PENNSYLVANIA DAILY MUNICIPAL INCOME FUND INC, 485BPOS, 1997-03-27

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND INC
485BPOS, 1997-03-27

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As filed with the Securities and Exchange Commission on March 27, 1997

Registration No. 33-48014

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20449

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]

Pre-Effective Amendment No. [ ]

Post-Effective Amendment No. 7 [X]

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]

Amendment No. 8 [X]

(Check appropriate box or boxes)

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
(Exact Name of Registrant as Specified in Charter)

c/o Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10020
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code: (212) 830-5200

Bernadette N. Finn
c/o Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10020
(Name and Address of Agent for Service)

Copy to: MICHAEL ROSELLA, ESQ.
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
(212) 856-6858

It is proposed that this filing will become effective: (check appropriate
box)

[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a) (2)
[ ] on (date) pursuant to paragraph (a) (2) of Rule 485

The Registrant declares that an indefinite number of its shares of beneficial
interest is being registered by this Registration Statement pursuant to Section
24(f) under the Investment Company Act of 1940, as amended, and Rule 24f-2
thereunder, and the Registrant filed a Rule 24f-2 Notice for its fiscal year
ended November 30, 1996 on January 23, 1997.

<PAGE>

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND

Registration Statement on Form N-1A

CROSS REFERENCE SHEET -
Pursuant to Rule 404(c)

PART A
Item No. Prospectus Heading

1. Cover Page . . . . . . . . . . . . . Cover Page

2. Synopsis . . . . . . . . . . . . . . Introduction; Table of Fees and
Expenses

3. Condensed Financial Information. . . Selected Financial Information

4. General Description of Registrant. . General Information; Investment
Objectives, Policies and Risks

5. Management of the Fund . . . . . . . Management of the Fund; Custodian and
Transfer Agent; Distribution and
Service Plan

5a. Management Discussion of
Fund Performance . . . . . . . . . Management of the Fund

6. Capital Stock and Other
Securities . . . . . . . . . . . . . Description of Common Stock; How to
Purchase and Redeem Shares; General
Information; Dividends and
Distributions; Federal Income Taxes

7. Purchase of Securities
Being Offered. . . . . . . . . . . . How to Purchase and Redeem Shares;
Net Asset Value; Distribution and
Service Plan

8. Redemption or Repurchase . . . . . . How to Purchase and Redeem Shares

9. Legal Proceedings. . . . . . . . . . Not Applicable

<PAGE>

PART B Caption in Statement of
Item No. Additional Information

10. Cover Page . . . . . . . . . . . . Cover Page

11. Table of Contents. . . . . . . . . Contents

12. General Information
and History. . . . . . . . . . . . Management of the Fund

13. Investment Objectives Investment Objectives,
and Policies . . . . . . . . . . . Policies and Risks

14. Management of the Fund . . . . . . Management of the Fund

15. Control Persons and Principal
Holders of Securities. . . . . . . Management of the Fund

16. Investment Advisory and Management of the Fund; Distribution and
Other Services . . . . . . . . . . Service Plan; Custodian and Transfer
Agent; Expense Limitation

17. Brokerage Allocation . . . . . . . Investment Objectives, Policies and
Risks

18. Capital Stock and
Other Securities . . . . . . . . . Description of Common Stock

19. Purchase, Redemption and How to Purchase and Redeem
Pricing of Securities Being Offered Shares; Net Asset Value

20. Tax Status . . . . . . . . . . . . Federal Income Taxes; Pennsylvania
Income Taxes

21. Underwriters . . . . . . . . . . . Distribution and Service Plan

22. Calculations of Yield Quotations
of Money Market Funds. . . . . . . Yield Quotations

23. Financial Statement. . . . . . . Independent Auditor's Report; Statement
of Net Assets (audited), dated November
30, 1996; Statement of Operations
(audited), dated November 30, 1996;
Statement of Changes in Net Assets
(audited) as of Novemebr 30, 1996;
Notes to Financial Statements

<PAGE>
- --------------------------------------------------------------------------------
PENNSYLVANIA 600 FIFTH AVENUE
DAILY MUNICIPAL NEW YORK, N.Y. 10020
INCOME FUND (212) 830-5220
- --------------------------------------------------------------------------------

PROSPECTUS
April 1, 1997

Pennsylvania Daily Municipal Income Fund (the "Fund") is a non-diversified,
open-end management investment company that is a short-term, tax-exempt, money
market fund whose investment objectives are to seek as high a level of current
income exempt from Federal income taxes and to the extent possible from
Pennsylvania income taxes, as is believed to be consistent with preservation of
capital, maintenance of liquidity and stability of principal. No assurance can
be given that those objectives will be achieved. The Fund is concentrated in the
securities issued by Pennsylvania or entities within Pennsylvania and the Fund
may invest a significant percentage of its assets in a single issuer. Therefore,
an investment in the Fund may be riskier than an investment in other types of
money market funds. The Fund offers two classes of shares to the general public.
The Class A shares of the Fund are subject to a service fee pursuant to the
Fund's Rule 12b-1 Distribution and Service Plan and are sold through financial
intermediaries who provide servicing to Class A shareholders for which they
receive compensation from the Manager or the Distributor. The Class B shares of
the Fund are not subject to a service fee and either are sold directly to the
public or are sold through financial intermediaries that do not receive
compensation from the Manager or the Distributor. In all other respects, the
Class A and Class B shares represent the same interest in the income and assets
of the Fund.

This Prospectus sets forth concisely the information about the Fund that
prospective investors will find helpful in making their investment decisions. A
Statement of Additional Information about the Fund has been filed with the
Securities and Exchange Commission and is available upon request and without
charge by calling or writing the Fund at the above address. The Statement of
Additional Information bears the same date as this Prospectus and is
incorporated by reference into this Prospectus in its entirety.

Reich & Tang Asset Management L.P. acts as manager of the Fund and Reich & Tang
Distributors L.P. acts as distributor of the Fund's shares. Reich & Tang Asset
Management L.P. is a registered investment adviser. Reich & Tang Distributors
L.P. is a registered broker-dealer and member of the National Association of
Securities Dealers, Inc.

AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE UNITED STATES
GOVERNMENT. THE FUND INTENDS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE ALTHOUGH THERE CAN BE NO ASSURANCE THAT THIS VALUE WILL BE MAINTAINED.

SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. THIS
PROSPECTUS SHOULD BE READ AND RETAINED BY INVESTORS FOR FUTURE REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------

<PAGE>

<TABLE>
<CAPTION>
TABLE OF FEES AND EXPENSES

Annual Fund Operating Expenses
(as a percentage of average net assets)
Class A shares Class B shares

<S> <C> <C> <C> <C>
Management Fees (After Fee Waiver) 0.14% 0.14%
12b-1 Fees 0.25% 0.00%
Other Expenses 0.31% 0.31%
Administration Fees (After Fee Waiver) 0.01% ________ 0.01% ________
Total Fund Operating Expenses (After Fee Waiver) 0.70% 0.45%

<S> <C> <C> <C> <C>
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------

You would pay the following on a $1,000
investment, assuming 5% annual return
(cumulative through the end of each year):
Class A $7 $22 $39 $87
Class B $5 $14 $54 $57
</TABLE>

The purpose of the above fee table is to assist an investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a further discussion of these fees see "Management of the Fund"
and "Distribution and Service Plan" herein. The Manager has voluntarily waived a
portion of the Management Fees and all the Administration Fees with respect to
both Class A and Class B shares. Absent the fee waivers, the Management Fees and
the Administration Fees, would be .40% and .21% for both Class A and Class B
shares, respectively. Absent the fee waivers, Total Fund Operating Expenses for
the Class A and Class B shares would be 1.16% and .91%, respectively.

THE FIGURES REFLECTED IN THIS EXAMPLE SHOULD NOT BE CONSIDERED REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN ABOVE.
2
<PAGE>

SELECTED FINANCIAL INFORMATION
(for a share outstanding throughout the period)

The following financial information of Pennsylvania Daily Municipal Income Fund
has been examined by McGladrey & Pullen LLP Independent Certified Public
Accountants, whose report thereon appears in the Statement of Additional
Information and may be obtained by shareholders upon request.

Class B Class A
------- ----------------------------------------------------------
October 10, 1996 December 16, 1992
(Commencement of Year Ended November 30, (Commencement of
Offering) to Operations) to
November 30, 1996 1996 1995 1994 November 30, 1993
----------------- --------- --------- --------- -----------------
<S> <C> <C> <C> <C> <C>

Per Share Operating Performance:
(for a share outstanding throughout the period)

Net asset value, beginning of period.. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income.............. 0.005 0.030 0.034 0.024 0.022
Less distributions:
Dividends from net investment income (0.005) ( 0.030) ( 0.034) ( 0.024) ( 0.022)
--------- --------- --------- --------- ---------
Net asset value, end of period........ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
========= ========= ========= ========= =========

Total Return.......................... 3.25%* 3.01% 3.50% 2.44% 2.28%*

Ratios/Supplemental Data
Net assets, end of period (000)....... $ 5 $ 36,335 $ 40,980 $ 43,559 $ 38,817

Ratios to average net assets:
Expenses........................... 0.42%*+ 0.68%+^ 0.59%+ 0.49%+ 0.22%*+
Net investment income.............. 3.21%*+ 2.97%+ 3.44%+ 2.44%+ 2.26%*+

</TABLE>

* Annualized

+ Net of management, administration fees and shareholder servicing fees
waived equivalent to .49%, .61%, .68%, and .85% of average net assets, plus
expenses reimbursed equivalent to .33% of average net assets for the period
December 16, 1992 (Commencement of Operations) to November 30, 1993 for Class A
shares. Net of management and administration fees waived equivalent to .27% of
average net assets for Class B shares for the period October 10, 1996
(Commencement of Class B Offering) to November 30, 30, 1996

^ Includes expense offsets of 0.01%.

3
<PAGE>

- --------------------------------------------------------------------------------
INTRODUCTION
- --------------------------------------------------------------------------------

Pennsylvania Daily Municipal Income Fund (the "Fund") is a non-diversified,
open-end management investment company that is a short-term, tax-exempt money
market fund whose investment objectives are to seek as high a level of current
income exempt under current law, in the opinion of bond counsel to the issuer at
the date of issuance, from regular Federal income tax and, to the extent
possible, from Pennsylvania income taxes, as is believed to be consistent with
preservation of capital, maintenance of liquidity and stability of principal by
investing principally in short-term, high quality debt obligations of the
Commonwealth of Pennsylvania, Puerto Rico and other U.S. territories, and their
political subdivisions as described under "Investment Objectives, Policies and
Risks" herein. The Fund also may invest in municipal securities of issuers
located in states other than Pennsylvania, the interest income on which will be,
in the opinion of bond counsel to the issuer at the date of issuance, exempt
from regular Federal income tax, but will be subject to Pennsylvania income
taxes for Pennsylvania residents.

Interest on certain municipal securities purchased by the Fund may be a
preference item for purposes of the Federal alternative minimum tax. The Fund
seeks to maintain an investment portfolio with a dollar-weighted average
maturity of 90 days or less, and to value its investment portfolio at amortized
cost and maintain a net asset value of $1.00 per share, although there can be no
assurance that this value will be maintained. The Fund intends to invest all of
its assets in tax-exempt obligations; however, it reserves the right to invest
up to 20% of the value of its net assets in taxable obligations. This is a
summary of the Fund's fundamental investment policies which are set forth in
full under "Investment Objectives, Policies and Risks" herein and in the
Statement of Additional Information and may not be changed without approval of a
majority of the Fund's outstanding shares. Of course, no assurance can be given
that these objectives will be achieved.

The Fund's investment adviser is Reich & Tang Asset Management L.P. (the
"Manager"), which is a registered investment adviser and which currently acts as
investment manager or administrator to fifteen other open-end management
investment companies. The Fund's shares are distributed through Reich & Tang
Distributors L.P. (the "Distributor"), with whom the Fund has entered into a
Distribution Agreement and a Shareholder Servicing Agreement (with respect to
the Class A shares) pursuant to the Fund's plan adopted under Rule 12b-1 under
the Investment Company Act of 1940, as amended (the " 1940 Act"). (See
"Distribution and Service Plan".)

On any day on which the New York Stock Exchange, Inc. is open for trading ("Fund
Business Day"), investors may, without charge by the Fund, purchase and redeem
shares of the Fund's common stock at their net asset value next determined after
receipt of the order. An investor's purchase order will be accepted after the
payment is converted into Federal Funds, and shares will be issued as of the
Fund's next net asset value determination which is made as of 12 noon on each
Fund Business Day. (See "How to Purchase and Redeem Shares" and "Net Asset
Value" herein.) Dividends from accumulated net income are declared by the Fund
on each Fund Business Day.

The Fund generally pays interest dividends monthly. Net capital gains, if any,
will be distributed at least annually and in no event later than 60 days after
the end of the Fund's fiscal year. All dividends and distributions of capital
gains are automatically invested in additional shares of the Fund unless a
shareholder has elected by written notice to the Fund to receive either of such
distributions in cash. (See "Dividends and Distributions" herein.)

The Fund intends that its investment portfolio may be concentrated in
Pennsylvania Municipal

4
<PAGE>
Obligations as defined herein and bank participation certificates therein.
Prospective investors should consider the financial difficulties and pressures
which the Commonwealth of Pennsylvania and certain of its municipal subdivisions
have undergone. Both the Commonwealth and the City of Philadelphia have
historically experienced significant revenue shortfalls. There can be no
assurance that the Commonwealth will not experience further declines in economic
conditions or that portions of the municipal obligations purchased by the Fund
will not be affected by such declines. (See "Pennsylvania Risk Factors" in the
Statement of Additional Information.) There are certain risks inherent in the
Fund's policies of nondiversification and of concentration in the banking
industry through its investments in bank participation certificates. (See
"Investment Objectives, Policies and Risks" herein.)

The Fund's Board of Trustees is authorized to divide the unissued shares into
separate series of beneficial interest, one for each of the Fund's separate
investment portfolios that may be created in the future.

INVESTMENT OBJECTIVES,
POLICIES AND RISKS

The Fund is a non-diversified, open-end management investment company that is a
short-term, tax-exempt money market fund whose investment objectives are to seek
as high a level of current income exempt from regular Federal income tax and, to
the extent possible, from Pennsylvania income taxes, as is believed to be
consistent with the preservation of capital, maintenance of liquidity and
stability of principal. There can be no assurance that the Fund will achieve its
investment objectives.

The Fund's assets will be invested primarily (i.e., at least 80% of its net
assets) in high quality debt obligations issued by or on behalf of the
Commonwealth of Pennsylvania, other states, territories and possessions of the
United States, and their authorities, agencies, instrumentalities and political
subdivisions, the interest on which is, in the opinion of bond counsel to the
issuer at the date of issuance, currently exempt from regular Federal income
taxation ("Municipal Obligations") and in participation certificates (which, in
the opinion of Battle Fowler LLP, counsel to the Fund, cause the Fund to be
treated as the owner of the underlying Municipal Obligations) in Municipal
Obligations purchased from banks, insurance companies or other financial
institutions. Dividends paid by the Fund which are "exempt-interest dividends"
by virtue of being properly designated by the Fund as derived from Municipal
Obligations and participation certificates in Municipal Obligations will be
exempt from regular Federal income tax provided the Fund complies with Section
852(b)(5) of Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code").

Although the Supreme Court has determined that Congress has the authority to
subject the interest on bonds such as the Municipal Obligations to regular
Federal income taxation, existing law excludes such interest from regular
Federal income tax. However, "exempt-interest dividends" may be subject to the
Federal alternative minimum tax. Securities, the interest income on which may be
subject to the Federal alternative minimum tax (including participation
certificates in such securities), may be purchased by the Fund without limit.
Securities, the interest income on which is subject to regular Federal, state
and local income tax, will not exceed 20% of the value of the Fund's net assets.
(See "Federal Income Taxes" herein.) Exempt-interest dividends paid by the Fund
correctly identified by the Fund as derived from obligations issued by or on
behalf of the Commonwealth of Pennsylvania or any Pennsylvania local
governments, or their instrumentalities, authorities or districts ("Pennsylvania
Municipal Obligations") will be exempt from the Pennsylvania Income Tax.
Exempt-interest dividends correctly identified by the Fund as derived from
obligations of Puerto Rico and the Virgin Islands, as well as other types of
obligations that Pennsylvania is prohibited from taxing under the Constitution
or the laws of the United States of America or the constitution or

5
<PAGE>
laws of Pennsylvania ("Territorial Municipal Obligations") should be exempt from
the Pennsylvania Income Taxation provided the Fund complies with Pennsylvania
law. (See "Pennsylvania Income Taxes" herein.) To the extent suitable
Pennsylvania Municipal Obligations are not available for investment by the Fund,
the Fund may purchase Municipal Obligations issued by other states, their
agencies and instrumentalities, the dividends on which will be designated by the
Fund as derived from interest income which will be, in the opinion of bond
counsel to the issuer at the date of issuance, exempt from regular Federal
income tax but will be subject to the Pennsylvania Income Tax. However, except
as a temporary defensive measure during periods of adverse market conditions as
determined by the Manager, the Fund will invest at least 65% of its total assets
in Pennsylvania Municipal Obligations, although the exact amount of the Fund's
assets invested in such securities will vary from time to time.

Although the Fund will attempt to invest 100% of its assets in Municipal
Obligations and in participation certificates in Municipal Obligations, the Fund
reserves the right to invest up to 20% of the value of its net assets in
securities, the interest income on which is subject to Federal, state and local
income tax. The Fund will invest more than 25% of its assets in participation
certificates purchased from banks in industrial revenue bonds and other
Pennsylvania Municipal Obligations. The investment objectives of the Fund
described in the preceding paragraphs of this section may not be changed unless
approved by the holders of a majority of the outstanding shares of the Fund that
would be affected by such a change. As used in this Prospectus, the term
"majority of the outstanding shares" of the Fund means, respectively, the vote
of the lesser of (i) 67% or more of the shares of the Fund present at a meeting,
if the holders of more than 50% of the outstanding shares of the Fund are
present or represented by proxy or; (ii) more than 50% of the outstanding shares
of the Fund.

The Fund's investments may include "when-issued" Municipal Obligations, stand-by
commitments, taxable repurchase agreements and municipal leases. When a new
issue of Municipal Obligations is offered on a when-issued basis, the payment
obligation and the interest rate that will be received on the Municipal
Obligations are each fixed at the time the buyer enters into the commitment
although delivery and payment of the Municipal Obligations normally take place
within 45 days after the date of the Fund's commitment to purchase. Purchasing
Municipal Obligations on a when-issued basis can involve a risk that the yields
available in the market when the delivery takes place may actually be higher or
lower than those obtained in the transaction itself. (See "Description of
Municipal Obligations: When-Issued Securities" in the Statement of Additional
Information.)

Under a stand-by commitment, a bank or broker-dealer agrees to purchase at the
Fund's option a specified Municipal Obligation at a specified price with same
day settlement. A stand-by commitment is the equivalent of a "put" option
acquired by the Fund with respect to a particular Municipal Obligation held in
its portfolio. The Fund would enter into stand-by commitments only with banks
and other financial institutions that, in the Manager's opinion, present minimal
credit risks and, where the Municipal Obligation does not meet the eligibility
criteria, only where the issuer of the stand-by commitment has received a rating
which meets the eligibility criteria or, if not rated, presents a minimal risk
of default as determined by the Board of Trustees. The stand-by commitments that
the Fund may enter into are subject to certain risks, which include the ability
of the issuer of the commitment to pay for the securities at the time the
commitment is exercised, the fact that the commitment is not marketable by the
Fund, and that the maturity of the underlying security will generally be
different from that of the commitment. See "Description of Municipal
Obligations: Stand-by Commitments" in the Statement of Additional Information.

Under the terms of a typical repurchase agreement, the Fund would acquire an
underlying debt instrument for a relatively short period

6
<PAGE>
(usually not more than one week) subject to an obligation of the seller to
repurchase and the Fund to resell the instrument at a fixed price and time,
thereby determining the yield during the Fund's holding period. This results in
a fixed rate of return insulated from market fluctuations during such period. A
repurchase agreement is subject to the certain risks including that the seller
may fail to repurchase the security. See "Taxable Securities: Repurchase
Agreements" in the Statement of Additional Information.

Municipal Leases, which may take the form of a lease or an installment purchase
or conditional sale contract, are issued by state and local governments and
authorities to acquire a wide variety of equipment and facilities such as fire
and sanitation vehicles, telecommunications equipment and other capital assets.
Leases and installment purchase or conditional sale contracts (which normally
provide for title to the leased asset to pass eventually to the governmental
issuer) have evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for the
issuance of debt. The debt-issuance limitations of many state constitutions and
statutes are deemed to be inapplicable because of the inclusion in many leases
or contracts of "non-appropriation" clauses that provide that the governmental
issuer has no obligation to make future payments under the lease or contract
unless money is appropriated for such purpose by the appropriate legislative
body on a yearly or other periodic basis. To reduce this risk, the Fund will
only purchase Municipal Leases subject to a non-appropriation clause where the
payment of principal and accrued interest is backed by an unconditional
irrevocable letter of credit, a guarantee, insurance or other comparable
undertaking of an approved financial institution. These types of municipal
leases may be considered illiquid and subject to the 10% limitation of
investments in illiquid securities set forth under "Investment Restrictions"
contained herein. The Board of Trustees may adopt guidelines and delegate to the
Manager the daily function of determining and monitoring the liquidity of
municipal leases. In making such determination, the Board and the Manager may
consider such factors as the frequency of trades for the obligation, the number
of dealers willing to purchase or sell the obligations, the number of other
potential buyers and the nature of the marketplace for the obligations,
including the time needed to dispose of the obligations and the method of
soliciting offers.

7
<PAGE>
While there are several organizations that currently qualify as NRSROs, two
examples of NRSROs are Standard & Poor's Rating Services, a division of the
McGraw-Hill Companies ("S&P") and Moody's Investors Service, Inc. ("Moody's").
The two highest ratings by S&P and Moody's are "AAA" and "AA" by S&P in the case
of long-term bonds and notes or "Aaa" and "Aa" by Moody's in the case of bonds;
"SP-1" and "SP-2" by S&P or "MIG-1" and "MIG-2" by Moody's in the case of notes;
"A-1" and "A-2" by S&P or "Prime-1" and "Prime-2" by Moody's in the case of
tax-exempt commercial paper. Such instruments may produce a lower yield than
would be available from less highly rated instruments. The Fund's Board of
Trustees has determined that obligations which are backed by the credit of the
Federal Government will be considered to have a rating equivalent to Moody's
"Aaa".

Subsequent to its purchase by the Fund, the quality of an investment may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Trustees of the Fund shall reassess
promptly whether the security presents minimal credit risks and shall cause the
Fund to take such action as the Board of Trustees determines is in the best
interest of the Fund and its shareholders. However, reassessment is not required
if the security is disposed of or matures within five business days of the
Manager becoming aware of the new rating and provided further that the Board of
Trustees is subsequently notified of the Manager's actions.

In addition, in the event that a security (1) is in default, (2) ceases to be an
eligible investment under Rule 2a-7 or (3) is determined to no longer present
minimal credit risks, the Fund will dispose of the security absent a
determination by the Fund's Board of Trustees that disposal of the security
would not be in the best interests of the Fund. In the event that the security
is disposed of it shall be disposed of as soon as practicable consistent with
achieving an orderly disposition by sale, exercise of any demand feature or
otherwise. In the event of a default with respect to a security which
immediately before default accounted for 1/2 of 1% or more of the Fund's total
assets, the Fund shall promptly notify the Securities and Exchange Commission of
such fact and of the actions that the Fund intends to take in response to the
situation.

In view of the "concentration" of the Fund in bank participation certificates in
Pennsylvania Municipal Obligations, which may be secured by bank letters of
credit or guarantees, an investment in the Fund should be made with an
understanding of the characteristics of the banking industry and the risks which
such an investment may entail which include extensive governmental regulation,
changes in the availability and cost of capital funds and general economic
condition. (See "Variable Rate Demand Instruments and Participation
Certificates" in the Statement of Additional Information.) Banks are subject to
extensive governmental regulations which may limit both the amounts and types of
loans and other financial commitments which may be made and interest rates and
fees which may be charged. The profitability of this industry is largely
dependent upon the availability and cost of capital funds for the purpose of
financing lending operations under prevailing money market conditions. Also,
general economic conditions play an important part in the operations of this
industry and exposure to credit losses arising from possible financial
difficulties of borrowers might affect a bank's ability to meet its obligations
under a letter of credit. The Fund may invest 25% or more of the net assets of
the Fund in securities that are related in such a way that an economic, business
or political development or change affecting one of the securities would also
affect the other securities including, for example, securities the interest upon
which is paid from revenues of similar type projects, or securities the issuers
of which are located in the same state.

The Fund has adopted the following fundamental investment restrictions which
apply to all portfolios and which may not be changed unless approved by a
majority of the outstanding shares of each series of the Fund's shares that
would be affected by such a change. The Fund is subject to further

<PAGE>

investment restrictions that are set forth in the Statement of Additional
Information. The Fund may not:

1. Borrow Money. This restriction shall not apply to borrowings from banks for
temporary or emergency (not leveraging) purposes, including the meeting of
redemption requests that might otherwise require the untimely disposition
of securities, in an amount up to 15% of the value of the Fund's total
assets (including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing was made.
While borrowings exceed 5% of the value of the Fund's total assets, the
Fund will not make any investments. Interest paid on borrowings will reduce
net income.

2. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
in an amount up to 15% of the value of its total assets and only to secure
borrowings for temporary or emergency purposes.

3. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"), except the Fund may
purchase variable rate demand instruments which contain a demand feature
exercisable in seven days or less. The Fund will not invest in a repurchase
agreement maturing in more than seven days if any such investment together
with securities that are not readily marketable held by the Fund exceed 15%
of the Fund's net assets.

4. Invest more than 25% of its assets in the securities of "issuers" in any
single industry, provided that the Fund may invest more than 25% of its
assets in the banking industry through bank participation certificates and
there shall be no limitation on the purchase of those Municipal Obligations
and other obligations issued or guaranteed by the United States Government,
its agencies or instrumentalities. With respect to 75% of the total
amortized cost value of the Fund's assets, not more than 5% of the Fund's
assets may be invested in securities that are subject to underlying puts
from the same institution, and no single bank shall issue its letter of
credit and no single financial institution shall issue a credit enhancement
covering more than 5% of the total assets of the Fund. However, if the puts
are exercisable by the Fund in the event of default on payment of principal
and interest on the underlying security, then the Fund may invest up to 10%
of its assets in securities underlying puts issued or guaranteed by the
same institution; additionally, a single bank can issue its letter of
credit or a single financial institution can issue a credit enhancement
covering up to 10% of the Fund's assets, where the puts offer the Fund such
default protection.

5. Invest in securities of other investment companies, except (i) the Fund may
purchase unit investment trust securities where such unit trusts meet the
investment objectives of the Fund and then only up to 5% of the Fund's net
assets, (ii) as they may be acquired as part of a merger, consolidation or
acquisition of assets or (iii) as allowed by 12(d) of the 1940 Act
(investments by the Fund in other investment companies subjects that
portion of a shareholder's investment to additional fees resulting in a
duplication of such fees).

All investments by the Fund will mature or will be deemed to mature within 397
days or less from the date of acquisition and the average maturity of the Fund
portfolio (on a dollar-weighted basis) will be 90 days or less. The maturities
of variable rate demand instruments held in the Fund's portfolio will be deemed
to be the longer of the period required before the Fund is entitled to receive
payment of the principal amount of the instrument through demand, or the period
remaining until the next interest rate adjustment, although the stated
maturities may be in excess of 397 days.

<PAGE>

Notwithstanding the foregoing, the Fund, as a fundamental policy, will comply
with any restrictions on portfolio management imposed from time to time by
Pennsylvania income tax law in order for dividends on the Fund's shares to be
exempt from Pennsylvania income tax. Under current Pennsylvania tax law, the
Fund may not trade its portfolio securities for the purpose of seeking profits,
but only for the purpose of generating income earnings. Accordingly, in order to
comply with current Pennsylvania tax law, the Fund will not vary its investments
except to: (i) eliminate unsafe investments and investments not consistent with
the preservation of the Fund's capital or the tax status of the Fund's
investments, (ii) reinvest the earnings from securities in like securities or
(iii) defray administrative expenses. In complying with the foregoing
restrictions, the Fund may vary its portfolio securities if: (i) there has been
an adverse change in a security's credit rating or in that of its issuer or in
the Manager's credit analysis of the security or its issuer; (ii) there has
been, in the opinion of the Manager, a deterioration or anticipated
deterioration in general economic or market conditions affecting issuers of
Pennsylvania Municipal Obligations, or a change or anticipated change in
interest rates; or (iii) adverse changes or anticipated changes in market
conditions or economic or other factors temporarily affecting the issuers of one
or more portfolio securities make necessary or desirable, in the opinion of the
Manager, the sale of such security or securities in anticipation of the Fund's
repurchase of the same or comparable securities at a later date.

RISK FACTORS

As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the 1940 Act with respect to investing its assets in
one or relatively few issuers. This non-diversification may present greater
risks than in the case of a diversified company. However, the Fund intends to
qualify as a "regulated investment company" under Subchapter M of the Code. The
Fund will be restricted in that at the close of each quarter of the taxable
year, at least 50% of the value of its total assets must be represented by cash,
government securities, investment company securities and other securities
limited in respect of any one issuer to not more than 5% in value of the total
assets of the Fund and to not more than 10% of the outstanding voting securities
of such issuer. In addition, at the close of each quarter of its taxable year,
not more than 25% in value of the Fund's total assets may be invested in
securities of one issuer other than government securities. The limitations
described in this paragraph regarding qualification as a "regulated investment
company" are not fundamental policies and may be revised to the extent
applicable Federal income tax requirements are revised. (See "Federal Income
Taxes" herein.)

