MAINSTAY FUNDS, N-30D, 1996-09-03

MAINSTAY FUNDS
N-30D, 1996-09-03

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TABLE OF CONTENTS
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Chairperson's Letter 2

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

Returns & Lipper Rankings 6

Year-by-Year & Six-Month 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

Portfolio of Investments 9

Financial Statements 11

Notes to Financial Statements 15

The MainStay Funds 20
<PAGE>

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

Strategic security selection with a focus on quality and conservative duration
management -- these were the strategies that guided the management of the
MainStay(R) California Tax Free Fund for the six months ended June 30, 1996. As
a result, over this period, the Fund returned -1.22% and -1.45% for Class A and
Class B shares, respectively, excluding all sales charges.

A stronger economy -- good for stocks, challenging for municipal bonds

After a spectacular 1995, the stock market continued to climb for most of the
first half of 1996 -- but not without setbacks along the way. The economy was
stronger than expected, which led to inflation concerns, rising interest rates,
and price volatility. With the S&P 500* advancing 10.09% in the reporting
period, the stock market delivered a six-month return close to its historical
average for an entire year.+ Small capitalization stocks did even better, but
faced a sharp correction in mid-June. Investors were very active, pouring more
money into stock funds in the first six months than they had in any full year in
history.++ Whether the returns and investment activity we've seen in the first
half of the year can be sustained through what may be a bumpy second half
remains an open question.

Bonds had a difficult time during this period. The improving economy generally
hurt fixed-income investors, but boosted prices among lower-rated bonds. In
March, unexpected payroll gains, which indicated higher employment, caused bond
prices to plummet. In a single day, 30-year Treasury bond prices fell 3.3% and
most domestic bond categories, except high current yield, closed the first
quarter with negative returns. As employment rose in the second quarter, so did
long-term rates, with the 30-year Treasury bond yielding 6.90% at the end of
June. In the municipal market, supply and demand continued to influence
liquidity and pricing.

Rising interest rates affected more than just bonds. They also led to price
corrections in financial and consumer nondurable stocks. Economically sensitive
sectors such as chemicals and consumer cyclicals showed sparks of progress
during the first quarter, which failed to ignite in the second. Retail stocks,
on the other hand, did well, based on strong consumer spending, while health
care and technology stocks provided mixed results.

Positive results in international markets

2
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declined against the U.S. dollar, led by weaknesses in the Japanese yen and core
European currencies. Foreign bonds outperformed U.S. bonds during the reporting
period, increasing the potential value of international diversification.

Fund strategies, results, and outlook

The MainStay California Tax Free Fund portfolio management team used careful
security selection to identify opportunities with relatively high quality and
income potential. They also maintained a relatively neutral duration which was
successful in keeping performance in line with the market during a particularly
turbulent time. To help manage risk, the advisers sought broad diversification
by sector and location within the state. The Fund's specific strategies and
performance results are discussed in greater detail in the Fund managers'
comments on the following pages.

While the results of the last six months can't tell us what will happen next,
they may help us form realistic expectations based on historical trends. Viewed
in this light, continuing shifts in interest rates and municipal bond values
would not come as a surprise. Regardless of what the future holds, investors
seeking tax advantaged income may benefit by maintaining a long-range
perspective and adding to their accounts over time. Regular communication with
your Registered Representative can help you cope with volatility, make
adjustments when warranted, and stay focused on the future.

Educating investors, celebrating a decade of service

Throughout the past six months, we've been actively working to help our
shareholders better understand their investment results. The educational
brochures in our "Understanding Performance" series are an important part of
that effort, and you can receive copies by contacting your Registered
Representative. We've also simplified our prospectus and made our annual and
semiannual reports more user friendly. It's all part of our ongoing commitment
to help our shareholders make the most of their investments.

MainStay celebrated its 10th anniversary as a Fund group in May, passing a major
milestone for seven of our Funds. It has been our pleasure to serve you during
the last six months, and we look forward to continuing to do so for many years
to come.

/s/ Alice T. Kane
Alice T. Kane
July 1996

+ Source: Ibbotson Associates.

++ Source: Investment Company Institute.

3
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MAINSTAY CALIFORNIA TAX FREE FUND
- --------------------------------------------------------------------------------

Fund highlights for the six months ended June 30, 1996

o One-year total returns of 5.94% and 5.70% for Class A and Class B shares,
respectively, excluding all sales charges, as of 6/30/96

o Geographic and sector diversification among California municipal bonds

o A neutral duration helped the Fund perform in line with the market during a
turbulent period

For the six months ended June 30, 1996, the MainStay California Tax Free Fund
had total returns of -1.22% and -1.45% for Class A shares and Class B shares,
respectively, excluding all sales charges. Even though returns were negative,
these results were in line with the average Lipper* California municipal debt
fund, which returned -1.39% for the same period. During the second quarter, the
Fund achieved positive returns, modestly outperforming its peers.

While not completely out of the woods, the California municipal market appears
to have stabilized somewhat following a difficult five-year period. In the last
decade, the state has experienced everything from natural disasters to declining
real estate values, and a bankruptcy filing by Orange County.

These developments have resulted in Moody's downgrading the state's credit
rating from Aaa in January 1992 to A in July 1994. As California's economy
becomes more diversified, we have come to view the state as a stable issuer. In
fact, Orange County was able to reenter the fixed-income market in June, without
major rate penalties in light of its bankruptcy filing.

In the first six months of 1996, we maintained our conservative strategy, which
focused on seeking attractive yields among bonds with relatively high quality,
while making modest duration adjustments around a relatively neutral position
for the portfolio. We believe that duration is the single most important factor
affecting returns in the municipal market. The longer the duration, the more
price variations a portfolio may capture when interest rates move. We feel that
our relatively neutral posture helped the Fund's performance during this
turbulent period.

Credit rating
- --------------
A measure of an issuer's
ability to repay its debt
obligations. Higher ratings
indicate a greater likelihood
of meeting principal and
interest payments, while lower
ratings indicate a greater
likelihood of difficulty or
default. Ratings are provided
by independent rating agencies
such as Moody's Investors
Service, Inc., Standard &
Poor's, and others.

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

In an effort to manage portfolio risk, we purchased a diversified array of
general obligation and revenue bonds in the first half of the year, including
water, pollution control, health care, and public works issues. We also sought
geographic diversification within the state, with issues ranging from San Diego,
Stockton, and Santa Cruz to Walnut, the central valley, and the Mojave desert.

Unlike some municipal managers, we are underweighted in current coupon bonds,
and overweighted in discounted issues and higher-yielding bonds. We select
discounted issues based on our perception of long-term value and seek
higher-yielding bonds that may enhance income without exceeding our risk
parameters.

With the increase in insured credits in the market, there are more high-quality
issues to choose from, which has resulted in greater uniformity in price and
yield. As a result, it has become more important than ever to accurately assess
value among uninsured issuers, where variations in quality, price, and yield may
represent potential opportunities. One area we continue to favor is BBB-rated
hospital issues. We find their prices and risk/reward relationship attractive
and believe that selected opportunities continue to emerge. In the first half of
1996, we also identified other solid uninsured issues with attractive yields at
various quality levels.

During the reporting period, we found Puerto Rican bonds to be priced above
their fair value and sold them, despite their ability to provide double-tax
exempt income+ to California residents. Whether we're buying or selling, we
continue to focus on an appropriate combination of duration, quality, and yield
for the portfolio, and diversification by issuer, sector, and location.

Looking ahead, we anticipate that shifting supply and demand may result in
increased volatility in the municipal market. We will carefully monitor economic
growth and inflationary trends to strategically position the Fund's duration
relative to the market as a whole.

Ravi Akhoury
James Flood

Portfolio Managers

Current coupon bonds
- --------------
Fixed-income securities whose
prices and coupons (or
interest rate payments)
closely reflect the rates
currently available on bonds
at par value (e.g. $1,000).
Discount bonds offer lower
coupons and may trade at lower
prices. Higher yielding bonds
typically offer higher
coupons and may trade at
premium prices.

Insured credits
- --------------
Bonds that carry insurance or
other guarantees that interest
and principal payments will be
met. Although such insurance
may increase the cost of the
bond, it also reduces the risk
of default, regardless of the
issuer's credit quality.

- --------------
* See footnote and chart 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.

5
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Class A 5.94% 6.39%
Class B 5.70% 6.29%
- --------------------------------------------------------------------------------

Fund SEC returns*
- --------------------------------------------------------------------------------
Life of Fund
1 year through 6/30/96
- --------------------------------------------------------------------------------
Class A 1.18% 5.36%
Class B 0.70% 5.95%
- --------------------------------------------------------------------------------

Fund Lipper + rankings and Lipper category returns as of 6/30/96
- --------------------------------------------------------------------------------

Life of Fund
1 year through 6/30/96
- --------------------------------------------------------------------------------
Class A 61 out of 96 funds 35 out of 48 funds
Class B 70 out of 96 funds 81 out of 86 funds
Average Lipper
CA municipal debt fund 6.25% 6.68% (10/1/91)
- --------------------------------------------------------------------------------

Fund per-share net asset values and distributions for the six months
ended 6/30/96
- --------------------------------------------------------------------------------
NAV 6/30/96 Income Capital Gains
- --------------------------------------------------------------------------------
Class A $9.58 $0.2480 $0.0000
Class B $9.53 $0.2360 $0.0000
- --------------------------------------------------------------------------------
</TABLE>

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* 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 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
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YEAR-BY-YEAR & SIX-MONTH PERFORMANCE*
- --------------------------------------------------------------------------------

[Shown in a bar graph]
<TABLE>
<CAPTION>

Total
Period-end Return%
---------- ------
<S> <C> <C>
12/91 ................. 2.07
12/92 ................. 7.79
12/93 ................. 12.71
12/94 ................. -4.92
12/95 ................. 15.18 Class A
12/95 ................. 14.91 Class B
6/96 ................. -1.22 Class A
6/96 ................. -1.45 Class B

</TABLE>

- --------------
Returns are for Class A shares unless otherwise noted.

- --------------------------------------------------------------------------------
$10,000 INVESTED IN MAINSTAY CALIFORNIA TAX FREE FUND
VS. LEHMAN BROTHERS MUNICIPAL BOND INDEX AND INFLATION
- --------------------------------------------------------------------------------
[Shown in a line graph]

Class A Shares
Lehman Brothers
Period Municipal California Tax
End Bond Index++ Inflation ss. Free Fund
<S> <C> <C> <C> <C>
10/1/91 10,000 10,000 9,550
12/91 10,335 10,051 9,747.60
12/92 11,246.05 10,343 10,510.10
12/93 12,627.56 10,627 11,845.20
12/94 11,974.79 10,911 11,266.70
12/95 14,065.01 11,188 12,976.50
6/96 14,002.02 11,414 12,817.60

[Shown in a line graph]
Class B Shares

Lehman Brothers
Period Municipal California Tax
End Bond Index++ Inflation ss. Free Fund
<S> <C> <C> <C> <C>
10/1/91 10,000 10,000 10,000
12/91 10,335 10,051 10,206.91
12/92 11,246.05 10,343 11,005.34
12/93 12,627.56 10,627 12,403.35
12/94 11,974.79 10,911 11,797.59
12/95 14,065.01 11,188 13,566.75
6/96 14,002.02 11,414 13,092.59

</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 shown reflect the
Contingent Deferred Sales Charge (CDSC) of 2%, as it would apply for the
period shown. (The $10,000 invested in the Lehman Brothers Municipal Bond
Index begins on 9/30/91.) All results include reinvestment of 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.

ss. 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>

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DIVERSIFICATION OF HOLDINGS as of 6/30/96
- --------------------------------------------------------------------------------

[The tables below were represented as pie charts the printed document]
<TABLE>
<CAPTION>

<S> <C>

Revenue Pollution Control/
Resource Recovery ...............................17.09%

Revenue Transportation ...........................16.6%

Revenue Hospital/Nursing/Home/
Health Care .....................................15.9%

General Obligation-State .........................12.7%

Revenue Utility-Water ............................ 9.6%

All Other ........................................28.2%

</TABLE>

- --------------------------------------------------------------------------------
QUALITY BREAKDOWN as of 6/30/96C
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
AAA ..............................................59.1%

AA ............................................... 7.5%

A ................................................21.3%

BBB .............................................. 9.6%

Cash & Equivalents ............................... 2.5%

</TABLE>

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

8
<PAGE>

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PORTFOLIO OF INVESTMENTS June 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Value
-------------------------
<S> <C> <C>

LONG-TERM MUNICIPAL BONDS (97.5%)

CALIFORNIA (97.5%)
California General Obligation
5.90%, due 3/1/25 .............................. $ 750,000 $ 748,125
7.00%, due 8/1/09 .............................. 250,000 286,562
California Health Facilities Financing
Authority Revenue, Kaiser
Hospital Foundation, Series A
(zero coupon), due 10/1/12 ..................... 1,200,000 460,500
California Housing Finance Agency
Revenue Home Mortgage, Series C
8.30%, due 8/1/19 (a) .......................... 35,000 36,313
California Pollution Control
Financing Authority Revenue
Pacific Gas & Electric Co.
Series A
8.20%, due 12/1/18 ............................. 900,000 944,298
Series B
8.875%, due 1/1/10 (a) ......................... 750,000 805,312
San Diego Gas & Electric Co.
5.90%, due 6/1/14 .............................. 1,000,000 1,006,250
Southern California Edison
6.90%, due 12/1/17 (a) ......................... 850,000 922,250
California State Department of Water
Resources, Century Valley Project
Revenue, Water System, Series O
4.75%, due 12/1/17 ............................. 800,000 681,000
California State Public Works Board
Lease Revenue, Department of
Corrections, California State
Prison Series B
5.375%, due 12/1/19 ............................ 1,050,000 971,250
California State Veterans
General Obligation, Series AW
7.70%, due 4/1/12 (a) .......................... 880,000 937,200
California Statewide Community
Development Corp.
5.00%, due 10/1/23 ............................. 1,000,000 870,000
7.00%, due 9/1/09 .............................. 300,000 319,500
East Bay California Municipal
Utilities District, Water System Revenue
4.75%, due 6/1/21 .............................. 1,000,000 842,500
Eden Township Hospital District
Revenue
7.40%, due 11/1/19 ............................. 770,000 787,325
Foothill-Eastern Transportation
Corridor Agency, Toll Road
Revenue, Series A
5.00%, due 1/1/35 .............................. 1,100,000 893,750
Los Angeles California Harbor
Department Revenue
8.70%, due 9/1/15 ................................ 540,000 554,963

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

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

Los Angeles County California
Metropolitan Transportation
Authority Sales Tax Revenue
Series A
5.00%, due 7/1/25 ......................... $ 1,050,000 $ 921,375
Los Angeles County California
Parking Authority Community
Sales Tax Revenue
8.00%, due 7/1/16 .......................... 1,000,000 1,059,870
Los Angeles County California
Transportation Commission
Sales Tax Revenue, Series A
7.40%, due 7/1/15 .......................... 400,000 434,500
Mojave California Water Agency
Improvement District, Morongo
Pipeline, General Obligation
5.80%, due 9/1/22 .......................... 1,000,000 983,750
Oakland California Revenue, Series A
7.60%, due 8/1/21 .......................... 1,050,000 1,130,063
Riverside California Hospital Rev-
enue Riverside Community
Hospital Series A
6.75%, due 11/1/15 ......................... 515,000 499,550
Sacramento California Municipal
Utilities District Electric Revenue
6.25%, due 8/15/10 ......................... 500,000 535,000
San Francisco California City &
County Sewer Revenue, Series B
(zero coupon), due 10/1/08 ................. 1,400,000 705,250
Santa Cruz County California, Public
Financing Authority Revenue
Tax Allocation, Series B
7.625%, due 9/1/21 ......................... 825,000 921,938
South Coast Air Quality Management
District Building Corp. California
Revenue, Series B
(zero coupon), due 8/1/06 .................. 500,000 290,000
Southern California Public Power
Authority Mead-Phoenix
Transmission Project
Revenue, Series A
4.875%, due 7/1/20 ......................... 940,000 803,700
Stockton California Health Facilities
Revenue, St. Joseph Medical
Center Series A
5.50%, due 6/1/23 .......................... 1,000,000 931,250
Walnut California Improvement
Agency Tax Allocation
7.90%, due 9/1/09 .......................... 750,000 811,875
-----------
Total Long-Term Municipal Bonds
(Cost $22,394,033) ......................... $22,095,219
-----------

</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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MAINSTAY CALIFORNIA TAX FREE FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Value
----------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (5.3%)

California Health Facilities Financing
Authority Revenue, St. Joseph
Health Systems, Series B
3.00%, due 7/1/13 (b) .................. $ 15,000 $ 15,000
California Statewide Communities
Development Authority Revenue
Certificates of Participation
St. Joseph Health System Group
3.00%, due 7/1/24 (b) .................. 700,000 700,000
Los Angeles County California
Industrial Development Authority
Revenue
Properties Limited Partnership
4.10%, due 12/1/05 (b) ................. 200,000 200,000
Southland Steel & Metal Co. ............
4.10%, due 12/1/05 (b) ................. 300,000 300,000
------------
Total Short-Term Investments
(Cost $1,215,000) ...................... 1,215,000
------------
Total Investments
(Cost $23,609,033) (c) ................. 102.8% 23,310,219(d)
Liabilities in Excess of Cash
and Other Assets ....................... (2.8) (641,157)
------------- ------------
Net Assets ............................... 100.0% $ 22,669,062
============= ============

</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 June 30, 1996 net unrealized depreciation was $298,814, 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 $203,888 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $502,702.

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
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996 (Unaudited)
ASSETS:
<S> <C>
Investment in securities, at value (Note 2) (identified cost $23,609,033) ......$23,310,219
Cash ........................................................................... 58,450
Receivables:
Interest ..................................................................... 363,746
Fund shares sold ............................................................. 134,062
Unamortized organization expense (Note 2) ...................................... 2,186
Other assets ................................................................... 36
-----------
Total assets ............................................................... 23,868,699
-----------
LIABILITIES:
Payables:
Investment securities purchased .............................................. 1,001,330
Fund shares redeemed ......................................................... 10,000
NYLIFE Distributors .......................................................... 8,529
Custodian .................................................................... 7,403
Transfer agent ............................................................... 4,109
Adviser ...................................................................... 242
Trustees ..................................................................... 217
Accrued expenses ............................................................... 71,624
Dividend payable ............................................................... 96,183
-----------
Total liabilities .......................................................... 1,199,637
-----------
Net assets .....................................................................$22,669,062
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ...................................................................... $ 19,076
Class B ...................................................................... 4,608
Additional paid-in capital ..................................................... 23,132,643
Accumulated undistributed net investment income ................................ 7,673
Accumulated net realized loss on investments ................................... (196,124)
Unrealized depreciation on investments ......................................... (298,814)
-----------
Net assets .....................................................................$22,669,062
===========
CLASS A
Net assets applicable to outstanding shares ....................................$18,276,075
===========
Shares of beneficial interest outstanding ...................................... 1,907,618
===========
Net asset value per share outstanding .......................................... $ 9.58
Maximum sales charge (4.50% of offering price) ................................. 0.45
-----------
Maximum offering price per share outstanding ................................... $ 10.03
===========
CLASS B
Net assets applicable to outstanding shares ....................................$ 4,392,987
===========
Shares of beneficial interest outstanding ...................................... 460,778
===========
Net asset value per share outstanding .......................................... $ 9.53
===========

</TABLE>

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

Shareholder communication .................................................... 31,345
Administration (Note 3) ...................................................... 27,346
Advisory (Note 3) ............................................................ 27,346
Service (Note 3) ............................................................. 27,346
Transfer agent ............................................................... 13,756
Auditing ..................................................................... 10,487
Custodian .................................................................... 9,227
Amortization of organization expense ......................................... 4,373
Distribution--Class B (Note 3) ............................................... 3,703
Registration ................................................................. 2,113
Legal ........................................................................ 771
Trustees ..................................................................... 369
Miscellaneous ................................................................ 7,081
-----------
Total expenses before reimbursement ........................................ 165,263
Expense reimbursement from Adviser and Administrator (Note 3) .................. (25,937)
-----------
Net expenses ............................................................... 139,326
-----------
Net investment income .......................................................... 539,910
-----------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions ........................................................ 94,401
Futures transactions ......................................................... (154,180)
-----------
Net realized loss on investments ............................................... (59,779)
Net change in unrealized appreciation on investments ........................... (747,877)
-----------
Net realized and unrealized loss on investments ................................ (807,656)
-----------
Net decrease in net assets resulting from operations ........................... $(267,746)
===========
</TABLE>

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

12
<PAGE>

- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1996* 1995
----------- -----------
INCREASE IN NET ASSETS:
Operations:
<S> <C> <C>
Net investment income ....................................................... $ 539,910 $ 984,910
Net realized gain (loss) on investments ..................................... (59,779) 393,085
Net change in unrealized appreciation (depreciation) on investments ......... (747,877) 1,299,698
----------- -------------
Net increase (decrease) in net assets resulting from operations ............. (267,746) 2,677,693
----------- -------------
Dividends to shareholders:
From net investment income:
Class A ................................................................... (481,002) (933,088)
Class B ................................................................... (79,684) (50,283)
----------- -------------
Total dividends to shareholders ......................................... (560,686) (983,371)
----------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ................................................................... 682,329 2,897,464
Class B ................................................................... 2,572,929 1,997,817
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A ................................................................... 232,558 500,698
Class B ................................................................... 41,131 41,776
----------- -------------
3,528,947 5,437,755
Cost of shares redeemed:
Class A ................................................................... (1,732,384) (1,874,383)
Class B ................................................................... (86,901) (136,962)
----------- -------------
Increase in net assets derived from capital share transactions .......... 1,709,662 3,426,410
----------- -------------
Net increase in net assets .............................................. 881,230 5,120,732

NET ASSETS:
Beginning of period ........................................................... 21,787,832 16,667,100
----------- -------------
End of period ................................................................. $22,669,062 $ 21,787,832
=========== =============
Accumulated undistributed net investment income ............................... $ 7,673 $ 28,449
=========== =============

</TABLE>
- --------------
* Unaudited.

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

13
<PAGE>

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (selected per share and ratios)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------
Class A Class B Class A Class B September 1 Year ended
------- ------- ------- ------- through August 31 October 1, 1991(a)
Six months ended Year ended December 31 ---------------- through
June 30, 1996* December 31, 1995 1994** 1994 1993 August 31, 1992
------------------ ------------------- ----------- ---- ---- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period .............$ 9.95 $ 9.91 $ 9.10 $ 9.10 $ 9.57 $ 10.38 $ 9.90 $ 9.55
------ ------ ------ ------ ------ ------- ------ -------
Net investment income ............. 0.24 0.23 0.50 0.52 0.17 0.53 0.55 0.45
Net realized and unrealized gain
(loss) on investments ........... (0.36) (0.37) 0.85 0.81 (0.47) (0.51) 0.64 0.30
------ ------ ------ ------ ------ ------- ------ -------
Total from investment
operations ...................... (0.12) (0.14) 1.35 1.33 (0.30) 0.02 1.19 0.75
------ ------ ------ ------ ------ ------- ------ -------
Less dividends and distributions:
Dividends from net
investment income ............... (0.25) (0.24) (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...(0.25) (0.24) (0.50) (0.52) (0.17) (0.83) (0.71) (0.40)
------ ------ ------ ------ ------ ------- ------ -------
Net asset value at end of period ..$ 9.58 $ 9.53 $ 9.95 $ 9.91 $ 9.10 $ 9.57 $ 10.38 $ 9.90
====== ====== ====== ====== ====== ====== ======= ======
Total investment return (b) ....... (1.22%) (1.45%) 15.18% 14.91% (3.11%) 0.12% 12.58% 8.02%
Ratios (to average net
assets)/Supplemental Data:
Net investment income ........... 5.0%+ 4.7%+ 5.3% 5.1% 5.5%+ 5.4% 5.6% 5.6%+
Net expenses .................... 1.24%+ 1.49%+ 1.24% 1.49% 0.99%+ 0.99% 0.99% 0.99%+
Expenses (before
reimbursement) ................ 1.5%+ 1.7%+ 1.4% 1.7% 1.2%+ 1.1% 1.2% 1.6%+
Portfolio turnover rate ........... 41% 41% 107% 107% 24% 96% 154% 87%
Net assets at end of
period (in 000's) ...............$18,276 $4,393 $19,825 $1,963 $16,667 $17,356 $14,603 $10,085

</TABLE>

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

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

14
<PAGE>

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------

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 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.

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
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the shares of that class that are
outstanding.

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 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.

15
<PAGE>

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

Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities 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.

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 contracts.
However, the Fund's activities in futures contracts are conducted through
regulated exchanges which minimize 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.

Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The California Tax Free 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.

Security Transactions and Investment Income. The Fund records security
transactions 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. Discounts are accreted when required by Federal tax regulations.

16
<PAGE>

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STAEMENTS (unaudited) continued
- --------------------------------------------------------------------------------

Organization Costs. Costs incurred in connection with the Fund's initial
organization 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 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.

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
financial 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
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment 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
subsidiary 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 annual
rate of 0.25% of the average daily net assets of the Fund.

The Adviser and the Administrator have voluntarily agreed to reimburse the
expenses 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 period ended June 30, 1996 was $25,937.

17
<PAGE>

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

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,
litigation 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 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 six months ended
June 30, 1996.

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 distribution
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
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged 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
distribution of the Fund's shares and service activities.

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 $21,382 for the six
months ended June 30, 1996.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges on redemptions of Class B shares for the six months ended June 30,
1996 in the amount of $1,070.

18
<PAGE>

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (unaudited) continued
- --------------------------------------------------------------------------------

Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-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 June 30, 1996, NYLIFE Securities and NYLIFE Distributors held shares
of Class A with a net asset value of $95,800 and $4,066,562, respectively.

Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the six
months ended June 30, 1996 were $313.

Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $518 for the six months ended June
30, 1996.

Note 4 -- Federal Income Tax:

At December 31, 1995, for Federal income tax purposes, capital loss
carryforwards of $136,345 were 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 probable
that the capital gains so offset will not be distributed to shareholders.

Note 5 -- Purchases and Sales of Securities (in 000's):

During the six month period ended June 30, 1996 purchases and sales of
securities, other than U.S. Government securities, securities subject to
repurchase transactions and short-term securities, were $10,252 and $8,379,
respectively.

Note 6 -- Capital Share Transactions (in 000's):

<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1996* December 31, 1995
----------------------- ---------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold........................................... 70 268 304 208
Shares issued in reinvestment of dividends............ 24 4 52 4
------- ------- ------- -------
94 272 356 212
Shares redeemed....................................... 178 9 196 14
------- ------- ------- -------
Net increase (decrease) .............................. (84) 263 160 198
=== === === ===

</TABLE>

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

* Unaudited.

19
<PAGE>

- --------------------------------------------------------------------------------
THE MAINSTAY FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

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

GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

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

+ 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.

ss. 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.

20
<PAGE>

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

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
Government Fund [horizontal bar graph consistent with safety of principal current income and safety of principal
indicating risk/ primarily from U.S. government
reward of fund] securities ss.
- ------------------------------------------------------------------------------------------------------------------------------------

High Yield [horizontal bar graph An aggressive high yield bond You want to maximize current income
Corporate Bond Fund indicating risk/ fund that is actively managed for and can accept the higher risk of
reward 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/ U.S. bonds with an emphasis on diversification to your domestic
reward 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/ with free checkwriting|| ning to spend or invest in the near future
reward of fund]
- ------------------------------------------------------------------------------------------------------------------------------------

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

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

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

</TABLE>

A word about risk and reward

The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.

The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.

21
<PAGE>

This page intentionally left blank

22
<PAGE>

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

semi-annual report
six months in review

fund results

& portfolio highlights

[LOGO] MainStay(R)Funds

- --------------------------------------------------------------------------------
Unaudited June 30, 1996
- --------------------------------------------------------------------------------
OFFICERS & TRUSTEES

Alice T.Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Harry G. Hohn 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 W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary

Dechert Price & Rhoads
Legal Counsel

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] NEW YORK LIFE

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.

[RECYCLING SYMBOL] MSSA04 (896)
<PAGE>

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

Chairperson's Letter 2

MainStay Capital Appreciation Fund Highlights
and Portfolio Managers' Comments 4

Returns & Lipper Rankings 7

Year-by-Year & Six-Month Performance 8

$10,000 Invested in the MainStay Capital Appreciation
Fund Class A Shares vs. S&P 500 and Inflation 8

$10,000 Invested in the MainStay Capital Appreciation
Fund Class B Shares vs. S&P 500 and Inflation 8

Top 10 Equity Holdings 9

10 Largest Purchases 10

10 Largest Sales 10

Diversification by Industry -- Top 5 11

Portfolio Composition 11

Portfolio of Investments 12

Financial Statements 15

Notes to Financial Statements 19

The MainStay Funds 24
<PAGE>

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

Strategic security selection amid powerful economic forces and shifting market
perceptions -- this was the strategy that guided the management of the
MainStay(R) Capital Appreciation Fund for the six months ended June 30, 1996. As
a result, over this period, the Fund returned 9.77% and 9.51% for Class A and
Class B shares, respectively, excluding all sales charges.

A stronger economy -- good for stocks, challenging for bonds

Positive results in international markets

Foreign equity markets lagged the U.S. during the first quarter of 1996, but
provided more competitive returns in the second. Latin America posted strong
gains and Japan showed signs of economic recovery, which boosted its equity
returns to 43.5% for the 12 months ended June 30, 1996. In all but a handful of
markets, foreign currencies declined against the U.S. dollar, led by weaknesses
in the Japanese yen and core European currencies. Foreign bonds outperformed
U.S. bonds during the reporting period, increasing the potential value of
international diversification.

2
<PAGE>

Fund strategies, results, and outlook

The MainStay Capital Appreciation Fund portfolio management team used careful
security selection to identify opportunities with strong growth potential. While
rising interest rates hurt some sectors, others provided excellent returns. The
portfolio managers identified strengths in selected stocks, including HFS,
WorldCom, Nike, Oracle, Nine West, and Bed Bath & Beyond, all of which benefited
the portfolio. The Fund's specific strategies and performance results are
discussed in greater detail in the Fund managers' comments on the following
pages.

While the positive results of the last six months can't tell us what will happen
next, they may help us form realistic expectations based on historical trends.
Viewed in this light, a more moderate second half would not come as a surprise.
Regardless of what the future holds, growth investors may benefit by maintaining
a long-range perspective and adding to their accounts over time. Regular
communication with your Registered Representative can help you cope with
volatility, make adjustments when warranted, and stay focused on the future.

Educating investors, celebrating a decade of service

MainStay celebrated its 10th anniversary as a Fund group in May, passing a major
milestone for seven of our Funds, including the Capital Appreciation Fund. It
has been our pleasure to serve you during the last six months, and we look
forward to continuing to do so for many years to come.

/s/ Alice T. Kane

Alice T. Kane
July 1996

- ---------
* See footnote on page 8 for more information on the S&P 500.
+ Source: Ibbotson Associates.
++ Source: Investment Company Institute.

3
<PAGE>

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

Fund highlights for the six months ended June 30, 1996

o One-year total returns of 24.82% and 24.22% for Class A and Class B shares,
respectively, excluding all sales charges, as of 6/30/96

o Fund track record exceeded 10 years

o Strong performance from HFS, our largest holding as of 6/30/96, and Nike,
one of our largest purchases in the first six months of 1996

For the six months ended June 30, 1996, the MainStay Capital Appreciation Fund
returned 9.77% and 9.51% for Class A and Class B shares, respectively, excluding
all sales charges. Although the Fund outpaced its peers in the Lipper* growth
category and the S&P 500 in the first quarter, for the first six months of 1996,
the S&P 500 returned 10.09% and the average Lipper growth fund returned 10.21%.

After a lackluster 1995, consumer cyclicals bounced back in March. Our bottom-up
stock selection benefited the portfolio, with securities such as Bed Bath &
Beyond, Lowe's, and Home Depot recording double-digit returns in March. We were
attracted to Nike for its accelerating sales, new product introductions, and
strong potential in an olympic year and made it one of our largest purchases in
the first half of 1996. With an outstanding six-month return, Nike shared the
footlights with Nine West, among the portfolio's top performers.

The Fund's top holding, HFS, was also its best performer. The company announced
the acquisition of Avis, adding a recognized car rental brand to its famous
hotel and real estate brand names. Other strong consumer stocks in the second
quarter were Mirage Resorts and CUC International, a membership-based consumer
services company.

The Fund's financial stocks had mixed performance in the first six months of
1996. After a surprisingly strong employment report in early March, any hopes of
the Fed lowering interest rates were dashed, the bond market dropped sharply,
and interest-sensitive bank and insurance stocks suffered. As rates began to
climb, we took some profits, which

Consumer cyclicals
- ----------------------------
Consumer products and
services whose sales tend to
rise and fall with changes
in the economic cycle.

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.

- ------
* See footnote and chart on page 7 for more information on Lipper Analytical
Services, Inc.

4
<PAGE>

benefited the portfolio. Nevertheless, we remained overweighted in financials
relative to the S&P 500 because the fundamentals were and continue to be
compelling for selected stocks in the group. Therefore, we concluded the first
quarter with an emphasis on consumer finance companies.

In the second quarter, a volatile bond market and credit quality concerns led
financial stocks to underperform. Bank of New York announced
larger-than-expected reserves for bad consumer loans, which led us to sell the
stock before the end of the quarter. Green Tree Financial and First USA, which
continue to have strong potential, were notable underperformers for the
portfolio in this environment. Our decision to hold SunAmerica, First Data, and
Household International, however, benefited the Fund, as each recorded
double-digit gains for the first six months of the year.

Health care stocks were generally disappointing during the first half of the
year. Guidant and Medtronic performed exceptionally well during the first three
months of the year, as did hospital consolidators OrNda HealthCorp and
Columbia/HCA. On the other hand, Genzyme was a disappointment, suffering from
FDA limitations on a new product introduction. Several HMOs preannounced
disappointing second quarter earnings, which they attributed to higher
utilization trends and premium pricing pressures. This led to underperformance
at Humana, United Healthcare, and PacifiCare Health Systems in the second
quarter. Profit taking among pharmaceutical companies and signs of sector
rotation also weakened health care stock performance. We continue to monitor the
fundamental outlook for these issues in a rapidly changing environment.

Excess capacity, inventory adjustments, and weaker demand for personal computers
and cellular phones led to mixed performance among technology stocks during the
first half of 1996. In this environment, our bottom-up selection process worked
in the portfolio's favor, with stocks such as WorldCom, Oracle, and Microsoft
providing strong overall performance. Computer Associates outperformed the
market in the first

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
greater than the sector's
general relationship to the
market as a whole.

Sector rotation
- ----------------------------
A general movement of
investments out of one sector
of the market into another
that has become more
attractive to investors.

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

5
<PAGE>

quarter -- and Sun Microsystems and Intel both provided double-digit advances in
the second. Other technology holdings, however, such as Lam Research and
Seagate, suffered from preannounced earnings disappointments, which negatively
impacted the portfolio. While we sold Micron at a profit, unfortunately we did
so long after the stock's heyday had passed. Among technology stocks, we remain
focused primarily on software, networking, and database management companies.

Despite strong gains in April and May, the Fund lagged the S&P 500 by nearly 300
basis points in June. Two notable underperformers were copy machine companies
Alco Standard and Danka Business Systems, which faced unrelated setbacks. Since
their problems appear temporary and demand for both companies' products and
services remains robust, we are continuing to hold both stocks.

Throughout the first half of the year, we concentrated on risk management by
focusing on highly liquid securities and faithfully adhering to our strict
diversification guidelines. Investor attention is now shifting to second-quarter
earnings reports, which began in the second week of July. Going forward, we
believe a low inflation environment and slow but steady economic growth should
provide a positive backdrop for growth stocks. No matter how the economy
unfolds, however, we will continue to use careful security selection to seek
long-term growth of capital.

Edmund Spelman
Rudy Carryl
Portfolio Managers

6
<PAGE>

<TABLE>
<CAPTION>
Fund average annual total returns *
- -----------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/96
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 24.82% 22.18% 13.82% 14.51%
Class B 24.22% 22.00% 13.73% 14.43%
- -----------------------------------------------------------------------------------------------------------

Fund SEC returns*
- -----------------------------------------------------------------------------------------------------------
1 year 5 years 10 years

- -----------------------------------------------------------------------------------------------------------
Class A 17.95% 20.81% 13.17%
Class B 19.22% 21.82% 13.73%
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
Fund Lipper+ rankings and Lipper category returns as of 6/30/96
- -----------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/96
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A (cap app category) 63 out of n/a n/a 63 out of
166 funds 149 funds
===========================================================================================================
Class B (cap app category) 70 out of 8 out of 14 out of 12 out of
166 funds 81 funds 51 funds 47 funds
Average Lipper capital
appreciation fund 23.97% 15.67% 10.96% 11.31% (5/1/86)
- -----------------------------------------------------------------------------------------------------------
Average Lipper
growth fund 22.19% 14.60% 11.84% 12.22% (5/1/86)
- -----------------------------------------------------------------------------------------------------------
Fund per-share net asset values and distributions for the six months ended 6/30/96
- -----------------------------------------------------------------------------------------------------------
NAV 6/30/96 Income Capital Gains
- -----------------------------------------------------------------------------------------------------------
Class A $28.43 $0.0000 $0.0000
Class B $28.22 $0.0000 $0.0000
- -----------------------------------------------------------------------------------------------------------
</TABLE>

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. Lipper averages listed above are not class specific; life of fund
return is from the period of the Class B shares' initial offering through
6/30/96. For the 12-month period ended 6/30/96, the Lipper growth fund
category included 618 funds. The MainStay Capital Appreciation Fund was
ranked 196 out of 618 (A shares) for the 1-year period and 223 out of 618,
5 out of 247, and 25 out of 145 (B shares) for the 1-year, 5-year, and
10-year periods, respectively. The Fund's Class A shares were first offered
to the public 1/3/95; Class B shares 5/1/86.

7
<PAGE>

- --------------------------------------------------------------------------------
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
- --------------------------------------------------------------------------------

[Shown in a bar graph]
<TABLE>
<CAPTION>
Total Returns
Period-end %
---------- -------------
<S> <C>
12/86 -3.56
12/87 -2.18
12/88 2.55
12/89 26.06
12/90 4.12
12/91 68.36
12/92 11.00
12/93 14.01
12/94 -1.52
12/95 35.79 Class A
12/95 35.11 Class B
6/96 9.77 Class A
6/96 9.51 Class B
- --------------------------------------------------------------------------------
</TABLE>

- ----------
Returns are for Class B shares unless otherwise noted. See footnote * on
page 7 for more information on performance.

- --------------------------------------------------------------------------------
$10,000 INVESTED IN THE MAINSTAY CAPITAL APPRECIATION
FUND VS. S&P 500 AND INFLATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares [Shown in a line graph]
<S> <C> <C> <C>
Period-end S&P 500++ Inflation ss. Capital Appreciation Fund
5/1/86 $10,000 $10,000 $ 9,450
12/86 10,550 10,175 9,113.82
12/87 11,097 10,626 8,915.07
12/88 12,927 11,096 9,142.21
12/89 17,011 11,611 11,524.51
12/90 16,481 12,320 11,998.69
12/91 21,481 12,698 21,201.49
12/92 23,115 13,066 22,423.58
12/93 25,435 13,425 25,565.91
12/94 25,780 13,785 25,176.34
12/95 35,433 14,134 34,185.91
6/30/96 $39,004 $14,420 $37,525.31
</TABLE>

<TABLE>
<CAPTION>
Class B Shares [Shown in a line graph]
<S> <C> <C> <C>
Period-end S&P 500++ Inflation ss. Capital Appreciation Fund
5/1/86 $10,000 $10,000 $10,000
12/86 10,550 10,175 9,644.25
12/87 11,097 10,626 9,433.94
12/88 12,927 11,096 9,674.30
12/89 17,011 11,611 12,195.25
12/90 16,481 12,320 12,697.66
12/91 21,481 12,698 21,377.23
12/92 23,115 13,066 23,728.66
12/93 25,435 13,425 27,053.88
12/94 25,780 13,785 26,641.63
12/95 35,433 14,134 35,994.20
6/30/96 $39,004 $14,420 $39,416.30
</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. 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.

8
<PAGE>

- --------------------------------------------------------------------------------
TOP 10 EQUITY HOLDINGS as of 6/30/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Holding $ Amount
<S> <C>
HFS Inc. $48,734,000

Computer Associates International, Inc. 29,337,187

3Com Corp. 26,987,925

SunAmerica Inc. 24,860,000

Green Tree Financial Corp. 23,537,500

Oracle Corp. 23,425,875

WorldCom,Inc. 23,099,128

Amgen Inc. 22,356,000

Travelers Group Inc. 21,831,562

Sun Microsystems, Inc. 21,253,875
</TABLE>

9
<PAGE>

- --------------------------------------------------------------------------------
10 LARGEST PURCHASES for the six months ended 6/30/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security Amount of purchase
<S> <C>
Safeway Inc. $15,212,898

Nike,Inc. Class B 14,805,875

AutoZone, Inc. 12,935,329

Cisco Systems Inc. 12,541,476

Lone Star Steakhouse & Saloon, Inc. 11,782,653

Sterling Software, Inc. 11,379,615

Oakley, Inc. 10,165,902

Mirage Resorts, Inc. 9,862,750

CUC International Inc. 9,371,438

PacifiCare Health Systems, Inc. Class B 9,351,905
</TABLE>

- --------------------------------------------------------------------------------
10 LARGEST SALES for the six months ended 6/30/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security Amount of sale
<S> <C>
Bank of New York Co., Inc. $13,971,669

Barnett Banks, Inc. 12,415,777

Micron Technology Inc. 12,069,390

Viacom Inc. Class B 10,436,830

First Interstate Bancorp. 9,379,434

Circuit City Stores, Inc. 7,461,456

Intel Corp. 7,416,474

Tele-Communications International, Inc. Class A 4,138,960

Micro Warehouse Inc. 4,045,890

Seagate Technology, Inc. 3,967,413
</TABLE>

Note: This breakdown is provided for information purposes only. The Fund's
holdings may change daily. All purchases and sales are aggregated by
issuer. 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 "Portfolio of Investments" for specific type
of security held.

10
<PAGE>

- --------------------------------------------------------------------------------
DIVERSIFICATION BY INDUSTRY -- TOP 5 as of 6/30/96
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Financial Service............................ 10.3%
[Pie Chart} Retail....................................... 8.8%
Health Care.................................. 8.7%
Technology................................... 7.3%
Computers & Office Equipment................. 6.8%
All Other.................................... 58.1%
</TABLE>

- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION as of 6/30/96
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Common Stocks ............................ 92.2%
[Pie Chart} Cash & Equivalents........................... 7.5%
Preferred Stocks............................. 0.3%
</TABLE>

Note: Actual percentages will vary over time.

11
<PAGE>

Shares Value
----------------------------------------
<S> <C> <C>
COMMON STOCKS (92.2%)+

AIRLINES (1.5%)
Atlantic Southeast Airlines, Inc... 180,000 $ 5,085,000
Southwest Airlines Co.............. 431,300 12,561,612
---------------
17,646,612
---------------

AUTO PARTS (0.9%)
Lear Seating Corp. (a)............. 300,700 10,599,675
---------------

BANKS (2.3%)
NationsBank Corp................... 129,000 10,658,625
Wells Fargo & Co................... 70,333 16,800,795
---------------
27,459,420
---------------

BIOTECHNOLOGY (2.7%)
Amgen Inc. (a)..................... 414,000 22,356,000
Genzyme Corp. (a).................. 201,800 10,140,450
Visible Genetics Inc (a)........... 50,000 487,500
---------------
32,983,950
---------------

BROKERAGE (0.8%)
Schwab (Charles) Corp.............. 382,500 9,371,250
---------------

BUILDINGS (1.2%)
Lennar Corp........................ 175,800 4,395,000
Oakwood Homes Corp................. 468,200 9,656,625
---------------
14,051,625
---------------

COMPUTERS & OFFICE EQUIPMENT (6.8%)
Alco Standard Corp................. 446,800 20,217,700
Danka Business Systems
Plc ADR (b)...................... 341,200 9,980,100
EMC Corp. (a)...................... 270,500 5,038,063
Hewlett-Packard Co................. 179,000 17,832,875
Seagate Technology, Inc. (a)....... 146,800 6,606,000
Sun Microsystems, Inc. (a)......... 361,000 21,253,875
---------------
80,928,613
---------------

CONSUMER DURABLES (1.2%)
Black & Decker Corp................ 357,700 13,816,162
---------------
<CAPTION>

Shares Value
----------------------------------------
<S> <C> <C>
CONSUMER FINANCIAL SERVICES (1.3%)
First Data Corp.................... 194,700 15,502,987
---------------

CONSUMER SERVICES (2.4%)
CUC International Inc. (a)......... 332,700 $ 11,810,850
Service Corp. International........ 302,000 17,365,000
---------------
29,175,850
---------------

DRUGS (5.2%)
Elan Corp. Plc ADR (a) (b)......... 226,200 12,921,675
Mylan Laboratories Inc............. 332,250 5,731,313
Pharmacia & Upjohn, Inc............ 340,300 15,100,812
Schering-Plough Corp............... 312,000 19,578,000
Teva Pharmaceutical Industries
Ltd. ADR (b)..................... 245,000 9,279,375
---------------
62,611,175
---------------

ELECTRONICS (1.5%)
Harman International Industries,
Inc.............................. 168,500 8,298,625
Vishay Intertechnology, Inc. (a)... 387,502 9,154,735
---------------
17,453,360
---------------

ENERGY (1.9%)
Abacan Resource Corp. (a).......... 2,150,000 8,969,531
Triton Energy Ltd. (a)............. 278,500 13,542,063
---------------
22,511,594
---------------

FINANCIAL SERVICES (10.3%)
Federal National Mortgage
Association...................... 404,000 13,534,000
First USA, Inc..................... 321,500 17,682,500
Green Tree Financial Corp.......... 753,200 23,537,500
Household International, Inc....... 243,000 18,468,000
Resource Bancshares Mortgage
Group, Inc. (a).................. 300,557 3,644,254
SunAmerica Inc..................... 440,000 24,860,000
Travelers Group Inc................ 478,500 21,831,562
---------------
123,557,816
---------------

FOOD DISTRIBUTOR (0.6%)
Richfood Holdings, Inc............. 212,000 6,890,000
---------------

HEALTH CARE (8.7%)
Columbia/HCA Healthcare Corp....... 282,560 15,081,640
HealthCare COMPARE Corp. (a)....... 213,000 10,383,750
HEALTHSOUTH Corp. (a).............. 387,000 13,932,000
Humana Inc. (a).................... 406,000 7,257,250
Johnson & Johnson.................. 394,884 19,546,758
OrNda HealthCorp. (a).............. 525,000 12,600,000
</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.

12
<PAGE>

<TABLE>
<CAPTION>
Shares Value
----------------------------------------
<S> <C> <C>
COMMON STOCKS (Continued)

HEALTH CARE (Continued)
PacifiCare Health Systems, Inc.
Class B (a)...................... 116,300 $ 7,879,325
United Healthcare Corp............. 357,800 18,068,900
---------------
104,749,623
---------------

INSURANCE (2.8%)
American International Group, Inc.. 203,050 20,025,806
MGIC Investment Corp............... 241,600 13,559,800
---------------
33,585,606
---------------

INTERNATIONAL OILS (0.3%)
British Petroleum Co., Plc ADR (b). 31,841 3,403,007
---------------

MEDICAL EQUIPMENT (4.2%)
Guidant Corp....................... 287,100 14,139,675
Heartport, Inc. (a)................ 10,000 302,500
Medtronic, Inc..................... 359,000 20,104,000
Nellcor Puritan Bennett Inc. (a)... 40,000 1,940,000
ResMed, Inc. (a)................... 7,500 116,250
Waters Corp. (a)................... 434,400 14,335,200
---------------
50,937,625
---------------

PUBLISHING (0.9%)
News Corp. Ltd. ADR (b)............ 454,600 10,683,100
---------------

RESTAURANTS & LODGING (5.9%)
HFS Inc. (a)....................... 696,200 48,734,000
Lone Star Steakhouse &
Saloon, Inc. (a)................. 295,000 11,136,250
Mirage Resorts, Inc. (a)........... 210,800 11,383,200
---------------
71,253,450
---------------

RETAIL (8.8%)
AutoZone, Inc. (a)................. 366,300 12,728,925
Bed Bath & Beyond, Inc (a)......... 248,000 6,634,000
Home Depot, Inc. (The)............. 276,900 14,952,600
Kohl's Corp. (a)................... 296,600 10,862,975
Kroger Co. (The) (a)............... 292,500 11,553,750
Lowe's Cos., Inc................... 410,000 14,811,250
Oakley, Inc. (a)................... 214,000 9,737,000
Office Depot, Inc. (a)............. 386,000 7,864,750
Safeway Inc. (a)................... 512,300 16,905,900
---------------
106,051,150
---------------
<CAPTION>
Shares Value
----------------------------------------
<S> <C> <C>

SOFTWARE (6.6%)
Computer Associates
International, Inc............... 411,750 $ 29,337,187
Microsoft Corp. (a)................ 102,000 12,252,750
Oracle Corp. (a)................... 594,000 23,425,875
Sterling Software, Inc. (a)........ 185,500 14,283,500
---------------
79,299,312
---------------

TECHNOLOGY (7.3%)
Cisco Systems, Inc. (a)............ 262,200 14,847,075
Electronic Data Systems Corp. 175,000 9,406,250
Intel Corp......................... 194,500 14,283,594
Lam Research Corp. (a)............. 229,500 5,967,000
Linear Technology Corp............. 300,000 9,000,000
Motorola, Inc...................... 110,000 6,916,250
3Com Corp. (a)..................... 589,900 26,987,925
---------------
87,408,094
---------------

TELECOMMUNICATION EQUIPMENT (0.3%)
General Instrument Corp. (a)....... 114,800 3,314,850
---------------

TELECOMMUNICATION SERVICES (1.9%)
WorldCom, Inc. (a)................. 417,140 23,099,128
---------------

TEXTILE & APPAREL (3.9%)
Nike, Inc. Class B................. 206,800 21,248,700
Nine West Group Inc. (a)........... 297,900 15,230,138
Warnaco Group, Inc. (The)
Class A.......................... 382,300 9,844,225
---------------
46,323,063
---------------
Total Common Stocks
(Cost $768,659,683).............. 1,104,668,097
---------------

PREFERRED STOCK (0.3%)

PUBLISHING (0.3%)
News Corp. Ltd. ADR--Preference
Shares (b)....................... 146,800 2,954,350
---------------
Total Preferred Stock
(Cost $2,270,220)................ 2,954,350
---------------
</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>
Principal
Amount Value
---------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (7.4%)

COMMERCIAL PAPER (7.4%)
American Express Credit Corp.
5.39%, due 7/3/96................ $ 18,465,000 $ 18,465,000
Ford Motor Credit Co.
5.37%, due 7/1/96................ 37,794,000 37,794,000
Smith Barney Inc.
5.45%, due 7/2/96................ 32,510,000 32,510,000
---------------
Total Short-Term Investments
(Cost $88,769,000)............... 88,769,000
---------------
Total Investments
(Cost $859,698,903) (c).......... 99.9% 1,196,391,447(d)
Cash and Other Assets,
Less Liabilities................. 0.1 1,796,962
------------- ---------------
Net Assets......................... 100.0% $ 1,198,188,409
============= ===============
</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 June 30, 1996 net unrealized appreciation was $336,692,544, 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 $349,481,969 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $12,789,425.

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

14
<PAGE>

AS OF JUNE 30, 1996 (Unaudited)
<S> <C>
ASSETS:
Investment in securities, at value (Note 2) (identified cost $859,698,903) ........................ $1,196,391,447
Cash............................................................................................... 144
Receivables:.
Investment securities sold....................................................................... 20,199,172
Fund shares sold ................................................................................ 2,633,066
Dividends and interest........................................................................... 533,188
Other assets....................................................................................... 1,763
--------------
Total assets.................................................................................... 1,219,758,780
--------------
LIABILITIES:
Payables:
Investment securities purchased ................................................................. 19,342,212
NYLIFE Distributors ............................................................................. 993,807
Fund shares redeemed............................................................................. 579,217
Adviser.......................................................................................... 280,613
Transfer agent................................................................................... 202,444
Custodian........................................................................................ 19,354
Trustees......................................................................................... 11,122
Accrued expenses .................................................................................. 141,602
--------------
Total liabilities .............................................................................. 21,570,371
--------------
Net assets ........................................................................................ $1,198,188,409
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A ......................................................................................... $ 27,727
Class B ......................................................................................... 396,670
Additional paid-in capital ........................................................................ 845,170,147
Accumulated undistributed net realized gain on investments ........................................ 15,901,321
Net unrealized appreciation on investments ........................................................ 336,692,544
-------------
Net assets ........................................................................................ $1,198,188,409
==============
CLASS A
Net assets applicable to outstanding shares ....................................................... $ 78,835,988
============
Shares of beneficial interest outstanding ......................................................... 2,772,725
============
Net asset value per share outstanding ............................................................. $ 28.43
Maximum sales charge (5.50% of offering price) .................................................... 1.65
--------------
Maximum offering price per share outstanding ...................................................... $ 30.08
==============
CLASS B
Net assets applicable to outstanding shares ....................................................... $1,119,352,421
==============
Shares of beneficial interest outstanding ......................................................... 39,666,974
===============
Net asset value per share outstanding ............................................................ $ 28.22
===============
</TABLE>

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

15
<PAGE>

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Unaudited)
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) ................................................................................... $ 2,790,564
Interest ........................................................................................ 1,934,133
--------------
Total income ................................................................................... 4,724,697
--------------
Expenses: (Note 2)
Distribution--Class B (Note 3) ................................................................... 2,471,003
Administration (Note 3) .......................................................................... 1,531,570
Advisory (Note 3) ................................................................................ 1,531,570
Service (Note 3) ................................................................................. 1,310,287
Transfer agent ................................................................................... 913,329
Shareholder communication ........................................................................ 112,541
Registration ..................................................................................... 77,698
Recordkeeping (Note 3) ........................................................................... 65,986
Custodian ........................................................................................ 54,041
Auditing ......................................................................................... 48,145
Legal ............................................................................................ 39,294
Trustees ......................................................................................... 24,870
Miscellaneous .................................................................................... 17,476
--------------
Total expenses .................................................................................. 8,197,810
--------------
Net investment loss ................................................................................ (3,473,113)
--------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ................................................................... 23,339,976
Net change in unrealized appreciation on investments ............................................... 71,011,011
--------------
Net realized and unrealized gain on investments .................................................... 94,350,987
--------------
Net increase in net assets resulting from operations ............................................... $90,877,874
==============
</TABLE>

- -----------------
(a) Dividends recorded net of foreign withholding taxes of $15,293.

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

16
<PAGE>

<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1996* 1995
------------ ---------------
<S> <C> <C>
INCREASE IN NET ASSETS:

Operations:
Net investment loss ..................................................... $ (3,473,113) $ (2,553,635)
Net realized gain (loss) on investments ................................. 23,339,976 (7,438,705)
Net change in unrealized appreciation on investments .................... 71,011,011 206,149,738
------------- ---------------
Net increase in net assets resulting from operations .................... 90,877,874 196,157,398
------------- ---------------
Distributions to shareholders:
From net realized gain on investments:
Class A ................................................................ -- (86,358)
Class B ................................................................ -- (1,608,869)
------------- ---------------
Total distributions to shareholders................................... -- (1,695,227)
------------- ---------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ................................................................ 46,634,025 49,152,255
Class B ................................................................ 292,634,958 330,945,526
Net asset value of shares issued to shareholders in reinvestment of
distributions:
Class A ................................................................ -- 72,656
Class B ................................................................ -- 1,586,582
------------- ---------------
339,268,983 381,757,019
Cost of shares redeemed:
Class A ................................................................ (17,491,097) (10,509,357)
Class B ................................................................ (115,122,180) (164,188,120)
------------- ---------------
Increase in net assets derived from capital share transactions........ 206,655,706 207,059,542
------------- ---------------
Net increase in net assets ........................................... 297,533,580 401,521,713
NET ASSETS:
Beginning of period........................................................ 900,654,829 499,133,116
------------- ---------------
End of period ............................................................. $1,198,188,409 $900,654,829
============== ===============
</TABLE>
- ---------
* Unaudited.

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

17
<PAGE>

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (selected per share data and ratios)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Class B
Class A Class B Class A Class B Septermber 1 ---------------------------------------------
------- ------- ------- ------ through Year ended August 31
Six months ended Year ended December 31 ---------------------------------------------
June 30, 1996* December 31, 1995 1994** 1994 1993 1992 1991
------------------- ------------------ ------------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period...$ 25.90 $ 25.77 $ 19.11 $ 19.11 $ 19.93 $ 19.47 $ 14.14 $ 15.96 $ 11.35
------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income
(loss).................. (0.03) (0.09) 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............ 2.56 2.54 6.81 6.79 (0.65) 1.13 5.64 1.30 5.16
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations........... 2.53 2.45 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........ $ 28.43 $ 28.22 $ 25.90 $ 25.77 $ 19.11 $ 19.93 $ 19.47 $ 14.14 $ 15.96
======= ======= ======= ======= ======= ======= ======= ======= =======
Total investment
return (b) .......... 9.77% 9.51% 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%)+ (0.7%)+ 0.2% (0.4%) (0.5%)+ (0.6%) (0.7%) (1.2%) (1.0%)
Expenses............. 1.1%+ 1.6%+ 1.1% 1.7% 1.8%+ 1.8% 1.8% 2.0% 2.5%
Portfolio turnover rate. 10% 10% 29% 29% 11% 31% 73% 157% 327%
Average commission rate
paid..................$ 0.0598 $ 0.0598 (c) (c) (c) (c) (c) (c) (c)
Net assets at end of
period (in 000's).... $78,836 $1,119,352 $44,434 $856,221 $499,133 $472,497 $279,300 $128,710 $65,659
</TABLE>

- --------
* Unaudited.
** 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.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.

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

18
<PAGE>

Note 1 -- Organization and Business:

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 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 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 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. 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

19
<PAGE>

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 Capital Appreciation 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.

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:

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

20
<PAGE>

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 annual
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 combined
fees to 0.65% on assets in excess of $200 million and 0.50% on assets in excess
of $500 million.

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.

21
<PAGE>

Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $748,353 for the six
months ended June 30, 1996.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges on redemptions of Class B shares for the six months ended June 30,
1996 in the amount of $425,712.

Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the six
months ended June 30, 1996 were $77,511.

Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $22,096 for the six months ended
June 30, 1996.

Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the period January 1, 1996 through June 30,
1996 amounted to $65,986.

Note 4 -- Federal Income Tax:

At December 31, 1995, for Federal income tax purposes, capital loss
carryforwards of $4,041,812 were 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 prior fiscal year
as if they arose on January 1, 1996.

Note 5 -- Purchases and Sales of Securities (in 000's):

22
<PAGE>

Note 6 -- Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1996* December 31, 1995
----------------- ------------------
<S> <C> <C> <C> <C>
Class A Class B Class A Class B
------- ------- ------- -------
Shares sold.......................................................... 1,686 10,641 2,135 14,247
Shares issued in reinvestment of distributions....................... -- -- 3 61
------- ------- ------- -------
1,686 10,641 2,138 14,308
Shares redeemed...................................................... 629 4,206 422 7,192
------- ------- ------- -------
Net increase 1,057 6,435 1,716 7,116
======= ======= ======= =======
</TABLE>

- --------
* Unaudited.

23
<PAGE>

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

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

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

# 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
- ------------------------------------------------------------------------------------------------------------------------------------

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
Government Fund [horizontal bar consistent with safety of principal current income and safety of principal
graph indicating primarily from U.S. government
risk/reward of securities ss.
fund]
- ------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

<S> <C> <C> <C>
Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund [horizontal bar exempt from regular federal bracket or want to pay less of your
graph indicating income tax# investment income to the IRS
risk/reward of
fund]
- ------------------------------------------------------------------------------------------------------------------------------------

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

A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.

25
<PAGE>

This page intentionally left blank
26
<PAGE>

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

semi-annual report
six months in review

fund results

& portfolio highlights

[LOGO] MainStay(R) Funds

- --------------------------------------------------------------------------------
UNAUDITED JUNE 30, 1996
- --------------------------------------------------------------------------------

OFFICERS & TRUSTEES

Alice T.Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer, and Trustee
Harry G. Hohn 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 W. Zuccaro Tax Vice President
A.Thomas Smith III Secretary

Dechert Price & Rhoads
Legal Counsel

[LOGO] MainStay(R) Funds

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] NEW YORK LIFE

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.

[RECYCLING SYMBOL] MSSAO5 (896)
<PAGE>

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

Chairperson's Letter 2

MainStay Convertible Fund Highlights
and Portfolio Managers' Comments 4

Returns & Lipper Rankings 7

Year-by-Year & Six-Month Performance 8

$10,000 Invested in the MainStay Convertible Fund
Class A Shares vs. S&P 500 and Inflation 8

$10,000 Invested in the MainStay Convertible Fund
Class B Shares vs. S&P 500 and Inflation 8

Top 10 Holdings 9

10 Largest Purchases 10

10 Largest Sales 10

Diversification by Industry -- Top 5 11

Portfolio Composition 11

Portfolio of Investments 12

Financial Statements 22

Notes to Financial Statements 26

The MainStay Funds 32
<PAGE>

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

Strategic security selection amid powerful economic forces and shifting market
perceptions -- this was the strategy that guided the management of the
MainStay(R) Convertible Fund for the six months ended June 30, 1996. As a
result, over this period, the Fund returned 6.16% and 5.78% for Class A and
Class B shares, respectively, excluding all sales charges.

A stronger economy -- good for stocks, challenging for bonds

Rising interest rates affected more than just bonds. They also led to price
corrections in financial and consumer nondurable stocks. Economically sensitive
sectors such as chemicals and consumer cyclicals showed sparks of progress
during the first quarter, which failed to ignite in the second. Retail stocks,
on the other hand, did well, based on strong consumer spending while health care
and technology stocks provided mixed results.

Positive results in international markets

Foreign equity markets lagged the U.S. during the first quarter of 1996, but
provided more competitive returns in the second. Latin America posted strong
gains and Japan showed signs of economic recovery, which boosted its equity
returns to 43.5% for the 12 months ended June 30, 1996. Small company funds did
well in European markets, as they did in the U.S. In all but a handful of
markets, foreign currencies declined against the U.S. dollar, led by weaknesses
in the Japanese yen and core European currencies. Foreign bonds outperformed
U.S. bonds during the reporting period, increasing the potential value of
international diversification.

2
<PAGE>

Fund strategies, results, and outlook

The MainStay Convertible Fund portfolio management team used active management
and careful security selection to identify opportunities with strong capital
appreciation and income potential. Continuing to trim our holdings among
financials and homebuilders in the first quarter helped performance as interest
rates rose. The portfolio managers maintained a highly defensive posture
throughout the reporting period, identifying strengths among selected
technology, retail, energy, and international issues, which benefited the
portfolio. Chubb, Hilton Hotels, and Home Shopping Network did well, but a few
technology holdings negatively impacted performance. The Fund's specific
strategies and performance results are discussed in greater detail in the Fund
managers' comments on the following pages.

While the positive results of the last six months can't tell us what will happen
next, they may help us form realistic expectations based on historical trends.
Viewed in this light, a more moderate second half would not come as a surprise.
Regardless of what the future holds, growth and income investors may benefit by
maintaining a long-range perspective and adding to their accounts over time.
Regular communication with your Registered Representative can help you cope with
volatility, make adjustments when warranted, and stay focused on the future.

Educating investors, celebrating a decade of service

MainStay celebrated its 10th anniversary as a Fund group in May, passing a major
milestone for seven of our Funds, including the Convertible Fund. It has been
our pleasure to serve you during the last six months, and we look forward to
continuing to do so for many years to come.

/s/ Alice T. Kane
Alice T. Kane
July 1996

----------
* See footnote on page 8 for more information
on the S&P 500.
+ Source: Ibbotson Associates.
++ Source: Investment Company Institute.

3
<PAGE>

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

Fund highlights for the six months ended June 30, 1996

o One-year total returns of 14.16% and 13.44% for Class A and Class B shares,
respectively, excluding all sales charges, as of 6/30/96
o Fund track record exceeded ten years
o Defensively well positioned as the market began its readjustment in June

For the six-month period ended June 30, 1996, the MainStay Convertible Fund
provided total returns of 6.16% and 5.78% for Class A and Class B shares,
respectively, excluding all sales charges. This compared to a 6.98% return for
the average Lipper* convertible securities fund over the same period.

In the first half of 1996, we found the convertible market overvalued and
maintained a defensive posture, with relatively large cash and Treasury
positions. While our defensive stance detracted from performance during the
first quarter, it also helped to protect the Fund from market declines on down
days. Although past performance is no guarantee of future results, on March 8,
when the market was down 300 basis points, the Fund's net asset value declined
by only 75 basis points.

Security and industry selection have been key factors in the Fund's performance.
In the first quarter, our decision to reduce our exposure to the financial and
homebuilding sectors contributed positively to performance as interest rates
rose. We added selectively to the technology and retail sectors, where we found
performance-boosting opportunities that met our strict risk/reward requirements.
In addition, we added some international issues, with a focus on Canada and
Japan. These holdings provided modest gains, while enhancing the diversity,
liquidity, and risk/reward characteristics of the portfolio.

Defensive posture
- --------------------------------------
Any action, such as holding large cash
reserves, taken to protect a portfolio
against anticipated market movements
which might prove to be unfavorable.

- ----------
* See footnote and chart on page 7
for more information on Lipper
Analytical Services, Inc.

4
<PAGE>

Although convertible securities were strong for much of the second quarter, the
market's strength evaporated in mid-June, when small capitalization stocks
experienced a pronounced correction. The NASDAQ Index was off as much as 10%
from its high point to its low point during this period. This volatility,
coupled with rising interest rates, minimized the downside protection the
convertible market typically enjoys in more favorable environments. During the
reporting period, we attempted to manage risk by maintaining strict liquidity
disciplines and following our strict diversification guidelines to limit the
Fund's exposure to any single issuer.

Our defensive cash position, which detracted from performance as the market
rose, helped somewhat during the correction. Although the convertible market was
strewn with "land mines" during this period, our careful security selection
helped us to avoid most of them. Nevertheless, three of our sizable technology
holdings, Applied Magnetics, Quantum, and Apple Computer, were hit especially
hard in June. Each was acquired at extremely attractive valuation levels and had
appreciated nicely. But Applied Magnetics and Quantum suffered from the slowdown
in disk drive demand and some problems with new technology, and Apple was hurt
by its continued restructuring and a general weakness in the personal computer
market. Looking ahead, both Applied Magnetics and Quantum have improved their
production efficiency and we believe their competitive advantages are still
compelling. We believe that Apple could be turned around by management or an
acquisition, either of which would be favorable for its bond and stock holders.
We are continuing to monitor the fundamental prospects for each of these issues.

Over the reporting period, energy issues, principally in natural gas,
contributed positively to performance. Despite general weakness among
financials, Chubb, our largest holding as of June 30, 1996, appreciated

Correction
- ---------------------------------------
A shift in security prices which brings
them more in line with historical
averages.

