorable for more economically sensitive sectors such as
chemicals, papers, retailers, autos, and auto parts.

As a result of our disciplined individual stock selection, on balance, the Fund
was overweighted during the year in economically sensitive sectors with very low
price/earnings ratios, which limited the Fund's

4
<PAGE>

performance. We were also very underweighted in technology, capital goods stocks
and utilities, primarily because these sectors did not meet our strict criteria
for free cash flow and value catalysts. This unfavorable sector mix was
partially offset by our decisions to hold or buy stocks in some niche segments
which did very well, such as fertilizer and farm- related stocks (IMC Global,
Potash Corp., Vigoro, and Case), oil service (Coastal Corp.) and defense issues
(McDonnell Douglas, Lockheed Martin, Loral, and Honeywell). Also benefiting the
Fund were investments in transportation (Union Pacific was one of our largest
purchases) and banking (First Fidelity was bought by First Union and First
Interstate, with bids from both Wells Fargo and First Bank System). Although the
Fund was only market-weighted in consumer nondurables, it benefited from
extraordinary returns in such names as Philip Morris, Kroger, and Merck.

The Fund's primary weaknesses relative to its peer group came in the second and
third quarters. We pared back on selected energy holdings in the third quarter
in response to their poor showing and saw disappointing results in consumer
cyclicals, particularly retail holdings, in both the second and third quarters.

In the fourth quarter, our decision to hold HMOs such as U.S. Healthcare,
Humana, and FHP, helped contribute to the Fund's positive overall performance.
On balance, we believe it was a reasonably good year, given the defensive
capital preservation bias in value investing and our rigorous methodology.

Although the economy may slow further before turning around, we believe an
eventual pick-up in the economy will cause a rotation back into cyclical stocks,
which should cause value investing to come back into favor. Our screening
process continues to point toward housing and auto-related stocks, as well as
basic industry, where we already have a sizable weighting. At the same time,
technology stocks have undergone severe corrections and there may be some
selected stocks in this sector that now offer the appropriate value catalysts.
Finally, while the retail sector shows some favorable attributes, we have little
confidence in earnings estimates based on weak year-end sales. Over the long
term, we are confident that our adherence to strict value disciplines will
reward the patient investor who seeks to accumulate capital and manage downside
risk.[ ]

Denis Laplaige, Thomas Kolefas
Portfolio Managers

Weighting
- --------------------------------------------------------------------------------
The proportion of a portfolio allocated to a specific security or sector, i.e.,
a fund is said to be overweighted in a sector when that portion of the portfolio
is larger than the sector's general relationship to the market as a whole.

5
<PAGE>

<TABLE>
<CAPTION>
Fund average annual total returns *
- -------------------------------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 12/31/95
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 28.74% 19.75% 11.54%
Class B 28.01% 19.61% 11.47%
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Fund SEC returns *
- -------------------------------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 12/31/95
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 21.66% 18.40% 10.89%
Class B 23.01% 19.42% 11.47%
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Fund Lipper/+/ rankings and year-end Lipper category returns
- ---------------------------------------------------------------------------------------------------------------------------------
Life of Fund/Class
1 year 5 years through 12/31/95
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 315 out of 445 funds n/a 315 out of 445 funds
Class B 336 out of 445 funds 13 out of 194 funds 65 out of 117 funds
Average Lipper growth
and income fund 30.83% 15.33% 11.71%
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Fund year-end per-share net asset values and distributions for 1995
- -------------------------------------------------------------------------------------------------------------------------------
NAV 12/31/95 Income Capital Gains
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A $18.25 $0.2853 $0.3171
Class B $18.25 $0.1875 $0.3171
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gains and dividend distributions are reinvested.

/+/ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales charges.
For the 12-month period ended 12/31/95, the Lipper growth and income fund
category included 445 funds. The Fund's Class A shares were first offered to
the public 1/3/95; Class B shares 5/1/86.