The primary purpose of investing in a portfolio of Pennsylvania Municipal
Obligations is the special tax treatment accorded Pennsylvania resident
individual investors. However, payment of interest and preservation of principal
are dependent upon the continuing ability of the Pennsylvania issuers and/or
obligors of state, municipal and public authority debt obligations to meet their
obligations thereunder. Investors should consider the greater risk of the Fund's
concentration versus the safety that comes with a less concentrated investment
portfolio and should compare yields available on portfolios of Pennsylvania
issues with those of more diversified portfolios including out-of-state issues
before making an investment decision. The Fund's management believes that by
maintaining the Fund's investment portfolio in liquid, short-term, high quality
investments, including the participation certificates and other variable rate
demand instruments that have high quality credit support from banks, insurance
companies or other financial institutions, the Fund is largely insulated from
the credit risks that may exist on long-term Pennsylvania Municipal Obligations.
For additional information, please refer to the Statement of Additional
Information.

Prospective investors should consider the financial difficulties and pressures
which the
10
<PAGE>

Commonwealth of Pennsylvania and certain of its municipal subdivisions have
undergone. Both the Commonwealth and the City of Philadelphia have historically
experienced significant revenue shortfalls. There can be no assurance that the
Commonwealth will not experience a further decline in economic conditions or
that portions of the Municipal Obligations purchased by the Fund will not be
affected by such a decline. The Commonwealth is a party to numerous lawsuits, in
which an adverse final decision could materially affect the Commonwealth's
governmental operations and consequently its ability to pay debt service on its
obligations. (See "Pennsylvania Risk Factors" in the Statement of Additional
Information.)

MANAGEMENT OF THE FUND

The Fund's Board of Trustees, which is responsible for the overall management
and supervision of the Fund, has employed Reich & Tang Asset Management L.P.
(the "Manager") to serve as investment manager of the Fund. The Manager provides
persons satisfactory to the Fund's Board of Trustees to serve as officers of the
Fund. Such officers, as well as certain other employees and trustees of the
Fund, may be directors or officers of Reich & Tang Asset Management, Inc., the
sole general partner of the Manager, or employees of the Manager or its
affiliates. Due to the services performed by the Manager, the Fund currently has
no employees and its officers are not required to devote full-time to the
affairs of the Fund. The Statement of Additional Information contains general
background information regarding each Trustee and principal officers of the
Fund.

The Manager is a Delaware limited partnership with its principal office at 600
Fifth Avenue, New York, New York 10020. As of February 28, 1996 the Manager was
investment manager, adviser or supervisor with respect to assets aggregating in
excess of $9.7 billion. The Manager acts as manager or administrator of fifteen
other registered investment companies and also advises pension trusts,
profit-sharing trusts and endowments.

New England Investment Companies, L.P. ("NEICLP") is the limited partner and
owner of a 99.5% interest in the Manager. Reich & Tang Asset Management, Inc. (a
wholly-owned subsidiary of NEICLP) is the sole general partner and owner of the
remaining .5% interest of the Manager. New England Investment Companies, Inc.
("NEIC"), a Massachusetts corporation, serves as the sole general partner of
NEICLP. Reich & Tang Asset Management L.P. succeeded NEICLP as the Manager of
the Fund.

On August 30, 1996, The New England Mutual Life Insurance Company ("The New
England") and Metropolitan Life Insurance Company ("MetLife") merged, with
MetLife being the continuing company. The Manager remains an indirect
wholly-owned subsidiary of NEICLP, but Reich & Tang Asset Management, Inc., its
sole general partner, is now an indirect subsidiary of MetLife. Also, MetLife
New England Holdings, Inc., a wholly-owned subsidiary of MetLife, owns 51% of
the outstanding limited partnership interest of NEICLP and may be deemed a
"controlling person" of the Manager. Reich & Tang, Inc. owns approximately 16%
of the outstanding partnership units of NEICLP.

NEIC is a holding company offering a broad array of investment styles across a
wide range of asset categories through twelve subsidiaries, divisions and
affiliates offering a wide array of investment styles and products to
institutional clients. Its business units include, AEW Capital Management, L.P.,
Back Bay Advisors, L.P., Graystone

<PAGE>
Partners, L.P., Harris Associates, L.P., Jurika & Voyles, L.P., Loomis, Sayles &
Co., L.P., MC Management, L.P., New England Funds, L.P., New England Funds
Management, L.P., Reich & Tang Asset Management L.P., Vaughan-Nelson,
Scarborough & McConnell L.P. and Westpeak Investment Advisors, L.P. These
affiliates in the aggregate are investment advisors or managers to 43 other
registered investment companies.

The merger between The New England and MetLife resulted in an "assignment" of
the Investment Management Contract relating to the Fund. Under the 1940 Act,
such an assignment caused the automatic termination of this agreement. On
November 28, 1995, the Board of Trustees, including a majority of the trustees
who are not interested persons (as defined in the 1940 Act) of the Fund or the
Manager, approved the Investment Management Contract effective August 30, 1996,
which has a term which extends to July 31, 1998 and may be continued in force
thereafter for successive twelve-month periods beginning each August 1, provided
that such continuance is specifically approved annually by majority vote of the
Fund's outstanding voting securities or by its Board of Trustees, and in either
case by a majority of the trustees who are not parties to the Investment
Management Contract or interested persons of any such party, by votes cast in
person at a meeting called for the purpose of voting on such matter.

The Investment Management Contract was approved by a majority of the
shareholders of the Fund on April 4, 1996 and contains the same terms and
conditions governing the Manager's investment management responsibilities as the
Fund's previous Investment Management Contract with the Manager, except as to
the date of execution and termination.

The merger and the change in control of the Manager has not had any impact upon
the Manager's performance of its responsibilities and obligations under the
Investment Management Contract.

Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Trustees of
the Fund. Pursuant to the Investment Management Contract, the Manager receives
from the Fund a fee equal to .40% per annum of the Fund's average daily net
assets for managing the Fund's investment portfolio. The Manager, at its
discretion, may voluntarily waive all or a portion of the management fee.

Pursuant to an Administrative Services Contract for the Fund, the Manager
performs clerical, accounting supervision and office service functions for the
Fund and provides the Fund with personnel to (i) supervise the performance of
bookkeeping and related services by Investors Fiduciary Trust Company, the
Fund's bookkeeping agent; (ii) prepare reports to and filings with regulatory
authorities; and (iii) perform such other services as the Fund may from time to
time request of the Manager. The personnel rendering such services may be
employees of the Manager or its affiliates. The Manager, at its discretion, may
voluntarily waive all or a portion of the administrative services fee. For its
services under the Administrative Services Contract, the Manager receives a fee
of .21% of the Fund's average daily net assets not in excess of $1.25 billion,
plus .20% of such assets in excess of $1.25 billion but not in excess of $1.5
billion, plus .19% of such assets in excess of $1.5 billion. Any portion of the
total fees received by the Manager and its past profits may be used to provide
shareholder services and for distribution of Fund shares. (See "Distribution and
Service Plan" herein.)

In addition, Reich & Tang Distributors L.P., the Distributor, receives a fee
equal to .25% per annum of the Fund's average daily net assets of the Class A
shares of the Fund under the Shareholder Servicing Agreement. The fees are
accrued daily and paid monthly. Investment management fees and operating
expenses, which are attributable to both classes of the Fund, will be allocated
daily to each Class share based on the
12
<PAGE>
percentage of outstanding shares at the end of the day.

DESCRIPTION OF SHARES

The Fund was established as a Massachusetts business trust under the laws of
Massachusetts by an Agreement and Declaration of Trust dated July 30, 1992. The
Fund has an unlimited authorized number of shares of beneficial interest. The
Fund currently has only one portfolio and effective January 26, 1995, a majority
of the Fund's Board of Trustees, including independent Trustees, approved the
creation of a second class of shares of the Fund's common stock. In furtherance
of this action, the Board of Trustees has reclassified the existing common stock
of the Fund into Class A and Class B shares. The Class A shares will be offered
to investors who desire certain additional shareholder services from
Participating Organizations that are compensated by the Fund's Manager and
Distributor for such services. Generally, all shares will be voted in the
aggregate, except when voting by Class is required by law or the matter involved
affects only one Class, in which case, shares will be voted separately by Class.
These shares are entitled to one vote per share with proportional voting for
fractional shares. There are no conversion or preemptive rights in connection
with any shares of the Trust. All shares when issued in accordance with the
terms of the offering will be fully paid and non-assessable. Shares of the Fund
are redeemable at net asset value, at the option of the shareholders.

The Fund is subdivided into two classes of stock, Class A and Class B. Each
share, regardless of class, will represent an interest in the same portfolio of
investments and will have identical voting, dividend, liquidation and other
rights, preferences, powers, restrictions, limitations, qualifications,
designations and terms and conditions, except that: (i) the Class A and Class B
shares will have different class designations; (ii) only the Class A shares will
be assessed a service fee pursuant to the Rule 12b-1 Distribution and Service
Plan of the Fund of .25% of the Fund's average daily net assets; (iii) only the
holders of the Class A shares would be entitled to vote on matters pertaining to
the Plan and any related agreements in accordance with provisions of Rule 12b-1;
and (iv) the exchange privilege will permit shareholders to exchange their
shares only for shares of the same class of an Exchange Fund. Payments that are
made under the Plans will be calculated and charged daily to the appropriate
class prior to determining daily net asset value per share and
dividends/distributions.

As a Massachusetts business trust, the Fund is not required to hold annual
shareholder meetings. Procedures for calling a shareholder's meeting for the
purpose of voting on the question of removal of a Trustee or Trustees of the
Fund, similar to those set forth in Section 16(c) of the 1940 Act, are available
to shareholders of the Fund. A meeting for such purpose can be called by the
holders of at least 10% of the Fund's outstanding shares of beneficial interest.
The Fund will aid shareholder communication with other shareholders as required
under Section 16(c) of the 1940 Act.

DIVIDENDS AND DISTRIBUTIONS

The Fund declares dividends equal to all its net investment income (excluding
capital gains and losses, if any, and amortization of market discount) on each
Fund Business Day and generally pays dividends monthly. There is no fixed
dividend rate. In computing these dividends, interest earned and expenses are
accrued daily.

Net realized capital gains, if any, are distributed at least annually and in no
event later than 60 days after the end of the Fund's fiscal year.

All dividends and distributions of capital gains are automatically invested in
additional Fund shares of the same Class of shares immediately upon payment
thereof unless a shareholder has elected by written notice to the Fund to
receive either of such distributions in cash.

The Class A shares will bear the service fee under the Plan. As a result, the
net income of and the dividends payable to the Class A shares will be lower than
the net income of and dividends payable to the Class B shares of the Fund.

<PAGE>

Dividends paid to each Class of shares of the Fund will, however, be declared
and paid on the same days at the same times and, except as noted with respect to
the service fees payable under the Plan, will be determined in the same manner
and paid in the same amounts.

HOW TO PURCHASE AND REDEEM SHARES

Investors who have accounts with Participating Organizations may invest in the
Fund through their Participating Organizations in accordance with the procedures
established by the Participating Organizations. Certain Participating
Organizations are compensated by the Distributor from its shareholder servicing
fee and by the Manager from its management fee for the performance of these
services. An investor who purchases shares through a Participating Organization
that receives payment from the Manager or the Distributor will become a Class A
shareholder. (See "Investment Through Participating Organizations" herein.) (See
"Investments Through Participating Organizations" herein.) All other investors,
and investors who have accounts with Participating Organizations but who do not
wish to invest in the Fund through their Participating Organizations, may invest
in the Fund directly as Class B shareholders of the Fund and not receive the
benefit of the servicing functions performed by a Participating Organization.
Class B shares may also be offered to investors who purchase their shares
through Participating Organizations who do not receive compensation from the
Distributor or the Manager because they may not be legally permitted to receive
such as fiduciaries. The Manager pays the expenses incurred in the distribution
of Class B shares. Participating Organizations whose clients become Class B
shareholders will not receive compensation from the Manager or Distributor for
the servicing they may provide to their clients. (See "Direct Purchase and
Redemption Procedures" herein.)

With respect to both Classes of shares, the minimum initial investment in the
Fund by Participating Organizations is $1,000, which may be satisfied by initial
investments aggregating $1,000 by a Participating Organization on behalf of
customers whose initial investments are less than $1,000. The minimum initial
investment for securities brokers, financial institutions and other industry
professionals that are not Participating Organizations is $1,000. The minimum
initial investment for all other investors is $5,000. Initial investments may be
made in any amount in excess of the applicable minimums. The minimum amount for
subsequent investments is $100 unless the investor is a client of a
Participating Organization whose clients have made aggregate subsequent
investments of $100.

The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a charge for either sales or redemptions. All
transactions in Fund shares are effected through the Fund's transfer agent,
which accepts orders for purchases and redemptions from Participating
Organizations and from investors directly.

In order to maximize earnings on its portfolio, the Fund normally has its assets
as fully invested as is practicable. Many securities in which the Fund invests
require immediate settlement in funds of Federal Reserve member banks on deposit
at a Federal Reserve Bank (commonly known as "Federal Funds"). Accordingly, the
Fund does not accept a purchase order or invest an investor's payment in
portfolio securities until the payment has been converted into Federal Funds.

Shares will be issued as of the first determination of the Fund's net asset
value per share for each Class made after acceptance of the investor's purchase
order at the net asset value per share next determined after receipt of the
purchase order. Shares begin accruing income dividends on the day they are
purchased. The Fund reserves the right to reject any subscription for its
shares. Certificates for Fund shares will not be issued to an investor.

Shares are issued as of 12 noon, New York City time, on any Fund Business Day,
as defined herein, on which an order for the shares and accompanying Federal
Funds are received by the Fund's transfer agent before 12 noon. Orders
accompanied by Federal Funds and received after
14
<PAGE>
12 noon, New York City time, on a Fund Business Day will not result in share
issuance until the following Fund Business Day. Fund shares begin accruing
income on the day the shares are issued to an investor.

There is no redemption charge, no minimum period of investment, no minimum
amount for a redemption, and no restriction on frequency of withdrawals. Unless
other instructions are given in proper form to the Fund's transfer agent, a
check for the proceeds of a redemption will be sent to the shareholder's address
of record. If a shareholder elects to redeem all the shares of the Fund he owns,
all dividends accrued to the date of such redemption will be paid to the
shareholder along with the proceeds of the redemption.

The right of redemption may not be suspended or the date of payment upon
redemption postponed for more than seven days after the shares are tendered for
redemption, except for any period during which the New York Stock Exchange, Inc.
is closed (other than customary weekend and holiday closings) or during which
the Securities and Exchange Commission determines that trading thereon is
restricted, or for any period during which an emergency (as determined by the
Securities and Exchange Commission) exists as a result of which disposal by the
Fund of its portfolio securities is not reasonably practicable or as a result of
which it is not reasonably practicable for the Fund fairly to determine the
value of its net assets, or for such other period as the Securities and Exchange
Commission may by order permit for the protection of the shareholders of the
Fund.

Redemption requests received by the Fund's transfer agent before 12 noon, New
York City time, on any Fund Business Day become effective at 12 noon that day.
Shares redeemed are not entitled to participate in dividends declared on the day
a redemption becomes effective. A redemption request received after 12 noon, New
York City time, on any Fund Business Day becomes effective on the next Fund
Business Day.

The Fund has reserved the right to redeem the shares of any shareholder if the
net asset value of all the remaining shares in the shareholder's or his
Participating Organization's account after a withdrawal is less than $500.
Written notice of a proposed mandatory redemption will be given at least 30 days
in advance to any shareholder whose account is to be redeemed or the Fund may
impose a monthly service charge of $10 on such accounts. For Participant
Investor accounts, notice of a proposed mandatory redemption will be given only
to the appropriate Participating Organization, and the Participating
Organization will be responsible for notifying the Participant Investor of the
proposed mandatory redemption. During the notice period a shareholder or
Participating Organization who receives such a notice may avoid mandatory
redemption by purchasing sufficient additional shares to increase the total net
asset value to at least the minimum amount and thereby avoid such mandatory
redemption.

The redemption of shares may result in the investor's receipt of more or less
than he paid for his shares and, thus, in a taxable gain or loss to the
investor.

Investments Through
Participating Organizations

Participant Investors may, if they wish, invest in the Fund through the
Participating Organizations with which they have accounts. "Participating
Organizations" are securities brokers, banks and financial institutions or other
industry professionals or organizations which have entered into shareholder
servicing agreements with the Manager with respect to investment of their
customer accounts in the Fund. When instructed by its customer to purchase or
redeem Fund shares, the Participating Organization, on behalf of the customer,
transmits to the Fund's transfer agent a purchase or redemption order, and in
the case of a purchase order, payment for the shares being purchased.

Participating Organizations may confirm to their customers who are shareholders
in the Fund each purchase and redemption of Fund shares for the
15

<PAGE>

customers' accounts. Also, Participating Organizations may send their customers
periodic account statements showing the total number of Fund shares owned by
each customer as of the statement closing date, purchases and redemptions of
Fund shares by each customer during the period covered by the statement and the
income earned by Fund shares of each customer during the statement period
(including dividends paid in cash or reinvested in additional Fund shares).
Participant Investors whose Participating Organizations have not undertaken to
provide such confirmations and statements will receive them from the Fund
directly.

Participating Organizations may charge Participant Investors a fee in connection
with their use of specialized purchase and redemption procedures offered to
Participant Investors by the Participating Organizations. In addition,
Organizations offering purchase and redemption procedures similar to those
offered to shareholders who invest in the Fund directly may impose charges,
limitations, minimums and restrictions in addition to or different from those
applicable to shareholders who invest in the Fund directly. Accordingly, the net
yield to investors who invest through Participating Organizations may be less
than by investing in the Fund directly. A Participant Investor should read this
Prospectus in conjunction with the materials provided by the Participating
Organization describing the procedures under which Fund shares may be purchased
and redeemed through the Participating Organization.

The Glass-Steagall Act limits the ability of a depository institution to become
an underwriter or distributor of securities. However, it is the Fund
management's position that banks are not prohibited from acting in other
capacities for investment companies, such as providing administrative and
shareholder account maintenance services and receiving compensation from the
Manager for providing such services. However, this is an unsettled area of the
law and if a determination contrary to the Fund management's position is made by
a bank regulatory agency or court concerning shareholder servicing and
administration payments to banks from the Manager, any such payments will be
terminated and any shares registered in the banks' names, for their underlying
customers, will be reregistered in the name of the customers at no cost to the
Fund or its shareholders. In addition, state securities laws on this issue may
differ from the interpretations of Federal law expressed herein and banks and
financial institutions may be required to register as dealers pursuant to state
law.

In the case of qualified Participating Organizations, orders received by the
Fund's transfer agent before 12 noon, New York City time, on a Fund Business
Day, without accompanying Federal Funds will result in the issuance of shares on
that day provided that the Federal Funds required in connection with the orders
are received by the Fund's transfer agent before 4:00 p.m., New York City time,
on that day. Orders for which Federal Funds are received after 4:00 p.m., New
York City time, will not result in share issuance until the following Fund
Business Day. Participating Organizations are responsible for instituting
procedures to insure that purchase orders by their respective clients are
processed expeditiously.

Direct Purchase and Redemption Procedures

The following purchase and redemption procedures apply to investors who wish to
invest in the Fund directly and not through Participating Organizations. These
investors may obtain a current prospectus and the subscription order form
necessary to open an account by telephoning the Fund at the following numbers:

Within New York State 212-830-5280
Outside New York State (toll free) 800-433-1918

All shareholders, other than certain Participant Investors, will receive from
the Fund individual confirmations of each purchase and redemption of Fund shares
and a monthly statement listing the total number of Fund shares owned as of the
statement closing date, purchase and redemptions of Fund shares during the month
covered by the statement and the dividends paid on Fund shares
16

<PAGE>

of each shareholder during the statement period (including dividends paid in
cash or reinvested in additional Fund shares).

Initial Purchases of Shares

Mail

Investors may send a check made payable to "Pennsylvania Daily Municipal Income
Fund" along with a completed subscription order form to:

Pennsylvania Daily Municipal Income Fund
c/o Reich & Tang Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020

Checks are accepted subject to collection at full value in United States
currency. Payment by a check drawn on any member of the Federal Reserve System
can normally be converted into Federal Funds within two business days after
receipt of the check. Checks drawn on a non-member bank may take substantially
longer to convert into Federal Funds. An investor's subscription will not be
accepted until the Fund receives Federal Funds.

Bank Wire

To purchase shares of the Fund using the wire system for transmittal of money
among banks, investors should first obtain a new account number by telephoning
the Fund at either 212-830-5280 (within New York State) or at 800-433-1918
(outside New York State). The investors should then instruct a member commercial
bank to wire money immediately to:

Investors Fiduciary Trust Company
Reich & Tang Funds
ABA # 101003621
DDA # 890752-954-6
For Pennsylvania Daily Municipal Income Fund
Account of (Investor's Name)
Fund Account # 0215
SS#/Tax I.D.#

The investor should then promptly complete and mail the subscription order form.

Investors planning to wire funds should instruct their bank early in the day so
the wire transfer can be accomplished before 12 noon, New York City time, on
that same day. There may be a charge by the investor's bank for transmitting the
money by bank wire, and there also may be a charge for use of Federal Funds. The
Fund does not charge investors in the Fund for its receipt of wire transfers.
Payment in the form of a "bank wire" received prior to 12 noon, New York City
time, on a Fund Business Day will be treated as a Federal Funds payment received
on that day.

Personal Delivery

Deliver a check made payable to "Pennsylvania Daily Municipal Income Fund" along
with a completed subscription order form to:

Reich & Tang Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020

Electronic Funds Transfers (EFT)
Pre-authorized Credit and
Direct Deposit Privilege

You may purchase shares of the Fund (minimum of $100) by having salary, dividend
payments, interest payments or any other payments designated by you, or by
having federal salary, social security, or certain veteran's, military or other
payments from the federal government, automatically deposited into your Fund
account. You can also have money debited from your checking account. To enroll
in any one of these programs, you must file with the Fund a completed EFT
Application, Pre-authorized Credit Application, or a Direct Deposit Sign-Up Form
for each type of payment that you desire to include in the Privilege. The
appropriate form may be obtained from your broker or the Fund. Death or legal
incapacity will automatically terminate your participation in the Privilege. You
may elect at any time to terminate your participation by notifying in writing
the appropriate depositing entity and/or federal agency. Further, the Fund may
terminate your participation upon 30 days' notice to you.

Subsequent Purchases of Shares

Subsequent purchases can be made by personal delivery or by bank wire, as
indicated above, or by mailing a check to:

<PAGE>
Pennsylvania Daily Municipal Income Fund
Mutual Funds Group
P.O. Box 13232
Newark, New Jersey 07101-3232

There is a $100 minimum for subsequent purchases of shares. All payments should
clearly indicate the shareholder's account number.

Provided that the information on the subscription form on file with the Fund is
still applicable, a shareholder may reopen an account without filing a new
subscription order form at any time during the year the shareholder's account is
closed or during the following calendar year.

Redemption of Shares

A redemption is effected immediately following, and at a price determined in
accordance with, the next determination of net asset value per share of each
Class following receipt by the Fund's transfer agent of the redemption order
(and any supporting documentation which it may require). Normally, payment for
redeemed shares is made on the same Fund Business Day after the redemption is
effected, provided the redemption request is received prior to 12 noon, New York
City time. However, redemption payments will not be effected unless the check
(including a certified or cashier's check) used for investment has been cleared
for payment by the investor's bank and converted into Federal Funds. A bank
check will be considered by the Fund to have cleared 15 days after it is
deposited by the Fund.

A shareholder's original subscription order form permits the shareholder to
redeem by written request and to elect one or more of the additional redemption
procedures described below. A shareholder may only change the instructions
indicated on his original subscription order form by transmitting a written
direction to the Fund's transfer agent. Requests to institute or change any of
the additional redemption procedures will require a signature guarantee. When a
signature guarantee is called for, the shareholder should have "Signature
Guaranteed" stamped under his signature, signed and guaranteed by an eligible
guarantor institution which includes a domestic bank, a domestic savings and
loan institution, a domestic credit union, a member bank of the Federal Reserve
System or a member firm of a national securities exchange, pursuant to the
Fund's transfer agent's standards and procedures.

Written Requests

Shareholders may make a redemption in any amount by sending a written request
to:

Pennsylvania Daily Municipal Income Fund
c/o Reich & Tang Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020

Normally the redemption proceeds are paid by check mailed to the shareholder of
record.

Checks

By making the appropriate election on their subscription form, shareholders may
request a supply of checks which may be used to effect redemptions from any one
or more of the Classes of shares in the Fund in which they invest. The checks,
which will be issued in the shareholder's name, are drawn on a special account
maintained by the Fund with the Fund's agent bank. Checks may be drawn in any
amount of $250 or more. When a check is presented to the Fund's agent bank for
payment, it instructs the Fund's transfer agent to redeem a sufficient number of
full and fractional shares in the shareholder's account to cover the amount of
the check. The use of a check to make a withdrawal enables a shareholder in the
Fund to receive dividends on the shares to be redeemed up to the Fund Business
Day on which the check clears. Checks provided by the Fund may not be certified.
Fund shares purchased by check may not be redeemed by check for up to 15 days
following the date of purchase.

There is no charge to the shareholder for checks provided by the Fund. The Fund
reserves the right to impose a charge or impose a different minimum check amount
in the future, if the Board of Trustees determines that doing so is in the best
interests of the Fund and its shareholders.

<PAGE>

Shareholders electing the checking option are subject to the procedures, rules
and regulations of the Fund's agent bank. Checks drawn on a jointly owned
account may, at the shareholder's election, require only one signature. The
Fund's agent bank will not honor checks which are in amounts exceeding the value
of the shareholder's account at the time the check is presented for payment.
Since the dollar value of the account changes daily, the total value of the
account may not be determined in advance and the account may not be entirely
redeemed by check. In addition, the Fund reserves the right to charge the
shareholder's account a fee up to $20 for checks not honored as a result of an
insufficient account value, a check deemed not negotiable because it has been
held longer than six months, an unsigned check and a post-dated check. The Fund
reserves the right to terminate or modify the check redemption procedure at any
time or to impose additional fees following notification to the Fund's
shareholders.

Investors wishing to avail themselves of this method of redemption should elect
it on their subscription order form. Individuals and joint tenants are not
required to furnish any supporting documentation. Corporations and other
entities making this election, however, are required to furnish a certified
resolution or other evidence of authorization in accordance with the Fund's
normal practices. Appropriate authorization forms will be sent by the Fund or
its agents to corporations and other shareholders who select this option. As
soon as the authorization forms are filed in good order with the Fund's agent
bank, it will provide the shareholder with a supply of checks. This checking
service may be terminated or modified at any time upon notification to
shareholders.

Telephone

The Fund accepts telephone requests for redemption from shareholders who elect
this option. The proceeds of a telephone redemption may be sent to the
shareholders at their addresses or, if in excess of $1,000, to their bank
accounts, both as set forth in the subscription order form or in a subsequent
written authorization. The Fund may accept telephone redemption instructions
from any person with respect to accounts of shareholders who elect this service
and thus such shareholders risk possible loss of principal and interest in the
event of a telephone redemption not authorized by them. The Fund will employ
reasonable procedures to confirm that telephone redemption instructions are
genuine, and will require that shareholders electing such option provide a form
of personal identification. The failure by the Fund to employ such reasonable
procedures may cause the Fund to be liable for the losses incurred by investors
due to telephone redemptions based upon unauthorized or fraudulent instructions.

A shareholder making a telephone withdrawal should call the Fund at
212-830-5280; outside New York State at 800-433-1918 and state (i) the name of
the shareholder appearing on the Fund's records, (ii) the shareholder's account
number with the Fund, (iii) the amount to be withdrawn, (iv) whether such amount
is to be forwarded to the shareholder's designated bank account or address and
(v) the name of the person requesting the redemption. Usually the proceeds are
sent to the designated bank account or address on the same Fund Business Day the
redemption is effected, provided the redemption request is received before 12
noon, New York City time and on the next Fund Business Day if the redemption
request is received after 12 noon, New York City time. The Fund reserves the
right to terminate or modify the telephone redemption service in whole or in
part at any time and will notify the shareholders accordingly.

Exchange Privilege

Shareholders of the Fund are entitled to exchange some or all of a Class of
their shares in the Fund for shares of certain other investment companies which
retain Reich & Tang Asset Management L.P. as investment adviser and which
participate in the exchange privilege program with the Fund. If only one Class
of shares is available in a particular Fund, the shareholder of the Fund is

<PAGE>

entitled to exchange his or her shares for shares available in that Fund.
Currently the exchange privilege program has been established between the Fund
and California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free
Income Fund, Inc., Daily Tax Free Income Fund, Inc., Florida Daily Municipal
Income Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North
Carolina Daily Municipal Income Fund, Inc., Reich & Tang Equity Fund, Inc. and
Short Term Income Fund, Inc. In the future, the exchange privilege program may
be extended to other investment companies which retain Reich & Tang Asset
Management L.P. as investment adviser, manager or administrator.

