JP MORGAN INSTITUTIONAL FUNDS, 485BPOS, 1998-11-02

JP MORGAN INSTITUTIONAL FUNDS
485BPOS, 1998-11-02

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As filed with the Securities and Exchange Commission on October 30, 1998.
Registration Nos. 033-54642 and 811-07342

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 58

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 59

J.P. MORGAN INSTITUTIONAL FUNDS
(formerly The JPM Institutional Funds)
(Exact Name of Registrant as Specified in Charter)

60 State Street, Suite 1300, Boston, Massachusetts 02109
(Address of Principal Executive Offices)

Registrant's Telephone Number, including Area Code:
(617) 557-0700

Margaret W. Chambers, c/o Funds Distributor, Inc.
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Name and Address of Agent for Service)

Copy to: John E. Baumgardner, Jr., Esq.
Sullivan & Cromwell
125 Broad Street
New York, New York 10004

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

[ ] Immediately upon filing pursuant to paragraph (b)
[X] on October 30, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485.

If appropriate, check the following box:

[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

<PAGE>

The Short Term Bond Portfolio, The U.S. Fixed Income Portfolio, The
Non-U.S. Fixed Income Portfolio, Series Portfolio II, The Tax Exempt Bond
Portfolio, and The New York Tax Exempt Bond Portfolio have also executed this
registration statement.

<PAGE>

EXPLANATORY NOTE

This post-effective amendment No. 58 to the registration statement of
J.P. Morgan Institutional Funds (the "Registrant") on Form N-1A is being filed
to update the Registrant's disclosure in the Prospectuses and Statement of
Additional Information relating to J.P. Morgan Institutional Short Term Bond
Fund, Bond Fund, Bond Fund-Ultra, International Bond Fund, Global Strategic
Income Fund, Tax Exempt Bond Fund and New York Tax Exempt Bond Fund, each a
separate series of shares of the Registrant, for the purpose of incorporating
changes approved by shareholders at a shareholder meeting held on August 20,
1998 and to meet guidelines established by revisions to Form N-1A. As a result,
the Amendment does not affect any of the Registrant's other currently effective
prospectuses or statements of additional information for each other series of
shares of the Registrant.

<PAGE>

- --------------------------------------------------------------------------------
November 2, 1998 | Prospectus
================================================================================

J.P. MORGAN INSTITUTIONAL
FIXED INCOME FUNDS

====================================
Seeking high total return or current
income by investing primarily in
fixed income securities.

Short Term Bond Fund

Bond Fund

International Bond Fund

Global Strategic Income Fund

Tax Exempt Bond Fund

New York Tax Exempt Bond Fund

California Bond Fund

This prospectus contains essential information for anyone investing in these
funds. Please read it carefully and keep it for reference.

As with all mutual funds, the fact that these shares are registered with the
Securities and Exchange Commission does not mean that the commission approves
them or guarantees that the information in this prospectus is correct or
adequate. It is a criminal offense to state or suggest otherwise.

Distributed by Funds Distributor, Inc. [LOGO] JPMorgan

<PAGE>

Contents
<TABLE>
================================================================================================================
<S> <C>

2 | J.P. MORGAN INSTITUTIONAL FIXED INCOME FUNDS

Each fund's goal, investment approach, J.P. Morgan Institutional Short Term Bond Fund........................ 2
risks, expenses, and performance
J.P. Morgan Institutional Bond Fund................................... 4

J.P. Morgan Institutional International Bond Fund..................... 6

J.P. Morgan Institutional Global Strategic Income Fund................ 8

J.P. Morgan Institutional Tax Exempt Bond Fund........................10

J.P. Morgan Institutional New York Tax Exempt Bond Fund...............12

J.P. Morgan Institutional California Bond Fund........................14

16 | FIXED INCOME MANAGEMENT APPROACH

Principles and techniques common J.P. Morgan...........................................................16
to the funds in this prospectus
J.P. Morgan Institutional fixed income funds..........................16

The spectrum of fixed income funds....................................16

Who may want to invest................................................16

Fixed income investment process.......................................17

18 | YOUR INVESTMENT

Investing in the J.P. Morgan Investing through a financial professional............................18
Institutional Fixed Income funds
Investing through an employer-sponsored retirement plan...............18

Investing through an IRA or rollover IRA..............................18

Investing directly....................................................18

Opening your account..................................................18

Adding to your account................................................18

Selling shares........................................................19

Account and transaction policies......................................19

Dividends and distributions...........................................20

Tax considerations....................................................20

21 | Fund Details

More about risk and the funds' Business structure....................................................21
business operations
Management and administration.........................................21

Risk and reward elements..............................................24

Investments...........................................................26

Financial highlights..................................................28

FOR MORE INFORMATION..........................................back cover

</TABLE>
<PAGE>

J.P. MORGAN INSTITUTIONAL
SHORT TERM BOND FUND | TICKET SYMBOL: JMSBX
================================================================================
REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND)

[GRAPHIC] RISK/RETURN SUMMARY

For a more detailed discussion of the fund's investments and their
main risks, as well as fund strategies, please see pages 24-27.

[GRAPHIC] GOAL

The fund's goal is to provide high total return, consistent with low
volatility of principal. This goal can be changed without shareholder approval.

[GRAPHIC] INVESTMENT APPROACH

The fund invests primarily in fixed income securities, including U.S.
government and agency securities, domestic and foreign corporate bonds, private
placements, asset-backed and mortgage-related securities, and money market
instruments, that it believes have the potential to provide a high total return
over time. These securities may be of any maturity, but under normal market
conditions the fund's duration (duration is a measure of average weighted
maturity of the securities held by a fund and a common measurement of
sensitivity to interest rate movements) will range between one and three years,
similar to that of the Merrill Lynch 1-3 Year Treasury Index. To the extent the
fund purchases securities with longer maturities, it may use futures contracts
to manage duration.

Up to 25% of assets may be invested in foreign securities, including 20% in debt
securities denominated in foreign currencies of developed countries. At least
90% of assets must be invested in securities that, at the time of purchase, are
rated investment-grade (BBB/Baa or better) or are the unrated equivalent,
including at least 75% A or better. No more than 10% of assets may be invested
in securities rated B or BB.

The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
duration fixed income funds will depend on the success of the investment
process, which is described on page 17.

Although any rise in interest rates is likely to cause a fall in the price of
bonds, the fund's comparatively short duration is designed to help keep its
share price within a relatively narrow range. Because it seeks to minimize risk,
the fund will generally offer less income, and during periods of declining
interest rates, may offer lower total returns than bond funds with longer
durations. To the extent that the fund seeks higher returns by investing in non-
investment-grade bonds, often called junk bonds, it takes on additional risks.
To the extent the fund invests in foreign securities, it could lose money
because of foreign government actions, political instability, currency
fluctuation or lack of adequate and accurate information. The fund may engage in
active and frequent trading, leading to increased portfolio turnover and the
possibility of increased capital gains. See page 20 for further discussion on
the tax treatment of capital gains.

An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.

PORTFOLIO MANAGEMENT

The fund's assets are managed by J.P. Morgan, which currently manages over $275
billion, including more than $2 billion using the same strategy as the fund.

The portfolio management team is led by Connie J. Plaehn, managing director, who
has been on the team since the fund's inception and has been at J.P. Morgan
since 1984, and William G. Tennille, vice president, who joined the team in
January of 1994 and has been at J.P. Morgan since 1992.

- --------------------------------------------------------------------------------
Before you invest

Investors considering the fund should understand that:

. There is no assurance that the fund will meet its investment goal.

. The fund does not represent a complete investment program.

|
2 | J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND
|
<PAGE>

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

PERFORMANCE (unaudited)

The bar chart and table shown below indicate the risks of investing in J.P.
Morgan Institutional Short Term Bond Fund.

The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year since the fund's inception date.

The table indicates the risks by showing how the fund's average annual returns
for the past one year and life of the fund compare to those of the Merrill Lynch
1-3 Year Treasury Index. This is a widely recognized, unmanaged index of U.S.
Treasury notes and bonds with maturities of 1-3 years used as a measure of
overall short-term bond market performance.

The fund's past performance does not necessarily indicate how the fund will
perform in the future.

- -----------------------------
Year-by-year total return (%) Shows changes in returns by calendar year/2/
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]

1994 0.36
1995 10.80
1996 5.10
1997 6.40

J.P. Morgan Institutional Short Term Bond Fund

For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 3.36% (for the quarter ended 6/30/95); and the
lowest quarterly return was -0.47% (for the quarter ended 3/31/94).

- ----------------------------
Average annual total return Shows performance over time, for periods ended
December 31, 1997
- --------------------------------------------------------------------------------
Past 1 yr. Life of fund/1/
J.P. Morgan Institutional Short Term Bond Fund
(after expenses) 6.40 5.37
- --------------------------------------------------------------------------------
Merrill Lynch 1-3 Year Treasury Index (no expenses) 6.66 5.60
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Investor Expenses

The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses
after reimbursement are deducted from fund assets prior to performance
calculations.

- -----------------------------------------------------
Annual fund operating expenses/3/ (%)
(expenses that are deducted from fund assets)
- -----------------------------------------------------
Management fees 0.25
Marketing (12b-1) fees none
Other expenses/4/ 0.74
- -----------------------------------------------------
Total annual fund
operating expenses/4/ 0.99

- --------------------------------------------------------------------------------
Expense example
- --------------------------------------------------------------------------------

The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
(before reimbursement) unchanged, and all shares sold at the end of each time
period. The example is for comparison only; the fund's actual return and your
actual costs may be higher or lower.

- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 101 315 547 1,212
- --------------------------------------------------------------------------------

1 The fund commenced operations on 7/8/93 and returns reflect performance of
the fund from 7/31/93.

2 The fund's fiscal year end is 10/31. For the period 1/1/98 through 9/30/98,
the total return for the fund was 6.34% and the total return for the index
was 6.19%.

3 The fund has a master/feeder structure as described on page 21. This table is
restated to show the current fee arrangements in effect as of 8/1/98, and
shows the fund's expenses and its share of master portfolio expenses for the
past fiscal year using the current fees as if they had been in effect during
the past fiscal year, before reimbursement, expressed as a percentage of the
fund's average net assets.

4 The current fee arrangements, which will expire 2/28/99, limit other expenses
and total operating expenses to 0.00% and 0.25%, respectively. Effective
3/1/99, after reimbursement, other expenses and total operating expenses will
be 0.10% and 0.35%, respectively, and can be changed or terminated at any
time at the option of J.P. Morgan.

J.P. MORGAN INSTITUTIONAL BOND FUND | 3
<PAGE>

J.P. MORGAN INSTITUTIONAL BOND FUND | TICKER SYMBOL: JMIBX
================================================================================
Registrant: J.P. Morgan Institutional Funds
(J.P. Morgan Institutional Bond Fund)

[GRAPHIC] RISK/RETURN SUMMARY

For a more detailed discussion of the fund's investments and their main
risks, as well as fund strategies, please see pages 24-27.

[GRAPHIC] GOAL

The fund's goal is to provide high total return consistent with moderate
risk of capital and maintenance of liquidity. This goal can be changed without
shareholder approval.

[GRAPHIC] INVESTMENT APPROACH

The fund invests primarily in fixed income securities, including U.S.
government and agency securities, corporate bonds, private placements, asset-
backed and mortgage-backed securities, that it believes have the potential to
provide a high total return over time. These securities may be of any maturity,
but under normal market conditions the management team will keep the fund's
duration (duration is a measure of average weighted maturity of the securities
held by a fund and a common measurement of sensitivity to interest rate
movements) within one year of that of the Salomon Brothers Broad Investment
Grade Bond Index (currently about five years).

Up to 25% of assets may be invested in foreign securities, including 20% in debt
securities denominated in foreign currencies of developed countries. At least
75% of assets must be invested in securities that, at the time of purchase, are
rated investment-grade (BBB/Baa or better) or are the unrated equivalent,
including at least 65% A or better. No more than 25% of assets may be invested
in securities rated B or BB.

To the extent that the fund seeks higher returns by investing in non-investment-
grade bonds, often called junk bonds, it takes on additional risks, since these
bonds are more sensitive to economic news and their issuers have a less secure
financial position. To the extent the fund invests in foreign securities, it
could lose money because of foreign government actions, political instability,
currency fluctuation or lack of adequate and accurate information. The fund may
engage in active and frequent trading, leading to increased portfolio turnover
and the possibility of increased capital gains. See page 20 for further
discussion on the tax treatment of capital gains.

PORTFOLIO MANAGEMENT

The fund's assets are managed by J.P. Morgan, which currently manages over $275
billion, including more than $36 billion using the same strategy as the fund.

The portfolio management team is led by William G. Tennille, vice president, who
has been at J.P. Morgan since 1992, and Connie J. Plaehn, managing director, who
has been at J.P. Morgan since 1984. Both have been on the team since January of
1994.

================================================================================
Before you invest

Investors considering the fund should understand that:

o There is no assurance that the fund will meet its investment goal.

o The fund does not represent a complete investment program.

|
4 | J.P. MORGAN INSTITUTIONAL BOND FUND
|

<PAGE>

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

Performance (unaudited)

The bar chart and table shown below indicate the risks of investing in J.P.
Morgan Institutional Bond Fund.

The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year since the fund's inception date.

The table indicates the risks by showing how the fund's average annual returns
for the past one and five years and life of the fund compare to those of the
Salomon Brothers Broad Investment Grade Bond Index. This is a widely
recognized, unmanaged index of U.S. Treasury and agency securities and
investment-grade mortgage and corporate bonds used as a measure of overall bond
market performance.

The fund's past performance does not necessarily indicate how the fund will
perform in the future.

[BAR GRAPH APPEARS HERE]

- --------------------------------
Year-by-year total return (%) Shows changes in returns by calendar year/2/
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997

J.P. Morgan Institutional Bond Fund 10.23 10.09 13.45 6.53 9.88 (2.68) 18.42 3.30 9.29
- ---------------------------------------------------------------------------------------------------------------------------------

</TABLE>

For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 6.30% (for the quarter ended 6/30/95); and the
lowest quarterly return was -2.38% (for the quarter ended 3/31/94).
<TABLE>
<CAPTION>

- --------------------------------
Average annual total return (%) Shows performance over time, for periods ended December 31, 1997
- ---------------------------------------------------------------------------------------------------------
Past 1 yr. Past 5 yrs. Life of fund/1/
<S> <C> <C> <C>
J.P. Morgan Institutional Bond Fund (after
expenses) 9.29 7.41 8.16
- ---------------------------------------------------------------------------------------------------------
Salomon Brothers Broad Investment Grade Bond Index
(no expenses) 9.62 7.53 9.06
- ---------------------------------------------------------------------------------------------------------
</TABLE>

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

Investor Expenses

=========================================================
Annual fund operating expenses/3/ (%)
(expenses that are deducted from fund assets)
=========================================================

Management fees 0.30

Marketing (12b-1) fees none

Other expenses/4/ 0.23

=========================================================
Total annual fund
operating expenses/4/ 0.53
- ---------------------------------------------------------

================================================================================
Expense example
================================================================================

- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.

Your cost($) 53 170 296 665
- --------------------------------------------------------------------------------

1 The fund commenced operations on 7/12/93. Returns for the period 3/31/88
through 7/31/93 reflect performance of The Pierpont Bond Fund, the fund's
predecessor, which commenced operations on 3/11/88.

2 The fund's fiscal year end is 10/31. For the period 1/1/98 through 9/30/98,
the total return for the fund was 7.54% and the total return for the index
was 8.28%.

3 The fund has a master/feeder structure as described on page 21. This table
is restated to show the current fee arrangements in effect as of 8/1/98,
and shows the fund's expenses and its share of master portfolio expenses
for the past fiscal year using the current fees as if they had been in
effect during the past fiscal year before reimbusement, expressed as a
percentage of the fund's average net assets.

4 After reimbursement, other expenses and total operating expenses are 0.20%
and 0.50%, respectively. This reimbursement arrangement can be changed or
terminated at any time after 2/28/99 at the option of J.P. Morgan.

|
J.P. MORGAN INSTITUTIONAL BOND FUND | 5
|

<PAGE>

J.P. Morgan Institutional
International Bond Fund |
================================================================================
Registrant: J.P. Morgan Institutional Funds
(J.P. Morgan Institutional International Bond Fund)

[GRAPHIC] RISK/RETURN SUMMARY

For a more detailed discussion of the fund's investments and their main
risks, as well as fund strategies, please see pages 24-27.

[GRAPHIC] GOAL

The fund's goal is to provide high total return, consistent with
moderate risk of capital, by investing in a portfolio of international fixed
income securities. This goal can be changed without shareholder approval.

[GRAPHIC] INVESTMENT APPROACH

The fund invests primarily in fixed income securities from developed
countries outside the U.S., including those issued by foreign governments,
corporations, financial institutions, and supranational organizations (such as
the World Bank), that it believes have the potential to provide a high total
return over time. These securities may be of any maturity, but under normal
market conditions the management team will keep the fund's duration (duration is
a measure of average weighted maturity of the securities held by a fund and a
common measurement of sensitivity to interest rate movements) within one year of
that of the Salomon Brothers Non-U.S. World Government Bond Index (currency
hedged) (currently about five and a half years). All of the fund's assets must
be invested in securities that, at the time of purchase, are rated investment-
grade (BBB/Baa or better) or are the unrated equivalent, including at least 65%
A or better.

In addition to the investment process described on page 17, the management team
makes country allocation decisions, based primarily on financial and economic
forecasts and other macro-economic factors. The fund generally seeks to reduce
currency risk by hedging its investments back to the U.S. dollar.

The fund's share price and total return will vary in response to changes in
international bond markets and interest rates. How well the fund's performance
compares to that of similar fixed income funds will depend on the success of the
investment process.

Because the fund is non-diversified and may invest more than 5% of assets in a
single issuer, it takes on additional risks. Because the fund's primary
investments are foreign securities, it could lose money because of foreign
government actions, political instability or lack of adequate and accurate
information. Its performance may vary more widely than that of comparable funds.
Investors should be prepared to ride out periods of negative total return.

PORTFOLIO MANAGEMENT

The fund's assets are managed by J.P. Morgan, which currently manages over $275
billion, including more than $3.2 billion using the same strategy as the fund.

The portfolio management team is led by Dominic J. Pegler, vice president, who
has been on the team since joining J.P. Morgan from the Bank of England in April
of 1996, where he was an economist and later managed UK foreign exchange
reserves, and Maria Ryan, associate, who joined the team in January of 1997 and
has been at J.P. Morgan since 1990.

================================================================================
Before you invest

Investors considering the fund should understand that:

o There is no assurance that the fund will meet its investment goal.

o The fund does not represent a complete investment program.

|
6 | J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND
|

<PAGE>
================================================================================

Performance (unaudited)

The bar chart and table shown below indicate the risks of investing in J.P.
Morgan Institutional International Bond Fund.

The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year since the fund's inception date.

The table indicates the risks by showing how the fund's average annual returns
for the past one year and life of the fund compare to those of the Salomon
Brothers Non-U.S. World Government Bond Index (currency hedged). This is a
widely recognized, unmanaged index of government bonds of developed countries
used as a measure of overall international bond market performance.

The fund's past performance does not necessarily indicate how the fund will
perform in the future.

==============================
Year-by-year total return (%) Shows changes in returns by calendar year/2/
==============================--------------------------------------------------

1995 1996 1997

J.P. Morgan Institutional International Bond Fund 17.40 11.15 10.78
- --------------------------------------------------------------------------------

For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 5.69% (for the quarter ended 9/30/98); and the
lowest quarterly return was 0.57% (for the quarter ended 3/31/96).

===============================
Average annual total return Shows performance over time, for periods ended December 31, 1997
=============================== -----------------------------------------------------------------
Past 1 yr. Life of fund/1/
<S> <C> <C>
J.P. Morgan Institutional International Bond Fund
(after expenses) 10.78 12.85
- -------------------------------------------------------------------------------------------------
Salomon Brothers Non-U.S. World Government Bond
Index (currency hedged) (no expenses) 11.07 13.17
- -------------------------------------------------------------------------------------------------
</TABLE>
================================================================================

Investor Expenses

======================================================
Annual fund operating expenses/3/ (%)
(expenses that are deducted from fund assets)
======================================================

Management fees 0.35

Marketing (12b-1) fees none

Other expenses/4/ 2.06
======================================================
Total annual fund
rperating expenses/4/ 2.41
- ------------------------------------------------------

================================================================================
Expense example
================================================================================

- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.

Your cost($) 244 751 1,285 2,746
- --------------------------------------------------------------------------------

/1/ The fund commenced operations on 12/1/94 and returns reflect performance of
the fund from 12/31/94.

/2/ The fund's fiscal year end is 9/30. For the period 1/1/98 through 9/30/98,
the total return for the fund was 11.26% and the total return for the index
was 10.93%.

/3/ The fund has a master/feeder structure as described on page 21. This table
shows the fund's expenses and its share of master portfolio expenses for
the past fiscal year before reimbusement, expressed as a percentage of the
fund's average net assets.

/4/ After reimbursement, other expenses and total operating expenses are 0.30%
and 0.65%, respectively. This reimbursement arrangement can be changed or
terminated at any time after 1/31/99 at the option of J.P. Morgan.

|
J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND | 7
|

<PAGE>

J.P. MORGAN INSTITUTIONAL
GLOBAL STRATEGIC INCOME FUND | TICKER SYMBOL: JPGSX
================================================================================
Registrant: J.P. Morgan Institutional Funds
(J.P. Morgan Institutional Global Strategic Income Fund)

[GRAPHIC] RISK/RETURN SUMMARY

For a more detailed discussion of the fund's investments and their main
risks, as well as fund strategies, please see pages 24-27.

[GRAPHIC] GOAL

The fund's goal is to provide high total return from a portfolio of
fixed income securities of foreign and domestic issuers. This goal can be
changed without shareholder approval.

[GRAPHIC] INVESTMENT APPROACH

The fund invests in a wide range of debt securities from the U.S. and
other markets, both developed and emerging. Issuers may include governments,
corporations, financial institutions, and supranational organizations (such as
the World Bank), that the fund believes have the potential to provide a high
total return over time. The fund may invest directly in mortgages and in
mortgage-backed securities. The fund's securities may be of any maturity, but
under normal market conditions its duration (duration is a measure of average
weighted maturity of the securities held by a fund and a common measurement of
sensitivity to interest rate movements) will generally be similar to that of the
Lehman Brothers Aggregate Bond Index (currently about four and a half years). At
least 40% of assets must be invested in securities that, at the time of
purchase, are rated investment-grade (BBB/Baa or better) or are the unrated
equivalent. The balance of assets must be invested in securities rated B or
higher at the time of purchase (or the unrated equivalent), except that the
fund's emerging market component has no minimum quality rating and may invest
without limit in securities that are in the lowest rating categories (or are the
unrated equivalent).

The management team uses the process described on page 17, and also makes
country allocations, based primarily on macro-economic factors. The team uses
the model allocation shown at right as a basis for its sector allocation,
although the actual allocations are adjusted periodically within the indicated
ranges. Within each sector, a dedicated team handles securities selection. The
fund typically hedges its non-dollar investments in developed countries back to
the U.S. dollar.

The fund's share price and total return vary in response to changes in global
bond markets, interest rates, and currency exchange rates. How well the fund's
performance compares to that of similar fixed income funds will depend on the
success of the investment process. Because of credit and foreign and emerging
markets investment risks, the fund's performance is likely to be more volatile
than that of most fixed income funds. Foreign and emerging market investment
risks include foreign government actions, political instability, currency
fluctuations and lack of adequate and accurate information. The fund may invest
a substantial portion of its assets in non-investment grade bonds, often called
junk bonds, since these bonds are more sensitive to economic news and their
issuers have a less secure financial position. The fund's mortgage-backed
investments involve the risk of losses due to default or to prepayments that
occur earlier or later than expected. Some investments, including directly owned
mortgages, may be illiquid. The fund has the potential for long-term total
returns that exceed those of more traditional bond funds, but investors should
also be prepared for risks that exceed those of more traditional bond funds.

MODEL SECTOR ALLOCATION

[PIE CHART]

23% high yield corporates (range 13-33%)
35% public/private mortgages (range 20-45%)
12% international non-dollar (range 0-25%)
15% emerging markets (range 5-25%)
15% Public/private corporates (range 5-25%)

PORTFOLIO MANAGEMENT

The fund's assets are managed by J.P. Morgan, which currently manages over $275
billion, including more than $3.7 billion using similar strategies as the fund.

The portfolio management team is led by Gerard W. Lillis, managing director, who
has been at J.P. Morgan since 1978, and Mark E. Smith, managing director, who
joined J.P. Morgan in 1994 from Allied Signal, Inc. where he managed fixed
income portfolios and oversaw asset allocation activities. Both have been on the
team since the fund's inception.

BEFORE YOU INVEST

Investors considering the fund should understand that:

o There is no assurance that the fund will meet its investment goal.

o The fund does not represent a complete investment program.

|
8 | J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND
|

<PAGE>

INVESTOR EXPENSES

Annual fund operating expenses/1/ (%)
(expenses that are deducted from fund assets)

Management fees 0.45
Marketing (12b-1) fees none
Other expenses/2/ 0.73
=====
Total annual fund
operating expenses/2/ 1.18

Expense example -----

1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 120 375 649 1,432

/1/ The fund has a master/feeder structure as described on page 21. This table
shows the fund's expenses and its share of master portfolio expenses for
the past fiscal period before reimbursement, expressed as a percentage of
the fund's average net assets.

/2/ After reimbursement, other expenses and total operating expenses are 0.20%
and 0.65%, respectively. This reimbursement arrangement can be changed or
terminated at any time after 2/28/99 at the option of J.P. Morgan.

|
J.P MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND | 9
|
<PAGE>

J.P. MORGAN INSTITUTIONAL
TAX EXEMPT BOND FUND | TICKER SYMBOL: JITBX
================================================================================
Registrant: J.P. Morgan Institutional Funds
(J.P. Morgan Institutional Tax Exempt Bond Fund)

[GRAPHIC] RISK/RETURN SUMMARY

For a more detailed discussion of the fund's investments and their main
risks, as well as fund strategies, please see pages 24-27.

[GRAPHIC] GOAL

The fund's goal is to provide a high level of current income that is
exempt from federal income tax consistent with moderate risk of capital. This
goal can be changed without shareholder approval.

[GRAPHIC] INVESTMENT APPROACH

The fund invests primarily in high quality municipal securities that it
believes have the potential to provide current income that is free from federal
personal income tax. While the fund's goal is high tax-exempt income, the fund
may invest to a limited extent in taxable securities, including U.S. government,
government agency, corporate, or taxable municipal securities. The fund's
securities may be of any maturity, but under normal market conditions the fund's
duration (duration is a measure of average weighted maturity of the securities
held by a fund and a common measurement of sensitivity to interest rate
movements) will generally range between four and seven years, similar to that of
the Lehman Brothers 1-16 Year Municipal Bond Index. At least 90% of assets must
be invested in securities that, at the time of purchase, are rated investment-
grade (BBB/Baa or better) or are the unrated equivalent. No more than 10% of
assets may be invested in securities rated B or BB.

The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar tax-
exempt funds will depend on the success of the investment process, which is
rescribed on page 17.

Investors should be prepared for higher share price volatility than from a tax
exempt fund of shorter duration. The fund's performance could also be affected
by market reaction to proposed tax legislation. To the extent that the fund
seeks higher returns by investing in non-investment-grade bonds, often called
junk bonds, it takes on additional risks, since these bonds are more sensitive
to economic news and their issuers have a less secure financial position.

PORTFOLIO MANAGEMENT

The fund's assets are managed by J.P. Morgan, which currently manages over $275
billion, including more than $8 billion using the same strategy as the fund.

The portfolio management team is led by Robert W. Meiselas, vice president, who
joined the team in May of 1997 and has been at J.P. Morgan since 1987, and
Elaine B. Young, vice president, who joined the team in January of 1996 and has
been at J.P. Morgan since August of 1994. Prior to joining J.P. Morgan, Ms.
Young was a municipal bond trader and fixed income portfolio manager at Scudder,
Stevens, & Clark, Inc.

================================================================================
Before you invest

Investors considering the fund should understand that:

o There is no assurance that the fund will meet its investment goal.

o The fund does not represent a complete investment program.

|
10 | J.P. MORGAN INSTITUTIONAL TAX EXEMPT BOND FUND
|

<PAGE>

Performance (unaudited)

The bar chart and table shown below indicate the risks of investing in J.P.
Morgan Institutional Tax Exempt Bond Fund.

The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year for each of the fund's last 10 calendar years.

The table indicates the risks by showing how the fund's average annual returns
for the past one, five and ten years compare to those of the Lehman Brothers 1-
16 Year Municipal Bond Index. This is a widely recognized, unmanaged index of
general obligation and revenue bonds with maturities of 1-16 years used as a
measure of overall tax-exempt bond market performance./1/

The fund's past performance does not necessarily indicate how the fund will perform in the future.

===============================
Year-by-year total return (%) Shows changes in returns by calendar year/2//3/
===============================-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
7.38% 8.25% 6.87% 10.92% 7.47% 9.58% (2.53)% 13.50% 37.1% 7.58%

J.P. Morgan Institutional Tax Exempt Bond Fund

</TABLE>

For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 6.52% (for the quarter ended 6/30/85); and the
lowest quarterly return was -3.08% (for the quarter ended 3/31/94).
<TABLE>
<CAPTION>
======================================
Average annual total return (%) Shows performance over time, for periods ended December 31, 1997/2/
======================================-------------------------------------------------------------------------------------
Past 1 yr. Past 5 yrs. Past 10 yrs.
<S> <C> <C> <C>

J.P. Morgan Institutional Tax Exempt Bond Fund (after expenses) 7.58 6.23 7.19
- -----------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Quality Intermediate Municipal
Bond Index (no expenses) 7.33 6.52 7.53
- -----------------------------------------------------------------------------------------------------------------------------
Lehman Brothers 1-16 Year Municipal Bond Index
(no expenses) 7.97 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------

=============================================================================================================================
</TABLE>

INVESTOR EXPENSES
The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses
after reimbursement are deducted from fund assets prior to performance
calculations.

Annual fund operating expenses/4/ (%)
(expenses that are deducted from fund assets)

Management fees 0.30
Marketing (12b-1) fees none
Other expenses/5/ 0.26
======
Total annual fund
operating expenses/5/ 0.56
------

Expense example
- ---------------
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
(before reimbursement) unchanged, and all shares sold at the end of each time
period. The example is for comparison only; the fund's actual return and your
actual costs may be higher or lower.

1 yr. 3 yrs. 5 yrs. 10 yrs.
- --------------------------------------------------------
Your cost($) 57 179 313 701
- --------------------------------------------------------
/1/ The fund's benchmark changed from the Lehman Brothers Quality Intermediate
Municipal Bond Index, a widely recognized, unmanaged index of general
obligation and revenue bonds rated A or better with maturities of 2-12
years, to the Lehman Brothers 1-16 Year Municipal Bond Index on 5/1/97
because this index provided a broader mix of municipal securities and
included municipal securities rated below A.

/2/ The fund commenced operations on 7/12/93. For the period 1/1/88 through
7/31/93 returns reflect performance of The Pierpont Tax Exempt Bond Fund,
the predecessor of the fund, which commenced operations on 10/3/84.

/3/ The fund's fiscal year end is 8/31. For the period 1/1/98 through 9/30/98,
the total return for the fund was 5.16% and the total return for the index
was 5.44%.

/4/ The fund has a master/feeder structure as described on page 21. This
table is restated to show the current fee arrangements in effect as of
8/1/98, and shows the fund's expenses and its share of master portfolio
expenses for the past fiscal year using the current fees as if they had
been in effect during the past fiscal year, before reimbursement, expressed
as a percentage of the fund's average net assets.

/5/ After reimbursement, other expenses and total operating expenses are 0.20%
and 0.50%, respectively. This reimbursement arrangement can be changed or
terminated at any time after 12/31/98 at the option of J.P. Morgan.

|
J.P. MORGAN INSTITUTIONAL TAX EXEMPT BOND FUND | 11
|
<PAGE>

J.P. MORGAN INSTITUTIONAL NEW YORK
TAX EXEMPT BOND FUND | TICKER SYMBOL: JPNTX
================================================================================
Registrant: J.P. Morgan Institutional Funds
(J.P. Morgan Institutional New York tax exempt Bond Fund)

[GRAPHIC] RISK/RETURN SUMMARY

For a more detailed discussion of the fund's investments and their main
risks, as well as fund strategies, please see pages 24-27.

[GRAPHIC] GOAL

The fund's goal is to provide a high level of tax exempt income for New
York residents consistent with moderate risk of capital. This goal can be
changed without shareholder approval.

[GRAPHIC] INVESTMENT APPROACH

The fund invests primarily in New York municipal securities that it
believes have the potential to provide high current income which is free from
federal, state, and New York City personal income taxes for New York residents.
The fund may also invest to a limited extent in securities of other states or
territories. To the extent that the fund invests in municipal securities of
other states, the income from such securities would be free from federal
personal income taxes for New York residents but would be subject to New York
State and New York City personal income taxes. For non-New York residents, the
income from New York municipal securities is free from federal personal income
taxes only. The fund may also invest in taxable securities. The fund's
securities may be of any maturity, but under normal market conditions the fund's
duration (duration is a measure of average weighted maturity of the securities
held by a fund and a common measurement of sensitivity to interest rate
movements) will generally range between three and seven years, similar to that
of the Lehman Brothers 1-16 Year Municipal Bond Index. At least 90% of assets
must be invested in securities that, at the time of purchase, are rated
investment-grade (BBB/Baa or better) or are the unrated equivalent. No more than
10% of assets may be invested in securities rated B or BB.

The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
fixed income funds will depend on the success of the investment process, which
is described on page 17. Because most of the fund's investments will typically
be from issuers in the State of New York, its performance will be affected by
the fiscal and economic health of that state and its municipalities. The fund is
non-diversified and may invest more than 5% of assets in a single issuer, which
could further concentrate its risks. To the extent that the fund seeks higher
returns by investing in non-investment-grade bonds, often called junk bonds, it
takes on additional risks, since these bonds are more sensitive to economic news
and their issuers have a less secure financial condition.

PORTFOLIO MANAGEMENT

The fund's assets are managed by J.P. Morgan, which currently manages over $275
billion, including more than $8 billion using the same strategy as the fund.

The portfolio management team is led by Robert W. Meiselas, vice president, who
has been at J.P. Morgan since 1987, and Elaine B. Young, vice president, who
joined J.P. Morgan from Scudder, Stevens & Clark, Inc. in 1994 where she was a
municipal bond trader and fixed income portfolio manager. Both have been on the
team since June of 1997.

================================================================================
Before you invest

Investors considering the fund should understand that:

O There is no assurance that the fund will meet its investment goal.

O The fund does not represent a complete investment program.

|
12 | J.P. MORGAN INSTITUTIONAL NEW YORK TAX EXEMPT BOND FUND
|
<PAGE>

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

Performance (unaudited)

The bar chart and table shown below indicate the risks of investing in J.P.
Morgan Institutional New York Tax Exempt Bond Fund.

The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year since the fund's inception date.

The table indicates the risks by showing how the fund's average annual returns
for the past year and the life of the fund compare to those of the Lehman
Brothers 1-16 Year Municipal Bond Index. This is a widely recognized, unmanaged
index of general obligation and revenue bonds with maturities of 1-16 years used
as a measure of overall tax-exempt bond market performance.1

The fund's past performance does not necessarily indicate how the fund will
perform in the future.

- --------------------------------
Year-by-year total return (%) Shows changes in returns by calendar year/3/
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995 1996 1997

J.P. Morgan Institutional New York Tax Exempt Bond Fund 13.28% 4.21% 7.68%
- --------------------------------------------------------------------------------------------------------------
</TABLE>

For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 4.86% (for the quarter ended 3/31/95) and the
lowest quarterly return was -0.82% (for the quarter ended 12/31/94).

- ---------------------------------
Average annual total return (%) Shows performance over time, for periods ended December 31, 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Past 1 yr. Life of fund/2/
J.P. Morgan Institutional New York Tax Exempt Bond
Fund (after expenses) 7.68 6.91
- -------------------------------------------------------------------------------------------------------------
Lehman Brothers New York 1-15 Year Municipal Bond
Index (no expenses) 8.73 7.73
- -------------------------------------------------------------------------------------------------------------
Lehman Brothers 1-16 Year Municipal Bond Index (no
expenses) 7.97 7.29
- -------------------------------------------------------------------------------------------------------------
</TABLE>

Investor Expenses

The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses after
reimbursement are deducted from fund assets prior to performance calculations.

=======================================================
Annual fund operating expenses/4/ (%)
(expenses that are deducted from fund assets)
=======================================================

Management fees 0.30

Marketing (12b-1) fees none

Other expenses/5/ 0.32

=======================================================
Total annual fund
operating expenses/5/ 0.62
=======================================================

================================================================================
Expense example
================================================================================

- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.

Your cost($) 63 199 346 774
- --------------------------------------------------------------------------------

/1/ The fund's benchmark changed from the Lehman Brothers New York 1-15 Year
Municipal Bond Index, a widely recognized, unmanaged index of New York
general obligation and revenue bonds with maturities of 1-15 years, to the
Lehman Brothers 1-16 Year Municipal Bond Index on 5/1/97 because this index
provided a broader mix of municipal securities and was not concentrated in
New York City bonds.

/2/ The fund commenced operations on 4/11/94, and returns reflect performance
of the fund from 4/30/94.

/3/ The fund's fiscal year end is 3/31. For the period 1/1/98 through 9/30/98,
the total return for the fund was 5.02% and the total return for the index
was 5.44%.

/4/ The fund has a master/feeder structure as described on page 21. This table
is restated to show the current fee arrangements in effect as of 8/1/98,
and shows the fund's expenses and its share of master portfolio expenses
for the past fiscal year using the current fees as if they had been in
effect during the past fiscal year, before reimbursement, expressed as a
percentage of the fund's average net assets.

|
J.P. MORGAN INSTITUTIONAL NEW YORK TAX EXEMPT BOND | 13
<PAGE>

J.P. MORGAN INSTITUTIONAL
CALIFORNIA BOND FUND | TICKER SYMBOL: JPICX
================================================================================
Registrant: J.p. Morgan Series Trust
(J.P. Morgan California Bond Fund: Institutional shares)

[GRAPHIC] RISK/RETURN SUMMARY

For a more detailed discussion of the fund's investments and their main
risks, as well as fund strategies, please see pages 24-27.

[GRAPHIC] GOAL

The fund's goal is to provide high after-tax total return for California
residents consistent with moderate risk of capital. This goal can be changed
without shareholder approval.

[GRAPHIC] INVESTMENT APPROACH

The fund invests primarily in California municipal securities that it
believes have the potential to provide high current income which is free from
federal and state personal income taxes for California residents. Because the
fund's goal is high after-tax total return rather than high tax-exempt income,
the fund may invest to a limited extent in securities of other states or
territories. To the extent that the fund invests in municipal securities of
other states, the income from such securities would be free from federal
personal income taxes for California residents but would be subject to
California state personal income taxes. For non-California residents, the income
from California municipal securities is free from federal personal income taxes
only. The fund may also invest in taxable securities. The fund's securities may
be of any maturity, but under normal market conditions the fund's duration
(duration is a measure of average weighted maturity of the securities held by a
fund and a common measurement of sensitivity to interest rate movements) will
generally range between three and ten years, similar to that of the Lehman
Brothers 1-16 Year Municipal Bond Index. At least 90% of assets must be invested
in securities that, at the time of purchase, are rated investment-grade (BBB/Baa
or better) or are the unrated equivalent. No more than 10% of assets may be
invested in securities rated B or BB.

The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
fixed income funds will depend on the success of the investment process, which
is described on page 17. Because most of the fund's investments will typically
be from issuers in the State of California, its performance will be affected by
the fiscal and economic health of that state and its municipalities. The fund is
non-diversified and may invest more than 5% of assets in a single issuer, which
could further concentrate its risks. To the extent that the fund seeks higher
returns by investing in non-investment-grade bonds, often called junk bonds, it
takes on additional risks, because these bonds are more sensitive to economic
news and their issuers have a less secure financial condition.

PORTFOLIO MANAGEMENT

The fund's assets are managed by J.P. Morgan, which currently manages over $275
billion, including more than $8 billion using the same strategy as the fund.

================================================================================
Before you invest

Investors considering the fund should understand that:

o There is no assurance that the fund will meet its investment goal.

o The fund does not represent a complete investment program.

|
14 | J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND
|

<PAGE>

Performance (unaudited)
The bar chart and table shown below indicate the risks of investing in J.P.
Morgan Institutional California Bond Fund.

The bar chart indicates the risks by showing the performance of the fund's
shares during it's first complete calendar year of operations.

The table indicates the risks by showing how the fund's average annual returns
for the past year compare to those of the Lehman Brothers 1-16 Year Municipal
Bond Index. This is a widely recognized, unmanaged index of general obligation
and revenue bonds with maturities of 1-16 years used as a measure of overall
tax-exempt bond market performance.

The fund's past performance does not necessarily indicate how the fund will
perform in the future.

Total return (%) Shows changes in returns by calendar year/1/
1997 7.72
[ ] J.P. Morgan California Bond Fund: Institutional Shares

For the period covered by this total return chart, the fund's highest quarterly
return was 3.44% (for the quarter ended 9/30/98) and the lowest quarterly return
was -0.34% (for the quarter ended 3/31/97).

Average annual total return (%) Shows performance over time, for period ended
December 31, 1997
Past 1 yr./2/
J.P. Morgan California Bond Fund: Institutional Shares (after
expenses) 7.72
- -----------------------------------------------------------------------------
Lehman Brothers 1-16 Year Municipal Bond Index (no expenses) 7.97
Investor Expenses
- -----------------------------------------------------------------------------

INVESTOR EXPENSES
The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses after
reimbursement are deducted from fund assets prior to performance calculations.

Annual fund operating expenses/3/ (%)
(expenses that are deducted from fund assets)

Management fees 0.30
Marketing (12b-1) fees none
Other expenses/4/ 0.54
=====
Total annual fund
operating expenses/4/ 0.84

Expense example -----

1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 86 268 466 1,037

1 The fund's fiscal year end is 4/30. For the period 1/1/98 through 9/30/98,
the total return for the fund was 5.16% and the total return for the index
was 5.44%.

2 The fund commenced operations on 12/23/96, and returns reflect performance of
the fund from 12/31/96.

3 This table is restated to show the current fee arrangements in effect as of
8/1/98, and shows expenses for the past fiscal year using the current fees as
if they had been in effect during the past fiscal year, before reimbursement,
expressed as a percentage of average net assets.

J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND | 15
<PAGE>

FIXED INCOME MANAGEMENT APPROACH
================================================================================

J.P. MORGAN

Known for its commitment to proprietary research and its disciplined investment
strategies, J.P. Morgan is the asset management choice for many of the world's
most respected corporations, financial institutions, governments, and
individuals. Today, J.P. Morgan employs over 300 analysts and portfolio managers
around the world and has more than $275 billion in assets under management,
including assets managed by the funds' advisor, J.P. Morgan Investment
Management Inc.

J.P. MORGAN INSTITUTIONAL FIXED INCOME FUNDS

These funds invest primarily in bonds and other fixed income securities, either
directly or through a master portfolio (another fund with the same goal). The
funds seek high total return or high current income.

While each fund follows its own strategy, the funds as a group share a single
investment philosophy. This philosophy, developed by the funds' advisor,
emphasizes the potential for consistently enhancing performance while managing
risk.

THE SPECTRUM OF FIXED INCOME FUNDS

The funds described in this prospectus pursue different goals and offer varying
degrees of risk and potential reward. The table below shows degrees of the
relative risk and return that these funds potentially offer. These and other
distinguishing features of each fixed income fund were described on the
preceding pages. Differences among these funds include:

o the types of securities they hold

o the tax status of the income they offer

o the relative emphasis on current income versus total return

[CHART APPEARS HERE]

The positions of the funds in this graph reflect long-term performance goals
only, and are relative, not absolute.

* Based on tax-equivalent returns for an investor in the highest income tax
bracket.

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

Who May Want to Invest

The funds are designed for investors who:

o want to add an income investment to further diversify a portfolio

o want an investment whose risk/return potential is higher than that of money
market funds but generally less than that of stock funds

o want an investment that pays monthly dividends

o with regard to the Tax Exempt Bond Fund, are seeking income that is exempt
from federal personal income tax

o with regard to the state-specific funds, are seeking income that is exempt
from federal, state, and local (if applicable) personal income taxes in New
York or California

The funds are not designed for investors who:

o are investing for aggressive long-term growth

o require stability of principal

o with regard to the Global Strategic Income Fund, are not prepared to accept a
higher degree of risk than most traditional bond funds

o with regard to the federal or state tax-exempt funds, are investing through a
tax-deferred account such as an IRA

|
16 | FIXED INCOME MANAGEMENT APPROACH
|
<PAGE>

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

FIXED INCOME INVESTMENT PROCESS

J.P. Morgan seeks to generate an
information advantage through the
depth of its global fixed-income
research and the sophistication of
its analytical systems. Using a team-
oriented approach, J.P. Morgan seeks
to gain insights in a broad range of
distinct areas and takes positions in
many different ones, helping the
funds to limit exposure to
concentrated sources of risk.

In managing the funds described in
this prospectus, J.P. Morgan employs
a three-step process that combines
sector allocation, fundamental
research for identifying portfolio
securities, and duration management.

[GRAPHIC] Sector allocation The sector
allocation team meets monthly,
The funds invest across a range of analyzing the fundamentals of a broad
different types of securities range of sectors in which a fund may
invest. The team seeks to enhance
performance and manage risk by
underweighting or overweighting
sectors.

[GRAPHIC] Security selection Relying on the
insights of different specialists,
Each fund makes its portfolio decisions including credit analysts,
as described earlier in this prospectus quantitative researchers, and
dedicated fixed income traders, the
portfolio managers make buy and sell
decisions according to each fund's
goal and strategy.

[GRAPHIC] Duration management Forecasting teams
use fundamental economic factors to
J.P. Morgan uses a disciplined process develop strategic forecasts of the
to control each fund's sensitivity direction of interest rates. Based on
to interest rates these forecasts, strategists
establish each fund's target duration
(a measure of average weighted
maturity of the securities held by a
fund and a common measurement of
sensitivity to interest rate
movements), typically remaining
relatively close to the duration of
the market as a whole, as represented
by the fund's benchmark. The
strategists closely monitor the funds
and make tactical adjustments as
necessary.

|
FIXED INCOME MANAGEMENT APPROACH | 17
|
<PAGE>

YOUR INVESTMENT
================================================================================

For your convenience, the J.P. Morgan Institutional Funds offer several ways to
start and add to fund investments.

INVESTING THROUGH A FINANCIAL PROFESSIONAL

If you work with a financial professional, either at J.P. Morgan or elsewhere,
he or she is prepared to handle your planning and transaction needs. Your
financial professional will be able to assist you in establishing your fund
account, executing transactions, and monitoring your investment. If your fund
investment is not held in the name of your financial professional and you prefer
to place a transaction order yourself, please use the instructions for investing
directly.

INVESTING THROUGH AN EMPLOYER-SPONSORED RETIREMENT PLAN

Your fund investments are handled through your plan. Refer to your plan
materials or contact your benefits office for information on buying, selling, or
exchanging fund shares.

INVESTING THROUGH AN IRA OR ROLLOVER IRA

Please contact a J.P. Morgan Retirement Services Specialist at 1-888-576-4472
for information on J.P. Morgan's comprehensive IRA services, including lower
minimum investments.

INVESTING DIRECTLY

Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:

o Choose a fund (or funds) and determine the amount you are investing. The
minimum amount for initial investments is $5,000,000 for the Short Term Bond,
Bond, Tax Exempt Bond, New York Tax Exempt Bond and California Bond funds and
$1,000,000 for the Global Strategic Income and International Bond funds and
for additional investments $25,000, although these minimums may be less for
some investors. For more information on minimum investments, call 1-800-766-
7722.

o Complete the application, indicating how much of your investment you want to
allocate to which fund(s). Please apply now for any account privileges you
may want to use in the future, in order to avoid the delays associated with
adding them later on.

o Mail in your application, making your initial investment as shown at right.

For answers to any questions, please speak with a J.P. Morgan Funds Services
Representative at 1-800-766-7722.

OPENING YOUR ACCOUNT

By wire
o Mail your completed application to the Shareholder Services Agent.

o Call the Shareholder Services Agent to obtain an account number and to place
a purchase order. Funds that are wired without a purchase order will be
returned uninvested.

o After placing your purchase order, instruct your bank to wire the amount of
your investment to:

Morgan Guaranty Trust Company of New York
Routing number: 021-000-238
Credit: J.P. Morgan Institutional Funds
Account number: 001-57-689

FFC: your account number, name of registered owner(s) and fund name

By check

o Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.

o Mail the check with your completed application to the Shareholder Services
Agent.

By exchange

o Call the Shareholder Services Agent to effect an exchange.

ADDING TO YOUR ACCOUNT

By wire

o Call the Shareholder Services Agent to place a purchase order. Funds that are
wired without a purchase order will be returned uninvested.

o Once you have placed your purchase order, instruct your bank to wire the
amount of your investment as described above.

By check

o Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.

o Mail the check with a completed investment slip to the Shareholder Services
Agent. If you do not have an investment slip, attach a note indicating your
account number and how much you wish to invest in which fund(s).

By exchange

o Call the Shareholder Services Agent to effect an exchange.

|
18 |
|

<PAGE>

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

SELLING SHARES

By phone -- wire payment

o Call the Shareholder Services Agent to verify that the wire redemption
privilege is in place on your account. If it is not, a representative can
help you add it.

o Place your wire request. If you are transferring money to a non-Morgan
account, you will need to provide the representative with the personal
identification number (PIN) that was provided to you when you opened your
fund account.

By phone -- check payment

o Call the Shareholder Services Agent and place your request. Once your request
has been verified, a check for the net amount, payable to the registered
owner(s), will be mailed to the address of record. For checks payable to any
other party or mailed to any other address, please make your request in
writing (see below).

In writing

o Write a letter of instruction that includes the following information: The
name of the registered owner(s) of the account; the account number; the fund
name; the amount you want to sell; and the recipient's name and address or
wire information, if different from those of the account registration.

o Indicate whether you want the proceeds sent by check
or by wire.

o Make sure the letter is signed by an authorized party. The Shareholder
Services Agent may require additional information, such as a signature
guarantee.

o Mail the letter to the Shareholder Services Agent.

By exchange

o Call the Shareholder Services Agent to effect an exchange.

Redemption In Kind

o Each fund reserves the right to make redemptions of over $250,000 in
securities rather than in cash.

ACCOUNT AND TRANSACTION POLICIES

Telephone orders The funds accept telephone orders from all shareholders. To
guard against fraud, the funds require shareholders to use a PIN, and may record
telephone orders or take other reasonable precautions. However, if a fund does
take such steps to ensure the authenticity of an order, you may bear any loss if
the order later proves fraudulent.

Exchanges You may exchange shares in these funds for shares in any other J.P.
Morgan Institutional or J.P. Morgan mutual fund at no charge (subject to the
securities laws of your state). When making exchanges, it is important to
observe any applicable minimums. Keep in mind that for tax purposes an exchange
is considered a sale.

A fund may alter, limit, or suspend its exchange policy at any time.

Business hours and NAV calculations The funds' regular business days and hours
are the same as those of the New York Stock Exchange (NYSE). Each fund
calculates its net asset value per share (NAV) every business day as of the
close of trading on the NYSE (normally 4:00 p.m. eastern time). Each fund's
securities are typically priced using pricing services or market quotes. When
these methods are not available or do not represent a security's value at the
time of pricing (e.g. when an event occurs after the close of trading that would
materially impact a security's value), the security is valued in accordance with
the fund's fair valuation procedures.

Timing of orders Orders to buy or sell shares are executed at the next NAV
calculated after the order has been accepted. Orders are accepted until the
close of trading on the NYSE every business day and are executed the same day,
at that day's NAV. A fund has the right to suspend redemption of shares and to
postpone payment of proceeds for up to seven days or as permitted by law.

================================================================================
Shareholder Services Agent
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
1-800-766-7722

Representatives are available 8:00 a.m. to 5:00 p.m. eastern
time on fund business days.

|
YOUR INVESTMENT | 19
|

<PAGE>

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

Timing of settlements When you buy shares, you will become the owner of record
when a fund receives your payment, generally the day following execution. When
you sell shares, proceeds are generally available the day following execution
and will be forwarded according to your instructions.

When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your check
clears. This may take up to 15 days.

Statements and reports The funds send monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months each fund sends out an annual or semi-annual report containing
information on its holdings and a discussion of recent and anticipated market
conditions and fund performance.

Accounts with below-minimum balances If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), each fund reserves the right to request that you buy more shares
or close your account. If your account balance is still below the minimum 60
days after notification, each fund reserves the right to close out your account
and send the proceeds to the address of record.

DIVIDENDS AND DISTRIBUTIONS

Income dividends are typically declared daily and paid monthly. If an investor's
shares are redeemed during the month, accrued but unpaid dividends are paid with
the redemption proceeds. Shares of a fund earn dividends on the business day the
purchase is effective, but not on the business day the redemption is effective.
Each fund distributes capital gains, if any, once a year. However, a fund may
make more or fewer payments in a given year, depending on its investment results
and its tax compliance situation. Each fund's dividends and distributions
consist of most or all of its net investment income and net realized capital
gains.

Dividends and distributions are reinvested in additional fund shares.
Alternatively, you may instruct your financial professional or J.P. Morgan Funds
Services to have them sent to you by check, credited to a separate account, or
invested in another J.P. Morgan Institutional Fund.

TAX CONSIDERATIONS

In general, selling shares, exchanging shares, and receiving distributions
(whether reinvested or taken in cash) are all taxable events. These transactions
typically create the following tax liabilities for taxable accounts:

- --------------------------------------------------------------------------------
Transaction Tax status
- --------------------------------------------------------------------------------
Income dividends from the Exempt from federal, state,
New York Tax Exempt Bond and New York City personal
Fund income taxes for New York
residents only

Income dividends from the Exempt from federal and state
California Bond Fund personal income taxes for
California residents only

Income dividends from the Exempt from federal personal
Tax Exempt Bond Fund income taxes

Income dividends from Ordinary income
all other funds

Short-term capital gains Ordinary income
distributions

Long-term capital gains Capital gains
distributions

Sales or exchanges of Capital gains or
shares owned for more losses
than one year

Sales or exchanges of Gains are treated as ordinary
shares owned for one year income; losses are subject
or less to special rules
- --------------------------------------------------------------------------------

Because long-term capital gains distributions are taxable as capital gains
regardless of how long you have owned your shares, you may want to avoid making
a substantial investment when a fund is about to declare a long-term capital
gains distribution. A portion of the Tax Exempt Bond, New York Tax Exempt Bond
and California Bond funds' returns may be subject to federal, state, or local
tax, or the alternative minimum tax. Every January, each fund issues tax
information on its distributions for the previous year. Any investor for whom a
fund does not have a valid taxpayer identification number will be subject to
backup withholding for taxes. The tax considerations described in this section
do not apply to tax-deferred accounts or other non-taxable entities. Because
each investor's tax circumstances are unique, please consult your tax
professional about your fund investment.

|
20 | YOUR INVESTMENT
|

|
<PAGE>

FUND DETAILS
================================================================================

BUSINESS STRUCTURE

As noted earlier, each fund (except the California Bond Fund) is a "feeder" fund
that invests in a master portfolio. (Except where indicated, this prospectus
uses the term "the fund" to mean the feeder fund and its master portfolio taken
together.)

Each master portfolio accepts investments from other feeder funds, and all the
feeders of a given master portfolio bear the portfolio's expenses in proportion
to their assets. However, each feeder can set its own transaction minimums,
fund-specific expenses and other conditions. This means that one feeder could
offer access to the same master portfolio on more attractive terms, or could
experience better performance, than another feeder. Information about other
feeders is available by calling 1-800-766-7722. Generally, when a master
portfolio seeks a vote, each of its feeder funds will hold a shareholder meeting
and cast its vote proportionately, as instructed by its shareholders. Fund
shareholders are entitled to one full or fractional vote for each dollar or
fraction of a dollar invested.

Each feeder fund and its master portfolio expect to maintain consistent goals,
but if they do not, the feeder fund will withdraw from the master portfolio,
receiving its assets either in cash or securities. Each feeder fund's trustees
would then consider whether it should hire its own investment adviser, invest in
a different master portfolio, or take other action.

The California Bond Fund is a series of J.P. Morgan Series Trust, a
Massachusetts business trust. Information about other series or classes is
available by calling 1-800-766-7722. In the future, the trustees could create
other series or share classes, which would have different expenses.

MANAGEMENT AND ADMINISTRATION

The feeder funds described in this prospectus, their corresponding master
portfolios, and J.P. Morgan Series Trust are all governed by the same trustees.
The trustees are responsible for overseeing all business activities. The
trustees are assisted by Pierpont Group, Inc., which they own and operate on a
cost basis; costs are shared by all funds governed by these trustees. Funds
Distributor, Inc., as co-administrator, along with J.P. Morgan, provides fund
officers. J.P. Morgan, as co-administrator, oversees each fund's other service
providers.

J.P. Morgan, subject to the expense reimbursements described earlier in this
prospectus, receives the following fees for investment advisory and other
services:

- --------------------------------------------------------------------------------
Advisory services Percentage of the master
portfolio's average net assets
- --------------------------------------------------------------------------------
Short Term Bond 0.25%
- --------------------------------------------------------------------------------
Bond 0.30%
- --------------------------------------------------------------------------------
International Bond 0.35%
- --------------------------------------------------------------------------------
Global Strategic Income 0.45%
- --------------------------------------------------------------------------------
Tax Exempt Bond 0.30%
- --------------------------------------------------------------------------------
New York Tax Exempt Bond 0.30%
- --------------------------------------------------------------------------------
Administrative services Master portfolio's and fund's pro-
(fee shared with Funds rata portions of 0.09% of the
Distributor, Inc.) first $7 billion in J.P. Morgan-
advised portfolios, plus 0.04% of
average net assets over $7 billion
- --------------------------------------------------------------------------------
Shareholder services 0.10% of the fund's average
net assets
- --------------------------------------------------------------------------------

The California Bond Fund, subject to the expense reimbursements described
earlier in this prospectus, pays J.P. Morgan the following fees for investment
advisory and other services:

- --------------------------------------------------------------------------------
Advisory services 0.30% of each fund's average
net assets
- --------------------------------------------------------------------------------
Administrative services Fund's pro-rata portion of
(fee shared with Funds 0.09% of the first $7 billion
Distributor, Inc.) in J.P. Morgan-advised portfolios,
plus 0.04% of average net
assets over $7 billion
- --------------------------------------------------------------------------------
Shareholder services 0.10% of the fund's average
net assets
- --------------------------------------------------------------------------------

J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in a fund.

Year 2000 Fund operations and shareholders could be adversely affected if the
computer systems used by J.P. Morgan, the funds' other service providers and
other entities with computer systems linked to the funds do not properly process
and calculate January 1, 2000 and after date-related information. J.P. Morgan is
working to avoid these problems and to obtain assurances from other service
providers that they are taking similar steps. However, it is not certain that
these actions will be sufficient to prevent these date-related problems from
adversely impacting fund

|
FUND DETAILS | 21
|
<PAGE>

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

operations and shareholders. In addition, to the extent that operations of
issuers of securities held by the funds are impaired by date-related problems or
prices of securities decline as a result of real or perceived date-related
problems of issuers held by the fund or generally, the net asset value of the
funds will decline.

The Euro Effective January 1, 1999 the euro, a single multinational currency,
will replace the national currencies of certain countries in the Economic
Monetary Union (EMU).

J.P. Morgan has identified the following potential risks to the funds that
invest in foreign securities, after the conversion: The risk that the valuation
of assets is not properly converted from the national currency to euro; currency
risk resulting from increased volatility in exchange rates between EMU countries
and non-participating countries; the inability of any of the fund, its service
providers and the issuers of the funds' portfolio securities to make information
technology updates timely; and the potential unenforceability of contracts.
There have been recent laws and regulations designed to ensure the continuity of
contracts, however there is a risk that the valuation of contracts will be
negatively impacted after the conversion. J.P. Morgan is working to avoid these
problems and to obtain assurances from other service providers that they are
taking similar steps. However, it is not certain that these actions will be
sufficient to prevent problems associated with the conversion from adversely
impacting fund operations and shareholders.

|
22 | FUND DETAILS
|

<PAGE>
===============================================================================

(THIS PAGE IS INTENTIONALLY LEFT BLANK)

|
| 23
|
<PAGE>

Risk and Reward Elements

This table discusses the main elements that make up each fund's overall risk and
reward characteristics (described on pages 2-15). It also outlines each fund's
policies toward various securities, including those that are designed to help
certain funds manage risk.

<TABLE>
<CAPTION>
==================================================================================================================================
Potential risks Potential rewards Policies to balance risk and reward
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>

Market conditions
o Each fund's share price, yield, o Bonds have generally outperformed money o Under normal circumstances the funds
and total return will fluctuate market investments over the long plan to remain fully invested in
in response to bond market term, with less risk than stocks bonds and other fixed income
movements securities as noted in the table on
o Most bonds will rise in value when pages 26-27
o The value of most bonds will interest rates fall
fall when interest rates rise; o The funds seek to limit risk and
the longer a bond's maturity enhance total return or yields
and the lower its credit quality, o Mortgage-backed and asset-backed through careful management, sector
the more its value typically falls securities can offer attractive allocation, individual securities
returns selection, and duration management
o Adverse market conditions
may from time to time cause o During severe market downturns, the
a fund to take temporary funds have the option of investing up
defensive positions that are to 100% of assets in investment-grade
inconsistent with its principal short-term securities
investment strategies and
may hinder a fund from achieving o J.P. Morgan monitors interest rate
its investment objective trends, as well as geographic and
demographic information related to
o Mortgage-backed and asset- mortgage-backed securities and
backed securities (securities mortgage prepayments
representing an interest in, or
secured by, a pool of mortgages
or other assets such as receivables)
could generate capital losses or
periods of low yields if they are
paid off substantially earlier or
later than anticipated
- ----------------------------------------------------------------------------------------------------------------------------------
Credit quality
o The default of an issuer would leave o Investment-grade bonds o Each fund maintains its own policies
a fund with unpaid interest or have a lower risk of default for balancing credit quality against
principal potential yields and gains in light
o Junk bonds offer higher yields and of its investment goals
o Junk bonds (those rated BB/Ba or higher potential gains
lower) have a higher risk of default, o J.P. Morgan develops its own ratings
tend to be less liquid, and may be of unrated securities and makes a
more difficult to value credit quality determination for
unrated securities
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign investments
o A fund could lose money because of o Foreign bonds, which represent a o Foreign bonds are a primary
foreign government actions, political major portion of the world's fixed investment only for the International
instability, or lack of adequate and income securities, offer attractive Bond and Global Strategic Income
accurate information potential performance and funds and may be a significant
opportunities for diversification investment for the Short Term Bond
o Currency exchange rate movements o Favorable exchange rate movements and Bond funds; the Tax Exempt Bond,
could reduce gains or create losses could generate gains or reduce losses New York Tax Exempt Bond and
California Bond funds are not
o Currency and investment risks tend to o Emerging markets can offer higher permitted to invest any assets in
be higher in emerging markets returns foreign bonds

o To the extent that a fund invests in
foreign bonds, it may manage the
currency exposure of its foreign
investments relative to its
benchmark, and may hedge a portion of
its foreign currency exposure into
the U.S. dollar from time to time
(see also "Derivatives"); these
currency management techniques may
not be available for certain emerging
markets investments
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
|
24 | FUND DETAILS
|
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================================
=================================================================================================================================
Potential risks Potential rewards Policies to balance risk and reward
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>

Management choices
o A fund could underperform its o A fund could outperform its o J.P. Morgan focuses its active
benchmark due to its sector, benchmark due to these same management on those areas where it
securities or duration choices choices believes its commitment to research
can most enhance returns and manage
Derivatives risks in a consistent way
o Derivatives such as futures, options, o Hedges that correlate well with
swaps and forward foreign currency underlying positions can reduce or o The funds use derivatives, such as
conntracts that are used for hedging eliminate losses at low cost futures, options, swaps and forward
the portfolio or specific securities foreign currency contracts for
may not fully offset the underlying o A fund could make money and protect hedging and for risk management
positions(1) and this could result in against losses if management's (i.e., to adjust duration or to
losses to the fund that would not analysis proves correct establish or adjust exposure to
have otherwise occurred particular securities, markets, or
o Derivatives that involve leverage currencies); risk management may
o Derivatives used for risk management could generate substantial gains at include management of a fund's
may not have the intended effects and low cost exposure relative to its benchmark;
may result in losses or missed the Tax Exempt Bond, New York Tax
opportunities Exempt Bond and California Bond funds
are permitted to enter into futures
o The counterparty to a derivatives and options transactions, however,
contract could default these transactions result in taxable
gains or losses so it is expected
o Certain types of derivatives involve that these funds will utilize them
costs to the funds which can reduce infrequently; forward foreign
returns currency contracts are not permitted
to be used by the Tax Exempt Bond,
o Derivatives that involve leverage New York Tax Exempt Bond and
could magnify losses California Bond funds

o The funds only establish hedges that
they expect will be highly correlated
with underlying positions

o While the funds may use derivatives
that incidentally involve leverage,
they do not use them for the specific
purpose of leveraging their
portfolios
- ----------------------------------------------------------------------------------------------------------------------------------
Illiquid holdings
o A fund could have difficulty valuing o These holdings may offer more o No fund may invest more than 15% of
these holdings precisely attractive yields or potential growth net assets in illiquid holdings
than comparable widely traded
o A fund could be unable to sell these securities o To maintain adequate liquidity to
holdings at the time or price desired meet redemptions, each fund may hold
investment-grade short-term
securities (including repurchase
agreements) and, for temporary or
extraordinary purposes, may borrow
from banks up to 33 1/3% of the value
of its assets
- ----------------------------------------------------------------------------------------------------------------------------------
When-issued and delayed delivery
securities
o When a fund buys securities before o A fund can take advantage of o Each fund uses segregated accounts to
issue or for delayed delivery, it attractive transaction opportunities offset leverage risk
could be exposed to leverage risk if
it does not use segregated accounts
- ----------------------------------------------------------------------------------------------------------------------------------
Short-term trading
o Increased trading would raise a o A fund could realize gains in a short o The expected turnover rate for each
fund's transaction costs period of time fund is as follows:
o Tax Exempt Bond 50%
o Increased short-term capital gains o A fund could protect against losses o New York Tax Exempt Bond,
distributions would raise if a bond is overvalued and its value California Bond 75%
shareholders' income tax liability later falls o Short Term Bond, Bond, Global
Strategic Income 300%
o International Bond 350%

o The funds generally avoid short-term
trading, except to take advantage of
attractive or unexpected
opportunities or to meet demands
generated by shareholder activity
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

1 A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash
payment based on changes in the value of a securities index. An option is
the right to buy or sell a set quantity of an underlying instrument at a
pre-determined price. A swap is a privately negotiated agreement to
exchange one stream of payments for another. A forward foreign currency
contract is an obligation to buy or sell a given currency on a future date
and at a set price.

