JP MORGAN INSTITUTIONAL FUNDS, 485BPOS, 1999-11-29

JP MORGAN INSTITUTIONAL FUNDS
485BPOS, 1999-11-29

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As filed with the Securities and Exchange Commission on November 29, 1999.
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. 68

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 69

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 December 1, 1999
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>

EXPLANATORY NOTE

This post-effective amendment No. 68 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 Prospectus and Statement of
Additional Information relating to J.P. Morgan Institutional Tax Exempt Bond
Fund, and J.P. Morgan Institutional New York Tax Exempt Bond Fund, (the
"Funds"), a series of shares of the Registrant, to include updated financial
information for the fiscal year ended July 31, 1999 and to update other
information in the registration statement.

<PAGE>

DECEMBER 1, 1999

PROSPECTUS

J.P. MORGAN INSTITUTIONAL
FIXED INCOME FUNDS

Short Term Bond Fund
Bond Fund
Global Strategic Income Fund
Tax Exempt Bond Fund
New York Tax Exempt Bond Fund
California Bond Fund

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

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.
JPMorgan
<PAGE>

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

[THIS PAGE IS INTENTIONALLY LEFT BLANK]

<PAGE>

CONTENTS
- --------------------------------------------------------------------------------
2
Each fund's goal, investment approach,
risks, expenses, and performance

J.P. MORGAN INSTITUTIONAL FIXED INCOME FUNDS
J.P. Morgan Institutional Short Term Bond Fund .............. 2
J.P. Morgan Institutional Bond Fund ......................... 4
J.P. Morgan Institutional Global Strategic Income Fund ...... 6
J.P. Morgan Institutional Tax Exempt Bond Fund .............. 8
J.P. Morgan Institutional New York Tax Exempt Bond Fund ..... 10
J.P. Morgan Institutional California Bond Fund .............. 12

14
Principles and techniques common
to the funds in this prospectus

FIXED INCOME MANAGEMENT APPROACH
J.P. Morgan ................................................. 14
J.P. Morgan Institutional fixed income funds ................ 14
The spectrum of fixed income funds .......................... 14
Who may want to invest ...................................... 14
Fixed income investment process ............................. 15

16
Investing in the J.P. Morgan
Institutional Fixed Income funds

YOUR INVESTMENT
Investing through a financial professional .................. 16
Investing through an employer-sponsored retirement plan ..... 16
Investing through an IRA or rollover IRA .................... 16
Investing directly .......................................... 16
Opening your account ........................................ 16
Adding to your account ...................................... 16
Selling shares .............................................. 17
Account and transaction policies ............................ 17
Dividends and distributions ................................. 18
Tax considerations .......................................... 18

19
More about risk and the funds'
business operations

FUND DETAILS
Business structure .......................................... 19
Management and administration ............................... 19
Risk and reward elements .................................... 20
Investments ................................................. 22
Financial highlights ........................................ 24

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

<PAGE>

J.P. MORGAN INSTITUTIONAL
SHORT TERM BOND FUND TICKER SYMBOL: JMSBX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND)
[GRAPHIC OMITTED]
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 20-23.

[GRAPHIC OMITTED]
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 OMITTED]
PRINCIPAL STRATEGIES
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 will range between one and three years, similar to that of the Merrill
Lynch 1-3 Year Treasury Index. For a description of duration, please see fixed
income investment process on page 15.

Up to 25% of assets may be invested in foreign securities, including 20% in debt
securities denominated in foreign currencies of developed countries. The fund
typically hedges its non-dollar investments back to the U.S. dollar. 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.

PRINCIPAL RISKS
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 15.

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. Because of the sensitivity of the fund's mortgage related securities
to changes in interest rates, the performance and duration of the fund may be
more volatile than if it did not hold these securities. The fund uses futures
contracts and other derivatives to help manage duration, yield curve exposure,
and credit and spread volatility. 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 18 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 $326
billion, including more than $52 billion using similar strategies 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, William G. Tennille, vice president, who joined the team in January
1994 and has been at J.P. Morgan since 1992 and Augustus Cheh, vice president,
who has been a fixed income portfolio manager and analyst since joining J.P.
Morgan in 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.