There is no charge for the exchange privilege or limitation as to frequency of
exchange. The minimum amount for an exchange is $1,000, except that shareholders
who are establishing a new account with an investment company through the
exchange privilege must ensure that a sufficient number of shares are exchanged
to meet the minimum initial investment required for the investment company into
which the exchange is being made. Each Class of shares is exchanged at its
respective net asset value.

The exchange privilege provides shareholders of the Fund with a convenient
method to shift their investment among different investment companies when they
feel such a shift is desirable. The exchange privilege is available to
shareholders resident in any state in which shares of the investment company
being acquired may legally be sold. Shares may be exchanged only between the
same Class of shares of investment company accounts registered in identical
names. Before making an exchange, the investor should review the current
prospectus of the investment company into which the exchange is to be made.

An exchange pursuant to the exchange privilege is treated for Federal income tax
purposes as a sale on which a shareholder may realize a taxable gain or loss.

Instructions for exchanges may be made by sending a signature guaranteed written
request to:

Pennsylvania Daily Municipal Income Fund
c/o Reich & Tang Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020

or, for shareholders who have elected that option, by telephone. The Fund
reserves the right to reject any exchange request and may modify or terminate
the exchange privilege at any time and will notify the shareholders accordingly.

Specified Amount Automatic Withdrawal Plan

Shareholders may elect to withdraw shares and receive payment from the Fund of a
specified amount of $50 or more automatically on a monthly basis in an amount
approved and confirmed by the Manager. A specified amount plan payment is made
by the Fund on the 23rd day of each month. Whenever such 23rd day of a month is
not a Fund Business Day, the payment date is the Fund Business Day preceding the
23rd day of the month. In order to make a payment, a number of shares equal in
aggregate net asset value to the payment amount are redeemed at their net asset
value on the Fund Business Day immediately preceding the date of payment. To the
extent that the redemptions to make plan payments exceed the number of shares
purchased through reinvestment of dividends and distributions, the redemptions
reduce the number of shares purchased on original investment, and may ultimately
liquidate a shareholder's investment.

The election to receive automatic withdrawal payments may be made at the time of
the original subscription by so indicating on the subscription order form. The
election may also be made, changed or terminated at any later time by the
participant. Because the withdrawal plan involves the redemption of Fund shares,
such withdrawals may constitute taxable events to the shareholder, but the Fund
does not expect that there will be any realizable capital gains.
20

<PAGE>

DISTRIBUTION AND SERVICE PLAN

Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission has required that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by Rule 12b-1. The Fund's Board of Trustees has adopted a
distribution and service plan (the "Plan") and, pursuant to the Plan, the Fund
and Reich & Tang Distributors L.P. (the "Distributor") have entered into a
Distribution Agreement and a Shareholder Servicing Agreement (with respect to
the Class A shares of the Fund) as distributor of the Fund's shares.

Reich & Tang Asset Management, Inc. serves as the sole general partner for both
Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P., and Reich
& Tang Asset Management L.P. serves as the sole limited partner of the
Distributor.

Under the Distribution Agreement, the Distributor, for nominal consideration and
as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.

Under the Shareholder Servicing Agreement, the Distributor receives (with
respect to the Class A shares) from the Fund a service fee equal to .25% per
annum of the Fund's average daily net assets (the "Service Fee") for providing
personal shareholder services and/or for the maintenance of shareholder
accounts. This fee is accrued daily and paid monthly and any portion of the fee
may be deemed to be used by the Distributor for payments to Participating
Organizations with respect to their provision of such services to their clients
or customers who are shareholders of the Class A shares of the Fund. The Class B
shareholders will not receive the benefit of such services from Participating
Organizations and, therefore, will not be assessed a Rule 12b-1 fee.

The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Service Fee, the Fund will pay for (i) telecommunications expenses including
the cost of dedicated lines and CRT terminals, incurred by the Distributor and
Manager in carrying out their obligations under the Shareholder Servicing
Agreement and (ii) preparing, printing and delivering the Fund's prospectus to
existing shareholders of the Fund and preparing and printing subscription
application forms for shareholder accounts.

The Plan provides that the Manager may make payments from time to time from its
own resources, which may include the management fee, and past profits for the
following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements, for performing shareholder servicing and related
administrative functions on behalf of the Fund; (ii) to compensate certain
Participating Organizations for providing assistance in distributing the Fund's
shares; and (iii) to pay the costs of printing and distributing the Fund's
prospectus to prospective investors, and to defray the cost of the preparation
and printing of brochures and other promotional materials, mailings to
prospective shareholders, advertising, and other promotional activities,
including the salaries and/or commissions of sales personnel in connection with
the distribution of the Fund's shares. The Distributor may also make payments
from time to time from its own resources, which may include the Service Fee and
past profits, for the purposes enumerated in (i) above. The Distributor will
determine the amount of such payments made pursuant to the Plan, provided that
such payments will not increase the amount which the Fund is required to pay to
the Manager and the Distributor for any fiscal year under either the Investment
Management Contract in effect for that year or the Shareholder Servicing
Agreement in effect for that year. For the fiscal year ended November 30, 1996,
the total amount spent

<PAGE>

pursuant to the Plan was .31% of the average daily net assets of the Fund. Of
such amount, .03% was paid directly by the Fund and .28% was paid by the Manager
(which may be deemed an indirect payment by the Fund).

FEDERAL INCOME TAXES

The Fund has elected to qualify under the Code as a regulated investment company
that distributes "exempt-interest dividends" as defined in the Code. The Fund's
policy is to distribute as dividends each year 100% (and in no event less than
90%) of its tax-exempt interest income, net of certain deductions, and its
investment company taxable income (if any). If distributions are made in this
manner, dividends designated as derived from the interest earned on Municipal
Obligations are "exempt-interest dividends" and are not subject to regular
Federal income tax, although such "exempt-interest dividends" may be subject to
Federal alternative minimum tax. Dividends paid from taxable income, if any, and
distributions of any realized short-term capital gains (whether from tax-exempt
or taxable obligations) are taxable to shareholders as ordinary income for
Federal income tax purposes, whether received in cash or reinvested in
additional shares of the Fund. The Fund will inform shareholders of the amount
and nature of its income and gains in a written notice mailed to shareholders
not later than 60 days after the close of the Fund's taxable year. For Social
Security recipients, interest on tax-exempt bonds, including tax-exempt interest
dividends paid by the Fund, is to be added to adjusted gross income for purposes
of computing the amount of Social Security benefits includible in gross income.

Interest on certain "private activity bonds" (generally, a bond issue in which
more than 10% of the proceeds are used for a non-governmental trade or business
and which meets the private security or payment test, or a bond issue which
meets the private loan financing test) issued after August 7, 1986 will
constitute an item of tax preference subject to the individual alternative
minimum tax.

With respect to variable rate demand instruments, including participation
certificates therein, the Fund is relying on the opinion of Battle Fowler LLP,
counsel to the Fund, that it will be treated for Federal income tax purposes as
the owner thereof and that the interest on the underlying Municipal Obligations
will be exempt from regular Federal income taxes to the Fund. Counsel has
pointed out that the Internal Revenue Service has announced that it will not
ordinarily issue advance rulings on the question of the ownership of securities
or participation interests therein subject to a put and could reach a conclusion
different from that reached by counsel. (See "Federal Income Taxes" in the
Statement of Additional Information.)

In South Carolina v. Baker, the U.S. Supreme Court held that the Federal
government may constitutionally require states to register bonds they issue and
may subject the interest on such bonds to Federal tax if not registered, and the
Court further held that there is no constitutional prohibition against the
Federal government's taxing the interest earned on state or other municipal
bonds. The Supreme Court decision affirms the authority of the Federal
government to regulate and control bonds such as the Municipal Obligations and
to tax such bonds in the future. The decision does not, however, affect the
current exemption from taxation of the interest earned on the Municipal
Obligations in accordance with Section 103 of the Code.

PENNSYLVANIA INCOME TAXES

The following is based upon the advice of Dechert Price & Rhoads, special
Pennsylvania counsel to the Fund.

Shares of the Fund are not subject to any of the personal property taxes
presently in effect in Pennsylvania to the extent of that proportion of the Fund
represented by Pennsylvania Municipal Obligations. The taxes referred to above
include the County Personal Property Tax, the additional personal property taxes
imposed on Pittsburgh residents by the School District of Pittsburgh and by the
City of Pittsburgh. Shares of the Fund may

<PAGE>

be taxable under the Pennsylvania iheritance and estate taxes.

The proportion of interest income representing interest income from Pennsylvania
Municipal Obligations distributed to shareholders of the Fund is not taxable
under the Pennsylvania Personal Income Tax or under the Corporate Net Income
Tax, nor will such interest be taxable under the Philadelphia School District
Investment Income Tax imposed on Philadelphia resident individuals.

The disposition by the Fund of a Pennsylvania Municipal Obligation (whether by
sale, exchange, redemption or payment at maturity) will not constitute a taxable
event to a shareholder under the Pennsylvania Personal Income Tax if the
Pennsylvania Municipal Obligation was issued prior to February 1, 1994. Further,
although there is no published authority on the subject, counsel is of the
opinion that (i) a shareholder of the Fund will not have a taxable event under
the Pennsylvania state and local income taxes referred to in the preceding
paragraph (other than the Corporate Net Income Tax) upon the redemption or sale
of his shares to the extent that the Fund is then comprised of Pennsylvania
Municipal Obligations issued prior to February 1, 1994 and (ii) the disposition
by the Fund of a Pennsylvania Municipal Obligation (whether by sale, exchange,
redemption or payment at maturity) will not constitute a taxable event to a
shareholder under the Corporation Income Tax or the Philadelphia School District
Investment Income Tax if the Pennsylvania Municipal Obligation was issued prior
to February 1, 1994. The School District tax has no application to gain on the
disposition of property held by the taxpayer for more than six months. Gains on
the sale, exchange, redemption, or payment at maturity of a Pennsylvania
Municipal Obligation issued on or after February 1, 1994, will be taxable under
all of these taxes, as will gains on the redemption or sale of a unit to the
extent that the Fund is comprised of Pennsylvania Municipal Obligations issued
on or after February 1, 1994.

The foregoing is a general, abbreviated summary of certain provisions of
Pennsylvania statutes and administrative interpretations presently in effect
governing the taxation of shareholders of the Fund. These provisions are subject
to change by legislative or administrative action, and any such change may be
retroactive with respect to Fund transactions. Shareholders are advised to
consult with their own tax advisers for more detailed information concerning
Pennsylvania tax matters.

GENERAL INFORMATION

The Fund was established as a Massachusetts business trust under the laws of
Massachusetts on July 30, 1992 and it is registered with the Securities and
Exchange Commission as a non-diversified, open-end management investment
company.

The Fund prepares semi-annual unaudited and annual audited reports which include
a list of investment securities held by the Fund and which are sent to
shareholders.

<PAGE>

Trustee sooner dies, resigns, retires or is removed by the vote of the
shareholders.

For further information with respect to the Fund and the shares offered hereby,
reference is made to the Fund's Registration Statement filed with the Securities
and Exchange Commission, including the exhibits thereto. The Registration
Statement and the exhibits thereto may be examined at the Commission and copies
thereof may be obtained upon payment of certain duplicating fees.

NET ASSET VALUE

The net asset value of each Class of the Fund's shares is determined as of 12
noon, New York City time, on each Fund Business Day. Fund Business Day means
weekdays (Monday through Friday) except customary business holidays and Good
Friday. It is computed by dividing the value of the Fund's net assets (i.e., the
value of its securities and other assets less its liabilities, including
expenses payable or accrued but excluding capital stock and surplus) by the
total number of shares outstanding.

The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, except that if fluctuating
interest rates cause the market value of the Fund's portfolio to deviate more
than 1/2 of 1% from the value determined on the basis of amortized cost, the
Board of Trustees will consider whether any action should be initiated. Although
the amortized cost method provides certainty in valuation, it may result in
periods during which the value of an instrument is higher or lower than the
price an investment company would receive if the instrument were sold. The Fund
intends to maintain a stable net asset value at $1.00 per share although there
can be no assurance that this will be achieved.

CUSTODIAN AND TRANSFER AGENT

Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105 is custodian for the Fund's cash and securities. Reich & Tang Services
L.P., 600 Fifth Avenue, New York, New York 10020 is the transfer agent and
dividend agent for the shares of the Fund. The Fund's transfer agent and
custodian does not assist in, and is not responsible for, investment decisions
involving assets of the Fund.

<PAGE>

Table of Contents

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

Table of Fees and Expenses.....................2
Selected Financial Information.................3
Introduction...................................4
Investment Objectives,
Policies and Risks...........................5
Risk Factors...................................10
Management of the Fund.........................11
Description of Shares..........................13
Dividends and Distributions....................13 PENNSYLVANIA
How to Purchase and Redeem Shares..............14 DAILY MUNICIPAL
Investments Through INCOME
Participating Organizations................15 FUND
Direct Purchase and
Redemption Procedures ....................16
Initial Purchases of Shares..................17
Electronic Funds Transfers (EFT),
Pre-authorized Credit and
Direct Deposit Privilege..................17 PROSPECTUS
Subsequent Purchases of Shares...............17 April 1, 1997
Redemption of Shares.........................18
Exchange Privilege...........................19
Specified Amount Automatic
Withdrawal Plan...........................20
Distribution and Service Plan..................21
Federal Income Taxes...........................22
Pennsylvania Income Taxes......................22
General Information ...........................23
Net Asset Value................................24
Custodian and Transfer Agent...................24
<PAGE>
PENNSYLVANIA
DAILY MUNICIPAL 600 Fifth Avenue, New York, NY 10020
INCOME FUND (212) 830-5220
================================================================================

STATEMENT OF ADDITIONAL INFORMATION
April 1, 1997

This Statement of Additional Information, although not in itself a Prospectus,
expands upon and supplements the information contained in the current Prospectus
of Pennsylvania Daily Municipal Income Fund (the "Fund"), dated April 1, 1997
and should be read in conjunction with the Prospectus. The Fund's Prospectus may
be obtained from any Participating Organization or by writing or calling the
Fund. This Statement of Additional Information is incorporated by reference into
the Prospectus in its entirety.

<TABLE>
<CAPTION>
Table of Contents

<S> <C> <C> <C>
Investment Objectives, Yield Quotations.......................................16
Policies and Risks.......................................2 Manager................................................17
Description of Municipal Obligations.........................4 Expense Limitation...................................19
Variable Rate Demand Instruments Management of the Fund.................................19
and Participation Certificates.........................5 Compensation Table.................................21
When-Issued Securities...................................7 Counsel and Auditors...............................22
Stand-by Commitments.....................................8 Distribution and Service Plan..........................22
Taxable Securities...........................................9 Description of Shares..................................23
Repurchase Agreements....................................9 Federal Income Taxes...................................24
Pennsylvania Risk Factors....................................9 Pennsylvania Income Taxes..............................26
Investment Restrictions.....................................14 Custodian and Transfer Agent...........................27
Portfolio Transactions......................................15 Description of Ratings.................................28
How to Purchas Taxable Equivalent Yield Tables........................29
and Redeem Shares.......................................16 Independent Auditor's Report...........................31
Net Asset Value.............................................16 Financial Statements...................................32

</TABLE>

<PAGE>

INVESTMENT OBJECTIVES, POLICIES AND RISKS

As stated in the Prospectus, the Fund is a non-diversified, open-end management
investment company that is a short-term, tax-exempt money market fund. The
Fund's investment objectives are to seek as high a level of current income,
exempt from regular Federal tax and, to the extent possible, Pennsylvania income
taxes (the "Pennsylvania Income Tax"), as is believed to be consistent with
preservation of capital, maintenance of liquidity and stability of principal. No
assurance can be given that these objectives will be achieved. The following
discussion expands upon the description of the Fund's investment objectives,
policies and risks in the Prospectus.

The Fund's assets will be invested primarily (i.e., at least 80% of net assets)
in high quality debt obligations issued by or on behalf of the Commonwealth of
Pennsylvania, other states, territories and possessions of the United States and
their authorities, agencies, instrumentalities and political subdivisions, the
interest on which is, in the opinion of bond counsel to the issuer at the date
of issuance, currently exempt from regular Federal income taxation ("Municipal
Obligations") and in participation certificates (which, in the opinion of Battle
Fowler LLP, counsel to the Fund, cause the Fund to be treated as the owner of
the underlying Municipal Obligations) in Municipal Obligations purchased from
banks, insurance companies or other financial institutions. Dividends paid by
the Fund which are "exempt-interest dividends" by virtue of being properly
designated by the Fund as derived from Municipal Obligations and participation
certificates in Municipal Obligations will be exempt from Federal income tax
provided the Fund complies with Section 852(b)(5) of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). Although the Supreme
Court has determined that Congress has the authority to subject the interest on
bonds such as the Municipal Obligations to regular Federal income taxation,
existing law excludes such interest from regular Federal income tax. However,
"exempt-interest dividends" may be subject to the Federal alternative minimum
tax.

Securities, the interest income on which may be subject to the Federal
alternative minimum tax (including participation certificates in such
securities), may be purchased by the Fund without limit. Securities, the
interest income on which is subject to regular Federal, state and local income
tax, will not exceed 20% of the value of the Fund's net assets. (See "Federal
Income Taxes" herein.) Exempt-interest dividends paid by the Fund that are
correctly identified by the Fund as derived from obligations issued by or on
behalf of the Commonwealth of Pennsylvania or any Pennsylvania local
governments, or their instrumentalities, authorities or districts ("Pennsylvania
Municipal Obligations") will be exempt from the Pennsylvania Income Tax.
Exempt-interest dividends correctly identified by the Fund as derived from
obligations of Puerto Rico and the Virgin Islands, as well as any other types of
obligations that Pennsylvania is prohibited from taxing under the Constitution,
the laws of the United States of America or the Pennsylvania Constitution
("Territorial Municipal Obligations"), also should be exempt from Pennsylvania
Income Tax provided the Fund complies with Pennsylvania laws. (See "Pennsylvania
Income Taxes" herein.) To the extent that suitable Pennsylvania Municipal
Obligations are not available for investment by the Fund, the Fund may purchase
Municipal Obligations issued by other states, their agencies and
instrumentalities, the dividends on which will be designated by the Fund as
derived from interest income which will be, in the opinion of bond counsel to
the issuer at the date of issuance, exempt from regular Federal income tax but
will be subject to the Pennsylvania Income Tax. Except as a temporary defensive
measure during periods of adverse market conditions as determined by the
Manager, the Fund will invest at least 65% of its total assets in Pennsylvania
Municipal Obligations, although the exact amount of the Fund's assets invested
in such securities will vary from time to time. The Fund seeks to maintain an
investment portfolio with a dollar-weighted average maturity of 90 days or less
and to value its investment portfolio at amortized cost and maintain a net asset
value of a $1.00 per share of each Class. There can be no assurance that this
value will be maintained.

The Fund may hold uninvested cash reserves pending investment. The Fund's
investments may include "when-issued" Municipal Obligations, stand-by
commitments and taxable repurchase agreements. Although the Fund will attempt to
invest 100% of its assets in Municipal Obligations and in participation
certificates in Municipal Obligations, the Fund reserves the right to invest up
to 20% of the value of its net assets in securities, the interest income on
which is subject to regular Federal, state and local income tax. The Fund will
invest more than 25% of its assets in participation certificates purchased from
banks in industrial revenue bonds and other Pennsylvania Municipal Obligations.
In view of this "concentration" in bank participation certificates in
Pennsylvania Municipal Obligations, an investment in Fund shares should be made
with an

<PAGE>
understanding of the characteristics of the banking industry and the risks which
such an investment may entail. (See "Variable Rate Demand Instruments and
Participation Certificates" herein.) The investment objectives of the Fund
described in the preceding paragraphs of this section may not be changed unless
approved by the holders of a majority of the outstanding shares of the Fund that
would be affected by such a change. As used herein, the term "majority of the
outstanding shares" of the Fund means, respectively, the vote of the lesser of
(i) 67% or more of the shares of the Fund present at a meeting, if the holders
of more than 50% of the outstanding shares of the Fund are present or
represented by proxy or (ii) more than 50% of the outstanding shares of the
Fund.

The Fund may only purchase Municipal Obligations that have been determined by
the Fund's Board of Trustees to present minimal credit risks and that are
Eligible Securities at the time of acquisition. The term Eligible Securities
means (i) Municipal Obligations with remaining maturities of 397 days or less
and rated in the two highest short-term rating categories by any two nationally
recognized statistical rating organizations ("NRSROs") or in such categories by
the only NRSRO that has rated the Municipal Obligations (collectively, the
"Requisite NRSROs") (acquisition in the latter situation must also be ratified
by the Board of Trustees); (ii) Municipal Obligations with remaining maturities
of 397 days or less but that at the time of issuance were long-term securities
(i.e., with maturities greater than 366 days) and whose issuer has received from
the Requisite NRSROs a rating with respect to comparable short-term debt in the
two highest short-term rating categories; and (iii) unrated Municipal
Obligations determined by the Fund's Board of Trustees to be of comparable
quality. Where the issuer of a long-term security with a remaining maturity
which would otherwise qualify it as an Eligible Security, does not have rated
short-term debt outstanding, the long-term security is treated as unrated but
may not be purchased if it has a long-term rating from any NRSRO that is below
the two highest long-term categories. A determination of comparability by the
Board of Trustees is made on the basis of its credit evaluation of the issuer,
which may include an evaluation of a letter of credit, guarantee, insurance or
other credit facility issued in support of the Municipal Obligations or
participation certificates. (See "Variable Rate Demand Instruments and
Participation Certificates" herein.) While there are several organizations that
currently qualify as NRSROs, two examples of NRSROs are Standard & Poor's Rating
Services, a division of the McGraw-Hill Companies ("S&P") and Moody's Investors
Service, Inc. ("Moody's"). The two highest ratings by S&P and Moody's are "AAA"
and "AA" by S&P in the case of long-term bonds and "Aaa" and "Aa" by Moody's in
the case of bonds; "MIG-1" and "MIG-2" by Moody's in the case of notes; "A-1"
and "A-2" by S&P or "Prime-1" and "Prime-2" by Moody's in the case of tax-exempt
commercial paper. Such instruments may produce a lower yield than would be
available from less highly rated instruments. The Fund's Board of Trustees has
determined that Municipal Obligations which are backed by the credit of the
Federal Government will be considered to have a rating equivalent to Moody's
"Aaa". (See "Description of Ratings" herein.)

As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the Investment Company Act of 1940 (the "1940 Act")
with respect to investing its assets in one or relatively few issuers. This
non-diversification may present greater risks than in the case of a diversified
company. However, the Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code. The Fund will be
restricted in that at the close of each quarter of the taxable year, at least
50% of the value of its total assets must be represented by cash, government
securities, investment company securities and other securities limited in
respect of any one issuer to not more than 5% in value of the total assets of
the Fund and to not more than 10% of the outstanding voting securities of such
issuer. In addition, at the close of each quarter of its taxable year, not more
than 25% in value of the Fund's total assets may be invested in securities of
one issuer other than Government securities. The limitations described in this
paragraph regarding qualification as a "regulated investment company" are not
fundamental policies and may be revised to the extent applicable Federal income
tax requirements are revised. (See "Federal Income Taxes" herein.)
3

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DESCRIPTION OF MUNICIPAL OBLIGATIONS

As used in the Prospectus, "Municipal Obligations" include the following as well
as "Variable Rate Demand Instruments and Participation Certificates" as
discussed herein.

1. Municipal Bonds with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition.

Municipal Bonds are debt obligations of states, cities, counties,
municipalities and municipal agencies (all of which are generally referred
to as "municipalities") which generally have a maturity at the time of
issue of one year or more and which are issued to raise funds for various
public purposes such as construction of a wide range of public facilities,
to refund outstanding obligations and to obtain funds for institutions and
facilities.

The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by
the issuer's pledge of its faith, credit and taxing power for the payment
of principal and interest. Issuers of general obligation bonds include
states, counties, cities, towns and other governmental units. The principal
of and interest on revenue bonds are payable from the income of specific
projects or authorities and generally are not supported by the issuer's
general power to levy taxes. In some cases, revenues derived from specific
taxes are pledged to support payments on a revenue bond.

In addition, certain kinds of "private activity bonds" are issued by public
authorities to provide funding for various privately operated industrial
facilities (hereinafter referred to as "industrial revenue bonds" or
"IRBs"). Interest on the IRBs is generally exempt, with certain exceptions,
from regular Federal income tax pursuant to Section 103(a) of the Code,
provided the issuer and corporate obligor thereof continue to meet certain
conditions. (See "Federal Income Taxes" herein.) IRBs are, in most cases,
revenue bonds and do not generally constitute the pledge of the credit of
the issuer of such bonds. The payment of the principal and interest on IRBs
usually depends solely on the ability of the user of the facilities
financed by the bonds or other guarantor to meet its financial obligations
and, in certain instances, the pledge of real and personal property as
security for payment. If there is no established secondary market for the
IRBs, the IRBs or the participation certificates in IRBs purchased by the
Fund will be supported by letters of credit, guarantees or insurance that
meet the definition of Eligible Securities at the time of acquisition and
provide the demand feature which may be exercised by the Fund at any time
to provide liquidity. Shareholders should note that the Fund may invest in
IRBs acquired in transactions involving a Participating Organization. In
accordance with Investment Restriction 6 (herein), the Fund is permitted to
invest up to 10% of the portfolio in high quality, short-term Municipal
Obligations (including IRBs) meeting the definition of Eligible Securities
at the time of acquisition that may not be readily marketable or have a
liquidity feature.

2. Municipal Notes with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. The principal kinds of
Municipal Notes include tax anticipation notes, bond anticipation notes,
revenue anticipation notes and project notes. Notes sold in anticipation of
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuing municipality or agency. Project notes
are issued by local agencies and are guaranteed by the United States
Department of Housing and Urban Development. Project notes are also secured
by the full faith and credit of the United States. The Fund's investments
may be concentrated in Municipal Notes of Pennsylvania issuers.

3. Municipal Commercial Paper that is an Eligible Security at the time of
acquisition. Issues of Municipal Commercial Paper typically represent very
short-term, unsecured, negotiable promissory notes. These obligations are
often issued to meet seasonal working capital needs of municipalities or to
provide interim construction financing and are paid from general revenues
of municipalities or are refinanced with long-term debt. In most cases
Municipal Commercial Paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions which may be called upon in the
event of default by the issuer of the commercial paper.

4. Municipal Leases, which may take the form of a lease or an installment
purchase or conditional sale contract, are issued by state and local
governments and authorities to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, telecommunications
equipment and other capital assets. Municipal Leases frequently have
special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved
4
<PAGE>

as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the
issuance of debt. The debt-issuance limitations of many state constitutions
and statutes are deemed to be inapplicable because of the inclusion in many
leases or contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. To reduce
this risk, the Fund will only purchase Municipal Leases subject to a
non-appropriation clause where the payment of principal and accrued
interest is backed by an unconditional irrevocable letter of credit, a
guarantee, insurance or other comparable undertaking of an approved
financial institution. These types of municipal leases may be considered
illiquid and subject to the 10% limitation of investments in illiquid
securities set forth under "Investment Restrictions" contained herein. The
Board of Trustees may adopt guidelines and delegate to the Manager the
daily function of determining and monitoring the liquidity of municipal
leases. In making such determination, the Board and the Manager may
consider such factors as the frequency of trades for the obligation, the
number of dealers willing to purchase or sell the obligations and the
number of other potential buyers and the nature of the marketplace for the
obligations, including the time needed to dispose of the obligations and
the method of soliciting offers. If the Board determines that any municipal
leases are illiquid, such lease will be subject to the 10% limitation on
investments in illiquid securities.

5. Any other Federal tax-exempt, and to the extent possible, Pennsylvania
Income tax-exempt obligations issued by or on behalf of states and
municipal governments and their authorities, agencies, instrumentalities
and political subdivisions, whose inclusion in the Fund would be consistent
with the Fund's "Investment Objectives, Policies and Risks" and permissible
under Rule 2a-7 under the 1940 Act.

Subsequent to its purchase by the Fund, a rated Municipal Obligation may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Trustees of the Fund shall reassess
promptly whether the Municipal Obligation presents minimal credit risks and
shall cause the Fund to take such action as the Board of Trustees determines in
the best interest of the Fund and its shareholders. However, reassessment is not
required if the Municipal Obligation is disposed of or matures within five
business days of the Manager becoming aware of the new rating and provided
further that the Board of Trustees is subsequently notified of the Manager's
actions.

In addition, in the event that a Municipal Obligation (1) is in default, (2)
ceases to be an Eligible Security or (3) there is a determination that it no
longer presents minimal credit risks, the Fund will dispose of the Municipal
Obligation absent a determination by the Fund's Board of Trustees that disposal
of the Municipal Obligation would not be in the best interests of the Fund. In
the event that the Municipal Obligation is disposed of it shall be disposed of
as soon as practicable consistent with achieving an orderly disposition by sale,
exercise of any demand feature or otherwise. In the event of a default with
respect to a Municipal Obligation which immediately before default accounted for
1/2 of 1% or more of the Fund's total assets, the Fund shall promptly notify the
Securities and Exchange Commission of such fact and of the actions that the Fund
intends to take in response to the situation. Certain obligations issued by
instrumentalities of the United States Government are not backed by the full
faith and credit of the United States Treasury but only by the creditworthiness
of the instrumentality. The Fund's Board of Trustees has determined that any
obligation that depends directly, or indirectly through a government insurance
program or other guarantee, on the full faith and credit of the United States
Government will be considered to have a rating in the highest category. Where
necessary to ensure that the Municipal Obligations are Eligible Securities or
where the obligations are not freely transferable, the Fund will require that
the obligation to pay the principal and accrued interest be backed by an
unconditional irrevocable bank letter of credit, a guarantee, insurance or other
comparable undertaking of an approved financial institution that would qualify
the investment as an Eligible Security.