FUND DETAILS | 25

<PAGE>

===============================================================================
Investments
===============================================================================

This table discusses the customary types of investments which can be held by
each fund. In each case the principal types of risk are listed on the following
page (see below for definitions). This table reads across two pages.
- -------------------------------------------------------------------------------
Asset-backed securities Interests in a stream of payments from specific assets,
such as auto or credit card receivables.
- -------------------------------------------------------------------------------
Bank obligations Negotiable certificates of deposit, time deposits and bankers'
acceptances of domestic and foreign issuers.
- -------------------------------------------------------------------------------
Commercial paper Unsecured short term debt issued by domestic and foreign banks
or corporations. These securities are usually discounted and are rated by S&P or
Moody's.
- -------------------------------------------------------------------------------
Convertible securities Domestic and foreign debt securities that can be
converted into equity securities at a future time and price.
- -------------------------------------------------------------------------------
Corporate bonds Debt securities of domestic and foreign industrial, utility,
banking, and other financial institutions.
- -------------------------------------------------------------------------------
Mortgages (directly held) Domestic debt instrument which gives the lender a lien
on property as security for the loan payment.
- -------------------------------------------------------------------------------
Mortgage-backed securities Domestic and foreign securities (such as Ginnie Maes,
Freddie Macs, Fannie Maes) which represent interests in pools of mortgages,
whereby the principal and interest paid every month is passed through to the
holder of the securities.
- -------------------------------------------------------------------------------
Mortgage dollar rolls The purchase of mortgage-backed securities with the
promise to purchase similar securities upon the maturity of the original
security. Segregated accounts are used to offset leverage risk.
- -------------------------------------------------------------------------------
Participation interests Interests that represent a share of bank debt or similar
securities or obligations.
- -------------------------------------------------------------------------------
Private placements Bonds or other investments that are sold directly to an
institutional investor.
- -------------------------------------------------------------------------------
REITs and other real-estate related instruments Securities of issuers that
invest in real estate or are secured by real estate.
- -------------------------------------------------------------------------------
Repurchase agreements Contracts whereby the seller of a security agrees to
repurchase the same security from the buyer on a particular date and at a
specific price.
- -------------------------------------------------------------------------------
Sovereign debt, Brady bonds, and debt of supranational organizations Dollar- or
non-dollar-denominated securities issued by foreign governments or supranational
organizations. Brady bonds are issued in connection with debt restructurings.
- -------------------------------------------------------------------------------
Swaps Contractual agreement whereby a party agrees to exchange periodic payments
with a counterparty. Segregated accounts are used to offset leverage risk.
- -------------------------------------------------------------------------------
Synthetic variable rate instruments Debt instruments whereby the issuer agrees
to exchange one security for another in order to change the maturity or quality
of a security in the fund.
- -------------------------------------------------------------------------------
Tax exempt municipal securities Securities, generally issued as general
obligation and revenue bonds, whose interest is exempt from federal taxation and
state and/or local taxes in the state where the securities were issued.
- -------------------------------------------------------------------------------
U.S. government securities Debt instruments (Treasury bills, notes, and bonds)
guaranteed by the U.S. government for the timely payment of principal and
interest.
- -------------------------------------------------------------------------------
Zero coupon, pay-in-kind, and deferred payment securities Domestic and foreign
securities offering non-cash or delayed-cash payment. Their prices are typically
more volatile than those of some other debt instruments and involve certain
special tax considerations.
- -------------------------------------------------------------------------------
Risk related to certain investments held by J.P. Morgan Institutional fixed
income funds:

Credit risk The risk a financial obligation will not be met by the issuer of a
security or the counterparty to a contract, resulting in a loss to the
purchaser.

Currency risk The risk currency exchange rate fluctuations may reduce gains or
increase losses on foreign investments.

Environmental risk The risk that an owner or operator of real estate may be
liable for the costs associated with hazardous or toxic substances located on
the property.

Extension risk The risk a rise in interest rates will extend the life of a
mortgage-backed security to a date later than the anticipated prepayment date,
causing the value of the investment to fall.

Interest rate risk The risk a change in interest rates will adversely affect the
value of an investment. The value of fixed income securities generally moves in
the opposite direction of interest rates (decreases when interest rates rise and
increases when interest rates fall).

Leverage risk The risk of gains or losses disproportionately higher than the
amount invested.

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26 | FUND DETAILS
|

<PAGE>

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

* Permitted (and if applicable, percentage limitation)
percentage of total assets - bold
percentage of net assets - italic

o Permitted, but not typically used

+ Permitted, but no current intention of use

<TABLE>

<CAPTION>
Short Inter- Global Tax New York
Term national Strategic Exempt Tax California
Principal Types of Risk Bond Bond Bond Income Bond Exempt Bond Bond
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
credit, interest rate, market, prepayment * * * * o o o
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, liquidity, political */1/ */1/ * * o o o
Domestic Domestic Domestic
Only Only Only
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity,
market, political * * * o * * *
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity,
market, political, valuation * * * o -- -- --
25% 25%
Foreign Foreign
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity,
market, political, valuation * * * * -- -- --
25% 25%
Foreign Foreign
- ------------------------------------------------------------------------------------------------------------------------------------
credit, environmental, extension, interest rate,
liquidity, market, natural event, political,
prepayment, valuation * * o * + + +
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, extension, interest rate,
leverage, market, political, prepayment * * o * -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
currency, extension, interest rate, leverage,
liquidity, market, political, prepayment *33 1/3% *33 1/3% -- *33 1/3% -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, extension, interest rate,
liquidity, political, prepayment * * * * -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
credit, interest rate,
liquidity, market, valuation * * o * * * *
- ------------------------------------------------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market,
natural event, prepayment, valuation * * -- * -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
credit * * o * o o o
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, interest rate, market,
political * * * * -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, interest rate, leverage,
market, political * * * * * -- --
- ------------------------------------------------------------------------------------------------------------------------------------
credit, interest rate, leverage, liquidity,
market -- -- -- -- * * *
- ------------------------------------------------------------------------------------------------------------------------------------
credit, interest rate, market, natural event,
political o o -- -- */2/ */2/ */2/
- ------------------------------------------------------------------------------------------------------------------------------------
interest rate * * * * * * *
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity,
market, political, valuation * * * * * * *
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Liquidity risk The risk the holder may not be able to sell the security at the
time or price it desires.

Market risk The risk that when the market as a whole declines, the value of a
specific investment will decline proportionately. This systematic risk is common
to all investments and the mutual funds that purchase them.

Natural event risk The risk of a natural disaster, such as a hurricane or
similar event, wil cause severe economic losses and default in payments by the
issuer of the security.

Political risk The risk governmental policies or other political actions will
negatively impact the value of the investment.

Prepayment risk The risk declining interest rates will result in unexpected
prepayments, causing the value of the investment to fall.

Valuation risk The risk the estimated value of a security does not match the
actual amount that can be realized if the security is sold.

(1) For each of the Short Term Bond and Bond funds, all foreign securities in
the aggregate may not exceed 25% of such fund's assets.

(2) At least 65% of assets must be in tax exempt securities (for New York Total
Return Bond and California Bond funds, the 65% must be in New York or
California municipal securities, respectively).

FUND DETAILS 27

<PAGE>

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

FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand each fund's
financial performance for the past one through five fiscal years or periods, as
applicable. Certain information reflects financial results for a single fund
share. The total returns in the tables represent the rate that an investor would
have earned (or lost) on an investment in a fund (assuming reinvestment of all
dividends and distributions). Except where noted, this information has been
audited by PricewaterhouseCoopers LLP, whose reports, along with each fund's
financial statements, are included in the respective fund's annual report, which
are available upon request.

<TABLE>

<CAPTION>
========================================================================================================================
J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND

Net asset value, beginning of period ($) 10.00 9.99 9.60 9.83 9.85 9.84
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.11 0.47 0.58 0.55 0.61 0.30
Net realized and unrealized gain (loss)
on investment ($) (0.01) (0.39) 0.24 0.02 (0.01) --
========================================================================================================================
Total from investment operations ($) 0.10 0.08 0.82 0.57 0.60 0.30
- ------------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) (0.11) (0.47) (0.59) (0.55) (0.61) (0.30)
Net asset value, end of period ($) 9.99 9.60 9.83 9.85 9.84 9.84
- ------------------------------------------------------------------------------------------------------------------------

=============================
Ratios and supplemental data
=============================-------------------------------------------------------------------------------------------
Total return (%) 1.01/2/ 0.87 8.81 6.01 6.27 3.10/2/
- ------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 27,605 47,679 18,916 17,810 27,375 76,934
- ------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.46/3/ 0.45 0.45 0.37 0.25 0.25/3/
- ------------------------------------------------------------------------------------------------------------------------
Net investment income (%) 3.92/3/ 4.96 6.09 5.69 6.19 6.16/3/
- ------------------------------------------------------------------------------------------------------------------------
Decrease reflected in expense ratio due
to expense reimbursement (%) 0.84/3/ 0.33 0.22 1.00 0.71 0.44(3)
========================================================================================================================
</TABLE>

/1/ The fund commenced operations on 7/8/93.

/2/ Not annualized.

/3/ Annualized.

|
28 | FUND DETAILS
|
<PAGE>

=======================================================================================================================
J.P. MORGAN INSTITUTIONAL BOND FUND

=============================
Per-share data For fiscal periods ended
=============================-------------------------------------------------------------------------------------------
10/31/93(1) 10/31/94 10/31/95 10/31/96 10/31/97 4/30/98
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ($) 10.00 10.14 9.23 9.98 9.84 10.01
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.15 0.55 0.63 0.61 0.65 0.33
Net realized and unrealized gain (loss)
on investment ($) 0.14 (0.88) 0.75 (0.11) 0.18 0.03
========================================================================================================================
Total from investment operations ($) 0.29 (0.33) 1.38 0.50 0.83 0.36
- ------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.15) (0.55) (0.63) (0.61) (0.64) (0.33)
Net realized gain (loss) ($) -- (0.03) -- (0.03) (0.02) (0.07)
========================================================================================================================
Total distributions ($) (0.15) (0.58) (0.63) (0.64) (0.66) (0.40)
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 10.14 9.23 9.98 9.84 10.01 9.97
=============================-------------------------------------------------------------------------------------------

=============================
Ratios and supplemental data
=============================-------------------------------------------------------------------------------------------
Total return (%) 2.90/2/ (3.33) 15.50 5.21 8.78 3.60/2/
- ------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 43,711 253,174 438,610 836,066 912,054 908,291
- ------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.50/3/ 0.50 0.47 0.50 0.50 0.49/3/
- -------------------------------------------------------------------------------------------------------------------------
Net investment income (%) 4.83/3/ 6.00 6.62 6.28 6.59 6.60/3/
- ------------------------------------------------------------------------------------------------------------------------
Decrease reflected in expense ratio due to
expense reimbursement (%) 0.39/3/ 0.19 0.05 0.03 0.00/4/ --
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ The fund commenced operations on 7/26/93.
/2/ Not annualized.
/3/ Annualized.
/4/ Less than 0.01%.

<TABLE>
=======================================================================================================================
J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND

=============================
Per-share data For fiscal periods ended
=============================-------------------------------------------------------------------------------------------
9/30/95/1/ 9/30/96 9/30/97 3/31/98
(unaudited)
<S> <C> <C> <C> <C>
Net asset value, beginning of period ($) 10.00 11.12 11.30 8.65
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.49 0.31 2.21 0.10
Net realized and unrealized gain
on investment and foreign currency
(loss) allocated from portfolio ($) 0.78 0.95 (1.11) 0.32
========================================================================================================================
Total from investment operations ($) 1.27 1.26 1.10 0.42
- ------------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) (0.15) -- (2.78) (0.76)
Net realized gain (loss) ($) -- (1.08) (0.97) (0.20)
========================================================================================================================
Total distributions ($) (0.15) (1.08) (3.75) (0.96)
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 11.12 11.30 8.65 8.11
- ------------------------------------------------------------------------------------------------------------------------

=============================
Ratios and supplemental data
=============================-------------------------------------------------------------------------------------------
Total return (%) 12.83/2/ 12.09 12.52 5.19/2/
- ------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 4,233 13,310 7,126 6,198
- ------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.60/3/ 0.65 0.50 0.65/3/
- ------------------------------------------------------------------------------------------------------------------------
Net investment income (%) 5.82/3/ 5.28 4.88 3.78/3/
- ------------------------------------------------------------------------------------------------------------------------
Decrease reflected in expense ratio due
to expense reimbursement (%) 1.90/3//4/ 1.02 1.91 1.41/3/
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

/1/ The fund commenced operations on 12/1/94.
/2/ Not annualized.
/3/ Annualized.
/4/ After consideration of certain state limitations.
<PAGE>

J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND
==================
Per-share data For fiscal periods ended
==================------------------------------------------------------------
10/31/97/1/ 4/30/98
(unaudited)
Net asset value, beginning of period ($) 10.00 10.16
- ------------------------------------------------------------------------------
Income from investment Operations:
Net investment income ($) 0.46 0.39
Net realized and
unrealized gain
on investment and foreign currency ($) 0.15 0.19
- ------------------------------------------------------------------------------
Total from investment operations ($) 0.61 0.58
- ------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.45) (0.40)
Net realized gain (loss) ($) -- (0.03)
- ------------------------------------------------------------------------------
Total distributions ($) (0.45) (0.43)
- ------------------------------------------------------------------------------
Net asset value, end of period ($) 10.16 10.31
- ------------------------------------------------------------------------------
=============================
Ratios and supplemental data
=============================-------------------------------------------------
Total return (%) 6.15/2/ 5.71/2/
- ------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 105,051 197,578
- ------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.65/3/ 0.65/3/
- ------------------------------------------------------------------------------
Net investment income (%) 7.12/3/ 7.23/3/
- ------------------------------------------------------------------------------
Decrease reflected in expense ratio due to
expense reimbursement (%) 0.53/3/ 0.17/3/
- ------------------------------------------------------------------------------
/1/ The fund commenced operations on 3/17/97.
/2/ Not annualized.
/3/ Annualized.
==============================================================================

J.P. MORGAN INSTITUTIONAL TAX EXEMPT BOND FUND
<TABLE>
<CAPTION>
===================
Per-share data For fiscal periods ended
===================-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>

8/31/93/1/ 8/31/94 8/31/95 8/31/96 8/31/97 8/31/98
Net asset value, beginning of period ($) 10.00 10.07 9.75 10.01 9.92 10.12
Income from investment operations:
Net investment income ($) 0.06 0.48 0.49 0.48 0.48 0.47
Net realized and unrealized gain (loss)
on investment ($) 0.07 (0.32) 0.26 (0.07) 0.20 0.26
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.13 0.16 0.75 0.41 0.68 0.73
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.06) (0.48) (0.49) (0.48) (0.48) (0.47)
Net realized gain (loss) ($) -- -- -- (0.02) (0.00)/2/ --
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions ($) (0.06) (0.48) (0.49) (0.50) (0.48) (0.47)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 10.07 9.75 10.01 9.92 10.12 10.38
- ------------------------------------------------------------------------------------------------------------------------------
================================
Ratios and supplemental data
================================-----------------------------------------------------------------------------------------------
Total return (%) 1.39/3/ 1.61 8.00 4.13 7.06 7.37
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) --/5/ 16,415 59,867 121,131 201,614 316,594
- ------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) -- 0.50 0.50 0.50 0.50 0.50
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income (%) 3.56/4/ 4.70 5.09 4.82 4.83 4.58
- ------------------------------------------------------------------------------------------------------------------------------
Decrease reflected in expense ratio due to
expense reimbursement (%) 2.50/4/ 1.48 0.21 0.10 0.06 0.03
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ The fund commenced operations on 7/12/93.
/2/ Less than $0.01 per share.
/3/ Not Annualized.
/4/ Annualized.
/5/ Net assets at 8/31/93 were $202.

|
30 | FUND DETAILS
|

<PAGE>

J.P. MORGAN INSTITUTIONAL NEW YORK TAX EXEMPT BOND FUND
<TABLE>
<CAPTION>
Per-share data For fiscal periods ended March 31
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>

1995/1/ 1996 1997 1998
Net asset value, beginning of period ($) 10.00 10.11 10.34 10.31
- --------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.42 0.49 0.48 0.48
Net realized and unrealized gain (loss)
on investment ($) 0.11 0.25 (0.02) 0.40
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.53 0.74 0.46 0.88
- --------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.42) (0.49) (0.48) (0.48)
Net realized gain (loss) ($) -- (0.02) (0.01) (0.04)
- --------------------------------------------------------------------------------------------------------------------
Total distributions ($) (0.42) (0.51) (0.49) (0.52)
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 10.11 10.34 10.31 10.67
- --------------------------------------------------------------------------------------------------------------------
Total return (%) 5.49/2/ 7.40 4.54 8.64
- --------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 20,621 47,926 90,792 111,418
- --------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.50/3/ 0.50 0.50 0.50
- --------------------------------------------------------------------------------------------------------------------
Net investment income (%) 4.65/3/ 4.67 4.70 4.54
- --------------------------------------------------------------------------------------------------------------------
Decrease reflected in expense ratio due to
expense reimbursement (%) 0.55/3/ 0.17 0.14 0.09
- --------------------------------------------------------------------------------------------------------------------

1 The fund commenced operations on 4/11/94.
2 Not annualized.
3 Annualized.

J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND

Per-share data For fiscal periods ended April 30
- --------------------------------------------------------------------------------------------------------------------
1997/1/ 1998
Net asset value, beginning of period ($) 10.00 9.90
- --------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.16 0.42
Net realized and unrealized gain (loss)
on investment ($) (0.10) 0.30
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.06 0.72
- --------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.16) (0.42)
Net asset value, end of period ($) 9.90 10.20
- --------------------------------------------------------------------------------------------------------------------
Total return (%) 0.56/2/ 7.35
- --------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 14,793 46,280
- --------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.45/3/ 0.45
- --------------------------------------------------------------------------------------------------------------------
Net investment income (%) 4.43/3/ 4.11
- --------------------------------------------------------------------------------------------------------------------
Decrease reflected in expense ratio due to
expense reimbursement (%) 3.01/3/ 0.34
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 40 44
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
1 The fund commenced operations on 12/23/96.
2 Not annualized.
2 Annualized.

FUND DETAILS | 31
<PAGE>
==============================================================================

(THIS PAGE IS INTENTIONALLY LEFT BLANK)

32
<PAGE>
===============================================================================

(THIS PAGE IS INTENTIONALLY LEFT BLANK)

33
<PAGE>

================================================================================
FOR MORE INFORMATION
================================================================================

For investors who want more information on these funds, the following documents
are available free upon request:

Annual/Semi-annual Reports Contain financial statements, performance data,
information on portfolio holdings, and a written analysis of market conditions
and fund performance for a fund's most recently completed fiscal year or half-
year.

Statement of Additional Information (SAI) Provides a fuller technical and legal
description of a fund's policies, investment restrictions, and business
structure. This prospectus incorporates each fund's SAI by reference.

Copies of the current versions of these documents, along with other information
about the fund, may be obtained by contacting:

J.P. Morgan Institutional Funds
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036

Telephone: 1-800-766-7722

Hearing impaired: 1-888-468-4015

Email: [email protected]

Text-only versions of these documents and this prospectus are available, upon
payment of a duplicating fee, from the Public Reference Room of the Securities
and Exchange Commission in Washington, D.C. (1-800-SEC-0330) and may be viewed
on-screen or downloaded from the SEC's Internet site at http://www.sec.gov. The
funds' investment company and 1933 Act registration numbers are:

J.P. Morgan Institutional Short Term Bond Fund.....................811-07342 and
033-54642
J.P. Morgan Institutional Bond Fund................................811-07342 and
033-54642
J.P. Morgan Institutional International Bond Fund..................811-07342 and
033-54642
J.P. Morgan Institutional Global Strategic Income Fund.............811-07342 and
033-54642
J.P. Morgan Institutional Tax Exempt Bond Fund.....................811-07342 and
033-54642
J.P. Morgan Institutional New York Tax Exempt Bond Fund............811-07342 and
033-54642
J.P. Morgan Institutional California Bond Fund.....................811-07795 and
333-11125

J.P. MORGAN INSTITUTIONAL FUNDS AND THE MORGAN TRADITION

The J.P. Morgan Institutional Funds combine a heritage of integrity and
financial leadership with comprehensive, sophisticated analysis and management
techniques. Drawing on J.P. Morgan's extensive experience and depth as an
investment manager, the J.P. Morgan Institutional Funds offer a broad array of
distinctive opportunities for mutual fund investors.

[LOGO] JPMorgan
================================================================================
J.P. Morgan Institutional Funds

Advisor Distributor
J.P. Morgan Investment Management Inc. Funds Distributor, Inc.
522 Fifth Avenue 60 State Street
New York, NY 10036 Boston, MA 02109
1-800-766-7722 1-800-221-7930

<PAGE>

J.P. MORGAN INSTITUTIONAL FUNDS

J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND
J.P. MORGAN INSTITUTIONAL BOND FUND
J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND

STATEMENT OF ADDITIONAL INFORMATION

NOVEMBER 2, 1998

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED NOVEMBER 2, 1998 FOR THE FUNDS LISTED ABOVE, AS SUPPLEMENTED FROM TIME TO
TIME. ADDITIONALLY, THIS STATEMENT OF ADDITIONAL INFORMATION INCORPORATES BY
REFERENCE THE FINANCIAL STATEMENTS INCLUDED IN THE SHAREHOLDER REPORTS RELATING
TO THE FUNDS LISTED ABOVE. THE PROSPECTUS AND THESE FINANCIAL STATEMENTS,
INCLUDING THE AUDITOR'S REPORT THEREON, ARE AVAILABLE, WITHOUT CHARGE UPON
REQUEST FROM FUNDS DISTRIBUTOR, INC., ATTENTION: J.P. MORGAN INSTITUTIONAL FUNDS
(800)221-7930.

<PAGE>

Table of Contents

General............................................................... 1
Investment Objectives and Policies.................................... 1
Investment Restrictions............................................... 29
Trustees and Officers................................................. 31
Investment Advisor.................................................... 35
Distributor........................................................... 38
Co-Administrator...................................................... 38
Services Agent........................................................ 40
Custodian and Transfer Agent.......................................... 41
Shareholder Servicing................................................. 41
Financial Professionals............................................... 43
Independent Accountants............................................... 43
Expenses.............................................................. 43
Purchase of Shares.................................................... 44
Redemption of Shares.................................................. 44
Exchange of Shares.................................................... 45
Dividends and Distributions........................................... 46
Net Asset Value....................................................... 46
Performance Data...................................................... 47
Portfolio Transactions................................................ 49
Massachusetts Trust................................................... 51
Description of Shares................................................. 51
Special Information Concerning
Investment Structure................................................. 53
Taxes.................................................................. 54
Additional Information................................................. 58
Financial Statements................................................... 60
Appendix A - Description of Security
Ratings............................................................... A-1
</TABLE>

<PAGE>

GENERAL

This Statement of Additional Information relates only to J.P. Morgan
Institutional Short Term Bond Fund, J.P. Morgan Institutional Bond Fund and J.P.
Morgan Institutional Global Strategic Income Fund (collectively, the "Funds").
Each of the Funds is a series of shares of beneficial interest of J.P. Morgan
Institutional Funds, an open-end management investment company formed as a
Massachusetts business trust (the "Trust"). In addition to the Funds, the Trust
consists of other series representing separate investment funds (each a "J.P.
Morgan Institutional Fund"). The other J.P. Morgan Institutional Funds are
covered by separate Statements of Additional Information.

This Statement of Additional Information describes the financial history,
investment objectives and policies, management and operation of each of the
Funds in order to enable investors to select the Fund or Funds which best suit
their needs. The J.P. Morgan Institutional Funds operate through a two-tier
master-feeder investment fund structure.

This Statement of Additional Information provides additional information
with respect to the Funds and should be read in conjunction with the relevant
Fund's current Prospectus (the "Prospectus"). Capitalized terms not otherwise
defined herein have the meanings accorded to them in the Prospectus. The Funds'
executive offices are located at 60 State Street, Suite 1300, Boston,
Massachusetts 02109.

Unlike other mutual funds which directly acquire and manage their own
portfolio of securities, each Fund seeks to achieve its investment objective by
investing all of its investable assets in a corresponding Master Portfolio (the
"Portfolio"), a corresponding open-end management investment company having the
same investment objective as the Fund. Each Fund invests in a Portfolio through
a two-tier master-feeder investment fund structure. See "Special Information
Concerning Investment Structure." Accordingly, references below to the Fund
also include the Portfolio; similarly, references to the Portfolio also include
the Fund unless the context requires otherwise.

Each Portfolio is advised by J.P. Morgan Investment Management Inc.
("JPMIM" or the "Advisor").

Investments in a Fund are not deposits or obligations of, or guaranteed or
endorsed by, Morgan Guaranty Trust Company of New York ("Morgan"), an affiliate
of the Advisor, or any other bank. Shares of a Fund are not federally insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other governmental agency. An investment in a Fund is subject to risk that may
cause the value of the investment to fluctuate, and when the investment is
redeemed, the value may be higher or lower than the amount originally invested
by the investor.

INVESTMENT OBJECTIVES AND POLICIES

J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND (the "Short Term Bond Fund")
is designed for investors who place a strong emphasis on conservation of capital
but who also want a return greater than that of a money market fund or other
very low risk investment vehicles. The Short Term Bond Fund is appropriate for
investors who do not require the stable net asset value typical of a money
market fund but who want less price fluctuation than is typical of a longer-term
bond fund. The Short Term Bond Fund's investment objective is to provide high
total return, consistent with low volatility of capital. The Short Term Bond
Fund seeks to achieve this high total return to the extent consistent with
modest risk of capital and the maintenance of

<PAGE>

liquidity. The Short Term Bond Fund attempts to achieve its investment
objective by investing all of its investable assets in The Short Term Bond
Portfolio (the "Portfolio"), a diversified open-end management investment
company having the same investment objective as the Short Term Bond Fund.

The Portfolio attempts to achieve its investment objective by investing
primarily in the corporate and government debt obligations and related
securities of domestic and foreign issuers described in this Statement of
Additional Information.

J.P. MORGAN INSTITUTIONAL BOND FUND (the "Bond Fund") is designed to be an
economical and convenient means of making substantial investments in a broad
range of corporate and government debt obligations and related investments of
domestic and foreign issuers, subject to certain quality and other restrictions.
See "Quality and Diversification Requirements." The Bond Fund's investment
objective is to provide a high total return consistent with moderate risk of
capital and maintenance of liquidity. Although the net asset value of the Bond
Fund will fluctuate, the Bond Fund attempts to conserve the value of its
investments to the extent consistent with its objective. The Bond Fund attempts
to achieve its objective by investing all of its investable assets in The U.S.
Fixed Income Portfolio (the "Portfolio"), a diversified open-end management
investment company having the same investment objective as the Bond Fund.

The Portfolio attempts to achieve its investment objective by investing
primarily in high grade and investment grade corporate and government debt
obligations and related securities of domestic and foreign issuers described in
the Prospectus and this Statement of Additional Information.

J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND (the "Global
Strategic Income Fund") is designed for the aggressive investor seeking to
diversify an investment portfolio by investing in fixed-income securities of
foreign and domestic issuers. The Global Strategic Income Fund's investment
objective is high total return from a portfolio of fixed-income securities of
foreign and domestic issuers. The Global Strategic Income Fund seeks to achieve
its objective by investing all of its investable assets in the Global Strategic
Income Portfolio (the "Portfolio"), a diversified open-end management
investment company having the same investment objective as the Global Strategic
Income Fund.

The Portfolio attempts to achieve its investment objective by investing
primarily in mortgage-backed securities and direct mortgage obligations; below
investment grade debt obligations of U.S. and non-U.S. issuers; investment grade
U.S. dollar-denominated debt obligations of U.S. and non-U.S. issuers;
investment grade non-dollar denominated debt obligations of non-U.S. issuers;
and obligations of emerging market issuers.

The following discussion supplements the information regarding the
investment objective of each of the Funds and the policies to be employed to
achieve this objective by their corresponding Portfolios as set forth above and
in the Prospectus. The investment objective of each Fund and its corresponding
Portfolio is identical. Accordingly, references below to a Fund also include
the Fund's corresponding Portfolio; similarly, references to a Portfolio also
include the corresponding Fund that invests in the Portfolio unless the context
requires otherwise.

2
<PAGE>

FIXED INCOME INVESTMENTS

Each Fund may invest in a broad range of debt securities of domestic and
foreign corporate and government issuers. The corporate securities in which the
Funds may invest include debt securities of various types and maturities, e.g.,
debentures, notes, mortgage securities, equipment trust certificates and other
collateralized securities and zero coupon securities. Collateralized securities
are backed by a pool of assets such as loans or receivables which generate cash
flow to cover the payments due on the securities. Collateralized securities are
subject to certain risks, including a decline in the value of the collateral
backing the security, failure of the collateral to generate the anticipated cash
flow or in certain cases more rapid prepayment because of events affecting the
collateral, such as accelerated prepayment of mortgages or other loans backing
these securities or destruction of equipment subject to equipment trust
certificates. In the event of any such prepayment a Fund will be required to
reinvest the proceeds of prepayments at interest rates prevailing at the time of
reinvestment, which may be lower. In addition, the value of zero coupon
securities which do not pay interest is more volatile than that of interest
bearing debt securities with the same maturity.

CORPORATE BONDS AND OTHER DEBT SECURITIES

Each Fund may invest in bonds and other debt securities of domestic and
foreign issuers to the extent consistent with its investment objective and
policies. A description of these investments appears below. See "Quality and
Diversification Requirements." For information on short-term investments in
these securities, see "Money Market Instruments."

MORTGAGE-BACKED SECURITIES. Each Fund may invest in mortgage-backed
securities. Each mortgage pool underlying mortgage-backed securities consists
of mortgage loans evidenced by promissory notes secured by first mortgages or
first deeds of trust or other similar security instruments creating a first lien
on owner occupied and non-owner occupied one-unit to four-unit residential
properties, multifamily (i.e., five or more) properties, agriculture properties,
commercial properties and mixed use properties. The investment characteristics
of adjustable and fixed rate mortgage-backed securities differ from those of
traditional fixed income securities. The major differences include the payment
of interest and principal on mortgage-backed securities on a more frequent
(usually monthly) schedule and the possibility that principal may be prepaid at
any time due to prepayments on the underlying mortgage loans or other assets.
These differences can result in significantly greater price and yield volatility
than is the case with traditional fixed income securities. As a result, a
faster than expected prepayment rate will reduce both the market value and the
yield to maturity from those which were anticipated. A prepayment rate that is
slower than expected will have the opposite effect of increasing yield to
maturity and market value.

3
<PAGE>

Macs") and the Federal National Mortgage Association ("Fannie Maes"). No
assurance can be given that the U.S. Government will provide financial support
to these federal agencies, authorities, instrumentalities and government
sponsored enterprises in the future.

There are several types of guaranteed mortgage-backed securities currently
available, including guaranteed mortgage pass-through certificates and multiple
class securities, which include guaranteed real estate mortgage investment
conduit certificates ("REMIC Certificates"), other collateralized mortgage
obligations ("CMOs") and stripped mortgage-backed securities.

Mortgage pass-through securities are fixed or adjustable rate
mortgage-backed securities which provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans.

Multiple class securities include CMOs and REMIC Certificates issued by
U.S. Government agencies, instrumentalities (such as Fannie Mae) and sponsored
enterprises (such as Freddie Mac) or by trusts formed by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. In general, CMOs are debt
obligations of a legal entity that are collateralized by, and multiple class
mortgage-backed securities represent direct ownership interests in, a pool of
mortgage loans or mortgaged-backed securities and payments on which are used to
make payments on the CMOs or multiple class mortgage-backed securities.

CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class mortgage-backed securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets").
The obligations of Fannie Mae and Freddie Mac under their respective guaranty of
the REMIC Certificates are obligations solely of Fannie Mae and Freddie Mac,
respectively.

CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the assets
underlying the CMOs or REMIC Certificates may cause some or all of the classes
of CMOs or REMIC Certificates to be retired substantially earlier than their
final scheduled distribution dates. Generally, interest is paid or accrues on
all classes of CMOs or REMIC Certificates on a monthly basis.

4
<PAGE>

the Board of Trustees. The market value of the class consisting entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. The yields on a class of SMBS that receives all or most of the
interest from Mortgage Assets are generally higher than prevailing market yields
on other mortgage-backed securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not be
fully recouped.

MORTGAGES (DIRECTLY HELD). Each Fund may invest directly in mortgages.
Mortgages are debt instruments secured by real property. Unlike mortgage-backed
securities, which generally represent an interest in a pool of mortgages, direct
investments in mortgages involve prepayment and credit risks of an individual
issuer and real property. Consequently, these investments require different
investment and credit analysis by the Advisor.

The directly placed mortgages in which the Funds invest may include
residential mortgages, multifamily mortgages, mortgages on cooperative apartment
buildings, commercial mortgages, and sale-leasebacks. These investments are
backed by assets such as office buildings, shopping centers, retail stores,
warehouses, apartment buildings and single-family dwellings. In the event that
the Fund forecloses on any non-performing mortgage, and acquires a direct
interest in the real property, the Fund will be subject to the risks generally
associated with the ownership of real property. There may be fluctuations in
the market value of the foreclosed property and its occupancy rates, rent
schedules and operating expenses. There may also be adverse changes in local,
regional or general economic conditions, deterioration of the real estate market
and the financial circumstances of tenants and sellers, unfavorable changes in
zoning, building environmental and other laws, increased real property taxes,
rising interest rates, reduced availability and increased cost of mortgage
borrowings, the need for unanticipated renovations, unexpected increases in the
cost of energy, environmental factors, acts of God and other factors which are
beyond the control of the Fund or the Advisor. Hazardous or toxic substances
may be present on, at or under the mortgaged property and adversely affect the
value of the property. In addition, the owners of property containing such
substances may be held responsible, under various laws, for containing,
monitoring, removing or cleaning up such substances. The presence of such
substances may also provide a basis for other claims by third parties. Costs of
clean-up or of liabilities to third parties may exceed the value of the
property. In addition, these risks may be uninsurable. In light of these and
similar risks, it may be impossible to dispose profitably of properties in
foreclosure.

ZERO COUPON, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES. Zero coupon
securities are securities that are sold at a discount to par value and on which
interest payments are not made during the life of the security. Upon maturity,
the holder is entitled to receive the par value of the security. Pay-in-kind
securities are securities that have interest payable by delivery of additional
securities. Upon maturity, the holder is entitled to receive the aggregate par
value of the securities. The Fund accrues income with respect to zero coupon
and pay-in-kind securities prior to the receipt of cash payments. Deferred
payment securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. While interest payments are not
made on such securities, holders of such securities are deemed to have received
"phantom income." Because a Fund will distribute "phantom income" to
shareholders, to the extent that shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional

5
<PAGE>

shares, the applicable Fund will have fewer assets with which to purchase income
producing securities. Zero coupon, pay-in-kind and deferred payment securities
may be subject to greater fluctuation in value and lesser liquidity in the event
of adverse market conditions than comparably rated securities paying cash
interest at regular interest payment periods.

ASSET-BACKED SECURITIES. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables or other asset-backed securities collateralized by such
assets. Payments of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the entities issuing the securities. The
asset-backed securities in which a Fund may invest are subject to the Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. For example, credit card debt receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts on credit card debt thereby reducing the
balance due. Additionally, if the letter of credit is exhausted, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on underlying sales contracts are not realized. Because
asset-backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through all
phases of the market cycle has not been tested.

CORPORATE FIXED INCOME SECURITIES. Each Fund may invest in publicly and
privately issued debt obligations of U.S. and non-U.S. corporations, including
obligations of industrial, utility, banking and other financial issuers. These
securities are subject to the risk of an issuer's inability to meet principal
and interest payments on the obligation and may also be subject to price
volatility due to such factors as market interest rates, market perception of
the creditworthiness of the issuer and general market liquidity.

MONEY MARKET INSTRUMENTS

Each Fund may invest in money market instruments to the extent consistent
with its investment objective and policies. A description of the various types
of money market instruments that may be purchased by the Funds appears below.
Also see "Quality and Diversification Requirements."

U.S. TREASURY SECURITIES. Each of the Funds may invest in direct
obligations of the U.S. Treasury, including Treasury bills, notes and bonds, all
of which are backed as to principal and interest payments by the full faith and
credit of the United States.

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<PAGE>

in which each Fund may invest that are not backed by the full faith and credit
of the United States include, but are not limited to: (i) obligations of the
Tennessee Valley Authority, the Federal Home Loan Mortgage Corporation, the
Federal Home Loan Banks and the U.S. Postal Service, each of which has the right
to borrow from the U.S. Treasury to meet its obligations; (ii) securities issued
by the Federal National Mortgage Association, which are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; and (iii) obligations of the Federal Farm Credit System and the
Student Loan Marketing Association, each of whose obligations may be satisfied
only by the individual credits of the issuing agency.

FOREIGN GOVERNMENT OBLIGATIONS. Each of the Funds, subject to its
applicable investment policies, may also invest in short-term obligations of
foreign sovereign governments or of their agencies, instrumentalities,
authorities or political subdivisions. These securities may be denominated in
the U.S. dollar or in another currency. See "Foreign Investments."

BANK OBLIGATIONS. Each of the Funds may invest in negotiable certificates
of deposit, time deposits and bankers' acceptances of (i) banks, savings and
loan associations and savings banks which have more than $2 billion in total
assets (the "Asset Limitation") and are organized under the laws of the United
States or any state, (ii) foreign branches of these banks or of foreign banks of
equivalent size (Euros) and (iii) U.S. branches of foreign banks of equivalent
size (Yankees). The Asset Limitation is not applicable to the Global Strategic
Income Fund. See "Foreign Investments." The Funds will not invest in
obligations for which the Advisor, or any of its affiliated persons, is the
ultimate obligor or accepting bank. Each of the Funds may also invest in
obligations of international banking institutions designated or supported by
national governments to promote economic reconstruction, development or trade
between nations (e.g., the European Investment Bank, the Inter-American
Development Bank, or the World Bank).

COMMERCIAL PAPER. Each of the Funds may invest in commercial paper,
including master demand obligations. Master demand obligations are obligations
that provide for a periodic adjustment in the interest rate paid and permit
daily changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and Morgan acting as agent, for no additional fee.
The monies loaned to the borrower come from accounts managed by Morgan or its
affiliates, pursuant to arrangements with such accounts. Interest and principal
payments are credited to such accounts. Morgan has the right to increase or
decrease the amount provided to the borrower under an obligation. The borrower
has the right to pay without penalty all or any part of the principal amount
then outstanding on an obligation together with interest to the date of payment.
Since these obligations typically provide that the interest rate is tied to the
Federal Reserve commercial paper composite rate, the rate on master demand
obligations is subject to change. Repayment of a master demand obligation to
participating accounts depends on the ability of the borrower to pay the accrued
interest and principal of the obligation on demand which is continuously
monitored by Morgan. Since master demand obligations typically are not rated by
credit rating agencies, the Funds may invest in such unrated obligations only if
at the time of an investment the obligation is determined by the Advisor to have
a credit quality which satisfies the Fund's quality restrictions. See "Quality
and Diversification Requirements." Although there is no secondary market for
master demand obligations, such obligations are considered by the Funds to be
liquid because they are payable upon demand. The Funds do not have any specific
percentage limitation on investments in master demand obligations. It is
possible that the issuer of a master demand

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<PAGE>

obligation could be a client of Morgan to whom Morgan, in its capacity as a
commercial bank, has made a loan.

REPURCHASE AGREEMENTS. Each of the Funds may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Funds' Trustees. In a repurchase agreement, a Fund buys a
security from a seller that has agreed to repurchase the same security at a
mutually agreed upon date and price. The resale price normally is in excess of
the purchase price, reflecting an agreed upon interest rate. This interest rate
is effective for the period of time the Fund is invested in the agreement and is
not related to the coupon rate on the underlying security. A repurchase
agreement may also be viewed as a fully collateralized loan of money by a Fund
to the seller. The period of these repurchase agreements will usually be short,
from overnight to one week, and at no time will the Funds invest in repurchase
agreements for more than thirteen months. The securities which are subject to
repurchase agreements, however, may have maturity dates in excess of thirteen
months from the effective date of the repurchase agreement. The Funds will
always receive securities as collateral whose market value is, and during the
entire term of the agreement remains, at least equal to 100% of the dollar
amount invested by the Funds in each agreement plus accrued interest, and the
Funds will make payment for such securities only upon physical delivery or upon
evidence of book entry transfer to the account of the Custodian. If the seller
defaults, a Fund might incur a loss if the value of the collateral securing the
repurchase agreement declines and might incur disposition costs in connection
with liquidating the collateral. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the security, realization upon disposal
of the collateral by a Fund may be delayed or limited.

Each of the Funds may make investments in other debt securities, including
without limitation corporate bonds and other obligations described in this
Statement of Additional Information.

TAX EXEMPT OBLIGATIONS

In certain circumstances the Bond and Short Term Bond Funds may invest in
tax exempt obligations to the extent consistent with each Fund's investment
objective and policies. A description of the various types of tax exempt
obligations which may be purchased by the Funds appears below. See "Quality and
Diversification Requirements."

MUNICIPAL BONDS. Municipal bonds are debt obligations issued by the
states, territories and possessions of the United States and the District of
Columbia, by their political subdivisions and by duly constituted authorities
and corporations. For example, states, territories, possessions and
municipalities may issue municipal bonds to raise funds for various public
purposes such as airports, housing, hospitals, mass transportation, schools,
water and sewer works. They may also issue municipal bonds to refund
outstanding obligations and to meet general operating expenses. Public
authorities issue municipal bonds to obtain funding for privately operated
facilities, such as housing and pollution control facilities, for industrial
facilities or for water supply, gas, electricity or waste disposal facilities.

8
<PAGE>

a special excise tax or from other specific revenue sources. They are not
generally payable from the general taxing power of a municipality.

MUNICIPAL NOTES. The Funds may also invest in municipal notes of various
types, including notes issued in anticipation of receipt of taxes, the proceeds
of the sale of bonds, other revenues or grant proceeds, as well as municipal
commercial paper and municipal demand obligations such as variable rate demand
notes and master demand obligations.

Municipal notes are short-term obligations with a maturity at the time of
issuance ranging from six months to five years. The principal types of
municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, grant 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.

Municipal commercial paper typically consists of very short-term unsecured
negotiable promissory notes that are sold to meet seasonal working capital or
interim construction financing needs of a municipality or agency. While these
obligations are intended to be paid from general revenues or refinanced with
long-term debt, they frequently are backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or institutions.

Municipal demand obligations are subdivided into two types: variable rate
demand notes and master demand obligations.

Variable rate demand notes are tax exempt municipal obligations or
participation interests that provide for a periodic adjustment in the interest
rate paid on the notes. They permit the holder to demand payment of the notes,
or to demand purchase of the notes at a purchase price equal to the unpaid
principal balance, plus accrued interest either directly by the issuer or by
drawing on a bank letter of credit or guaranty issued with respect to such note.
The issuer of the municipal obligation may have a corresponding right to prepay
at its discretion the outstanding principal of the note plus accrued interest
upon notice comparable to that required for the holder to demand payment. The
variable rate demand notes in which the Funds may invest are payable, or are
subject to purchase, on demand usually on notice of seven calendar days or less.
The terms of the notes provide that interest rates are adjustable at intervals
ranging from daily to six months, and the adjustments are based upon the prime
rate of a bank or other appropriate interest rate index specified in the
respective notes. Variable rate demand notes are valued at amortized cost; no
value is assigned to the right of each Fund to receive the par value of the
obligation upon demand or notice.

Master demand obligations are tax exempt municipal obligations that provide
for a periodic adjustment in the interest rate paid and permit daily changes in
the amount borrowed. The interest on such obligations is, in the opinion of
counsel for the borrower, excluded from gross income for federal income tax
purposes. For a description of the attributes of master demand obligations, see
"Money Market Instruments" above. Although there is no secondary market for
master demand obligations, such obligations are considered by the Funds to be
liquid because they are payable upon demand. The Funds have no specific
percentage limitations on investments in master demand obligations.

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<PAGE>

FOREIGN INVESTMENTS

The Global Strategic Income Fund makes substantial investments in foreign
countries. The Bond and Short Term Bond Funds may invest in certain foreign
securities. The Short Term Bond and Bond Funds may invest up to 20% of total
assets in fixed income securities of foreign issuers denominated in foreign
currencies. Neither the Bond or Short Term Bond Funds expect to invest more
than 25% of their respective total assets at the time of purchase in securities
of foreign issuers. In the case of the Bond and Short Term Bond Funds, any
foreign commercial paper must not be subject to foreign withholding tax at the
time of purchase.

Foreign investments may be made directly in securities of foreign issuers
or in the form of American Depositary Receipts ("ADRs"), European Depositary
Receipts ("EDRs") and Global Depositary Receipts ("GDRs") or in other similar
securities of foreign issuers. ADRs are securities, typically issued by a U.S.
financial institution (a "depositary"), that evidence ownership interests in a
security or a pool of securities issued by a foreign issuer and deposited with
the depositary. ADRs include American Depositary Shares and New York Shares.
EDRs are receipts issued by a European financial institution. GDRs, which are
sometimes referred to as Continental Depositary Receipts ("CDRs"), are
securities, typically issued by a non-U.S. financial institution, that evidence
ownership interests in a security or a pool of securities issued by either a
U.S. or foreign issuer. ADRs, EDRs, GDRs and CDRs may be available for
investment through "sponsored" or "unsponsored" facilities. A sponsored
facility is established jointly by the issuer of the security underlying the
receipt and a depositary, whereas an unsponsored facility may be established by
a depositary without participation by the issuer of the receipt's underlying
security. An unsponsored depositary may not provide the same shareholder
information that a sponsored depositary is required to provide under its
contractual arrangements with the issuer of the underlying foreign security.
Generally, ADRs, in registered form, are designed for use in the U.S. securities
markets, and EDRs, in bearer form, are designed for use in European securities
markets.

Holders of an unsponsored depositary receipt generally bear all costs of
the unsponsored facility. The depositary of an unsponsored facility frequently
is under no obligation to distribute shareholder communications received from
the issuer of the deposited security or to pass through to the holders of the
receipts voting rights with respect to the deposited securities.

Investment in securities of foreign issuers and in obligations of foreign
branches of domestic banks involves somewhat different investment risks from
those affecting securities of U.S. domestic issuers. There may be limited
publicly available information with respect to foreign issuers, and foreign
issuers are not generally subject to uniform accounting, auditing and financial
standards and requirements comparable to those applicable to domestic companies.
Dividends and interest paid by foreign issuers may be subject to withholding and
other foreign taxes which may decrease the net return on foreign investments as
compared to dividends and interest paid to a Fund by domestic companies.

Investors should realize that the value of a Fund's investments in foreign
securities may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign

10
<PAGE>

countries. In addition, changes in government administration or economic or
monetary policies in the United States or abroad could result in appreciation or
depreciation of portfolio securities and could favorably or unfavorably affect
the Fund's operations. Furthermore, the economies of individual foreign nations
may differ from the U.S. economy, whether favorably or unfavorably, in areas
such as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position; it may
also be more difficult to obtain and enforce a judgment against a foreign
issuer. Any foreign investment made by a Fund must be made in compliance with
U.S. and foreign currency restrictions and tax laws restricting the amounts and
types of foreign investments.

In addition, while the volume of transactions effected on foreign exchanges
has increased in recent years, in most cases it remains appreciably below that
of domestic security exchanges. Accordingly, a Fund's foreign investments may
be less liquid and their prices may be more volatile than comparable investments
in securities of U.S. companies. Moreover, the settlement periods for foreign
securities, which are often longer than those for securities of U.S. issuers,
may affect portfolio liquidity. In addition, there is generally less government
supervision and regulation of securities exchanges, brokers and issuers located
in foreign countries than in the United States.

Since investments in foreign securities may involve foreign currencies, the
value of the Fund's assets as measured in U.S. dollars may be affected favorably
or unfavorably by changes in currency rates and in exchange control regulations,
including currency blockage. Each Fund may enter into forward commitments for
the purchase or sale of foreign currencies in connection with the settlement of
foreign securities transactions or to manage the Fund's currency exposure. See
"Foreign Currency Exchange Transactions" below.

FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because each Fund may buy and sell
securities and receive interest in currencies other than the U.S. dollar, a Fund
may enter from time to time into foreign currency exchange transactions. The
Fund either enters into these transactions on a spot (i.e. cash) basis at the
spot rate prevailing in the foreign currency exchange market or uses forward
contracts to purchase or sell foreign currencies. The cost of the Fund's spot
currency exchange transactions is generally the difference between the bid and
offer spot rate of the currency being purchased or sold.

A forward foreign currency exchange contract is an obligation by the Fund
to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract. Forward foreign currency exchange
contracts establish an exchange rate at a future date. These contracts are
derivative instruments, as their value derives from the spot exchange rates of
the currencies underlying the contract. These contracts are entered into in the
interbank market directly between currency traders (usually large commercial
banks) and their customers. A forward foreign currency exchange contract
generally has no deposit requirement and is traded at a net price without
commission. Neither spot transactions nor forward foreign currency exchange
contracts eliminate fluctuations in the prices of the Fund's securities or in
foreign exchange rates, or prevent loss if the prices of these securities should
decline.

A Fund may enter into foreign currency exchange transactions in an attempt
to protect against changes in foreign currency exchange rates between the trade
and settlement dates of specific securities transactions or

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<PAGE>

anticipated securities transactions. A Fund may also enter into forward
contracts to hedge against a change in foreign currency exchange rates that
would cause a decline in the value of existing investments denominated or
principally traded in a foreign currency. To do this, the Fund would enter into
a forward contract to sell the foreign currency in which the investment is
denominated or principally traded in exchange for U.S. dollars or in exchange
for another foreign currency. A Fund will only enter into forward contracts to
sell a foreign currency for another foreign currency if the Advisor expects the
foreign currency purchased to appreciate against the U.S. dollar.

Although these transactions are intended to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time they limit
any potential gain that might be realized should the value of the hedged
currency increase. In addition, forward contracts that convert a foreign
currency into another foreign currency will cause the Fund to assume the risk of
fluctuations in the value of the currency purchased against the hedged currency
and the U.S. dollar. The precise matching of the forward contract amounts and
the value of the securities involved will not generally be possible because the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of such securities between the date
the forward contract is entered into and the date it matures. The projection of
currency market movements is extremely difficult, and the successful execution
of a hedging strategy is highly uncertain.

SOVEREIGN FIXED INCOME SECURITIES. Each of the Funds may invest in fixed
income securities issued or guaranteed by a foreign sovereign government or its
agencies, authorities or political subdivisions. Investment in sovereign fixed
income securities involves special risks not present in corporate fixed income
securities. The issuer of the sovereign debt or the governmental authorities
that control the repayment of the debt may be unable or unwilling to repay
principal or interest when due, and a Fund may have limited recourse in the
event of a default. During periods of economic uncertainty, the market prices
of sovereign debt, and a Fund's net asset value, may be more volatile than
prices of U.S. debt obligations. In the past, certain foreign countries have
encountered difficulties in servicing their debt obligations, withheld payments
of principal and interest and declared moratoria on the payment of principal and
interest on their sovereign debts.

A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward international lenders and local political
constraints. Sovereign debtors may also be dependent on expected disbursements
from foreign governments, multilateral agencies and other entities to reduce
principal and interest arrearages on their debt. The failure of a sovereign
debtor to implement economic reforms, achieve specified levels of economic
performance or repay principal or interest when due may result in the
cancellation of third-party commitments to lend funds to the sovereign debtor,
which may further impair such debtor's ability or willingness to service its
debts.

BRADY BONDS. Each Fund may invest in Brady bonds, which are securities
created through the exchange of existing commercial bank loans to public and
private entities in certain emerging markets for new bonds in connection with

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<PAGE>

debt restructurings. Brady bonds have been issued since 1989 and do not have a
long payment history. In light of the history of defaults of countries issuing
Brady bonds on their commercial bank loans, investments in Brady bonds may be
viewed as speculative. Brady bonds may be fully or partially collateralized or
uncollateralized, are issued in various currencies (but primarily the dollar)
and are actively traded in over-the-counter secondary markets. Incomplete
collateralization of interest or principal payment obligations results in
increased credit risk. Dollar-denominated collateralized Brady bonds, which may
be fixed-rate bonds or floating-rate bonds, are generally collateralized by U.S.
Treasury zero coupon bonds having the same maturity as the Brady bonds.

OBLIGATIONS OF SUPRANATIONAL ENTITIES. Each Fund may invest in obligations
of supranational entities designated or supported by governmental entities to
promote economic reconstruction or development and of international banking
institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the "World Bank"), the
European Coal and Steel Community, the Asian Development Bank and the
Inter-American Development Bank. Each supranational entity's lending activities
are limited to a percentage of its total capital (including "callable capital"
contributed by its governmental members at the entity's call), reserves and net
income. There is no assurance that participating governments will be able or
willing to honor their commitments to make capital contributions to a
supranational entity.

INVESTING IN EMERGING MARKETS

The Global Strategic Income Fund, and to a lesser extent the Bond and Short
Term Bond Funds, may also invest in countries with emerging economies or
securities markets. Political and economic structures in many of such countries
may be undergoing significant evolution and rapid development, and such
countries may lack the social, political and economic stability characteristic
of more developed countries. Certain of such countries may have in the past
failed to recognize private property rights and have at times nationalized or
expropriated the assets of private companies. As a result, the risks described
above, including the risks of nationalization or expropriation of assets, may be
heightened. In addition, unanticipated political or social developments may
affect the values of a Fund's investments in those countries and the
availability to a Fund of additional investments in those countries. The small
size and inexperience of the securities markets in certain of such countries and
the limited volume of trading in securities in those countries may make a Fund's
investments in such countries illiquid and more volatile than investments in
more developed countries, and a Fund may be required to establish special
custodial or other arrangements before making certain investments in those
countries. There may be little financial or accounting information available
with respect to issuers located in certain of such countries, and it may be
difficult as a result to assess the value or prospects of an investment in such
issuers.

Transaction costs in emerging markets may be higher than in the United
States and other developed securities markets. As legal systems in emerging
markets develop, foreign investors may be adversely affected by new or amended
laws and regulations or may not be able to obtain swift and equitable
enforcement of existing law.

The Global Strategic Income Fund may make investments denominated in emerging
markets currencies. Some countries in emerging markets also may have managed
currencies, which are not free floating against the U.S. dollar. In addition,

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<PAGE>

emerging markets are subject to the risk of restrictions upon the free
conversion of their currencies into other currencies. Any devaluations relative
to the U.S. dollar in the currencies in which the Fund's securities are quoted
would reduce the Fund's net asset value.

RESTRICTIONS ON INVESTMENT AND REPATRIATION. Certain emerging markets
limit, or require governmental approval prior to, investments by foreign
persons. Repatriation of investment income and capital from certain emerging
markets is subject to certain governmental consents. Even where there is no
outright restriction on repatriation of capital, the mechanics of repatriation
may affect the operation of the Fund.

ADDITIONAL INVESTMENTS

CONVERTIBLE SECURITIES. Each of the Funds may invest in convertible
securities of domestic and, subject to the Fund's investment restrictions,
foreign issuers. The convertible securities in which a Fund may invest include
any debt securities or preferred stock which may be converted into common stock
or which carry the right to purchase common stock. Convertible securities
entitle the holder to exchange the securities for a specified number of shares
of common stock, usually of the same company, at specified prices within a
certain period of time.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each of the Funds may
purchase securities on a when-issued or delayed delivery basis. For example,
delivery of and payment for these securities can take place a month or more
after the date of the purchase commitment. The purchase price and the interest
rate payable, if any, on the securities are fixed on the purchase commitment
date or at the time the settlement date is fixed. The value of such securities
is subject to market fluctuation and for money market instruments and other
fixed income securities no interest accrues to a Fund until settlement takes
place. At the time a Fund makes the commitment to purchase securities on a
when-issued or delayed delivery basis, it will record the transaction, reflect
the value each day of such securities in determining its net asset value and, if
applicable, calculate the maturity for the purposes of average maturity from
that date. At the time of settlement a when-issued security may be valued at
less than the purchase price. To facilitate such acquisitions, each Fund will
maintain with the custodian a segregated account with liquid assets, consisting
of cash, U.S. Government securities or other appropriate securities, in an
amount at least equal to such commitments. On delivery dates for such
transactions, each Fund will meet its obligations from maturities or sales of
the securities held in the segregated account and/or from cash flow. If a Fund
chooses to dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of any other portfolio
obligation, incur a gain or loss due to market fluctuation. Also, a Fund may be
disadvantaged if the other party to the transaction defaults. It is the current
policy of the Bond and Short Term Bond Funds not to enter into when-issued
commitments exceeding in the aggregate 15% of the market value of the Fund's
total assets, less liabilities other than the obligations created by when-issued
commitments.

STRUCTURED SECURITIES. The Global Strategic Income Fund may invest in
structured securities, including currency linked securities. The interest rate
or, in some cases, the principal payable at the maturity of a structured
security may change positively or inversely in relation to one or more interest
rates, financial indices, currency rates or other financial indicators
(reference prices). A structured security may be leveraged to the extent that
the magnitude of any change in the interest rate or principal

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<PAGE>

payable on a structured security is a multiple of the change in the reference
price. Thus, structured securities may decline in value due to adverse market
changes in currency exchange rates and other reference prices.

RISKS ASSOCIATED WITH DERIVATIVE SECURITIES AND CONTRACTS. The risks
associated with a Fund's transactions in derivative securities and contracts may
include some or all of the following: market risk, leverage and volatility
risk, correlation risk, credit risk, and liquidity and valuation risk.

MARKET RISK. Investments in structured securities are subject to the
market risks described above. Entering into a derivative contract involves a
risk that the applicable market will move against the Fund's position and that
the Fund will incur a loss. For derivative contracts other than purchased
options, this loss may substantially exceed the amount of the initial investment
made or the premium received by the Fund.

LEVERAGE AND VOLATILITY RISK. Derivative instruments may sometimes
increase or leverage a Fund's exposure to a particular market risk. Leverage
enhances the price volatility of derivative instruments held by a Fund. If a
Fund enters into futures contracts, writes options or engages in certain foreign
currency exchange transactions, it is required to maintain a segregated account
consisting of cash or liquid assets, hold offsetting portfolio securities or
cover written options which may partially offset the leverage inherent in these
transactions. Segregation of a large percentage of assets could impede
portfolio management or an investor's ability to meet redemption requests.

CORRELATION RISK. A Fund's success in using derivative contracts to hedge
portfolio assets depends on the degree of price correlation between the
derivative contract and the hedged asset. Imperfect correlation may be caused
by several factors, including temporary price disparities among the trading
markets for the derivative contract, the assets underlying the derivative
contract and the Fund's assets.

CREDIT RISK. Derivative securities and over-the-counter derivative
contracts involve a risk that the issuer or counterparty will fail to perform
its contractual obligations.

LIQUIDITY AND VALUATION RISK. Some derivative securities are not readily
marketable or may become illiquid under adverse market conditions. In addition,
during periods of extreme market volatility, a commodity exchange may suspend or
limit trading in an exchange-traded derivative contract, which may make the
contract temporarily illiquid and difficult to price. A Fund's ability to
terminate over-the-counter derivative contracts may depend on the cooperation of
the counterparties to such contracts. For thinly traded derivative securities
and contracts, the only source of price quotations may be the selling dealer or
counterparty.

INVESTMENT COMPANY SECURITIES. Securities of other investment companies
may be acquired by each of the Funds and their corresponding Portfolios to the
extent permitted under the 1940 Act or any order pursuant thereto. These limits
currently require that, as determined immediately after a purchase is made, (i)
not more than 5% of the value of a Fund's total assets will be invested in the
securities of any one investment company, (ii) not more than 10% of the value of
its total assets will be invested in the aggregate in securities of investment
companies as a group, and (iii) not more than 3% of

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the outstanding voting stock of any one investment company will be owned by a
Fund, provided however, that a Fund may invest all of its investable assets in
an open-end investment company that has the same investment objective as the
Fund (its corresponding Portfolio). As a shareholder of another investment
company, a Fund or Portfolio would bear, along with other shareholders, its PRO
RATA portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that a Fund or Portfolio bears directly in connection with its own operations.
Each Fund has applied for exemptive relief from the SEC to permit the Fund's
corresponding Portfolio to invest in affiliated investment companies. If the
requested relief is granted, the Fund's corresponding Portfolio would then be
permitted to invest in affiliated funds, subject to certain conditions specified
in the applicable order.

REVERSE REPURCHASE AGREEMENTS. Each of the Funds may enter into reverse
repurchase agreements. In a reverse repurchase agreement, a Fund sells a
security and agrees to repurchase the same security at a mutually agreed upon
date and price reflecting the interest rate effective for the term of the
agreement. For purposes of the 1940 Act a reverse repurchase agreement is also
considered as the borrowing of money by the Fund and, therefore, a form of
leverage. Leverage may cause any gains or losses for a Fund to be magnified.
The Funds will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, a Fund will enter into a reverse repurchase agreement
only when the interest income to be earned from the investment of the proceeds
is greater than the interest expense of the transaction. A Fund will not invest
the proceeds of a reverse repurchase agreement for a period which exceeds the
duration of the reverse repurchase agreement. Each Fund will establish and
maintain with the Custodian a separate account with a segregated portfolio of
securities in an amount at least equal to its purchase obligations under its
reverse repurchase agreements. See "Investment Restrictions" for each Fund's
limitations on reverse repurchase agreements and bank borrowings.

MORTGAGE DOLLAR ROLL TRANSACTIONS. The Funds may engage in mortgage
dollar roll transactions with respect to mortgage securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation. In a mortgage
dollar roll transaction, the Fund sells a mortgage backed security and
simultaneously agrees to repurchase a similar security on a specified future
date at an agreed upon price. During the roll period, the Fund will not be
entitled to receive any interest or principal paid on the securities sold. The
Fund is compensated for the lost interest on the securities sold by the
difference between the sales price and the lower price for the future repurchase
as well as by the interest earned on the reinvestment of the sales proceeds.
The Fund may also be compensated by receipt of a commitment fee. When the Fund
enters into a mortgage dollar roll transaction, liquid assets in an amount
sufficient to pay for the future repurchase are segregated with the custodian.
Mortgage dollar roll transactions are considered reverse repurchase agreements
for purposes of the Fund's investment restrictions.