5
<PAGE>

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

over the reporting period. Hilton Hotels did well as it moved into the booming
casino market. Home Shopping Network also helped performance, based on a change
in management.

In light of rising interest rates, we still believe the convertible market as a
whole is overvalued. While the correction has wrung out some of the speculative
excesses, new issues have absorbed a great deal of previously available cash,
making supply and demand dynamics less favorable for the market as a whole.

Our active management strategy seeks to take advantage of shifting relative
values among stocks, convertibles, and short positions, pursuing incremental
gains that may contribute positively to overall performance. As we enter the
third quarter, we believe our biggest convertible holdings offer solid
risk/reward characteristics and potential for downside protection.

Denis Laplaige
Neil Feinberg
Portfolio Managers

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.

6
<PAGE>

- --------------------------------------------------------------------------------
RETURNS & LIPPER RANKINGS as of 6/30/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund average annual total returns*
- --------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/96
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 14.16% 17.89% 10.43% 10.39%
Class B 13.44% 17.68% 10.33% 10.30%
- --------------------------------------------------------------------------------

Fund SEC returns*
- --------------------------------------------------------------------------------
1 year 5 years 10 years
- --------------------------------------------------------------------------------
Class A 7.88% 16.56% 9.81%
Class B 8.44% 17.47% 10.33%

Fund per-share net asset values and distributions for the six months ended
6/30/96
- --------------------------------------------------------------------------------
NAV 6/30/96 Income Capital Gains
- --------------------------------------------------------------------------------
Class A $14.01 $0.2660 $0.0000
Class B $14.00 $0.2260 $0.0000
- --------------------------------------------------------------------------------
</TABLE>

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%.

7
<PAGE>

[The following table was presented as a bar graph in the printed document]

<TABLE>
<CAPTION>
Total
Return
Period-end %
---------- ------
<S> <C>
12/86 1.03
12/87 -8.58
12/88 9.78
12/89 6.74
12/90 -6.70
12/91 48.47
12/92 13.11
12/93 24.47
12/94 -1.34
12/95 23.72 Class A
12/95 23.02 Class B
6/96 6.16 Class A
6/96 5.78 Class B
</TABLE>

- ----------
Returns are for Class B shares unless otherwise noted. See footnote * on
page 7 for more information on performance.

- --------------------------------------------------------------------------------
$10,000 INVESTED IN THE MAINSTAY CONVERTIBLE
FUND VS. S&P 500 AND INFLATION
- --------------------------------------------------------------------------------

[The following tables were presented as line graphs in the printed document]

<TABLE>
<CAPTION>
Class A Shares
S&P Convertible
Period-end 500++ Inflation ss. Fund
---------- ----- ------------- ----
<S> <C> <C> <C>
5/1/86 10,000 10,000 9,450
12/86 10,550 10,175 9,547.15
12/87 11,097 10,626 8,728.11
12/88 12,927 11,096 9,581.83
12/89 17,011 11,611 10,227.74
12/90 16,481 12,320 9,542.80
12/91 21,481 12,698 14,168.20
12/92 23,115 13,066 16,025.12
12/93 25,435 13,425 19,946.02
12/94 25,780 13,785 19,678.87
12/95 35,433 14,134 24,345.94
6/96 39,004 14,420 25,884.90
</TABLE>

<TABLE>
<CAPTION>
Class B Shares
S&P Convertible
Period-end 500++ Inflation ss. Fund
---------- ----- ------------- ----
<S> <C> <C> <C>
5/1/86 10,000 10,000 10,000
12/86 10,550 10,175 10,102.80
12/87 11,097 10,626 9,236.10
12/88 12,927 11,096 10,139.50
12/89 17,011 11,611 10,823.00
12/90 16,481 12,320 10,098.20
12/91 21,481 12,698 14,992.80
12/92 23,115 13,066 16,957.80
12/93 25,435 13,425 21,106.90
12/94 25,780 13,785 20,824.20
12/95 35,433 14,134 25,618.60
6/96 39,004 14,420 27,099.50
</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. 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.

ss.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.

8
<PAGE>

- --------------------------------------------------------------------------------
TOP 10 HOLDINGS as of 6/30/96
- --------------------------------------------------------------------------------

Holding $ Amount
<S> <C>
Chubb Corp. (Euro), 6.00%, due 5/15/98 $35,072,200

Cooper Industries, Inc., 7.05%, due 1/1/15 28,438,458

Apple Computer, Inc., 6.00%, due 6/1/01 18,335,625

Delta Air Lines, Inc., $3.50, Series C 13,746,600

Hollinger, Inc., Series US, (zero coupon), due 10/5/13 11,420,150

Amway Japan Ltd., $1.44, Premium Exchangeable Participating Shares 11,175,125

Unisys Corp., 8.25%, due 3/15/06 10,351,800

Hilton Hotels Corp., 5.00%, due 5/15/06 9,904,500

Chubb Corp. Common Stock 8,778,000

RPM, Inc. of Ohio, (zero coupon), due 9/30/12 7,766,000
</TABLE>

Note: This breakdown is provided for information 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. 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 "Portfolio of Investments" for
specific type of security held.

9
<PAGE>

Security Amount of purchase
<S> <C>
Chubb Corp.(Euro), 6.00%, due 5/15/98 and Common Stock $40,263,562

Apple Computer, Inc., 6.00%, due 6/1/01 and Common Stock 34,434,938

Cooper Industries, Inc., 7.05%, due 1/1/15, 6.00% Preferred Stock and Common Stock 26,739,453

Quantum Corp., 5.00%, due 3/1/03, 6.375%, due 4/1/02 and Common Stock 25,311,689

Time Warner, Inc., (zero coupon), due 6/22/13, (zero coupon), due 12/17/12 and $1.24
Preferred Stock 22,791,328

Unisys Corp., 8.25%, due 3/15/06 and 8.25%, due 8/1/00 20,932,150

Hasbro, Inc., 6.00%, due 11/15/98 and Common Stock 20,008,344

Conseco, Inc., 6.50%, Series D Preferred Stock, 7.00%, Series E Preferred Stock and
Common Stock 18,807,661

AMR Corp., 6.125%, due 11/1/24 and Common Stock 18,659,190

Solectron Corp., 6.00%, due 3/1/06 and Common Stock 15,315,430
</TABLE>

Security Amount of sale
<S> <C>
Chubb Corp. (Euro), 6.00%, due 5/15/98 and Common Stock $28,922,497

Hasbro, Inc., 6.00%, due 11/15/98 and Common Stock 20,479,227

Time Warner, Inc., (zero coupon), due 6/22/13, $1.24 Preferred Stock and Common Stock 20,258,676

AMR Corp., 6.125%, due 11/1/24 and Common Stock 20,073,204

TJX Companies, Inc., $3.125, Series C Preferred Stock and Common Stock 18,810,117

Quantum Corp., 5.00%, due 3/1/03, 6.375%, due 4/1/02 and Common Stock 17,824,520

Conseco, Inc., 6.50%, Series D Preferred Stock, 7.00%, Series E Preferred Stock
and Common Stock 17,764,746

Unisys Corp., 8.25%, due 3/15/06, 8.25%, due 8/1/00 and Common Stock 16,200,818

Apple Computer, Inc., 6.00%, due 6/1/01 and Common Stock 15,708,934

Cooper Industries, Inc., 7.05%, due 1/1/15, 6.00% Preferred Stock and Common Stock 15,122,356
</TABLE>

10
<PAGE>

Computers & Office Equipment.................. 10.6%
Insurance..................................... 9.4%
Retail........................................ 4.6%
[PIE CHART] Media......................................... 4.3%
Capital Goods................................. 4.1%
All Other..................................... 67.0%
</TABLE>

Convertible Bonds............................. 41.1%
Common Stocks................................. 19.7%
Convertible Preferred Stocks.................. 14.5%
[PIE CHART] Cash & Equivalents............................ 13.3%
U.S. Governments.............................. 8.2%
Corporate Bonds............................... 2.4%
Preferred Stocks.............................. 0.6%
Warrants...................................... 0.2%
</TABLE>

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

11
<PAGE>

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

Principal
Amount Value
--------------------------------
<S> <C> <C>
CONVERTIBLE SECURITIES (55.6%)+
BONDS (41.1%)

AIRLINES (0.3%)
Alaska Air Group
6.875%, due 6/15/14 .................... $ 2,000,000 $ 1,960,000
-------------

BANKS (0.9%)
Mitsubishi Bank Limited
International Finance
(Bermuda) Trust
3.00%, due 11/30/02 .................... 4,000,000 4,660,000
Sumitomo Bank International
0.75%, due 5/31/01 ..................... (Y)175,000,000 1,723,050
-------------
6,383,050
-------------

BUILDING MATERIALS (0.5%)
Lafarge Corp.
7.00%, due 7/1/13 ...................... $ 3,200,000 3,392,000
-------------

BUILDINGS (1.2%)
Toll Corp.
4.75%, due 1/15/04 ..................... 1,530,000 1,461,150
U.S. Home Corp.
4.875%, due 11/1/05 .................... 7,950,000 7,095,375
-------------
8,556,525
-------------

CAPITAL GOODS (4.1%)
Cooper Industries, Inc.
7.05%, due 1/1/15 ...................... 26,393,000 28,438,458
-------------

CELLULAR TELEPHONE (0.3%)
U.S. Cellular Corp.
(zero coupon), due 6/15/15 ............. 5,600,000 1,862,000
-------------

CHEMICALS (1.1%)
RPM, Inc. of Ohio
(zero coupon), due 9/30/12 ............. 17,650,000 7,766,000
-------------

COMPUTERS & OFFICE EQUIPMENT (8.7%)
Apple Computer, Inc.
6.00%, due 6/1/01 ...................... 19,250,000 18,335,625
Applied Magnetics Corp.
7.00%, due 3/15/06 (c) ................. 8,000,000 7,320,000
Comptronix Corp.
6.75%, due 3/1/02 ...................... 600,000 330,000
EMC Corp.
4.25%, due 1/1/01 ...................... 5,000,000 5,400,000
Inacom Corp.
6.00%, due 6/15/05 ..................... 5,500,000 5,527,500
Quantum Corp.
5.00%, due 3/1/03 (c) .................. 1,250,000 1,150,000
6.375%, due 4/1/02 ..................... 7,300,000 7,446,000
Safeguard Scientifics, Inc.
6.00%, due 2/1/06 (c) .................. 2,775,000 3,774,000
Unisys Corp.
8.25%, due 3/15/06 ..................... 8,520,000 10,351,800
-------------
59,634,925
-------------

CONGLOMERATES (0.7%)
Mitsubishi Corp., Series 4
1.60%, due 9/30/96 ..................... (Y)541,000,000 5,055,645
-------------

CONSUMER SERVICES (0.8%)
ADT Operations, Inc.
(zero coupon), due 7/6/10 (e) .......... $ 7,000,000 3,937,500
Laidlaw, Inc. (ADT Ltd.)
6.00%, due 1/15/99 (c) ................. 1,500,000 1,867,500
-------------
5,805,000
-------------

CONSUMER STAPLES (0.2%)
American Brands, Inc. (Euro)
7.75%, due 6/15/02 ..................... 950,000 1,520,503
-------------

DRUGS (0.7%)
Alza Corp.
5.00%, due 5/1/03 ...................... 2,625,000 2,552,813
North American Vaccine, Inc.
6.50%, due 5/1/03 ...................... 2,000,000 1,935,000
-------------
4,487,813
-------------

ELECTRICAL EQUIPMENT (1.0%)
C-Cube Microsystems, Inc.
5.875%, due 11/1/05 .................... 500,000 607,460
California Microwave, Inc.
5.25%, due 12/15/03 .................... 1,500,000 1,286,250
Cypress Semiconductor Corp.
3.15%, due 3/15/01(c)(e) .............. 4,900,000 4,679,500
-------------
6,573,210
-------------

ENERGY (0.5%)
Pennzoil Co.
6.50%, due 1/15/03 ...................... 2,500,000 3,575,000
-------------
</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.

12
<PAGE>

Principal
Amount Value
--------------------------------
<S> <C> <C>
BONDS (Continued)

FINANCIAL SERVICES (0.3%)
Cityscape Financial Corp.
6.00%, due 5/1/06 ...................... $ 2,000,000 $ 2,230,000
-------------

HEALTH CARE (0.7%)
Phoenix Shannon, Plc ADR
9.50%, due 11/1/00 (c)(f) .............. 2,500,000 2,475,000
Quintiles Transnational Corp.
4.25%, due 5/31/00 ..................... 2,550,000 2,556,375
-------------
5,031,375
-------------

HOUSEHOLD PRODUCTS (0.6%)
Whirlpool Corp.
(zero coupon), due 5/14/11 ............. 10,200,000 3,952,500
-------------

INSURANCE (6.5%)
Chubb Corp. (Euro)
6.00%, due 5/15/98 ..................... 29,230,000 35,072,200
Fidelity National Financial, Inc.
(zero coupon), due 2/15/09 ............. 3,525,000 1,581,844
Fremont General Corp.
(zero coupon), due 10/12/13 ............ 7,085,000 3,294,525
Italy Province (Republic of)
5.00%, due 6/28/01 ..................... 2,500,000 2,550,000
USF&G Corp.
(zero coupon), due 3/3/09 (e) .......... 3,800,000 2,256,250
-------------
44,754,819
-------------

MEDIA (1.0%)
Time Warner, Inc.
(zero coupon), due 12/17/12 ............ 5,000,000 1,787,500
(zero coupon), due 6/22/13 ............. 13,000,000 5,378,750
-------------
7,166,250
-------------

MEDICAL EQUIPMENT (0.5%)
RoTech Medical Corp.
5.25%, due 6/1/03 ...................... 3,500,000 3,342,500
-------------

MINING (0.2%)
Stillwater Mining Co.
7.00%, due 5/1/03 ...................... 1,200,000 1,272,000
-------------

OIL SERVICES (0.5%)
Nabors Industries, Inc.
5.00%, due 5/15/06 ..................... 2,200,000 2,447,500
Valhi (Dresser), Inc.
(zero coupon), due 10/20/07 ............ 3,000,000 1,290,000
-------------
3,737,500
-------------

PAPER & FOREST PRODUCTS (0.3%)
Repap Enterprises, Inc.
8.50%, due 8/1/97 ...................... 2,000,000 1,965,000
-------------

POLLUTION & RELATED (0.2%)
United Waste Systems, Inc.
4.50%, due 6/1/01 ...................... 1,000,000 1,087,500
-------------

PUBLISHING (1.7%)
Hollinger, Inc.
Series US
(zero coupon), due 10/5/13 (e) ......... 34,090,000 11,420,150
-------------

RECREATION & ENTERTAINMENT (0.4%)
Alliance Gaming Corp.
7.50%, due 9/15/03 ..................... 1,800,000 1,260,000
Turner Broadcasting System, Inc.
(zero coupon), due 2/13/07 (c) ......... 3,000,000 1,406,250
-------------
2,666,250
-------------

RESTAURANTS & LODGING (1.9%)
Chock Full O' Nuts Corp.
7.00%, due 4/1/12 ...................... 1,700,000 1,472,625
Hilton Hotels Corp.
5.00%, due 5/15/06 ..................... 9,300,000 9,904,500
UBS Finance Delaware, Inc.
Series MTN
2.00%, due 12/15/00 .................... 1,425,000 1,403,625
-------------
12,780,750
-------------

RETAIL (3.8%)
Baker (J.), Inc.
7.00%, due 6/1/02 ...................... 1,450,000 1,208,937
Federated Department Stores
5.00%, due 10/1/03 ..................... 2,200,000 2,464,000
Home Shopping Network, Inc.
5.875%, due 3/1/06 (c) ................. 6,000,000 6,990,000
Michaels Stores, Inc.
6.75%, due 1/15/03 (e) ................. 8,850,000 7,533,563
Price Co.
5.50%, due 2/28/12 ..................... 1,625,000 1,700,156
6.75%, due 3/1/01 ...................... 1,625,000 1,755,000
Rite Aid Corp.
(zero coupon), due 7/24/06 ............. 3,000,000 1,563,750
</TABLE>

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

13
<PAGE>

Principal
Amount Value
--------------------------------
<S> <C> <C>
BONDS (Continued)

RETAIL (Continued)
Staples, Inc.
4.50%, due 10/1/00 (c) ................. $ 750,000 $ 819,375
Waban, Inc.
6.50%, due 7/1/02 ...................... 1,800,000 1,989,000
-------------
26,023,781
-------------

TECHNOLOGY (1.3%)
Altera Corp.
5.75%, due 6/15/02 (c) ................. 2,350,000 2,350,000
DII Group, Inc.
6.00%, due 10/15/02 (c) ................ 1,750,000 1,680,000
SCI Systems, Inc.
5.00%, due 5/1/06 ...................... 3,750,000 3,909,375
Solectron Corp.
6.00%, due 3/1/06 (c) .................. 450,000 411,750
Storage Technology Corp.
8.00%, due 5/31/15 ..................... 250,000 300,000
-------------
8,651,125
-------------

TELECOMMUNICATION EQUIPMENT (0.2%)
BroadBand Technologies, Inc.
5.00%, due 5/15/01 ..................... 1,500,000 1,481,250
-------------

TELECOMMUNICATION SERVICES (0.0%) (b)
Rogers Communications, Inc.
2.00%, due 11/26/05 .................... 500,000 258,750
-------------
Total Convertible Bonds
(Cost $277,530,095) .................... 282,831,629
-------------

Shares
------

PREFERRED STOCKS (14.5%)

AIRLINES (2.5%)
Delta Air Lines, Inc.
$3.50, Series C (e) .................... 218,200 13,746,600
USAir Group, Inc.
$4.375, Series B ....................... 59,500 3,160,938
-------------
16,907,538
-------------

AUTO PARTS (0.3%)
MascoTech, Inc.
$1.20 (i1) ............................. 122,800 1,842,000
-------------

BANKS (0.7%)
Banc One Corp.
$3.50, Series C ........................ 22,500 1,501,875
First Union Corp.
$2.15, Series B ........................ 8,000 514,000
Rochester Community Savings
Bank Financial, Inc.
7.00%, Series B ........................ 12,000 480,000
Union Planters Corp.
8.00%, Series E ........................ 45,800 1,740,400
Washington Mutual Savings Bank
$6.00, Series D ........................ 7,000 819,000
-------------
5,055,275
-------------

CABLE (0.8%)
Cablevision Systems Corp.
8.50%, Series I (i2) ................... 96,700 2,514,200
TCI Communications, Inc.
$2.125, Series A ....................... 75,000 3,309,375
-------------
5,823,575
-------------

CAPITAL GOODS (0.0%) (b)
Cooper Industries, Inc.
6.00% .................................. 3,500 58,625
-------------

CHEMICALS (0.1%)
Arcadian Corp.
9.50%, Series A ........................ 18,500 367,687
-------------

CONGLOMERATES (0.6%)
Corning Delaware L.P.
6.00% (e) .............................. 54,500 3,113,313
Kaman Corp.
6.50%, Series 2 ........................ 13,000 676,000
-------------
3,789,313
-------------

DOMESTIC OIL & GAS (0.6%)
Enron Corp.
6.25% .................................. 159,000 4,114,125
-------------

DOMESTIC OILS (1.7%)
Occidental Petroleum Corp.
$3.875 (c) ............................. 87,000 5,176,500
Parker & Parsley Capital LLC
6.25% (c) .............................. 69,500 3,787,750
Snyder Oil Corp.
$1.50 (i3) ............................. 72,000 1,368,000
Valero Energy Corp.
$3.125 .................................. 25,000 1,312,500
-------------
11,644,750
-------------

</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 (unaudited) continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

Shares Value
--------------------------------
<S> <C> <C>
PREFERRED STOCKS (Continued)

ELECTRICAL EQUIPMENT (0.5%)
Elsag Bailey Process Automation N.V
5.50% .................................. 70,000 $ 3,482,500
-------------

ENERGY (0.2%)
Unocal Corp
7.00% (c) .............................. 25,000 1,412,500
-------------

FINANCIAL SERVICES (0.0%) (b)
Aon Corp.
6.25% .................................. 5,000 318,750
-------------

FOOD, BEVERAGES & TOBACCO (0.3%)
Chiquita Brands International, Inc.
$2.875, Series A (e) ................... 52,500 2,362,500
-------------

HEALTH CARE (0.1%)
FHP International Corp.
5.00%, Series A ........................ 25,000 637,500
-------------

HOUSEHOLD PRODUCTS (1.6%)
Amway Japan Limited PEPS
$1.44 (h) .............................. 529,000 11,175,125
-------------

INSURANCE (0.8%)
Conseco, Inc.
6.50%, Series D ........................ 83,000 5,218,625
-------------

OIL SERVICES (0.3%)
Noble Drilling Corp.
$1.50 .................................. 65,800 2,319,450
-------------

PAPER & FOREST PRODUCTS (0.9%)
International Paper Co.
5.25% .................................. 104,600 4,628,550
James River Corp. of Virginia
9.00%, Series P (i4) ................... 32,500 820,625
Sonoco Products Co.
$2.25, Series A ........................ 9,000 542,250
-------------
5,991,425
-------------

REAL ESTATE (0.2%)
Security Capital Pacific Trust
$1.75, Series A ........................ 54,700 1,435,875
-------------

RETAIL (0.2%)
Kmart Financing I
7.75% .................................. 7,300 192,538
Venture Stores, Inc.
$3.25 (i5) ............................. 18,900 1,025,325
-------------
1,217,863
-------------

STEEL, ALUMINUM & OTHER METALS (1.7%)
Bethlehem Steel Corp.
$3.50 (c) .............................. 107,000 4,453,875
Reynolds Metals Co.
7.00% .................................. 64,500 2,991,187
WHX Corp.
$3.75, Series B ........................ 26,400 1,118,700
6.50%, Series A ........................ 75,400 3,147,950
-------------
11,711,712
-------------

TELECOMMUNICATION SERVICES (0.1%)
Mobile Telecommunication
Technologies Corp.
$2.25 (c) .............................. 31,500 767,812
-------------

TELEPHONE UTILITIES (0.2%)
Nortel Inversora, S.A
10.00% (n) ............................. 30,000 1,380,000
-------------

TRANSPORTATION (0.1%)
Arkansas Best Corp.
$2.875, Series A ....................... 24,000 771,000
-------------

Total Preferred Stocks
(Cost $95,088,822) ..................... 99,805,525
-------------

Total Convertible Securities
(Cost $372,618,917) .................... 382,637,154
-------------

Principal
Amount
---------

CORPORATE BONDS (2.4%)

BUILDINGS (0.0%)(b)
UDC Homes, Inc.
(zero coupon), due 11/1/00
(a)(d)(g) .............................. $ 18,799 4,700
-------------

COMPUTERS & OFFICE EQUIPMENT (0.2%)
Businessland, Inc.
5.50%, due 3/1/07 ...................... 1,965,000 1,296,900
-------------

</TABLE>

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

15
<PAGE>

Principal
Amount Value
--------------------------------
<S> <C> <C>
CORPORATE BONDS (Continued)

INSURANCE (0.2%)
Statesman Group, Inc.
6.25%, due 5/1/03 ...................... $ 1,500,000 $ 1,533,750
-------------

MEDIA (2.0%)
American Media, Inc.
(zero coupon), due 5/15/97 ............. 3,250,000 2,916,875
Park Communications, Inc.
13.75%, due 5/15/04 (k)(l) ............. 2,000,000 2,100,000
Park Newspapers, Inc.
11.875%, due 5/15/04 ................... 4,100,000 4,141,000
Spanish Broadcasting System, Inc.
7.50%, due 6/15/02
12.50%, beginning 6/15/97 .............. 500,000 495,000
12.25%, due 6/1/01(c) .................. 3,862,000 3,862,000
-------------
13,514,875
-------------

Total Corporate Bonds
(Cost $15,814,136) ..................... 16,350,225
-------------

U.S. GOVERNMENT (8.2%)

United States Treasury Bond (2.6%)
6.00%, due 2/15/26 ..................... 20,000,000 17,734,400
-------------

United States Treasury Notes (5.6%)
5.625%, due 11/30/00 ................... 5,000,000 4,842,950
5.625%, due 2/28/01 .................... 4,000,000 3,865,640
6.25%, due 4/30/01 ..................... 30,000,000 29,714,100
-------------
38,422,690
-------------
Total U.S. Government
(Cost $56,060,482) ..................... 56,157,090
-------------

Shares
------

COMMON STOCKS (19.7%)

AEROSPACE (0.2%)
Orbital Sciences Corp. (a) ............... 95,950 1,559,187
-------------

AIRLINES (0.4%)
AMR Corp. (a) ............................ 25,982 2,364,362
Delta Air Lines, Inc. .................... 6,340 526,220
-------------
2,890,582
-------------

AUTO MANUFACTURING (0.1%)
General Motors Corp., Class H ............ 13,000 781,625
-------------

BANKS (0.3%)
Barnett Banks, Inc. ...................... 24,528 1,496,208
National City Corp. ...................... 8,343 293,057
Summit Bancorp ........................... 15,800 554,975
-------------
2,344,240
-------------

BUILDINGS (0.2%)
Toll Brothers, Inc. (a) .................. 22,500 368,437
U.S. Home Corp. (a) ...................... 47,900 1,179,538
-------------
1,547,975
-------------

CASINOS (0.3%)
Aztar Corp. (a) .......................... 150,000 1,725,000
MGM Grand, Inc. (a) ...................... 10,000 398,750
-------------
2,123,750
-------------

CHEMICALS (0.3%)
Lubrizol Corp. ........................... 60,000 1,822,500
Tetra Technologies, Inc. (a) ............. 33,100 575,112
-------------
2,397,612
-------------

COMPUTERS & OFFICE EQUIPMENT (1.7%)
3DO Company, (The) (a) ................... 122,000 1,296,250
Acxiom Corp. (a) ......................... 11,700 399,263
American Management Systems
Inc. (a) ............................... 25,000 731,250
AmeriData Technologies, Inc. (a) ......... 74,800 1,187,450
Apple Computer, Inc. (a) ................. 78,400 1,646,400
Applied Magnetics Corp. (a) .............. 42,200 443,100
Cablevision Systems Corp.
Class A (a) ............................ 10,000 462,500
Computer Products, Inc. (a) .............. 42,800 732,950
Compuware Corp. (a) ...................... 34,500 1,362,750
Electro Scientific Industries, Inc. (a) .. 15,100 317,100
FSI International, Inc. (a) .............. 15,000 189,375
LAM Research Corp. (a) ................... 24,400 634,400
Oracle Corp. (a) ......................... 20,000 788,750
Sequent Computer Systems, Inc. (a) ....... 40,000 540,000
Spyglass, Inc. (a) ....................... 19,500 418,031
Viewlogic Systems, Inc. (a) .............. 48,000 666,000
-------------
11,815,569
-------------

CONGLOMERATES (0.4%)
Hanson, Plc ADR (f) ...................... 209,400 2,983,950
-------------

DOMESTIC OILS (0.7%)
Ashland, Inc. ............................ 30,000 1,188,750
Horsham Corp. ............................ 130,000 1,803,750
Santa Fe Energy Resources, Inc. (a) ...... 90,500 1,074,687
Valero Energy Corp. ...................... 20,000 500,000
-------------
4,567,187
-------------

</TABLE>

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

16
<PAGE>

Shares Value
--------------------------------
<S> <C> <C>
COMMON STOCKS (Continued)

DRUGS (0.3%)
Regeneron Pharmaceuticals, Inc. (a) ...... 82,000 $ 1,424,750
Teva Pharmaceutical Industries
Limited ADR (f) ........................ 4,400 166,650
Vertex Pharmaceuticals, Inc. (a) ......... 8,000 243,000
-------------
1,834,400
-------------

ELECTRIC UTILITIES (1.0%)
Huaneng Power
International, Inc. ADR (a)(f) ......... 32,000 572,000
Peco Energy Co. .......................... 127,000 3,302,000
Western Resources, Inc. .................. 100,000 2,987,500
-------------
6,861,500
-------------

ELECTRICAL EQUIPMENT (1.6%)
Alcatel Alsthom CGE ADR (f) .............. 26,900 474,112
C-Cube Microsystems, Inc. (a) ............ 8,550 282,150
Cypress Semiconductor Corp. (a) .......... 101,000 1,212,000
ESS Technology, Inc. (a) ................. 16,300 301,550
Kemet Corp. (a) .......................... 32,900 658,000
Lexmark International Group, Inc.
Class A (a) ............................ 50,000 1,006,250
Linear Technology Corp. .................. 13,000 390,000
LTX Corp. (a) ............................ 135,500 846,875
Mattson Technology, Inc. (a) ............. 10,000 106,250
Solectron Corp. (a) ...................... 37,400 1,416,525
Varian Associates, Inc. .................. 22,000 1,138,500
Wisconsin Energy Corp. ................... 43,400 1,253,175
Zilog, Inc. (a) .......................... 46,400 1,113,600
Zygo Corp. (a) ........................... 16,700 730,625
-------------
10,929,612
-------------

ENERGY (0.7%)
Chevron Corp. ............................ 45,000 2,655,000
Seagull Energy Corp. (a) ................. 29,200 730,000
Unocal Corp. ............................. 48,000 1,620,000
-------------
5,005,000
-------------

FINANCE (0.1%)
Golden West Financial Corp. .............. 12,500 700,000
-------------

FINANCIAL SERVICES (0.1%)
Cityscape Financial Corp. (a) ............ 8,000 410,000
Paychex, Inc. ............................ 12,000 577,500
-------------
987,500
-------------

FOOD, BEVERAGES & TOBACCO (0.1%)
Chiquita Brands International, Inc. ...... 37,000 481,000
-------------

GAS UTILITIES (0.0%)(b)
United Gas Holdings Corp. (a)(d) ......... 29,712 50,510
-------------

HEALTH CARE (1.3%)
Coventry Corp. (a) ....................... 20,000 315,000
FPA Medical Management, Inc. (a) ......... 81,000 1,260,563
Health Management Systems
Inc. (a) ............................... 21,400 679,450
Health Systems International, Inc.
Class A (a) ............................ 37,500 1,017,187
Integrated Health Services, Inc. ......... 60,000 1,425,000
Regency Health Services, Inc. (a) ........ 155,200 1,765,400
Vencor, Inc. (a) ......................... 91,000 2,775,500
-------------
9,238,100
-------------

HOME BUILDING (0.2%)
Kaufman & Broad Home Corp. ............... 90,800 1,316,600
-------------

HOUSEHOLD PRODUCTS (0.1%)
Newell Co. ............................... 30,000 918,750
-------------

INSURANCE (1.9%)
Chubb Corp. .............................. 176,000 8,778,000
Conseco, Inc. ............................ 20,000 800,000
Fidelity National Financial, Inc. ........ 45,000 680,625
Mid Ocean Limited (j) .................... 12,800 524,800
Transatlantic Holdings, Inc. ............. 10,800 757,350
USF&G Corp. .............................. 87,500 1,432,813
-------------
12,973,588
-------------

MACHINERY (0.1%)
Applied Materials, Inc. (a) .............. 16,800 512,400
-------------

MEDIA (0.5%)
Merrill Lynch "Cox" (m) .................. 149,500 3,307,688
-------------

MEDICAL EQUIPMENT (0.7%)
American Medical Response, Inc. .......... 25,000 881,250
Biomet, Inc. (a) ......................... 37,000 531,875
Fisher Scientific International, Inc. .... 28,469 1,067,588
Guidant Corp. ............................ 10,000 492,500
Stryker Corp. ............................ 18,400 418,600
Ventritex, Inc. (a) ...................... 25,000 428,125
-------------
3,819,938
-------------

</TABLE>

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

17
<PAGE>

Shares Value
--------------------------------
<S> <C> <C>
COMMON STOCKS (Continued)

MINING (0.8%)
Battle Mountain Gold Co. ................. 468,800 $ 3,398,800
Freeport-McMoRan Copper &
Gold, Inc., Class A .................... 7,200 215,100
Placer Dome, Inc. ........................ 50,000 1,193,750
TVX Gold, Inc. (a) ....................... 100,000 725,000
-------------
5,532,650
-------------

OIL SERVICES (0.7%)
Falcon Drilling Company, Inc. (a) ........ 45,000 1,220,625
Global Marine, Inc. (a) .................. 52,700 731,212
McDermott International, Inc. ............ 30,000 626,250
Noble Drilling Corp. (a) ................. 50,000 693,750
Oceaneering International, Inc. (a) ...... 90,500 1,368,813
-------------
4,640,650
-------------

PAPER & FOREST PRODUCTS (0.4%)
Alco Standard Corp. ...................... 7,400 334,850
Georgia-Pacific Corp. .................... 25,000 1,775,000
International Paper Co. .................. 20,000 737,500
-------------
2,847,350
-------------

POLLUTION & RELATED (0.2%)
Sanifill, Inc. (a) ....................... 28,488 1,403,034
-------------

PUBLISHING (0.2%)
Banta Corp. .............................. 17,600 444,400
Times Mirror Co., Class A ................ 20,400 887,400
-------------
1,331,800
-------------

REAL ESTATE (0.5%)
Meditrust Corp. .......................... 50,000 1,668,750
Simon Property Group, Inc. ............... 66,700 1,634,150
-------------
3,302,900
-------------

RECREATION & ENTERTAINMENT (0.0%)(b)
WMS Industries, Inc. (a) ................. 10,000 246,250
-------------

RESTAURANTS & LODGING (0.5%)
Buffets, Inc. (a) ........................ 153,000 1,874,250
ITT Corp. (a) ............................ 15,000 993,750
Promus Hotel Corp. (a) ................... 14,000 414,750
-------------
3,282,750
-------------

RETAIL (0.6%)
Autozone, Inc. (a) ....................... 20,000 695,000
Dillard Department Stores, Inc.
Class A ................................ 10,000 365,000
Home Shopping Network, Inc. (a) .......... 84,900 1,018,800
Michaels Stores, Inc. (a) ................ 26,300 447,100
Pier 1 Imports, Inc. ..................... 52,600 782,425
Whole Foods Market, Inc. (a) ............. 25,500 675,750
-------------
3,984,075
-------------

SERVICES (0.1%)
Sylvan Learning Systems, Inc. (a) ........ 9,900 373,725
-------------

STEEL, ALUMINUM & OTHER METALS (0.6%)
Allegheny Ludlum Corp. ................... 87,000 1,642,125
J&L Specialty Steel, Inc. ................ 33,700 501,288
Kaiser Aluminum Corp. (a) ................ 37,953 417,483
Reynolds Metals Co. ...................... 13,900 724,537
Santa Fe Pacific Gold Corp. .............. 21,000 296,625
WHX Corp. (a) ............................ 40,000 365,000
-------------
3,947,058
-------------

TECHNOLOGY (0.2%)
Liposome Co., Inc. (a) ................... 71,700 1,344,375
Micron Technology, Inc. .................. 10,000 258,750
-------------
1,603,125
-------------

TELECOMMUNICATION EQUIPMENT (0.6%)
ADC Telecommunications, Inc. (a) ......... 19,200 864,000
Brightpoint, Inc. (a) .................... 7,000 150,500
BroadBand Technologies, Inc. (a) ......... 9,500 306,375
Clearnet Communications, Inc.
Class A (a) ............................ 50,000 837,500
General DataComm Industries
Inc. (a) .............................. 49,200 664,200
Philips Electronics N.V.-N.Y. ADR (f) .... 20,000 652,500
Teltrend, Inc. (a) ....................... 20,700 802,125
-------------
4,277,200
-------------

TELECOMMUNICATION SERVICES (0.5%)
Geotek Communications, Inc. (a) .......... 37,000 506,438
Mobile Telecommunication
Technologies Corp. (a) ................. 15,000 219,375
Rogers Communications, Inc.
Class B (a) ............................ 193,000 1,808,892
Tele-Communications, Inc.
Class A (a) ............................ 40,000 725,000
-------------
3,259,705
-------------

</TABLE>

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

18
<PAGE>

Shares Value
--------------------------------
<S> <C> <C>
COMMON STOCKS (Continued)

TEXTILE & APPAREL (0.5%)
Albany International Corp., Class A ...... 10,400 $ 235,300
Burlington Industries, Inc. (a) .......... 102,000 1,440,750
Fieldcrest Cannon, Inc. (a) .............. 6,300 123,638
Gucci Group N.V.-NY ...................... 28,000 1,806,000
-------------
3,605,688
-------------

TRANSPORTATION (0.0%)(b)
USAir Group, Inc. (a) .................... 7,500 135,000
-------------

TURNKEY & SOFTWARE SYSTEMS(0.0%)(b)
Electronic Arts, Inc. (a) ................ 8,000 214,000
-------------

Total Common Stocks
(Cost $138,773,744) .................... 135,935,223
-------------

PREFERRED STOCK (0.6%)

MEDIA (0.6%)
Spanish Broadcasting System, Inc.
Series A (a)(c) ........................ 4,138 3,848,340
-------------

Total Preferred Stock
(Cost $3,635,300) ...................... 3,848,340
-------------

WARRANTS (0.2%)

MEDIA (0.2%)
Spanish Broadcasting System, Inc.
expire 6/29/99 (a)(c) .................. 5,027 904,860
expire 6/30/99 (a) ..................... 2,200 396,000
-------------
1,300,860
-------------

Total Warrants
(Cost $765,050) ........................ 1,300,860
-------------

Principal
Amount
---------

SHORT-TERM INVESTMENTS (12.6%)

COMMERCIAL PAPER (9.7%)
American Express Credit Corp.
5.374%, due 7/1/96 ..................... $ 34,000,000 34,000,000
Ford Motor Credit Corp.
5.423%, due 7/2/96 ..................... 33,216,000 33,216,000
-------------
67,216,000
-------------

U.S. GOVERNMENT (2.9%)
United States Treasury Bill
(zero coupon), due 8/8/96 .............. 20,000,000 19,898,000
-------------

Total Short-Term Investments
(Cost $87,113,531) ..................... 87,114,000
-------------

Total Investments
(Cost $674,781,160) (o) ................ 99.3% 683,342,892(p)
Cash and Other Assets,
Less Liabilities ....................... 0.7 4,591,079
----- -------------
Net Assets ............................... 100.0% $ 687,933,971
===== =============

Shares
------

SHORT POSITIONS (-15.9%)
COMMON STOCKS (-15.9%)

AIRLINES (-2.1%)
Delta Air Lines, Inc. .................... (170,000) (14,110,000)
-------------

BANKS (-0.2%)
Banc One Corp. ........................... (33,000) (1,122,000)
-------------

BUILDINGS (-0.6%)
Toll Brothers, Inc. (a) .................. (57,100) (935,013)
U.S. Home Corp. (a) ...................... (120,900) (2,977,162)
-------------
(3,912,175)
-------------

CAPITAL GOODS (-1.6%)
Cooper Industries, Inc. .................. (261,400) (10,848,100)
-------------

CELLULAR TELEPHONE (-0.1%)
U.S. Cellular Corp. (a) .................. (19,400) (601,400)
-------------

CHEMICALS (-0.0%)(b)
RPM, Inc. of Ohio ........................ (12,500) (195,312)
-------------

COMPUTERS & OFFICE EQUIPMENT (-0.9%)
Apple Computer, Inc. (a) ................. (92,500) (1,942,500)
Quantum Corp. (a) ........................ (30,100) (440,212)
Safeguard Scientifics, Inc. (a) .......... (45,300) (3,533,400)

</TABLE>

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

19
<PAGE>

Shares Value
--------------------------------
<S> <C> <C>
COMMON STOCKS (Continued)

COMPUTERS & OFFICE EQUIPMENT (Continued)
Unisys Corp. (a) ......................... (25,000) $ (178,125)
-------------
(6,094,237)
-------------

CONGLOMERATES (-0.2%)
Corning, Inc. ............................ (33,500) (1,285,562)
-------------

CONSUMER SERVICES (-0.5%)
ADT Limited (a) .......................... (173,300) (3,271,038)
-------------

CONSUMER STAPLES (-0.0%)(b)
American Brands, Inc. .................... (5,000) (226,875)
-------------

DOMESTIC OIL & GAS (-0.1%)
Enron Oil & Gas Co. ...................... (23,200) (646,700)
-------------

DOMESTIC OILS (-0.3%)
Occidental Petroleum Corp. ............... (77,400) (1,915,650)
Parker & Parsley Petroleum Co. ........... (3,200) (88,800)
-------------
(2,004,450)
-------------

ELECTRICAL EQUIPMENT (-0.3%)
C-Cube Microsystems, Inc. (a) ............ (24,800) (818,400)
Cypress Semiconductor Corp. (a) .......... (125,000) (1,500,000)
-------------
(2,318,400)
-------------

ENERGY (-1.1%)
Chevron Corp. ............................ (98,500) (5,811,500)
Unocal Corp. ............................. (48,000) (1,620,000)
-------------
(7,431,500)
-------------

FINANCIAL SERVICES (-0.2%)
Cityscape Financial Corp. (a) ............ (27,000) (1,383,750)
-------------

FOOD, BEVERAGES & TOBACCO (-0.1%)
Chiquita Brands International, Inc. ...... (37,000) (481,000)
-------------

HEALTH CARE(-0.0%)(b)
Quintiles Transnational Corp. (a) ........ (1,500) (98,625)
-------------

HOUSEHOLD PRODUCTS (-1.1%)
Amway Japan Limited ...................... (48,000) (2,406,893)
Amway Japan Limited ADR (f) .............. (174,200) (4,333,225)
Whirlpool Corp. .......................... (20,200) (1,002,425)
-------------
(7,742,543)
-------------

INSURANCE (-4.3%)
Chubb Corp. .............................. (463,800) (23,132,025)
Conseco, Inc. ............................ (114,200) (4,568,000)
Fidelity National Financial, Inc. ........ (15,600) (235,950)
Fremont General Corp. .................... (39,600) (910,800)
USF&G Corp. .............................. (65,000) (1,064,375)
-------------
(29,911,150)
-------------

MEDIA (-0.3%)
Time Warner, Inc. ........................ (53,400) (2,095,950)
-------------

OIL SERVICES (-0.2%)
Noble Drilling Corp. (a) ................. (78,000) (1,082,250)
-------------

PAPER & FOREST PRODUCTS (-0.2%)
International Paper Co. .................. (30,000) (1,106,250)
James River Corp. of Virginia ............ (10,000) (263,750)
Repap Enterprises, Inc. (a) .............. (7,000) (26,688)
-------------
(1,396,688)
-------------

REAL ESTATE (-0.0%)(b)
Security Capital Pacific Trust ........... (15,300) (332,775)
-------------

RESTAURANTS & LODGING (-0.5%)
Hilton Hotels Corp. ...................... (20,000) (2,250,000)
McDonalds Corp. .......................... (20,000) (935,000)
-------------
(3,185,000)
-------------

RETAIL (-0.4%)
Home Shopping Network, Inc. (a) .......... (220,000) (2,640,000)
Staples, Inc. (a) ........................ (6,900) (134,550)
-------------
(2,774,550)
-------------

STEEL, ALUMINUM & OTHER METALS (-0.1%)
Reynolds Metals Co. ...................... (17,000) (886,125)
-------------

TECHNOLOGY (-0.2%)
Altera Corp. (a) ......................... (40,100) (1,523,800)
-------------

TELECOMMUNICATION EQUIPMENT (-0.1%)
BroadBand Technologies, Inc. (a) ........ (25,000) (806,250)
-------------

</TABLE>

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

20
<PAGE>

Shares Value
--------------------------------
<S> <C> <C>
COMMON STOCKS (Continued)

TELECOMMUNICATION SERVICES (-0.2%)
Mobile Telecommunication
Technologies Corp. (a) ................. (15,000) $ (219,375)
Tele-Communications, Inc.
Class A (a) ............................ (88,000) (1,595,000)
-------------
(1,814,375)
-------------

Total Short Positions
(Proceeds $103,853,470) ................ $(109,582,580)
=============

</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) PEPS-Premium Exchangeable Participating Shares-each PEP is exchangeable for
1.25 American Depository Shares of Amway Japan on 2/15/99.
(i1) Depository Shares-each share represents one-tenth of convertible preferred
stock.
(i2) Depository Shares-each share represents one-tenth of Series I convertible
preferred stock.
(i3) Depository Shares-each share represents one-fourth of $6.00 preferred
stock.
(i4) Depository Shares-each share represents one-tenth of Series P preferred
stock.
(i5) Depository Shares-each share represents one-tenth of preferred stock.
(j) Ordinary Shares.
(k) PIK ("Payment in Kind") interest or dividend payment is made with
additional securities.
(l) 2,000 Units-each unit reflects $1,000 of principal amount of Senior Payment
in Kind Notes, plus 1 warrant to acquire 10 shares of common stock at a
future date.
(m) STRYPES-Structured Yield Product Exchangeable for Common Stock.
(n) MEDS-Mandatorially Exchangeable Debt Security.
(o) The cost for Federal income tax purposes is $675,693,185.
(p) At June 30, 1996 net unrealized appreciation was $7,649,707, 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 $26,192,221 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $18,542,514.
(q) Forward foreign currency contracts open at June 30, 1996:

Contract In Delivery Gross Unrealized
to Deliver Exchange For Date Appreciation
---------- ------------ -------- ----------------
<S> <C> <C> <C>
(Y)319,020,000 3,000,000 12/6/96 $11,233
(Y)585,860,000 5,500,000 12/6/96 11,186
--------
Net Appreciation ............................... $22,419
========
</TABLE>

(r) Foreign cash held at June 30, 1996:

Currency Cost Value
-------------- ---------- --------
<S> <C> <C>
(Y)101,100,000 $1,000,000 $925,019
========== ========
</TABLE>

The following abbreviation is used in portfolio and footnotes:

(Y) - Japanese Yen.

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

21
<PAGE>

AS OF JUNE 30, 1996 (Unaudited)
<S> <C>
ASSETS:
Investment in securities, at value (Note 2) (identified cost $674,781,160) ............... $ 683,342,892
Cash denominated in foreign currencies (identified cost $1,000,000) ...................... 925,019
Cash ..................................................................................... 706
Deposit with broker ...................................................................... 108,188,078
Receivables:
Investment securities sold ............................................................. 47,814,101
Fund shares sold ....................................................................... 6,194,817
Dividends and interest ................................................................. 4,622,415
Short stock rebate ..................................................................... 3,382,529
Unrealized appreciation on forward foreign currency contracts ............................ 22,419
Other assets ............................................................................. 972
-------------
Total assets .......................................................................... 854,493,948
-------------

LIABILITIES:
Securities sold short (proceeds $103,853,470) ............................................ 109,582,580
Payables:
Investment securities purchased ........................................................ 47,762,503
Fund shares redeemed ................................................................... 1,614,964
NYLIFE Distributors .................................................................... 539,822
Margin ................................................................................. 307,662
Adviser ................................................................................ 201,626
Transfer agent ......................................................................... 110,000
Custodian .............................................................................. 17,000
Trustees ............................................................................... 6,318
Accrued expenses ......................................................................... 208,797
Dividend payable ......................................................................... 6,208,705
-------------
Total liabilities ..................................................................... 166,559,977
-------------
Net assets ............................................................................... $ 687,933,971
=============

COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized
Class A ................................................................................ $ 30,993
Class B ................................................................................ 460,504
Additional paid-in capital ............................................................... 653,184,362
Accumulated undistributed net investment income .......................................... 1,392,879
Accumulated undistributed net realized gain on investments ............................... 29,801,830
Accumulated undistributed net realized gain on foreign currency transactions ............. 283,343
Net unrealized appreciation on investments ............................................... 8,486,751
Net unrealized depreciation on securities sold short ..................................... (5,729,110)
Net unrealized appreciation on translation of assets and liabilities in
foreign currencies ..................................................................... 22,419
-------------
Net assets ............................................................................... $ 687,933,971
=============

CLASS A
Net assets applicable to outstanding shares .............................................. $ 43,406,033
=============

Shares of beneficial interest outstanding ................................................ 3,099,259
=============

Net asset value per share outstanding .................................................... $ 14.01
Maximum sales charge (5.50% of offering price) ........................................... 0.82
-------------
Maximum offering price per share outstanding ............................................. $ 14.83
=============

CLASS B
Net assets applicable to outstanding shares .............................................. $ 644,527,938
=============

Shares of beneficial interest outstanding ................................................ 46,050,387
=============

Net asset value per share outstanding .................................................... $ 14.00
=============
</TABLE>

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

22
<PAGE>

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------

FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Unaudited)

<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) ..................................................................... $ 3,429,517
Interest .......................................................................... 13,261,215
------------
Total income ..................................................................... 16,690,732
------------

Expenses: (Note 2)
Distribution--Class B (Note 3) .................................................... 1,709,709
Administration (Note 3) ........................................................... 1,042,299
Advisory (Note 3) ................................................................. 1,042,299
Service (Note 3) .................................................................. 723,819
Dividends on securities sold short ................................................ 720,699
Transfer agent .................................................................... 403,905
Margin expense .................................................................... 302,802
Registration ...................................................................... 74,622
Custodian ......................................................................... 51,412
Shareholder communication ......................................................... 47,700
Recordkeeping (Note 3) ............................................................ 38,760
Auditing .......................................................................... 25,150
Legal ............................................................................. 25,084
Broker foreign transaction fee .................................................... 20,246
Trustees .......................................................................... 11,498
Miscellaneous ..................................................................... 7,934
------------
Total expenses ................................................................... 6,247,938
------------
Net investment income ............................................................... 10,442,794
------------

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions ............................................................. 27,217,495
Securities sold short ............................................................. (1,768,823)
Foreign currency transactions ..................................................... 452,612
------------
Net realized gain on investments and foreign currency transactions .................. 25,901,284
------------

Net change in unrealized appreciation (depreciation) on investments:
Security transactions ............................................................. (6,091,636)
Securities sold short ............................................................. (1,339,930)
Translation of assets and liabilities in foreign currencies ....................... (126,929)
------------
Net unrealized loss on investments and foreign currencies ........................... (7,558,495)
------------
Net realized and unrealized gain on investments and foreign currency transactions ... 18,342,789
------------
Net increase in net assets resulting from operations ................................ $ 28,785,583
============
</TABLE>

- ----------
(a) Dividends recorded net of foreign withholding taxes of $12,629.

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

23
<PAGE>

Six months
ended Year ended
June 30, December 31,
1996* 1995
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income ........................................................... $ 10,442,794 $ 12,381,727
Net realized gain on investments ................................................ 27,217,495 18,176,793
Net realized gain (loss) on short sale transactions ............................. (1,768,823) 708,783
Net realized gain (loss) on foreign currency transactions ....................... 452,612 (34,489)
Net change in unrealized appreciation (depreciation) on security transactions ... (6,091,636) 25,839,539
Net change in unrealized depreciation on securities sold short .................. (1,339,930) (4,375,360)
Net change in unrealized appreciation (depreciation) on translation of assets and
liabilities in foreign currencies .............................................. (126,929) 133,823
------------- -------------
Net increase in net assets resulting from operations ............................ 28,785,583 52,830,816
------------- -------------

Dividends and distributions to shareholders:
From net investment income:
Class A ........................................................................ (772,519) (511,874)
Class B ........................................................................ (9,690,380) (10,670,355)
From net realized gain on investments:
Class A ........................................................................ -- (778,196)
Class B ........................................................................ -- (12,402,053)
------------- -------------
Total dividends and distributions to shareholders ............................ (10,462,899) (24,362,478)
------------- -------------

Capital share transactions:
Net proceeds from sale of shares:
Class A ........................................................................ 19,719,563 26,364,588
Class B ........................................................................ 229,038,571 235,388,770
Net asset value of shares issued to shareholders in reinvestment of
dividends and distributions:
Class A ........................................................................ 281,830 1,134,619
Class B ........................................................................ 3,504,974 21,090,194
------------- -------------
252,544,938 283,978,171
Cost of shares redeemed:
Class A ........................................................................ (4,590,123) (1,093,624)
Class B ........................................................................ (32,640,462) (37,359,550)
------------- -------------
Increase in net assets derived from capital share transactions ............... 215,314,353 245,524,997
------------- -------------
Net increase in net assets ................................................... 233,637,037 273,993,335

NET ASSETS:
Beginning of period ............................................................... 454,296,934 180,303,599
------------- -------------
End of period ..................................................................... $ 687,933,971 $ 454,296,934
============= =============

Accumulated undistributed net investment income ................................... $ 1,392,879 $ 1,412,984
============= =============
</TABLE>

- ----------
* Unaudited.

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

24
<PAGE>

Class B
-----------------------------------------------------
Class A Class B Class A Class B September 1
------- ------- ------- ------- through Year ended August 31
Six months ended Year ended December 31 ---------------------------------------
June 30, 1996* December 31, 1995 1994** 1994 1993 1992 1991
------------------- ------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ....... $ 13.45 $ 13.45 $ 11.67 $ 11.67 $ 12.83 $ 13.92 $ 11.46 $ 10.10 $ 8.02
------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income ....... 0.27 0.23 0.59 0.51 0.19 0.50 0.92 0.32 0.24
Net realized and
unrealized gain (loss)
on investments ............ 0.56 0.55 2.14 2.14 (0.71) 0.70 2.45 1.32 2.08
Net realized and unrealized
gain (loss) on foreign
currency transactions ..... 0.00(b) 0.00(b) (0.00)(b) (0.00)(b) -- (0.01) -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ................ 0.83 0.78 2.73 2.65 (0.52) 1.19 3.37 1.64 2.32
------- ------- ------- ------- ------- ------- ------- ------- -------
Less dividends and
distributions:
From net investment
income .................... (0.27) (0.23) (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 ............. (0.27) (0.23) (0.95) (0.87) (0.64) (2.28) (0.91) (0.28) (0.24)

------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value at end
of period ................. $ 14.01 $ 14.00 $ 13.45 $ 13.45 $ 11.67 $ 12.83 $ 13.92 $ 11.46 $ 10.10
======= ======= ======= ======= ======= ======= ======= ======= =======
Total investment return (a) 6.16% 5.78% 23.72% 23.02% (4.09%) 8.95% 30.80% 16.43% 29.58%

Ratios (to average net
assets)/ Supplemental
Data:
Net investment income ..... 4.2%+ 3.6%+ 4.9% 4.3% 4.8%+ 3.5% 3.4% 2.9% 2.8%

Expenses .................. 1.6%+ 2.2%+ 1.5% 2.1% 1.9%+ 1.9% 1.9% 2.3% 2.7%

Portfolio turnover rate ..... 204% 204% 243% 243% 77% 269% 370% 291% 283%

Average commission rate
paid ...................... $0.0462 $ 0.0462 (c) (c) (c) (c) (c) (c) (c)
Net assets at end of
period (in 000's) ......... $43,406 $644,528 $26,836 $427,461 $180,304 $160,407 $58,943 $28,899 $20,029

</TABLE>

* Unaudited.

** 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.

25
<PAGE>

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

Note 1 -- Organization and Business:

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 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

26
<PAGE>

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
markets 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 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
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
Convertible 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
liabilities. The contract or notional amounts reflect the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. The
unrealized appreciation/depreciation on forward contracts reflects the Fund's
exposure at period end to credit loss in the event of a counterparty's failure
to perform its obligations.

Securities Sold Short. The Fund may engage in short sales as a method of hedging
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.

27
<PAGE>

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

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
transactions 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 collection is not expected. Discounts on securities purchased for the Fund
are accreted 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.

Note 3 -- Fees and Related Party Policies:

28
<PAGE>

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

29
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY CONVERTIBLE 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 $534,330 for the six
months ended June 30, 1996.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges on redemptions of Class B shares for the six months ended June 30,
1996 in the amount of $315,897.

Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the six
months ended June 30, 1996 were $42,259.

Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $10,821 for the six months ended
June 30, 1996.

Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the period January 1, 1996 through June 30,
1996 amounted to $38,760.

Note 4 -- Deposit with Broker:

Deposit with broker comprises cash of $107,263,059 and (Y)101,100,000 (cost
$1,000,000, value at June 30, 1996 $925,019). Cash deposited with broker is
partially restricted as collateral for securities sold short.

Note 5 -- Purchases and Sales of Securities (in 000's):

30
<PAGE>

Note 6 -- Capital Share Transactions (in 000's):

Six months ended Year ended
June 30, 1996* December 31, 1995
----------------- ------------------
Class A Class B Class A Class B
------- ------- ------- --------
<S> <C> <C> <C> <C>
Shares sold ...................................................... 1,412 16,343 1,991 17,601
Shares issued in reinvestment of dividends and distributions ..... 20 252 85 1,583
----- ------ ----- ------
1,432 16,595 2,076 19,184
Shares redeemed .................................................. 328 2,335 81 2,840
----- ------ ----- ------
Net increase ..................................................... 1,104 14,260 1,995 16,344
===== ====== ===== ======
</TABLE>

- ----------
* Unaudited.

31
<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 Invests primarily in common stocks You want your investments to grow
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]
- -----------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund [horizontal bar Invests in a portfolio that tracks You seek a conservative way to partici-
graph indicating the makeup and returns of the pate in the growth potential of stocks+
risk/reward of S&P 500*
fund]
- -----------------------------------------------------------------------------------------------------------------------------------
International Equity Fund [horizontal bar Offers broad diversification into You prefer the higher return potential
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++
- -----------------------------------------------------------------------------------------------------------------------------------

GROWTH & INCOME FUNDS

- -----------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return Fund [horizontal bar Balances current income with growth You seek a combination of income and
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]
- -----------------------------------------------------------------------------------------------------------------------------------
Value Fund [horizontal bar Seeks undervalued stocks with You seek to maximize total return from
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]
- -----------------------------------------------------------------------------------------------------------------------------------
Convertible Fund [horizontal bar Invests in convertible securities for You want income from securities that
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>

* 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.

# 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.

32
<PAGE>

- -----------------------------------------------------------------------------------------------------------------------------------
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]
- -----------------------------------------------------------------------------------------------------------------------------------
International Bond Fund [horizontal bar Seeks high current yields and You prefer the higher return potential
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++

- -----------------------------------------------------------------------------------------------------------------------------------
Money Market Fund [horizontal bar Seeks to provide current income, You are averse to risk or want to earn
graph indicating stability of principal, and competitive yields on cash you're plan-
risk/reward of liquidity, 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> <C>
Tax Free Bond Fund [horizontal bar Seeks high current income that's You're in a high federal income tax
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]
- -----------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund [horizontal bar Seeks high current income exempt You're a California resident and want to
graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free#
fund] preservation of capital#

- -----------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund [horizontal bar Seeks high current income exempt You're a New York State or City resident
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>

A word about risk and reward

33
<PAGE>

This page intentionally left blank

34
<PAGE>

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

semi-annual report
six months in review

fund results

& portfolio highlights

[LOGO] MAINSTAY(R)FUNDS

- --------------------------------------------------------------------------------
UNAUDITED JUNE 30, 1996
- --------------------------------------------------------------------------------

OFFICERS & TRUSTEES

Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Harry G. Hohn 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 W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary

Dechert Price & Rhoads
Legal Counsel

[LOGO] MAINSTAY(R) FUNDS

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] NEW YORK LIFE

This report is provided for the information of shareholders of the MainStay
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.

[RECYCLING SYMBOL] MSSA06 (896)
<PAGE>

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

Chairperson's Letter 2

MainStay Equity Index Fund Highlights and
Portfolio Manager's Comments 4

Returns & Lipper Rankings 6

Year-by-Year & Six-Month Performance 7

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

Top 10 Equity Holdings 8

Diversification by Industry -- Top 5 9

Portfolio Composition 9

Portfolio of Investments 10

Financial Statements 20

Notes to Financial Statements 24

The MainStay Funds 30
<PAGE>

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

Faithfully following the movements of the S&P 500 Index* amid powerful economic
forces and shifting market perceptions -- this was the strategy that guided the
management of the MainStay(R) Equity Index Fund for the six months ended June
30, 1996. As a result, over this period, the Fund returned 9.66%, excluding all
sales charges.

A stronger economy -- good for stocks, challenging for bonds

After a spectacular 1995, the stock market continued to climb for most of the
first half of 1996 -- but not without setbacks along the way. The economy was
stronger than expected, which led to inflation concerns, rising interest rates,
and price volatility. With the S&P 500 advancing 10.09% in the reporting period,
the stock market delivered a six-month return close to its historical average
for an entire year.+ Small capitalization stocks did even better, but faced a
sharp correction in mid-June. Investors were very active, pouring more money
into stock funds in the first six months than they had in any full year in
history.++ Whether the returns and investment activity we've seen in the first
half of the year can be sustained through what may be a bumpy second half
remains an open question.

Positive results in international markets

Foreign equity markets lagged the U.S. during the first quarter of 1996, but
provided more competitive returns in the second. Latin America posted strong
gains and Japan showed signs of economic recovery, which boosted its equity
returns to 43.5% for the 12 months ended June 30, 1996. Small company funds did
well in European markets, as they did in the U.S. In all but a handful of
markets, foreign currencies declined against the U.S. dollar, led by weaknesses
in the Japanese yen and core European currencies. Foreign bonds outperformed
U.S. bonds during the reporting period, increasing the potential value of
international diversification.

2
<PAGE>

Fund strategies, results, and outlook

The MainStay Equity Index Fund portfolio manager used strict quantitative
disciplines to track the movements of the S&P 500 as closely as possible during
the reporting period. While rising interest rates hurt several sectors, others
provided excellent returns. Shoes were among the top performing industries and
soft drink beverage companies also did well. Truckers, homebuilding stocks, and
HMOs were among the laggards in the first half of the year. The Fund's
investment approach and performance results are discussed in greater detail in
the Fund manager's comments on the following pages.

Educating investors, celebrating a decade of service

During the reporting period, NYLIFE Distributors Inc. voluntarily waived a
portion of its 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 on the
Fund's performance.

/s/ Alice T. Kane

Alice T. Kane
July 1996

- -----------
* See footnote on page 7 for more information on the S&P 500.
+ Source: Ibbotson Associates.
++ Source: Investment Company Institute.
3
<PAGE>

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

Fund highlights for the six months ended June 30, 1996

o One-year total return of 24.70% for Class A shares, excluding all sales
charges, as of 6/30/96

o Fund returns closely tracked the S&P 500 Index

For the six months ended June 30, 1996, the MainStay Equity Index Fund returned
9.66%, excluding all sales charges. Over the same period, the S&P 500 returned
10.09%, the average Lipper* equity fund returned 9.64%, and the average Lipper
S&P 500 Index objective fund returned 9.83%.

After the stock market posted outstanding gains in 1995, many analysts expected
less-than-spectacular returns this year. With only half the year over, however,
the market has already gained more than 10%. The driving force behind last
year's performance -- strong corporate profits -- showed little signs of
abating, despite scattered pockets of weakness. Although interest rates began to
edge higher, investors appeared confident that the economy's "soft landing" was
a reality and that inflation would remain under control. Only at the very end of
June did we see any significant signs of impending inflation, as the country
approached full employment.

Small company stocks outperformed larger issues throughout the first half of the
year, leading the S&P 500 Index to underperform the NASDAQ Composite Index and
mutual funds that were heavily invested in smaller issues. During the reporting
period, the NASDAQ Composite Index returned 12.63%.

The Equity Index Fund does not seek to benefit from shifting investor
preferences among small-, medium-, and large-capitalization issues. Instead, it
seeks to track the performance of the Standard & Poor's 500 Composite Stock
Price Index, which consists primarily of larger issues

Soft landing
- -------------------------

A curb on economic growth
or other Federal Reserve
action that is
sufficiently gradual to
not create major
disruptions or
distortions in the equity
and fixed-income markets.

Inflation
- -------------------------

An increase in the supply
of money relative to
available goods and
services, resulting in
higher prices or a rising
"cost of living."

Capitalization
- -------------------------

The amount of outstanding
equity a company has
issued. Companies may
vary greatly in the
amount of equity capital
they have raised, and
their capitalization may
change with new issues or
stock repurchases.

4
<PAGE>

- --------------------------------------------------------------------------------
HIGHLIGHTS & PORTFOLIO MANAGER'S COMMENTS
- --------------------------------------------------------------------------------

representing about two-thirds of the capitalization of the stock market as a
whole. Since the Fund incurs fees and expenses that the Index does not,
investors should anticipate trailing the Index by a small margin.

The Fund seeks to remain as fully invested as possible at all times, to give
investors broad exposure to the companies that make up the S&P 500 Index. The
Fund also seeks to invest in stocks in the same proportions as they are invested
in the Index. As a result, investors may experience greater gains or losses from
the price movements of sectors or securities with greater representation in the
Index.

During the reporting period, one of the best performing industries in the S&P
500 Index was the shoe industry, which was propelled upward by Nike's 48%
return, to finish the first half of the year with a 41.75% gain. Since this
industry only represented 0.4% of the S&P 500, however, its impact on the Fund's
performance was very modest. The Coca-Cola Company and PepsiCo, with respective
returns of 32.4% and 27.4%, had a greater impact, as they pushed the soft drink
beverage industry up 30.8%. This sector accounts for 3.5% of the Index. In the
first half of the year, the worst performing sectors in the Index were trucking
companies (-16.3%), homebuilding stocks (-12.2%), and HMOs (-12.1%), which
represented 0.043%, 0.043%, and 0.372% of the Index, respectively. These small
weightings served to moderate the negative impact these laggards had on the
portfolio as a whole.

James A. Mehling, CFA
Portfolio Manager

Exposure
- -------------------------

The amount invested in a
specific security,
maturity, market,
country, or currency.
Participation in positive
as well as negative
events affecting a
security or sector
generally increases with
the level of exposure.

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

5
<PAGE>

Fund average annual total returns*
- --------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 6/30/96
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 24.70% 14.48% 15.53%
- --------------------------------------------------------------------------------
Fund SEC returns*
- --------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 6/30/96
- --------------------------------------------------------------------------------

Class A 20.96% 13.78% 14.90%
- --------------------------------------------------------------------------------

Fund Lipper+ rankings and Lipper category returns as of 6/30/96
- --------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 6/30/96
- --------------------------------------------------------------------------------
Equity Index
Fund 40 out of 43 funds 14 out of 14 funds 13 out of 13 funds
Average Lipper
S&P 500 Index 25.42% 15.19% 16.42%
objective fund
- --------------------------------------------------------------------------------
Fund per-share net asset value and distributions for the six months ended
6/30/96
- --------------------------------------------------------------------------------
NAV 6/30/96 Income Capital Gains
- --------------------------------------------------------------------------------
Class A $21.00 $0.2400 $0.3109
- --------------------------------------------------------------------------------

</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. The 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.
Lipper averages listed above are not class specific; life of fund return is
from the period 12/20/90 through 6/30/96. For the 12-month period ended
6/30/96, the Lipper equity category included 3,521 funds and the MainStay
Equity Index Fund was ranked 902 out of 3,521,523 out of 1,176, and 506 out
of 1,094 funds for the 1-year, 5-year, and since inception periods,
respectively.