Variable Rate Demand Instruments and Participation Certificates

Variable rate demand instruments that the Fund will purchase are tax-exempt
Municipal Obligations that provide for a periodic adjustment in the interest
rate paid on the instrument and permit the holder to demand payment of the
unpaid principal balance plus accrued interest at specified intervals upon a
specified number of days' notice either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to such
instrument.

The variable rate demand instruments in which the Fund may invest are payable on
not more than thirty calendar days' notice and may be exercised at any time or
at specified intervals not exceeding 397 days

<PAGE>
depending upon the terms of the instrument. The terms of the instruments provide
that interest rates are adjustable at intervals ranging from daily to up to 397
days and the adjustments are based upon the "prime rate"* of a bank or other
appropriate interest rate adjustment index as provided in the respective
instruments. The Fund will decide which variable rate demand instruments it will
purchase in accordance with procedures prescribed by its Board of Trustees to
minimize credit risks. A fund utilizing the amortized cost method of valuation
under Rule 2a-7 of the 1940 Act may only purchase variable rate demand
instruments only if (i) the instrument is subject to an unconditional demand
feature, exercisable by the Fund in the event of a default in the payment of
principal or interest on the underlying securities, that is an Eligible
Security, or (ii) the instrument is not subject to an unconditional demand
feature but does qualify as an Eligible Security and has a long-term rating by
the Requisite NRSROs in one of the two highest rating categories, or if unrated,
is determined to be of comparable quality by the Fund's Board of Trustees. The
Fund's Board of Trustees may determine that an unrated variable rate demand
instrument meets the Fund's high quality criteria if it is backed by a letter of
credit or guarantee or is insured by an insurer that meets the quality criteria
for the Fund stated herein or on the basis of a credit evaluation of the
underlying obligor. If an instrument is ever not deemed to be an Eligible
Security, the Fund either will sell it in the market or exercise the demand
feature.

The variable rate demand instruments that the Fund may invest in include
participation certificates purchased by the Fund from banks, insurance companies
or other financial institutions in fixed or variable rate, tax-exempt Municipal
Obligations (expected to be concentrated in IRBs) owned by such institutions or
affiliated organizations. The Fund will not purchase participation certificates
in fixed rate tax-exempt Municipal Obligations without obtaining an opinion of
counsel that the Fund will be treated as the owner thereof for Federal income
tax purposes. A participation certificate gives the Fund an undivided interest
in the Municipal Obligation in the proportion that the Fund's participation
interest bears to the total principal amount of the Municipal Obligation and
provides the demand repurchase feature described below. Where the institution
issuing the participation does not meet the Fund's eligibility criteria, the
participation is backed by an irrevocable letter of credit or guaranty of a bank
(which may be the bank issuing the participation certificate, a bank issuing a
confirming letter of credit to that of the issuing bank, or a bank serving as
agent of the issuing bank with respect to the possible repurchase of the
certificate of participation) or insurance policy of an insurance company that
the Board of Trustees of the Fund has determined meets the prescribed quality
standards for the Fund. The Fund has the right to sell the participation
certificate back to the institution and, where applicable, draw on the letter of
credit or insurance after no more than 30 days' notice either at any time or at
specified intervals not exceeding 397 days (depending on the terms of the
participation), for all or any part of the full principal amount of the Fund's
participation interest in the security plus accrued interest. The Fund intends
to exercise the demand only (1) upon a default under the terms of the bond
documents, (2) as needed to provide liquidity to the Fund in order to make
redemptions of Fund shares, or (3) to maintain a high quality investment
portfolio. The institutions issuing the participation certificates will retain a
service and letter of credit fee (where applicable) and a fee for providing the
demand repurchase feature, in an amount equal to the excess of the interest paid
on the instruments over the negotiated yield at which the participations were
purchased by the Fund. The total fees generally range from 5% to 15% of the
applicable prime rate or other interest rate index. With respect to insurance,
the Fund will attempt to have the issuer of the participation certificate bear
the cost of the insurance, although the Fund retains the option to purchase
insurance if necessary, in which case the cost of insurance will be an expense
of the Fund subject to the expense limitation. The Manager has been instructed
by the Fund's Board of Trustees to continually monitor the pricing, quality and
liquidity of the variable rate demand instruments held by the Fund, including
the participation certificates, on the basis of published financial information
and reports of the rating agencies and other bank analytical services to which
the Fund may subscribe. Although these instruments may be sold by the Fund, the
Fund intends to hold them until maturity, except under the circumstances stated
above. (See "Federal Income Taxes" herein.)

which may be charged. The profitability of this industry is largely dependent
upon the availability and cost of capital funds for the purpose of financing
lending operations under prevailing money market conditions. Also, general
economic conditions play an important part in the operations of this industry
and exposure to credit losses arising from possible financial difficulties of
borrowers might affect a bank's ability to meet its obligations under a letter
of credit. The Fund may invest 25% or more of the net assets of any portfolio in
securities that are related in such a way that an economic, business or
political development or change affecting one of the securities would also
affect the other securities including, for example, securities the interest upon
which is paid from revenues of similar type projects, or securities the issuers
of which are located in the same state.

While the value of the underlying variable rate demand instruments may change
with changes in interest rates generally, the variable rate nature of the
underlying variable rate demand instruments should minimize changes in value of
the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed income
securities. The portfolio may contain variable rate demand instruments on which
stated minimum or maximum rates, or maximum rates set by state law, limit the
degree to which interest on such variable rate demand instruments may fluctuate;
to the extent it does, increases or decreases in value may be somewhat greater
than would be the case without such limits. Additionally, the portfolio may
contain variable rate demand participation certificates in fixed rate Municipal
Obligations. The fixed rate of interest on these Municipal Obligations will be a
ceiling on the variable rate of the participation certificate. In the event that
interest rates increased so that the variable rate exceeded the fixed rate on
the Municipal Obligations, the Municipal Obligations could no longer be valued
at par and may cause the Fund to take corrective action, including the
elimination of the instruments from the portfolio. Because the adjustment of
interest rates on the variable rate demand instruments is made in relation to
movements of the applicable banks' "prime rates", or other interest rate
adjustment index, the variable rate demand instruments are not comparable to
long-term fixed rate securities. Accordingly, interest rates on the variable
rate demand instruments may be higher or lower than current market rates for
fixed rate obligations of comparable quality with similar maturities.

Because of the variable rate nature of the instruments, the Fund's yield will
decline and its shareholders will forego the opportunity for capital
appreciation during periods when prevailing interest rates have declined. On the
other hand, during periods where prevailing interest rates have increased, the
Fund's yield will increase and its shareholders will have reduced risk of
capital depreciation.

For purposes of determining whether a variable rate demand instrument held by
the Fund matures within 397 days from the date of its acquisition, the maturity
of the instrument will be deemed to be the longer of (1) the period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment. The maturity of a variable rate demand instrument will be determined
in the same manner for purposes of computing the Fund's dollar weighted average
portfolio maturity. If a variable rate demand instrument ceases to be an
Eligible Security, it will be sold in the market or through exercise of the
repurchase demand feature to the issuer.

When-Issued Securities

New issues of certain Municipal Obligations frequently are offered on a
when-issued basis. The payment obligation and the interest rate that will be
received on the Municipal Obligations are each fixed at the time the buyer
enters into the commitment although delivery and payment of the Municipal
Obligations normally take place within 45 days after the date of the Fund's
commitment to purchase. Although the Fund will only make commitments to purchase
when-issued Municipal Obligations with the intention of actually acquiring them,
the Fund may sell these securities before the settlement date if deemed
advisable by the Manager.

Municipal Obligations purchased on a when-issued basis and the securities held
in the Fund's portfolio are subject to changes in value (both generally changing
in the same way, that is, both experiencing appreciation when interest rates
decline and depreciation when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Purchasing Municipal Obligations on
a when-
7

<PAGE>
issued basis can involve a risk that the yields available in the market when the
delivery takes place may actually be higher or lower than those obtained in the
transaction itself. A separate account of the Fund consisting of cash or liquid
debt securities equal to the amount of the when-issued commitments will be
established at the Fund's custodian bank. For the purpose of determining the
adequacy of the securities in the account, the deposited securities will be
valued at market value. If the market or fair value of such securities declines,
additional cash or highly liquid securities will be placed in the account daily
so that the value of the account will equal the amount of such commitments by
the Fund. On the settlement date of the when-issued securities, the Fund will
meet its obligations from then-available cash flow, sale of securities held in
the separate account, sale of other securities or, although it would not
normally expect to do so, from sale of the when-issued securities themselves
(which may have a value greater or lesser than the Fund's payment obligations).
Sale of securities to meet such obligations may result in the realization of
capital gains or losses, which are not exempt from Federal income tax.

Stand-by Commitments

When the Fund purchases Municipal Obligations it may also acquire stand-by
commitments from banks and other financial institutions with respect to such
Municipal Obligations. Under a stand-by commitment, a bank or broker-dealer
agrees to purchase at the Fund's option a specified Municipal Obligation at a
specified price with same day settlement. A stand-by commitment is the
equivalent of a "put" option acquired by the Fund with respect to a particular
Municipal Obligation held in its portfolio.

The amount payable to the Fund upon its exercise of a stand-by commitment
normally would be (1) the acquisition cost of the Municipal Obligation
(excluding any accrued interest that the Fund paid on the acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the security, plus (2) all interest accrued on
the security since the last interest payment date during the period the security
was owned by the Fund. Absent unusual circumstances relating to a change in
market value, the Fund would value the underlying Municipal Obligation at
amortized cost. Accordingly, the amount payable by a bank or dealer during the
time a stand-by commitment is exercisable would be substantially the same as the
market value of the underlying Municipal Obligation.

The Fund's right to exercise a stand-by commitment would be unconditional and
unqualified. A stand-by commitment would not be transferable by the Fund,
although it could sell the underlying Municipal Obligation to a third party at
any time.

The Fund expects that stand-by commitments generally will be available without
the payment of any direct or indirect consideration. However, if necessary and
advisable, the Fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for outstanding
stand-by commitments held in the Fund's portfolio would not exceed 1/2 of 1% of
the value of the Fund's total assets calculated immediately after each stand-by
commitment was acquired.

The Fund would enter into stand-by commitments only with banks and other
financial institutions that, in the Manager's opinion, present minimal credit
risks and, where the Municipal Obligation does not meet the eligibility
criteria, only where the issuer of the stand-by commitment has received a rating
which meets the eligibility criteria or, if not rated, presents a minimal risk
of default as determined by the Board of Trustees. The Fund's reliance upon the
credit of these banks and broker-dealers would be supported by the value of the
underlying Municipal Obligations held by the Fund that were subject to the
commitment.

The Fund intends to acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The purpose of this practice is to permit the Fund to be fully
invested in securities the interest on which is exempt from Federal income taxes
while preserving the necessary liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions and to purchase at a later date
securities other than those subject to the stand-by commitment.

The acquisition of a stand-by commitment would not affect the valuation or
assumed maturity of the underlying Municipal Obligations which will continue to
be valued in accordance with the amortized cost method. Stand-by commitments
acquired by the Fund would be valued at zero in determining net asset value. In
those cases in which the Fund paid directly or indirectly for a stand-by
commitment, its cost would be reflected as unrealized depreciation for the
period during which the commitment is held by the Fund. Stand-

8
<PAGE>
by commitments would not affect the dollar weighted average maturity of the
Fund's portfolio. The maturity of a security subject to a stand-by commitment is
longer than the stand-by repurchase date.

The stand-by commitments that the Fund may enter into are subject to certain
risks, which include the ability of the issuer of the commitment to pay for the
securities at the time the commitment is exercised, the fact that the commitment
is not marketable by the Fund, and that the maturity of the underlying security
will generally be different from that of the commitment.

In addition, the Fund may apply to the Internal Revenue Service for a ruling, or
seek from its counsel an opinion, that interest on Municipal Obligations subject
to stand-by commitments will be exempt from Federal income taxation. (See
"Federal Income Taxes" herein.) In the absence of a favorable tax ruling or
opinion of counsel, the Fund will not engage in the purchase of securities
subject to stand-by commitments.

TAXABLE SECURITIES

Although the Fund will attempt to invest 100% of its net assets in tax-exempt
Municipal Obligations, the Fund may invest up to 20% of the value of its net
assets in securities of the kind described below, the interest income on which
is subject to regular Federal income tax, under any one or more of the following
circumstances: (a) pending investment of proceeds of sales of Fund shares or of
portfolio securities, (b) pending settlement of purchases of portfolio
securities and (c) to maintain liquidity for the purpose of meeting anticipated
redemptions. In addition, the Fund may temporarily invest more than 20% in such
taxable securities when, in the opinion of the Manager, it is advisable to do so
because of adverse market conditions affecting the market for Municipal
Obligations. The kinds of taxable securities in which the Fund may invest are
limited to the following short-term, fixed-income securities (maturing in 397
days or less from the time of purchase): (1) obligations of the United States
Government or its agencies, instrumentalities or authorities; (2) commercial
paper meeting the definition of Eligible Securities at the time of acquisition;
(3) certificates of deposit of domestic banks with assets of $1 billion or more;
and (4) repurchase agreements with respect to any Municipal Obligations or other
securities which the Fund is permitted to own. (See "Federal Income Taxes"
herein.)

Repurchase Agreements

The Fund may invest in instruments subject to repurchase agreements with
securities dealers or member banks of the Federal Reserve System. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt instrument for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase and the Fund to resell the
instrument at a fixed price and time, thereby determining the yield during the
Fund's holding period. This results in a fixed rate of return insulated from
market fluctuations during such period. A repurchase agreement is subject to the
risk that the seller may fail to repurchase the security. Repurchase agreements
may be deemed to be loans under the 1940 Act. All repurchase agreements entered
into by the Fund shall be fully collateralized at all times during the period of
the agreement in that the value of the underlying security shall be at least
equal to the amount of the loan, including the accrued interest thereon, and the
Fund or its custodian shall have possession of the collateral, which the Fund's
Board believes will give it a valid, perfected security interest in the
collateral. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Fund but only constitute collateral for the seller's obligation to pay
the repurchase price. Therefore, the Fund may suffer time delays and incur costs
in connection with the disposition of the collateral. The Fund's Board believes
that the collateral underlying repurchase agreements may be more susceptible to
claims of the seller's creditors than would be the case with securities owned by
the Fund. It is expected that repurchase agreements will give rise to income
which will not qualify as tax-exempt income when distributed by the Fund. The
Fund will not invest in a repurchase agreement maturing in more than seven days
if any such investment together with illiquid securities held by the Fund exceed
15% of the Fund's net assets. (See Investment Restriction Number 6 herein.)
Repurchase agreements are subject to the same risks described herein for
stand-by commitments.

PENNSYLVANIA RISK FACTORS

Prospective investors should consider the financial difficulties and pressures
which the Commonwealth of Pennsylvania and certain of its municipal subdivisions
have undergone. Both the Commonwealth and the City

<PAGE>

of Philadelphia have historically experienced significant revenue shortfalls.
There can be no assurance that the Commonwealth will not experience further
declines in economic conditions or that portions of the Municipal Obligations
purchased by the Fund will not be affected by such declines. Without intending
to be complete, the following briefly summarizes some of these difficulties and
the current financial situation, as well as some of the complex factors
affecting the financial situation in the Commonwealth. It is derived from
sources that are generally available to investors and is based in part on
information obtained from various agencies in Pennsylvania. No independent
verification has been made of the following information.

State Economy

Pennsylvania has been historically identified as a heavy industry state although
that reputation has changed recently as the industrial composition of the
Commonwealth diversified when the coal, steel and railroad industries began to
decline. The major new sources of growth in Pennsylvania are in the service
sector, including trade, medical and the health services, education and
financial institutions. Pennsylvania's agricultural industries are also an
important component of the Commonwealth's economic structure, accounting for
more than $3.6 billion in crop and livestock products annually while
agribusiness and food related industries support $39 billion in economic
activity annually.

Non-manufacturing employment in Pennsylvania has increased in recent years to
82.1% of total employment in 1995 and to 82.5% as of December 1996.
Consequently, manufacturing employment constitutes a diminished share of total
employment within the Commonwealth. Manufacturing, contributing 17.9% of 1995
non-agricultural employment and 17.5% as of December 1996, has fallen behind
both the services sector and the trade sector as the largest single source of
employment within the Commonwealth. In 1995, the services sector accounted for
30.4% of all non-agricultural employment while the trade sector accounted for
22.8%.

Pennsylvania's annual average unemployment rate was below the national average
from 1986 until 1990. Slower economic growth caused the unemployment rate in the
Commonwealth to rise to 6.9% in 1991 and 7.5% in 1992. The resumption of faster
economic growth resulted in a decrease in the Commonwealth's unemployment rate
to 7.1% in 1993. In 1994 and 1995, Pennsylvania's annual average unemployment
rate was below the Middle Atlantic Region's average, but slightly higher than
that of the United States. For January 1997 the unadjusted unemployment rate was
5.3% in the Commonwealth and 5.9 % in the United States, while the seasonally
adjusted unemployment rate for the Commonwealth was 4.7% compared to 5.4% for
the United States.

State Budget

The Commonwealth operates under an annual budget which is formulated and
submitted for legislative approval by the Governor each February. The
Pennsylvania Constitution requires that the Governor's budget proposal consist
of three parts: (i) a balanced operating budget setting forth proposed
expenditures and estimated revenues from all sources and, if estimated revenues
and available surplus are less than proposed expenditures, recommending specific
additional sources of revenue sufficient to pay the deficiency; (ii) a capital
budget setting forth proposed expenditures to be financed from the proceeds of
obligations of the Commonwealth or its agencies or from operating funds; and
(iii) a financial plan for not less than the succeeding five fiscal years, which
includes for each year projected operating expenditures and estimated revenues
and projected expenditures for capital projects. The General Assembly may add,
change or delete any items in the budget prepared by the Governor, but the
Governor retains veto power over the individual appropriations passed by the
legislature. The Commonwealth's fiscal year begins on July 1 and ends on June
30.

All funds received by the Commonwealth are subject to appropriation in specific
amounts by the General Assembly or by executive authorization by the Governor.
Total appropriations enacted by the General Assembly may not exceed the ensuing
year's estimated revenues, plus (less) the unappropriated fund balance (deficit)
of the preceding year, except for constitutionally authorized debt service
payments. Appropriations from the principal operating funds of the Commonwealth
(the General Fund, the Motor License Fund and the State Lottery Fund) are
generally made for one fiscal year and are returned to the unappropriated
surplus of the fund if not spent or encumbered by the end of the fiscal year.
The constitution

<PAGE>

specifies that a surplus of operating funds at the end of a fiscal year must be
appropriated for the ensuing year.

Pennsylvania uses the "fund" method of accounting for receipts and
disbursements. For purposes of government accounting, a "fund" is an independent
fiscal and accounting entity with a self balancing set of accounts, recording
cash and/or other resources together with all related liabilities and equities.
In the Commonwealth, over 150 funds have been established by legislative
enactment or in certain cases by administrative action for the purpose of
recording the receipt and disbursement of moneys received by the Commonwealth.
Annual budgets are adopted each fiscal year for the principal operating funds of
the Commonwealth and several other special revenue funds. Expenditures and
encumbrances against these funds may only be made pursuant to appropriation
measures enacted by the General Assembly and approved by the Governor. The
General Fund, the Commonwealth's largest fund, receives all tax revenues,
non-tax revenues and federal grants and entitlements that are not specified by
law to be deposited elsewhere. The majority of the Commonwealth's operating and
administrative expenses are payable from the General Fund. Debt service on all
bond indebtedness of the Commonwealth, except that issued for highway purposes
or for the benefit of other special revenue funds, is payable from the General
Fund.

Financial information for the principal operating funds of the Commonwealth are
maintained on a budgetary basis of accounting, which is used for the purpose of
insuring compliance with the enacted operating budget. The Commonwealth also
prepares annual financial statements in accordance with generally accepted
accounting principles ("GAAP"). Budgetary basis financial reports are based on a
modified cash basis of accounting as opposed to a modified accrual basis of
accounting prescribed by GAAP. Financial information is adjusted at fiscal year
end to reflect appropriate accruals for financial reporting in conformity with
GAAP.

Recent Financial Results

The fiscal years 1992 through 1996 were years of recovery for Pennsylvania from
the recession in 1990 and 1991. The recovery fiscal years were characterized by
modest economic growth and low inflation rates in the Commonwealth. These
economic conditions, combined with several years of tax reductions following the
various tax rate increases and tax base expansions enacted in fiscal 1991 for
the General Fund, produced modest increases in Pennsylvania's tax revenues
during the period. Tax revenues from fiscal 1992 through fiscal 1996 rose at an
annual average rate of 2.8%. Total revenues and other income sources increased
during this period by an average annual rate of 3.3%. Expenditures and other
uses during the fiscal 1992 through fiscal 1996 period rose at a 4.4% annual
rate, led by annual average increases of 14.2% for protection of persons and
property program costs and 11.4% for capital outlay costs. Expenditure
reductions for fiscal 1996 from the previous fiscal year for operating transfers
out and for conservation of natural resources program costs were the result of
accounting changes affecting the General Fund and the Motor License Fund and a
recategorization of expenditures due to a departmental restructuring in the
General Fund. At the close of fiscal 1996, the fund balance for the governmental
fund types totaled $1,986.3 million, an increase of $58.7 million over fiscal
1995 and $758.5 million over fiscal 1992.

Commonwealth revenues for the 1995 fiscal year were above estimate and exceeded
fiscal year expenditures and encumbrances. Fiscal 1995 was the fourth
consecutive fiscal year the Commonwealth reported an increase in the fiscal
year-end unappropriated balance. Prior to reserves for transfer to the Tax
Stabilization Reserve Fund, the fiscal 1995 closing unappropriated surplus was
$540.0 million, an increase of $204.2 million over the fiscal 1994 closing
unappropriated surplus prior to transfers. Commonwealth revenues during the 1995
fiscal year were $459.4 million, 2.9% above the estimate of revenues used at the
time the 1995 fiscal year budget was enacted. Corporation taxes contributed
$329.4 million of the additional receipts largely due to higher receipts from
the corporate net income tax. Fiscal 1995 revenues from the corporate net income
tax were 22.6% over collections in fiscal 1994 and include the effects of the
reduction of the tax rate from 12.25% to 11.99% that became effective with tax
years beginning on and after January 1, 1994. The sales and use tax and
miscellaneous revenues also showed strong year-over-year growth that produced
above-estimate revenue collections. Sales and use tax revenues were $5,526.9
million, $128.8 million above the enacted budget estimate and 7.9% over fiscal
1994 collections. Tax receipts from both motor vehicles and non-motor vehicle
sales contributed to the higher collections. Miscellaneous revenue collections
for fiscal 1995 were $183.5 million, $44.9 million above estimate and were
largely due to additional investment earnings, escheat revenues and other
miscellaneous revenues.

<PAGE>

Commonwealth revenues (prior to tax refunds) for the 1996 fiscal year increased
by $113.9 million over the prior fiscal year to $16,338.5 million representing a
growth rate of 0.7%. Tax rate reductions and other tax law changes substantially
reduced the amount and rate of revenue growth for the fiscal year. The
Commonwealth has estimated that tax changes enacted for the 1996 fiscal year
reduced Commonwealth revenues by $283.4 million representing 1.7% age points of
fiscal 1996 growth in Commonwealth revenues. The most significant tax changes
enacted for the 1996 fiscal year were (i) the reduction of the corporate net
income tax rate to 9.99%; (ii) double weighing of the sales factor of the
corporate net income apportionment calculation; (iii) an increase in the maximum
annual allowance for a net operating loss deduction from $0.5 million to $1.0
million; (iv) an increase in the basic exemption amount for the capital stock
and franchise tax; (v) the repeal of the tax on annuities; and (vi) the
elimination of inheritance tax on transfers of certain property to surviving
spouses.

Among the major sources of Commonwealth revenues for the 1996 fiscal year,
corporate tax receipts declined $338.4 million from receipts in the prior fiscal
year, largely due to the various tax changes enacted for these taxes. Corporate
tax changes were enacted to reduce the cost of doing business in Pennsylvania
for the purpose of encouraging business to remain in Pennsylvania and to expand
employment opportunities within the state. Sales and use tax receipts for fiscal
year increased $155.5 million, or 2.8%, over receipts during fiscal 1995. All of
the increase was produced by the non-motor vehicle portion of the tax as
receipts from the sale of motor vehicles declined slightly for the fiscal 1996,
Personal income tax receipts for the fiscal year increased $291.1 million, or
5.7%, over receipts during fiscal 1995. Personal income tax receipts were aided
by a 10.2% increase in non-withholding tax payments which generally are
comprised of quarterly estimated and annual final return tax payments. Non-tax
receipts for the fiscal year increased $23.7 million for the fiscal year.
Included in that increase was $67 million in net receipts from a tax amnesty
program that was available for a portion of the 1996 fiscal year. Some portion
of the tax amnesty receipts represent normal collections of delinquent taxes.
The tax amnesty program is not expected to be repeated.

The unappropriated surplus (prior to transfers to Tax Stabilization Reserve
Fund) at the close of the fiscal year for the General Fund was $183.8 million,
$65.5 million above estimate. Transfers to the Tax Stabilization Reserve Fund
from fiscal 1996 operations will be $27.6 million. This amount represents the
fifteen percent of the fiscal year ending unappropriated surplus transfer
provided under current law. With the addition of this transfer and anticipated
interest earnings, the Tax Stabilization Reserve Fund balance will be $211
Million.

Fiscal 1997 Budget

The enacted fiscal 1997 budget provides for expenditures from Commonwealth
revenues of $16,375.8 million, an increase of 0.6% over appropriated amounts
from Commonwealth revenues for fiscal 1996. The fiscal 1997 budget is based on
anticipated Commonwealth revenues before refunds of $16,744.5 million, an
increase over actual fiscal 1996 revenues of 2.5%.

Increased authorized spending for fiscal 1997 is driven largely by increased
costs of the corrections and the probation and parole programs. Continuation of
the trend of rapidly rising inmate populations increases operation costs for
correctional facilities and requires the opening of new facilities. The fiscal
1997 budget contains an appropriation increase in excess of $110 million for
these programs. The approved budget also contains some departmental
restructurings. Although the departmental restructurings are estimated to save
approximately $8 million, a $25 million increase in funds was committed to
economic and community development programs for fiscal 1997.

Providing funding for these programs increases in a fiscal year budget where
appropriations increased by only $96.7 million, or 0.6%, required reductions and
savings in other programs funded from the General Fund. A major reform of the
current welfare system was enacted in May 1996 to encourage recipients toward
self sufficiency through work requirements, to provide temporary support for
families showing personal responsibility and to maintain safeguards for those
who cannot help themselves. Net savings to the fiscal 1997 budget of $176.5
million is anticipated. Many of these savings are redirected in the fiscal 1997
budget toward providing additional support services to those working and seeking
work.

Proposed Fiscal 1998 Budget

On February 4, 1997, the Governor presented his proposed General Fund budget for
fiscal 1998 to the General Assembly. Revenue estimates in the proposed budget
were developed using a national economic forecast with projected annual growth
rates below two percent. Total Commonwealth revenues before

<PAGE>
reductions for refunds and proposed tax changes are estimated to be $17,339.2
billion, 2.4% above revised estimates for fiscal 1997. Proposed appropriations
against those revenues totaled $16,915.7 million, a 2.7% increase over currently
estimated fiscal 1997 appropriations. As proposed, the fiscal 1998 budget
assumes the draw down of the currently estimated $177.6 million unappropriated
surplus at June 30, 1997; however, no appropriation lapses are included in this
projection. Four tax law proposals and a proposed increase transfer of the taxes
to a special purpose are included in the proposed budget. Together these items
are estimated to reduce fiscal 1998 Commonwealth revenues by $66.9 million. All
require legislative enactment. The General Assembly is reviewing the proposed
budget in hearings before its committees. The General Assembly may change,
eliminate or add amounts and items to the Governor's proposed budget and there
can be no assurance that the budget, as prepared by the Governor, will be
enacted into law.

Debt Limits and Outstanding Debt

The Constitution of Pennsylvania permits the issuance of the following types of
debt: (i) debt to suppress insurrection or rehabilitate areas affected by
disaster; (ii) electorate approved debt; (iii) debt for capital projects subject
to an aggregate outstanding debt limit of 1.75 times the annual average tax
revenues of the preceding five fiscal years; and (iv) tax anticipation notes
payable in the fiscal year of issuance.

Under the Pennsylvania Fiscal Code, the Auditor General is required to certify
to the Governor and the General Assembly certain information regarding the
Commonwealth's indebtedness. According to the February 28, 1997 Auditor General
certificate, the average annual tax revenues deposited in all funds in the five
fiscal years ended June 30, 1996 was approximately $18.9 billion, and,
therefore, the net debt limitation for the 1997 fiscal year is $33.1 billion.
Outstanding net debt totaled $3.9 billion at June 30, 1996, approximately equal
to the net debt at June 30, 1995. At February 28, 1997, the amount of debt
authorized by law to be issued, but not yet incurred, was $17.3 billion.

Outstanding general obligation debt totaled $5,054.5 million at June 30, 1996,
an increase of $9.1 million from June 30, 1995. Over the ten-year period ending
June 30, 1996, total outstanding general obligation debt increased at an annual
rate of 1.1%. Within the most recent five-year period, outstanding general
obligation debt has grown at an annual rate of 1.1%.