6
<PAGE>

- --------------------------------------------------------------------------------
Year-by-Year Performance*
- --------------------------------------------------------------------------------

[BAR GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
Year ended 12/31 Total Return %
<S> <C>
86 -9.51
87 -2.57
88 16.11
89 21.38
90 -6.05
91 41.26
92 19.52
93 13.55
94 -0.22
95 28.74
95 28.01
</TABLE>

- --------------------------------------------------------------------------------
$10,000 invested in the MainStay Value Fund
vs. S&P 500 and Inflation
- --------------------------------------------------------------------------------

Class A Shares

[LINE GRAPH APPEARS HERE]

Year End S&P 500/++/ Inflation /(s)/ Value Fund
<S> <C> <C> <C>
5/1/86 10,000 10,000 9,450
86 10,550 10,175 8,551
87 11,097 10,626 8,331
88 12,927 11,096 96,734
89 17,011 11,611 11,742
90 16,481 12,320 11,032
91 21,481 12,698 15,583
92 23,115 13,066 18,625
93 25,435 13,425 21,148
94 25,780 13,785 21,102
95 35,433 14,144 27,166
</TABLE>

Class B Shares

[LINE GRAPH APPEARS HERE]

Year End S&P 500/++/ Inflation /(s)/ Value Fund
<S> <C> <C> <C>
5/1/86 10,000 10,000 10,000
86 10,550 10,175 9,049
87 11,097 10,626 8,816
88 12,927 11,096 10,237
89 17,011 11,611 12,425
90 16,481 12,320 11,674
91 21,481 12,698 16,490
92 23,115 13,066 19,709
93 25,435 13,425 22,379
94 25,780 13,785 22,330
95 35,433 14,144 28,585
</TABLE>
- --------------------
The Class A graph assumes an initial investment of $10,000 made on 5/1/86
reflecting the effect of the 5.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,450. The Class B graph assumes
an initial investment of $10,000 made on 5/1/86. Returns shown do not
reflect the Contingent Deferred Sales Charge (CDSC), as it would not apply
for the period shown. All results include reinvestment of distributions at
net asset value and the change in share price for the stated period. Past
performance is no guarantee of future results.

/++/ "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are
registered trademarks of Standard & Poor's Corporation. The S&P 500 is an
unmanaged index and is considered to be generally representative of the
U.S. stock market. Results assume the reinvestment of all income and
capital gains distributions.

/(S)/ Inflation is represented by the Consumer Price Index (CPI) which is a
commonly used measure of the rate of inflation and shows the changes in
the cost of selected goods. It does not represent an investment return.

7
<PAGE>

<TABLE>
<CAPTION>
Holding $ amount
<S> <C>
Philip Morris Cos. Inc. $16,317,150
Aetna Life and Casualty Co. 14,888,750
Allstate Corp. 12,772,644
Humana, Inc. 12,743,062
Case Corp. 11,698,275
U.S. Healthcare, Inc. 11,648,250
International Business Machines Corp. 11,588,025
Premark International, Inc. 11,512,125
IMC Global, Inc. 11,485,875
Lockheed Martin Corp. 11,311,773
American International Group, Inc. 11,252,625
McDonnell Douglas Corp. 11,150,400
British Petroleum Company, Plc ADR 11,100,988
Unocal Corp. 10,965,563
Chubb Corp. 10,865,025
First Interstate Bancorp 10,851,750
Conrail Inc. 10,752,000
Eastman Kodak Co. 10,619,500
Illinois Central Corp. 10,368,925
Kroger Co. 10,293,750
RJR Nabisco Holdings Corp. 10,281,375
Panhandle Eastern Corp. 10,043,363
Bankers Trust New York Corp. 10,041,500
Travelers Group Inc. 10,036,673
Providian Corp. 9,865,575
</TABLE>

8
<PAGE>

- --------------------------------------------------------------------------------
10 Largest Purchases in 1995
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Holding amount of purchase
<S> <C>
Aetna Life and Casualty Co. $15,614,088

International Business Machines Corp. 11,906,955

Premark International, Inc. 11,479,740

Apple Computer, Inc. 11,449,846

Conrail Inc. 10,664,053

British Petroleum Company, Plc 10,489,550

Champion International Corp. 10,440,417

Bankers Trust New York Corp. 10,376,910

Litton Industries, Inc. 10,150,784

Union Pacific Corp. 9,991,427
</TABLE>

- --------------------------------------------------------------------------------
10 Largest Sales in 1995
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Holding amount of sale
<S> <C>
Chicago & North Western Holdings Corp. $10,157,000

IMC Global, Inc. 9,386,263

Apple Computer, Inc. 8,762,118

Dow Chemical Co. 8,226,664

Lockheed Martin Corp 7,930,253

Weyerhaeuser Co. 7,419,537

Tidewater Inc. 6,431,322

ITT Corp. 6,302,514

Dial Corp. 6,259,298

Niagara Mohawk Power Corp. 6,230,972
</TABLE>

Note: This breakdown is provided for informational purposes only. This Fund's
holdings may change daily. A shareholder owns shares of the Fund but does
not own a direct interest in any of the specific securities listed above.
All securities listed indicate total purchases/sales for the issuer for
the year. Short-term securities are excluded. See financial statements
for specific type of security held.