6
<PAGE>

[The following table was represented by a Bar Graph
in Printed material]

Period-end Total Return %
----------- --------------
<S> <C>
12/91 28.01
12/92 6.23
12/93 9.01
12/94 0.47
12/95 35.91
6/96 9.66
</TABLE>

- --------------------------------------------------------------------------------
$10,000 INVESTED IN THE MAINSTAY EQUITY INDEX FUND
VS. S&P 500 AND INFLATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

[The following table was represented by a Line Graph
in printed material]

Period-end S&P 500++ Inflation ss. Equity Index Fund
- ---------- --------- ------------- -----------------
<S> <C> <C> <C>
12/20/90 $10000 $10000 $ 9700.00
12/31/90 10094 10000 9700.00
12/91 13157 10306 12430.37
12/92 14158 10605 13200.21
12/93 15578 10897 14390.95
12/94 15790 11188 14462.75
12/95 21702 11472 19656.61
6/96 $23889 $11704 $21555.56

</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. 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>

Holding $ Amount
<S> <C>
General Electric Company $4,368,855

Coca-Cola Company 3,708,635

Exxon Corp. 3,262,677

AT&T Corp. 3,002,846

Philip Morris Companies, Inc. 2,627,144

Royal Dutch Petroleum Company 2,486,291

Merck & Co., Inc. 2,402,435

Microsoft Corp. 2,158,766

Johnson & Johnson 1,990,989

Procter & Gamble Company 1,884,638
</TABLE>

8
<PAGE>

<TABLE>
[These figures were represented in the form of a pie chart]

<S> <C>
Oil - Integrated International 6.3%
Telephone .................... 4.4%
Major Regional banks ......... 4.0%
Health Care - Diversified .... 3.9%
Drugs ........................ 3.9%
All Other .................... 77.5%

</TABLE>

<TABLE>
[These figures were represented in the form of a pie chart]

<S> <C>
Common Stocks ................ 95.3%
Cash & Equivalents ........... 4.7%
</TABLE>

Note: Actual percentages will vary over time.

9
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY EQUITY INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
--------------------------
<S> <C> <C>
COMMON STOCKS (95.3%)+

AEROSPACE/DEFENSE (2.0%)
Boeing Company (The) ......................... 10,363 $ 902,876
General Dynamics Corp. ....................... 1,911 118,482
Lockheed Martin Corp. ........................ 6,020 505,680
Loral Space &
Communications Ltd. (a) .................... 4,416 60,168
McDonnell Douglas Corp. ...................... 6,822 330,867
Northrop Grumman Corp. ....................... 1,550 105,594
Raytheon Company ............................. 7,317 377,740
Rockwell International Corp. ................. 6,531 373,900
United Technologies Corp. .................... 3,709 426,535
----------
3,201,842
----------
AIRLINES (0.3%)
AMR Corp. (a) ................................ 2,310 210,210
Delta Air Lines, Inc. ........................ 1,579 131,057
Southwest Airlines Co. ....................... 4,298 125,179
USAir Group, Inc. (a) ........................ 1,890 34,020
----------
500,466
----------
ALUMINUM (0.4%)
Alcan Aluminum Limited ....................... 6,779 206,760
Aluminum Co. of America ...................... 5,347 306,784
Reynolds Metals Company ...................... 1,914 99,767
----------
613,311
----------
AUTOMOBILES (1.9%)
Chrysler Corp. ............................... 11,403 706,986
Ford Motor Company ........................... 33,886 1,097,059
General Motors Corp. ......................... 22,628 1,185,142
----------
2,989,187
----------
AUTOPARTS--AFTER MARKET (0.3%)
Cooper Tire & Rubber Company ................. 2,498 55,580
Echlin Inc. .................................. 1,898 71,887
Genuine Parts Company ........................ 3,661 167,491
Goodyear Tire & Rubber Company ............... 4,550 219,537
----------
514,495
----------
BEVERAGES--ALCOHOLIC (0.7%)
Anheuser-Busch Companies, Inc. ............... 7,599 569,925
Brown-Forman Corp. ........................... 2,127 85,080

<CAPTION>
Shares Value
--------------------------
<S> <C> <C>
BEVERAGES--ALCOHOLIC (Continued)
Coors (Adolph) Co. ........................... 1,105 19,752
Seagram Company Ltd. ......................... 11,211 376,970
----------
1,051,727
----------
BEVERAGES--SOFT DRINKS (3.4%)
Coca-Cola Company (The) ...................... 75,880 3,708,635
PepsiCo, Inc. ................................ 47,349 1,674,971
----------
5,383,606
----------
BROADCAST/MEDIA (0.5%)
Comcast Corp. Class A ........................ 7,297 134,995
Tele-Communications
TCI Group, Class A (a) ..................... 19,847 359,727
U.S. West Media Group (a) .................... 14,244 259,953
----------
754,675
----------
BUILDING MATERIALS (0.2%)
Masco Corp. .................................. 4,696 142,054
Owens-Corning Fiberglas Corp. ................ 1,512 65,016
Sherwin-Williams Company ..................... 2,519 117,133
----------
324,203
----------
CHEMICALS (2.2%)
Air Products & Chemicals, Inc. ............... 3,337 192,712
Dow Chemical Company (The) ................... 7,775 590,900
Du Pont (E.I.) De Nemours
& Company .................................. 16,777 1,327,480
Eastman Chemical Co. ......................... 2,322 141,352
Goodrich (B.F.) Company ...................... 1,639 61,258
Hercules Inc. ................................ 3,331 184,038
Monsanto Company ............................. 17,432 566,540
Praxair, Inc. ................................ 4,617 195,068
Rohm & Haas Company .......................... 2,044 128,261
Union Carbide Corp. .......................... 4,127 164,048
----------
3,551,657
CHEMICALS--DIVERSIFIED (0.3%)
Avery Dennison Corp. ......................... 1,565 85,879
Engelhard Corp. .............................. 4,332 99,636
FMC Corp. (a) ................................ 1,098 71,645
PPG Industries Inc. .......................... 5,774 281,482
----------
538,642
----------
</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.

10
<PAGE>

- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS June 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
--------------------------
<S> <C> <C>
COMMON STOCKS (Continued)

CHEMICALS--SPECIALTY (0.4%)
Grace (W.R.) & Co. ........................... 2,982 $ 211,349
Great Lakes Chemical Corp. ................... 1,977 123,068
Morton International, Inc. ................... 4,448 165,688
Nalco Chemical Company ....................... 2,086 65,709
Sigma-Aldrich Corp. .......................... 1,441 77,094
----------
642,908
----------
COMMUNICATION--EQUIPMENT MANUFACTURERS (1.5%)
Andrew Corp. (a) ............................. 1,779 95,621
Bay Networks Inc. (a) ........................ 5,608 144,406
Cabletron Systems, Inc. (a) .................. 2,149 147,475
Cisco Systems, Inc. (a) ...................... 16,748 948,356
DSC Communications Corp. (a) ................. 3,504 105,558
General Instrument Corp. (a) ................. 3,509 101,322
Northern Telecom Limited ..................... 7,718 419,666
Scientific-Atlanta, Inc. ..................... 2,307 35,759
Tellabs, Inc. (a) ............................ 2,629 175,814
3Com Corp. (a) ............................... 5,008 229,116
----------
2,403,093
----------
COMPUTER--SOFTWARE & SERVICES (3.0%)
Autodesk, Inc. ............................... 1,401 41,855
Automatic Data Processing, Inc. .............. 8,688 335,574
Ceridian Corp. (a) ........................... 1,994 100,697
Computer Associates
International Inc. ......................... 7,311 520,909
Computer Sciences Corp. (a) .................. 1,584 118,404
First Data Corp. ............................. 6,779 539,778
Microsoft Corp. (a) .......................... 17,971 2,158,766
Novell Inc. (a) .............................. 11,129 154,415
Oracle Corp. (a) ............................. 19,639 774,513
Shared Medical Systems Corp. ................. 697 44,782
----------
4,789,693
----------
COMPUTER SYSTEMS (2.9%)
Amdahl Corp. (a) ............................. 3,472 37,324
Apple Computer Inc. (a) ...................... 3,807 79,947
Compaq Computer Corp. (a) .................... 7,945 391,291
Data General Corp. (a) ....................... 1,199 15,587
Digital Equipment Corp. (a) .................. 4,606 207,270
EMC Corporation (a) .......................... 6,915 128,792
Hewlett-Packard Company ...................... 15,434 1,537,612
Intergraph Corp. (a) ......................... 1,404 17,023

<CAPTION>
Shares Value
--------------------------
<S> <C> <C>
COMPUTER SYSTEMS (Continued)
International Business
Machines Corp. ............................. 17,123 $1,695,177
Silicon Graphics, Inc. (a) ................... 4,786 114,864
Sun Microsystems Inc. (a) .................... 5,530 325,579
Tandem Computers Inc. (a) .................... 3,459 42,805
Unisys Corp. (a) ............................. 5,205 37,086
----------
4,630,357
----------
CONGLOMERATES (0.3%)
Teledyne, Inc. ............................... 1,666 60,184
Tenneco, Inc. ................................ 5,261 268,969
Textron Inc. ................................. 2,609 208,394
----------
537,547
----------
CONTAINERS--METAL & GLASS (0.1%)
Ball Corp. ................................... 742 21,332
Crown Cork & Seal Company, Inc. .............. 3,824 172,080
----------
193,412
----------
CONTAINERS--PAPER (0.1%)
Bemis Company, Inc. .......................... 1,540 53,900
Stone Container Corp. ........................ 2,761 37,964
Temple-Inland Inc. ........................... 1,663 77,745
----------
169,609
----------
COSMETICS (0.8%)
Alberto-Culver Company ....................... 734 34,039
Avon Products, Inc. .......................... 4,180 188,623
Gillette Company ............................. 13,304 829,837
International Flavors &
Fragrances, Inc. ........................... 3,405 162,163
----------
1,214,662
----------
DRUGS (3.9%)
Eli Lilly & Company .......................... 16,590 1,078,350
Merck & Co., Inc. ............................ 37,175 2,402,435
Pfizer Inc. .................................. 19,206 1,370,828
Pharmacia & Upjohn, Inc. ..................... 15,155 672,503
Schering-Plough Corp. ........................ 11,069 694,580
----------
6,218,696
----------
ELECTRIC POWER COMPANIES (3.2%)
American Electric
Power Company, Inc. ........................ 5,564 237,166
Baltimore Gas & Electric Company ............. 4,562 129,447
</TABLE>

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

11
<PAGE>

ELECTRIC POWER COMPANIES (Continued)
Carolina Power & Light Company ............... 4,608 $ 175,104
Central & South West Corp. ................... 6,282 182,178
CINergy Corp. ................................ 4,780 152,960
Consolidated Edison
Company of New York ........................ 7,047 206,125
Dominion Resources Inc. ...................... 5,183 207,320
DTE Energy Company ........................... 4,510 139,246
Duke Power Company ........................... 6,200 317,750
Edison International ......................... 13,422 236,563
Entergy Corp. ................................ 6,811 193,262
FPL Group, Inc. .............................. 5,412 248,952
General Public Utilities Corp. ............... 3,482 122,741
Houston Industries Inc. ...................... 7,906 194,685
Niagara Mohawk Power Corp. . ................. 4,386 33,992
Northern States Power Company ................ 2,044 100,922
Ohio Edison Company .......................... 4,559 99,728
Pacific Gas & Electric Company ............... 12,807 297,763
PacifiCorp ................................... 8,576 190,816
Peco Energy Company .......................... 6,653 172,978
PP&L Resources, Inc. ......................... 4,770 112,691
Public Service Enterprise
Group Inc. ................................. 7,529 206,106
Southern Company (The) ....................... 20,148 496,144
Texas Utilities Company ...................... 6,763 289,118
Unicom Corp. ................................. 6,599 183,947
Union Electric Company ....................... 3,064 123,326
----------
5,051,030
----------
ELECTRICAL EQUIPMENT (3.7%)
AMP Inc. ..................................... 6,607 265,106
Emerson Electric Co. ......................... 6,772 612,019
General Electric Company ..................... 50,507 4,368,855
General Signal Corp. ......................... 1,400 53,025
Grainger (W.W.), Inc. ........................ 1,534 118,885
Honeywell Inc. ............................... 3,801 207,155
Raychem Corp. ................................ 1,344 96,600
Thomas & Betts Corp. ......................... 746 27,975
Westinghouse Electric Corp. .................. 12,417 232,819
----------
5,982,439
----------
ELECTRONIC--DEFENSE (0.0%)(b)
EG&G, Inc. ................................... 1,628 34,799

<CAPTION>
Shares Value
--------------------------
<S> <C> <C>
ELECTRONIC--INSTRUMENTATION (0.1%)
Perkin-Elmer Corp. (The) ..................... 1,275 $ 61,519
Tektronix, Inc. .............................. 961 43,005
----------
104,524
----------
ELECTRONIC--SEMICONDUCTORS (2.4%)
Advanced Micro Devices, Inc. (a) ............. 3,958 53,928
Applied Materials, Inc. (a) .................. 5,367 163,694
Intel Corp. .................................. 24,739 1,816,770
LSI Logic Corp. (a) .......................... 3,921 101,946
Micron Technology Inc. ....................... 6,304 163,116
Motorola, Inc. ............................... 17,773 1,117,477
National Semiconductor Corp. (a) ............. 4,135 64,093
Texas Instruments, Inc. ...................... 5,700 284,287
----------
3,765,311
----------
ENGINEERING & CONSTRUCTION (0.1%)
Fluor Corp. .................................. 2,493 162,980
Foster Wheeler Corp. ......................... 1,212 54,388
----------
217,368
----------
ENTERTAINMENT (1.4%)
King World Productions, Inc. (a) ............. 1,103 40,122
Time Warner, Inc. ............................ 11,795 462,954
Viacom Inc. Class B (a) ...................... 11,205 435,594
Walt Disney Company (The) .................... 20,449 1,285,731
----------
2,224,401
----------
FINANCIAL--MISCELLANEOUS (1.8%)
American Express Company ..................... 14,613 652,105
American General Corp. ....................... 6,173 224,543
Federal Home Loan Mortgage Corp. ............. 5,482 468,711
Federal National
Mortgage Association ....................... 33,050 1,107,175
Green Tree Financial Corp. ................... 3,961 123,781
MBNA Corp. ................................... 6,868 195,738
Transamerica Corp. ........................... 2,011 164,400
----------
2,936,453
----------
FOOD DISTRIBUTORS (0.2%)
Fleming Companies, Inc. ...................... 1,301 18,702
SuperValu Inc. ............................... 2,091 65,866
Sysco Corp. .................................. 5,447 186,560
----------
271,128
----------
</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)

FOODS (2.8%)
Archer Daniels Midland Company ............... 15,891 $ 303,915
Campbell Soup Company ........................ 7,489 527,975
ConAgra, Inc. ................................ 7,300 331,238
CPC International, Inc. ...................... 4,420 318,240
General Mills, Inc. .......................... 4,751 258,930
Heinz (H.J.) Company ......................... 11,170 339,289
Hershey Foods Corp. .......................... 2,384 174,926
Kellogg Company .............................. 6,580 481,985
Quaker Oats Company .......................... 3,991 136,193
Ralston Purina Group ......................... 3,186 204,302
Sara Lee Corp. ............................... 14,624 473,452
Unilever, N.V ................................ 4,844 702,985
Wrigley (Wm.) Jr. Company .................... 3,467 175,083
----------
4,428,513
----------
GOLD (0.5%)
Barrick Gold Corp. ........................... 10,626 288,230
Echo Bay Mines Ltd. .......................... 3,712 39,904
Homestake Mining Company ..................... 4,193 71,805
Newmont Mining Corp. ......................... 2,834 139,929
Placer Dome Inc. ............................. 7,274 173,667
Santa Fe Pacific Gold Corp. .................. 3,991 56,373
----------
769,908
----------
HARDWARE & TOOLS (0.2%)
Black & Decker Corp. ......................... 2,516 97,181
Snap-On, Inc. ................................ 1,262 59,787
Stanley Works (The) .......................... 2,771 82,437
----------
239,405
----------
HEALTH CARE--DIVERSIFIED (3.9%)
Abbott Laboratories .......................... 23,853 1,037,606
Allergan Inc. ................................ 1,937 76,027
American Home Products Corp. ................. 19,038 1,144,660
Bristol-Myers Squibb Company ................. 15,236 1,371,240
Johnson & Johnson ............................ 40,222 1,990,989
Mallinckrodt Group, Inc. ..................... 2,236 86,924
Warner-Lambert Company ....................... 8,071 443,905
----------
6,151,351
----------
HEALTH CARE--HMOs (0.4%)
Humana Inc. (a) .............................. 4,885 87,319
United Healthcare Corp. ...................... 5,281 266,691

<CAPTION>
Shares Value
--------------------------
<S> <C> <C>
HEALTH CARE--HMOs (Continued)
U.S. Healthcare, Inc. ........................ 4,644 $ 255,420
----------
609,430
----------
HEALTH CARE--MISCELLANEOUS (0.4%)
Alza Corp. (a) ............................... 2,480 67,890
Amgen Inc. (a) ............................... 7,945 429,030
Beverly Enterprises, Inc. (a) ................ 2,655 31,860
Manor Care, Inc. ............................. 1,903 74,931
----------
603,711
----------
HEAVY TRUCKS & PARTS (0.3%)
Cummins Engine Company, Inc. ................. 1,240 50,065
Dana Corp. ................................... 3,037 94,147
Eaton Corp. .................................. 2,304 135,072
ITT Industries, Inc. ......................... 3,371 84,696
Navistar International Corp. (a) ............. 2,252 22,239
Paccar Inc. .................................. 1,191 58,359
----------
444,578
----------
HOMEBUILDING (0.0%)(b)
Centex Corp. ................................. 742 23,095
Kaufman & Broad Home Corp. ................... 1,002 14,529
Pulte Corp. .................................. 728 19,474
----------
57,098
----------
HOSPITAL MANAGEMENT (0.5%)
Columbia/HCA Healthcare Corp. ................ 13,322 711,062
Community Psychiatric Centers (a) ............ 1,383 13,138
Tenet Healthcare Corp. (a) ................... 6,126 130,943
----------
855,143
----------
HOTEL--MOTEL (0.4%)
Harrah's Entertainment, Inc. (a) ............. 3,097 87,490
Hilton Hotels Corp. .......................... 1,512 170,100
ITT Corp. (New) (a) .......................... 3,469 229,821
Marriott International, Inc. ................. 3,883 208,712
----------
696,123
----------
HOUSEHOLD--FURNISHINGS & APPLIANCES (0.2%)
Armstrong World Industries, Inc. ............. 1,099 63,330
Maytag Corp. ................................. 3,389 70,745
Whirlpool Corp. .............................. 2,189 108,629
----------
242,704
----------
</TABLE>

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

13
<PAGE>

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

COMMON STOCKS (Continued)

HOUSEHOLD PRODUCTS (1.9%)
Clorox Company (The) ......................... 1,544 $ 136,837
Colgate-Palmolive Company .................... 4,379 371,120
Kimberly-Clark Corp. ......................... 8,484 655,389
Procter & Gamble Company (The) ............... 20,796 1,884,638
----------
3,047,984
----------
HOUSEWARES (0.2%)
Newell Co. ................................... 4,729 144,826
Rubbermaid, Inc. ............................. 4,804 130,909
Tupperware Corp. (a) ......................... 1,814 76,641
----------
352,376
----------
INSURANCE BROKERS (0.3%)
Alexander & Alexander Services,
Inc ........................................ 1,444 28,519
Aon Corporation .............................. 3,324 168,693
Marsh & McLennan Companies, Inc. ............. 2,219 214,133
----------
411,345
----------
INVESTMENT BANK/BROKERAGE (1.0%)
Dean Witter Discover & Company ............... 5,104 292,204
Merrill Lynch & Co., Inc. .. ................. 5,272 343,339
Morgan Stanley Group Inc. .................... 4,639 227,891
Salomon Inc. ................................. 3,307 145,508
Travelers Group Inc. ......................... 14,417 657,776
----------
1,666,718
----------
LEISURE TIME (0.1%)
Bally Entertainment Corp. (a) ................ 1,515 41,662
Brunswick Corp. .............................. 2,797 55,940
Outboard Marine Corp. ........................ 575 10,422
----------
108,024
----------
LIFE INSURANCE (0.4%)
Jefferson-Pilot Corp. ........................ 2,171 112,078
Lincoln National Corp. ....................... 3,149 145,641
Providian Corp. .............................. 2,876 123,309
Torchmark Corp. .............................. 2,166 94,762
UNUM Corp. ................................... 2,153 134,024
USLIFE Corp. ................................. 943 31,001
----------
640,815
----------

<CAPTION>
Shares Value
--------------------------
<S> <C> <C>
MACHINE TOOLS (0.0%)(b)
Cincinnati Milacron Inc. ..................... 994 $ 23,856
Giddings & Lewis Inc. ........................ 973 15,811
----------
39,667
----------
MACHINERY--DIVERSIFIED (0.8%)
Briggs & Stratton Corp. ...................... 772 31,749
Case Corporation ............................. 2,150 103,200
Caterpillar Inc. ............................. 5,971 404,535
Cooper Industries, Inc. ...................... 3,319 137,739
Deere & Company .............................. 7,800 312,000
Harnischfeger Industries, Inc. ............... 1,425 47,381
Ingersoll-Rand Company ....................... 3,303 144,506
Nacco Industries, Inc. ....................... 264 14,619
Timken Company (The) ......................... 956 37,045
Varity Corp. (a) ............................. 1,216 58,520
----------
1,291,294
----------
MAJOR REGIONAL BANKS (4.0%)
Banc One Corp. ............................... 13,639 463,726
Bank of Boston Corp. ......................... 3,353 165,974
Bank of New York
Company, Inc. (The) ........................ 6,042 309,653
Barnett Banks, Inc. .......................... 2,915 177,815
Boatmen's Bancshares, Inc. ................... 4,720 189,390
Comerica Inc. ................................ 3,564 159,044
CoreStates Financial Corp. ................... 6,675 256,987
Fifth Third Bancorp .......................... 2,794 150,876
First Bank System, Inc. ...................... 4,382 254,156
First Union Corp. ............................ 8,624 524,986
Fleet Financial Group, Inc. .................. 7,791 338,908
KeyCorp ...................................... 7,120 275,900
Mellon Bank Corp. ............................ 4,014 228,798
National City Corp. .......................... 4,768 167,476
NationsBank Corp. ............................ 8,920 737,015
Norwest Corp. ................................ 10,658 371,698
PNC Bank Corp. ............................... 10,351 307,942
Republic New York Corp. ...................... 1,669 103,895
Suntrust Banks, Inc. ......................... 6,750 249,750
U.S. Bancorp (Portland, OR) .................. 4,642 167,692
Wachovia Corp. ............................... 5,117 223,869
Wells Fargo & Company ........................ 2,912 695,604
----------
6,521,154
----------
MANUFACTURED HOUSING (0.0%)(b)
Fleetwood Enterprises, Inc. .................. 1,493 46,283
----------
</TABLE>

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

14
<PAGE>

Shares Value
--------------------------
<S> <C> <C>
COMMON STOCKS (Continued)

MANUFACTURING--DIVERSIFIED (0.9%)
AlliedSignal, Inc. ........................... 8,459 $ 483,220
Crane Co. .................................... 750 30,750
Dover Corp. .................................. 3,452 159,224
Illinois Tool Works Inc. ..................... 3,569 241,354
Johnson Controls, Inc. ....................... 1,226 85,207
Millipore Corp. .............................. 1,312 54,940
Pall Corp. ................................... 3,525 85,041
Parker Hannifin Corp. ........................ 2,176 92,208
Trinova Corp. ................................ 737 24,597
Tyco International Ltd. ...................... 4,587 186,920
----------
1,443,461
----------
MEDICAL PRODUCTS (0.9%)
Bard (C.R.), Inc. ............................ 1,765 60,010
Bausch & Lomb Inc. ........................... 1,679 71,358
Baxter International Inc. .................... 8,193 387,119
Becton, Dickinson & Company .................. 1,886 151,351
Biomet Inc. (a) .............................. 3,559 51,161
Boston Scientific Corp. (a) .................. 5,260 236,700
Medtronic, Inc. .............................. 6,956 389,536
St. Jude Medical, Inc. (a) ................... 2,152 72,092
United States Surgical Corp. ................. 1,692 52,452
----------
1,471,779
----------
METALS--MISCELLANEOUS (0.3%)
Asarco, Inc. ................................. 1,237 34,172
Cyprus Amax Minerals Co. ..................... 2,678 60,590
Freeport-McMoRan Copper &
Gold Inc. .................................. 6,042 192,589
INCO Limited ................................. 3,453 111,359
Phelps Dodge Corp. ........................... 2,083 129,927
----------
528,637
----------
MISCELLANEOUS (1.4%)
Airtouch Communications (a) .................. 15,010 424,032
American Greetings Corp. ..................... 2,197 60,143
Corning Inc. ................................. 6,796 260,796
Dial Corp. (The) ............................. 2,707 77,488
Harcourt General, Inc. ....................... 2,242 112,100
Harris Corp. ................................. 1,213 73,993
Jostens, Inc. ................................ 1,158 22,871
Minnesota Mining &
Manufacturing Company ...................... 12,571 867,399
Pioneer Hi-Bred International, Inc. .......... 2,502 132,293

<CAPTION>
Shares Value
--------------------------
<S> <C> <C>
MISCELLANEOUS (Continued)
TRW Inc. ..................................... 2,029 182,356
Whitman Corp. ................................ 3,292 79,420
----------
2,292,891
----------
MONEY CENTER BANKS (2.5%)
BankAmerica Corp. ............................ 11,198 848,248
Bankers Trust New York Corp. ................. 2,377 175,601
Chase Manhattan Corp. (The) .................. 13,197 932,038
Citicorp ..................................... 14,731 1,217,149
First Chicago Corp. .......................... 9,554 373,800
Morgan (J.P.) & Company, Inc. ................ 5,686 481,178
----------
4,028,014
----------
MULTI-LINE INSURANCE (1.3%)
Aetna Life & Casualty Company ................ 3,447 246,461
American International Group, Inc. ........... 14,317 1,412,014
CIGNA Corp. .................................. 2,336 275,356
ITT Hartford Group, Inc. ..................... 3,469 184,724
----------
2,118,555
----------
NATURAL GAS DISTRIBUTERS & PIPE LINES (0.8%)
Coastal Corp. ................................ 3,184 132,932
Columbia Gas System, Inc. .................... 1,650 86,006
Consolidated Natural Gas Company ............. 2,767 144,576
Eastern Enterprises .......................... 583 19,385
Enron Corp. .................................. 7,622 311,549
Enserch Corp. ................................ 2,053 44,653
Nicor Inc. ................................... 1,638 46,478
Noram Energy Corp. ........................... 3,870 42,086
Oneok, Inc. .................................. 726 18,150
Pacific Enterprises .......................... 2,478 73,411
PanEnergy Corp. .............................. 4,520 148,595
Peoples Energy Corp. ......................... 984 32,964
Sonat Inc. ................................... 2,548 114,660
Williams Companies, Inc. (The) ............... 3,058 151,371
----------
1,366,816
----------
OFFICE EQUIPMENT & SUPPLIES (0.6%)
Alco Standard Corp. .......................... 3,866 174,936
Moore Corp. Ltd. ............................. 3,106 58,626
Pitney Bowes Inc. ............................ 4,487 214,254
Xerox Corp. .................................. 9,742 521,197
----------
969,013
----------
</TABLE>

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

15
<PAGE>

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

COMMON STOCKS (Continued)

OIL & GAS DRILLING (0.0%)(b)
Helmerich & Payne, Inc. ...................... 711 $ 26,040
Rowan Companies, Inc. (a) .................... 2,488 36,698
----------
62,738
----------
OIL--EXPLORATION & PRODUCTION (0.2%)
Burlington Resources, Inc. ................... 3,912 168,216
Oryx Energy Company (a) ...................... 3,031 49,254
Santa Fe Energy Resources, Inc. (a) .......... 2,646 31,421
----------
248,891
----------
OIL--INTEGRATED DOMESTIC (1.3%)
Amerada Hess Corp. ........................... 2,764 148,219
Ashland Inc. ................................. 1,914 75,842
Atlantic Richfield Company ................... 4,844 574,014
Kerr-McGee Corp. ............................. 1,520 92,530
Louisiana Land & Exploration
Company (The) .............................. 963 55,493
Occidental Petroleum Corp. ................... 9,614 237,947
Pennzoil Company ............................. 1,352 62,530
Phillips Petroleum Company ................... 7,872 329,640
Sun Company, Inc. ............................ 2,237 67,949
Unocal Corp. ................................. 7,353 248,164
USX-Marathon Group ........................... 8,786 176,818
----------
2,069,146
----------
OIL--INTEGRATED INTERNATIONAL (6.3%)
Amoco Corp. .................................. 15,052 1,089,388
Chevron Corp. ................................ 19,716 1,163,244
Exxon Corp. .................................. 37,556 3,262,677
Mobil Corp. .................................. 11,900 1,334,288
Royal Dutch Petroleum Company ................ 16,171 2,486,291
Texaco Inc. .................................. 7,979 669,239
----------
10,005,127
----------
OIL--WELL EQUIPMENT & SERVICES (0.8%)
Baker Hughes Inc. ............................ 4,179 137,385
Dresser Industries, Inc. ..................... 5,459 161,041
Halliburton Company .......................... 3,442 191,031
McDermott International, Inc. ................ 1,650 34,444
Schlumberger Limited ......................... 7,334 617,889
Western Atlas, Inc. (a) ...................... 1,589 92,559
----------
1,234,349
----------

<CAPTION>
Shares Value
--------------------------
<S> <C> <C>
PAPER & FOREST PRODUCTS (0.9%)
Boise Cascade Corp. .......................... 1,355 49,627
Champion International Corp. ................. 2,778 115,982
Georgia-Pacific Corp. ........................ 2,746 194,966
International Paper Company .................. 8,980 331,137
James River Corp. of Virginia ................ 2,500 65,938
Louisiana-Pacific Corp. ...................... 3,410 75,446
Mead Corp. ................................... 1,558 80,821
Potlatch Corp. ............................... 841 32,904
Union Camp Corp. ............................. 2,063 100,571
Westvaco Corp. ............................... 3,074 91,836
Weyerhaeuser Company ......................... 6,070 257,975
Willamette Industries, Inc. .................. 1,667 99,186
----------
1,496,389
----------
PERSONAL LOANS (0.2%)
Beneficial Corp. ............................. 1,644 92,269
Household International Inc. ................. 3,010 228,760
----------
321,029
----------
PHOTOGRAPHY/IMAGING (0.5%)
Eastman Kodak Company ........................ 10,329 803,080
Polaroid Corp. ............................... 1,397 63,738
----------
866,818
----------
POLLUTION CONTROL (0.5%)
Browning-Ferris Industries Inc. .............. 6,420 186,180
Laidlaw, Inc. Class B ........................ 8,822 89,323
WMX Technologies, Inc. ....................... 14,694 481,228
----------
756,731
----------
PROPERTY--CASUALTY INSURANCE (1.2%)
Allstate Corp. (The) ......................... 13,388 610,828
Chubb Corp. (The) ............................ 5,255 262,093
General Re Corp. ............................. 2,489 378,950
Loews Corp. .................................. 3,569 281,505
SAFECO Corp. ................................. 3,835 135,663
St. Paul Companies, Inc. (The) ............... 2,569 137,442
USF&G Corp. .................................. 3,473 56,870
----------
1,863,351
----------
</TABLE>

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

16
<PAGE>

Shares Value
--------------------------
<S> <C> <C>
COMMON STOCKS (Continued)

PUBLISHING (0.3%)
Dun & Bradstreet Corp. (The) ................. 5,136 $ 321,000
McGraw-Hill Companies, Inc. .................. 3,046 139,355
Meredith Corp. ............................... 771 32,189
----------
492,544
----------
PUBLISHING--NEWSPAPER (0.6%)
Dow Jones & Company, Inc. .................... 2,838 118,487
Gannett Company, Inc. ........................ 4,184 296,018
Knight-Ridder Inc. ........................... 1,430 103,675
New York Times Company (The) ................. 2,955 96,407
Times Mirror Company ......................... 3,271 142,288
Tribune Company .............................. 1,917 139,222
----------
896,097
----------
RAILROADS (1.0%)
Burlington Northern Santa Fe Corp. ........... 4,344 351,321
Conrail Inc. ................................. 2,365 156,977
CSX Corp. .................................... 6,268 302,431
Norfolk Southern Corp. ....................... 3,909 331,288
Union Pacific Corp. .......................... 6,201 433,295
----------
1,575,312
----------
RESTAURANTS (0.7%)
Darden Restaurants, Inc. ..................... 4,751 51,073
Luby's Cafeterias, Inc. ...................... 710 16,685
McDonald's Corp. ............................. 21,029 983,106
Ryan's Family Steak Houses, Inc. (a) ......... 1,643 15,198
Shoney's, Inc. (a) ........................... 1,330 14,464
Wendy's International, Inc. .................. 3,575 66,584
----------
1,147,110
----------
RETAIL STORES--APPAREL (0.3%)
Charming Shoppes, Inc. (a) . ................. 3,170 22,388
Gap, Inc. (The) .............................. 8,398 269,786
Limited, Inc. (The) .......................... 8,284 178,106
TJX Companies, Inc. (The) .................... 2,214 74,722
----------
545,002
----------
RETAIL STORES--DEPARTMENT (0.7%)
Dillard Department Stores, Inc. .............. 3,441 125,596
Federated Department Stores,
Inc. (a) ................................... 6,103 208,265

<CAPTION>
Shares Value
--------------------------
<S> <C> <C>
RETAIL STORES--DEPARTMENT (Continued)
May Department Stores Company ................ 7,450 325,938
Mercantile Stores Company, Inc. .............. 1,097 64,312
Nordstrom, Inc. .............................. 2,483 110,493
Penney (J.C.) Company, Inc. .................. 6,798 356,895
----------
1,191,499
----------
RETAIL STORES--DRUG (0.2%)
Longs Drug Stores Corp. ...................... 577 25,749
Rite Aid Corp. ............................... 2,510 74,672
Walgreen Company ............................. 7,530 252,255
----------
352,676
----------
RETAIL STORES--FOOD CHAIN (0.6%)
Albertson's, Inc. ............................ 7,656 316,767
American Stores Co. .......................... 4,452 183,645
Giant Food, Inc. ............................. 1,794 64,360
Great Atlantic & Pacific .....................
Tea Company, Inc. .......................... 1,307 42,968
Kroger Company (The) (a) ..................... 3,771 148,954
Winn-Dixie Stores, Inc. ...................... 4,591 162,407
----------
919,101
----------
RETAIL STORES--GENERAL MERCHANDISE (1.7%)
Dayton Hudson Corp. .......................... 2,213 228,215
Kmart Corp. .................................. 13,967 172,842
Sears, Roebuck & Company ..................... 11,801 573,824
Wal-Mart Stores, Inc. ........................ 69,463 1,762,624
----------
2,737,505
----------
RETAIL STORES--SPECIALTY (1.1%)
Circuit City Stores, Inc. .................... 2,992 108,086
Home Depot, Inc. (The) ....................... 14,336 774,144
Lowe's Companies, Inc. ....................... 4,717 170,402
Melville Corp. ............................... 3,185 128,993
Pep Boys-Manny, Moe & Jack . ................. 1,908 64,872
Price/Costco, Inc. (a) ....................... 5,906 127,717
Tandy Corp. .................................. 1,907 90,344
Toys "R" Us (a) .............................. 8,234 234,669
Woolworth Corp. (a) .......................... 4,014 90,315
----------
1,789,542
----------
</TABLE>

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

17
<PAGE>

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

COMMON STOCKS (Continued)

SAVINGS & LOANS (0.2%)
Ahmanson (H.F.) & Company .. ................. 3,462 $ 93,474
Golden West Financial Corp. .................. 1,800 100,800
Great Western Financial Corp. ................ 4,033 96,288
----------
290,562
----------
SHOES (0.4%)
Brown Group, Inc. ............................ 560 9,730
Nike, Inc. ................................... 4,343 446,243
Reebok International Ltd. .................... 2,264 76,127
Stride Rite Corp. ............................ 1,424 11,748
----------
543,848
----------
SPECIALIZED SERVICES (0.5%)
Block (H & R), Inc. .......................... 3,181 103,780
CUC International Inc. (a) . ................. 5,321 188,896
Ecolab, Inc. ................................. 1,925 63,525
Interpublic Group of Cos., Inc. .............. 2,357 110,484
National Service Industries, Inc. ............ 1,514 59,235
Ogden Corp. .................................. 1,406 25,484
Safety-Kleen Corp. ........................... 1,680 29,400
Service Corp. International .................. 3,409 196,018
----------
776,822
----------
SPECIALTY PRINTING (0.2%)
Deluxe Corp. ................................. 2,493 88,502
Donnelley (R.R.) & Sons Company .............. 4,607 160,669
Harland (John H.) Co. (The) .................. 762 18,764
----------
267,935
----------
STEEL (0.2%)
Armco Inc. (a) ............................... 3,289 16,445
Bethlehem Steel Corp. (a) .................... 3,447 40,933
Inland Steel Industries, Inc. ................ 1,451 28,476
Nucor Corp. .................................. 2,657 134,511
USX-U.S. Steel Group Inc. .................... 2,395 67,958
Worthington Industries, Inc. ................. 2,673 55,799
----------
344,122
----------

<CAPTION>
Shares Value
--------------------------
<S> <C> <C>
TELECOMMUNICATIONS--LONG DISTANCE (2.7%)
AT&T Corp. ................................... 48,433 3,002,846
MCI Communications Corp. ..................... 20,660 529,413
Sprint Corp. ................................. 10,995 461,790
WorldCom, Inc. (a) ........................... 5,838 323,279
----------
4,317,328
----------
TELEPHONE (4.4%)
Alltel Corp. ................................. 5,716 175,767
Ameritech Corp. .............................. 16,703 991,741
Bell Atlantic Corp. .......................... 13,123 836,591
BellSouth Corp. .............................. 29,983 1,270,530
GTE Corp. .................................... 29,377 1,314,621
NYNEX Corp. .................................. 12,933 614,317
Pacific Telesis Group ........................ 12,977 437,974
SBC Communications, Inc. ..................... 18,370 904,722
US West, Inc. ................................ 14,253 454,314
----------
7,000,577
----------
TEXTILES--APPAREL MANUFACTURERS (0.2%)
Fruit Of The Loom Inc. Class A (a) ........... 2,268 57,834
Liz Claiborne, Inc. .......................... 2,247 77,802
Russell Corp ................................. 1,317 36,382
Springs Industries, Inc. ..................... 571 28,836
VF Corp. ..................................... 1,921 114,540
----------
315,394
----------
TOBACCO (1.9%)
American Brands, Inc. ........................ 5,564 252,466
Philip Morris Companies, Inc. ................ 25,261 2,627,144
UST Inc. ..................................... 5,900 202,075
----------
3,081,685
----------
TOYS (0.2%)
Hasbro Inc. .................................. 2,623 93,772
Mattel, Inc. ................................. 8,339 238,704
----------
332,476
----------
TRANSPORTATION--MISCELLANEOUS (0.1%)
Federal Express Corp. (a) .................... 1,667 136,694
Ryder System, Inc. ........................... 2,356 66,262
----------
202,956
----------
TRUCKERS (0.1%)
Caliber System, Inc. ......................... 1,214 41,276
</TABLE>

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

18
<PAGE>

Shares Value
=====================================
<S> <C> <C>
COMMON STOCKS (Continued)

TRUCKERS (Continued)
Consolidated Freightways, Inc. ...... 1,227 $ 25,920
Yellow Corp. (a) .................... 735 9,739
------------
76,935
Total Common Stocks
(Cost $116,072,996) ............... 152,375,628(c)
------------
PREFERRED STOCK (0.0%)(b)

CONGLOMERATES (0.0%)(b)
Teledyne, Inc. $1.20, Series E ...... 11 169
------------
Total Preferred Stock
(Cost $165) ....................... 169
------------
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount
==========
SHORT-TERM INVESTMENTS (4.4%)
<S> <C> <C>
COMMERCIAL PAPER (2.0%)
American Honda Finance Corp.
5.35%, due 7/25/96 (d) ............ $ 800,000 797,147
Dynamic Funding Corp.
5.36%, due 7/2/96 (d) ............. 950,000 949,859
Empire District Electric Co.
5.45%, due 7/29/96 (d) ............ 150,000 149,364
Jet Funding Corp.
5.40%, due 7/31/96 (d) ............ 400,000 398,200
Sanwa Business Credit Corp.
5.40%, due 7/8/96 (d) ............. 950,000 949,002
------------
Total Commercial Paper
(Cost $3,243,572) ................. 3,243,572
------------

Principal
Amount Value
=====================================
U.S. GOVERNMENT (2.4%)
United States Treasury Bill
5.13%, due 10/17/96 (d) ........... $3,950,000 $ 3,887,155
------------
Total U.S. Government
(Cost $3,889,373) ................. 3,887,155
------------
Total Short-Term Investments
(Cost $7,132,945) ................. 7,130,727
------------
Total Investments
(Cost $123,206,106)(e) ............ 99.7% 159,506,524(f)
Cash and Other Assets,
Less Liabilities .................. 0.3 407,858
------------
Net Assets .......................... 100.0% $159,914,382
========== ============
</TABLE>

<TABLE>
<CAPTION>
Contracts Unrealized
Long Appreciation
====================================
<S> <C> <C>
FUTURES CONTRACTS (0.0%) (b)
Standard & Poor's 500
September 1996 .................... 16 $ 8,525
------------
Total Futures Contracts
(Settlement Value $5,414,400) ..... $ 8,525(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 98.7% of net assets.

(d) Segregated as collateral for futures contracts.

(e) The cost for Federal income tax purposes is $123,232,927.

(f) At June 30, 1996 net unrealized appreciation was $36,273,597, 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 $37,452,142 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $1,178,545.

(g) Represents the difference between the value of the contracts at the time
they were opened and the value at June 30, 1996.

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

19
<PAGE>

AS OF JUNE 30, 1996 (Unaudited)
<S> <C>
ASSETS:
Investment in securities, at value (Note 2)
(identified cost $123,206,106) ............................. $159,506,524
Receivables:
Securities sold .......................................... 1,888,992
Fund shares sold ......................................... 651,635
Dividends and interest ................................... 236,939
Unamortized organization expense
(Note 2) .................................................. 55,802
Other assets ............................................... 227
Variation margin receivable on
futures contracts ......................................... 65,195
------------
Total assets ............................................ 162,405,314
------------

LIABILITIES:
Payables:

Investment securities purchased .......................... 1,702,419
Custodian ................................................ 448,384
Fund shares redeemed ..................................... 92,033
NYLIFE Distributors ...................................... 34,997
NYLIFE Inc. .............................................. 33,000
Transfer agent ........................................... 15,147
Management ............................................... 12,835
Accrued expenses ........................................... 152,117
------------
Total liabilities ....................................... 2,490,932
------------
Net Assets ................................................. $159,914,382
============

COMPOSITION OF NET ASSETS:

Shares of beneficial interest
outstanding (par value of $.01 per share)
unlimited number of shares authorized ....................... $ 76,141
Additional paid-in capital .................................. 119,424,036
Accumulated undistributed net investment
income ..................................................... 1,240,274
Accumulated undistributed net realized
gain on investments ........................................ 2,864,988
Net unrealized appreciation on investments .................. 36,308,943
------------
Net assets applicable to outstanding shares ................. $159,914,382
============
Shares of beneficial interest outstanding ................... 7,614,095
============
Net asset value per share outstanding ....................... $ 21.00
Maximum sales charge (3.00% of offering price) .............. 0.65
------------
Maximum offering price per share outstanding ................ $ 21.65
------------
</TABLE>

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

20
<PAGE>

FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Unaudited)
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) ................................................. $ 1,305,091
Interest ...................................................... 474,718
------------
Total income ................................................. 1,779,809
------------
Expenses: (Note 2)
Administration (Note 3) ....................................... 268,585
Distribution (Note 3) ......................................... 167,866
Management (Note 3) ........................................... 67,146
Shareholder communication ..................................... 63,243
Transfer agent ................................................ 60,778
Custodian ..................................................... 22,482
Registration .................................................. 18,669
Auditing ...................................................... 12,955
Amortization of organization costs ............................ 6,222
Legal ......................................................... 5,111
Trustees ...................................................... 3,410
Miscellaneous ................................................. 4,871
------------
Total expenses before reimbursement .......................... 701,338
Expense reimbursement from Administrator ........................ (164,168)
------------
Net expenses ................................................. 537,170
------------
Net investment income ........................................... 1,242,639
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from:
Security transactions ......................................... 657,304
Futures transactions .......................................... 1,608,665
------------
Net realized gain on investments ................................ 2,265,969
------------
Net change in unrealized appreciation on
investments:
Security transactions ......................................... 8,870,323
Futures transactions .......................................... (281,000)
------------
Net unrealized gain on investments .............................. 8,589,323
------------
Net realized and unrealized gain on investments ................. 10,855,292
------------
Net increase in net assets resulting from
operations ...................................................... $12,097,931
===========
</TABLE>

- ----------
(a) Dividends recorded net of foreign withholding taxes of $15,318.

The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
21
<PAGE>

NET ASSETS:
Beginning of period .......................................................... 109,307,669 61,560,899
------------- -------------
End of period ................................................................ $ 159,914,382 $ 109,307,669
============= =============
Accumulated undistributed net investment income .............................. $ 1,240,274 $ 1,369,359
============= =============
</TABLE>

- ----------
* Unaudited.

The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE>

December 20
Six months September 1 1990(a)
ended Year ended through Year ended August 31 through
June 30 December 31 December 31 ------------------------ August 31
1996* 1995 1994** 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>

Net asset value at beginning of
period .................................... $ 19.15 $ 14.09 $ 14.48 $ 13.84 $ 12.15 $ 11.41 $ 9.45
--------- --------- ---------- -------- --------- -------- -------
Net investment income ..................... 0.14 0.24 0.09 0.27 0.22 0.18 0.11
Net realized and unrealized gain (loss)
on investments .......................... 1.71 4.82 (0.48) 0.37 1.47 0.56 1.85
--------- --------- ---------- -------- --------- -------- -------
Total from investment operations .......... 1.85 5.06 (0.39) 0.64 1.69 0.74 1.96
--------- --------- ---------- -------- --------- -------- -------
Less dividends and distributions:
From net investment income ................ (0.24) (0.27) -- (0.25) (0.18) (0.17) --
From net realized gain on investments ..... (0.31) (0.27) -- (0.18) (0.02) (0.04) --
--------- --------- ---------- -------- --------- -------- -------
Total dividends and distributions ......... (0.55) (0.54) -- (0.43) (0.20) (0.21) --
--------- --------- ---------- -------- --------- -------- -------
Reverse Share Split ....................... 0.55 0.54 -- 0.43 0.20 0.21 --
--------- --------- ---------- -------- --------- -------- -------
Net asset value at end of period .......... $ 21.00 $ 19.15 $ 14.09 $ 14.48 $ 13.84 $ 12.15 $ 11.41
========= ========= ========== ======== ========= ======== =======
Total investment return (b) ............... 9.66% 35.91% (2.68%) 4.59% 13.91% 6.49% 20.74%
Ratios (to average net assets)/Supplemental
Data:
Net investment income ................... 1.9%+ 1.7% 2.0%+ 1.9% 1.9% 1.8% 1.9%+
Expenses ................................ 0.8%+ 1.1% 0.9%+ 0.9% 0.9% 1.2% 1.4%+
Portfolio turnover rate ................... 1% 4% 2% 12% 4% 3% 1%
Average commission rate paid .............. $ 0.0499 (c) (c) (c) (c) (c) (c)
Net assets at end of period (in 000's) .... $ 159,914 $ 109,308 $ 61,561 $ 62,828 $ 62,921 $ 41,742 $ 23,534
</TABLE>

- ----------

* Unaudited.
** 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.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.

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

23
<PAGE>

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

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
Equity Index Fund (the "Fund"). The Fund's objective is to provide investment
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 Account 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 determined
by taking the assets attributable to the shares, subtracting the liabilities
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
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. 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.

24
<PAGE>

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 Equity Index Fund
invests in stock index futures contracts 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
liabilities. The contract or notional amounts and variation margin reflect the
extent of the Fund's involvement in long futures positions. 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 contracts. 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 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
outstanding, 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
organization and registration totalled $124,798. Such costs are being amortized
over ten years beginning at the commencement of 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
purchased, 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.

25
<PAGE>

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

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
Management 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
subsidiary 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
approximate annual rate of the average daily net assets of 0.10% and 0.40%,
respectively.

The Administration and Investment Management Agreements for the Fund also
provide that in the event the expenses of the Fund (including the fees of the
Fund's Adviser and the Administrator, but excluding interest, taxes,
organization expenses, brokerage commissions, litigation and indemnification
expenses and other extraordinary expenses) for any fiscal year exceed the limits
set by any state that regulates mutual fund expenses, the Administrator and
Advisor will each reduce their fees by 80% and 20%, respectively, of such
excess. In addition, effective January 1, 1996, in the event the total expenses
of the Fund (including 12b-1 fees) for any fiscal year exceeds .80% of the value
of the Fund's average annual net assets, the Administrator will reduce its fees
payable by the Fund by the difference between the Fund's total expenses and
.80%. This waiver is voluntary and may be terminated at any time.

Distribution Fees. The Trust, on behalf of the Fund, has a Distribution
Agreement with NYLIFE Distributors (the "Distributor"). The Fund has adopted a
Distribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1
under the 1940 Act.

Pursuant to the 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 shares, which
is an expense of the Fund for distribution or service activities as designated
by the Distributor.

26
<PAGE>

Sales Charge. The Fund was advised that the amount of sales charge retained by
NYLIFE Distributors was $1,024,708 for the six months ended June 30, 1996.

Capital. At June 30, 1996, NYLIFE Securities owned shares of the Fund with a net
asset value of $210,000.

Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the six
months ended June 30, 1996 were $8,525.

Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $2,680 for the six months ended
June 30, 1996.

Note 4 -- Purchases and Sales of Securities (in 000's):

Note 5 -- Capital Share Transactions (in 000's):

<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1996* 1995
----------- ------------
<S> <C> <C>
Shares sold ............................. 2,258 1,845
Shares issued in reinvestment of
dividends and distributions ............ 163 171
----- -----
2,421 2,016
Shares redeemed ........................ 347 502
Reduction of shares due to
reverse share split .................... 168 174
----- -----
Net increase ........................... 1,906 1,340
===== =====
</TABLE>

- ---------
* Unaudited.
27
<PAGE>

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

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
reinvested 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
difference 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
guarantee.

28
<PAGE>

This page intentionally left blank

29
<PAGE>

GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

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

<S> <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 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
Equity Index Fund graph indicating the makeup and returns of the participate in the growth potential
risk/reward of fund] S&P 500* of stocks+
- ------------------------------------------------------------------------------------------------------------------------------------

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

GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

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

<S> <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 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>

* 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.

# 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>

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

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

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

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

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

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

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 fund] income tax# investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------

Seeks high current income exempt You're a California resident and want
California Tax Free Fund [horizontal bar from both federal and California keep more of what you earn by invest-
graph indicating income taxes consistent with ing for income that's double tax free#
risk/reward of fund] preservation of capital#
- ------------------------------------------------------------------------------------------------------------------------------------

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

</TABLE>

A word about risk and reward

31
<PAGE>

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

semi-annual report
six months in review

fund results

& portfolio highlights

[LOGO] MainStay(R) Funds

- --------------------------------------------------------------------------------
UNAUDITED JUNE 30, 1996
- --------------------------------------------------------------------------------

OFFICERS & TRUSTEES

Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Harry G. Hohn 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 W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary

Dechert Price & Rhoads
Legal Counsel

[LOGO] MainStay(R) Funds

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] NEW YORK LIFE

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.

[RECYCLING SYMBOL] MSSA07 (896)
<PAGE>

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

Chairperson's Letter 2

MainStay Government Fund Highlights
and Portfolio Managers' Comments 4

Returns & Lipper Rankings 7

Year-by-Year & Six-Month Performance 8

$10,000 Invested in the MainStay Government Fund
Class A Shares vs. Lehman Brothers Government Bond
Index and Inflation 8

$10,000 Invested in the MainStay Government Fund
Class B Shares vs. Lehman Brothers Government Bond
Index and Inflation 8

Portfolio Composition 9

Portfolio of Investments 10

Financial Statements 12

Notes to Financial Statements 16

The MainStay Funds 22
<PAGE>

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

Strategic security selection and duration management amid powerful economic
forces and shifting market perceptions -- these were the strategies that guided
the management of the MainStay(R) Government Fund for the six months ended June
30, 1996. As a result, over this period, the Fund returned -2.25% and -2.61% for
Class A and Class B shares, respectively, excluding all sales charges.

A stronger economy -- good for stocks, challenging for bonds

After a spectacular 1995, the stock market continued to climb for most of the
first half of 1996 -but not without setbacks along the way. The economy was
stronger than expected, which led to inflation concerns, rising interest rates,
and price volatility. With the S&P 500* advancing 10.09% in the reporting
period, the stock market delivered a six-month return close to its historical
average for an entire year.+ Small capitalization stocks did even better, but
faced a sharp correction in mid-June. Investors were very active, pouring more
money into stock funds in the first six months than they had in any full year in
history.++ Whether the returns and investment activity we've seen in the first
half of the year can be sustained through what may be a bumpy second half
remains an open question.

Bonds had a difficult time during this period. The improving economy generally
hurt fixed-income investors, but boosted prices among lower-rated bonds. In
March, unexpected payroll gains, which indicated higher employment, caused bond
prices to plummet. In a single day, 30-year Treasury bond prices fell 3.3% and
most domestic bond categories, except high current yield, closed the first
quarter with negative returns. As employment rose in the second quarter, so did
long-term rates, with the 30-year Treasury bond yielding 6.90% at the end of
June. Since rising rates depress bond prices, the net effect on the portfolio
was negative.

Positive results in international markets

Foreign equity markets lagged the U.S. during the first quarter of 1996, but
provided more competitive returns in the second. Latin America posted strong
gains and Japan showed signs of economic recovery, which boosted its equity
returns to 43.5% for the 12 months ended June 30, 1996. Small company funds did
well in European markets, as they did in the U.S. In all but a handful of
markets, foreign currencies declined against the U.S. dollar, led by weaknesses
in the Japanese yen and core European currencies.

2
<PAGE>

Foreign bonds outperformed U.S. bonds during the reporting period, increasing
the potential value of international diversification.

Fund strategies, results, and outlook

The MainStay Government Fund portfolio management team used conservative
duration management to help boost portfolio performance. Careful security
selection among Treasuries and mortgage-backed securities also helped the Fund
outperform the average Lipper ss. general U.S. government fund during the
reporting period. The Fund's specific strategies and performance results are
discussed in greater detail in the Fund managers' comments on the following
pages.

While the results of the last six months can't tell us what will happen next,
they may help us form realistic expectations based on historical trends. Viewed
in this light, continuing fluctuations in interest rates and bond values would
not come as a surprise. Regardless of what the future holds, investors seeking
income may benefit by maintaining a long-range perspective and adding to their
accounts over time. Regular communication with your Registered Representative
can help you cope with volatility, make adjustments when warranted, and stay
focused on the future.

Educating investors, celebrating a decade of service

MainStay celebrated its 10th anniversary as a Fund group in May, passing a major
milestone for seven of our Funds, including the Government Fund. It has been our
pleasure to serve you during the last six months, and we look forward to
continuing to do so for many years to come.

/s/ Alice T. Kane
Alice T. Kane
July 1996

- ---------

+ Source: Ibbotson Associates.

++ Source: Investment Company Institute.

ss. See footnote and chart on page 7 for more information on Lipper Analytical
Services, Inc.

3
<PAGE>

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

Fund highlights for the six months ended June 30, 1996

o One-year total returns of 3.27% and 2.66% for Class A and Class B shares,
respectively, excluding all sales charges, as of 6/30/96

o Fund track record exceeded ten years

o Active duration management and security selection in Treasuries and
mortgage-backed securities added value during a turbulent period

For the six-month period ended June 30, 1996, the MainStay Government Fund
provided total returns of -2.25% and -2.61% for Class A and Class B shares,
respectively, excluding all sales charges. Despite negative returns, both share
classes slightly outperformed the average Lipper general U.S. government fund,
which returned -2.62% over the same period.

After an outstanding 1995, in the first quarter of 1996, government bonds gave
their worst showing since 1987. The yield on the 30-year Treasury bond rose 72
basis points, producing a price decline of 8.4%. The rate rise was triggered by
an unexpected surge in the economy, led by autos, housing, nondefense capital
goods, and even the battered retail sector.

Shifting Federal Reserve policies also affected interest rates. The Fed began
the first quarter continuing its easing monetary policy with a modest reduction
in short-term rates at the end of January, which caused a slightly steeper yield
curve. As the quarter progressed, the Fed's move to a neutral policy caused
long-term rates to move higher relative to intermediate- and short-term rates.
By the end of the first quarter, the yield curve was approximately ten basis
points steeper than at year-end 1995. In the second quarter, the market's
attention was focused on what the Fed would do next, but mixed signals and
general uncertainty left the relationship of long-, intermediate-, and short-
term rates largely unchanged.

Basis point
- -----------
One hundredth of one
percent in the yield of
an investment, e.g., 100
basis points equals 1%.

Yield curve
- -----------
When 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.

4
<PAGE>

In this environment, the Fund benefited from three key management approaches:
our duration management, and security selection strategies in Treasuries and in
the mortgage market.

The longer a Fund's duration, the more price variations it will capture when
interest rates move. As interest rates rose in the first quarter, we moved to a
slightly short-of-neutral duration position, which helped the Fund perform
closely in line with the market. After rates rose in the second quarter, we
moved to a slightly longer-than-neutral duration, which helped the Fund
outperform its peers for the quarter. To help avoid the downside potential of
market timing and more effectively manage risk, we generally seek to make only
modest duration adjustments relative to the market as a whole, until we see a
definitive trend developing.

In the Treasury market, security selection was a positive component of our
first-quarter total return. In the volatile markets of February and March,
liquidity was at a premium, which led to stronger returns for new-issue
Treasuries. Older issues underperformed due to an increase in supply from heavy
investor selling. As the second quarter progressed, the value relationship
between older Treasuries and new issues reversed, leading us to sell our new
Treasury issues and buy older ones. The move had a positive effect on
performance. We believe the trend will again reverse in the third quarter and
intend to sell our older issues and buy newer issues as the quarter unfolds.

In the mortgage market, security selection also contributed favorably to
performance. Rising interest rates in the first quarter caused refinancing to
dry up. This led mortgage-backed securities to lengthen in duration and
underperform Treasuries, negatively impacting the portfolio. Nevertheless, we
found their fundamentals attractive and saw this underperformance as an
opportunity to increase our exposure in this sector at low cost, which added
value to the portfolio. We also sold adjustable-rate

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.

Mortgage-backed
securities
- ---------------
Securities representing
interests in "pools" of
mortgages in which
principal and interest
payments by the holders
of underlying fixed- or
adjustable-rate mortgages
are, in effect, "passed
through" to investors
(net of fees paid to the
issuer or guarantor of
the securities).

5
<PAGE>

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

mortgages to purchase fixed-rate mortgages as limited new issues tightened
adjustable-rate mortgage spreads. During the second quarter, we continued to
strategically add high-yielding, high-quality, short-term mortgage assets, which
helped the Fund's returns. With a lack of new supply, higher rates, and lower
volatility, these mortgage-backed securities enjoyed tighter spreads than
Treasuries with similar duration, which was a plus for the Fund's performance.
We are currently overweighted in the mortgage sector, believing that lower
volatility has enhanced the return profile on mortgages.

As we enter the second half of the year, we will closely monitor the Federal
Reserve for early signals of changing monetary policy. Meanwhile, we will focus
on inflationary trends and signals of economic strength to strategically adjust
the portfolio's duration around the market's neutral point.

Ravi Akhoury
Edward Munshower
Portfolio Managers

Yield spread
- ------------

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

6
<PAGE>

Fund average annual total returns*
- --------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/96
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>

Class A 3.27% 6.04% 6.84% 6.66%
Class B 2.66% 5.83% 6.74% 6.56%
- --------------------------------------------------------------------------------

<CAPTION>
Fund Lipper+ rankings and Lipper category returns as of 6/30/96
Life of Fund
1 year 5 years 10 years through 6/30/96
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 107 out of n/a n/a 91 out of
171 funds 156 funds

Class B 137 out of 61 out of 30 out of 27 out of
171 funds 68 funds 38 funds 36 funds

Average Lipper
general
U.S. government
fund 3.48% 7.13% 7.15% 7.04% (5/1/86)
- --------------------------------------------------------------------------------

<CAPTION>
Fund per-share net asset values and distributions for the six months ended
6/30/96
- --------------------------------------------------------------------------------
NAV 6/30/96 Income Capital Gains
<S> <C> <C> <C>
Class A $7.97 $0.2510 $0.0000
Class B $7.97 $0.2210 $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%.

7
<PAGE>

Total Return
Period-end %
---------- ------------
<S> <C>
12/86 5.92
12/87 3.53
12/88 6.40
12/89 12.17
12/90 6.92
12/91 13.40
12/92 3.81
12/93 5.88
12/94 -2.85
12/95 16.38 Class A
12/95 15.69 Class B
6/96 -2.25 Class A
6/96 -2.61 Class B

- --------------------------------------------------------------------------------
$10,000 INVESTED IN THE MAINSTAY GOVERNMENT FUND VS.
LEHMAN BROTHERS GOVERNMENT BOND INDEX AND INFLATION
- --------------------------------------------------------------------------------

Class A Shares
<S> <C> <C>

Lehman Brothers
Government Bond Government
Period-end Index++ Inflation/ss/ Fund
- ---------- --------------- ------------- ----------
<S> <C> <C> <C>
5/1/86 10000 10000 9550
12/86 10567.31 10175 10114.98
12/87 10799.29 10626 10471.77
12/88 11558.03 11096 11142.27
12/89 13202.90 11611 12498.66
12/90 14353.77 12320 13363.79
12/91 16552.19 12698 15154.70
12/92 17748.45 13066 15733.24
12/93 19640.11 13425 16658.07
12/94 18977.20 13785 16183.72
12/95 22457.78 14134 18834.51
6/96 22054.84 14420 18410.20

<CAPTION>
Class B Shares
<S> <C> <C> <C>
5/1/86 10000 10000 10000
12/86 10567.31 10175 10591.60
12/87 10799.29 10626 10965.20
12/88 11558.63 11096 11667.30
12/89 13202.90 11611 13087.60
12/90 14353.77 12320 13993.50
12/91 16552.19 12698 15868.80
12/92 17748.45 13066 16474.60
12/93 19640.11 13425 17443.00
12/94 18977.20 13785 16946.30
12/95 22457.78 14134 19605.70
6/96 22054.84 14420 19093.50
</TABLE>

- ---------
Returns are for Class B
shares unless otherwise
noted. See footnote * on
page 7 for more
information on
performance.

- ---------
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 Bond 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.

ss. 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.

8
<PAGE>

[The following graph was represented by a pie chart]

U.S. Treasury Notes ............................ 35.3%
U.S. Treasury Bonds ............................ 21.7%
Federal Home Loan Mortgage Corporation ......... 18.9%
Government National Mortgage Association ....... 15.1%
Federal National Mortgage Association .......... 14.7%
Cash & Equivalents* ............................ (5.7%)

Note: Actual percentages will vary over time.

* Cash & Equivalents represent liabilities in excess of cash and other assets
including short-term securities.

9
<PAGE>

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

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

LONG-TERM U.S. GOVERNMENT &
FEDERAL AGENCIES (105.7%)+

FEDERAL HOME LOAN MORTGAGE
CORPORATION (COLLATERALIZED
MORTGAGE OBLIGATIONS)(11.9%)

<S> <C> <C>
Series 1604 Class C
5.00%, due 2/15/03......................... $ 9,035,000 $ 8,944,650
Series 1625 Class CA
5.125%, due 2/15/03........................ 24,033,800 23,808,603
Series 1678 Class PC
5.20%, due 7/15/03......................... 15,000,000 14,831,250
Series 1645 Class ZA
5.50%, due 4/15/05......................... 15,879,640 15,239,531
Series 1627 Class PZ
5.60%, due 8/15/17......................... 11,096,528 10,673,528
Series 1858 Class B
6.00%, due 6/15/11......................... 11,905,000 11,640,828
Series 1817 Class AB
6.50%, due 2/15/14......................... 8,038,476 7,980,680
Series 1783-A Class A
8.00%, due 2/15/00......................... 9,831,611 10,042,794
--------- ----------
103,161,864
----------
FEDERAL HOME LOAN MORTGAGE
CORPORATION (MORTGAGE PASS-
THROUGH SECURITIES) (3.0%)
6.00%, due 8/1/24-10/1/24.................... 28,751,968 26,330,478
----------
FEDERAL HOME LOAN MORTGAGE
CORPORATION GOLD (MORTGAGE PASS-
THROUGH SECURITIES) (4.0%)
7.00%, due 2/1/26-5/1/26....................... 35,648,088 34,333,743
----------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (2.2%)
8.50%, due 2/1/05............................ 18,390,000 19,218,653
----------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (COLLATERALIZED
MORTGAGE OBLIGATIONS) (4.1%)
Series 1993-224 Class PD
5.25%, due 8/25/15........................... 15,667,000 15,412,411
Series 1993-93 Class C
5.50%, due 2/25/06........................... 19,992,812 19,630,542
----------
35,042,953
<CAPTION>

Principal
Amount Value
--------------------------
<S> <C> <C>
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (MORTGAGE PASS-
THROUGH SECURITIES) (8.4%)
6.50%, due 7/1/24............................ $15,337,295 $14,433,775
7.00%, due 7/1/11 TBA (a).................... 45,233,550 44,632,848
9.00%, due 6/1/25............................ 12,686,979 13,240,004
-----------
72,306,627
-----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION (MORTGAGE PASS-
THROUGH SECURITIES) (15.1%)
6.50%, due 7/1/26 TBA (a).................... 21,350,000 20,009,007
7.50%, due 6/15/26........................... 14,415,000 14,207,856
8.00%, due 7/1/26 TBA (a).................... 9,240,000 9,326,671
8.00%, due 7/1/26 TBA (a).................... 85,997,000 86,803,652
-----------
130,347,186
-----------
UNITED STATES TREASURY BONDS (21.7%)
6.25%, due 8/15/23............................ 100,061,000 90,711,300
8.875%, due 8/15/17........................... 46,807,000 56,197,420
11.25%, due 2/15/15........................... 27,745,000 40,039,364
-----------
186,948,084
-----------
UNITED STATES TREASURY NOTES (35.3%)
5.50%, due 11/15/98 (b)....................... 101,840,000 100,232,965
5.625%, due 11/30/00.......................... 6,000 5,812
6.375%, due 3/31/01........................... 15,025,000 14,959,191
6.50%, due 5/15/05............................ 59,565,000 58,782,912
7.875%, due 11/15/04.......................... 13,000,000 13,972,920
8.125%, due 2/15/98........................... 81,695,000 84,247,969
8.75%, due 10/15/97........................... 31,100,000 32,168,907
-----------
304,370,676
-----------
Total Long-Term U.S. Government &
Federal Agencies
(Cost $919,184,432).......................... 912,060,264
-----------

SHORT-TERM INVESTMENTS (11.9%)

COMMERCIAL PAPER (0.1%)
Travelers Group Inc.
5.432%, due 7/1/96........................... 615,000 615,000
-----------
</TABLE>

- ----------
+ Percentages indicated are based on Fund net assets.