Debt Ratings

All outstanding general obligation bonds of the Commonwealth are rated "AA-" by
S&P and "A-1" by Moody's.

City of Philadelphia

The City of Philadelphia (the "City" or "Philadelphia") is the largest city in
the Commonwealth, with an estimated population of 1,585,577 according to the
1990 Census. Philadelphia experienced a series of general fund deficits for
fiscal years 1988 through 1992 which culminated in serious financial
difficulties for the City. In its 1992 Comprehensive Annual Financial Report,
Philadelphia reported a cumulative general fund deficit of $71.4 million for
fiscal 1992.

In June 1991, the Pennsylvania legislature established the Pennsylvania
Intergovernmental Corporation Authority ("PICA"), a five-member board to assist
Philadelphia in remedying fiscal emergencies. PICA is designed to provide
assistance through the issuance of funding debt and to make factual findings and
recommendations to Philadelphia concerning its budgetary and fiscal affairs. The
legislation empowered PICA to issue notes and bonds on behalf of Philadelphia,
and also authorized Philadelphia to levy a one-percent sales tax the proceeds of
which would be used to pay off the bonds. In return for PICA'a fiscal
assistance, Philadelphia is required, among other things, to establish five-year
financial plans that include balanced annual budgets. Under the legislation, if
Philadelphia does not comply with such requirements, PICA may withhold bond
revenues and certain state funding. At this time, the City is operating under a
five-year fiscal plan approved by PICA on April 30, 1996. As of February 28,
1997, PICA has issued approximately $1,761.7 million of its Special Tax Revenue
Bonds. The financial assistance has included the refunding of certain city
general obligation bonds, funding of capital projects and the liquidation of the
City's Cumulative General Fund balance deficit as of June 30, 1992 of $244.9
million.

No further PICA bonds are to be issued by PICA for the purpose of financing a
capital project or deficit as the authority for such bond sales expired on
December 31, 1994, PICA's authority to issue debt for the purpose

of financing a cash flow deficit expired on December 31, 1996. Its ability to
refund existing outstanding debt is unrestricted. PICA had $1,146.2 million in
Special Tax Revenue Bonds outstanding as of June 30, 1996.

The audited General Fund balance of the City as of June 30, 1994, 1995 and 1996
showed a surplus of approximately $15.4 million, $80.5 million and $118.5
million, respectively.

S&P rating on Philadelphia's general obligation bonds is "BBB-." Moody's rating
is currently "Baa."

Litigation

The Commonwealth is a party to numerous lawsuits in which an adverse final
decision could materially affect the Commonwealth's governmental operations and
consequently its ability to pay debt service on its obligations. The
Commonwealth also faces tort claims made possible by the limited waiver of
sovereign immunity effected by Act 152, approved September 28, 1978, as amended.
Under Act 152, damages from any loss are limited to $250,000 per person and $1
million for each accident.

INVESTMENT RESTRICTIONS

1. Make portfolio investments other than as described under "Investment
Objectives, Policies and Risks" or any other form of Federal tax-exempt
investment which meets the Fund's high quality criteria, as determined by
the Board of Trustees and which is consistent with the Fund's objectives
and policies.

2. Borrow Money. This restriction shall not apply to borrowings from banks for
temporary or emergency (not leveraging) purposes, including the meeting of
redemption requests that might otherwise require the untimely disposition
of securities, in an amount up to 15% of the value of the Fund's total
assets (including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing was made.
While borrowings exceed 5% of the value of the Fund's total assets, the
Fund will not make any investments. Interest paid on borrowings will reduce
net income.

3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
in an amount up to 15% of the value of its total assets and only to secure
borrowings for temporary or emergency purposes.

4. Sell securities short or purchase securities on margin, or engage in the
purchase and sale of put, call, straddle or spread options or in writing
such options, except to the extent that securities subject to a demand
obligation and stand-by commitments may be purchased as set forth under
"Investment Objectives, Policies and Risks."

5. Underwrite the securities of other issuers, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security.

6. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"), except the Fund may
purchase variable rate demand instruments which contain a demand feature.
The Fund will not invest in a repurchase agreement maturing in more than
seven days if any such investment together with securities that are not
readily marketable held by the Fund exceed 10% of the Fund's net assets.

7. Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, or oil and gas interests, but this
shall not prevent the Fund from investing in Municipal Obligations secured
by real estate or interests in real estate.

8. Make loans to others, except through the purchase of portfolio
investments, including repurchase agreements, as described under
"Investment Objectives, Policies and Risks."

9. Purchase more than 10% of all outstanding voting securities of any one
issuer or invest in companies for the purpose of exercising control.

10. Invest more than 25% of its assets in the securities of "issuers" in
any single industry, provided that the Fund may invest more than 25% of its
assets in the banking industry through bank participation certificates and
there shall be no limitation on the purchase of those Municipal
Obligations. When the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from those of
the government creating the issuing entity and a security is backed only by
the assets and
14
<PAGE>
revenues of the entity, the entity would be deemed to be the sole issuer of
the security. Similarly, in the case of an industrial revenue bond, if that
bond is backed only by the assets and revenues of the non-governmental
user, then such non-governmental user would be deemed to be the sole
issuer. If, however, in either case, the creating government or some other
entity, such as an insurance company or other corporate obligor, guarantees
a security or a bank issues a letter of credit, such a guarantee or letter
of credit would be considered a separate security and would be treated as
an issue of such government, other entity or bank. With respect to 75% of
the total amortized cost value of the Fund's assets, not more than 5% of
the Fund's assets may be invested in securities that are subject to
underlying puts from the same institution, and no single bank shall issue
its letter of credit and no single financial institution shall issue a
credit enhancement covering more than 5% of the total assets of the Fund.
However, if the puts are exercisable by the Fund in the event of default on
payment of principal and interest on the underlying security, then the Fund
may invest up to 10% of its assets in securities underlying puts issued or
guaranteed by the same institution; additionally, a single bank can issue
its letter of credit or a single financial institution can issue a credit
enhancement covering up to 10% of the Fund's assets, where the puts offer
the Fund such default protection.

11. Invest in securities of other investment companies, except (i) the Fund may
purchase unit investment trust securities where such unit trusts meet the
investment objectives of the Fund and then only up to 5% of the Fund's net
assets, (ii) as they may be acquired as part of a merger, consolidation or
acquisition of assets or (iii) as allowed by 12(d) of the 1940 Act
(investments by the Fund in other investment companies subjects that
portion of a shareholder's investment to additional fees resulting in a
duplication of such fees).

12. Issue senior securities except insofar as the Fund may be deemed to
have issued a senior security in connection with any permitted borrowings.

If a percentage restriction is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or in the amount of the Fund's assets will not constitute a
violation of such restriction.

PORTFOLIO TRANSACTIONS

The Fund's purchases and sales of portfolio securities usually are principal
transactions. Portfolio securities are normally purchased directly from the
issuer, from banks and financial institutions or from an underwriter or market
maker for the securities. There usually are no brokerage commissions paid for
such purchases. The Fund has paid no brokerage commissions since its formation.
Any transaction for which the Fund pays a brokerage commission will be effected
at the best price and execution available. Purchases from underwriters of
portfolio securities include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asked price. The Fund purchases participation
certificates in variable rate Municipal Obligations with a demand feature from
banks or other financial institutions at a negotiated yield to the Fund based on
the applicable interest rate adjustment index for the security. The interest
received by the Fund is net of a fee charged by the issuing institution for
servicing the underlying obligation and issuing the participation certificate,
letter of credit, guarantee or insurance and providing the demand repurchase
feature.

Allocation of transactions, including their frequency, to various dealers is
determined by the Manager in its best judgment and in a manner deemed in the
best interest of shareholders of the Fund rather than by any formula. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price. No preference in purchasing portfolio securities will
be given to banks or dealers that are Participating Organizations.

Investment decisions for the Fund will be made independently from those for any
other investment companies or accounts that may be or become managed by the
Manager or its affiliates. If, however, the Fund and other investment companies
or accounts managed by the Manager are simultaneously engaged in the purchase or
sale of the same security, the transactions may be averaged as to price and
allocated equitably to each account. In some cases, this policy might adversely
affect the price paid or received by the Fund or the size of the position
obtainable for the Fund. In addition, when purchases or sales of the same
security for the Fund and for other investment companies managed by the Manager
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantage available to large denomination purchasers or
sellers.
15
<PAGE>
No portfolio transactions are executed with the Manager or its affiliates acting
as principal. In addition, the Fund will not buy bankers' acceptances,
certificates of deposit or commercial paper from the Manager or its affiliates.

HOW TO PURCHASE AND REDEEM SHARES

The material relating to the purchase and redemption of shares in the Prospectus
is herein incorporated by reference.

NET ASSET VALUE

The Fund does not determine net asset value per share on the following holidays:
New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas.

The net asset value of the Fund's shares is determined as of 12 noon, New York
City time, on each Fund Business Day. It is computed by dividing the value of
the Fund's net assets (i.e., the value of its securities and other assets less
its liabilities, including expenses payable or accrued but excluding capital
stock and surplus) by the total number of shares outstanding.

The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, except that if fluctuating
interest rates cause the market value of the Fund's portfolio to deviate more
than 1/2 of 1% from the value determined on the basis of amortized cost, the
Board of Trustees will consider whether any action should be initiated, as
described in the following paragraph. Although the amortized cost method
provides certainty in valuation, it may result in periods during which the value
of an instrument is higher or lower than the price an investment company would
receive if the instrument were sold.

The Fund's Board of Trustees has established procedures to stabilize the Fund's
net asset value at $1.00 per share of each Class. These procedures include a
review of the extent of any deviation of net asset value per share, based on
available market rates, from the Fund's $1.00 amortized cost per share. Should
that deviation exceed 1/2 of 1%, the Board will consider whether any action
should be initiated to eliminate or reduce material dilution or other unfair
results to shareholders. Such action may include redemption of shares in kind,
selling portfolio securities prior to maturity, reducing or withholding
dividends and utilizing a net asset value per share as determined by using
available market quotations. The Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less, will not purchase any instrument with a
remaining maturity greater than 397 days, will limit portfolio investments,
including repurchase agreements, to those United States dollar-denominated
instruments that the Fund's Board of Trustees determines present minimal credit
risks, and will comply with certain reporting and record keeping procedures. The
Fund has also established procedures to ensure compliance with the requirement
that portfolio securities are Eligible Securities. (See "Investment Objectives,
Policies and Risks" herein.)

YIELD QUOTATIONS

The Fund calculates a seven-day yield quotation using a standard method
prescribed by the rules of the Securities and Exchange Commission. Under that
method, the Fund's yield figure, which is based on a chosen seven-day period, is
computed as follows: the Fund's return for the seven-day period (which is
obtained by dividing the net change in the value of a hypothetical account
having a balance of one share at the beginning of the period by the value of
such account at the beginning of the period (expected to always be $1.00) is
multiplied by (365/7) with the resulting annualized figure carried to the
nearest hundredth of 1%). For purposes of the foregoing computation, the
determination of the net change in account value during the seven-day period
reflects (i) dividends declared on the original share and on any additional
shares, including the value of any additional shares purchased with dividends
paid on the original share, and (ii) fees charged to all shareholder accounts.
Realized capital gains or losses and unrealized appreciation or depreciation of
the Fund's portfolio securities are not included in the computation. Therefore
annualized yields may be different from effective yields quoted for the same
period.

The Fund's "effective yield" is obtained by adjusting its "current yield" to
give effect to the compounding nature of the Fund's portfolio, as follows: the
unannualized base period return is compounded and brought

<PAGE>

out to the nearest one hundredth of 1% by adding one to the base period return,
raising the sum to a power equal to 365 divided by 7, and subtracting one from
the result, i.e., effective yield = (base period return + 1)365/7 - 1.

Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day. The Fund's yield for any given period is not an indication, or
representation by the Fund, of future yields or rates of return on the Fund's
shares, and may not provide a basis for comparison with bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors who
purchase the Fund's shares directly may realize a higher yield than Participant
Investors because they will not be subject to any fees or charges that may be
imposed by Participating Organizations.

The Fund may from time to time advertise its tax equivalent yield. The tax
equivalent yield is computed based upon a 30-day (or one month) period ended on
the date of the most recent balance sheet included in this Statement of
Additional Information, computed by dividing that portion of the yield of the
Fund (as computed pursuant to the formula previously discussed) which is
tax-exempt by one minus a stated income tax rate and adding the product to that
portion, if any, of the yield of the Fund that is not tax-exempt. The tax
equivalent yield for the Fund may also fluctuate daily and does not provide a
basis for determining future yields.

The Fund may from time to time advertise a taxable equivalent yield table which
shows the yield an investor would need to receive from a taxable investment in
order to equal a tax-free yield from the Fund. (See "Taxable Equivalent Yield
Table" herein.)

The Fund's Class A shares' yield for the seven-day period ended February 28,
1997 was 2.85%, which is equivalent to an effective yield of 2.89%. The Fund's
Class B shares' yield for the seven-day period ended February 28, 1997 was
3.11%, which is equivalent to an effective yield of 3.16%.

MANAGER

The Investment Manager for the Fund is Reich & Tang Asset Management L.P., a
Delaware limited partnership with principal offices at 600 Fifth Avenue, New
York, New York 10020 (the "Manager"). As of February 28, 1997, the Manager was
investment manager, adviser or supervisor with respect to assets aggregating in
excess of $9.7 billion. In addition to the Fund, the Manager acts as investment
manager and administrator of eighteen other investment companies and also
advises pension trusts, profit-sharing trusts and endowments.

On August 30, 1996, The New England Mutual Life Insurance Company ("The New
England") and Metropolitan Life Insurance Company ("MetLife") merged, with
MetLife being the continuing company. The Manager remains an indirect
wholly-owned subsidiary of NEICLP, but Reich & Tang Asset Management, Inc., its
sole general partner, is now an indirect subsidiary of MetLife. Also, MetLife
New England Holdings, Inc., a wholly-owned subsidiary of MetLife, owns 55% of
the outstanding limited partnership interest of NEICLP and may be deemed a
"controlling person" of the Manager. Reich & Tang, Inc. owns approximately 16%
of the outstanding partnership units of NEICLP.

MetLife is a mutual life insurance company with assets of $142.2 billion at
March 31, 1996. It is the second largest life insurance company in the United
States in terms of total assets. MetLife provides a wide range of insurance and
investment products and services to individuals and groups and is the leader
among United States life insurance companies in terms of total life insurance in
force, which exceeded $1.2 trillion at March 31, 1996 for MetLife and its
insurance affiliates. MetLife and its affiliates provide insurance or other
financial services to approximately 36 million people worldwide.
17
<PAGE>
NEIC is a holding company offering a broad array of investment styles across a
wide range of asset categories through twelve subsidiaries, divisions and
affiliates offering a wide array of investment styles and products to
institutional clients. Its business units include, AEW Capital Management, L.P.,
Back Bay Advisors, L.P., Graystone Partners, L.P., Harris Associates, L.P.,
Jurika & Voyles, L.P., Loomis, Sayles & Co., L.P., MC Management, L.P., New
England Funds, L.P., New England Funds Management, L.P., Reich & Tang Asset
Management L.P., Vaughan-Nelson, Scarborough & McConnell L.P. and Westpeak
Investment Advisors, L.P. These affiliates in the aggregate are investment
advisors or managers to 43 other registered investment companies.

The merger and the change in control of the Manager has not had any impact upon
the Manager's performance of its responsibilities and obligations under the
Investment Management Contract.

Pursuant to an Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Trustees of
the Fund.

The Manager provides persons satisfactory to the Board of Trustees of the Fund
to serve as officers of the Fund. Such officers, as well as certain other
employees and trustees of the Fund, may be directors or officers of NEIC, the
sole general partner of the Manager, or employees of the Manager or its
affiliates.

The Investment Management Contract is terminable without penalty by the Fund on
sixty days' written notice when authorized either (1) by majority vote of its
outstanding voting shares or (2) by a vote of a majority of its Board of
Trustees or (3) by the Manager on sixty days' written notice, and will
automatically terminate in the event of its assignment. The Investment
Management Contract provides that in the absence of willful misfeasance, bad
faith or gross negligence on the part of the Manager, or of reckless disregard
of its obligations thereunder, the Manager shall not be liable for any action or
failure to act in accordance with its duties thereunder.

For its services under the Investment Management Contract, the Manager receives
from the Fund a fee equal to .40% per annum of the Fund's average daily net
assets for managing the Fund's investment portfolio. The Manager, at its
discretion, may voluntarily waive all or a portion of the management fee. The
fees are accrued daily and paid monthly. Any portion of the total fees received
by the Manager may be used by the Manager to provide shareholder services. (See
"Distribution and Service Plan" herein.) For the Fund's fiscal year ended
November 30, 1996, the fee payable to the Manager under the Investment
Management Contract was $160,103, of which $28,516 was waived. The Fund's net
assets at the close of business on November 30, 1996 totaled $36,339,972. For
the Fund's fiscal year ended November 30, 1995, the fee payable the manager
under the Investment management contract was $155,535, $63,396 of which was
waved. The Fund's net assets at the close of business on November 30, 1995
totaled $40,980,201. For the Fund's fiscal year ended November 30, 1994, the fee
payable to the Manager under the Investment Management Contract was $158,042,
$90,058 of which was waived. The Fund's net assets at the close of business on
November 30, 1994 totaled $43,559,447.

<PAGE>
Pursuant to the Administrative Services Contract with the Fund, the Manager also
performs clerical, accounting supervision, office service and related functions
for the Fund and provides the Fund with personnel to (i) supervise the
performance of bookkeeping related services by Investors Fiduciary Trust
Company, the Fund's bookkeeping agent, (ii) prepare reports to and filings with
regulatory authorities, and (iii) perform such other services as the Fund may
from time to time request of the Manager. The personnel rendering such services
may be employees of the Manager, of its affiliates or of other organizations.
The Manager, at its discretion, may voluntarily waive all or a portion of the
administrative services fee. For its services under the Administrative Services
Contract, the Manager receives from the Fund a fee equal to .21% of the Fund's
average daily net assets not in excess of $1.25 billion, plus .20% of such
assets in excess of $1.25 billion but not in excess of $1.5 billion, plus .19%
of such assets in excess of $1.5 billion. For the Fund's fiscal year ended
November 30, 1996, the fee payable to the Manager under the Administrative
Services Contract was $84,054, of which $80,051 was waived. For the Fund's
fiscal year ended November 30, 1995, the fee payable to the manager under the
Administrative Services Contract was $77,767, all of which was waived. For the
Fund's fiscal year ended November 30, 1994, the fee payable to the Manager under
the Administrative Services Contract was $79,021, all of which was waived.

The Manager at its discretion may waive its rights to any portion of the
management fee or the administrative services fee and may use any portion of the
management fee and the administrative services fee for purposes of shareholder
and administrative services and distribution of the Fund's shares. There can be
no assurance that such fees will be waived in the future.

Expense Limitation

The Manager has agreed, pursuant to the Investment Management Contract, to
reimburse the Fund for its expenses (exclusive of interest, taxes, brokerage,
and extraordinary expenses) which in any year exceed the limits on investment
company expenses prescribed by any state in which the Fund's shares are
qualified for sale. For the purpose of this obligation to reimburse expenses,
the Fund's annual expenses are estimated and accrued daily, and any appropriate
estimated payments are made to it on a monthly basis. Subject to the obligations
of the Manager to reimburse the Fund for its excess expenses as described above,
the Fund has, under the Investment Management Contract, confirmed its obligation
for payment of all its other expenses, including all operating expenses, taxes,
brokerage fees and commissions, commitment fees, certain insurance premiums,
interest charges and expenses of the custodian, transfer agent and dividend
disbursing agent's fees, telecommunications expenses, auditing and legal
expenses, bookkeeping agent fees, costs of forming the corporation and
maintaining corporate existence, compensation of trustees, officers and
employees of the Fund and costs of other personnel performing services for the
Fund who are not officers of the Manager or its affiliates, costs of investor
services, shareholders' reports and corporate meetings, Securities and Exchange
Commission registration fees and expenses, state securities laws registration
fees and expenses, expenses of preparing and printing the Fund's prospectus for
delivery to existing shareholders and of printing application forms for
shareholder accounts, and the fees and reimbursements payable to the Manager
under the Investment Management Contract and the Administrative Services
Contract and the Distributor under the Shareholder Servicing Agreement.

The Fund may from time to time hire its own employees or contract to have
management services performed by third parties (including Participating
Organizations) as discussed herein, and the management of the Fund intends to do
so whenever it appears advantageous to the Fund. The Fund's expenses for
employees and for such services are among the expenses subject to the expense
limitation described above. As a result of the recent passage of the National
Securities Market Improvement Act of 1996, all state expense limitations have
been eliminated at this time.

Pursuant to the Investment Management Contract, for the fiscal years ended
November 30, 1994, November 30, 1995 and November 30, 1996 the Manager received
investment Management and administrative services fees aggregating $67,984,
$92,139 and $135,590 respectively.

MANAGEMENT OF THE FUND

The Trustees and Officers of the Fund and their principal occupations during the
past five years are set forth below. Mr. Duff may be deemed an "interested
person" of the Fund, as defined in the 1940 Act, on the basis of his affiliation
with Reich & Tang Asset Management L.P. Unless otherwise specified, the address
of each of the following persons is 600 Fifth Avenue, New York 10020.
19

<PAGE>

Steven W. Duff, 42 - President of the Mutual Funds division of the Manager since
September 1994. Mr. Duff was formerly Director of Mutual Fund Administration at
NationsBank with which he was associated from June 1981 to August 1994. Mr. Duff
is President and a Director of California Daily Tax Free Income Fund, Inc.,
Cortland Trust, Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily Tax
Free Income Fund, Inc., Michigan Daily Tax Free Income Fund, Inc., New Jersey
Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc.,
North Carolina Daily Municipal Income Fund, Inc. and Short Term Income Fund,
Inc., Executive Vice President of Reich & Tang Equity Fund, Inc. and Delafield
Fund, Inc. President and Chief Executive Officer of Tax Exempt Proceeds Fund,
Inc. and President and Trustee of Florida Daily Municipal Income Fund,
Institutional Daily Income Fund and Pennsylvania Daily Municipal Income Fund.

Dr. W. Giles Mellon 65 - Professor of Business Administration and Area Chairman
of Economics in the Graduate School of Management, Rutgers University with which
he has been associated since 1966. His address is Rutgers University Graduate
School of Management, 92 New Street, Newark, New Jersey 07102. Dr. Mellon is
also a Director of AEW Commercial Mortgage Securities Fund, Inc., California
Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc.,
Daily Tax Free Income Fund, Inc., Delafield Fund, Inc., Michigan Daily Tax Free
Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., North Carolina
Daily Municipal Income Fund, Inc., Reich & Tang Equity Fund, Inc., Short Term
Income Fund, Inc. and a Trustee of Florida Daily Municipal Income Fund,
Institutional Daily Income Fund and Pennsylvania Daily Municipal Income Fund.

Robert Straniere 55 - Member of the New York State Assembly and a partner with
the Straniere Law Firm since 1981. His address is 182 Rose Avenue, Staten
Island, New York 10306. Mr. Straniere is also a Director of AEW Commercial
Mortgage Securities Fund, Inc., California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc.,
Delafield Fund, Inc., Life Cycle Mutual Funds, Inc., Michigan Daily Tax Free
Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., North Carolina
Daily Municipal Income Fund, Inc., Reich & Tang Equity Fund, Inc. and Short Term
Income Fund, Inc., and a Trustee of Florida Daily Municipal Income Fund,
Institutional Daily Income Fund and Pennsylvania Daily Municipal Income Fund.

Dr. Yung Wong 57 - Director of Shaw Investment Management (U.K.) Limited from
October 1994 to October 1995, and formerly was a General Partner of Abacus
Limited Partnership (a general partner of a venture capital investment firm)
from 1984 to 1994. His address is 29 Alden Road, Greenwich, Connecticut 06831.
Dr. Wong is a Director of AEW Commercial Mortgage Securities Fund, Inc.,
California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income
Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc., Michigan
Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc.,
North Carolina Daily Municipal Income Fund, Inc., Reich & Tang Equity Fund, Inc.
and Short Term Income Fund, Inc. and a Trustee of Eclipse Financial Asset Trust,
Florida Daily Municipal Income Fund, Institutional Daily Income Fund and
Pennsylvania Daily Municipal Income Fund.

Molly Flewharty 46 - Vice President of the Mutual Funds division of the Manager
since September 1993. Ms. Flewharty was formerly Vice President of Reich & Tang,
Inc. which she was associated with from December 1977 to September 1993. Ms.
Flewharty is also Vice President of California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax
Free Income Fund, Inc., Florida Daily Municipal Income Fund, Institutional Daily
Income Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North
Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income
Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund, Inc. and Tax
Exempt Proceeds Fund, Inc.

Lesley M. Jones 48 - Senior Vice President of the Mutual Funds division of the
Manager since September 1993. Ms. Jones was formerly Senior Vice President of
Reich & Tang, Inc. which she was associated with from April 1973 to September
1993. Ms. Jones is also a Vice President of California Daily Tax Free Income
Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income
Fund, Inc., Florida Daily Municipal Income Fund, Institutional Daily Income
Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal
Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North Carolina
Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income Fund,
Reich & Tang Equity Fund, Inc. and Short Term Income Fund, Inc.
20
<PAGE>
Dana E. Messina 40 - Executive Vice President of the Mutual Funds division of
the Manager since January 1995, and was Vice President from September 1993 to
January 1995. Ms. Messina was formerly Vice President of Reich & Tang, Inc.
which she was associated with from December 1980 to September 1993. Ms. Messina
is also Vice President of California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax
Free Income Fund, Inc., Florida Daily Municipal Income Fund, Institutional Daily
Income Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North
Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income
Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund, Inc. and Tax
Exempt Proceeds Fund, Inc.

Bernadette N. Finn 49 - Vice President of the Mutual Funds division of the
Manager since September 1993. Ms. Finn was formerly Vice President and Assistant
Secretary of Reich & Tang, Inc. which she was associated with from September
1970 to September 1993. Ms. Finn is also Secretary of California Daily Tax Free
Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust,
Inc., Daily Tax Free Income Fund, Inc., Florida Daily Municipal Income Fund,
Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal Income
Fund, Inc., New York Daily Tax Free Income Fund, Inc., North Carolina Daily
Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income Fund and Tax
Exempt Proceeds Fund, Inc., a Vice President and Secretary of Delafield Fund,
Inc., Institutional Daily Income Fund, Reich & Tang Equity Fund, Inc. and Short
Term Income Fund, Inc.

Richard De Sanctis 40 - Vice President and Treasurer of the Manager since
September 1993. Mr. De Sanctis was formerly Controller of Reich & Tang, Inc.
from January 1991 to September 1993, Vice President and Treasurer of Cortland
Financial Group, Inc. and Vice President of Cortland Distributors, Inc. from
1989 to December 1990. Mr. De Sanctis is also Treasurer of California Daily Tax
Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily Tax
Free Income Fund, Inc., Delafield Fund, Inc., Florida Daily Municipal Income
Fund, Institutional Daily Income Fund, Michigan Daily Tax Free Income Fund,
Inc., New Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free
Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc., Short
Term Income Fund, Inc., and Tax Exempt Proceeds Fund, Inc., and is Vice
President and Treasurer of Cortland Trust, Inc.

The Fund paid an aggregate remuneration of $6,000 to its trustees with respect
to the period ended November 30, 1996, all of which consisted of aggregate
trustee's fees paid to the three disinterested trustees, pursuant to the terms
of the Investment Management Contract (see "Manager" herein). See Compensation
Table below.

<TABLE>
<CAPTION>
COMPENSATION TABLE

<S> <C> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Aggregate Compensation Pension or Retirement Total Compensation from
Name of Person, from Registrant for Benefits Accrued as Estimated Annual Fund and Fund Complex
Position Fiscal Year Part of Fund Expenses Benefits upon Retirement Paid to Directors*

W. Giles Mellon, $2,000 0 0 $52,000 (13 Funds)
Director

Robert Straniere, $2,000 0 0 $52,000 (13 Funds)
Director

Yung Wong, $2,000 0 0 $52,000 (13 Funds)
Director

* The total compensation paid to such persons by the Fund and Fund Complex for
the fiscal year ending November 30, 1996 (and, with respect to certain of the
funds in the Fund Complex, estimated to be paid during the fiscal year ending
November 30, 1996. The parenthetical number represents the number of
investment companies (including the Fund) from which such person receives
compensation that are considered part of the same Fund complex as the Fund,
because, among other things, they have a common investment advisor.
</TABLE>

21
<PAGE>

Counsel and Auditors

Legal matters in connection with the Fund are passed upon by Battle Fowler LLP,
75 East 55th Street, New York, New York 10022. Matters in connection with
Massachusetts and Pennsylvania law are passed upon by Dechert Price & Rhoads,
477 Madison Avenue, New York, New York 10022.

McGladrey & Pullen LLP, 555 Fifth Avenue, New York, New York 10017, independent
certified public accountants, have been selected as auditors for the Fund.

DISTRIBUTION AND SERVICE PLAN

Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission has required that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by Rule 12b-1. The Fund's Board of Trustees has adopted a
distribution and service plan (the "Plan") and, pursuant to the Plan, the Fund
has entered into a Distribution Agreement and a Shareholder Servicing Agreement
(with respect to Class A Shares only) with the Reich & Tang Distributors L.P.
(the "Distributor") as distributor of the Fund's shares.