2 J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND

<PAGE>

- --------------------------------------------------------------------------------
PERFORMANCE (unaudited)

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

The bar chart indicates some of the risks by showing changes in the performance
of the fund's shares from year to year for each of the last 5 calendar years.

The table indicates some of the risks by showing how the fund's average annual
returns for the past one year, five years 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(1,2)
- --------------------------------------------------------------------------------
1994 1995 1996 1997 1998

20%

10.80
10%
7.04
6.40
5.10
0.36
0%

[ ] J.P. Morgan Institutional Short Term Bond Fund

The fund's year-to-date total return as of 9/30/99 is 2.03%. 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).

<PAGE>

Average annual total return Shows performance over time, for periods ended December 31, 1998
- ---------------------------------------------------------------------------------------------------------------
Past 1 yr. Past 5 yrs. Life of fund(1)
<S> <C> <C> <C>
J.P. Morgan Institutional Short Term Bond Fund (after expenses) 7.04 5.89 5.68
- ---------------------------------------------------------------------------------------------------------------
Merrill Lynch 1-3 Year Treasury Index (no expenses) 7.00 5.99 5.86
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

- --------------------------------------------------------------------------------
INVESTOR EXPENSES
The expenses of the fund before and after 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 0.39
- --------------------------------------------------------------------
Total operating expenses 0.64
Fee waiver and expense
reimbursement(4) 0.34
- --------------------------------------------------------------------
Net expenses(4) 0.30
- --------------------------------------------------------------------

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, net expenses for the period
8/1/99 through 2/28/01 and total operating expenses thereafter, 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($) 31 150 302 746
- --------------------------------------------------------------------------------

(1) The fund commenced operations on 9/13/93. For the period 7/31/93 through
9/30/93, returns reflect performance of the Pierpont Short Term Bond Fund.
(2) The fund's fiscal year end is 10/31.
(3) The fund has a master/feeder structure as described on page 19. 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) Reflects an agreement dated 7/30/99 by Morgan Guaranty Trust Company of New
York, an affiliate of J.P. Morgan, to reimburse the fund to the extent
expenses (excluding extraordinary expenses) exceed 0.30% of the fund's
average daily net assets through 2/28/01.

J.P. MORGAN INSTITUTIONAL SHORT TERM 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 OMITTED]
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 20-23.

[GRAPHIC OMITTED]
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 OMITTED]
PRINCIPAL STRATEGIES
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
within one year of that of the Salomon Smith Barney Broad Investment Grade Bond
Index (currently about five years). For a description of duration, please see
fixed income investment process on page 15.

Up to 25% of assets may be invested in foreign securities, including 20% in debt
securities denominated in foreign currencies of developed countries. The fund
typically hedges its non-dollar investments back to the U.S. dollar. 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. The fund may use futures contracts and
other derivatives to help manage duration, yield curve exposure, and credit and
spread volatility. 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 18 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 $326
billion, including more than $19 billion using similar strategies as the fund.

The portfolio management team is led by William G. Tennille, vice president, who
has been at J.P. Morgan since 1992, Connie J. Plaehn, managing director, who has
been at J.P. Morgan since 1984, and John Snyder, vice president, who has been at
J.P. Morgan since 1993. Mr. Tennille and Ms. Plaehn have been on the team since
January 1994. Mr. Snyder has been a fixed income portfolio manager since joining
J.P. Morgan.

- --------------------------------------------------------------------------------
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 provide some indication of the risks of
investing in J.P. Morgan Institutional Bond Fund.

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

The table indicates some of the risks by showing how the fund's average annual
returns for the past one, five and ten years compare to those of the Salomon
Smith Barney 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.
<TABLE>
<CAPTION>

Year-by-year total return (%) Shows changes in returns by calendar year(1,2)
- ------------------------------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
20%
18.42

13.45
10% 10.23 10.09
9.98 9.29
7.54
6.53
0% 3.30
- ------------------------------------------------------------------------------------------------------------------
(2.68)
(10%)

</TABLE>
[ ] J.P. Morgan Institutional Bond Fund

The fund's year-to-date total return as of 9/30/99 is -1.35%. 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).