LOANS OF PORTFOLIO SECURITIES. Subject to applicable investment
restrictions, each Fund is permitted to lend securities in an amount up to 33
1/3% of the value of its total assets. Each of the Funds may lend its
securities if such loans are secured continuously by cash or equivalent
collateral or by a letter of credit in favor of the Fund at least equal at all
times to 100% of the market value of the securities loaned, plus accrued
interest. While such securities are on loan, the borrower will pay the Fund any
income accruing thereon. Loans will be subject to termination by a Fund

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<PAGE>

in the normal settlement time, generally three business days after notice, or by
the borrower on one day's notice. Borrowed securities must be returned when the
loan is terminated. Any gain or loss in the market price of the borrowed
securities which occurs during the term of the loan inures to a Fund and its
respective investors. The Funds may pay reasonable finders' and custodial fees
in connection with a loan. In addition, a Fund will consider all facts and
circumstances including the creditworthiness of the borrowing financial
institution, and no Fund will make any loans in excess of one year. The Funds
will not lend their securities to any officer, Trustee, Director, employee or
other affiliate of the Funds, the Advisor or the Distributor, unless otherwise
permitted by applicable law.

ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED SECURITIES.
No Fund may acquire any illiquid securities if, as a result thereof, more than
15% of its net assets would be in illiquid investments. Subject to this
non-fundamental policy limitation, each Fund may acquire investments that are
illiquid or have limited liquidity, such as private placements or investments
that are not registered under the Securities Act of 1933, as amended (the "1933
Act"), and cannot be offered for public sale in the United States without first
being registered under the 1933 Act. An illiquid investment is any investment
that cannot be disposed of within seven days in the normal course of business at
approximately the amount at which it is valued by a Fund. The price a Fund pays
for illiquid securities or receives upon resale may be lower than the price paid
or received for similar securities with a more liquid market. Accordingly the
valuation of these securities will reflect any limitations on their liquidity.

Each Fund may also purchase Rule 144A securities sold to institutional
investors without registration under the 1933 Act. These securities may be
determined to be liquid in accordance with guidelines established by the Advisor
and approved by the Trustees. The Trustees will monitor the Advisor's
implementation of these guidelines on a periodic basis.

As to illiquid investments, a Fund is subject to a risk that should the
Fund decide to sell them when a ready buyer is not available at a price the Fund
deems representative of their value, the value of the Fund's net assets could be
adversely affected. Where an illiquid security must be registered under the
1933 Act, before it may be sold, a Fund may be obligated to pay all or part of
the registration expenses, and a considerable period may elapse between the time
of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, a Fund might obtain a less favorable
price than prevailed when it decided to sell.

QUALITY AND DIVERSIFICATION REQUIREMENTS

Each Fund intends to meet the diversification requirements of the 1940 Act.
Current 1940 Act diversification requirements require that with respect to 75%
of the assets of the Fund: (1) the Fund may not invest more than 5% of its total
assets in the securities of any one issuer, except obligations of the U.S.
Government, its agencies and instrumentalities, and (2) the Fund may not own
more than 10% of the outstanding voting securities of any one issuer. As for
the other 25% of the Fund's assets not subject to the limitation described
above, there is no limitation on investment of these assets under the 1940 Act,
so that all of such assets may be invested in securities of any one issuer.
Investments not subject to the limitations described above could involve an
increased risk to a Fund should an issuer, or a state or its

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<PAGE>

related entities, be unable to make interest or principal payments or should the
market value of such securities decline.

Each Fund will comply with the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company. See "Taxes".

SHORT TERM BOND AND BOND FUNDS. If the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the obligation is backed
only by the assets and revenues of the subdivision, such subdivision is regarded
as the sole issuer. Similarly, in the case of an industrial development revenue
bond or pollution control revenue bond, if the bond is backed only by the assets
and revenues of the nongovernmental user, the nongovernmental user is regarded
as the sole issuer. If in either case the creating government or another entity
guarantees an obligation, the guaranty is regarded as a separate security and
treated as an issue of such guarantor. Since securities issued or guaranteed by
states or municipalities are not voting securities, there is no limitation on
the percentage of a single issuer's securities which the Fund may own so long as
it does not invest more than 5% of its total assets that are subject to the
diversification limitation in the securities of such issuer, except obligations
issued or guaranteed by the U.S. Government. Consequently, the Fund may invest
in a greater percentage of the outstanding securities of a single issuer than
would an investment company which invests in voting securities. See "Investment
Restrictions.

The Bond and Short Term Bond Funds invest in a diversified portfolio of
securities that are considered "high grade," "investment grade" and "below
investment grade" as described in Appendix A. In addition, at the time the
Funds invest in any commercial paper, bank obligation or repurchase agreement,
the issuer must have outstanding debt rated A or higher by Moody's or Standard &
Poor's, the issuer's parent corporation, if any, must have outstanding
commercial paper rated Prime-1 by Moody's or A-1 by Standard & Poor's, or if no
such ratings are available, the investment must be of comparable quality in the
Advisor's opinion. See below.

THE GLOBAL STRATEGIC INCOME FUND. The higher total return sought by the
Global Strategic Income Fund is generally obtainable from high yield high risk
securities in the lower rating categories of the established rating services.
These securities are rated below Baa by Moody's or below BBB by Standard &
Poor's. The Global Strategic Income Fund may invest in securities rated as low
as B by Moody's or Standard & Poor's, which may indicate that the obligations
are speculative to a high degree. Lower rated securities are generally referred
to as junk bonds. See the Appendix attached to this Statement of Additional
Information for a description of the characteristics of the various ratings
categories. The Global Strategic Income Fund is not obligated to dispose of
securities whose issuers subsequently are in default or which are downgraded
below the minimum ratings noted above. The credit ratings of Moody's and
Standard & Poor's (the "Rating Agencies"), such as those ratings described in
this Statement of Additional Information, may not be changed by the Rating
Agencies in a timely fashion to reflect subsequent economic events. The credit
ratings of securities do not evaluate market risk. The Global Strategic Income
Fund may also invest in unrated securities which, in the opinion of the Advisor,
offer comparable yields and risks to the rated securities in which the Fund may
invest.

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<PAGE>

Debt securities that are rated in the lower rating categories, or which are
unrated, involve greater volatility of price and risk of loss of principal and
income, including the possibility of default or bankruptcy of the issuer of such
securities, and have greater price volatility, especially during periods of
economic uncertainty or change. These lower quality fixed income securities
tend to be affected by economic changes and short-term corporate and industry
developments to a greater extent than higher quality securities, which react
primarily to fluctuations in the general level of interest rates. Although the
Advisor seeks to minimize these risks through diversification, investment
analysis and attention to current developments in interest rates and economic
conditions, there can be no assurance that the Advisor will be successful in
limiting the Global Strategic Income Fund's exposure to the risks associated
with lower rated securities. Because the Global Strategic Income Fund invests
in securities in the lower rated categories, the achievement of the Fund's
investment objective is more dependent on the Advisor's ability than would be
the case if the Fund were investing in securities in the higher rated
categories.

Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. Economic downturns or an
increase in interest rates may cause a higher incidence of default by the
issuers of these securities, especially issuers that are highly leveraged. The
market for these lower quality fixed income securities is generally less liquid
than the market for investment grade fixed income securities. It may be more
difficult to sell these lower rated securities to meet redemption requests, to
respond to changes in the market, or to determine accurately the Portfolio's net
asset value.

Reduced volume and liquidity in the high yield bond market or the reduced
availability of market quotations may make it more difficult to dispose of the
Global Strategic Income Fund's investments in high yield securities and to value
accurately these assets. The reduced availability of reliable, objective data
may increase the Global Strategic Income Fund's reliance on management's
judgment in valuing high yield bonds. In addition, the Global Strategic Income
Fund's investments in high yield securities may be susceptible to adverse
publicity and investor perceptions whether or not justified by fundamental
factors.

BELOW INVESTMENT GRADE DEBT. Certain lower rated securities purchased by
each Fund, such as those rated Ba or B by Moody's or BB or B by Standard &
Poor's (commonly known as junk bonds), may be subject to certain risks with
respect to the issuing entity's ability to make scheduled payments of principal
and interest and to greater market fluctuations. While generally providing
greater income than investments in higher quality securities, lower quality
fixed income securities involve greater risk of loss of principal and income,
including the possibility of default or bankruptcy of the issuers of such
securities, and have greater price volatility, especially during periods of
economic uncertainty or change. These lower quality fixed income securities
tend to be affected by economic changes and short-term corporate and industry
developments to a greater extent than higher quality securities, which react
primarily to fluctuations in the general level of interest rates. To the extent
that the Fund invests in such lower quality securities, the achievement of its
investment objective may be more dependent on the Advisor's own credit analysis.

Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse

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<PAGE>

publicity, and the outlook for economic growth. Economic downturns or an
increase in interest rates may cause a higher incidence of default by the
issuers of these securities, especially issuers that are highly leveraged. The
market for these lower quality fixed income securities is generally less liquid
than the market for investment grade fixed income securities. It may be more
difficult to sell these lower rated securities to meet redemption requests, to
respond to changes in the market, or to value accurately the Fund's portfolio
securities for purposes of determining the Fund's net asset value. See Appendix
A for more detailed information on these ratings.

In determining suitability of investment in a particular unrated security,
the Advisor takes into consideration asset and debt service coverage, the
purpose of the financing, history of the issuer, existence of other rated
securities of the issuer, and other relevant conditions, such as comparability
to other issuers.

OPTIONS AND FUTURES TRANSACTIONS

The Funds may purchase and sell (a) exchange traded and over-the-counter
(OTC) put and call options on fixed income securities, indexes of fixed income
securities and futures contracts on fixed income securities and indexes of fixed
income securities and (b) futures contracts on fixed income securities and
indexes of fixed income securities. Each of these instruments is a derivative
instrument as its value derives from the underlying asset or index.

Each of the Funds may use futures contracts and options for hedging and
risk management purposes. The Funds may not use futures contracts and options
for speculation.

Each of the Funds may utilize options and futures contracts to manage its
exposure to changing interest rates and/or security prices. Some options and
futures strategies, including selling futures contracts and buying puts, tend to
hedge a Fund's investments against price fluctuations. Other strategies,
including buying futures contracts and buying calls, tend to increase market
exposure. Options and futures contracts may be combined with each other or with
forward contracts in order to adjust the risk and return characteristics of a
Fund's overall strategy in a manner deemed appropriate to the Advisor and
consistent with the Fund's objective and policies. Because combined options
positions involve multiple trades, they result in higher transaction costs and
may be more difficult to open and close out.

The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase a Fund's return. While the use of these instruments by a
Fund may reduce certain risks associated with owning its portfolio securities,
these techniques themselves entail certain other risks. If the Advisor applies a
strategy at an inappropriate time or judges market conditions or trends
incorrectly, options and futures strategies may lower a Fund's return. Certain
strategies limit the Fund's possibilities to realize gains as well as its
exposure to losses. A Fund could also experience losses if the prices of its
options and futures positions were poorly correlated with its other investments,
or if it could not close out its positions because of an illiquid secondary
market. In addition, the Fund will incur transaction costs, including trading
commissions and option premiums, in connection with its futures and options
transactions and these transactions could significantly increase the Fund's
turnover rate.

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<PAGE>

The Fund may purchase put and call options on securities, indexes of
securities and futures contracts, or purchase and sell futures contracts, only
if such options are written by other persons and if (i) the aggregate premiums
paid on all such options which are held at any time do not exceed 20% of the
Fund's net assets, and (ii) the aggregate margin deposits required on all such
futures or options thereon held at any time do not exceed 5% of the Fund's total
assets. In addition, the Fund will not purchase or sell (write) futures
contracts, options on futures contracts or commodity options for risk management
purposes if, as a result, the aggregate initial margin and options premiums
required to establish these positions exceed 5% of the net asset value of the
Fund.

OPTIONS

PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, a Fund
obtains the right (but not the obligation) to sell the instrument underlying the
option at a fixed strike price. In return for this right, the Fund pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities, indexes
of securities, indexes of securities prices, and futures contracts. The Fund
may terminate its position in a put option it has purchased by allowing it to
expire or by exercising the option. The Fund may also close out a put option
position by entering into an offsetting transaction, if a liquid market exits.
If the option is allowed to expire, the Fund will lose the entire premium it
paid. If the Fund exercises a put option on a security, it will sell the
instrument underlying the option at the strike price. If the Fund exercises an
option on an index, settlement is in cash and does not involve the actual sale
of securities. If an option is American style, it may be exercised on any day
up to its expiration date. A European style option may be exercised only on its
expiration date.

The buyer of a typical put option can expect to realize a gain if the
underlying instrument falls substantially. However, if the price of the
instrument underlying the option does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs).

The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the instrument underlying the option at the option's
strike price. A call buyer typically attempts to participate in potential price
increases of the instrument underlying the option with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can expect
to suffer a loss if security prices do not rise sufficiently to offset the cost
of the option.

SELLING (WRITING) PUT AND CALL OPTIONS. When a Fund writes a put option,
it takes the opposite side of the transaction from the option's purchaser. In
return for the receipt of the premium, the Fund assumes the obligation to pay
the strike price for the instrument underlying the option if the party to the
option chooses to exercise it. The Fund may seek to terminate its position in a
put option it writes before exercise by purchasing an offsetting option in the
market at its current price. If the market is not liquid for a put option the
Fund has written, however, it must continue to be prepared to pay the strike
price while the option is outstanding, regardless of price changes, and must
continue to post margin as discussed below.

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<PAGE>

If the price of the underlying instrument rises, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received. If security prices remain the same over time, it is
likely that the writer will also profit, because it should be able to close out
the option at a lower price. If security prices fall, the put writer would
expect to suffer a loss. This loss should be less than the loss from purchasing
and holding the underlying instrument directly, however, because the premium
received for writing the option should offset a portion of the decline.

Writing a call option obligates the Fund to sell or deliver the option's
underlying instrument in return for the strike price upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium a call writer offsets part of the effect of a price decline. At the
same time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.

The writer of an exchange traded put or call option on a security, an index
of securities or a futures contract is required to deposit cash or securities or
a letter of credit as margin and to make mark to market payments of variation
margin as the position becomes unprofitable.

OPTIONS ON INDEXES. Each of the Funds may purchase and sell put and call
options on any securities index based on securities in which the Fund may
invest. Options on securities indexes are similar to options on securities,
except that the exercise of securities index options is settled by cash payment
and does not involve the actual purchase or sale of securities. In addition,
these options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security. A Fund, in purchasing or selling index options, is subject
to the risk that the value of its portfolio securities may not change as much as
an index because the Fund's investments generally will not match the composition
of an index.

For a number of reasons, a liquid market may not exist and thus a Fund may
not be able to close out an option position that it has previously entered into.
When a Fund purchases an OTC option, it will be relying on its counterparty to
perform its obligations, and the Fund may incur additional losses if the
counterparty is unable to perform.

EXCHANGE TRADED AND OTC OPTIONS. All options purchased or sold by the Fund
will be traded on a securities exchange or will be purchased or sold by
securities dealers (OTC options) that meet creditworthiness standards approved
by the Fund's Board of Trustees. While exchange-traded options are obligations
of the Options Clearing Corporation, in the case of OTC options, the Fund relies
on the dealer from which it purchased the option to perform if the option is
exercised. Thus, when the Fund purchases an OTC option, it relies on the dealer
from which it purchased the option to make or take delivery of the underlying
securities. Failure by the dealer to do so would result in the loss of the
premium paid by the Fund as well as loss of the expected benefit of the
transaction.

Provided that the Fund has arrangements with certain qualified dealers who
agree that the Fund may repurchase any option it writes for a maximum

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<PAGE>

price to be calculated by a predetermined formula, the Fund may treat the
underlying securities used to cover written OTC options as liquid. In these
cases, the OTC option itself would only be considered illiquid to the extent
that the maximum repurchase price under the formula exceeds the intrinsic value
of the option.

FUTURES CONTRACTS

The Funds may purchase and sell futures contracts. When a Fund purchases a
futures contract, it agrees to purchase a specified quantity of an underlying
instrument at a specified future date or to make a cash payment based on the
value of a securities index. When a Fund sells a futures contract, it agrees to
sell a specified quantity of the underlying instrument at a specified future
date or to receive a cash payment based on the value of a securities index. The
price at which the purchase and sale will take place is fixed when the Fund
enters into the contract. Futures can be held until their delivery dates or the
position can be (and normally is) closed out before then. There is no
assurance, however, that a liquid market will exist when the Fund wishes to
close out a particular position.

When a Fund purchases a futures contract, the value of the futures contract
tends to increase and decrease in tandem with the value of its underlying
instrument. Therefore, purchasing futures contracts will tend to increase the
Fund's exposure to positive and negative price fluctuations in the underlying
instrument, much as if it had purchased the underlying instrument directly.
When a Fund sells a futures contract, by contrast, the value of its futures
position will tend to move in a direction contrary to the value of the
underlying instrument. Selling futures contracts, therefore, will tend to
offset both positive and negative market price changes, much as if the
underlying instrument had been sold.

The purchaser or seller of a futures contract is not required to deliver or
pay for the underlying instrument unless the contract is held until the delivery
date. However, when a Fund buys or sells a futures contract it will be required
to deposit "initial margin" with its custodian in a segregated account in the
name of its futures broker, known as a futures commission merchant (FCM).
Initial margin deposits are typically equal to a small percentage of the
contract's value. If the value of either party's position declines, that party
will be required to make additional "variation margin" payments equal to the
change in value on a daily basis. The party that has a gain may be entitled to
receive all or a portion of this amount. A Fund may be obligated to make
payments of variation margin at a time when it is disadvantageous to do so.
Furthermore, it may not always be possible for a Fund to close out its futures
positions. Until it closes out a futures position, the Fund will be obligated
to continue to pay variation margin. Initial and variation margin payments do
not constitute purchasing on margin for purposes of a Fund's investment
restrictions. In the event of the bankruptcy of an FCM that holds margin on
behalf of a Fund, the Fund may be entitled to return of margin owed to it only
in proportion to the amount received by the FCM's other customers, potentially
resulting in losses to the Fund.

Each Fund will segregate liquid assets in connection with its use of
options and futures contracts to the extent required by the staff of the
Securities and Exchange Commission. Securities held in a segregated account
cannot be sold while the futures contract or option is outstanding, unless they
are replaced with other suitable assets. As a result, there is a possibility
that segregation of a large percentage of a Fund's assets could

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<PAGE>

impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.

OPTIONS ON FUTURES CONTRACTS. The Funds may purchase and sell put and call
options, including put and call options on futures contracts. Futures contracts
obligate the buyer to take and the seller to make delivery at a future date of a
specified quantity of a financial instrument or an amount of cash based on the
value of a securities index. Currently, futures contracts are available on
various types of fixed income securities, including but not limited to U.S.
Treasury bonds, notes and bills, Eurodollar certificates of deposit and on
indexes of fixed income securities.

Unlike a futures contract, which requires the parties to buy and sell a
security or make a cash settlement payment based on changes in a financial
instrument or securities index on an agreed date, an option on a futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to exercise its option,
the holder may close out the option position by entering into an offsetting
transaction or may decide to let the option expire and forfeit the premium
thereon. The purchaser of an option on a futures contract pays a premium for
the option but makes no initial margin payments or daily payments of cash in the
nature of "variation" margin payments to reflect the change in the value of the
underlying contract as does a purchaser or seller of a futures contract.

The seller of an option on a futures contract receives the premium paid by
the purchaser and may be required to pay initial margin. Amounts equal to the
initial margin and any additional collateral required on any options on futures
contracts sold by a Fund are paid by the Fund into a segregated account, in the
name of the FCM, as required by the 1940 Act and the SEC's interpretations
thereunder.

COMBINED POSITIONS. Each Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call
option at one strike price and buying a call option at a lower price, in order
to reduce the risk of the written call option in the event of a substantial
price increase. Because combined options positions involve multiple trades,
they result in higher transaction costs and may be more difficult to open and
close out.

CORRELATION OF PRICE CHANGES. Because there are a limited number of types
of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match a Fund's
current or anticipated investments exactly. A Fund may invest in options and
futures contracts based on securities with different issuers, maturities, or
other characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.

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<PAGE>

volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. A Fund may purchase or sell futures
contracts or purchase put and call options, including put and call options on
futures contracts with a greater or lesser value than the securities it wishes
to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in a Fund's options or
futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.

LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a liquid
market will exist for any particular option or futures contract at any
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or down more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for a Fund
to enter into new positions or close out existing positions. If the market for
a contract is not liquid because of price fluctuation limits or otherwise, it
could prevent prompt liquidation of unfavorable positions, and could potentially
require a Fund to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Fund's access to other
assets held to cover its options or futures positions could also be impaired.
(See "Exchange Traded and OTC Options" above for a discussion of the liquidity
of options not traded on an exchange.)

POSITION LIMITS. Futures exchanges can limit the number of futures and
options on futures contracts that can be held or controlled by an entity. If an
adequate exemption cannot be obtained, a Fund or the Advisor may be required to
reduce the size of its futures and options positions or may not be able to trade
a certain futures or options contract in order to avoid exceeding such limits.

ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS. The Funds
intend to comply with Section 4.5 of the regulations under the Commodity
Exchange Act, which limits the extent to which a Fund can commit assets to
initial margin deposits and option premiums. In addition, the Funds will comply
with guidelines established by the SEC with respect to coverage of options and
futures contracts by mutual funds, and if the guidelines so require, will set
aside appropriate liquid assets in a segregated custodial account in the amount
prescribed. Securities held in a segregated account cannot be sold while the
futures contract or option is outstanding, unless they are replaced with other
suitable assets. As a result, there is a possibility that segregation of a
large percentage of a Fund's assets could impede portfolio management or the
Fund's ability to meet redemption requests or other current obligations.

25
<PAGE>

caps, floors and collars and options on interest rate swaps (collectively
defined as "swap transactions").

Each Fund may enter into swap transactions for any legal purpose consistent
with its investment objective and policies, such as for the purpose of
attempting to obtain or preserve a particular return or spread at a lower cost
than obtaining that return or spread through purchases and/or sales of
instruments in cash markets, to protect against currency fluctuations, as a
duration management technique, to protect against any increase in the price of
securities a Fund anticipates purchasing at a later date, or to gain exposure to
certain markets in the most economical way possible. A Fund will not sell
interest rate caps, floors or collars if it does not own securities with coupons
which provide the interest that a Fund may be required to pay.

Swap agreements are two-party contracts entered into primarily by
institutional counterparties for periods ranging from a few weeks to several
years. In a standard swap transaction, two parties agree to exchange the returns
(or differentials in rates of return) that would be earned or realized on
specified notional investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated by reference to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency or commodity, or in a "basket" of securities representing a particular
index. The purchaser of an interest rate cap or floor, upon payment of a fee,
has the right to receive payments (and the seller of the cap is obligated to
make payments) to the extent a specified interest rate exceeds (in the case of a
cap) or is less than (in the case of a floor) a specified level over a specified
period of time or at specified dates. The purchaser of an interest rate collar,
upon payment of a fee, has the right to receive payments (and the seller of the
collar is obligated to make payments) to the extent that a specified interest
rate falls outside an agreed upon range over a specified period of time or at
specified dates. The purchaser of an option on an interest rate swap, upon
payment of a fee (either at the time of purchase or in the form of higher
payments or lower receipts within an interest rate swap transaction) has the
right, but not the obligation, to initiate a new swap transaction of a
pre-specified notional amount with pre-specified terms with the seller of the
option as the counterparty.

The "notional amount" of a swap transaction is the agreed upon basis for
calculating the payments that the parties have agreed to exchange. For example,
one swap counterparty may agree to pay a floating rate of interest (e.g., 3
month LIBOR) calculated based on a $10 million notional amount on a quarterly
basis in exchange for receipt of payments calculated based on the same notional
amount and a fixed rate of interest on a semi-annual basis. In the event a Fund
is obligated to make payments more frequently than it receives payments from the
other party, it will incur incremental credit exposure to that swap
counterparty. This risk may be mitigated somewhat by the use of swap agreements
which call for a net payment to be made by the party with the larger payment
obligation when the obligations of the parties fall due on the same date. Under
most swap agreements entered into by a Fund,

26
<PAGE>

payments by the parties will be exchanged on a "net basis", and a Fund will
receive or pay, as the case may be, only the net amount of the two payments.

The amount of a Fund's potential gain or loss on any swap transaction is
not subject to any fixed limit. Nor is there any fixed limit on a Fund's
potential loss if it sells a cap or collar. If the Fund buys a cap, floor or
collar, however, the Fund's potential loss is limited to the amount of the fee
that it has paid. When measured against the initial amount of cash required to
initiate the transaction, which is typically zero in the case of most
conventional swap transactions, swaps, caps, floors and collars tend to be more
volatile than many other types of instruments.

The use of swap transactions, caps, floors and collars involves investment
techniques and risks which are different from those associated with portfolio
security transactions. If the Advisor is incorrect in its forecasts of market
values, interest rates, and other applicable factors, the investment performance
of a Fund will be less favorable than if these techniques had not been used.
These instruments are typically not traded on exchanges. Accordingly, there is
a risk that the other party to certain of these instruments will not perform its
obligations to a Fund or that a Fund may be unable to enter into offsetting
positions to terminate its exposure or liquidate its position under certain of
these instruments when it wishes to do so. Such occurrences could result in
losses to a Fund.

The Advisor will, however, consider such risks and will enter into swap
and other derivatives transactions only when it believes that the risks are not
unreasonable.

Each Fund will maintain cash or liquid assets in a segregated account with
its custodian in an amount sufficient at all times to cover its current
obligations under its swap transactions, caps, floors and collars. If a Fund
enters into a swap agreement on a net basis, it will segregate assets with a
daily value at least equal to the excess, if any, of a Fund's accrued
obligations under the swap agreement over the accrued amount a Fund is entitled
to receive under the agreement. If a Fund enters into a swap agreement on other
than a net basis, or sells a cap, floor or collar, it will segregate assets with
a daily value at least equal to the full amount of a Fund's accrued obligations
under the agreement.

Each Fund will not enter into any swap transaction, cap, floor, or collar,
unless the counterparty to the transaction is deemed creditworthy by the
Advisor. If a counterparty defaults, a Fund may have contractual remedies
pursuant to the agreements related to the transaction. The swap markets in
which many types of swap transactions are traded have grown substantially in
recent years, with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the markets for certain types of swaps (e.g., interest rate swaps)
have become relatively liquid. The markets for some types of caps, floors and
collars are less liquid.

27
<PAGE>

The liquidity of swap transactions, caps, floors and collars will be as set
forth in guidelines established by the Advisor and approved by the Trustees
which are based on various factors, including (1) the availability of dealer
quotations and the estimated transaction volume for the instrument, (2) the
number of dealers and end users for the instrument in the marketplace, (3) the
level of market making by dealers in the type of instrument, (4) the nature of
the instrument (including any right of a party to terminate it on demand) and
(5) the nature of the marketplace for trades (including the ability to assign or
offset a Fund's rights and obligations relating to the instrument). Such
determination will govern whether the instrument will be deemed within the 15%
restriction on investments in securities that are not readily marketable.

During the term of a swap, cap, floor or collar, changes in the value of
the instrument are recognized as unrealized gains or losses by marking to market
to reflect the market value of the instrument. When the instrument is
terminated, a Fund will record a realized gain or loss equal to the difference,
if any, between the proceeds from (or cost of) the closing transaction and a
Fund's basis in the contract.

The federal income tax treatment with respect to swap transactions, caps,
floors, and collars may impose limitations on the extent to which a Fund may
engage in such transactions.

RISK MANAGEMENT

Each Fund may employ non-hedging risk management techniques. Examples of
risk management strategies include synthetically altering the duration of a
portfolio or the mix of securities in a portfolio. For example, if the Advisor
wishes to extend maturities in a fixed income portfolio in order to take
advantage of an anticipated decline in interest rates, but does not wish to
purchase the underlying long term securities, it might cause the Fund to
purchase futures contracts on long term debt securities. Similarly, if the
Advisor wishes to decrease fixed income securities or purchase equities, it
could cause the Fund to sell futures contracts on debt securities and purchase
futures contracts on a stock index. Such non-hedging risk management techniques
are not speculative, but because they involve leverage include, as do all
leveraged transactions, the possibility of losses as well as gains that are
greater than if these techniques involved the purchase and sale of the
securities themselves rather than their synthetic derivatives.

PORTFOLIO TURNOVER

The table below sets forth the portfolio turnover rates for the Portfolios
corresponding to the Funds. A rate of 100% indicates that the equivalent of all
of the Portfolio's assets have been sold and reinvested in a year. High
portfolio turnover may result in the realization of substantial net capital
gains or losses. To the extent net short term capital gains are realized, any
distributions resulting from such gains are considered ordinary income for
federal income tax purposes. See "Taxes" below.

THE SHORT TERM BOND PORTFOLIO (SHORT TERM BOND FUND) -- For the fiscal year
ended October 31, 1996: 191%. For the fiscal year ended October 31, 1997: 219%.
For the six months ended April 30, 1998 (unaudited): 198%.

28
<PAGE>

THE U.S. FIXED INCOME PORTFOLIO (BOND FUND) -- For the fiscal year ended
October 31, 1996: 186%. For the fiscal year ended October 31, 1997: 93%. For
the six months ended April 30, 1998 (unaudited): 53%.

THE GLOBAL STRATEGIC INCOME PORTFOLIO (GLOBAL STRATEGIC INCOME FUND) -- For the
period March 17, 1997 (commencement of operations) through October 31, 1997:
212%. For the six months ended April 30, 1998 (unaudited): 123%.

INVESTMENT RESTRICTIONS

The investment restrictions of each Fund and its corresponding Portfolio
are identical, unless otherwise specified. Accordingly, references below to a
Fund also include the Fund's corresponding Portfolio unless the context requires
otherwise; similarly, references to a Portfolio also include its corresponding
Fund unless the context requires otherwise.

The investment restrictions below have been adopted by each Fund and by
each corresponding Portfolio. Except where otherwise noted, these investment
restrictions are "fundamental" policies which, under the 1940 Act, may not be
changed without the vote of a majority of the outstanding voting securities of
the Fund or Portfolio, as the case may be. A "majority of the outstanding
voting securities" is defined in the 1940 Act as the lesser of (a) 67% or more
of the voting securities present at a meeting if the holders of more than 50% of
the outstanding voting securities are present or represented by proxy, or (b)
more than 50% of the outstanding voting securities. The percentage limitations
contained in the restrictions below apply at the time of the purchase of
securities. Whenever a Fund is requested to vote on a change in the fundamental
investment restrictions of its corresponding Portfolio, the Trust will hold a
meeting of Fund shareholders and will cast its votes as instructed by the Fund's
shareholders.

Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC staff
interpretations thereof, are amended or modified, each Fund and its
corresponding Portfolio:

1. May not make any investment inconsistent with the Fund's classification as a
diversified investment company under the Investment Company Act of 1940.

2. May not purchase any security which would cause the Fund to concentrate its
investments in the securities of issuers primarily engaged in any particular
industry except as permitted by the SEC;

3. May not issue senior securities, except as permitted under the Investment
Company Act of 1940 or any rule, order or interpretation thereunder;

4. May not borrow money, except to the extent permitted by applicable law;

5. May not underwrite securities of other issuers, except to the extent that the
Fund, in disposing of portfolio securities, may be deemed an underwriter within
the meaning of the 1933 Act;

6. May not purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may (a) invest in securities or other instruments
directly or indirectly secured by real estate, (b) invest in securities or other
instruments issued by issuers that invest in real estate and (c) make direct
investments in mortgages;

29
<PAGE>

7. May not purchase or sell commodities or commodity contracts unless acquired
as a result of ownership of securities or other instruments issued by persons
that purchase or sell commodities or commodities contracts; but this shall not
prevent the Fund from purchasing, selling and entering into financial futures
contracts (including futures contracts on indices of securities, interest rates
and currencies), options on financial futures contracts (including futures
contracts on indices of securities, interest rates and currencies), warrants,
swaps, forward contracts, foreign currency spot and forward contracts or other
derivative instruments that are not related to physical commodities; and

8. May make loans to other persons, in accordance with the Fund's investment
objective and policies and to the extent permitted by applicable law.

NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The investment restrictions
described below are not fundamental policies of the Funds and their
corresponding Portfolios and may be changed by their Trustees. These
non-fundamental investment policies require that the Funds and their
corresponding Portfolios:

(i) May not acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration of over
seven calendar days, if as a result thereof, more than 15% of the market value
of the Fund's net assets would be in investments which are illiquid;

(ii) May not purchase securities on margin, make short sales of securities, or
maintain a short position, provided that this restriction shall not be deemed to
be applicable to the purchase or sale of when-issued or delayed delivery
securities, or to short sales that are covered in accordance with SEC rules; and

(iii) May not acquire securities of other investment companies, except as
permitted by the 1940 Act or any order pursuant thereto.

There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or total
assets, in the securities rating of the investment, or any other later change.

For purposes of the fundamental investment restriction regarding industry
concentration, JPMIM may classify issuers by industry in accordance with
classifications set forth in the DIRECTORY OF COMPANIES FILING ANNUAL REPORTS
WITH THE SECURITIES AND EXCHANGE COMMISSION or other sources. In the absence of
such classification or if JPMIM determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, JPMIM
may classify an issuer accordingly. For instance, personal credit finance
companies and business credit finance companies are deemed to be separate
industries and wholly owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to financing
the activities of their parents.

30
<PAGE>

TRUSTEES AND OFFICERS

TRUSTEES

The Trustees of the Trust, who are also the Trustees of each of the
Portfolios, their business addresses, principal occupations during the past
five years and dates of birth are set forth below.

FREDERICK S. ADDY--Trustee; Retired; Prior to April 1994, Executive Vice
President and Chief Financial Officer, Amoco Corporation. His address is 5300
Arbutus Cove, Austin, Texas 78746, and his date of birth is January 1, 1932.

WILLIAM G. BURNS--Trustee; Retired, Former Vice Chairman and Chief
Financial Officer, NYNEX. His address is 2200 Alaqua Drive, Longwood,
Florida 32779, and his date of birth is November 2, 1932.

ARTHUR C. ESCHENLAUER--Trustee; Retired; Former Senior Vice President,
Morgan Guaranty Trust Company of New York. His address is 14 Alta Vista
Drive, RD #2, Princeton, New Jersey 08540, and his date of birth is May 23,
1934.

MATTHEW HEALEY (1)--Trustee, Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc., since prior to 1993. His address is Pine
Tree Club Estates, 10286 Saint Andrews Road, Boynton Beach, Florida 33436,
and his date of birth is August 23, 1937.

MICHAEL P. MALLARDI--Trustee; Retired; Prior to April 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His
address is 10 Charnwood Drive, Suffern, New York 10910, and his date of birth
is March 17, 1934.

The Trustees of the Trust are the same as the Trustees of each of the
Portfolios. A majority of the disinterested Trustees have adopted written
procedures reasonably appropriate to deal with potential conflicts of
interest arising from the fact that the same individuals are Trustees of the
Trust, each of the Portfolios and the J.P. Morgan Funds, up to and including
creating a separate board of trustees.

Each Trustee is currently paid an annual fee of $75,000 (adjusted as of
April 1, 1997) for serving as Trustee of the Trust, each of the Master
Portfolios (as defined below), J.P. Morgan Funds and J.P. Morgan Series Trust
and is reimbursed for expenses incurred in connection with service as a
Trustee. The Trustees may hold various other directorships unrelated to these
funds.

- --------------------
(1) Mr. Healey is an "interested person" (as defined in the 1940 Act) of the
Trust. Mr. Healey is also an "interested person" (as defined in the 1940 Act)
of the advisor due to his son's affiliation with JPMIM.

31
<PAGE>

Trustee compensation expenses paid by the Trust for the calendar year
ended December 31, 1997 are set forth below.

<TABLE>
<CAPTION>
TOTAL TRUSTEE COMPENSATION
ACCRUED BY THE MASTER
AGGREGATE TRUSTEE PORTFOLIOS(*), J.P. MORGAN
COMPENSATION FUNDS, J.P. MORGAN SERIES
PAID BY THE TRUST AND THE TRUST DURING
NAME OF TRUSTEE TRUST DURING 1997 1997(**)
--------------- ----------------- ---------------------------
<S> <C> <C>
Frederick S. Addy, Trustee $11,772.77 $72,500

William G. Burns, Trustee $11,786.38 $72,500

Arthur C. Eschenlauer, $11,786.38 $72,500
Trustee

Matthew Healey, Trustee(***), $11,786.38 $72,500
Chairman and Chief
Executive Officer

Michael P. Mallardi, Trustee $11,786.38 $72,500
</TABLE>

(*) Includes the Portfolios and 17 other portfolios (collectively the "Master
Portfolios") for which JPMIM acts as investment advisor.

(**) No investment company within the fund complex has a pension or retirement
plan. Currently there are 18 investment companies (15 investment
companies comprising the Master Portfolios, the Trust, J.P. Morgan Funds
and J.P. Morgan Series Trust) in the fund complex.

(***) During 1997, Pierpont Group, Inc. paid Mr. Healey, in his role as Chairman
of Pierpont Group, Inc., compensation in the amount of $147,500,
contributed $22,100 to a defined contribution plan on his behalf and paid
$20,500 in insurance premiums for his benefit.

The Trustees decide upon general policies and are responsible for
overseeing the Trust's and Portfolio's business affairs. Each of the
Portfolios and the Trust has entered into a Fund Services Agreement with
Pierpont Group, Inc. to assist the Trustees in exercising their overall
supervisory responsibilities over the affairs of the Portfolios and the
Trust. Pierpont Group, Inc. was organized in July 1989 to provide services
for the J.P. Morgan Family of Funds (formerly "The Pierpont Family of
Funds"), and the Trustees are the equal and sole shareholders of Pierpont
Group, Inc. The Trust and the Portfolios have agreed to pay Pierpont Group,
Inc. a fee in an amount representing its reasonable costs in performing these
services. These costs are periodically reviewed by the Trustees. The
principal offices of Pierpont Group, Inc. are located at 461 Fifth Avenue,
New York, New York 10017.

The aggregate fees paid to Pierpont Group, Inc. by each Fund and its
corresponding Portfolio during the indicated fiscal years are set forth below:

32
<PAGE>

SHORT TERM BOND FUND -- For the fiscal year ended October 31, 1995: $4,748.
For the fiscal year ended October 31, 1996: $568. For the fiscal year ended
October 31, 1997: $900. For the six months ended April 30, 1998 (unaudited):
$868.

THE SHORT TERM BOND PORTFOLIO -- For the fiscal year ended October 31, 1995:
$5,573. For the fiscal year ended October 31, 1996: $1,005. For the fiscal
year ended October 31, 1997: $1,343. For the six months ended April 30, 1998
(unaudited): $1,181.

BOND FUND -- For the fiscal year ended October 31, 1995: $29,276. For the
fiscal year ended October 31, 1996: $30,044. For the fiscal year ended
October 31, 1997: $29,814. For the six months ended April 30, 1998
(unaudited): $14,131.

THE U.S. FIXED INCOME PORTFOLIO --For the fiscal year ended October 31, 1995:
$40,729. For the fiscal year ended October 31, 1996: $36,922. For the
fiscal year ended October 31, 1997: $35,577. For the six months ended April
30, 1998 (unaudited): $17,465.

GLOBAL STRATEGIC INCOME FUND - For the period March 17, 1997 (commencement of
operations) through October 31, 1997: 1,573. For the six months ended April
30, 1998 (unaudited): $2,241.

GLOBAL STRATEGIC INCOME PORTFOLIO -- For the period March 17, 1997
(commencement of operations) through October 31, 1997: $1,574. For the six
months ended April 30, 1998 (unaudited): $2,326.

OFFICERS

The Trust's and Portfolios' executive officers (listed below), other
than the Chief Executive officer and the officers who are employees of the
Advisor, are provided and compensated by Funds Distributor, Inc. ("FDI"), a
wholly owned indirect subsidiary of Boston Institutional Group, Inc. The
officers conduct and supervise the business operations of the Trust and the
Portfolios. The Trust and the Portfolios have no employees.

The officers of the Trust and the Portfolios, their principal
occupations during the past five years and dates of birth are set forth
below. Unless otherwise specified, each officer holds the same position with
the Trust and each Portfolio. The business address of each of the officers
unless otherwise noted is Funds Distributor, Inc., 60 State Street, Suite
1300, Boston, Massachusetts 02109.

MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group, since
prior to 1993. His address is Pine Tree Club Estates, 10286 Saint Andrews
Road, Boynton Beach, Florida 33436. His date of birth is August 23, 1937.

MARGARET W. CHAMBERS; Vice President and Secretary. Senior Vice
President and General Counsel of FDI since April, 1998. From August 1996 to
March 1998, Ms. Chambers was Vice President and Assistant General Counsel for
Loomis, Sayles & Company, L.P. From January 1986 to July 1996, she was an
associate with the law firm of Ropes & Gray. Her date of birth is October
12, 1959.

MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President,
Chief Executive Officer, Chief Compliance Officer and Director of FDI, Premier

33
<PAGE>

Mutual Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an
officer of certain investment companies distributed or administered by FDI.
Prior to July 1994, she was President and Chief Compliance Officer of FDI.
Her date of birth is August 1, 1957.

DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant
Vice President and Assistant Department Manager of Treasury Services and
Administration of FDI and an officer of certain investment companies
distributed or administered by FDI. Prior to April 1997, Mr. Conroy was
Supervisor of Treasury Services and Administration of FDI. From April 1993
to January 1995, Mr. Conroy was a Senior Fund Accountant for Investors Bank &
Trust Company. His date of birth is March 31, 1969.

JACQUELINE HENNING; Assistant Secretary and Assistant Treasurer of (The
U.S. Fixed Income and Short Term Bond Portfolios only). Managing Director,
State Street Cayman Trust Company, Ltd. since October 1994. Prior to October
1994, Mrs. Henning was head of mutual funds at Morgan Grenfell in Cayman and
was Managing Director of Bank of Nova Scotia Trust Company (Cayman) Limited
prior to September 1993. Address: P.O. Box 2508 GT, Elizabethan Square, 2nd
Floor, Shedden Road, George Town, Grand Cayman, Cayman Islands, BWI. Her
date of birth is March 24, 1942.

KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Vice
President and Senior Counsel of FDI and an officer of certain investment
companies distributed or administered by FDI. From June 1994 to January
1996, Ms. Jacoppo-Wood was a Manager of SEC Registration at Scudder, Stevens
& Clark, Inc. Prior to May 1994, Ms. Jacoppo-Wood was a senior paralegal at
The Boston Company Advisors, Inc. ("TBCA"). Her date of birth is December 29,
1966.

CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Senior Associate General Counsel of FDI and Premier Mutual and
an officer of certain investment companies distributed or administered by
FDI. From April 1994 to July 1996, Mr. Kelley was Assistant Counsel at
Forum Financial Group. Prior to April 1994, Mr. Kelley was employed by
Putnam Investments in legal and compliance capacities. His date of birth is
December 24, 1964.

KATHLEEN K. MORRISEY. Vice President and Assistant Secretary. Vice
President and Assistant Secretary of FDI. Manager of Treasury Services
Administration and an officer of certain investment companies advised or
administered by Montgomery Asset Management, L.P. and Dresdner RCM Global
Investors, Inc., and their respective affiliates. From July 1994 to November
1995, Ms. Morrisey was a Fund Accountant II for Investors Bank & Trust
Company. Prior to July 1994 she was a Finance student at Stonehill College
in North Easton, Massachusetts. Her date of birth is July 5, 1972.

MARY A. NELSON; Vice President and Assistant Treasurer. Vice President
and Manager of Treasury Services and Administration of FDI and Premier Mutual
and an officer of certain investment companies distributed or administered by
FDI. Prior to August 1994, Ms. Nelson was an Assistant Vice President and
Client Manager for The Boston Company, Inc. Her date of birth is April 22,
1964.

34
<PAGE>

Morgan Guaranty Trust Company of New York. Her address is 60 Wall Street,
New York, New York 10260. Her date of birth is March 13, 1966.

MICHAEL S. PETRUCELLI; Vice President and Assistant Secretary. Senior
Vice President and Director of Strategic Client Initiatives for FDI since
December 1996. From December 1989 through November 1996, Mr. Petrucelli was
employed with GE Investments where he held various financial, business
development and compliance positions. He also served as Treasurer of the GE
Funds and as Director of GE Investment Services. Address: 200 Park Avenue,
New York, New York, 10166. His date of birth is May 18, 1961.

STEPHANIE D. PIERCE; Vice President and Assistant Secretary. Vice
President and Client Development Manager for FDI since April 1998. From
April 1997 to March 1998, Ms. Pierce was employed by Citibank, NA as an
officer of Citibank and Relationship Manager on the Business and Professional
Banking team handling over 22,000 clients. Address: 200 Park Avenue, New
York, New York 10166. Her date of birth is August 18, 1968.

GEORGE A. RIO; President and Treasurer. Executive Vice President and
Client Service Director of FDI since April 1998. From June 1995 to March
1998, Mr. Rio was Senior Vice President and Senior Key Account Manager for
Putnam Mutual Funds. From May 1994 to June 1995, Mr. Rio was Director of
Business Development for First Data Corporation. From September 1983 to May
1994, Mr. Rio was Senior Vice President & Manager of Client Services and
Director of Internal Audit at The Boston Company. His date of birth is
January 2, 1955.

CHRISTINE ROTUNDO; Assistant Treasurer. Vice President, Morgan Guaranty
Trust Company of New York. Ms. Rotundo serves in the Funds Administration
group as a Manager of the Tax Group and is responsible for U.S. mutual fund
tax matters. Prior to September 1995, Ms. Rotundo served as a Senior Tax
Manager in the Investment Company Services Group of Deloitte & Touche LLP.
Her address is 60 Wall Street, New York, New York 10260. Her date of birth is
September 26, 1965.

INVESTMENT ADVISOR

The Funds have not retained the services of an investment adviser
because each Fund seeks to achieve its investment objective by investing all
of its investable assets in a corresponding Portfolio. Subject to the
supervision of the Portfolio's Trustees, the Advisor makes each Portfolio's
day-to-day investment decisions, arranges for the execution of portfolio
transactions and generally manages the Portfolio's investments. Prior to
October 28, 1998, Morgan was each Portfolio's investment advisor. JPMIM, a
wholly owned subsidiary of J.P. Morgan & Co. Incorporated ("J.P. Morgan"), is
a registered investment adviser under the Investment Advisers Act of 1940, as
amended, manages employee benefit funds of corporations, labor unions and
state and local governments and the accounts of other institutional
investors, including investment companies. Certain of the assets of employee
benefit accounts under its management are invested in commingled pension
trust funds for which Morgan serves as trustee.

J.P. Morgan, through the Advisor and other subsidiaries, acts as
investment advisor to individuals, governments, corporations, employee
benefit plans, mutual funds and other institutional investors with combined
assets under management of approximately $275 billion.

35
<PAGE>

J.P. Morgan has a long history of service as adviser, underwriter and
lender to an extensive roster of major companies and as a financial advisor
to national governments. The firm, through its predecessor firms, has been
in business for over a century and has been managing investments since 1913.

Morgan, also a wholly owned subsidiary of J.P. Morgan, is a bank holding
company organized under the laws of the State of Delaware. Morgan, whose
principal offices are at 60 Wall Street, New York, New York 10260, is a New
York trust company which conducts a general banking and trust business.
Morgan is subject to regulation by the New York State Banking Department and
is a member bank of the Federal Reserve System. Through offices in New York
City and abroad, Morgan offers a wide range of services, primarily to
governmental, institutional, corporate and high net worth individual
customers in the United States and throughout the world.

The basis of the Advisor's investment process is fundamental investment
research as the firm believes that fundamentals should determine an asset's
value over the long term. J.P. Morgan currently employs over 100 full time
research analysts, among the largest research staffs in the money management
industry, in its investment management divisions located in New York, London,
Tokyo, Frankfurt, and Singapore to cover companies, industries and countries
on site. In addition, the investment management divisions employ
approximately 300 capital market researchers, portfolio managers and traders.
The Advisor's fixed income investment process is based on analysis of real
rates, sector diversification, and quantitative and credit analysis.

The investment advisory services the Advisor provides to the Portfolios
are not exclusive under the terms of the Advisory Agreements. The Advisor is
free to and does render similar investment advisory services to others. The
Advisor serves as investment advisor to personal investors and other
investment companies and acts as fiduciary for trusts, estates and employee
benefit plans. Certain of the assets of trusts and estates under management
are invested in common trust funds for which the Advisor serves as trustee.
The accounts which are managed or advised by the Advisor have varying
investment objectives and the Advisor invests assets of such accounts in
investments substantially similar to, or the same as, those which are
expected to constitute the principal investments of the Portfolios. Such
accounts are supervised by officers and employees of the Advisor who may also
be acting in similar capacities for the Portfolios. See "Portfolio
Transactions."

Sector weightings are generally similar to a benchmark with the emphasis
on security selection as the method to achieve investment performance
superior to the benchmark. The benchmarks for the Portfolios in which the
Funds invest are currently: The Short Term Bond Portfolio--Merrill Lynch 1-3
Year Treasury Index; The U.S. Fixed Income Portfolio--Salomon Brothers Broad
Investment Grade Bond Index; The Global Strategic Income Portfolio--The
Lehman Brothers Aggregate Bond Index.

The Portfolios are managed by officers of the Advisor who, in acting for
their customers, including the Portfolios, do not discuss their investment
decisions with any personnel of J.P. Morgan or any personnel of other
divisions of the Advisor or with any of its affiliated persons, with the
exception of certain other investment management affiliates of J.P. Morgan.

As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Advisory
Agreements, the Portfolio corresponding to each Fund has agreed to pay the

36
<PAGE>

Advisor a fee, which is computed daily and may be paid monthly, equal to the
annual rates of each Portfolio's average daily net assets shown below.

SHORT TERM BOND: 0.25%

U.S. FIXED INCOME: 0.30%

GLOBAL STRATEGIC INCOME: 0.45%

The table below sets forth for each Fund listed the advisory fees paid
by its corresponding Portfolio to Morgan, each Portfolio's investment advisor
prior to October 28, 1998, for the fiscal period indicated.

THE SHORT TERM BOND PORTFOLIO (Short Term Bond Fund) -- For the fiscal year
ended October 31, 1995: $146,335. For the fiscal year ended October 31,
1996: $50,319. For the fiscal year ended October 31, 1997: $92,126. For the
six months ended April 30, 1998 (unaudited): $98,805.

THE U.S. FIXED INCOME PORTFOLIO (Bond Fund) -- For the fiscal year ended
October 31, 1995: $1,339,147. For the fiscal year ended October 31, 1996:
$2,402,660. For the fiscal year ended October 31, 1997: $2,908,384. For the
six months ended April 30, 1998 (unaudited): $1,657,846.

THE GLOBAL STRATEGIC INCOME PORTFOLIO (Global Strategic Income Fund) -- For
the period March 17, 1997 (commencement of operations) through October 31,
1997: $212,934. For the six months ended April 30, 1998 (unaudited):
$342,898.

The Investment Advisory Agreements provide that they will continue in
effect for a period of two years after execution only if specifically
approved thereafter annually in the same manner as the Distribution
Agreement. See "Distributor" below. Each of the Investment Advisory
Agreements will terminate automatically if assigned and is terminable at any
time without penalty by a vote of a majority of the Portfolio's Trustees, or
by a vote of the holders of a majority of the Portfolio's outstanding voting
securities, on 60 days' written notice to the Advisor and by the Advisor on
90 days' written notice to the Portfolio. See "Additional Information."

The Glass-Steagall Act and other applicable laws generally prohibit
banks and their subsidiaries, such as the Advisor, from engaging in the
business of underwriting or distributing securities, and the Board of
Governors of the Federal Reserve System has issued an interpretation to the
effect that under these laws a bank holding company registered under the
federal Bank Holding Company Act or certain subsidiaries thereof may not
sponsor, organize, or control a registered open-end investment company
continuously engaged in the issuance of its shares, such as the Trust. The
interpretation does not prohibit a holding company or a subsidiary thereof
from acting as investment advisor and custodian to such an investment
company. The Advisor believes that it may perform the services for the
Portfolios contemplated by the Advisory Agreements without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. State
laws on this issue may differ from the interpretation of relevant federal
law, and banks and financial institutions may be required to register as
dealers pursuant to state securities laws. However, it is possible that
future changes in either federal or state statutes and regulations concerning
the permissible activities of banks or trust companies, as well as further
judicial or administrative decisions and interpretations of present and future

37
<PAGE>

statutes and regulations, might prevent the Advisor from continuing to
perform such services for the Portfolios.

If the Advisor were prohibited from acting as investment advisor to any
Portfolio, it is expected that the Trustees of the Portfolio would recommend
to investors that they approve the Portfolio's entering into a new investment
advisory agreement with another qualified investment advisor selected by the
Trustees.

Under separate agreements, Morgan also provides certain financial, fund
accounting and administrative services to the Trust and the Portfolios and
shareholder services for the Trust. See "Services Agent" and "Shareholder
Servicing" below.

DISTRIBUTOR

FDI serves as the Trust's exclusive Distributor and holds itself
available to receive purchase orders for each of the Fund's shares. In that
capacity, FDI has been granted the right, as agent of the Trust, to solicit
and accept orders for the purchase of each of the Fund's shares in accordance
with the terms of the Distribution Agreement between the Trust and FDI.
Under the terms of the Distribution Agreement between FDI and the Trust, FDI
receives no compensation in its capacity as the Trust's distributor.

The Distribution Agreement shall continue in effect with respect to each
of the Funds for a period of two years after execution only if it is approved
at least annually thereafter (i) by a vote of the holders of a majority of
the Fund's outstanding shares or by its Trustees and (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Distribution Agreement, cast
in person at a meeting called for the purpose of voting on such approval (see
"Trustees and Officers"). The Distribution Agreement will terminate
automatically if assigned by either party thereto and is terminable at any
time without penalty by a vote of a majority of the Trustees of the Trust, a
vote of a majority of the Trustees who are not "interested persons" of the
Trust, or by a vote of the holders of a majority of the Fund's outstanding
shares as defined under "Additional Information," in any case without payment
of any penalty on 60 days' written notice to the other party. The principal
offices of FDI are located at 60 State Street, Suite 1300, Boston,
Massachusetts 02109.

CO-ADMINISTRATOR

Under Co-Administration Agreements with the Trust and the Portfolios
dated August 1, 1996, FDI also serves as the Trust's and the Portfolios'
Co-Administrator. The Co-Administration Agreements may be renewed or amended
by the respective Trustees without a shareholder vote. The Co-Administration
Agreements are terminable at any time without penalty by a vote of a majority
of the Trustees of the Trust or the Portfolios, as applicable, on not more
than 60 days' written notice nor less than 30 days' written notice to the
other party. The Co-Administrator may subcontract for the performance of its
obligations, provided, however, that unless the Trust or the Portfolios, as
applicable, expressly agrees in writing, the Co-Administrator shall be fully
responsible for the acts and omissions of any subcontractor as it would for
its own acts or omissions. See "Services Agent" below.

38
<PAGE>

prepares and files documents required for notification of state securities
administrators; (iv) reviews and files marketing and sales literature; (v)
files Portfolio regulatory documents and mails Portfolio communications to
Trustees and investors; and (vi) maintains related books and records.

For its services under the Co-Administration Agreements, each Fund and
Portfolio has agreed to pay FDI fees equal to its allocable share of an
annual complex-wide charge of $425,000 plus FDI's out-of-pocket expenses.
The amount allocable to each Fund or Portfolio is based on the ratio of its
net assets to the aggregate net assets of the Trust, J.P. Morgan Funds, the
Master Portfolios and other investment companies subject to similar
agreements with FDI.

The table below sets forth for each Fund listed and its corresponding
Portfolio the administrative fees paid to FDI for the fiscal periods
indicated.

SHORT TERM BOND FUND -- For the period August 1, 1996 through October 31,
1996: $137. For the fiscal year ended October 31, 1997: $764. For the six
months ended April 30, 1998 (unaudited): $706.

THE SHORT TERM BOND PORTFOLIO -- For the period August 1, 1996 through
October 31, 1996: $156. For the fiscal year ended October 31, 1997: $886.
For the six months ended April 30, 1998 (unaudited): $814.

BOND FUND -- For the period August 1, 1996 through October 31, 1996: $7,415.
For the fiscal year ended October 31, 1997: $25,518. For the six months
ended April 30, 1998 (unaudited): $10,941.

THE U.S. FIXED INCOME PORTFOLIO -- For the period August 1, 1996 through
October 31, 1996: $6,419. For the fiscal year ended October 31, 1997:
$23,296. For the six months ended April 30, 1998 (unaudited): $11,478.

GLOBAL STRATEGIC INCOME FUND -- For the period March 17, 1997 (commencement
of operations) through October 31, 1997: $1,378. For the six months ended
April 30, 1998 (unaudited): $1,765.

THE GLOBAL STRATEGIC INCOME PORTFOLIO -- For the period March 17, 1997
(commencement of operations) through October 31, 1997: $889. For the six
months ended April 30, 1998 (unaudited): $1,147.

The table below sets forth for each Fund listed and its corresponding
Portfolio the administrative fees paid to Signature Broker-Dealer Services,
Inc. (which provided distribution and administrative services to the Trust
and placement agent and administrative services to the Portfolios prior to
August 1, 1996) for the fiscal periods indicated.

SHORT TERM BOND FUND -- For the fiscal year ended October 31, 1995: $13,185.
For the period November 1, 1995 through July 31, 1996: $1,332.

THE SHORT TERM BOND PORTFOLIO -- For the fiscal year ended October 31, 1995:
$4,485. For the period November 1, 1995 through July 31, 1996: $1,547.

BOND FUND -- For the fiscal year ended October 31, 1995: $85,904. For the
period November 1, 1995 through July 31, 1996: $67,809.

39
<PAGE>

THE U.S. FIXED INCOME PORTFOLIO -- For the fiscal year ended October 31,
1995: $27,436. For the period November 1, 1995 through July 31, 1996:
$65,610.

SERVICES AGENT

The Trust, on behalf of each Fund, and each Fund's corresponding
Portfolio have entered into Administrative Services Agreements (the "Services
Agreements") with Morgan pursuant to which Morgan is responsible for certain
administrative and related services provided to each Fund and its
corresponding Portfolio. The Services Agreements may be terminated at any
time, without penalty, by the Trustees or Morgan, in each case on not more
than 60 days' nor less than 30 days' written notice to the other party.

Under the Services Agreements, Morgan provides certain administrative
and related services to the Funds and the Portfolios, including services
related to tax compliance, preparation of financial statements, calculation
of performance data, oversight of service providers and certain regulatory
and Board of Trustee matters.

Under the Services Agreements, each of the Funds and its corresponding
Portfolio has agreed to pay Morgan fees equal to its allocable share of an
annual complex-wide charge. This charge is calculated daily based on the
aggregate net assets of the Master Portfolios and J.P. Morgan Series Trust in
accordance with the following annual schedule: 0.09% of the first $7 billion
of their aggregate average daily net assets and 0.04% of their aggregate
average daily net assets in excess of $7 billion, less the complex-wide fees
payable to FDI. The portion of this charge payable by each Fund and Portfolio
is determined by the proportionate share that their net assets bear to the
total net assets of the Trust, J.P. Morgan Funds, the Master Portfolios, the
other investors in the Master Portfolios for which Morgan provides similar
services and J.P. Morgan Series Trust.

Under prior administrative services agreements in effect from December
29, 1995 through July 31, 1996, with Morgan, each Fund and its corresponding
Portfolio paid Morgan a fee equal to its proportionate share of an annual
complex-wide charge. This charge was calculated daily based on the aggregate
net assets of the Master Portfolios in accordance with the following
schedule: 0.06% of the first $7 billion of the Master Portfolios' aggregate
average daily net assets, and 0.03% of the Master Portfolios' average daily
net assets in excess of $7 billion.

Prior to December 29, 1995, the Trust and each Portfolio had entered
into Financial and Fund Accounting Services Agreements with Morgan, the
provisions of which included certain of the activities described above and,
prior to September 1, 1995, also included reimbursement of usual and
customary expenses.

The table below sets forth for each Fund listed and its corresponding
Portfolio the fees paid to Morgan, net of fee waivers and reimbursements, as
Services Agent. See the Prospectus and "Expenses" below for applicable
expense limitations.

SHORT TERM BOND FUND -- For the fiscal year ended October 31, 1995:
$(91,382)*. For the fiscal year ended October 31, 1996: $(83,872).* For the
fiscal year ended October 31, 1997: $(91,821). For the six months ended
April 30, 1998 (unaudited): $(76,202)*.

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<PAGE>

THE SHORT TERM BOND PORTFOLIO -- For the fiscal year ended October 31, 1995:
$(21,070)*. For the fiscal year ended October 31, 1996: $(42,274).* For the
fiscal year ended October 31, 1997: $(99,895). For the six months ended
April 30, 1998 (unaudited): $(46,416)*.

BOND FUND -- For the fiscal year ended October 31, 1995: $(146,399).* For
the fiscal year ended October 31, 1996: $(18,383).* For the fiscal year
ended October 31, 1997: $234,599. For the six months ended April 30, 1998
(unaudited): $132,771.

- --------------------
(*) Indicates a reimbursement by Morgan for expenses in excess of its fees
under the Services Agreements. No fees were paid for the fiscal period.

THE U.S. FIXED INCOME PORTFOLIO --For the fiscal year ended October 31, 1995:
$167,081. For the fiscal year ended October 31, 1996: $191,348. For the
fiscal year ended October 31, 1997: $300,675. For the six months ended April
30, 1998 (unaudited): $165,103.

GLOBAL STRATEGIC INCOME FUND -- For the period March 17, 1997 (commencement
of operations) through October 31, 1997: $(165,680)*. For the six months
ended April 30, 1998 (unaudited): $(101,077)*.

THE GLOBAL STRATEGIC INCOME PORTFOLIO -- For the period March 17, 1997
(commencement of operations) through October 31, 1997: $(54,641)*. For the
six months ended April 30, 1998 (unaudited): $(19,371)*.

- --------------------
(*) Indicates a reimbursement by Morgan for expenses in excess of its fees
under the Services Agreements. No fees were paid for the fiscal period.

CUSTODIAN AND TRANSFER AGENT

State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02110, serves as the Trust's and each of the
Portfolio's custodian and fund accounting agent and each Fund's transfer and
dividend disbursing agent. Pursuant to the Custodian Contracts, State Street
is responsible for maintaining the books of account and records of portfolio
transactions and holding portfolio securities and cash. In the case of
foreign assets held outside the United States, the Custodian employs various
subcustodians who were approved by the Trustees of the Portfolios in
accordance with the regulations of the SEC. The custodian maintains portfolio
transaction records. As transfer agent and dividend disbursing agent, State
Street is responsible for maintaining account records detailing the ownership
of Fund shares and for crediting income, capital gains and other changes in
share ownership to shareholder accounts.

SHAREHOLDER SERVICING

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<PAGE>

Fund shares may be effected, and certain other matters pertaining to a Fund;
assisting customers in designating and changing dividend options, account
designations and addresses; providing necessary personnel and facilities to
coordinate the establishment and maintenance of shareholder accounts and
records with the Funds' transfer agent; transmitting purchase and redemption
orders to the Funds' transfer agent and arranging for the wiring or other
transfer of funds to and from customer accounts in connection with orders to
purchase or redeem Fund shares; verifying purchase and redemption orders,
transfers among and changes in accounts; informing the Distributor of the
gross amount of purchase orders for Fund shares; and providing other related
services.

Effective August 1, 1998, under the Shareholder Servicing Agreement,
each Fund has agreed to pay Morgan for these services a fee at the annual
rate of 0.10% (expressed as a percentage of the average daily net asset value
of Fund shares owned by or for shareholders).

The table below sets forth for each Fund listed the shareholder
servicing fees paid by each Fund to Morgan, net of fee waivers and
reimbursements, for the fiscal periods indicated. See the Prospectus and
"Expenses" below for applicable expense limitations.

SHORT TERM BOND FUND -- For the fiscal year ended October 31, 1995: $24,729.
For the fiscal year ended October 31, 1996: $7,885. For the fiscal year
ended October 31, 1997: $18,131. For the six months ended April 30, 1998
(unaudited): $21,922.

BOND FUND -- For the fiscal year ended October 31, 1995: $161,357. For the
fiscal year ended October 31, 1996: $472,758. For the fiscal year ended
October 31, 1997: $608,161. For the six months ended April 30, 1998
(unaudited): $333,201.

GLOBAL STRATEGIC INCOME FUND -- For the period March 17, 1997 (commencement
of operations) through October 31, 1997: $47,162. For the six months ended
April 30, 1998 (unaudited): $72,890.

As discussed under "Investment Advisor," the Glass-Steagall Act and
other applicable laws and regulations limit the activities of bank holding
companies and certain of their subsidiaries in connection with registered
open-end investment companies. The activities of Morgan in acting as
shareholder servicing agent for Fund shareholders under the Shareholder
Servicing Agreement and providing administrative services to the Funds and
the Portfolios under the Services Agreements and the activities of JPMIM in
acting as Advisor to the Portfolios under the Investment Advisory Agreements,
may raise issues under these laws. However, JPMIM and Morgan believe that
they may properly perform these services and the other activities without
violation of the Glass-Steagall Act or other applicable banking laws or
regulations.