9
<PAGE>

[PIE CHART APPEARS HERE]

<TABLE>
<S> <C>
Insurance 10.7%
Chemicals 10.0%
Retail 7.9%
Banks 6.2%
Energy 5.2%
Other 60.0%
</TABLE>

[PIE CHART APPEARS HERE]

<TABLE>
<S> <C>
Common Stocks 89.9%
Cash & Equivalents 8.9%
Preferred Stock 1.2%
</TABLE>

Note: actual percentages will vary over time

10
<PAGE>

<TABLE>
<CAPTION>
Shares Value
-------------------------
<S> <C> <C>

COMMON STOCKS (89.9%)+
AEROSPACE (1.5%)
McDonnell Douglas Corp............................... 121,200 $ 11,150,400
------------
AUTO MANUFACTURING (0.3%)
General Motors Corp.................................. 45,500 2,405,813
------------
BANKS (6.2%)
Bankers Trust New York Corp.......................... 151,000 10,041,500
First Bank System, Inc............................... 65,000 3,225,625
First Interstate Bancorp............................. 79,500 10,851,750
First Union Corp..................................... 133,000 7,398,125
National City Corp................................... 215,400 7,135,125
PNC Bank Corp........................................ 207,500 6,691,875
------------
45,344,000
------------
BEVERAGES (0.9%)
Anheuser-Busch Cos., Inc............................. 99,600 6,660,750
------------
BUILDING MATERIALS (0.6%)
Armstrong World Industries, Inc...................... 72,600 4,501,200
------------
CAPITAL GOODS (2.5%)
Case Corp............................................ 255,700 11,698,275
Honeywell Inc........................................ 133,400 6,486,575
------------
18,184,850
------------
CHEMICALS (10.0%)
Agrium, Inc.......................................... 127,600 5,742,000
FMC Corp. (a)........................................ 135,500 9,163,188
Geon Co. (The)....................................... 12,500 304,687
Georgia Gulf Corp.................................... 258,000 7,933,500
IMC Global, Inc...................................... 281,000 11,485,875
International Specialty Products, Inc. (a)........... 623,500 6,780,562
Lyondell Petrochemical Co............................ 312,300 7,143,863
Potash Corp. of Saskatchewan Inc..................... 97,500 6,910,312
PPG Industries, Inc.................................. 187,400 8,573,550
Vigoro Corp. (The)................................... 157,300 9,713,275
------------
73,750,812
------------
CONGLOMERATES (1.4%)
Hanson Plc ADR (c)................................... 259,300 3,954,325
Textron Inc.......................................... 54,000 3,645,000
U.S. Industries, Inc. (a)............................ 15,135 278,106
Whitman Corp......................................... 88,400 2,055,300
------------
9,932,731
------------
</TABLE>
- -------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Shares Value
-------------------------
<S> <C> <C>

DEFENSE ELECTRONICS (3.9%)
Litton Industries, Inc. (a).......................... 219,400 $ 9,763,300
Lockheed Martin Corp. ............................... 143,187 11,311,773
Loral Corp........................................... 222,000 7,853,250
------------
28,928,323
------------
DOMESTIC OILS (3.3%)
Noble Affiliates, Inc................................ 148,100 4,424,487
Parker & Parsley Petroleum Co........................ 399,400 8,786,800
Unocal Corp.......................................... 376,500 10,965,563
------------
24,176,850
------------
DRUGS (1.8%)
Merck & Co., Inc..................................... 110,000 7,232,500
Warner-Lambert Co.................................... 61,400 5,963,475
------------
13,195,975
------------
ENERGY (5.2%)
Coastal Corp......................................... 258,300 9,621,675
Horsham Corp......................................... 322,200 4,349,700
MAPCO, Inc........................................... 141,500 7,729,437
Panhandle Eastern Corp............................... 360,300 10,043,363
Tosco Corp........................................... 161,700 6,164,812
------------
37,908,987
------------
FINANCE (1.4%)
Travelers Group Inc.................................. 159,629 10,036,673
------------
FOOD (1.3%)
Archer Daniels Midland Co............................ 402,255 7,240,590
IBP, Inc............................................. 41,000 2,070,500
------------
9,311,090
------------
FOOD, BEVERAGES & TOBACCO (4.7%)
American Brands, Inc................................. 185,800 8,291,325
Philip Morris Cos. Inc............................... 180,300 16,317,150
RJR Nabisco Holdings Corp............................ 333,000 10,281,375
------------
34,889,850
------------
HEALTH CARE (3.9%)
Baxter International Inc............................. 48,600 2,035,125
FHP International Corp. (a).......................... 69,100 1,969,350
Foundation Health Corp. (a).......................... 7,500 322,500
Humana, Inc. (a)..................................... 465,500 12,743,062
U.S. Healthcare, Inc................................. 250,500 11,648,250
------------
28,718,287
------------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