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

10
<PAGE>

- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Value
-----------------------------
SHORT-TERM INVESTMENTS (Continued)
<S> <C> <C>
UNITED STATES TREASURY NOTE (11.8%)
6.25%, due 8/31/96 (b) $ 102,100,000 $ 102,211,289
-----------

Total Short-Term Investments
(Cost $102,840,363) 102,826,289
-----------

Total Investments
(Cost $1,022,024,795) (c) 117.6% 1,014,886,553(d)

Liabilities in Excess of Cash
and Other Assets (17.6) (151,992,564)
----- -------------

Net Assets 100.0% $862,893,989
===== =============
</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.

(d) At June 30, 1996 net unrealized depreciation was $7,201,519,
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 $1,956,132 and aggregate unrealized
depreciation of all investments on which there was an excess
of cost over market value of $9,157,651.

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

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996 (Unaudited)
<S> <C>
ASSETS:
Investment in securities, at value (Note 2)
(identified cost $1,022,024,795) ......................... $ 1,014,886,553
Cash ..................................................... 3,893
Receivables:
Investment securities sold ............................. 40,820,963
Interest ............................................... 13,786,126
Fund shares sold ....................................... 379,121
Other assets ............................................. 1,495
-------------
Total assets .......................................... 1,069,878,151
-------------

LIABILITIES:
Payables:
Investment securities purchased ........................ 200,784,329
Fund shares redeemed ................................... 878,772
NYLIFE Distributors .................................... 813,060
Adviser ................................................ 212,190
Transfer agent ......................................... 136,420
Custodian .............................................. 14,810
Trustees ............................................... 8,860
Accrued expenses ......................................... 228,591
Dividend payable ......................................... 3,907,130
---------------
Total liabilities ..................................... 206,984,162
---------------
Net assets ............................................... $ 862,893,989
===============

COMPOSITION OF NET ASSETS:

Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized:
Class A ................................................ $ 20,238
Class B ................................................ 1,062,265
Additional paid-in capital ............................... 1,018,081,554
Accumulated undistributed net investment income .......... 1,122,505
Accumulated net realized loss on investments ............. (150,254,331)
Net unrealized depreciation on investments ............... (7,138,242)
---------------
Net assets ............................................... $ 862,893,989
===============
CLASS A
Net assets applicable to outstanding shares .............. $ 16,132,008
===============
Shares of beneficial interest outstanding ................ 2,023,842
===============
Net asset value per share outstanding .................... $ 7.97
Maximum sales charge (4.50% of offering price) ........... 0.38
---------------
Maximum offering price per share outstanding ............. $ 8.35
===============
CLASS B
Net assets applicable to outstanding shares .............. $ 846,761,981
===============
Shares of beneficial interest outstanding ................ 106,226,470
===============
Net asset value per share outstanding .................... $ 7.97
===============
</TABLE>

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

12
<PAGE>

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------

FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Unaudited)
<S> <C>
INVESTMENT INCOME:
Income:
Interest $34,230,953
------------
Expenses: (Note 2)
Distribution--Class B (Note 3) ............................ 2,691,954
Administration (Note 3) ................................... 1,382,300
Advisory (Note 3) ......................................... 1,382,300
Service (Note 3) .......................................... 1,151,925
Transfer agent ............................................ 525,969
Shareholder communication ................................. 169,285
Recordkeeping (Note 3) .................................... 59,563
Auditing .................................................. 55,060
Custodian ................................................. 47,879
Legal ..................................................... 24,743
Registration .............................................. 23,557
Trustees .................................................. 11,190
Miscellaneous ............................................. 38,413
------------
Total expenses ........................................... 7,564,138
------------
Net investment income ....................................... 26,666,815
------------

REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments ............................ (17,198,943)
Net change in unrealized appreciation on investments ........ (34,786,790)
------------
Net realized and unrealized loss on investments ............. (51,985,733)
------------
Net decrease in net assets resulting from operations ........ $(25,318,918)
============

</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>
Six months
Ended Year ended
June 30, December 31,
1996* 1995
---------------- -------------
<S> <C> <C>
DECREASE IN NET ASSETS:
Operations:
Net investment income ........................................................ $ 26,666,815 $ 67,902,081
Net realized gain (loss) on investments ...................................... (17,198,943) 30,263,895
Net change in unrealized appreciation (depreciation) on investments .......... (34,786,790) 50,910,905
----------- -----------
Net increase (decrease) in net assets resulting from operations .............. (25,318,918) 149,076,881
----------- -----------

Dividends to shareholders:
From net investment income:
Class A .................................................................... (453,011) (587,166)
Class B .................................................................... (24,561,019) (65,467,814)
In excess of net investment income:
Class A .................................................................... -- (4,714)
Class B .................................................................... -- (525,566)
----------- -----------
Total dividends to shareholders .......................................... (25,014,030) (66,585,260)
----------- -----------

Capital share transactions: Net proceeds from sale of shares:
Class A .................................................................... 6,724,443 18,152,317
Class B .................................................................... 41,622,111 68,492,581
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A .................................................................... 243,100 395,104
Class B .................................................................... 15,164,075 46,973,420
----------- -----------
63,753,729 134,013,422

Cost of shares redeemed:
Class A .................................................................... (2,854,706) (6,301,705)
Class B .................................................................... (150,639,869) (231,727,262)
----------- -----------
Decrease in net assets derived from capital share transactions ........... (89,740,846) (104,015,545)
----------- -----------
Net decrease in net assets ............................................... (140,073,794) (21,523,924)

NET ASSETS:
Beginning of period ............................................................ 1,002,967,783 1,024,491,707
------------- -------------
End of period .................................................................. $ 862,893,989 $ 1,002,967,783
=============== ===============
Accumulated undistributed net investment income/(excess distribution) .......... $ 1,122,505 $ (530,280)
=============== ===============
</TABLE>

- ---------
* Unaudited.

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

14
<PAGE>

Class B
------------------------------------------------
Class A Class B Class A Class B September 1
------- ------- ------- ------- through Year ended August 31
Six months ended Year ended December 31 -----------------------------------
June 30, 1996* December 31, 1995 1994** 1994 1993 1992 1991
------------------ ------------------- ----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ............. $ 8.41 $ 8.41 $ 7.76 $ 7.76 $ 8.04 $ 8.77 $ 8.88 $ 8.82 $ 8.48
------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income ............ 0.25 0.22 0.58 0.54 0.19 0.57 0.68 0.73 0.81
Net realized and
unrealized gain (loss)
on investments .................. (0.44) (0.44) 0.65 0.65 (0.29) (0.71) (0.09) 0.07 0.35
------ ------ ------ ------ ------ ------ ------ ------ ------

Total from investment
operations....................... (0.19) (0.22) 1.23 1.19 (0.10) (0.14) 0.59 0.80 1.16
------ ------ ------ ------ ------ ------ ------ ------ ------

Less dividends and
distributions:
From net investment
income........................... (0.25) (0.22) (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.................... (0.25) (0.22) (0.58) (0.54) (0.18) (0.59) (0.70) (0.74) (0.82)
------ ------ ------ ------ ------ ------ ------ ------ ------

Net asset value at end
of period........................ $ 7.97 $ 7.97 $ 8.41 $ 8.41 $ 7.76 $ 8.04 $ 8.77 $ 8.88 $ 8.82
====== ====== ======= ======= ======= ======= ======= ======= =======
Total investment
return (a)....................... (2.25%) (2.61%) 16.38% 15.69% (1.24%) (1.63%) 6.92% 9.46% 14.33%

Ratios (to average net
assets)/Supplemental
Data:
Net investment income 6.8%+ 6.2%+ 7.3% 6.7% 7.1%+ 7.1% 7.8% 8.3 9.5%
Expenses......................... 1.1%+ 1.7%+ 1.0% 1.7% 1.7%+ 1.7% 1.7% 1.8% 1.8%
Portfolio turnover rate........... 166% 166% 540% 540% 143% 491% 629% 613% 318%
Net assets at end of
period (in 000's)..............$16,132 $846,762 $12,784 $990,184 $1,024,492 $1,119,586 $1,210,998 $957,010 $622,550
</TABLE>

- ----------
* Unaudited.
** 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.

15
<PAGE>

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

Note 1 -- Organization and Business:

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

16
<PAGE>

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 portfolio
to a counterparty from whom it simultaneously agrees to buy a similar security
on a delayed delivery basis. The MDR transactions of the Fund are classified 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 recognized. The
securities the Fund has agreed to acquire are included at market value in the
portfolio of investments and liability for such purchase commitments is included
as payables for investments purchased.

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
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
transactions 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. 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 securities.

17
<PAGE>

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

Note 3 -- Fees and Related Party Policies:

NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned
subsidiary 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
approximate 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%.

18
<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 $70,349 for the six
months ended June 30, 1996.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges on redemptions of Class B shares for the six months ended June 30,
1996 in the amount of $490,681.

Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the six
months ended June 30, 1996 were $14,069.

Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $24,386 for the six months ended
June 30, 1996.

Fees for recordkeeping services provided to the Fund are charged to the Fund.
The fee for the period January 1, 1996 through June 30, 1996 amounted to
$59,563.

19
<PAGE>

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

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
deferred 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 offset
future capital gains, it is probable that the capital gains so offset will not
be distributed to shareholders.

Capital Loss Amount
Available Through (000's)
----------------- ---------

1997 .................... $ 9,269
1998 .................... 12,043
2001 .................... 4,831
2002 .................... 106,003
--------
$132,146
========

Note 5 -- Purchases and Sales of Securities (in 000's):

During the six month period ended June 30, 1996 purchases and sales of U.S.
Government securities, other than securities subject to repurchase transactions
and short-term securities, were $1,585,249 and $1,630,682, respectively.

Note 6 -- Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1996* December 31, 1995
---------------- -----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ................................ 821 5,118 2,246 8,414
Shares issued in reinvestment of
dividends . ............................. 30 1,866 48 5,761
----- ----- ----- ------
851 6,984 2,294 14,175
Shares redeemed ............................ 347 18,534 774 28,453
----- ------ ----- -------
Net increase (decrease) .................... 504 (11,550) 1,520 (14,278)
===== ======= ===== =======
</TABLE>

- ---------
* Unaudited.

20
<PAGE>

This page intentionally left blank

21
<PAGE>

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

<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
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 of companies in expanding markets and are willing to accept a higher
bar graph with strong growth potential level of risk for higher return potential
representing
risk/reward
of Fund]
- ----------------------------------------------------------------------------------------------------------------------------------
Invests in a portfolio that tracks You seek a conservative way to participate
Equity Index Fund [Horizontal the makeup and returns of the in the growth potential of stocks+
bar graph S&P 500*
representing
risk/reward
of Fund]
- ----------------------------------------------------------------------------------------------------------------------------------
Offers broad diversification into You prefer the higher return potential
International Equity Fund [Horizontal international stock markets with of international equities or want to add
bar graph an emphasis on risk control diversification to your domestic
representing investments++
risk/reward
of Fund]
- ----------------------------------------------------------------------------------------------------------------------------------

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

# 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>
Seeks a high level of current income You are seeking to combine high
Government Fund [Horizontal consistent with safety of principal current income and safety of principal
bar graph primarily from U.S. government
representing securities ss.
risk/reward
of Fund]
- ------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

</TABLE>

23
<PAGE>

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

semi-annual report
six months in review

fund results

& portfolio highlights

[LOGO] MainStay(R) Funds

- --------------------------------------------------------------------------------
Unaudited June 30, 1996
- --------------------------------------------------------------------------------

OFFICERS & TRUSTEES

Alice T.Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer, and Trustee
Harry G. Hohn 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 W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary

Dechert Price & Rhoads
Legal Counsel

[LOGO] MainStay(R) Funds

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] New York Life

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.

[RECYCLING SYMBOL] MSSA08 (896)
<PAGE>

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

Chairperson's Letter 2

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

Returns & Lipper Rankings 7

Year-by-Year & Six-Month Performance 8

$10,000 Invested in the MainStay High Yield Corporate
Bond Fund Class A Shares vs. S&P 500 and Inflation 8

$10,000 Invested in the MainStay High Yield Corporate
Bond Fund Class B Shares vs. S&P 500 and Inflation 8

Top 10 Holdings 9

10 Largest Purchases 10

10 Largest Sales 10

Diversification by Industry -- Top 5 11

Quality Breakdown 11

Portfolio of Investments 12

Financial Statements 21

Notes to Financial Statements 25

The MainStay Funds 32
<PAGE>

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

Strategic security selection and duration management amid powerful economic
forces and shifting market perceptions -- these were the strategies that guided
the management of the MainStay(R) High Yield Corporate Bond Fund for the six
months ended June 30, 1996. As a result, over this period, the Fund returned
7.05% and 6.73% for Class A and Class B shares, respectively, excluding all
sales charges.

A stronger economy -- good for stocks and high yield securities, tough on other
bonds

Bonds had a difficult time during this period. The improving economy generally
hurt fixed-income investors, but boosted prices among lower-rated bonds. In
March, unexpected payroll gains, which indicated higher employment, caused bond
prices to plummet. In a single day, 30-year Treasury bond prices fell 3.3% and
most domestic bond categories, except high current yield, closed the first
quarter with negative returns. As employment rose in the second quarter, so did
long-term rates, with the 30-year Treasury bond yielding 6.90% at the end of
June. Despite these difficulties, high yield bonds enjoyed a relatively robust
six months, largely as a result of the stronger economy.

Positive results in international markets

2
<PAGE>

Fund strategies, results, and outlook

The MainStay High Yield Corporate Bond Fund portfolio management team maintained
a conservative posture throughout the first half of 1996, with a significant
portion of the portfolio in cash and U.S. government securities for defensive
purposes. In the second quarter, the portfolio managers reduced the portfolio's
duration to boost portfolio performance. Careful security selection brought
gains from Mesa Petroleum, GPA, and selected restaurant issues in the first half
of the year -- and Spanish Broadcasting, Gateway, and Envirodyne, among others,
in the second. The Fund's specific strategies and performance results are
discussed in greater detail in the Fund managers' comments on the following
pages.

While the results of the last six months can't tell us what will happen next,
they may help us form realistic expectations based on historical trends. Viewed
in this light, continuing fluctuations in interest rates and bond values would
not come as a surprise. Regardless of what the future holds, investors seeking
income may benefit by maintaining a long-range perspective and adding to their
accounts over time. Regular communication with your Registered Representative
can help you cope with volatility, make adjustments when warranted, and stay
focused on the future.

Educating investors, celebrating a decade of service

MainStay celebrated its 10th anniversary as a Fund group in May, passing a major
milestone for seven of our Funds, including the High Yield Corporate Bond Fund.
It has been our pleasure to serve you during the last six months, and we look
forward to continuing to do so for many years to come.

/s/ Alice T. Kane
Alice T. Kane
July 1996

- ----------
* See note on page 8 for more information on the S&P 500.
+ Source: Ibbotson Associates.
++ Source: Investment Company Institute.

3
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY HIGH YIELD CORPORATE BOND FUND
- --------------------------------------------------------------------------------

Fund highlights for the six months ended June 30, 1996

o One-year total returns of 14.92% and 14.39% for Class A and Class B shares,
respectively, excluding all sales charges, as of 6/30/96
o Fund track record exceeded ten years
o Six-month and one-year performance well ahead of the Fund's average
peer fund

For the six-month period ended June 30, 1996, the MainStay High Yield Corporate
Bond Fund provided total returns of 7.05% and 6.73% for Class A and Class B
shares, respectively, excluding all sales charges. This placed the Fund well
ahead of the average Lipper high current yield fund, which returned 4.84% over
the same period. For the six months ended 6/30/96, Class A shares ranked in the
top 16% (24 out of 151) and Class B shares in the top 20% (30 out of 151) of
their Lipper peer group.*

With rising interest rates, yield spreads over Treasuries tightened even further
during the first six months of 1996. Believing that spreads would return to
normal historical levels during the year, for temporary defensive purposes, we
have continued to maintain a healthy cash position (consisting of cash and U.S.
government securities) of approximately 20%. Although the anticipated widening
has not yet occurred, we have remained on the defensive.

In the first quarter, we took profits in issues such as Waxman Industries and
Liggett Group. Although these issues continued to do well, we felt their risk
potential made the sales prudent. These decisions improved the Fund's credit
quality, and allowed us to focus on more seasoned issuers with strong and
improving credit momentum, many of which have provided positive returns.

During the first quarter, we concentrated on special situations based on
short-term events, such as refinancings, including Mesa Petroleum and GPA, both
of which contributed positively to performance. At the same

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.

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

Credit quality
- ---------------------------------------
A measure of an individual issuer's
ability to repay principal and interest
on its fixed-income securities -- or a
measure of the general credit risk of
securities in a fixed-income portfolio.

- ----------
* See footnote and chart on page 7 for more information on Lipper Analytical
Services, Inc.

4
<PAGE>

time, we avoided situations with negative earnings comparisons, particularly
among cyclical issues. One example of how our careful security selection paid
off was Selmer, a clarinet and piano company, which appreciated during the first
quarter. Another strategy that added value was our emphasis on restaurant
issues, which outperformed the sector average substantially in January and
February. By the end of the first quarter, we took profits and substantially
reduced our weighting in restaurant issues, which proved to be a well-timed move
because they later declined in value.

Recognizing that a weak economy could cause credit quality to deteriorate and
spreads to widen, we have maintained a cautious posture. With some signs of
strength in the economy, we were surprised to see the default rate remain less
than 1% as interest rates rose and spreads continued to narrow. Although our
cash position hindered performance in the strong second quarter market, we more
than compensated for any weaknesses with our disciplined security selection. We
look for credits returning at least 300 basis points over Treasuries with
adequate liquidity, strong asset coverage, and free cash flow. Among our best
performers in the second quarter were Spanish Broadcasting, Gateway, Hosiery
Corp., Envirodyne, and Newflo. At the same time, having excess cash gave us
flexibility to pursue other opportunities such as Park Communications bonds
which came to market during the period.

We continue to believe that we are in the latter stages of the economic cycle
and remain cautious. We already have fewer interest-rate sensitive holdings than
the market and have now shortened the Fund's duration by emphasizing
shorter-term (2-3 year) issues such as Unisys, UIH, and GI Holdings. Both the
duration play and our security choices have had a positive impact on performance
as interest rates have climbed.

Basis point
- ---------------------------------------
One hundredth of one percent in the
yield of an investment, e.g., 100 basis
points equals 1%

5
<PAGE>

We continue to emphasize credit quality and companies that have significantly
improved their financial picture by paying down debt. We currently like
broadcasting, newspapers, and international cable, but find little value in
retail or supermarket issues. As a whole, the high yield market does not
represent compelling relative value, and we are not willing to compromise our
risk-averse approach or to stretch for yield by selecting credits we believe are
inferior. We will continue to hold cash and retain our defensive posture until
the market offers better value in high yield securities.

Denis Laplaige
Steve Tananbaum
Portfolio Managers

6
<PAGE>

<S> <C> <C> <C> <C>
Class A 14.92% 16.72% 10.49% 10.46%
Class B 14.39% 16.54% 10.40% 10.38%
- ------------------------------------------------------------------------------------------------------------------------------------

Fund SEC returns*
- ------------------------------------------------------------------------------------------------------------------------------------

1 year 5 years 10 years
- ------------------------------------------------------------------------------------------------------------------------------------

Class A 9.74% 15.65% 9.98%
Class B 9.39% 16.32% 10.40%
- ------------------------------------------------------------------------------------------------------------------------------------

Fund Lipper+ rankings and Lipper category returns as of 6/30/96
- ------------------------------------------------------------------------------------------------------------------------------------

Life of Fund
1 year 5 years 10 years through 6/30/96
- ------------------------------------------------------------------------------------------------------------------------------------

Class A 15 out of 138 funds n/a n/a 11 out of 119 funds
Class B 19 out of 138 funds 2 out of 62 funds 6 out of 36 funds 7 out of 36 funds
- ------------------------------------------------------------------------------------------------------------------------------------

Average Lipper
high current
yield fund 11.21% 12.87% 8.89% 8.96% (5/1/86)
- ------------------------------------------------------------------------------------------------------------------------------------

NAV 6/30/96 Income Capital Gains
- ------------------------------------------------------------------------------------------------------------------------------------

Class A $8.11 $0.3600 $0.0000
Class B $8.11 $0.3360 $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.

+ 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. Lipper averages listed above are not class specific; life of fund
return is from the period of the Class B shares' initial offering through
6/30/96. For the 5-year and 10-year periods ended 6/30/96, the Fund's Class
B shares placed among the top 4% and 17%, respectively, of Lipper high
current yield funds. Class A shares are not ranked by Lipper for these
periods. The Fund's Class A shares were first offered to the public 1/3/95;
Class B shares 5/1/86.

7
<PAGE>

[Shown as a bar graph]

<TABLE>
<CAPTION>
Total Return %
--------------
Period-end Class A Class B
- ---------- ------- -------

- ----------
Returns are for Class B shares unless otherwise noted.
See footnote * on page 7 for more information on performance.

- --------------------------------------------------------------------------------
$10,000 INVESTED IN THE MAINSTAY HIGH YIELD
CORPORATE BOND FUND VS. S&P 500 AND INFLATION
- --------------------------------------------------------------------------------

[The table below was represented as a line graph in the printed document]

<TABLE>
<CAPTION>
Class A Shares

High Yield
Period-end S&P500++ Inflation ss. Corporate Bond Fund
- ---------- -------- ------------- -------------------
<S> <C> <C> <C>
5/1/86 10,000 10,000 9,550
12/86 10,550 10,175 10,027.79
12/87 11,097 10,626 10,046.70
12/88 12,927 11,096 11,743.25
12/89 17,011 11,611 11,151.15
12/90 16,481 12,320 10,276.18
12/91 21,481 12,698 13,592.61
12/92 23,115 13,066 16,534.87
12/93 25,435 13,425 20,114.97
12/94 25,780 13,785 20,416.09
12/95 35,433 14,134 24,556.77
6/96 39,004 14,420 26,286.76
</TABLE>

[The table below was represented as a line graph in the printed material]

<TABLE>
<CAPTION>
Class B Shares

High Yield
Period-end S&P500++ Inflation ss. Corporate Bond Fund
- ---------- -------- ------------- -------------------

- ----------
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.

++ "Standard & Poor's 500 Composite
Stock Price Index" and "S&P 500"
are registered trademarks of
Standard & Poor's. 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.

ss. 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.

8
<PAGE>

- --------------------------------------------------------------------------------
TOP 10 HOLDINGS as of 6/30/96
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Holding $ Amount
<S> <C>
Trizec Finance Ltd., 10.875%,due 10/15/05 $37,865,385

Affinity Group, Inc., 11.50%,due 10/15/03 37,132,088

Telewest, Plc, (zero coupon),due 10/1/07 34,457,180

Microcell Telecommunications, Inc., (zero coupon),due 6/1/06 33,401,063

United International Holdings, Inc., (zero coupon),due 11/15/99 32,666,700

Continental Cablevision, Inc., 11.00%,due 6/1/07 31,346,935

Hollinger, Inc., (zero coupon),due 10/5/13 31,240,425

Unisys Corp., 8.875%,due 7/15/97 27,858,000

Thermadyne Holdings Corp., 10.75%,due 11/1/03 27,072,080

General Media, Inc., 10.625%,due 12/31/00 26,406,900
</TABLE>

9
<PAGE>

<TABLE>
<CAPTION>
Security Amount of purchase
<S> <C>
Spanish Broadcasting System, Inc., 7.50%,due 6/15/02, 12.25%,due 6/1/01,
Series A Preferred Stock and Warrants expiration 6/29/99 $49,832,375

Time Warner, Inc., 10.25%, Series K Preferred Stock 46,200,000

Microcell Telecommunications, Inc., (zero coupon),due 6/1/06 40,781,450

Cablevision Systems Corp., 10.50%,due 5/15/16, 11.75%,
Series H Preferred Stock and 11.125%, Series L Preferred Stock 35,516,250

Telewest, Plc, (zero coupon),due 10/1/07 35,035,059

Continental Cablevision, Inc., 11.00%,due 6/1/07 31,393,476

Unisys Corp., 8.875%,due 7/15/97, 15.00%,due 7/1/97 and Common Stock 30,551,549

GPA Group, Plc, 8.75%,due 12/15/98 and Preferred Stock 28,241,644

Park Newspapers, Inc., 11.875%,due 5/15/04 27,350,000

Grupo Televisa, S.A., (zero coupon),due 5/15/08 and Series A,
11.375%,due 5/15/03 26,905,764
</TABLE>

<TABLE>
<CAPTION>
Security Amount of sale
<S> <C>
Nextel Communications, Inc., (zero coupon),due 8/15/04
and Class A Common Stock $30,174,063

Time Warner, Inc., 10.25%, Series K Preferred Stock 27,677,356

Horseshoe Gaming LLC, Series B, 12.75%,due 9/30/00 25,651,688

Spanish Broadcasting System, Inc., 7.50%,due 6/15/02 24,922,000

Canada Government, Series A - 76, 6.535%,due 6/1/25 23,997,390

Indah Kiat International Finance Co., 12.50%,due 6/15/06 22,980,963

Sullivan Graphics, Inc., 12.75%,due 8/1/05 22,818,025

Hollywood Casino Corp., 12.75%,due 11/1/03 22,436,476

Envirodyne Industries, Inc., 10.25%,due 12/1/01 and 12.00%, due 6/15/00
21,464,781
Flagstar Corp., 10.875%,due 12/1/02 19,520,366
</TABLE>

10
<PAGE>

- --------------------------------------------------------------------------------
DIVERSIFICATION BY INDUSTRY* -- TOP 5 as of 6/30/96
- --------------------------------------------------------------------------------

[Shown as pie chart]

<S> <C>
Media .................................. 14.7%
Cable .................................. 6.0%
Telecommunication Services ............. 5.2%
Casinos ................................ 5.0%
Retail ................................. 3.6%
All Other .............................. 65.5%
</TABLE>

- --------------------------------------------------------------------------------
QUALITY BREAKDOWN as of 6/30/96
- --------------------------------------------------------------------------------

[Shown as pie chart]

<S> <C>
BBB .................................... 1.6%
BB ..................................... 10.5%
B ...................................... 49.6%
CCC .................................... 7.4%
CC ..................................... 1.2%
Other .................................. 8.5%
U.S. Government & Federal Agency ....... 21.1%
Cash & Other Assets, Less Liabilities .. 0.5%
</TABLE>

Note: Actual percentages will vary over time.
Bond quality ratings provided by Standard & Poor's. See the prospectus for
details.
* Excluding U.S. Government & Federal Agency and short positions in common
stocks.

11
<PAGE>

<TABLE>
<CAPTION>
Principal
Amount Value
-----------------------------------
<S> <C> <C>
LONG-TERM BONDS (84.9%)+
CONVERTIBLE BONDS (0.5%)

BUILDINGS (0.1%)
U.S. Home Corp.
4.875%, due 11/1/05 ............... $ 3,072,000 $ 2,741,760
--------------

COMPUTERS & OFFICE EQUIPMENT (0.1%)
Apple Computer, Inc.
6.00%, due 6/1/01 (c) ............. 2,530,000 2,409,825
--------------

RETAIL (0.1%)
Michaels Stores, Inc.
6.75%, due 1/15/03 ................ 2,160,000 1,838,700
--------------

TELECOMMUNICATION SERVICES (0.2%)
Petersburg Long Distance, Inc.
9.00%, due 6/1/06 (c) ............. 2,520,000 3,024,000
--------------
Total Convertible Bonds
(Cost $9,069,853) ................. 10,014,285
--------------

CORPORATE BONDS (57.4%)

AEROSPACE (1.9%)
K&F Industries, Inc.
11.875%, due 12/1/03 .............. 7,175,000 7,677,250
13.75%, due 8/1/01 ................ 14,873,000 15,467,920
Sequa Corp
8.75%, due 12/15/01 ............... 1,742,000 1,678,853
9.375%, due 12/15/03 .............. 14,150,000 13,584,000
9.625%, due 10/15/99 .............. 1,000,000 1,006,250
--------------
39,414,273
--------------

APPLIANCES & FURNITURE (0.4%)
Central Rents, Inc.
Series B
12.875%, due 12/15/03 ............. 8,000,000 8,040,000
--------------

AUTO PARTS (1.5%)
Great Dane Holdings, Inc.
12.75%, due 8/1/01 ................ 22,910,000 21,879,050
J.B. Poindexter & Co.
12.50%, due 5/15/04 ............... 9,493,000 8,211,445
--------------
30,090,495
--------------

- ----------
+ Percentages indicated are based on Fund net assets.

<CAPTION>
Principal
Amount Value
-----------------------------------
<S> <C> <C>
BUILDING MATERIALS (0.7%)
Associated Materials, Inc.
11.50%, due 8/15/03 ............... $ 13,250,000 $ 11,196,250
Miles Homes Services, Inc.
12.00%, due 4/1/01 ................ 1,000,000 750,000
Triangle Pacific Corp.
10.50%, due 8/1/03 ................ 1,500,000 1,556,250
--------------
13,502,500
--------------

BUILDINGS (1.7%)
Greystone Homes, Inc.
10.75%, due 3/1/04 ................ 4,000,000 3,920,000
NVR, Inc.
11.00%, due 4/15/03 ............... 20,606,000 20,812,060
Peters (JM) Co.
12.75%, due 5/1/02 ................ 10,500,000 9,660,000
UDC Homes, Inc.
(zero coupon)
due 11/1/00 (a)(e)(h) ............. 108,500 27,125
--------------
34,419,185
--------------

CABLE (3.2%)
Cablevision Systems Corp.
10.50%, due 5/15/16 ............... 18,000,000 17,415,000
Jones Intercable, Inc.
11.50%, due 7/15/04 ............... 10,053,000 10,932,637
United International Holdings, Inc.
Series B
(zero coupon), due 11/15/99 ....... 5,080,000 3,352,800
(zero coupon), due 11/15/99 ....... 49,495,000 32,666,700
--------------
64,367,137
--------------

CASINOS (4.8%)
Argosy Gaming Co.
13.25%, due 6/1/04 (c) ............ 25,930,000 26,318,950
Capital Gaming International, Inc.
Series B
11.50%, due 2/1/01 (i) ............ 5,232,000 2,393,640
Casino Magic Finance Corp.
11.50%, due 10/15/01 .............. 22,696,000 23,376,880
Colorado Gaming & Entertainment
Co.
12.00%, due 6/1/03 (g) ............ 131,000 122,752
El Comandante Capital Corp.
11.75%, due 12/15/03 .............. 15,550,000 14,617,000
Horseshoe Gaming LLC, Series B
12.75%, due 9/30/00 ............... 13,954,000 14,965,665
President Riverboat Casinos, Inc.
13.00%, due 9/15/01 ............... 13,868,000 11,371,760
</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 June 30, 1996 (unaaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Value
-----------------------------------
<S> <C> <C>
CORPORATE BONDS (Continued)

CASINOS (Continued)
Treasure Bay Gaming & Resorts
Class A
(zero coupon)
due 1/1/50 (a)(c)(h)(i) ........... $ 9,886,075 $ 2,534,888
12.25%, due 11/15/00
(a)(c)(h)(i) ...................... 3,950,000 770,250
12.25%, due 11/15/00
(a)(c)(h)(i)(m1) .................. 2,300 448,500
Trump Castle Funding, Inc.
13.875%, due 11/15/05 (g) ......... 202 202

96,920,487
--------------

CELLULAR TELEPHONE (2.7%)
Celcaribe, S.A
(zero coupon), due 3/15/04
13.50%, beginning 3/15/98 ......... 2,700,000 2,119,500
(zero coupon), due 3/15/04
13.50%, beginning 3/15/98
(c)(m2) ........................... 192 1,977,600
Centennial Cellular Corp.
8.875%, due 11/1/01 ............... 14,893,000 13,776,025
10.125%, due 5/15/05 .............. 10,350,000 9,936,000
Occidente y Caribe Celular, S.A
(zero coupon), due 3/15/04
14.00%, beginning 3/15/01
(c)(m3) ........................... 37,165 18,954,150
PriCellular Wireless Corp.
Series B
(zero coupon), due 11/15/01
14.00%, beginning 11/15/97 ........ 9,355,000 8,513,050
--------------
55,276,325
--------------

CHEMICALS (0.7%)
Uniroyal Chemical Co., Inc.
9.00%, due 9/1/00 ................. 14,450,000 14,594,500
--------------
CHILD CARE SERVICES (0.9%)
La Petite Holdings Corp.
9.625%, due 8/1/01 ................ 20,292,000 18,719,370
--------------

COMPUTERS & OFFICE EQUIPMENT (1.5%)
Unisys Corp.
8.875%, due 7/15/97 ............... 27,858,000 27,858,000
15.00%, due 7/1/97 ................ 2,500,000 2,643,750
--------------
30,501,750
--------------
<CAPTION>

Principal
Amount Value
-----------------------------------
<S> <C> <C>
CONGLOMERATES (0.9%)
Figgie International, Inc.
9.875%, due 10/1/99 ............... $ 11,750,000 $ 11,926,250
Jordan Industries, Inc.
(zero coupon), due 8/1/05
11.75%, beginning 8/1/98 .......... 3,000,000 2,160,000
Spreckels Industries, Inc.
11.50%, due 9/1/00 ................ 4,250,000 4,377,500
--------------
18,463,750
--------------

CONSUMER DURABLES (1.4%)
Samsonite Corp.
11.125%, due 7/15/05 .............. 5,597,000 5,680,955
Selmer Co., Inc.
11.00%, due 5/15/05 ............... 20,550,000 21,680,250
11.00%, due 5/15/05 (c) ........... 1,500,000 1,545,000
--------------
28,906,205
--------------

CONSUMER NON-DURABLES (0.2%)
Twin Laboratories, Inc.
10.25%, due 5/15/06 (c) ........... 4,500,000 4,590,000
--------------

CONTAINERS (0.5%) Americold Corp.
12.875%, due 5/1/08 ............... 6,353,000 6,480,060
Envirodyne Industries, Inc.
10.25%, due 12/1/01 ............... 3,326,000 2,843,730
--------------
9,323,790
--------------

DEFENSE ELECTRONICS (0.3%)
Tracor, Inc.
10.875%, due 8/15/01 .............. 6,000,000 6,330,000
--------------

DOMESTIC OIL & GAS (0.6%)
Dual Drilling Co.
9.875%, due 1/15/04 ............... 2,000,000 2,090,000
Mesa Capital Corp.
12.75%, due 6/30/98 ............... 9,956,000 10,055,560
--------------
12,145,560
--------------

ENERGY (0.6%)
Nuevo Energy Co.
12.50%, due 6/15/02 ............... 10,000,000 10,800,000
Texas Petrochemical Corp.
11.125%, due 7/1/06 (c) ........... 2,000,000 2,032,500
--------------
12,832,500
--------------
</TABLE>

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

13
<PAGE>

Principal
Amount Value
-----------------------------------
<S> <C> <C>
CORPORATE BONDS (Continued)

EQUIPMENT FINANCING (1.2%)
Atlas Air, Inc.
12.25%, due 12/1/02 ............... $ 6,135,000 $ 6,671,813
GPA Delaware, Inc.
8.75%, due 12/15/98 ............... 18,395,000 18,395,000
--------------
25,066,813
--------------

FOOD, BEVERAGES & TOBACCO (1.8%)
All-American Bottling Corp.
13.00%, due 8/15/01 ............... 20,215,000 18,597,800
BGLS, Inc.
Series B
15.75%, due 1/31/01 ............... 6,173,000 5,185,320
Great American Cookie Co.
Series B
10.875%, due 1/15/01 .............. 4,633,000 3,474,750
National Tobacco Holding, LLC
13.50%, due 5/17/03
16.50%, beginning 6/1/01
(c)(e)(n) ......................... 12,266,666 9,306,609
--------------
36,564,479
--------------

INDUSTRIAL (3.2%)
G-I Holdings, Inc.
Series B
(zero coupon), due 10/1/98 ........ 9,200,000 7,383,000
Interlake Corp.
12.00%, due 11/15/01 .............. 3,500,000 3,675,000
Monarch Marking Systems, Inc.
12.50%, due 7/1/03 ................ 7,887,000 8,399,655
Newflo Corp.
Series B
13.25%, due 11/15/02 .............. 16,285,000 17,424,950
Thermadyne Holdings Corp.
10.75%, due 11/1/03 ............... 26,672,000 27,072,080
--------------
63,954,685
--------------

INSURANCE (0.2%)
Life Partners Group, Inc.
12.75%, due 7/15/02 ............... 4,380,000 4,807,050
--------------

LEISURE (0.6%)
Bally's Health & Tennis
13.00%, due 1/15/03 ............... 12,983,000 11,165,380
--------------

Principal
Amount Value
-----------------------------------
<S> <C> <C>
MEDIA (10.7%)
Affiliated Newspaper Investments
Inc
(zero coupon), due 7/1/06
13.25%, beginning 7/1/99 .......... $ 27,660,000 $ 19,362,000

Allbritton Communications Co.
Series B
9.75%, due 11/30/07 ............... 21,800,000 19,947,000
American Media, Inc.
Series XW
(zero coupon), due 5/15/97 ........ 750,000 673,125
Comcast Cellular Corp.
Series A
(zero coupon), due 3/5/00 ......... 12,228,000 8,345,610
Continental Cablevision, Inc.
11.00%, due 6/1/07 ................ 27,926,000 31,346,935
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 ................ 9,065,000 9,563,575
General Media, Inc.
10.625%, due 12/31/00 ............. 33,855,000 26,406,900
Maxwell Communications, Plc
Facility A (a)(c)(h)(i)(j) ........ 9,973,584 723,085
Park Broadcasting, Inc.
11.75%, due 5/15/04 (c) ........... 5,500,000 5,486,250
Park Communications, Inc.
13.75%, due 5/15/04 (c)(g)(m4) .... 22,010 23,110,500
Park Newspapers, Inc.
11.875%, due 5/15/04 (c) .......... 25,550,000 25,805,500
Spanish Broadcasting System, Inc.
7.50%, due 6/15/02
12.50%, beginning 6/15/97 ......... 2,210,000 2,187,900
12.25%, due 6/1/01 (c) ............ 23,250,000 23,250,000
Telemundo Group, Inc.
7.00%, due 2/15/06
10.50%, beginning 2/15/99 ......... 22,070,000 19,973,350
--------------
216,187,384
--------------

NON-DEFENSE ELECTRONICS (0.3%)
Mosler, Inc.
11.00%, due 4/15/03 ............... 8,075,000 6,702,250
--------------

PAPER & FOREST PRODUCTS (1.0%)
Buckeye Cellulose Corp.
9.25%, due 9/15/08 ................ 2,000,000 2,000,000
Four M Corp.
12.00%, due 6/1/06 (c) ............ 4,500,000 4,590,000
Gaylord Container Corp.
11.50%, due 5/15/01 ............... 14,170,000 14,488,825

21,078,825
--------------
</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>
Principal
Amount Value
-----------------------------------
<S> <C> <C>
CORPORATE BONDS (Continued)

POLLUTION & RELATED (1.0%)
ICF Kaiser International, Inc.

13.00%, due 12/31/03 .............. $ 10,174,000 $ 9,716,170
13.00%, due 12/31/03 (m5) ......... 11,700 11,232,000
--------------
20,948,170
--------------

REAL ESTATE (0.7%)
Olympia & York Maiden
Lane Finance Corp.
7.332%, due 3/20/99
(c)(d)(h)(i) ...................... 9,957,785 6,970,449
10.375%, due 12/31/95
(c)(h)(i)(o) ...................... 4,000 1,560
Saul B.F. Real Estate Investment
Trust
11.625%, due 4/1/02 ............... 6,000,000 6,150,000
--------------
13,122,009
--------------

RECREATION & ENTERTAINMENT (2.3%)
Affinity Group, Inc.
11.50%, due 10/15/03 .............. 36,315,000 37,132,088
Six Flags Theme Parks, Series A
(zero coupon), due 6/15/05
12.25%, beginning 6/15/98 ......... 5,000,000 4,200,000
Stratosphere Corp.
14.25%, due 5/15/02 ............... 5,534,000 6,142,740
--------------
47,474,828
--------------

RESTAURANTS & LODGING (2.3%)
American Restaurant Group, Inc. .
12.00%, due 9/15/98 (p) ........... 5,755,000 5,121,950
12.00%, due 9/15/98 ............... 22,115,000 19,682,350
Family Restaurant, Inc.
9.75%, due 2/1/02 ................. 34,465,000 21,195,975
--------------
46,000,275
--------------

RETAIL (2.6%)
Brylane L.P., Series B
10.00%, due 9/1/03 ................ 8,200,000 7,954,000
Guitar Center Management Co.
11.00%, due 7/1/06 (c) ............ 7,210,000 7,354,200
IHF Holdings, Inc.
Series B
(zero coupon), due 11/15/04
15.00%, beginning 11/15/99 ........ 19,500,000 13,503,750
Petro PSC Properties L.P.
12.50%, due 6/1/02 ................ 10,905,000 10,523,325

<CAPTION>
Principal
Amount Value
-----------------------------------
<S> <C> <C>
RETAIL (Continued)
Waban, Inc.
11.00%, due 5/15/04 ............... $ 13,250,000 $ 13,780,000
--------------
53,115,275
--------------

STEEL, ALUMINUM & OTHER METALS (0.2%)
Maxxam Group, Inc.
(zero coupon), due 8/1/03
12.25%, beginning 8/1/98 .......... 995,000 706,450
Weirton Steel Corp.
11.375%, due 7/1/04 (c) ........... 3,420,000 3,368,700
--------------
4,075,150
--------------

TELECOMMUNICATION EQUIPMENT (0.4%)
Telex Communications, Inc.
12.00%, due 7/15/04 ............... 8,250,000 8,827,500
--------------

TELECOMMUNICATION SERVICES (2.8%)
Dial Call Communications, Inc.
Series B
(zero coupon), due 12/15/05
10.25%, beginning 12/15/98 ........ 10,310,000 6,186,000
Microcell Telecommunications, Inc.
(zero coupon), due 6/1/06
14.00%, beginning 12/1/01
(c)(m6) ........................... 68,515 33,401,062
Petersburg Long Distance, Inc.
(zero coupon), due 6/1/04
14.00%, beginning 6/1/99 (c)(m7) .. 14,475 11,435,250
Teleport Communications
Group, Inc.
(zero coupon), due 7/1/07
11.125%, beginning 7/1/01 ......... 10,000,000 5,825,000
--------------
56,847,312
--------------

TEXTILE & APPAREL (1.0%)
Hosiery Corp. of America, Inc.
13.75%, due 8/1/02 ................ 18,400,000 19,964,000
--------------

TRANSPORTATION (0.1%)
Penn Traffic Co.
8.625%, due 12/15/03 .............. 2,500,000 2,087,500
--------------

UTILITIES (0.5%)
Consolidated Hydro, Inc.
(zero coupon), due 7/15/03
12.00%, beginning 7/15/98 ......... 44,902,000 10,551,970
--------------
Total Corporate Bonds
(Cost $1,145,466,292) ............. 1,166,978,682
--------------
</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>
Principal
Amount Value
-----------------------------------
<S> <C> <C>
FOREIGN BONDS (0.6%)

MEDIA (0.0%) (b)
Maxwell Communications, Plc
Facility B (a)(c)(h)(i)(j) ...(Pd) 1,131,066 $ 127,416
--------------

RETAIL (0.6%)
Isosceles
Bank debt (g) ..................... 2,000,000 2,859,007
Bank debt, Series B (g) ........... 6,600,000 9,127,070
--------------
11,986,077
--------------
Total Foreign Bonds

(Cost $10,713,315) ................ 12,113,493
--------------

LOAN PARTICIPATIONS (0.6%)

SUPERMARKETS (0.6%)
Somerfield, Plc
Facility A
13.465%, due 6/30/98 (c)(d)(j) .... 7,021,049 8,824,893
Facility B
7.233%, due 6/30/98 (c)(d)(j) ..... 3,126,003 3,929,134
--------------
12,754,027
--------------
Total Loan Participations
(Cost $10,246,652) ................ 12,754,027
--------------

U.S. GOVERNMENT &
FEDERAL AGENCY (16.9%)

Federal National Mortgage
Association (5.5%)
Series B
12.00%, due 6/26/98 ............... $ 100,000,000 110,660,000
--------------
United States Treasury Notes (11.4%)
9.125%, due 5/15/99 ............... 105,900,000 113,594,694
13.375%, due 8/15/01 .............. 25,000,000 32,464,750
15.75%, due 11/15/01 .............. 61,000,000 86,477,260
--------------
232,536,704
--------------
Total U.S. Government &
Federal Agency
(Cost $353,824,141) ............... 343,196,704
--------------

<CAPTION>
Principal
Amount Value
-----------------------------------
<S> <C> <C>
YANKEE BONDS (8.9%)

CABLE (1.9%) CF Cable TV, Inc.
9.125%, due 7/15/07 ............... $ 2,000,000 $ 2,015,000
Multicanal Participacoes, S.A
12.625%, due 6/18/04 (c) .......... 2,450,000 2,535,750
Telewest, Plc
(zero coupon), due 10/1/07
11.00%, beginning 10/1/00 ......... 58,402,000 34,457,180
--------------
39,007,930
--------------

CHEMICALS (0.3%)
Polysindo International
Finance Co. B.V
11.375%, due 6/15/06 .............. 6,500,000 6,613,750
--------------

COMPUTERS & OFFICE EQUIPMENT (1.1%)
International Semi-Technology Corp.
(zero coupon), due 8/15/03
11.50%, beginning 8/15/00 ......... 39,213,000 22,449,443
--------------

FINANCIAL (1.6%) Hollinger, Inc.
(zero coupon), due 10/5/13 ........ 93,255,000 31,240,425
--------------

MEDIA (1.5%) Grupo Televisa, S.A
(zero coupon), due 5/15/08
13.25%, beginning 5/15/01 (c) ..... 29,880,000 16,209,900
Le Groupe Videotron Ltee
10.625%, due 2/15/05 .............. 14,195,000 14,833,775
--------------
31,043,675
--------------

REAL ESTATE (1.9%)
Trizec Finance Ltd.
10.875%, due 10/15/05 ............. 37,677,000 37,865,385
--------------

RECREATION & ENTERTAINMENT (0.6%)
Plitt Theaters, Inc.
10.875%, due 6/15/04 .............. 11,450,000 11,564,500
--------------
Total Yankee Bonds
(Cost $176,748,656) ............... 179,785,108
--------------
Total Long-Term Bonds
(Cost $1,706,068,909) ............. 1,724,842,299
--------------
</TABLE>

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

16
<PAGE>

Shares Value
-----------------------------------
<S> <C> <C>
COMMON STOCKS (5.8%)

BANKS (0.3%)
Wells Fargo & Co. ................... 26,200 $ 6,258,525
--------------

BUILDINGS (0.2%)

NVR, Inc. (a) ....................... 379,300 4,219,712
--------------

CABLE (0.3%)
United International Holdings
Inc., Class A (a) ................. 436,200 5,997,750
--------------

CASINOS (0.2%)
Aztar Corp. (a) ..................... 100,000 1,150,000
Casino America, Inc. (a) ............ 165,651 1,366,621
Colorado Gaming &
Entertainment Co. (a) ............. 368,128 920,320
--------------
3,436,941
--------------

CELLULAR TELEPHONE (0.0%) (b)
Celcaribe, S.A. (a)(c) .............. 439,020 702,432
--------------

CHEMICALS (0.1%)
FMC Corp. (a) ....................... 26,000 1,696,500
--------------

COMPUTERS & OFFICE EQUIPMENT (0.3%)
Autodesk, Inc. ...................... 50,000 1,493,750
Wallace Computer Services, Inc. ..... 66,600 3,987,675
--------------
5,481,425
--------------

CONGLOMERATES (0.4%)
Hanson, Plc ADR (k) ................. 593,500 8,457,375
--------------

DOMESTIC OIL AND GAS (0.0%) (b)
Mesa, Inc. (a) ...................... 43,890 241,395
--------------

ELECTRICAL EQUIPMENT (0.3%)
Berg Electronics Corp. (a) .......... 231,900 5,507,625
--------------

FOOD, BEVERAGES & TOBACCO (0.5%)
Dr. Pepper Bottling Holdings, Inc.
Class A (a) ....................... 300,000 1,800,000
RJR Nabisco Holdings Corp. .......... 290,000 8,990,000
--------------
10,790,000
--------------

Shares Value
-----------------------------------

<S> <C> <C>
GAS UTILITIES (0.1%)
UGI Corp. ........................... 101,800 $ 2,239,600
United Gas Holdings Corp. (a)(e) .... 98,050 166,685
--------------
2,406,285
--------------

INDUSTRIAL (0.0%) (b)
Insilco Corp. (a) ................... 221 7,404
--------------

INSURANCE (0.3%)
Allstate Corp. ...................... 75,000 3,421,875
London Insurance Group, Inc. ........ 134,500 2,826,499
--------------
6,248,374
--------------

MEDIA (0.7%)
Affiliated Newspaper
Investments, Inc. (a) ............. 28,000 840,000
Comcast Corp.
Class A ........................... 360,000 6,615,000
Lin Television Corp. (a) ............ 7,000 252,000
Matav-Cable Systems Media
Ltd. ADR (a)(k) ................... 184,400 3,065,650
Metromedia International Group
Inc. (a) .......................... 48,500 594,125
New World Communications Group
Inc., Class A (a) ................. 172,000 2,515,500
--------------
13,882,275
--------------

REAL ESTATE (0.1%)
American Health Properties, Inc. .... 26,300 581,887
American Health Properties, Inc.(l) .. 5,130 78,233
Santa Anita Realty Enterprises, Inc. . 103,500 1,306,687
--------------
1,966,807
--------------

RECREATION & ENTERTAINMENT (0.0%) (b)
Turner Broadcasting System, Inc.
Class B ........................... 12,500 343,750
--------------

RESTAURANTS & LODGING (0.2%)
Bob Evans Farms, Inc. ............... 190,000 3,230,000
--------------

RETAIL (0.3%)
Limited, Inc. (The) ................. 90,000 1,935,000
Loehmann's Holdings, Inc.
Series A (a) ...................... 43,750 43,750
Melville Corp. ...................... 91,000 3,685,500
Value City Department Stores, Inc. (a) 132,400 1,456,400
--------------
7,120,650
--------------
</TABLE>

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

17
<PAGE>

Shares Value
-----------------------------------
<S> <C> <C>
COMMON STOCKS (Continued)

SUPERMARKETS (0.0%) (b)
Grand Union Co. (a) ................. 51,999 $ 337,994
--------------

TELECOMMUNICATION EQUIPMENT (0.0%) (b)
PageMart Wireless, Inc., Class A (a) . 45,500 455,000
--------------

TELECOMMUNICATION SERVICES (1.5%)
Clearnet Communications, Inc.
Class A (a) ....................... 339,000 5,678,250
ProNet, Inc. (a) .................... 33,700 412,825
QUALCOMM, Inc. (a) .................. 38,500 2,045,313
Rogers Cantel Mobile
Communications, Inc., Class B (a) .. 75,000 1,753,125
Rogers Communications, Inc.
Class B (a) ....................... 2,131,900 19,981,197
--------------
29,870,710
--------------

TEXTILE & APPAREL (0.0%) (b)
Hosiery Corp. of America, Inc. (a) .. 17,400 87,000

Total Common Stocks
(Cost $121,356,488) ............... 118,745,929
--------------

PREFERRED STOCKS (4.0%)

BANKS (0.0%) (b)
River Bank America, N.Y
15.00%, Series A .................. 30,000 735,000
--------------

CABLE (0.6%)
Cablevision Systems Corp.
8.50%, Series I ................... 8,000 208,000
11.125%, Series L (c)(g) .......... 123,687 11,626,578
11.75%, Series H (n) .............. 5,620 542,330
--------------
12,376,908
--------------

DOMESTIC OIL & GAS (0.0%) (b)
TransAmerican Energy Corp.
$19.00, Series A .................. 150 15,000
--------------

EQUIPMENT FINANCING (0.5%)
GPA Group, Plc (a)(c) ............... 30,000,000 10,800,000
--------------

Shares Value
-----------------------------------
<S> <C> <C>
FOOD, BEVERAGES & TOBACCO (0.1%)
National Tobacco Holding, LLC
14.50% (c)(e)(g)(q) ............... 1,533,334 $ 1,533,334
Seven Up Holdings Co.
16.00% (a) ........................ 4,491 129,542
--------------
1,662,876
--------------

MEDIA (1.2%)
Spanish Broadcasting System, Inc.
Series A (a)(c) ................... 24,910 23,166,300
--------------

PUBLISHING (0.9%)
Time Warner, Inc.
10.25%, Series K (c)(n) ........... 18,876 18,498,921
--------------

RETAIL (0.0%) (b) Loehmann's Holdings, Inc.
$0.056, Series A (g) .............. 2,297 1,148
--------------

TELECOMMUNICATION SERVICES (0.7%)
K-III Communications Corp.
10.00%, Series C (c) .............. 150,000 13,762,500
--------------
Total Preferred Stocks
(Cost $80,284,290) ................ 81,018,653
--------------

WARRANTS (1.0%)

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 1,200
--------------

CABLE (0.0%) (b)
United International
Holdings, Inc. (a) ................ 19,834 575,186
--------------

CASINOS (0.0%) (b)
Belle Casino, Inc. (a) .............. 5,500 55
Boomtown, Inc.
expire 11/1/98 (a) ................ 7,350 7,350
</TABLE>

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

18
<PAGE>

Shares Value
-----------------------------------
<S> <C> <C>
WARRANTS (Continued)

CASINOS (Continued)
Casino America, Inc.
expire 11/15/96 (a) ............... 20,393 $ 204
expire 5/3/01 (a) ................. 36,808 36,808
Casino Magic Corp.
expire 10/14/96 (a) ............... 12,000 12
HDA Management Corp.
expire 12/15/98 (a) ............... 6,450 322,500
Louisiana Casino, Inc.
expire 12/1/98 (a) ................ 12,000 60,000
Presidential Riverboat Casinos, Inc.
expire 9/23/96 (a) ................ 33,000 330
--------------
427,259
--------------

CONGLOMERATES (0.1%)
IFA Capital, Inc.
Series H
expire 11/14/99 (a) ............... 8,000 800,000
--------------

DOMESTIC OIL & GAS (0.1%)
TransAmerican Refining Corp.
expire 2/15/02 (a) ................ 1,244,665 1,866,997
--------------

FOOD, BEVERAGES & TOBACCO (0.2%)
Browne Bottling Co.
expire 8/15/03 (a) ................ 3,467 86,675
Cookies USA, Inc.
expire 1/15/01 (a) ................ 834 4,170
National Tobacco Holding, LLC
Class A
expire 5/17/06 (c)(e)(r)(t) ....... 4,259,246 2,960,048
expire 5/17/06 (a)(c)(e)(s) ....... 547,970 0

3,050,893
--------------

GAS UTILITIES (0.0%) (b)
UGI Corp.
expire 3/31/98 (a) ................ 34,580 5,187
--------------

HOUSEHOLD PRODUCTS (0.0%) (b)
Chattem, Inc.
expire 6/17/99 (a) ................ 9,500 19,000
--------------

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

MEDIA (0.6%)
Commodore Media, Inc.
expire 5/1/00 (a)(c) .............. 4,000 $ 560,000
General Media, Inc.
expire 12/31/96 (a) ............... 32,290 161,450
Spanish Broadcasting System, Inc.
expire 6/29/99 (a)(c) ............. 30,262 5,447,160
expire 6/30/99 (a)(c) ............. 30,250 5,445,000
--------------
11,613,610
--------------

POLLUTION & RELATED (0.0%) (b)
ICF Kaiser International, Inc. .
expire 12/31/98 (a) ............... 48,835 30,522
--------------

RECREATION & ENTERTAINMENT (0.0%) (b)
Sam Houston Race Park
expire 7/15/99 (a)(h) ............. 12,000 12
--------------

RETAIL (0.0%) (b)
Petro PSC Properties L.P.
expire 6/1/97 (a) ................. 14,010 462,330
--------------

TELECOMMUNICATION SERVICES (0.0%)
(b) Nextel Communications, Inc.
Series A
expire 12/15/98 (a) ............... 3,087 15,435
Series C
expire 1999 (a) ................... 3,500 17,500
--------------
32,935
--------------
Total Warrants
(Cost $14,047,035) ................ 19,410,131
--------------
</TABLE>

<TABLE>
<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 29,500
--------------
Total Purchased Put Option
(Cost $590,000) ................... 29,500
--------------
</TABLE>

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

19
<PAGE>

<TABLE>
<CAPTION>
Principal
Amount Value
-----------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (4.2%)

U.S. GOVERNMENT (4.2%)
United States Treasury Note
8.50%, due 4/15/97 ................ $ 83,725,000 $ 85,490,760
--------------
Total Short-Term Investment
(Cost $85,481,654) ................ 85,490,760
--------------
Total Investments
(Cost $2,007,828,376) (u) ......... 99.9% 2,029,537,272(v)
Cash and Other Assets,
Less Liabilities .................. 0.1 1,828,256
------------- --------------
Net Assets .......................... 100.0% $2,031,365,528
============= ==============
</TABLE>

<TABLE>
<CAPTION>
Shares
------------
<S> <C> <C>
SHORT POSITION (-0.0%) (b)
COMMON STOCK (-0.0%) (b)

TELECOMMUNICATION SERVICES (-0.0%) (b)

Petersburg Long Distance, Inc. (a) .. (75,000) $ (614,063)
--------------
Total Short Position
(Proceeds $626,562) ............... $ (614,063)
==============
</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 June 30, 1996.
(e) Fair valued securities. Aggregate at 2.66% of net assets. (See Note 2)
(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 or dividend payment is made with
additional securities.
(h) Issuer in bankruptcy.
(i) Issue in default.
(j) Multiple tranche facilities.
(k) ADR - American Depository Receipt.
(l) Depository Shares - each share represents one-tenth of Psychiatric Group
preferred stock.
(m1) 2,300 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) 37,165 Units - each unit reflects $1,000 principal amount of Senior
Discounted Notes, plus 4 warrants to acquire 5,709 shares of Class B common
stock at a future date.
(m4) 22,010 Units - each unit reflects $1,000 principal amount of Senior Payment
in Kind Notes, plus 1 warrant to acquire 10 shares of common stock at a
future date.
(m5) 11,700 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.
(m6) 68,515 Units - each unit reflects $1,000 principal amount of Senior
Discounted Notes, plus 4 warrants to acquire 3,702 shares of Class B common
stock at a future date.
(m7) 14,475 Units - each unit reflects $1,000 principal amount of Senior
Discounted Notes, plus 1 warrant to acquire 34 shares of common stock at a
future date.
(n) CIK ("Cash in Kind") interest or dividend payment is made with cash or
additional securities.
(o) The company defaulted on the payment of
principal to its creditors on maturity date.
(p) Issued in exchange of like 144a security.
(q) The 61.33% preferred membership interest entitles the Fund to a Payment in
Kind dividend of 14.50% for the first five years and 17.50% for the sixth
and seventh year.
(r) The warrants entitles the Fund to 9.89% of the total voting rights and
13.94% non-voting rights with dividend payments.
(s) The redeemable warrants can be redeemed by National Tobacco Corp. for
nominal consideration during the first five years, only on a pro-rata basis
with prepayment of the Subordinated Notes.
(t) Investment in non-controlled affiliate (cost $2,960,051). (See Note 6.)
(u) The cost for Federal income tax purposes is $2,009,699,601.
(v) At June 30, 1996, net unrealized appreciation was $19,837,671, 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 $67,104,127 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $47,266,456.
(w) Forward foreign currency contracts open at June 30, 1996:

<TABLE>
<CAPTION>
Gross Unrealized
Contract In Delivery Appreciation/
to Deliver Exchange For Date (Depreciation)
---------- ------------ ---- --------------
<S> <C> <C> <C>
C$ 27,437,060 $20,111,455 7/22/96 $ 11,222
(Pd)11,843,939 18,035,000 7/16/96 (365,124)

Net Depreciation ....................... $(353,902)
</TABLE>

The following abbreviations are used in portfolio and footnotes:
(C$) - Canadian Dollars.
(Pd) - British Pound Sterling.

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

20
<PAGE>

<TABLE>
<CAPTION>
<S> <C>
AS OF JUNE 30, 1996 (Unaudited)
ASSETS:
Investment in securities, at value (Note 2)
(identified cost $2,007,828,376) ............................................. $2,029,537,272
Cash .......................................................................... 4,829
Deposit with broker ........................................................... 626,562
Receivables:
Investment securities sold .................................................. 48,824,073
Dividends and interest ...................................................... 36,673,112
Fund shares sold ............................................................ 8,737,258
Unrealized appreciation on forward foreign currency contracts ................. 11,222
Other assets .................................................................. 9,524
--------------
Total assets ............................................................... 2,124,423,852
--------------
LIABILITIES:
Securities sold short (proceeds $626,562) ..................................... 614,063
Payables:
Investment securities purchased ............................................. 74,023,727
NYLIFE Distributors ......................................................... 1,404,143
Fund shares redeemed ........................................................ 1,053,531
Adviser ..................................................................... 463,405
Transfer agent .............................................................. 252,647
Custodian ................................................................... 38,096
Trustees .................................................................... 19,219
Unrealized depreciation on forward foreign currency contracts ................. 365,124
Accrued expenses .............................................................. 755,906
Dividend payable .............................................................. 14,068,463
--------------
Total liabilities .......................................................... 93,058,324
--------------
Net assets .................................................................... $2,031,365,528
==============

COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ..................................................................... $ 86,053
Class B ..................................................................... 2,420,025
Additional paid-in capital .................................................... 1,971,467,321
Accumulated distributions in excess of net investment income .................. (1,242,338)
Accumulated undistributed net realized gain on investments .................... 37,103,725
Accumulated undistributed net realized gain on foreign currency transactions .. 163,249
Net unrealized appreciation on investments .................................... 21,708,896
Net unrealized appreciation on securities sold short .......................... 12,499
Net unrealized depreciation on translation of assets
and liabilities in foreign currencies ......................................... (353,902)
--------------
Net assets .................................................................... $ 2,031,365,528
==============

CLASS A
Net assets applicable to outstanding shares ................................... $ 69,808,851
--------------

Shares of beneficial interest outstanding ..................................... 8,605,334
--------------

Net asset value per share outstanding ......................................... $ 8.11
Maximum sales charge (4.50% of offering price) ................................ 0.38
--------------
Maximum offering price per share outstanding .................................. $ 8.49
==============

CLASS B
Net assets applicable to outstanding shares ................................... $ 1,961,556,677
==============
Shares of beneficial interest outstanding ..................................... 242,002,548
==============

Net asset value per share outstanding ......................................... $ 8.11
==============
</TABLE>

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

21
<PAGE>

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------

FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Unaudited)
INVESTMENT INCOME:
<S> <C>
Income:
Dividends (a) ............................................................... $ 2,723,328
Interest .................................................................... 91,709,203
-------------
Total income ............................................................... 94,432,531
-------------
Expenses: (Note 2)
Distribution--Class B (Note 3) .............................................. 5,166,617
Administration (Note 3) ..................................................... 2,590,066
Advisory (Note 3) ........................................................... 2,590,066
Service (Note 3) ............................................................ 2,298,098
Transfer agent .............................................................. 851,592
Legal ....................................................................... 323,602
Shareholder communication ................................................... 185,199
Registration ................................................................ 124,880
Custodian ................................................................... 117,327
Recordkeeping (Note 3) ...................................................... 103,159
Auditing .................................................................... 81,243
Trustees .................................................................... 38,551
Miscellaneous ............................................................... 44,130

Total expenses ............................................................. 14,514,530
-------------
Net investment income ......................................................... 79,918,001
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions ....................................................... 40,995,135
Securities sold short ....................................................... (490,131)
Foreign currency transactions ............................................... (25,809)
-------------
Net realized gain on investments and foreign currency transactions ............ 40,479,195
-------------
Net change in unrealized appreciation (depreciation) on investments:
Security transactions ....................................................... (2,073,167)
Securities sold short ....................................................... 12,499
Translation of assets and liabilities in foreign currencies ................. (164,844)
-------------

Net unrealized loss on investments and foreign currency ....................... (2,225,512)
-------------
Net realized and unrealized gain on investments
and foreign currency transactions ............................................. 38,253,683
-------------
Net increase in net assets resulting from operations .......................... $ 118,171,684
=============
</TABLE>

- ----------
(a) Dividends recorded net of foreign withholding taxes of $36,693.

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

22
<PAGE>

<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1996* 1995
------------ ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income .............................................................. $ 79,918,001 $ 132,026,507
Net realized gain on investments ................................................... 40,995,135 40,528,746
Net realized loss on securities sold short ......................................... (490,131) (220,429)

Net realized gain (loss) on foreign currency transactions .......................... (25,809) 13,599
Net change in unrealized appreciation (depreciation) on securities transactions .... (2,073,167) 68,715,773
Net change in unrealized appreciation (depreciation) on securities sold short ...... 12,499 (375,243)

Net change in unrealized depreciation on translation of assets and liabilities
in foreign currencies ............................................................ (164,844) (189,058)

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

Net increase in net assets resulting from operations ............................... 118,171,684 240,499,895
--------------- ---------------
Dividends and distributions to shareholders:
From net investment income:
Class A .................................................................... (2,560,715) (2,874,284)

Class B .................................................................... (75,591,690) (141,411,911)

From net realized gain on investments and foreign currency transactions:
Class A .................................................................... -- (551,204)

Class B .................................................................... -- (20,770,265)

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 .................. (78,152,405) (171,827,819)

--------------- ---------------
Capital share transactions: Net proceeds from sale of shares:
Class A .................................................................... 36,140,622 49,974,931
Class B .................................................................... 433,763,386 493,045,911
Net asset value of shares issued to shareholders in reinvestment
of dividends and distributions:
Class A .................................................................... 1,541,388 2,657,250
Class B .................................................................... 41,947,384 116,525,515
--------------- ---------------
513,392,780 662,203,607
Cost of shares redeemed:
Class A .................................................................... (11,815,899) (10,194,187)

Class B .................................................................... (154,318,295) (205,507,147)

--------------- ---------------
Increase in net assets derived from capital share transactions ..... 347,258,586 446,502,273
--------------- ---------------
Net increase in net assets ......................................... 387,277,865 515,174,349

NET ASSETS:
Beginning of period ........................................................................ 1,644,087,663 1,128,913,314
--------------- ---------------
End of period .............................................................................. $ 2,031,365,528 $ 1,644,087,663
=============== ===============
Accumulated distributions in excess of net investment income ............................... $ (1,242,338) $ (3,007,934)

=============== ===============
</TABLE>

- ----------
* Unaudited.