If Morgan were prohibited from providing any of the services under the
Shareholder Servicing Agreement and the Services Agreements, the Trustees
would seek an alternative provider of such services. In such event, changes
in the operation of the Funds or the Portfolios might occur and a shareholder
might no longer be able to avail himself or herself of any services then
being provided to shareholders by Morgan.

Each Fund may be sold to or through financial intermediaries who are
customers of J.P. Morgan ("financial professionals"), including financial

42
<PAGE>

institutions and broker-dealers, that may be paid fees by J.P. Morgan or its
affiliates for services provided to their clients that invest in the Fund.
See "Financial Professionals" below. Organizations that provide record
keeping or other services to certain employee benefit or retirement plans
that include the Fund as an investment alternative may also be paid a fee.

FINANCIAL PROFESSIONALS

The services provided by financial professionals may include
establishing and maintaining shareholder accounts, processing purchase and
redemption transactions, arranging for bank wires, performing shareholder
subaccounting, answering client inquiries regarding the Trust, assisting
clients in changing dividend options, account designations and addresses,
providing periodic statements showing the client's account balance and
integrating these statements with those of other transactions and balances in
the client's other accounts serviced by the financial professional,
transmitting proxy statements, periodic reports, updated prospectuses and
other communications to shareholders and, with respect to meetings of
shareholders, collecting, tabulating and forwarding executed proxies and
obtaining such other information and performing such other services as Morgan
or the financial professional's clients may reasonably request and agree upon
with the financial professional.

Although there is no sales charge levied directly by the Fund, financial
professionals may establish their own terms and conditions for providing
their services and may charge investors a transaction-based or other fee for
their services. Such charges may vary among financial professionals but in
all cases will be retained by the financial professional and not be remitted
to the Fund or J.P. Morgan.

Each Fund has authorized one or more brokers to accept purchase and
redemption orders on its behalf. Such brokers are authorized to designate
other intermediaries to accept purchase and redemption orders on the Fund's
behalf. A Fund will be deemed to have received a purchase or redemption
order when an authorized broker or, if applicable, a broker's authorized
designee, accepts the order. These orders will be priced at the Fund's net
asset value next calculated after they are so accepted.

INDEPENDENT ACCOUNTANTS

The independent accountants of the Trust and the Portfolios are
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036. PricewaterhouseCoopers LLP conducts an annual audit of the financial
statements of each of the Funds and the Portfolios, assists in the
preparation and/or review of each of the Fund's and the Portfolio's federal
and state income tax returns and consults with the Funds and the Portfolios
as to matters of accounting and federal and state income taxation.

EXPENSES

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<PAGE>

applicable to the Funds or the Portfolios. For the Funds, such expenses also
include transfer, registrar and dividend disbursing costs, the expenses of
printing and mailing reports, notices and proxy statements to Fund
shareholders, and filing fees under state securities laws. For the
Portfolios, such expenses also include applicable registration fees under
foreign securities laws, custodian fees and brokerage expenses.

Morgan has agreed that it will reimburse the Funds noted below to the
extent necessary to maintain the Fund's total operating expenses (which
include expenses of the Fund and the Portfolio) at the following annual rates
of the Fund's average daily net assets.

Bond: 0.50%
Short Term Bond Fund (thru 2/28/99): 0.25%
Short Term Bond Fund (after 2/28/99): 0.35%
Global Strategic Income Fund: 0.65%
</TABLE>

This limit does not cover extraordinary expenses during the period. There is
no assurance that Morgan will continue this waiver.

PURCHASE OF SHARES

Investors may open Fund accounts and purchase shares as described in the
Prospectus. References in the Prospectus and this Statement of Additional
Information to customers of Morgan or a Financial Professional include
customers of their affiliates and references to transactions by customers
with Morgan or a Financial Professional include transactions with their
affiliates. Only Fund investors who are using the services of a financial
institution acting as shareholder servicing agent pursuant to an agreement
with the Trust on behalf of a Fund may make transactions in shares of a Fund.

Each Fund may, at its own option, accept securities in payment for
shares. The securities delivered in such a transaction are valued by the
method described in "Net Asset Value" as of the day the Fund receives the
securities. This is a taxable transaction to the shareholder. Securities
may be accepted in payment for shares only if they are, in the judgment of
the Advisor, appropriate investments for the Fund's corresponding Portfolio.
In addition, securities accepted in payment for shares must: (i) meet the
investment objective and policies of the acquiring Fund's corresponding
Portfolio; (ii) be acquired by the applicable Fund for investment and not for
resale (other than for resale to the Fund's corresponding Portfolio); and
(iii) be liquid securities which are not restricted as to transfer either by
law or liquidity of market. Each Fund reserves the right to accept or reject
at its own option any and all securities offered in payment for its shares.

Prospective investors may purchase shares with the assistance of a
Financial Professional, and the Financial Professional may charge the
investor a fee for this service and other services it provides to its
customers.

REDEMPTION OF SHARES

Investors may redeem shares as described in the Prospectus.

If the Trust on behalf of a Fund and its corresponding Portfolio
determine that it would be detrimental to the best interest of the remaining
shareholders of a Fund to make payment wholly or partly in cash, payment of
the redemption price may be made in whole or in part by a distribution in
kind of securities from the Fund, in lieu of cash, in conformity with the

44
<PAGE>

applicable rule of the SEC. If shares are redeemed in kind, the redeeming
shareholder might incur transaction costs in converting the assets into cash.
The method of valuing portfolio securities is described under "Net Asset
Value," and such valuation will be made as of the same time the redemption
price is determined. The Trust, on behalf of all of the Funds and their
corresponding Portfolios (except the Global Strategic Income Portfolio), have
elected to be governed by Rule 18f-1 under the 1940 Act pursuant to which the
Funds and the corresponding Portfolios are obligated to redeem shares solely
in cash up to the lesser of $250,000 or one percent of the net asset value of
each Fund during any 90 day period for any one shareholder. The Trust will
redeem Fund shares in kind only if it has received a redemption in kind from
the corresponding Portfolio and therefore shareholders of each Fund that
receive redemptions in kind will receive securities of the Portfolio. The
Portfolios have advised the Trust that the Portfolios will not redeem in kind
except in circumstances in which a Fund is permitted to redeem in kind. The
Trust is in the process of seeking exemptive relief from the SEC with respect
to redemptions in kind by a Fund. If the requested relief is granted, each
Fund would then be permitted to pay redemptions to greater than 5%
shareholders in securities, rather than in cash, to the extent permitted by
the SEC and applicable law. The method of valuing portfolio securities is
described under "Net Asset Value," and such valuation will be made as of the
same time the redemption price is determined.

FURTHER REDEMPTION INFORMATION. Investors should be aware that
redemptions from each Fund may not be processed if a redemption request is
not submitted in proper form. To be in proper form, each Fund must have
received the shareholder's taxpayer identification number and address. In
addition, if a shareholder sends a check for the purchase of fund shares and
shares are purchased before the check has cleared, the transmittal of
redemption proceeds from the shares will occur upon clearance of the check
which may take up to 15 days. The Trust, on behalf of the Fund, and the
Portfolio, reserves the right to suspend the right of redemption and to
postpone the date of payment upon redemption as follows: (i) for up to seven
days, (ii) during periods when the New York Stock Exchange is closed for
other than weekends and holidays or when trading on such Exchange is
restricted as determined by the SEC by rule or regulation, (iii) during
periods in which an emergency, as determined by the SEC, exists that causes
disposal by the Portfolio of, or evaluation of the net asset value of, its
portfolio securities to be unreasonable or impracticable, or (iv) for such
other periods as the SEC may permit. For information regarding redemption
orders placed through a financial professional, please see "Financial
Professionals" above.

EXCHANGE OF SHARES

An investor may exchange shares from the Fund into any other J.P. Morgan
Institutional Fund, J.P. Morgan Fund or J.P. Morgan Series Trust fund without
charge. An exchange may be made so long as after the exchange the investor
has shares, in each fund in which he or she remains an investor, with a value
of at least that fund's minimum investment amount. Shareholders should read
the prospectus of the fund into which they are exchanging and may only
exchange between fund accounts that are registered in the same name, address
and taxpayer identification number. Shares are exchanged on the basis of
relative net asset value per share. Exchanges are in effect redemptions from
one fund and purchases of another fund and the usual purchase and redemption
procedures and requirements are applicable to exchanges. Shareholders
subject to federal income tax who exchange shares in one fund for shares in
another fund may recognize capital gain or loss for federal income tax
purposes. Shares of the fund to be acquired are purchased for settlement
when the

45
<PAGE>

proceeds from redemption become available. In the case of investors in
certain states, state securities laws may restrict the availability of the
exchange privilege. The Fund reserves the right to discontinue, alter or
limit its exchange privilege at any time.

DIVIDENDS AND DISTRIBUTIONS

Each Fund declares and pays dividends and distributions as described
under "Dividends and Distributions" in the Prospectus.

Dividends and capital gains distributions paid by a Fund are
automatically reinvested in additional shares of the Fund unless the
shareholder has elected to have them paid in cash. Dividends and
distributions to be paid in cash are credited to the shareholder's account at
Morgan or at his financial professional or, in the case of certain Morgan
customers, are mailed by check in accordance with the customer's
instructions. Each Fund reserves the right to discontinue, alter or limit the
automatic reinvestment privilege at any time.

If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend
and other distributions reinvested in additional shares. No interest will
accrue on amounts represented by uncashed distribution or redemption checks.

NET ASSET VALUE

Each of the Funds computes its net asset value separately for each class
of shares outstanding once daily as of the close of trading on the New York
Stock Exchange (normally 4:00 p.m. eastern time) on each business day as
described in the prospectus. The net asset value will not be computed on the
day the following legal holidays are observed: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day. On days when U.S. trading
markets close early in observance of these holidays, the Fund will close for
purchases and redemptions at the same time. The Fund and the Portfolio may
also close for purchases and redemptions at such other times as may be
determined by the Board of Trustees to the extent permitted by applicable
law. The days on which net asset value is determined are the Funds' business
days.

The net asset value of the Fund is equal to the value of the Fund's
investment in its corresponding Portfolio (which is equal to the Fund's pro
rata share of the total investment of the Fund and of any other investors in
the Portfolio less the Fund's pro rata share of the Portfolio's liabilities)
less the Fund's liabilities. The following is a discussion of the procedures
used by the Portfolio corresponding to the Fund in valuing its assets.

Portfolio securities are valued at the last sale price on the
securities exchange or national securities market on which such securities
are primarily traded. Unlisted securities are valued at the last average of
the quoted bid and asked prices in the OTC market. The value of each
security for which readily available market quotations exist is based on a
decision as to the broadest and most representative market for such security.
For purposes of calculating net asset value all assets and liabilities
initially expressed in foreign currencies will be converted into U.S. dollars
at the prevailing average currency exchange rate on the valuation date.

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Securities or other assets for which market quotations are not readily
available (including certain restricted and illiquid securities) are valued
at fair value in accordance with procedures established by and under the
general supervision and responsibility of the Trustees. Such procedures
include the use of independent pricing services which use prices based upon
yields or prices of securities of comparable quality, coupon, maturity and
type; indications as to values from dealers; and general market conditions.
Short-term investments which mature in 60 days or less are valued at
amortized cost if their original maturity was 60 days or less, or by
amortizing their value on the 61st day prior to maturity, if their original
maturity when acquired by the Portfolio was more than 60 days, unless this is
determined not to represent fair value by the Trustees.

Trading in securities in most foreign markets is normally completed
before the close of trading in U.S. markets and may also take place on days
on which the U.S. markets are closed. If events materially affecting the
value of securities occur between the time when the market in which they are
traded closes and the time when the Portfolio's net asset value is
calculated, such securities will be valued at fair value in accordance with
procedures established by and under the general supervision of the Trustees.

PERFORMANCE DATA

From time to time, the Funds may quote performance in terms of yield,
actual distributions, total return or capital appreciation in reports, sales
literature and advertisements published by the Trust. Current performance
information for the Funds may be obtained by calling the number provided on
the cover page of this Statement of Additional Information. See also the
Prospectus.

Comparative performance information may be used from time to time in
advertising the Funds' shares, including appropriate market indices including
the benchmarks indicated under "Investment Advisor" above or data from Lipper
Analytical Services, Inc., Micropal, Inc., Ibbotson Associates, Morningstar
Inc., the Dow Jones Industrial Average and other industry publications.

The Funds may advertise "total return" and non-standardized total return
data. The total return shows what an investment in a Fund would have earned
over a specified period of time (one, five or ten years or since commencement
of operations, if less) assuming that all distributions and dividends by the
Fund were reinvested on the reinvestment dates during the period and less all
recurring fees. This method of calculating total return is required by
regulations of the SEC. Total return data similarly calculated, unless
otherwise indicated, over other specified periods of time may also be used.
All performance figures are based on historical earnings and are not intended
to indicate future performance.

YIELD QUOTATIONS. As required by regulations of the SEC, the annualized
yield for the Funds is computed by dividing each Fund's net investment income
per share earned during a 30-day period by the net asset value on the last
day of the period. The average daily number of shares outstanding during the
period that are eligible to receive dividends is used in determining the net
investment income per share. Income is computed by totaling the interest
earned on all debt obligations during the period and subtracting from that
amount the total of all recurring expenses incurred during the period. The
30-day yield is then annualized on a bond-equivalent basis assuming
semi-annual reinvestment and compounding of net investment income.

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Below is set forth historical yield information for the Funds for the
periods indicated:

SHORT TERM BOND FUND (4/30/98): 30-day yield: 6.28%.

BOND FUND (4/30/98): 30-day yield: 6.39%.

GLOBAL STRATEGIC INCOME FUND (4/30/98): 30-day yield: 6.56%.

TOTAL RETURN QUOTATIONS. The Funds may advertise "total return" and
non-standardized total return data. The total return shows what an
investment in a Fund would have earned over a specified period of time (one,
five or ten years or since commencement of operations, if less) assuming that
all distributions and dividends by the Fund were reinvested on the
reinvestment dates during the period and less all recurring fees. This
method of calculating total return is required by regulations of the SEC.
Total return data similarly calculated, unless otherwise indicated, over
other specified periods of time may also be used. All performance figures
are based on historical earnings and are not intended to indicate future
performance.

As required by regulations of the SEC, the average annual total return
of the Funds for a period is computed by assuming a hypothetical initial
payment of $1,000. It is then assumed that all of the dividends and
distributions by the Fund over the period are reinvested. It is then assumed
that at the end of the period, the entire amount is redeemed. The average
annual total return is then calculated by determining the annual rate
required for the initial payment to grow to the amount which would have been
received upon redemption.

Aggregate total returns, reflecting the cumulative percentage change
over a measuring period, may also be calculated.

Historical performance information for periods prior to the
establishment of the Short Term Bond and Bond Funds will be that of their
corresponding predecessor J.P. Morgan Funds and will be presented in
accordance with applicable SEC staff interpretations.

Below is set forth historical return information for the Funds or their
predecessors for the periods indicated:

SHORT TERM BOND FUND (4/30/98): Average annual total return, 1 year: 7.03%;
average annual total return, 5 years: N/A; average annual total return,
commencement of operations (July 13, 1993) to period end: 5.42%; aggregate
total return, 1 year: 7.03%; aggregate total return, 5 years: N/A; aggregate
total return, commencement of operations (July 13, 1993) to period end:
28.83%.

BOND FUND (4/30/98): Average annual total return, 1 year: 10.51%; average
annual total return, 5 years: 6.85%; average annual total return, 10 years:
8.25%; average annual total return, commencement of operations (March 11,
1988) to period end: 8.10%; aggregate total return, 1 year: 10.51%; aggregate
total return, 5 years: 39.26%; aggregate total return, 10 years: 121.03%;
aggregate total return, commencement of operations (March 11, 1988) to period
end: 120.17%.

GLOBAL STRATEGIC INCOME FUND (4/30/98): Average annual total return, 1 year:
11.53; average annual total return, 5 years: N/A; average annual total return,

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commencement of operations (March 14, 1997) to period end: 10.75%; aggregate
total return, 1 year: 11.53; aggregate total return, 5 years: N/A; aggregate
total return, commencement of operations (March 14, 1997) to period end:
12.21%.

GENERAL. A Fund's performance will vary from time to time depending
upon market conditions, the composition of its corresponding Portfolio, and
its operating expenses. Consequently, any given performance quotation should
not be considered representative of a Fund's performance for any specified
period in the future. In addition, because performance will fluctuate, it
may not provide a basis for comparing an investment in a Fund with certain
bank deposits or other investments that pay a fixed yield or return for a
stated period of time.

From time to time, the Funds may, in addition to any other permissible
information, include the following types of information in advertisements,
supplemental sales literature and reports to shareholders: (1) discussions of
general economic or financial principles (such as the effects of compounding
and the benefits of dollar-cost averaging); (2) discussions of general
economic trends; (3) presentations of statistical data to supplement such
discussions; (4) descriptions of past or anticipated portfolio holdings for
one or more of the Funds; (5) descriptions of investment strategies for one
or more of the Funds; (6) descriptions or comparisons of various savings and
investment products (including, but not limited to, qualified retirement
plans and individual stocks and bonds), which may or may not include the
Funds; (7) comparisons of investment products (including the Funds) with
relevant markets or industry indices or other appropriate benchmarks; (8)
discussions of Fund rankings or ratings by recognized rating organizations;
and (9) discussions of various statistical methods quantifying the Fund's
volatility relative to its benchmark or to past performance, including risk
adjusted measures. The Funds may also include calculations, such as
hypothetical compounding examples, which describe hypothetical investment
results in such communications. Such performance examples will be based on
an express set of assumptions and are not indicative of the performance of
any of the Funds.

PORTFOLIO TRANSACTIONS

The Advisor places orders for all Portfolios for all purchases and sales
of portfolio securities, enters into repurchase agreements, and may enter
into reverse repurchase agreements and execute loans of portfolio securities
on behalf of all the Portfolios. See "Investment Objectives and Policies."

Fixed income and debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their
own accounts without a stated commission. The price of the security usually
includes profit to the dealers. In underwritten offerings, securities are
purchased at a fixed price which includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or
discount. On occasion, certain securities may be purchased directly from an
issuer, in which case no commissions or discounts are paid.

Portfolio transactions for the Portfolios corresponding to the Funds
will be undertaken principally to accomplish a Portfolio's objective in
relation to expected movements in the general level of interest rates. The
Portfolios corresponding to the Funds may engage in short-term trading
consistent with their objectives. See "Investment Objectives and Policies --
Portfolio Turnover."

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In connection with portfolio transactions for the Portfolios, the
Advisor intends to seek best execution on a competitive basis for both
purchases and sales of securities.

Subject to the overriding objective of obtaining the best execution of
orders, the Advisor may allocate a portion of a Portfolio's brokerage
transactions to affiliates of the Advisor. In order for affiliates of the
Advisor to effect any portfolio transactions for a Portfolio, the
commissions, fees or other remuneration received by such affiliates must be
reasonable and fair compared to the commissions, fees, or other remuneration
paid to other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time. Furthermore, the Trustees of each Portfolio,
including a majority of the Trustees who are not "interested persons," have
adopted procedures which are reasonably designed to provide that any
commissions, fees, or other remuneration paid to such affiliates are
consistent with the foregoing standard.

Portfolio securities will not be purchased from or through or sold to or
through the Co-Administrator, the Distributor or the Advisor or any other
"affiliated person" (as defined in the 1940 Act) of the Co-Administrator,
Distributor or Advisor when such entities are acting as principals, except to
the extent permitted by law. In addition, the Portfolios will not purchase
securities during the existence of any underwriting group of which the
Advisor or an affiliate of the Advisor is a member, except to the extent
permitted by law.

Investment decisions made by the Advisor are the product of many factors
in addition to basic suitability for the particular fund or other client in
question. Thus, a particular security may be bought or sold for certain
clients even though it could have been bought or sold for other clients at
the same time. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling the same security. The
Portfolio may only sell a security to other portfolios or accounts managed by
the Advisor or its affiliates in accordance with procedures adopted by the
Trustees.

It also sometimes happens that two or more clients simultaneously
purchase or sell the same security. On those occasions when the Advisor
deems the purchase or sale of a security to be in the best interests of the
Portfolio, as well as other clients including other funds, the Advisor to the
extent permitted by applicable laws and regulations, may, but is not
obligated to, aggregate the securities to be sold or purchased for the
Portfolio with those to be sold or purchased for other clients in order to
obtain best execution, including lower brokerage commissions if appropriate.
In such event, allocation of the securities so purchased or sold as well as
any expenses incurred in the transaction will be made by the Advisor in the
manner it considers to be most equitable and consistent with the Advisor's
fiduciary obligations to the Portfolio. In some instances, this procedure
might adversely affect the Portfolio.

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or different exchanges or are held or written in one or more accounts or
through one or more brokers. The number of options which a Portfolio may
write may be affected by options written by the Advisor for other investment
advisory clients. An exchange may order the liquidation of positions found to
be in excess of these limits, and it may impose certain other sanctions.

MASSACHUSETTS TRUST

The Trust is a "Massachusetts business trust" of which each Fund is a
separate and distinct series. A copy of the Declaration of Trust for the
Trust is on file in the office of the Secretary of The Commonwealth of
Massachusetts. Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, the Trust's Declaration of Trust provides
that the shareholders will not be subject to any personal liability for the
acts or obligations of any Fund and that every written agreement, obligation,
instrument or undertaking made on behalf of any Fund will contain a provision
to the effect that the shareholders are not personally liable thereunder.

Effective January 1, 1998, the name of the Trust was changed from "The
JPM Institutional Funds" to "J.P. Morgan Institutional Funds" and each Fund's
name changed accordingly.

The Trust's Declaration of Trust further provides that the name of the
Trust refers to the Trustees collectively as Trustees, not as individuals or
personally, that no Trustee, officer, employee or agent of a Fund is liable
to a Fund or to a shareholder, and that no Trustee, officer, employee, or
agent is liable to any third persons in connection with the affairs of a
Fund, except as such liability may arise from his or its own bad faith,
willful misfeasance, gross negligence or reckless disregard of his or its
duties to such third persons. It also provides that all third persons shall
look solely to Fund property for satisfaction of claims arising in connection
with the affairs of a Fund. With the exceptions stated, the Trust's
Declaration of Trust provides that a Trustee, officer, employee, or agent is
entitled to be indemnified against all liability in connection with the
affairs of a Fund.

The Trust shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of
the shareholders or by action of the Trustees upon notice to the shareholders.

DESCRIPTION OF SHARES

The Trust is an open-end management investment company organized as a
Massachusetts business trust in which each Fund represents a separate series
of shares of beneficial interest. See "Massachusetts Trust."

The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares ($0.001 par value) of one or more series
and classes within any series and to divide or combine the shares (of any
series, if applicable) without changing the proportionate beneficial interest
of each shareholder in a Fund (or in the assets of other series, if
applicable). To date shares of 23 series are currently available for sale to
the public. Each share represents an equal proportional interest in a Fund
with each other share. Upon liquidation of a Fund, holders are entitled to
share pro rata in the net assets of a Fund available for distribution to such
shareholders. See "Massachusetts Trust." Shares of a Fund have no preemptive
or conversion rights and are fully paid and nonassessable. The rights of

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redemption and exchange are described in the Prospectus and elsewhere in this
Statement of Additional Information.

The shareholders of the Trust are entitled to one vote for each dollar
of net asset value (or a proportionate fractional vote in respect of a
fractional dollar amount), on matters on which shares of the Fund shall be
entitled to vote. Subject to the 1940 Act, the Trustees have the power to
alter the number and the terms of office of the Trustees, to lengthen their
own terms, or to make their terms of unlimited duration subject to certain
removal procedures, and appoint their own successors, PROVIDED, HOWEVER, that
immediately after such appointment the requisite majority of the Trustees
have been elected by the shareholders of the Trust. The voting rights of
shareholders are not cumulative so that holders of more than 50% of the
shares voting can, if they choose, elect all Trustees being selected while
the shareholders of the remaining shares would be unable to elect any
Trustees. It is the intention of the Trust not to hold meetings of
shareholders annually. The Trustees may call meetings of shareholders for
action by shareholder vote as may be required by either the 1940 Act or the
Trust's Declaration of Trust.

The Trustees have no current intention to create any classes within the
initial series or any subsequent series. The Trustees may, however,
authorize the issuance of shares of additional series and the creation of
classes of shares within any series with such preferences, privileges,
limitations and voting and dividend rights as the Trustees may determine.
The proceeds from the issuance of any additional series would be invested in
separate, independently managed portfolios with distinct investment
objectives, policies and restrictions, and share purchase, redemption and net
asset valuation procedures. Any additional classes would be used to
distinguish among the rights of different categories of shareholders, as
might be required by future regulations or other unforeseen circumstances.
All consideration received by the Trust for shares of any additional series
or class, and all assets in which such consideration is invested, would
belong to that series or class, subject only to the rights of creditors of
the Trust and would be subject to the liabilities related thereto.
Shareholders of any additional series or class will approve the adoption of
any management contract or distribution plan relating to such series or class
and of any changes in the investment policies related thereto, to the extent
required by the 1940 Act.

For information relating to mandatory redemption of Fund shares or their
redemption at the option of the Trust under certain circumstances, see the
Prospectus.

As of September 30, 1998, the following owned of record or, to the
knowledge of management, beneficially owned more than 5% of the outstanding
shares of:

SHORT TERM BOND FUND -- Morgan as Agent for Charitable Remainder
Unitrust (21.83%); JPMIM as Agent for J. Davidson CRT (11.00%); JPMIM as
Agent for R. Davidson CRT (11.00%); Morgan as Agent for Jurodin (10.07%);
Morgan as Agent for RSL 4201 Trust (6.88%).

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BOND FUND -- Morgan as Agent for Ameritech Union (6.18%).

GLOBAL STRATEGIC INCOME FUND -- Morgan as Agent for RSL 4201 Trust
(20.51%); Morgan as Agent for R. Lauder (12.64%); Morgan as Agent for
Kenan Charitable Trust (12.12%); Morgan as Agent for The Dyson
Foundation (8.80%); Charles Schwab & Co. Inc. Special Custody Account
for Benefit of Customers (6.14%).

The address of each owner listed above is c/o Morgan, 522 Fifth Avenue,
New York, New York 10036. As of the date of this Statement of Additional
Information, the officers and Trustees as a group owned less than 1% of the
shares of each Fund.

SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE

Unlike other mutual funds which directly acquire and manage their own
portfolio of securities, each Fund is an open-end management investment
company which seeks to achieve its investment objective by investing all of
its investable assets in a corresponding Master Portfolio, a separate
registered investment company with the same investment objective and policies
as the Fund. Fund shareholders are entitled to one vote for each dollar of
net asset value (or a proportionate fractional vote in respect of a
fractional dollar amount), on matters on which shares of the Fund shall be
entitled to vote.

In addition to selling a beneficial interest to a Fund, a Portfolio may
sell beneficial interests to other mutual funds or institutional investors.
Such investors will invest in the Portfolio on the same terms and conditions
and will bear a proportionate share of the Portfolio's expenses. However,
the other investors investing in the Portfolio may sell shares of their own
fund using a different pricing structure than the Fund. Such different
pricing structures may result in differences in returns experienced by
investors in other funds that invest in the Portfolio. Such differences in
returns are not uncommon and are present in other mutual fund structures.
Information concerning other holders of interests in the Portfolio is
available from Morgan at (800) 766-7722.

The Trust may withdraw the investment of a Fund from a Portfolio at any
time if the Board of Trustees of the Trust determines that it is in the best
interests of the Fund to do so. Upon any such withdrawal, the Board of
Trustees would consider what action might be taken, including the investment
of all the assets of the Fund in another pooled investment entity having the
same investment objective and restrictions as the Fund or the retaining of an
investment adviser to manage the Fund's assets in accordance with the
investment policies with respect to the Portfolio described above and in each
Fund's prospectus.

Certain changes in a Portfolio's fundamental investment policies or
restrictions, or a failure by a Fund's shareholders to approve such change in
the Portfolio's investment restrictions, may require withdrawal of the Fund's
interest in the Portfolio. Any such withdrawal could result in a
distribution in kind of portfolio securities (as opposed to a cash
distribution) from the Portfolio which may or may not be readily marketable.
The distribution in kind may result in the Fund having a less diversified
portfolio of investments or adversely affect the Fund's liquidity, and the
Fund could incur brokerage, tax or other charges in converting the securities
to cash. Notwithstanding

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the above, there are other means for meeting shareholder redemption requests,
such as borrowing.

Smaller funds investing in a Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large
fund withdraws from the Portfolio, the remaining funds may subsequently
experience higher pro rata operating expenses, thereby producing lower
returns.

Additionally, because a Portfolio would become smaller, it may become
less diversified, resulting in potentially increased portfolio risk (however,
these possibilities also exist for traditionally structured funds which have
large or institutional investors who may withdraw from a fund). Also, funds
with a greater pro rata ownership in the Portfolio could have effective
voting control of the operations of the Portfolio. Whenever the Fund is
requested to vote on matters pertaining to the Portfolio (other than a vote
by the Fund to continue the operation of the Portfolio upon the withdrawal of
another investor in the Portfolio), the Trust will hold a meeting of
shareholders of the Fund and will cast all of its votes proportionately as
instructed by the Fund's shareholders. The Trust will vote the shares held
by Fund shareholders who do not give voting instructions in the same
proportion as the shares of Fund shareholders who do give voting
instructions. Shareholders of the Fund who do not vote will have no affect
on the outcome of such matters.

TAXES

Each Fund intends to qualify and remain qualified as a regulated
investment company under Subchapter M of the Code. As a regulated investment
company, a Fund must, among other things, (a) derive at least 90% of its
gross income from dividends, interest, payments with respect to loans of
stock and securities, gains from the sale or other disposition of stock,
securities or foreign currency and other income (including but not limited to
gains from options, futures, and forward contracts) derived with respect to
its business of investing in such stock, securities or foreign currency; and
(b) diversify its holdings so that, at the end of each fiscal quarter of its
taxable year, (i) at least 50% of the value of the Fund's total assets is
represented by cash, cash items, U.S. Government securities, investments in
other regulated investment companies, and other securities limited, in
respect of any one issuer, to an amount not greater than 5% of the Fund's
total assets, and 10% of the outstanding voting securities of such issuer,
and (ii) not more than 25% of the value of its total assets is invested in
the securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies).

As a regulated investment company, a Fund (as opposed to its
shareholders) will not be subject to federal income taxes on the net
investment income and capital gains that it distributes to its shareholders,
provided that at least 90% of its net investment income and realized net
short-term capital gains in excess of net long-term capital losses for the
taxable year is distributed in accordance with the Code's timing requirements.

Under the Code, a Fund will be subject to a 4% excise tax on a portion
of its undistributed taxable income and capital gains if it fails to meet
certain distribution requirements by the end of the calendar year. Each Fund
intends to make distributions in a timely manner and accordingly does not
expect to be subject to the excise tax.

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For federal income tax purposes, dividends that are declared by a Fund
in October, November or December as of a record date in such month and
actually paid in January of the following year will be treated as if they
were paid on December 31 of the year declared. Therefore, such dividends
generally will be taxable to a shareholder in the year declared rather than
the year paid.

Distributions of net investment income, certain foreign currency gains,
and realized net short-term capital gain in excess of net long-term capital
losses are generally taxable to shareholders of the Funds as ordinary income
whether such distributions are taken in cash or reinvested in additional
shares. Distributions to corporate shareholders of the Funds are not
eligible for the dividends received deduction. Each Fund generally pays a
monthly dividend. If dividend payments exceed income earned by the Fund, the
over distribution would be considered a return of capital rather than a
dividend payment. The Fund intends to pay dividends in such a manner so as
to minimize the possibility of a return of capital. Distributions of net
long-term capital gain (i.e., net long-term capital gains in excess of net
short-term capital losses) are taxable to shareholders of a Fund as long-term
capital gain, regardless of whether such distributions are taken in cash or
reinvested in additional shares and regardless of how long a shareholder has
held shares in the Fund. In general, long-term capital gain of an individual
shareholder will be subject to a reduced rate of tax. Investors should
consult their tax advisors concerning the treatment of capital gains and
losses.

Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held for more
than one year except in certain cases where, if applicable, a put is acquired
or a call option is written thereon or the straddle rules described below are
otherwise applicable. Other gains or losses on the sale of securities will be
short-term capital gains or losses. Gains and losses on the sale, lapse or
other termination of options on securities will be treated as gains and
losses from the sale of securities. If an option written by a Portfolio
lapses or is terminated through a closing transaction, such as a repurchase
by the Portfolio of the option from its holder, the Portfolio will realize a
short-term capital gain or loss, depending on whether the premium income is
greater or less than the amount paid by the Portfolio in the closing
transaction. If securities are purchased by a Portfolio pursuant to the
exercise of a put option written by it, the Portfolio will subtract the
premium received from its cost basis in the securities purchased.

Any distribution of net investment income or capital gains will have the
effect of reducing the net asset value of Fund shares held by a shareholder
by the same amount as the distribution. If the net asset value of the shares
is reduced below a shareholder's cost as a result of such a distribution, the
distribution, although constituting a return of capital to the shareholder,
will be taxable as described above. Investors should thus consider the
consequences of purchasing shares in the Fund shortly before the Fund
declares a sizable dividend distribution.

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extent of any exempt-interest dividends received by the shareholder with
respect to such shares. In addition, no loss will be allowed on the
redemption or exchange of shares of the Fund, if within a period beginning 30
days before the date of such redemption or exchange and ending 30 days after
such date, the shareholder acquires (such as through dividend reinvestment)
securities that are substantially identical to shares of the Fund.

Under the Code, gains or losses attributable to disposition of foreign
currency or to certain foreign currency contracts, or to fluctuations in
exchange rates between the time a Portfolio accrues income or receivables or
expenses or other liabilities denominated in a foreign currency and the time
a Portfolio actually collects such income or pays such liabilities, are
generally treated as ordinary income or ordinary loss. Similarly, gains or
losses on the disposition of debt securities held by a Portfolio, if any,
denominated in foreign currency, to the extent attributable to fluctuations
in exchange rates between the acquisition and disposition dates are also
treated as ordinary income or loss.

Forward currency contracts, options and futures contracts entered into
by a Portfolio may create "straddles" for U.S. federal income tax purposes
and this may affect the character and timing of gains or losses realized by
the Portfolio on forward currency contracts, options and futures contracts or
on the underlying securities.

Certain options, futures and foreign currency contracts held by a
Portfolio at the end of each taxable year will be required to be "marked to
market" for federal income tax purposes -- i.e., treated as having been sold
at market value. For options and futures contracts, 60% of any gain or loss
recognized on these deemed sales and on actual dispositions will be treated
as long-term capital gain or loss, and the remainder will be treated as
short-term capital gain or loss regardless of how long the Portfolio has held
such options or futures. However, gain or loss recognized on certain foreign
currency contracts will be treated as ordinary income or loss.

FOREIGN SHAREHOLDERS. Dividends of net investment income and
distributions of realized net short-term gain in excess of net long-term loss
to a shareholder who, as to the United States, is a nonresident alien
individual, fiduciary of a foreign trust or estate, foreign corporation or
foreign partnership (a "foreign shareholder") will be subject to U.S.
withholding tax at the rate of 30% (or lower treaty rate) unless the
dividends are effectively connected with a U.S. trade or business of the
shareholder, in which case the dividends will be subject to tax on a net
income basis at the graduated rates applicable to U.S. individuals or
domestic corporations. Distributions treated as long term capital gains to
foreign shareholders will not be subject to U.S. tax unless the distributions
are effectively connected with the shareholder's trade or business in the
United States or, in the case of a shareholder who is a nonresident alien
individual, the shareholder was present in the United States for more than
182 days during the taxable year and certain other conditions are met.

In the case of a foreign shareholder who is a nonresident alien
individual or foreign entity, a Fund may be required to withhold U.S. federal
income tax as "backup withholding" at the rate of 31% from distributions
treated as long-term capital gains and from the proceeds of redemptions,
exchanges or other dispositions of Fund shares unless IRS Form W-8 is
provided. Transfers by gift of shares of a Fund by a foreign shareholder who
is a nonresident alien individual will not be subject to U.S. federal gift
tax, but the value of shares of the Fund held by such a shareholder at his or

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her death will be includible in his or her gross estate for U.S. federal
estate tax purposes.

FOREIGN TAXES. It is expected that the Global Strategic Income Fund may
be subject to foreign withholding taxes or other foreign taxes with respect
to income (possibly including, in some cases, capital gains) received from
sources within foreign countries. So long as more than 50% in value of the
total assets of the Fund (including its share of the assets of the
corresponding Portfolio) at the close of any taxable year consists of stock
or securities of foreign corporations, the Fund may elect to treat any
foreign income taxes deemed paid by it as paid directly by its shareholders.
The Fund will make such an election only if it deems it to be in the best
interest of its shareholders. The Fund will notify its shareholders in
writing each year if it makes the election and of the amount of foreign
income taxes, if any, to be treated as paid by the shareholders and the
amount of foreign taxes, if any, for which shareholders of the Fund will not
be eligible to claim a foreign tax credit because the holding period
requirements (described below) have not been satisfied. If the Fund makes
the election, each shareholder will be required to include in his income (in
addition to the dividends and distributions he receives) his proportionate
share of the amount of foreign income taxes deemed paid by the Fund and will
be entitled to claim either a credit (subject to the limitations discussed
below) or, if he itemizes deductions, a deduction for his share of the
foreign income taxes in computing federal income tax liability (no deduction
will be permitted in computing an individual's alternative minimum tax
liability). Effective for dividends paid after September 5, 1997,
shareholders of the Fund will not be eligible to claim a foreign tax credit
with respect to taxes paid by the Fund (notwithstanding that the Fund elects
to treat the foreign taxes deemed paid by it as paid directly by its
shareholders) unless certain holding period requirements are met. A
shareholder who is a nonresident alien individual or a foreign corporation
may be subject to U.S. withholding tax on the income resulting from the
election described in this paragraph, but may not be able to claim a credit
or deduction against such U.S. tax for the foreign taxes treated as having
been paid by such shareholder. A tax-exempt shareholder will not ordinarily
benefit from this election. Shareholders who choose to utilize a credit
(rather than a deduction) for foreign taxes will be subject to the limitation
that the credit may not exceed the shareholder's U.S. tax (determined without
regard to the availability of the credit) attributable to his or her total
foreign source taxable income. For this purpose, the portion of dividends
and distributions paid by the Global Strategic Income Fund from its foreign
source net investment income will be treated as foreign source income. The
Fund's gains and losses from the sale of securities will generally be treated
as derived from U.S. sources, however, and certain foreign currency gains
and losses likewise will be treated as derived from U.S. sources. The
limitation on the foreign tax credit is applied separately to foreign source
"passive income," such as the portion of dividends received from the Fund
which qualifies as foreign source income. In addition, the foreign tax
credit is allowed to offset only 90% of the alternative minimum tax imposed
on corporations and individuals. Because of these limitations, if the
election is made, shareholders may nevertheless be unable to claim a credit
for the full amount of their proportionate shares of the foreign income taxes
paid by the Global Strategic Income Fund. Effective for taxable years of a
shareholder beginning after December 31, 1997, individual shareholders of the
Fund with $300 or less of creditable foreign taxes ($600 in the case of an
individual shareholder filing jointly) may elect to be exempt from the
foreign tax credit limitation rules described above (other than the 90%
limitation applicable for purposes of the alternative minimum tax), provided
that all of such individual shareholder's foreign source income is "qualified
passive

57
<PAGE>

income" (which generally includes interest, dividends, rents, royalties and
certain other types of income) and further provided that all of such foreign
source income is shown on one or more payee statements furnished to the
shareholder. Shareholders making this election will not be permitted to carry
over any excess foreign taxes to or from a tax year to which such an election
applies.

STATE AND LOCAL TAXES. Each Fund may be subject to state or local taxes
in jurisdictions in which the Fund is deemed to be doing business. In
addition, the treatment of a Fund and its shareholders in those states which
have income tax laws might differ from treatment under the federal income tax
laws. Shareholders should consult their own tax advisors with respect to any
state or local taxes.

OTHER TAXATION. The Trust is organized as a Massachusetts business
trust and, under current law, neither the Trust nor any Fund is liable for
any income or franchise tax in The Commonwealth of Massachusetts, provided
that each Fund continues to qualify as a regulated investment company under
Subchapter M of the Code. The Portfolios are organized as New York trusts.
The Portfolios are not subject to any federal income taxation or income or
franchise tax in the State of New York or The Commonwealth of Massachusetts.
The investment by a Fund in its corresponding Portfolio does not cause the
Fund to be liable for any income or franchise tax in the State of New York.

ADDITIONAL INFORMATION

Telephone calls to the Funds, J.P. Morgan or a Financial Professional as
shareholder servicing agent may be tape recorded. With respect to the
securities offered hereby, this Statement of Additional Information and the
Prospectus do not contain all the information included in the Trust's
registration statement filed with the SEC under the 1933 Act and the 1940 Act
and the Portfolios' registration statements filed under the 1940 Act.
Pursuant to the rules and regulations of the SEC, certain portions have been
omitted. The registration statements including the exhibits filed therewith
may be examined at the office of the SEC in Washington, D.C.

Statements contained in this Statement of Additional Information and the
Prospectus concerning the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the applicable
Registration Statements. Each such statement is qualified in all respects by
such reference.

No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with
the offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of
the Trust, the Funds or the Distributor. The Prospectus and this Statement
of Additional Information do not constitute an offer by any Fund or by the
Distributor to sell or solicit any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful for the Fund
or the Distributor to make such offer in such jurisdictions.

58
<PAGE>

assumption that the first two digits are always 19. As the century is
implied in the date, on January 1, 2000, computers that are not year 2000
compliant will assume the year is 1900. Systems that calculate, compare, or
sort using the incorrect date will cause erroneous results, ranging from
system malfunctions to incorrect or incomplete transaction processing. If
not remedied, potential risks include business interruption or shutdown,
financial loss, reputation loss, and/or legal liability.

J.P. Morgan has undertaken a firmwide initiative to address the year
2000 issue and has developed a comprehensive plan to prepare, as appropriate,
its computer systems. Each business line has taken responsibility for
identifying and fixing the problem within its own area of operation and for
addressing all interdependencies. A multidisciplinary team of internal and
external experts supports the business teams by providing direction and
firmwide coordination. Working together, the business and multidisciplinary
teams have completed a thorough education and awareness initiative and a
global inventory and assessment of J.P. Morgan's technology and application
portfolio to understand the scope of the year 2000 impact at J.P. Morgan.
J.P. Morgan presently is renovating and testing these technologies and
applications in partnership with external consulting and software development
organizations, as well as with year 2000 tool providers. J.P. Morgan is on
target with its plan to substantially complete renovation, testing, and
validation of its key systems by year-end 1998 and to participate in
industry-wide testing (or streetwide testing) in 1999. J.P. Morgan is also
working with key external parties, including clients, counterparties,
vendors, exchanges, depositories, utilities, suppliers, agents and regulatory
agencies, to stem the potential risks the year 2000 problem poses to J.P.
Morgan and to the global financial community.

Costs associated with efforts to prepare J.P. Morgan's systems for the
year 2000 approximated $95 million in 1997. In 1998, J.P. Morgan will
continue its efforts to prepare its systems for the year 2000. The total
cost to become year-2000 compliant is estimated at $250 million, for internal
systems renovation and testing, testing equipment, and both internal and
external resources working on the project. Remaining costs will be incurred
primarily in 1998. The costs associated with J.P. Morgan becoming year-2000
compliant will be borne by J.P. Morgan and not the Fund nor the Portfolio.

THE EURO. Effective January 1, 1999 the euro, a single multinational
currency, will replace the national currencies of certain countries in the
Economic Monetary Union (EMU). Conversion rates among EMU countries will be
fixed on December 31, 1998, however, existing currencies will still be used
through July 1, 2002. During this transition period, transactions may be
settled in either euro or existing currencies, but financial markets and
payment systems are expected to use the euro exclusively. Beginning January
1, 1999, J.P. Morgan intends to conduct and settle all fund transactions,
where appropriate, in the euro.

J.P. Morgan has identified the following potential risks to the Funds,
after the conversion: The risk that valuation of assets are not properly
redenominated; currency risk resulting from increased volatility in exchange
rates between EMU countries and non-participating countries; the inability
any of the Funds, their service providers and the issuers of the Funds'
portfolio securities to make information technology updates timely; and the
potential unenforceability of contracts. There have been recent laws and
regulations designed to ensure the continuity of contracts, however there is
a risk that the valuation of contracts will be negatively impacted after the
Funds' conversion. J.P. Morgan is working to avoid these problems and to
obtain

59
<PAGE>

assurances from other service providers that they are taking similar steps.
However, it is not certain that these actions will be sufficient to prevent
problems associated with the conversion from adversely impacting fund
operations and shareholders.

The I.R.S has concluded that euro conversion will not cause a U.S.
taxpayer to realize gain or loss to the extent taxpayer's rights and
obligations are altered solely by reason of the conversion.

FINANCIAL STATEMENTS

The following financial statements and the reports thereon of
PricewaterhouseCoopers LLP of each Fund are incorporated herein by reference
to their respective annual report filings made with the SEC pursuant to
Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder. Any of the
following financial reports are available without charge upon request by
calling J.P. Morgan Funds Services at (800) 766-7722. Each Fund's financial
statements include the financial statements of the corresponding Portfolio.

- --------------------------------------------------------------------------------
Date of Annual Date of Semi-Annual
Report; Date Annual Report; Date Semi-Annual
Name of Fund Report Filed; and Report Filed; and
Accession Number Accession Number
- --------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------
J.P. Morgan Institutional 10/31/97; 4/30/98;
Short Term Bond Fund 01/08/98; 6/29/98;
0001047469-98-000421 0001047469-98-025737
- --------------------------------------------------------------------------------
J.P. Morgan Institutional 10/31/97; 4/30/98;
Bond Fund 01/08/98; 7/6/98;
0001047469-98-000474 0001047469-98-026394
- --------------------------------------------------------------------------------
J.P. Morgan Institutional 10/31/97: 4/30/98:
Global Strategic Income 01/08/98; 6/30/98;
Fund 0001047469-98-000414 0001047469-98-025978
</TABLE>

60
<PAGE>

APPENDIX A

DESCRIPTION OF SECURITY RATINGS

STANDARD & POOR'S

CORPORATE AND MUNICIPAL BONDS

AAA - Debt rated AAA have the highest ratings assigned by Standard & Poor's to
a debt obligation. Capacity to pay interest and repay principal is
extremely strong.

AA - Debt rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree.

A - Debt rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.

BBB - Debt rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher rated categories.

BB - Debt rated BB are regarded as having less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest
and principal payments.

B - An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.

CCC - An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.

CC - An obligation rated CC is currently highly vulnerable to nonpayment.

C - The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this
obligation are being continued.

A-1
<PAGE>

COMMERCIAL PAPER, INCLUDING TAX EXEMPT

A - Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined
with the designations 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 very strong.

SHORT-TERM TAX-EXEMPT NOTES

SP-1 - The short-term tax-exempt note rating of SP-1 is the highest rating
assigned by Standard & Poor's and has a very strong or strong capacity
to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a "plus" (+) designation.

SP-2 - The short-term tax-exempt note rating of SP-2 has a satisfactory
capacity to pay principal and interest.

MOODY'S

CORPORATE AND MUNICIPAL BONDS

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.

A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements
maybe present which suggest a susceptibility to impairment sometime in
the future.

Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.

A-2
<PAGE>

Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.

B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.

Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.

Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.

C - Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.

COMMERCIAL PAPER, INCLUDING TAX EXEMPT

- Leading market positions in well established industries.

- High rates of return on funds employed.

- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.

- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.

- Well established access to a range of financial markets and assured
sources of alternate liquidity.

SHORT-TERM TAX EXEMPT NOTES

MIG-1 - The short-term tax-exempt note rating MIG-1 is the highest rating
assigned by Moody's for notes judged to be the best quality. Notes
with this rating enjoy 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 - MIG-2 rated notes are of high quality but with margins of protection
not as large as MIG-1.

A-3

<PAGE>

J.P. MORGAN INSTITUTIONAL FUNDS

J.P. MORGAN INSTITUTIONAL NEW YORK TAX EXEMPT BOND FUND

STATEMENT OF ADDITIONAL INFORMATION

NOVEMBER 2, 1998

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED NOVEMBER 2, 1998 FOR THE FUND LISTED ABOVE, AS SUPPLEMENTED FROM TIME TO
TIME. ADDITIONALLY, THIS STATEMENT OF ADDITIONAL INFORMATION INCORPORATES BY
REFERENCE THE FINANCIAL STATEMENTS INCLUDED IN THE SHAREHOLDER REPORTS RELATING
TO THE FUNDS LISTED ABOVE. THE PROSPECTUS AND THESE FINANCIAL STATEMENTS,
INCLUDING THE AUDITOR'S REPORT THEREON, ARE AVAILABLE, WITHOUT CHARGE UPON
REQUEST FROM FUNDS DISTRIBUTOR, INC., ATTENTION: J.P. MORGAN INSTITUTIONAL FUNDS
(800)221-7930.

<PAGE>

Table of Contents

Page
----

General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Investment Objective and Policies. . . . . . . . . . . . . . . . . . . . . . 1
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Trustees and Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Investment Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Co-Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Services Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Custodian and Transfer Agent . . . . . . . . . . . . . . . . . . . . . . . . 32
Shareholder Servicing. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Financial Professionals. . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Exchange of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Dividends and Distributions. . . . . . . . . . . . . . . . . . . . . . . . . 36
Net Asset Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Massachusetts Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Description of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Special Information Concerning Investment Structure. . . . . . . . . . . . . 43
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Appendix A-Description of Security Ratings . . . . . . . . . . . . . . . . .A-1
Appendix B-Additional Information Concerning New York Municipal Securities .B-1

<PAGE>

GENERAL

This Statement of Additional Information relates only to the J.P. Morgan
Institutional New York Tax Exempt Bond Fund (the "Fund"). The Fund is a series
of shares of beneficial interest of the J.P. Morgan Institutional Funds, an
open-end management investment company formed as a Massachusetts business trust
(the "Trust"). The Fund is a non-diversified, open-end management investment
company. In addition to the Fund, the Trust consists of other series
representing separate investment funds (each a "J.P. Morgan Institutional
Fund"). The other J.P. Morgan Institutional Funds are covered by separate
Statements of Additional Information.

This Statement of Additional Information describes the financial history,
investment objective and policies, management and operation of the Fund and
provides additional information with respect to the Fund and should be read in
conjunction with the Fund's current Prospectus (the "Prospectus"). Capitalized
terms not otherwise defined herein have the meanings accorded to them in the
Prospectus. The Fund's executive offices are located at 60 State Street, Suite
1300, Boston, Massachusetts 02109.

Unlike other mutual funds which directly acquire and manage their own
portfolio of securities, the Fund seeks to achieve its investment objective by
investing all of its investable assets in The New York Tax Exempt Bond Portfolio
(the "Portfolio"), a corresponding non-diversified open-end management
investment company having the same investment objective as the Fund. The Fund
invests in the Portfolio through a two-tier master-feeder investment fund
structure. See "Special Information Concerning Investment Structure."
Accordingly, references below to the Fund also include the Portfolio; similarly,
references to the Portfolio also include the Fund unless the context requires
otherwise.

The Portfolio is advised by J.P. Morgan Investment Management Inc. ("JPMIM"
or the "Advisor").

Investments in the Fund are not deposits or obligations of, or guaranteed
or endorsed by, Morgan Guaranty Trust Company of New York ("Morgan"), an
affiliate of the Advisor, or any other bank. Shares of the Fund are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other governmental agency. An investment in the Fund is
subject to risk that may cause the value of the investment to fluctuate, and
when the investment is redeemed, the value may be higher or lower than the
amount originally invested by the investor.

INVESTMENT OBJECTIVE AND POLICIES

The following discussion supplements the information regarding the
investment objective of the Fund and the policies to be employed to achieve this
objective.

The investment objective of the Fund is to provide a high level of tax
exempt income for New York residents consistent with moderate risk of capital.
The investment objective of the Fund and the investment objective of the
Portfolio are identical. The Fund invests primarily in New York Municipal
Securities (defined below), the income from which is exempt from federal and New
York personal income taxes. It may also invest in other municipal securities
that generate income exempt from federal income tax but not from New York income
tax. In certain circumstances, the Fund may invest in taxable debt obligations
to the extent consistent with its objective.

<PAGE>

The Fund is designed for investors subject to federal and New York State
and New York City personal income taxes who seek a high level of income exempt
from Federal, New York State and local income taxes and who are willing to
receive some taxable income and capital gains to achieve that return.
Additionally, the Fund is designed to be an economical and convenient means of
investing in a portfolio consisting primarily of debt obligations that are
exempt from federal and New York State and New York City personal income taxes.
The Fund is not suitable for tax-deferred retirement or pension plans, including
Individual Retirement Accounts (IRAs), 401(k) plans and 403(b) plans. The Fund
is not a complete investment program and there is no assurance that the Fund
will achieve its investment objective.

The Advisor actively manages the Fund's duration, the allocation of
securities across market sectors and the selection of securities to maximize
after tax income. The Advisor adjusts the Fund's duration based upon fundamental
economic and capital markets research and the Advisor's interest rate outlook.
For example, if interest rates are expected to rise, the duration may be
shortened to lessen the Fund's exposure to the expected decrease in bond prices.
If interest rates are expected to remain stable, the Advisor may lengthen the
duration in order to enhance the Fund's yield.

Under normal market conditions, the Fund will have a duration of three to
seven years, although the maturities of individual portfolio securities may vary
widely. Duration measures the price sensitivity of the Fund's portfolio,
including expected cash flow under a wide range of interest rate scenarios. A
longer duration generally results in greater price volatility. As a result,
when interest rates increase, the prices of longer duration securities increase
more than the prices of comparable quality securities with a shorter duration.

The Advisor also attempts to enhance after tax income by allocating the
Fund's assets among market sectors. Specific securities which the Advisor
believes are undervalued are selected for purchase within sectors using advanced
quantitative tools, analysis of credit risk, the expertise of a dedicated
trading desk and the judgment of fixed income portfolio managers and analysts.

Although the Fund generally purchases securities in order to generate tax
exempt income, it also engages in short-term trading to the extent consistent
with its objective. The annual portfolio turnover rate of the Fund is generally
not expected to exceed 75%. Portfolio transactions may generate taxable capital
gains and result in increased transaction costs.

Under normal circumstances, the Fund invests at least 65% of its total
assets in New York municipal bonds. For purposes of this policy, "New York
municipal bonds" has the same meaning as "New York Municipal Securities," which
are obligations of any duration (or maturity) issued by New York, its political
subdivisions and their agencies, authorities and instrumentalities and any other
obligations, the interest from which is exempt from New York State and New York
City personal income taxes. The interest from many but not all New York
Municipal Securities is also exempt from federal income tax. The Fund may also
invest in debt obligations of state and municipal issuers outside of New York.
In general, the interest on such securities is exempt from federal income tax
but subject to New York income tax. A portion of the Fund's distributions from
interest on New York Municipal Securities and other municipal securities in
which the Fund invests may under certain circumstances be subject to federal
alternative minimum tax. See "Taxes".

<PAGE>

TAX EXEMPT OBLIGATIONS

Since the Fund invests primarily in New York Municipal Securities, its
performance and the ability of New York issuers to meet their obligations may be
affected by economic, political, demographic or other conditions in the State of
New York. As a result, the value of the Fund's shares may fluctuate more widely
than the value of shares of a fund investing in securities of issuers in
multiple states. The ability of state, county or local governments to meet
their obligations will depend primarily on the availability of tax and other
revenues to those governments and on their general fiscal conditions.
Constitutional or statutory restrictions may limit a municipal issuer's power to
raise revenues or increase taxes. The availability of federal, state and local
aid to issuers of New York Municipal Securities may also affect their ability to
meet their obligations. Payments of principal and interest on revenue bonds
will depend on the economic or fiscal condition of the issuer or specific
revenue source from whose revenues the payments will be made. Any reduction in
the actual or perceived ability of an issuer of New York Municipal Securities to
meet its obligations (including a reduction in the rating of its outstanding
securities) would probably reduce the market value and marketability of the
Fund's portfolio securities.

The Fund may invest in municipal securities of any maturity and type.
These include both general obligation bonds secured by the issuer's pledge of
its full faith, credit and taxing authority and revenue bonds payable from
specific revenue sources, but generally not backed by the issuer's taxing
authority. In addition, the Fund may invest in all types of municipal notes,
including tax, revenue and grant anticipation notes, municipal commercial paper,
and municipal demand obligations such as variable rate demand notes and master
demand obligations. There is no specific percentage limitation on these
investments.

Municipal bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from revenues derived from particular facilities, from the proceeds of a
special excise tax or from other specific revenue sources. They are not
generally payable from the general taxing power of a municipality.

MUNICIPAL NOTES. The Fund may also invest in municipal notes of various
types, including notes issued in anticipation of receipt of taxes, the proceeds
of the sale of bonds, other revenues or grant proceeds, as well as municipal
commercial paper and municipal demand obligations such as variable rate demand
notes and master demand obligations. The interest rate on variable rate demand
notes is adjustable at periodic intervals as specified in the notes. Master
demand obligations permit the investment of fluctuating amounts

<PAGE>

at periodically adjusted interest rates. They are governed by agreements
between the municipal issuer and Morgan acting as agent, for no additional fee.
Although master demand obligations are not marketable to third parties, the Fund
considers them to be liquid because they are payable on demand. There is no
specific percentage limitation on these investments. Municipal notes are
subdivided into three categories of short-term obligations: municipal notes,
municipal commercial paper and municipal demand obligations.

Municipal demand obligations are subdivided into two types: variable rate
demand notes and master demand obligations.

Variable rate demand notes are tax exempt municipal obligations or
participation interests that provide for a periodic adjustment in the interest
rate paid on the notes. They permit the holder to demand payment of the notes,
or to demand purchase of the notes at a purchase price equal to the unpaid
principal balance, plus accrued interest either directly by the issuer or by
drawing on a bank letter of credit or guaranty issued with respect to such note.
The issuer of the municipal obligation may have a corresponding right to prepay
at its discretion the outstanding principal of the note plus accrued interest
upon notice comparable to that required for the holder to demand payment. The
variable rate demand notes in which the Fund may invest are payable, or are
subject to purchase, on demand usually on notice of seven calendar days or less.
The terms of the notes provide that interest rates are adjustable at intervals
ranging from daily to six months, and the adjustments are based upon the prime
rate of a bank or other appropriate interest rate index specified in the
respective notes. Variable rate demand notes are valued at amortized cost; no
value is assigned to the right of the Fund to receive the par value of the
obligation upon demand or notice.

Master demand obligations are tax exempt municipal obligations that provide
for a periodic adjustment in the interest rate paid and permit daily changes in
the amount borrowed. The interest on such obligations is, in the opinion of
counsel for the borrower, excluded from gross income for federal income tax
purposes. Although there is no secondary market for master demand obligations,
such obligations are considered by the Fund to be liquid because they are
payable upon demand. The Fund has no specific percentage limitations on
investments in master demand obligations.

<PAGE>

values greater than the principal amounts payable on maturity, which would be
reflected in the net asset value of the Fund's shares. The values of such
"premium" securities tend to approach the principal amount as they near
maturity.

PUTS. The Fund may purchase without limit, municipal bonds or notes
together with the right to resell the bonds or notes to the seller at an agreed
price or yield within a specified period prior to the maturity date of the bonds
or notes. Such a right to resell is commonly known as a "put." The aggregate
price for bonds or notes with puts may be higher than the price for bonds or
notes without puts. Consistent with the Fund's investment objective and subject
to the supervision of the Trustees, the purpose of this practice is to permit
the Fund to be fully invested in tax exempt securities 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 put. The principal risk of puts is that the writer of
the put may default on its obligation to repurchase. The Advisor will monitor
each writer's ability to meet its obligations under puts.

Puts may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of Fund shares
and from recent sales of portfolio securities are insufficient to meet
obligations or when the funds available are otherwise allocated for investment.
In addition, puts may be exercised prior to the expiration date in order to take
advantage of alternative investment opportunities or in the event the Advisor
revises its evaluation of the creditworthiness of the issuer of the underlying
security. In determining whether to exercise puts prior to their expiration
date and in selecting which puts to exercise, the Advisor considers the amount
of cash available to the Fund, the expiration dates of the available puts, any
future commitments for securities purchases, alternative investment
opportunities, the desirability of retaining the underlying securities in the
Fund's portfolio and the yield, quality and maturity dates of the underlying
securities.

The Fund values any municipal bonds and notes subject to puts with
remaining maturities of less than 60 days by the amortized cost method. If the
Fund were to invest in municipal bonds and notes with maturities of 60 days or
more that are subject to puts separate from the underlying securities, the puts
and the underlying securities would be valued at fair value as determined in
accordance with procedures established by the Board of Trustees. The Board of
Trustees would, in connection with the determination of the value of a put,
consider, among other factors, the creditworthiness of the writer of the put,
the duration of the put, the dates on which or the periods during which the put
may be exercised and the applicable rules and regulations of the SEC. Prior to
investing in such securities, the Fund, if deemed necessary based upon the
advice of counsel, will apply to the SEC for an exemptive order, which may not
be granted, relating to the amortized valuation of such securities.

Since the value of the put is partly dependent on the ability of the put
writer to meet its obligation to repurchase, the Fund's policy is to enter into
put transactions only with municipal securities dealers who are approved by the
Advisor. Each dealer will be approved on its own merits, and it is the Fund's
general policy to enter into put transactions only with those dealers which are
determined to present minimal credit risks. In connection with such
determination, the Advisor reviews regularly the list of approved dealers,
taking into consideration, among other things, the ratings, if available, of

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<PAGE>

their equity and debt securities, their reputation in the municipal securities
markets, their net worth, their efficiency in consummating transactions and any
collateral arrangements, such as letters of credit, securing the puts written by
them. Commercial bank dealers normally will be members of the Federal Reserve
System, and other dealers will be members of the National Association of
Securities Dealers, Inc. or members of a national securities exchange. Other
put writers will have outstanding debt rated Aa or better by Moody's Investors
Service, Inc. ("Moody's") or AA or better by Standard & Poor's Ratings Group
("Standard & Poor's"), or will be of comparable quality in the Advisor's opinion
or such put writers' obligations will be collateralized and of comparable
quality in the Advisor's opinion. The Trustees have directed the Advisor not to
enter into put transactions with any dealer which in the judgment of the Advisor
become more than a minimal credit risk. In the event that a dealer should
default on its obligation to repurchase an underlying security, the Fund is
unable to predict whether all or any portion of any loss sustained could
subsequently be recovered from such dealer.

Entering into a put with respect to a tax exempt security may be treated,
depending upon the terms of the put, as a taxable sale of the tax exempt
security by the Fund with the result that, while the put is outstanding, the
Fund will no longer be treated as the owner of the security and the interest
income derived with respect to the security will be treated as taxable income to
the Fund.

NON-MUNICIPAL SECURITIES

The Fund may invest in bonds and other debt securities of domestic issuers
to the extent consistent with its investment objective and policies. The Fund
may invest in U.S. Government, bank and corporate debt obligations, as well as
asset-backed securities and repurchase agreements. The Fund will purchase such
securities only when the Advisor believes that they would enhance the after tax
income of a shareholder of the Fund in the highest federal and New York income
tax brackets. Under normal circumstances, the Fund's holdings of non-municipal
securities and securities of municipal issuers outside New York will not exceed
35% of its total assets. A description of these investments appears below. See
"Quality and Diversification Requirements." For information on short-term
investments in these securities, see "Money Market Instruments."

<PAGE>

in the event of adverse market conditions than comparably rated securities
paying cash interest at regular interest payment periods.

ASSET-BACKED SECURITIES. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables or other asset-backed securities collateralized by such
assets. Payments of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the entities issuing the securities. The
asset-backed securities in which the Fund may invest are subject to the Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. For example, credit card debt receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts on credit card debt thereby reducing the
balance due. Additionally, if the letter of credit is exhausted, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on underlying sales contracts are not realized. Because
asset-backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through all
phases of the market cycle has not been tested.

MONEY MARKET INSTRUMENTS

The Fund may invest in money market instruments, to the extent consistent
with its investment objective and policies, that meet the quality requirements
described below, except that short-term municipal obligations of New York State
issuers may be rated MIG-2 by Moody's or SP-2 by Standard & Poor's. Under
normal circumstances, the Fund will purchase these securities to invest
temporary cash balances or to maintain liquidity to meet withdrawals. However,
the Fund may also invest in money market instruments as a temporary defensive
measure taken during, or in anticipation of, adverse market conditions. A
description of the various types of money market instruments that may be
purchased by the Fund appears below. Also see "Quality and Diversification
Requirements."