Under the Shareholder Servicing Agreement, the Distributor receives from the
Fund a service fee equal to .25% per annum of the Fund's average daily net
assets (the "Service Fee") for providing personal shareholder services and/or
for the maintenance of shareholder accounts. The fee is accrued daily and paid
monthly and any portion of the fee may be deemed to be used by the Distributor
for payments to Participating Organizations with respect to servicing their
clients or customers who are shareholders of the Fund.

The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Service Fee, the Fund will pay for (i) telecommunications expenses including
the cost of dedicated lines and CRT terminals, incurred by the Manager and
Distributor in carrying out their obligations under the Shareholder Servicing
Agreement and (ii) preparing, printing and delivering the Fund's prospectus to
existing shareholders of the Fund and preparing and printing subscription
application forms for shareholder accounts.

The Plan provides that the Manager may make payments from time to time from its
own resources, which may include the management fee and past profits for the
following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements for performing shareholder servicing and related
administrative functions on behalf of the Fund; (ii) to compensate certain
Participating Organizations for providing assistance in distributing the Fund's
shares; and (iii) to pay the costs of printing and distributing the Fund's
prospectus to prospective investors, and to defray the cost of the preparation
and printing of brochures and other promotional materials, mailings to
prospective shareholders, advertising, and other promotional activities,
including the salaries and/or commissions of sales personnel in connection with
the distribution of the Fund's shares. The Distributor may also make payments
from time to time from its own resources, which may include the Service Fee with
respect to Class A shares and past profits for the purpose enumerated in (i)
above. The Distributor will determine the amount of such payments made pursuant
to the Plan, provided that such payments will not increase the amount which the
Fund is required to pay to the Manager and the Distributor for any fiscal year
under either the Investment Management Contract in effect for that year, the
Administrative Services Contract in effect for that year or under the
Shareholder Servicing Agreement in effect for that year.

The following information applies only to the Class A shares of the Fund. For
the Fund's fiscal year ended November 30, 1996, the Fund paid a distribution fee
of $12,023 for expenditures pursuant to the Plan. During such period, the
Manager made payments pursuant to the Plan from its own resources aggregating
$124,650, of which $115,931 was spent on broker assistant payments, $3,482 was
spent on sales personnel and related expenses of the Manager, $1,137 was spent
on travel and entertainment, $4,009 was spent on prospectus and application
printing and $91 was spent on miscellaneous expenses. For the Fund's fiscal
22

<PAGE>

year ended November 30, 1996, the amount payable by the Fund for shareholder
servicing fees was $100,062, of which $88,039 was waived. For the Fund's fiscal
year ended November 30, 1995, the Fund paid a distribution fee of $0 for
expenditures pursuant to the Plan. During such period, the Manager made payments
pursuant to the Plan from its own resources aggregating $132,876, of which
$120,409 was spent on broker assistant payments, $6,808 was spent on sales
personnel and related expenses of the Manager, $1,319 was spent on travel and
entertainment, $3,878 was spent on prospectus and application printing and $462
was spent on miscellaneous expenses. For the Fund's fiscal year ended November
30, 1995, the Fund paid shareholder servicing fees of $97,209, all of which was
waived. For the Fund's fiscal year ended November 30, 1994, the Fund paid a
distribution fee of $0 for expenditures pursuant to the Plan. During such
period, the Manager made payments pursuant to the Plan from its own resources
aggregating $128,951, of which $120,535 was spent on broker assistant payments,
$2,945 was spent on sales personnel and related expenses of the Manager, $355
was spent on travel and entertainment, $4,919 was spent on prospectus and
application printing and $197 was spent on miscellaneous expenses. For the
Fund's fiscal year ended November 30, 1994, the Fund paid shareholder servicing
fees of $98,776, all of which was waived.

In accordance with Rule 12b-1, the Plan provides that all written agreements
relating to the Plan entered into between either the Fund or the Distributor and
Participating Organizations or other organizations must be in a form
satisfactory to the Fund's Board of Trustees. In addition, the Plan requires the
Fund and the Distributor to prepare, at least quarterly, written reports setting
forth all amounts expended for distribution purposes by the Fund and the
Distributor pursuant to the Plan and identifying the distribution activities for
which those expenditures were made.

The Plan provides that it may continue in effect for successive annual periods
provided it is approved by the Class A shareholders or by the Board of Trustees,
including a majority of Trustees who are not interested persons of the Fund and
who have no direct or indirect interest in the operation of the Plan or in the
agreements related to the Plan. The Board of Trustees recently approved the
continuance of the Plan at the Board of Trustees meeting held on July 8, 1996.
The Plan further provides that it may not be amended to increase materially the
costs which may be spent by the Fund for distribution pursuant to the Plan
without shareholder approval, and the other material amendments must be approved
by the Trustees in the manner described in the preceding sentence. The Plan may
be terminated at any time by a vote of a majority of the disinterested Trustees
of the Fund or the Fund's Class A shareholders.

DESCRIPTION OF SHARES

The Fund was established as a Massachusetts business trust under the laws of
Massachusetts by an Agreement and Declaration of Trust dated July 30, 1992. The
Fund has an unlimited authorized number of shares of beneficial interest. These
shares are entitled to one vote per share with proportional voting for
fractional shares. There are no conversion or preemptive rights in connection
with any shares of the Fund. All shares when issued in accordance with the terms
of the offering will be fully paid and non-assessable. Shares of the Fund are
redeemable at net asset value, at the option of the shareholders. The Fund is
subdivided into two classes of stock, Class A and Class B. Each share,
regardless of class, will represent an interest in the same portfolio of
investments and will have identical voting, dividend, liquidation and other
rights, preferences, powers, restrictions, limitations, qualifications,
designations and terms and conditions, except that: (i) the Class A and Class B
shares will have different class designations; (ii) only the Class A shares will
be assessed a service fee pursuant to the Rule 12b-1 Distribution and Service
Plan of the Fund of .25% of the Fund's average daily net assets; (iii) only the
holders of the Class A shares would be entitled to vote on matters pertaining to
the Plan and any related agreements in accordance with provisions of Rule 12b-1;
and (iv) the exchange privilege will permit shareholders to exchange their
shares only for shares of the same class of an Exchange Fund. Payments that are
made under the Plans will be calculated and charged daily to the appropriate
class prior to determining daily net asset value per share and
dividends/distributions. On February 28, 1997, there were 41,112,001 shares of
the Fund outstanding. As of February 28, 1997, the amount of shares owned by all
officers and trustees of the Fund, as a group, was less than 1% of the
outstanding shares. Set forth below is certain information as to persons who
owned 5% or more of the Fund's outstanding shares as of February 28, 1997:

<PAGE>

Nature of
Name and address % of Class Ownership
- ---------------- ---------- ---------

PNC Securities Corp. 10.03 Record
c/o Pittsburgh National Bank
Fifth Avenue & Wood Street
Pittsburgh PA 15265

Lewco Securities Corp. 6.11 Record
34 Exchange Place
Jersey City NJ 07311

Under its Declaration of Trust the Fund has the right to redeem for cash shares
of beneficial interest owned by any shareholder to the extent and at such times
as the Fund's Board of Trustees determines to be necessary or appropriate to
prevent an undue concentration of share ownership which would cause the Fund to
become a "personal holding company" for Federal income tax purposes. In this
regard, the Fund may also exercise its right to reject purchase orders.

The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
Trustees can elect 100% of the Trustees if the holders choose to do so, and, in
that event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Trustees. Unless specifically requested by an
investor, the Fund will not issue certificates evidencing Fund shares.

As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
meetings only (a) for the election of Trustees, (b) for approval of the revised
investment advisory contracts with respect to a particular class or series of
beneficial interest, (c) for approval of revisions to the Fund's distribution
agreement with respect to a particular class or series of beneficial interest,
and (d) upon the written request of holders of shares entitled to cast not less
than 25% of all the votes entitled to be cast at such meeting. Annual and other
meetings may be required with respect to such additional matters relating to the
Fund as may be required by the 1940 Act, including the removal of Fund
trustee(s) and communication among shareholders, any registration of the Fund
with the Securities and Exchange Commission or any state, or as the Trustee may
consider necessary or desirable. For example, procedures for calling a
shareholder's meeting for the removal of Trustees of the Fund, similar to those
set forth in Section 16(c) of the 1940 Act, are available to shareholders of the
Fund. A meeting for such purpose can be called by the holders of at least 10% of
the Fund's outstanding shares of beneficial interest. The Fund will aid
shareholder communications with other shareholders as required under Section
16(c) of the 1940 Act. Each Trustee serves until the next meeting of the
shareholders called for the purpose of considering the election or reelection of
such Trustee or of a successor to such Trustee, and until the election and
qualification of his or her successor, elected at such a meeting, or until such
Trustee sooner dies, resigns, retires or is removed by the vote of the
shareholders.

FEDERAL INCOME TAXES

The Fund intends to qualify under the Code and under Pennsylvania law as a
"regulated investment company" that distributes "exempt-interest dividends". The
Fund intends to continue to qualify for regulated investment company status so
long as such qualification is in the best interests of its shareholders. Such
qualification relieves the Fund of liability for Federal income taxes to the
extent its earnings are distributed in accordance with the applicable provisions
of the Code.

The Fund's policy is to distribute as dividends each year 100% and in no event
less than 90% of its tax-exempt interest income, net of certain deductions.
Exempt-interest dividends, as defined in the Code, are dividends or any part
thereof (other than capital gain dividends) paid by the Fund that are
attributable to interest on obligations, the interest on which is exempt from
regular Federal income tax, and designated by the Fund as exempt-interest
dividends in a written notice mailed to the Fund's shareholders not later than
60 days after the close of its taxable year. The percentage of the total
dividends paid by the Fund during any taxable year that qualifies as
exempt-interest dividends will be the same for all shareholders receiving
dividends during the year.

24
<PAGE>

Exempt-interest dividends are to be treated by the Fund's shareholders as items
of interest excludable from their gross income under Section 103(a) of the Code.
However, a shareholder is advised to consult his tax advisors with respect to
whether exempt-interest dividends retain the exclusion under Section 103 of the
Code if such shareholder would be treated as a "substantial user" or "related
person" under Section 147(a) of the Code with respect to some or all of the
"private activity bonds," if any, held by the Fund. If a shareholder receives an
exempt-interest dividend with respect to any share and such share has been held
for six months or less, then any loss on the sale or exchange of such share will
be disallowed to the extent of the amount of such exempt-interest dividend. The
Code provides that interest on indebtedness incurred, or continued, to purchase
or carry certain tax-exempt securities such as shares of the Fund is not
deductible. As a result, among other consequences, a certain proportion of
interest on indebtedness incurred, or continued, to purchase or carry securities
on margin may not be deductible during the period an investor holds shares of
the Fund. For Social Security recipients, interest on tax-exempt bonds,
including exempt-interest dividends paid by the Fund, is to be added to adjusted
gross income for purposes of computing the amount of social security benefits
includible in gross income. The amount of such interest received will have to be
disclosed on the shareholders' Federal income tax returns. Further, under P.L.
99-514, taxpayers other than corporations are required to include as an item of
tax preference for purposes of the Federal alternative minimum tax all
tax-exempt interest on "private activity" bonds (generally, a bond issue in
which more than 10% of the proceeds are used in a non-governmental trade or
business) (other than Section 501(c)(3) bonds) issued after August 7, 1986.
Thus, this provision will apply to the portion of the exempt-interest dividends
from the Fund's assets, that are attributable to such post-August 7, 1986
private activity bonds, if any of such bonds are acquired by the Fund.
Corporations are required to increase their alternative minimum taxable income
for purposes of calculating their alternative minimum tax liability by 75% of
the amount by which the adjusted current earnings (which will include tax-exempt
interest) of the corporation exceeds the alternative minimum taxable income
(determined without this tax item). In addition, in certain cases, Subchapter S
corporations with accumulated earnings and profits from Subchapter C years are
subject to a minimum tax on excess "passive investment income" which includes
tax-exempt interest.

Although it is not intended, it is possible that the Fund may realize short-term
or long-term capital gains or losses from its portfolio transactions. The Fund
may also realize short-term or long-term capital gains upon the maturity or
disposition of securities acquired at discounts resulting from market
fluctuations. Short-term capital gains will be taxable to shareholders as
ordinary income when they are distributed. Any net capital gains (the excess of
its net realized long-term capital gain over its net realized short-term capital
loss) will be distributed annually to the Fund's shareholders. The Fund will
have no tax liability with respect to distributed net capital gains and the
distributions will be taxable to shareholders as long-term capital gains
regardless of how long the shareholders have held Fund shares. However, Fund
shareholders who at the time of such a net capital gain distribution have not
held their Fund shares for more than 6 months, and who subsequently dispose of
those shares at a loss, will be required to treat such loss as a long-term
capital loss to the extent of the net capital gain distribution. Distributions
of net capital gain will be designated as a "capital gain dividend" in a written
notice mailed to the Fund's shareholders not later than 60 days after the close
of the Fund's taxable year.

The Fund intends to distribute at least 90% of its investment company taxable
income (taxable income subject to certain adjustments exclusive of the excess of
its net long-term capital gain over its net short-term capital loss) for each
taxable year. The Fund will be subject to Federal income tax on any
undistributed investment company taxable income. To the extent such income is
distributed it will be taxable to shareholders as ordinary income. Expenses paid
or incurred by the Fund will be allocated between tax-exempt and taxable income
in the same proportion as the amount of the Fund's tax-exempt income bears to
the total of such exempt income and its gross income (excluding from gross
income the excess of capital gains over capital losses). If the Fund does not
distribute at least 98% of its ordinary income and 98% of its capital gain net
income for a taxable year, the Fund will be subject to a nondeductible 4% excise
tax on the excess of such amounts over the amounts actually distributed.

If a shareholder fails to provide the Fund with a current taxpayer
identification number, the Fund generally is required to withhold 31% of taxable
interest, dividend payments, and proceeds from the redemption of shares of the
Fund.
25

<PAGE>

Dividends and distributions to shareholders will be treated in the same manner
for Federal income tax purposes whether received in cash or reinvested in
additional shares of the Fund.

With respect to the variable rate demand instruments, including participation
certificates therein, the Fund has obtained and is relying on the opinion of
Battle Fowler LLP, counsel to the Fund, that it will be treated for Federal
income tax purposes as the owner thereof and the interest on the underlying
Municipal Obligations will be tax-exempt to the Fund. Counsel has pointed out
that the Internal Revenue Service has announced that it will not ordinarily
issue advance rulings on the question of ownership of securities or
participation interests therein subject to a put and, as a result, the Internal
Revenue Service could reach a conclusion different from that reached by counsel.

From time to time, proposals have been introduced before Congress to restrict or
eliminate the Federal income tax exemption for interest on Municipal
Obligations. If such a proposal were introduced and enacted in the future, the
ability of the Fund to pay exempt-interest dividends would be adversely affected
and the Fund would reevaluate its investment objective and policies and consider
changes in the structure.

In South Carolina v. Baker, the United States Supreme Court held that the
Federal government may constitutionally require states to register bonds they
issue and may subject the interest on such bonds to Federal tax if not
registered, and that there is no constitutional prohibition against the Federal
government's taxing the interest earned on state or other municipal bonds. The
Supreme Court decision affirms the authority of the Federal government to
regulate and control bonds such as the Municipal Obligations and to tax such
bonds in the future. The decision does not, however, affect the current
exemption from taxation of the interest earned on the Municipal Obligations in
accordance with Section 103 of the Code.

PENNSYLVANIA INCOME TAXES

The following is based upon the advice of Dechert Price & Rhoads, special
Pennsylvania counsel to the Fund.

The disposition by the Fund of a Pennsylvania Municipal Obligation (whether by
sale, exchange, redemption or payment at maturity) will not constitute a taxable
event to a shareholder under the Pennsylvania Personal Income Tax if the
Pennsylvania Municipal Obligation was issued prior to February 1, 1994. Further,
although there is no published authority on the subject, counsel is of the
opinion that (i) a shareholder of the Fund will not have a taxable event under
the Pennsylvania state and local income taxes referred to in the preceding
paragraph (other than the Corporate Net Income Tax) upon the redemption or sale
of his shares to the extent that the Fund is then comprised of Pennsylvania
Municipal Obligations and (ii) the disposition by the Fund of a Pennsylvania
Municipal Obligation (whether by sale, exchange, redemption or payment at
maturity) will not constitute a taxable event to a shareholder under the
Corporation Income Tax or the Philadelphia School District Investment Income Tax
if the Pennsylvania Municipal Obligation was issued prior to February 1, 1994.
(The School District tax has no application to gain on the disposition of
property held by the taxpayer for more than six months.)

The foregoing is a general, abbreviated summary of certain of the provisions of
Pennsylvania statutes and administrative interpretations presently in effect
governing the taxation of shareholders of the Fund. These provisions are subject
to change by legislative or administrative action, and any such change may be
retroactive with respect to Fund transactions. Shareholders are advised to
consult with their own tax advisers for more detailed information concerning
Pennsylvania tax matters.

26
<PAGE>
CUSTODIAN AND TRANSFER AGENT

Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105 is custodian for the Fund's cash and securities. Reich & Tang Services
L.P., 600 Fifth Avenue, New York, New York 10020 is the transfer agent and
dividend disbursing agent for the shares of the Fund. The transfer agent and
custodian does not assist in, and is not responsible for, investment decisions
involving assets of the Fund.

27
<PAGE>
DESCRIPTION OF RATINGS*

Description of Moody's Investors Service, Inc.'s Two Highest Municipal Bond
Ratings

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

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

Con.(...): Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of projects
unseasoned in operating experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.

Description of Moody's Investors Service, Inc.'s Two Highest Ratings of State
and Municipal Notes and Other Short-Term Loans:

Moody's ratings for state and municipal notes and other short-term loans will be
designated Moody's Investment Grade ("MIG"). A short-term issue having a demand
feature ( i.e., payment relying on external liquidity and usually payable on
demand rather than use of fixed maturity dates) is differentiated by Moody's
with the symbol VMIG, instead of MIG. This distinction is in recognition of the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower are uppermost in importance in short-term
borrowing, while various factors of the first importance in bond risk are of
lesser importance in the short run. Symbols used will be as follows:

MIG-1: Loans bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.

MIG-2: Loans bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.

Description of Standard & Poor's Rating Services, a division of the McGraw-Hill
Companies Two Highest Debt Ratings:

AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.

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

Provisional Ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.

Description of Standard & Poor's Rating Services, a division of the McGraw-Hill
Companies Two Highest Commercial Paper Ratings:

A: Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.

A-1: This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.

* As described by the rating agencies.

28
<PAGE>

<TABLE>
<CAPTION>
CORPORATE TAXABLE EQUIVALENT YIELD TABLE

1. If Your Corporate Taxable Income Bracket Is . . .

_________________________________________________________________________________________________________________________

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate $0 $50,001 $75,001 $100,001 $335,001 $10,000,001 15,000,001 $18,333,334
Return 50,000 75,000 100,000 335,000 10,000,000 15,000,000 18,333,333 and over
_________________________________________________________________________________________________________________________

2. Then Your Combined Income Tax Bracket Is . . .
_________________________________________________________________________________________________________________________
Federal
Tax 15.00% 25.00% 34.00% 39.00% 34.00% 35.00% 38.00% 35.00%
Rate
_________________________________________________________________________________________________________________________
State
Tax 9.99% 9.99% 9.99% 9.99% 9.99% 9.99% 9.99% 9.99%
Rate
_________________________________________________________________________________________________________________________
Combined
Marginal 23.49% 32.49% 40.59% 45.09% 40.54% 41.49% 44.19% 41.49%
Tax Rate
_________________________________________________________________________________________________________________________

3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
_________________________________________________________________________________________________________________________

Tax Equivalent Taxable Investment Yield
Exempt Requires to Match Tax Exempt Yield
Yield
_________________________________________________________________________________________________________________________

2.00% 2.61% 2.96% 3.37% 3.64% 3.37% 3.42% 3.58% 3.42%
_________________________________________________________________________________________________________________________

2.50% 3.27% 3.70% 4.21% 4.55% 4.21% 4.27% 4.48% 4.27%
_________________________________________________________________________________________________________________________

3.00% 3.92% 4.44% 5.05% 5.46% 5.05% 5.13% 5.38% 5.13%
_________________________________________________________________________________________________________________________

3.50% 4.57% 5.18% 5.89% 6.37% 5.89% 5.98% 6.27% 5.98%
_________________________________________________________________________________________________________________________

4.00% 5.23% 5.93% 6.73% 7.29% 6.73% 6.84% 7.17% 6.84%
_________________________________________________________________________________________________________________________

4.50% 5.88% 6.67% 7.57% 8.20% 7.57% 7.69% 8.06% 7.69%
_________________________________________________________________________________________________________________________

5.00% 6.54% 7.41% 8.42% 9.11% 8.42% 8.55% 8.96% 8.55%
_________________________________________________________________________________________________________________________

5.50% 7.19% 8.15% 9.26% 10.02% 9.26% 9.40% 9.86% 9.40%
_________________________________________________________________________________________________________________________

6.00% 7.84% 8.89% 10.10% 10.93% 10.10% 10.26% 10.75% 10.26%
_________________________________________________________________________________________________________________________

6.50% 8.50% 9.63% 10.94% 11.84% 10.94% 11.11% 11.65% 11.11%
_________________________________________________________________________________________________________________________

7.00% 9.15% 10.37% 11.78% 12.75% 11.78% 11.96% 12.54% 11.96%
_________________________________________________________________________________________________________________________
</TABLE>

To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, in section three, to see the equivalent taxable yields
for each of the tax free income yields given.

29
<PAGE>
<TABLE>
<CAPTION>
PERSONAL TAXABLE EQUIVALENT YIELD TABLE

_____________________________________________________________________________________________________

1. If Your Taxable Income Bracket Is . . .
_____________________________________________________________________________________________________

<S> <C> <C> <C> <C> <C>
Single $0- $24,651- $59,751 $124,651- $271,050
Return 24,650 59,750 124,650 271,050 and over
_____________________________________________________________________________________________________

Joint $0- $41,201- $96,601- $151,751- $271,050
Return 41,200 99,600 151,750 271,050 and over
_____________________________________________________________________________________________________

2. Then Your Combined Income Tax Bracket Is . . .
_____________________________________________________________________________________________________

Federal
Tax Rate 15.00% 28.00% 31.00% 36.00% 39.60%
_____________________________________________________________________________________________________

State
Tax Rate 2.80% 2.80% 2.80% 2.80% 2.80%
_____________________________________________________________________________________________________

Combined
Tax Rate 17.38% 30.02% 32.93% 37.79% 41.29%
____________________________________________________________________________________________________

3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
_____________________________________________________________________________________________________

Tax Exempt Equivalent Taxable Investment Yield
Yield Required to Match Tax Exempt Yield
_____________________________________________________________________________________________________

2.0% 2.42% 2.86% 2.98% 3.22% 3.41%
_____________________________________________________________________________________________________

2.5% 3.03% 3.57% 3.73% 4.02% 4.26%
_____________________________________________________________________________________________________

3.0% 3.63% 4.29% 4.47% 4.82% 5.11%
_____________________________________________________________________________________________________

3.5% 4.24% 5.00% 5.22% 5.63% 5.96%
_____________________________________________________________________________________________________

4.0% 4.84% 5.72% 5.96% 6.43% 6.81%
_____________________________________________________________________________________________________

4.5% 5.45% 6.43% 6.71% 7.23% 7.66%
_____________________________________________________________________________________________________

5.0% 6.05% 7.14% 7.46% 8.04% 8.52%
____________________________________________________________________________________________________

5.5% 6.66% 7.86% 8.20% 8.84% 9.37%
_____________________________________________________________________________________________________

6.0% 7.26% 8.57% 8.95% 9.65% 10.22%
_____________________________________________________________________________________________________

6.5% 7.87% 9.29% 9.69% 10.45% 11.07%
____________________________________________________________________________________________________

7.0% 8.47% 10.00% 10.44% 11.25% 11.92%
____________________________________________________________________________________________________
</TABLE>
To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, in section three, to see the equivalent taxable yields
for each of the tax free income yields given.

30
<PAGE>

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

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
INDEPENDENT AUDITOR'S REPORT

===============================================================================

The Board of Trustees and Shareholders
Pennsylvania Daily Municipal Income Fund

We have audited the accompanying statement of net assets of Pennsylvania Daily
Municipal Income Fund as of November 30, 1996, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the selected financial
information for each of the three years in the period then ended and for the
period from December 16, 1992 (Commencement of Operations) to November 30, 1993.
These financial statements and selected financial information are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and selected financial information based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and selected
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of November 30, 1996, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and selected financial information
referred to above present fairly, in all material respects, the financial
position of Pennsylvania Daily Municipal Income Fund as of November 30, 1996,
the results of its operations, the changes in its net assets and the selected
financial information for the periods indicated, in conformity with generally
accepted accounting principles.

\s\McGladrey & Pullen, LLP

New York, New York
December 17, 1996
31

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

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
STATEMENT OF NET ASSETS
NOVEMBER 30, 1996

===============================================================================
<TABLE>
<CAPTION>

Ratings (a)
----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
------ ---- ----- -------- ------- ------
Other Tax Exempt Investments (20.18%)
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$1,800,000 City of Philadelphia, PA TRAN - Series A 1996 to 1997 06/30/97 3.90% $ 1,805,472 MIG-1 SP-1
700,000 Luzerne County, PA Flood Protection
MBIA Insured 07/15/97 3.85 702,536 Aaa AAA
265,000 Pennsylvania Intergovernmental Cooperational Authority
(PICA) - Series 1996
FGIC Insured 06/15/97 3.60 266,782 Aaa AAA
1,000,000 Pennsylvania Turnpike RB - Series L
MBIA Insured 06/01/97 3.56 1,010,805 Aaa AAA
1,000,000 Philadelphia, PA School District TRAN 06/30/97 3.94 1,002,770 MIG-1 SP-1
1,500,000 Temple University of the Commonwealth System of Higher
Education University Funding Obligation 05/20/97 3.65 1,506,191 SP-1+
1,000,000 University of Pittsburgh, PA (University Capital Project) - Series A (d)
Pre-Refunded In Government Securities 06/01/97 3.80 1,041,199 AAA
- ---------- -----------
7,265,000 Total Other Tax Exempt Investments 7,335,755
- ---------- -----------

<CAPTION>
Other Variable Rate Demand Instruments (c) (53.65%)
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$ 200,000 Allegheny County, PA ACES (Allegheny Hospital) - Series 1988C
LOC PNC Bank 03/01/13 3.55% $ 200,000 VMIG-1 A1+
500,000 Allegheny, PA IDA
(Commercial Development Parkway Center Project) - Series A
LOC Mellon Bank, N.A. 05/01/09 3.80 500,000 A1
2,000,000 Beaver County, PA IDA
LOC Barclays Bank PLC 08/01/20 3.55 2,000,000 P1 A1+
700,000 Butler County, PA IDA (Armco Incorporated Project) - Series 1996A (b)
LOC Chase Manhattan Bank, N.A. 06/01/20 3.80 700,000
400,000 Chartiers Valley, PA IDA
(Commercial Steel Corporation) - Series 1990A (b)
LOC PNC Bank 09/01/05 3.75 400,000
1,500,000 Chester County, PA HEFA(Barclay Friends Project) - Series A
LOC Bank of Ireland 08/01/25 3.55 1,500,000 VMIG-1 A1
2,000,000 City of York General Authority (Adjusted Rate Pooled Financing)
LOC First Union National Bank 09/01/26 3.50 2,000,000 A1
1,900,000 Clarion County, PA EDA (Piney Creek) - Series A
LOC Swiss Bank Corp. 12/01/11 3.75 1,900,000 VMIG-1 A1+
370,000 Clinton County, PA Municipal Authority HRB
(Lock Haven Hospital Project) - Series 1991A (b)
LOC Mellon Bank, N.A. 09/01/07 3.65 370,000
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
32
<PAGE>
- -------------------------------------------------------------------------------
PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
STATEMENT OF NET ASSETS (CONTINUED)
NOVEMBER 30, 1996

===============================================================================
<TABLE>
<CAPTION>

Ratings (a)
----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
------ ---- ----- -------- ------- ------
Other Variable Rate Demand Instruments (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$1,000,000 College Township IDA
LOC Wachovia Bank & Trust Co., N.A. 11/01/11 3.60% $ 1,000,000 A1+
500,000 Delaware County, PA IDA
(Scott Paper Company) - Series A 12/01/18 3.55 500,000 P1 A1+
500,000 Delaware County, PA IDA PCRB
(Philadelphia Electric Co.) - Series A
LOC Toronto-Dominion Bank 08/01/16 4.05 500,000 P1 A1+
400,000 Jeannette, PA Health Services Authority (Jeannette Corporation)
LOC PNC Bank 07/01/99 3.80 400,000 VMIG-1
500,000 Lehigh County, PA IDA - Series 1985A
LOC Rabobank Nederland 12/01/15 3.35 500,000 P1
1,950,000 Montgomery County, PA Redevelopment Authority MHRB
(Glenmore Associates Project) 11/15/25 3.55 1,950,000 A1+
1,000,000 North Eastern Pennsylvania Hospital and Education Auth. RB
(All Health Pooled Fin. Prog.)
LOC Chase Manhattan Bank, N.A. 07/01/26 3.70 1,000,000 VMIG-1
625,000 Pennsylvania Economic Development Financing Authority RB - Series D11
LOC PNC Bank 11/01/05 3.80 625,000 A1
100,000 Pennsylvania State EDA (B&W Ebensburg Project)
LOC Swiss Bank Corp. 12/01/11 3.55 100,000 VMIG-1
1,100,000 Pennsylvania State Higher Education
Assistance Agency Student Loan 07/01/18 3.60 1,100,000 VMIG-1 A1+
1,000,000 Sewickley Valley Hospital Authority, PA RN
(D.T. Watson Rehabilitation Hospital)
LOC PNC Bank 10/01/97 4.13 1,000,000 P1 A1
1,250,000 York County, PA IDA VRD Limited Obligation RB (b)
(Metal Exchange Corporation Project) 06/01/06 3.90 1,250,000
- ---------- -----------
19,495,000 Total Other Variable Rate Demand Instruments 19,495,000
- ---------- -----------

<CAPTION>
Put Bonds (d) (7.43%%)
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$2,700,000 Allegheny County, PA
LOC Canadian Imperial Bank of Commerce 10/30/97 3.65% $ 2,700,000 P1 A1
- ---------- -----------
2,700,000 Total Put Bonds 2,700,000
- ---------- -----------

<CAPTION>
Tax Exempt Commercial Paper (9.08%)
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$1,500,000 Montgomery County, PA IDA PCR Refunding Bonds
(PECO Energy Co. Proj.) - Series 1994B
LOC Deutsche Bank A.G. 12/11/96 3.65% $ 1,500,000 P1 A1+
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.