11
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY VALUE FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Shares Value
-------------------------
<S> <C> <C>

COMMON STOCKS (CONTINUED)
HOUSEHOLD PRODUCTS (1.6%)
Premark International, Inc........................... 227,400 $ 11,512,125
------------
INSURANCE (10.7%)
Aetna Life and Casualty Co........................... 215,000 14,888,750
Allstate Corp. (The)................................. 310,581 12,772,644
American International Group, Inc.................... 121,650 11,252,625
Chubb Corp. (The).................................... 112,300 10,865,025
Providian Corp....................................... 242,100 9,865,575
SAFECO Corp.......................................... 259,000 8,935,500
St. Paul Cos., Inc. (The)............................ 61,800 3,437,625
Torchmark Corp....................................... 150,000 6,787,500
------------
78,805,244
------------
INTERNATIONAL OILS (2.6%)
British Petroleum Company, Plc ADR (c)............... 108,700 11,100,988
Occidental Petroleum Corp............................ 216,000 4,617,000
Union Texas Petroleum Holdings, Inc.................. 184,900 3,582,437
------------
19,300,425
------------
OIL SERVICES (0.5%)
Nabors Industries, Inc. (a).......................... 326,800 3,635,650
------------
PAPER & FOREST PRODUCTS (4.7%)
Champion International Corp.......................... 206,100 8,656,200
Chesapeake Corp...................................... 255,900 7,581,037
Rayonier, Inc........................................ 216,950 7,240,707
Stone Container Corp................................. 415,000 5,965,625
Temple-Inland Inc.................................... 119,500 5,272,937
------------
34,716,506
------------
PHOTOGRAPHY (1.4%)
Eastman Kodak Co..................................... 158,500 10,619,500
------------
PUBLISHING (0.1%)
Harland (John H.) Co. (The).......................... 16,400 342,350
------------
RAILROADS (4.2%)
Conrail Inc.......................................... 153,600 10,752,000
Illinois Central Corp................................ 270,200 10,368,925
Union Pacific Corp................................... 142,700 9,418,200
------------
30,539,125
------------
REAL ESTATE (0.8%)
Meditrust............................................ 175,200 6,110,100
------------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
-------------------------
<S> <C> <C>

RETAIL (7.9%)
American Stores Co................................... 235,100 $ 6,288,925
Dillard Department Stores, Inc....................... 236,000 6,726,000
Federated Department Stores, Inc. (a)................ 234,000 6,435,000
Kroger Co. (The) (a)................................. 274,500 10,293,750
Limited Inc. (The)................................... 441,500 7,671,062
Mac Frugals Bargains Close-Outs, Inc. (a)............ 74,000 1,036,000
Penney (J.C.) Co., Inc............................... 190,100 9,053,513
Sears, Roebuck and Co................................ 224,200 8,743,800
Stop & Shop Cos., Inc. (The) (a)..................... 78,300 1,810,687
------------
58,058,737
------------
TECHNOLOGY (1.7%)
Apple Computer, Inc.................................. 26,400 841,500
International Business Machines Corp................. 126,300 11,588,025
------------
12,429,525
------------
TEXTILE & APPAREL (1.0%)
Burlington Industries, Inc. (a)...................... 420,800 5,523,000
Jones Apparel Group, Inc. (a)........................ 40,000 1,575,000
------------
7,098,000
------------
TIRE & RUBBER (1.3%)
Goodyear Tire & Rubber Co. (The)..................... 217,100 9,850,913
------------
TRANSPORTATION (0.4%)
Arkansas Best Corp................................... 338,000 2,661,750
------------
UTILITIES-ELECTRIC (2.1%)
Entergy Corp......................................... 146,600 4,288,050
Long Island Lighting Co.............................. 83,900 1,373,863
Unicom Corp.......................................... 299,400 9,805,350
------------
15,467,263
------------
Total Common Stocks
(Cost $542,174,845)................................. 660,243,804
------------
PREFERRED STOCKS (1.2%)
DOMESTIC OILS (0.2%)
Parker & Parsley Capital LLC 6.25% (b)............... 27,000 1,269,000
------------
INTERNATIONAL OILS (1.0%)
Occidental Petroleum Corp. $3.875 (b)................ 130,000 7,280,000
------------
Total Preferred Stocks
(Cost $8,393,375)................................... 8,549,000
------------
</TABLE>