U.S. TREASURY SECURITIES. The Fund may invest in direct obligations of the
U.S. Treasury, including Treasury bills, notes and bonds, all of which are
backed as to principal and interest payments by the full faith and credit of the
United States.

ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. The Fund may invest in obligations
issued or guaranteed by U.S. Government agencies or instrumentalities. These
obligations may or may not be backed by the "full faith and credit" of the
United States. Securities which are backed by the full faith and credit of the
United States include obligations of the Government National Mortgage
Association, the Farmers Home Administration, and the Export-Import Bank. In
the case of securities not backed by the full faith and credit of the United
States, the Fund must look principally to the federal agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments. Securities in which the Fund may
invest that are not backed by the full faith and credit of the United States
include, but are not limited to: (i) obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan
Banks and the U.S. Postal Service, each of which has the

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<PAGE>

right to borrow from the U.S. Treasury to meet its obligations; (ii) securities
issued by the Federal National Mortgage Association, which are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; and (iii) obligations of the Federal Farm Credit System and the
Student Loan Marketing Association, each of whose obligations may be satisfied
only by the individual credits of the issuing agency.

COMMERCIAL PAPER. The Fund may invest in commercial paper, including
master demand obligations. Master demand obligations are obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and Morgan acting as agent, for no additional fee.
The monies loaned to the borrower come from accounts managed by Morgan or its
affiliates, pursuant to arrangements with such accounts. Interest and principal
payments are credited to such accounts. Morgan has the right to increase or
decrease the amount provided to the borrower under an obligation. The borrower
has the right to pay without penalty all or any part of the principal amount
then outstanding on an obligation together with interest to the date of payment.
Since these obligations typically provide that the interest rate is tied to the
Federal Reserve commercial paper composite rate, the rate on master demand
obligations is subject to change. Repayment of a master demand obligation to
participating accounts depends on the ability of the borrower to pay the accrued
interest and principal of the obligation on demand which is continuously
monitored by Morgan. Since master demand obligations typically are not rated by
credit rating agencies, the Fund may invest in such unrated obligations only if
at the time of an investment the obligation is determined by the Advisor to have
a credit quality which satisfies the Fund's quality restrictions. See "Quality
and Diversification Requirements." Although there is no secondary market for
master demand obligations, such obligations are considered by the Fund to be
liquid because they are payable upon demand. The Fund does not have any
specific percentage limitation on investments in master demand obligations. It
is possible that the issuer of a master demand obligation could be a client of
Morgan to whom Morgan, in its capacity as a commercial bank, has made a loan.

8
<PAGE>

of thirteen months from the effective date of the repurchase agreement. The
Fund will always receive securities as collateral whose market value is, and
during the entire term of the agreement remains, at least equal to 100% of the
dollar amount invested by the Fund in the agreement plus accrued interest, and
the Fund will make payment for such securities only upon physical delivery or
upon evidence of book entry transfer to the account of the custodian. If the
seller defaults, the Fund might incur a loss if the value of the collateral
securing the repurchase agreement declines and might incur disposition costs in
connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon disposal of the collateral by the Fund may be delayed or
limited.

The Fund may make investments in other debt securities, including without
limitation corporate bonds and other obligations described in this Statement of
Additional Information.

ADDITIONAL INVESTMENTS

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable,
if any, on the securities are fixed on the purchase commitment date or at the
time the settlement date is fixed. The value of such securities is subject to
market fluctuation and for money market instruments and other fixed income
securities no interest accrues to the Fund until settlement takes place. At the
time the Fund makes the commitment to purchase securities on a when-issued or
delayed delivery basis, it will record the transaction, reflect the value each
day of such securities in determining its net asset value and, if applicable,
calculate the maturity for the purposes of average maturity from that date. At
the time of settlement a when-issued security may be valued at less than the
purchase price. To facilitate such acquisitions, the Fund will maintain with
the custodian a segregated account with liquid assets, consisting of cash, U.S.
Government securities or other appropriate securities, in an amount at least
equal to such commitments. On delivery dates for such transactions, the Fund
will meet its obligations from maturities or sales of the securities held in the
segregated account and/or from cash flow. If the Fund chooses to dispose of the
right to acquire a when-issued security prior to its acquisition, it could, as
with the disposition of any other portfolio obligation, incur a gain or loss due
to market fluctuation. Also, the Fund may be disadvantaged if the other party
to the transaction defaults. It is the current policy of the Fund not to enter
into when-issued commitments exceeding in the aggregate 15% of the market value
of the Fund's total assets, less liabilities other than the obligations created
by when-issued commitments.

INVESTMENT COMPANY SECURITIES. Securities of other investment companies
may be acquired by the Fund to the extent permitted under the 1940 Act or any
order pursuant thereto. These limits currently require that, as determined
immediately after a purchase is made, (i) not more than 5% of the value of the
Fund's total assets will be invested in the securities of any one investment
company, (ii) not more than 10% of the value of its total assets will be
invested in the aggregate in securities of investment companies as a group, and
(iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund, provided however, that the Fund may invest
all of its investable assets in an open-end investment company that has the same
investment objective as the Fund. As a shareholder of another

9
<PAGE>

investment company, the Fund would bear, along with other shareholders, its pro
rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that the Fund bears directly in connection with its own operations. The Fund has
applied for exemptive relief from the SEC to permit the Fund's corresponding
Portfolio to invest in affiliated investment companies. If the requested relief
is granted, the Fund's corresponding Portfolio would then be permitted to invest
in affiliated funds, subject to certain conditions specified in the applicable
order.

REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund sells a security and
agrees to repurchase the same security at a mutually agreed upon date and price,
reflecting the interest rate effective for the term of the agreement. For
purposes of the 1940 Act a reverse repurchase agreement is also considered as
the borrowing of money by the Fund and, therefore, a form of leverage. Leverage
may cause any gains or losses for the Fund to be magnified. The Fund will
invest the proceeds of borrowings under reverse repurchase agreements. In
addition, the Fund will enter into a reverse repurchase agreement only when the
interest income to be earned from the investment of the proceeds is greater than
the interest expense of the transaction. The Fund will not invest the proceeds
of a reverse repurchase agreement for a period which exceeds the duration of the
reverse repurchase agreement. The Fund will establish and maintain with the
custodian a separate account with a segregated portfolio of securities in an
amount at least equal to its purchase obligations under its reverse repurchase
agreements. See "Investment Restrictions" for the Fund's limitations on reverse
repurchase agreements and bank borrowings.

LOANS OF PORTFOLIO SECURITIES. Subject to applicable investment
restrictions, the Fund is permitted to lend securities in an amount up to 331/3%
of the value of the Fund's total assets. The Fund may lend its securities if
such loans are secured continuously by cash or equivalent collateral or by a
letter of credit in favor of the Fund at least equal at all times to 100% of the
market value of the securities loaned, plus accrued interest. While such
securities are on loan, the borrower will pay the Fund any income accruing
thereon. Loans will be subject to termination by the Fund in the normal
settlement time, generally three business days after notice, or by the borrower
on one day's notice. Borrowed securities must be returned when the loan is
terminated. Any gain or loss in the market price of the borrowed securities
which occurs during the term of the loan inures to the Fund and its respective
investors. The Fund may pay reasonable finders' and custodial fees in
connection with a loan. In addition, the Fund will consider all facts and
circumstances including the creditworthiness of the borrowing financial
institution, and the Fund will not make any loans in excess of one year. The
Fund will not lend its securities to any officer, Trustee, Director, employee or
other affiliate of the Fund, the Advisor or the Distributor, unless otherwise
permitted by applicable law.

ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED SECURITIES.
The Fund may not acquire any illiquid securities if, as a result thereof, more
than 15% of the Fund's net assets would be in illiquid investments. Subject to
this non-fundamental policy limitation, the Fund may acquire investments that
are illiquid or have limited liquidity, such as private placements or
investments that are not registered under the Securities Act of 1933, as amended
(the "1933 Act"), and cannot be offered for public sale in the United States
without first being registered under the 1933 Act. An illiquid investment is
any investment that cannot be disposed of within

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<PAGE>

seven days in the normal course of business at approximately the amount at which
it is valued by the Portfolio. The price the Fund pays for illiquid securities
or receives upon resale may be lower than the price paid or received for similar
securities with a more liquid market. Accordingly the valuation of these
securities will reflect any limitations on their liquidity.

The Fund may also purchase Rule 144A securities sold to institutional
investors without registration under the 1933 Act. These securities may be
determined to be liquid in accordance with guidelines established by the Advisor
and approved by the Trustees. The Trustees will monitor the Advisor's
implementation of these guidelines on a periodic basis.

As to illiquid investments, the Fund is subject to a risk that should the
Fund decide to sell them when a ready buyer is not available at a price the Fund
deems representative of their value, the value of the Fund's net assets could be
adversely affected. Where an illiquid security must be registered under the
1933 Act, before it may be sold, the Fund may be obligated to pay all or part of
the registration expenses, and a considerable period may elapse between the time
of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.

SYNTHETIC VARIABLE RATE INSTRUMENTS. The Fund may invest in certain
synthetic variable rate instruments. Such instruments generally involve the
deposit of a long-term tax exempt bond in a custody or trust arrangement and the
creation of a mechanism to adjust the long-term interest rate on the bond to a
variable short-term rate and a right (subject to certain conditions) on the part
of the purchaser to tender it periodically to a third party at par. Morgan will
review the structure of synthetic variable rate instruments to identify credit
and liquidity risks (including the conditions under which the right to tender
the instrument would no longer be available) and will monitor those risks. In
the event that the right to tender the instrument is no longer available, the
risk to the Fund will be that of holding the long-term bond. In the case of
some types of instruments credit enhancement is not provided, and if certain
events, which may include (a) default in the payment of principal or interest on
the underlying bond, (b) downgrading of the bond below investment grade or (c) a
loss of the bond's tax exempt status, occur, then (i) the put will terminate and
(ii) the risk to the Fund will be that of holding a long-term bond.

QUALITY AND DIVERSIFICATION REQUIREMENTS

The Fund is registered as a non-diversified investment company which means
that the Fund is not limited by the 1940 Act in the proportion of its assets
that may be invested in the obligations of a single issuer. Thus, the Fund may
invest a greater proportion of its assets in the securities of a smaller number
of issuers and, as a result, may be subject to greater risk with respect to its
portfolio securities. The Fund, however, will comply with the diversification
requirements imposed by the Internal Revenue Code of 1986, as amended (the
"Code"), for qualification as a regulated investment company. See "Taxes".

It is the current policy of the Fund that under normal circumstances at
least 90% of total assets will consist of securities that at the time of
purchase are rated Baa or better by Moody's or BBB or better by Standard &
Poor's. The remaining 10% of total assets may be invested in securities that

11
<PAGE>

are rated B or better by Moody's or Standard & Poor's. See "Below Investment
Grade Debt" below. In each case, the Fund may invest in securities which are
unrated, if in the Advisor's opinion, such securities are of comparable quality.
Securities rated Baa by Moody's or BBB by Standard & Poor's are considered
investment grade, but have some speculative characteristics. Securities rated
Ba or B by Moody's and BB or B by Standard & Poor's are below investment grade
and considered to be speculative with regard to payment of interest and
principal. These standards must be satisfied at the time an investment is made.
If the quality of the investment later declines, the Fund may continue to hold
the investment.

The Fund invests principally in a portfolio of "investment grade" tax
exempt securities. An investment grade bond is rated, on the date of
investment, within the four highest ratings of Moody's, currently Aaa, Aa, A and
Baa or of Standard & Poor's, currently AAA, AA, A and BBB, while high grade debt
is rated, on the date of the investment, within the two highest of such ratings.
Investment grade municipal notes are rated, on the date of investment, MIG-1 or
MIG-2 by Standard & Poor's or SP-1 and SP-2 by Moody's. Investment grade
municipal commercial paper is rated, on the date of investment, Prime 1 or Prime
2 by Moody's and A-1 or A-2 by Standard & Poor's. The Fund may also invest up to
10% of its total assets in securities which are "below investment grade." Such
securities must be rated, on the date of investment, B or better by Moody's or
Standard & Poor's, or of comparable quality. The Fund may invest in debt
securities which are not rated or other debt securities to which these ratings
are not applicable, if in the opinion of the Advisor, such securities are of
comparable quality to the rated securities discussed above. In addition, at the
time the Fund invests in any taxable commercial paper, bank obligation or
repurchase agreement, the issuer must have outstanding debt rated A or higher by
Moody's or Standard & Poor's, the issuer's parent corporation, if any, must have
outstanding commercial paper rated Prime-1 by Moody's or A-1 by Standard &
Poor's, or if no such ratings are available, the investment must be of
comparable quality in the Advisor's opinion.

BELOW INVESTMENT GRADE DEBT. Certain lower rated securities purchased by
the Fund, such as those rated Ba or B by Moody's or BB or B by Standard & Poor's
(commonly known as junk bonds), may be subject to certain risks with respect to
the issuing entity's ability to make scheduled payments of principal and
interest and to greater market fluctuations. While generally providing higher
coupons or interest rates than investments in higher quality securities, lower
quality fixed income securities involve greater risk of loss of principal and
income, including the possibility of default or bankruptcy of the issuers of
such securities, and have greater price volatility, especially during periods of
economic uncertainty or change. These lower quality fixed income securities
tend to be affected by economic changes and short-term corporate and industry
developments to a greater extent than higher quality securities, which react
primarily to fluctuations in the general level of interest rates. To the extent
that the Fund invests in such lower quality securities, the achievement of its
investment objective may be more dependent on the Advisor's own credit analysis.

12
<PAGE>

be more difficult to sell these lower rated securities to meet redemption
requests, to respond to changes in the market, or to value accurately the Fund's
portfolio securities for purposes of determining the Fund's net asset value.
See Appendix A for more detailed information on these ratings.

OPTIONS AND FUTURES TRANSACTIONS

The Fund may purchase and sell (a) exchange traded and over-the-counter
(OTC) put and call options on fixed income securities, indexes of fixed income
securities and futures contracts on fixed income securities and indexes of fixed
income securities and (b) futures contracts on fixed income securities and
indexes of fixed income securities. Each of these instruments is a derivative
instrument as its value derives from the underlying asset or index.

The Fund may use futures contracts and options for hedging and risk
management purposes. The Funds may not use futures contracts and options for
speculation.

The Fund may utilize options and futures contracts to manage its exposure
to changing interest rates and/or security prices. Some options and futures
strategies, including selling futures contracts and buying puts, tend to hedge
the Fund's investments against price fluctuations. Other strategies, including
buying futures contracts and buying calls, tend to increase market exposure.
Options and futures contracts may be combined with each other or with forward
contracts in order to adjust the risk and return characteristics of the Fund's
overall strategy in a manner deemed appropriate to the Advisor and consistent
with the Fund's objective and policies. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.

The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase the Fund's return. While the use of these instruments by
the Fund may reduce certain risks associated with owning its portfolio
securities, these techniques themselves entail certain other risks. If the
Advisor applies a strategy at an inappropriate time or judges market conditions
or trends incorrectly, options and futures strategies may lower the Fund's
return. Certain strategies limit the Fund's possibilities to realize gains as
well as its exposure to losses. A Fund could also experience losses if the
prices of its options and futures positions were poorly correlated with its
other investments, or if it could not close out its positions because of an
illiquid secondary market. In addition, the Fund will incur transaction costs,
including trading commissions and option premiums, in connection with its
futures and options transactions and these transactions could significantly
increase the Fund's turnover rate.

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<PAGE>

futures or options thereon held at any time do not exceed 5% of the Fund's total
assets. In addition, the Fund will not purchase or sell (write) futures
contracts, options on futures contracts or commodity options for risk management
purposes if, as a result, the aggregate initial margin and options premiums
required to establish these positions exceed 5% of the net asset value of the
Fund.

OPTIONS

PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the Fund
obtains the right (but not the obligation) to sell the instrument underlying the
option at a fixed strike price. In return for this right, the Fund pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities, indexes
of securities, indexes of securities prices, and futures contracts. The Fund
may terminate its position in a put option it has purchased by allowing it to
expire or by exercising the option. The Fund may also close out a put option
position by entering into an offsetting transaction, if a liquid market exits.
If the option is allowed to expire, the Fund will lose the entire premium it
paid. If the Fund exercises a put option on a security, it will sell the
instrument underlying the option at the strike price. If the Fund exercises an
option on an index, settlement is in cash and does not involve the actual sale
of securities. If an option is American style, it may be exercised on any day
up to its expiration date. A European style option may be exercised only on its
expiration date.

SELLING (WRITING) PUT AND CALL OPTIONS. When the Fund writes a put option,
it takes the opposite side of the transaction from the option's purchaser. In
return for the receipt of the premium, the Fund assumes the obligation to pay
the strike price for the instrument underlying the option if the party to the
option chooses to exercise it. The Fund may seek to terminate its position in a
put option it writes before exercise by purchasing an offsetting option in the
market at its current price. If the market is not liquid for a put option the
Fund has written, however, it must continue to be prepared to pay the strike
price while the option is outstanding, regardless of price changes, and must
continue to post margin as discussed below.

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<PAGE>

purchasing and holding the underlying instrument directly, however, because the
premium received for writing the option should offset a portion of the decline.

OPTIONS ON INDEXES. The Fund may purchase or sell put and call options on
any securities index based on securities in which the Fund may invest. Options
on securities indexes are similar to options on securities, except that the
exercise of securities index options is settled by cash payment and does not
involve the actual purchase or sale of securities. In addition, these options
are designed to reflect price fluctuations in a group of securities or segment
of the securities market rather than price fluctuations in a single security.
The Fund, in purchasing or selling index options, is subject to the risk that
the value of its portfolio securities may not change as much as index because
the Fund's investments generally will not match the composition of an index.

For a number of reasons, a liquid market may not exist and thus the Fund
may not be able to close out an option position that it has previously entered
into. When the Fund purchases an OTC option, it will be relying on its
counterparty to perform its obligations, and the Fund may incur additional
losses if the counterparty is unable to perform.

Provided that the Fund has arrangements with certain qualified dealers who
agree that the Fund may repurchase any option it writes for a maximum price to
be calculated by a predetermined formula, the Fund may treat the underlying
securities used to cover written OTC options as liquid. In these cases, the OTC
option itself would only be considered illiquid to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.

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<PAGE>

FUTURES CONTRACTS

When the Fund purchases a futures contract, it agrees to purchase a
specified quantity of an underlying instrument at a specified future date or to
make a cash payment based on the value of a securities index. When the Fund
sells a futures contract, it agrees to sell a specified quantity of the
underlying instrument at a specified future date or to receive a cash payment
based on the value of a securities index. The price at which the purchase and
sale will take place is fixed when the Fund enters into the contract. Futures
can be held until their delivery dates or the position can be (and normally is)
closed out before then. There is no assurance, however, that a liquid market
will exist when the Fund wishes to close out a particular position.

When the Fund purchases a futures contract, the value of the futures
contract tends to increase and decrease in tandem with the value of its
underlying instrument. Therefore, purchasing futures contracts will tend to
increase the Fund's exposure to positive and negative price fluctuations in the
underlying instrument, much as if it had purchased the underlying instrument
directly. When the Fund sells a futures contract, by contrast, the value of its
futures position will tend to move in a direction contrary to the value of the
underlying instrument. Selling futures contracts, therefore, will tend to
offset both positive and negative market price changes, much as if the
underlying instrument had been sold.

The purchaser or seller of a futures contract is not required to deliver or
pay for the underlying instrument unless the contract is held until the delivery
date. However, when the Fund buys or sells a futures contract it will be
required to deposit "initial margin" with its custodian in a segregated account
in the name of its futures broker, known as a futures commission merchant (FCM).
Initial margin deposits are typically equal to a small percentage of the
contract's value. If the value of either party's position declines, that party
will be required to make additional "variation margin" payments equal to the
change in value on a daily basis. The party that has a gain may be entitled to
receive all or a portion of this amount. The Fund may be obligated to make
payments of variation margin at a time when it is disadvantageous to do so.
Furthermore, it may not always be possible for the Fund to close out its futures
positions. Until it closes out a futures position, the Fund will be obligated
to continue to pay variation margin. Initial and variation margin payments do
not constitute purchasing on margin for purposes of the Fund's investment
restrictions. In the event of the bankruptcy of an FCM that holds margin on
behalf of the Fund, the Fund may be entitled to return of margin owed to it only
in proportion to the amount received by the FCM's other customers, potentially
resulting in losses to the Fund.

The Fund will segregate liquid assets in connection with its use of options
and futures contracts to the extent required by the staff of the Securities and
Exchange Commission. Securities held in a segregated account cannot be sold
while the futures contract or option is outstanding, unless they are replaced
with other suitable assets. As a result, there is a possibility that
segregation of a large percentage of the Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.

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<PAGE>

cash based on the value of a securities index. Currently, futures contracts are
available on various types of fixed income securities, including but not limited
to U.S. Treasury bonds, notes and bills, Eurodollar certificates of deposit and
on indexes of fixed income securities.

The seller of an option on a futures contract receives the premium paid by
the purchaser and may be required to pay initial margin. Amounts equal to the
initial margin and any additional collateral required on any options on futures
contracts sold by the Fund are paid by the Fund into a segregated account, in
the name of the FCM, as required by the 1940 Act and the SEC's interpretations
thereunder.

COMBINED POSITIONS. The Fund may purchase and write options in combination
with each other, or in combination with futures or forward contracts, to adjust
the risk and return characteristics of the overall position. For example, the
Fund may purchase a put option and write a call option on the same underlying
instrument, in order to construct a combined position whose risk and return
characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price and
buying a call option at a lower price, in order to reduce the risk of the
written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.

CORRELATION OF PRICE CHANGES. Because there are a limited number of types
of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match the Fund's
current or anticipated investments exactly. The Fund may invest in options and
futures contracts based on securities with different issuers, maturities, or
other characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.

17
<PAGE>

purchase or sell options and futures contracts with a greater or lesser value
than the securities it wishes to hedge or intends to purchase in order to
attempt to compensate for differences in volatility between the contract and the
securities, although this may not be successful in all cases. If price changes
in the Fund's options or futures positions are poorly correlated with its other
investments, the positions may fail to produce anticipated gains or result in
losses that are not offset by gains in other investments.

LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a liquid
market will exist for any particular option or futures contract at any
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or down more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for the Fund
to enter into new positions or close out existing positions. If the market for
a contract is not liquid because of price fluctuation limits or otherwise, it
could prevent prompt liquidation of unfavorable positions, and could potentially
require the Fund to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Fund's access to other
assets held to cover its options or futures positions could also be impaired.
(See "Exchange Traded and OTC Options" above for a discussion of the liquidity
of options not traded on an exchange.)

POSITION LIMITS. Futures exchanges can limit the number of futures and
options on futures contracts that can be held or controlled by an entity. If an
adequate exemption cannot be obtained, the Fund or the Advisor may be required
to reduce the size of its futures and options positions or may not be able to
trade a certain futures or options contract in order to avoid exceeding such
limits.

ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS. The Fund
intends to comply with Section 4.5 of the regulations under the Commodity
Exchange Act, which limits the extent to which a Fund can commit assets to
initial margin deposits and option premiums. In addition, the Fund will comply
with guidelines established by the SEC with respect to coverage of options and
futures contracts by mutual funds, and if the guidelines so require, will set
aside appropriate liquid assets in a segregated custodial account in the amount
prescribed. Securities held in a segregated account cannot be sold while the
futures contract or option is outstanding, unless they are replaced with other
suitable assets. As a result, there is a possibility that segregation of a
large percentage of the Fund's assets could impede portfolio management or the
Fund's ability to meet redemption requests or other current obligations.

SWAPS AND RELATED SWAP PRODUCTS. The Fund may engage in swap transactions,
including, but not limited to, interest rate, currency, securities index,
basket, specific security and commodity swaps, interest rate caps, floors and
collars and options on interest rate swaps (collectively defined as "swap
transactions").

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<PAGE>

instruments in cash markets, to protect against currency fluctuations, as a
duration management technique, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date, or to gain exposure
to certain markets in the most economical way possible. The Fund will not sell
interest rate caps, floors or collars if it does not own securities with coupons
which provide the interest that a Fund may be required to pay.

The "notional amount" of a swap transaction is the agreed upon basis for
calculating the payments that the parties have agreed to exchange. For example,
one swap counterparty may agree to pay a floating rate of interest (e.g., 3
month LIBOR) calculated based on a $10 million notional amount on a quarterly
basis in exchange for receipt of payments calculated based on the same notional
amount and a fixed rate of interest on a semi-annual basis. In the event the
Fund is obligated to make payments more frequently than it receives payments
from the other party, it will incur incremental credit exposure to that swap
counterparty. This risk may be mitigated somewhat by the use of swap agreements
which call for a net payment to be made by the party with the larger payment
obligation when the obligations of the parties fall due on the same date. Under
most swap agreements entered into by the Fund, payments by the parties will be
exchanged on a "net basis", and the Fund will receive or pay, as the case may
be, only the net amount of the two payments.

19
<PAGE>

collar, however, the Fund's potential loss is limited to the amount of the fee
that it has paid. When measured against the initial amount of cash required to
initiate the transaction, which is typically zero in the case of most
conventional swap transactions, swaps, caps, floors and collars tend to be more
volatile than many other types of instruments.

The use of swap transactions, caps, floors and collars involves investment
techniques and risks which are different from those associated with portfolio
security transactions. If the Advisor is incorrect in its forecasts of market
values, interest rates, and other applicable factors, the investment performance
of the Fund will be less favorable than if these techniques had not been used.
These instruments are typically not traded on exchanges. Accordingly, there is
a risk that the other party to certain of these instruments will not perform its
obligations to the Fund or that the Fund may be unable to enter into offsetting
positions to terminate its exposure or liquidate its position under certain of
these instruments when it wishes to do so. Such occurrences could result in
losses to the Fund.

The Advisor will, however, consider such risks and will enter into swap
and other derivatives transactions only when it believes that the risks are not
unreasonable.

The Fund will maintain cash or liquid assets in a segregated account with
its custodian in an amount sufficient at all times to cover its current
obligations under its swap transactions, caps, floors and collars. If the Fund
enters into a swap agreement on a net basis, it will segregate assets with a
daily value at least equal to the excess, if any, of the Fund's accrued
obligations under the swap agreement over the accrued amount the Fund is
entitled to receive under the agreement. If the Fund enters into a swap
agreement on other than a net basis, or sells a cap, floor or collar, it will
segregate assets with a daily value at least equal to the full amount of a
Fund's accrued obligations under the agreement.

The Fund will not enter into any swap transaction, cap, floor, or collar,
unless the counterparty to the transaction is deemed creditworthy by the
Advisor. If a counterparty defaults, the Fund may have contractual remedies
pursuant to the agreements related to the transaction. The swap markets in
which many types of swap transactions are traded have grown substantially in
recent years, with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the markets for certain types of swaps (e.g., interest rate swaps)
have become relatively liquid. The markets for some types of caps, floors and
collars are less liquid.

20
<PAGE>

demand) and (5) the nature of the marketplace for trades (including the ability
to assign or offset the Fund's rights and obligations relating to the
instrument). Such determination will govern whether the instrument will be
deemed within the 15% restriction on investments in securities that are not
readily marketable.

During the term of a swap, cap, floor or collar, changes in the value of
the instrument are recognized as unrealized gains or losses by marking to market
to reflect the market value of the instrument. When the instrument is
terminated, the Fund will record a realized gain or loss equal to the
difference, if any, between the proceeds from (or cost of) the closing
transaction and a Fund's basis in the contract.

The federal income tax treatment with respect to swap transactions, caps,
floors, and collars may impose limitations on the extent to which a Fund may
engage in such transactions.

RISK MANAGEMENT

The Fund may employ non-hedging risk management techniques. Examples of
such strategies include synthetically altering the duration of its portfolio or
the mix of securities in its portfolio. For example, if the Advisor wishes to
extend maturities in a fixed income portfolio in order to take advantage of an
anticipated decline in interest rates, but does not wish to purchase the
underlying long-term securities, it might cause the Fund to purchase futures
contracts on long-term debt securities. Similarly, if the Advisor wishes to
decrease exposure to fixed income securities or purchase equities, it could
cause the Fund to sell futures contracts on debt securities and purchase futures
contracts on a stock index. Such non-hedging risk management techniques are not
speculative, but because they involve leverage include, as do all leveraged
transactions, the possibility of losses as well as gains that are greater than
if these techniques involved the purchase and sale of the securities themselves
rather than their synthetic derivatives.

SPECIAL FACTORS AFFECTING THE FUND

The Fund intends to invest a high proportion of its assets in municipal
obligations in New York Municipal Securities. Payment of interest and
preservation of principal is dependent upon the continuing ability of New York
issuers and/or obligors of New York Municipal Securities to meet their
obligations thereunder.

The fiscal stability of New York is related, at least in part, to the
fiscal stability of its localities and authorities. Various New York agencies,
authorities and localities have issued large amounts of bonds and notes either
guaranteed or supported by New York through lease-purchase arrangements, other
contractual arrangements or moral obligation provisions. While debt service is
normally paid out of revenues generated by projects of such New York agencies,
authorities and localities, in the past the State has had to provide special
assistance, in some cases of a recurring nature, to enable such agencies,
authorities and localities to meet their financial obligations and, in some
cases, to prevent or cure defaults. The presence of such aid in the future
should not be assumed. To the extent that New York agencies and local
governments require State assistance to meet their financial obligations, the
ability of New York to meet its own obligations as they become due or to obtain
additional financing could be adversely affected.

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<PAGE>

For further information concerning New York Municipal Obligations, see
Appendix B to this Statement of Additional Information. The summary set forth
above and in Appendix B is based on information from an official statement of
New York general obligation municipal obligations and does not purport to be
complete.

PORTFOLIO TURNOVER

The portfolio turnover rates for the fiscal years ended March 31, 1997 and
1998 were 35% and 51%, respectively. A rate of 100% indicates that the
equivalent of all of the Portfolio's assets have been sold and reinvested in a
year. High portfolio turnover may result in the realization of substantial net
capital gains or losses. To the extent net short term capital gains are
realized, any distributions resulting from such gains are considered ordinary
income for federal income tax purposes. See "Taxes" below.

INVESTMENT RESTRICTIONS

The investment restrictions of the Fund and Portfolio are identical, unless
otherwise specified. Accordingly, references below to the Fund also include the
Portfolio unless the context requires otherwise; similarly, references to the
Portfolio also include the Fund unless the context requires otherwise.

The investment restrictions below have been adopted by the Fund and
Portfolio. Except where otherwise noted, these investment restrictions are
"fundamental" policies which, under the 1940 Act, may not be changed without the
vote of a majority of the outstanding voting securities of the Fund or
Portfolio, as the case may be. A "majority of the outstanding voting
securities" is defined in the 1940 Act as the lesser of (a) 67% or more of the
voting securities present at a meeting if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy, or (b) more
than 50% of the outstanding voting securities. The percentage limitations
contained in the restrictions below apply at the time of the purchase of
securities. Whenever the Fund is requested to vote on a change in the
fundamental investment restrictions of the Portfolio, the Trust will hold a
meeting of Fund shareholders and will cast its votes as instructed by the Fund's
shareholders.

Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC staff
interpretations thereof, are amended or modified, the Fund and its corresponding
Portfolio:

1. May not purchase any security which would cause the Fund to concentrate its
investments in the securities of issuers primarily engaged in any particular
industry except as permitted by the SEC;

2. May not issue senior securities, except as permitted under the Investment
Company Act of 1940 or any rule, order or interpretation thereunder;

3. May not borrow money, except to the extent permitted by applicable law;

4. May not underwrite securities of other issuers, except to the extent that the
Fund, in disposing of portfolio securities, may be deemed an underwriter within
the meaning of the 1933 Act;

22
<PAGE>

5. May not purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may (a) invest in securities or other instruments
directly or indirectly secured by real estate, (b) invest in securities or other
instruments issued by issuers that invest in real estate and (c) make direct
investments in mortgages;

6. May not purchase or sell commodities or commodity contracts unless acquired
as a result of ownership of securities or other instruments issued by persons
that purchase or sell commodities or commodities contracts; but this shall not
prevent the Fund from purchasing, selling and entering into financial futures
contracts (including futures contracts on indices of securities, interest rates
and currencies), options on financial futures contracts (including futures
contracts on indices of securities, interest rates and currencies), warrants,
swaps, forward contracts, foreign currency spot and forward contracts or other
derivative instruments that are not related to physical commodities; and

7. May make loans to other persons, in accordance with the Fund's investment
objective and policies and to the extent permitted by applicable law.

NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The investment restrictions
described below are not fundamental policies of the Fund and its corresponding
Portfolio and may be changed by their Trustees. These non-fundamental
investment policies require that the Fund and its corresponding Portfolio:

(iii) May not acquire securities of other investment companies, except as
permitted by the 1940 Act or any order pursuant thereto.

For purposes of fundamental investment restrictions regarding industry
concentration, the Advisor may classify issuers by industry in accordance with
classifications set forth in the DIRECTORY OF COMPANIES FILING ANNUAL REPORTS
WITH THE SECURITIES AND EXCHANGE COMMISSION or other sources. In the absence of
such classification or if the Advisor determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
Advisor may classify an issuer accordingly. For instance, personal credit
finance companies and business credit finance companies are deemed to be
separate industries and wholly owned finance companies are considered to be in
the industry of their parents if their activities are primarily related to
financing the activities of their parents.

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<PAGE>

TRUSTEES AND OFFICERS

TRUSTEES

The Trustees of the Trust, who are also the Trustees of the Portfolio,
their business addresses, principal occupations during the past five years and
dates of birth are set forth below.

FREDERICK S. ADDY--Trustee; Retired; Prior to April 1994, Executive Vice
President and Chief Financial Officer Amoco Corporation. His address is 5300
Arbutus Cove, Austin, Texas 78746, and his date of birth is January 1, 1932.

WILLIAM G. BURNS--Trustee; Retired; Former Vice Chairman and Chief
Financial Officer, NYNEX. His address is 2200 Alaqua Drive, Longwood, Florida
32779, and his date of birth is November 2, 1932.

ARTHUR C. ESCHENLAUER--Trustee; Retired; Former Senior Vice President,
Morgan Guaranty Trust Company of New York. His address is 14 Alta Vista Drive,
RD #2, Princeton, New Jersey 08540, and his date of birth is May 23, 1934.

MATTHEW HEALEY (1)--Trustee, Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc., since prior to 1993. His address is Pine Tree
Club Estates, 10286 Saint Andrews Road, Boynton Beach, Florida 33436, and his
date of birth is August 23, 1937.

MICHAEL P. MALLARDI--Trustee; Retired; Prior to April 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His address
is 10 Charnwood Drive, Suffern, New York 10910, and his date of birth is
March 17, 1934.

The Trustees of the Trust are the same as the Trustees of the Portfolio. A
majority of the disinterested Trustees have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising from
the fact that the same individuals are Trustees of the Trust, the Portfolio and
the J.P. Morgan Institutional Funds, up to and including creating a separate
board of trustees.

Each Trustee is currently paid an annual fee of $75,000 (adjusted as of
April 1, 1997) for serving as Trustee of the Trust, each of the Master
Portfolios (as defined below), J.P. Morgan Funds and J.P. Morgan Series Trust
and is reimbursed for expenses incurred in connection with service as a Trustee.
The Trustees may hold various other directorships unrelated to the Fund.

- --------------------
(1) Mr. Healey is an "interested person" of the Trust, the Advisor and the
Portfolio as that term is defined in the 1940 Act.

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<PAGE>

Trustee compensation expenses paid by the Trust for the calendar year ended
December 31, 1997 are set forth below.

William G. Burns, Trustee $11,786.38 $72,500

Arthur C. Eschenlauer, $11,786.38 $72,500
Trustee

Matthew Healey, Trustee(***), $11,786.38 $72,500
Chairman and Chief
Executive Officer

Michael P. Mallardi, Trustee $11,786.38 $72,500
</TABLE>

(*) Includes the Portfolio and 19 other Portfolios (collectively the "Master
Portfolios") for which JPMIM acts as investment adviser.

(**) No investment company within the fund complex has a pension or retirement
plan. Currently there are 18 investment companies (15 investment companies
comprising the Master Portfolios, the Trust, the J.P. Morgan Funds and J.P.
Morgan Series Trust) in the fund complex.

(***) During 1997, Pierpont Group, Inc. paid Mr. Healey, in his role as Chairman
of Pierpont Group, Inc., compensation in the amount of $147,500, contributed
$22,100 to a defined contribution plan on his behalf and paid $20,500 in
insurance premiums for his benefit.

The Trustees decide upon matters of general policy and are responsible for
overseeing the Trust's and Portfolio's business affairs. The Portfolio and the
Trust have entered into a Fund Services Agreement with Pierpont Group, Inc. to
assist the Trustees in exercising their overall supervisory responsibilities
over the affairs of the Portfolio and the Trust. Pierpont Group, Inc. was
organized in July 1989 to provide services for the J.P. Morgan Family of Funds
(formerly the "Pierpont Family of Funds"), and the Trustees are the equal and
sole shareholders of Pierpont Group, Inc. The Trust and the Portfolio have
agreed to pay Pierpont Group, Inc. a fee in an amount representing its
reasonable costs in performing these services. These costs are periodically
reviewed by the Trustees. The principal offices of Pierpont Group, Inc. are
located at 461 Fifth Avenue, New York, New York 10017.

The aggregate fees paid to Pierpont Group, Inc. by the Fund and the
Portfolio during the indicated fiscal years are set forth below:

FUND -- For the fiscal years ended March 31, 1996, 1997 and 1998: $2,409, $2,907
and $3,447, respectively.

PORTFOLIO -- For the fiscal years ended March 31, 1996, 1997 and 1998: $5,530,
$5,302 and $5,740, respectively.

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<PAGE>

OFFICERS

The Trust's and Portfolio's executive officers (listed below), other than
the Chief Executive Officer and the officers who are employees of the Advisor,
are provided and compensated by Funds Distributor, Inc. ("FDI"), a wholly owned
indirect subsidiary of Boston Institutional Group, Inc. The officers conduct
and supervise the business operations of the Trust and the Portfolio. The Trust
and the Portfolio have no employees.

The officers of the Trust and the Portfolio, their principal occupations
during the past five years and dates of birth are set forth below. Unless
otherwise specified, each officer holds the same position with the Trust and the
Portfolio and other trusts and portfolios in the J.P. Morgan Family of Funds.
The business address of each of the officers unless otherwise noted is Funds
Distributor, Inc., 60 State Street, Suite 1300, Boston, Massachusetts 02109.

MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group, since
prior to 1993. His address is Pine Tree Club Estates, 10286 Saint Andrews Road,
Boynton Beach, Florida 33436. His date of birth is August 23, 1937.

MARGARET W. CHAMBERS; Vice President and Secretary. Senior Vice President
and General Counsel of FDI since April, 1998. From August 1996 to March 1998,
Ms. Chambers was Vice President and Assistant General Counsel for Loomis, Sayles
& Company, L.P. From January 1986 to July 1996, she was an associate with the
law firm of Ropes & Gray. Her date of birth is October 12, 1959.

MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President,
Chief Executive Officer, Chief Compliance Officer and Director of FDI, Premier
Mutual Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an
officer of certain investment companies distributed or administered by FDI.
Prior to July 1994, she was President and Chief Compliance Officer of FDI. Her
date of birth is August 1, 1957.

DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant Vice
President and Assistant Department Manager of Treasury Services and
Administration of FDI and an officer of certain investment companies
distributed or administered by FDI. Prior to April 1997, Mr. Conroy was
Supervisor of Treasury Services and Administration of FDI. From April 1993 to
January 1995, Mr. Conroy was a Senior Fund Accountant for Investors Bank & Trust
Company. His date of birth is March 31, 1969.

KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Vice President
and Senior Counsel of FDI and an officer of certain investment companies
distributed or administered by FDI. From June 1994 to January 1996, Ms.
Jacoppo-Wood was a Manager of SEC Registration at Scudder, Stevens & Clark, Inc.
Prior to May 1994, Ms. Jacoppo-Wood was a senior paralegal at The Boston
Company Advisors, Inc. ("TBCA"). Her date of birth is December 29, 1966.

CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Senior Associate General Counsel of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI.
From April 1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum
Financial Group. Prior to April 1994, Mr. Kelley was employed by Putnam
Investments in legal and compliance capacities. His date of birth is December
24, 1964.

26
<PAGE>

KATHLEEN K. MORRISEY; Vice President and Assistant Secretary. Vice
President and Assistant Secretary of FDI. Manager of Treasury Services
Administration and an officer of certain investment companies advised or
administered by Montgomery Asset Management, L.P. and Dresdner RCM Global
Investors, Inc., and their respective affiliates. From July 1994 to November
1995, Ms. Morrisey was a Fund Accountant II for Investors Bank & Trust Company.
Prior to July 1994 she was a Finance student at Stonehill College in North
Easton, Massachusetts. Her date of birth is July 5, 1972.

MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI.
Prior to August 1994, Ms. Nelson was an Assistant Vice President and Client
Manager for The Boston Company, Inc. Her date of birth is April 22, 1964.

MARY JO PACE; Assistant Treasurer. Vice President, Morgan Guaranty Trust
Company of New York since 1990. Ms. Pace serves in the Funds Administration
group as a Manager for the Budgeting and Expense Processing Group. Prior to
September 1995, Ms. Pace served as a Fund Administrator for Morgan Guaranty
Trust Company of New York. Her address is 60 Wall Street, New York, New York
10260. Her date of birth is March 13, 1966.

MICHAEL S. PETRUCELLI; Vice President and Assistant Secretary. Senior Vice
President and Director of Strategic Client Initiatives for FDI since December
1996. From December 1989 through November 1996, Mr. Petrucelli was employed
with GE Investments where he held various financial, business development and
compliance positions. He also served as Treasurer of the GE Funds and as
Director of GE Investment Services. Address: 200 Park Avenue, New York, New
York, 10166. His date of birth is May 18, 1961.

STEPHANIE D. PIERCE; Vice President and Assistant Secretary. Vice
President and Client Development Manager for FDI since April 1998. From April
1997 to March 1998, Ms. Pierce was employed by Citibank, NA as an officer of
Citibank and Relationship Manager on the Business and Professional Banking team
handling over 22,000 clients. Address: 200 Park Avenue, New York, New York
10166. Her date of birth is August 18, 1968.

GEORGE A. RIO; President and Treasurer. Executive Vice President and
Client Service Director of FDI since April 1998. From June 1995 to March 1998,
Mr. Rio was Senior Vice President and Senior Key Account Manager for Putnam
Mutual Funds. From May 1994 to June 1995, Mr. Rio was Director of Business
Development for First Data Corporation. From September 1983 to May 1994, Mr.
Rio was Senior Vice President & Manager of Client Services and Director of
Internal Audit at The Boston Company. His date of birth is January 2, 1955.

CHRISTINE ROTUNDO; Assistant Treasurer. Vice President, Morgan Guaranty
Trust Company of New York. Ms. Rotundo serves in the Funds Administration group
as a Manager of the Tax Group and is responsible for U.S. mutual fund tax
matters. Prior to September 1995, Ms. Rotundo served as a Senior Tax Manager in
the Investment Company Services Group of Deloitte & Touche LLP. Her address is
60 Wall Street, New York, New York 10260. Her date of birth is September 26,
1965.

27
<PAGE>

INVESTMENT ADVISOR

The Fund has not retained the services of an investment adviser because
each Fund seeks to achieve its investment objective by investing all of its
investable assets in a corresponding Portfolio. Subject to the supervision of
the Portfolio's Trustees, the Advisor makes the Portfolio's day-to-day
investment decisions, arranges for the execution of Portfolio transactions and
generally manages the Portfolio's investments. Prior to October 28, 1998,
Morgan was the Investment Advisor. JPMIM, a wholly owned subsidiary of J.P.
Morgan & Co. Incorporated ("J.P. Morgan"), is a registered investment adviser
under the Investment Advisers Act of 1940, as amended, and manages employee
benefit funds of corporations, labor unions and state and local governments and
the accounts of other institutional investors, including investment companies.
Certain of the assets of employee benefit accounts under its management are
invested in commingled pension trust funds for which Morgan serves as trustee.

J.P. Morgan, through the Advisor and other subsidiaries, acts as investment
advisor to individuals, governments, corporations, employee benefit plans,
mutual funds and other institutional investors with combined assets under
management of approximately $275 billion.

J.P. Morgan has a long history of service as adviser, underwriter and
lender to an extensive roster of major companies and as a financial advisor to
national governments. The firm, through its predecessor firms, has been in
business for over a century and has been managing investments since 1913.

Morgan, also a wholly owned subsidiary of J.P. Morgan, is a bank holding
company organized under the laws of the State of Delaware. Morgan, whose
principal offices are at 60 Wall Street, New York, New York 10260, is a New York
trust company which conducts a general banking and trust business. Morgan is
subject to regulation by the New York State Banking Department and is a member
bank of the Federal Reserve System. Through offices in New York City and
abroad, Morgan offers a wide range of services, primarily to governmental,
institutional, corporate and high net worth individual customers in the United
States and throughout the world.

The basis of the Advisor's investment process is fundamental investment
research as the firm believes that fundamentals should determine an asset's
value over the long term. J.P. Morgan currently employs over 100 full time
research analysts, among the largest research staffs in the money management
industry, in its investment management divisions located in New York, London,
Tokyo, Frankfurt and Singapore to cover companies, industries and countries on
site. In addition, the investment management divisions employ approximately 300
capital market researchers, portfolio managers and traders. The Advisor's fixed
income investment process is based on analysis of real rates, sector
diversification, and quantitative and credit analysis.

The investment advisory services the Advisor provides to the Portfolio are
not exclusive under the terms of the Advisory Agreement. The Advisor is free to
and does render similar investment advisory services to others. The Advisor
serves as investment advisor to personal investors and other investment
companies and acts as fiduciary for trusts, estates and employee benefit plans.
Certain of the assets of trusts and estates under management are invested in
common trust funds for which the Advisor serves as trustee. The accounts which
are managed or advised by the Advisor have varying investment objectives and the
Advisor invests assets of such accounts in investments substantially similar to,
or the same as, those which are expected

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<PAGE>

to constitute the principal investments of the Portfolio. Such accounts are
supervised by officers and employees of the Advisor who may also be acting in
similar capacities for the Portfolio. See "Portfolio Transactions."

The Portfolio is managed by officers of the Advisor who, in acting for
their customers, including the Portfolio, do not discuss their investment
decisions with any personnel of J.P. Morgan or any personnel of other divisions
of the Advisor or with any of its affiliated persons, with the exception of
certain investment management affiliates of J.P. Morgan.

As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Investment
Advisory Agreement, the Portfolio has agreed to pay the Advisor a fee, which is
computed daily and may be paid monthly, equal to the annual rate of 0.30% of the
Portfolio's average daily net assets.

For the fiscal years ended March 31, 1996, 1997 and 1998, the advisory fees
paid by the Portfolio were $246,966, $380,380 and $513,516, respectively.

The Investment Advisory Agreement provides that it will continue in effect
for a period of two years after execution only if specifically approved
thereafter annually in the same manner as the Distribution Agreement. See
"Distributor" below. The Investment Advisory Agreement will terminate
automatically if assigned and is terminable at any time without penalty by a
vote of a majority of the Portfolio's Trustees, or by a vote of the holders of a
majority of the Portfolio's outstanding voting securities, on 60 days' written
notice to the Advisor and by the Advisor on 90 days' written notice to the
Portfolio. See "Additional Information."

The Glass-Steagall Act and other applicable laws generally prohibit banks
and their subsidiaries, such as the Advisor, from engaging in the business of
underwriting or distributing securities, and the Board of Governors of the
Federal Reserve System has issued an interpretation to the effect that under
these laws a bank holding company registered under the federal Bank Holding
Company Act or certain subsidiaries thereof may not sponsor, organize, or
control a registered open-end investment company continuously engaged in the
issuance of its shares, such as the Trust. The interpretation does not prohibit
a holding company or a subsidiary thereof from acting as investment advisor and
custodian to such an investment company. The Advisor believes that it may
perform the services for the Portfolio contemplated by the Advisory Agreement
without violation of the Glass-Steagall Act or other applicable banking laws or
regulations. State laws on this issue may differ from the interpretation of
relevant federal law, and banks and financial institutions may be required to
register as dealers pursuant to state securities laws. However, it is possible
that future changes in either federal or state statutes and regulations
concerning the permissible activities of banks or trust companies, as well as
further judicial or administrative decisions and interpretations of present and
future statutes and regulations, might prevent the Advisor from continuing to
perform such services for the Portfolio.

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<PAGE>

If the Advisor were prohibited from acting as investment advisor to the
Portfolio, it is expected that the Trustees of the Portfolio would recommend to
investors that they approve the Portfolio's entering into a new investment
advisory agreement with another qualified investment advisor selected by the
Trustees.

Under separate agreements, Morgan provides certain financial, fund
accounting and administrative services to the Trust and the Portfolio and
shareholder services for the Trust. See "Services Agent" and "Shareholder
Servicing" below.

DISTRIBUTOR

FDI serves as the Trust's exclusive Distributor and holds itself available
to receive purchase orders for the Fund's shares. In that capacity, FDI has
been granted the right, as agent of the Trust, to solicit and accept orders for
the purchase of the Fund's shares in accordance with the terms of the
Distribution Agreement between the Trust and FDI. Under the terms of the
Distribution Agreement between FDI and the Trust, FDI receives no compensation
in its capacity as the Trust's distributor.

The Distribution Agreement shall continue in effect with respect to the
Fund for a period of two years after execution only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by its Trustees and (ii) by a vote of a majority of the
Trustees of the Trust who are not "interested persons" (as defined by the
1940 Act) of the parties to the Distribution Agreement, cast in person at a
meeting called for the purpose of voting on such approval (see "Trustees and
Officers"). The Distribution Agreement will terminate automatically if assigned
by either party thereto and is terminable at any time without penalty by a vote
of a majority of the Trustees of the Trust, a vote of a majority of the Trustees
who are not "interested persons" of the Trust, or by a vote of the holders of a
majority of the Fund's outstanding shares as defined under "Additional
Information," in any case without payment of any penalty on 60 days' written
notice to the other party. The principal offices of FDI are located at 60 State
Street, Suite 1300, Boston, Massachusetts 02109.

CO-ADMINISTRATOR

Under Co-Administration Agreements with the Trust and the Portfolio dated
August 1, 1996, FDI also serves as the Trust's and the Portfolio's
Co-Administrator. The Co-Administration Agreements may be renewed or amended by
the respective Trustees without a shareholder vote. The Co-Administration
Agreements are terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust or the Portfolio, as applicable, on not more than 60
days' written notice nor less than 30 days' written notice to the other party.
The Co-Administrator may subcontract for the performance of its obligations,
provided, however, that unless the Trust or the Portfolio, as applicable,
expressly agrees in writing, the Co-Administrator shall be fully responsible for
the acts and omissions of any subcontractor as it would for its own acts or
omissions. See "Services Agent" below.

FDI (i) provides office space, equipment and clerical personnel for
maintaining the organization and books and records of the Trust and the
Portfolio; (ii) provides officers for the Trust and the Portfolio; (iii)
prepares and files documents required for notification of state securities
administrators; (iv) reviews and files marketing and sales literature; (v)

30
<PAGE>

files Portfolio regulatory documents and mails Portfolio communications to
Trustees and investors; and (vi) maintains related books and records.

For its services under the Co-Administration Agreements, the Fund and
Portfolio have agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The amount
allocable to the Fund or Portfolio is based on the ratio of its net assets to
the aggregate net assets of the Trust, the Master Portfolios and certain other
investment companies subject to similar agreements with FDI.

The table below sets forth for the Fund and the Portfolio the
administrative fees paid to FDI for the fiscal periods indicated.

FUND -- For the period August 1, 1996 through March 31, 1997: $1,867. For the
fiscal year ended March 31, 1998: $2,809.

PORTFOLIO -- For the period August 1, 1996 through March 31, 1997: $1,914. For
the fiscal year ended March 31, 1998: $2,869.

The table below sets forth for the Fund and the Portfolio the
administrative fees paid to Signature Broker-Dealer Services, Inc. (which
provided distribution and administrative services to the Trust and placement
agent and administrative services to the Portfolio prior to August 1, 1996) for
the fiscal periods indicated.

FUND -- For the fiscal year ended March 31, 1996: $5,065. For the period April
1, 1996 through July 31, 1996: $2,361.

PORTFOLIO -- For the fiscal year ended March 31, 1996: $6,648. For the period
April 1, 1996 through July 31, 1996: $4,617.

SERVICES AGENT

The Trust, on behalf of the Fund, and the Portfolio have entered into
Administrative Services Agreements (the "Services Agreements") with Morgan,
pursuant to which Morgan is responsible for certain administrative and related
services provided to the Fund and Portfolio. The Services Agreements may be
terminated at any time, without penalty, by the Trustees or Morgan, in each case
on not more than 60 days' nor less than 30 days' written notice to the other
party.

Under the Services Agreements, Morgan provides certain administrative and
related services to the Fund and the Portfolio, including services related to
tax compliance, preparation of financial statements, calculation of performance
data, oversight of service providers and certain regulatory and Board of Trustee
matters.

Under the Services Agreements, the Fund and the Portfolio have agreed to
pay Morgan fees equal to its allocable share of an annual complex-wide charge.
This charge is calculated daily based on the aggregate net assets of the Master
Portfolios and J.P. Morgan Series Trust in accordance with the following annual
schedule: 0.09% of the first $7 billion of their aggregate average daily net
assets and 0.04% of their aggregate average daily net assets in excess of $7
billion, less the complex-wide fees payable to FDI. The portion of this charge
payable by the Fund and Portfolio is determined by the proportionate share that
its net assets bear to the total net assets of the Trust, the Master Portfolios,
the other investors in the Master Portfolios for which Morgan provides similar
services and J.P. Morgan Series Trust.

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<PAGE>

Under prior administrative services agreements in effect from December 29,
1995 through July 31, 1996, with Morgan, the Portfolio paid Morgan a fee equal
to its proportionate share of an annual complex-wide charge. This charge was
calculated daily based on the aggregate net assets of Master Portfolios in
accordance with the following schedule: 0.06% of the first $7 billion of the
Master Portfolios' aggregate average daily net assets, and 0.03% of the Master
Portfolios' aggregate average daily net assets in excess of $7 billion. Prior
to December 29, 1995, the Trust and the Portfolio had entered into Financial and
Fund Accounting Services Agreements with Morgan, the provisions of which
included certain of the activities described above and, prior to September 1,
1995, also included reimbursement of usual and customary expenses.

The table below sets forth for the Fund and the Portfolio the fees paid to
Morgan as Services Agent.

FUND -- For the fiscal years ended March 31, 1996, 1997 and 1998: $(10,606)(*)
$21,188 and $31,005, respectively.

PORTFOLIO -- For the fiscal years ended March 31, 1996, 1997 and 1998: $7,691,
$37,675 and $52,013, respectively.

CUSTODIAN AND TRANSFER AGENT

State Street Bank and Trust Company ("State Street"), 225 Franklin Street,
Boston, Massachusetts 02110, serves as the Trust's and the Portfolio's custodian
and fund accounting agent and the Fund's transfer and dividend disbursing agent.
Pursuant to the custodian contracts, State Street is responsible for maintaining
the books of account and records of portfolio transactions and holding portfolio
securities and cash. The custodian maintains portfolio transaction records. As
transfer agent and dividend disbursing agent, State Street is responsible for
maintaining account records detailing the ownership of Fund shares and for
crediting income, capital gains and other changes in share ownership to
shareholder accounts.

SHAREHOLDER SERVICING

The Trust, on behalf of the Fund, has entered into a Shareholder Servicing
Agreement with Morgan pursuant to which Morgan acts as shareholder servicing
agent for its customers and for other Fund investors who are customers of a
Financial Professional. Under this agreement, Morgan is responsible for
performing shareholder account, administrative and servicing functions, which
include but are not limited to, answering inquiries regarding account status and
history, the manner in which purchases and redemptions of Fund shares may be
effected, and certain other matters pertaining to the Fund; assisting customers
in designating and changing dividend options, account designations and
addresses; providing necessary personnel and facilities to coordinate the
establishment and maintenance of shareholder accounts and records with the
Fund's transfer agent; transmitting purchase and redemption orders to the Fund's
transfer agent and arranging for the wiring or other transfer of funds to and
from customer accounts in connection with orders to purchase or redeem Fund
shares; verifying purchase and redemption orders, transfers among and changes in
accounts; informing the Distributor of the

- --------------------
(*) Indicates a reimbursement by Morgan for expenses in excess of its fees
under the Services Agreement. No fees were paid for the fiscal year.

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<PAGE>

gross amount of purchase orders for Fund shares; monitoring the activities of
the Fund's transfer agent; and providing other related services.

Effective August 1, 1998, under the Shareholder Servicing Agreement, the
Fund has agreed to pay Morgan for these services a fee at an annual rate of
0.10% (expressed as a percentage of the average daily net asset value of Fund
shares owned by or for shareholders).

The shareholder servicing fees paid by the Fund to Morgan for the fiscal
years ended March 31, 1996, 1997 and 1998 were $21,606, $53,364 and $76,492,
respectively.

As discussed under "Investment Advisor," the Glass-Steagall Act and other
applicable laws and regulations limit the activities of bank holding companies
and certain of their subsidiaries in connection with registered open-end
investment companies. The activities of Morgan in acting as shareholder
servicing agent for Fund shareholders under the Shareholder Servicing Agreement
and providing administrative services to the Fund and the Portfolio under the
Services Agreements, and the activities of JPMIM in acting as Advisor to the
Portfolio under the Investment Advisory Agreement may raise issues under these
laws. However, Morgan and JPMIM believe that they may properly perform these
services and the other activities described in the Prospectus without violating
the Glass-Steagall Act or other applicable banking laws or regulations.

If Morgan were prohibited from providing any of the services under the
Shareholder Servicing Agreement and the Services Agreements, the Trustees would
seek an alternative provider of such services. In such event, changes in the
operation of the Fund or the Portfolio might occur and a shareholder might no
longer be able to avail himself or herself of any services then being provided
to shareholders by Morgan.

The Fund may be sold to or through financial intermediaries who are
customers of J.P. Morgan ("financial professionals"), including financial
institutions and broker-dealers, that may be paid fees by J.P. Morgan or its
affiliates for services provided to their clients that invest in the Fund. See
"Financial Professionals" below. Organizations that provide record keeping or
other services to certain employee benefit or retirement plans that include the
Fund as an investment alternative may also be paid a fee.

FINANCIAL PROFESSIONALS

The services provided by financial professionals may include establishing
and maintaining shareholder accounts, processing purchase and redemption
transactions, arranging for bank wires, performing shareholder subacounting,
answering client inquiries regarding the Trust, assisting clients in changing
dividend options, account designations and addresses, providing periodic
statements showing the client's account balance and integrating these statements
with those of other transactions and balances in the client's other accounts
serviced by the financial professional, transmitting proxy statements, periodic
reports, updated prospectuses and other communications to shareholders and, with
respect to meetings of shareholders, collecting, tabulating and forwarding
executed proxies and obtaining such other information and performing such other
services as J.P. Morgan or the financial professional's clients may reasonably
request and agree upon with the financial professional.

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<PAGE>

Although there is no sales charge levied directly by the Fund, financial
professionals may establish their own terms and conditions for providing their
services and may charge investors a transaction or other fee for their services.
Such charges may vary among financial professionals and will not be remitted to
the Fund or J.P. Morgan.

The Fund has authorized one or more brokers to accept purchase and
redemption orders on its behalf. Such brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
The Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order. These orders will be priced at the Fund's net asset value next
calculated after they are so accepted.

INDEPENDENT ACCOUNTANTS

The independent accountants of the Trust and the Portfolio are
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036. PricewaterhouseCoopers LLP conducts an annual audit of the financial
statements of the Fund and the Portfolio, assists in the preparation and/or
review of the Fund's and the Portfolio's federal and state income tax returns
and consults with the Fund and the Portfolio as to matters of accounting and
federal and state income taxation.

EXPENSES

In addition to the fees payable to Pierpont Group, Inc., JPMIM, Morgan and
FDI under various agreements discussed under "Trustees and Officers,"
"Investment Advisor", "Co-Administrator", "Distributor", "Services Agent" and
"Shareholder Servicing" above, the Fund and the Portfolio are responsible for
usual and customary expenses associated with their respective operations. Such
expenses include organization expenses, legal fees, accounting and audit
expenses, insurance costs, the compensation and expenses of the Trustees, costs
associated with registration fees under federal securities laws, and
extraordinary expenses applicable to the Fund or the Portfolio. For the Fund,
such expenses also include transfer, registrar and dividend disbursing costs,
the expenses of printing and mailing reports, notices and proxy statements to
Fund shareholders; and filing fees under state securities laws. For the
Portfolio, such expenses also include custodian fees and brokerage expenses.
Under fee arrangements prior to September 1, 1995, Morgan as Services Agent was
responsible for reimbursements to the Trust and the Portfolio and the usual and
customary expenses described above (excluding organization and extraordinary
expenses, custodian fees and brokerage expenses).

Morgan has agreed that it will reimburse the Fund until further notice to
the extent necessary to maintain the Fund's total operating expenses (which
include expenses of the Fund and the Portfolio) at the annual rate of 0.50% of
the Fund's average daily net assets. This limit does not cover extraordinary
expenses during the period. There is no assurance that Morgan will continue
this waiver.

PURCHASE OF SHARES

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<PAGE>

affiliates. Only Fund investors who are using the services of a financial
institution acting as shareholder servicing agent pursuant to an agreement with
the Trust on behalf of the Fund may make transactions in shares of the Fund.

The Fund may, at its own option, accept securities in payment for shares.
The securities delivered in such a transaction are valued by the method
described in "Net Asset Value" as of the day the Fund receives the securities.
This is a taxable transaction to the shareholder. Securities may be accepted in
payment for shares only if they are, in the judgment of the Advisor appropriate
investments for the Fund's corresponding Portfolio. In addition, securities
accepted in payment for shares must: (i) meet the investment objective and
policies of Portfolio; (ii) be acquired by the Fund for investment and not for
resale (other than for resale to the Portfolio); (iii) be liquid securities
which are not restricted as to transfer either by law or liquidity of market;
and (iv) if stock, have a value which is readily ascertainable as evidenced by a
listing on a stock exchange, OTC market or by readily available market
quotations from a dealer in such securities. The Fund reserves the right to
accept or reject at its own option any and all securities offered in payment for
its shares.

Prospective investors may purchase shares with the assistance of a
Financial Professional, and a Financial Professional may charge the investor a
fee for this service and other services it provides to its customers.

REDEMPTION OF SHARES

Investors may redeem shares as described in the Prospectus.

If the Trust, on behalf of the Fund, and the Portfolio determines that it
would be detrimental to the best interest of the remaining shareholders of a
Fund to make payment wholly or partly in cash, payment of the redemption price
may be made in whole or in part by a distribution in kind of securities from the
Fund, in lieu of cash, in conformity with the applicable rule of the SEC. If
shares are redeemed in kind, the redeeming shareholder might incur transaction
costs in converting the assets into cash. The method of valuing portfolio
securities is described under "Net Asset Value," and such valuation will be made
as of the same time the redemption price is determined. The Trust on behalf of
the Fund and the Portfolio have elected to be governed by Rule 18f-1 under the
1940 Act pursuant to which the Fund and the Portfolio are obligated to redeem
shares solely in cash up to the lesser of $250,000 or one percent of the net
asset value of the Fund during any 90 day period for any one shareholder. The
Trust will redeem Fund shares in kind only if it has received a redemption in
kind from the Portfolio and therefore shareholders of the Fund that receive
redemptions in kind will receive securities of the Portfolio. The Portfolio has
advised the Trust that the Portfolio will not redeem in kind except in
circumstances in which the Fund is permitted to redeem in kind.

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<PAGE>

redemption as follows: (i) for up to seven days, (ii) during periods when the
New York Stock Exchange is closed for other than weekends and holidays or when
trading on such Exchange is restricted as determined by the SEC by rule or
regulation, (iii) during periods in which an emergency, as determined by the
SEC, exists that causes disposal by the Portfolio of, or evaluation of the net
asset value of, its portfolio securities to be unreasonable or impracticable, or
(iv) for such other periods as the SEC may permit. For information regarding
redemption orders placed through a financial professional, please see "Financial
Professionals" above.

EXCHANGE OF SHARES

An investor may exchange shares of the Fund for shares of any J.P. Morgan
Institutional Fund, J.P. Morgan Fund or J.P. Morgan Series Trust fund without
charge. An exchange may be made so long as after the exchange the investor has
shares, in each fund in which he or she remains an investor, with a value of at
least that fund's minimum investment amount. Shareholders should read the
prospectus of the fund into which they are exchanging and may only exchange
between fund accounts that are registered in the same name, address and taxpayer
identification number. Shares are exchanged on the basis of relative net asset
value per share. Exchanges are in effect redemptions from one fund and
purchases of another fund and the usual purchase and redemption procedures and
requirements are applicable to exchanges. Shareholders subject to federal
income tax who exchange shares in one fund for shares in another fund may
recognize capital gain or loss for federal income tax purposes. Shares of the
fund to be acquired are purchased for settlement when the proceeds from
redemption become available. In the case of investors in certain states, state
securities laws may restrict the availability of the exchange privilege. The
Fund reserves the right to discontinue, alter or limit its exchange privilege at
any time.