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

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
STATEMENT OF NET ASSETS (Continued)
NOVEMBER 30, 1996

===============================================================================
<TABLE>
<CAPTION>

Ratings (a)
----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
------ ---- ----- -------- ------- ------
Tax Exempt Commercial Paper (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$1,800,000 Venango IDA PA Resource Recovery RB (d)
(Scrubgrass Project) - Series A
LOC Natwest Bank 02/20/97 3.60% $ 1,800,000 P1 A1+
- ---------- -----------
3,300,000 Total Tax Exempt Commercial Paper 3,300,000
- ---------- -----------

<CAPTION>
Variable Rate Demand Instruments - Private Placements (c) (8.26%)
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$3,000,000 Pennsylvania Economic Development Financing Authority - Series 1992E (b)
LOC First National Bank of Maryland 12/01/17 3.97% $ 3,000,000
- ---------- -----------
3,000,000 Total Variable Rate Demand Instruments - Private Placements 3,000,000
- ---------- -----------
Total Investments (98.60%)(Cost $35,830,755+) 35,830,755
Cash and Other Assets, Net of Liabilities (1.40%) 509,217
-----------
Net Asset Value, offering and redemption price per share:
Net Assets (100.00%) $36,339,972
-----------
Class A shares, 36,335,897 Shares Outstanding (Note 3) $ 1.00
===========
Class B shares, 5,017 Shares Outstanding (Note 3) $ 1.00
===========

+ Aggregate cost for federal income tax purposes is identical.
</TABLE>
FOOTNOTES:
(a) The ratings noted for variable rate demand instruments are those of the
bank whose letter of credit secures such instruments or the guarantor of
the bond. P1 and A1+ are the highest ratings assigned for tax exempt
commercial paper.
(b) Securities that are not rated have been determined by the Fund's Board of
Trustees to be of comparable quality to the rated securities in which the
Fund may invest.
(c) Securities payable on demand at par including accrued interest (usually
with seven days notice) and where indicated are unconditionally secured as
to principal and interest by a bank letter of credit. The interest rates
are adjustable and are based on bank prime rates or other interest rate
adjustment indices. The rate shown is the rate in effect at the date of
this statement.
(d) The maturity date is the next put date.

EDA = Economic Development Authority MHRB = Multi-family Housing Revenue Bond
HEFA = Health & Education Finance Authority PCRB = Pollution Control Revenue Bond
HDA = Hospital Development Authority RB = Revenue Bond
HRB = Hospital Revenue Bond RN = Revenue Note
IDA = Industrial Development Authority TRAN = Tax and Revenue Anticipation Note
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
34
<PAGE>
- -------------------------------------------------------------------------------

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1996

===============================================================================
<TABLE>
<CAPTION>

INVESTMENT INCOME
<S> <C>

Income:
Interest................................................................................ $ 1,458,741
-------------
Expenses: (Note 2)
Investment management fee............................................................... 160,103
Administration fee...................................................................... 84,054
Distribution fee........................................................................ 100,062
Custodian fee........................................................................... 5,123
Shareholder servicing and related shareholder expenses.................................. 39,636
Legal, compliance and filing fees....................................................... 15,356
Audit and accounting.................................................................... 45,702
Trustees' fees.......................................................................... 5,406
Amortization of organization expenses................................................... 9,902
Other................................................................................... 2,577
-------------
Total expenses........................................................................ 467,921
Less: Expenses paid indirectly (Note 2)............................................... ( 2,159)
Less: Fees waived (Note 2)............................................................ ( 196,606)
-------------
Net expenses.......................................................................... 269,156
-------------
Net investment income....................................................................... 1,189,585

<CAPTION>
REALIZED GAIN (LOSS) ON INVESTMENTS
<S> <C>
Net realized gain (loss) on investments..................................................... -0-
-------------
Increase in net assets from operations...................................................... $ 1,189,585
=============
</TABLE>

- -------------------------------------------------------------------------------
See Notes to Financial Statements.
35
<PAGE>

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

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED NOVEMBER 30, 1996 AND 1995

===============================================================================
<TABLE>
<CAPTION>

1996 1995
--------------- ---------------

INCREASE (DECREASE) IN NET ASSETS
<S> <C> <C>

Operations:
Net investment income......................................... $ 1,189,585 $ 1,338,881
Net realized gain (loss) on investments...................... -0- 707
-------------- --------------
Increase in net assets from operations............................ 1,189,585 1,339,588
Dividends to shareholders from net investment income:
Class A....................................................... ( 1,189,561)* ( 1,338,881)*
Class B....................................................... ( 24)* --
Capital share transactions (Note 3):
Class A....................................................... ( 4,645,246) ( 2,579,953)
Class B....................................................... 5,017 --
---------------- --------------
Total increase (decrease)................................. ( 4,640,229) ( 2,579,246)
Net assets:
Beginning of year............................................. 40,980,201 43,559,447
---------------- ---------------
End of year................................................... $ 36,339,972 $ 40,980,201
================ ===============

* Designated as exempt-interest dividends for federal income tax purposes.

</TABLE>

- -------------------------------------------------------------------------------
See Notes to Financial Statements.
36
<PAGE>
- -------------------------------------------------------------------------------

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS

===============================================================================
1. Summary of Accounting Policies.

Pennsylvania Daily Municipal Income Fund, a Massachusetts business trust, is a
no-load, non-diversified, open-end management investment company registered
under the Investment Company Act of 1940. The Fund is a short term, tax exempt
money market fund. The Fund has two classes of stock authorized, Class A and
Class B. The Class A shares are subject to a service fee pursuant to the
Distribution and Service Plan. The Class B shares are not subject to a service
fee. Additionally, the Fund may allocate among its classes certain expenses to
the extent allowable to specific classes, including transfer agent fees,
government registration fees, certain printing and postage costs, and
administrative and legal expenses. Class Specific expenses of the Fund were
limited to distribution fees and minor transfer agent expenses. In all other
respects the Class A and Class B shares represent the same interest in the
income and assets of the Fund. Distribution for Class B shares commenced on
October 10, 1996 and all Fund shares outstanding before October 10, 1996 were
designated as Class A shares. The Fund's financial statements are prepared in
accordance with generally accepted accounting principles for investment
companies as follows:

a) Valuation of Securities -
Investments are valued at amortized cost. Under this valuation method, a
portfolio instrument is valued at cost and any discount or premium is
amortized on a constant basis to the maturity of the instrument. The
maturity of variable rate demand instruments is deemed to be the longer of
the period required before the Fund is entitled to receive payment of the
principal amount or the period remaining until the next interest rate
adjustment.

b) Federal Income Taxes -
it is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
all of its tax exempt and taxable income to its shareholders. Therefore, no
provision for federal income tax is required.

c) Dividends and Distributions -
Dividends from investment income (excluding capital gains and losses, if
any, and amortization of market discount) are declared daily and paid
monthly. Distributions of net capital gains, if any, realized on sales of
investments are made after the close of the Fund's fiscal year, as declared
by the Fund's Board of Trustees.

d) Use of Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results
could differ from those estimates.

e) General -
Securities transactions are recorded on a trade date basis. Interest income
is accrued as earned. Realized gains and losses from securities
transactions are recorded on the identified cost basis.

2. Investment Management Fees and Other Transactions with Affiliates.
Under the Investment Management Contract, the Fund pays an investment management
fee to Reich & Tang Asset Management L.P. (Manager), equal to .40% of the Fund's
average daily net assets. The Manager is required to reimburse the Fund for its
expenses (exclusive of interest, taxes, brokerage, and extraordinary expenses)
to the extent

- -------------------------------------------------------------------------------
37
<PAGE>
- -------------------------------------------------------------------------------

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

===============================================================================

2. Investment Management Fees and Other Transactions with Affiliates (Continued)
that such expenses, including the investment management and the shareholder
servicing and administration fees, for any fiscal year exceed the limits on
investment company expenses prescribed by any state in which the Fund's shares
are qualified for sale. No such reimbursement was required for the year ended
November 30, 1996.

Pursuant to an Administrative Services Contract the Fund pays to the Manager an
annual fee of .21% of the Fund's average daily net assets not in excess of $1.25
billion, plus .20% of such assets in excess of $1.25 billion but not in excess
of $1.5 billion, plus .19% of such assets in excess of $1.5 billion.

Pursuant to a distribution and service plan adopted under Securities and
Exchange Commission Rule 12b-1, the Fund and Reich & Tang Distributors L.P.,
(the Distributor), an affiliate of the Manager, have entered into a Distribution
Agreement and a Shareholder Servicing Agreement. For its services under the
Shareholder Servicing Agreement, the Distributor receives from the Fund a fee
equal to .25% of the Fund's average daily net assets. There were no additional
expenses borne by the Fund pursuant to the Distribution Plan.

For the year ended November 30, 1996 the Manager voluntarily waived investment
management fees and administration fees and the Distributor voluntarily waived
shareholder servicing fees of $28,516, $80,051 and $88,039, respectively.

Fees are paid to Trustees who are unaffiliated with the Manager on the basis of
$1,000 per annum plus $250 per meeting attended.

Included in the Statement of Operations under the captions "custodian fee" and
"shareholder servicing and related shareholder expenses" are expense offsets of
$2,159.

Included in the Statement of Operations under the caption "shareholder servicing
and related shareholder expenses" are fees of $22,507 paid to Reich & Tang
Services L.P., an affiliate of the Manager, as servicing agent for the Fund.

3. Capital Stock.
At November 30, 1996, an unlimited number of shares of beneficial interest ($.01
par value) were authorized and capital paid in amounted to $36,340,914.
Transactions in capital stock, all at $1.00 per share, were as follows:
<TABLE>
<CAPTION>

Class A Class B
------- -------
Year Year October 10, 1996
Ended Ended (Commencement of Offering)
November 30, 1996 November 30, 1995 to November 30, 1996
----------------- ----------------- --------------------
<S> <C> <C> <C>

Sold.................................. 150,377,896 125,004,714 5,100
Issued on reinvestment of dividends... 932,450 1,130,639 17
Redeemed.............................. ( 155,955,592) ( 128,715,306) ( 100)
------------- -------------- -------------
Net increase ......................... ( 4,645,246) ( 2,579,953) 5,017
============= ============== =============
</TABLE>

4. Concentration of Credit Risk.
The Fund invests primarily in obligations of political subdivisions of the State
of Pennsylvania and, accordingly, is subject to the credit risk associated with
the non-performance of such issuers. Approximately 66% of these investments are
further secured, as to principal and interest, by letters of credit issued by
financial institutions. The Fund maintains a policy of monitoring its exposure
by reviewing the credit worthiness of the issuers, as well as that of the
financial institutions issuing the letters of credit, and by limiting the amount
of holdings with letters of credit from one financial institution.

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

38
<PAGE>
- -------------------------------------------------------------------------------

===============================================================================

5. Sales of Securities.
Accumulated undistributed realized losses at November 30, 1996 amounted to $942
which represents tax basis capital losses which may be carried forward to offset
future gains through November 30, 2001.

6. Selected Financial Information.
Reference is made to page 2 of the Prospectus for the Selected Financial
Information.

- -------------------------------------------------------------------------------
39
<PAGE>

PART C
OTHER INFORMATION

ITEM 24. Financial Statements and Exhibits.

(a) Financial Statements.

Included in Prospectus (Part A):

(1) Financial Highlights

(2) Table of Fees and Expenses

Included in Statement of Additional Information (Part B):

(1) Independent Auditor's Report dated November 30, 1996.

(2) Statement of Net Assets (audited), dated November 30, 1996.

(3) Statement of Operations (audited), dated November 30, 1996.

(4) Statement of Changes in Net Assets (audited) as of November
30, 1996.

(5) Notes to Financial Statements.

(b) Exhibits.

* (1) Declaration of Trust of the Registrant.

* (2) By-laws of the Registrant.

(3) Not applicable.

(4) Not applicable.

(5) Form of Investment Management Contract between the Registrant
and Reich & Tang Asset Management L.P.

(6) Form of Distribution Agreement between the Registrant and
Reich & Tang Distributors L.P.

(7) Not applicable.

** (8) Custody Agreement between the Registrant and Investors
Fiduciary Trust Company.

(9) Not applicable.

* (10.1) Consent of Battle Fowler LLP to the use of their
name under the heading "Federal Income Taxes" and
"Investment Objectives, Policies and Risks" in the
Prospectus.

- --------------------
* Filed with Pre-Effective Amendment No. 1 to Registration Statement No.
33-48014 on November 13, 1992, and is incorporated herein by reference.

** Filed with Post-Effective Amendment No. 5 to Registration Statement No.
33-48014 on March 29, 1996, and is incorporated herein by reference.

C-1

<PAGE>

* (10.2) Opinion of Dechert, Price & Rhoads as to the
legality of the securities being registered, and as to
Pennsylvania Law, including their consent to the filing
thereof and to the use of their name under the heading
"Pennsylvania Income Taxes" in the Prospectus.

(11) Consent of Independent Certified Public Accountants.

(12) Not applicable.

* (13) Written assurance of Reich & Tang L.P. that its purchase of
shares of the Registrant was for investment purposes without
any present intention of redeeming or reselling.

(14) Not applicable.

(15.1) Form of Distribution Plan Pursuant to Rule 12b-1 under the
Investment Company Act of 1940.

(15.2) Form of Distribution Agreement between the Registrant and
Reich & Tang Distributors L.P. filed herein as Exhibit 6.

(15.3) Form of Shareholder Servicing Agreement between the Registrant
and Reich & Tang Distributors L.P.

** (15.4) Administrative Services Agreement between the Registrant
and Reich & Tang Asset Management L.P.

***(16.1) Powers of Attorney of Messrs. Straniere, Wong, and Mellon.

****(16.2) Power of Attorney of Mr. Steven W. Duff.

(17) Financial Data Schedule (for EDGAR filing only).

ITEM 25. Persons Controlled by or Under Common Control with Registrant.

None.

ITEM 26. Number of Holders of Securities.

Number of Record Holders
Title of Class as of February 28, 1997
-------------- -----------------------
Common Stock
(par value $.001) 1,370
--------------

ITEM 27. Indemnification.

Registrant incorporates herein by reference to Item 27 of the
Registration Statement filed with the Commission on December 18, 1990.

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

* Filed with Pre-Effective Amendment No. 1 to said Registration Statement No.
33-48014 on November 13, 1992, and is incorporated herein by reference.

** Filed with Post-Effective Amendment No. 2 to Registration Statement No.
33-48014 on Janaury 21, 1994, and is incorporated herein by reference. *** Filed
with Post-Effective Amendment No. 1 to Registration Statement on Form N-1A (File
Nos. 33-48014 and 811-6681) filed on November 13, 1992 and incorporated herein
by reference).

**** Filed with Post-Effective Amendement No. 3 to Registration Statement on
Form N-1A (File Nos. 33-48014 and 811-6681) filed on March 29, 1995 and
incorporated herein by reference).

C-2

<PAGE>

ITEM 28. Business and Other Connections of Investment Adviser.

The description of Reich & Tang Asset Management L.P. under the caption
"Management of the Fund" in the Prospectus and in the Statement of Additional
Information constituting parts A and B, respectively, of the Registration
Statement are incorporated herein by reference.

New England Investment Companies, L.P. ("NEICLP"), is the limited partner
and owner of a 99.5% interest in Reich & Tang Asset Management L.P. (the
"Manager"). Reich & Tang Asset Management, Inc. (a wholly-owned subsidiary of
NEICLP) is the general partner and owner of the remaining .5% interest of the
Manager. New England Investment Companies, Inc. ("NEIC"), a Massachusetts
corporation, serves as sole general partner of NEICLP. Reich & Tang Asset
Management L.P. succeeded NEICLP as the Manager of the Fund.

On August 30, 1996, The New England Mutual Life Insurance Company ("The
New England") and Metropolitan Life Insurance Company ("MetLife") merged, with
MetLife being the continuing company. The Manager remains an indirect
wholly-owned subsidiary of NEICLP, but Reich & Tang Asset Management, Inc., its
sole general partner, is now an indirect subsidiary of MetLife. Also, MetLife
New England Holdings, Inc., a wholly-owned subsidiary of MetLife, owns 51% of
the outstanding limited partnership interest of NEICLP and may be deemed a
"controlling person" of the Manager. Reich & Tang, Inc. owns approximately 16%
of the outstanding partnership units of NEICLP.

The Registrant's investment advisor, Reich & Tang Asset Management L.P., is
a registered investment advisor. Reich & Tang Asset Management L.P.'s investment
advisory clients include California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax
Free Income Fund, Inc., Florida Daily Municipal Income Fund, Michigan Daily Tax
Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York
Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income Fund,
Inc., Pennsylvania Daily Municipal Income Fund, North Carolina Daily Municipal
Income Fund, Inc., Short Term Income Fund, Inc. and Tax Exempt Proceeds Fund,
Inc., registered investment companies whose addresses are 600 Fifth Avenue, New
York, New York 10020, which invest principally in money market instruments;
Delafield Fund, Inc. and Reich & Tang Equity Fund, Inc., registered investment
companies whose addresses are 600 Fifth Avenue, New York, New York 10020, which
invest principally in equity securities. In addition, Reich & Tang Asset
Management L.P. is the sole general partner of Alpha Associates L.P., August
Associates, Reich & Tang Minutus L.P., Reich & Tang Minutus II L.P. Reich and
Tang Equity Partnerships L.P., and Tucek Partners L.P., private investment
partnerships organized as limited partnerships.

Peter S. Voss, President, Chief Executive Officer and a Director of NEIC
since October 1992, Chairman of the Board of NEIC since December 1992, Group
Executive Vice President, Bank of America, responsible for the global asset
management private banking businesses, from April 1992 to October 1992,
Executive Vice President of Security Pacific Bank, and Chief Executive Officer
of Security Pacific Hoare Govett Companies a wholly-owned subsidiary of Security
Pacific Corporation, from April 1988 to April 1992, Director of The New England
since March 1993, Chairman of the Board of Directors of NEIC's subsidiaries
other than Loomis, Sayles & Company, L.P. ("Loomis") and Back Bay Advisors, L.P.
("Back Bay"), where he serves as a Director, and Chairman of the Board of
Trustees of all of the mutual funds in the TNE Fund Group and the Zenith Funds.
G. Neil Ryland, Executive Vice President, Treasurer and Chief Financial Officer
NEIC since July 1993, Executive Vice President and Chief Financial Officer of
The Boston Company, a diversified financial services company, from March 1989
until July 1993, from September 1985 to December 1988, Mr. Ryland was employed
by Kenner Parker Toys, Inc. as Senior Vice President and Chief Financial
Officer. Edward N. Wadsworth, Executive Vice President, General Counsel, Clerk
and Secretary of NEIC since December 1989, Senior Vice President and Associate
General Counsel of The New England from 1984 until December 1992, and Secretary
of Westpeak and Draycott

C-3

<PAGE>

and the Treasurer of NEIC. Lorraine C. Hysler has been Secretary of Reich &
Tang Asset Management Inc. since July 1994, Assistant Secretary of NEIC since
September 1993, Vice President of the Mutual Funds Group of New England
Investment Companies, L.P. from September 1993 until July 1994, and Vice
President of Reich & Tang Mutual Funds since July 1994. Ms. Hysler joined Reich
& Tang, Inc. in May 1977 and served as Secretary from April 1987 until September
1993. Richard E. Smith, III has been a Director of Reich & Tang Asset Management
Inc. since July 1994, President and Chief Operating Officer of the Capital
Management Group of New England Investment Companies, L.P. from May 1994 until
July 1994, President and Chief Operating Officer of the Reich & Tang Capital
Management Group since July 1994, Executive Vice President and Director of Rhode
Island Hospital Trust from March 1993 to May 1994, President, Chief Executive
Officer and Director of USF&G Review Management Corp. from January 1988 until
September 1992. Steven W. Duff has been a Director of Reich & Tang Asset
Management Inc. since October 1994, President and Chief Executive Officer of
Reich & Tang Mutual Funds since August 1994, Senior Vice President of
NationsBank from June 1981 until August 1994, Mr. Duff is President and a
Director of California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax
Free Income Fund, Inc.,Cortland Trust, Inc., Daily Tax Free Income Fund, Inc.,
Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal Income
Fund, Inc., New York Daily Tax Free Income Fund, Inc., North Carolina Daily
Municipal Income Fund, Inc. and Short Term Income Fund, Inc., President and
Trustee of Florida Daily Municipal Income Fund, Pennsylvania Daily Municipal
Income Fund, President and Chief Executive Officer of Tax Exempt Proceeds Fund,
Inc., Executive Vice President of Reich & Tang Equity Fund, Inc. and Delafield
Fund, Inc. Bernadette N. Finn has been Vice President - Compliance of Reich &
Tang Asset Management Inc. since July 1994, Vice President of Mutual Funds
division of Reich & Tang Asset Management Inc. from September 1993 until July
1994, Vice President of Reich & Tang Mutual Funds since July 1994. Ms. Finn
joined Reich & Tang, Inc. in September 1970 and served as Vice President from
September 1982 until May 1987 and as Vice President and Assistant Secretary from
May 1987 until September 1993. Ms. Finn is also Secretary of California Daily
Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc.,
Cortland Trust, Inc., Daily Tax Free Income Fund, Inc., Florida Daily Municipal
Income Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North
Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income
Fund and Tax Exempt Proceeds Fund, Inc., a Vice President and Secretary of
Delafield Fund, Inc., Reich & Tang Equity Fund, Inc. and Short Term Income Fund,
Inc. Richard De Sanctis has been Vice President and Treasurer of Reich & Tang
Asset Management Inc. since July 1994, Assistant Treasurer of NEIC since
September 1993 and Treasurer of the Mutual Funds Group of New England Investment
Companies, L.P. from September 1993 until July 1994. Mr De Sanctis joined Reich
& Tang, Inc. in December 1990 and served as Controller of Reich & Tang, Inc.,
from January 1991 to September 1993. Mr De Sanctis was Vice President and
Treasurer of Cortland Financial Group, Inc. and Vice President of Cortland
Distributors, Inc. from 1989 to December 1990. Mr. De Sanctis is also Treasurer
of California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free
Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc.,
Florida Daily Municipal Income Fund, Michigan Daily Tax Free Income Fund, Inc.,
New Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income
Fund, Inc., North Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily
Municipal Income Fund, Reich & Tang Equity Fund, Inc., Tax Exempt Proceeds Fund,
Inc. and Short Term Income Fund, Inc. and is Vice President and Treasurer of
Cortland Trust, Inc.

ITEM 29. Principal Underwriters.

(a) Reich & Tang Distributors L.P. is also distributor for California
Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc.,
Cortland Trust, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc.,
Florida Daily Municipal Income Fund, Michigan Daily Tax Free Income Fund, Inc.,
New Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income
Fund, Inc., North Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily
Municipal Income Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund,
Inc. and Tax Exempt Proceeds Fund, Inc.

C-4

<PAGE>

(b) The following are the directors and officers of Reich & Tang Asset
Management, Inc., the general partner of Reich & Tang Asset Management L.P.
Reich & Tang Distributors L.P. does not have any officers. The principal
business address of Messrs Voss, Ryland, and Wadsworth is 399 Boylston Street,
Boston, Massachusetts 02116. For all other persons, the principal businesss
address is 600 Fifth Avenue, New York, New York 10020.

Positions and Offices
With General Partner Positions and Offices
Name Of the Distributor With Registrant

Peter S. Voss President and Director None
G. Neal Ryland Director None
Edward N. Wadsworth Clerk None
Richard E. Smith III Director None
Steven W. Duff Director President and Trustee
Bernadette N. Finn Vice President Secretary
Lorraine C. Hysler Secretary None
Richard De Sanctis Vice President and Treasurer
Treasurer
Richard I. Weiner Vice President None

Item 30. Location of Accounts and Records.

Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained in the physical possession of Registrant at 600 Fifth
Avenue, New York, New York 10020, the Registrant's Manager; and at Investors
Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri, 64105, the
Registrant's custodian; and at Reich & Tang Services L.P., 600 Fifth Avenue, New
York, New York 10020, the Registrant's Transfer Agent and Dividend Disbursing
Agent.

Item 31. Management Services.

No such management-related service contracts.

Item 32. Undertakings.

(a) Not applicable.

(b) Not applicable.

C-5

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant certifies that it has
met all of the requirements for effectiveness of this Post-Effective Amendment
to its Registration Statement pursuant to Rule 485(b) under the Securities Act
of 1933 and has duly caused this Post-Effective Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, and State of New York, on the 26th day of
March, 1997.

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND

By: /s/ Bernadette N. Finn
Bernadette N. Finn
Secretary

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities and on the date indicated.

Signature Capacity Date

(1) Principal Executive Officer

By: /s/ Steven W. Duff President and 3/26/97
Steven W. Duff Trustee

(2) Principal Financial and
Accounting Officer

By: /s/ Richard De Sanctis Treasurer 3/26/97

Richard De Sanctis

(3) Majority of Trustees

Yung Wong Trustee
W. Giles Mellon Trustee
Robert Straniere Trustee

By: /s/ Bernadette N. Finn 3/26/97
Bernadette N. Finn
Attorney-in-Fact *

* Powers of Attorney filed as Exhibit 16 with Post-Effective Amendment No. 1
to said Registration Statement on November 13, 1992 and with
Post-Effective Amendment No. 3 to said Registration Statement on March 29,
1995 and are incorporated herein by reference.

INVESTMENT MANAGEMENT CONTRACT
PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
the "Fund"
New York, New York

, 1996

Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10022

Gentlemen:

We herewith confirm our agreement with you as follows:

1. We propose to engage in the business of investing and
reinvesting our assets in securities of the type, and in accordance with the
limitations, specified in our Declaration of Trust, By-Laws and Registration
Statement filed with the Securities and Exchange Commission under the Investment
Company Act of 1940 (the "1940 Act") and the Securities Act of 1933, including
the Prospectus forming a part thereof (the "Registration Statement"), all as
from time to time in effect, and in such manner and to such extent as may from
time to time be authorized by our Board of Trustees. We enclose copies of the
documents listed above and will furnish you such amendments thereto as may be
made from time to time.

2.(a) We hereby employ you to manage the investment and reinvestment of
our assets as above specified, and, without limiting the generality of the
foregoing, to provide the investment management services specified below.

(b) Subject to the general control of our Board of Trustees, you will make
decisions with respect to all purchases and sales of the portfolio
securities. To carry out such decisions, you are hereby authorized, as our
agent and attorney-in-fact for our account and at our risk and in our name,
to place orders for the investment and reinvestment of our assets. In all
purchases, sales and other transactions in our portfolio securities you are
authorized to exercise full discretion and act for us in the same manner
and with the same force and effect as our Fund itself might or could do
with respect to such purchases, sales or other transactions, as well as
with respect to all other things necessary or incidental to the furtherance
or conduct of such purchases, sales or other transactions.

<PAGE>

(c) You will report to our Board of Trustees at each meeting thereof all
changes in our portfolio since your prior report, and will also keep us in
touch with important developments affecting our portfolio and, on your
initiative, will furnish us from time to time with such information as you
may believe appropriate for this purpose, whether concerning the individual
entities whose securities are included in our portfolio, the activities in
which such entities engage, Federal income tax policies applicable to our
investments, or the conditions prevailing in the money market or the
economy generally. You will also furnish us with such statistical and
analytical information with respect to our portfolio securities as you may
believe appropriate or as we may reasonably request. In making such
purchases and sales of our portfolio securities, you will comply with the
policies set from time to time by our Board of Trustees as well as the
limitations imposed by our Declaration of Trust and by the provisions of
the Internal Revenue Code and the 1940 Act relating to regulated investment
companies and the limitations contained in the Registration Statement.

(d) It is understood that you will from time to time employ, subcontract
with or otherwise associate with yourself, entirely at your expense, such
persons as you believe to be particularly fitted to assist you in the
execution of your duties hereunder.

(e) You or your affiliates will also furnish us, at your own expense, such
investment advisory supervision and assistance as you may believe
appropriate or as we may reasonably request subject to the requirements of
any regulatory authority to which you may be subject. You and your
affiliates will also pay the expenses of promoting the sale of our shares
(other than the costs of preparing, printing and filing our registration
statement, printing copies of the prospectus contained therein and
complying with other applicable regulatory requirements), except to the
extent that we are permitted to bear such expenses under a plan adopted
pursuant to Rule 12b-1 under the 1940 Act or a similar rule.

