PENNSYLVANIA DAILY MUNICIPAL INCOME FUND INC, 485BPOS, 1998-03-27

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND INC
485BPOS, 1998-03-27

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As filed with the Securities and Exchange Commission on March 27, 1998
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. 8 [X]

and/or

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

Amendment No. 9 [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 filed a Rule 24f-2 Notice for its fiscal year ended November 30,
1997 on January 12, 1998.

<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. . . Financial Highlights

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, Policies and
and Policies . . . . . . . . . . . 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;
Other Services . . . . . . . . . . Distribution and 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 Statements. . . . . . . Independent Auditor's Report;
Statement of Net Assets (audited),
dated November 30, 1997; Statement
of Operations (audited), dated
November 30, 1997; Statement of
Changes in Net Assets (audited) as
of November 30, 1997; Notes to
Financial Statements

<PAGE>

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

PROSPECTUS
April 1, 1998

Pennsylvania Daily Municipal Income Fund (the "Fund") is an 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 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 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 a prospective investor
should know before investing in the Fund. A Statement of Additional Information
about the Fund has been filed with the Securities and Exchange Commission (the
"SEC") 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. The SEC maintains a website (http://www.sec.gov)
that contains the Statement of Additional Information and other reports and
information regarding the Fund which have been filed electronically with the
SEC.

Reich & Tang Asset Management L.P. is a registered investment adviser and acts
as investment manager of the Fund. Reich & Tang Distributors, Inc. acts as
distributor of the Fund's shares and 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 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 SEC OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SEC 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 OF FEES AND EXPENSES

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

Management Fees (After Fee Waiver) 0.00% 0.00%
12b-1 Fees 0.25% 0.25%
Other Expenses 0.45% 0.45%
Administration Fees (After Fee Waiver) 0.00% 0.00%
------------
Total Fund Operating Expenses (After Fee Waiver) 0.70% 0.45%

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 $25 $57

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 a portion of the Administration Fees with
respect to both Class A and Class B shares. Expense information in the table has
been restated to reflect current fees had they been in effect during the
previous fiscal year. Absent the fee waivers, the Management Fees and the
Administration Fees would be .40% and .21% for both the 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 1.31% and 1.06%, 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.

</TABLE>

<PAGE>

FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period)

The following financial highlights 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.

Year Ended December 16, 1992
November 30, (Commencement of
Class A --------------------------------------------------- Sales) to
- ------- 1997 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........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income..................... 0.030 0.030 0.034 0.024 0.022

Less distributions:
Dividends from net investment income ( 0.030) ( 0.030) ( 0.034) ( 0.024) ( 0.022)
--------- --------- --------- --------- ---------
Net asset value, end of period.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total Return................................ 3.05% 3.01% 3.50% 2.44% 2.28%*

Ratios/Supplemental Data
Net assets, end of period (000)............. $ 43,064 $ 36,335 $ 40,980 $ 43,559 $ 38,817

Ratios to average net assets:
Expenses.................................. 0.70% 0.68% 0.59% 0.49% 0.22%*
Net investment income..................... 3.00% 2.97% 3.44% 2.44% 2.26%*
Management, administration fees
and shareholder servicing fees waived... 0.49% 0.49% 0.61% 0.68% 0.85%*
Expenses reimbursed....................... -- -- -- -- 0.33%*
Expense offsets........................... -- 0.01% -- -- --

</TABLE>

October 10, 1996
Year (Commencement of
Class B Ended Sales) to
- ------- November 30, 1997 November 30, 1996
----------------- -----------------
<S> <C> <C>

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

Net asset value, beginning of period................. $ 1.00 $ 1.00
--------- ---------

Income from investment operations:
Net investment income.............................. 0.033 0.005

Less distributions:
Dividends from net investment income............... ( 0.033) ( 0.005)
-------- --------
Net asset value, end of period....................... $ 1.00 $ 1.00
========= =========
Total Return......................................... 3.31% 3.25%*

Ratios/Supplemental Data
Net assets, end of period (000)...................... $ 392 $ 5

Ratios to average net assets:
Expenses............................................. 0.45% 0.42%*
Net investment income................................ 3.28% 3.21%*
Management and administration fees waived............ 0.49% 0.27%*
Expense offsets...................................... -- 0.01%*

*Annualized
</TABLE>
<PAGE>

INTRODUCTION

Pennsylvania Daily Municipal Income Fund (the "Fund") is an 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, Inc. (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 of 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 Obligations and Participation Certificates as defined
herein. 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
<PAGE>

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
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 and of concentration in the banking industry through its
investments in 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 an 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 ("Participation Certificates"). 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 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 Federal
income taxation, existing law exempts 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 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 laws of Pennsylvania
("Territorial Municipal Obligations") should be exempt from Pennsylvania income
tax 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,
<PAGE>

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
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, 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. 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 will 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 (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
<PAGE>

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.

The Fund may only purchase securities 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"); (ii) Municipal Obligations which are subject to a Demand Feature or
Guarantee (as such terms are defined in Rule 2a-7 of the 1940 Act) and which
have received a rating from an NRSRO, or such guarantor has received a rating
from an NRSRO, with respect to a class of debt obligations (or any debt
obligation within that class) that is comparable in priority and security to the
Guarantee (unless, the guarantor, directly or indirectly, controls, is
controlled by or is under common control with the issuer or the security subject
to the Guarantee); and the issuer of the Demand Feature or Guarantee, or another
institution, has undertaken promptly to notify the holder of the security in the
event the Demand Feature or Guarantee is substituted with another Demand Feature
or Guarantee; and (iii) unrated Municipal Obligations determined by the Fund's
Board of Trustees to be of comparable quality. In addition, 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) are deemed unrated and may be purchased if such had received a long-term
rating from the Requisite NRSROs in one of the three highest rating categories.
Provided, however, that such may not be purchased if it (i) does not satisfy the
rating requirements set forth in the preceding sentence and (ii) has received a
long-term rating from any NRSRO that is not within the three highest long-term
rating 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" in the
Statement of Additional Information.) 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
<PAGE>

"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.

Subsequent to its purchase by the Fund, the quality of an investment may cease
to be rated or its rating may be reduced such that the investment is no longer a
First Tier Security or is rated 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. The term First Tier Security
means any Eligible Security that: (i) is a rated security that has received a
short-term rating from the Requisite NRSROs in the highest short-term rating
category for debt obligations; (ii) is an unrated security that is, as
determined by the fund's board of directors, to be of comparable quality; (iii)
is a security issued by a registered investment company that is a money market
fund; or (iv) is a government security.