DIVIDENDS AND DISTRIBUTIONS

The Fund declares and pays dividends and distributions as described under
"Dividends and Distributions" in the Prospectus.

Dividends and capital gains distributions paid by a Fund are automatically
reinvested in additional shares of the Fund unless the shareholder has elected
to have them paid in cash. Dividends and distributions to be paid in cash are
credited to the shareholder's account at Morgan or at his financial professional
or, in the case of certain Morgan customers, are mailed by check in accordance
with the customer's instructions. Each Fund reserves the right to discontinue,
alter or limit the automatic reinvestment privilege at any time.

If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.

NET ASSET VALUE

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<PAGE>

following legal holidays are observed: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. On days when U.S. trading markets close
early in observance of these holidays, the Fund will close for purchases and
redemptions at the same time. The Fund and the Portfolio may also close for
purchases and redemptions at such other times as may be determined by the Board
of Trustees to the extent permitted by applicable law. The days on which net
asset value is determined are the Fund's business days.

The net asset value of the Fund is equal to the value of the Fund's
investment in its corresponding Portfolio (which is equal to the Fund's pro rata
share of the total investment of the Fund and of any other investors in the
Portfolio less the Fund's pro rata share of the Portfolio's liabilities) less
the Fund's liabilities. The following is a discussion of the procedures used by
the Portfolio corresponding to the Fund in valuing its assets.

Securities or other assets for which market quotations are not readily
available (including certain restricted and illiquid securities) are valued at
fair value in accordance with procedures established by and under the general
supervision and responsibility of the Trustees. Such procedures include the use
of independent pricing services which use prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. Short-term investments which
mature in 60 days or less are valued at amortized cost if their original
maturity was 60 days or less, or by amortizing their value on the 61st day prior
to maturity, if their original maturity when acquired by the Portfolio was more
than 60 days, unless this is determined not to represent fair value by the
Trustees.

Trading in securities in most foreign markets is normally completed before
the close of trading in U.S. markets and may also take place on days on which
the U.S. markets are closed. If events materially affecting the value of
securities occur between the time when the market in which they are traded
closes and the time when the Portfolio's net asset value is calculated, such
securities will be valued at fair value in accordance with procedures
established by and under the general supervision of the Trustees.

PERFORMANCE DATA

From time to time, the Fund may quote performance in terms of yield, tax
equivalent yield, actual distributions, total returns or capital appreciation in
reports, sales literature and advertisements published by the Trust. Current
performance information for the Fund may be obtained by calling the number
provided on the cover page of this Statement of Additional Information. See also
the Prospectus.

37
<PAGE>

YIELD QUOTATIONS. As required by regulations of the SEC, the annualized
yield for the Fund is computed by dividing the Fund's net investment income per
share earned during a 30-day period by the net asset value on the last day of
the period. The average daily number of shares outstanding during the period
that are eligible to receive dividends is used in determining the net investment
income per share. Income is computed by totaling the interest earned on all
debt obligations during the period and subtracting from that amount the total of
all recurring expenses incurred during the period. The 30-day yield is then
annualized on a bond-equivalent basis assuming semi-annual reinvestment and
compounding of net investment income. Annualized tax-equivalent yield reflects
the approximate annualized yield that a taxable investment must earn for
shareholders at specified federal and New York income tax levels to produce an
after-tax yield equivalent to the annualized tax-exempt yield.

Below is set forth historical yield information for the period ended March
31, 1998: 30-day yield: 4.11%; 30-day tax equivalent yield at 39.6% tax rate:
6.80%.

TOTAL RETURN QUOTATIONS. The Fund may advertise "total return" and
non-standardized total return data. The total return shows what an investment
in a Fund would have earned over a specified period of time (one, five or ten
years or since commencement of operations, if less) assuming that all
distributions and dividends by the Fund were reinvested on the reinvestment
dates during the period and less all recurring fees. This method of calculating
total return is required by regulations of the SEC. Total return data similarly
calculated, unless otherwise indicated, over other specified periods of time may
also be used. All performance figures are based on historical earnings and are
not intended to indicate future performance.

As required by regulations of the SEC, the average annual total return of
the Fund for a period is computed by assuming a hypothetical initial payment of
$1,000. It is then assumed that all of the dividends and distributions by the
Fund over the period are reinvested. It is then assumed that at the end of the
period, the entire amount is redeemed. The average annual total return is then
calculated by determining the annual rate required for the initial payment to
grow to the amount which would have been received upon redemption.

Aggregate total returns, reflecting the cumulative percentage change over a
measuring period, may also be calculated.

Below is set forth historical return information for the Fund for the
period ended March 31, 1998: Average annual total return, 1 year: 7.68%; average
annual total return, 5 years: N/A; average annual total return, commencement of
operations (April 11, 1994) to period end: 6.57%; aggregate total return, 1
year: 8.64%; aggregate total return, 5 years: N/A; aggregate total return,
commencement of operations (April 11, 1994) to period end: 28.67%.

GENERAL. The Fund's performance will vary from time to time depending upon
market conditions, the composition of the Portfolio, and operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in the Fund with certain bank

38
<PAGE>

deposits or other investments that pay a fixed yield or return for a stated
period of time.

From time to time, the Fund may, in addition to any other permissible
information, include the following types of information in advertisements,
supplemental sales literature and reports to shareholders: (1) discussions of
general economic or financial principles (such as the effects of compounding and
the benefits of dollar-cost averaging); (2) discussions of general economic
trends; (3) presentations of statistical data to supplement such discussions;
(4) descriptions of past or anticipated portfolio holdings for the Fund; (5)
descriptions of investment strategies for the Fund; (6) descriptions or
comparisons of various savings and investment products (including, but not
limited to, qualified retirement plans and individual stocks and bonds), which
may or may not include the Fund; (7) comparisons of investment products
(including the Fund) with relevant markets or industry indices or other
appropriate benchmarks; (8) discussions of fund rankings or ratings by
recognized rating organizations; and (9) discussions of various statistical
methods quantifying the Fund's volatility relative to its benchmark or to past
performance, including risk adjusted measures. The Fund may also include
calculations, such as hypothetical compounding examples, which describe
hypothetical investment results in such communications. Such performance
examples will be based on an express set of assumptions and are not indicative
of the performance of the Fund.

PORTFOLIO TRANSACTIONS

The Advisor places orders for the Portfolio for all purchases and sales of
portfolio securities, enters into repurchase agreements, and may enter into
reverse repurchase agreements and execute loans of portfolio securities on
behalf of the Portfolio. See "Investment Objective and Policies."

Fixed income and debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their own
accounts without a stated commission. The price of the security usually
includes profit to the dealers. In underwritten offerings, securities are
purchased at a fixed price which includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
On occasion, certain securities may be purchased directly from an issuer, in
which case no commissions or discounts are paid.

Portfolio transactions for the Portfolio will be undertaken principally to
accomplish a Portfolio's objective in relation to expected movements in the
general level of interest rates. The Portfolio may engage in short-term trading
consistent with its objective. See "Investment Objective and Policies --
Portfolio Turnover."

In connection with portfolio transactions for the Portfolio, the Advisor
intends to seek the best execution on a competitive basis for both purchases and
sales of securities.

39
<PAGE>

comparable period of time. Furthermore, the Trustees of the Portfolio,
including a majority of the Trustees who are not "interested persons," have
adopted procedures which are reasonably designed to provide that any
commissions, fees, or other remuneration paid to such affiliates are consistent
with the foregoing standard.

Portfolio securities will not be purchased from or through or sold to or
through the Co-Administrator, the Distributor or the Advisor or any other
"affiliated person" (as defined in the 1940 Act) of the Co-Administrator,
Distributor or Advisor when such entities are acting as principals, except to
the extent permitted by law. In addition, the Portfolio will not purchase
securities from any underwriting group of which the Advisor or an affiliate of
the Advisor is a member, except to the extent permitted by law.

Investment decisions made by the Advisor are the product of many factors in
addition to basic suitability for the particular portfolio or other client in
question. Thus, a particular security may be bought or sold for certain clients
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling the same security. The Fund may only
sell a security to other portfolios or accounts managed by the Advisor or its
affiliates in accordance with procedures adopted by the Trustees.

On those occasions when the Advisor deems the purchase or sale of a
security to be in the best interests of the Portfolio as well as other customers
including other Portfolios, the Advisor to the extent permitted by applicable
laws and regulations, may, but is not obligated to, aggregate the securities to
be sold or purchased for the Portfolio with those to be sold or purchased for
other customers in order to obtain best execution, including lower brokerage
commissions if appropriate. In such event, allocation of the securities so
purchased or sold as well as any expenses incurred in the transaction will be
made by the Advisor in the manner it considers to be most equitable and
consistent with its fiduciary obligations to the Portfolio. In some instances,
this procedure might adversely affect the Portfolio.

If the Portfolio writes options that effect a closing purchase transaction
with respect to an option written by it, normally such transaction will be
executed by the same broker-dealer who executed the sale of the option. The
writing of options by the Portfolio will be subject to limitations established
by each of the exchanges governing the maximum number of options in each class
which may be written by a single investor or group of investors acting in
concert, regardless of whether the options are written on the same or different
exchanges or are held or written in one or more accounts or through one or more
brokers. The number of options which the Portfolio may write may be affected by
options written by the Advisor for other investment advisory clients. An
exchange may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.

MASSACHUSETTS TRUST

40
<PAGE>

acts or obligations of any Fund and that every written agreement, obligation,
instrument or undertaking made on behalf of any Fund will contain a provision to
the effect that the shareholders are not personally liable thereunder.

Effective January 1, 1998, the name of the Trust was changed from "The JPM
Institutional Funds" to "J.P. Morgan Institutional Funds", and the Fund's name
changed accordingly. Effective October 28, 1998 the name of the Fund was
changed from "J.P. Morgan Institutional New York Total Return Bond Fund" to J.P.
Morgan Institutional New York Tax Exempt Bond Fund", and the Portfolio's name
changed accordingly.

The Trust's Declaration of Trust further provides that the name of the
Trust refers to the Trustees collectively as Trustees, not as individuals or
personally, that no Trustee, officer, employee or agent of a Fund is liable to a
Fund or to a shareholder, and that no Trustee, officer, employee, or agent is
liable to any third persons in connection with the affairs of a Fund, except as
such liability may arise from his or its own bad faith, willful misfeasance,
gross negligence or reckless disregard of his or its duties to such third
persons. It also provides that all third persons shall look solely to Fund
property for satisfaction of claims arising in connection with the affairs of a
Fund. With the exceptions stated, the Trust's Declaration of Trust provides
that a Trustee, officer, employee, or agent is entitled to be indemnified
against all liability in connection with the affairs of a Fund.

The Trust shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders or by action of the Trustees upon notice to the shareholders.

DESCRIPTION OF SHARES

The Trust is an open-end management investment company organized as a
Massachusetts business trust in which the Fund represents a separate series of
shares of beneficial interest. See "Massachusetts Trust."

The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares ($0.001 par value) of one or more series and
classes within any series and to divide or combine the shares (of any series)
without changing the proportionate beneficial interest of each shareholder in a
Fund (or in the assets of other series, if applicable). To date shares of 23
series are currently available for sale to the public. Each share represents an
equal proportional interest in a Fund with each other share. Upon liquidation
of the Fund, holders are entitled to share pro rata in the net assets of the
Fund available for distribution to such shareholders. See "Massachusetts
Trust." Shares of a Fund have no preemptive or conversion rights and are fully
paid and nonassessable. The rights of redemption and exchange are described in
the Prospectus and elsewhere in this Statement of Additional Information.

41
<PAGE>

the shares voting can, if they choose, elect all Trustees being selected while
the shareholders of the remaining shares would be unable to elect any Trustees.
It is the intention of the Trust not to hold meetings of shareholders annually.
The Trustees may call meetings of shareholders for action by shareholder vote as
may be required by either the 1940 Act or the Trust's Declaration of Trust.

Shareholders of the Trust have the right, upon the declaration in writing
or vote of more than two-thirds of its outstanding shares, to remove a Trustee.
The Trustees will call a meeting of shareholders to vote on removal of a Trustee
upon the written request of the record holders of 10% of the Trust's shares. In
addition, whenever ten or more shareholders of record who have been such for at
least six months preceding the date of application, and who hold in the
aggregate either shares having a net asset value of at least $25,000 or at least
1% of the Trust's outstanding shares, whichever is less, shall apply to the
Trustees in writing, stating that they wish to communicate with other
shareholders with a view to obtaining signatures to request a meeting for the
purpose of voting upon the question of removal of any Trustee or Trustees and
accompanied by a form of communication and request which they wish to transmit,
the Trustees shall within five business days after receipt of such application
either: (1) afford to such applicants access to a list of the names and
addresses of all shareholders as recorded on the books of the Trust; or
(2) inform such applicants as to the approximate number of shareholders of
record, and the approximate cost of mailing to them the proposed communication
and form of request. If the Trustees elect to follow the latter course, the
Trustees, upon the written request of such applicants, accompanied by a tender
of the material to be mailed and of the reasonable expenses of mailing, shall,
with reasonable promptness, mail such material to all shareholders of record at
their addresses as recorded on the books, unless within five business days after
such tender the Trustees shall mail to such applicants and file with the SEC,
together with a copy of the material to be mailed, a written statement signed by
at least a majority of the Trustees to the effect that in their opinion either
such material contains untrue statements of fact or omits to state facts
necessary to make the statements contained therein not misleading, or would be
in violation of applicable law, and specifying the basis of such opinion. After
opportunity for hearing upon the objections specified in the written statements
filed, the SEC may, and if demanded by the Trustees or by such applicants shall,
enter an order either sustaining one or more of such objections or refusing to
sustain any of them. If the SEC shall enter an order refusing to sustain any of
such objections, or if, after the entry of an order sustaining one or more of
such objections, the SEC shall find, after notice and opportunity for hearing,
that all objections so sustained have been met, and shall enter an order so
declaring, the Trustees shall mail copies of such material to all shareholders
with reasonable promptness after the entry of such order and the renewal of such
tender.

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<PAGE>

the Trust for shares of any additional series or class, and all assets in which
such consideration is invested, would belong to that series or class, subject
only to the rights of creditors of the Trust and would be subject to the
liabilities related thereto. Shareholders of any additional series or class
will approve the adoption of any management contract or distribution plan
relating to such series or class and of any changes in the investment policies
related thereto, to the extent required by the 1940 Act.

For information relating to mandatory redemption of Fund shares or their
redemption at the option of the trust under certain circumstances, see the
Prospectus.

As of September 30, 1998, the following owned of record or, to the
knowledge of management, beneficially owned more than 5% of the outstanding
shares of the Fund:

Morgan as Agent for Trust of LHP Klotz for the benefit of R. Klotz (8.83%);
Morgan as Agent for G. Attfield and A. Hubbard (7.46%); Morgan as Agent for
G. Attfield and A. Hubbard (7.17%); Morgan as Agent for E. Greene, (6.54%);
Charles Schwab & Co. Special Custody Account for Benefit of Customers,
(5.97%); Morgan as Agent for Shubert Organization (5.58%).

The address of each owner listed above is c/o Morgan, 522 Fifth Avenue, New
York, New York 10036. As of the date of this Statement of Additional
Information, the officers and Trustees as a group owned less than 1% of the
shares of the Fund.

SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE

Unlike other mutual funds which directly acquire and manage their own
portfolio of securities, the Fund is an open-end management investment company
which seeks to achieve its investment objective by investing all of its
investable assets in a corresponding Master Portfolio, a separate registered
investment company with the same investment objective and policies as the Fund.
Fund shareholders are entitled to one vote for each dollar of net asset value
(or a proportionate fractional vote in respect of a fractional dollar amount),
on matters on which shares of the Fund shall be entitled to vote.

In addition to selling a beneficial interest to the Fund, the Portfolio may
sell beneficial interests to other mutual funds or institutional investors.
Such investors will invest in the Portfolio on the same terms and conditions and
will bear a proportionate share of the Portfolio's expenses. However, the other
investors investing in the Portfolio may sell shares of their own fund using a
different pricing structure than the Fund. Such different pricing structures
may result in differences in returns experienced by investors in other funds
that invest in the Portfolio. Such differences in returns are not uncommon and
are present in other mutual fund structures. Information concerning other
holders of interests in the Portfolio is available from Morgan at (800)
766-7722.

The Trust may withdraw the investment of the Fund from the Portfolio at any
time if the Board of Trustees of the Trust determines that it is in the best
interests of the Fund to do so. Upon any such withdrawal, the Board of Trustees
would consider what action might be taken, including the investment of all the
assets of the Fund in another pooled investment entity having the same
investment objective and restrictions as the Fund or the retaining of an
investment adviser to manage the Fund's assets in accordance with the

43
<PAGE>

investment policies with respect to the Portfolio described above and in each
Fund's prospectus.

Certain changes in the Portfolio's fundamental investment policies or
restrictions, or a failure by the Fund's shareholders to approve such change in
the Portfolio's investment restrictions, may require withdrawal of the Fund's
interest in the Portfolio. Any such withdrawal could result in a distribution
in kind of portfolio securities (as opposed to a cash distribution) from the
Portfolio which may or may not be readily marketable. The distribution in kind
may result in the Fund having a less diversified portfolio of investments or
adversely affect the Fund's liquidity, and the Fund could incur brokerage, tax
or other charges in converting the securities to cash. Notwithstanding the
above, there are other means for meeting shareholder redemption requests, such
as borrowing.

Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large
fund withdraws from the Portfolio, the remaining funds may subsequently
experience higher pro rata operating expenses, thereby producing lower returns.

Additionally, because the Portfolio would become smaller, it may become
less diversified, resulting in potentially increased portfolio risk (however,
these possibilities also exist for traditionally structured funds which have
large or institutional investors who may withdraw from a fund). Also funds with
a greater pro rata ownership in the Portfolio could have effective voting
control of the operations of the Portfolio. Whenever the Fund is requested to
vote on matters pertaining to the Portfolio (other than a vote by the Fund to
continue the operation of the Portfolio upon the withdrawal of another investor
in the Portfolio), the Trust will hold a meeting of shareholders of the Fund and
will cast all of its votes proportionately as instructed by the Fund's
shareholders. The Trust will vote the shares held by Fund shareholders who do
not give voting instructions in the same proportion as the shares of Fund
shareholders who do give voting instructions. Shareholders of the Fund who do
not vote will have no affect on the outcome of such matters.

TAXES

The Fund intends to qualify and remain qualified as a regulated investment
company under Subchapter M of the Code. As a regulated investment company, the
Fund must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock, securities or foreign
currency and other income (including but not limited to gains from options,
futures, and forward contracts) derived with respect to its business of
investing in such stock, securities or foreign currency and (b) diversify its
holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
value of the Fund's total assets is represented by cash, U.S. Government
securities, investments in other regulated investment companies and other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the Fund's total assets, and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities or the securities of other regulated investment companies).

As a regulated investment company, the Fund (as opposed to its
shareholders) will not be subject to federal income taxes on the net

44
<PAGE>

investment income and capital gains that it distributes to its shareholders,
provided that at least 90% of its net investment income and realized net
short-term capital gains in excess of net long-term capital losses for the
taxable year is distributed.

Under the Code, the Fund will be subject to a 4% excise tax on a portion of
its undistributed taxable income and capital gains if it fails to meet certain
distribution requirements by the end of the calendar year. The Fund intends to
make distributions in a timely manner and accordingly does not expect to be
subject to the excise tax.

For federal income tax purposes, dividends that are declared by the Fund in
October, November or December as of a record date in such month and actually
paid in January of the following year will be treated as if they were paid on
December 31 of the year declared. Therefore, such dividends will generally be
taxable to a shareholder in the year declared rather than the year paid.

The Fund intends to qualify to pay exempt-interest dividends to its
shareholders by having, at the close of each quarter of its taxable year, at
least 50% of the value of its total assets consist of tax exempt securities. An
exempt-interest dividend is that part of dividend distributions made by the Fund
which consists of interest received by the Fund on tax exempt securities.
Shareholders will not incur any federal income tax on the amount of
exempt-interest dividends received by them from the Fund. In view of the Fund's
investment policies, it is expected that a substantial portion of all dividends
will be exempt-interest dividends, although the Fund may from time to time
realize and distribute net short-term capital gains and may invest limited
amounts in taxable securities under certain circumstances. As of March 31,
1997, the Fund incurred and elected to defer post-October losses of $20,009
until the next taxable year. For federal income tax purposes, the Fund has a
capital loss carryforward at March 31, 1997 of approximately $44,000, all of
which expires in the year 2005. To the extent that this capital loss is used to
offset future gains, it is probable that the gains so offset will not be
distributed to shareholders.

Distributions of net investment income (other than exempt-interest
dividends) and realized net short-term capital gains in excess of net long-term
capital losses are generally taxable to shareholders of the Fund as ordinary
income whether such distributions are taken in cash or reinvested in additional
shares. The Fund generally pays a monthly dividend. If dividend payments exceed
income earned by the Fund, the over distribution would be considered a return of
capital rather than a dividend payment. The Fund intends to pay dividends in
such a manner so as to minimize the possibility of a return of capital.
Distributions of net long-term capital gains (i.e., net long-term capital gains
in excess of net short-term capital losses) are taxable to shareholders of the
Fund as long-term capital gains, regardless of whether such distributions are
taken in cash or reinvested in additional shares and regardless of how long a
shareholder has held shares in the Fund. In general, long-term capital gain of
an individual shareholder will be subject to a reduced rate of tax. Investors
should consult their tax advisors concerning the treatment of capital gains and
losses.

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<PAGE>

short-term capital gains or losses. Gains and losses on the sale, lapse or
other termination of options on securities will be treated as gains and losses
from the sale of securities. If an option written by the Fund lapses or is
terminated through a closing transaction, such as a repurchase by the Fund of
the option from its holder, the Fund will realize a short-term capital gain or
loss, depending on whether the premium income is greater or less than the amount
paid by the Fund in the closing transaction. If securities are purchased by the
Fund pursuant to the exercise of a put option written by it, the Fund will
subtract the premium received from its cost basis in the securities purchased.

Any distribution of net investment income or capital gains will have the
effect of reducing the net asset value of Fund shares held by a shareholder by
the same amount as the distribution. If the net asset value of the shares is
reduced below a shareholder's cost as a result of such a distribution, the
distribution, although constituting a return of capital to the shareholder, will
be taxable as described above. Investors should thus consider the consequences
of purchasing shares in the Fund shortly before the Fund declares a sizable
dividend distribution.

Any gain or loss realized on the redemption or exchange of Fund shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year, and
otherwise as short-term capital gain or loss. However, any loss realized by a
shareholder upon the redemption or exchange of shares in the Fund held for six
months or less (i) will be treated as a long-term capital loss to the extent of
any long-term capital gain distributions received by the shareholder with
respect to such shares, and (ii) will be disallowed to the extent of any
exempt-interest dividends received by the shareholder with respect to such
shares. In addition, no loss will be allowed on the redemption or exchange of
shares of the Fund, if within a period beginning 30 days before the date of such
redemption or exchange and ending 30 days after such date, the shareholder
acquires (such as through dividend reinvestment) securities that are
substantially identical to shares of the Fund.

Certain options and futures held by the Fund at the end of each fiscal year
will be required to be "marked to market" for federal income tax purposes --
i.e., treated as having been sold at market value. For options and futures
contracts, 60% of any gain or loss recognized on these deemed sales and on
actual dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss regardless of how
long the Fund has held such options or futures.

If a correct and certified taxpayer identification number is not on file,
the Fund is required, subject to certain exemptions, to withhold 31% of certain
payments made or distributions declared to non-corporate shareholders.

STATE AND LOCAL TAXES. The Fund may be subject to state or local taxes in
jurisdictions in which the Fund is deemed to be doing business. In addition,
the treatment of the Fund and its shareholders in those states which have income
tax laws might differ from treatment under the federal income tax laws.
Shareholders should consult their own tax advisors with respect to any state or
local taxes.

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<PAGE>

Subchapter M of the Code. The Portfolio is organized as a New York trust. The
Portfolio is not subject to any federal income taxation or income or franchise
tax in the State of New York or The Commonwealth of Massachusetts. The
investment by the Fund in the Portfolio does not cause the Fund to be liable for
any income or franchise tax in the State of New York.

ADDITIONAL INFORMATION

Telephone calls to the Fund, J.P. Morgan or a Financial Professional as
shareholder servicing agent may be tape recorded. With respect to the
securities offered hereby, this Statement of Additional Information and the
Prospectus do not contain all the information included in the Trust's
registration statement filed with the SEC under the 1933 Act and the Trust's and
the Portfolio's registration statements filed under the 1940 Act. Pursuant to
the rules and regulations of the SEC, certain portions have been omitted. The
registration statement including the exhibits filed therewith may be examined at
the office of the SEC in Washington, D.C.

No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with the
offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Fund or the Distributor. The Prospectus and this Statement of
Additional Information do not constitute an offer by the Fund or by the
Distributor to sell or solicit any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful for the Fund or
the Distributor to make such offer in such jurisdictions.

THE YEAR 2000 INITIATIVE

With the new millennium rapidly approaching, organizations are examining
their computer systems to ensure they are year 2000 compliant. The issue, in
simple terms, is that many existing computer systems use only two numbers to
identify a year in the date field with the assumption that the first two digits
are always 19. As the century is implied in the date, on January 1, 2000,
computers that are not year 2000 compliant will assume the year is 1900. Systems
that calculate, compare, or sort using the incorrect date will cause erroneous
results, ranging from system malfunctions to incorrect or incomplete transaction
processing. If not remedied, potential risks include business interruption or
shutdown, financial loss, reputation loss, and/or legal liability.

47
<PAGE>

global inventory and assessment of J.P. Morgan's technology and application
portfolio to understand the scope of the year 2000 impact at J.P. Morgan. J.P.
Morgan presently is renovating and testing these technologies and applications
in partnership with external consulting and software development organizations,
as well as with year 2000 tool providers. J.P. Morgan is on target with its
plan to substantially complete renovation, testing, and validation of its key
systems by year-end 1998 and to participate in industry-wide testing (or
streetwide testing) in 1999. J.P. Morgan is also working with key external
parties, including clients, counterparties, vendors, exchanges, depositories,
utilities, suppliers, agents and regulatory agencies, to stem the potential
risks the year 2000 problem poses to J.P. Morgan and to the global financial
community.

Costs associated with efforts to prepare J.P. Morgan's systems for the year
2000 approximated $95 million in 1997. In 1998, J.P. Morgan will continue its
efforts to prepare its systems for the year 2000. The total cost to become
year-2000 compliant is estimated at $250 million, for internal systems
renovation and testing, testing equipment, and both internal and external
resources working on the project. Remaining costs will be incurred primarily in
1998. The costs associated with J.P. Morgan becoming year-2000 compliant will
be borne by J.P. Morgan and not the Fund nor the Portfolio.

FINANCIAL STATEMENTS

The financial statements and the report thereon of PricewaterhouseCoopers
LLP are incorporated herein by reference to the Fund's March 31, 1998 annual
report filing made with the SEC on May 28, 1998 pursuant to Section 30(b) of the
1940 Act and Rule 30b2-1 thereunder (Accession Number 0001016969-98-000036).
The financial statements are available without charge upon request by calling
J.P. Morgan Funds Services at (800) 766-7722. The Fund's financial statements
include the financial statements of the Portfolio.

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<PAGE>

APPENDIX A

DESCRIPTION OF SECURITY RATINGS

STANDARD & POOR'S

CORPORATE AND MUNICIPAL BONDS

AAA - Debt rated AAA have the highest ratings assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.

AA - Debt rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small
degree.

A - Debt rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.

BBB - Debt rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher rated categories.

BB - Debt rated BB are regarded as having less near-term vulnerability to
default than other speculative issues. However, they face major
ongoing uncertainties or exposure to adverse business, financial or
economic conditions which could lead to inadequate capacity to meet
timely interest and principal payments.

B - An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.

CCC - An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions,
the obligor is not likely to have the capacity to meet its financial
commitment on the obligation.

CC - An obligation rated CC is currently highly vulnerable to nonpayment.

C - The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.

A-1
<PAGE>

COMMERCIAL PAPER, INCLUDING TAX EXEMPT

A-1 - This designation indicates that the degree of safety regarding timely
payment is very strong.

SHORT-TERM TAX-EXEMPT NOTES

SP-2 - The short-term tax-exempt note rating of SP-2 has a satisfactory
capacity to pay principal and interest.

MOODY'S

CORPORATE AND MUNICIPAL BONDS

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.

A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in
the future.

A-2
<PAGE>

Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.

Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.

Ca - Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

C - Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

COMMERCIAL PAPER, INCLUDING TAX EXEMPT

- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.

SHORT-TERM TAX EXEMPT NOTES

MIG-2 - MIG-2 rated notes are of high quality but with margins of protection
not as large as MIG-1.

A-3
<PAGE>

APPENDIX B

ADDITIONAL INFORMATION CONCERNING NEW YORK MUNICIPAL SECURITIES

The following information is a summary of special factors affecting
investments in New York municipal obligations. It does not purport to be a
complete description and is based on information from the supplement (dated
January 30, 1998) to the Annual Information Statement of the State of New York
dated August 15, 1997, and other sources of information. The factors affecting
the financial condition of New York State (the "State") and New York City (the
"City") are complex and the following description constitutes only a summary.

GENERAL

New York is the third most populous state in the nation and has a
relatively high level of personal wealth. The state's economy is diverse, with
a comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. The State's location and its excellent air
transport facilities and natural harbors have made it an important link in
international commerce. Travel and tourism constitute an important part of the
economy. Like the rest of the nation, New York has a declining proportion of
its workforce engaged in manufacturing, and an increasing proportion engaged in
service industries.

SERVICES: The services sector, which includes entertainment, personal
services, such as health care and auto repairs, and business-related services,
such as information processing, law and accounting, is the State's leading
economic sector. The services sector accounts for more than three of every ten
nonagricultural jobs in New York and has a noticeably higher proportion of total
jobs than does the rest of the nation.

MANUFACTURING: Manufacturing employment continues to decline in importance
in New York, as in most other states, and New York's economy is less reliant on
this sector than is the nation. The principal manufacturing industries in
recent years produced printing and publishing materials, instruments and related
products, machinery, apparel and finished fabric products, electronic and other
electric equipment, food and related products, chemicals and allied products,
and fabricated metal products.

TRADE: Wholesale and retail trade is the second largest sector in terms of
nonagricultural jobs in New York but is considerably smaller when measured by
income share. Trade consists of wholesale businesses and retail businesses,
such as department stores and eating and drinking establishments.

FINANCE, INSURANCE AND REAL ESTATE: New York City is the nation's leading
center of banking and finance and, as a result, this is a far more important
sector in the State than in the nation as a whole. Although this sector
accounts for under one-tenth of all nonagricultural jobs in the State, it
contributes over one-sixth of all nonfarm labor and proprietors' income.

AGRICULTURE: Farming is an important part of the economy of large regions
of the State, although it constitutes a very minor part of total State output.
Principal agricultural products of the State include milk

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and dairy products, greenhouse and nursery products, apples and other fruits,
and fresh vegetables. New York ranks among the nation's leaders in the
production of these commodities.

GOVERNMENT: Federal, State and local government together are the third
largest sector in terms of nonagricultural jobs, with the bulk of the employment
accounted for by local governments. Public education is the source of nearly
one-half of total state and local government employment.

The importance of the different sectors of the State's economy relative to
the national economy is shown in the following table, which compares
nonagricultural employment and income by industrial categories for the State and
the nation as a whole. Relative to the nation, the State has a smaller share of
manufacturing and construction and a larger share of service-related industries.
The State's finance, insurance, and real estate share, as measured by income, is
particularly large relative to the nation. The State is likely to be less
affected than the nation as a whole during an economic recession that is
concentrated in manufacturing and construction, but likely to be more affected
during a recession that is concentrated in the service-producing sector.

ECONOMIC OUTLOOK

U. S. ECONOMY

The State has updated its mid-year forecast of national and state economic
activity through the end of calendar year 1999. At the national level, although
the current projection is for a faster annual growth rate for 1998 as a whole
and slower annual growth for 1999 than expected in the earlier forecast, growth
in both years is still expected to be substantially slower than it was during
1997. The revised forecast projects real Gross Domestic Product (GDP) growth of
2.6 percent in 1998, which is more than a full percentage point lower than the
estimated 1997 growth rate. In 1999, real GDP growth is expected to fall even
further to 2.0 percent. The growth of nominal GDP is projected to decline from
5.8 percent in 1997 to 4.8 percent in 1998 and 4.3 percent in 1999. The
inflation rate is expected to drop to 2.2 percent in 1998 before rising to 2.5
percent in 1999. The annual rate of job growth is expected to be 2.3 percent in
1998, equaling the strong growth rate experienced in 1997. In 1999, however,
employment growth is forecast to slow markedly to 1.3 percent. Growth in
personal income and wages is expected to slow in 1998 and again in 1999.

STATE ECONOMY

At the State level, moderate growth is projected to continue in 1998 and
1999 for employment, wages and personal income, although the growth rates will
lessen gradually during the course of the two years. Personal income is
estimated to grow by 5.4 percent in 1997, fueled in part by a continued large
increase in financial sector bonus payments, and is projected to grow 4.7
percent in 1998 and 4.4 percent in 1999. Increases in bonus payments at
year-end 1998 are projected to be modest, a substantial change from the rate of
increase of the last few years. Overall employment growth is expected to
continue at a modest rate, reflecting the slowing growth in the national
economy, continued spending restraint in government, and restructuring in the
health care, social service, and banking sectors.

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STATE FINANCIAL PLAN

The State Constitution requires the Governor to submit to the legislature a
balanced executive budget which contains a complete plan of expenditures (the
"State Financial Plan") for the ensuing fiscal year and all moneys and revenues
estimated to be available therefor, accompanied by bills containing all proposed
appropriations or reappropriations and any new or modified revenue measures to
be enacted in connection with the executive budget. A final budget must be
approved before the statutory deadline of April 1. The State Financial Plan is
updated quarterly pursuant to law.

1997-98 FISCAL YEAR

The State's current fiscal year commenced on April 1, 1997, and ends on
March 31, 1998, and is referred to herein as the State's 1997-98 fiscal year.
The State's budget for the 1997-98 fiscal year was adopted by the Legislature on
August 4, 1997, more than four months after the start of the fiscal year. Prior
to adoption of the budget, the Legislature enacted appropriations for
disbursements considered to be necessary for State operations and other
purposes, including necessary appropriations for State-supported debt service.
The State's Financial Plan for the 1997-98 fiscal year was formulated on August
11, 1997 and is based on the State's budget as enacted by the Legislature, as
well as actual results for the first quarter of the current fiscal year. The
1997-98 State Financial Plan is expected to be updated in October and January.

The adopted 1997-98 budget projects an increase in General Fund
disbursements of $1.7 billion or 5.2 percent over 1996-97 levels. The average
annual growth rate over the last three fiscal years is approximately 1.2
percent. State Funds disbursements (excluding federal grants) are projected to
increase by 5.4 percent from the 1996-97 fiscal year. All Governmental Funds
projected to increase by 7.0 percent over the 1996-97 fiscal year. See Exhibit
A to this Annual Information Statement for a description of the State's fund
types.

The 1997-98 State Financial Plan is projected to be balanced on a cash
basis. The Financial Plan projections include a reserve for future needs of
$530 million. As compared to the Governor's Executive Budget as amended in
February 1997, the State's adopted budget for 1997-98 increases General Fund
spending by $1.7 billion, primarily from increases for local assistance ($1.3
billion). Resources used to fund these additional expenditures include
increased revenues projected for the 1997-98 fiscal year, increased resources
produced in the 1996-97 fiscal year that will be utilized in 1997-98,
reestimates of social service, fringe benefit and other spending, and certain
non-recurring resources. Total non-recurring resources included in the 1997-98
Financial Plan are projected by DOB to be $270 million, or 0.7 percent of total
General Fund receipts.

The 1997-98 adopted budget includes multi-year tax reductions, including a
State funded property and local income tax reduction program, estate tax relief,
utility gross receipts tax reductions, permanent reductions in the State sales
tax on clothing, and elimination of assessments on medical providers. These
reductions are intended to reduce the overall level of State and local taxes in
New York and to improve the State's competitive position vis-a-vis other states.
The various elements of the State and local tax and assessment reductions have
little or no impact on the 1997-98 Financial Plan, and do not begin to
materially affect the outyear projections until the State's 1999-2000

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fiscal year. The adopted 1997-98 budget also makes significant investments in
education, and proposes a new $2.4 billion general obligation bond proposal for
school facilities to be submitted to the voters in November 1997.

The 1997-98 Financial Plan also includes: a projected General Fund reserve
of $530 million; a projected balance of $332 million in the Tax Stabilization
Reserve Fund; and a projected $65 million balance in the Contingency Reserve
Fund.

The projections do not include any subsequent actions that the Governor may
take to exercise his line-item veto (or vetoing any companion legislation)
before signing the 1997-98 budget appropriation bills into law. Under the
Constitution, the Governor may veto any additions to the Executive Budget within
10 days after the submission of appropriation bills for his approval. If the
Governor were to take such action, the resulting impact on the Financial Plan
would be positive.

The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal government, that
are not under the control of the State. In addition, the State Financial Plan
is based upon forecasts of national and State economic activity. Economic
forecasts have frequently failed to predict accurately the timing and magnitude
of changes in the national and the State economies. The Division of Budget
believes that its projections of receipts and disbursements relating to the
current State Financial Plan, and the assumptions on which they are based, are
reasonable. Actual results, however, could differ materially and adversely from
the projections set forth in this Annual Information Statement, and those
projections may be changed materially and adversely from time to time. See the
section entitled "Special Considerations" below for a discussion of risks and
uncertainties faced by the State.

THIRD QUARTER UPDATE (CURRENT FISCAL YEAR)

The State revised the cash-basis 1997-98 State Financial Plan on January
20, 1998, in conjunction with the release of the Executive Budget for the
1998-99 fiscal year. The changes from the prior Update reflect actual results
through December 1997, as well as modified economic and spending projections for
the balance of the current fiscal year.

The 1997-98 General Fund Financial Plan continues to be balanced, with a
projected cash surplus of $1.83 billion, an increase of $1.3 billion over the
surplus estimate of $530 million in the prior update. The increase in the
surplus results primarily from higher-than-expected tax receipts, which are
forecast to exceed the October estimate by $1.28 billion.

In order to make the surplus available to help finance 1998-99
requirements, the State plans to accelerate $1.18 billion in income tax refund
payments into 1997-98, or provide reserves for such payments. The balance in
the refund reserve on March 31, 1998 is projected to be $1.647 billion,
including $521 million as a result of LGAC. This acceleration decreases
reported personal income receipts by $1.18 billion in 1997-98, while increasing
available personal income receipts in 1998-99, as these refunds will no longer
be a charge against current revenues in 1998-99. As a result, projections of
available receipts in

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1997-98 have been increased by only $103 million from the Mid-Year Update.

Compared to the prior update, personal income tax collections for 1997-98
are now projected at $18.50 billion, or $363 million less than projected in
October after accounting for the refund reserve transaction discussed above.
Business tax receipts are projected at $4.98 billion, an increase of $158
million. User tax collections are estimated at $7.06 billion, or $52 million
higher than the prior update, and reflect a projected loss of $20 million in
sales tax receipts from an additional week of sales tax exemption for clothing
and footwear costing less than $500, which was authorized and implemented in
January 1998. Other tax receipts are projected to increase by $103 million over
the prior update and total $1.09 billion for the fiscal year. Miscellaneous
receipts and transfers from other funds are projected to reach $3.57 billion, or
$153 million higher than the Mid-Year Update.

The State projects that disbursements will increase by $565 million over
the Mid-Year Update, with nearly the entire increase attributable to one-time
disbursements of $561 million that pre-pay expenditures previously scheduled for
1998-99. In the absence of these accelerated payments, projected General Fund
spending in the current year would have remained essentially unchanged from the
Mid-Year Update. The Governor is proposing legislation to use a portion of the
current year surplus to transfer $425 million to pay for capital projects
authorized under the Community Enhancement Facilities Assistance Program (CEFAP)
that were previously planned to be financed with bond proceeds in 1998-99 and
thereafter, and $136 million in costs for an additional Medicaid payment
originally scheduled for 1998-99. Aside from these actions, a number of other
changes produced a net increase of $4 million in projected disbursements over
the Mid-Year Update. These included higher spending in General State charges
($80 million), largely as a result of litigation settlements and collective
bargaining costs, an increase in General Fund transfers for education ($70
million) to offset declines in Lottery receipts, and additional costs associated
with a delay of Housing Finance Agency (HFA) receipts into 1998-99 that were
originally planned to offset capital projects spending ($25 million). These
increases were offset in part by projected savings in Medicaid ($85 million),
social services ($75 million), and debt service ($37 million).

The General Fund closing balance is projected to be $465 million at the end
of 1997-98, a decline of $462 million from the Mid-Year Update. The decline
reflects the application of the $530 million undesignated reserve plus
additional surplus monies projected in the January Update to pay for certain
one-time costs in the State's Financial Plan (as described above). The effect
of this action is to help lower the State's projected disbursements in 1998-99.

The remaining General Fund closing balance will be held in two funds, the
TSRF and CRF. The TSRF is projected to have $400 million on deposit at the
close of the fiscal year, following a required deposit of $15 million and an
extraordinary deposit of $68 million made from the 1997-98 surplus. The CRF is
projected to have a closing balance of $65 million, following an earlier planned
deposit of $24 million in 1997-98. A description of these funds can be found in
Exhibit A, "Glossary of Financial Terms," in the Annual Information Statement.

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1998-99 FISCAL YEAR (EXECUTIVE BUDGET FORECAST)

The Governor presented his 1998-99 Executive Budget to the Legislature on
January 20, 1998. The Executive Budget contains financial projections for the
State's 1997-98 through 2000-01 fiscal years, detailed estimates of receipts and
a proposed Capital Program and Financing Plan for the 1997-98 through 2002-03
fiscal years. It is expected that the Governor will prepare amendments to his
Executive Budget as permitted under law and that these amendments will be
reflected in a revised Financial Plan to be released on or before February 19,
1998. There can be no assurance that the Legislature will enact into law the
Executive Budget as proposed by the Governor, or that the State's adopted budget
projections will not differ materially and adversely from the projections set
forth in this Update. For a more detailed discussion of the State's budgetary
process and uncertainties involving its forecasts and projections, see "State
Organization- State Financial Procedures" in the Annual Information Statement.

The 1998-99 Financial Plan is projected to be balanced on a cash basis in
the General Fund. Total General Fund receipts, including transfers from other
funds, are projected to be $36.22 billion, an increase of $1.02 billion over
projected receipts in the current fiscal year. Total General Fund
disbursements, including transfers to other funds, are projected to be $36.18
billion, an increase of $1.02 billion over the projected expenditures (including
prepayments), for the current fiscal year. As compared to the 1997-98 State
Financial Plan, the Executive Budget proposes year-to-year growth in General
Fund spending of 2.89 percent. State Funds spending (i.e., General Fund plus
other dedicated funds, with the exception of federal aid) is projected to grow
by 8.5 percent. Spending from All Governmental Funds (excluding transfers) is
proposed to increase by 7.6 percent from the prior fiscal year.

Current law and programmatic requirements are primarily responsible for the
year-to-year growth in General Fund spending. These include a current law
increase in school aid ($607 million), cost and enrollment growth in handicapped
education ($91 million) and Medicaid ($212 million), and employee contract
increases and inflation adjustments for State agency operations. The Executive
Budget also includes increases of $84 million for corrections programs to cover
new capacity demands and $152 million for mental health programs to finance
current law increases and the expansion of community beds. Other spending
growth reflects a requested increase of $108 million for the Judiciary and $117
million for long-term debt service. New spending is partially offset by
reductions of $453 million in capital projects transfers due to the financing of
CEFAP from resources available in 1997-98, $37 million in welfare assistance
savings, $36 million from lower spending in General State charges, and $68
million in lower transfers primarily due to the elimination of the Lottery
transfer made in 1997-98.

The 1998-99 Financial Plan projects that the State will end 1998-99 with a
closing balance in the General Fund of $500 million, which reflects $400 million
in the TSRF and $100 million in the CRF, following an anticipated deposit of $35
million in the latter fund during the year.

OUTYEAR PROJECTIONS OF RECEIPTS AND DISBURSEMENTS

The Executive Budget projects gaps of approximately $1.75 billion in
1990-00 growing to $3.75 billion in 2000-01.

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General Fund receipts are projected at $36.14 billion and $35.75 billion
for 1999-00 and 2000-01, respectively. The receipt projections were prepared on
the basis of an economic forecast of a steadily growing national economy, in an
environment of low inflation and slow employment growth. The forecast for the
State's economic performance likewise is for slow but steady economic growth.
Personal income is expected to rise between 4.25 and 4.5 percent over this
period, with average total employment growth of slightly less than one percent a
year. Private sector employment is expected to rise slightly more rapidly.

Statutory changes affecting General Fund receipts are dominated by the
dedication of a portion of the income tax to fund school tax reductions under
STAR. Personal income receipts dedicated to STAR are estimated at $1.39 billion
in 1999-00 and at $2.04 billion in 2000-01. The General Fund tax relief
provided by the estate and gift tax reduction program, sales tax reductions and
other 1997 enactments further reduce taxes and fees by roughly $1 billion by the
last year of the forecast period. Other 1998-99 budget proposals that lower
General Fund taxes and fees will annualize to approximately $110 million in
1990-00 and $100 million in 2000-01.

The receipt projections reflect constant law income tax liability growth of
approximately 5.3 percent annually and sales tax growth averaging slightly less
than 5 percent over the period. Constant law business tax liability is
projected to rise slowly over the two years.

Miscellaneous receipt projections reflect $250 million in each of the
outyears as the potential State benefit from a broader national settlement
involving tobacco taxes and health liability.

Disbursements from the General Fund are projected at $37.84 billion in
1999-00 and $39.45 billion in 2000-01, after assuming implementation of spending
proposals contained in the Executive Budget, the value of which is annualized
and assumed to continue. The projections include additional school aid
increases of roughly 7 percent annually to finance present law and implement
proposals enacted under the STAR/School Aid program. Additional funding to
implement welfare reform is also included, as well as funding for mental health
community reinvestment, prison expansion, and other previous multi-year spending
commitments. Growth in General Fund Medicaid spending is projected at just over
6 percent annually. Other spending growth is projected to follow recent trends.
Consistent with past practice, funding is not included for any costs associated
with new collective bargaining agreements after the expiration of the current
round of contracts at the end of the 1998-99 fiscal year.

Savings actions totaling $600 million in 1999-00 and growing to $800
million in 2000-01 are assumed in these spending projections. It is expected
that the 1999-00 Financial Plan will include continued actions by State agencies
to deliver services more efficiently, continued savings from workforce
management efforts, aggressive efforts to maximize federal and other non-General
Fund spending offsets, and other efforts to control State spending.

The Governor is required by law to propose a balanced budget each year. In
order to address any potential remaining budget gap, the Governor is expected to
make additional proposals to bring receipts in line with disbursements. The
State has closed projected budget gaps of $5.0 billion, $3.9 billion and $2.3
billion in its 1995-96, 1996-97 and 1997-98 fiscal years, respectively.

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SPECIAL CONSIDERATIONS

The Division of the Budget believes that the economic assumptions and
projections of receipts and disbursements accompanying the 1998-99 Executive
Budget are reasonable. However, the economic and financial condition of the
State may be affected by various financial, social, economic and political
factors. Those factors can be very complex, can vary from fiscal year to fiscal
year, and are frequently the result of actions taken not only by the State but
by entities, such as the federal government, that are outside the State's
control. Because of the uncertainty and unpredictability of changes in these
factors, their impact cannot be fully included in the assumptions underlying the
State's projections. For example, there can be no assurance that the
Legislature will enact the Governor's proposals or that the State's actions will
be sufficient to preserve budgetary balance or to align recurring receipts and
disbursements in either 1998-99 or in future fiscal years.

Uncertainties with regard to the economy present the largest potential risk
to future budget balance in New York State. This risk includes either a
financial market or broader economic "correction" during the period, a risk
heightened by the relatively lengthy expansions currently underway. The
securities industry is more important to the New York economy than the national
economy, and a significant deterioration in stock market performance could
ultimately produce adverse changes in wage and employment levels. In addition,
a normal "forecast error" of one percentage point in the expected growth rate
could cumulatively raise or lower receipts by over $1 billion by the last year
of the 1998 through 2001 projection period. On the other hand, the national or
State economy may continue to perform better than projected, which could produce
beneficial short-term results in State receipts.

An additional risk to the State Financial Plan arises from the potential
impact of certain litigation and federal disallowances now pending against the
State, which could produce adverse effects on the State's projections of
receipts and disbursements. The Financial Plan assumes no significant federal
disallowances or other federal actions that could affect State finances, but has
reserves of $500 million in the event of such an action, as indicated in the
section entitled "General Fund Closing Balance." For more information on
litigation pending against the State, see the section entitled "Litigation" in
this update and in the Annual Information Statement.

On August 11, 1997 President Clinton exercised his line-item veto powers to
cancel a provision in the Federal Balanced Budget Act of 1997 that would have
deemed New York State's health care provider taxes to be approved by the federal
government. New York and several other states have used hospital rate
assessments and other provider tax mechanisms to finance various Medicaid and
health insurance programs since the early 1980s. The State's process of
taxation and redistribution of health care dollars was sanctioned by federal
legislation in 1987 and 1991. However, the federal Health Care Financing
Administration (HCFA) regulations governing the use of provider taxes require
the State to seek waivers from HCFA that grant explicit approval of the provider
taxing system now in place. The State filed the majority of these waivers with
HCFA in 1995 but has yet to receive final approval.

The Balanced Budget Act of 1997 provision passed by Congress was intended
to rectify the uncertainty created by continued inaction on the

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State's waiver requests. A federal disallowance of the State's provider tax
system could jeopardize up to $2.6 billion in Medicaid reimbursement received
through December 31, 1998. The President's veto message valued any potential
disallowance at $200 million. The Financial Plan projections do not anticipate
any provider tax disallowance.

On October 9, 1997 the President offered a corrective amendment to the HCFA
regulations governing such taxes. The Governor stated that this proposal did
not appear to address all of the State's concerns, and negotiations are ongoing
between the State and HCFA. In addition, the City of New York and other
affected parties in the health care industry have filed a lawsuit challenging
the constitutionality of the President's line-item veto.

GENERAL PORTFOLIO RECEIPTS

The 1998-99 Financial Plan projects General Fund receipts (including
transfers from other funds) of $36.22 billion, an increase of $1.02 billion over
the estimated 1997-98 level. Recurring growth in the State General Fund tax
base is projected to be approximately six percent during 1998-99, after
adjusting for tax law and administrative changes. This growth rate is lower
than the rates for 1996-97 or currently estimated for 1997-98, but roughly
equivalent to the rate for 1995-96.

The forecast of General Fund receipts in 1998-99 incorporates several
Executive Budget tax proposals that, if enacted, would further reduce receipts
otherwise available to the General Fund by approximately $700 million during
1998-99. The Executive Budget proposes accelerating school tax relief for
senior citizens under STAR, which is projected to reduce General Fund receipts
by $537 million in 1998-99. The proposed reduction supplements STAR tax
reductions already scheduled in law, which are projected at $187 million in
1998-99. The Budget also proposes several new tax-cut initiatives and other
funding changes that are projected to further reduce receipts available to the
General Fund by over $200 million. These initiatives include reducing the fee
to register passenger motor vehicles and earmarking a larger portion of such
fees to dedicated funds and other purposes; extending the number of weeks in
which certain clothing purchases are exempt from sales taxes; more fully
conforming State law to reflect recent Federal changes in estate taxes;
continuing lower pari-mutuel tax rates; and accelerating scheduled property tax
relief for farmers from 1999 to 1998. In addition to the specific tax and fee
reductions discussed above, the Executive Budget also proposes establishing a
reserve of $100 million to permit the acceleration into 1998-99 of other tax
reductions that are otherwise scheduled in law for implementation in future
fiscal years.

General Fund receipts in 1998-99 will also be affected by the loss of
certain one-time receipts recorded in 1997-98, the largest of which include
approximately $200 million in retroactive federal reimbursements for prior-year
social service spending recorded as a transfer from other funds and about $55
million in retroactive assessments on Office of Mental Retardation and
Developmental Disabilities facilities that were received in 1997-98 as
miscellaneous receipts. Estimates for 1998-99 also reflect the loss of the
one-time receipts from a tax amnesty program.

Personal income tax collections in the General Fund are projected to
increase by $1.32 billion over 1997-98, from $18.50 billion to $19.82 billion.
The increase reflects growth in constant law liability of over six percent in
1998, down from an estimated 12 percent growth in 1997. Growth in personal
income tax liability in 1997 benefited from a

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temporary surge in capital-gains income in response to 1997 reductions in the
federal tax rate on such income. In addition to the General Fund receipts,
approximately $724 million in personal income tax collections will be deposited
in special revenue funds to finance the School Tax Assistance Program (STAR).

User tax collections and fee receipts are projected to reach $7.2 billion
in 1998-99, an increase of $144 million over the current year. The largest
source of receipts in this category is the sales and use tax, which accounts for
nearly 80 percent of projected receipts. Sales tax receipts are the most
responsive to economic trends such as nominal growth in income, prices,
employment, and consumer confidence. The strong growth in income experienced
this year produced continuing growth in the base of the sales and use tax of 5.2
percent in 1997-98. The sales tax growth rate projected for the coming year is
expected to be marginally higher.

The 1998-99 forecast for user taxes and fees also reflects the impact of
scheduled tax reductions that will lower receipts by $38 million, as well as the
impact of two Executive Budget proposals that are projected to lower receipts by
an additional $79 million. The first proposal would divert $30 million in motor
vehicle registration fees from the General Fund to the Dedicated Highway and
Bridge Trust Fund; the second would reduce fees for motor vehicle registrations,
which would further lower receipts by $49 million. The underlying growth of
receipts in this category is projected at 4 percent, after adjusting for these
scheduled and recommended changes.

In comparison to the current fiscal year, business tax receipts are
projected to decline slightly in 1998-99, falling from $4.98 billion to $4.96
billion. The decline in this category is largely attributable to scheduled tax
reductions. In total, collections for corporation and utility taxes and the
petroleum business tax are projected to fall by $107 million from 1997-98. The
decline in receipts in these categories is partially offset by growth in the
corporation franchise, insurance and bank taxes, which are projected to grow by
$88 million over the current fiscal year.

Receipts from other taxes, which include taxes on estate and gifts, real
property gains, and pari-mutuel wagering, are projected to total $1.01 billion
in 1998-99, a decline of $78 million from the current year. The main reason for
the decline is an expected fall in the number and value of large estate tax
payments from the extraordinary level achieved in 1997-98. The decline also
reflects the first full-year impact of the repeal of the gains tax.

Miscellaneous receipts, which include license revenues, fee and fine
income, investment income and abandoned property proceeds, as well as the yield
of the largest share of the State's medical provider assessments, are projected
to fall from $1.57 billion in the current year to $1.4 billion in 1998-99, a
decline of $170 million. The decline is largely a result of the loss of over
$90 million in one-time transactions and $56 million in statutory reductions in
medical provider assessments.

Transfers to the General Fund from other funds consist primarily of tax
revenues in excess of debt service requirements. Proceeds from the one-cent
sales tax in excess of those used to support debt service payments to the Local
Government Assistance Corporation (LGAC) account for 85 percent of the 1998-99
receipts in this category. LGAC transfers to the General Fund are projected to
increase by $72 million to $1.55

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billion in 1998-99, consistent with estimates for sales and use receipts. Other
transfers periodically include non-recurring transactions, which result in
significant annual increases and decreases for this category. All other
transfers are projected to decrease by $250 million to $270 million in 1998-99.
These reflect nearly $200 million in nonrecurring federal reimbursements that
will be unavailable in 1998-99 and thereafter.

DISBURSEMENTS

The 1998-99 Financial Plan projects General Fund disbursements of $36.18
billion, an increase of $1.02 billion over projected spending for the current
year.

Disbursements from the category of Grants to Local Government constitute
approximately 67.9 percent of all General Fund spending, and include payments to
local governments, non-profit providers and individuals. Disbursements in this
category are projected to increase by $931 million to $24.55 billion in 1998-99,
or 3.9 percent above 1997-98. The largest increases are for school aid and
Medicaid.

School aid is projected at $9.47 billion in 1998-99, an increase of $607
million on a State fiscal year basis. This increase funds both the balance of
aid payable for the 1997-98 school year and a proposed 1998-99 school year
increase of $518 million. Medicaid costs are estimated to increase $212 million
to $5.68 billion, about the same spending level as in 1994-95. After adjusting
1997-98 spending for the one-time acceleration of a 53rd weekly Medicaid payment
scheduled for 1998-99, Medicaid spending is projected to increase by $348
million or 6.5 percent. The adjustment eliminates this extraordinary payment in
1997-98 for purposes of comparison with 1998-99. Spending in local assistance
programs for higher education, handicapped education, mental hygiene, local
public health and revenue sharing are also proposed to increase.

Support for State operations, which pays for the costs of operating the
Executive, Legislative, and Judicial branches of government, is projected to
increase by $524 million to $6.73 billion, or 8.4 percent higher than 1997-98.
This projected increase is primarily due to costs associated with an additional
27th payroll and current collective bargaining agreements, the loss of Federal
disproportionate share receipts that offset General Fund spending in mental
hygiene programs, and a $108 million requested increase in the Judiciary's
budget. Adjusting for the extra payroll, State operations spending increases by
a projected 6.1 percent. The State workforce is roughly 191,000 at present and
is projected to remain stable over the year.

Total spending in General State charges is projected to decline slightly
from 1997-98 to $2.23 billion. This annual decline reflects projected decreases
in one-time costs for pension and Court of Claims payments, offset by projected
increases for health insurance contributions, social security costs, and the
loss of reimbursements due to a reduction in the fringe benefit rate charged to
positions financed by non-General funds.

Transfers in support of debt service are projected to grow at 5.8 percent
in 1998-99, from $2.03 billion to $2.15 billion. Transfers in support of
capital projects for 1998-99 are estimated to total $190 million, a decrease of
$453 million from 1997-98, reflecting the absence of one-time transfers for the
Hudson River Park and CEFAP in 1997-98.

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All other transfers reflect remaining transfers from the General Fund to
other funds. These transfers decline by $68 million to $323 million in 1998-99,
reflecting non-recurring transfers in 1997-98 to the State University Tuition
Stabilization Fund ($29 million) and to the Lottery fund to support school aid
as a result of lower-than-projected 1997-98 Lottery receipts ($70 million),
offset by a $34 million increase in the State subsidy to the Roswell Park Cancer
Institute.

GENERAL PORTFOLIO CLOSING PORTFOLIO BALANCE

The State projects a General Fund closing balance of $500 million for
1998-99. The TSRF is projected to have a balance of $400 million (the same as
1997-98) and the CRF a balance of $100 million, following a planned $35 million
deposit to the CRF in 1998-99.

NON-RECURRING RESOURCES

The Division of the Budget estimates that the 1998-99 Financial Plan
includes approximately $62 million in non-recurring resources, comprising less
than two-tenths of one percent of General Fund disbursements. The non-recurring
resources projected for use in 1998-99 consist of $27 million in retroactive
federal welfare reimbursements for family assistance recipients with HIV/AIDS,
$25 million in receipts from the Housing Finance Agency that were originally
anticipated in 1997-98, and $10 million in other measures, including $5 million
in asset sales.

SPECIAL REVENUE FUNDS

For 1998-99, the Financial Plan projects disbursements of $30.16 billion
from Special Revenue Funds (SRFs), an increase of $2.32 billion or 8.3 percent
over 1997-98. Disbursements in State SRFs are projected at $8.29 billion, an
increase of $1.09 billion or 15.2 percent from 1997-98. Disbursements from
federal funds, which account for approximately three-quarters of all SRF
spending, are estimated at $21.87 billion in 1998-99, an increase of $1.22
billion or 5.9 percent from 1997-98.

The implementation of the first phase of the STAR program accounts for $724
million of the $1.09 billion increase in proposed State SRF spending in 1998-99.
Other projected State SRF spending increases include: $149 million in additional
operating assistance for mass transit systems; $82 million to expand the Child
Health Plus program, which provides health insurance for uninsured children
under 19 years of age; and $138 million for various State agency activities.
Spending from the State Lottery Fund is projected to increase slightly over
1997-98, while disbursements from the Indigent Care Fund are projected to remain
flat.

The $1.22 billion year-to-year growth in federal SRF spending is primarily
due to increases in Medicaid ($433 million), Children and Family Assistance
Programs ($297 million), education programs ($172 million), the expanded Child
Health Plus program ($144 million), and the welfare program ($50 million).

CAPITAL PROJECTS FUNDS

Disbursements from Capital Projects funds in 1998-99 are estimated at $4.82
billion, or $1.07 billion higher than 1997-98. The proposed spending plan
includes: $2.51 billion in disbursements for transportation purposes, including
the State and local highway and

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bridge program; $815 million for environmental activities; $379 million for
correctional services; $228 million for SUNY and CUNY; $290 million for mental
hygiene projects; and $375 million for CEFAP.

Approximately 28 percent of capital projects are proposed to be financed by
"pay-as-you-go" resources. State-supported bond issuances finance 46 percent of
capital projects, with federal grants financing the remaining 26 percent.

DEBT SERVICE FUNDS

Disbursements from Debt Service Funds are estimated at $3.39 billion in
1998-99, an increase of $281 million in debt service costs from 1997-98. The
increase in debt service is primarily attributable to bonds previously issued in
support of the following: $107 million for transportation purposes in the State
and local highway and bridge programs financed by the Dedicated Highway and
Bridge Trust Fund; $26 million for the mental hygiene programs financed through
the Mental Health Services Fund; $34 million for the environment; $37 million
for public protection purposes; and $43 million for CUNY senior and community
college debt service formerly classified as local assistance in the General
Fund. Debt service for LGAC bonds is projected at $345 million, an increase of
$15 million from 1997-98.

CASH FLOW

The projected 1998-99 General Fund cash flow will not depend on either
short-term spring borrowing or the issuance of LGAC bonds. The new-money bond
issuance portion of the LGAC program was completed in 1995-96, and provisions
prohibiting the State from returning to a reliance upon cash flow manipulation
to balance its budget will remain in bond covenants until the LGAC bonds are
retired.

The 1998-99 cash flow projects substantial closing balances in each quarter
of the fiscal year, with excesses in receipts over disbursements in every
quarter of the fiscal year and no monthly balance (prior to March) lower than
$1.5 billion. The closing fund balance is projected at $500 million.

PRIOR FISCAL YEARS

CASH-BASIS RESULTS FOR PRIOR FISCAL YEARS

The State reports its financial results on two bases of accounting: the
cash basis, showing receipts and disbursements; and the modified accrual basis,
prescribed by generally Accepted Accounting Principles ("GAAP"), showing
revenues and expenditures.

GENERAL FUND 1994-95 THROUGH 1996-97

The General Fund is the principal operating fund of the State and is used
to account for all financial transactions, except those required to be accounted
for in another fund. It is the State's largest fund and receives most State
taxes and other resources not dedicated to particular purposes. General Fund
moneys are also transferred to other funds, primarily to support certain capital
projects and debt service payments in other fund types. A narrative description
of cash-basis results in the General Fund is presented below, followed by a
tabular presentation of the actual General Fund results for the prior three
fiscal years.

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New York State's financial operations have improved during recent fiscal
years. During the period 1989-90 through 1991-92, the State incurred General
Fund operating deficits that were closed with receipts from the issuance of tax
and revenue anticipation notes ("TRANs"). A national recession, followed by the
lingering economic slowdown in New York and the regional economy, resulted in
repeated shortfalls in receipts and three budget deficits during those years.
During its last five fiscal years, however, the State has recorded balanced
budgets on a cash basis, with positive fund balances as described below.

1996-97 FISCAL YEAR

The State ended its 1996-97 fiscal year on March 31, 1997 in balance on a
cash basis, with a General Fund cash surplus as reported by DOB of approximately
$1.4 billion. The cash surplus was derived primarily from higher-than-expected
revenues and lower-than-expected spending for social services programs. The
Governor in his Executive Budget applied $1.05 billion of the cash surplus
amount to finance the 1997-98 Financial Plan when enacted by the State
Legislature.