<PAGE>

Average annual total return (%) Shows performance over time, for periods ended
December 31, 1998
- ------------------------------------------------------------------------------------------------------------
Past 1 yr. Past 5 yrs. Past 10 yrs.(1)
<S> <C> <C> <C>
J.P. Morgan Institutional Bond Fund (after expenses) 7.54 6.95 8.48
- ------------------------------------------------------------------------------------------------------------
Salomon Smith Barney Investment Grade Bond Index (no expenses) 8.72 7.30 9.31
- ------------------------------------------------------------------------------------------------------------
</TABLE>

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

Management fees 0.30
Marketing (12b-1) fees none
Other expenses 0.22
- --------------------------------------------------------------------
Total operating expenses 0.52
Fee waiver and expense
reimbursement(4) 0.02
- --------------------------------------------------------------------
Net expenses(4) 0.50
- --------------------------------------------------------------------

- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 51 163 288 650
- --------------------------------------------------------------------------------

(1) The fund commenced operations on 7/26/93. 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.
(3) The fund has a master/feeder structure as described on page 19. 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) Reflects an agreement dated 7/30/99 by Morgan Guaranty Trust Company of New
York, an affiliate of J.P. Morgan, to reimburse the fund to the extent
expenses (excluding extraordinary expenses) exceed 0.50% of the fund's
average daily net assets through 2/28/01.

J.P. MORGAN INSTITUTIONAL BOND FUND 5

<PAGE>

J.P. MORGAN INSTITUTIONAL
GLOBAL STRATEGIC INCOME FUND TICKER SYMBOL: JPIGX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND)

[GRAPHIC OMITTED]
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 20-23. 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 OMITTED]
PRINCIPAL STRATEGIES
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 will generally be similar to that of
the Lehman Brothers Aggregate Bond Index (currently about four and a half
years). For a description of duration, please see fixed income investment
process on page 15. 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 15, 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.

PRINCIPAL RISKS
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. 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. 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. The fund may engage in active and frequent trading,
leading to increased portfolio turnover and the possibility of increased capital
gains. See page 18 for further discussion on the tax treatment of capital gains.

MODEL SECTOR ALLOCATION

35% public/private 9% international
mortgages non-dollar
(range 20-45%) (range 0-25%)

27% high yield 13% public/private
corporates corporates
(range 17-37%) (range 5-25%)

16% emerging
markets
(range 0-25%)
<PAGE>

PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $326
billion, including more than $3 billion using similar strategies as the fund.

The portfolio management team is led by 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. He has 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.

6 J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND

<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (unaudited)

The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Institutional Global Strategic Income Fund.

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

The table indicates some of 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
Lehman Brothers Aggregate Bond Index. This is a widely recognized, unmanaged
index 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.

Total return (%) Shows changes in returns by calendar year(1,2)
- --------------------------------------------------------------------------------
1998

20%

10%

2.59
0%

[ ] J.P. Morgan Institutional Global Strategic Income Fund

The fund's year-to-date total return as of 9/30/99 is -0.07%. For the period
covered by this total return chart, the fund's highest quarterly return was
3.13% (for the quarter ended 3/31/98); and the lowest quarterly return was
- -1.45% (for the quarter ended 9/30/98).