In addition, in the event that a security (1) is in default, (2) ceases to be an
Eligible Security, (3) is determined to no longer present minimal credit risks
or an event of insolvency occurs with respect to the issuer of a portfolio
security or the provider of any Demand Feature or Guarantee, 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 a security is disposed of, such disposal shall occur 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 SEC 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 Participation Certificates, which
may be secured by 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 investment
restrictions that are set forth in the
<PAGE>

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 10%
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 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. Immediately after the acquisition of any
securities subject to a Demand Feature or Guarantee (as such terms are
defined in Rule 2a-7 of the Investment Company Act of 1940), with respect
to 75% of the total assets of the Fund, not more than 10% of the Fund's
assets may be invested in securities that are subject to a Guarantee or
Demand Feature from the same institution. However, the Fund may only invest
more than 10% of its assets in securities subject to a Guarantee or Demand
Feature issued by a non-controlled person.

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.

With respect to 75% of its total assets, the Fund shall invest not more than 5%
of its total assets in Municipal Obligations or Participation Certificates
issued by a single issuer. Provided, however, the Fund shall not invest more
than 5% of its total assets in Municipal Obligations or Participation
Certificates issued by a single issuer, unless Municipal Obligations are First
Tier Securities.

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
<PAGE>

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

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 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 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
<PAGE>

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, 1998 the Manager was
investment manager, adviser or supervisor with respect to assets aggregating in
excess of $11.28 billion. The Manager acts as manager or administrator of
fifteen other registered investment companies and also advises pension trusts,
profit-sharing trusts and endowments.

Effective January 1, 1998, NEIC Operating Partnership, L.P. ("NEICOP") is the
limited partner and owner of a 99.5% interest in the Manager replacing New
England Investment Companies, L.P. ("NEICLP") as the limited partner and owner
of such interest in the Manager due to a restructuring by New England Investment
Companies, Inc. ("NEIC"). Reich & Tang Asset Management, Inc. (a wholly-owned
subsidiary of NEICOP) is the sole general partner and owner of the remaining .5%
interest of the Manager. NEIC, a Massachusetts corporation, serves as the
managing general partner of NEICOP.

Reich & Tang Asset Management, Inc. is an indirect subsidiary of Metropolitan
Life Insurance Company ("MetLife"). Also, MetLife directly and indirectly owns
approximately 47% of the outstanding partnership interests of NEICOP, and may be
deemed a "controlling person" of the Manager. Reich & Tang, Inc. owns, directly
and indirectly, approximately 13.7% of the outstanding partnership interests of
NEICOP.

MetLife is a mutual life insurance company with assets of $297.6 billion at
December 31, 1996. It is the second largest life insurance company in the United
States in terms of total assets. On August 30, 1996, The New England Mutual Life
Insurance Company ("The New England") and MetLife merged, with MetLife being the
continuing company. MetLife provides a wide range of insurance and investment
products and services to individuals and groups and its the leader among United
States life insurance companies in terms of total life insurance in force, which
exceeded $1.6 trillion at December 31, 1996 for MetLife and its insurance
affiliates. MetLife and its affiliates provide insurance or other financial
services to approximately 36 million people worldwide.

NEICOP is a holding company offering a broad array of investment styles across a
wide range of asset categories through thirteen subsidiaries, divisions and
affiliates offering a wide array of investment styles and products to
institutional clients. Its business units, in addition to the manager, include
AEW Capital Management, L.P., Back Bay Advisors, L.P., Capital Growth
Management, Limited Partnership, Greystone Partners, L.P., Harris Associates,
L.P., Jurika & Voyles, L.P., Loomis, Sayles & Company, L.P., New England Funds,
L.P., New England Investment Associates, Inc., Snyder Capital Management, L.P.,
Vaughan, Nelson, Scarborough & McCullough, L.P., and Westpeak Investment
Advisors, L.P. These affiliates in the aggregate are investment advisors or
managers to 80 other registered investment companies.

The recent restructuring of NEICLP did not result in a change in control of the
Manager and has no impact upon the Manager's performance of its responsibilities
and obligations.

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, Inc., 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 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
<PAGE>

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 Class A and Class B shares 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.
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.) All
<PAGE>

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 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 SEC determines that trading thereon is restricted, or for any period during
<PAGE>

which an emergency (as determined by the SEC) 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 SEC 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 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
<PAGE>

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 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,
<PAGE>

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, a Voided Copy of your money
market check 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. You may elect at any time to terminate your
participation by notifying in writing the appropriate depositing entity and/or
federal agency. Death or legal incapacity will automatically terminate your
participation in the Privilege. 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:

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
<PAGE>

(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 and mailed to the shareholder
of record.

Checks

By making the appropriate election on their subscription order 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.

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.
<PAGE>

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
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
<PAGE>

sold. Shares of the same Class may be exchanged only between 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.

DISTRIBUTION AND SERVICE PLAN

Pursuant to Rule 12b-1 under the 1940 Act, the SEC 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, Inc.
(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.

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.
<PAGE>

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 with respect to Class A shares 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 Class A 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, 1997, the total amount spent pursuant to the Plan was .35% of the average
daily net assets of the Fund. Of such amount, .25% was paid directly by the Fund
and .10% 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. Although it is not intended, it is possible that
the Fund may realize short-term or long-term capital gains or losses. 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 "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
<PAGE>

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 of the underlying
Municipal Obligations and the interest thereon will be exempt from regular
Federal income taxes to the Fund to the same extent as interest on the
underlying Municipal Obligations. 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.

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 SEC as an open-end
management investment company.

The Fund prepares semi-annual unaudited and annual audited reports which include
a list of
<PAGE>

investment securities held by the Fund and which are sent to shareholders.

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
stock, (c) for approval of revisions to the Fund's distribution agreement with
respect to a particular class or series of stock, and (d) upon the written
request of shareholders 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 SEC or any state, or
as the Trustees may consider necessary or desirable. 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.

As the year 2000 approaches, an issue has emerged regarding how existing
application software programs and operating systems can accomodate this date
value. Failure to adequately address this issue could have potentially serious
repercussions. The Manager is in the process of working with the Fund's service
providers to prepare for the year 2000. Based on information currently
available, the Manager does not expect that the Fund will incur significant
operating expenses or be required to incur materials costs to be year 2000
compliant. Although the Manager does not anticipate that the year 2000 issue
will have a material impact of the Fund's ability to provide service at current
levels, there can be no assurance that steps taken in preparation for the year
2000 will be sufficient to avoid adverse impact on the Fund.

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 SEC,
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 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

Fund's transfer agent and custodian do not assist in, and are not responsible
for, investment decisions involving assets of the Fund.

<PAGE>

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

Table of Fees and Expenses.....................
Financial Highlights...........................
Introduction...................................