The General Fund closing fund balance was $433 million. Of that amount,
$317 million was in the TSRF, after a required deposit of $15 million and an
additional deposit of $65 million in 1996-97. The TSRF can be used in the event
of any future General Fund deficit, as provided under the State Constitution and
State Finance Law. In addition, $41 million remains on deposit in the CRF.
This fund assists the State in financing any extraordinary litigation costs
during the fiscal year. The remaining $75 million reflects amounts on deposit
in the Community Projects Fund. This fund was created to fund certain
legislative initiatives. The General Fund closing fund balance does not include
$1.86 billion in the tax refund reserve account, of which $521 million was made
available as a result of the Local Government Assistance Corporation ("LGAC")
financing program and was required to be on deposit as of March 31, 1997.

General Fund receipts and transfers from other funds for the 1996-97 fiscal
year totaled $33.04 billion, an increase of 0.7 percent from the previous fiscal
year (excluding deposits into the tax refund reserve account). General Fund
disbursements and transfers to other funds totaled $32.90 billion for the
1996-97 fiscal year, an increase of 0.7 percent from the 1995-96 fiscal year.

1995-96 FISCAL YEAR

The State ended its 1995-96 fiscal year on March 31, 1996 with a General
Fund cash surplus, as reported by DOB, of $445 million. Of that amount, $65
million was deposited into the TSRF, and $380 million was used to reduce 1996-97
Financial Plan liabilities.

The General Fund closing fund balance was $287 million, an increase of $129
million from 1994-95 levels. The $129 million change in fund balance is
attributable to the $65 million voluntary deposit to the TSRF, a $15 million
required deposit to the TSRF, a $40 million deposit to the CRF, and a $9 million
deposit to the Revenue Accumulation Fund. The closing fund balance included
$237 million on deposit in the TSRF. In addition, $41 million was on deposit in
the CRF. The remaining $9 million reflected amounts then on deposit in the
Revenue Accumulation Fund. The General Fund closing balance does not include
$678 million in the tax refund reserve account of which $521 million was made
available as a result of the LGAC financing program and was required to be on
deposit as of March 31, 1996.

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General Fund receipts and transfers from other funds totaled $32.81
billion, a decrease of 1.1 percent from 1994-95 levels. General Fund
disbursements and transfers to other funds totaled $32.68 billion for the
1995-96 fiscal year, a decrease of 2.2 percent from 1994-95 levels.

1994-95 FISCAL YEAR

The State ended its 1994-95 fiscal year with the General Fund in balance.
There was a $241 million decline in the fund balance reflecting the planned use
of $264 million from the CRF, partially offset by the required deposit of $23
million to the TSRF. In addition, $278 million was on deposit in the tax refund
reserve account, $250 million of which was deposited to continue the process of
restructuring the State's cash flow as part of the LGAC program. The closing
fund balance of $158 million reflects $157 million in the TSRF and $1 million in
the CRF.

General Fund receipts and transfers from other funds totaled $33.16
billion, an increase of 2.9 percent from 1993-94 levels. General Fund
disbursements and transfers to other funds totaled $33.40 billion for the
1994-95 fiscal year, an increase of 4.7 percent from the previous fiscal year.

OTHER GOVERNMENTAL FUNDS (1994-95 THROUGH 1996-97)

Activity in the three other governmental funds has remained relatively
stable over the last three fiscal years, with federally-funded programs
comprising approximately two-thirds of these funds. The most significant change
in the structure of these funds has been the redirection of a portion of
transportation-related revenues from the General Fund to two new dedicated funds
in the Special Revenue and Capital Projects fund types. These revenues are used
to support the capital programs of the Department of Transportation and the
Metropolitan Transportation Authority ("MTA").

In the SPECIAL REVENUE FUNDS, disbursements increased from $24.38 billion
to $26.02 billion over the last three years, primarily as a result of increased
costs for the federal share of Medicaid. Other activity reflected dedication of
taxes to a new fund for mass transportation, new lottery games, and new fees for
criminal justice programs.

Disbursements in the CAPITAL PROJECTS FUNDS declined from $3.62 billion to
$3.54 billion over the last three years, as spending for miscellaneous capital
programs decreased, partially offset by increases for mental hygiene, health and
environmental programs. The composition of this fund type's receipts also
changed as the dedicated transportation taxes began to be deposited, general
obligation bond proceeds declined substantially, federal grants remained stable,
and reimbursements from public authority bonds (primarily transportation
related) increased. The increase in the negative fund balance in 1994-95
resulted from delays in reimbursements caused by delays in the timing of public
authority bond sales.

Activity in the DEBT SERVICE FUNDS reflected increased use of bonds during
the three-year period for improvements to the State's capital facilities and the
continued implementation of the LGAC fiscal reform program. The increases were
moderated by the refunding savings achieved by the State over the last several
years using strict present

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value savings criteria. The growth in LGAC debt service was offset by reduced
short-term borrowing costs reflected in the General Fund.

LITIGATION
STATE FINANCE POLICIES

INSURANCE LAW

Proceedings have been brought by two groups of petitioners challenging
regulations promulgated by the Superintendent of Insurance that established
excess medical malpractice premium rates for the 1986-87 through 1995-96 and
1996-97 fiscal years, respectively (NEW YORK STATE HEALTH MAINTENANCE
ORGANIZATION CONFERENCE, INC., ET AL. V. MUHL, ET AL. ["HMO"], AND NEW YORK
STATE CONFERENCE OF BLUE CROSS AND BLUE SHIELD PLANS, ET AL. V. MUHL, ET AL.
["BLUE CROSS 'I' AND 'II'"], Supreme Court, Albany County). By order filed
January 22, 1997, the Court in Blue Cross I permitted the plaintiffs in HMO to
intervene and dismissed the challenges to the rates for the period prior to
1995-96. By decision dated July 24, 1997, the Court in Blue Cross I held that
the determination made by the Superintendent in establishing the 1995-96 rate
was arbitrary and capricious and directed that premiums paid pursuant to that
determination be returned to the payors. The State has appealed this decision.

OFFICE OF MENTAL/HEALTH PATIENT-CARE COSTS

Two actions, Balzi, et al. v. Surles, et al., commenced in November 1985 in
the United States District Court for the Southern District of New York, and
Brogan, et al. v. Sullivan, et al., commenced in May 1990 in the United States
District Court for the Western District of New York, now consolidated, challenge
the practice of using patients' Social Security benefits for the costs of care
of patients of State Office of Mental Health facilities. The cases have been
settled by a stipulation and order dated January 7, 1998.

STATE PROGRAMS
MEDICAID

Several cases, including PORT JEFFERSON HEALTH CARE FACILITY, ET AL. V.
WING (Supreme Court, Suffolk County), challenge the constitutionally of Public
Health Law Section 2807-d, which imposes a tax on the gross receipts hospitals
and residential health care facilities receive from all patient care services.
Plaintiffs allege that the tax assessments were not uniformly applied, in
violation of federal regulations. In a decision dated June 30, 1997, the Court
held that the 1.2 percent and 3.8 percent assessments on gross receipts imposed
pursuant to Public health Law Sections 2807-d(2)(b)(ii) and 2807-d(2)(b)(iii),
respectively, are unconstitutional. An order entered August 27, 1997 enforced
the terms of the decision. The State has appealed that order.

SHELTER ALLOWANCE

In an action commenced in March 1987 against State and New York City
officials (JIGGETTS, ET AL. V. BANE, ET AL., Supreme Court, New York County),
plaintiffs allege that the shelter allowance granted to recipients of public
assistance is not adequate for proper housing. In a decision dated April 16,
1997, the Court held that the shelter allowance promulgated by the Legislature
and enforced through Department of Social Services regulations is not reasonably
related to the cost of rental housing in New York City and results in
homelessness to families

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<PAGE>

in New York City. A judgment was entered on July 25, 1997, directing, INTER
ALIA, that the State (i) submit a proposed schedule of shelter allowances (for
the Aid to Department Children program and any successor program) that bears a
reasonable relation to the cost of housing in New York City; and (ii) compel the
New York City Department of Social Services to pay plaintiffs a monthly shelter
allowance in the full amount of their contract rents, provided they continue to
meet the eligibility requirements for public assistance, until such time as a
lawful shelter allowance is implemented, and provide interim relief to other
eligible recipients of Aid to Department Children under the interim relief
system established in this case. The State has sought relief from each and
every provision of this judgment except that portion directing the continued
provision of interim relief.

TAX LAW

In MATTER OF THE PETITION OF CONSOLIDATED RAIL CORPORATION V. TAX APPEALS
TRIBUNAL (Appellate Division, Third Department, commenced December 22, 1995),
petitioner, a rail freight corporation that purchases diesel motor fuel out of
State and imports the fuel into the State for use, distribution, storage or sale
in the State, contended that the assessment of the petroleum business tax
imposed pursuant to Tax Law Section 301-a to such fuel purchases violated the
Commerce Clause of the United States Constitution. Petitioner contended that
the application of Section 301-a to the interstate transaction, but not to
purchasers who purchase fuel within the State for use, distribution, storage or
sale within the State, discriminates against interstate commerce. In a decision
dated July 17, 1997, the Appellate Division, Third Department, dismissed the
petition. Petitioner appealed to the Court of Appeals. On December 4, 1997,
the Court of Appeals dismissed the appeal, SUA SPONTE, upon the ground that no
substantial Constitutional question was directly involved.

In New York Association of Convenience Stores, et al. v. Urbach, et al.,
petitioners, New York Association of Convenience Stores, National Association of
Convenience Stores, M.W.S. Enterprises, Inc. and Sugarcreek Stores, Inc. seek to
compel respondents, the Commissioner of Taxation and Finance and the Department
of Taxation and Finance, to enforce sales and excise taxes imposed pursuant to
Tax Law Articles 12-A, 20 and 28 on tobacco products and motor fuel sold to
non-Indian consumers on Indian reservations. In orders dated August 13, 1996
and August 24, 1996, the Supreme Court, Albany County, ordered, INTER ALIA, that
there be equal implementation and enforcement of said taxes for sales to
non-Indian consumers on and off Indian reservations, and further ordered that,
if respondents failed to comply within 120 days, no tobacco products or motor
fuel could be introduced onto Indian reservations other than for Indian
consumption or, alternatively, the collection and enforcement of such taxes
would be suspended statewide. Respondents appealed to the Appellate Division,
Third Department, and invoked CPLR 5519(a)(1), which provides that the taking of
the appeal stayed all proceedings to enforce the orders pending the appeal.
Petitioner's motion to vacate the stay was denied. In a decision entered May 8,
1997, the Third Department modified the orders by deleting the portion thereof
that provided for the statewide suspension of the enforcement and collection of
the sales and excise taxes on motor fuel and tobacco products. The Third
Department held, inter alia, that petitioners had not sought such relief in
their petition and that it was an error for the Supreme Court to have awarded
such undemanded relief without adequate notice of its intent to do so. On May
22, 1997, respondents appealed to the Court of Appeals on other grounds, and
again invoked the statutory stay. On October 23, 1997, the Court of Appeals

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granted petitioners' motion for leave to cross-appeal from the portion of the
Third Department's decision that deleted the statewide suspension of the
enforcement and collection of the sales and excise taxes on motor fuel and
tobacco.

CIVIL RIGHTS CLAIMS

In an action commenced in 1980 (United States, et al. v. Yonkers Board of
Education, et al.), the United States District Court for the Southern District
of New York found, in 1985, that Yonkers and its public schools were
intentionally segregated. In 1986, the District Court ordered Yonkers to
develop and comply with a remedial educational improvement plan ("EIP I"). On
January 19, 1989, the District Court granted motions by Yonkers and the NAACP to
add the State Education Department, the Yonkers Board of Education, and the
State Urban Development Corporation as defendants, based on allegations that
they had participated in the perpetuation of the segregated school system. On
August 30, 1993, the District Court found that vestiges of a dual school system
continued to exist in Yonkers. On March 27, 1995, the District Court made
factual findings regarding the role of the State and the other State defendants
(the "State") in connection with the creation and maintenance of the dual school
system, but found no legal basis for imposing liability. On September 3, 1996,
the Court of Appeals, based on the District Court's factual findings, held the
State defendants liable under 42 USC Section 1983 and the Equal Educational
Opportunity Act, 20 USC Sections 1701, et seq., for the unlawful dual school
system, because the State, INTER ALIA, had taken no action to force the school
district to desegregate despite its actual or constructive knowledge of DE JURE
segregation. By Order dated October 8, 1997, the District Court held that
vestiges of the prior segregated school system continued to exist and that,
based on the State's conduct in creating and maintaining that system, the State
is liable for eliminating segregation and its vestiges in Yonkers and must fund
a remedy to accomplish that goal. Yonkers presented a proposed educational
improvement plan ("EIP II") to eradicate these vestiges of segregation. The
October 8, 1997 Order of the District Court ordered that EIP II be implemented
and directed that, within 10 days of the entry of the Order, the State make
available to Yonkers $450,000 to support planning activities to prepare the EIP
II budget for 1997-98 and the accompanying capital facilities plan. A final
judgment to implement EIP II was entered on October 14, 1997. The State intends
to appeal that judgment. Additionally, the Court adopted a requirement that the
State pay to Yonkers $9 million as its pro rata share of the funding of EIP I
for the 1996-97 school year. The requirement for State funding of EIP I has not
yet been reduced to an order.

CONTRACT AND TORT CLAIMS

In INTER-POWER OF NEW YORK, INC. V. STATE OF NEW YORK, commenced November
16, 1994 in the Court of Claims, plaintiffs alleged that by reason of the
failure of the State's Department of Environmental Conservation to provide in a
timely manner accurate and complete data, plaintiff was unable to complete by
the projected completion date a cogeneration facility, and thereby suffered
damages. The parties have agreed to settle this case for $29 million.

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AUTHORITIES AND LOCALITIES

PUBLIC AUTHORITIES

The fiscal stability of the State is related in part to the fiscal
stability of its public authorities. For the purposes of this Interim Annual
Information Statement, public authorities refer to public benefit corporations
created pursuant to State law, other than local authorities. Public authorities
are not subject to the constitutional restrictions on the incurrence of debt
which apply to the State itself and may issue bonds and notes within the amounts
and restrictions set forth in legislative authorization. The State's access to
the public credit markets could be impaired and the market price of its
outstanding debt may be materially and adversely affected if any of its public
authorities were to default on their respective obligations, particularly those
using the financing techniques referred to as State-supported or State-related
debt under the section entitled "Debt and Other Financing Activities" in this
Interim Annual Information Statement. As of September 30, 1996, there were 17
public authorities that had outstanding debt of $100 million or more, and the
aggregate outstanding debt, including refunding bonds, of all State authorities
was $75.4 billion, only a portion of which constitutes State-supported or
State-related debt.

There are numerous public authorities with various responsibilities,
including those which finance, construct and/or operate revenue producing public
facilities. Public authority operating expenses and debt service costs are
generally paid by revenues generated by the projects financed or operated, such
as tolls charged for the use of highways, bridges or tunnels, rentals charged
for housing units, and charges for occupancy at medical care facilities. In
addition, State legislation authorizes several financing techniques for public
authorities that are described under the section entitled "Debt and Other
Financing Activities." Also, there are statutory arrangements providing for
State local assistance payments otherwise payable to localities to be made under
certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local assistance
payments have been paid to public authorities under these arrangements, if local
assistance payments are diverted the affected localities could seek additional
State assistance. Some authorities also receive moneys from State appropriations
to pay for the operating costs of certain of their programs. As described
below, the MTA receives the bulk of this money in order to provide transit and
commuter services.

METROPOLITAN TRANSPORTATION AUTHORITY

The MTA oversees the operation of subway and bus lines in New York City by
its affiliates, the New York City Transit Authority and the Manhattan and Bronx
Surface Transit Operating Authority (collectively, the "TA"). The MTA operates
certain commuter rail and bus services in the New York Metropolitan area through
MTA's subsidiaries, the Long Island Rail Road Company, the Metro-North Commuter
Railroad Company, and the Metropolitan Suburban Bus Authority. In addition, the
Staten Island Rapid Transit Operating Authority, an MTA subsidiary, operates a
rapid transit line on Staten Island. Through its affiliated agency, the
Triborough Bridge and Tunnel Authority (the "TBTA"), the MTA operates certain
intrastate toll bridges and tunnels. Because fare revenues are not sufficient
to finance the mass transit portion of these operations, the MTA has depended
on, and will continue to depend on, operating support from the State, local
governments and TBTA, and, to the extent

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<PAGE>

available, federal operating assistance, including loans, grants and subsidies.
If current revenue projections are not realized and/or operating expenses exceed
current projections, the TA or commuter railroads may be required to seek
additional State assistance, raise fares or take other actions.

Since 1980, the State has enacted several taxes--including a surcharge on
the profits of banks, insurance corporations and general business corporations
doing business in the 12-county Metropolitan Transportation Region served by the
MTA and a special one-quarter of 1 percent regional sales and use tax-that
provide revenues for mass transit purposes, including assistance to the MTA.
Since 1987 State law has required that the proceeds of a one-quarter of 1
percent mortgage recording tax paid on certain mortgages in the Metropolitan
Transportation Region be deposited in a special MTA fund for operating or
capital expenses. In 1993, the State dedicated a portion of certain additional
State petroleum business tax receipts to fund operating or capital assistance to
the MTA. For the 1997-98 fiscal year, State assistance to the MTA is projected
to total approximately $1.2 billion, an increase of $76 million over the 1996-97
fiscal year.

State legislation accompanying the 1996-97 adopted State budget authorized
the MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance a
portion of the $12.17 billion MTA capital plan for the 1995 through 1999
calendar years (the "1995-99 Capital Program"). In July 1997, the Capital
Program Review Board ("CPRB") approved the 1995-99 Capital Program, which
supersedes the overlapping portion of the MTA's 1992-96 Capital Program. The
1995-99 Capital Program is the fourth capital plan since the Legislature
authorized procedures for the adoption, approval and amendment of MTA capital
programs and is designed to upgrade the performance of the MTA's transportation
systems by investing in new rolling stock, maintaining replacement schedules for
existing assets and bringing the MTA system into a state of good repair. The
1995-99 Capital Program assumes the issuance of an estimated $5.1 billion in
bonds under this $6.5 billion aggregate bonding authority. The remainder of the
plan is projected to be financed through assistance from the State, the federal
government, and the City of New York, and from various other revenues generated
from actions taken by the MTA.

There can be no assurance that all the necessary governmental actions for
future capital programs will be taken, that funding sources currently identified
will not be decreased or eliminated, or that the 1995-99 Capital Program, or
parts thereof, will not be delayed or reduced. Should funding levels fall below
current projections, the MTA would have to revise its 1995-99 Capital Program
accordingly. If the 1995-99 Capital Program is delayed or reduced, ridership
and fare revenues may decline, which could, among other things, impair the MTA's
ability to meet its operating expenses without additional assistance.

THE CITY OF NEW YORK

The fiscal health of the State may also be affected by the fiscal health of
New York City ("the City"), which continues to require significant financial
assistance from the State. The City depends on State aid both to enable the
City to balance its budget and to meet its cash requirements. The State could
also be affected by the ability of the City and certain entities issuing debt
for the benefit of the City to market their securities successfully in the
public credit markets.

The City has achieved balanced operating results for each of its fiscal
years since 1981 as reported in accordance with the then-

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applicable GAAP standards. The City's financial plans are usually prepared
quarterly, and the annual financial report for its most recent completed fiscal
year is prepared at the end of October of each year. For current information on
the City's four-year financial plan and its most recent financial disclosure,
contact the Office of the Comptroller, Municipal Building, Room 517, One Centre
Street, New York, NY 10007, Attention: Deputy Comptroller for Finance.

FISCAL OVERSIGHT

In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among those actions, the
State established NYC MAC to provide financing assistance to the City; the New
York State Financial Control Board (the "Control Board") to oversee the City's
financial affairs; and the Office of the State Deputy Comptroller for the City
of New York ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. A "Control Period" existed from 1975 to 1986 during which the
City was subject to certain statutorily-prescribed fiscal controls. Although
the Control Board terminated the Control Period in 1986 when certain statutory
conditions were met and suspended certain Control Board powers, upon the
occurrence or "substantial likelihood and imminence" of the occurrence of
certain events, including (but not limited to) a City operating deficit of more
than $100 million or impaired access to the public credit markets, the Control
Board is required by law to reimpose a Control Period.

Currently, the City and its Covered Organizations (i.e., those which
received or may receive moneys from the City directly, indirectly or
contingently) operate under a four-year financial plan (the "Financial Plan")
which the City prepares annually and periodically updates. The City's Financial
Plan includes it capital, revenue and expense projections and outlines proposed
gap-closing programs for years with projected budget gaps. The City's
projections set forth in the Financial Plan are based on various assumptions and
contingencies, some of which are uncertain and may not materialize. Unforeseen
developments and changes in major assumptions could significantly affect the
city's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements.

Implementation of the Financial Plan is also dependent upon the ability to
the City and certain entities issuing debt for the benefit of the city to market
their securities successfully. The City issues securities to finance, refinance
and rehabilitate infrastructure and other capital needs, as well as for seasonal
financing needs. In order to help the City to avoid exceeding its State
Constitutional general debt limit, the State created the New York City
Transitional Finance Authority to finance a portion of the City's capital
program. Despite this additional financing mechanism, the City currently
projects that, if no further action is taken, it will reach its debt limit in
City fiscal year 1999-2000. On June 2, 1997, an action was commenced seeking a
declaratory judgment declaring the legislation establishing the Transitional
Finance Authority to be unconstitutional. If such legislation were voided,
projected contracts for City capital projects would exceed the City's debt limit
during fiscal year 1997-98. Future developments concerning the City or entities
issuing debt for the benefit of the City, and public discussion of such
developments, as well as prevailing market conditions and securities credit
ratings, may affect the ability or cost to sell securities issued by the City or
such entities and may also affect the market for their outstanding securities.

B-21
<PAGE>

MONITORING AGENCIES

The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's Financial Plans which analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service requirements
for, and Financial Plan compliance by, the City and its Covered Organizations.
According to recent staff reports, while economic recovery in New York City has
been slower than in other regions of the country, a surge in Wall Street
profitability resulted in increased tax revenues and generated a substantial
surplus for the City in City fiscal year 1996-97. Although several sectors of
the City's economy have expanded recently, especially tourism and business and
professional services, City tax revenues remain heavily dependent on the
continued profitability of the securities industries and the course of the
national economy. These reports have also indicated that recent City budgets
have been balanced in part through the use of non-recurring resources; that the
City's Financial Plan tends to rely on actions outside its direct control; that
the City has not yet brought its long-term expenditure growth in line with
recurring revenue growth; and that the City is therefore likely to continue to
face substantial gaps between forecast revenues and expenditures in future years
that must be closed with reduced expenditures and/or increased revenues. In
addition to these monitoring agencies, the Independent Budget Office ("IBO") has
been established pursuant to the City Charter to provide analysis to elected
officials and the public on relevant fiscal and budgetary issues affecting the
City. Copies of the most recent Control Board, OSDC, City Comptroller, and IBO
staff reports are available by contacting the Control Board at 270 Broadway,
21st Floor, New York, NY 10007, Attention: Executive Director; OSDC at 270
Broadway, 23rd Floor, New York, NY 10007, Attention: Deputy Comptroller; the
City Comptroller at Municipal Building, Room 517, One Centre Street, New York,
NY 10007, Attention: Deputy Comptroller for Finance; and the IBO at 110 William
Street, 14th Floor, New York, NY 10038, Attention: Director.

OTHER LOCALITIES

Certain localities outside New York City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The potential impact on the State of any
future requests by localities for additional assistance is not included in the
projections of the State's receipts and disbursements for the State's 1997-98
fiscal year.

Fiscal difficulties experienced by the City of Yonkers resulted in the
re-establishment of the Financial Control Board of the City of Yonkers by the
State in 1984. That Board is charged with oversight of the fiscal affairs of
Yonkers. Future actions taken by the State to assist Yonkers could result in
increased State expenditures for extraordinary local assistance.

Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the City of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.

B-22
<PAGE>

Eighteen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities, aid that was largely continued in 1997. Twenty-eight
municipalities are scheduled to share the more than $32 million in targeted
unrestricted aid allocated in the 1997-98 budget. An additional $21 million
will be dispersed among all cities, towns and villages, a 3.97 percent increase
in General Purpose State Aid.

Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1995, the total indebtedness of all localities in
the State other than New York City was approximately $19.0 billion. A small
portion (approximately $102.3 million) of that indebtedness represented
borrowing to finance budgetary deficits and was issued pursuant to State
enabling legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City authorized by State law to issue debt to finance deficits
during the period that such deficit financing is outstanding. Eighteen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1995.

From time to time, federal expenditure reductions could reduce, or in some
cases eliminate, federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities.
If the State, the City or any of the public authorities were to suffer serious
financial difficulties jeopardizing their respective access to the public credit
markets, the marketability of notes and bonds issued by localities within the
State could be adversely affected. Localities also face anticipated and
potential problems resulting from certain pending litigation, judicial decisions
and long-range economic trends. Long-range potential problems of declining
urban population, increasing expenditures and other economic trends could
adversely affect localities and require increasing State assistance in the
future.

B-23
<PAGE>
<PAGE>

J.P. MORGAN INSTITUTIONAL FUNDS

J.P. MORGAN INSTITUTIONAL BOND FUND - ULTRA

STATEMENT OF ADDITIONAL INFORMATION

NOVEMBER 2, 1998

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED NOVEMBER 2, 1998 FOR THE J.P. MORGAN INSTITUTIONAL BOND FUND - ULTRA, AS
SUPPLEMENTED FROM TIME TO TIME. ADDITIONALLY, THIS STATEMENT OF ADDITIONAL
INFORMATION INCORPORATES BY REFERENCE THE FINANCIAL STATEMENTS INCLUDED IN THE
SHAREHOLDER REPORT RELATING TO THE FUND. THE PROSPECTUS AND THE FINANCIAL
STATEMENTS, INCLUDING THE AUDITOR'S REPORT THEREON, ARE AVAILABLE, WITHOUT
CHARGE, UPON REQUEST FROM FUNDS DISTRIBUTOR, INC., ATTENTION: J.P. MORGAN
INSTITUTIONAL FUNDS (800) 221-7930.

<PAGE>

Table of Contents

Page
----

General . . . . . . . . . . . . . . . . . . . 1
Investment Objectives and Policies . . . . . . 1
Investment Restrictions . . . . . . . . . . . 26
Trustees and Officers . . . . . . . . . . . . 28
Investment Advisor . . . . . . . . . . . . . . 32
Distributor . . . . . . . . . . . . . . . . . 34
Co-Administrator . . . . . . . . . . . . . . . 35
Services Agent . . . . . . . . . . . . . . . . 35
Custodian and Transfer Agent . . . . . . . . . 36
Shareholder Servicing . . . . . . . . . . . . 37
Financial Professionals. . . . . . . . . . . . 38
Independent Accountants . . . . . . . . . . . 38
Expenses . . . . . . . . . . . . . . . . . . . 39
Purchase of Shares . . . . . . . . . . . . . . 39
Redemption of Shares . . . . . . . . . . . . . 40
Exchange of Shares . . . . . . . . . . . . . . 40
Dividends and Distributions . . . . . . . . . 41
Net Asset Value . . . . . . . . . . . . . . . 41
Performance Data . . . . . . . . . . . . . . . 42
Portfolio Transactions . . . . . . . . . . . . 44
Massachusetts Trust . . . . . . . . . . . . . 46
Description of Shares . . . . . . . . . . . . 46
Special Information Concerning Investmen
Structure . . . . . . . . . . . . . . . . . 48
Taxes . . . . . . . . . . . . . . . . . . . . 50
Additional Information . . . . . . . . . . . 54
Financial Statements . . . . . . . . . . . . 55
Appendix A - Description of Securities
Ratings . . . . . . . . . . . . . . . . . . . A-1

<PAGE>

GENERAL

This Statement of Additional Information relates only to the J.P. Morgan
Institutional Bond Fund - Ultra (the "Fund"). The Fund is a series of shares of
beneficial interest of the J.P. Morgan Institutional Funds, an open-end
management investment company formed as a Massachusetts business trust (the
"Trust"). In addition to the Fund, the Trust consists of other series
representing separate investment funds (each a "J.P. Morgan Institutional
Fund"). The other J.P. Morgan Institutional Funds are covered by separate
Statements of Additional Information.

This Statement of Additional Information describes the investment
objectives and policies, management and operation of the Fund and provides
additional information with respect to the Fund and should be read in
conjunction with the Fund's current Prospectus (the "Prospectus"). Capitalized
terms not otherwise defined herein have the meanings accorded to them in the
Prospectus. The Fund's executive offices are located at 60 State Street, Suite
1300, Boston, Massachusetts 02109.

UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIO OF SECURITIES, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY
INVESTING ALL OF ITS INVESTABLE ASSETS IN THE U.S. FIXED INCOME PORTFOLIO (THE
"PORTFOLIO"), A CORRESPONDING DIVERSIFIED OPEN-END MANAGEMENT INVESTMENT COMPANY
HAVING THE SAME INVESTMENT OBJECTIVE AS THE FUND. THE FUND INVESTS IN THE
PORTFOLIO THROUGH A TWO-TIER MASTER-FEEDER INVESTMENT FUND STRUCTURE. SEE
"SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE."

The Portfolio is advised by J.P. Morgan Investment Management Inc.
("JPMIM" or the "Advisor").

Investments in the Fund are not deposits or obligations of, or guaranteed
or endorsed by, Morgan Guaranty Trust Company of New York, ("Morgan"), an
affiliate of the Advisor, or any other bank. Shares of the Fund are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other governmental agency. An investment in the Fund is
subject to risk that may cause the value of the investment to fluctuate, and
when the investment is redeemed, the value may be higher or lower than the
amount originally invested by the investor.

INVESTMENT OBJECTIVE AND POLICIES

The Fund is designed to be an economical and convenient means of making
substantial investments in a broad range of corporate and government debt
obligations and related investments of domestic and foreign issuers, subject to
certain quality and other restrictions. See "Quality and Diversification
Requirements." The Fund's investment objective is to provide a high total
return consistent with moderate risk of capital and maintenance of liquidity.
Although the net asset value of the Fund will fluctuate, the Fund attempts to
conserve the value of its investments to the extent consistent with its
objective. The Fund attempts to achieve its objective by investing all of its
investable assets in The U.S. Fixed Income Portfolio (the "Portfolio"), a
diversified open-end management investment company having the same investment
objective as the Fund.

The Portfolio attempts to achieve its investment objective by investing in
high grade corporate and government debt obligations and related securities

1
<PAGE>

of domestic and foreign issuers described in this Statement of Additional
Information.

The following discussion supplements the information regarding the
investment objective of the Fund and the policies to be employed to achieve this
objective by the Portfolio as set forth above and in the Prospectus. The Fund
and the Portfolio have the same investment objective. Accordingly, references
below to the Fund also include the Portfolio; similarly, references to the
Portfolio also include the Fund unless the context requires otherwise.

FIXED INCOME INVESTMENTS

The Fund may invest in a broad range of debt securities of domestic and
foreign corporate and government issuers. The corporate securities in which the
Fund may invest include debt securities of various types and maturities, e.g.,
debentures, notes, mortgage securities, equipment trust certificates and other
collateralized securities and zero coupon securities. Collateralized securities
are backed by a pool of assets such as loans or receivables which generate cash
flow to cover the payments due on the securities. Collateralized securities are
subject to certain risks, including a decline in the value of the collateral
backing the security, failure of the collateral to generate the anticipated cash
flow or in certain cases more rapid prepayment because of events affecting the
collateral, such as accelerated prepayment of mortgages or other loans backing
these securities or destruction of equipment subject to equipment trust
certificates. In the event of any such prepayment the Fund will be required to
reinvest the proceeds of prepayments at interest rates prevailing at the time of
reinvestment, which may be lower. In addition, the value of zero coupon
securities which do not pay interest is more volatile than that of interest
bearing debt securities with the same maturity.

CORPORATE BONDS AND OTHER DEBT SECURITIES

The Fund may invest in bonds and other debt securities of domestic and
foreign issuers to the extent consistent with its investment objective and
policies. A description of these investments appears below. See "Quality and
Diversification Requirements." For information on short-term investments in
these securities, see "Money Market Instruments."

MORTGAGE-BACKED SECURITIES. The Fund may invest in mortgage-backed
securities. Each mortgage pool underlying mortgage-backed securities consists
of mortgage loans evidenced by promissory notes secured by first mortgages or
first deeds of trust or other similar security instruments creating a first lien
on owner occupied and non-owner occupied one-unit to four-unit residential
properties, multifamily (i.e., five or more) properties, agriculture properties,
commercial properties and mixed use properties. The investment characteristics
of adjustable and fixed rate mortgage-backed securities differ from those of
traditional fixed income securities. The major differences include the payment
of interest and principal on mortgage-backed securities on a more frequent
(usually monthly) schedule and the possibility that principal may be prepaid at
any time due to prepayments on the underlying mortgage loans or other assets.
These differences can result in significantly greater price and yield volatility
than is the case with traditional fixed income securities. As a result, a
faster than expected prepayment rate will reduce both the market value and the
yield to maturity from those which were anticipated. A prepayment rate that is
slower than

2
<PAGE>

expected will have the opposite effect of increasing yield to maturity and
market value.

GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. Government National
Mortgage Association mortgage-backed certificates ("Ginnie Maes") are supported
by the full faith and credit of the United States. Certain other U.S.
Government securities, issued or guaranteed by federal agencies or government
sponsored enterprises, are not supported by the full faith and credit of the
United States, but may be supported by the right of the issuer to borrow from
the U.S. Treasury. These securities include obligations of instrumentalities
such as the Federal Home Loan Mortgage Corporation ("Freddie Macs") and the
Federal National Mortgage Association ("Fannie Maes"). No assurance can be
given that the U.S. Government will provide financial support to these federal
agencies, authorities, instrumentalities and government sponsored enterprises in
the future.

CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class mortgage-backed securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Fund does not intend to purchase residual interests
in REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets").
The obligations of Fannie Mae and Freddie Mac under their respective guaranty of
the REMIC Certificates are obligations solely of Fannie Mae and Freddie Mac,
respectively.

3
<PAGE>

of CMOs or REMIC Certificates to be retired substantially earlier than their
final scheduled distribution dates. Generally, interest is paid or accrues on
all classes of CMOs or REMIC Certificates on a monthly basis.

STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed securities
("SMBS") are derivative multiclass mortgage securities, issued or guaranteed by
the U.S. Government, its agencies or instrumentalities or by private issuers.
Although the market for such securities is increasingly liquid, privately issued
SMBS may not be readily marketable and will be considered illiquid for purposes
of the Fund's limitation on investments in illiquid securities. The Advisor may
determine that SMBS which are U.S. Government securities are liquid for purposes
of the Fund's limitation on investments in illiquid securities in accordance
with procedures adopted by the Board of Trustees. The market value of the class
consisting entirely of principal payments generally is unusually volatile in
response to changes in interest rates. The yields on a class of SMBS that
receives all or most of the interest from Mortgage Assets are generally higher
than prevailing market yields on other mortgage-backed securities because their
cash flow patterns are more volatile and there is a greater risk that the
initial investment will not be fully recouped.

MORTGAGES (DIRECTLY HELD). The Fund may invest directly in mortgages.
Mortgages are debt instruments secured by real property. Unlike mortgage-backed
securities, which generally represent an interest in a pool of mortgages, direct
investments in mortgages involve prepayment and credit risks of an individual
issuer and real property. Consequently, these investments require different
investment and credit analysis by the Advisor.

The directly placed mortgages in which the Fund invests may include
residential mortgages, multifamily mortgages, mortgages on cooperative apartment
buildings, commercial mortgages, and sale-leasebacks. These investments are
backed by assets such as office buildings, shopping centers, retail stores,
warehouses, apartment buildings and single-family dwellings. In the event that
the Fund forecloses on any non-performing mortgage, and acquires a direct
interest in the real property, the Fund will be subject to the risks generally
associated with the ownership of real property. There may be fluctuations in
the market value of the foreclosed property and its occupancy rates, rent
schedules and operating expenses. There may also be adverse changes in local,
regional or general economic conditions, deterioration of the real estate market
and the financial circumstances of tenants and sellers, unfavorable changes in
zoning, building environmental and other laws, increased real property taxes,
rising interest rates, reduced availability and increased cost of mortgage
borrowings, the need for unanticipated renovations, unexpected increases in the
cost of energy, environmental factors, acts of God and other factors which are
beyond the control of the Fund or the Advisor. Hazardous or toxic substances
may be present on, at or under the mortgaged property and adversely affect the
value of the property. In addition, the owners of property containing such
substances may be held responsible, under various laws, for containing,
monitoring, removing or cleaning up such substances. The presence of such
substances may also provide a basis for other claims by third parties. Costs of
clean-up or of liabilities to third parties may exceed the value of the
property. In addition, these risks may be uninsurable. In light of these and
similar risks, it may be impossible to dispose profitably of properties in
foreclosure.

4
<PAGE>

ZERO COUPON, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES. Zero coupon
securities are securities that are sold at a discount to par value and on which
interest payments are not made during the life of the security. Upon maturity,
the holder is entitled to receive the par value of the security. Pay-in-kind
securities are securities that have interest payable by delivery of additional
securities. Upon maturity, the holder is entitled to receive the aggregate par
value of the securities. The Fund accrues income with respect to zero coupon
and pay-in-kind securities prior to the receipt of cash payments. Deferred
payment securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. While interest payments are not
made on such securities, holders of such securities are deemed to have received
"phantom income." Because the Fund will distribute "phantom income" to
shareholders, to the extent that shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional shares, the Portfolio will
have fewer assets with which to purchase income producing securities. Zero
coupon, pay-in-kind and deferred payment securities may be subject to greater
fluctuation in value and lesser liquidity in the event of adverse market
conditions than comparably rated securities paying cash interest at regular
interest payment periods.

ASSET-BACKED SECURITIES. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables or other asset-backed securities collateralized by such
assets. Payments of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the entities issuing the securities. The
asset-backed securities in which the Fund may invest are subject to the Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. For example, credit card debt receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts on credit card debt thereby reducing the
balance due. Additionally, if the letter of credit is exhausted, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on underlying sales contracts are not realized. Because
asset-backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through all
phases of the market cycle has not been tested.

CORPORATE FIXED INCOME SECURITIES. The Fund may invest in publicly and
privately issued debt obligations of U.S. and non-U.S. corporations, including
obligations of industrial, utility, banking and other financial issuers. These
securities are subject to the risk of an issuer's inability to meet principal
and interest payments on the obligation and may also be subject to price
volatility due to such factors as market interest rates, market perception of
the creditworthiness of the issuer and general market liquidity.

MONEY MARKET INSTRUMENTS

The Fund may invest in money market instruments to the extent consistent
with its investment objective and policies. A description of the various

5
<PAGE>

types of money market instruments that may be purchased by the Fund appears
below. Also see "Quality and Diversification Requirements."

FOREIGN GOVERNMENT OBLIGATIONS. The Fund, subject to its investment
policies, may also invest in short-term obligations of foreign sovereign
governments or of their agencies, instrumentalities, authorities or political
subdivisions. These securities may be denominated in the U.S. dollar or in
another currency. See "Foreign Investments."

BANK OBLIGATIONS. The Fund may invest in negotiable certificates of
deposit, time deposits and bankers' acceptances of (i) banks, savings and loan
associations and savings banks which have more than $2 billion in total assets
(the "Asset Limitation") and are organized under the laws of the United States
or any state, (ii) foreign branches of these banks or of foreign banks of
equivalent size (Euros) and (iii) U.S. branches of foreign banks of equivalent
size (Yankees). See "Foreign Investments." The Fund will not invest in
obligations for which the Advisor, or any of its affiliated persons, is the
ultimate obligor or accepting bank. The Fund may also invest in obligations of
international banking institutions designated or supported by national
governments to promote economic reconstruction, development or trade between
nations (e.g., the European Investment Bank, the Inter-American Development
Bank, or the World Bank).

6
<PAGE>

or its affiliates, pursuant to arrangements with such accounts. Interest and
principal payments are credited to such accounts. Morgan has the right to
increase or decrease the amount provided to the borrower under an obligation.
The borrower has the right to pay without penalty all or any part of the
principal amount then outstanding on an obligation together with interest to the
date of payment. Since these obligations typically provide that the interest
rate is tied to the Federal Reserve commercial paper composite rate, the rate on
master demand obligations is subject to change. Repayment of a master demand
obligation to participating accounts depends on the ability of the borrower to
pay the accrued interest and principal of the obligation on demand which is
continuously monitored by the Morgan. Since master demand obligations typically
are not rated by credit rating agencies, the Fund may invest in such unrated
obligations only if at the time of an investment the obligation is determined by
the Advisor to have a credit quality which satisfies the Fund's quality
restrictions. See "Quality and Diversification Requirements." Although there is
no secondary market for master demand obligations, such obligations are
considered by the Fund to be liquid because they are payable upon demand. The
Fund does not have any specific percentage limitation on investments in master
demand obligations. It is possible that the issuer of a master demand obligation
could be a client of Morgan to whom Morgan, in its capacity as a commercial
bank, has made a loan.

REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
brokers, dealers or banks that meet the credit guidelines approved by the Fund's
Trustees. In a repurchase agreement, the Fund buys a security from a seller
that has agreed to repurchase the same security at a mutually agreed upon date
and price. The resale price normally is in excess of the purchase price,
reflecting an agreed upon interest rate. This interest rate is effective for
the period of time the Fund is invested in the agreement and is not related to
the coupon rate on the underlying security. A repurchase agreement may also be
viewed as a fully collateralized loan of money by the Fund to the seller. The
period of these repurchase agreements will usually be short, from overnight to
one week, and at no time will the Fund invest in repurchase agreements for more
than thirteen months. The securities which are subject to repurchase
agreements, however, may have maturity dates in excess of thirteen months from
the effective date of the repurchase agreement. The Fund will always receive
securities as collateral whose market value is, and during the entire term of
the agreement remains, at least equal to 100% of the dollar amount invested by
the Fund in each agreement plus accrued interest, and the Fund will make payment
for such securities only upon physical delivery or upon evidence of book entry
transfer to the account of the custodian. If the seller defaults, the Fund
might incur a loss if the value of the collateral securing the repurchase
agreement declines and might incur disposition costs in connection with
liquidating the collateral. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the security, realization upon disposal
of the collateral by the Fund may be delayed or limited.

The Fund may make investments in other debt securities, including without
limitation corporate bonds and other obligations described in this Statement of
Additional Information.

TAX EXEMPT OBLIGATIONS

In certain circumstances the Fund may invest in tax exempt obligations to
the extent consistent with its investment objective and policies. A

7
<PAGE>

description of the various types of tax exempt obligations which may be
purchased by the Fund appears below. See "Quality and Diversification
Requirements."

Municipal demand obligations are subdivided into two types: variable rate
demand notes and master demand obligations.

8
<PAGE>

demand payment. The variable rate demand notes in which the Fund may invest are
payable, or are subject to purchase, on demand usually on notice of seven
calendar days or less. The terms of the notes provide that interest rates are
adjustable at intervals ranging from daily to six months, and the adjustments
are based upon the prime rate of a bank or other appropriate interest rate index
specified in the respective notes. Variable rate demand notes are valued at
amortized cost; no value is assigned to the right of the Fund to receive the par
value of the obligation upon demand or notice.

Master demand obligations are tax exempt municipal obligations that provide
for a periodic adjustment in the interest rate paid and permit daily changes in
the amount borrowed. The interest on such obligations is, in the opinion of
counsel for the borrower, excluded from gross income for federal income tax
purposes. For a description of the attributes of master demand obligations, see
"Money Market Instruments" above. Although there is no secondary market for
master demand obligations, such obligations are considered by the Fund to be
liquid because they are payable upon demand. The Fund has no specific
percentage limitations on investments in master demand obligations.

FOREIGN INVESTMENTS

The Fund may invest in certain foreign securities. The Fund may invest up
to 20% of total assets in fixed income securities of foreign issuers denominated
in foreign currencies. The Fund does not expect to invest more than 25% of its
total assets, at the time of purchase, in securities of foreign issuers. No
foreign commercial paper may be subject to foreign withholding tax at the time
of purchase.

9
<PAGE>

holders of the receipts voting rights with respect to the deposited securities.

Investors should realize that the value of the Fund's investments in
foreign securities may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign countries.
In addition, changes in government administration or economic or monetary
policies in the United States or abroad could result in appreciation or
depreciation of portfolio securities and could favorably or unfavorably affect
the Fund's operations. Furthermore, the economies of individual foreign nations
may differ from the U.S. economy, whether favorably or unfavorably, in areas
such as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position; it may
also be more difficult to obtain and enforce a judgment against a foreign
issuer. Any foreign investment made by the Fund must be made in compliance with
U.S. and foreign currency restrictions and tax laws restricting the amounts and
types of foreign investments.

In addition, while the volume of transactions effected on foreign exchanges
has increased in recent years, in most cases it remains appreciably below that
of domestic security exchanges. Accordingly, the Portfolio's foreign
investments may be less liquid and their prices may be more volatile than
comparable investments in securities of U.S. companies. Moreover, the
settlement periods for foreign securities, which are often longer than those for
securities of U.S. issuers, may affect portfolio liquidity. In addition, there
is generally less government supervision and regulation of securities exchanges,
brokers and issuers located in foreign countries than in the United States.

Since investments in foreign securities may involve foreign currencies, the
value of the Fund's assets as measured in U.S. dollars may be affected favorably
or unfavorably by changes in currency rates and in exchange control regulations,
including currency blockage. The Fund may enter into forward commitments for
the purchase or sale of foreign currencies in connection with the settlement of
foreign securities transactions or to manage the Fund's currency exposure. See
"Foreign Currency Exchange Transactions" below.

FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the Fund may buy and sell
securities and receive interest in currencies other than the U.S. dollar, the
Fund may enter from time to time into foreign currency exchange transactions.
The Fund either enters into these transactions on a spot (i.e. cash) basis at
the spot rate prevailing in the foreign currency exchange market or uses forward
contracts to purchase or sell foreign currencies. The cost of the Fund's spot
currency exchange transactions is generally the

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<PAGE>

difference between the bid and offer spot rate of the currency being purchased
or sold.

The Fund may enter into forward foreign currency exchange transactions in
an attempt to protect against changes in forward foreign currency exchange rates
between the trade and settlement dates of specific securities transactions or
anticipated securities transactions. The Fund may also enter into forward
contracts to hedge against a change in foreign currency exchange rates that
would cause a decline in the value of existing investments denominated or
principally traded in a foreign currency. To do this, the Fund would enter into
a forward contract to sell the foreign currency in which the investment is
denominated or principally traded in exchange for U.S. dollars or in exchange
for another foreign currency. The Fund will only enter into forward contracts
to sell a foreign currency for another foreign currency if the Advisor expects
the foreign currency purchased to appreciate against the U.S. dollar.

SOVEREIGN FIXED INCOME SECURITIES. The Fund may invest in fixed income
securities issued or guaranteed by a foreign sovereign government or its
agencies, authorities or political subdivisions. Investment in sovereign fixed
income securities involves special risks not present in corporate fixed income
securities. The issuer of the sovereign debt or the governmental authorities
that control the repayment of the debt may be unable or unwilling to repay
principal or interest when due, and the Fund may have limited recourse in the
event of a default. During periods of economic uncertainty, the market prices
of sovereign debt, and the Fund's net asset value, may be more volatile than
prices of U.S. debt obligations. In the past, certain foreign countries have
encountered difficulties in servicing their debt

11
<PAGE>

obligations, withheld payments of principal and interest and declared moratoria
on the payment of principal and interest on their sovereign debts.

OBLIGATIONS OF SUPRANATIONAL ENTITIES. The Fund may invest in obligations
of supranational entities designated or supported by governmental entities to
promote economic reconstruction or development and of international banking
institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the "World Bank"), the
European Coal and Steel Community, the Asian Development Bank and the
Inter-American Development Bank. Each supranational entity's lending activities
are limited to a percentage of its total capital (including "callable capital"
contributed by its governmental members at the entity's call), reserves and net
income. There is no assurance that participating governments will be able or
willing to honor their commitments to make capital contributions to a
supranational entity.

ADDITIONAL INVESTMENTS

CONVERTIBLE SECURITIES. The Fund may invest in convertible securities of
domestic and, subject to the Fund's investment restrictions, foreign issuers.
The convertible securities in which the Fund may invest include any debt
securities or preferred stock which may be converted into common stock or which
carry the right to purchase common stock. Convertible securities entitle the
holder to exchange the securities for a specified number of shares of common
stock, usually of the same company, at specified prices within a certain period
of time.

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<PAGE>

dates for such transactions, the Fund will meet its obligations from maturities
or sales of the securities held in the segregated account and/or from cash flow.
If the Fund chooses to dispose of the right to acquire a when-issued security
prior to its acquisition, it could, as with the disposition of any other
portfolio obligation, incur a gain or loss due to market fluctuation. Also, the
Fund may be disadvantaged if the other party to the transaction defaults. It is
the current policy of the Fund not to enter into when-issued commitments
exceeding in the aggregate 15% of the market value of the Fund's total assets,
less liabilities other than the obligations created by when-issued commitments.

CREDIT RISK. Derivative securities and over-the-counter derivative
contracts involve a risk that the issuer or counterparty will fail to perform
its contractual obligations.

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<PAGE>

INVESTMENT COMPANY SECURITIES. Securities of other investment companies
may be acquired by the Fund and the Portfolio to the extent permitted under the
1940 Act or any order pursuant thereto. These limits currently require that, as
determined immediately after a purchase is made, (i) not more than 5% of the
value of the Fund's total assets will be invested in the securities of any one
investment company, (ii) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group,
and (iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund, provided however, that the Fund may invest
all of its investable assets in an open-end investment company that has the same
investment objective as the Fund (the Portfolio). As a shareholder of another
investment company, the Fund or Portfolio would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory
and other expenses that the Fund or Portfolio bears directly in connection with
its own operations. The Fund has applied for exemptive relief from the SEC to
permit the Fund's corresponding Portfolio to invest in affiliated investment
companies. If the requested relief is granted, the Fund's corresponding
Portfolio would then be permitted to invest in affiliated funds, subject to
certain conditions specified in the applicable order.

REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund sells a security and
agrees to repurchase the same security at a mutually agreed upon date and price
reflecting the interest rate effective for the term of the agreement. For
purposes of the 1940 Act a reverse repurchase agreement is also considered as
the borrowing of money by the Portfolio and, therefore, a form of leverage.
Leverage may cause any gains or losses for the Fund to be magnified. The Fund
will invest the proceeds of borrowings under reverse repurchase agreements. In
addition, the Fund will enter into a reverse repurchase agreement only when the
interest income to be earned from the investment of the proceeds is greater than
the interest expense of the transaction. The Fund will not invest the proceeds
of a reverse repurchase agreement for a period which exceeds the duration of the
reverse repurchase agreement. The Fund will establish and maintain with the
custodian a separate account with a segregated portfolio of securities in an
amount at least equal to its purchase obligations under its reverse repurchase
agreements. See "Investment Restrictions" for the Fund's limitations on reverse
repurchase agreements and bank borrowings.

MORTGAGE DOLLAR ROLL TRANSACTIONS. The Fund may engage in mortgage dollar
roll transactions with respect to mortgage securities issued by the Government
National Mortgage Association, the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation. In a mortgage dollar roll transaction,
the Portfolio sells a mortgage backed security and simultaneously agrees to
repurchase a similar security on a specified future date at an agreed upon
price. During the roll period, the Fund will not be entitled to receive any
interest or principal paid on the securities sold. The Fund is compensated for
the lost interest on the securities sold by the difference between the sales
price and the lower price for the future repurchase as well as by the interest
earned on the reinvestment of the sales proceeds. The Fund may also be
compensated by receipt of a commitment fee. When the Fund enters into a
mortgage dollar roll transaction, liquid assets in an amount sufficient to pay
for the future repurchase are segregated with the

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<PAGE>

custodian. Mortgage dollar roll transactions are considered reverse repurchase
agreements for purposes of the Fund's investment restrictions.

LOANS OF PORTFOLIO SECURITIES. Subject to applicable investment
restrictions, the Fund is permitted to lend securities in an amount up to 33
1/3% of the value of the Fund's net assets. The Fund may lend its securities if
such loans are secured continuously by cash or equivalent collateral or by a
letter of credit in favor of the Portfolio at least equal at all times to 100%
of the market value of the securities loaned, plus accrued interest. While such
securities are on loan, the borrower will pay the Fund any income accruing
thereon. Loans will be subject to termination by the Fund in the normal
settlement time, generally three business days after notice, or by the borrower
on one day's notice. Borrowed securities must be returned when the loan is
terminated. Any gain or loss in the market price of the borrowed securities
which occurs during the term of the loan inures to the Fund and its respective
investors. The Fund may pay reasonable finders' and custodial fees in
connection with a loan. In addition, the Portfolio will consider all facts and
circumstances including the creditworthiness of the borrowing financial
institution, and will not make any loans in excess of one year. The Fund will
not lend securities to any officer, Trustee, Director, employee or other
affiliate of the Portfolio, the Advisor or the Distributor, unless otherwise
permitted by applicable law.

ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED SECURITIES.
The Fund may not acquire any illiquid securities if, as a result thereof, more
than 15% of its net assets would be in illiquid investments. Subject to this
non-fundamental policy limitation, the Fund may acquire investments that are
illiquid or have limited liquidity, such as private placements or investments
that are not registered under the Securities Act of 1933, as amended (the "1933
Act"), and cannot be offered for public sale in the United States without first
being registered under the 1933 Act. An illiquid investment is any investment
that cannot be disposed of within seven days in the normal course of business at
approximately the amount at which it is valued by the Fund. The price the Fund
pays for illiquid securities or receives upon resale may be lower than the price
paid or received for similar securities with a more liquid market. Accordingly
the valuation of these securities will reflect any limitations on their
liquidity.

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<PAGE>

QUALITY AND DIVERSIFICATION REQUIREMENTS

The Fund intends to meet the diversification requirements of the 1940 Act.
Current 1940 Act diversification requirements require that with respect to , 75%
of the assets of the Fund: (1) the Fund may not invest more than 5% of its total
assets in the securities of any one issuer, except obligations of the U.S.
Government, its agencies and instrumentalities, and (2) the Fund may not own
more than 10% of the outstanding voting securities of any one issuer. As for
the other 25% of the Fund's assets not subject to the limitation described
above, there is no limitation on investment of these assets under the 1940 Act,
so that all of such assets may be invested in securities of any one issuer.
Investments not subject to the limitations described above could involve an
increased risk to the Fund should an issuer, or a state or its related entities,
be unable to make interest or principal payments or should the market value of
such securities decline.

The Fund will comply with the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company. See "Taxes."

If the assets and revenues of an agency, authority, instrumentality or
other political subdivision are separate from those of the government creating
the subdivision and the obligation is backed only by the assets and revenues of
the subdivision, such subdivision is regarded as the sole issuer. Similarly, in
the case of an industrial development revenue bond or pollution control revenue
bond, if the bond is backed only by the assets and revenues of the
nongovernmental user, the nongovernmental user is regarded as the sole issuer.
If in either case the creating government or another entity guarantees an
obligation, the guaranty is regarded as a separate security and treated as an
issue of such guarantor. Since securities issued or guaranteed by states or
municipalities are not voting securities, there is no limitation on the
percentage of a single issuer's securities which the Fund may own so long as it
does not invest more than 5% of its total assets that are subject to the
diversification limitation in the securities of such issuer, except obligations
issued or guaranteed by the U.S. Government. Consequently, the Fund may invest
in a greater percentage of the outstanding securities of a single issuer than
would an investment company which invests in voting securities. See "Investment
Restrictions.

The Fund invests in a diversified portfolio of securities with the quality
ratings described in the Prospectus. These securities are considered "high
grade," "investment grade" and "below investment grade" as described in Appendix
A. In addition, at the time the Fund invests in any commercial paper, bank
obligation or repurchase agreement, the issuer must have outstanding debt rated
A or higher by Moody's or Standard & Poor's, the issuer's parent corporation, if
any, must have outstanding commercial paper rated Prime-1 by Moody's or A-1 by
Standard & Poor's, or if no such ratings are available, the investment must be
of comparable quality in the Advisor's opinion. See below.

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<PAGE>

securities, lower quality fixed income securities involve greater risk of loss
of principal and income, including the possibility of default or bankruptcy of
the issuers of such securities, and have greater price volatility, especially
during periods of economic uncertainty or change. These lower quality fixed
income securities tend to be affected by economic changes and short-term
corporate and industry developments to a greater extent than higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. To the extent that the Portfolio invests in such lower quality
securities, the achievement of its investment objective may be more dependent on
the Advisor's own credit analysis.

Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. Economic downturns or an
increase in interest rates may cause a higher incidence of default by the
issuers of these securities, especially issuers that are highly leveraged. The
market for these lower quality fixed income securities is generally less liquid
than the market for investment grade fixed income securities. It may be more
difficult to sell these lower rated securities to meet redemption requests, to
respond to changes in the market, or to value accurately the Fund's portfolio
securities for purposes of determining the Fund's net asset value. See Appendix
A for more detailed information on these ratings.

OPTIONS AND FUTURES TRANSACTIONS

The Fund may purchase and sell (a) exchange traded and over-the-counter
(OTC) put and call options on fixed income securities, indexes of fixed income
securities and futures contracts on fixed income securities and indexes of fixed
income securities, and (b) futures contracts on fixed income securities and
indexes of fixed income securities. Each of these instruments is a derivative
instrument as its value derives from the underlying asset or index.

The Fund may use futures contracts and options for hedging purposes and
risk management. The Fund may not use futures contracts and options for
speculation.

The Fund may utilize options and futures contracts to manage their exposure
to changing interest rates and/or security prices. Some options and futures
strategies, including selling futures contracts and buying puts, tend to hedge
the Fund's investments against price fluctuations. Other strategies, including
buying futures contracts and buying calls, tend to increase market exposure.
Options and futures contracts may be combined with each other or with forward
contracts in order to adjust the risk and return characteristics of the Fund's
overall strategy in a manner deemed appropriate to the Advisor and consistent
with the Fund's objective and policies. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.

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<PAGE>

their use will increase the Fund's return. While the use of these instruments by
the Fund may reduce certain risks associated with owning its portfolio
securities, these techniques themselves entail certain other risks. If the
Advisor applies a strategy at an inappropriate time or judges market conditions
or trends incorrectly, options and futures strategies may lower the Fund's
return. Certain strategies limit the Fund's possibilities to realize gains as
well as its exposure to losses. The Fund could also experience losses if the
prices of its options and futures positions were poorly correlated with its
other investments, or if it could not close out its positions because of an
illiquid secondary market. In addition, the Fund will incur transaction costs,
including trading commissions and option premiums, in connection with its
futures and options transactions and these transactions could significantly
increase the Fund's turnover rate.

OPTIONS

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<PAGE>

the buyer can expect to suffer a loss if security prices do not rise
sufficiently to offset the cost of the option.

OPTIONS ON INDEXES. The Fund may purchase or sell put and call options on
any securities index based on securities in which the Fund may invest. Options
on securities indexes are similar to options on securities, except that the
exercise of securities index options is settled by cash payment and does not
involve the actual purchase or sale of securities. In addition, these options
are designed to reflect price fluctuations in a group of securities or segment
of the securities market rather than price fluctuations in a single security.
The Fund, in purchasing or selling index options, is subject to the risk that
the value of its portfolio securities may not change as much as an index because
the Fund's investments generally will not match the composition of an index.

19
<PAGE>

FUTURES CONTRACTS

The Fund may purchase and sell futures contracts. When the Fund purchases a
futures contract, it agrees to purchase a specified quantity of an underlying
instrument at a specified future date or to make a cash payment based on the
value of a securities index. When the Fund sells a futures contract, it agrees
to sell a specified quantity of the underlying instrument at a specified future
date or to receive a cash payment based on the value of a securities index. The
price at which the purchase and sale will take place is fixed when the Fund
enters into the contract. Futures can be held until their delivery dates or the
position can be (and normally is) closed out before then. There is no
assurance, however, that a liquid market will exist when the Fund wishes to
close out a particular position.

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<PAGE>

it is disadvantageous to do so. Furthermore, it may not always be possible for
the Fund to close out its futures positions. Until it closes out a futures
position, the Fund will be obligated to continue to pay variation margin.
Initial and variation margin payments do not constitute purchasing on margin for
purposes of the Fund's investment restrictions. In the event of the bankruptcy
of an FCM that holds margin on behalf of the Fund, the Fund may be entitled to
return of margin owed to it only in proportion to the amount received by the
FCM's other customers, potentially resulting in losses to the Fund.

OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and sell put and call
options, including put and call options on futures contracts. Futures contracts
obligate the buyer to take and the seller to make delivery at a future date of a
specified quantity of a financial instrument or an amount of cash based on the
value of a securities index. Currently, futures contracts are available on
various types of fixed income securities, including but not limited to U.S.
Treasury bonds, notes and bills, Eurodollar certificates of deposit and on
indexes of fixed income securities.

The seller of an option on a futures contract receives the premium paid by
the purchaser and may be required to pay initial margin. Amounts equal to the
initial margin and any additional collateral required on any options on futures
contracts sold by the Fund are paid by the Fund into a segregated account, in
the name of the FCM, as required by the 1940 Act and the SEC's interpretations
thereunder.

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<PAGE>

substantial price increase. Because combined options positions involve multiple
trades, they result in higher transaction costs and may be more difficult to
open and close out.

CORRELATION OF PRICE CHANGES. Because there are a limited number of types
of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match the Fund's
current or anticipated investments exactly. The Fund may invest in options and
futures contracts based on securities with different issuers, maturities, or
other characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.

Options and futures contracts prices can also diverge from the prices of
their underlying instruments, even if the underlying instruments match the
Fund's investments well. Options and futures contracts prices are affected by
such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. The Fund may purchase or sell futures
contracts or purchase put and call options, including put and call options on
futures contracts with a greater or lesser value than the securities it wishes
to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in the Fund's options or
futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.

LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a liquid
market will exist for any particular option or futures contract at any
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or down more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for the
Portfolio to enter into new positions or close out existing positions. If the
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions, and
could potentially require the Portfolio to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, the
Portfolio's access to other assets held to cover its options or futures
positions could also be impaired. (See "Exchange Traded and OTC Options" above
for a discussion of the liquidity of options not traded on an exchange.)

POSITION LIMITS. Futures exchanges can limit the number of futures and
options on futures contracts that can be held or controlled by an entity. If an
adequate exemption cannot be obtained, the Portfolio or the Advisor may be
required to reduce the size of its futures and options positions or may not be
able to trade a certain futures or options contract in order to avoid exceeding
such limits.

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<PAGE>

ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS. The Portfolio
intends to comply with Section 4.5 of the regulations under the Commodity
Exchange Act, which limits the extent to which a Portfolio can commit assets to
initial margin deposits and option premiums. In addition, the Portfolio will
comply with guidelines established by the SEC with respect to coverage of
options and futures contracts by mutual funds, and if the guidelines so require,
will set aside appropriate liquid assets in a segregated custodial account in
the amount prescribed. Securities held in a segregated account cannot be sold
while the futures contract or option is outstanding, unless they are replaced
with other suitable assets. As a result, there is a possibility that
segregation of a large percentage of the Portfolio's assets could impede
portfolio management or the Portfolio's ability to meet redemption requests or
other current obligations.

The Fund may enter into swap transactions for any legal purpose consistent
with its investment objective and policies, such as for the purpose of
attempting to obtain or preserve a particular return or spread at a lower cost
than obtaining that return or spread through purchases and/or sales of
instruments in cash markets, to protect against currency fluctuations, as a
duration management technique, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date, or to gain exposure
to certain markets in the most economical way possible. The Fund will not sell
interest rate caps, floors or collars if it does not own securities with coupons
which provide the interest that the Fund may be required to pay.

23
<PAGE>

purchase or in the form of higher payments or lower receipts within an interest
rate swap transaction) has the right, but not the obligation, to initiate a new
swap transaction of a pre-specified notional amount with pre-specified terms
with the seller of the option as the counterparty.

The "notional amount" of a swap transaction is the agreed upon basis for
calculating the payments that the parties have agreed to exchange. For example,
one swap counterparty may agree to pay a floating rate of interest (e.g., 3
month LIBOR) calculated based on a $10 million notional amount on a quarterly
basis in exchange for receipt of payments calculated based on the same notional
amount and a fixed rate of interest on a semi-annual basis. In the event the
Fund is obligated to make payments more frequently than it receives payments
from the other party, it will incur incremental credit exposure to that swap
counterparty. This risk may be mitigated somewhat by the use of swap agreements
which call for a net payment to be made by the party with the larger payment
obligation when the obligations of the parties fall due on the same date. Under
most swap agreements entered into by the Fund, payments by the parties will be
exchanged on a "net basis", and the Fund will receive or pay, as the case may
be, only the net amount of the two payments.