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

23
<PAGE>

Class B
------------------------------------------------
Class A Class B Class A Class B September 1
------- ------- ------- ------- through
Six months ended Year ended December 31 Year ended August 31
---------------------------------
June 30, 1996* December 31, 1995 1994** 1994 1993 1992 1991
-------------- ----------------- ------ ---- ---- ---- ----

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 7.92 $ 7.92 $ 7.44 $ 7.44 $ 7.70 $ 7.93 $ 7.41 $ 6.66 $ 6.54
------ ------ ------ ------ ------ ------ ------ ------ ------

Net investment income 0.37 0.35 0.84 0.81 0.23 0.69 0.70 0.79 0.89
Net realized and
unrealized gain (loss)
on investments 0.18 0.18 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) (0.00)(b) (0.00)(b) -- -- -- -- --
---- ---- ----- ----- ---- ---- ----- ---- -----

Total from investment
operations 0.55 0.53 1.45 1.42 (0.04) 0.61 1.24 1.54 1.04
---- ---- ---- ---- ----- ---- ---- ---- ----

Less dividends and
distributions:
From net investment
income (0.36) (0.34) (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 (0.36) (0.34) (0.97) (0.94) (0.22) (0.84) (0.72) (0.79) (0.92)
Net asset value at end
of period $ 8.11 $ 8.11 $ 7.92 $ 7.92 $ 7.44 $ 7.70 $ 7.93 $ 7.41 $ 6.66
====== ====== ====== ====== ====== ====== ====== ====== ======
Total investment
return (a) 7.05% 6.73% 20.28% 19.71% (0.48%) 7.95% 18.58% 24.55% 18.25%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 9.3%+ 8.7%+ 10.2% 9.5% 9.1%+ 8.7% 9.9% 11.0% 14.4%

Expenses 1.0%+ 1.6%+ 1.0% 1.6% 1.6%+ 1.6% 1.7% 1.9% 2.1%

Portfolio turnover rate 68% 68% 137% 137% 45% 190% 207% 226% 214%
Average commission
rate paid $0.0641 $ 0.0641 (c) (c) (c) (c) (c) (c) (c)
Net assets at end
period (in 000's) $69,809 $1,961,557 $42,850 $1,601,238 $1,128,913 $1,090,261 $808,538 $447,819 $262,103
</TABLE>

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

24
<PAGE>

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 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 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

25
<PAGE>

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
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 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
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 High Yield
Corporate Bond Fund enters into forward foreign currency exchange contracts in
order to protect against adverse changes in the level of foreign currency
exchange rates. This practice is known as hedging.

26
<PAGE>

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.

Commitments and Contingencies. As of June 30, 1996, the Fund had unfunded loan
commitments pursuant to the following loan agreements:
<TABLE>
<CAPTION>
Unfunded
Borrower Commitment
-------- ----------
<S> <C>
Somerfields Group, Plc ....................................... $2,460,718
==========
</TABLE>

Financial Instruments with Concentration of Credit Risk. The Fund invests in
Loan Participations. When the Fund purchases a Participation, the Fund typically
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
Participant and any other persons interpositioned between the Fund and the
Borrower ("Intermediate Participants"). The Fund may not directly benefit from
the collateral supporting the Senior Loan in which it has purchased the
Participation. 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
Selling Participant and each Intermediate Participant is a financial
institution.

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 High Yield Corporate 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.

Security Transactions and Investment Income. The Fund records security
transactions 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 collection is not expected. Discounts on securities purchased for the Fund
are accreted 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.

27
<PAGE>

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.

Note 3 -- Fees and Related Party Policies:

NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned
subsidiary 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,
litigation 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 reduce their fee payable by the Fund by 50% of the
amount of such

28
<PAGE>

excess up to the extent of their fees. The expenses of the Fund did not exceed
the most restrictive expense limitation for the six months ended June 30, 1996.

Distribution Fees. The Trust, on behalf of the Fund, has a Distribution
Agreement with NYLIFE Distributors Inc. (the "Distributor"). The Fund, with
respect to each class of shares, has adopted a Distribution Plan (the "Plan") in
accordance with the provisions of Rule 12b-1 under the 1940 Act. 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 distribution 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
0.75% 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 $619,728 for the six
months ended June 30, 1996.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges on redemptions of Class B shares for the six months ended June 30,
1996 in the amount of $695,297.

Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the six
months ended June 30, 1996 were $53,431.

29
<PAGE>

Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $40,288 for the six months ended
June 30, 1996.

Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the period January 1, 1996 through June 30,
1996 amounted to $103,159.

Note 4 -- Federal Income Tax:

The Fund intends to elect, to the extent provided by regulations, to treat
$692,686 of qualifying capital losses that arose during the prior fiscal year as
if they arose on January 1, 1996.

Note 5 -- Deposit with Broker:

Cash deposited with broker in the amount of $626,562 is partially restricted as
collateral for securities sold short.

Note 6 -- Affiliated Issuers:

Issuers in which the Fund held 5% of the outstanding voting securities are
defined as "affiliated" in the Act. As of June 30, 1996, the Fund owned 23.8% of
the outstanding voting shares of National Tobacco Holding, LLC.

Note 7 -- Purchases and Sales of Securities (in 000's):

During the six months ended June 30, 1996 purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $1,654,239 and $1,052,675,
respectively.

Note 8 -- Capital Share Transactions (in 000's):

<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1996* December 31, 1995
-------------- -----------------
Class A Class B Class A Class B
------- ------- ------- -------

<S> <C> <C> <C> <C>
Shares sold ................................ 4,464 53,628 6,348 61,789
Shares issued in reinvestment of dividends
and distributions ......................... 191 5,197 334 14,700
----- ------ ----- ------
4,655 58,825 6,682 76,489
Shares redeemed ............................ 1,458 19,098 1,274 25,907
----- ------ ----- ------

Net increase ............................... 3,197 39,727 5,408 50,582
===== ====== ===== ======
</TABLE>

- ----------
* Unaudited.

30
<PAGE>

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31
<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
of Fund] potential
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating Invests in a portfolio that tracks You seek a conservative way to
Equity Index Fund risk/reward the makeup and returns of the participate in the growth potential
of Fund] S&P 500* of stocks+
- ------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

</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.

# 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.

32
<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
Government Fund graph indicating consistent with safety of principal current income and safety of
risk/reward primarily from U.S. government principal
of Fund] securities ss.
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating An aggressive high yield bond You want to maximize current income
High Yield risk/reward fund that is actively managed for and can accept the higher risk of
Corporate Bond Fund of Fund] maximum current income securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------

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

[horizontal bar Seeks to provide current income, You are averse to risk or want to
Money Market Fund graph indicating stability of principal, and liquidity, earn competitive yields on cash
risk/reward with free checkwriting|| you're planning to spend or invest in
of Fund] 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 indicating Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund 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 Seeks high current income exempt You're a California resident and want
California Tax Free Fund graph indicating from both federal and California to keep more of what you earn by
risk/reward income taxes consistent with investing for income that's double
of Fund] preservation of capital# tax free#
- ------------------------------------------------------------------------------------------------------------------------------------

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

</TABLE>

A word about risk and reward

33
<PAGE>

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<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY HIGH YIELD
CORPORATE BOND FUND
- --------------------------------------------------------------------------------

semi-annual report
six months in review

fund results

& portfolio highlights

[LOGO] MainStay(R) Funds

- --------------------------------------------------------------------------------
UNAUDITED JUNE 30, 1996
- --------------------------------------------------------------------------------

OFFICERS & TRUSTEES

Dechert Price & Rhoads
Legal Counsel

[LOGO] MainStay(R) Funds

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] NEW YORK LIFE

This report is provided for the information of shareholders of the MainStay
High Yield Corporate Bond. 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.

[RECYCLING SYMBOL] MSSA09(896)
<PAGE>

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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 & Six-Month 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 10 Holdings 8

10 Largest Purchases 9

10 Largest Sales 9

Diversification by Country -- Top 5 10

Quality Breakdown 10

Portfolio of Investments 11

Financial Statements 14

Notes to Financial Statements 18

The MainStay Funds 24
<PAGE>

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

Strategic country selection and selective currency and maturity management amid
powerful economic forces and shifting market perceptions -- these were the
strategies that guided the management of the MainStay(R) International Bond Fund
for the six months ended June 30, 1996. As a result, over this period, the Fund
returned 4.97% and 4.55% for Class A and Class B shares, respectively, excluding
all sales charges.

A stronger U.S. economy -- good for domestic stocks, challenging for U.S. bonds

After a spectacular 1995, the stock market continued to climb for most of the
first half of 1996 -- but not without setbacks along the way. The economy was
stronger than expected, which led to inflation concerns, rising interest rates,
and price volatility. With the S&P 500* advancing 10.09% in the reporting
period, the stock market delivered a six-month return close to its historical
average for an entire year.+ Small capitalization stocks did even better, but
faced a sharp correction in mid-June. Investors were very active, pouring more
money into stock funds in the first six months of the year than they had in any
full year in history.++

Domestic bonds had a difficult time during this period. The improving economy
generally hurt fixed-income investors, but boosted prices among lower-rated
bonds. In March, unexpected payroll gains, which indicated higher employment
levels, caused bond prices to plummet. In a single day, 30-year Treasury bond
prices fell 3.3% and most domestic bond categories, except high current yield,
closed the first quarter with negative returns. As employment rose in the second
quarter, so did long-term rates, with the 30-year Treasury bond yielding 6.90%
at the end of June.

Rising interest rates affected more than just bonds. They also led to price
corrections in domestic financial and consumer nondurable stocks. Economically
sensitive sectors such as chemicals and consumer cyclicals showed sparks of
progress during the first quarter, which failed to ignite in the second. Retail
stocks, on the other hand, did well, based on strong consumer spending, while
health care and technology stocks provided mixed results.

Positive results in international markets

Foreign bonds outperformed U.S. bonds during the reporting period, increasing
the potential value of international diversification. International bond markets
varied widely in their local returns, from Italy at over 10% to Japan at less
than 1%. Foreign equity markets lagged the U.S. during the first quarter of
1996, but provided more competitive returns in the second. Latin America posted
strong gains and Japan showed signs of economic recovery, which boosted its
equity returns to 43.5% for the 12 months

2
<PAGE>

ended June 30, 1996. In all but a handful of markets, foreign currencies
declined against the U.S. dollar, led by weaknesses in the Japanese yen and core
European currencies.

Fund strategies, results, and outlook

The MainStay International Bond Fund portfolio manager used strategic country
selection and selective currency and maturity management to outperform the
average Lipper ss. general world income fund by more than 2 1/2-to-1.
Investments in Italy, Sweden, and the U.K. provided positive performance,
including some currency gains. The Fund also benefited from currency gains in
Australia, where investments were not hedged. Despite the strength of Latin
American markets, the Fund avoided these emerging markets in favor of more
developed and liquid ones. The Fund's specific strategies and performance
results are discussed in greater detail in the Fund manager's comments on the
following pages.

While the positive results of the last six months can't tell us what will happen
next, they may help us form realistic expectations based on historical trends.
Viewed in this light, continuing fluctuations in interest rates and bond values
would not come as a surprise. Regardless of what the future holds, international
income investors may benefit by maintaining a long-range perspective and adding
to their accounts over time. Regular communication with your Registered
Representative can help you cope with volatility, make adjustments when
warranted, and stay focused on the future.

Educating investors, celebrating a decade of service

/s/ Alice T. Kane

Alice T. Kane
July 1996

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

+ Source: Ibbotson Associates.

++ Source: Investment Company Institute.

ss. See footnote and chart on page 6 for more information on Lipper Analytical
Services, Inc.

3
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY INTERNATIONAL BOND FUND
- --------------------------------------------------------------------------------

Fund highlights for the six months ended June 30, 1996

o One-year total returns of 12.20% and 11.41% for Class A and Class B shares,
respectively, excluding all sales charges, as of 6/30/96
o Outperformed peer funds for the six-month and one-year periods ended
6/30/96
o Favorable results from country allocation, currency management, and
maturity exposure

For the six-month period ended June 30, 1996, the MainStay International Bond
Fund provided total returns of 4.97% and 4.55% for Class A and Class B shares,
respectively, excluding all sales charges. These results placed the Fund well
ahead of the average Lipper general world income fund, which returned a meager
1.69%.

Our strong performance in the first half of the year resulted from a combination
of factors, including fruitful decisions on country allocation, currency
management, and maturity selection. Regarding country allocation, our best
decision was to emphasize European bonds, particularly in peripheral European
markets such as Sweden and Italy which were up 6.5% and 10.2% respectively, both
in local terms. We also avoided one of the worst-performing bond markets, Japan,
which returned less than 1% over the same period. Overall, the Fund benefited
investors seeking international diversification during the reporting period.

Although emerging markets, particularly Latin America, posted strong returns in
the second quarter, their risk profiles did not fit our strategy. Given the
instability and volatility of emerging markets, we prefer to forego profits on
occasion rather than expose investors to undue risk. The Fund also uses strict
liquidity and diversification disciplines to help manage risks the portfolio may
encounter.

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.

International
diversification
- --------------------------------
Purchasing securities in
several international markets,
which may react differently to
economic, monetary, and market
trends. This diversification
may provide opportunities for
investors to pursue higher
returns while seeking to
manage the risks of domestic
investments.

Liquidity
- --------------------------------
The ability of a security to
be readily traded or exchanged
for cash. Generally speaking,
the larger the capitalization
of an issuer, the more liquid
its securities are likely to
be.

4
<PAGE>

On the currency management front, the Fund benefited from our decision to
selectively hedge against foreign currency declines, as several currencies
continued to drop against the U.S. dollar. Out of our universe of 14 bond
markets, only four (Italy, U.K., Sweden, and Australia) were associated with
rising currencies against the U.S. dollar. The Australian dollar was up 5.0% and
since we decided not to hedge our Australian bond holdings, the Fund captured
the gains. In the second quarter, we wisely moderated hedging activity in the
Italian lira, U.K. pound, and Swedish krona, allowing us to capture most of the
gains in those currencies. By actively hedging other European currencies,
however, we avoided significant currency losses in bonds in core European
countries.

Maturity management benefited the portfolio in the first quarter, when we
emphasized short-and intermediate-term securities, while many markets
experienced vicious sell-offs in longer-maturity bonds. Our strategy provided
opportunities to purchase longer-maturity bonds at attractive prices during the
second quarter. These longer positions brought us to a neutral duration, which
helped the portfolio as we entered the third quarter.

Looking ahead, the Fund continues to favor high yielding European bond markets,
such as Italy, Spain, and Sweden at the expense of markets with low yields, such
as Japan and Switzerland. Recently, the Fund has been purchasing bonds in the
U.K., where yields have finally risen to attractive levels. Since we anticipate
continued appreciation in the U.S. dollar, we are seeking to help protect the
portfolio against further declines in foreign currencies.

Michael Perelstein
Portfolio Manager

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

Maturity management
- -------------------
Purchasing securities of
selected maturities to shorten
or lengthen the duration of a
portfolio. Duration is 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.

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.

5
<PAGE>

Fund average annual total returns*
- ------------------------------------------------------------------------------------------------------------------------------------
Life of Fund
1 year through 6/30/96
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C>
Class A 12.20% 13.11%
Class B 11.41% 12.49%
- ------------------------------------------------------------------------------------------------------------------------------------

Fund SEC returns*
- ------------------------------------------------------------------------------------------------------------------------------------

Life of Fund
1 year through 6/30/96
- ------------------------------------------------------------------------------------------------------------------------------------

Class A 7.15% 10.25%
Class B 6.41% 10.45%
- ------------------------------------------------------------------------------------------------------------------------------------

Fund Lipper+ rankings and Lipper category returns as of 6/30/96
- ------------------------------------------------------------------------------------------------------------------------------------

Life of Fund
1 year through 6/30/96
- ------------------------------------------------------------------------------------------------------------------------------------

Class A 32 out of 158 funds 26 out of 140 funds
Class B 39 out of 158 funds 28 out of 124 funds
Average Lipper
general world income fund 8.67% 10.18% (9/12/94)
- ------------------------------------------------------------------------------------------------------------------------------------

NAV 6/30/96 Income Capital Gains
- ------------------------------------------------------------------------------------------------------------------------------------

Class A $10.63 $0.3120 $0.0000
Class B $10.65 $0.2700 $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, 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>

[The table below was represented by a graph in the printed document]

<TABLE>
<CAPTION>
Period End Total Returns%
- ---------- --------------
<S> <C>
12/94 0.20
12/95 18.68 Class A
12/95 17.96 Class B
6/96 4.97 Class A
6/96 4.55 Class B
</TABLE>

- --------------------------------------------------------------------------------
$10,000 invested in the MainStay International Bond
Fund vs. Salomon Brothers Non-U.S. Dollar World
Government Bond Index
- --------------------------------------------------------------------------------

[The table below was represented by a graph in the printed document]

<TABLE>
<CAPTION>
Class A Shares

Salomon Brothers International Bond
Period-end Index+ Fund
- ----------- ------------------- -----------------
<S> <C> <C>
9/12/94 10000 9550
9/94 10197.89 9597.75
12/94 10256.27 9569.10
3/95 11737.01 10324.22
6/95 12310.96 10625.04
9/95 12011.98 10820.91
12/95 12261.42 11356.48
3/96 12053.68 11581.38
6/96 12101.95 11920.98
</TABLE>

[The table below was represented by a graph in the printed document]

<TABLE>
<CAPTION>
Class B Shares

Salomon Brothers International Bond
Period-end Index+ Fund
- ----------- ------------------- -----------------
<S> <C> <C>
9/12/94 10000 10000
9/94 10197.89 10050.00
12/94 10256.27 10020.00
3/95 11737.01 10808.90
6/95 12310.96 11091.10
9/95 12011.98 11273.00
12/95 12261.42 11819.40
3/96 12053.68 12040.50
6/96 12101.95 11862.43
</TABLE>

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

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.) 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 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>

- --------------------------------------------------------------------------------
TOP 10 HOLDINGS as of 6/30/96
- --------------------------------------------------------------------------------

<S> <C> <C>
Holding Country $ Amount

Buoni Poliennali del Tesoro, 8.50%, due 1/1/04 Italy $1,021,899

United Kingdom Treasury Bond, 8.50%, due 7/16/07 United Kingdom 936,811

Buoni Poliennali del Tesoro, 8.50%, due 4/1/99 Italy 885,924

Bundesschatzanweisungen, 6.50%, due 2/20/97 Germany 786,144

Province of Ontario, 7.25%, due 9/27/05 Canada 754,244

United Kingdom Treasury Bond, 10.00%, due 9/8/03 United Kingdom 645,692

France Obligations Assimilables du Tresor, 8.50%, due 11/25/02 France 637,618

International Bank of Reconstruction & Development, 7.125%, due 4/12/05 Germany 612,559

France Obligations Assimilables du Tresor, 8.50%, due 3/28/00 France 599,612

New South Wales Treasury Corp., 6.50%, due 5/1/06 Australia 595,838

</TABLE>

8
<PAGE>

<TABLE>
<CAPTION>
Amount
Security Country of purchase

<S> <C> <C>
United Kingdom Treasury Bonds, due 7/14/00 - 7/16/07 United Kingdom $2,405,238

Buoni Poliennali del Tesoro, due 8/1/97 - 11/1/23 Italy 2,319,452

Australian Government, due 7/15/00 - 8/15/08 Australia 1,436,012

Canadian Government, due 9/1/00 - 6/1/08 Canada 1,369,675

Kingdom of Denmark, due 11/15/98 - 12/15/04 Denmark 942,963

Queensland Treasury Corp., due 6/14/05 - 9/14/07 Australia 770,982

Province of Ontario, due 1/10/01 - 9/27/05 Canada 745,868

New South Wales Treasury Corp., due 2/1/98 - 5/1/06 Australia 602,789

Swedish Government, due 1/23/97 - 2/9/05 Sweden 480,581

Treuhandanstalt, due 4/23/03 Germany 423,871
</TABLE>

Security Country Amount of sale
<S> <C> <C>

Australian Government, due 7/15/00 - 8/15/08 Australia $1,653,276

Buoni Poliennali del Tesoro, due 8/1/97 - 1/1/04 Italy 1,354,346

Canadian Government, due 9/1/00 - 6/1/08 Canada 923,039

Province of Ontario, due 1/10/01 - 9/27/05 Canada 770,920

Queensland Treasury Corp., due 6/14/05 - 9/14/07 Australia 622,236

Certificati di Credito del Tesoro, due 10/1/01 Italy 519,505

Kingdom of Denmark, due 11/15/98 - 12/15/04 Denmark 486,156

France Obligations Assimilables du Tresor, due 11/12/97 - 12/26/12 France 419,548

Swedish Government, due 1/23/97 - 2/9/05 Sweden 394,700

United Kingdom Treasury Bonds, due 7/14/00 - 7/16/07 United Kingdom 323,510
</TABLE>

9
<PAGE>

- --------------------------------------------------------------------------------
DIVERSIFICATION BY COUNTRY -- TOP 5 as of 6/30/96
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Germany............................. 13.2%
(Pie Chart) Italy............................... 11.7%
France.............................. 10.1&
Canda............................... 9.5%
United Kingdom...................... 7.9%
All Other........................... 47.6%

</TABLE>

- --------------------------------------------------------------------------------
QUALITY BREAKDOWN as of 6/30/96C
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
AAA.............................. 43.2%
(Pie Chart) AA............................... 33.0%
A................................ 11.07%
Cash & Equivalents............... 12.1%
</TABLE>

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

10
<PAGE>

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

<S> <C> <C>
LONG-TERM GOVERNMENT BONDS (87.9%)+

AUSTRALIA (6.7%)
Australian Government
Series 302
9.75%, due 3/15/02 ...... A$ 440,000 $ 361,648
Series 1101
12.00%, due 11/15/01 .... 450,000 404,778
New South Wales Treasury Corp.
Series 6
6.50%, due 5/1/06 ....... 910,000 595,838
Series Euro
7.50%, due 2/1/98 ....... 400,000 312,478
Queensland Treasury Corp.
Series 7
8.00%, due 9/14/07 ...... 220,000 159,742
---------
1,834,484
---------

AUSTRIA (3.9%)
Republic of Austria
Series 3
5.75%, due 3/22/99 ...... AS 2,100,000 200,740
Series 93-1
7.00%, due 1/20/03 ...... 3,110,000 301,931
Series 95-1
7.50%, due 1/24/05 ...... 5,500,000 543,460
----------
1,046,131
----------

BELGIUM (1.9%)
Kingdom of Belgium
Series 15
6.75%, due 5/25/97 ...... BF 5,000,000 164,159
Series 12
8.00%, due 12/24/12 ..... 5,000,000 167,942
Series 3
10.00%, due 8/2/00 ...... 5,000,000 186,343
---------
518,444
---------

CANADA (9.5%)
Canadian Government
Series A76
9.00%, due 6/1/25 ....... C$ 150,000 120,395
9.75%, due 6/1/01 645,000 524,920
Series H74
10.00%, due 6/1/08 .... 160,000 136,769
Series A33
11.50%, due 9/1/00 .... 550,000 469,258

- ----------
+ Percentages indicated are based on Fund net assets.

<CAPTION>
Principal
Amount Value
-----------------------
<S> <C> <C>
CANADA (Continued)
Province of British Columbia
Series BCCD
8.00%, due 8/23/05 .... C$ 640,000 $ 477,697
Series EC-8
10.75%, due 2/19/01 ... 135,000 111,701
Province of Ontario
7.25%, due 9/27/05 .... 1,085,000 754,244
---------
2,594,984
---------
DENMARK (7.5%)
Kingdom of Denmark
7.00%, due 12/15/04 ... DK 2,750,000 463,935
7.00%, due 11/10/24 ... 1,000,000 146,966
8.00%, due 11/15/01 ... 2,220,000 404,424
9.00%, due 11/15/98 ... 2,480,000 458,681
9.00%, due 11/15/00 ... 2,940,000 555,137
---------
2,029,143
---------

FRANCE (10.1%)
France Bons du Tresor
Negociables
5.75%, due 11/12/98 ... FF 1,220,000 242,148
France Obligations
Assimilables du Tresor
6.00%, due 10/25/25 ... 440,000 71,409
7.50%, due 4/25/05 .... 2,700,000 562,281
8.25%, due 2/27/04 .... 2,262,000 489,784
8.50%, due 3/28/00 .... 2,790,000 599,612
8.50%, due 11/25/02 ... 2,900,000 637,618
8.50%, due 12/26/12 ... 690,000 154,658
---------
2,757,510
---------

GERMANY (13.2%)
Bundesschatzanweisungen
6.50%, due 2/20/97 ... DM 1,175,000 786,144
International Bank of
Reconstruction & Development
7.125%, due 4/12/05 .. 900,000 612,559
Republic of Deutschland
6.25%, due 1/4/24 .... 475,000 274,457
Treuhand-Obligationen
5.625%, due 9/24/98 .. 790,000 532,656
7.00%, due 11/25/99 .. 600,000 418,999
Treuhandanstalt
6.50%, due 4/23/03 ... 625,000 417,340
7.375%, due 12/2/02 .. 800,000 560,317
---------
3,602,472
---------
</TABLE>

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

11
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY INTERNATIONAL BOND FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Value
-----------------------
<S> <C> <C>
LONG-TERM GOVERNMENT BONDS (Continued)

IRELAND (2.9%)
Irish Government

6.25%, due 4/1/99 ..... IP 95,000 $ 151,314
8.25%, due 8/18/15 .... 58,000 96,921
8.75%, due 7/27/97 .... 95,000 156,740
8.75%, due 9/30/12 .... 95,000 166,491
9.25%, due 7/11/03 .... 125,000 222,163
---------
793,629
---------

ITALY (11.7%)
Buoni Poliennali del Tesoro
8.50%, due 4/1/99 ..... IL 1,350,000,000 885,924
8.50%, due 1/1/04 ..... 1,610,000,000 1,021,899
9.00%, due 11/1/23 .... 250,000,000 154,655
9.50%, due 2/1/01 ..... 885,000,000 595,083
10.00%, due 8/1/03 .... 760,000,000 519,551
---------
3,177,112
---------

NETHERLANDS (0.8%)
Netherlands Government
6.25%, due 2/15/97 .... NG 55,000 32,784
7.75%, due 1/15/00 .... 85,000 54,153
7.75%, due 3/1/05 ..... 80,000 51,202
8.25%, due 9/15/07 .... 105,000 69,447
---------
207,586
---------

SPAIN (5.5%)
Spanish Government
8.30%, due 12/15/98 ... SP 4,000,000 31,701
10.50%, due 10/30/03 .. 66,300,000 568,988
11.30%, due 1/15/02 ... 41,490,000 365,258
11.90%, due 7/15/96 ... 22,090,000 172,280
12.25%, due 3/25/00 ... 40,000,000 353,652
---------
1,491,879
---------

SWEDEN (6.3%)
Banque Nationale de Paris
Series EMTN
11.00%, due 11/4/99 ... SK 3,050,000 505,599
Swedish Government
Series 1035
6.00%, due 2/9/05 ..... 800,000 104,507
Series 1034
9.00%, due 4/20/09 .... 2,700,000 425,055
Series 1033
10.25%, due 5/5/03 .... 3,000,000 506,663
Series 1030
13.00%, due 6/15/01 ... 900,000 165,847
---------
1,707,671
---------
<CAPTION>
Principal
Amount Value
-----------------------
<S> <C> <C>
UNITED KINGDOM (7.9%)
United Kingdom Treasury Bonds
8.50%, due 7/16/07 ....(Pd) 585,000 $ 936,811
9.75%, due 8/27/02 .... 130,000 223,519
10.00%, due 2/26/01 ... 195,000 333,953
10.00%, due 9/8/03 .... 370,000 645,692
----------
2,139,975
----------
Total Long-Term Government Bonds
(Cost $23,385,285) .... 23,901,020
----------

SHORT-TERM INVESTMENT (1.9%)
COMMERCIAL PAPER (1.9%)

UNITED STATES (1.9%)
A.I. Credit Corp.
5.47%, due 7/1/96 ..... $ 525,000 525,000
---------

Total Short-Term Investment
(Cost $525,000) 525,000
---------
Total Investments
(Cost $23,910,285)(a) ... 89.8% 24,426,020(b)
Cash and Other Assets,
Less Liabilities 10.2 2,775,261
--------- ----------
Net Assets 100.0% $27,201,281
========= ==========
</TABLE>

- ----------
(a) The cost for Federal income tax purposes is $23,941,126.
(b) At June 30, 1996 net unrealized appreciation for securities was $484,894,
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 $778,369 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $293,475.

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

12
<PAGE>

- --------------------------------------------------------------------------------
PORTOFOLIO OF INVESTMENTS (unaudited) continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(c) Forward Foreign Currency Contracts Open at June 30, 1996:
Gross
Contract In Delivery Unrealized
To Deliver Exchange For Date Appreciation
---------- ------------ -------- ------------
<S> <C> <C> <C>
A$ 186,000 DM 224,576 8/22/96 $ 2,106
A$ 1,225,000 $ 965,055 8/28/96 4,308
DM 3,170,880 (Pd) 1,388,000 7/2/96 73,037
DM 68,677 (Pd) 29,800 7/2/96 1,174
DM 6,620,000 $ 4,645,614 7/5/96 294,844
DM 106,170 SP 9,000,000 7/22/96 254
DM 1,929,575 $ 1,306,132 8/5/96 35,606
DM 1,945,000 $ 1,344,160 8/20/96 62,244
DM 930,000 $ 637,139 9/23/96 22,937
DM 6,875,000 $ 4,625,611 10/18/96 77,751
DM 930,000 $ 621,658 12/20/96 3,903
FF 1,351,000 DM 399,598 8/2/96 230
IP 480,000 (Pd) 495,744 7/2/96 3,445
(Y) 77,050,000 $ 765,203 7/2/96 62,352
(Pd) 492,960 IP 480,000 7/2/96 881
$ 590,976 A$ 760,000 7/2/96 7,082
-------
652,154
-------
</TABLE>

<TABLE>
<CAPTION>
Gross
Contract In Delivery Unrealized
To Deliver Exchange For Date Depreciation
---------- ------------ ---- ------------

<S> <C> <C> <C>
C$ 160,000 $ 117,087 9/16/96 269
DK 8,406,008 DM 2,175,351 8/9/96 3,046
DM 2,432,000 $ 1,600,000 9/23/96 6,171
DM 867,474 $ 571,333 10/18/96 2,507
DM 5,601,200 $ 3,697,925 11/4/96 11,430
IP 480,000 (Pd) 493,488 10/2/96 1,031
IL 465,000,000 DM 437,318 7/23/96 14,997
(Pd) 1,388,000 DM 3,190,145 7/2/96 60,378
(Pd) 29,800 DM 70,328 7/2/96 90
(Pd) 408,000 DM 957,576 10/2/96 880
SP 64,500,000 DM 760,274 7/22/96 2,224
SK 2,274,140 DM 511,608 7/24/96 5,986
$ 734,404 (Y)77,050,000 7/2/96 31,554
$ 1,825,000 DM 2,670,796 7/5/96 69,710
$ 2,100,000 DM 3,074,400 8/5/96 75,664
--------
285,937
--------
Net Appreciation ........................... $366,217
========
</TABLE>

<TABLE>
<CAPTION>
(d) Foreign cash held at June 30, 1996:

Currency Cost Value
-------- ---- -----
<S> <C> <C> <C>
A$ 210,374 $166,259 $165,585
AS 2,777,731 279,198 259,293
C$ 161,530 118,825 118,277
DK 80,115 13,462 13,659
DM 229,390 150,272 150,696
FF 26,723 5,152 5,191
IP 20,875 32,970 33,347
IL 781,064,948 503,787 509,254
MP 3 1 0(e)
(Pd) 167 257 259
SP 82,611 637 644
SK 2,270,824 333,285 342,213
---------- ----------
$1,604,105 $1,598,418
========== ==========
</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
(Y) --Japanese Yen
MP--Mexican Peso
NG--Netherland Guilder
(Pd)--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>

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996 (Unaudited)
<S> <C>
ASSETS:
Investment in securities, at value (Note 2) (identified cost $23,910,285) ............. $24,426,020
Cash denominated in foreign currencies (identified cost $1,604,105) ................... 1,598,418
Cash .................................................................................. 4,110
Receivables:
Interest ............................................................................ 809,229
Investment securities sold .......................................................... 678,041
Fund shares sold .................................................................... 20,040
Unrealized appreciation on foreign currency contracts ................................. 652,154
Unamortized organization expense (Note 1) ............................................. 39,043
Other assets .......................................................................... 43
-----------
Total assets ........................................................................ 28,227,098
-----------

LIABILITIES:
Payables:
Investment securities purchased ..................................................... 524,761
NYLIFE Distributors ................................................................. 18,220
Fund shares redeemed ................................................................ 7,210
Organization ........................................................................ 6,527
Transfer agent ...................................................................... 6,249
Adviser ............................................................................. 5,455
Custodian ........................................................................... 1,826
Trustees ............................................................................ 261
Accrued expenses ...................................................................... 46,630
Unrealized depreciation on foreign currency contracts ................................. 285,937
Dividend payable ...................................................................... 122,741
-----------
Total liabilities ................................................................... 1,025,817
-----------
Net assets ............................................................................ $27,201,281
===========

COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................................. $11,017
Class B ............................................................................. 14,545
Additional paid-in capital ............................................................ 26,102,076
Accumulated distribution in excess of net investment income ........................... (21,772)
Accumulated undistributed net realized gain on investments ............................ 253,669
Accumulated distribution in excess of net realized gain on
foreign currency transactions ......................................................... (30,094)
Net unrealized appreciation on investments ............................................ 515,735
Net unrealized appreciation on translation of assets and liabilities
in foreign currencies ................................................................. 356,105
-----------
Net assets ............................................................................ $27,201,281
===========

CLASS A
Net assets applicable to outstanding shares ........................................... $11,709,447
===========

Shares of beneficial interest outstanding ............................................. 1,101,664
===========

Net asset value per share outstanding ................................................. $10.63
Maximum sales charge (4.50% of offering price) ........................................ 0.50
-----------
Maximum offering price per share outstanding .......................................... $11.13
===========

CLASS B
Net assets applicable to outstanding shares ........................................... $15,491,834
===========

Shares of beneficial interest outstanding ............................................. 1,454,535
===========

Net asset value per share outstanding ................................................. $10.65
===========
</TABLE>

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 OPERATIONS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Unaudited)
INVESTMENT INCOME:
<S> <C>
Income:
Interest (a) ..................................................................... $911,394
---------
Expenses: (Note 2)
Advisory (Note 3) ................................................................ 57,805
Distribution--Class B (Note 3) ................................................... 47,775
Administration (Note 3) .......................................................... 32,114
Service (Note 3) ................................................................. 32,114
Transfer agent ................................................................... 21,753
Shareholder communication ........................................................ 17,575
Registration ..................................................................... 11,981
Custodian ........................................................................ 10,832
Auditing ......................................................................... 10,308
Amortization of organization expense ............................................. 6,083
Recordkeeping (Note 3) ........................................................... 6,036
Legal ............................................................................ 1,235
Trustees ......................................................................... 533
Miscellaneous .................................................................... 4,740
---------
Total expenses before reimbursement ............................................. 260,884
Expense reimbursement from Administrator and Adviser (Note 3) ...................... (38,655)
---------
Net expenses .................................................................... 222,229
---------
Net investment income .............................................................. 689,165
---------
REALIZED AND UNREALIZED GAIN(LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain from:
Security transactions ............................................................ 281,891
Foreign currency transactions .................................................... 737,794
---------
Net realized gain on investments and foreign currency transactions ................. 1,019,685
---------
Net change in unrealized appreciation on investments:
Security transactions ............................................................ (893,520)
Translation of assets and liabilities in foreign currencies ...................... 379,004
---------
Net unrealized loss on investments and foreign currencies .......................... (514,516)
---------
Net realized and unrealized gain on investments
and foreign currency transactions .................................................. 505,169
---------
Net increase in net assets resulting from operations ............................... $1,194,334
==========
</TABLE>
- ----------
(a) Interest recorded net of foreign withholding taxes of $14,411.

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>
Six month
ended Year ended
June 30, December 31,
1996* 1995
-------------- ------------
INCREASE IN NET ASSETS
<S> <C> <C>
Operations:
Net investment income ........................................... $689,165 $1,251,026
Net realized gain on investments ................................ 281,891 375,199
Net realized gain on foreign currency transactions .............. 737,794 231,524
Net change in unrealized appreciation on investments ............ (893,520) 1,599,712
Net change in unrealized appreciation on translation
of assets and liabilities in foreign currencies .................. 379,004 7,928
----------- -----------
Net increase in net assets resulting from operations ............ 1,194,334 3,465,389
----------- -----------
Dividends and distributions to shareholders:
From net investment income:
Class A ........................................................ (339,828) (646,470)
Class B ........................................................ (371,109) (598,457)
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 ............ (710,937) (2,647,760)
----------- -----------
Capital share transactions: Net proceeds from sale of shares:
Class A ........................................................ 393,885 10,769,762
Class B ........................................................ 3,775,920 6,263,522
Net asset value of shares issued to shareholders in reinvestment
of dividends and distributions:
Class A ........................................................ 17,703 209,585
Class B ........................................................ 273,231 1,152,182
----------- -----------
4,460,739 18,395,051
Cost of shares redeemed:
Class A ........................................................ (409,871) (30,768)
Class B ........................................................ (2,038,973) 11,631,056
----------- -----------
Increase in net assets derived from capital share transactions 2,011,895 6,733,227
----------- -----------
Net increase in net assets ................................... 2,495,292 7,550,856
NET ASSETS:
Beginning of period ............................................... 24,705,989 17,155,133
----------- -----------
End of period ..................................................... $27,201,281 $24,705,989
=========== ===========
Accumulated distribution in excess of net investment income........ $ (21,772) $ --
=========== ===========
</TABLE>

- ----------
* Unaudited.

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

16
<PAGE>

<TABLE>
<CAPTION>
Class B
----------------
September 13,**
Class A Class B Class A Class B through
------- ------- ------- -------
Six months ended Year ended December 31,
June 30, 1996* December 31, 1995 1994
-------------- ----------------- ---------------

<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period .......... $ 10.43 $ 10.45 $ 9.90 $ 9.90 $ 10.00
--------- --------- --------- --------- ---------

Net investment income ........................... 0.30 0.26 1.15 1.06 0.12
Net realized and unrealized gain (loss)
on investments ................................. (0.25) (0.25) 0.59 0.61 (0.08)
Net realized and unrealized gain (loss)
on foreign currency transactions ............... 0.46 0.46 0.07 0.07 (0.02)
--------- --------- --------- --------- ---------
Total from investment operations ................ 0.51 0.47 1.81 1.74 0.02
--------- --------- --------- --------- ---------
Less dividends and distributions:
From net investment income ...................... (0.31) (0.27) (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 ............... (0.31) (0.27) (1.28) (1.19) (0.12)
--------- --------- --------- --------- ---------
Net asset value at end of period ................ $ 10.63 $ 10.65 $ 10.43 $ 10.45 $ 9.90
========= ========= ========= ========= =========
Total investment return (a) ..................... 4.97% 4.55% 18.68% 17.96% 0.20%
Ratios (to average net assets)/Supplemental Data:
Net investment income ......................... 5.7%+ 5.1%+ 5.6% 4.9% 4.8%+
Net expenses .................................. 1.4%+ 2.0%+ 1.5% 2.2% 2.8%+
Expenses (before reimbursement) ............... 1.7%+ 2.3%+ 1.8% 2.5% 3.1%+
Portfolio turnover rate 35% 35% 103% 103% 4%
Net assets at end of period (in 000's) $11,709 $15,492 $11,494 $13,212 $17,155
</TABLE>

- ----------
* Unaudited.
** 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.

17
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY INTERNATIONAL BOND FUND
- --------------------------------------------------------------------------------

Note 1 -- Organization and Business:

The Fund's investment objective is to seek competitive overall return
commensurate 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
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

18
<PAGE>

Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities (foreign
exchanges 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
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 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
exchange contracts in order to hedge its foreign currency denominated
investments 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
liabilities. The contract or notional amounts reflect the extent of the Fund's
involvement 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
period 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
organization and registration totalled approximately $61,000 and are being
amortized over 60 months beginning at the commencement of operations.

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 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.

19
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY INTERNATIONAL BOND FUND
- --------------------------------------------------------------------------------

Security Transactions and Investment Income. The Fund records security
transactions 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 respective securities, or, if applicable, over the period to the first
date of call.

Foreign Currency Investing. The books and records of the Fund are recorded 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 period. The changes in net
assets arising from fluctuations in exchange rates and the changes in net assets
resulting from changes in market prices are not separately presented. However,
gains and losses from certain foreign currency transactions are treated as
ordinary income for Federal income tax purposes.

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
assets and liabilities at period-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
include those resulting from future adverse political and economic developments
and possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions.

20
<PAGE>

closures in the financial statements. Actual results could differ from those
estimates.

Note 3 -- Fees and Related Party Policies:

NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned
subsidiary 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 annual
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
$38,655 for the six months ended June 30, 1996, 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
Administrator would have been paid 0.45% and 0.25%, respectively.

21
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY INTERNATIONAL BOND FUND
- --------------------------------------------------------------------------------

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.

Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $7,084 for the six
months ended June 30, 1996.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges on redemptions of Class B shares for the six months ended June 30,
1996 in the amount of $19,718.

Capital. At June 30, 1996 NYLIFE Distributors held shares of Class A of the Fund
with a net asset value of $10,761,474.

Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the six
months ended June 30, 1996 were $1,260.

Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $592 for the six months ended June
30, 1996.

Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the period January 1, 1996 through June 30,
1996 amounted to $6,036.

22
<PAGE>

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 during
the prior fiscal 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>
Six months ended Year ended
June 30, 1996* December 31, 1995
---------------- -----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold .............................. 37 358 1,084 588
Shares issued in reinvestment of dividends
and distributions ........................ 2 26 20 110
-- --- ----- -----
39 384 1,104 698
Shares redeemed .......................... 39 193 2 1,168
-- --- ----- -----
Net increase (decrease) .................. 0 191 1,102 (470)
== === ===== =====
</TABLE>
- ----------
* Unaudited.

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 GRAPH Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund REPRESENTING 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
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR GRAPH Invests in a portfolio that tracks You seek a conservative way to
Equity Index Fund REPRESENTING RISK/REWARD the makeup and returns of the participate in the growth potential
OF FUND] S&P 500* of stocks+
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR GRAPH Offers broad diversification into You prefer the higher return
International Equity Fund REPRESENTING RISK/REWARD international stock markets with potential of international equities
OF FUND] an emphasis on risk control or want to add diversification to
your domestic investments++
- ------------------------------------------------------------------------------------------------------------------------------------

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

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

<S> <C> <C> <C>
[HORIZONTAL BAR GRAPH Balances current income with growth You seek a combination of income and
Total Return Fund REPRESENTING RISK/REWARD opportunities by investing in stocks, growth potential and want to manage
OF FUND] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR GRAPH Seeks undervalued stocks with You seek to maximize total return
Value Fund REPRESENTING RISK/REWARD attractive dividends and a stimulus from securities which may have more
OF FUND] for positive change potential than the market currently
sees
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR GRAPH Invests in convertible securities for You want income from securities that
Convertible Fund REPRESENTING RISK/REWARD a special blend of long-term growth may offer growth potential if
OF FUND] potential and dividend income converted into common stock
- ------------------------------------------------------------------------------------------------------------------------------------

</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.

# 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
Government Fund REPRESENTING RISK/REWARD consistent with safety of principal current income and safety of
OF FUND] primarily from U.S. government principal
securities ss.
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR GRAPH An aggressive high yield bond You want to maximize current income
High Yield REPRESENTING RISK/REWARD fund that is actively managed for and can accept the higher risk of
Corporate Bond Fund OF FUND] maximum current income securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR GRAPH Seeks high current yields and You prefer the higher return
International Bond Fund REPRESENTING RISK/REWARD competitive total return from non- potential of international bonds or
OF FUND] U.S. bonds with an emphasis on want to add diversification to your
risk control domestic investments++
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR GRAPH Seeks to provide current income, You are averse to risk or want to
Money Market Fund REPRESENTING RISK/REWARD stability of principal, and liquidity, earn competitive yields on cash
OF FUND] with free checkwriting|| you're planning 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 REPRESENTING RISK/REWARD exempt from regular federal bracket or want to pay less of your
OF FUND] income tax# investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------

Seeks high current income exempt You're a California resident and want
California Tax Free Fund [HORIZONTAL BAR GRAPH from both federal and California to keep more of what you earn by
REPRESENTING RISK/REWARD income taxes consistent with investing for income that's double
OF FUND] preservation of capital# tax free#
- ------------------------------------------------------------------------------------------------------------------------------------

[HORIZONTAL BAR GRAPH Seeks high current income exempt You're a New York State or City
New York Tax Free Fund REPRESENTING RISK/REWARD from federal, New York State, and resident and want to keep more of
OF FUND] New York City income taxes consis- what you earn with income that's
tent with preservation of capital# double or triple tax free#
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

A word about risk and reward

25
<PAGE>

This page intentionally left blank

26
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY INTERNATIONAL
BOND FUND
- --------------------------------------------------------------------------------

semi-annual report
six months in review

fund results

& portfolio highlight

[LOGO] MainStay(R) Funds

- --------------------------------------------------------------------------------
UNAUDITED JUNE 30, 1996
- --------------------------------------------------------------------------------

OFFICERS & TRUSTEES

Alice T.Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer, and Trustee
Harry G. Hohn 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 W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary

Dechert Price & Rhoads
Legal Counsel

[LOGO] MainStay(R) Funds

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] NEW YORK LIFE

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.

[RECYCLE SYMBOL]

MSSA10 (896)
<PAGE>

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

Chairperson's Letter 2

MainStay International Equity Fund Highlights
and Portfolio Managers' Comments 4

Returns & Lipper Rankings 7

Year-by-Year & Six-Month Performance 8

$10,000 Invested in the MainStay International Equity
Fund Class A Shares vs. MSCI EAFE Index 8

$10,000 Invested in the MainStay International Equity
Fund Class B Shares vs. MSCI EAFE Index 8

Top 10 Equity Holdings 9

10 Largest Purchases 10

10 Largest Sales 10

Diversification by Country -- Top 5 11

Portfolio Composition 11

Portfolio of Investments 12

Financial Statements 19

Notes to Financial Statements 23

The MainStay Funds 30
<PAGE>

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

Strategic country and security selection and currency management amid powerful
international economic forces and shifting market perceptions -- this was the
strategy that guided the management of the MainStay(R) International Equity Fund
for the six months ended June 30, 1996. As a result, over this period, the Fund
returned 6.67% and 6.42% for Class A and Class B shares, respectively, excluding
all sales charges.

A stronger U.S. economy -- good for domestic stocks, challenging for U.S. bonds

After a spectacular 1995, the U.S. stock market continued to climb for most of
the first half of 1996 -- but not without setbacks along the way. The economy
was stronger than expected, which led to inflation concerns, rising interest
rates, and price volatility. With the S&P 500* advancing 10.09% in the reporting
period, the stock market delivered a six-month return close to its historical
average for an entire year.+ Small capitalization stocks did even better, but
faced a sharp correction in mid-June. Investors were very active, pouring more
money into stock funds in the first six months of the year than they had in any
full year in history.++

Domestic bonds had a difficult time during this period. The improving economy
generally hurt fixed-income investors, but boosted prices among lower-rated
bonds. In March, unexpected payroll gains which indicated higher employment
levels caused bond prices to plummet. In a single day, 30-year Treasury bond
prices fell 3.3% and most domestic bond categories, except high current yield,
closed the first quarter with negative returns. As employment rose in the second
quarter, so did long-term rates, with the 30-year Treasury bond yielding 6.90%
at the end of June.

Positive results in international markets

Foreign equity markets lagged the U.S. during the first quarter of 1996, but
provided more competitive returns in the second. Latin America posted strong
gains and Japan showed signs of economic recovery, which boosted its equity
returns to 43.5% for the 12 months ended June 30, 1996. Hong Kong and France
were strong in the first quarter, with Spain, Italy, and Norway leading the pack
in the second. In all but a handful of markets, foreign currencies declined
against the U.S. dollar, led by weaknesses in the

2
<PAGE>

Japanese yen and core European currencies. Foreign bonds outperformed U.S. bonds
during the reporting period, increasing the potential value of international
diversification.

Fund strategies, results, and outlook

The MainStay International Equity Fund portfolio management team used careful
country and security selection to identify opportunities with strong growth
potential. Despite advances in Latin America, we avoided these emerging markets
in favor of more developed and liquid ones. While currency shifts hurt several
markets, others provided strong currency gains. Selective currency hedging
helped protect the Fund in core European markets and the Japanese market, and
helped capture gains in others. The Fund's managers identified strengths in
selected energy and natural resources stocks, from Norway and the Netherlands to
Australia and New Zealand, all of which benefited the portfolio. The Fund's
specific strategies and performance results are discussed in greater detail in
the Fund managers' comments on the following pages.

While the positive results of the last six months can't tell us what will happen
next, they may help us form realistic expectations based on historical trends.
Viewed in this light, a more moderate second half would not come as a surprise.
Regardless of what the future holds, international growth investors may benefit
by maintaining a long-range perspective and adding to their accounts over time.
Regular communication with your Registered Representative can help you cope with
volatility, make adjustments when warranted, and stay focused on the future.

Educating investors, celebrating a decade of service

/s/ Alice T. Kane

Alice T. Kane
July 1996

- ----------

+ Source: Ibbotson Associates.

++ Source: Investment Company Institute.

3
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------

Fund highlights for the six months ended June 30, 1996

o One-year total returns of 18.97% and 18.09% for Class A and Class B shares,
respectively, excluding all sales charges, as of 6/30/96

o Outpaced the Morgan Stanley Capital International EAFE Index for the
one-year and six-month periods ended 6/30/96

o Benefited from country allocation and selective currency management
strategies

For the six months ended June 30, 1996, the MainStay International Equity Fund
had total returns of 6.67% and 6.42% for Class A shares and Class B shares,
respectively, excluding all sales charges. These results lagged the average
Lipper* international fund, which returned 8.02% for the same period, but were
well ahead of the Morgan Stanley Capital International EAFE Index,+ which
returned only 4.67%.

In the first quarter of 1996, the Fund benefited from international
diversification in two of the better performing international markets -- Hong
Kong in Asia, and France in Europe. With its close ties to the growing U.S.
economy, Hong Kong's market was up 11.7%, and France continued its interest-rate
reductions, which resulted in a stock market gain of 11.6% (both in local
terms). In the second quarter, the Fund had significant investments in the three
top-performing equity markets -- Spain (+10.9%), Italy (+10.8%), and Norway
(+8.8%). These markets rallied as a result of declining trends in local interest
rates. Japan, the largest equity market outside of the U.S., performed in line
with the average of international markets in the second quarter, but signs of
economic recovery caused Japanese equities to surge 43.5% over the 12 months
ended June 30, 1996. The weakest of the developed European markets was the U.K.,
which was up only 2.6% over the reporting period. The Fund benefited from
substantial investments in Japan and modest positions in the U.K. Singapore was
the weakest developed market, down 3.4% for the first six months of 1996, but
its relatively small weighting in the portfolio moderated its negative impact on
returns.

International
diversification
- ---------------------------

Purchasing securities in
several international markets,
which may react differently to
economic, monetary, and market
trends. This diversification
may provide opportunities for
investors to pursue higher
returns while seeking to
manage the risks of domestic
investments.

- ----------

* See footnote and chart on page 7 for more information on Lipper Analytical
Services, Inc.

+ See footnote on page 8 for more information on The Morgan Stanley Capital
International EAFE Index.

4
<PAGE>

Latin America and other emerging markets were strong performers in the second
quarter, causing the Fund to lag other funds that invested there. These markets,
however, do not fit the Fund's overall risk management strategy of investing
primarily in developed markets, and as of June 30, 1996, the Fund's portfolio
did not include any investments in emerging markets. Given the instability and
volatility of emerging markets, we prefer to forego profits on occasion rather
than expose investors to undue risk. We also use strict liquidity and
diversification disciplines to help manage risks the portfolio may encounter.

Throughout the first half of the year, the Fund also benefited from our currency
management strategies. Selective hedging helped protect the portfolio, as
expensive foreign currencies declined relative to the U.S. dollar. During the
six-month reporting period, the Japanese yen and the German mark both declined
about 6.0%, and the Swiss franc dropped 8.0% relative to the U.S. dollar. On the
other hand, the Italian lira and U.K. pound increased relative to the U.S.
dollar. Our currency management strategies in these countries allowed us to
capture most of the gains. The Australian dollar gained 5.0% relative to the
U.S. dollar in the first quarter and remained flat in the second. Since we were
not hedged in Australian dollars, we captured the entire gain in that portion of
our portfolio.

As we enter the second half of the year, the threat of Federal Reserve
tightening may increase the risk of foreign currencies declining against the
U.S. dollar. Should that occur, diversification into developed markets whose
central banks act independently of the Fed may again look attractive. With this
possibility in mind, we hold diversified positions in both Europe and Asia. We
find Austria, Italy, Spain, and France attractive because we anticipate
continued interest rate reductions in the face of mounting recessionary malaise.
In Asia, we remain interested in Singapore, which we believe is now
significantly undervalued. In Japan, persistent government efforts to promote
economic growth continue to provide a positive outlook. We are emphasizing
energy and natural resources through investments in Norway (Norsk Hydro), the
Netherlands (Royal Dutch Petroleum), Australia (mining and metals), and New
Zealand (forest products).

Emerging markets
- ---------------------------
Underdeveloped markets with
less size, capital, or
influence than the leading
markets in the world economy.
While emerging markets may
sometimes offer greater growth
potential than established
markets, they generally carry
greater risks.

Liquidity
- ----------------------------
The ability of a security to
be readily traded or exchanged
for cash. Generally speaking,
the larger an issuer's
capitalization, the more
liquid its securities are
likely to be.

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.

5
<PAGE>

The Fund is positioned across a broad array of developed equity markets, with a
tilt in favor of major Asian and peripheral European markets. The Fund continues
to pursue long-term growth of capital with an acceptable level of risk using a
"country-first" approach. We seek to identify the most promising markets outside
the U.S. and equities in each market with attractive growth potential. Current
income is a secondary objective of the Fund.

Michael Perelstein
Shigemi Takagi
Portfolio Managers

6
<PAGE>

<TABLE>
<CAPTION>
Fund average annual total returns*
- --------------------------------------------------------------------------------
Life of Fund
1 year through 6/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
Class A 18.97% 5.27%

Class B 18.09% 4.59%
- --------------------------------------------------------------------------------

<CAPTION>
Fund SEC returns*
- --------------------------------------------------------------------------------
Life of Fund
1 year through 6/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
Class A 12.43% 2.02%

Class B 13.09% 2.43%
- --------------------------------------------------------------------------------

Class B 94 out of 298 funds 173 out of 224 funds

Average Lipper
international fund 15.46% 7.55% (9/12/94)
- --------------------------------------------------------------------------------

Fund per-share net asset values and distributions for the six months ended
6/30/96

<CAPTION>
- --------------------------------------------------------------------------------
NAV 6/30/96 Income Capital Gains
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A $10.72 $0.0000 $0.0000

Class B $10.61 $0.0000 $0.0000
- --------------------------------------------------------------------------------
</TABLE>

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%.

7
<PAGE>

[The table below was represented as a bar graph in the printed document.]

<TABLE>
<CAPTION>
Total Return %
--------------
Period-end Class A Class B
---------- ------- -------
<S> <C> <C>
12/94 -2.30
12/95 5.25 4.27
6/96 6.67 6.42
</TABLE>

- ----------
See footnote * on page 7
for more information on
performance.

- --------------------------------------------------------------------------------
$10,000 INVESTED IN THE MAINSTAYINTERNATIONAL EQUITY
FUND VS. MORGAN STANLEY EAFE INDEX
- --------------------------------------------------------------------------------

[The table below was represented as a line graph in the printed document.]

<TABLE>
<CAPTION>
Class A Shares

Morgan Stanley International
Period-end EAFE Index Equity Fund
- ---------- ---------- -----------
<S> <C> <C>
9/12/94 10,000.00 9,450.00
9/94 9,687.24 9,336.60
12/94 9,595.04 9,232.65
3/95 9,781.28 9,053.10
6/95 9,860.06 8,712.90
9/95 10,278.96 9,251.55
12/95 10,703.37 9,717.81
3/96 11,020.72 10,123.88
6/96 11,203.21 10,365.61
</TABLE>

[The table below was represented as a line graph in the printed document.]

<TABLE>
<CAPTION>
Class B Shares

Morgan Stanley International
Period-end EAFE Index Equity Fund
- ---------- ---------- -----------
<S> <C> <C>
9/12/94 10,000.00 10,000.00
9/94 9,687.24 9,880.00
12/94 9,595.04 9,770.00
3/95 9,781.28 9,560.00
6/95 9,860.06 9,180.00
9/95 10,278.96 9,730.00
12/95 10,703.37 10,187.10
3/96 11,020.72 10,606.10
6/96 11,203.21 10,407.46
</TABLE>

- ----------

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. 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 Morgan Stanley Capital International Europe, Australia, Far East (Free)
Index -- The EAFE Index -- is an unmanaged, capitalization-weighted index
containing approximately 1,100 equity securities of companies located
outside the U.S.

8
<PAGE>

<TABLE>
<CAPTION>
Holding Country $ Amount

<S> <C> <C>
Bank of Tokyo-- Mitsubishi Ltd. Japan $1,061,766

Kao Corp. Japan 1,038,973

Sumitomo Bank Japan 792,450

Fuji Bank, Ltd. Japan 774,580

Toyota Motor Corp. Japan 774,398

Hitachi, Ltd. Japan 771,845

Tokyo Electric Power Japan 709,667

Broken Hill Proprietary Co., Ltd. Australia 698,479

Industrial Bank of Japan, Ltd. Japan 669,552

Assicurazioni Generali Italy 660,331
</TABLE>

9
<PAGE>

<TABLE>
<CAPTION>
Security Country Amount of purchase

<S> <C> <C>
Kao Corp. Japan $860,833

Bank of Tokyo-- Mitsubishi Ltd. Japan 791,293

Hitachi, Ltd. Japan 564,628

Tokyo Electric Power Japan 534,953

Sun Hung Kai Properties Ltd. Hong Kong 527,883

Hong Kong Telecommunications Ltd. Hong Kong 495,390

Broken Hill Proprietary Co., Ltd. Australia 473,439

Hang Seng Bank Ltd. Hong Kong 418,009

Sumitomo Bank Japan 397,935

Cheung Kong (Holdings) Ltd. Hong Kong 392,658
</TABLE>

<TABLE>
<CAPTION>
Security Country Amount of sale

<S> <C> <C>
Dai-Ichi Kangyo Bank, Ltd. Japan $699,083

Sun Hung Kai Properties Ltd. Hong Kong 326,439

Seven-Eleven of Japan Co., Ltd. Japan 321,916

Hong Kong Telecommunications Ltd. Hong Kong 309,997

Tele Danmark AS Class B Denmark 271,465

Electrabel, SA Belgium 270,491

Hang Seng Bank Ltd. Hong Kong 265,175

Hutchison Whampoa Ltd. Hong Kong 224,190

Generale de Banque, SA Belgium 219,074

Swire Pacific Ltd. Class A Hong Kong 218,442
</TABLE>

10
<PAGE>

[PIE CHART]
<TABLE>
<CAPTION>
<S> <C>
Japan .......................... 37.9%
France ......................... 9.3%
United Kingdom ................. 8.3%
Singapore ...................... 5.8%
Italy .......................... 5.2%
All Other ...................... 33.5%
</TABLE>

[PIE CHART]

<TABLE>
<CAPTION>
<S> <C>
Common Stocks................... 94.1%
Preferred Stock................. 0.1%
Cash & Equivalents.............. 5.8%
</TABLE>

Note: Actual percentages will vary over time.

11
<PAGE>

<TABLE>
<CAPTION>
Shares Value
----------------------------
<S> <C> <C>
COMMON STOCKS (94.1%)+

AUSTRALIA (5.0%)
Amcor, Ltd. (forest products & paper) .......... 36,800 $ 250,535
Boral, Ltd. (building materials &
components) .................................. 35,600 92,463
Brambles Industries, Ltd. (business
& public services) ........................... 10,700 148,892
Broken Hill Proprietary Co., Ltd.
(energy sources) ............................. 50,510 698,479
Coles Myer, Ltd. (merchandising) ............... 20,268 73,698
CRA, Ltd. (metals-nonferrous) .................. 9,568 147,297
CSR, Ltd. (multi-industry) ..................... 46,600 164,678
Foster's Brewing Group, Ltd.
(beverages & tobacco) ........................ 74,080 127,688
Mount Isa Mines Holdings, Ltd.
(metals-nonferrous) .......................... 52,300 67,507
National Australia Bank, Ltd. (banking) ........ 38,800 358,817
News Corp., Ltd. (broadcasting &
publishing) .................................. 44,712 253,725
Pacific Dunlop, Ltd. (multi-industry) .......... 10,200 22,960
Santos, Ltd. (energy sources) .................. 37,500 129,864
Westpac Banking Corp., Ltd. (banking) .......... 48,900 216,681
WMC, Ltd. (metals-nonferrous) .................. 40,800 292,217
-----------
3,045,501
-----------
AUSTRIA (3.1%)
Austrian Airlines Oesterreichische
Luftverkehrs AG (transportation-
airlines)(a) ................................. 450 69,270
Bank Austria AG (banking) ...................... 5,450 437,532
Creditanstalt-Bankverein Stamm
(banking) .................................... 2,600 172,081
EA-Generali AG (insurance) ..................... 950 281,567
Oesterreichische Brau-Beteiligungs AG
(beverages & tobacco) ........................ 1,950 111,040
OMV AG (energy sources) ........................ 2,750 278,533
Verbundgesellschaft-Oesterreichische
Elektrizitatswirtschafts AG Class A
(utilities-electrical & gas) ................. 3,550 270,913
Wienerberger Baustoffindustrie AG
(building materials & components) ............ 1,320 266,529
-----------
1,887,465
-----------
FRANCE (9.3%)
Alcatel Alsthom (electrical &
electronics) ................................. 3,461 301,858
AXA (insurance) ................................ 3,588 196,263
Carrefour, SA (merchandising) .................. 825 462,172
Compagnie de Saint Gobain
(miscellaneous-materials &
commodities) ................................. 1,773 237,292

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

Compagnie de Suez, SA (banking) ................ 5,312 194,295
Compagnie Financiere de Paribas, SA
Class A (banking) ............................ 1,446 85,388
Compagnie Generale des Eaux (business
& public services) ........................... 3,516 392,709
Elf Aquitaine, SA (energy sources) ............. 5,893 433,383
Eridania Beghin-Say, SA (food &
household products) .......................... 450 70,453
Groupe Danone (food & household
products) .................................... 2,463 372,697
Havas, SA (business & public services) ......... 1,081 88,402
Lafarge, SA (building materials &
components) .................................. 2,194 132,754
L'Air Liquide (chemicals) ...................... 3,392 598,927
L'Oreal (health & personal care) ............... 1,770 587,584
LVMH-Moet Hennessy Louis Vuitton
(beverages & tobacco) ........................ 1,660 393,711
Lyonnaise des Eaux, SA (multi-industry) ........ 478 45,645
Michelin (CGDE) Class B (tire & rubber) ........ 780 38,121
Pernod-Ricard (beverages & tobacco) ............ 980 62,819
Pinault-Printemps-Redoute, SA (building
materials & components) ...................... 270 94,456
PSA Peugeot, SA (automobiles) .................. 520 69,595
Rhone-Poulenc Class A (chemicals) .............. 3,738 98,241
Schneider, SA (machinery & engineering) ........ 940 49,300
Societe Generale (banking) ..................... 2,970 326,533
Thomson CSF, SA (aerospace & military
technology) .................................. 1,215 34,151
Total, SA Class B (energy sources) ............. 3,985 295,542
-----------
5,662,291
-----------
GERMANY (3.3%)
Allianz AG Holding (insurance) ................. 150 259,667
BASF AG (chemicals) ............................ 300 85,735
Bayer AG (chemicals) ........................... 3,000 105,936
Daimler-Benz AG (automobiles) (a) .............. 200 107,020
Daimler-Benz AG Rights (automobiles) (a) ....... 200 28
Deutsche Bank AG (banking) ..................... 4,950 234,144
Dresdner Bank AG (banking) ..................... 2,450 61,566
Karstadt AG (merchandising) .................... 50 20,218
Linde AG (machinery & engineering) ............. 300 195,120
Mannesmann AG (machinery &
engineering) ................................. 150 51,835
Muenchener Rueckversicherungs-
Gesellschaft AG (insurance) .................. 54 111,396
Preussag AG (multi-industry) ................... 50 12,647
RWE AG (utilities-electrical & gas) ............ 1,500 58,438
Siemens AG (electrical & electronics) .......... 5,350 285,752
Thyssen AG (metals-steel) ...................... 150 27,406
VEBA AG (utilities-electrical & gas) ........... 4,500 239,081
Viag AG (multi-industry) ....................... 300 119,634
Volkswagen AG (automobiles) .................... 100 37,152
-----------
2,012,775
-----------
</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.