Investment Objectives,
Policies and Risks...........................
Risk Factors...................................
Management of the Fund......................... PENNSYLVANIA
Description of Shares.......................... DAILY
Dividends and Distributions.................... MUNICIPAL
How to Purchase and Redeem Shares.............. INCOME
Investments Through FUND
Participating Organizations................
Direct Purchase and
Redemption Procedures ....................
Initial Purchases of Shares.................. PROSPECTUS
Electronic Funds Transfers (EFT), April 1, 1998
Pre-authorized Credit and
Direct Deposit Privilege..................
Subsequent Purchases of Shares...............
Redemption of Shares.........................
Exchange Privilege...........................
Specified Amount Automatic
Withdrawal Plan...........................
Distribution and Service Plan..................
Federal Income Taxes...........................
Pennsylvania Income Taxes......................
General Information ...........................
Net Asset Value................................
Custodian and Transfer Agent...................

<PAGE>

PENNSYLVANIA 600 Fifth Avenue, New York, NY 10020
DAILY MUNICIPAL (212) 830-5220
INCOME FUND
================================================================================

STATEMENT OF ADDITIONAL INFORMATION
April 1, 1998

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, 1998
and should be read in conjunction with the Prospectus. The Fund's Prospectus may
be obtained, without charge, 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>
<S> <C> <C> <C>
Table of Contents
- -------------------------------------------------------------------------------------------------------------------
Investment Objectives, Yield Quotations..................................
Policies and Risks...................................... Manager...........................................
Description of Municipal Obligations........................ Expense Limitation...........................
Variable Rate Demand Instruments Management of the Fund............................
and Participation Certificates........................ Compensation Table...........................
When-Issued Securities.................................. Counsel and Auditors.........................
Stand-by Commitments.................................... Distribution and Service Plan.....................
Taxable Securities.......................................... Description of Shares.............................
Repurchase Agreements................................... Federal Income Taxes..............................
Pennsylvania Risk Factors................................... Pennsylvania Income Taxes.........................
Investment Restrictions..................................... Custodian and Transfer Agent......................
Portfolio Transactions...................................... Description of Ratings............................
How to Purchase Taxable Equivalent Yield Tables...................
and Redeem Shares....................................... Independent Auditor's Report......................
Net Asset Value............................................. Financial Statements..............................
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

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

INVESTMENT OBJECTIVES, POLICIES AND RISKS

As stated in the Prospectus, the Fund is an 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 ("Participation
Certificates"). 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 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 Federal income taxation, existing law
exempts 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 Participation Certificates in Pennsylvania
Municipal Obligations, an investment in Fund shares should be made with an
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
<PAGE>

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 securities 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") ; (ii) Municipal Obligations which are subject to a Demand Feature or
Guarantee (as such terms are defined in Rule 2a-7 of the 1940 Act) and which
have received a rating from an NRSRO or such guarantor has received a rating
from an NRSRO with respect to a class of debt obligations (or any debt
obligation within that class) that is comparable in priority and security to the
Guarantee (unless, the guarantor, directly or indirectly, controls, is
controlled by or is under common control with the issuer or the security subject
to the Guarantee); and the issuer of the Demand Feature or Guarantee, or another
institution, has undertaken promptly to notify the holder of the security in the
event the Demand Feature or Guarantee is substituted with another Demand Feature
or Guarantee; and (iii) unrated Municipal Obligations determined by the Fund's
Board of Trustees to be of comparable quality. In addition, 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) are deemed unrated and may be purchased if such had received a long-term
rating from the Requisite NRSROs in one of the three highest rating categories.
Provided, however, that such may not be purchased if it (i) does not satisfy the
rating requirements set forth in the preceding sentence and (ii) has received a
long-term rating from any NRSRO that is not within the three highest long-term
rating 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 concentration in Municipal Obligations and Participation Certificates may
present greater risks than in the case of a more diversified company. 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.)

<PAGE>

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 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
<PAGE>

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 such that the investment is no longer a
First Tier Security or is rated below the minimum required for purchase by the
Fund. If this occurs, the Board of Trustees of the Fund shall promptly reassess
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, or an event of insolvency occurs with
respect to the issuer of a portfolio security or the provider of any Demand
Feature or Guarantee, 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 (the "SEC") 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.. 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 a Guarantee 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 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 which are Eligible
Securities.. 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
<PAGE>

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.)

In view of the "concentration" of the Fund in bank Participation Certificates in
Pennsylvania Municipal Obligations, which may be secured by 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. 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 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, which limit
the degree to which interest on such variable rate demand instruments may
fluctuate; to the extent state law contains such limits, 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

- --------------------------------------------------------------------------------
* The "prime rate" is generally the rate charged by a bank to its creditworthy
customers for short-term loans. The prime rate of a particular bank may differ
from other banks and will be the rate announced by each bank on a particular
day. Changes in the prime rate may occur with great frequency and generally
become effective on the date announced.
<PAGE>

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 indecies, 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 these 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-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

<PAGE>

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-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.)
<PAGE>

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
10% 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 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. For 1994 through 1997, 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 1998, the unadjusted
unemployment rate was 5.2% in both the Commonwealth and the United States, while
the
<PAGE>

seasonally adjusted unemployment rate for the Commonwealth was 4.6% compared to
4.7% 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 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 1997 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 1993 through 1997 rose at an annual
average rate of 4.3%. Total revenues and other income sources increased during
this period by an average annual rate of 4.1%. Expenditures and other uses
during the fiscal 1993 through 1997 period rose at a 3.8% annual rate, led by
annual average increases of 14.1% for protection of persons and property program
costs. At the close of fiscal 1997, the fund balance for the governmental fund
types totaled $2,900.9 million, an increase of $914.6 million over fiscal 1996
and $940.9 million over fiscal 1993.
<PAGE>

Commonwealth revenues for the 1997 fiscal year were above estimate and exceeded
fiscal year expenditures and encumbrances. Fiscal 1997 was the sixth consecutive
fiscal year the Commonwealth reported an increase in the fiscal year-end
unappropriated balance. Prior to reserves for the transfer to the Tax
Stabilization Reserve Fund, the fiscal 1996 closing unappropriated surplus was
$183.8 million, a decrease of $366.2 million over the fiscal 1995 closing
unappropriated surplus prior to transfers.

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 unappropriated balance of Commonwealth revenues increased during the 1997
fiscal year by $432.9 million. Higher than estimated revenues and slightly lower
expenditures than budgeted caused the increase. The unappropriated balance rose
from an adjusted amount of $158.5 million at the beginning of fiscal 1997 to
$591.4 million (prior to reserves for transfer to the Tax Stabilization Reserve
Fund) at the close of the fiscal year. Transfers to the Tax Stabilization
Reserve Fund for fiscal 1997 operations are expected to be $88.7 million, which
represents the normal fifteen percent of the ending unappropriated balance, plus
an additional $100 million authorized by the General Assembly when it enacted
the fiscal 1998 budget.