The amount of the Fund's potential gain or loss on any swap transaction is
not subject to any fixed limit. Nor is there any fixed limit on the Fund's
potential loss if it sells a cap or collar. If the Fund buys a cap, floor or
collar, however, the Fund's potential loss is limited to the amount of the fee
that it has paid. When measured against the initial amount of cash required to
initiate the transaction, which is typically zero in the case of most
conventional swap transactions, swaps, caps, floors and collars tend to be more
volatile than many other types of instruments.

The use of swap transactions, caps, floors and collars involves investment
techniques and risks which are different from those associated with portfolio
security transactions. If the Advisor is incorrect in its forecasts of market
values, interest rates, and other applicable factors, the investment performance
of a Fund will be less favorable than if these techniques had not been used.
These instruments are typically not traded on exchanges. Accordingly, there is
a risk that the other party to certain of these instruments will not perform its
obligations to the Fund or that the Fund may be unable to enter into offsetting
positions to terminate its exposure or liquidate its position under certain of
these instruments when it wishes to do so. Such occurrences could result in
losses to the Fund.

The Advisor will, however, consider such risks and will enter into swap
and other derivatives transactions only when it believes that the risks are not
unreasonable.

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<PAGE>

with a daily value at least equal to the excess, if any, of the Fund's accrued
obligations under the swap agreement over the accrued amount the Fund is
entitled to receive under the agreement. If the Fund enters into a swap
agreement on other than a net basis, or sells a cap, floor or collar, it will
segregate assets with a daily value at least equal to the full amount of the
Fund's accrued obligations under the agreement.

The Fund will not enter into any swap transaction, cap, floor, or collar,
unless the counterparty to the transaction is deemed creditworthy by the
Advisor. If a counterparty defaults, a Fund may have contractual remedies
pursuant to the agreements related to the transaction. The swap markets in
which many types of swap transactions are traded have grown substantially in
recent years, with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the markets for certain types of swaps (e.g., interest rate swaps)
have become relatively liquid. The markets for some types of caps, floors and
collars are less liquid.

The liquidity of swap transactions, caps, floors and collars will be as set
forth in guidelines established by the Advisor and approved by the Trustees
which are based on various factors, including (1) the availability of dealer
quotations and the estimated transaction volume for the instrument, (2) the
number of dealers and end users for the instrument in the marketplace, (3) the
level of market making by dealers in the type of instrument, (4) the nature of
the instrument (including any right of a party to terminate it on demand) and
(5) the nature of the marketplace for trades (including the ability to assign or
offset the Fund's rights and obligations relating to the instrument). Such
determination will govern whether the instrument will be deemed within the 15%
restriction on investments in securities that are not readily marketable.

During the term of a swap, cap, floor or collar, changes in the value of
the instrument are recognized as unrealized gains or losses by marking to market
to reflect the market value of the instrument. When the instrument is
terminated, the Fund will record a realized gain or loss equal to the
difference, if any, between the proceeds from (or cost of) the closing
transaction and the Fund's basis in the contract.

The federal income tax treatment with respect to swap transactions, caps,
floors, and collars may impose limitations on the extent to which the Fund may
engage in such transactions.

RISK MANAGEMENT

The Fund may employ non-hedging risk management techniques. Examples of
risk management strategies include synthetically altering the duration of a
portfolio or the mix of securities in a portfolio. For example, if the Advisor
wishes to extend maturities in a fixed income portfolio in order to take
advantage of an anticipated decline in interest rates, but does not wish to
purchase the underlying long term securities, it might cause the Fund to
purchase futures contracts on long term debt securities. Similarly, if the

25
<PAGE>

Advisor wishes to decrease fixed income securities or purchase equities, it
could cause the Fund to sell futures contracts on debt securities and purchase
futures contracts on a stock index. Such non-hedging risk management techniques
are not speculative, but because they involve leverage include, as do all
leveraged transactions, the possibility of losses as well as gains that are
greater than if these techniques involved the purchase and sale of the
securities themselves rather than their synthetic derivatives.

PORTFOLIO TURNOVER

For the fiscal years ended October 31, 1996 and 1997 and the six months
ended April 30, 1998 (unaudited), the portfolio turnover rates for the Portfolio
were 186%, 93% and 53%, respectively. A rate of 100% indicates that the
equivalent of all of the Portfolio's assets have been sold and reinvested in a
year. High portfolio turnover may result in the realization of substantial net
capital gains or losses. To the extent net short term capital gains are
realized, any distributions resulting from such gains are considered ordinary
income for federal income tax purposes. See "Taxes" below.

INVESTMENT RESTRICTIONS

The investment restrictions of the Fund and the Portfolio are identical,
unless otherwise specified. Accordingly, references below to the Fund also
include the Portfolio unless the context requires otherwise; similarly,
references to the Portfolio also include the Fund unless the context requires
otherwise.

The investment restrictions below have been adopted by the Trust with
respect to the Fund and by the Portfolio. Except where otherwise noted, these
investment restrictions are "fundamental" policies which, under the 1940 Act,
may not be changed without the vote of a majority of the outstanding voting
securities of the Fund or Portfolio, as the case may be. A "majority of the
outstanding voting securities" is defined in the 1940 Act as the lesser of
(a) 67% or more of the voting securities present at a meeting if the holders of
more than 50% of the outstanding voting securities are present or represented by
proxy, or (b) more than 50% of the outstanding voting securities. The
percentage limitations contained in the restrictions below apply at the time of
the purchase of securities. Whenever the Fund is requested to vote on a change
in the fundamental investment restrictions of the Portfolio, the Trust will hold
a meeting of Fund shareholders and will cast its votes as instructed by the
Fund's shareholders.

Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC staff
interpretations thereof, are amended or modified, the Fund and its corresponding
Portfolio:

1. May not make any investment inconsistent with the Fund's classification as a
diversified investment company under the Investment Company Act of 1940.

2. May not purchase any security which would cause the Fund to concentrate its
investments in the securities of issuers primarily engaged in any particular
industry except as permitted by the SEC;

3. May not issue senior securities, except as permitted under the Investment
Company Act of 1940 or any rule, order or interpretation thereunder;

26
<PAGE>

4. May not borrow money, except to the extent permitted by applicable law;

5. May not underwrite securities of other issuers, except to the extent that the
Fund, in disposing of portfolio securities, may be deemed an underwriter within
the meaning of the 1933 Act;

8. May make loans to other persons, in accordance with the Fund's investment
objective and policies and to the extent permitted by applicable law.

(i) May not acquire any illiquid securities, such as repurchase agreements
with more than seven days to maturity or fixed time deposits with a duration of
over seven calendar days, if as a result thereof, more than 15% of the market
value of the Fund's net assets would be in investments which are illiquid;

(iii) May not acquire securities of other investment companies, except as
permitted by the 1940 Act or any order pursuant thereto.

27
<PAGE>

absence of such classification or if JPMIM determines in good faith based on its
own information that the economic characteristics affecting a particular issuer
make it more appropriately considered to be engaged in a different industry,
JPMIM may classify an issuer accordingly. For instance, personal credit finance
companies and business credit finance companies are deemed to be separate
industries and wholly owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to financing
the activities of their parents.

TRUSTEES AND OFFICERS

TRUSTEES

The Trustees of the Trust, who are also the Trustees of the Portfolio,
their business addresses, principal occupations during the past five years and
dates of birth are set forth below.

WILLIAM G. BURNS--Trustee; Retired, Former Vice Chairman and Chief
Financial Officer, NYNEX. His address is 2200 Alaqua Drive, Longwood, Florida
32779, and his date of birth is November 2, 1932.

ARTHUR C. ESCHENLAUER--Trustee; Retired; Former Senior Vice President,
Morgan Guaranty Trust Company of New York. His address is 14 Alta Vista Drive,
RD #2, Princeton, New Jersey 08540, and his date of birth is May 23, 1934.

MATTHEW HEALEY(1)--Trustee, Chairman and Chief Executive Officer; Chairman,
Pierpont Group, Inc., since prior to 1993. His address is Pine Tree Country
Club Estates, 10286 Saint Andrews Road, Boynton Beach, Florida 33436, and his
date of birth is August 23, 1937.

MICHAEL P. MALLARDI--Trustee; Retired; Prior to April 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His address
is 10 Charnwood Drive, Suffern, New York 10910, and his date of birth is
March 17, 1934.

The Trustees of the Trust are the same as the Trustees of the Portfolio. A
majority of the disinterested Trustees have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising from
the fact that the same individuals are Trustees of the Trust, the Portfolio and
the J.P. Morgan Funds, up to and including creating a separate board of
trustees.

Each Trustee is currently paid an annual fee of $75,000 (adjusted as of
April 1, 1997) for serving as Trustee of the Trust, each of the Master
Portfolios (as defined below), the J.P. Morgan Funds and J.P. Morgan Series
Trust and is reimbursed for expenses incurred in connection with service as a

- --------------------
(1) Mr. Healey is an "interested person" of the Trust, the Advisor and
the Portfolio as that term is defined in the 1940 Act.

28
<PAGE>

Trustee. The Trustees may hold various other directorships unrelated to these
funds.

Trustee compensation expenses paid by the Trust for the calendar year ended
December 31, 1997 are set forth below.

<TABLE>
<CAPTION>
TOTAL TRUSTEE COMPENSATION
ACCRUED BY THE MASTER
PORTFOLIOS(*), J.P. MORGAN
AGGREGATE TRUSTEE COMPENSATION FUNDS, J.P. MORGAN SERIES
NAME OF TRUSTEE PAID BY THE TRUST DURING 1997 TRUST AND THE TRUST DURING 1997(**)
--------------- ------------------------------ -----------------------------------
<S> <C> <C>

Frederick S. Addy, Trustee $11,786 $72,500

William G. Burns, Trustee $11,786 $72,500

Arthur C. Eschenlauer, Trustee $11,786 $72,500

Matthew Healey, Trustee(***), $11,786 $72,500
Chairman and Chief Executive
Officer

Michael P. Mallardi, Trustee $11,786 $72,500
</TABLE>

(*) Includes the Portfolio and 18 other portfolios (collectively the "Master
Portfolios") for which JPMIM acts as investment advisor.

(**) No investment company within the fund complex has a pension or retirement
plan. Currently there are 18 investment companies (15 investment
companies comprising the Master Portfolios, the J.P. Morgan Funds, the
Trust and J.P. Morgan Series Trust) in the fund complex.

(***) During 1997, Pierpont Group, Inc. paid Mr. Healey, in his role as
Chairman of Pierpont Group, Inc., compensation in the amount of $147,500,
contributed $22,100 to a defined contribution plan on his behalf and paid
$20,500 in insurance premiums for his benefit.

The Trustees decide upon matters of general policies and are responsible
for overseeing the Trust's and Portfolio's business affairs. The Portfolio and
the Trust have entered into a Fund Services Agreement with Pierpont Group, Inc.
to assist the Trustees in exercising their overall supervisory responsibilities
over the affairs of the Portfolio and the Trust. Pierpont Group, Inc. was
organized in July 1989 to provide services for the J.P. Morgan Family of Funds
(formerly "The Pierpont Family of Funds"), and the Trustees are the equal and
sole shareholders of Pierpont Group, Inc. The Trust and the Portfolio have
agreed to pay Pierpont Group, Inc. a fee in an amount representing its
reasonable costs in performing these services to the Trust, the Portfolio and
certain other registered investment companies subject to similar agreements with
Pierpont Group, Inc. These costs are periodically reviewed by the Trustees.
The principal offices of Pierpont Group, Inc. are located at 461 Fifth Avenue,
New York, New York 10017.

29
<PAGE>

The aggregate fees paid to Pierpont Group, Inc. by the Fund and Portfolio
for the indicated fiscal years are set forth below:

FUND: For the period December 15, 1997 (commencement of operations) through
the six months ended April 30, 1998 (unaudited):$465.

PORTFOLIO: For the fiscal year ended October 31, 1995: $40,729. For the
fiscal year ended October 31, 1996: $36,922. For the fiscal year ended October
31, 1997: $35,577. For the six months ended April 30, 1998 (unaudited): $17,465.

OFFICERS

The officers of the Trust and the Portfolio, their principal occupations
during the past five years and dates of birth are set forth below. Unless
otherwise specified, each officer holds the same position with the Trust and the
Portfolio. The business address of each of the officers unless otherwise noted
is Funds Distributor, Inc., 60 State Street, Suite 1300, Boston, Massachusetts
02109.

MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group, since
prior to 1993. His address is Pine Tree Country Club Estates, 10286 Saint
Andrews Road, Boynton Beach, Florida 33436. His date of birth is August 23,
1937.

MARGARET W. CHAMBERS; Vice President and Secretary. Senior Vice President
and General Counsel of FDI since April, 1998. From August 1996 to March 1998,
Ms. Chambers was Vice President and Assistant General Counsel for Loomis, Sayles
& Company, L.P. From January 1986 to July 1996, she was an associate with the
law firm of Ropes & Gray. Her date of birth is October 12, 1959.

DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant Vice
President and Assistant Department Manager of Treasury Services and
Administration of FDI and an officer of certain investment companies
distributed or administered by FDI. Prior to April 1997, Mr. Conroy was
Supervisor of Treasury Services and Administration of FDI. From April 1993 to
January 1995, Mr. Conroy was a Senior Fund Accountant for Investors Bank & Trust
Company. His date of birth is March 31, 1969.

JACQUELINE HENNING; Assistant Secretary and Assistant Treasurer of the
Portfolio only. Managing Director, State Street Cayman Trust Company, Ltd.

30
<PAGE>

since October 1994. Prior to October 1994, Mrs. Henning was head of mutual funds
at Morgan Grenfell in Cayman and was Managing Director of Bank of Nova Scotia
Trust Company (Cayman) Limited prior to September 1993. Address: P.O. Box 2508
GT, Elizabethan Square, 2nd Floor, Shedden Road, George Town, Grand Cayman,
Cayman Islands, BWI. Her date of birth is March 24, 1942.

KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Vice President
and Senior Counsel of FDI and an officer of certain investment companies
distributed or administered by FDI. From June 1994 to January 1996, Ms.
Jacoppo-Wood was a Manager of SEC Registration at Scudder, Stevens & Clark, Inc.
Prior to May 1994, Ms. Jacoppo-Wood was a senior paralegal at The Boston
Company Advisors, Inc. ("TBCA"). Her date of birth is December 29, 1966.

CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Senior Associate General Counsel of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI. From
April 1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial
Group. Prior to April 1994, Mr. Kelley was employed by Putnam Investments in
legal and compliance capacities. His date of birth is December 24, 1964.

KATHLEEN K. MORRISEY; Vice President and Assistant Secretary. Vice
President and Assistant Secretary of FDI. Manager of Treasury Services
Administration and an officer of certain investment companies advised or
administered by Montgomery Asset Management, L.P. and Dresdner RCM Global
Investors, Inc., and their respective affiliates. From July 1994 to November
1995, Ms. Morrisey was a Fund Accountant II for Investors Bank & Trust Company.
Prior to July 1994 she was a finance student at Stonehill College. Her date of
birth is July 5, 1972.

MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI.
Prior to August 1994, Ms. Nelson was an Assistant Vice President and Client
Manager for The Boston Company, Inc. Her date of birth is April 22, 1964.

MICHAEL S. PETRUCELLI; Vice President and Assistant Secretary. Senior Vice
President and Director of Strategic Client Initiatives for FDI since December
1996. From December 1989 through November 1996, Mr. Petrucelli was employed
with GE Investments where he held various financial, business development and
compliance positions. He also served as Treasurer of the GE Funds and as
Director of GE Investment Services. Address: 200 Park Avenue, New York, New
York, 10166. His date of birth is May 18, 1961.

STEPHANIE D. PIERCE; Vice President and Assistant Secretary. Vice
President and Client Development Manager for FDI since April 1998. From April
1997 to March 1998, Ms. Pierce was employed by Citibank, NA as an officer of
Citibank and Relationship Manager on the Business and Professional Banking

31
<PAGE>

team handling over 22,000 clients. Address: 200 Park Avenue, New York, New York
10166. Her date of birth is August 18, 1968.

GEORGE A. RIO; President and Treasurer. Executive Vice President and
Client Service Director of FDI since April 1998. From June 1995 to March 1998,
Mr. Rio was Senior Vice President and Senior Key Account Manager for Putnam
Mutual Funds. From May 1994 to June 1995, Mr. Rio was Director of Business
Development for First Data Corporation. From September 1983 to May 1994, Mr.
Rio was Senior Vice President & Manager of Client Services and Director of
Internal Audit at The Boston Company. His date of birth is January 2, 1955.

CHRISTINE ROTUNDO; Assistant Treasurer. Vice President, Morgan Guaranty
Trust Company of New York. Ms. Rotundo serves in the Funds Administration group
as a Manager of the Tax Group and is responsible for U.S. mutual fund tax
matters. Prior to September 1995, Ms. Rotundo served as a Senior Tax Manager in
the Investment Company Services Group of Deloitte & Touche LLP. Her address is
60 Wall Street, New York, New York 10260. Her date of birth is September 26,
1965.

INVESTMENT ADVISOR

The Fund has not retained the services of an investment adviser because the
Fund seeks to achieve its investment objective by investing all of its
investable assets in the Portfolio. Subject to the supervision of the
Portfolio's Trustees, the Advisor makes each Portfolio's day-to-day investment
decisions, arranges for the execution of Portfolio transactions and generally
manages the Portfolio's investments. Prior October 28, 1998, Morgan was the
Portfolio's investment advisor. JPMIM, a wholly owned subsidiary of J.P. Morgan
& Co. Incorporated ("J.P. Morgan"), is a registered investment adviser under the
Investment Advisers Act of 1940, as amended, manages employee benefit funds of
corporations, labor unions and state and local governments and the accounts of
other institutional investors, including investment companies. Certain of the
assets of employee benefit accounts under its management are invested in
commingled pension trust funds for which Morgan serves as trustee.

J.P. Morgan, through the Advisor and other subsidiaries, acts as investment
advisor to individuals, governments, corporations, employee benefit plans,
mutual funds and other institutional investors with combined assets under
management of approximately $275 billion.

J.P. Morgan has a long history of service as adviser, underwriter and
lender to an extensive roster of major companies and as a financial advisor to
national governments. The firm, through its predecessor firms, has been in
business for over a century and has been managing investments since 1913.

Morgan, also a wholly owned subsidiary of J.P. Morgan, is a bank holding
company organized under the laws of the State of Delaware. Morgan, whose
principal offices are at 60 Wall Street, New York, New York 10260, is a New York
trust company which conducts a general banking and trust business. Morgan is
subject to regulation by the New York State Banking Department and is a member
bank of the Federal Reserve System. Through offices in New York City and
abroad, Morgan offers a wide range of services, primarily to governmental,
institutional, corporate and high net worth individual customers in the United
States and throughout the world.

32
<PAGE>

The basis of the Advisor's investment process is fundamental investment
research as the firm believes that fundamentals should determine an asset's
value over the long term. J.P. Morgan currently employs over 100 full time
research analysts, among the largest research staffs in the money management
industry, in its investment management divisions located in New York, London,
Tokyo, Frankfurt and Singapore to cover companies, industries and countries on
site. In addition, the investment management divisions employ approximately 300
capital market researchers, portfolio managers and traders. The Advisor's fixed
income investment process is based on analysis of real rates, sector
diversification and quantitative and credit analysis.

As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Advisory
Agreements, the Portfolio has agreed to pay the Advisor a fee, which is computed
daily and may be paid monthly, equal to the annual rate of 0.30% of the
Portfolio's average daily net assets.

The advisory fees paid by the Portfolio to the Advisor for the fiscal years
ended October 31, 1995, 1996 and 1997 and the six months ended April 30, 1998
(unaudited) were $1,339,147, $2,402,660, $2,908,384 and $1,657,846,
respectively.

33
<PAGE>

The Glass-Steagall Act and other applicable laws generally prohibit banks
and their subsidiaries, such as the Advisor, from engaging in the business of
underwriting or distributing securities, and the Board of Governors of the
Federal Reserve System has issued an interpretation to the effect that under
these laws a bank holding company registered under the federal Bank Holding
Company Act or certain subsidiaries thereof may not sponsor, organize, or
control a registered open-end investment company continuously engaged in the
issuance of its shares, such as the Trust. The interpretation does not prohibit
a holding company or a subsidiary thereof from acting as investment advisor and
custodian to such an investment company. The Advisor believes that it may
perform the services for the Portfolio contemplated by the Advisory Agreement
without violation of the Glass-Steagall Act or other applicable banking laws or
regulations. State laws on this issue may differ from the interpretation of
relevant federal law, and banks and financial institutions may be required to
register as dealers pursuant to state securities laws. However, it is possible
that future changes in either federal or state statutes and regulations
concerning the permissible activities of banks or trust companies, as well as
further judicial or administrative decisions and interpretations of present and
future statutes and regulations, might prevent the Advisor from continuing to
perform such services for the Portfolio.

DISTRIBUTOR

34
<PAGE>

days' written notice to the other party. The principal offices of FDI are
located at 60 State Street, Suite 1300, Boston, Massachusetts 02109.

CO-ADMINISTRATOR

The table below sets forth for the Fund and the Portfolio the
administrative fees paid to FDI for the fiscal periods indicated:

FUND: For the period December 15, 1997 (commencement of operations) through
the six months ended April 30, 1998 (unaudited): $359.

PORTFOLIO: For the period August 1, 1996 through October 31, 1996: $6,419.
For the fiscal year ended October 31, 1997: $23,296. For the six months ended
April 30, 1998 (unaudited): $11,478.

The administrative fees paid by the Portfolio to Signature Broker-Dealer
Services, Inc. (which provided distribution and administrative services to the
Trust and placement agent and administrative services to the Portfolio prior to
August 1, 1996) for the fiscal year ended October 31, 1995 and the period
November 1, 1995 through July 31, 1996 were $27,436 and $65,610, respectively.

SERVICES AGENT

The Trust, on behalf of the Fund, and the Portfolio have entered into
Administrative Services Agreements (the "Services Agreements") with Morgan
pursuant to which Morgan is responsible for certain administrative and related
services provided to the Fund and the Portfolio. The Services Agreements may be
terminated at any time, without penalty, by the Trustees or Morgan, in each

35
<PAGE>

case on not more than 60 days' nor less than 30 days' written notice to the
other party.

Under the Services Agreements, the Fund and the Portfolio have agreed to
pay Morgan fees equal to their allocable share of an annual complex-wide charge.
This charge is calculated daily based on the aggregate net assets of the Master
Portfolios and J.P. Morgan Series Trust in accordance with the following annual
schedule: 0.09% of the first $7 billion of their aggregate average daily net
assets and 0.04% of their average daily net assets in excess of $7 billion, less
the complex-wide fees payable to FDI. The portion of this charge payable by the
Fund and Portfolio is determined by the proportionate share that their net
assets bear to the total net assets of the Trust, the Master Portfolios, the
other investors in the Master Portfolios for which Morgan provides similar
services and J.P. Morgan Series Trust.

Under prior administrative services agreements in effect from December 29,
1995 through July 31, 1996, with Morgan, the Portfolio paid Morgan a fee equal
to its proportionate share of an annual complex-wide charge. This charge was
calculated daily based on the aggregate net assets of the Portfolio in
accordance with the following schedule: 0.06% of the first $7 billion of the
Portfolio's aggregate average daily net assets, and 0.03% of the Portfolio's
average daily net assets in excess of $7 billion. Prior to December 29, 1995,
the Trust and the Portfolio had entered into Financial and Fund Accounting
Services Agreements with Morgan, the provisions of which included certain of the
activities described above and, prior to September 1, 1995, also included
reimbursement of usual and customary expenses.

The table below sets forth for the Fund and Portfolio the fees paid to
Morgan, net of fee waivers and reimbursements, as Services Agent. See the
Prospectus and "Expenses" below for expense limitations.

FUND: For the period December 15, 1997 (commencement of operations) through
the six months ended April 30, 1998 (unaudited): $(41,278).

PORTFOLIO: For the fiscal year ended October 31, 1995: $167,081. For the
fiscal year ended October 31, 1996: $191,348. For the fiscal year ended October
31, 1997: $300,675. For the six months ended April 30, 1998 (unaudited):
$165,103.

- ---------------------
*Indicates a reimbursement by Morgan for expenses in excess of its fees under
the Services Agreements. No fees were paid for the fiscal periods.

CUSTODIAN AND TRANSFER AGENT

36
<PAGE>

foreign assets held outside the United States, the custodian employs various
subcustodians who were approved by the Trustees of the Portfolio in accordance
with the regulations of the SEC. The custodian maintains portfolio transaction
records. As transfer agent and dividend disbursing agent, State Street is
responsible for maintaining account records detailing the ownership of Fund
shares and for crediting income, capital gains and other changes in share
ownership to shareholder accounts.

SHAREHOLDER SERVICING

The Trust on behalf of the Fund has entered into a Shareholder Servicing
Agreement with Morgan pursuant to which Morgan acts as shareholder servicing
agent for its customers and for other Fund investors who are customers of a
Financial Professional. Under this agreement, Morgan is responsible for
performing shareholder account, administrative and servicing functions, which
include, but are not limited to, answering inquiries regarding account status
and history, the manner in which purchases and redemptions of Fund shares may be
effected, and certain other matters pertaining to the Fund; assisting customers
in designating and changing dividend options, account designations and
addresses; providing necessary personnel and facilities to coordinate the
establishment and maintenance of shareholder accounts and records with the
Fund's transfer agent; transmitting purchase and redemption orders to the Fund's
transfer agent and arranging for the wiring or other transfer of funds to and
from customer accounts in connection with orders to purchase or redeem Fund
shares; verifying purchase and redemption orders, transfers among and changes in
accounts; informing the Distributor of the gross amount of purchase orders for
Fund shares; and providing other related services.

Under the Shareholder Servicing Agreement, the Fund has agreed to pay
Morgan for these services a fee at the annual rate of 0.05% (expressed as a
percentage of the average daily net asset values of Fund shares owned by or for
shareholders).

The table below sets forth for the Fund the shareholder servicing fee paid
by the Fund to Morgan, net of fee waivers and reimbursements, for the fiscal
periods indicated. See the Prospectus and "Expenses" below for applicable
expense limitations.

FUND: For the period December 15, 1997 (commencement of operations) through
the six months ended April 30, 1998 (unaudited): $(41,278).

As discussed under "Investment Advisor," the Glass-Steagall Act and other
applicable laws and regulations limit the activities of bank holding companies
and certain of their subsidiaries in connection with registered open-end
investment companies. The activities of Morgan in acting as shareholder
servicing agent for Fund shareholders under the Shareholder Servicing Agreement
and providing administrative services to the Fund and the Portfolio under the
Services Agreement, and the activities of JPMIM in acting as Advisor to the
Portfolio under the Investment Advisory Agreement, may raise issues under these
laws. However, JPMIM and Morgan believe that they may properly perform these
services and the other activities without violation of the Glass-Steagall Act or
other applicable banking laws or regulations.

If Morgan were prohibited from providing any of the services under the
Shareholder Servicing Agreement and the Services Agreement, the Trustees would
seek an alternative provider of such services. In such event, changes in the
operation of the Fund or the Portfolio might occur and a shareholder might no

37
<PAGE>

longer be able to avail himself or herself of any services then being provided
to shareholders by Morgan.

FINANCIAL PROFESSIONALS

The services provided by financial professionals may include establishing
and maintaining shareholder accounts, processing purchase and redemption
transactions, arranging for bank wires, performing shareholder subaccounting,
answering client inquiries regarding the Trust, assisting clients in changing
dividend options, account designations and addresses, providing periodic
statements showing the client's account balance and integrating these statements
with those of other transactions and balances in the client's other accounts
serviced by the financial professional, transmitting proxy statements, periodic
reports, updated prospectuses and other communications to shareholders and, with
respect to meetings of shareholders, collecting, tabulating and forwarding
executed proxies and obtaining such other information and performing such other
services as Morgan or the financial professional's clients may reasonably
request and agree upon with the financial professional.

Although there is no sales charge levied directly by the Fund, financial
professionals may establish their own terms and conditions for providing their
services and may charge investors a transaction-based or other fee for their
services. Such charges may vary among financial professionals but in all cases
will be retained by the financial professional and not be remitted to the Fund
or J.P. Morgan.

INDEPENDENT ACCOUNTANTS

38
<PAGE>

EXPENSES

In addition to the fees payable to Pierpont Group, Inc., JPMIM, Morgan and
FDI under various agreements discussed under "Trustees and Officers,"
"Investment Advisor," "Co-Administrator", "Distributor," "Services Agent" and
"Shareholder Servicing" above, the Fund and the Portfolio are responsible for
usual and customary expenses associated with their respective operations. Such
expenses include organization expenses, legal fees, accounting and audit
expenses, insurance costs, the compensation and expenses of the Trustees,
registration fees under federal securities laws, and extraordinary expenses
applicable to the Fund or the Portfolio. For the Fund, such expenses also
include transfer, registrar and dividend disbursing costs, the expenses of
printing and mailing reports, notices and proxy statements to Fund shareholders,
and filing fees under state securities laws. For the Portfolio, such expenses
also include applicable registration fees under foreign securities laws,
custodian fees and brokerage expenses.

Morgan has agreed that it will reimburse all Fund expenses except those
allocated to the Fund by the Portfolio. If the Portfolio's allocation of
expenses to the Fund exceeds 0.50% of the Fund's average daily net assets,
Morgan will reimburse the Fund to the extent necessary to maintain the Fund's
total operating expenses at the annual rate of 0.50% of the Fund's average daily
net assets. If the Portfolio's allocation of expenses to the Fund falls below
0.35% of the Fund's average daily net assets, Morgan will reimburse Fund in
excess of those expenses required to bring the Fund's total operating expenses
to the annual rate of 0.35% of the Fund's average daily net assets. These limit
do not cover extraordinary expenses during the period. There is no assurance
that Morgan will continue this waiver beyond 2/28/99.

PURCHASE OF SHARES

Investors may open Fund accounts and purchase shares as described in the
Prospectus. References in the Prospectus and this Statement of Additional
Information to customers of Morgan or a Financial Professional include customers
of their affiliates and references to transactions by customers with Morgan or a
Financial Professional include transactions with their affiliates. Only Fund
investors who are using the services of a financial institution acting as
shareholder servicing agent pursuant to an agreement with the Trust on behalf of
the Fund may make transactions in shares of the Fund.

The Fund may, at its own option, accept securities in payment for shares.
The securities delivered in such a transaction are valued by the method
described in "Net Asset Value" as of the day the Fund receives the securities.
This is a taxable transaction to the shareholder. Securities may be accepted in
payment for shares only if they are, in the judgment of the Advisor, appropriate
investments for the Portfolio. In addition, securities accepted in payment for
shares must: (i) meet the investment objective and policies of the acquiring
Portfolio; (ii) be acquired by the Fund for investment and not for resale (other
than for resale to the Portfolio); and (iii) be liquid securities which are not
restricted as to transfer either by law or liquidity of market. The Fund
reserves the right to accept or reject at its own option any and all securities
offered in payment for its shares.

Prospective investors may purchase shares with the assistance of a
Financial Professional, and the Financial Professional may charge the investor a
fee for this service and other services it provides to its customers.

39
<PAGE>

REDEMPTION OF SHARES

Investors may redeem shares as described in the Prospectus.

If the Trust, on behalf of the Fund, and the Portfolio determine that it
would be detrimental to the best interest of the remaining shareholders of the
Fund to make payment wholly or partly in cash, payment of the redemption price
may be made in whole or in part by a distribution in kind of securities from the
Portfolio, in lieu of cash, in conformity with the applicable rule of the SEC.
If shares are redeemed in kind, the redeeming shareholder might incur
transaction costs in converting the assets into cash. The method of valuing
portfolio securities is described under "Net Asset Value," and such valuation
will be made as of the same time the redemption price is determined. The Trust,
on behalf of the Fund, and the Portfolio have elected to be governed by
Rule 18f-1 under the 1940 Act pursuant to which the Fund and the Portfolio are
obligated to redeem shares solely in cash up to the lesser of $250,000 or one
percent of the net asset value of the Fund during any 90 day period for any one
shareholder. The Trust will redeem Fund shares in kind only if it has received
a redemption in kind from the Portfolio and therefore shareholders of the Fund
that receive redemptions in kind will receive securities of the Portfolio. The
Portfolio has advised the Trust that the Portfolio will not redeem in kind
except in circumstances in which the Fund is permitted to redeem in kind. The
Trust is in the process of seeking exemptive relief from the SEC with respect to
redemptions in kind by the Fund. If the requested relief is granted, the Fund
would then be permitted to pay redemptions to greater than 5% shareholders in
securities, rather than in cash, to the extent permitted by the SEC and
applicable law. The method of valuing portfolio securities is described under
"Net Asset Value," and such valuation will be made as of the same time the
redemption price is determined.

FURTHER REDEMPTION INFORMATION. Investors should be aware that redemptions
from the Fund may not be processed if a redemption request is not submitted in
proper form. To be in proper form, the Fund must have received the
shareholder's taxpayer identification number and address. In addition, if a
shareholder sends a check for the purchase of fund shares and shares are
purchased before the check has cleared, the transmittal of redemption proceeds
from the shares will occur upon clearance of the check which may take up to 15
days. The Trust, on behalf of the Fund, and the Portfolio reserve the right to
suspend the right of redemption and to postpone the date of payment upon
redemption as follows: (i) for up to seven days, (ii) during periods when the
New York Stock Exchange is closed for other than weekends and holidays or when
trading on such Exchange is restricted as determined by the SEC by rule or
regulation, (iii) during periods in which an emergency, as determined by the
SEC, exists that causes disposal by the Portfolio of, or evaluation of the net
asset value of, its portfolio securities to be unreasonable or impracticable, or
(iv) for such other periods as the SEC may permit. For information regarding
redemption orders placed through a financial professional, please see "Financial
Professionals" above.

EXCHANGE OF SHARES

An investor may exchange shares from any J.P. Morgan Institutional Fund
into any other J.P. Morgan Institutional Fund, J.P. Morgan Fund or shares of
J.P. Morgan Series Trust fund without charge. An exchange may be made so long as
after the exchange the investor has shares, in each fund in which he or she

40
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remains an investor, with a value of at least that fund's minimum investment
amount. Shareholders should read the prospectus of the fund into which they are
exchanging and may only exchange between fund accounts that are registered in
the same name, address and taxpayer identification number. Shares are exchanged
on the basis of relative net asset value per share. Exchanges are in effect
redemptions from one fund and purchases of another fund and the usual purchase
and redemption procedures and requirements are applicable to exchanges.
Shareholders subject to federal income tax who exchange shares in one fund for
shares in another fund may recognize capital gain or loss for federal income tax
purposes. Shares of the fund to be acquired are purchased for settlement when
the proceeds from redemption become available. In the case of investors in
certain states, state securities laws may restrict the availability of the
exchange privilege. The Fund reserves the right to discontinue, alter or limit
its exchange privilege at any time.

DIVIDENDS AND DISTRIBUTIONS

The Fund declares and pays dividends and distributions as described under
"Dividends and Distributions" in the Prospectus.

Dividends and capital gains distributions paid by the Fund are
automatically reinvested in additional shares of the Fund unless the shareholder
has elected to have them paid in cash. Dividends and distributions to be paid
in cash are credited to the shareholder's account at Morgan or at his financial
professional or, in the case of certain Morgan customers, are mailed by check in
accordance with the customer's instructions. The Fund reserves the right to
discontinue, alter or limit the automatic reinvestment privilege at any time.

If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.

NET ASSET VALUE

The Fund computes its net asset value separately for each class of shares
outstanding once daily as of the close of trading on the New York Stock Exchange
(normally 4:00 p.m. eastern time) on each business day as described in the
prospectus. The net asset value will not be computed on the day the following
legal holidays are observed: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. On days when U.S. trading markets close
early in observance of these holidays, the Fund will close for purchases and
redemptions at the same time. The Fund and the Portfolio may also close for
purchases and redemptions at such other times as may be determined by the Board
of Trustees to the extent permitted by applicable law. The days on which net
asset value is determined are the Funds' business days.

The net asset value of the Fund is equal to the value of the Fund's
investment in its corresponding Portfolio (which is equal to the Fund's pro rata
share of the total investment of the Fund and of any other investors in the
Portfolio less the Fund's pro rata share of the Portfolio's liabilities) less
the Fund's liabilities. The following is a discussion of the procedures used by
the Portfolio corresponding to the Fund in valuing its assets.

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Portfolio securities are valued at the last sale price on the securities
exchange or national securities market on which such securities are primarily
traded. Unlisted securities are valued at the last average of the quoted bid
and asked prices in the OTC market. The value of each security for which
readily available market quotations exist is based on a decision as to the
broadest and most representative market for such security. For purposes of
calculating net asset value all assets and liabilities initially expressed in
foreign currencies will be converted into U.S. dollars at the prevailing average
currency exchange rate on the valuation date.

Securities or other assets for which market quotations are not readily
available (including certain restricted and illiquid securities) are valued at
fair value in accordance with procedures established by and under the general
supervision and responsibility of the Trustees. Such procedures include the use
of independent pricing services which use prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. Short-term investments which
mature in 60 days or less are valued at amortized cost if their original
maturity was 60 days or less, or by amortizing their value on the 61st day prior
to maturity, if their original maturity when acquired by the Portfolio was more
than 60 days, unless this is determined not to represent fair value by the
Trustees.

Trading in securities in most foreign markets is normally completed before
the close of trading in U.S. markets and may also take place on days on which
the U.S. markets are closed. If events materially affecting the value of
securities occur between the time when the market in which they are traded
closes and the time when the Portfolio's net asset value is calculated, such
securities will be valued at fair value in accordance with procedures
established by and under the general supervision of the Trustees.

PERFORMANCE DATA

From time to time, the Fund may quote performance in terms of yield, actual
distributions, average annual and aggregate total returns or capital
appreciation in reports, sales literature and advertisements published by the
Trust. Current performance information for the Fund may be obtained by calling
the number provided on the cover page of this Statement of Additional
Information. See also the Prospectus.

Comparative performance information may be used from time to time in
advertising the Fund's shares, including appropriate market indices including
the benchmark indicated under "Investment Advisor" above or data from Lipper
Analytical Services, Inc., Micropal, Inc., Ibbotson Associates, Morningstar
Inc., the Dow Jones Industrial Average and other industry publications.

The Fund may advertise "total return" and non-standardized total return
data. The total return shows what an investment in the Fund would have earned
over a specified period of time (one, five or ten years or since commencement of
operations, if less) assuming that all distributions and dividends by the Fund
were reinvested on the reinvestment dates during the period and less all
recurring fees. This method of calculating total return is required by
regulations of the SEC. Total return data similarly calculated, unless
otherwise indicated, over other specified periods of time may also be used. All
performance figures are based on historical earnings and are not intended to
indicate future performance.

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Historical performance of the Fund shown below is that of the J.P. Morgan
Bond Fund, a series of the J.P. Morgan Funds which also invests in the
Portfolio, and is presented in accordance with applicable SEC staff
interpretations. Historical 30-day yield information of the J.P. Morgan
Institutional Bond Fund-Ultra for the period ended April 30, 1998 6.52%.

TOTAL RETURN QUOTATIONS. The Fund may advertise "total return" and
non-standardized total return data. The total return shows what an investment
in the Fund would have earned over a specified period of time (one, five or ten
years or since commencement of operations, if less) assuming that all
distributions and dividends by the Fund were reinvested on the reinvestment
dates during the period and less all recurring fees. This method of calculating
total return is required by regulations of the SEC. Total return data similarly
calculated, unless otherwise indicated, over other specified periods of time may
also be used. All performance figures are based on historical earnings and are
not intended to indicate future performance.

Aggregate total returns, reflecting the cumulative percentage change over a
measuring period, may also be calculated.

Historical performance information for any period or portion thereof prior
to the establishment of the Fund will be that of the J.P. Morgan Bond Fund, a
series of the J.P. Morgan Funds which also invests in the Portfolio, and is
presented in accordance with applicable SEC staff interpretations. The
applicable financial information in the registration statements for the J.P.
Morgan Funds (Registration Nos. 033-54632 and 811-07340) is incorporated herein
by reference.

Below is set forth historical return information of the Fund for the period
ended April 30, 1998:

Average annual total return, 1 year: 10.57%; average annual total return, 5
years: 6.86%; average annual total return, commencement of operations(2) to

- -----------------------
(2) The J.P. Morgan Bond Fund (a separate feeder fund investing in the same
master portfolio) commenced operations on March 11, 1988.

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<PAGE>

period end: 8.13%; aggregate total return, 1 year: 10.57%; aggregate total
return, 5 years: 39.34%; aggregate total return, commencement of operations to
period end: 119.90%.

GENERAL. The Fund's performance will vary from time to time depending upon
market conditions, the composition of the Portfolio, and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in the Fund with certain bank deposits or other
investments that pay a fixed yield or return for a stated period of time.

PORTFOLIO TRANSACTIONS

Fixed income and debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their own
accounts without a stated commission. The price of the security usually
includes profit to the dealers. In underwritten offerings, securities are
purchased at a fixed price which includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
On occasion, certain securities may be purchased directly from an issuer, in
which case no commissions or discounts are paid.

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<PAGE>

Portfolio transactions for the Portfolio will be undertaken principally to
accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates. The Portfolio may engage in short-term trading
consistent with its objectives. See "Investment Objectives and Policies --
Portfolio Turnover."

In connection with portfolio transactions for the Portfolio, the Advisor
intends to seek best execution on a competitive basis for both purchases and
sales of securities.

Subject to the overriding objective of obtaining the best execution of
orders, the Advisor may allocate a portion of the Portfolio's brokerage
transactions to affiliates of the Advisor. In order for affiliates of the
Advisor to effect any portfolio transactions for the Portfolio, the commissions,
fees or other remuneration received by such affiliates must be reasonable and
fair compared to the commissions, fees, or other remuneration paid to other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time. Furthermore, the Trustees of the Portfolio, including a majority of the
Trustees who are not "interested persons," have adopted procedures which are
reasonably designed to provide that any commissions, fees, or other remuneration
paid to such affiliates are consistent with the foregoing standard.

Portfolio securities will not be purchased from or through or sold to or
through the Co-Administrator, the Distributor or the Advisor or any other
"affiliated person" (as defined in the 1940 Act) of the Co-Administrator,
Distributor or Advisor when such entities are acting as principals, except to
the extent permitted by law. In addition, the Portfolio will not purchase
securities during the existence of any underwriting group relating thereto of
which the Advisor or an affiliate of the Advisor is a member, except to the
extent permitted by law.

Investment decisions made by the Advisor are the product of many factors in
addition to basic suitability for the particular fund or other client in
question. Thus, a particular security may be bought or sold for certain clients
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the same security. The Portfolio may only
sell a security to other portfolios or accounts managed by the Advisor or its
affiliates in accordance with procedures adopted by the Trustees.

It also sometimes happens that two or more clients simultaneously purchase
or sell the same security. On those occasions when the Advisor deems the
purchase or sale of a security to be in the best interests of the Portfolio as
well as other customers, the Advisor to the extent permitted by applicable laws
and regulations, may, but is not obligated to, aggregate the securities to be
sold or purchased for the Portfolio with those to be sold or purchased for other
customers in order to obtain best execution, including lower brokerage
commissions if appropriate. In such event, allocation of the securities so
purchased or sold as well as any expenses incurred in the transaction will be
made by the Advisor in the manner it considers to be most equitable and
consistent with its fiduciary obligations to the Portfolio. In some instances,
this procedure might adversely affect the Portfolio.

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<PAGE>

If a Portfolio that writes options effects a closing purchase transaction
with respect to an option written by it, normally such transaction will be
executed by the same broker-dealer who executed the sale of the option. The
writing of options by a Portfolio will be subject to limitations established by
each of the exchanges governing the maximum number of options in each class
which may be written by a single investor or group of investors acting in
concert, regardless of whether the options are written on the same or different
exchanges or are held or written in one or more accounts or through one or more
brokers. The number of options which a Portfolio may write may be affected by
options written by the Advisor for other investment advisory clients. An
exchange may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.

MASSACHUSETTS TRUST

The Trust is a "Massachusetts business trust" of which the Fund is a
separate and distinct series. A copy of the Declaration of Trust for the Trust
is on file in the office of the Secretary of The Commonwealth of Massachusetts.
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. However, the Trust's Declaration of Trust provides that the shareholders
will not be subject to any personal liability for the acts or obligations of any
Fund and that every written agreement, obligation, instrument or undertaking
made on behalf of any Fund will contain a provision to the effect that the
shareholders are not personally liable thereunder.

Effective January 1, 1998, the name of the Trust was changed from "The JPM
Institutional Funds" to "J.P. Morgan Institutional Funds" and each Fund's name
changed accordingly.

The Trust's Declaration of Trust further provides that the name of the
Trust refers to the Trustees collectively as Trustees, not as individuals or
personally, that no Trustee, officer, employee or agent of the Fund is liable to
the Fund or to a shareholder, and that no Trustee, officer, employee, or agent
is liable to any third persons in connection with the affairs of the Fund,
except as such liability may arise from his or its own bad faith, willful
misfeasance, gross negligence or reckless disregard of his or its duties to such
third persons. It also provides that all third persons shall look solely to
Fund property for satisfaction of claims arising in connection with the affairs
of the Fund. With the exceptions stated, the Trust's Declaration of Trust
provides that a Trustee, officer, employee, or agent is entitled to be
indemnified against all liability in connection with the affairs of the Fund.

The Trust shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders or by action of the Trustees upon notice to the shareholders.

DESCRIPTION OF SHARES

The Trust is an open-end management investment company organized as a
Massachusetts business trust in which each Fund represents a separate series of
shares of beneficial interest. See "Massachusetts Trust."

<PAGE>

series, if applicable) without changing the proportionate beneficial interest of
each shareholder in the Fund (or in the assets of other series, if applicable).
To date shares of 23 series are currently available for sale to the public.
Each share represents an equal proportional interest in a Fund with each other
share. Upon liquidation of a Fund, holders are entitled to share pro rata in
the net assets of that Fund available for distribution to such shareholders.
See "Massachusetts Trust." Fund shares have no preemptive or conversion rights
and are fully paid and nonassessable. The rights of redemption and exchange are
described in the Prospectus and elsewhere in this Statement of Additional
Information.

The shareholders of the Trust are entitled to one vote for each dollar of
net asset value (or a proportionate fractional vote in respect of a fractional
dollar amount), on matters on which shares of the Fund shall be entitled to
vote. Subject to the 1940 Act, the Trustees themselves have the power to alter
the number and the terms of office of the Trustees, to lengthen their own terms,
or to make their terms of unlimited duration subject to certain removal
procedures, and appoint their own successors, PROVIDED, HOWEVER, that
immediately after such appointment the requisite majority of the Trustees have
been elected by the shareholders of the Trust. The voting rights of
shareholders are not cumulative so that holders of more than 50% of the shares
voting can, if they choose, elect all Trustees being selected while the
shareholders of the remaining shares would be unable to elect any Trustees. It
is the intention of the Trust not to hold meetings of shareholders annually.
The Trustees may call meetings of shareholders for action by shareholder vote as
may be required by either the 1940 Act or the Trust's Declaration of Trust.

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<PAGE>

the objections specified in the written statements filed, the SEC may, and if
demanded by the Trustees or by such applicants shall, enter an order either
sustaining one or more of such objections or refusing to sustain any of them. If
the SEC shall enter an order refusing to sustain any of such objections, or if,
after the entry of an order sustaining one or more of such objections, the SEC
shall find, after notice and opportunity for hearing, that all objections so
sustained have been met, and shall enter an order so declaring, the Trustees
shall mail copies of such material to all shareholders with reasonable
promptness after the entry of such order and the renewal of such tender.

The Trustees have no current intention to create any classes within the
initial series or any subsequent series. The Trustees may, however, authorize
the issuance of shares of additional series and the creation of classes of
shares within any series with such preferences, privileges, limitations and
voting and dividend rights as the Trustees may determine. The proceeds from the
issuance of any additional series would be invested in separate, independently
managed portfolios with distinct investment objectives, policies and
restrictions, and share purchase, redemption and net asset valuation procedures.
Any additional classes would be used to distinguish among the rights of
different categories of shareholders, as might be required by future regulations
or other unforeseen circumstances. All consideration received by the Trust for
shares of any additional series or class, and all assets in which such
consideration is invested, would belong to that series or class, subject only to
the rights of creditors of the Trust and would be subject to the liabilities
related thereto. Shareholders of any additional series or class will approve
the adoption of any management contract or distribution plan relating to such
series or class and of any changes in the investment policies related thereto,
to the extent required by the 1940 Act.

For information relating to mandatory redemption of Fund shares or their
redemption at the option of the Trust under certain circumstances, see the
Prospectus.

As of September 30, 1998, the following owned of record or, to the
knowledge of management, beneficially owned more than 5% of the outstanding
shares of the Fund: Morgan as Agent for Tenet Healthcare Foundation (24.92%);
Morgan as Agent for 1984 Geisel Trust (23.85%); Bankers Trust Company for the
benefit of Magnetek (15.17%); JPMIM as Agent for Artic Slope Regional
Corporation (13.95%); Michigan Catholic Conference Diocese Investment (11.16%);
and Morgan as Agent for 1984 Geisel Trust (10.95%).

The address of each owner listed above is c/o Morgan, 522 Fifth Avenue, New
York, New York 10036. As of the date of this Statement of Additional
Information, the officers and Trustees as a group owned less than 1% of the
shares of the Fund.

SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE

Unlike other mutual funds which directly acquire and manage their own
portfolio of securities, each Fund is an open-end management investment company
which seeks to achieve its investment objective by investing all of its
investable assets in a corresponding Master Portfolio, a separate registered
investment company with the same investment objective and policies as the Fund.
Fund shareholders are entitled to one vote for each dollar of net asset value
(or a proportionate fractional vote in respect of a fractional

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<PAGE>

dollar amount), on matters on which shares of the Fund shall be entitled to
vote.

The Trust may withdraw the investment of a Fund from a Portfolio at any
time if the Board of Trustees of the Trust determines that it is in the best
interests of the Fund to do so. Upon any such withdrawal, the Board of Trustees
would consider what action might be taken, including the investment of all the
assets of the Fund in another pooled investment entity having the same
investment objective and restrictions in accordance with the investment policies
with respect to the Portfolio described above and in the Fund's Prospectus.

Certain changes in the Portfolio's fundamental investment policies or
restrictions, or a failure by the Fund's shareholders to approve such change in
the Portfolio's investment restrictions, may require withdrawal of
the Fund's interest in the Portfolio. Any such withdrawal could result in a
distribution in kind of portfolio securities (as opposed to a cash distribution)
from the Portfolio which may or may not be readily marketable. The distribution
in kind may result in the Fund having a less diversified portfolio of
investments or adversely affect the Fund's liquidity, and the Fund could incur
brokerage, tax or other charges in converting the securities to cash.
Notwithstanding the above, there are other means for meeting shareholder
redemption requests, such as borrowing.

Additionally, because the Portfolio would become smaller, it may become
less diversified, resulting in potentially increased portfolio risk (however,
these possibilities also exist for traditionally structured funds which have
large or institutional investors who may withdraw from a fund). Also, funds
with a greater pro rata ownership in the Portfolio could have effective voting
control of the operations of the Portfolio. Whenever the Fund is requested to
vote on matters pertaining to the Portfolio (other than a vote by the Fund to
continue the operation of the Portfolio upon the withdrawal of another investor
in the Portfolio), the Trust will hold a meeting of shareholders of the Fund and
will cast all of its votes proportionately as instructed by the Fund's
shareholders. The Trust will vote the shares held by Fund shareholders who do
not give voting instructions in the same proportion as the shares of Fund
shareholders who do give voting instructions. Shareholders of the Fund who do
not vote will have no affect on the outcome of such matters.

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<PAGE>

TAXES

The Fund intends to continue to qualify and remain qualified as a regulated
investment company under Subchapter M of the Code. As a regulated investment
company, a Fund must, among other things, (a) derive at least 90% of its gross
income from dividends, interest, payments with respect to loans of stock and
securities, gains from the sale or other disposition of stock, securities or
foreign currency and other income (including but not limited to gains from
options, futures, and forward contracts) derived with respect to its business of
investing in such stock, securities or foreign currency; and (b) diversify its
holdings so that, at the end of each fiscal quarter of its taxable year, (i) at
least 50% of the value of the Fund's total assets is represented by cash, cash
items, U.S. Government securities, investments in other regulated investment
companies, and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the Fund's total assets, and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities or securities of other regulated investment
companies).

As a regulated investment company, a Fund (as opposed to its shareholders)
will not be subject to federal income taxes on the net investment income and
capital gains that it distributes to its shareholders, provided that at least
90% of its net investment income and realized net short-term capital gains in
excess of net long-term capital losses for the taxable year is distributed in
accordance with the Code's timing requirements.

Under the Code, a Fund will be subject to a 4% excise tax on a portion of
its undistributed taxable income and capital gains if it fails to meet certain
distribution requirements by the end of the calendar year. The Fund intends to
make distributions in a timely manner and accordingly does not expect to be
subject to the excise tax.

For federal income tax purposes, dividends that are declared by a Fund in
October, November or December as of a record date in such month and actually
paid in January of the following year will be treated as if they were paid on
December 31 of the year declared. Therefore, such dividends generally will be
taxable to a shareholder in the year declared rather than the year paid.

Distributions of net investment income, certain foreign currency gains, and
realized net short-term capital gain in excess of net long-term capital losses
are generally taxable to shareholders of the Funds as ordinary income whether
such distributions are taken in cash or reinvested in additional shares.
Distributions to corporate shareholders of the Funds are not eligible for the
dividends received deduction. The Fund generally pays a monthly dividend. If
dividend payments exceed income earned by the Fund, the over distribution would
be considered a return of capital rather than a dividend payment. The Fund
intends to pay dividends in such a manner so as to minimize the possibility of a
return of capital. Distributions of net long-term capital gain (i.e., net
long-term capital gains in excess of net short-term capital losses) are taxable
to shareholders of a Fund as long-term capital gain, regardless of whether such
distributions are taken in cash or reinvested in additional shares and
regardless of how long a shareholder has held shares in the Fund. In general,
long-term capital gain of an individual shareholder will be subject to a reduced
rate of tax. Investors should consult their tax advisors concerning the
treatment of capital gains and losses.

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Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held for more than
one year except in certain cases where, if applicable, a put is acquired or a
call option is written thereon. Other gains or losses on the sale of securities
will be short-term capital gains or losses. Gains and losses on the sale, lapse
or other termination of options on securities will be treated as gains and
losses from the sale of securities. If an option written by a Portfolio lapses
or is terminated through a closing transaction, such as a repurchase by the
Portfolio of the option from its holder, the Portfolio will realize a short-term
capital gain or loss, depending on whether the premium income is greater or less
than the amount paid by the Portfolio in the closing transaction. If securities
are purchased by a Portfolio pursuant to the exercise of a put option written by
it, the Portfolio will subtract the premium received from its cost basis in the
securities purchased.

Any distribution of net investment income or capital gains will have the
effect of reducing the net asset value of Fund shares held by a shareholder by
the same amount as the distribution. If the net asset value of the shares is
reduced below a shareholder's cost as a result of such a distribution, the
distribution, although constituting a return of capital to the shareholder, will
be taxable as described above. Investors should thus consider the consequences
of purchasing shares in the Fund shortly before the Fund declares a sizable
dividend distribution.

Any gain or loss realized on the redemption or exchange of Fund shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year, and
otherwise as short-term capital gain or loss. However, any loss realized by a
shareholder upon the redemption or exchange of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
long-term capital gain distributions received by the shareholder with respect to
such shares. In addition, no loss will be allowed on the redemption or exchange
of shares of the Fund, if within a period beginning 30 days before the date of
such redemption or exchange and ending 30 days after such date, the shareholder
acquires (such as through dividend reinvestment) securities that are
substantially identical to shares of the Fund.

Under the Code, gains or losses attributable to disposition of foreign
currency or to certain foreign currency contracts, or to fluctuations in
exchange rates between the time a Portfolio accrues income or receivables or
expenses or other liabilities denominated in a foreign currency and the time a
Portfolio actually collects such income or pays such liabilities, are generally
treated as ordinary income or ordinary loss. Similarly, gains or losses on the
disposition of debt securities held by a Portfolio, if any, denominated in
foreign currency, to the extent attributable to fluctuations in exchange rates
between the acquisition and disposition dates are also treated as ordinary
income or loss.

Forward currency contracts, options and futures contracts entered into by a
Portfolio may create "straddles" for U.S. federal income tax purposes and this
may affect the character and timing of gains or losses realized by the Portfolio
on forward currency contracts, options and futures contracts or on the
underlying securities.

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Certain options, futures and foreign currency contracts held by a Portfolio
at the end of each taxable year will be required to be "marked to market" for
federal income tax purposes -- i.e., treated as having been sold at market
value. For options and futures contracts, 60% of any gain or loss recognized on
these deemed sales and on actual dispositions will be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss regardless of how long the Portfolio has held such options or
futures. However, gain or loss recognized on certain foreign currency contracts
will be treated as ordinary income or loss.

FOREIGN SHAREHOLDERS. Dividends of net investment income and distributions
of realized net short-term gain in excess of net long-term loss to a shareholder
who, as to the United States, is a nonresident alien individual, fiduciary of a
foreign trust or estate, foreign corporation or foreign partnership (a "foreign
shareholder") will be subject to U.S. withholding tax at the rate of 30% (or
lower treaty rate) unless the dividends are effectively connected with a U.S.
trade or business of the shareholder, in which case the dividends will be
subject to tax on a net income basis at the graduated rates applicable to U.S.
individuals or domestic corporations. Distributions treated as long term capital
gains to foreign shareholders will not be subject to U.S. tax unless the
distributions are effectively connected with the shareholder's trade or business
in the United States or, in the case of a shareholder who is a nonresident alien
individual, the shareholder was present in the United States for more than 182
days during the taxable year and certain other conditions are met.

In the case of a foreign shareholder who is a nonresident alien individual
or foreign entity, a Fund may be required to withhold U.S. federal income tax as
"backup withholding" at the rate of 31% from distributions treated as long-term
capital gains and from the proceeds of redemptions, exchanges or other
dispositions of Fund shares unless IRS Form W-8 is provided. Transfers by gift
of shares of a Fund by a foreign shareholder who is a nonresident alien
individual will not be subject to U.S. federal gift tax, but the value of shares
of the Fund held by such a shareholder at his or her death will be includible in
his or her gross estate for U.S. federal estate tax purposes.

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<PAGE>

federal income tax liability (no deduction will be permitted in computing an
individual's alternative minimum tax liability). Effective for dividends paid
after September 5, 1997, shareholders of the Fund will not be eligible to claim
a foreign tax credit with respect to taxes paid by the Fund (notwithstanding
that the Fund elects to treat the foreign taxes deemed paid by it as paid
directly by its shareholders) unless certain holding period requirements are
met. A shareholder who is a nonresident alien individual or a foreign
corporation may be subject to U.S. withholding tax on the income resulting from
the election described in this paragraph, but may not be able to claim a credit
or deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. A tax-exempt shareholder will not ordinarily benefit
from this election. Shareholders who choose to utilize a credit (rather than a
deduction) for foreign taxes will be subject to the limitation that the credit
may not exceed the shareholder's U.S. tax (determined without regard to the
availability of the credit) attributable to his or her total foreign source
taxable income. For this purpose, the portion of dividends and distributions
paid by the Global Strategic Income Fund from its foreign source net investment
income will be treated as foreign source income. The Fund's gains and losses
from the sale of securities will generally be treated as derived from U.S.
sources, however, and certain foreign currency gains and losses likewise will
be treated as derived from U.S. sources. The limitation on the foreign tax
credit is applied separately to foreign source "passive income," such as the
portion of dividends received from the Fund which qualifies as foreign source
income. In addition, the foreign tax credit is allowed to offset only 90% of
the alternative minimum tax imposed on corporations and individuals. Because of
these limitations, if the election is made, shareholders may nevertheless be
unable to claim a credit for the full amount of their proportionate shares of
the foreign income taxes paid by the Global Strategic Income Fund. Effective
for taxable years of a shareholder beginning after December 31, 1997, individual
shareholders of the Fund with $300 or less of creditable foreign taxes ($600 in
the case of an individual shareholder filing jointly) may elect to be exempt
from the foreign tax credit limitation rules described above (other than the 90%
limitation applicable for purposes of the alternative minimum tax), provided
that all of such individual shareholder's foreign source income is "qualified
passive income" (which generally includes interest, dividends, rents, royalties
and certain other types of income) and further provided that all of such foreign
source income is shown on one or more payee statements furnished to the
shareholder. Shareholders making this election will not be permitted to carry
over any excess foreign taxes to or from a tax year to which such an election
applies.

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the Fund continues to qualify as a regulated investment company under Subchapter
M of the Code. The Portfolio is organized as a New York trust. The Portfolio
is not subject to any federal income taxation or income or franchise tax in the
State of New York or The Commonwealth of Massachusetts. The investment by the
Fund in the Portfolio does not cause the Fund to be liable for any income or
franchise tax in the State of New York.

ADDITIONAL INFORMATION

Telephone calls to the Fund, J.P. Morgan or a Financial Professional as
shareholder servicing agent may be tape recorded. With respect to the
securities offered hereby, this Statement of Additional Information and the
Prospectus do not contain all the information included in the Trust's
registration statement filed with the SEC under the 1933 Act and the 1940 Act
and the Portfolio's registration statements filed under the 1940 Act. Pursuant
to the rules and regulations of the SEC, certain portions have been omitted.
The registration statements including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.

No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with the
offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Fund or the Distributor. The Prospectus and this Statement of
Additional Information do not constitute an offer by the Fund or by the
Distributor to sell or solicit any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful for the Fund or
the Distributor to make such offer in such jurisdictions.

THE YEAR 2000 INITIATIVE. With the new millennium rapidly approaching,
organizations are examining their computer systems to ensure they are year 2000
compliant. The issue, in simple terms, is that many existing computer systems
use only two numbers to identify a year in the date field with the assumption
that the first two digits are always 19. As the century is implied in the date,
on January 1, 2000, computers that are not year 2000 compliant will assume the
year is 1900. Systems that calculate, compare, or sort using the incorrect date
will cause erroneous results, ranging from system malfunctions to incorrect or
incomplete transaction processing. If not remedied, potential risks include
business interruption or shutdown, financial loss, reputation loss, and/or legal
liability.

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Costs associated with efforts to prepare J.P. Morgan's systems for the year
2000 approximated $95 million in 1997. In 1998, J.P. Morgan will continue its
efforts to prepare its systems for the year 2000. The total cost to become
year-2000 compliant is estimated at $250 million, for internal systems
renovation and testing, testing equipment, and both internal and external
resources working on the project. Remaining costs will be incurred primarily in
1998. The costs associated with J.P. Morgan becoming year-2000 compliant will
be borne by J.P. Morgan and not the Fund nor the Portfolio.

THE EURO. Effective January 1, 1999 the euro, a single multinational
currency, will replace the national currencies of certain countries in the
Economic Monetary Union (EMU). Conversion rates among EMU countries will be
fixed on December 31, 1998, however, existing currencies will still be used
through July 1, 2002. During this transition period, transactions may be
settled in either euro or existing currencies, but financial markets and payment
systems are expected to use the euro exclusively. Beginning January 1, 1999,
J.P. Morgan intends to conduct and settle all fund transactions, where
appropriate, in the euro.

J.P. Morgan has identified the following potential risks to the Funds,
after the conversion: The risk that valuation of assets are not properly
redenominated; currency risk resulting from increased volatility in exchange
rates between EMU countries and non-participating countries; the inability any
of the Funds, their service providers and the issuers of the Funds' portfolio
securities to make information technology updates timely; and the potential
unenforceability of contracts. There have been recent laws and regulations
designed to ensure the continuity of contracts, however there is a risk that the
valuation of contracts will be negatively impacted after the Funds' conversion.
J.P. Morgan is working to avoid these problems and to obtain assurances from
other service providers that they are taking similar steps. However, it is not
certain that these actions will be sufficient to prevent problems associated
with the conversion from adversely impacting fund operations and shareholders.

The I.R.S has concluded that euro conversion will not cause a U.S. taxpayer
to realize gain or loss to the extent taxpayer's rights and obligations are
altered solely by reason of the conversion.

FINANCIAL STATEMENTS

The Portfolio's financial statements and the report thereon of
PricewaterhouseCoopers LLP are incorporated herein by reference to The U.S.

<PAGE>

Fixed Income Portfolio's October 31, 1997 annual report filing made with the SEC
on January 8, 1998 pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1
thereunder (Accession No. 0001047469-98-000473) and The U.S. Fixed Income
Portfolio's April 30, 1998 semi-annual report filing made with the SEC on July
6, 1998 pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder
(Accession No. 0001047469-98-026396). The annual and semi-annual reports are
available without charge upon request by calling J.P. Morgan Funds Services at
(800) 766-7722.

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APPENDIX A

DESCRIPTION OF SECURITY RATINGS

STANDARD & POOR'S

CORPORATE AND MUNICIPAL BONDS
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