12
<PAGE>

- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS June 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
----------------------------
<S> <C> <C>
COMMON STOCKS (Continued)

HONG KONG (3.9%)
Cheung Kong (Holdings) Ltd. (real
estate) ...................................... 55,000 $ 396,132
China Light & Power Co. Ltd. (utilities-
electrical & gas) ............................ 44,500 201,790
Hang Seng Bank Ltd. (banking) .................. 32,800 330,522
Hong Kong Telecommunications Ltd.
(telecommunications) ......................... 200,400 359,869
Hutchison Whampoa Ltd. (multi-
industry) .................................... 63,000 396,371
Sun Hung Kai Properties Ltd. (real
estate) ...................................... 42,000 424,586
Swire Pacific Ltd. Class A (multi-
industry) ................................... 28,500 243,929
-----------
2,353,199
-----------
ITALY (5.2%)
Assicurazioni Generali (insurance) ............. 28,650 660,331
Banca Commerciale Italiana (banking) ........... 75,000 150,612
Benetton Group SPA (textiles &
apparel) ..................................... 9,500 122,641
Credito Italiano (banking) ..................... 38,000 44,498
Edison SPA (energy sources) .................... 11,000 66,341
Fiat SPA (automobiles) ......................... 101,000 338,150
Fiat SPA di Risp (automobiles) ................. 18,000 30,748
Istituto Bancario San Paolo di Torino
SPA (banking) ................................ 22,500 145,233
Italgas SPA (utilities-electrical & gas) ....... 14,000 52,258
Mediobanca SPA (financial services) ............ 23,500 149,160
Montedison SPA (multi-industry) (a) ............ 92,000 53,446
Olivetti Group SPA (data processing &
reproduction) (a) ............................ 70,000 37,744
Parmalat Finanziaria SPA (food &
household products) .......................... 94,000 126,253
Pirelli SPA (industrial components) ............ 68,000 113,722
Riunione Adriatica di Sicurta SPA
(insurance) .................................. 14,325 147,991
Sirti SPA (telecommunications) ................. 9,500 61,011
Telecom Italia SPA (telecommunications) ........ 185,000 397,443
Telecom Italia SPA di Risp
(telecommunications) ......................... 27,000 46,562
Telecom Italia Mobile SPA
(telecommunications) ......................... 178,000 397,492
Telecom Italia Mobile SPA di Risp
(telecommunications) ......................... 20,000 27,253
-----------
3,168,889
-----------
JAPAN (37.9%)
Ajinomoto Co., Inc. (food & household
products) .................................... 10,000 119,433
Asahi Bank, Ltd. (banking) ..................... 31,000 358,936

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

Asahi Chemical Industry Co., Ltd.
(chemicals) .................................. 51,000 363,604
Asahi Glass Co., Ltd. (miscellaneous-
materials & components) ...................... 27,000 322,468
Bank of Tokyo-Mitsubishi Ltd. (banking) ........ 45,800 1,061,766
Bridgestone Corp. (industrial components) ...... 7,000 133,382
Canon, Inc. (recreation & other
consumer goods) .............................. 23,000 478,095
Chiba Bank, Ltd. (banking) ..................... 4,000 35,228
Dai Nippon Printing Co., Ltd.
(business & public services) ................. 14,000 270,593
Daiei, Inc. (merchandising) .................... 14,000 168,482
Daiwa House Industry Co., Ltd.
(construction & housing) ..................... 10,000 154,989
Fanuc Co., Ltd. (electronic
components & instruments) .................... 4,000 159,000
Fuji Bank, Ltd. (banking) ...................... 36,000 774,580
Fuji Photo Film Co., Ltd. (recreation
& other consumer goods) ...................... 4,000 126,179
Fujitsu, Ltd. (data processing &
reproduction) ................................ 27,000 246,159
Furukawa Electric Co., Ltd. (industrial
components) .................................. 33,000 197,064
Hankyu Corp. (transportation-road
& rail) ...................................... 16,000 93,650
Hitachi, Ltd. (electrical & electronics) ....... 83,000 771,845
Honda Motor Co., Ltd. (automobiles) ............ 9,000 233,031
Industrial Bank of Japan, Ltd. (banking) ....... 27,000 669,552
Ito-Yokado Co., Ltd. (merchandising) ........... 5,000 301,317
Itochu Corp. (wholesale &
international trade) ......................... 62,000 432,985
Japan Air Lines
(transportation-airlines) (a) ................ 24,000 194,083
Japan Energy Corp. (energy sources) ............ 52,000 192,952
Joyo Bank (banking) ............................ 8,000 60,610
Kajima Corp. (construction & housing) .......... 9,000 92,720
Kansai Electric Power Co., Inc.
(utilities-electrical & gas) ................. 7,000 160,186
Kao Corp. (food & household
products) .................................... 77,000 1,038,973
Kawasaki Steel Corp. (metals-steel) ............ 6,000 21,607
Kinki Nippon Railway Co., Ltd.
(transportation-road & rail) ................. 23,000 165,446
Kirin Brewery Co., Ltd. (beverages &
tobacco) ..................................... 30,000 366,503
Komatsu, Ltd. (machinery &
engineering) ................................. 27,000 265,852
Kubota Corp. (machinery &
engineering) ................................. 7,000 46,141
Marubeni Corp. (wholesale &
international trade) ......................... 58,000 317,272
Marui Co., Ltd. (merchandising) ................ 10,000 221,543
Matsushita Electric Industrial Co., Ltd.
(appliances & household durables) ............ 16,000 297,579
Mitsubishi Chemical Corp. (chemicals) .......... 34,000 156,849
</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)
Mitsubishi Corp. (multi-industry) .............. 24,000 $315,084
Mitsubishi Electric Corp. (electrical &
electronics) ................................. 56,000 390,062
Mitsubishi Estate Co., Ltd.
(construction & housing) ..................... 9,000 123,900
Mitsubishi Heavy Industries, Ltd.
(machinery & engineering) .................... 49,000 425,737
Mitsubishi Trust & Banking
(financial services) ......................... 19,000 320,463
Mitsui Engineering & Shipbuilding
Co., Ltd. (machinery &
engineering) (a) ............................. 44,000 133,983
Mitsui Fudosan Co., Ltd.
(construction & housing) ..................... 17,000 229,384
Mitsui Marine & Fire Insurance Co.,
Ltd. (insurance) ............................. 11,000 87,350
Mitsui Trust & Banking Co., Ltd.
(financial services) ......................... 7,000 81,688
Mitsukoshi, Ltd. (merchandising) ............... 4,000 42,668
NEC Corp. (electrical & electronics) ........... 23,000 249,532
New Oji Paper Co., Ltd. (forest
products & paper) ............................ 11,000 94,872
Nippon Express Co., Ltd.
(transportation-road & rail) ................. 9,000 87,797
Nippon Paper Industries Co. (forest
products & paper) ............................ 13,000 81,187
Nippon Steel Corp. (metals-steel) .............. 48,000 164,544
Nippon Yusen Kabushiki Kaish
(transportation-shipping) .................... 5,000 28,901
Nippondenso Co., Ltd. (industrial
components) .................................. 3,000 65,095
Nissan Motor Co., Ltd. (automobiles) ........... 22,000 195,159
NKK Corp. (metals-steel) (a) ................... 11,000 33,295
Nomura Securities Co., Ltd. (financial
services) .................................... 19,000 370,697
Obayashi Corp. (construction
& housing) ................................... 16,000 144,559
Osaka Gas Co., Ltd. (utilities-electrical
& gas) ....................................... 6,000 21,935
Sakura Bank, Ltd. (banking) .................... 41,000 456,032
Sankyo Co., Ltd. (health & personal
care) ........................................ 4,000 103,569
Sanyo Electric Co., Ltd. (appliances &
household durables) .......................... 19,000 115,886
Sekisui Chemical Co. (building
materials & components) ...................... 2,000 24,434
Sekisui House, Ltd. (construction &
housing) ..................................... 2,000 22,793
Sharp Corp. (appliances & household
durables) .................................... 14,000 245,065
Shimizu Corp. (construction &
housing) ..................................... 9,000 99,284

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

Shiseido Co., Ltd. (health & personal
care) ........................................ 2,000 25,528
Shizuoka Bank, Ltd. (banking) .................. 1,000 12,855
Sony Corp. (appliances & household
durables) .................................... 4,000 262,934
Sumitomo Bank (banking) ........................ 41,000 792,450
Sumitomo Chemical Co., Ltd.
(chemicals) .................................. 6,000 28,609
Sumitomo Corp. (wholesale &
international trade) ......................... 10,000 88,800
Sumitomo Electric Industries (industrial
components) .................................. 17,000 243,333
Sumitomo Marine & Fire (insurance) ............. 19,000 165,428
Sumitomo Metal Industries, Ltd.
(metals-steel) ............................... 29,000 88,836
Sumitomo Metal Mining Co., Ltd.
(metals-nonferrous) .......................... 14,000 121,128
Taisei Corp. (construction & housing) .......... 47,000 333,372
Taisho Pharmaceutical Co., Ltd. (health
& personal care) ............................. 1,000 21,607
Takeda Chemical Industries
(health & personal care) ..................... 19,000 336,053
Teijin, Ltd. (chemicals) ....................... 98,000 531,612
Tobu Railway Co., Ltd. (transportation-
road & rail) ................................. 44,000 288,425
Tohoku Electric Power Co., Inc.
(utilities-electrical & gas) ................. 2,000 44,673
Tokai Bank (banking) ........................... 24,000 310,707
Tokio Marine & Fire Insurance Co.
(insurance) .................................. 23,000 306,149
Tokyo Dome Corp. (leisure & tourism) ........... 7,000 141,040
Tokyo Electric Power
(utilities-electrical & gas) ................. 28,000 709,667
Tokyo Gas Co., Ltd. (utilities-electrical
& gas) ....................................... 37,000 134,932
Tokyu Corp. (transportation-road
& rail) ...................................... 10,000 76,127
Toppan Printing Co., Ltd. (business
& public services) ........................... 39,000 568,901
Tostem Corp. (building materials &
components) .................................. 3,000 88,344
Toto, Ltd. (building materials &
components) .................................. 1,000 15,043
Toyoda Automatic Loom Works
(machinery & engineering) .................... 1,000 19,966
Toyota Motor Corp. (automobiles) ............... 31,000 774,398
Yamaichi Securities (financial services) ....... 36,000 246,815
Yamanouchi Pharmaceutical (health &
personal care) ............................... 5,000 108,492
Yamazaki Baking Co., Ltd. (food &
household products) .......................... 1,000 18,508
Yasuda Trust & Banking (financial
services) .................................... 42,000 265,359
-----------
22,995,700
-----------
</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 June 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
----------------------------
<S> <C> <C>

COMMON STOCKS (Continued)

MALAYSIA (3.2%)
AMMB Holdings Berhad (financial
services) .................................... 5,000 $ 70,134
DCB Holdings Berhad (financial
services) .................................... 14,000 47,971
Edaran Otomobil Nasional Berhad
(automobiles) ................................ 4,000 38,313
Golden Hope Plantations Berhad
(miscellaneous-materials &
commodities) ................................. 74,000 115,067
Hume Industries Berhad (building
materials & components) ...................... 12,000 58,672
Malayan Banking Berhad (banking) ............... 23,000 221,222
Malaysia International Shipping Berhad
(transportation-shipping) .................... 24,000 74,542
Malaysian Resources Corp. Berhad
(real estate) ................................ 19,000 46,449
Resorts World Berhad (leisure &
tourism) ..................................... 41,000 234,968
Rothmans of Pall Mall Berhad
(beverages & tobacco) ........................ 10,000 105,201
Sime Darby Berhad (multi-industry) ............. 69,000 190,804
Technology Resources Industries Berhad
(multi-industry) (a) ......................... 19,000 66,246
Telekom Malaysia Berhad
(telecommunications) ......................... 28,000 249,115
Tenaga Nasional Berhad (utilities-
electrical & gas) ............................ 43,000 180,945
United Engineers Ltd. (machinery &
engineering) ................................. 25,000 173,330
YTL Corp. Berhad (multi-industry) .............. 7,000 36,469
-----------
1,909,448
-----------
NETHERLANDS (1.3%)
Elsevier NV (broadcasting & publishing) ........ 3,900 59,175
ING Groep NV (insurance) ....................... 3,307 98,611
Koninklijke PTT Nederland NV (forest
products & paper) ............................ 2,500 94,612
Philips Electronics NV (appliances &
household durables) .......................... 1,600 52,022
Royal Dutch Petroleum Co. (energy
sources) ..................................... 2,300 355,177
Unilever NV (food & household products) ........ 700 101,290
Wolters Kluwer CVA NV (broadcasting &
publishing) .................................. 300 34,078
-----------
794,965
-----------
NEW ZEALAND (1.1%)
Brierley Investments Ltd. (multi-industry) ..... 94,000 88,867
Carter Holt Harvey Ltd. (forest products
& paper) ..................................... 69,200 157,864

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

Fletcher Challenge Building (building
materials & components) ...................... 13,025 25,430
Fletcher Challenge Energy (energy
sources) ..................................... 13,025 28,732
Fletcher Challenge Paper (forest
products & paper) ............................ 26,050 50,326
Lion Nathan Ltd. (beverages & tobacco) ......... 24,300 63,426
Telecom Corp. of New Zealand Ltd.
(telecommunications) ......................... 65,700 275,454
-----------
690,099
-----------
NORWAY (1.8%)
Bergesen d.y. ASA Class A
(transportation-shipping) .................... 2,400 49,874
Bergesen d.y. ASA Class B
(transportation-shipping) .................... 1,400 28,231
Dyno Industrier ASA (chemicals) ................ 1,200 26,600
Hafslund ASA Class A (energy sources) .......... 2,700 19,534
Hafslund ASA Class B (energy sources) .......... 1,700 10,729
Kvaerner ASA Class B (machinery &
engineering) ................................. 1,100 42,501
Norsk Hydro ASA (energy sources) ............... 12,400 606,989
Norske Skogindustrier ASA Class A
(forest products & paper) .................... 3,400 102,581
Nycomed ASA Class A (health &
personal care) (a) ........................... 2,700 38,860
Nycomed ASA Class B (health &
personal care) (a) ........................... 1,700 23,552
Orkla ASA Class A (multi-industry) ............. 2,300 121,084
-----------
1,070,535
-----------
SINGAPORE (5.8%)
City Developments, Ltd. (real estate) .......... 43,000 335,118
DBS Land, Ltd. (real estate) ................... 63,000 216,034
Development Bank of Singapore, Ltd.
Foreign Registered (banking) ................. 32,000 399,024
Fraser & Neave, Ltd. (beverages &
tobacco) ..................................... 31,200 322,734
Keppel Corp., Ltd. (machinery &
engineering) ................................. 33,000 275,888
Oversea-Chinese Banking Corp., Ltd.
Foreign Registered (banking) ................. 43,000 502,677
Oversea-Chinese Banking Corp., Ltd.
Foreign Registered Rights (banking) (a) ...... 4,300 34,424
Singapore Airlines, Ltd. Foreign
Registered (transportation-airlines) ......... 58,000 612,282
Singapore Press Holdings, Ltd. Foreign
Registered (broadcasting & publishing) ....... 16,000 314,005
Straits Steamship Land, Ltd. (multi-
industry) .................................... 26,000 86,947
United Overseas Bank, Ltd. Foreign
Registered (banking) ......................... 43,000 411,281
-----------
3,510,414
-----------
</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>
COMMON STOCKS (Continued)

SPAIN (4.9%)
Acerinox, SA (metals-steel) .................... 286 $ 29,781
Autopistas Concesionaria Espanola, SA
(business & public services) ................. 3,690 42,885
Banco Bilbao Vizcaya, SA (banking) ............. 6,430 260,299
Banco Central Hispanoamericano, SA
(banking) .................................... 1,810 36,848
Banco Santander, SA (banking) .................. 4,080 190,308
Corporacion Bancaria de Espana, SA
(banking) .................................... 3,870 168,740
Corporacion Mapfre, SA (insurance) ............. 590 30,097
Empresa Nacional de Electricidad, SA
(utilities-electrical & gas) ................. 8,750 545,317
Fomento de Construcciones y Contratas,
SA (construction & housing) .................. 1,140 94,255
Gas Natural SDG (utilities-
electrical & gas) ............................ 890 186,740
Iberdrola, SA (utilities-electrical
& gas) ....................................... 36,930 378,791
Repsol, SA (energy sources) .................... 13,060 453,822
Telefonica de Espana
(telecommunications) ......................... 31,250 575,250
-----------
2,993,133
-----------
UNITED KINGDOM (8.3%)
Abbey National Plc (banking) ................... 12,970 109,027
Barclays Plc (banking) ......................... 21,897 263,002
Bass Plc (beverages & tobacco) ................. 2,350 29,540
B.A.T Industries Plc (beverages &
tobacco) ..................................... 20,823 162,098
BOC Group Plc (chemicals) ...................... 1,824 26,187
Boots Co. Plc (merchandising) .................. 2,549 22,932
British Airways Plc (transportation-
airlines) .................................... 1,996 17,182
British Gas Plc (energy sources) ............... 35,310 98,757
British Petroleum Co. Plc (energy sources) ..... 46,704 409,650
British Telecommunications Plc
(telecommunications) ......................... 37,780 203,111
BTR Plc (multi-industry) ....................... 44,550 175,477
Cable & Wireless Plc
(telecommunications) ......................... 14,220 94,125
Commercial Union Plc (insurance) ............... 2,046 18,439
General Electric Co. Plc (electrical &
electronics) ................................. 27,656 149,113
GKN Plc (machinery & engineering) .............. 1,109 17,025
Glaxo Wellcome Plc (health &
personal care) ............................... 25,948 349,356
Granada Group Plc (leisure & tourism) .......... 6,370 85,318
Grand Metropolitan Plc (multi-
industry) .................................... 22,212 147,371
Great Universal Stores Plc
(merchandising) .............................. 12,940 131,494

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

Guinness Plc (beverages & tobacco) ............. 20,050 145,799
Hanson Plc (multi-industry) .................... 61,824 173,392
HSBC Holdings Plc (GBP par) (financial
services) .................................... 4,993 78,202
Imperial Chemical Industries Plc
(chemicals) .................................. 1,150 14,081
Kingfisher Plc (merchandising) ................. 1,566 15,743
Lloyds TSB Group Plc (banking) ................. 41,236 201,828
Marks & Spencer Plc (merchandising) ............ 38,326 280,187
MEPC Plc (real estate) ......................... 980 6,182
National Power Plc (utilities-
electrical & gas) ............................ 11,860 95,826
Peninsular & Oriental Steam
Navigation Co. Deferred Stock
(transportation-shipping) .................... 8,611 65,026
Prudential Corp. Plc (insurance) ............... 18,880 119,103
Rank Organisation Plc (leisure &
tourism) ..................................... 9,710 75,135
Redland Plc (building materials &
components) .................................. 1,864 11,614
Reed International Plc (broadcasting
& publishing) ................................ 30,970 518,266
Reuters Holdings Plc (broadcasting &
publishing) .................................. 10,840 131,209
RMC Group Plc (building materials &
components) .................................. 990 15,583
RTZ Corp. Plc (metals-nonferrous) .............. 9,140 135,343
Sainsbury Plc (merchandising) .................. 12,040 70,902
Scottish Power Plc (utilities-electrical
& gas) ....................................... 23,010 108,689
Thorn Emi Plc (appliances & household
durables) .................................... 1,640 45,715
Unilever Plc (food & household
products) .................................... 8,730 173,628
Vodafone Group Plc (multi-industry) ............ 5,243 19,511
-----------
5,010,168
-----------
Total Common Stocks
(Cost $55,453,870) ........................... 57,104,582
-----------

PREFERRED STOCK (0.1%)

AUSTRIA (0.1%)
Creditanstalt-Bankverein Vorzug (banking) ...... 1,550 78,496
-----------
Total Preferred Stock
(Cost $90,929) ............................... 78,496
-----------
</TABLE>

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

16
<PAGE>

UNITED STATES (3.5%)
A.I. Credit Corp.
5.47%, due 7/1/96 ............................ $2,125,000 $2,125,000
-----------
Total Short-Term Investment
(Cost $2,125,000) ............................ 2,125,000
-----------
Total Investments
(Cost $57,669,799)(b) ........................ 97.7% 59,308,078(c)
Cash and Other Assets,
Less Liabilities ............................. 2.3 1,414,193
----- -----------
Net Assets ..................................... 100.0% $60,722,271
===== ===========
</TABLE>
- ----------

(a) Non-income producing securities.

(b) The cost for Federal income tax purposes is $57,724,034.

(c) At June 30, 1996 net unrealized appreciation for securities was $1,584,044,
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 $3,426,495 and aggregate gross
unrealized depreciation for all investments on which there was an excess of
cost over market value of $1,842,451.

(d) Forward Foreign Currency Contracts Open at June 30, 1996:

<TABLE>
<CAPTION>
Gross
Contract In Delivery Unrealized
To Deliver Exchange For Date Appreciation
- -------------------- -------------- -------- --------
<S> <C> <C> <C>
A$ 655,000 $ 516,009 8/28/96 $ 2,304
AS 20,060,300 (Pd) 1,235,000 7/12/96 44,661
DK 2,656,500 $ 459,602 7/30/96 6,069
DM 3,331,804 (Pd) 1,450,000 7/2/96 63,627
DM 6,925,000 $ 4,859,649 7/5/96 308,428
DM 342,102 SP 29,000,000 7/22/96 820
DM 610,000 $ 413,756 8/5/96 12,102
DM 436,557 DK 1,685,000 8/9/96 279
DM 3,075,000 $ 2,125,086 8/20/96 98,406
DM 1,515,000 $ 1,037,920 9/23/96 37,366
DM 3,403,150 (Pd) 1,450,000 10/2/96 3,129
DM 7,050,000 $ 4,722,916 10/18/96 59,292
DM 965,000 $ 645,053 12/20/96 4,049
FF 3,350,000 DM 990,860 8/2/96 571
FF 1,460,000 DM 431,557 10/30/96 452
(Y) 314,848,800 $ 3,072,742 7/2/96 200,692
(Y) 1,137,956,025 $ 10,846,182 8/5/96 414,539
(Y) 346,100,000 $ 3,308,163 8/5/96 135,464
(Y) 495,625,000 $ 4,748,448 10/28/96 150,040
N$ 1,050,000 $ 715,995 8/7/96 317
$ 777,600 A$ 1,000,000 7/2/96 9,318
----------
1,551,925
----------
</TABLE>

<TABLE>
<CAPTION>
Gross
Contract In Delivery Unrealized
To Deliver Exchange For Date Appreciation
- -------------------- -------------- -------- --------
<S> <C> <C> <C>
A$ 480,000 $ 376,800 7/2/96 921
DK 1,685,000 DM 436,054 8/9/96 610
DM 1,800,000 $ 1,186,552 10/18/96 4,160
DM 3,510,000 $ 2,318,095 11/4/96 6,378
IL 2,464,000,000 DM 2,361,065 7/23/96 50,682
(Pd) 1,450,000 DM 3,423,450 7/2/96 3,406
SP 188,500,000 DM 2,221,286 7/22/96 6,893
$ 3,060,000 DM 4,478,157 7/5/96 116,884
$ 454,958 DK 2,656,500 7/30/96 1,424
$ 3,195,000 DM 4,677,480 8/5/96 115,118
$ 1,056,075 (Y)113,000,000 8/5/96 20,204
$ 1,500,000 DM 2,262,750 10/18/96 3,175
----------
329,855
----------
Net Appreciation ................................................ $1,222,070
==========
</TABLE>

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

17
<PAGE>

(e) Foreign cash held at June 30, 1996:

<TABLE>
<CAPTION>
Currency Cost Value
- --------------- ---------- ----------
<S> <C> <C>
A$ 13,133 $ 10,423 $ 10,337
AS 243,781 22,687 22,756
BF 9,516 303 304
DK 2,488 422 424
DM 13,988 9,164 9,189
FF 111,094 21,572 21,579
HK 117,290 15,160 15,152
IL 50,508,115 32,586 32,931
(Y) 626,297 5,765 5,710
MK 9,957 3,986 3,990
MP 3 1 1
NG 15,124 8,742 8,860
N$ 8,098 5,456 5,548
NK 124,398 18,894 19,148
(Pd) 635,090 961,327 986,808
S$ 9,990 7,093 7,078
SP 1,337,119 10,372 10,428
---------- ----------
$1,133,953 $1,160,243
========== ==========
</TABLE>

(f) The following abbreviations are used in footnotes (d) & (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
(Y) --Japanese Yen
MK --Malaysian Ringgit
MP --Mexican Peso
NG --Netherland Guilder
N$ --New Zealand Dollar
NK --Norwegian Krone
(Pd) --Pound Sterling
S$ --Singapore Dollar
SP --Spanish Peseta
$ --U.S. Dollar

The table below sets forth the diversification of International Equity Fund
investments by industry.

<TABLE>
<CAPTION>
Value Percent+
----------- --------
COMMON STOCKS, PREFERRED STOCK
& SHORT-TERM INVESTMENT
<S> <C> <C>
Aerospace & Military Technology ............. $ 34,151 0.1%
Appliances & Household Durables ............. 1,019,201 1.7
Automobiles ................................. 1,823,593 3.0
Banking ..................................... 10,167,797 16.7
Beverages & Tobacco ......................... 1,890,559 3.1
Broadcasting & Publishing ................... 1,310,457 2.1
Building Materials & Components ............. 825,323 1.4
Business & Public Services .................. 1,512,381 2.5
Chemicals ................................... 2,036,381 3.3
Construction & Housing ...................... 1,295,256 2.1
Data Processing & Reproduction .............. 283,903 0.5
Electrical & Electronics .................... 2,148,162 3.5
Electronic Components &
Instruments .............................. 159,000 0.3
Energy Sources .............................. 4,078,483 6.7
Financial Services .......................... 1,630,490 2.7
Food & Household Products ................... 2,021,236 3.3
Forest Products & Paper ..................... 831,976 1.4
Health & Personal Care ...................... 1,594,600 2.6
Industrial Components ....................... 752,596 1.2
Insurance ................................... 4,607,392 7.6
Leisure & Tourism ........................... 536,461 0.9
Machinery & Engineering ..................... 1,696,678 2.8
Merchandising ............................... 1,811,357 3.0
Metals-Nonferrous ........................... 763,492 1.3
Metals-Steel ................................ 365,469 0.6
Miscellaneous-Materials &
Commodities .............................. 352,359 0.6
Miscellaneous-Materials &
Components ............................... 322,468 0.5
Multi-Industry .............................. 2,480,561 4.1
Real Estate ................................. 1,424,501 2.3
Recreation & Other Consumer Goods ........... 604,275 1.0
Telecommunications .......................... 2,686,686 4.4
Textiles & Apparel .......................... 122,641 0.2
Tire & Rubber ............................... 38,121 0.1
Transportation-Airlines ..................... 892,816 1.5
Transportation-Road & Rail .................. 711,445 1.2
Transportation-Shipping ..................... 246,574 0.4
Utilities-Electrical & Gas .................. 3,390,181 5.6
Wholesale & International Trade ............. 839,056 1.4
----------- -----
59,308,078 97.7
Cash and Other Assets,
Less Liabilities ......................... 1,414,193 2.3
----------- -----
Net Assets .................................. $60,722,271 100.0%
=========== =====
</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.

18
<PAGE>

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996 (Unaudited)
<S> <C>

ASSETS:
Investment in securities, at value (Note 2) (identified cost $57,669,799) .......................................... $59,308,078

Cash denominated in foreign currencies (identified cost $1,133,953) ................................................ 1,160,243

Cash ............................................................................................................... 3,723

Receivables:
Investment securities sold ....................................................................................... 1,710,000

Fund shares sold ................................................................................................. 469,380

Dividends and interest ........................................................................................... 238,099

Unrealized appreciation on foreign currency contracts .............................................................. 1,551,925

Unamortized organization expense (Note 1) .......................................................................... 39,043

Other assets ....................................................................................................... 81

-----------

Total assets .................................................................................................... 64,480,572

-----------

LIABILITIES:
Payables:
Investment securities purchased .................................................................................. 3,223,533

NYLIFE Distributors .............................................................................................. 57,909

Adviser .......................................................................................................... 28,866

Transfer agent ................................................................................................... 20,913

Fund shares redeemed ............................................................................................. 20,412

Organization ..................................................................................................... 12,299

Custodian ........................................................................................................ 12,088

Trustees ......................................................................................................... 537

Accrued expenses ................................................................................................... 51,889

Unrealized depreciation on foreign currency contracts .............................................................. 329,855

-----------

Total liabilities ............................................................................................... 3,758,301

-----------

Net assets ......................................................................................................... $60,722,271

===========

Class B .......................................................................................................... 41,995

Additional paid-in capital ......................................................................................... 56,866,418

Accumulated undistributed net investment income .................................................................... 138,018

Accumulated undistributed net realized gain on investments ......................................................... 64,382

Accumulated undistributed net realized gain on foreign currency transactions ....................................... 715,065

Net unrealized appreciation on investments ......................................................................... 1,638,279

Net unrealized appreciation on translation of assets and liabilities in foreign currencies ......................... 1,243,055

-----------

Net assets ......................................................................................................... $60,722,271

===========

CLASS A
Net assets applicable to outstanding shares ........................................................................ $16,150,710

===========

Shares of beneficial interest outstanding .......................................................................... 1,505,914

===========

Net asset value per share outstanding .............................................................................. $ 10.72

Maximum sales charge (5.50% of offering price) ..................................................................... 0.62

-----------

Maximum offering price per share outstanding ....................................................................... $ 11.34

===========

CLASS B
Net assets applicable to outstanding shares ........................................................................ $44,571,561

===========

Shares of beneficial interest outstanding .......................................................................... 4,199,536

===========

Net asset value per share outstanding .............................................................................. $ 10.61

===========

</TABLE>

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

19
<PAGE>

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Unaudited)
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) .................................................................................................... $ 510,942
Interest ......................................................................................................... 96,112
-----------
Total income .................................................................................................... 607,054
-----------
Expenses: (Note 2)
Advisory (Note 3) ................................................................................................ 147,621
Distribution--Class B (Note 3) ................................................................................... 122,952
Administration (Note 3) .......................................................................................... 98,414
Transfer agent ................................................................................................... 71,814
Service (Note 3) ................................................................................................. 61,509
Custodian ........................................................................................................ 31,822
Shareholder communication ........................................................................................ 16,862
Registration ..................................................................................................... 16,837
Auditing ......................................................................................................... 10,705
Recordkeeping (Note 3) ........................................................................................... 10,089
Amortization of organization expense ............................................................................. 6,083
Legal ............................................................................................................ 2,249
Trustees ......................................................................................................... 920
Miscellaneous .................................................................................................... 10,923
-----------
Total expenses .................................................................................................. 608,800
-----------
Net investment loss ................................................................................................ (1,746)

-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain from:
Security transactions ............................................................................................ 201,377
Foreign currency transactions .................................................................................... 859,798
-----------
Net realized gain on investments and foreign currency transactions ................................................. 1,061,175
-----------
Net change in unrealized appreciation on investments:
Security transactions ............................................................................................ 780,097
Translation of assets and liabilities in foreign currencies ...................................................... 1,102,303
-----------
Net unrealized gain on investments and foreign currencies .......................................................... 1,882,400
-----------
Net realized and unrealized gain on investments and foreign currency transactions .................................. 2,943,575
-----------
Net increase in net assets resulting from operations ............................................................... $ 2,941,829
===========
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $74,802.

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

20
<PAGE>

<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1996* 1995
----------- ------------
<S> <C> <C>

INCREASE IN NET ASSETS:
Operations:
Net investment loss ................................................................................ $ (1,746) $ (187,373)

Net realized gain (loss) on investments ............................................................ 201,377 (115,889)

Net realized gain on foreign currency transactions ................................................. 859,798 1,119,827
Net change in unrealized appreciation on investments ............................................... 780,097 1,026,063
Net change in unrealized appreciation on translation of assets and liabilities in foreign currencies 1,102,303 89,231
----------- ------------
Net increase in net assets resulting from operations ............................................... 2,941,829 1,931,859
----------- ------------
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 ........................................................................................... 2,861,136 12,687,452
Class B ........................................................................................... 21,025,020 16,939,110
Net asset value of shares issued to shareholders in reinvestment of dividends and distributions:
Class A ........................................................................................... -- 63,636
Class B ........................................................................................... -- 519,055
----------- ------------
23,886,156 30,209,253
Cost of shares redeemed:
Class A ........................................................................................... (499,972) (284,551)

Class B ........................................................................................... (3,801,945) (13,373,866)

----------- ------------
Increase in net assets derived from capital share transactions .................................. 19,584,239 16,550,836
----------- ------------
Net increase in net assets ...................................................................... 22,526,068 17,646,733

NET ASSETS:
Beginning of period .................................................................................. 38,196,203 20,549,470
----------- ------------
End of period ........................................................................................ $60,722,271 $ 38,196,203
=========== ============
Accumulated undistributed net investment income ...................................................... $ 138,018 $ 139,764
=========== ============
</TABLE>
- ----------
* Unaudited.

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

21
<PAGE>

<TABLE>
<CAPTION>
Class B
---------------
Class A Class B Class A Class B September 13**
------- ------- ------- ------- through
Six months ended Year ended December 31
June 30, 1996* December 31, 1995 1994
-------------------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period .................. $ 10.05 $ 9.97 $ 9.77 $ 9.77 $ 10.00
------- ------- ------- ------- -------
Net investment income (loss) ............................ 0.00(c) 0.00(c) 0.27 0.26 (0.04)
Net realized and unrealized gain (loss) on investments .. 0.22 0.21 0.10 0.07 (0.16)
Net realized and unrealized gain (loss) on foreign
currency transactions ................................. 0.45 0.43 0.14 0.09 (0.03)
------- ------- ------- ------- -------
Total from investment operations ........................ 0.67 0.64 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 ........................ $ 10.72 $ 10.61 $ 10.05 $ 9.97 $ 9.77
======= ======= ======= ======= =======
Total investment return (a) ............................. 6.67% 6.42% 5.25% 4.27% (2.30%)
Ratios (to average net assets)/Supplemental Data:
Net investment income (loss) .......................... 0.5%+ (0.2%)+ (0.2%) (1.0%) (1.6%)+
Expenses .............................................. 2.0%+ 2.7%+ 2.2% 3.0% 3.9%+
Portfolio turnover rate ................................. 12% 12% 25% 25% 9%
Average commission rate paid ............................ $0.0420 $0.0420 (b) (b) (b)
Net assets at end of period (in 000's) .................. $16,151 $44,572 $12,856 $25,341 $20,549
</TABLE>

- ----------
* Unaudited.
** Commencement of Operations.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
(b) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
(c) 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>

Note 1 -- Organization and Business:

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

23
<PAGE>

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.

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
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 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
investments 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
liabilities. The contract or notional amounts reflect the extent of the Fund's
involvement 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
period end to credit loss in the event of a counterparty's failure to perform
its obligations.

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
declare and pay dividends quarterly.

24
<PAGE>

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
transactions 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 securities 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 period. The changes in net
assets arising from fluctuations in exchange rates and the changes in net assets
resulting from changes in market prices are not separately presented. However,
gains and losses from certain foreign currency transactions are treated as
ordinary income for Federal income tax purposes.

25
<PAGE>

Note 3 -- Fees and Related Party Policies:

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

26
<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 $50,719 for the six
months ended June 30, 1996.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges on redemptions of Class B shares for the six months ended June 30,
1996 in the amount of $23,674.

Capital. At June 30, 1996 NYLIFE Distributors held shares of Class A of the Fund
with a net asset value of $10,720,000.

Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the six
months ended June 30, 1996 were $5,705.

Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $929 for the six months ended June
30, 1996.

Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the period January 1, 1996 through June 30,
1996 amounted to $10,089.

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 prior fiscal year as
if they arose on January 1, 1996.

27
<PAGE>

Note 5 -- Purchases and Sales of Securities (in 000's):

Note 6 -- Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1996* December 31, 1995
--------------------- ----------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ............................................................ 275 2,028 1,304 1,761
Shares issued in reinvestment of dividends and distributions ........... -- -- 6 52
--- ----- ----- -----
275 2,028 1,310 1,813
Shares redeemed ........................................................ 49 369 30 1,376
--- ----- ----- -----
Net increase ........................................................... 226 1,659 1,280 437
=== ===== ===== =====
</TABLE>
- ----------
* Unaudited.

28
<PAGE>

This page intentionally left blank

29
<PAGE>

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

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

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
of fund] potential
- ------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

</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.

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

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

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

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

Seeks high current income exempt You're a California resident and want
California Tax Free Fund [horizontal bar graph from both federal and California to keep more of what you earn by
indicating risk/reward income taxes consistent with investing for income that's double
of fund] preservation of capital# tax free#
- ------------------------------------------------------------------------------------------------------------------------------------

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

</TABLE>

A word about risk and reward

<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY INTERNATIONAL
EQUITY FUND
- --------------------------------------------------------------------------------

semi-annual report
six months in review

fund results

& portfolio highlights

[LOGO] MainStay(R) Funds

- --------------------------------------------------------------------------------
UNAUDITED JUNE 30, 1996
- --------------------------------------------------------------------------------

OFFICERS & TRUSTEES

Alice T. Kane Chairperson andTrustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Harry G. Hohn 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 W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary

Dechert Price & Rhoads
Legal Counsel

[LOGO] MainStay(R) Funds

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] NEW YORK LIFE

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.

[RECYCLING SYMBOL] MSSA11 (896)
<PAGE>

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

Chairperson's Letter 2

MainStay Money Market Fund
Portfolio Managers' Comments 4

Yields & Lipper Rankings 5

Portfolio of Investments 6

Financial Statements 8

Notes to Financial Statements 12

The MainStay Funds 16
<PAGE>

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

Strategic security selection with a focus on quality and capital preservation --
these were the strategies that guided the management of the MainStay(R) Money
Market Fund for the six months ended June 30, 1996. For the seven-day period
ended June 30, 1996, the Fund had a current yield of 4.71%.

A stronger economy -- good for stocks, challenging for bonds

Bonds had a difficult time during this period. The improving economy generally
hurt fixed-income investors, but boosted prices among lower-rated bonds. In
March, unexpected payroll gains, which indicated higher employment levels,
caused bond prices to plummet. In a single day, 30-year Treasury bond prices
fell 3.3% and most domestic bond categories, except high current yield, closed
the first quarter with negative returns. As employment rose in the second
quarter, so did long-term rates, with the 30-year Treasury bond yielding 6.90%
at the end of June. Despite these movements in long-term rates, however, money
market instruments remained relatively stable throughout the reporting period.

Positive results in international markets

2
<PAGE>

Fund strategies, results, and outlook

The MainStay Money Market Fund portfolio management team focused on quality,
liquidity, and capital preservation to achieve the Fund's returns, which were
ahead of the average Lipper ss. money market fund during the reporting period.
With an average maturity of 53 days as of June 30th, and no second-tier
securities, the Fund continues to pursue its objective with a positive outlook
for the future. The Fund's specific strategies and performance results are
discussed in greater detail in the Fund managers' comments on the following
pages.

While the results of the last six months can't tell us what will happen next,
they may help us form realistic expectations based on historical trends. Viewed
in this light, continuing fluctuations in interest rates would not come as a
surprise. Regardless of what the future holds, investors seeking current income
may benefit by maintaining a broad perspective on the markets and adding to
their accounts over time. Regular communication with your Registered
Representative can help you cope with volatility, make adjustments when
warranted, and stay focused on the future.

Educating investors, celebrating a decade of service

MainStay celebrated its 10th anniversary as a Fund group in May, passing a major
milestone for seven of our Funds, including the Money Market Fund. It has been
our pleasure to serve you during the last six months, and we look forward to
continuing to do so for many years to come.

/s/ Alice T. Kane

Alice T. Kane
July 1996

- ---------

* "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are
registered trademarks of Standard & Poor's. 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.
+ Source: Ibbotson Associates.
++ Source: Investment Company Institute.
ss. See footnote and chart on page 5 for more
information on Lipper Analytical Services, Inc.

3
<PAGE>

- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS' COMMENTS
- --------------------------------------------------------------------------------

For the seven-day period ended June 30, 1996, the MainStay Money Market Fund had
a current yield of 4.71% for both Class A and Class B shares. For the six-month
and 1-year periods ended June 30, 1996, Class A shares outperformed the average
Lipper money market fund. Class B shares outperformed their average peer fund
over the six-month, 1-, 5-, and 10-year periods ended June 30, 1996.

During the first six months of 1996, a variety of factors influenced interest
rates. A combination of unexpected employment gains, inflation concerns, and
changing Federal Reserve policies caused long-term and intermediate-term rates
to climb, but did not materially affect money market rates.

In managing the portfolio, our key concerns were quality, liquidity, and
preservation of capital. In an effort to maintain high quality, as of June 30,
the portfolio held no second-tier securities. In keeping with the Fund's
liquidity policies, we maintained an average maturity of approximately 53 days
as of June 30th, in line with the Lipper average.

In selecting securities for the portfolio, we seek as high a level of current
income as we consider consistent with the preservation of capital and liquidity.
Our conservative management approach never seeks yield at the expense of capital
preservation, since stability is a prime reason for choosing a money market
fund.

Ravi Akhoury
Frank Salem
Portfolio Managers

Credit quality
- ----------------------------------------
A measure of an individual issuer's
ability to repay principal and interest
on its fixed-income securities -- or a
measure of the general credit risk of
securities in a fixed-income portfolio.

Liquidity
- ----------------------------------------
The ability of a security to be readily
traded or exchanged for cash. Generally
speaking, the larger an issuer's
capitalization, the more liquid its
securities are likely to be.

Second-tier securities
- ----------------------------------------
Investments whose credit rating is in
the top two highest general ratings
available for that asset class, but not
rated in the highest category by at
least two major rating agencies such as
Moody's Investors Services, Inc. or
Standard & Poor's.

Average maturity
- ----------------------------------------
Maturity is the termination date of an
obligation or the length of time a
fixed-income security is required to pay
interest. Average maturity reflects the
average of the maturities of all
fixed-income securities in a portfolio.

4
<PAGE>

- --------------------------------------------------------------------------------
YIELDS & LIPPER RANKINGS as of 6/30/96
- --------------------------------------------------------------------------------

Fund SEC yields*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
7-day current yield
- --------------------------------------------------------------------------------
<S> <C>
Class A 4.71%
Class B 4.71%
- --------------------------------------------------------------------------------
</TABLE>

Fund Lipper+ rankings and Lipper category returns as of 6/30/96

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/96
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 123 out of n/a n/a 96 out of
277 funds 254 funds
- --------------------------------------------------------------------------------
Class B 123 out of 63 out of 46 out of 48 out of
277 funds 173 funds 104 funds 104 funds
- --------------------------------------------------------------------------------
Average Lipper
money market fund 5.02% 3.98% 5.54% 5.55% (5/1/86)
- --------------------------------------------------------------------------------
</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. Investment return and
principal value may fluctuate so that upon redemption, shares may be worth
more or less than their original cost. The Administrator and Adviser have
agreed to assume a portion of the expenses for the MainStay Money Market
Fund; had these expenses not been assumed, the average 7-day yield would
have been 4.30%. Yield is based on the latest seven-day period ending
6/30/96. This expense limitation may be terminated or revised at any time.

5
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amortized
Amount Cost
-----------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (99.6%)+

BANK NOTES (4.5%)
Bank of America-Illinois
5.82%, due 3/24/97 (c) ..................... $ 2,500,000 $ 2,500,000
First National Bank of Maryland
5.13%, due 2/26/97 (b)(c) ................. 4,000,000 4,000,634
Fleet National Bank-Providence,
Rhode Island
5.61%, due 10/30/96 (b)(c) ................. 5,000,000 5,000,000
PNC Bank N.A.-Pittsburgh,
Pennsylvania
5.52%, due 2/6/97 (b)(c) ................... 4,000,000 3,998,475
-----------
15,499,109
-----------

CERTIFICATES OF DEPOSIT (5.6%)
Bayerische Vereinsbank AG
5.80%, due 4/29/97 (c) ..................... 7,500,000 7,500,000
First National Bank of Maryland
5.69%, due 10/23/96 (b)(c) ................. 8,000,000 8,000,000
Mercantile Safe Deposit & Trust Co.,
Baltimore, Maryland
5.68%, due 12/23/96 (b)(c) ................. 3,700,000 3,700,894
-----------
19,200,894
-----------

MEDIUM-TERM NOTES (14.4%)
Abbey National Treasury Services Plc
5.05%, due 3/3/97 (c) ........................ 9,200,000 9,194,519
Associates Corp. of North America
7.50%, due 10/15/96 (c) ...................... 4,800,000 4,825,324
AT&T Capital Corp.
6.30%, due 7/25/96 (c) ....................... 1,765,000 1,765,553
Bankers Trust Corp.-New York
5.27%, due 2/14/97 (b)(c) .................... 3,500,000 3,500,000
First Security Bank of Idaho
6.88%, due 10/4/96 (c) ....................... 8,440,000 8,465,327
Ford Motor Credit Corp.
5.66%, due 1/5/97 (b)(c) ..................... 4,000,000 4,004,368
Household Bank FSB
6.44%, due 6/10/97 (b)(c) .................... 5,000,000 5,000,000
International Lease Finance Corp.
6.80%, due 9/30/96 (b)(c) .................... 4,260,000 4,269,877
Southern California Edison Co.
5.90%, due 1/15/97 (c) ....................... 5,625,000 5,646,177
Toyota Motor Credit Corp.
5.30%, due 9/3/96 (b)(c) ..................... 3,000,000 2,999,504
----------
49,670,649
----------

<CAPTION>
Principal Amortized
Amount Cost
-----------------------------
<S> <C> <C>
COMMERCIAL PAPER (75.1%)
Atlantic Asset Securitization Corp.
5.37%, due 7/11/96 (a) ..................... $13,350,000 $13,330,086
Banca CRT Financial Corp.
4.92%, due 8/8/96 .......................... 5,000,000 4,974,033
4.94%, due 8/8/96 .......................... 3,500,000 3,481,750
5.06%, due 9/3/96 .......................... 3,000,000 2,973,013
5.08%, due 9/3/96 .......................... 2,000,000 1,981,938
Banco Nacional de Mexico S.A.
5.47%, due 11/19/96 ........................ 6,400,000 6,262,885
Bancomer S.A
5.37%, due 9/13/96 ......................... 4,000,000 3,955,847
5.39%, due 7/11/96 ......................... 8,000,000 7,988,022
5.42%, due 7/11/96 ......................... 3,000,000 2,995,483
Centric Funding Corp.
5.33%, due 7/2/96 .......................... 6,000,000 5,999,112
Cheltenham & Gloucester Plc
5.28%, due 7/3/96 .......................... 12,000,000 11,996,480
Clipper Receivables Corp.
5.35%, due 7/12/96 (a) ..................... 2,900,000 2,895,259
COSCO (Cayman) Co. Ltd.
5.34%, due 7/29/96 ......................... 9,000,000 8,962,620
Credito Italiano (DE) Inc.
5.01%, due 8/27/96 ......................... 11,000,000 10,912,742
5.25%, due 7/3/96 .......................... 5,000,000 4,998,542
Duracell Inc.
5.38%, due 7/26/96 ......................... 2,600,000 2,590,286
Eastern Realty Investment Corp.
5.38%, due 7/12/96 ......................... 4,100,000 4,093,260
ESC Securitization Inc.
5.40%, due 9/19/96 (a) ..................... 7,600,000 7,508,800
Goldman Sachs & Co.
5.32%, due 7/10/96 ......................... 12,150,000 12,133,841
Halliburton Co.
5.35%, due 7/9/96 .......................... 7,500,000 7,491,083
Korea Development Bank
5.40%, due 9/4/96 .......................... 5,300,000 5,248,325
Lyon Short Term Funding Corp.
5.40%, due 7/12/96 (a) ..................... 3,500,000 3,494,225
Market Street Funding Corp.
5.38%, due 7/12/96 (a) ..................... 5,477,000 5,467,996
Mitsubishi Motors Credit of
America Inc. Series C
5.40%, due 7/15/96 ......................... 7,500,000 7,484,250
5.45%, due 7/25/96 ......................... 4,950,000 4,932,015
MPS U.S. Commercial Paper Corp.
5.29%, due 7/8/96 .......................... 7,000,000 6,992,800
5.41%, due 9/19/96 ......................... 5,000,000 4,939,889
5.42%, due 9/19/96 ......................... 5,000,000 4,939,778
</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)
Nacional Financiera SNC
Series A
5.30%, due 7/1/96 ........................ $10,300,000 $10,300,000
National Bank of Pakistan
5.38%, due 10/25/96 ...................... 3,000,000 2,947,993
Pemex Capital Inc.
5.42%, due 9/10/96 ....................... 4,000,000 3,957,242
Petroleo Brasileiro S.A.-Petrobras
5.42%, due 1/14/97 ....................... 8,000,000 7,762,724
Receivables Capital Corp.
5.31%, due 7/2/96 (a) .................... 3,500,000 3,499,484
Redland Finance Inc.
5.32%, due 7/3/96 ........................ 4,000,000 3,998,818
Songs Fuel Co.
5.15%, due 7/5/96 ........................ 9,028,000 9,022,834
5.33%, due 7/5/96 ........................ 2,702,000 2,700,400
SRD Finance Inc.
5.42%, due 7/18/96 ....................... 6,000,000 5,984,643
5.50%, due 7/18/96 ....................... 7,000,000 6,981,819
State Bank of New South Wales Ltd.
5.62%, due 7/1/96 ........................ 16,335,000 16,335,000
Svenska Handelsbanken Inc.
4.91%, due 8/6/96 ........................ 5,000,000 4,975,450
Triple-A One Funding Corp.
5.35%, due 7/9/96 (a) .................... 3,275,000 3,271,106
UNIfunding Inc.
4.94%, due 8/9/96 ........................ 5,000,000 4,973,242
Wood Street Funding Corp.
5.38%, due 7/9/96 (a) .................... 1,250,000 1,248,506
-----------
258,983,621
-----------
Total Short-Term Investments
(Amortized Cost $343,354,273) (d) 99.6% 343,354,273
Cash and Other Assets,
Less Liabilities ........................ 0.4 1,298,514
------------ -----------
Net Assets ................................ 100.0% $344,652,787
============ ============

</TABLE>
- -----------
(a) May be sold to institutional investors only.
(b) Floating rate. Rate shown is the rate in effect at June 30, 1996.
(c) Coupon interest bearing security.
(d) The cost stated also represents the aggregate cost for Federal income tax
purposes.

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 ........................ $ 2,999,504 0.9%
Banks # ................................... 225,510,310 65.4
Brokerage ................................. 12,133,840 3.5
Consumer Financial Services ............... 6,899,628 2.0
Electrical Equipment ...................... 2,590,286 0.8
Energy .................................... 7,491,083 2.2
Finance ................................... 66,594,658 19.3
Utilities ................................. 11,723,234 3.4
Utilities-Electrical ...................... 5,646,177 1.6
Utilities-Telephone ....................... 1,765,553 0.5
------------ ------
343,354,273 99.6
Cash and Other Assets,
Less Liabilities ....................... 1,298,514 0.4
------------ ------
Net Assets ................................ $344,652,787 100.0%
============ ======
</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.

The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
7
<PAGE>

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996 (Unaudited)
<S> <C>
ASSETS:
Investment in securities, at value (Note 2)
(amortized cost $343,354,273) ............................. $ 343,354,273
Receivables:
Fund shares sold ........................................ 2,463,778
Interest ................................................ 1,742,797
Other assets .............................................. 647
-------------
Total assets ........................................... 347,561,495
-------------
LIABILITIES:
Payables:
Fund shares redeemed .................................... 1,317,641
Transfer agent .......................................... 119,361
NYLIFE Distributors ..................................... 43,299
Adviser ................................................. 38,167
Custodian ............................................... 14,926
Trustees ................................................ 3,360
Accrued expenses .......................................... 58,991
Dividend payable .......................................... 1,312,963
-------------
Total liabilities ...................................... 2,908,708
-------------
Net assets ................................................ $ 344,652,787
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized:
Class A ................................................. $ 471,236
Class B ................................................. 2,975,409
Additional paid-in capital ................................ 341,217,845
Accumulated net realized loss on investments .............. (11,703)
-------------
Net assets ................................................ $ 344,652,787
=============
CLASS A
Net assets applicable to outstanding shares ............... $ 47,123,608
=============
Shares of beneficial interest outstanding ................. 47,123,608
=============

Net asset value per share outstanding .................... $ 1.00
=============
CLASS B
Net assets applicable to outstanding shares .............. $ 297,529,179
=============
Shares of beneficial interest outstanding ................ 297,540,886
=============
Net asset value per share outstanding .................... $ 1.00
=============
</TABLE>

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 OPERATIONS
- --------------------------------------------------------------------------------

FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Income:
Interest ................................................... $ 9,325,255
-----------
Expenses: (Note 2)
Transfer agent ............................................. 516,646
Administration (Note 3) .................................... 416,846
Advisory (Note 3) .......................................... 416,846
Registration ............................................... 58,407
Shareholder communication .................................. 55,449
Recordkeeping (Note 3) ..................................... 30,877
Auditing ................................................... 22,195
Custodian .................................................. 20,784
Legal ...................................................... 11,527
Trustees ................................................... 6,676
Miscellaneous .............................................. 8,125
-----------
Total expenses before reimbursement ....................... 1,564,378
Expense reimbursement from Administrator
and Adviser (Note 3) ........................................ (383,554)
-----------
Net expenses .............................................. 1,180,824
-----------
Net investment income ........................................ 8,144,431
-----------
REALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ............................. 1,640
-----------
Net increase in net assets resulting from operations ......... $ 8,146,071
===========
</TABLE>

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

9
<PAGE>

- ----------
* Unaudited.

The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
10
<PAGE>

Class B
----------------------------------------------------
Class A Class B Class A Class B
------- ------- ------- ------- September 1
through Year ended August 31
Six months ended Year ended December 31 -------------------------------------
June 30, 1996* December 31, 1995 1994** 1994 1993 1992 1991
-------------- ----------------- ------ ---- ---- ---- ----
<S> <C> <C> <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 $1.00 $1.00
----- ----- ----- ----- ----- ----- ----- ----- -----

Net investment income ...... 0.02 0.02 0.05 0.05 0.02 0.03 0.03 0.04 0.06
----- ----- ----- ----- ----- ----- ----- ----- -----
Less dividends from
net investment income .... (0.02) (0.02) (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 $1.00 $1.00
===== ===== ===== ===== ===== ===== ===== ===== =====
Total investment
return (a) ............... 2.43% 2.43% 5.51% 5.51% 1.54% 3.08% 2.71% 3.80% 6.63%
Ratios (to average net
assets)/Supplemental
Data:
Net investment
income .................. 4.8%+ 4.8%+ 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% 0.7% 0.7%
Expenses (before
reimbursement) .......... 0.9%+ 0.9%+ 0.9% 0.9% 0.9%+ 1.0% 0.9% 1.0% 0.9%
Net assets at end
of period (in 000's) $47,124 $297,529 $34,880 $279,843 $221,912 $192,477 $149,907 $182,567 $246,954
</TABLE>
- ----------
* Unaudited.
** 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>

- --------------------------------------------------------------------------------
MAINSTAY MONEY MARKET FUND
- --------------------------------------------------------------------------------

Note 1 -- Organization and Business:

The Fund currently offers two classes of shares. Class A shares, whose
distribution 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
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization 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
regulations which may differ from generally accepted accounting principles.

Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Interest income is accrued daily and discounts
on securities purchased for the Fund are accreted on the constant yield method
over the life of the respective securities.

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.

12
<PAGE>

Note 3 -- Fees and Related Party Policies:

NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned
subsidiary 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 annual
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
six months ended June 30, 1996 was $383,554.

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,
litigation 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 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 six months ended June 30, 1996.

Contingent Deferred Sales Charge. Even though the Fund does not assess a
contingent 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 contingent
deferred sales charges for the six months ended June 30, 1996 in the amount of
$311,655.

13
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY MONEY MARKET FUND
- --------------------------------------------------------------------------------

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.

Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the six
months ended June 30, 1996 were $19,990.

Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $7,621 for the six months ended
June 30, 1996.

Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the period January 1, 1996 through June 30,
1996 amounted to $30,877.

Note 4 -- Capital Share Transactions (in 000's):

<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1996* December 31, 1995
---------------- -----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ................................ 60,153 269,638 88,180 421,596
Shares issued in reinvestment of dividends . 1,000 6,780 1,157 12,087
------ ------- ------ -------
61,153 276,418 89,337 433,683
Shares redeemed ............................ 48,910 258,733 54,457 375,749
------ ------- ------ -------
Net increase ............................... 12,243 17,685 34,880 57,934
====== ======= ====== =======
</TABLE>

- ----------
* Unaudited.

14
<PAGE>

This page intentionally left blank

15
<PAGE>

GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------

[Horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph representing 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++
- ------------------------------------------------------------------------------------------------------------------------------------

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

FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
[Horizontal bar
graph representing Balances current income with growth You seek a combination of income and
Total Return Fund risk/reward opportunities by investing in stocks, growth potential and want to manage
of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar
graph representing Seeks undervalued stocks with You seek to maximize total return from
Value Fund risk/reward attractive dividends and a stimulus securities which may have more poten-
of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar
graph representing Invests in convertible securities for You want income from securities that
Convertible Fund 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 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.

# 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.

16
<PAGE>

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
Government Fund graph representing consistent with safety of principal current income and safety of principal
risk/reward primarily from U.S. government
of Fund] securities. ss.
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar
High Yield graph representing An aggressive high yield bond You want to maximize current income
Corporate Bond Fund 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 Seeks high current yields and You prefer the higher return potential
International Bond Fund graph representing competitive total return from non- of 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
graph representing Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund risk/reward stability of principal, and competitive yields on cash you're plan-
of Fund] liquidity, 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 representing from both federal and California keep more of what you earn by invest-
risk/reward income taxes consistent with ing 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 representing 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>

A word about risk and reward

17
<PAGE>

This page intentionally left blank

18
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY MONEY
MARKET FUND
- --------------------------------------------------------------------------------

semi-annual report
six months in review

fund results

& portfolio highlights

[LOGO] MainStay(R) Funds
- --------------------------------------------------------------------------------
UNAUDITED JUNE 30, 1996
- --------------------------------------------------------------------------------

OFFICERS & TRUSTEES

Alice T.Kane Chairperson and Trustee

Walter W. Ubl President, Chief Executive Officer, and Trustee
Harry G. Hohn 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 W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary

Dechert Price & Rhoads
Legal Counsel

[LOGO] MainStay(R) Funds

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] NEW YORK LIFE

This report is provided for the information of shareholders of the MainStay
Money Market 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.

[RECYCLING LOGO] MSSA12 (896)
<PAGE>

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

Chairperson's Letter 2

MainStay New York Tax Free Fund Highlights
and Portfolio Managers' Comments 4

Returns & Lipper Rankings 7

Year-by-Year & Six-Month Performance 8

$10,000 Invested in the MainStay New York
Tax Free Fund Class A Shares vs. Lehman Brothers
Municipal Bond Index and Inflation 8

$10,000 Invested in the MainStay New York
Tax Free Fund Class B Shares vs. Lehman Brothers
Municipal Bond Index and Inflation 8

Diversification of Holdings 9

Quality Breakdown 9

Portfolio of Investments 10

Financial Statements 12

Notes to Financial Statements 16

The MainStay Funds 22
<PAGE>

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

Strategic security selection with a focus on quality and conservative duration
management -- these were the strategies that guided the management of the
MainStay New York Tax Free Fund for the six months ended June 30, 1996. As a
result, over this period, the Fund returned -1.34% and- 1.38% for Class A and
Class B shares, respectively, excluding all sales charges.

A stronger economy -- good for stocks, challenging for bonds

Bonds had a difficult time during this period. The improving economy generally
hurt fixed-income investors, but boosted prices among lower-rated bonds. In
March, unexpected payroll gains, which indicated higher employment levels,
caused bond prices to plummet. In a single day, 30-year Treasury bond prices
fell 3.3% and most domestic bond categories, except high current yield, closed
the first quarter with negative returns. As employment rose in the second
quarter, so did long-term rates, with the 30-year Treasury bond yielding 6.90%
at the end of June. In the municipal market, supply and demand continued to
influence liquidity and pricing.

Positive results in international markets

2
<PAGE>

Fund strategies, results, and outlook

The MainStay New York Tax Free Fund portfolio management team used careful
security selection to identify opportunities with relatively high quality and
income potential. They also maintained a relatively neutral duration which was
successful in keeping performance in line with the market during a particularly
turbulent time. To help manage risk, the Fund's managers sought broad
diversification by sector and location within the state. The Fund's specific
strategies and performance results are discussed in greater detail in the Fund
managers' comments on the following pages.

Educating investors, celebrating a decade of service

/s/ Alice T. Kane
Alice T. Kane
July 1996

- ----------

+ Source: Ibbotson Associates.

++ Source: Investment Company
Institute.

3
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY NEW YORK TAX FREE FUND
- --------------------------------------------------------------------------------

Fund highlights for the six months ended June 30, 1996

o One-year total returns of 6.45% and 6.27% for Class A and Class B shares,
respectively, excluding all sales charges, as of 6/30/96

o Geographic and sector diversification among New York municipal issues

o A relatively neutral duration helped the Fund modestly outperform its
average peer fund during a turbulent period

For the six months ended June 30, 1996, the MainStay New York Tax Free Fund had
total returns of -1.34% and -1.38% for Class A shares and Class B shares,
respectively, excluding all sales charges. Even though these returns were
negative, both share classes modestly outperformed the average Lipper* New York
municipal debt fund, which returned -1.40% for the same period. During the
second quarter, the Fund achieved positive returns, slightly outperforming its
peers.

The stalemate between the governor and the legislature over the New York state
budget finally ended in mid-July. In one of the most rancorous legislative
sessions in recent memory, the final budget was approved by all parties more
than three full months after the state's fiscal year began on April 1.

In New York City, budget developments have been more optimistic. In the mayor's
most recent version, there was less reliance on "one-shot" solutions and
unreliable funding sources. While the city has not yet addressed some long-term
structural imbalances in its finances, its Baa1/BBB+ credit rating appears
secure for the near future.

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.

- ----------
* See footnote and chart on page 7 for more information on Lipper Analytical
Services, Inc.

4
<PAGE>

The longer the duration, the more price variations a portfolio may capture when
interest rates move. We feel that our relatively neutral posture helped our
performance during this turbulent period.

To manage portfolio risk, we bought a diversified array of general obligation
and revenue bonds in the first half of the year, including water, power,
housing, transportation, pollution control, and health care issues. We also
purchased a mix of securities by location, including various New York State and
New York City issues -- and by type, including current coupon bonds, as well as
discount and higher yielding issues that met our stringent risk/reward
guidelines.

Our reasons for purchase varied by issue. In some cases, we liked the price and
coupon structure, in others the credit quality was appealing, and in still other
cases, we believed the yield more than compensated for any risks the portfolio
would have to assume. We were attracted to a Port Authority issue because it
added a degree of liquidity, being tax deductible for residents of two states --
both New York and New Jersey. In our selection process, we also give attention
to prerefunding potential -- and during the first half, some New York City
issues were prerefunded, giving a modest boost to performance.

With the increase in insured credits in the market there are more high-quality
issues to choose from, which has resulted in greater uniformity in price and
yields. Therefore, it has become more important that ever to accurately assess
value among uninsured issuers where variations in quality, price, and yields may
represent potential opportunities. We continue to like BBB-rated hospital
issues. We find their prices and risk/reward relationship attractive and believe
that selected opportunities continue to emerge. In the first half of 1996, we
also identified other solid uninsured issues with attractive yields at various
quality levels.

Current coupon bonds
- ----------------------------------------
Fixed-income securities whose prices and
coupons (or interest rate payments)
closely reflect the rates currently
available on bonds at par value (e.g.
$1,000). Discount bonds offer lower
coupons and may trade at lower prices.
Higher yielding bonds typically offer
higher coupons and may trade at premium
prices.

Prerefunding
- ----------------------------------------
Returning principal prior to the initial
date at which a bond can be called or
"refunded" (usually 10 years after
issuance). In order to prerefund, the
issuer must return the par value of the
bond and provide or guarantee interest
payments through the initial call date.

Insured credits
- ----------------------------------------
Bonds that carry insurance or other
guarantees that interest and principal
payments will be met. Although such
insurance may increase the cost of the
bond, it also reduces the risk of
default, regardless of the issuer's
credit quality.

5
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY NEW YORK TAX FREE FUND
- --------------------------------------------------------------------------------

During the reporting period, we found Puerto Rican bonds to be priced above
their fair value and sold them. This was despite their ability to provide double
(or triple) tax-exempt income+ to residents of New York State (or New York
City). Whether we're buying or selling, we continue to focus on an appropriate
combination of duration, quality, and yield for the portfolio, and
diversification by issuer, sector, and location.

Looking ahead, we anticipate increased volatility in the municipal market. We
will carefully monitor economic growth and inflationary trends to strategically
position the Fund's duration relative to the market as a whole.

Ravi Akhoury
James Flood
Portfolio Managers

- ----------

+ 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.

6
<PAGE>

Fund average annual total returns*
- --------------------------------------------------------------------------------
Life of Fund
1 year through 6/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
Class A 6.45% 6.69%
Class B 6.27% 6.62%
- --------------------------------------------------------------------------------

<CAPTION>
Fund Lipper+ rankings and Lipper category returns as of 6/30/96
- --------------------------------------------------------------------------------
Life of Fund
1 year through 6/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
Class A 16 out of 95 funds 26 out of 44 funds
Class B 21 out of 95 funds 60 out of 83 funds
Average Lipper NY
municipal debt fund 5.54% 6.77%(10/1/91)
- --------------------------------------------------------------------------------

<CAPTION>
Fund per-share net asset values and distributions for the six months ended
6/30/96
- --------------------------------------------------------------------------------
NAV 6/30/96 Income Capital Gains
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A $9.73 $0.2540 $0.0000
Class B $9.64 $0.2420 $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.

7
<PAGE>

[Shown in a bar graph]

Total
Return
Period-end %
---------- ------
<S> <C>
12/91 2.08
12/92 8.98
12/93 12.11
12/94 -4.71
12/95 15.97 Class A
12/95 15.67 Class B
6/96 -1.34 Class A
6/96 -1.38 Class B
</TABLE>

- ---------
Returns are for Class A shares
unless otherwise noted. See
footnote * on page 7 for more
information on performance.

- --------------------------------------------------------------------------------
$10,000 INVESTED IN MAINSTAY NEW YORK TAX FREE FUND
VS. LEHMAN BROTHERS MUNICIPAL BOND INDEX AND INFLATION
- --------------------------------------------------------------------------------

[Shown in a line graph]

Class A Shares
<TABLE>
<CAPTION>
Lehman
Municipal NY Tax
Bond Free
Period-end Index++ Inflation ss. Fund
- ---------- --------- --------- ------
<S> <C> <C> <C>
10/1/91 10,000 10,000 9,550
12/91 10,335.00 10,051 9,748.80
12/92 11,246.05 10,343 10,627.60
12/93 12,627.56 10,627 11,915.50
12/94 11,974.79 10,911 11,353.20
12/95 14,065.01 11,188 13,166.80
6/30/96 14,002.02 11,414 12,990.00
</TABLE>

[Shown in a line graph]

Class B Shares
<TABLE>
<CAPTION>
Lehman
Municipal NY Tax
Bond Free
Period-end Index++ Inflation ss. Fund
- ---------- --------- --------- ------
<S> <C> <C> <C>
10/1/91 10,000 10,000 10,000
12/91 10,335.00 10,051 10,208.17
12/92 11,246.05 10,343 11,128.38
12/93 12,627.56 10,627 12,476.96
12/94 11,974.79 10,911 11,888.17
12/95 14,065.01 11,188 13,750.89
6/30/96 14,002.02 11,414 13,290.44
</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 shown reflect the
Contingent Deferred Sales Charge
(CDSC) of 2%, as it would apply for
the period shown. (The $10,000
invested in the Lehman Brothers
Municipal Bond Index begins on
9/30/91.) All results include
reinvestment of 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.

ss. 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.