Commonwealth revenues (prior to tax refunds) during the fiscal year totaled
$17,320.6 million, $576.1 (3.4 percent) above the estimate made at the time the
budget was enacted. Revenue from taxes was the largest contributor to higher
than estimated receipts. Tax revenue in fiscal 1997 grew 6.1 percent over tax
revenues in fiscal 1996. This rate of increase was not adjusted for legislated
tax reductions that affected receipts during both of those fiscal years and
therefore understates the actual underlying rate of growth of tax revenue during
fiscal 1997. Receipts from the personal income tax produced the largest single
component of higher revenues for the fiscal year. Personal income collections
were $236.3 million over estimate representing a 6.9 percent increase over
fiscal 1996 receipts. Receipts of the sales and use tax were $185.6 million over
estimate representing a 6.2 percent increase. Collections of corporate taxes,
led by the capital stock and franchise and the gross receipt taxes, also
exceeded their estimates for the fiscal year. Non-tax revenues were $19.8
million (5.8 percent) over estimate mostly due to higher than anticipated
interest earnings.
<PAGE>

Fiscal 1998 Budget

The budget for fiscal 1998 was enacted in May 1997. Commonwealth revenues for
the fiscal year at that time were estimated to be $17,435.4 million before
reserves for tax refunds. That estimate represented an increase over estimated
fiscal 1997 Commonwealth revenues of 1.0 percent. Although fiscal 1997 revenues
exceeded the fiscal 1998 budget estimate, the adopted fiscal 1998 budget revenue
estimate remains unchanged and represents a 0.7 percent increase over actual
fiscal 1997 revenues. Fiscal 1998 estimates for Commonwealth revenues are based
on an economic forecast for national economic growth to slow through the
remainder of calendar year 1997. A growth rate of just above 1.0 percent is
anticipated by the Commonwealth to be maintained for the last two quarters of
the 1998 fiscal year and result in a 1.2 percent growth rate in real gross
domestic product for the second calendar quarter of 1998 over the second quarter
of 1997. This anticipated rate of economic growth is a result of anticipated
slowing of gains in consumer spending, business investment and residential
housing. Inflation is projected to remain modest and the unemployment rate is
expected to reach 6.0 percent by the second calendar quarter of 1998.

The rate of anticipated growth of Commonwealth revenues is also affected by the
enactment of tax reductions and tax revenue dedications effective for the 1998
fiscal year. Excluding these newly enacted changes, revenues are projected to
increase by 2.4 percent during fiscal 1998. Tax reductions enacted for the 1998
fiscal year budget totaled an estimate of $170.6 million, including $16.2
million that is reflected in higher projected tax refunds. In addition, $75
million of existing sales tax revenue has been earmarked for mass transit
funding and one cent of the cigarette tax ($10.8 million) has been earmarked for
a children's health program and are no longer included in the General Fund.
Major changes to taxes enacted for fiscal 1998 include: (i) the repeal of the
sales and use tax on computer services ($79.1 million); (ii) an increase in the
amount of income that is exempt from the personal income tax for low-income
families ($25.4 million); (iii) enactment of a research and development tax
credit program for business ($15.0 million); (iv) conforming state tax laws to
federal laws for subchapter S and limited liability companies ($16.3 million);
and various other miscellaneous changes. Most changes are effective beginning in
July 1997, although some are effective retroactively to January 1997.

Appropriations enacted for fiscal 1998 are 3.7 percent ($618 million) above
appropriations enacted for fiscal 1997 (including supplemental appropriations).
Major funding increases provided by the fiscal 1998 budget include; (i) $166
million of appropriations for elementary and secondary education plus an
estimated $51 million in reduced employer retirement contributions payable by
local school districts due to a reduction in the contribution rate; (ii) $42
million for higher education institutions plus $16 million for student
scholarships; (iii) $70 million for higher caseload, utilization, and cost of
nursing home care; (iv) $60 million for economic development assistance through
programs providing incentive grants and loans; and (v) $38 million for
corrections including $17 million for operating costs for new and expanded
facilities. The balance of the increase is spread over many other departments
and program operations.

Based on current expectations and the adopted budget for fiscal 1998 and
excluding any estimate for appropriations lapses during the fiscal year, the
unappropriated surplus is projected to decline from $402.7 million at the
beginning of the fiscal year to $16.7 million at fiscal year-end (prior to
transfer to the Tax Stabilization Reserve Fund).

Proposed Fiscal 1999 Budget

In February 1998, the Governor presented his proposed General Fund budget for
fiscal 1999 to the General Assembly. Revenue estimates in the proposed budget
were developed using a national economic forecast with a projected real gross
domestic product growth annual rate below 2 percent. Total commonwealth revenues
before reductions for the tax refunds and proposed tax changes are estimated to
be $18,191.0 million, 2.9 percent above revised estimates for fiscal 1997.
Proposed appropriations from those revenues total $17,787.4 million, a 3.0
percent increase over currently estimated appropriations for fiscal 1998. As
proposed, the fiscal 1999 budget assumes the draw down of the currently
estimated $280.6 million unappropriated surplus at June 30, 1998, however, no
appropriations lapses are included in this projection. The proposed fiscal 1999
budget includes five proposed tax reductions representing an estimated $128.1
million (0.7 percent) of fiscal 1999 revenues. The proposal with the largest
effect on revenues is an expansion of the amount of household income eligible
for tax revenues. The proposal with the largest effect on revenues is an
expansion of the amount of household income eligible for tax forgiveness from
the
<PAGE>

personal income tax and is estimated at $54.1 million. A 0.5 mill reduction to
the tax rate for the capital stock and franchise tax and an increase from three
to ten years in the time period for a business to recover operating losses for
corporate net tax purpose are also proposed. Estimated fiscal 1999 costs of
these proposals are $46.2 million and $17.8 million respectively. In addition,
funding for two tax credit programs is proposed at $5 million each. All proposed
tax changes 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 proposed 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 August 29, 1997 Auditor General
certificate, the average annual tax revenues deposited in all funds in the five
fiscal years ended June 30, 1997 was approximately $19.6 billion, outstanding
net debt totaled $3.7 billion at August 31, 1997, and therefore, the net debt
limitation for the 1998 fiscal year is $30.6 billion, approximately $2.5 billion
less than the prior fiscal year. At August 29, 1997, the amount of debt
authorized by law to be issued, but not yet incurred, was $17.1 billion.

Outstanding general obligation debt totaled $4,795.1 million at June 30, 1997, a
decrease of $261.0 million from June 30, 1996. Over the ten-year period ending
June 30, 1997, total outstanding general obligation debt increased at an annual
rate of 0.5 percent. Within the most recent five-year period, outstanding
general obligation debt has decreased at an annual rate of 0.3 percent.

Debt Ratings

All outstanding general obligation bonds of the Commonwealth are rated "AA-" by
S&P and "Aa3" 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 $1,102.4 million in Special Tax
Revenue Bonds outstanding as of June 30, 1997.