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

12
<PAGE>

<TABLE>
<CAPTION>
Principal
Amount Value
--------------------------
<S> <C> <C>

SHORT-TERM INVESTMENTS (9.3%)
COMMERCIAL PAPER (9.3%)
American Express Credit Corp.
5.65%, due 1/5/96............................... $ 20,423,000 $ 20,423,000
Beneficial Corp.
5.92%, due 1/3/96............................... 13,012,000 13,012,000
Ford Motor Credit Co.
5.80%, due 1/2/96............................... 13,364,000 13,364,000
General Electric Capital Corp.
5.95%, due 1/4/96............................... 21,473,000 21,473,000
------------
Total Short-Term Investments
(Cost $68,272,000).............................. 68,272,000
------------
Total Investments
(Cost $618,840,220) (d)......................... 100.4% 737,064,804 (e)
Liabilities in Excess of Cash and
Other Assets.................................... (0.4) (2,967,114)
------------ ------------
Net Assets....................................... 100.0% $734,097,690
============ ============
</TABLE>
- -------
(a) Non-income producing securities.
(b) May be sold to institutional investors only.
(c) ADR--American Depository Receipt.
(d) The cost for Federal income tax purposes is $618,902,385.
(e) At December 31, 1995 net unrealized appreciation was $118,162,419, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $131,531,214 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $13,368,795.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

13
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY VALUE FUND
- --------------------------------------------------------------------------------

STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1995

<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (Note 2)
(identified cost $618,840,220)................................... $737,064,804
Cash.............................................................. 230
Receivables:
Investment securities sold....................................... 2,828,230
Dividends and interest........................................... 1,785,043
Fund shares sold................................................. 1,473,473
Other assets...................................................... 556
------------
Total assets.................................................... 743,152,336
------------
LIABILITIES:
Payables:
Investment securities purchased.................................. 7,479,555
NYLIFE Distributors.............................................. 677,081
Adviser.......................................................... 190,588
Fund shares redeemed............................................. 166,996
Transfer agent................................................... 128,015
Custodian........................................................ 12,400
Trustees......................................................... 3,819
Accrued expenses.................................................. 114,954
Dividend payable.................................................. 281,238
------------
Total liabilities............................................... 9,054,646
------------
Net assets........................................................ $734,097,690
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized
Class A.......................................................... $ 13,838
Class B.......................................................... 388,462
Additional paid-in capital........................................ 609,675,901
Accumulated undistributed net realized gain on investments........ 5,794,905
Net unrealized appreciation on investments........................ 118,224,584
------------
Net assets........................................................ $734,097,690
============
CLASS A
Net assets applicable to outstanding shares....................... $ 25,257,893
============
Shares of beneficial interest outstanding......................... 1,383,786
============
Net asset value per share outstanding............................. $ 18.25
Maximum sales charge (5.50% of offering price).................... 1.06
------------
Maximum offering price per share outstanding...................... $ 19.31
============
CLASS B
Net assets applicable to outstanding shares....................... $708,839,797
============
Shares of beneficial interest outstanding......................... 38,846,202
============
Net asset value per share outstanding............................. $ 18.25
============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a).................................................... $ 12,890,256
Interest......................................................... 2,868,681
------------
Total income.................................................... 15,758,937
------------
Expenses: (Note 2)
Distribution--Class B (Note 3)................................... 3,472,749
Administration (Note 3).......................................... 1,932,406
Advisory (Note 3)................................................ 1,932,406
Service (Note 3)................................................. 1,489,000
Transfer agent................................................... 1,002,666
Shareholder communication........................................ 171,287
Registration..................................................... 86,563
Recordkeeping (Note 3)........................................... 85,935
Legal............................................................ 84,206
Custodian........................................................ 67,522
Trustees......................................................... 23,202
Auditing......................................................... 21,929
Miscellaneous.................................................... 10,380
------------
Total expenses.................................................. 10,380,251
------------
Net investment income............................................. 5,378,686
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments.................................. 16,635,456
Net change in unrealized appreciation on investments.............. 123,032,869
------------
Net realized and unrealized gain on investments................... 139,668,325
------------
Net increase in net assets resulting from operations.............. $145,047,011
============
</TABLE>
- -------
(a) Dividends recorded net of foreign withholding taxes of $57,619.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