8
<PAGE>

[The following table was represented by a pie chart]

Revenue Hospital/Nursing Home/Health Care............... 21.0%
Revenue Transportation.................................. 23.1%
Revenue Education....................................... 8.5%
General Obligation - Special Tax........................ 8.2%
General Obligation - County/City........................ 10.1%
All Other............................................... 29.1%

- --------------------------------------------------------------------------------
QUALITY BREAKDOWN as of 6/30/96
- --------------------------------------------------------------------------------

[The following table was represented by a pie chart]

AAA..................................................... 55.6%
AA...................................................... 11.0%
A....................................................... 7.0%
BBB..................................................... 24.8%
Cash & Equivalents...................................... 1.6%

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

9
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY NEW YORK TAX FREE FUND
- --------------------------------------------------------------------------------

Principal
Amount Value
---------- -----------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (98.4%)+

NEW YORK (98.4%)
Metropolitan Transportation
Authority Service Contract,
Commuter Facilities Revenue,
Series L 7.50%, due 7/1/17 ..................... $ 775,000 $ 830,219
Monroe County New York Airport
Authority Revenue, Greater
Rochester International
7.25%, due 1/1/19 (a) .......................... 750,000 812,813
Municipal Assistance Corp.
New York City, Series 67
7.625%, due 7/1/08 (b) ......................... 800,000 876,000
New York City General Obligation
Series A
6.25%, due 8/1/17 .............................. 1,000,000 976,250
Series C
7.50%, due 8/1/20 .............................. 300,000 323,250
Series F
8.20%, due 11/15/04 ............................ 170,000 189,338
New York City Industrial Develop-
ment Agency Civil Facility Revenue
Rockefeller Foundation Project
5.375%, due 7/1/23 (b) ......................... 1,000,000 950,000
New York City Municipal Water
Finance Authority, Water & Sewer
System Revenue, Series B
5.375%, due 6/15/19 ............................ 925,000 867,187
New York State Dormitory Authority
Revenue
City University, Series C
5.00%, due 7/1/17 .............................. 1,000,000 855,000
Court Facilities Lease, Series A
5.25%, due 5/15/21 ............................. 900,000 778,500
Manhattanville College
(zero coupon), due 7/1/19 ...................... 2,175,000 560,062
(zero coupon), due 7/1/21 ...................... 1,175,000 268,781
Park Ridge Housing Income Project
7.85%, due 2/1/29 .............................. 800,000 864,000
New York State Energy Research &
Development Authority Electric
Facilities Revenue, Con Edison
7.75%, due 1/1/24 (a) .......................... 500,000 526,250
New York State Energy Research &
Development Authority Gas
Facilities Revenue, Brooklyn Union Gas
6.75%, due 2/1/24 (a) .......................... 755,000 806,906
New York State Environmental
Facilities Corp., State Water
Pollution Control Revenue
Series A
4.65%, due 6/15/07 ............................. 395,000 375,250

<CAPTION>
Principal
Amount Value
---------- -----------
<S> <C> <C>
New York State Local Government
Assistance Corp., Series A
7.00%, due 4/1/12 (b) ......................... $ 775,000 $ 845,719
New York State Medical Care
Facilities Finance Agency Revenue
7.50%, due 2/15/21 ............................. 755,000 832,387
7.875%, due 8/15/20 ............................ 800,000 888,000
8.875%, due 8/15/07 ............................ 605,000 642,813
New York State Medical Care Facilities
Finance Agency Revenue
St. Francis Hospital of Roslyn
Project A
7.625%, due 11/1/21 ............................ 835,000 902,844
New York State Mortgage Agency
Homeowner Revenue, Series 53
5.90%, due 10/1/17 ............................. 200,000 195,750
New York State Power Authority
Revenue General Purpose
Series CC
5.125%, due 1/1/10 ............................. 500,000 479,375
New York State Thruway Authority
Service Contract Revenue, Series A
5.125%, due 1/1/06 ............................. 1,000,000 990,000
New York State Urban Development
Corp. Correctional Facilities
Revenue
5.25%, due 1/1/18 .............................. 700,000 648,375
Port Authority of New York &
New Jersey Consolidated
Series 103
5.25%, due 12/15/12 ............................ 900,000 858,375
Triborough Bridge & Tunnel Authority
of New York, General Purpose
Revenue, Series L
8.125%, due 1/1/12 ............................. 1,000,000 1,068,750
-----------
Total Long-Term Municipal Bonds
(Cost $19,056,958) ............................. 19,212,194
-----------

SHORT-TERM INVESTMENT (2.6%)

New York City General Obligation
Series B
3.55%, due 8/15/22 (c) ......................... 500,000 500,000
-----------
Total Short-Term Investment
(Cost $500,000) ................................ 500,000
-----------
Total Investments
(Cost $19,556,958) (d) ......................... 101.0% 19,712,194(e)
Liabilities in Excess of Cash
and Other Assets ............................... (1.0) (193,927)
---------- -----------
Net Assets ....................................... 100.0% $19,518,267
========== ===========

</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.

10
<PAGE>

<TABLE>
<CAPTION>
Contracts Unrealized
Long Appreciation
---------- -----------
<S> <C> <C>
FUTURES CONTRACTS (0.0%) (f)

Municipal Bond
September 1996 (30 year) ....................... 4 $ 10,500
-----------
Total Futures Contracts
(Settlement Value $449,375) .................... $ 10,500(g)
===========
</TABLE>

- ----------
(a) Interest on these securities is subject to alternative minimum tax.

(b) Segregated or partially segregated as collateral for futures contracts.

(d) The cost stated also represents the aggregate cost for Federal income tax
purposes.

(e) At June 30,1996 net unrealized appreciation was $155,236, 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 $275,744 and aggregate gross unrealized depreciation for
all investments on which there was an excess of cost over market value of
$120,508.

(f) Less than one tenth of a percent.

(g) Represents the difference between the value of the contracts at the time
they were opened and the value at June 30, 1996.

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

11
<PAGE>

AS OF JUNE 30, 1996 (Unaudited)
<S> <C>
ASSETS:
Investment in securities, at value (Note 2) (identified cost $19,556,958) $ 19,712,194
Cash .................................................................... 60,436
Receivables:
Investment securities sold ............................................ 470,158
Interest .............................................................. 419,184
Fund shares sold ...................................................... 167
Unamortized organization expense (Note 2) ............................... 2,152
Other assets ............................................................ 32
Variation margin receivable on futures contracts ........................ 14,374
------------
Total assets ........................................................ 20,678,697
------------
LIABILITIES:
Payables:
Investment securities purchased ....................................... 965,930
Fund shares redeemed .................................................. 35,693
Transfer agent ........................................................ 4,127
Custodian ............................................................. 3,394
NYLIFE Distributors ................................................... 1,323
Trustees .............................................................. 194
Accrued expenses ........................................................ 66,015
Dividend payable ........................................................ 83,754
------------
Total liabilities ................................................... 1,160,430
------------
Net assets .............................................................. $ 19,518,267
============

COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................... $ 17,133
Class B ............................................................... 2,950
Additional paid-in capital .............................................. 19,765,422
Accumulated distributions in excess of net investment income ............ (1,212)
Accumulated net realized loss on investments ............................ (431,762)
Unrealized appreciation on investments .................................. 165,736
------------
Net assets .............................................................. $ 19,518,267
============
CLASS A
Net assets applicable to outstanding shares ............................. $ 16,676,318
============
Shares of beneficial interest outstanding ............................... 1,713,250
============
Net asset value per share outstanding ................................... $ 9.73
Maximum sales charge (4.50% of offering price) .......................... 0.46
------------
Maximum offering price per share outstanding ............................ $ 10.19
============
CLASS B
Net assets applicable to outstanding shares ............................. $ 2,841,949
============
Shares of beneficial interest outstanding ............................... 294,950
============
Net asset value per share outstanding ................................... $ 9.64
============
</TABLE>

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

12
<PAGE>

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------

FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Unaudited)
<S> <C>
INVESTMENT INCOME:
Income:
Interest ....................................................... $ 604,123
---------
Expenses: (Note 2)
Shareholder communication ...................................... 31,627
Administration (Note 3) ........................................ 24,225
Advisory (Note 3) .............................................. 24,225
Service (Note 3) ............................................... 24,225
Transfer agent ................................................. 17,320
Auditing ....................................................... 10,437
Custodian ...................................................... 10,214
Amortization of organization expense ........................... 4,252
Distribution--Class B (Note 3) ................................. 2,488
Registration ................................................... 1,406
Legal .......................................................... 663
Trustees ....................................................... 306
Miscellaneous .................................................. 7,135
---------
Total expenses before reimbursement .......................... 158,523
Expense reimbursement from Adviser and Administrator (Note 3) .... (35,938)
---------
Net expenses ................................................. 122,585
---------
Net investment income ............................................ 481,538
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions .......................................... 14,072
Futures transactions ........................................... (118,567)
---------
Net realized loss on investments ................................. (104,495)
---------
Net change in unrealized appreciation on investments:
Security transactions .......................................... (660,203)
Futures transactions ........................................... 10,500
---------
Net unrealized loss on investments ............................... (649,703)
---------
Net realized and unrealized loss on investments .................. (754,198)
---------
Net decrease in net assets resulting from operations ............. $(272,660)
=========

</TABLE>

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

13
<PAGE>

Six months
ended Year ended
June 30, December 31,
1996* 1995
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income ............................................................... $ 481,538 $ 981,802
Net realized gain (loss) on investments ............................................. (104,495) 426,130
Net change in unrealized appreciation (depreciation) on investments ................. (649,703) 1,308,574
------------ ------------
Net increase (decrease) in net assets resulting from operations ..................... (272,660) 2,716,506
------------ ------------
Dividends to shareholders:
From net investment income:
Class A .......................................................................... (448,073) (936,551)

Class B .......................................................................... (52,620) (46,485)
------------ ------------
Total dividends to shareholders ................................................ (500,693) (983,036)

------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A .......................................................................... 328,394 933,639
Class B .......................................................................... 1,350,612 1,529,472
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A .......................................................................... 144,578 363,729
Class B .......................................................................... 29,413 29,496
------------ ------------
1,852,997 2,856,336
Cost of shares redeemed:
Class A .......................................................................... (1,337,342) (1,843,250)

Class B .......................................................................... (60,297) (15,993)

------------ ------------
Increase in net assets derived from capital share transactions ................. 455,358 997,093
------------ ------------
Net increase (decrease) in net assets .......................................... (317,995) 2,730,563
NET ASSETS:
Beginning of period .................................................................... 19,836,262 17,105,699
------------ ------------
End of period .......................................................................... $ 19,518,267 $ 19,836,262
============ ============
Accumulated undistributed net investment income/(excess distribution) .................. $ (1,212) $ 17,943
============ ============

</TABLE>

- ----------
* Unaudited.

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>
Class A
------------------------------------------------------

Class A Class B Class A Class B September 1 Year ended
------- ------- ------- ------- through August 31 October 1, 1991(a)
Six months ended Year ended December 31 ------------------- through
June 30, 1996* December 31, 1995 1994** 1994 1993 August 31, 1992
-------------------- ------------------ ------ ------- ------ -----------------

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period .. $ 10.12 $ 10.02 $ 9.20 $ 9.20 $ 9.58 $ 10.43 $ 9.95 $ 9.55
------- ------- ------ ------ ------ ------- ------ ------

Net investment income .. 0.24 0.23 0.52 0.59 0.19 0.56 0.60 0.49
Net realized and
unrealized gain (loss)
on investments ....... (0.38) (0.37) 0.91 0.82 (0.39) (0.59) 0.54 0.34
------- ------- ------ ------ ------ ------- ------ ------
Total from investment
operations ........... (0.14) (0.14) 1.43 1.41 (0.20) (0.03) 1.14 0.83
------- ------- ------ ------ ------ ------- ------ ------
Less dividends and
distributions:
Dividends from net
investment income .... (0.25) (0.24) (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 ........ (0.25) (0.24) (0.51) (0.59) (0.18) (0.82) (0.66) (0.43)
------- ------- ------ ------ ------ ------- ------ ------
Net asset value at
end of period ........ $ 9.73 $ 9.64 $ 10.12 $ 10.02 $ 9.20 $ 9.58 $ 10.43 $ 9.95
======= ======= ======= ======= ====== ====== ======= ======

Total investment
return (b) ........... (1.34%) (1.38%) 15.97% 15.67% (2.11%) (0.35%) 11.88 % 8.95%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 5.0%+ 4.8%+ 5.4% 5.1% 6.1%+ 5.7% 6.0 % 5.9%+
Net expenses ......... 1.24%+ 1.49%+ 1.24% 1.49% 0.99%+ 0.99% 0.98 % 0.99%+
Expenses (before
reimbursement) ..... 1.6%+ 1.9%+ 1.4% 1.6% 1.2%+ 1.1% 1.2 % 1.5%+
Portfolio turnover rate 60% 60% 114% 114% 39% 169% 131 % 23%
Net assets at end of
period (in 000's) .... $16,676 $2,842 $18,248 $1,588 $17,106 $17,862 $15,665 $10,605

</TABLE>

- ----------
* Unaudited.

** 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.

15
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY NEW YORK TAX FREE FUND
- --------------------------------------------------------------------------------

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 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.

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 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.

16
<PAGE>

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.

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

17
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY NEW YORK TAX FREE FUND
- --------------------------------------------------------------------------------

Organization Costs. Costs incurred in connection with the Fund's initial
organization 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.

Note 3 -- Fees and Related Party Policies:

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

The Adviser and the Administrator have voluntarily agreed to reimburse the
expenses 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 reimbursement
to the New York Tax Free Fund for the period ended June 30, 1996 was $35,938.

18
<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 $14,044 for the six
months ended June 30, 1996.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges on redemptions of Class B shares for the six months ended June 30,
1996 in the amount of $2,275.

19
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY NEW YORK TAX FREE FUND
- --------------------------------------------------------------------------------

Capital. At June 30, 1996, NYLIFE Securities and NYLIFE Distributors held shares
of Class A with a net asset value of $97,300 and $6,332,045, respectively.

Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the six
months ended June 30, 1996 were $237.

Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $481 for the six months ended June
30, 1996.

Note 4 -- Federal Income Tax:

At December 31, 1995, for Federal income tax purposes, capital loss
carryforwards of $327,267 were 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 probable
that the capital gains so offset will not be distributed to shareholders.

Note 5 -- Purchases and Sales of Securities (in 000's):

Note 6 -- Capital Share Transactions (in 000's):

<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1996* December 31, 1995
------------------------ -----------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ................................................. 33 140 97 157
Shares issued in reinvestment of dividends .................. 15 3 38 3
--- --- --- ---
48 143 135 160
Shares redeemed ............................................. 137 6 191 2
--- --- --- ---
Net increase (decrease) ..................................... (89) 137 (56) 158
=== === === ===

</TABLE>

- ----------
* Unaudited.

20
<PAGE>

This page intentionally left blank

21
<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*
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++
- -----------------------------------------------------------------------------------------------------------------------------------

<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>

* 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.

# 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

- -----------------------------------------------------------------------------------------------------------------------------------
[horizontal bar An aggressive high yield bond You want to maximize current income
High Yield graph indicating fund that is actively managed for and can accept the higher risk of
Corporate Bond Fund 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
International Bond Fund graph indicating competitive total return from non- of 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 competitive yields on cash you're plan-
risk/reward liquidity, with free checkwriting|| ning to spend or invest in the near future
of fund]
- -----------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
TAX-FREE INCOME FUNDS

- -----------------------------------------------------------------------------------------------------------------------------------
[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>

23
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY NEW YORK
TAX FREE FUND
- --------------------------------------------------------------------------------

semi-annual report
six months in review

fund results

& portfolio highlights

[LOGO] MainStay(R) Funds

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

OFFICERS & TRUSTEES

Alice T.Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer, and Trustee
Harry G. Hohn 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 W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary

Dechert Price & Rhoads
Legal Counsel

[LOGO] MainStay(R) Funds

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] NEW YORK LIFE

[RECYCLING SYMBOL] MSSA13 (896)
<PAGE>

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

Chairperson's Letter 2

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

Returns & Lipper Rankings 7

Year-by-Year & Six-Month Performance 8

$10,000 Invested in the MainStay Tax Free Bond Fund
Class A Shares vs. Lehman Brothers Municipal Bond
Index and Inflation 8

$10,000 Invested in the MainStay Tax Free Bond Fund
Class B Shares vs. Lehman Brothers Municipal Bond
Index and Inflation 8

Top 10 Holdings 9

Diversification by State -- Top 5 10

Quality Breakdown 10

Portfolio of Investments 11

Financial Statements 16

Notes to Financial Statements 20

The MainStay Funds 26
<PAGE>

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

Strategic security selection with a focus on quality and conservative duration
management -- these were the strategies that guided the management of the
MainStay(R) Tax Free Bond Fund for the six months ended June 30, 1996. As a
result, over this period, the Fund returned -1.26% and -1.38% for Class A and
Class B shares, respectively, excluding all sales charges.

A stronger economy -- good for stocks, challenging for bonds

Bonds had a difficult time during this period. The improving economy generally
hurt fixed-income investors, but boosted prices among lower-rated bonds. In
March, unexpected payroll gains, which indicated higher employment levels,
caused bond prices to plummet. In a single day, 30-year Treasury bond prices
fell 3.3% and most domestic bond categories, except high current yield, closed
the first quarter with negative returns. As employment rose in the second
quarter, so did long-term rates, with the 30-year Treasury bond yielding 6.90%
at the end of June. In the municipal market, supply and demand continued to
influence liquidity and pricing.

Positive results in international markets

Foreign equity markets lagged the U.S. during the first quarter of 1996, but
provided more competitive returns in the second. Latin America posted strong
gains and Japan showed signs of economic recovery, which boosted its equity
returns to 43.5% for the 12 months ended June 30, 1996. Small company funds did
well in European markets, as they did in the U.S. In all but a handful of
markets, foreign currencies declined against the U.S. dollar, led by weaknesses
in the Japanese yen and core European currencies.

2
<PAGE>

Foreign bonds outperformed U.S. bonds during the reporting period, increasing
the potential value of international diversification.

Fund strategies, results, and outlook

The MainStay Tax Free Bond Fund portfolio management team used careful security
selection to identify opportunities with relatively high quality and income
potential. They also maintained a relatively neutral duration to keep
performance in line with the market. To help manage risk, the Fund's managers
sought broad diversification by sector and state, purchasing municipal
securities issued in more than 20 states during the reporting period. The Fund's
specific strategies and performance results are discussed in greater detail in
the Fund managers' comments on the following pages.

Educating investors, celebrating a decade of service

MainStay celebrated its 10th anniversary as a Fund group in May, passing a major
milestone for seven of our Funds, including the Tax Free Bond Fund. It has been
our pleasure to serve you during the last six months, and we look forward to
continuing to do so for many years to come.

/s/ Alice T. Kane
Alice T. Kane
July 1996

- ----------
* "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500"
are registered trademarks of Standard & Poor's. 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.

+ Source: Ibbotson Associates.
++ Source: Investment Company Institute.

3
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY TAX FREE BOND FUND
- --------------------------------------------------------------------------------

Fund highlights for the six months ended June 30, 1996

o One-year total returns of 5.45% and 5.21% for Class A and Class B shares,
respectively, excluding all sales charges, as of 6/30/96

o Fund track record exceeded ten years

o A neutral duration helped the Fund perform in line with the market, while
geographic and sector diversification helped manage risk

For the six months ended June 30, 1996, the MainStay Tax Free Bond Fund posted
total returns of -1.26% and -1.38% for Class A and Class B shares, respectively,
excluding all sales charges. Both share classes equaled or outperformed the
average Lipper* general municipal debt fund, which returned -1.38% over the same
period. In the second quarter, both share classes achieved positive returns,
outpacing their average peer fund.

Despite negative returns, municipals outperformed taxable fixed-income
securities throughout the first half of 1996, providing a relative advantage for
investors seeking tax-free income. In this difficult environment, the Fund
maintained its conservative, quality-oriented strategy with a generally neutral
portfolio duration. We believe that duration is the single most important factor
affecting returns in the municipal market, and that our relatively neutral
duration helped the portfolio remain closely in line with its peers during the
reporting period.

Strategically, the Fund is somewhat underweighted in current coupon bonds and
slightly overweighted in discount or higher yielding issues that we believe may
offer more value over the long term. With the increase in insured credits in the
market, there are more high-quality issues to choose from, which has resulted in
greater uniformity in price and yield. As a result, it has become more important
than ever to accurately assess value among uninsured issuers, where variations
in quality, price, and yield may represent opportunities. One area we continue
to favor is

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.

Current coupon bonds
- ------------------------------
Fixed-income securities whose
prices and coupons (or
interest rate payments)
closely reflect the rates
currently available on bonds
at par value (e.g. $1,000).
Discount bonds offer lower
coupons and may trade at lower
prices. Higher yielding bonds
typically offer higher coupons
and may trade at premium
prices.

Insured credits
- ------------------------------
Bonds that carry insurance or
other guarantees that interest
and principal payments will be
met. Although such insurance
may increase the cost of the
bond, it also reduces the risk
of default, regardless of the
issuer's credit quality.

4
<PAGE>

BBB-rated hospital issues. We find their prices and risk/reward relationship
attractive and believe that selected opportunities continue to emerge. In our
selection process, we also give attention to prerefunding potential. During the
first half of the year, some New York City issues were prerefunded, giving a
modest boost to performance.

To help control risk, the portfolio continued to seek broad geographic
diversification, purchasing tax-exempt bonds issued in over 20 states during the
reporting period. The Fund also spread its purchases across a variety of
municipal sectors, from water, power, airports, and hospitals, to colleges,
universities, toll roads, and urban development.

With manageable quantities of new issuance, anticipation of large interest
coupons, and a large number of municipals being called in midyear, the market
was largely able to absorb new issues. While not as much money is being
reinvested in municipal bonds as in the past, investments were sufficient to
keep supply and demand in line. With increasing interest rates, supply should
remain modest in the second half of the year, because refundings and
refinancings of older issues will likely be reduced. As long as the stock market
continues to rise, we believe investors will continue to shift assets out of
bonds into equities.

Public debate on the flat tax, which hurt municipals in 1995, has continued to
wane since Steve Forbes dropped out of the race for the Republican presidential
nomination. While there are still some powerful political proponents of the
idea, we continue to view any major tax reform including a flat tax as
increasingly unlikely.

The Fund continues to maintain its focus on high quality bonds. Since the spread
between AAA-rated and A-rated municipal bonds remains very narrow, quality
improvements are easier to achieve at a lower cost in terms of yield. As of June
30, 1996, the average credit rating on the Fund's bonds according to Standard &
Poor's is AA2.

Prerefunding
- ----------------------------
Returning principal prior to
the initial date at which a
bond can be called or
"refunded" (usually 10 years
after issuance). In order to
prerefund, the issuer must
return the par value of the
bond and provide or guarantee
interest payments through the
initial call date.

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.

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.

- ----------

* See footnote and chart on page 7 for more information on Lipper Analytical
Services, Inc.

5
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY TAX FREE BOND FUND
- --------------------------------------------------------------------------------

Ravi Akhoury
James Flood
Portfolio Managers

6
<PAGE>

- --------------------------------------------------------------------------------
RETURNS AND LIPPER RANKINGS as of 6/60/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Fund average annual total returns*
- -----------------------------------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/96
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 5.45% 6.46% 6.51% 6.21%
Class B 5.21% 6.41% 6.48% 6.19%
- -----------------------------------------------------------------------------------------------------------------------------------

Fund SEC returns*
- -----------------------------------------------------------------------------------------------------------------------------------
1 year 5 years 10 years
- -- --------------------------------------------------------------------------------------------------------------------------------
Class A 0.70% 5.48% 6.02%
Class B 0.21% 6.09% 6.48%
- -----------------------------------------------------------------------------------------------------------------------------------

Fund Lipper+ rankings and Lipper category returns as of 6/30/96
- -----------------------------------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/96
- -----------------------------------------------------------------------------------------------------------------------------------
Class A 144 out of n/a n/a 169 out of
228 funds 210 funds
Class B 166 out of 91 out of 57 out of 58 out of
228 funds 101 funds 60 funds 59 funds
Average Lipper general
municipal debt fund 5.67% 7.34% 7.59% 7.45% (5/1/86)
- -----------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
Fund per-share net asset values and distributions for the six months ended 6/30/96
- -----------------------------------------------------------------------------------------------------------------------------------
NAV 6/30/96 Income Capital Gains
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A $9.64 $0.2540 $0.0000
Class B $9.65 $0.2420 $0.0000
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

- ----------

7
<PAGE>

[The table below was represented as a bar graph in the printed document.]

<TABLE>
<CAPTION>
Total Return %
-----------------
Period-end Class A Class B
- ---------- ------- -------
<S> <C> <C>
12/86 6.01%
12/87 0.58%
12/88 8.77%
12/89 7.38%
12/90 4.68%
12/91 10.89%
12/92 8.41%
12/93 10.39%
12/94 - 6.02%
12/95 15.00% 14.86%
6/96 - 1.26% - 1.38%
</TABLE>

- ----------
Returns are for Class B shares unless otherwise noted. See footnote *
on page 7 for more information on performance.

- --------------------------------------------------------------------------------
$10,000 INVESTED IN MAINSTAY TAX FREE BOND FUND VS.
LEHMAN BROTHERS MUNICIPAL BOND INDEX AND INFLATION
- --------------------------------------------------------------------------------

[The table below was represented as a line graph in the printed document.]

<TABLE>
<CAPTION>
Class A Shares

Lehman Brothers
Municipal Tax Free
Period-end Bond Index Inflation Bond Fund
- ---------- ---------- --------- ---------
<S> <C> <C> <C>
5/1/86 10000 10000 9550
12/86 10826.37 10175 10123.38
12/87 10989.55 10626 10181.92
12/88 12106.57 11096 11074.28
12/89 13412.61 11611 11891.28
12/90 14390.09 12320 12447.57
12/91 16137.35 12698 13803.19
12/92 17559.87 13066 14964.95
12/93 19717.02 13425 16520.45
12/94 18697.79 13785 15525.44
12/95 21961.53 14134 17854.68
6/96 21863.17 14420 17630.64
</TABLE>

[The table below was represented as a line graph in the printed document.]

<TABLE>
<CAPTION>
Class B Shares
Lehman Brothers
Municipal Tax Free
Period-end Bond Index Inflation Bond Fund
- ---------- ---------- --------- ---------
<S> <C> <C> <C>
5/1/86 10000 10000 10000
12/86 10826.37 10175 10600.40
12/87 10989.55 10626 10661.70
12/88 12106.57 11096 11596.10
12/89 13412.61 11611 12451.60
12/90 14390.09 12320 13034.10
12/91 16137.35 12698 14453.60
12/92 17559.87 13066 15670.10
12/93 19717.02 13425 17298.90
12/94 18697.79 13785 16257.00
12/95 21961.53 14134 18673.20
6/96 21863.17 14420 18416.30
</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 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.

ss.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.

8
<PAGE>

- -------------------------------------------------------------------------------
TOP 10 HOLDINGS as of 6/30/96
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Holding $ Amount
- ------- --------
<S> <C>
Los Angeles County Metropolitan Transportation Authority Sales Tax Revenue,
Series A, 5.00%, due 7/1/25 $16,935,750

Michigan State Hospital Finance Authority Revenue, Genesys Health System,
Series A, 7.50%, due 10/1/27 15,807,994

Georgia Municipal Electric Authority Power Revenue, Series A, 8.00%, due 1/1/15 15,758,719

Illinois Development Finance Authority Pollution Control Revenue, Illinois Power Co.,
Series A, 8.30%, due 4/1/17 12,960,000

Texas Water Resources Finance Authority Revenue, 7.625%, due 8/15/08 12,922,200

Intermountain Power Agency of Utah Power Supply Revenue, Series D, 8.625%, due 7/1/21 12,266,421

Eden Township California, Hospital District Revenue, 7.40%, due 11/1/19 10,531,750

Matagorda County Texas Navigation District 1 Pollution Control Revenue,
Houston Lighting & Power Co., Series D, 7.60%, due 10/1/19 10,426,250

Sabine River Authority Texas Pollution Control Revenue, 8.20%, due 7/1/14 10,200,000

Charlotte General Obligation, Water & Sewer, 5.60%, due 5/1/21 9,540,781
</TABLE>

Note: This breakdown is for information 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 "Portfolio of Investments" for specific type
of security held.

9
<PAGE>

- --------------------------------------------------------------------------------
DIVERSIFICATION BY STATE - TOP 5 as of 6/30/96
- --------------------------------------------------------------------------------

[The information below was represented as a pie chart in the printed document]

<TABLE>
<S> <C>
New York 21.2%
Texas 14.9%
California 14.4%
Illinois 10.0%
Utah 4.8%
All Other 34.7%
</TABLE>

- --------------------------------------------------------------------------------
QUALITY BREAKDOWN as of 6/30/96
- --------------------------------------------------------------------------------

[The information below was represented as a pie chart in the printed document]

<TABLE>
<S> <C>
AAA 54.0%
AA 14.2%
A 8.0%
BBB 22.9%
Cash & Equivilents 0.9%
</TABLE>

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

10
<PAGE>

- -------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS June 30, 1996 (unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (99.1%)+

ALABAMA (0.8%)
Birmingham Alabama Airport Author-
ity Revenue, Series A
7.375%, due 7/1/10 (a) .............................. $ 3,600,000 $ 3,933,000
------------
CALIFORNIA (14.4%)
California Health Facilities Financing
Authority Revenue, Kaiser
Foundation Hospital, Series A
(zero coupon), due 10/1/12 .......................... 3,700,000 1,419,875
California Pollution Control
Financing Authority Revenue
Pacific Gas & Electric Co., Series A
8.20%, due 12/1/18 .................................. 1,100,000 1,154,142
San Diego Gas & Electric Co
Series A
5.90%, due 6/1/14 ................................... 2,000,000 2,012,500
Southern California Edison Co.
6.90%, due 12/1/17 .................................. 1,950,000 2,115,750
California State Board of Public
Works Department of Corrections
Lease Revenue, California
State Prison Series B
5.375%, due 12/1/19 ................................. 4,950,000 4,578,750
California State Department of Water
Resources, Central Valley Project
Revenue, Water System, Series O
4.75%, due 12/1/17 .................................. 4,200,000 3,575,250
California State General Obligation
5.90%, due 3/1/25 ................................... 250,000 249,375
East Bay Municipal Utilities
District, Water System Revenue
4.75%, due 6/1/21 ................................... 5,000,000 4,212,500
5.00%, due 6/1/26 ................................... 6,000,000 5,265,000
Eden Township California Hospital
District Revenue
7.40%, due 11/1/19 .................................. 10,300,000 10,531,750
Foothill-Eastern Transportation
Corridor Agency, Toll Road
Revenue Series A
5.00%, due 1/1/35 ................................... 4,150,000 3,371,875
Los Angeles County Metropolitan
Transportation Authority Sales Tax
Revenue, Series A
5.00%, due 7/1/25 ................................... 19,300,000 16,935,750
Los Angeles County Transportation
Commission Sales Tax Revenue
Series A
7.40%, due 7/1/15 ................................... 600,000 651,750
8.00%, due 7/1/16 ................................... 600,000 635,922
-----------
<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
CALIFORNIA (Continued)
Los Angeles Department of Water &
Power, Water Revenue
8.00%, due 5/15/28 ................................. $ 1,000,000 $ 1,077,500
Oakland California Revenue, Series A
7.60%, due 8/1/21 .................................. 5,500,000 5,919,375
Riverside California Hospital Rev-
enue Riverside Community
Hospital Series A
6.75%, due 11/1/15 ................................. 1,000,000 970,000
Santa Cruz County, Public Financing
Authority Revenue
Tax Allocation, Series B
7.625%, due 9/1/21 ................................. 175,000 195,563
South Coast Air Quality Management
District Building Corp., California
Revenue, Series B
(zero coupon), due 8/1/06 .......................... 2,700,000 1,566,000
(zero coupon), due 8/1/07 .......................... 3,400,000 1,836,000
Southern California Public Power
Authority Transmission Project
Revenue
Mead-Adelanto, Series A
4.875%, due 7/1/20 ................................. 2,500,000 2,153,125
Mead-Phoenix, Series A
4.875%, due 7/1/20 ................................. 5,000,000 4,275,000
Walnut California Improvement
Agency Tax Allocation
7.90%, due 9/1/09 .................................. 385,000 416,762
----------
75,119,514
----------
DELAWARE (0.6%)
Delaware State Economic
Development Authority Revenue,
Delmarva Power & Light Co. Project,
Series B
7.15%, due 7/1/18 .................................. 3,000,000 3,345,000
----------

DISTRICT OF COLUMBIA (2.3%)
District of Columbia Georgetown
University
7.40%, due 4/1/18 .................................. 4,380,000 4,713,975
Series A
7.40%, due 4/1/18 .................................. 2,815,000 3,054,275
Metropolitan Washington Airports
Authority Revenue, Series A
7.25%, due 10/1/10 (a) ............................. 4,000,000 4,365,000
----------
12,133,250
----------

FLORIDA (3.9%)
Bay County Medical Center Revenue
8.00%, due 10/1/19 ................................. 4,000,000 4,400,000
</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.

11
<PAGE>

- -------------------------------------------------------------------------------
MAINSTAY TAX FREE FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (Continued)

FLORIDA (Continued)
Florida Municipal Power Agency
Revenue Stanton II Project
4.50%, due 10/1/27 .................................. $ 5,000,000 $ 3,925,000
Florida State Board of Education
Administration Capital Outlay
Series D
4.75%, due 6/1/22 ................................... 1,975,000 1,646,656
Series A
5.00%, due 6/1/24 ................................... 4,740,000 4,147,500
Orange County Health Facilities
Authority Revenue, Pooled
Hospital Loan Program, Series B
7.875%, due 12/1/25 ................................. 5,980,000 6,268,236
----------
20,387,392
----------

GEORGIA (3.0%)
Georgia Municipal Electric Authority
Power Revenue, Series A
8.00%, due 1/1/15 (b) ............................... 14,745,000 15,758,719
----------

ILLINOIS (10.0%)
Chicago Illinois Gas Supply Revenue
Peoples Gas, Light & Coke Co.
Series A
8.10%, due 5/1/20 (a) ............................... 2,000,000 2,205,000
Chicago Illinois General Obligation
Series B
5.125%, due 1/1/25 .................................. 9,000,000 7,875,000
Illinois Development Finance
Authority Pollution Control
Revenue Illinois Power Co.
Series C
7.625%, due 12/1/16 (a) ............................. 3,500,000 3,666,495
Series A
8.30%, due 4/1/17 (b) ............................... 12,000,000 12,960,000
Illinois Health Facilities Authority
Revenue Glenoaks Hospital
Series E
9.50%, due 11/15/19 ................................. 925,000 1,060,281
Hinsdale Hospital, Series A
9.00%, due 11/15/15 ................................. 6,390,000 7,204,725
Series B
9.00%, due 11/15/15 ................................. 1,905,000 2,147,888
Series C
9.50%, due 11/15/19 ................................. 5,870,000 6,728,487
Methodist Medical Center,
Series A
8.00%, due 10/1/14 .................................. 1,000,000 1,005,380
Proctor Community Hospital
7.375%, due 1/1/23 .................................. 3,700,000 3,723,125

<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
ILLINOIS (Continued)
Illinois Regional Transportation
Authority Sales Tax Revenue
Series C
7.10%, due 6/1/25 ................................... $ 1,500,000 $ 1,655,625
Southwestern Illinois Development
Authority Medical Facilities
Revenue Anderson Hospital Project
Series A
7.00%, due 8/15/12 .................................. 2,000,000 1,995,000
----------
52,227,006
----------
INDIANA (0.5%)
Indiana Health Facility Financing
Authority Jackson County Schneck
Memorial Hospital
7.50%, due 2/15/12 .................................. 2,600,000 2,733,250
----------
KENTUCKY (0.9%)

Carroll County Kentucky Pollution
Control Revenue, Series A
7.45%, due 9/15/16 .................................... 4,000,000 4,495,000
----------

LOUISIANA (2.3%)
Louisiana State Offshore Terminal
Authority, Deepwater Port Revenue
Series E
7.60%, due 9/1/10 ................................... 4,980,000 5,453,100
Ouachita Parish Louisiana Hospital
Service Glenwood Regional Medical
Center
7.50%, due 7/1/21 (b) ............................... 6,000,000 6,375,000
----------
11,828,100
----------
MASSACHUSETTS (1.8%)
Massachusetts State Health &
Educational Facilities Revenue
Harvard University, Series P
5.375%, due 11/1/32 ................................. 2,000,000 1,872,500
University Hospital, Series C
7.25%, due 7/1/19 (b) ............................... 2,500,000 2,700,000
Massachusetts Water Resources
Authority General Revenue
Series C
5.25%, due 12/1/15 .................................. 5,000,000 4,643,750
----------
9,216,250
----------
</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 (unaudited) continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (Continued)

MICHIGAN (4.2%)
Flint Michigan Hospital Building
Authority Revenue, Hurley Medical
Center, Series B
8.125%, due 7/1/06 .................................. $ 2,100,000 $ 2,142,000
Michigan State Hospital Finance
Authority Revenue, Genesys Health
System, Series A
7.50%, due 10/1/27 .................................. 15,255,000 15,807,994
Monroe County Michigan Pollution
Control Revenue, Detroit Edison
Co., Series I
7.30%, due 9/1/19 (a) ............................... 3,630,000 3,956,700
----------
21,906,694
----------
MINNESOTA (0.6%)
Minneapolis & Saint Paul Minnesota
Metropolitan Airport Commission
Revenue, Series 7
7.80%, due 1/1/13 ................................... 2,750,000 2,973,437
----------

MISSISSIPPI (1.1%)
Mississippi State General Obligation
Series C
4.75%, due 12/01/15 ................................. 6,355,000 5,632,119
----------

NEVADA (1.3%)
Clark County Airport Revenue
8.125%, due 7/1/18 (a) .............................. 6,500,000 7,036,250
----------

NEW YORK (21.2%)
Metropolitan Transportation
Authority Service Contract
Commuter Facilities Revenue,
Series 5
7.00%, due 7/1/12 ................................... 2,265,000 2,417,888
Series L
7.50%, due 7/1/17 ................................... 3,225,000 3,454,781
Monroe County New York Airport
Authority Revenue Greater
Rochester International
7.25%, due 1/1/19 (a) (b) ........................... 5,800,000 6,285,750
Municipal Assistance Corp.
New York City, Series 67
7.625%, due 7/1/08 .................................. 3,660,000 4,007,700
New York City General Obligation
Series A
6.25%, due 8/1/17 ................................... 5,000,000 4,881,250
7.75%, due 8/15/07 .................................. 2,000,000 2,205,000
7.75%, due 8/15/15 .................................. 180,000 196,650

<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
NEW YORK (Continued)
New York City General Obligation
Series A
7.75%, due 8/15/16 .................................. $ 900,000 $ 983,250
Series B
7.00%, due 6/1/15 ................................... 5,800,000 5,981,250
Series D
8.00%, due 8/1/04 ................................... 1,500,000 1,676,250
Series F
8.20%, due 11/15/04 ................................. 1,560,000 1,737,450

New York City Municipal Water
Finance Authority, Water & Sewer
System Revenue, Series B
5.375%, due 6/15/19 ................................... 575,000 539,063
New York State Dormitory Authority
Revenue
City University System, Series A
5.625%, due 7/1/16 .................................. 5,000,000 4,943,750
Cornell University, Series A
7.375%, due 7/1/30 .................................. 2,880,000 3,171,600
Court Facilities Lease, Series A
5.25%, due 5/15/21 .................................. 4,100,000 3,546,500
Park Ridge Housing Income Project
7.85%, due 2/1/29 ................................... 1,400,000 1,512,000
State University Educational
Facilities
Series B
7.50%, due 5/15/11 .................................. 4,250,000 4,850,313
Series A
7.50%, due 5/15/13 .................................. 4,250,000 4,850,313
New York State Energy Research &
Development Authority, Electric
Facilities Pollution Control Revenue
Brooklyn Union Gas Co. Project
6.75%, due 2/1/24 ................................... 500,000 534,375
Con Edison
7.75%, due 1/1/24 (a) (b) ........................... 8,425,000 8,867,312
New York State Environmental
Facilities Corp. State Water
Pollution Control Revenue
Series A
4.65%, due 6/15/07 .................................. 1,400,000 1,330,000
7.50%, due 6/15/12 .................................. 3,050,000 3,362,625
Series B
5.20% due 5/15/14 ................................... 3,000,000 2,831,250
New York State Local Government
Assistance
Series C
5.50%, due 4/1/22 ................................... 8,350,000 7,765,500
Series A
7.00%, due 4/1/12 ................................... 2,225,000 2,428,031
New York State Medical Care
Facilities Finance Agency Revenue
7.50%, due 2/15/21 .................................. 600,000 661,500
7.875%, due 8/15/20 ................................. 1,215,000 1,348,650
8.875%, due 8/15/07 ................................. 400,000 425,000
</TABLE>

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

13
<PAGE>

NEW YORK (Continued)
New York State Medical Care Facilities
Finance Agency Revenue
Hospital & Nursing Home, Series A
8.00%, due 2/15/28 .................................. $ 3,000,000 $ 3,251,250
St. Francis Hospital Project
Series A
7.625% due 11/1/21 .................................. 2,300,000 2,486,875
New York State Mortgage Agency
Homeowner Revenue, Series 53
5.90% due 10/1/17 ................................... 800,000 783,000
New York State Power Authority
Revenue & General Purpose
Series T
5.00%, due 1/1/19 ................................... 2,900,000 2,548,375
Series CC
5.125%, due 1/1/10 .................................. 1,000,000 958,750
New York State Urban Development
Corp. Correctional Facilities
Revenue
5.25%, due 1/1/18 ................................... 300,000 277,875
5.70%, due 4/1/20 ................................... 3,000,000 2,816,250
Series A
5.25%, due 1/1/21 ................................... 10,000,000 8,687,500
Port Authority of New York & New
Jersey Consolidated, Series 103
5.25%, due 12/15/12 ................................. 2,050,000 1,955,187
------------
110,560,063
------------
NORTH CAROLINA (3.5%)
Charlotte General Obligation
Water & Sewer
5.60%, due 5/1/20 ................................... 5,980,000 5,897,775
5.60%, due 5/1/21 ................................... 9,625,000 9,540,781
University of North Carolina, Chapel
Hill Campus Hospital Revenue
5.00%, due 2/15/29 .................................. 3,000,000 2,568,750
-----------
18,007,306
------------

OHIO (0.5%)
Ohio State Air Quality Development
Authority, Pollution Control
Revenue Cleveland County Project
8.00%, due 12/1/13 .................................. 2,000,000 2,357,500
------------
<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
PENNSYLVANIA (3.7%)
Allegheny County Airport Revenue
Greater Pittsburgh International
Airport, Series C
8.25%, due 1/1/16 ................................... 4,800,000 5,118,000

PENNSYLVANIA (Continued)
Allegheny County Pennsylvania
Hospital Development Authority
Revenue, Saint Margaret Memorial
Hospital Project A
9.80%, due 7/1/10 (b) ............................... $ 1,500,000 $ 1,532,415
Delaware County Pennsylvania
Authority Memorial Hospital
Revenue
5.50%, due 8/15/19 .................................. 2,000,000 1,910,000
Emmaus Pennsylvania General
Authority Revenue, Series E
7.90%, due 5/15/18 .................................. 6,450,000 6,957,938
Pottsville City Hospital Authority
Revenue, Warne Clinic
7.00%, due 7/1/14 ................................... 4,000,000 3,995,000
-----------
19,513,353
-----------

TENNESSEE (1.1%)
Metropolitan Government Nashville &
Davidson County Tennessee Health
& Education Facilities Board
Revenue Vanderbilt University
Series A
7.625%, due 5/1/08 .................................. 1,615,000 1,726,031
Metropolitan Government Nashville
& Davidson County Tennessee
Water & Sewer Revenue
7.00%, due 1/1/14 ................................... 4,050,000 4,124,358
----------
5,850,389
----------

TEXAS (14.9%)
Arlington Texas Independent
School District
4.75%, due 2/15/22 .................................. 7,335,000 6,216,413
Brazos River Authority Texas Revenue
Houston Lighting & Power Co.
Series A
6.70%, due 3/1/17 ................................... 5,000,000 5,393,750
Series B
7.20%, due 12/1/18 .................................. 740,000 798,275
Project C
8.10%, due 5/1/19 ................................... 2,050,000 2,206,313
Project A
8.25%, due 5/1/19 ................................... 2,500,000 2,684,375
Harris County Texas Toll Road
Senior Lien
5.00%, due 8/15/16 .................................. 2,185,000 1,974,694
Houston Water & Sewer Revenue
Junior Lien, Series A
5.25%, due 12/1/25 .................................. 5,900,000 5,361,625
</TABLE>

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

14
<PAGE>

TEXAS (Continued)
Keller Independent School District
Series A
5.40%, due 8/15/23 .................................. $ 6,925,000 $ 6,492,187
Matagorda County Texas Navigation
District 1, Pollution Control
Revenue
Central Power & Light Co. Project
7.50%, due 12/15/14 ................................. 3,150,000 3,461,062
Houston Lighting & Power Co.
Series D
7.60%, due 10/1/19 (a) .............................. 9,500,000 10,426,250
Matagorda County Texas Navigation
District 1 Revenue, Houston
Lighting & Power Co., Series E
7.20%, due 12/1/18 (b) .............................. 6,470,000 7,076,562
Sabine River Authority Texas
Pollution Control Revenue
8.20%, due 7/1/14 ................................... 10,000,000 10,200,000
Tarrant County Texas Junior College
District
4.625%, due 2/15/15 ................................. 3,000,000 2,613,750
Texas Water Resources Finance
Authority Revenue
7.625%, due 8/15/08 (b) ............................. 11,965,000 12,922,200
-----------
77,827,456
-----------

UTAH (4.8%)
Intermountain Power Agency of Utah
Power Supply Revenue
Series F
5.00%, due 7/1/13 ................................... 4,450,000 4,010,563
Series A
5.00%, due 7/1/21 ................................... 3,400,000 2,919,750
Series B
7.20%, due 7/1/19 ................................... 3,475,000 3,627,552
Series D
8.625%, due 7/1/21 .................................. 11,530,000 12,266,421
International Power Agency of Utah
Special Obligation
First Crossover Series
7.875%, due 7/1/14 .................................. 2,000,000 2,040,000
-----------
24,864,286
-----------

VIRGINIA (0.9%)
Upper Occoquan Regional Sewerage
Authority Revenue
4.75%, due 7/1/29 ................................... 5,500,000 4,537,500
-----------

<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
WEST VIRGINIA (0.8%)
West Virginia School Building
Authority Revenue, Series B
6.75%, due 7/1/17 ................................... $ 1,000,000 $ 1,062,500
West Virginia State Building
Commission Lease Revenue, West
Virginia Regional Jail & Correction
Series A
7.00%, due 7/1/15 ................................... 3,000,000 3,247,500
-----------
4,310,000
----------
Total Investments
(Cost $521,084,778)(c) .............................. 99.1% $516,552,834(d)

Cash and Other Assets, Less Liabilities ............... 0.9 4,925,217
---------- -----------
Net Assets ............................................ 100.0% $521,478,051
========== ===========

<CAPTION>
Contracts Unrealized
Long Appreciation
---------------------------
<S> <C> <C>
FUTURES CONTRACTS (0.0%)(e)
Municipal Bond
September 1996 (30 year) ............................ 200 $ 618,750
U.S. Treasury Bond
September 1996 (30 year) ............................ 50 4,687
----------
Total Futures Contracts
(Settlement Value $27,945,313) ...................... $ 623,437(f)
========
</TABLE>

- ---------
(a) Interest on these securities is subject to alternative minimum tax.
(b) Segregated as collateral for futures contracts.
(c) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(d) At June 30, 1996 net unrealized depreciation was $4,531,944, 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 $5,355,853 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $9,887,797.
(e) Less than one tenth of a percent.
(f) Represents the difference between the value of the contracts at the time
they were opened and the value at June 30, 1996.

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

15
<PAGE>

<S> <C>
ASSETS:
Investment in securities, at value (Note 2) (identified cost $521,084,778) $ 516,552,834
Cash ..................................................................... 3,166,498
Receivables:
Interest ............................................................... 10,949,663
Fund shares sold ....................................................... 85,318
Other assets ............................................................. 894
Variation margin receivable on futures contracts ......................... 356,894
-------------
Total assets ......................................................... 531,112,101
-------------
LIABILITIES:
Payables:
Investment securities purchased ........................................ 6,832,311
NYLIFE Distributors .................................................... 330,698
Adviser ................................................................ 127,745
Transfer agent ......................................................... 44,086
Custodian .............................................................. 9,755
Trustees ............................................................... 5,267
Fund shares redeemed ................................................... 5,097
Accrued expenses ......................................................... 114,944
Dividend payable ......................................................... 2,164,147
-------------
Total liabilities .................................................... 9,634,050
-------------
Net assets ............................................................... $ 521,478,051
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ................................................................ $ 13,719
Class B ................................................................ 526,632
Additional paid-in capital ............................................... 542,181,615
Accumulated undistributed net investment income .......................... 601,967
Accumulated net realized loss on investments ............................. (17,937,375)
Net unrealized depreciation on investments ............................... (3,908,507)
-------------
Net assets ............................................................... $ 521,478,051
=============

CLASS A
Net assets applicable to outstanding shares .............................. $ 13,223,274
=============
Shares of beneficial interest outstanding ................................ 1,371,861
=============

Net asset value per share outstanding .................................... $ 9.64
Maximum sales charge (4.50% of offering price) ........................... 0.45
-------------
Maximum offering price per share outstanding ............................. $ 10.09
=============

CLASS B
Net assets applicable to outstanding shares .............................. $ 508,254,777
=============

Shares of beneficial interest outstanding ................................ 52,663,220
=============

Net asset value per share outstanding .................................... $ 9.65
=============
</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 OPERATIONS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Unaudited)

<S> <C>
INVESTMENT INCOME:
Income:
Interest .......................................................................................... $ 17,110,495
------------
Expenses: (Note 2)
Administration (Note 3) ........................................................................... 798,624
Advisory (Note 3) ................................................................................. 798,624
Service (Note 3) .................................................................................. 665,520
Distribution--Class B (Note 3) .................................................................... 556,930
Transfer agent .................................................................................... 149,319
Shareholder communication ......................................................................... 80,343
Recordkeeping (Note 3) ............................................................................ 40,150
Auditing .......................................................................................... 29,636
Custodian ......................................................................................... 27,504
Registration ...................................................................................... 17,340
Legal ............................................................................................. 15,940
Trustees .......................................................................................... 7,783
Miscellaneous ..................................................................................... 31,223
------------
Total expenses .................................................................................. 3,218,936
------------
Net investment income ............................................................................... 13,891,559
------------
REALIZED AND UNREALIZED GAIN (LOSS)ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions ............................................................................. 3,362,794
Futures transactions .............................................................................. (3,039,795)
------------
Net realized gain on investments .................................................................... 322,999
------------
Net change in unrealized appreciation on investments:
Security transactions ............................................................................. (22,605,314)
Futures transactions .............................................................................. 623,437
------------
Net unrealized loss on investments .................................................................. (21,981,877)
------------
Net realized and unrealized loss on investments ..................................................... (21,658,878)
------------
Net decrease in net assets resulting from operations ................................................ $ (7,767,319)
============
</TABLE>

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>
Six months
ended Year ended
June 30, December 31,
1996* 1995
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income .................................................................. $ 13,891,559 $ 28,098,025
Net realized gain on investments ....................................................... 322,999 3,237,252
Net change in unrealized appreciation (depreciation) on investments .................... (21,981,877) 42,963,850
------------- -------------
Net increase (decrease) in net assets resulting from operations ........................ (7,767,319) 74,299,127
------------- -------------
Dividends to shareholders:
From net investment income:
Class A .............................................................................. (315,481) (420,574)

Class B .............................................................................. (12,928,821) (27,677,470)

------------- -------------
Total dividends to shareholders .................................................... (13,244,302) (28,098,044)

------------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A .............................................................................. 4,912,847 9,868,992
Class B .............................................................................. 24,577,582 57,450,885
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A .............................................................................. 217,663 364,579
Class B .............................................................................. 6,760,298 17,430,060
------------- -------------
36,468,390 85,114,516
Cost of shares redeemed:
Class A .............................................................................. (1,229,972) (1,090,878)

Class B .............................................................................. (45,815,115) (90,939,204)

------------- -------------
Decrease in net assets derived from capital share transactions ........................... (10,576,697) (6,915,566)

------------- -------------
Net increase (decrease) in net assets .............................................. (31,588,318) 39,285,517

NET ASSETS:
Beginning of period ...................................................................... 553,066,369 513,780,852
------------- -------------
End of period ............................................................................ $ 521,478,051 $ 553,066,369
============= =============
Accumulated undistributed net investment income/(excess distribution) .................... $ 601,967 $ (45,290)

============= =============
</TABLE>

- ----------
* Unaudited.

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

<TABLE>
<CAPTION>
Class B
----------------------------------------------------------
Class A Class B Class A Class B September 1
------- ------- ------- ------- through Year ended August 31
Six months ended Year ended December 31 -------------------------------------------
June 30, 1996* December 31, 1995 1994** 1994 1993 1992 1991
-------------------- ------------------- ------------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.02 $ 10.03 $ 9.20 $ 9.20 $ 9.71 $ 10.39 $ 10.21 $ 9.82 $ 9.40
------- ------- ------- ------- ------- ------- ------- ------- -------

Net investment income 0.26 0.25 0.52 0.51 0.17 0.51 0.57 0.59 0.59
Net realized and
unrealized gain (loss)
on investments (0.39) (0.39) 0.83 0.83 (0.51) (0.58) 0.47 0.40 0.43
------- ------- ------- ------- ------- ------- ------- ------- -------

Total from investment
operations (0.13) (0.14) 1.35 1.34 (0.34) (0.07) 1.04 0.99 1.02
------- ------- ------- ------- ------- ------- ------- ------- -------

Less dividends and
distributions:
From net investment
income (0.25) (0.24) (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
distributions (0.25) (0.24) (0.53) (0.51) (0.17) (0.61) (0.86) (0.60) (0.60)

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

Net asset value at
end of period $ 9.64 $ 9.65 $10.02 $ 10.03 $ 9.20 $ 9.71 $ 10.39 $ 10.21 $ 9.82

======= ======= ======= ======= ======= ======= ======= ======= ======

Total investment
return (a) (1.26%) (1.38%) 15.00% 14.86% (3.53%) (0.69%) 10.81% 10.42% 11.21%

Ratios (to average net
assets)/Supplemental
Data:
Net investment income 5.4%+ 5.2%+ 5.5% 5.2% 5.6%+ 5.4% 5.6% 5.9% 6.1%

Expenses 1.0%+ 1.2%+ 1.0% 1.2% 1.2%+ 1.2% 1.2% 1.3% 1.4%

Portfolio turnover rate 53% 53% 110% 110% 37% 92% 138% 97% 52%

Net assets at end
of period (in 000's) $13,223 $508,255 $9,752 $543,314 $513,781 $552,156 $476,761 $292,936 $174,625
</TABLE>

- ----------
* Unaudited.
** 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.

19
<PAGE>

- -------------------------------------------------------------------------------
MAINSTAY TAX FREE BOND FUND
- -------------------------------------------------------------------------------

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
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

20
<PAGE>

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 practice is known as
hedging.

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.

21
<PAGE>

- -------------------------------------------------------------------------------
MAINSTAY TAX FREE BOND FUND
- -------------------------------------------------------------------------------

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. Discounts are accreted when required by Federal tax
regulations.

Note 3 -- Fees and Related Party Policies:

NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned
subsidiary 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 annual
rate of 0.30% of the average daily net assets of the Fund.

22
<PAGE>

Fund for distribution 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:

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 $29,932 for the six
months ended June 30, 1996.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges on redemptions of Class B shares for the six months ended June 30,
1996 in the amount of $264,645.

Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-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.

Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the six
months ended June 30, 1996 were $4,496.

Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $13,431 for the six months ended
June 30, 1996.

Fees for recordkeeping services provided to the Trust by NYLIFE Distributors are
charged to the Fund. The fee for the period January 1, 1996 through June 30,
1996 amounted to $40,150.

23
<PAGE>

- -------------------------------------------------------------------------------
MAINSTAY TAX FREE BOND FUND
- -------------------------------------------------------------------------------

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 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.

Note 5 -- Purchases and Sales of Securities (in 000's):

Note 6 -- Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1996* December 31, 1995
------------------- ---------------------
<S> <C> <C> <C> <C>
Class A Class B Class A Class B
------- -------- ------- --------
Shares sold 503 2,513 1,047 5,918
Shares issued in reinvestment of dividends 22 692 38 1,794
------- -------- ------- --------
525 3,205 1,085 7,712
Shares redeemed 126 4,697 112 9,416
------- -------- ------- --------
Net increase (decrease) 399 (1,492) 973 (1,704)
======= ======= ======= =======
</TABLE>

- ----------
* Unaudited.

24
<PAGE>

This page intentionally left blank

25
<PAGE>

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

<S> <C> <C>
[horizontal bar Invests primarily in common stocks You want your investments to grow and
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 Offers broad diversification into You prefer the higher return
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++
- ------------------------------------------------------------------------------------------------------------------------------------

<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 potential
risk/reward for positive change than the market currently sees
of fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating Invests in convertible securities for You want income from securities that
Convertible Fund 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 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.

# 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
Government Fund graph indicating consistent with safety of principal current income and safety of principal
risk/reward primarily from U.S. government
of fund] securities ss.
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
High Yield graph indicating An aggressive high yield bond You want to maximize current income
Corporate Bond Fund 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 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 U.S. bonds with an emphasis on diversification to your domestic
of 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 stability of principal, and liquidity, competitive yields on cash you're planning
of fund] with free checkwriting|| 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 indicating Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund 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 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>

27
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY TAX FREE
BOND FUND
- --------------------------------------------------------------------------------

semi-annual report
six months in review

fund results

& portfolio highlights

[LOGO] MainStay(R)Funds

- -------------------------------------------------------------------------------
UNAUDITED JUNE 30, 1996
- --------------------------------------------------------------------------------

OFFICERS & TRUSTEES

Alice T.Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer, and Trustee
Harry G. Hohn 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 W. Zuccaro Tax Vice President
A.Thomas Smith III Secretary

Dechert Price & Rhoads
Legal Counsel

[LOGO] MainStay(R)Funds

NYLIFE Distributors Inc.
260 Cherry Hill Road
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds

[LOGO] NEW YORK LIFE

NYLIFE Distributors Inc. is an indirect wholly owned
subsidiary of New York Life Insurance Company.

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.

[RECYCLING SYMBOL] MSSA14 (896)
<PAGE>

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

Chairperson's Letter 2

MainStay Total Return Fund Highlights
and Portfolio Managers' Comments 4

Returns & Lipper Rankings 7

Year-by-Year & Six-Month Performance 8

$10,000 Invested in the MainStay Total Return Fund
Class A Shares vs. S&P 500 and Inflation 8

$10,000 Invested in the MainStay Total Return Fund
Class B Shares vs. S&P 500 and Inflation 8

Top 10 Equity Holdings 9

Top 10 Bond Holdings 9

10 Largest Purchases 10

10 Largest Sales 10

Diversification by Industry -- Top 5 11

Portfolio Composition 11

Portfolio of Investments 12

Financial Statements 17

Notes to Financial Statements 21

The MainStay Funds 26

<PAGE>

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

Strategic security selection amid powerful economic forces and shifting market
perceptions -- this was the strategy that guided the management of the
MainStay(R) Total Return Fund for the six months ended June 30, 1996. As a
result, over this period, the Fund returned 5.32% and 5.06% for Class A and
Class B shares, respectively, excluding all sales charges.

A stronger economy -- good for stocks, challenging for bonds

Bonds had a difficult time during this period. The improving economy generally
hurt fixed-income investors, but boosted prices among lower-rated bonds. In
March, unexpected payroll gains, which indicated higher employment levels,
caused bond prices to plummet. In a single day, 30-year Treasury bond prices
fell 3.3% and most domestic bond categories, except high current yield, closed
the first quarter with negative returns. As employment rose in the second
quarter, so did long-term rates, with the 30-year Treasury bond yielding 6.90%
at the end of June.

Positive results in international markets

<PAGE>

Fund strategies, results, and outlook

The MainStay Total Return Fund portfolio management team used careful security
selection to identify opportunities with strong growth and income potential.
While rising interest rates hurt some sectors, others provided excellent
returns. The Fund's managers identified strengths in selected stocks, including
HFS, WorldCom, Nike, Oracle, Nine West, and Bed Bath & Beyond, all of which
benefited the portfolio. On the fixed-income side, the managers added value by
maintaining a relatively neutral duration and identifying selected Treasury and
mortgage-backed securities that contributed positively to performance. The
Fund's specific strategies and performance results are discussed in greater
detail in the Fund managers' comments on the following pages.

While the positive results of the last six months can't tell us what will happen
next, they may help us form realistic expectations based on historical trends.
Viewed in this light, a more moderate second half would not come as a surprise.
Regardless of what the future holds, growth and income investors may benefit by
maintaining a long-range perspective, relying on professional asset allocation,
and adding to their accounts over time. Regular communication with your
Registered Representative can help you cope with volatility, make adjustments
when warranted, and stay focused on the future.

Educating investors, celebrating a decade of service

/s/ Alice T. Kane
Alice T. Kane
July 1996

- ----------
* See footnote on page 8 for more information on
the S&P 500.
+ Source: Ibbotson Associates.
++ Source: Investment Company Institute.

3
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY TOTAL RETURN FUND
- --------------------------------------------------------------------------------

Fund highlights for the six months ended June 30, 1996

o One-year total returns of 16.69% and 16.11% for Class A and Class B shares,
respectively, excluding all sales charges, as of 6/30/96
o Class A and Class B shares both outperformed the average Lipper balanced
fund
o Fund benefited from strengths in various equity sectors and from a
relatively neutral duration in the bond portion of the portfolio

For the six months ended June 30, 1996, the MainStay Total Return Fund posted
total returns of 5.32% and 5.06% for Class A and Class B shares, respectively,
excluding all sales charges. This compared favorably with the average Lipper*
balanced fund, which returned 5.05% for the same period.

The Fund's equity component is managed as a growth portfolio. During the first
quarter, it benefited from improving fundamentals among consumer cyclicals such
as Bed Bath & Beyond, Lowe's, and Home Depot. Health care stocks provided mixed
results in the first quarter and disappointments in the second. Profit taking
and shifting investor interest hurt pharmaceuticals and several HMOs were hurt
by prereported weak second quarter earnings. Nevertheless, we continue to hold
health care issues with strong underlying fundamentals, such as Guidant,
Medtronic, Amgen, Johnson & Johnson, and HEALTHSOUTH. We believe these holdings
may prove rewarding when investors return their focus to consistent earnings
growth.

In the second quarter, equity performance was hurt by unrelated weaknesses in
Alco Standard and Danka Business Systems, two companies that market and service
copy machines. Since both stocks have strong fundamentals and the concerns
appear to be short-term, we remain invested in both companies.

Consumer cyclicals
- ----------------------------------------
Consumer products and services whose
sales tend to rise and fall with changes
in the economic cycle.

- ---------
* See footnote and chart on page 7
for more information on Lipper
Analytical Services, Inc.

4
<PAGE>

While financial stocks generally underperformed in the first half, several of
our holdings, including Household International and SunAmerica, reported
double-digit gains in the second quarter. Nevertheless, rising rates and
concerns about consumer debt burdens hurt regional banks and consumer finance
companies, including Wells Fargo, Green Tree Financial, and First USA. We have
taken some profits, but remain overweighted in financials because we find the
fundamentals remain compelling.

Technology stocks have been weak for most of the year and suffered from lower
earnings expectations in the second quarter due to excess capacity, weak demand,
and pricing pressures in the personal computer segment. In this environment, our
bottom-up selection process worked in the portfolio's favor, with stocks such as
WorldCom, Oracle, and Microsoft providing strong overall performance. Computer
Associates outperformed the market in the first quarter -- and Sun Microsystems
and Intel both provided double-digit advances in the second. We remain
overweighted in technology, with emphasis on software, networking, and database
management companies which we believe have the strongest growth prospects.

Consumer stocks have been our best performing sector throughout the first six
months of 1996, with our largest holding HFS, turning in the Fund's best
individual stock performance in the first six months. Other consumer stocks that
provided double-digit gains included Nike, Mirage Resorts, CUC International,
and Nine West.

In the bond component of the portfolio, we added value through Treasury security
selection and emphasis on the bank/finance sector in the first quarter -- and
our maturity management and security selection in corporates, Treasuries, and
mortgage-backed securities in the second.

In the first quarter, older Treasury issues underperformed newer ones. Seeing
this trend as an opportunity to buy older issues at attractive prices, we
increased our exposure to older-issue Treasuries. This move

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 greater than the sector's
general relationship to the market as a
whole.

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.

Maturity management
- ---------------------------------------
Purchasing securities of selected
maturities to shorten or lengthen the
duration of a portfolio. Duration is 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.

Mortgage-backed
securities
- ---------------------------------------
Securities representing interests in
"pools" of mortgages in which principal
and interest payments by the holders of
underlying fixed- or adjustable-rate
mortgages are, in effect, "passed
through" to investors (net of fees paid
to the issuer or guarantor of the
securities).

5
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY TOTAL RETURN FUND
- --------------------------------------------------------------------------------

benefited performance in the second quarter, when the trend reversed, with older
issues outperforming newer ones. We believe the trend will reverse yet again in
the third quarter, and intend to sell outperforming older issues and purchase
new issues as the quarter unfolds. In the mortgage market, we added
higher-yielding, high-quality short-term mortgage assets in the second quarter,
which helped our performance. As of June 30, 1996, the debt portion of the
portfolio had an average weighted quality rating of AA+, and the portfolio was
allocated 60% in stocks, 38% in bonds, and 2% in cash equivalents.

In both the equity and fixed-income components of the portfolio, we seek to
manage risk by strict adherence to liquidity parameters, which benefit the
portfolio when we seek to sell a position -- and diversification disciplines,
which help avoid undue exposure to any single issuer.

Ravi Akhoury
Rudy Carryl
Edmund Spelman
Portfolio Managers

6
<PAGE>

Fund SEC returns*
- --------------------------------------------------------------------------------
Life of Fund
1 year 5 years through 6/30/96
- --------------------------------------------------------------------------------
Class A 10.28% 11.97% 11.67%
Class B 11.11% 12.82% 12.31%
- --------------------------------------------------------------------------------

Fund per-share net asset values and distributions for the six months ended
6/30/96
- --------------------------------------------------------------------------------
NAV 6/30/96 Income Capital Gains
- --------------------------------------------------------------------------------
Class A $19.34 $0.1745 $0.0000
Class B $19.34 $0.1271 $0.0000
- --------------------------------------------------------------------------------
</TABLE>

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%.

7
<PAGE>

[The table below was presented as a bar graph in the printed document]

<TABLE>
<CAPTION>
Total
Return
Period-end %
---------- ------
<S> <C>
12/87 0.50
12/88 7.65
12/89 14.99
12/90 5.06
12/91 36.84
12/92 3.62
12/93 10.50
12/94 -2.41
12/95 28.66 Class A
12/95 27.96 Class B
6/96 5.32 Class A
6/96 5.06 Class B

</TABLE>

- ----------
Returns are for Class B shares unless otherwise noted. See footnote * on
page 7 for more information on performance.

- --------------------------------------------------------------------------------
$10,000 INVESTED IN THE MAINSTAYTOTAL RETURN FUND
VS. S&P 500 AND INFLATION
- --------------------------------------------------------------------------------

[The tables below were presented as line graphs in the printed document]

Class A Shares
<TABLE>
<CAPTION>
S&P Total Return
Period-end 500++ Inflation ss. Fund
- ---------- ----- --------- ------------
<S> <C> <C> <C>
12/28/87 10000 10000 9450
12/88 11754 10442 10223.39
12/89 15467 10927 11756.08
12/90 14985 11594 12350.77
12/91 19531 11950 16900.47
12/92 21017 12296 17512.17
12/93 23126 12634 19350.48
12/94 23440 12972 18884.50
12/95 32217 13302 24297.37
6/96 35464 13570 25590.13
</TABLE>

Class B Shares
<TABLE>
<CAPTION>

S&P Total Return
Period-end 500++ Inflation ss. Fund
- ---------- ----- --------- ------------
<S> <C> <C> <C>
12/28/87 10000 10000 10000
12/88 11754 10442 10818.40
12/89 15467 10927 12440.30
12/90 14985 11594 13069.60
12/91 19531 11950 17884.10
12/92 21017 12296 18531.40
12/93 23126 12634 20476.70
12/94 23440 12972 19983.60
12/95 32217 13302 25571.40
6/96 35464 13570 26865.80
</TABLE>

- ----------
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.