<PAGE>

Average annual total return Shows performance over time, for periods ended December 31, 1998
- ----------------------------------------------------------------------------------------------------
Past 1 yr. Life of fund(1)
<S> <C> <C>
J.P. Morgan Institutional Global Strategic Income Fund (after expenses) 2.59 7.00
- ----------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index (no expenses) 8.67 10.91
- ----------------------------------------------------------------------------------------------------
</TABLE>

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

Management fees 0.45
Marketing (12b-1) fees none
Other expenses 0.38
- --------------------------------------------------------------------
Total operating expenses 0.83
Fee waiver and expense
reimbursement(4) 0.18
- --------------------------------------------------------------------
Net expenses(4) 0.65
- --------------------------------------------------------------------

- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 66 236 432 998
- --------------------------------------------------------------------------------

(1) The fund commenced operations on 3/14/97 and performance is calculated as of
3/31/97.
(2) The fund's fiscal year is 10/31.
(3) The fund has a master/feeder structure as described on page 19. This table
shows the fund's expenses and its share of master portfolio expenses for the
past fiscal year before reimbursement, expressed as a percentage of the
fund's average net assets.
(4) Reflects an agreement dated 7/30/99 by Morgan Guaranty Trust Company of New
York, an affiliate of J.P. Morgan, to reimburse the fund to the extent
expenses (excluding extraordinary expenses) exceed 0.65% of the fund's
average daily net assets through 2/28/01.

J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND 7

<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 OMITTED]
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 20-23.

[GRAPHIC OMITTED]
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 OMITTED]
PRINCIPAL STRATEGIES
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 will
generally range between four and seven years, similar to that of the Lehman
Brothers 1-16 Year Municipal Bond Index (currently 5.4 years). For a description
of duration, please see fixed income investment process on page 15. 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.

PRINCIPAL RISKS
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
described on page 15.

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 $326
billion, including more than $1.5 billion using similar strategies as the fund.

The portfolio management team is led by Robert W. Meiselas, vice president, who
joined the team in May 1997 and has been at J.P. Morgan since 1987, and Benjamin
Thompson, vice president, who joined the team in June of 1999. Prior to joining
J.P. Morgan, Mr. Thompson was a senior fixed income portfolio manager at Goldman
Sachs.

- --------------------------------------------------------------------------------
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 TAX EXEMPT BOND FUND

<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (unaudited)

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

The bar chart indicates some of 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 some of the risks by showing how the fund's average annual
returns for the past one and five years compare to those of the Lehman Brothers
1-16 Year Municipal Bond Index, the fund's current benchmark. Since this index
has not been in existence during all of the past ten years, the table also shows
the performance of the Lehman Quality Intermediate Municipal Bond Index, the
fund's previous benchmark. Both are unmanaged indices that measure municipal
bond market performance.

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

20%

13.50

10% 10.92
9.58
8.25
7.47
7.58
6.87

5.65
3.71
0%
- ----------------------------------------------------------------------------------------------------------------------------------
(2.53)
(10%)

</TABLE>

[ ] J.P. Morgan Institutional Tax Exempt Bond Fund

The fund's year-to-date total return as of 9/30/99 is -0.64%. For the period
covered by this year-by-year total return chart, the fund's highest quarterly
return was 5.16% (for the quarter ended 3/31/95); and the lowest quarterly
return was -3.08% (for the quarter ended 3/31/94).

<PAGE>

J.P. Morgan Institutional Tax Exempt Bond Fund (after expenses) 5.65 5.45 7.02
- -----------------------------------------------------------------------------------------------------------------
Lehman Brothers 1-16 Year Municipal Bond Index (no expenses) 6.25 5.86 N/A
- -----------------------------------------------------------------------------------------------------------------
Lehman Quality Intermediate Municipal Bond Index (no expenses) 6.01 5.60 7.55
- -----------------------------------------------------------------------------------------------------------------
</TABLE>

Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.30
Marketing (12b-1) fees none
Other expenses 0.23
- --------------------------------------------------------------------
Total operating expenses 0.53
Fee waiver and expense
reimbursement(4) 0.03
- --------------------------------------------------------------------
Net expenses(4) 0.50
- --------------------------------------------------------------------

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, net expenses for the period
8/1/99 through 11/28/00 and total operating expenses thereafter, 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($) 51 167 293 662
- --------------------------------------------------------------------------------

(1) 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.

(2) The fund's fiscal year end is 7/31. Prior to this the fiscal year end was
8/31.

(3) The fund has a master/feeder structure as described on page 19. This table
shows the fund's expenses and its share of master portfolio expenses for the
past fiscal year before reimbursement, expressed as a percentage of average
net assets.