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.
<PAGE>

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 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 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. Immediately after the
acquisition of any securities subject to a Demand Feature or Guarantee (as
such terms are defined in Rule 2a-7 under the Investment Company Act of
1940), with respect to 75% of the total assets of the Fund, not more
<PAGE>

than 10% of the Fund's assets may be invested in securities that are
subject to a Guarantee or Demand Feature from the same institution.
However, the Fund may only invest more than 10% of its assets in securities
subject to a Guarantee or Demand Feature issued by a non-controlled person.

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.

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, Martin Luther King, Jr. Day, Presidents' 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.
<PAGE>

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 SEC. 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" for each Class 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 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 for each Class 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.)
<PAGE>

The Fund's Class A shares' yield for the seven-day period ended February 28,
1998 was 2.87%, which is equivalent to an effective yield of 2.91%. The Fund's
Class B shares' yield for the seven-day period ended February 28, 1998 was
3.41%, which is equivalent to an effective yield of 3.47%.

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, 1998, the Manager was
investment manager, adviser or supervisor with respect to assets aggregating in
excess of $11.28 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.

Reich & Tang Asset Management, Inc., is an indirect subsidiary of Metropolitan
Life Insurance Company ("MetLife"). Also, MetLife directly and indirectly owns
approximately 47% of the outstanding partnership interests of NEICOP, and may be
deemed a "controlling person" of the Manager. Reich & Tang, Inc. owns, directly
and indirectly, approximately 13.7% of the outstanding partnership interests of
NEICOP.

The recent restructuring of NEICLP did not result in a change in control of the
Manager and has no impact upon the Manager's performance of its responsibilities
and obligations.

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 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, 1997, the fee payable to the Manager under the Investment
Management Contract was $170,844, of which $124,396 was waived. The Fund's net
assets at the close of business on November 30, 1997 totaled $43,455,857. For
the Fund's fiscal year ended November 30, 1996, the fee payable the manager
under the Investment management contract was $160,103, $28,516 of which 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 to the Manager under the Investment Management Contract was $155,535,
$63,396 of which was waived. The Fund's net assets at the close of business on
November 30, 1995 totaled $40,980,201.

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, 1997, the fee payable to the Manager under the Administrative
Services Contract was $89,693, of which $85,422 was waived. 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.

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
<PAGE>

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, SEC 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. As a
result of the passage of the National Securities Markets Improvement Act of
1996, all state expense limitations have been eliminated at this time.

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.

Pursuant to the Investment Management Contract, for the fiscal years ended
November 30, 1995, November 30, 1996 and November 30, 1997 the Manager received
investment Management and administrative services fees aggregating $92,139,
$135,590 and $50,719 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.

Steven W. Duff, 44 - 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 Back Bay Fund, Inc., 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., Short Term
Income Fund, Inc., and Virginia Daily Municipal 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, 66 - Professor of Business Administration 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., Back Bay Funds, 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., Virginia Daily Municipal Income Fund, Inc., and a Trustee of
Florida Daily Municipal Income Fund, Institutional Daily Income Fund and
Pennsylvania Daily Municipal Income Fund.

Robert Straniere, 56 - 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., Back Bay Funds, 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., Virginia Daily Municipal Income Fund, Inc. and
a Trustee of Florida Daily Municipal Income Fund, Institutional Daily Income
Fund and Pennsylvania Daily Municipal Income Fund.
<PAGE>

Dr. Yung Wong, 59 - 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., Back
Bay Funds, 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 Virginia Daily
Municipal 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, 47 - 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 Back Bay Funds, Inc., 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., Tax Exempt Proceeds Fund, Inc. and Virginia Daily
Municipal Income Fund, Inc.

Lesley M. Jones, 49 - 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 Back Bay Funds, Inc., 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., Short Term Income Fund,
Inc. and Virginia Daily Municipal Income Fund, Inc.

Dana E. Messina, 41 - 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 Back Bay Funds, Inc., 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.. Tax Exempt Proceeds Fund, Inc. and Virginia Daily Municipal Income Fund,
Inc.

Bernadette N. Finn, 50 - 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 Back Bay Funds, Inc.,
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, Tax Exempt Proceeds Fund, Inc. and Virginia Daily
Municipal Income 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 Back Bay Funds, Inc.,
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., Tax Exempt Proceeds Fund, Inc. and Virginia Daily
Municipal Income Fund, Inc., and is Vice President and Treasurer of Cortland
Trust, Inc.
<PAGE>

The Fund paid an aggregate remuneration of $6,000 to its trustees with respect
to the period ended November 30, 1997, 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.

Compensation Table

(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 $51,500 (14 Funds)
Director

Robert Straniere, $2,000 0 0 $51,500 (14 Funds)
Director

Yung Wong, $2,000 0 0 $51,500 (14 Funds)
Director

* The total compensation paid to such persons by the Fund and Fund Complex for
the fiscal year ending November 30, 1997 (and, with respect to certain of the
funds in the Fund Complex, estimated to be paid during the fiscal year ending
November 30, 1997). 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>

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 SEC 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, Inc. (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 distribution of the Fund's Class A shares and 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
<PAGE>

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, 1997, the Fund paid a distribution fee
of $106,492 for expenditures pursuant to the Plan. During such period, the
Manager made payments pursuant to the Plan from its own resources aggregating
$149,853, of which $145,066 was spent on broker assistant payments, $3,974 was
spent on sales personnel and related expenses of the Manager, $630 was spent on
travel and entertainment, $115 was spent on prospectus and application printing
and $67 was spent on miscellaneous expenses. For the Fund's fiscal year ended
November 30, 1997, the amount payable by the Fund for shareholder servicing fees
was $106,492, of which none was waived. 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 year ended November 30, 1996, the
Fund paid shareholder servicing fees of $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, $6,068 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.

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 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
<PAGE>

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, 1998, there were 15,409,847 shares of the Fund outstanding. As
of February 28, 1998, 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, 1998:

Nature of
Name and address % of Class Ownership

PNC Securities Corp. 17.03% Record
c/o Pittsburgh National Bank
Fifth Avenue & Wood Street
Pittsburgh, PA 15265

Lewco Securities Corp. 12.83% Record
34 Exchange Place
Jersey City, NJ 07311

Nujaco and Co. 9.05% Record
Core States Bank NA
530 Walnut Street-1st Floor
Penn Mutual Building
Philadelphia, PA 19101

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 shareholders 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 SEC 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
<PAGE>

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.

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 qualified 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. A shareholder is advised to consult its tax adviser with
respect to whether exempt-interest dividends retain the exclusion under Section
103(a) 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.

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
net realized long-term capital gain over 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
<PAGE>

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. Capital gains realized by corporations are generally taxed at the
same rate as ordinary income. However, capital gains dividends are taxable at a
maximum rate of 28% to non-corporate shareholders if the Fund's holding period
is more than 12 months and 20% if the Fund's holding period is more than 18
months, without regard to the length of time shares have been held by the
holder. Corresponding maximum rate and holding period rules apply with respect
to capital gains realized by a holder on the disposition of shares.