14
<PAGE>

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
September 1
Year ended through Year ended
December 31 December 31 August 31
1995 1994* 1994
------------ ------------ ------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income............... $ 5,378,686 $ 1,288,831 $ 1,601,231
Net realized gain on investments.... 16,635,456 5,313,050 19,534,498
Net change in unrealized
appreciation on investments........ 123,032,869 (34,834,924) 6,143,493
------------ ------------ ------------
Net increase (decrease) in net
assets resulting from operations... 145,047,011 (28,233,043) 27,279,222
------------ ------------ ------------
Dividends and distributions to
shareholders:
From net investment income:
Class A............................. (267,440) -- --
Class B............................. (6,780,394) (1,007,143) (1,592,465)
From net realized gain on
investments:
Class A............................. (426,799) -- --
Class B............................. (12,055,583) (18,560,847) (11,349,759)
------------ ------------ ------------
Total dividends and distributions
to shareholders................... (19,530,216) (19,567,990) (12,942,224)
------------ ------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A............................. 23,330,370 -- --
Class B............................. 181,653,393 67,452,278 242,065,471
Net asset value of shares issued to
shareholders in reinvestment
of dividends and distributions:
Class A............................. 685,112 -- --
Class B............................. 18,480,553 19,258,459 12,778,078
------------ ------------ ------------
224,149,428 86,710,737 254,843,549
Cost of shares redeemed:
Class A............................. (1,267,040) -- --
Class B............................. (86,666,292) (16,334,014) (45,915,871)
------------ ------------ ------------
Increase in net assets derived from
capital share transactions........ 136,216,096 70,376,723 208,927,678
------------ ------------ ------------
Net increase in net assets......... 261,732,891 22,575,690 223,264,676
NET ASSETS:
Beginning of period.................. 472,364,799 449,789,109 226,524,433
------------ ------------ ------------
End of period........................ $734,097,690 $472,364,799 $449,789,109
============ ============ ============
Accumulated undistributed net
investment income................... $ -- $ 287,524 $ 5,836
============ ============ ============
</TABLE>
- -------
* The Fund changed its fiscal year end from August 31 to December 31.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

15
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY VALUE FUND
- --------------------------------------------------------------------------------

FINANCIAL HIGHLIGHTS
(SELECTED PER SHARE DATA AND RATIOS)

<TABLE>
<CAPTION>
Class B
-------------------------------------------------
Class A Class B September 1 Year ended August 31
-------- --------- through ------------------------------------
Year ended December 31
December 31, 1995 1994* 1994 1993 1992 1991
------------------- ----------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period.... $ 14.66 $ 14.66 $ 16.30 $ 15.90 $ 13.82 $ 13.27 $ 10.42
-------- --------- -------- -------- -------- ------- -------
Net investment income... 0.29 0.19 0.04 0.06 0.07 0.12 0.14
Net realized and
unrealized gain (loss)
on investments......... 3.91 3.91 (1.03) 1.04 3.40 1.64 3.07
-------- --------- -------- -------- -------- ------- -------
Total from investment
operations............. 4.20 4.10 (0.99) 1.10 3.47 1.76 3.21
-------- --------- -------- -------- -------- ------- -------
Less dividends and
distributions:
From net investment
income................. (0.29) (0.19) (0.03) (0.06) (0.10) (0.09) (0.20)
From net realized gain
on investments......... (0.32) (0.32) (0.62) (0.64) (1.29) (1.12) (0.16)
-------- --------- -------- -------- -------- ------- -------
Total dividends and
distributions.......... (0.61) (0.51) (0.65) (0.70) (1.39) (1.21) (0.36)
-------- --------- -------- -------- -------- ------- -------
Net asset value at end
of period.............. $ 18.25 $ 18.25 $ 14.66 $ 16.30 $ 15.90 $ 13.82 $ 13.27
======== ========= ======== ======== ======== ======= =======
Total investment return
(a).................... 28.74% 28.01% (6.03%) 7.26% 26.58% 14.82% 31.79%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income.. 1.5% 0.9% 0.8%+ 0.5% 0.5% 0.8% 1.2%
Expenses............... 1.2% 1.8% 1.8%+ 1.9% 1.9% 1.9% 2.4%
Portfolio turnover rate. 48% 48% 11% 53% 77% 145% 150%
Net assets at end of
period (in 000's)...... $ 25,258 $ 708,840 $472,365 $449,789 $226,524 $77,877 $44,548
</TABLE>
- -------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized
(a) Total return is calculated exclusive of sales charges and is not
annualized.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.