(4) Reflects an agreement dated 7/30/99 by Morgan Guaranty Trust Company of New
York, an affiliate of J.P. Morgan, to reimburse the fund to the extent
expenses (excluding extraordinary expenses) exceed 0.50% of the fund's
average daily net assets through 11/28/00.

J.P. MORGAN INSTITUTIONAL TAX EXEMPT BOND FUND 9

<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 OMITTED]
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 20-23.

[GRAPHIC OMITTED]
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 OMITTED]
PRINCIPAL STRATEGIES
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 will generally range between three and seven years, similar to that of
the Lehman Brothers 1-16 Year Municipal Bond Index (currently 5.4 years). For a
description of duration, please see fixed income investment process on page 15.
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.

PRINCIPAL RISKS
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 15. 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 $326
billion, including more than $1.5 billion using similar strategies as the fund.

The portfolio management team is led by Robert W. Meiselas, vice president, who
joined the team in June of 1997 and has been at J.P. Morgan since 1987, and
Benjamin Thompson, vice president, who joined the team in June of 1999. Prior to
joining J.P. Morgan, Mr. Thompson was a senior fixed income portfolio manager at
Goldman Sachs.

- --------------------------------------------------------------------------------
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 NEW YORK TAX EXEMPT BOND FUND

<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (unaudited)

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

The bar chart indicates some of the risks by showing changes in the performance
of the fund's shares from year to year for each of the last 4 calendar years.

The table indicates some of 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.

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(1,2)
- --------------------------------------------------------------------------------
1995 1996 1997 1998

20%

13.28
10%
7.68
5.61
4.21
0%

[ ] J.P. Morgan Institutional New York Tax Exempt Bond Fund

The fund's year-to-date total return as of 9/30/99 is -0.62%. 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 -0.59% (for the quarter ended 3/31/96).

<PAGE>

Average annual total return (%) Shows performance over time, for periods ended
December 31, 1998
- ---------------------------------------------------------------------------------------------------
Past 1 yr. Life of fund(1)
<S> <C> <C>
J.P. Morgan Institutional New York Tax Exempt Bond Fund (after expenses) 5.61 6.63
- ---------------------------------------------------------------------------------------------------
Lehman Brothers 1-16 Year Municipal Bond Index (no expenses) 6.25 7.07
- ---------------------------------------------------------------------------------------------------
</TABLE>

Annual fund operating expenses3 (%)
(expenses that are deducted from fund assets)

Management fees 0.30
Marketing (12b-1) fees none
Other expenses 0.29
- --------------------------------------------------------------------
Total operating expenses 0.59
Fee waiver and expense
reimbursement(4) 0.09
- --------------------------------------------------------------------
Net expenses(4) 0.50
- --------------------------------------------------------------------

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, net expenses for the period
8/1/99 through 11/28/00 and total operating expenses thereafter, 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($) 51 180 320 729
- --------------------------------------------------------------------------------

(1) The fund commenced operations on 4/11/94, and returns reflect performance of
the fund from 4/30/94.
(2) The fund's fiscal year end is 7/31. Prior to this the fiscal year end was
3/31.
(3) The fund has a master/feeder structure as described on page 19. This table
shows the fund's expenses and its share of master portfolio expenses for the
past fiscal year before reimbursement, expressed as a percentage of average
net assets.
(4) Reflects an agreement dated 7/30/99 by Morgan Guaranty Trust Company of New
York, an affiliate of J.P. Morgan, to reimburse the fund to the extent
expenses (excluding extraordinary expenses) exceed 0.50% of the fund's
average daily net assets through 11/28/00.

J.P. MORGAN INSTITUTIONAL NEW YORK TAX EXEMPT BOND FUND 11

<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 OMITTED]
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 20-23.

[GRAPHIC OMITTED]
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 OMITTED]
PRINCIPAL STRATEGIES
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 will generally range between
three and ten years, similar to that of the Lehman Brothers 1-16 Year Municipal
Bond Index (currently 5.4 years). For a description of duration, please see
fixed income investment process on page 15. 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.