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.

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 of the underlying Municipal Obligations and the
interest thereon will be exempt from regular federal income taxes to the Fund to
the same extent as interest on the underlying Municipal Obligations. 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.

The Code provides that the interest on indebtedness incurred or continued to
purchase or carry shares of the Fund is not deductible. Therefore, among other
consequences, a certain proportion of interest on indebtedness incurred, or
continued to purchase or carry securities may not be deductible during the
period an investor holds shares of the Fund. P.L. 99-514 expands the application
of this rule as it applies to financial institutions, effective with respect to
Fund shares acquired after December 31, 1986. The Clinton Administration's
Revenue Proposals for fiscal years 1999 would extend this provision to all
financial intermediaries effective for taxable years beginning after the date of
enactment with respect to obligations acquired on or after the date of first
committee action.

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.
<PAGE>

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.

CUSTODIAN AND TRANSFER AGENT

Investors Fiduciary Trust Company, 801 Pennsylvania Street, Kansas City,
Missouri 64105 is custodian for the Fund's cash and securities. Reich & Tang
Services, Inc., 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 do not assist in, and are not responsible for, investment decisions
involving assets of the Fund.

<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.

<PAGE>

CORPORATE TAXABLE EQUIVALENT YIELD TABLE

- ------------------------------------------------------------------------------------------------------------------------------
1. If Your Corporate Taxable Income Bracket Is . . .
- ------------------------------------------------------------------------------------------------------------------------------
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 15.00% 25.00% 34.00% 39.00% 34.00% 35.00% 38.00% 35.00%
Tax Rate
- ----------- ------------- -------------- ------------- ------------- -------------- ------------- -------------- --------------
State 9.99% 9.99% 9.99% 9.99% 9.99% 9.99% 9.99% 9.99%
Tax Rate
- ----------- ------------- -------------- ------------- ------------- -------------- ------------- -------------- --------------
Combined 23.49% 32.49% 40.59% 45.09% 40.59% 41.49% 44.19% 41.49%
Marginal
Tax Rate
- -------------------------------------------------------------------------------------------------------------------------------

3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
- -------------------------------------------------------------------------------------------------------------------------------
Tax Exempt Equivalent Taxable Investment Yield
Yield Requires to Match Tax Exempt 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%
- ----------- ------------- -------------- ------------- ------------- -------------- ------------- -------------- --------------

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.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
PERSONAL TAXABLE EQUIVALENT YIELD TABLE

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

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

Single $0- $25,351-- $61,401- $128,101- $278,451
Return 25,350 61,400 128,100 278,450 and over

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

Joint $0- $42,350- $102,301- $155,951- $278,051
Return 42,350 102,300 155,950 278,050 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>
<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 assets and liabilities, including
the statement of investments, of Pennsylvania Daily Municipal Income Fund as of
November 30, 1997, 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 financial highlights for each of the four 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 financial
highlights on 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 financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1997, 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 financial highlights referred to
above present fairly, in all material respects, the financial position of
Pennsylvania Daily Municipal Income Fund as of November 30, 1997, the results of
its operations, the changes in its net assets and the financial highlights for
the periods indicated, in conformity with generally accepted accounting
principles.

\s\McGladrey & Pullen, LLP

New York, New York
December 24, 1997

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

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

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
STATEMENT OF INVESTMENTS
NOVEMBER 30, 1997

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

Ratings (a)
----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
------ ---- ----- -------- ------- ------
Other Tax Exempt Investments (13.74%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 250,000 Pennsylvania Higher Education Facility Authority RB - Series F
AMBAC Insured 12/15/97 3.82% $ 250,093 Aaa AAA
2,000,000 Philadelphia, PA School District TRAN
LOC Commerzbank A.G. 06/30/98 3.90 2,006,115 MIG-1 SP-1+
2,000,000 Philadelphia, PA TRAN - Series A
LOC Union Bank of Switzerland 06/30/98 3.95 2,005,557 MIG-1 SP-1+
680,000 State Public School Building Authority PA School RB - Series 1997D
AMBAC Insured 06/15/98 3.85 680,000 Aaa AAA
1,025,000 University of PA - Series B
MBIA Insured 06/01/98 3.73 1,028,457 Aaa AAA
----------- -----------
5,955,000 Total Other Tax Exempt Investments 5,970,222
----------- -----------
<CAPTION>
Other Variable Rate Demand Instruments (c) (38.48%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 700,000 Butler County, PA IDA (Armco Incorporated Project) - Series 1996A (b)
LOC Chase Manhattan Bank, N.A. 06/01/20 4.10% $ 700,000
3,800,000 Chester County, PA 1997 Archdiocese of Philadelphia
LOC Corestates Bank, N.A. 07/01/27 3.85 3,800,000 VMIG-1
900,000 City of York General Authority (Adjusted Rate Pooled Financing)
LOC First Union National Bank 09/01/26 3.95 900,000 A1
370,000 Clinton County, PA Municipal Authority HRB
(Lock Haven Hospital Project) - Series 1991A
LOC Mellon Bank, N.A. 09/01/07 4.15 370,000 A1
2,000,000 Delaware County, PA IDA Airport Facility RB
(United Parcel Service Project) - Series 1985 12/01/15 3.80 2,000,000 P1 A1+
2,400,000 Delaware County, PA IDA PCRB (Philadelphia Electric Co.) - Series A
LOC Toronto-Dominion Bank 08/01/16 3.75 2,400,000 P1 A1+
1,100,000 Delaware County, PA IDA PCRB British Petroleum Exploration & Oil 10/01/19 3.85 1,100,000 P1 A1+
500,000 Lehigh County, PA IDA - Series 1985A
LOC Rabobank Nederland 12/01/15 4.10 500,000 P1
1,000,000 Mercersbury Borough, PA General Purpose
(Mercersbury College Project)
LOC Mellon Bank, N.A. 11/01/27 4.05 1,000,000 A1
1,000,000 Northeastern Pennsylvania Hospital and Education Auth. RB
(All Health Pooled Fin. Prog.)
LOC Chase Manhattan Bank, N.A. 07/01/26 3.95 1,000,000 VMIG-1
100,000 Pennsylvania Higher Education Facility Authority - Series 1995 A
LOC Morgan Guaranty Trust Company 11/01/25 3.80 100,000 A1+

</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements.