3. We agree, subject to the limitations described below, to be responsible
for, and hereby assume the obligation for payment of, all our expenses,
including: (a) brokerage and commission expenses, (b) Federal, state or
local taxes, including issue and transfer taxes incurred by or levied on
us, (c) commitment fees and certain insurance premiums, (d) interest
charges on borrowings, (e) charges and expenses of our custodian, (f)
charges, expenses and payments relating to the issuance, redemption,
transfer and dividend disbursing functions for us, (g) recurring and
nonrecurring legal and accounting expenses, including those of the
bookkeeping agent, (h) telecommunications expenses, (i) the costs of
organizing and maintaining our
2
<PAGE>

existence as a trust, (j) compensation, including trustees' fees, of any of
our trustees, officers or employees who are not your officers or officers
of your affiliates, and costs of other personnel providing clerical,
accounting supervision and other office services to us as we may request,
(k) costs of shareholder's services including, charges and expenses of
persons providing confirmations of transactions in our shares, periodic
statements to shareholders, and recordkeeping and shareholders' services,
(l) costs of shareholders' reports, proxy solicitations, and trust
meetings, (m) fees and expenses of registering our shares under the
appropriate Federal securities laws and of qualifying such shares under
applicable state securities laws, including expenses attendant upon the
initial registration and qualification of such shares and attendant upon
renewals of, or amendments to, those registrations and qualifications, (n)
expenses of preparing, printing and delivering our prospectus to existing
shareholders and of printing shareholder application forms for shareholder
accounts, (o) payment of the fees and expenses provided for herein, under
the Administrative Services Agreement and under Shareholder Servicing
Agreement and Distribution Agreement, and (p) any other distribution or
promotional expenses contemplated by an effective plan adopted by us
pursuant to Rule 12b-1 under the Act. Our obligation for the foregoing
expenses is limited by your agreement to be responsible, while this
Agreement is in effect, for any amount by which our annual operating
expenses (excluding taxes, brokerage, interest and extraordinary expenses)
exceed the limits on investment company expenses prescribed by any state in
which our shares are qualified for sale.

4. We will expect of you, and you will give us the benefit of, your best
judgment and efforts in rendering these services to us, and we agree as an
inducement to your undertaking these services that you will not be liable
hereunder for any mistake of judgment or for any other cause, provided that
nothing herein shall protect you against any liability to us or to our
security holders by reason of willful misfeasance, bad faith or gross
negligence in the performance of your duties hereunder, or by reason of
your reckless disregard of your obligations and duties hereunder.

5. In consideration of the foregoing we will pay you a fee at the annual
rate of .40% of the Fund's average daily net assets. Your fee will be
accrued by us daily, and will be payable on the last day of each calendar
month for services performed hereunder during that month or on such other
schedule as you shall request of us in writing. You may use any portion of
this fee for distribution of our shares, or for making servicing payments
to organizations whose customers or clients are our shareholders. You may
waive your right to any fee to which you are entitled hereunder, provided
such waiver is

3
<PAGE>
delivered to us in writing. Any reimbursement of our expenses, to which we
may become entitled pursuant to paragraph 3 hereof, will be paid to us at
the same time as we pay you.

6. This Agreement will become effective on the date hereof and shall
continue in effect until ____________ __, 1996 and thereafter for
successive twelve-month periods (computed from each ), provided that such
continuation is specifically approved at least annually by our Board of
Trustees or by a majority vote of the holders of our outstanding voting
securities, as defined in the 1940 Act and the rules thereunder, and, in
either case, by a majority of those of our trustees who are neither party
to this Agreement nor, other than by their service as trustees of the
trust, interested persons, as defined in the 1940 Act and the rules
thereunder, of any such person who is party to this Agreement. Upon the
effectiveness of this Agreement, it shall supersede all previous Agreements
between us covering the subject matter hereof. This Agreement may be
terminated at any time, without the payment of any penalty, (i) by vote of
a majority of our outstanding voting securities, as defined in the 1940 Act
and the rules thereunder, or (ii) by a vote of a majority of our entire
Board of Trustees, on sixty days' written notice to you, or (iii) by you on
sixty days' written notice to us.

7. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by you and this agreement shall terminate
automatically in the event of any such transfer, assignment, sale,
hypothecation or pledge by you. The terms "transfer", "assignment" and
"sale" as used in this paragraph shall have the meanings ascribed thereto
by governing law and in applicable rules or regulations of the Securities
and Exchange Commission.

8. Except to the extent necessary to perform your obligations hereunder,
nothing herein shall be deemed to limit or restrict your right, or the
right of any of your employees or the officers and directors of Reich &
Tang Asset Management, Inc., your general partner, who may also be a
director, officer or employee of ours, or of a person affiliated with us,
as defined in the 1940 Act, to engage in any other business or to devote
time and attention to the management or other aspects of any other
business, whether of a similar or dissimilar nature, or to render services
of any kind to any other corporation, firm, individual or association.

4
<PAGE>

If the foregoing is in accordance with your understanding,
will you kindly so indicate by signing and returning to us the enclosed copy
hereof.

Very truly yours,

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND

By:___________________________________
Name:
Title:

ACCEPTED: , 1996

REICH & TANG ASSET MANAGEMENT L.P.

By: REICH & TANG ASSET MANAGEMENT, INC., as General Partner

By: ___________________________________
Name:
Title:

DISTRIBUTION AGREEMENT

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
the "Fund"

600 Fifth Avenue
New York, New York 10020

________________, 1996

Reich & Tang Distributors L.P.
600 Fifth Avenue
New York, New York 10020

Ladies and Gentlemen:

We hereby confirm our agreement with you as follows:

1. In consideration of the agreements on your part herein contained and of
the payment by us to you of a fee of $1 per year and on the terms and conditions
set forth herein we have agreed that you shall be, for the period of this
agreement, a distributor, as our agent, for the unsold portion of such number of
shares of our beneficial interests, $.01 par value per share, as may be
effectively registered from time to time under the Securities Act of 1933, as
amended (the "1933 Act"). This agreement is being entered into pursuant to the
Distribution and Service Plan (the "Plan") adopted by us in accordance with Rule
12b-1 under the Investment Company Act of 1940, as amended (the "1940 Act").

2. We hereby agree that you will act as our agent, and hereby appoint you
our agent, to offer, and to solicit offers to subscribe to, the unsold balance
of shares of our beneficial interests as shall then be effectively registered
under the Act. All subscriptions for shares of our beneficial interest obtained
by you shall be directed to us for acceptance and shall not be binding on us
until accepted by us. You shall have no authority to make binding subscriptions
on our behalf. We reserve the right to sell shares of our beneficial interest
through other distributors or directly to investors through subscriptions
received by us at our principal office in New York, New York. The right given to
you under this agreement shall not apply to shares of our beneficial interest
issued in connection with (a) the merger or consolidation of any other
investment company with us, (b) our acquisition by purchase or otherwise of all
or substantially all of the assets or stock of any other investment company, or
(c) the reinvestment in shares of our beneficial

<PAGE>

interest by our shareholders of dividends or other distributions or any other
offering by us of securities to our shareholders.

3. You will use your best efforts to obtain subscriptions to shares of our
beneficial interest upon the terms and conditions contained herein and in our
Prospectus, as in effect from time to time. You will send to us promptly all
subscriptions placed with you. We shall furnish you from time to time, for use
in connection with the offering of shares of our beneficial interest, such other
information with respect to us and shares of our beneficial interest as you may
reasonably request. We shall supply you with such copies of our Registration
Statement and Prospectus, as in effect from time to time, as you may request.
Except as we may authorize in writing, you are not authorized to give any
information or to make any representation that is not contained in the
Registration Statement or Prospectus, as then in effect. You may use employees,
agents and other persons, at your cost and expense, to assist you in carrying
out your obligations hereunder, but no such employee, agent or other person
shall be deemed to be our agent or have any rights under this agreement. You may
sell our shares to or through qualified brokers, dealers and financial
institutions under selling and servicing agreements provided that no dealer,
financial institution or other person shall be appointed or authorized to act as
our agent without our written consent. You will arrange for organizations whose
customers or clients are shareholders of our Fund ("Participating
Organizations") to enter into agreements with you for the performance of
shareholder servicing and related administrative functions not performed by you
or the Transfer Agent. Pursuant to our Shareholder Servicing Agreement with you,
you may make payments to Participating Organizations for performing shareholder
servicing and related administrative functions with respect to the Class A
Shares. Such payments will be made only pursuant to written agreements approved
in form and substance by our Board of Directors to be entered into by you and
the Participating Organizations. It is recognized that we shall have no
obligation or liability to you or any Participating Organization for any such
payments under the agreements with Participating Organizations. Our obligation
is solely to make payments to you under the Shareholder Servicing Agreement and
to the Manager under the Investment Management Contract and the Administrative
Services Contract. All sales of our shares effected through you will be made in
compliance with all applicable federal securities laws and regulations and the
Constitution, rules and regulations of the National Association of Securities
Dealers, Inc. ("NASD").

2
<PAGE>

4. We reserve the right to suspend the offering of shares of our beneficial
interest at any time, in the absolute discretion of our Board of Directors, and
upon notice of such suspension you shall cease to offer shares of our beneficial
interests hereunder.

5. Both of us will cooperate with each other in taking such action as may
be necessary to qualify shares of our beneficial interest for sale under the
securities laws of such states as we may designate, provided, that you shall not
be required to register as a broker-dealer or file a consent to service of
process in any such state where you are not now so registered. Pursuant to the
Investment Management Contract in effect between us and the Manager, we will pay
all fees and expenses of registering shares of our beneficial interest under the
Act and of qualification of shares of our beneficial interests, and to the
extent necessary, our qualification under applicable state securities laws. You
will pay all expenses relating to your broker-dealer qualification.

6. We represent to you that our Registration Statement and Prospectus have
been carefully prepared to date in conformity with the requirements of the 1933
Act and the 1940 Act and the rules and regulations of the Securities and
Exchange Commission (the "SEC") thereunder. We represent and warrant to you, as
of the date hereof, that our Registration Statement and Prospectus contain all
statements required to be stated therein in accordance with the 1933 Act and the
1940 Act and the SEC's rules and regulations thereunder; that all statements of
fact contained therein are or will be true and correct at the time indicated or
the effective date as the case may be; and that neither our Registration
Statement nor our Prospectus, when they shall become effective or be authorized
for use, will include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading to a purchaser of shares of our beneficial interest. We
will from time to time file such amendment or amendments to our Registration
Statement and Prospectus as, in the light of future development, shall, in the
opinion of our counsel, be necessary in order to have our Registration Statement
and Prospectus at all times contain all material facts required to be stated
therein or necessary to make any statements therein not misleading to a
purchaser of shares of our beneficial interest. If we shall not file such
amendment or amendments within fifteen days after our receipt of a written
request from you to do so, you may, at your option, terminate this agreement
immediately. We will not file any amendment to our Registration Statement or
Prospectus without giving you reasonable notice thereof in advance; provided,
however, that nothing in this agreement shall in any way limit our right to file
such amendments to our Registration Statement or Prospectus, of whatever
character, as we may deem advisable, such right being

3
<PAGE>
in all respects absolute and unconditional. We represent and warrant to you that
any amendment to our Registration Statement or Prospectus hereafter filed by us
will be carefully prepared in conformity within the requirements of the 1933 Act
and the 1940 Act and the SEC's rules and regulations thereunder and will, when
it becomes effective, contain all statements required to be stated therein in
accordance with the 1933 Act and the 1940 Act and the SEC's rules and
regulations thereunder; that all statements of fact contained therein will, when
the same shall become effective, be true and correct; and that no such
amendment, when it becomes effective, will include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading to a purchaser of our
shares.

7. We agree to indemnify, defend and hold you, and any person who controls
you within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which you or any such controlling person
may incur, under the 1933 Act or the 1940 Act, or under common law or otherwise,
arising out of or based upon any alleged untrue statement of a material fact
contained in our Registration Statement or Prospectus in effect from time to
time or arising out of or based upon any alleged omission to state a material
fact required to be stated in either of them or necessary to make the statements
in either of them not misleading; provided, however, that in no event shall
anything herein contained be so construed as to protect you against any
liability to us or our security holders to which you would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence in the
performance of your duties, or by reason of your reckless disregard of your
obligations and duties under this agreement. Our agreement to indemnify you and
any such controlling person is expressly conditioned upon our being notified of
any action brought against you or any such controlling person, such notification
to be given by letter or by telegram addressed to us at our principal office in
New York, New York, and sent to us by the person against whom such action is
brought within ten days after the summons or other first legal process shall
have been served. The failure so to notify us of any such action shall not
relieve us from any liability which we may have to the person against whom such
action is brought other than on account of our indemnity agreement contained in
this paragraph 7. We will be entitled to assume the defense of any suit brought
to enforce any such claim, and to retain counsel of good standing chosen by us
and approved by you. In the event we do elect to assume the defense of any such
suit and retain counsel of good standing approved by you, the defendant or
defendants in such suit shall bear the fees and expenses of any additional
counsel retained by any of them; but in case we do not

4
<PAGE>

elect to assume the defense of any such suit, or in case you, in good faith, do
not approve of counsel chosen by us, we will reimburse you or the controlling
person or persons named as defendant or defendants in such suit, for the fees
and expenses of any counsel retained by you or them. Our indemnification
agreement contained in this paragraph 7 and our representations and warranties
in this agreement shall remain in full force and effect regardless of any
investigation made by or on behalf of you or any controlling person and shall
survive the sale of any shares of our beneficial interest made pursuant to
subscriptions obtained by you. This agreement of indemnity will inure
exclusively to your benefit, to the benefit of your successors and assigns, and
to the benefit of any of your controlling persons and their successors and
assigns. We agree promptly to notify you of the commencement of any litigation
or proceeding against us in connection with the issue and sale of any shares of
our beneficial interest.

8. You agree to indemnify, defend and hold us, our several officers and
directors, and any person who controls us within the meaning of Section 15 of
the 1933 Act, free and harmless from and against any and all claims, demands,
liabilities, and expenses (including the cost of investigating or defending such
claims, demands or liabilities and any reasonable counsel fees incurred in
connection therewith) which we, our officers or directors, or any such
controlling person may incur under the 1933 Act or under common law or
otherwise, but only to the extent that such liability or expense incurred by us,
our officers or directors or such controlling person shall arise out of or be
based upon any alleged untrue statement of a material fact contained in
information furnished in writing by you to us for use in our Registration
Statement or Prospectus as in effect from time to time, or shall arise out of or
be based upon any alleged omission to state a material fact in connection with
such information required to be stated in the Registration Statement or
Prospectus or necessary to make such information not misleading. Your agreement
to indemnify us, our officers and directors, and any such controlling person is
expressly conditioned upon your being notified of any action brought against us,
our officers or directors or any such controlling person, such notification to
be given by letter or telegram addressed to you at your principal office in New
York, New York, and sent to you by the person against whom such action is
brought, within ten days after the summons or other first legal process shall
have been served. You shall have a right to control the defense of such action,
with counsel of your own choosing, satisfactory to us, if such action is based
solely upon such alleged misstatement or omission on your part, and in any other
event you and we, our officers or directors or such controlling person shall
each have the right to participate in the defense or preparation of the defense
of any such action. The failure so to notify you of any such action shall not
5
<PAGE>
relieve you from any liability which you may have to us, to our officers or
directors, or to such controlling person other than on account of your indemnity
agreement contained in this paragraph 8.

9. We agree to advise you immediately:

a. of any request by the SEC for amendments to our Registration Statement
or Prospectus or for additional information,

b. of the issuance by the SEC of any stop order suspending the
effectiveness of our Registration Statement or Prospectus or the initiation of
any proceedings for that purpose,

c. of the happening of any material event which makes untrue any statement
made in our Registration Statement or Prospectus or which requires the making of
a change in either of them in order to make the statements therein not
misleading, and

d. of all action of the SEC with respect to any amendments to our
Registration Statement or Prospectus.

10. This agreement will become effective on the date hereof and will remain
in effect thereafter for successive twelve-month periods (computed from each
____________), provided that such continuation is specifically approved at least
annually by vote of our Board of Directors and of a majority of those of our
trustees who are not interested persons (as defined in the 1940 Act) and have no
direct or indirect financial interest in the operation of the Plan or in any
agreements related to the Plan, cast in person at a meeting called for the
purpose of voting on this agreement. This agreement may be terminated at any
time, without the payment of any penalty, (i) by vote of a majority of our
entire Board of Directors, and by a vote of a majority of our Directors who are
not interested persons (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Plan or in any agreement
related to the Plan, or (ii) by vote of a majority of our outstanding voting
securities, as defined in the Act, on sixty days' written notice to you, or
(iii) by you on sixty days' written notice to us.

11. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by you and this Agreement shall terminate automatically
in the event of any such transfer, assignment, sale, hypothecation or pledge by
you. The terms "transfer", "assignment" and "sale" as used in this paragraph
shall have the meanings ascribed thereto by governing law and in applicable
rules or regulations of the SEC thereunder.

12. Except to the extent necessary to perform your obligations hereunder,
nothing herein shall be deemed to limit or
6
<PAGE>
restrict your right, the right of any of your employees or the right of any
officers or directors of Reich & Tang Asset Management, Inc., your general
partner, who may also be a director, officer or employee of ours, or of a person
affiliated with us, as defined in the 1940 Act, to engage in any other business
or to devote time and attention to the management or other aspects of any other
business, whether of a similar or dissimilar nature, or to render services of
any kind to another corporation, firm, individual or association.

If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.

Very truly yours,

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND

By:___________________________________

Accepted: ________________, 1996

REICH & TANG DISTRIBUTORS L.P.

By: REICH & TANG ASSET MANAGEMENT, INC.,
as General Partner

By: ___________________________________

McGLADREY & PULLEN L.L.P.
Certified Public Accountants & Consultants

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the use of our report dated December 17, 1996, on the
financial statements referred to therein in Post-Effective Amendment No. 7 to
the Registration Statement on Form N-1A, File No. 33-48014 of Pennsylvania Daily
Municipal Income Fund, as filed with the Securities and Exchange Commission.

We also consent to the reference to our Firm in the Prospectus under the
caption "Selected Financial Information" and in the Statement of Additional
Information under the caption "Counsel and Auditors."

/s/McGLADREY & PULLEN, LLP
McGladrey & Pullen, LLP

New York, New York
March 24, 1997

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
Distribution and Service Plan Pursuant to Rule
12b-1 Under the Investment Company Act of 1940

This Distribution and Service Plan (the "Plan") is hereby amended to
reflect that Reich & Tang Asset Management, Inc. has succeeded as sole general
partner of Reich & Tang Distributors L.P. (the "Distributor") and Reich & Tang
Asset Management L.P. has succeeded as sole limited partner of the Distributor.
The Board of Trustees of the Fund has approved unanimously this amendment to the
Plan and has authorized the Fund to re-execute the Distribution Agreement and
Shareholder Servicing Agreement with the Distributor to reflect the foregoing.
The Plan is hereby amended in its entirety as set forth herein and as authorized
under Section 9 of the previous Plan.

The Plan is adopted by Pennsylvania Daily Municipal Income Fund, Inc. (the
"Fund") in accordance with the provisions of Rule 12b-1 under the Investment
Company Act of 1940 (the "Act").

The Plan

1. The Fund and the Distributor, have entered into a Distribution
Agreement, in a form satisfactory to the Fund's Board of Trustees, under which
the Distributor will act as distributor of the Fund's shares. Pursuant to the
Distribution Agreement, the Distributor, as agent of the Fund, will solicit

<PAGE>
orders for the purchase of the Fund's shares, provided that any subscriptions
and orders for the purchase of the Fund's shares will not be binding on the Fund
until accepted by the Fund as principal.

2. The Fund and the Distributor have entered into a Shareholder Servicing
Agreement in a form satisfactory to the Fund's Board of Trustees, which provides
that the Distributor will be paid a service fee for providing or for arranging
for others to provide all personal shareholder servicing and related maintenance
of shareholder account functions not performed by us or our transfer agent.

3. The Manager may make payments from time to time from its own resources,
which may include the management fees and administrative services fees received
by the Manager from the Fund and from other companies, and past profits for the
following purposes:

(i) to pay the costs of, and to compensate others, including
organizations whose customers or clients are Class A Fund Shareholders
("Participating Organizations"), for performing personal shareholder
servicing and related maintenance of shareholder account functions on
behalf of the Fund;

(ii) to compensate Participating Organizations for providing assistance
in distributing Fund's Shares; and

2
<PAGE>
(iii) to pay the cost of the preparation and printing of brochures and
other promotional materials, mailings to prospective shareholders,
advertising, and other promotional activities, including salaries and/or
commissions of sales personnel of the Distributor and other persons, in
connection with the distribution of the Fund's shares.

The Distributor may also make payments from time to time from its own
resources, which may include the service fee and past profits for the purpose
enumerated in (i) above. Further, the Distributor may determine the amount of
such payments made pursuant to the Plan, provided that such payments will not
increase the amount which the Fund is required to pay to (1) the Manager for any
fiscal year under the Investment Management Contract or the Administrative
Services Agreement in effect for that year or otherwise or (2) to the
Distributor under the Shareholder Servicing Agreement in effect for that year or
otherwise. The Investment Management Contract will also require the Manager to
reimburse the Fund for any amounts by which the Fund's annual operating
expenses, including distribution expenses, exceed in the aggregate in any fiscal
year the limits prescribed by any state in which the Fund's shares are qualified
for sale.

4. The Fund will pay for (i) telecommunications expenses, including the
cost of dedicated lines and CRT terminals, incurred by the Distributor and
Participating
3

Organizations in carrying out its obligations under the
Shareholder Servicing Agreement with respect to the Class A shares of the Fund
and (ii) preparing, printing and delivering the Fund's prospectus to existing
shareholders of the Fund and preparing and printing subscription application
forms for shareholder accounts.

5. Payments by the Distributor or Manager to Participating Organizations as
set forth herein are subject to compliance by them with the terms of written
agreements in a form satisfactory to the Fund's Board of Trustees to be entered
into between the Distributor and the Participating Organizations.

6. The Fund and the Distributor will prepare and furnish to the Fund's
Board of Trustees, at least quarterly, written reports setting forth all amounts
expended for servicing and distribution purposes by the Fund, the Distributor
and the Manager, pursuant to the Plan and identifying the servicing and
distribution activities for which such expenditures were made.

7. The Plan became effective upon approval by (i) a majority of the
outstanding voting securities of the Fund (as defined in the Act), and (ii) a
majority of the Board of Trustees of the Fund, including a majority of the
Trustees who are not interested persons (as defined in the Act) of the Fund and
who have no direct or indirect financial interest in the operation of the Plan
or in any agreement entered into in connection with the Plan, pursuant to a vote
cast in person at a meeting called for the purpose of voting on the approval of
the Plan.

<PAGE>

8. The Plan will remain in effect until ___________ __, 1995 unless earlier
terminated in accordance with its terms, and thereafter may continue in effect
for successive annual periods if approved each year in the manner described in
clause (ii) of paragraph 7 hereof.

9. The Plan may be amended at any time with the approval of the Board of
Trustees of the Fund, provided that (i) any material amendments of the terms of
the Plan will be effective only upon approval as provided in clause (ii) of
paragraph 7 hereof, and (ii) any amendment which increases materially the amount
which may be spent by the Fund pursuant to the Plan will be effective only upon
the additional approval as provided in clause (i) of paragraph 7 hereof (with
each class of the Fund voting separately).

10. The Plan may be terminated without penalty at any time (i) by a vote of
the majority of the entire Board of Trustees of the Fund and by a vote of a
majority of the Trustees of the Fund who are not interested persons (as defined
in the Act) of the Fund and who have no direct or indirect financial interest in
the operation of the Plan or in any agreement related to the Plan, or (ii) by a
vote of a majority of the outstanding voting securities of the Fund (with each
class of the Fund voting separately) (as defined in the Act).

SHAREHOLDER SERVICING
AGREEMENT

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
(the "Fund")

600 Fifth Avenue
New York, New York 10020

, 1996
Reich & Tang Distributors L.P. ("Distributor")
600 Fifth Avenue
New York, New York 10020

Gentlemen:

We herewith confirm our agreement with you as follows:

1. We hereby employ you, pursuant to the Distribution and Service Plan, as
amended, adopted by us in accordance with Rule 12b-1 (the 9"Plan") under the
Investment Company Act of 1940, as amended (the "Act"), to provide the services
listed below. You will perform, or arrange for others including organizations
whose customers or clients are shareholders of our corporation (the
"Participating Organizations") to perform, all personal shareholder servicing
and related maintenance of shareholder account functions ("Shareholder
Services") not performed by us or our transfer agent.

2. You will be responsible for the payment of all expenses incurred by you
in rendering the foregoing services, except that we will pay for (i)
telecommunications expenses, including the cost of dedicated lines and CRT
terminals, incurred by the Distributor and Participating Organizations in
rendering such services to the Class A Shareholders, and (ii) preparing,
printing and delivering our prospectus to existing shareholders and preparing
and printing subscription application forms for shareholder accounts.

3. You may make payments from time to time from your own resources,
including the fee payable hereunder and past profits to compensate Participating
Organizations, for providing Shareholder Servicesd. Payments to Participating
Organizations to compensate them for providing Shareholder Services are subject
to compliance by them
<PAGE>

with the terms of written agreements satisfactory to our Board of Trustees to be
entered into between the Distributor and the Participating Organizations. The
Distributor will in its sole discretion determine the amount of any payments
made by the Distributor pursuant to this Agreement, provided, however, that no
such payment will increase the amount which we are required to pay either to the
Distributor under this Agreement or to the Manager under the Investment
Management Contract, the Administrative Services Agreement, or otherwise.

4. We will expect of you, and you will give us the benefit of, your best
judgment and efforts in rendering these services to us, and we agree as an
inducement to your undertaking these services that you will not be liable
hereunder for any mistake of judgment or for any other cause, provided that
nothing herein shall protect you against any liability to us or to our
shareholders by reason of willful misfeasance, bad faith or gross negligence in
the performance of your duties hereunder, or by reason of your reckless
disregard of your obligations and duties hereunder.

5. In consideration of your performance, we will pay you a service fee as
defined by Article III, Section 26(b)(9) of the Rules of Fair Practice, as
amended, of the National Association of Securities Dealers, Inc. at the annual
rate of one quarter of one percent (0.25%) of the Fund's average daily net
assets. Your fee will be accrued by us daily, and will be payable on the last
day of each calendar month for services performed hereunder during that month or
on such other schedule as you shall request of us in writing. You may waive your
right to any fee to which you are entitled hereunder, provided such waiver is
delivered to us in writing.

6. This Agreement will become effective on the date hereof and thereafter
for successive twelve-month periods (computed from each ___________), provided
that such continuation is specifically approved at least annually by vote of our
Board of Trustees and of a majority of those of our trustees who are not
interested persons (as defined in the Act) and have no direct or indirect
financial interest in the operation of the Plan or in any agreements related to
the Plan, cast in person at a meeting called for the purpose of voting on this
Agreement. This Agreement may be terminated at any time, without the payment of
any penalty, (i) by vote of a majority of our entire Board of Trustees, and by a
vote of a majority of our Trustees who are not interested persons (as defined in
the Act) and who have no direct or indirect financial interest in the operation
of the Plan or in any agreement related to the Plan, or (ii) by vote of a
majority of the outstanding voting securities of the Fund's Class A Shares, as
defined in the Act, on sixty days' written notice to you, or (iii) by you on
sixty days' written notice to us.

2
<PAGE>

7. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by you and this Agreement shall terminate automatically
in the event of any such transfer, assignment, sale, hypothecation or pledge by
you. The terms "transfer", "assignment" and "sale" as used in this paragraph
shall have the meanings ascribed thereto by governing law and in applicable
rules or regulations of the Securities and Exchange Commission thereunder.

8. Except to the extent necessary to perform your obligations hereunder,
nothing herein shall be deemed to limit or restrict your right, the right of any
of your employees or the right of any officers or directors of Reich & Tang
Asset Management, Inc., your general partner, who may also be a trustee, officer
or employee of ours, or of a person affiliated with us, as defined in the Act,
to engage in any other business or to devote time and attention to the
management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to another corporation,
firm, individual or association.

If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.

Very truly yours,

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND

By:

ACCEPTED: , 1996

REICH & TANG DISTRIBUTORS L.P.

By: REICH & TANG ASSET MANAGEMENT, INC.,
as General Partner

By:
3

<ARTICLE> 6
<LEGEND> The schedule contains summary financial information
extracted from the financial statements and supporting
schedules as of the end of the most current period and is
qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 888130
<NAME> Pennsylvania Daily Municipal Income Fund
<SERIES>
<NUMBER> 1
<NAME> Pennsylvania Daily Municipal Income Fund, Inc.

<S> <C>
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<PERIOD-TYPE> YEAR
<INVESTMENTS-AT-COST> 35830755
<INVESTMENTS-AT-VALUE> 35830755
<RECEIVABLES> 274501
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 350345
<TOTAL-ASSETS> 36455601
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 115629
<TOTAL-LIABILITIES> 115629
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 36340913
<SHARES-COMMON-STOCK> 36340913
<SHARES-COMMON-PRIOR> 40981143
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (942)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 36339972
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1458741
<OTHER-INCOME> 0
<EXPENSES-NET> 269156
<NET-INVESTMENT-INCOME> 1189585
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1189585
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1189584
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 150382995
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</TABLE>