8
<PAGE>

<TABLE>
<CAPTION>
Holding $ Amount
<S> <C>
HFS Inc. $25,606,000
3Com Corp. 17,430,750
Green Tree Financial Corp. 15,750,000
SunAmerica Inc. 15,102,450
Computer Associates International, Inc. 14,926,875
WorldCom, Inc. 13,780,844
Oracle Corp. 13,428,469
Amgen Inc. 13,176,000
Medtronic, Inc. 13,104,000
Sun Microsystems, Inc. 12,422,625
</TABLE>

- -----------------------------------------------------------------------------
TOP 10 BOND HOLDINGS as of 6/30/96
- -----------------------------------------------------------------------------

<TABLE>
<CAPTION>
Holding $ Amount
<S> <C>
Government National Mortgage Association I (Mortgage Pass-Through Security) 8.00%,due 7/22/26 $42,817,900
U.S. Treasury Bond 8.875%,due 8/15/17 16,763,056
Federal National Mortgage Association (Mortgage Pass-Through Security) 7.00%,due 7/19/11 15,691,265
U.S. Treasury Note 8.125%,due 2/15/98 15,592,500
U.S. Treasury Bond 6.25%,due 8/15/23 10,281,297
Federal Home Loan Mortgage Corporation Gold (Mortgage Pass-Through Security) 7.00%,due 2/1/26 9,692,780
Government National Mortgage Association I (Mortgage Pass-Through Security) 6.50%,due 7/22/26 8,481,569
Federal Home Loan Mortgage Corporation (Mortgage Pass-Through Security) 6.00%,due 8/1/24 7,587,916
Federal National Mortgage Association (Collateralized Mortgage Obligation) 6.50%,due 7/25/98 7,116,848
U.S. Treasury Bond 11.25%,due 2/15/15 7,049,641
</TABLE>

9
<PAGE>

<TABLE>
<CAPTION>
Security Amount of purchase
<S> <C>
U.S. Treasury Notes, due 6/30/97-2/15/06 $234,476,648

Government National Mortgage Association I (Mortgage Pass-Through Securities),
due 1/20/23-6/15/26 146,703,029

Federal Home Loan Mortgage Corporation Gold (Mortgage Pass-Through Securities),
due 10/6/04-5/1/26 126,571,673

U.S. Treasury Bonds, due 2/15/15-2/15/26 107,835,494

Federal National Mortgage Association (Mortgage Pass-Through Securities), due 7/25/98-6/1/25 81,760,767

Tennessee Valley Authority, due 4/15/42-7/15/43 9,986,206

Structured Asset Securities Corp., due 8/25/26-2/25/28 9,562,945

Bankers Trust Corp.--New York, due 5/15/02-11/15/15 8,850,958

Safeway Inc. (Common Stock) 8,295,875

Lehman Brothers Holdings Inc., due 3/15/05-5/15/07 8,115,336
</TABLE>

<TABLE>
<CAPTION>
Security Amount of sale
<S> <C>
U.S. Treasury Notes, due 6/30/97-2/15/06 $306,112,570

Government National Mortgage Association I (Mortgage Pass-Through Securities),
due 1/20/23-6/15/26 131,943,055

Federal Home Loan Mortgage Corporation Gold (Mortgage Pass-Through Securities),
due 10/6/04-5/1/26 109,359,467

U.S. Treasury Bonds, due 2/15/15-2/15/26 92,524,722

Federal National Mortgage Association (Mortgage Pass-Through Securities), due 7/25/98-6/1/25 72,777,394

First Interstate Bancorp (Common Stock) 8,363,225

Viacom Inc. (Common Stock) 8,309,132

Bank of New York Co., Inc. (Common Stock) 8,050,779

Micron Technology Inc. (Common Stock) 7,368,148

Barnett Banks, Inc. (Common Stock) 6,685,963
</TABLE>

10
<PAGE>

[The table below was presented as a pie chart in the printed document]

U.S. Government Obligations & Agencies............... 22.6%
Retail............................................... 7.2%
Finance.............................................. 6.5%
Drugs................................................ 5.4%
Technology........................................... 5.4%
All other............................................ 52.9%

</TABLE>

[The table below was presented as a pie chart in the printed document]

<TABLE>
<S> <C>
Common Stocks....................................... 60.3%
Bonds............................................... 2.1%
Cash & Equivalents.................................. 37.6%
</TABLE>

Note: Actual percentages will vary over time.

11
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY TOTAL RETURN FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------
<S> <C> <C>
LONG-TERM BONDS (37.6%)+
ASSET-BACKED SECURITIES (6.8%)

AIRPLANE LEASES (0.4%)
Aircraft Lease Portfolio Securitization
Series 1996-1 Class C
6.788%, due 6/15/06 (c)(e) ........ $ 4,550,000 $ 4,550,000
--------------

AUTO FINANCE (0.3%)
WFS Financial Owner Trust
Series 1996-B Class A3
6.65%, due 8/20/00 ................ 2,570,000 2,580,229
--------------

AUTO LOANS (0.9%)
Chevy Chase Auto Receivables Trust
Series 1995-2 Class A
5.80%, due 6/15/02 ................ 2,197,875 2,182,424
NationsBank Auto Grantor Trust
Series 1995-A Class A
5.85%, due 6/15/02 ................ 3,793,381 3,778,549
Olympic Automobile Receivables Trust
Series 1996-B Class A4
6.70%, due 3/15/02 ................ 3,125,000 3,138,688
--------------
9,099,661
--------------

CREDIT CARD RECEIVABLES (0.4%)
Standard Credit Card Master Trust
Series 1995-4 Class A
5.60%, due 2/15/00 (e) ............ 3,630,000 3,631,815
--------------

EQUIPMENT LOANS (0.4%)
Case Equipment Loan Trust
Series 1995-B Class A3
6.15%, due 9/15/02 ................ 4,200,000 4,178,664
--------------
MORTGAGE LOANS (3.6%)
Asset Securitization Corp.
Series 1996-D2 Class A1
6.92%, due 2/14/29 ................ 3,635,154 3,518,720
Capstead Securities Corp. IV
Series 1992-1 Class G
8.75%, due 1/25/20 ................ 4,164,000 4,248,571
Mortgage Capital Funding, Inc. ......
Series 1996-MC1 Class A2A
7.35%, due 7/15/05 ................ 3,209,000 3,222,542
Nomura Asset Securities Corp. .......
Series 1996-MD5 Class A1B
7.12%, due 4/13/36 ................ 4,000,000 3,903,760
Residential Asset Securitization Trust
Series 1996-A5 Class A3
7.75%, due 7/31/26 ................ 3,220,000 3,234,748
Series 1996-A2 Class A3
9.00%, due 6/25/26 ................ 2,599,554 2,661,709
Residential Funding Mortgage
Securities I
Series 1994-S12 Class A1
6.50%, due 4/25/09 ................ 2,519,796 2,511,128
Series 1996-S13 Class A1
7.00%, due 5/25/11 ................ 3,628,602 3,622,361
Structured Asset Securities Corp. ...
Series 1996-CFL Class A1A
5.711%, due 2/25/28 ............... 1,538,516 1,525,531
Series 1996-CFL Class A1B
5.751%, due 2/25/28 ............... 3,280,000 3,215,942
Series 1996-2 Class A1
7.00%, due 8/25/26 ................ 3,671,000 3,682,490
--------------
35,347,502
--------------

RECREATIONAL LOANS (0.8%)
Fleetwood Credit Corp. Grantor Trust
Series 1996-A Class A
6.75%, due 10/17/11 ............... 4,268,489 4,265,117
Green Tree Recreational,
Equipment & Consumer Trust
Series 1996-A Class A1
5.55%, due 2/15/18 ................ 3,756,624 3,684,422
--------------
7,949,539
--------------

Total Asset-Backed Securities
(Cost $67,705,763) ......................... 67,337,410
--------------

BRADY BOND (0.5%)

EURO BOND (0.5%)
Poland-Global Registered
2.75%, due 10/27/24 (e) ........... 9,215,000 5,194,956
--------------
Total Brady Bond
(Cost $5,107,832) ................. 5,194,956
--------------

CERTIFICATE OF DEPOSIT (0.2%)

BANKS (0.2%)
Mercantile Safe Deposit & Trust Co.,
Baltimore, Maryland
5.16%, due 1/30/98 ................ 2,350,000 2,310,309
--------------
Total Certificate of Deposit
(Cost $2,350,000) ................. 2,310,309
--------------
</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.

12
<PAGE>

<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------
<S> <C> <C>
CORPORATE BONDS (4.2%)

BANKS (1.6%)
Bankers Trust Corp.--New York
7.50%, due 11/15/15 ............... $ 2,320,000 $ 2,227,293
Capital One Bank
8.125%, due 2/27/98 ............... 2,165,000 2,212,478
First Union Corp.
7.50%, due 4/15/35 ................ 1,750,000 1,793,278
First USA Bank
6.25%, due 10/9/98 ................ 3,250,000 3,212,593
Regions Financial Corp.
7.75%, due 9/15/24 ................ 5,520,000 5,776,238
--------------
15,221,880
--------------

BROKERAGE (1.1%)
Lehman Brothers Holdings Inc.
7.375%, due 5/15/07 ............... 4,935,000 5,011,098
Merrill Lynch & Co.
6.65%, due 1/15/99 ................ 3,985,000 3,987,072
Salomon Inc.
6.70%, due 12/1/98 ................ 2,170,000 2,166,029
--------------
11,164,199
--------------

FINANCE (0.8%)
Associates Corp. of North America
7.75%, due 2/15/05 ................ 5,125,000 5,399,085
Chrysler Financial Corp.
5.66%, due 1/16/98 ................ 2,795,000 2,767,497
--------------
8,166,582
--------------

INDUSTRIAL (0.3%)
Philip Morris Cos. Inc.
6.95%, due 6/1/06 ................. 2,705,000 2,709,220
--------------

RETAIL (0.4%)
Sears Roebuck Acceptance Corp.
5.82%, due 12/7/98 ................ 4,000,000 3,941,320
--------------
Total Corporate Bonds
(Cost $41,849,140) ................ 41,203,201
--------------

U.S. GOVERNMENT & FEDERAL AGENCIES (21.4%)

FEDERAL AGENCY (0.9%)
Tennessee Valley Authority
7.25%, due 7/15/43 ................ 5,885,000 5,477,699
8.25%, due 4/15/42 ................ 2,980,000 3,179,630
--------------
8,657,329
--------------

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

FEDERAL HOME LOAN MORTGAGE
CORPORATION (0.8%)
6.82%, due 6/29/05 ................ 3,685,000 3,559,526
7.61%, due 5/24/06 ................ 4,035,000 4,016,842
--------------
7,576,368
--------------

FEDERAL HOME LOAN MORTGAGE
CORPORATION (COLLATERALIZED
MORTGAGE OBLIGATIONS) (0.8%)
Series 1709 Class B
5.50%, due 4/15/19 ................ 3,842,651 3,761,610
Series 1627 Class PZ
5.60%, due 8/15/17 ................ 4,427,112 4,258,351
--------------
8,019,961
--------------

FEDERAL HOME LOAN MORTGAGE
CORPORATION (MORTGAGE PASS-
THROUGH SECURITY) (O.8%)
6.00%, due 8/1/24 ................. 8,285,741 7,587,916
--------------

FEDERAL HOME LOAN MORTGAGE
CORPORATION GOLD (MORTGAGE
PASS-THROUGH SECURITIES) (1.4%)
7.00%, due 2/1/26-5/1/26 .......... 14,454,776 13,921,828
--------------

FEDERAL NATIONAL MORTGAGE
ASSOCIATION (0.2%)
7.85%, due 9/10/04 ................ 2,575,000 2,612,646
--------------

FEDERAL NATIONAL MORTGAGE
ASSOCIATION (COLLATERALIZED
MORTGAGE OBLIGATIONS) (1.1%)
Series 1993-29 Class PE
6.00%, due 11/25/19 ............... 3,755,000 3,693,981
Series 1993-118 Class A
6.50%, due 7/25/98 ................ 7,114,642 7,116,848
--------------
10,810,829
--------------

FEDERAL NATIONAL MORTGAGE
ASSOCIATION (MORTGAGE PASS-
THROUGH SECURITIES) (3.1%)
6.50%, due 7/1/24 ................. 6,246,662 5,878,671
7.00%, due 7/19/11 TBA (b) ........ 15,902,450 15,691,265
7.00%, due 10/1/23 ................ 3,945,084 3,815,646
9.00%, due 6/1/25 ................. 5,263,902 5,493,355
--------------
30,878,937
--------------

</TABLE>

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

13
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY TOTAL RETURN FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------
<S> <C> <C>
U.S. GOVERNMENT & FEDERAL AGENCIES (Continued)

GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION I (MORTGAGE PASS-
THROUGH SECURITIES) (5.7%)
6.50%, due 7/22/26 TBA (b) $ 9,050,000 $ 8,481,569
7.50%, due 6/15/26 ................ 4,950,000 4,878,868
8.00%, due 7/22/26 TBA (b) ........ 42,420,000 42,817,900
--------------
56,178,337
--------------

UNITED STATES TREASURY BONDS (3.9%)
6.25%, due 8/15/23 (d) ............ 11,341,000 10,281,297
6.875%, due 8/15/25 (d) ........... 4,890,000 4,840,318
8.875%, due 8/15/17 (d) ........... 13,962,000 16,763,056
11.25%, due 2/15/15 (d) ........... 4,885,000 7,049,641
--------------
38,934,312
--------------

UNITED STATES TREASURY NOTES (2.7%)
5.625%, due 11/30/00 (d) .......... 5,873,000 5,688,529
6.375%, due 3/31/01 ............... 1,713,000 1,705,497
7.875%, due 11/15/99 .............. 3,615,000 3,775,976
8.125%, due 2/15/98 (d) ........... 15,120,000 15,592,500
--------------
26,762,502
--------------

Total U.S. Government & Federal Agencies
(Cost $211,304,468) ............... 211,940,965
--------------

YANKEE BONDS (4.5%)

African Development Bank
8.80%, due 9/1/19 ................. 5,365,000 6,167,443
China International Trust &
Investing Corp.
9.00%, due 10/15/06 ............... 2,455,000 2,621,891
City of Naples
7.52%, due 7/15/06 ................ 3,785,000 3,881,215
Financiera Ener Nacional
9.375%, due 6/15/06 (c) ........... 3,500,000 3,540,390
Ford Capital BV
9.00%, due 8/15/98 ................ 2,932,000 3,074,407
Grand Metropolitan Investment
Corp.
7.45%, due 4/15/35 ................ 3,030,000 3,131,111
Hydro-Quebec
8.05%, due 7/7/24 ................. 3,400,000 3,615,084
Korea Electric Power
6.375%, due 12/1/03 ............... 5,490,000 5,211,822
Korea Telecom
7.50%, due 6/1/06 ................. 1,500,000 1,503,585
People's Republic of China
7.375%, due 7/3/01 ................ 3,290,000 3,297,863

<CAPTION>
Principal
Amount Value
------------------------------------
<S> <C> <C>
Republic of Columbia
7.25%, due 2/15/03 ................ $ 3,725,000 $ 3,481,087
Santander Financial Issuances
6.80%, due 7/15/05 ................ 1,765,000 1,691,135
7.75%, due 5/15/05 ................ 1,650,000 1,682,125
Wharf Capital International Ltd. ....
8.875%, due 11/1/04 ............... 1,015,000 1,048,526
--------------
Total Yankee Bonds
(Cost $43,847,084) ................ 43,947,684
--------------
Total Long-Term Bonds
(Cost $372,164,287) ............... 371,934,525
--------------

Shares
------

COMMON STOCKS (60.3%)

AIRLINES (0.9%)
Atlantic Southeast Airlines, Inc. ... 56,500 1,596,125
Southwest Airlines Co. .............. 235,500 6,858,937
--------------
8,455,062
--------------

AUTO PARTS (0.6%)
Lear Seating Corp. (a) .............. 175,000 6,168,750
--------------

BANKS (1.6%)
NationsBank Corp. ................... 78,000 6,444,750
Wells Fargo & Co. ................... 38,866 9,284,116
--------------
15,728,866
--------------

BROKERAGE (0.6%)
Schwab (Charles) Corp. .............. 233,500 5,720,750
--------------

BUILDINGS (0.8%)
Oakwood Homes Corp. ................. 405,800 8,369,625
--------------

COMMERCIAL SERVICES (0.9%)
Service Corp. International ......... 150,000 8,625,000
--------------

COMPUTERS & OFFICE EQUIPMENT (5.3%)
Alco Standard Corp. ................. 258,700 11,706,175
Danka Business Systems
Plc ADR (f) ....................... 193,000 5,645,250
Electronic Data Systems Corp. ....... 102,500 5,509,375
EMC Corp. (a) ....................... 200,000 3,725,000
Hewlett-Packard Co. ................. 93,000 9,265,125
Seagate Technology, Inc. (a) ........ 80,200 3,609,000
Sun Microsystems, Inc. (a) .......... 211,000 12,422,625
--------------
51,882,550
--------------
</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 June 30, 1996 (unaudited) continued
- --------------------------------------------------------------------------------

Shares Value
------------------------------------
<S> <C> <C>
COMMON STOCKS (Continued)

CONSUMER DURABLES (0.9%)
Black & Decker Corp. ................ 221,900 $ 8,570,887
--------------

CONSUMER FINANCIAL SERVICES (0.8%)
First Data Corp. .................... 101,000 8,042,125
--------------

CONSUMER SERVICES (0.6%)
CUC International Inc. (a) .......... 178,500 6,336,750
--------------

DRUGS (5.4%)
Amgen Inc. (a) ...................... 244,000 13,176,000
Elan Corp. Plc ADR (a)(f) ........... 138,000 7,883,250
Genzyme Corp. (a) ................... 111,600 5,607,900
Mylan Laboratories Inc. ............. 195,250 3,368,063
Pharmacia & Upjohn, Inc. ............ 200,700 8,906,062
Schering-Plough Corp. ............... 155,000 9,726,250
Teva Pharmaceutical Industries
Ltd. ADR (f) ...................... 124,000 4,696,500
--------------
53,364,025
--------------

ELECTRONICS (1.2%)
General Instrument Corp. (a) ........ 76,400 2,206,050
Harman International
Industries, Inc. .................. 88,000 4,334,000
Vishay Intertechnology, Inc. (a) .... 238,635 5,637,752
--------------
12,177,802
--------------

FINANCE (5.7%)
Federal National Mortgage
Association ....................... 290,000 9,715,000
Green Tree Financial Corp. .......... 504,000 15,750,000
Household International Inc. ........ 141,400 10,746,400
MGIC Investment Corp. ............... 140,500 7,885,563
Travelers Group Inc. ................ 259,999 11,862,454
--------------
55,959,417
--------------

FINANCIAL SERVICES (2.5%)
First USA, Inc. ..................... 168,000 9,240,000
SunAmerica Inc. ..................... 267,300 15,102,450
--------------
24,342,450
--------------

FOOD (0.4%)
Richfood Holdings, Inc. ............. 118,000 3,835,000
--------------
<CAPTION>

Shares Value
------------------------------------
<S> <C> <C>
HEALTH CARE (3.4%)
Columbia/HCA Healthcare Corp. ....... 182,776 9,755,669
HealthCare COMPARE Corp. (a) ........ 126,000 6,142,500
Humana, Inc. (a) .................... 236,000 4,218,500
Pacificare Health Systems,
Inc. Class B (a) .................. 61,400 4,159,850
United Healthcare Corp. ............. 190,500 9,620,250
--------------
33,896,769
--------------

HOSPITAL MANAGEMENT & SERVICES (1.3%)
HEALTHSOUTH Corp. (a) ............... 221,000 7,956,000
OrNda HealthCorp (a) ................ 217,000 5,208,000
--------------
13,164,000
--------------

INSURANCE (1.2%)
American International Group, Inc. .. 121,000 11,933,625
--------------

LEISURE (0.6%)
Mirage Resorts, Inc. (a) ............ 115,200 6,220,800
--------------

MEDICAL EQUIPMENT (3.3%)
Guidant Corp. ....................... 155,500 7,658,375
Johnson & Johnson ................... 235,188 11,641,806
Medtronic, Inc. ..................... 234,000 13,104,000
--------------
32,404,181
--------------

OIL & GAS EXPLORATION (0.7%)
Triton Energy Ltd. Class A (a) ...... 147,600 7,177,050
--------------

PUBLISHING (0.7%)
News Corp. Ltd. ADR (f) ............. 283,000 6,650,500
--------------

RESTAURANTS & LODGING (3.1%)
HFS Inc. (a) ........................ 365,800 25,606,000
Lone Star Steakhouse &
Saloon, Inc. (a) .................. 127,000 4,794,250
--------------
30,400,250
--------------

RETAIL (6.8%)
AutoZone, Inc. (a) .................. 179,400 6,234,150
Bed Bath & Beyond, Inc. (a) ......... 150,000 4,012,500
Home Depot, Inc. (The) .............. 153,500 8,289,000
Kohl's Corp. (a) .................... 214,000 7,837,750
Kroger Co. (The) (a) ................ 179,000 7,070,500

</TABLE>

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

15
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY TOTAL RETURN FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Shares Value
------------------------------------
<S> <C> <C>
COMMON STOCKS (Continued)

RETAIL (Continued)
Lowe's Cos., Inc. ................... 232,000 $ 8,381,000
Nike Inc. Class B ................... 107,300 11,025,075
Office Depot, Inc. (a) .............. 247,050 5,033,644
Safeway Inc. (a) .................... 283,600 9,358,800
--------------
67,242,419
--------------

SOFTWARE (2.0%)
Computer Associates International,
Inc .............................. 209,500 14,926,875
Microsoft Corp. (a) ................. 39,000 4,684,875
--------------
19,611,750
--------------

TECHNOLOGY (5.4%)
Intel Corp. ......................... 97,300 7,145,469
Lam Research Corp. (a) .............. 134,500 3,497,000
Linear Technology Corp. ............. 198,000 5,940,000
Motorola, Inc. ...................... 88,500 5,564,437
Oracle Corp. (a) .................... 340,500 13,428,469
3Com Corp. (a) ...................... 381,000 17,430,750
--------------
53,006,125
--------------

TELECOMMUNICATION SERVICES (1.4%)
WorldCom, Inc. (a) .................. 248,864 13,780,844
--------------

TEXTILE & APPAREL (1.4%)
Nine West Group Inc. (a) ............ 164,200 8,394,725
Warnaco Group, Inc. (The) Class A ... 213,000 5,484,750
--------------
13,879,475
--------------

TURNKEY & SOFTWARE SYSTEMS (0.8%)
Sterling Software, Inc. (a) ......... 109,500 8,431,500
--------------

Total Common Stocks
(Cost $379,337,187) ............... 595,378,347
--------------

PRINCIPAL
AMOUNT
------

SHORT-TERM INVESTMENTS (8.7%)

<CAPTION> Principal
Amount Value
------------------------------------
<S> <C> <C>
COMMERCIAL PAPER (7.5%)
American Express Credit Corp. .......
5.32%, due 7/1/96 ................. $ 12,000,000 12,000,000
5.45%, due 7/1/96 ................. 19,000,000 19,000,000
Ford Motor Credit Co. ...............
5.37%, due 7/2/96 ................. 30,000,000 30,000,000
Travelers Group Inc. ................
5.43%, due 7/1/96 ................. 12,935,000 12,935,000
--------------
Total Commercial Paper
(Cost $73,935,000) ................ 73,935,000
--------------

U.S. GOVERNMENT (1.2%)
United States Treasury Note
6.25%, due 8/31/96 (d) ............ 12,000,000 12,013,080
--------------
Total U.S. Government
(Cost $12,014,531) ................ 12,013,080
--------------

Total Short-Term Investments
(Cost $85,949,531) ................ 85,948,080
--------------

Total Investments
(Cost $837,451,005) (g) ........... 106.6% 1,053,260,952(h)
Liabilities in Excess of
Cash and Other Assets ............. (6.6) (65,150,773)
--------------
Net Assets .......................... 100.0% $ 988,110,179
==============

</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.

(d) Segregated or partially segregated as collateral for TBA.

(e) Floating rate. Rate shown is the rate in effect at June 30, 1996.

(f) ADR-American Depository Receipt.

(g) The cost for Federal income tax purposes is $837,476,540.

(h) At June 30, 1996 net unrealized appreciation was $215,784,412, 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 $224,403,579 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $8,619,167.

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

16
<PAGE>

AS OF JUNE 30, 1996 (Unaudited)
<S> <C>
ASSETS:
Investment in securities, at value (Note 2) (identified cost $837,451,005) $ 1,053,260,952
Cash ..................................................................... 3,851
Receivables:
Investment securities sold ............................................. 52,563,744
Dividends and interest ................................................. 4,853,478
Fund shares sold ....................................................... 1,367,063
Other assets ............................................................. 1,551
---------------
Total assets ......................................................... 1,112,050,639
---------------

LIABILITIES:
Payables:
Investment securities purchased ........................................ 118,418,938
NYLIFE Distributors .................................................... 854,514
Fund shares redeemed ................................................... 473,564
Adviser ................................................................ 252,479
Transfer agent ......................................................... 177,657
Custodian .............................................................. 19,840
Trustees ............................................................... 9,999
Accrued expenses ......................................................... 179,194
Dividend payable ......................................................... 3,554,275
---------------
Total liabilities .................................................... 123,940,460
---------------
Net assets ............................................................... $ 988,110,179
===============

CLASS A
Net assets applicable to outstanding shares .............................. $ 42,654,396
===============
Shares of beneficial interest outstanding ................................ 2,205,637
===============

Net asset value per share outstanding .................................... $ 19.34
Maximum sales charge (5.50% of offering price) ........................... 1.13
---------------
Maximum offering price per share outstanding ............................. $ 20.47
===============
CLASS B
Net assets applicable to outstanding shares .............................. $ 945,455,783
===============

Shares of beneficial interest outstanding ................................ 48,880,456
===============

Net asset value per share outstanding .................................... $ 19.34
===============
</TABLE>

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 OPERATIONS
- --------------------------------------------------------------------------------

FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Unaudited)
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) ............................................... $ 1,640,332
Interest .................................................... 12,318,684
-----------
Total income ............................................... 13,959,016
-----------

Expenses: (Note 2)
Distribution--Class B (Note 3) .............................. 2,282,480
Administration (Note 3) ..................................... 1,461,549
Advisory (Note 3) ........................................... 1,461,549
Service (Note 3) ............................................ 1,176,518
Transfer agent .............................................. 686,550
Shareholder communication ................................... 137,637
Recordkeeping (Note 3) ...................................... 60,585
Custodian ................................................... 56,754
Auditing .................................................... 44,417
Registration ................................................ 36,078
Legal ....................................................... 31,950
Trustees .................................................... 19,286
Miscellaneous ............................................... 24,862
-----------
Total expenses ............................................ 7,480,215
-----------
Net investment income ......................................... 6,478,801
-----------

REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments .............................. 24,868,831
Net change in unrealized appreciation on investments .......... 14,726,766
-----------
Net realized and unrealized gain on investments ............... 39,595,597
-----------
Net increase in net assets resulting from operations .......... $46,074,398
===========

</TABLE>

- ----------
(a) Dividends recorded net of foreign withholding taxes of $9,157.

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

18
<PAGE>

Six months
ended Year ended
June 30, December 31,
1996* 1995
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income ........................................................ $ 6,478,801 $ 15,094,150
Net realized gain on investments ............................................. 24,868,831 21,992,458
Net change in unrealized appreciation on investments ......................... 14,726,766 147,650,614
------------- -------------
Net increase in net assets resulting from operations ......................... 46,074,398 184,737,222
------------- -------------
Dividends to shareholders:
From net investment income:
Class A ..................................................................... (351,753) (256,021)
Class B ..................................................................... (6,133,787) (14,721,467)
------------- -------------
Total dividends to shareholders ........................................... (6,485,540) (14,977,488)
------------- -------------

Capital share transactions:
Net proceeds from sale of shares:
Class A ..................................................................... 25,910,505 18,317,094
Class B ..................................................................... 102,984,488 129,891,503
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A ..................................................................... 145,854 252,728
Class B ..................................................................... 2,744,227 14,355,622
------------- -------------
131,785,074 162,816,947
Cost of shares redeemed:
Class A ..................................................................... (3,903,833) (1,287,141)
Class B ..................................................................... (59,447,334) (99,927,014)
------------- -------------
Increase in net assets derived from capital share transactions ............ 68,433,907 61,602,792
------------- -------------
Net increase in net assets ................................................ 108,022,765 231,362,526

NET ASSETS:
Beginning of period ............................................................ 880,087,414 648,724,888
------------- -------------
End of period .................................................................. $ 988,110,179 $ 880,087,414
============= =============

Accumulated distribution in excess of net investment income .................... $ (6,739) $ --
============= =============

</TABLE>

- ----------
* Unaudited.

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

19
<PAGE>

Class B
--------------------------------------------------------
Class A Class B Class A Class B September 1,
------- ------- ------- ------- through Year ended August 31
Six months ended Year ended December 31, ------------------------------------------
June 30, 1996* December 31, 1995 1994** 1994 1993 1992 1991
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 18.53 $ 18.53 $ 14.76 $ 14.76 $ 15.28 $ 15.42 $ 13.37 $ 13.89 $ 11.07
------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income 0.17 0.13 0.42 0.33 0.11 0.38 0.33 0.22 0.26
Net realized
and unrealized gain (loss)
on investments 0.81 0.81 3.77 3.77 (0.52) (0.02) 2.31 0.32 2.83
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations 0.98 0.94 4.19 4.10 (0.41) 0.36 2.64 0.54 3.09
------- ------- ------- ------- ------- ------- ------- ------- -------
Less dividends and
distributions:
From net investment
income (0.17) (0.13) (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 (0.17) (0.13) (0.42) (0.33) (0.11) (0.50) (0.59) (1.06) (0.27)

------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value at end
of period $ 19.34 $ 19.34 $ 18.53 $ 18.53 $ 14.76 $ 15.28 $ 15.42 $ 13.37 $ 13.89
======= ======= ======= ======= ======= ======= ======= ======= =======

Total investment
return (a) 5.32% 5.06% 28.66% 27.96% (2.65%) 2.41% 20.09% 3.96% 28.42%

Ratios (to average net
assets)/Supplemental
Data:
Net investment income 1.9%+ 1.4%+ 2.5% 2.0% 2.5%+ 2.5% 2.4% 1.7% 2.1%

Expenses 1.1%+ 1.6%+ 1.1% 1.7% 1.7%+ 1.7% 1.8% 2.0% 2.4%

Portfolio turnover rate 102% 102% 228% 228% 74% 273% 340% 316% 213%

Average commission
rate paid $0.0598 $ 0.0598 (b) (b) (b) (b) (b) (b) (b)

Net assets at end of
period (in 000's) $42,654 $945,456 $19,206 $860,881 $648,725 $639,619 $486,959 $292,002 $116,072

</TABLE>

- ----------
* Unaudited.

** 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) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.

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

20
<PAGE>

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 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

21
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY TOTAL RETURN FUND
- --------------------------------------------------------------------------------

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 (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 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.

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.

Security Transactions and Investment Income. The Fund records security
transactions 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 recognized 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 securities or, if applicable, over the period to the first date of
call.

22
<PAGE>

Note 3 -- Fees and Related Party Policies:

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

23
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY TOTAL RETURN 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 $175,176 for the six
months ended June 30, 1996.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges on redemptions of Class B shares for the six months ended June 30,
1996 in the amount of $378,153.

Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the six
months ended June 30, 1996 were $34,152.

Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $21,624 for the six months ended
June 30, 1996.

Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the period January 1, 1996 through June 30,
1996 amounted to $60,585.

24
<PAGE>

Note 4 -- Purchases and Sales of Securities (in 000's):

During the six month period ended June 30, 1996 purchases and sales of U.S.
Government securities, other than short-term securities, were $698,953 and
$730,276, respectively. Purchases and sales of securities, other than U.S.
Government securities, securities subject to repurchase transactions and
short-term securities, were $296,937 and $203,263, respectively.

Note 5 -- Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1996* December 31, 1995
----------------- -----------------
Class A Class B Class A Class B
----- ----- ----- -----
<S> <C> <C> <C> <C>
Shares sold ...................................................... 1,364 5,381 1,098 7,677
Shares issued in reinvestment of dividends and distributions ..... 8 143 14 837
----- ----- ----- -----
1,372 5,524 1,112 8,514
Shares redeemed .................................................. 203 3,103 75 6,008
----- ----- ----- -----
Net increase ..................................................... 1,169 2,421 1,037 2,506
===== ===== ===== =====
</TABLE>

- ----------
* Unaudited.

25
<PAGE>

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

GROWTH FUNDS

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

GROWTH & INCOME FUNDS

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

# 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

- -----------------------------------------------------------------------------------------------------------------------------------
An aggressive high yield bond You want to maximize current income
High Yield [horizontal bar fund that is actively managed for and can accept the higher risk of
Corporate Bond Fund graph indicating maximum current income securities with high yield potential
risk/reward of fund]
- -----------------------------------------------------------------------------------------------------------------------------------
Seeks high current yields and You prefer the higher return potential
International Bond Fund [horizontal bar competitive total return from non- of international bonds or want to add
graph indicating U.S. bonds with an emphasis on diversification to your domestic
risk/reward of fund] risk control investments++

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

TAX-FREE INCOME FUNDS

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

- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

A word about risk and reward

<PAGE>

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

MAINSTAY TOTAL
RETURN FUND

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

semi-annual report
six months in review

fund results

& portfolio highlights

[LOGO] MainStay(R) Funds

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

UNAUDITED JUNE 30, 1996

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

OFFICERS & TRUSTEES

Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Harry G. Hohn 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 W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary

Dechert Price &Rhoads
Legal Counsel

[LOGO] MainStay(R) Funds

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] NEW YORK LIFE

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.

[RECYCLING SYMBOL] MSSA15 (896)
<PAGE>

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

Chairperson's Letter 2

MainStay Value Fund Highlights
and Portfolio Managers' Comments 4

Returns & Lipper Rankings 6

Year-by-Year & Six-Month 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 10 Equity Holdings 8

10 Largest Purchases 9

10 Largest Sales 9

Diversification by Industry -- Top 5 10

Portfolio Composition 10

Portfolio of Investments 11

Financial Statements 14

Notes to Financial Statements 18

The MainStay Funds 22
<PAGE>

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

Strategic security selection amid powerful economic forces and shifting market
perceptions -- this was the strategy that guided the management of the
MainStay(R) Value Fund for the six months ended June 30, 1996. As a result, over
this period, the Fund returned 7.22% and 6.89% for Class A and Class B shares,
respectively, excluding all sales charges.

A stronger economy -- good for stocks, challenging for bonds

After a spectacular 1995, the stock market continued to climb for most of the
first half of 1996 -- but not without setbacks along the way. The economy was
stronger than expected, which led to inflation concerns, rising interest rates,
and price volatility. With the S&P 500* advancing 10.09% in the reporting
period, the stock market delivered a six-month return close to its historical
average for an entire year. Small capitalization stocks did even better, but
faced a sharp correction in mid-June. Investors were very active, pouring more
money into stock funds in the first six months than they had in any full year in
history.++ Whether the returns and investment activity we've seen in the first
half of the year can be sustained through what may be a bumpy second half
remains an open question.

Bonds had a difficult time during this period. The improving economy generally
hurt fixed-income investors, but boosted prices among lower-rated bonds. In
March, unexpected payroll gains, which indicated higher employment levels,
caused bond prices to plummet. In a single day, 30-year Treasury bond prices
fell 3.3% and most domestic bond categories, except high current yield, closed
the first quarter with negative returns. As employment rose in the second
quarter, so did long-term rates, with the 30-year Treasury bond yielding 6.90%
at the end of June.

Positive results in international markets

Foreign equity markets lagged the U.S. during the first quarter of 1996, but
provided more competitive returns in the second. Latin America posted strong
gains and Japan showed signs of economic recovery, which boosted its equity
returns to 43.5% for the 12 months ended June 30, 1996. Small company funds did
well in European markets, as they did in the U.S. In all but a handful of
markets, foreign currencies declined against the U.S. dollar, led by weaknesses
in the Japanese yen and core European currencies. Foreign bonds outperformed
U.S. bonds during the reporting period, increasing the potential value of
international diversification.

2
<PAGE>

Fund strategies, results, and outlook

The MainStay Value Fund portfolio management team used careful security
selection to identify undervalued opportunities with strong appreciation
potential. While rising rates hurt some sectors, other sectors provided
excellent returns. The Fund's managers identified strengths in selected stocks,
including Stop & Shop, U.S. Healthcare, Premark, Dillard, and American Stores,
all of which benefited the portfolio. The Fund's specific strategies and
performance results are discussed in greater detail in the Fund managers'
comments on the following pages.

While the positive results of the last six months can't tell us what will happen
next, they may help us form realistic expectations based on historical trends.
Viewed in this light, a more moderate second half would not come as a surprise.
Regardless of what the future holds, value investors may benefit by maintaining
a long-range perspective and adding to their accounts over time. Regular
communication with your Registered Representative can help you cope with
volatility, make adjustments when warranted, and stay focused on the future.

Educating investors, celebrating a decade of service

MainStay celebrated its 10th anniversary as a Fund group in May, passing a major
milestone for seven of our Funds, including the Value Fund. It has been our
pleasure to serve you during the last six months, and we look forward to
continuing to do so for many years to come.

/S/ Alice T. Kane
Alice T. Kane
July 1996

- ----------
* See footnote on page 7 for more information on
the S&P 500.
+ Source: Ibbotson Associates.
++ Source: Investment Company Institute.

3
<PAGE>

o One-year total returns of 19.68% and 18.99% for Class A and Class B
shares, respectively, excluding all sales charges, as of 6/30/96
o Fund track record exceeded ten years
o Positive results in retailers, tobacco stocks, and consumer-related issues

For the six months ended June 30, 1996, the MainStay Value Fund returned 7.22%
and 6.89% for Class A and Class B shares, respectively, excluding all sales
charges. These results trailed the S&P 500, which returned 10.09%, and the
average Lipper* growth and income fund, which returned 9.24%, over the same
period.

The Fund had a strong first quarter and a challenging second quarter. During the
first quarter, the long-awaited signs of an economic recovery began to emerge,
with improvements in auto sales, housing activity, and retail sales. These signs
led to rising interest rates, prompting first-quarter corrections in financials,
consumer nondurables, utilities, and health care. In the second quarter, 30-year
Treasury yields pierced the 7% level, spreading the earlier corrections into
economically sensitive issues. The stock market also underwent a rotational
correction when the economy tried to accelerate while companies worked to reduce
inventories. These conflicting forces raised concerns about corporate earnings
and the potential for shortfalls in the second half of 1996.

Chemical issues such as Lyondell, Georgia Gulf, and Dow Chemical, which helped
overall performance in the first quarter, were particularly weak in the second.
Despite careful selection and screening of financial issues, regional banks such
as Wells Fargo and First Bank System underperformed as interest rates rose.
Aetna's buyout announcement of U.S. Healthcare confirmed the consolidation trend
in the HMO industry. We had previously purchased U.S. Healthcare based on
attractive earnings growth, management ownership, and strong asset value, and we
profited from the acquisition announcement. Nevertheless, our holdings in

Economic recovery
- ------------------------------
A general improvement in
formerly weak fundamental
factors underlying a country's
gross domestic product, which
may include factory output,
sales, productivity,
employment, and relative
currency values.

Sector rotation
- ------------------------------
A general movement of
investments out of one sector
of the market into another
that has become more
attractive to investors.

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

4
<PAGE>

Humana and FHP International suffered in the subsequent correction, as earnings
prospects for the industry came under pressure.

Shifting earnings and sector rotation produced mixed results among the Fund's
capital goods/technology stocks. In the first quarter, IBM was strong while
Xerox, Lockheed Martin, McDonnell Douglas, and Intel were weak. In the second
quarter, we sold Intel, felt the impact of weakness at IBM, and benefited from
strengths at Xerox, Lockheed Martin, and McDonnell Douglas.

Stop & Shop, which we purchased based on its restructuring, insider ownership,
and attractive value, benefited the Fund handsomely when the same fundamentals
led to a takeover announcement in the first quarter. During the second quarter,
our careful "bottom-up" security selection and review process paid off in a
number of areas. With an improved outlook in a class action suit, tobacco
stocks, including Philip Morris and RJR Nabisco, exhibited strong performance.
Our position in retail stocks such as Dillard, J.C. Penney, and Federated
Department Stores, strengthened the Fund's performance. Several other
consumer-related stocks, including Kroger and American Stores, made positive
contributions to the portfolio during the first six months of 1996, and
Premark's contribution was decisively positive when it spun off Tupperware in
the second quarter to realize greater value for its shareholders.

Despite short-term challenges, our outlook remains unchanged. We continue to
believe that metals, papers, and consumer cyclicals, such as auto parts and
building materials, offer attractive valuations. With the recent rise in
interest rates, we also anticipate opportunities to add to our financial
positions at attractive valuations. Overall, we believe these areas of corporate
America are best positioned for earnings improvements over the next 12 months.
If the economy improves as we expect, we believe the Fund may benefit as
undervalued issues move toward their full market potential.

Denis Laplaige
Jeffrey Simon
Portfolio Managers

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.

Consumer cyclicals
- ------------------------------
Consumer products and services
whose sales tend to rise and
fall with changes in the
economic cycle.

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

5
<PAGE>

- --------------------------------------------------------------------------------
RETURNS & LIPPER RANKINGS as of 6/30/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund average annual total returns*
- -----------------------------------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/96
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 19.68% 16.98% 11.41% 11.70%
Class B 18.99% 16.77% 11.31% 11.61%
- -----------------------------------------------------------------------------------------------------------------------------------

Fund SEC returns*
- -----------------------------------------------------------------------------------------------------------------------------------
1 year 5 years 10 years
- -----------------------------------------------------------------------------------------------------------------------------------
Class A 13.10% 15.66% 10.78%
Class B 13.99% 16.56% 11.31%
- -----------------------------------------------------------------------------------------------------------------------------------

Fund Lipper (+) rankings and Lipper category returns as of 6/30/96
- -----------------------------------------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/96
- -----------------------------------------------------------------------------------------------------------------------------------
Class A 359 out of n/a n/a 344 out of
485 funds 438 funds
Class B 378 out of 21 out of 74 out of 71 out of
485 funds 208 funds 120 funds 115 funds
Average Lipper growth
and income fund 22.13% 14.25% 11.70% 12.08% (5/1/86)
- -----------------------------------------------------------------------------------------------------------------------------------

Fund per-share net asset values and distributions for the six months ended 6/30/96

NAV 6/30/96 Income Capital Gains
- -----------------------------------------------------------------------------------------------------------------------------------
Class A $19.42 $0.1472 $0.0000
Class B $19.41 $0.0978 $0.0000
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

6
<PAGE>

- -------------------------------------------------------------------------------
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE*
- -------------------------------------------------------------------------------

[The following figures represent a bar graph in the printed copy]

<TABLE>
<CAPTION>
Period-end Class A Class B
<S> <C> <C>
12/86 -- -9.51
12/87 -- -2.57
12/88 -- 16.11
12/89 -- 21.38
12/90 -- -6.05
12/91 -- 41.26
12/92 -- 19.52
12/93 -- 13.55
12/94 -- -0.22
12/95 28.74 28.01
6/96 7.22 6.89
</TABLE>

- ----------
Returns are for Class B shares unless otherwise noted.

- -------------------------------------------------------------------------------
$10,000 INVESTED IN THE MAINSTAY VALUE FUND
vs. S&P 500 AND INFLATION
- ------------------------------------------------------------------------------

Class A Shares

[The following figures represent a line chart in the printed copy]

<TABLE>
<CAPTION>
Period-end S&P 500 Inflation Value Fund
<S> <C> <C> <C>
5/1/86 10000 10000 9450
12/86 10550 10175 8551.31
12/87 11097 10626 8331.40
12/88 12927 11096 9673.68
12/89 17011 11611 11741.81
12/90 16481 12320 11031.84
12/91 21481 12698 15583.05
12/92 23115 13066 18625.10
12/93 25435 13425 21148.25
12/94 25780 13785 21102.13
12/95 35433 14134 27166.10
6/96 39004 14420 29127.92
</TABLE>

Class B Shares

[The following figures represent a line chart in the printed copy]

<TABLE>
<CAPTION>
Period-end S&P 500 Inflation Value Fund
<S> <C> <C> <C>
5/1/86 10000 10000 10000
12/86 10550 10175 9049.00
12/87 11097 10626 8816.30
12/88 12927 11096 10236.70
12/89 17011 11611 12425.20
12/90 16481 12320 11673.90
12/91 21481 12698 16490.00
12/92 23115 13066 19709.10
12/93 25435 13425 22379.10
12/94 25780 13785 22330.80
12/95 35433 14134 28585.00
6/96 39004 14420 30555.60
</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.

7
<PAGE>

- --------------------------------------------------------------------------------
TOP EQUITY HOLDINGS as of 6/30/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Holding $ Amount
<S> <C>
IMC Global, Inc. $20,979,700

Aetna Life and Casualty Co. 19,734,000

Allstate Corp. 19,558,981

Philip Morris Cos. Inc. 19,375,200

International Business Machines Corp. 17,879,400

AT&T Corp. 17,719,600

Goodyear Tire & Rubber Co. 17,452,025

Conrail Inc. 16,341,525

American International Group, Inc. 16,189,294

Chubb Corp. 15,092,175

</TABLE>

8
<PAGE>

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
10 LARGEST PURCHASES for the six months ended 6/30/96
- --------------------------------------------------------------------------------

Security Amount of purchase
<S> <C>
AT&T Corp. $18,120,204

Wells Fargo & Co. 14,280,709

Hanson Plc ADR 13,685,361

Masco Corp. 11,929,531

Bowater Inc. 10,979,555

General Motors Corp. 10,117,050

Occidental Petroleum Corp. 9,770,714

IBP, Inc. 9,745,805

Boatmen's Bancshares, Inc. 9,269,625

Xerox Corp. 8,990,529

<CAPTION>
- --------------------------------------------------------------------------------
10 LARGEST SALES for the six months ended 6/30/96
- --------------------------------------------------------------------------------

Security Amount of sale
<S> <C>
U.S. Healthcare, Inc. $13,980,811

Eastman Kodak Co. 12,134,322

First Interstate Bancorp. 10,869,254

Loral Corp. 10,341,077

Providian Corp. 10,238,841

Intel Corp. 10,165,331

Champion International Corp. 10,157,031

Sears, Roebuck and Co. 9,784,742

First Union Corp. 7,976,392

Potash Corp. of Saskatchewan Inc. 7,168,116

</TABLE>

9
<PAGE>

- --------------------------------------------------------------------------------
DIVERSIFICATION BY INDUSTRY - TOP 5 as of 6/30/96
- --------------------------------------------------------------------------------

[The following is represented by a pie chart in the printed document]

<TABLE>
<S> <C>
Insurance ........ 10.9%
Chemicals ........ 9.2%
Banks ............ 7.1%
Retail ........... 5.7%
Energy ........... 5.4%
All Other ........ 61.7%
</TABLE>

[The following is represented by a pie chart in the printed document]

<TABLE>
<S> <C>
Commmon Stocks .......... 88.6%
Prefferred Stocks........ 1.1%
Cash & Equivalents ...... 10.3%
</TABLE>

Note: Actual percentages will vary over time.

10
<PAGE>

- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS June 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
-----------------------------
COMMON STOCKS (88.6%)+

AEROSPACE (1.3%)
<S> <C> <C>
McDonnell Douglas Corp. ....................... 237,000 $ 11,494,500
------------

AUTO MANUFACTURING (1.4%)
General Motors Corp. .......................... 233,800 12,245,275
------------

AUTO PARTS (0.9%)
Varity Corp. (a) .............................. 163,200 7,854,000
------------

BANKS (7.1%)
Bankers Trust New York Corp. .................. 158,000 11,672,250
Boatmen's Bancshares, Inc. .................... 232,000 9,309,000
First Bank System, Inc. ....................... 200,000 11,600,000
National City Corp. ........................... 215,400 7,565,925
PNC Bank Corp. ................................ 291,000 8,657,250
Wells Fargo & Co. ............................. 61,000 14,571,375
------------
63,375,800
------------
BUILDING MATERIALS (2.7%)
Armstrong World Industries, Inc. .............. 194,500 11,208,063
Masco Corp. ................................... 415,900 12,580,975
------------
23,789,038
------------

CAPITAL GOODS (3.4%)
Case Corp. .................................... 240,300 11,534,400
Coltec Industries Inc. (a) .................... 520,000 7,410,000
Xerox Corp. ................................... 209,100 11,186,850
------------
30,131,250
------------
CHEMICALS (9.2%)
Agrium, Inc. .................................. 579,800 7,600,816
Dow Chemical Co. (The) ........................ 109,900 8,352,400
FMC Corp. (a) ................................. 167,600 10,935,900
Geon Co. (The) ................................ 12,500 281,250
Georgia Gulf Corp. ............................ 318,200 9,307,350
IMC Global, Inc. .............................. 557,600 20,979,700
International Specialty
Products, Inc. (a) .......................... 598,800 6,586,800
Lyondell Petrochemical Co. .................... 355,000 8,564,375
PPG Industries, Inc. .......................... 187,400 9,135,750
------------
81,744,341
------------

<CAPTION>
Shares Value
-----------------------------
<S> <C> <C>
COMPUTERS & OFFICE EQUIPMENT (1.0%)
Gateway 2000, Inc. (a) ......................... 252,200 $ 8,574,800
------------

CONGLOMERATES (1.9%)
Hanson Plc ADR (b) ............................. 906,900 12,923,325
Textron Inc. ................................... 54,000 4,313,250
------------
17,236,575
------------

DEFENSE ELECTRONICS (2.1%)
Litton Industries, Inc. (a) .................... 155,800 6,777,300
Lockheed Martin Corp. .......................... 142,187 11,943,708
------------
18,721,008
------------
DOMESTIC OILS (2.2%)
Parker & Parsley Petroleum Co. ................. 259,000 7,187,250
Unocal Corp. ................................... 376,500 12,706,875
------------
19,894,125
------------
DRUGS (0.1%)
Warner-Lambert Co. ............................. 15,000 825,000
------------

ENERGY (5.4%)
Coastal Corp. .................................. 258,300 10,784,025
Horsham Corp. .................................. 322,200 4,470,525
MAPCO, Inc. .................................... 219,200 12,357,400
PanEnergy Corp. ................................ 360,300 11,844,862
Tosco Corp. .................................... 161,700 8,125,425
------------
47,582,237
------------

FINANCE (1.5%)
Travelers Group Inc. ........................... 287,893 13,135,118
------------

FOOD (2.5%)
Archer Daniels Midland Co. ..................... 502,255 9,605,627
IBP, Inc. ...................................... 458,700 12,671,587
------------
22,277,214
------------
FOOD, BEVERAGES & TOBACCO (4.5%)
American Brands, Inc. .......................... 225,800 10,245,675
Philip Morris Cos. Inc. ........................ 186,300 19,375,200
RJR Nabisco Holdings Corp. ..................... 335,300 10,394,300
------------
40,015,175
------------
HEALTH CARE (1.1%)
FHP International Corp. (a) .................... 69,100 1,891,613
</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>

HEALTH CARE (Continued)
<S> <C> <C>
Foundation Health Corp. (a) .................... 7,500 $ 269,062
Humana, Inc. (a) ............................... 428,200 7,654,075
------------
9,814,750
------------

HOUSEHOLD PRODUCTS (1.7%)
Premark International, Inc. .................... 253,100 4,682,350
Tupperware Corp. (a) ........................... 253,100 10,693,475
------------
15,375,825
------------

INSURANCE (10.9%)
Aetna Life and Casualty Co. .................... 276,000 19,734,000
Allstate Corp. (The) ........................... 428,690 19,558,981
American International
Group, Inc. .................................. 164,150 16,189,294
Chubb Corp. (The) .............................. 302,600 15,092,175
SAFECO Corp. ................................... 259,000 9,162,125
St. Paul Cos., Inc. (The) ...................... 189,000 10,111,500
Torchmark Corp. ................................ 150,000 6,562,500
------------
96,410,575
------------

INTERNATIONAL OILS (2.7%)
British Petroleum Co., Plc ADR (b) ............. 85,568 9,145,080
Occidental Petroleum Corp. ..................... 585,000 14,478,750
------------
23,623,830
------------

PAPER & FOREST PRODUCTS (4.4%)
Bowater Inc. ................................... 281,500 10,591,438
Chesapeake Corp. ............................... 255,900 6,717,375
Rayonier, Inc. ................................. 216,950 8,244,100
Stone Container Corp. .......................... 564,300 7,759,125
Temple-Inland Inc. ............................. 119,500 5,586,625
------------
38,898,663
------------

RAILROADS (4.7%)
Conrail Inc. ................................... 246,200 16,341,525
Illinois Central Corp. ......................... 462,450 13,122,019
Union Pacific Corp. ............................ 180,600 12,619,425
------------
42,082,969
------------
REAL ESTATE (0.7%)
Meditrust ...................................... 175,200 5,847,300
------------

<CAPTION>
Shares Value
-----------------------------
<S> <C> <C>
RETAIL (5.7%)
American Stores Co. ........................ 204,900 $ 8,452,125
Dillard Department Stores, Inc. ............ 236,000 8,614,000
Federated Department Stores,
Inc. (a) ................................. 234,000 7,985,250
Kroger Co. (The) (a) ....................... 336,600 13,295,700
Mac Frugals Bargains
Close-Outs, Inc. (a) ..................... 74,000 1,313,500
Penney (J.C.) Co., Inc. .................... 190,100 9,980,250
Sears, Roebuck and Co. ..................... 25,500 1,239,937
------------
50,880,762
------------
TECHNOLOGY (2.0%)
International Business Machines
Corp ..................................... 180,600 17,879,400
------------

TELECOMMUNICATION EQUIPMENT (2.0%)
AT&T Corp. ................................. 285,800 17,719,600
------------

TEXTILE & APPAREL (0.9%)
Burlington Industries, Inc. (a) ............ 459,700 6,493,262
Reebok International Ltd. .................. 51,400 1,728,325
------------
8,221,587
------------

TIRE & RUBBER (2.0%)
Goodyear Tire & Rubber Co. (The) ........... 361,700 17,452,025
------------

TRANSPORTATION (0.3%)
Arkansas Best Corp. ........................ 338,000 2,492,750
------------

UTILITIES--ELECTRIC (2.3%)
Entergy Corp. .............................. 146,600 4,159,775
Long Island Lighting Co. ................... 493,900 8,272,825
Unicom Corp. ............................... 299,400 8,345,775
------------
20,778,375
------------
Total Common Stocks
(Cost $672,849,930) ...................... 786,373,867
------------

PREFERRED STOCKS (1.1%)

DOMESTIC OILS (0.2%)
Parker & Parsley Capital
LLC 6.25% (c) ............................ 27,000 1,471,500
------------
</TABLE>

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

12
<PAGE>

INTERNATIONAL OILS (0.9%)
Occidental Petroleum Corp.
<S> <C> <C>
$3.875 (c) ............................... 130,000 $ 7,735,000
------------
Total Preferred Stocks
(Cost $8,393,375) ........................ 9,206,500
------------

Principal
Amount
------------
SHORT-TERM INVESTMENTS (9.9%)

COMMERCIAL PAPER (9.9%)
American Express Credit Corp.
5.28%, due 7/1/96........................... $ 15,280,000 15,280,000
Ford Motor Credit Co.
5.37%, due 7/2/96........................... 22,308,000 22,308,000
General Electric Capital Corp.
5.37%, due 7/5/96........................... 19,077,000 19,077,000
Prudential Funding Corp.
5.35%, due 7/3/96........................... 22,013,000 22,013,000
Travelers Group Inc.
5.43%, due 7/1/96........................... 9,235,000 9,235,000
------------
Total Short-Term Investments
(Cost $87,913,000) ....................... 87,913,000
------------
Total Investments
(Cost $769,156,305) (d) .................. 99.6% 883,493,367(e)
Cash and Other Assets,
Less Liabilities ......................... 0.4 3,650,922
------------- ------------
Net Assets ................................. 100.0% $887,144,289
============= ============
</TABLE>

- ----------
(a) Non-income producing securities.
(b) ADR--American Depository Receipt.
(c) May be sold to institutional investors only.
(d) The cost for Federal income tax purposes is $769,198,044.
(e) At June 30, 1996 net unrealized appreciation was $114,295,323, 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 $126,943,435 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $12,648,112.

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 ASSSETS AND LIABILITIES
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996 (Unaudited)
ASSETS:
<S> <C>
Investment in securities, at value (Note 2)
(identified cost $769,156,305) ................................. $883,493,367
Cash ........................................................... 91
Receivables:
Investment securities sold ................................... 17,139,516
Dividends and interest ....................................... 2,759,190
Fund shares sold ............................................. 1,849,801
Other assets ................................................... 1,384
-----------
Total assets ............................................... 905,243,349
-----------

LIABILITIES:
Payables:
Investment securities purchased .............................. 13,801,792
NYLIFE Distributors .......................................... 776,561
Fund shares redeemed ......................................... 397,170
Adviser ...................................................... 217,466
Transfer agent ............................................... 132,561
Custodian .................................................... 13,912
Trustees ..................................................... 8,655
Accrued expenses ............................................... 144,532
Dividend payable ............................................... 2,606,411
-----------
Total liabilities .......................................... 18,099,060
-----------
Net assets ..................................................... $887,144,289
===========

CLASS A
Net assets applicable to outstanding shares .................... $ 39,181,703
===========

Shares of beneficial interest outstanding ...................... 2,017,553
===========

Net asset value per share outstanding .......................... $ 19.42
Maximum sales charge (5.50% of offering price) ................. 1.13
-----------
Maximum offering price per share outstanding ................... $ 20.55
===========

CLASS B
Net assets applicable to outstanding shares .................... $847,962,586
===========
Shares of beneficial interest outstanding ...................... 43,684,805
===========
Net asset value per share outstanding .......................... $ 19.41
===========
</TABLE>

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 OPERATIONS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Unaudited)
INVESTMENT INCOME:
Income:
<S> <C>
Dividends (a) ............................................ $ 8,824,172
Interest ................................................. 2,232,276
-----------
Total income ........................................... 11,056,448
-----------
Expenses: (Note 2)
Distribution--Class B (Note 3) ........................... 2,099,626
Administration (Note 3) .................................. 1,242,484
Advisory (Note 3) ........................................ 1,242,484
Service (Note 3) ......................................... 1,021,201
Transfer agent ........................................... 649,612
Shareholder communication ................................ 101,723
Registration ............................................. 56,826
Recordkeeping (Note 3) ................................... 52,769
Custodian ................................................ 43,237
Auditing ................................................. 38,453
Legal .................................................... 29,119
Trustees ................................................. 17,900
Miscellaneous ............................................ 16,268
-----------
Total expenses ......................................... 6,611,702
-----------
Net investment income ...................................... 4,444,746
-----------

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments ........................... 52,214,221
Net change in unrealized appreciation on investments ....... (3,887,522)
-----------
Net realized and unrealized gain on investments ............ 48,326,699
-----------
Net increase in net assets resulting from operations ....... $52,771,445
===========
</TABLE>

- ---------
(a) Dividends recorded net of foreign withholding taxes of $18,284.

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

15
<PAGE>

- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1996* 1995
----------- -----------
INCREASE IN NET ASSETS:
Operations:
<S> <C> <C>
Net investment income ........................................................ $ 4,444,746 $ 5,378,686
Net realized gain on investments ............................................. 52,214,221 16,635,456
Net change in unrealized appreciation on investments ......................... (3,887,522) 123,032,869
----------- -----------
Net increase in net assets resulting from operations ......................... 52,771,445 145,047,011
----------- -----------
Dividends and distributions to shareholders:
From net investment income:
Class A .................................................................... (273,917) (267,440)
Class B .................................................................... (4,175,199) (6,780,394)
From net realized gain on investments:
Class A .................................................................... -- (426,799)
Class B .................................................................... -- (12,055,583)
----------- -----------
Total dividends and distributions to shareholders ........................ (4,449,116) (19,530,216)
----------- -----------
Capital share transactions: Net proceeds from sale of shares:
Class A .................................................................... 15,298,499 23,330,370
Class B .................................................................... 142,654,405 181,653,393
Net asset value of shares issued to shareholders in reinvestment of dividends
and distributions:
Class A .................................................................... 107,592 685,112
Class B .................................................................... 1,692,975 18,480,553
----------- -----------
159,753,471 224,149,428
Cost of shares redeemed:
Class A .................................................................... (3,274,279) (1,267,040)
Class B .................................................................... (51,754,922) (86,666,292)
----------- -----------
Increase in net assets derived from capital share transactions ........... 104,724,270 136,216,096
----------- -----------
Net increase in net assets ............................................... 153,046,599 261,732,891
----------- -----------
NET ASSETS:
Beginning of period ............................................................ 734,097,690 472,364,799
----------- -----------
End of period .................................................................. $887,144,289 $734,097,690
=========== ===========
Accumulated distributions in excess of net investment income ................... $ (4,370) $ --
=========== ===========
</TABLE>

- ----------
* Unaudited.

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

16
<PAGE>

<TABLE>
<CAPTION>
Class B
Class A Class B Class A Class B -----------------------------------------------------
-------- --------- --------- ------- September 1
through Year ended August 31
Six months ended Year ended December 31 -----------------------------------------
June 30, 1996* December 31, 1995 1994** 1994 1993 1992 1991
------------------ ------------------ ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ........ $ 18.25 $ 18.25 $ 14.66 $ 14.66 $ 16.30 $ 15.90 $ 13.82 $ 13.27 $ 10.42
------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income ........ 0.15 0.10 0.29 0.19 0.04 0.06 0.07 0.12 0.14
Net realized and unrealized
gain (loss) on investments 1.17 1.16 3.91 3.91 (1.03) 1.04 3.40 1.64 3.07
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ................ 1.32 1.26 4.20 4.10 (0.99) 1.10 3.47 1.76 3.21
------- ------- ------- ------- ------- ------- ------- ------- -------
Less dividends and
distributions:
From net investment income (0.15) (0.10) (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 ............. (0.15) (0.10) (0.61) (0.51) (0.65) (0.70) (1.39) (1.21) (0.36)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value at end
of period ................. $ 19.42 $ 19.41 $ 18.25 $ 18.25 $ 14.66 $ 16.30 $ 15.90 $ 13.82 $ 13.27
======= ======= ======= ======= ======= ======= ======= ======= =======

Total investment return (a) 7.22% 6.89% 28.74% 28.01% (6.03%) 7.26% 26.58% 14.82% 31.79%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.6%+ 1.1%+ 1.5% 0.9% 0.8%+ 0.5% 0.5% 0.8% 1.2%
Expenses ................ 1.1%+ 1.6%+ 1.2% 1.8% 1.8%+ 1.9% 1.9% 1.9% 2.4%
Portfolio turnover rate ..... 25% 25% 48% 48% 11% 53% 77% 145% 150%
Average commission
rate paid ................. $0.0594 $ 0.0594 (b) (b) (b) (b) (b) (b) (b)
Net assets at end of
period (in 000's) ......... $39,182 $847,963 $25,258 $708,840 $472,365 $449,789 $226,524 $77,877 $44,548
</TABLE>

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

17
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY VALUE FUND
- --------------------------------------------------------------------------------

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 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 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. Short-term securities which mature in more than 60
days are valued at cur-

18
<PAGE>

rent 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.

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
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles.

Note 3 -- Fees and Related Party Policies:

19
<PAGE>

- --------------------------------------------------------------------------------
MAINSTAY VALUE FUND
- --------------------------------------------------------------------------------

tered 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
subsidiary 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 annual
rate of the average daily net assets of 0.36% on assets up to $200 million,
0.325% on assets from $200 million to $500 million and 0.25% on assets in excess
of $500 million.

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.

20
<PAGE>

Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $301,910 for the six
months ended June 30, 1996.

The Fund was also advised that NYLIFE Distributors retained contingent deferred
sales charges on redemptions of Class B shares for the six months ended June 30,
1996 in the amount of $343,700.

Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the six
months ended June 30, 1996 were $39,894.

Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $17,898 for the six months ended
June 30, 1996.

Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the period January 1, 1996 through June 30,
1996 amounted to $52,769.

Note 4 -- Purchases and Sales of Securities (in 000's):

Note 5 -- Capital Share Transactions (in 000's):

<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1996* December 31, 1995
------------------- -------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ..................... 798 7,465 1,421 10,815
Shares issued in reinvestment
of dividends and distributions .. 6 88 38 1,028
--- ----- ----- ------
804 7,553 1,459 11,843
Shares redeemed ................. 170 2,714 75 5,223
--- ----- ----- ------
Net increase .................... 634 4,839 1,384 6,620
=== ===== ===== ======
</TABLE>

- ----------
* Unaudited.

21
<PAGE>

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

GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
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]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar graph Seeks undervalued stocks with You seek to maximize total return from
Value Fund 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
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar graph Invests in convertible securities for You want income from securities that
Convertible Fund 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 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.

# 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>

<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Seeks a high level of current income You are seeking to combine high
Government Fund [horizontal bar graph consistent with safety of principal current income and safety of principal
indicating risk/reward primarily from U.S. government
of fund] securities ss.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield An aggressive high yield bond You want to maximize current income
Corporate Bond Fund [horizontal bar graph fund that is actively managed for and can accept the higher risk of
indicating risk/reward maximum current income securities with high yield potential
of fund]
- ------------------------------------------------------------------------------------------------------------------------------------
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++
- ------------------------------------------------------------------------------------------------------------------------------------
[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
- ------------------------------------------------------------------------------------------------------------------------------------

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

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

Seeks 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 [horizontal bar graph from both federal and California keep more of what you earn by investing
Fund indicating risk/reward income taxes consistent with for income that's double tax free#
of fund] preservation of capital#

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

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

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

</TABLE>

23
<PAGE>

- --------------------------------------------------------------------------------
MainStay
Value Fund
- --------------------------------------------------------------------------------

semi-annual report
six months in review

fund results

& portfolio highlights

[LOGO] MainStay(R) Funds

- --------------------------------------------------------------------------------
Unaudited June 30, 1996
- --------------------------------------------------------------------------------

OFFICERS & TRUSTEES

Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer, and Trustee
Harry G. Hohn 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 W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary

Dechert Price & Rhoads
Legal Counsel

[LOGO] MainStay(R) Funds

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] NEW YORK LIFE

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.

[RECYCLING SYMBOL] MSSA16(896)