<PAGE>

- --------------------------------------------------------------------------------
PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
STATEMENT OF INVESTMENTS (Continued)
NOVEMBER 30, 1997

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

Ratings (a)
----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
------ ---- ----- -------- ------- ------
Other Variable Rate Demand Instruments (c) (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1,250,000 York County, PA IDA Limited Obligation RB (b)
(Metal Exchange Corporation Project)
LOC Comerica Bank 06/01/06 4.05% $ 1,250,000
1,600,000 York County, PA IDA PCRB (Philadelphia Electric Company)
LOC Toronto-Dominion Bank 08/01/16 3.75 1,600,000 P1 A1+
----------- -----------
16,720,000 Total Other Variable Rate Demand Instruments 16,720,000
----------- -----------
<CAPTION>
Tax Exempt Commercial Paper (9.66%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 900,000 Beaver City, PA IDA
LOC Union Bank of Switzerland 02/19/98 3.75% $ 900,000 VMIG-1 A1+
1,500,000 Montgomery County, PA IDA
LOC Deutsche Bank A.G. 01/21/98 3.75 1,500,000 P1 A1+
1,800,000 Venango, PA IDA Resource Recovery RB
(Scrubgrass Project)
LOC Natwest Bank 12/17/97 3.85 1,800,000 A1+
----------- -----------
4,200,000 Total Tax Exempt Commercial Paper 4,200,000
----------- -----------
Total Investments (61.88%) (Cost $26,890,222+) 26,890,222
Cash and Other Assets, Net of Liabilities (38.12%) 16,565,635
-----------
Net Assets (100.00%) $43,455,857
===========
+ 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 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.

<TABLE>
<CAPTION>
KEY:
<S> <C> <C> <C> <C> <C>
HRB = Hospital Revenue Bond PCRB = Pollution Control Revenue Bond
IDA = Industrial Development Authority RB = Revenue Bond
TRAN = Tax and Revenue Anticipation Note

</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements.

<PAGE>

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

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1997

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

<S> <C>
ASSETS

Investments in securities at value (Cost $26,890,222) .......................... $ 26,890,222

Receivables:

Securities sold............................................................. 16,876,152

Interest ................................................................... 200,338
---------------
Total assets.............................................................. 43,966,712
---------------

LIABILITIES

Due to custodian................................................................ 381,768

Accrued expenses................................................................ 45,690

Dividends payable............................................................... 83,397
---------------
Total liabilities......................................................... 510,855
---------------
Net assets...................................................................... $ 43,455,857
===============

Net Asset Value, offering and redemption price per share:

Class A Shares 43,064,785 Shares Outstanding (Note 3).......................... $ 1.00
===============
Class B Shares 392,014 Shares Outstanding (Note 3).......................... $ 1.00
===============

</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements.

<PAGE>

- --------------------------------------------------------------------------------
PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1997
================================================================================

INVESTMENT INCOME
<S> <C>

Income:

Interest..................................................................... $ 1,580,366
--------------
Expenses: (Note 2)

Investment management fee.................................................... 170,844

Administration fee........................................................... 89,693

Distribution fee............................................................. 106,492

Custodian fee................................................................ 4,978

Shareholder servicing and related shareholder expenses....................... 46,670

Legal, compliance and filing fees............................................ 9,913

Audit and accounting......................................................... 61,151

Trustees' fees............................................................... 6,159

Amortization of organization expenses........................................ 9,632

Other........................................................................ 2,977
--------------
Total expenses............................................................. 508,509

Less: Fees waived (Note 2)................................................. ( 209,818)
--------------
Net expenses............................................................... 298,691
--------------
Net investment income............................................................ 1,281,675

REALIZED GAIN (LOSS) ON INVESTMENTS

Net realized gain (loss) on investments.......................................... -0-
--------------
Increase in net assets from operations........................................... $ 1,281,675
==============

</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements.

<PAGE>

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

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED NOVEMBER 30, 1997 AND 1996

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

1997 1996
--------------- ---------------

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

Operations:
Net investment income......................................... $ 1,281,675 $ 1,189,585
Net realized gain (loss) on investments....................... -0- -0-
--------------- ---------------
Increase in net assets from operations........................... 1,281,675 1,189,585

Dividends to shareholders from net investment income:
Class A....................................................... ( 1,277,930)* ( 1,189,561)*
Class B....................................................... ( 3,745)* ( 24)*

Capital share transactions (Note 3)
Class A...................................................... 6,728,888 ( 4,645,246)
Class B...................................................... 386,997 5,017
--------------- ---------------
Total increase (decrease)................................. 7,115,885 ( 4,640,229)
Net assets:
Beginning of year............................................. 36,339,972 40,980,201
--------------- ---------------
End of year................................................... $ 43,455,857 $ 36,339,972
=============== ===============

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

</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements.

<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. This 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 wtransfer 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.

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

<PAGE>

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

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

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

2. Investment Management Fees and Other Transactions with Affiliates
(Continued).

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, 1997 the Manager voluntarily waived investment
management fees and administration fees of $124,396 and $85,422, respectively.

Included in the Statement of Operations under the caption "Shareholder servicing
and related shareholder expenses" are fees of $24,752 paid to Reich & Tang
Services L.P., an affiliate of the Manager, as servicing agent for the Fund.

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

3. Capital Stock.

At November 30, 1997, an unlimited number of shares of beneficial interest ($.01
par value) were authorized and capital paid in amounted to $43,456,799.
Transactions in capital stock, all at $1.00 per share, were as follows:
<TABLE>
<CAPTION>

Year Year
Ended Ended
November 30, 1997 November 30, 1996
----------------- -----------------
Class A
<S> <C> <C>

Sold...................................... 122,761,722 150,377,896
Issued on reinvestment of dividends....... 1,120,365 932,450
Redeemed.................................. ( 117,153,199) ( 155,955,592)
-------------- --------------
Net increase (decrease)................... 6,728,888 ( 4,645,246)
============== ==============

Year October 10, 1996
Ended (Commencement of Sales) to
November 30, 1997 November 30, 1996
----------------- -----------------
Class B
<S> <C> <C>

Sold...................................... 388,922 5,100
Issued on reinvestment of dividends....... 3,228 17
Redeemed.................................. ( 5,153) ( 100)
-------------- --------------
Net increase (decrease)................... 386,997 5,017
============== ==============
</TABLE>

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

<PAGE>

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

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

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

4. Sales of Securities.

Accumulated undistributed realized losses at November 30, 1997 amounted to $942.
This amount represents tax basis capital losses which may be carried forward to
offset future gains. Such losses expire on November 30, 2001.

5. 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 81% 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.

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

<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 December 24, 1997.

(2) Statement of Net Assets (audited), dated November 30,1997.

(3) Statement of Operations (audited), dated November 30,1997.

(4) Statement of Changes in Net Assets (audited) as of
November 30, 1997.

(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, Inc.

(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 Auditors.

(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, Inc. filed herein as Exhibit 6.

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

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

*** (16.1) Powers of Attorney Messrs. of 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, 1998
-------------- -----------------------

Common Stock

(par value $.001) Class A - 290
Class B - 1

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.

The Manager is a wholly-owned subsidiary of NEICOP, but Reich & Tang Asset
Management, Inc., its sole general partner, is an indirect subsidiary of
Metropolitan Life Insurance Company ("MetLife"). Also, MetLife directly and
indirectly owns approximately 47% of the outstanding partnership interests of
NEICOP, and may be deemed a "controlling person" of the Manager. Reich & Tang,
Inc. owns, directly and indirectly, approximately 13.7% of the outstanding
partnership interests of NEICOP.