16
<PAGE>

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 1 -- ORGANIZATION AND BUSINESS:

The Fund's investment objective is to realize maximum long-term total return
from a combination of capital growth and income.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:

The following is a summary of significant accounting policies followed by the
Fund:

SECURITIES VALUATION. Portfolio securities of the Value Fund are stated at
value determined (a) by appraising common and preferred stocks which are traded
on the New York Stock Exchange at the last sale price on that day or, if no
sale occurs, at the mean between the closing bid and asked prices, (b) by ap-
praising common and preferred stocks traded on other United States national se-
curities exchanges or foreign securities exchanges as nearly as possible in the
manner described in (a) by reference to their principal exchange, including the
National Association of Securities Dealers National Market System, (c) by ap-
praising over-the-counter securities quoted on the National Association of Se-
curities Dealers NASDAQ

17
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY VALUE FUND
- --------------------------------------------------------------------------------

system (but not listed on the National Market System) at the bid price supplied
through such system, (d) by appraising over-the-counter securities not quoted
on the NASDAQ system at prices supplied by the pricing agent or brokers se-
lected by the Adviser, if these prices are deemed to be representative of mar-
ket values at the regular close of business of the New York Stock Exchange.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost if their term to maturity at purchase was 60 days or
less, or by amortizing the difference between market value on the 61st day
prior to maturity and value on maturity date if their original term to maturity
at purchase exceeded 60 days.

FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $1,381,624 have been reclassified from accu-
mulated undistributed net realized gain on investments to accumulated undis-
tributed net investment income due to the tax treatment of short-term capital
gains.

Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Value Fund intends to declare and pay
dividends quarterly. Income dividends and capital gain distributions are deter-
mined in accordance with federal income tax regulations which may differ from
generally accepted accounting principles.

18
<PAGE>

allocated to separate classes of shares based upon their relative net asset
value on the date the income is earned or expenses and realized and unrealized
gains and losses are incurred.

NOTE 3 -- FEES AND RELATED PARTY POLICIES:

NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned sub-
sidiary of New York Life, is the Administrator for the Fund.

The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an an-
nual rate of the average daily net assets of 0.36% on assets up to $200 mil-
lion, 0.325% on assets from $200 million to $500 million and 0.25% on assets in
excess of $500 million.

19
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY VALUE FUND
- --------------------------------------------------------------------------------

Class B Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the lesser of:

The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund.

SALES CHARGES. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $413,692 for the year
ended December 31, 1995.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges for the year ended December 31, 1995 in the amount of $638,963.

OTHER. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1995 were $56,229.

Fees for the cost of legal services provided to the Fund by the Office of Gen-
eral Counsel of New York Life amounted to $34,782 for the year ended December
31, 1995.

20
<PAGE>

In connection with the placement of portfolio transactions for the year ended
December 31, 1995, NYLIFE Securities was paid commissions of $5,074 for the
Value Fund.

Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the year ended December 31, 1995 is shown on
the statement of operations.

NOTE 4 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):

NOTE 5 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):

<TABLE>
<CAPTION>
September 1
Year Ended through Year Ended
December 31 December 31 August 31
1995 1994* 1994
--------------- ----------- ----------
Class A Class B Class B
------- ------- ----------------------
<S> <C> <C> <C> <C>
Shares sold............................. 1,421 10,815 4,371 15,450
Shares issued in reinvestment of divi-
dends and distributions................ 38 1,028 1,322 840
----- ------ ----- ------
1,459 11,843 5,693 16,290
Shares redeemed......................... 75 5,223 1,063 2,942
----- ------ ----- ------
Net increase............................ 1,384 6,620 4,630 13,348
===== ====== ===== ======
</TABLE>
- -------
*The Fund changed its fiscal year end from August 31 to December 31.

21
<PAGE>

- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------

To the Board of Trustees and Shareholders of The MainStay Funds

In our opinion, the accompanying statement of assets and liabilities (including
the portfolio of investments) and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all mate-
rial respects, the financial position of the MainStay Value Fund, (one of the
thirteen funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1995, the results of its operations for the year then
ended and the changes in its net assets and the financial highlights for each
of the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter re-
ferred to as "financial statements") are the responsibility of the Fund's man-
agement; our responsibility is to express an opinion on these financial state-
ments based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which re-
quire that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and dis-
closures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall finan-
cial statement presentation. We believe that our audits, which included confir-
mation of securities at December 31, 1995 by correspondence with the custodian
and brokers, provide a reasonable basis for the opinion expressed above.

Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 12, 1996

22
<PAGE>

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23
<PAGE>

- --------------------------------------------------------------------------------
The MainStay Funds
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
GROWTH FUNDS
- -----------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of with strong growth potential level of risk for higher return potential
fund]
- -----------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund graph indicating the makeup and returns of the pate in the growth potential of stocks/+/
risk/reward of S&P 500*
fund]
- -----------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph indicating international stock markets with of international equities or want to add
risk/reward of an emphasis on risk control diversification to your domestic
fund] investments/++/
- -----------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
GROWTH & INCOME FUNDS
- -----------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of bonds, and money market instruments risk through diversification
fund]
- -----------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of for positive change tial than the market currently sees
fund]
- -----------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Invests in convertible securities for You want income from securities that
Convertible Fund graph indicating a special blend of long-term growth may offer growth potential if converted
risk/reward of potential and dividend income into common stock
fund]
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

# A small portion of the Fund's income may be subject to state and local taxes
and the Alternative Minimum Tax. Capital gains, if any, may also be taxed.

24
<PAGE>

<TABLE>
<CAPTION>
INCOME FUNDS
- -----------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[horizontal bar graph Seeks a high level of current income You are seeking to combine high current
Government Fund indicating risk/reward consistent with safety of principal income and safety of principal
of fund] primarily from U.S. government
securities/(S)/
- -----------------------------------------------------------------------------------------------------------------------------------
High Yield [horizontal bar graph An aggressive high yield bond You want to maximize current income
Corporate Bond Fund indicating risk/reward fund that is actively managed for and can accept the higher risk of
of fund] maximum current income securities with high yield potential
- -----------------------------------------------------------------------------------------------------------------------------------
[horizontal bar graph Seeks high current yields and You prefer the higher return potential
International Bond indicating risk/reward competitive total return from non- of international bonds or want to add
Fund of fund] U.S. bonds with an emphasis on diversification to your domestic
risk control investments/++/
- -----------------------------------------------------------------------------------------------------------------------------------
[horizontal bar graph Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund indicating risk/reward stability of principal, and liquidity, competitive yields on cash you're plan-
of fund] with free checkwriting/||/ ning to spend or invest in the near future
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TAX-FREE INCOME FUNDS
- -----------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[horizontal bar graph Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund indicating risk/reward exempt from regular federal bracket or want to pay less of your
of fund] income tax/#/ investment income to the IRS
- -----------------------------------------------------------------------------------------------------------------------------------
[horizontal bar graph Seeks high current income exempt You're a California resident and want to
California Tax Free indicating risk/reward from both federal and California keep more of what you earn by investing
Fund of fund] income taxes consistent with for income that's double tax free/#/
preservation of capital/#/
- -----------------------------------------------------------------------------------------------------------------------------------
[horizontal bar graph Seeks high current income exempt You're a New York State or City resident
New York Tax Free indicating risk/reward from federal, New York State, and and want to keep more of what you earn
Fund of fund] New York City income taxes consis- with income that's double or triple tax
tent with preservation of capital/#/ free/#/
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

If you would like to learn more about any of the MainStay Funds not covered by
your current prospectus, please call your Registered Representative. Your
Registered Representative can provide you with additional prospectuses which
contain more complete information including advisory fees, other expenses, and
share classes. Please read the prospectus carefully before you invest or send
money. Shares must be offered in the investor's state of residence.

25
<PAGE>

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26
<PAGE>

- --------------------------------------------------------------------------------
MainStay
Value Fund
- --------------------------------------------------------------------------------

1995
annual
report

The year in review
fund results
& portfolio highlights

[LOGO OF MAINSTAY(R) FUNDS APPEARS HERE]

- --------------------------------------------------------------------------------
December 31, 1995
- --------------------------------------------------------------------------------

Officers & Trustees

Dechert Price & Rhoads
Legal Counsel

[LOGO OF MAINSTAY(R) FUNDS APPEARS HERE]

NYLIFE Distributors Inc.
260 Cherry Hill Road
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
NYLIFE Distributors Inc. is an indirect wholly
owned subsidiary of New York Life Insurance Company.

[LOGO OF NEW YORK LIFE APPEARS HERE]

This report is provided for the information of shareholders of the MainStay
Value Fund. It may be given to others only when preceded or accompanied by an
effective MainStay Funds prospectus. This report does not offer to sell any
securities or solicit orders to buy them.

[LOGO OF RECYCLED PAPER APPEARS HERE] MSAN16 (296)