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 Back Bay Funds, Inc., 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. Tax Exempt Proceeds
Fund, Inc. and Virginia Daily Municipal Income 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

C-3
<PAGE>

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 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 Back Bay Funds, Inc., 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., Short Term Income Fund, Inc.
and Virginia Daily Municipal 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 Back Bay Funds, Inc., 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, Tax
Exempt Proceeds Fund, Inc. and Virginia Daily Municipal Income 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

C-4
<PAGE>
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 Back Bay Funds, Inc., 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., Short Term Income Fund,
Inc. and Virginia Daily Municipal Income Fund, Inc., and is Vice President and
Treasurer of Cortland Trust, Inc.

ITEM 29. Principal Underwriters.

(a) Reich & Tang Distributors, Inc. 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., Tax Exempt Proceeds Fund, Inc. and Virginia Daily Municipal Income Fund,
Inc.

(b) The following are the directors and officers of Reich & Tang
Distributors, Inc.. 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 Executive Officer None
Richard E. Smith III President None
Peter DeMarco Executive Vice President None
Steven W. Duff Director President and Director
Bernadette N. Finn Vice President Secretary
Robert F. Hoerle Managing Director None
Lorraine C. Hysler Secretary None
Richard De Sanctis Treasurer Treasurer
Richard I. Weiner Vice President None

C-5

<PAGE>

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, 801 Pennsylvania Street, Kansas City, Missouri, 64105,
the Registrant's custodian; and at Reich & Tang Services, Inc., 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-6

<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 27th day of
March, 1998.

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 3/27/98
Steven W. Duff Trustee

(2) Principal Financial and
Accounting Officer

By: /s/ Richard De Sanctis Treasurer 3/27/98
Richard De Sanctis

(3) Majority of Trustees

Yung Wong Trustee
W. Giles Mellon Trustee
Robert Straniere Trustee

By: /s/ Bernadette N. Finn 3/27/98
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 the 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
shareholders 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 the
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 1% 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 delivered to us
in writing. Any reimbursement of our expenses,

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<PAGE>

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 _______________, 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, by vote of a majority of our outstanding voting securities, as defined
in the 1940 Act and the rules thereunder, or by a vote of a majority of our
entire Board of Trustees, on sixty days' written notice to you, or 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.

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<PAGE>

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.

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 ASSET MANAGEMENT L.P.

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

By: _____________________________

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DISTRIBUTION AGREEMENT

PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
the "Fund"

600 Fifth Avenue
New York, New York 10020

_____________, 1998

Reich & Tang Distributors, Inc.
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, on behalf of our Fund, for
the period of this agreement, a distributor, as our agent, for the unsold
portion of such number of shares of our common stock, $.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 interest 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 benefical 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 stockholders of dividends or other distributions or any other
offering by us of securities to our stockholders.

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.

With respect to the Class A Shares of the Fund, you will arrange for
organizations whose customers or clients are shareholders of our corporation
("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 with respect to the Class A Shares, 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 Trustees 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 (with respect to the Class A
Shares) 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").

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<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 Trustees, and
upon notice of such suspension you shall cease to offer shares of our beneficial
interest 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 interest, 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

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<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

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<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
trustees, 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 trustees, 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 trustees 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 trustees, and any such controlling person is
expressly conditioned upon your being notified of any action brought against us,
our officers or trustees 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 trustees 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
relieve

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<PAGE>

you from any liability which you may have to us, to our officers or trustees, 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 (which was re-executed on the date hereof) became
effective on __________ 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
Trustees and of a majority of those of our directors 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, (a) on sixty days' written notice to you (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 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, or (b) 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.

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<PAGE>

12. 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, officers or directors, who may also be a trustee, 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: ____________________, 1998

REICH & TANG DISTRIBUTORS, INC.

By: ______________________________

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PENNSYLVANIA DAILY MUNICIPAL INCOME FUND

Distribution and Service Plan Pursuant to Rule
12b-1 Under the Investment Company Act of 1940

The Distribution and Service Plan (the "Plan") is adopted by Pennsylvania
Daily Municipal Fund (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 Reich & Tang Distributors, Inc. (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 Fund's
shares. Pursuant to the Distribution Agreement, the Distributor, as agent of the
Fund, will solicit 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 with respect to the Class A shares of the Fund, 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

<PAGE>

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 maintanence of shareholder account functions on
behalf of the Fund;

(ii) to compensate Participating Organizations for providing
assistance in distributing the Fund's Class A shares; and

(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

<PAGE>

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 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 the 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.
<PAGE>

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 Fund's Board of Trustees, 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.

8. The Plan will remain in effect until ______________ 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 6 hereof.

9. The Plan may be amended at any time with the approval of the Fund's
Board of Trustees, 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
<PAGE>

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
CLASS A SHARES
(the "Fund")

600 Fifth Avenue
New York, New York 10020

, 1998

Reich & Tang Distributors, Inc. ("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 "Plan") under the
Investment Company Act of 1940, as amended (the "Act"), to provide the services
listed below on behalf of the Class A Shares. 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 fees payable hereunder and past profits to compensate
Participating Organizations for providing Shareholder Services to the Class A
Shareholders of the Fund. Payments to Participating Organizations to compensate
them for
<PAGE>

providing Shareholder Services are subject to compliance by them with the terms
of written agreements satisfactory to our Board of Directors 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, the Fund 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 Class A Share'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 (which was re-executed on the date hereof) became
effective on ___________ 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
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, (a) on sixty days' written notice to you (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

2
<PAGE>

voting securities of the Fund's Class A Shares, as defined in the Act, or (b) 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 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, officers or directors, 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
CLASS A SHARES

By:

ACCEPTED: , 1998

REICH & TANG DISTRIBUTORS, INC.

By:

<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> 0000888130
<NAME> Pennsylvania Daily Municipal Income Fund, Inc.
<SERIES>
<NUMBER> 1
<NAME> Class A

<S> <C>
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<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
<PERIOD-TYPE> YEAR
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<INVESTMENTS-AT-VALUE> 26890222
<RECEIVABLES> 17076490
<ASSETS-OTHER> 0
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<SHARES-COMMON-PRIOR> 36340914
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<NET-CHANGE-FROM-OPS> 1281675
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1281675
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<NUMBER-OF-SHARES-SOLD> 123150644
<NUMBER-OF-SHARES-REDEEMED> 117158352
<SHARES-REINVESTED> 1123593
<NET-CHANGE-IN-ASSETS> 7115885
<ACCUMULATED-NII-PRIOR> 0
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<PER-SHARE-NAV-BEGIN> 1.00
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<EXPENSE-RATIO> .70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

</TABLE>