PRINCIPAL RISKS
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 15. 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 $326
billion, including more than $1.5 billion using similar strategies 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.

12 J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND

<PAGE>

PERFORMANCE (unaudited)

The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Institutional California Bond Fund.

The bar chart indicates some of the risks by showing changes in the performance
of the fund's shares from year to year for each of the last 2 calendar years.

The table indicates some of the risks by showing how the fund's average annual
returns for the past year and life of 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.

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(1,2)
- --------------------------------------------------------------------------------
1997 1998

10%
7.72
5.60
5%

0%
- --------------------------------------------------------------------------------
(5%)

[ ] J.P. Morgan California Bond Fund: Institutional Shares

The fund's year-to-date total return as of 9/30/99 is -0.30%. For the period
covered by this year-by-year 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).

<PAGE>

Average annual total return (%) Shows performance over time, for period ended
December 31, 1998
- -----------------------------------------------------------------------------------------------------
Past 1 yr. Life of fund(1)
<S> <C> <C>
J.P. Morgan California Bond Fund: Institutional Shares (after expenses) 5.60 6.66
- -----------------------------------------------------------------------------------------------------
Lehman Brothers 1-16 Year Municipal Bond Index (no expenses) 6.25 7.11
- -----------------------------------------------------------------------------------------------------
</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 expenses3 (%)
(expenses that are deducted from fund assets)

Management fees 0.30
Marketing (12b-1) fees none
Other expenses(4) 0.42
- --------------------------------------------------------------------
Total annual fund
operating expenses(4) 0.72
- --------------------------------------------------------------------

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($) 74 230 401 894
- --------------------------------------------------------------------------------

(1) The fund commenced operations on 12/23/96, and returns reflect performance
of the fund from 12/31/96.
(2) The fund's fiscal year end is 4/30.
(3) This table shows the fund's expenses and its share of master portfolio
expenses for the past fiscal year before reimbursement, expressed as a
percentage of 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 at the option of J.P. Morgan.

J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND 13

<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 380 analysts and portfolio managers
around the world and has more than $326 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

Potential risk and return

Return (after taxes)

Global Strategic Income Fund

New York Tax Exempt Bond Fund*
California Bond Fund*

Tax Exempt Bond Fund*

Bond Fund

Short Term Bond Fund

Risk

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.

<PAGE>

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

14 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 areas, 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 OMITTED]
The funds invest across a range of
different types of securities

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

[GRAPHIC OMITTED]
Each fund makes its portfolio decisions
as described earlier in this prospectus

Security selection Relying on the insights of different specialists, including
credit analysts, quantitative researchers, and dedicated fixed income traders,
the portfolio managers make buy and sell decisions according to each fund's goal
and strategy.

[GRAPHIC OMITTED]
J.P. Morgan uses a disciplined process
to control each fund's sensitivity
to interest rates

Duration management Forecasting teams use fundamental economic factors to
develop strategic forecasts of the direction of interest rates. Based on these
forecasts, strategists establish each fund's target duration, a common
measurement of a security's sensitivity to interest rate movements. For
securities owned by a fund, duration measures the average time needed to receive
the present value of all principal and interest payments by analyzing cash flows
and interest rate movements. A fund's duration is generally shorter than a
fund's average maturity because the maturity of a security only measures the
time until final payment is due. Each fund's target duration typically remains
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 15

<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 Fund 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.

<PAGE>
- --------------------------------------------------------------------------------
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-Delaware
Routing number: 031-100-238
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.

16 YOUR INVESTMENT

<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.

<PAGE>
- --------------------------------------------------------------------------------
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 as
permitted by law and to postpone payment of proceeds for up to seven days.

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 17

<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.

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

18 YOUR INVESTMENT

<PAGE>

FUND DETAILS
- --------------------------------------------------------------------------------

BUSINESS STRUCTURE
As noted earlier, each fund (except the California Bond Fund) is a series of
J.P. Morgan Institutional Funds, a Massachusetts business trust, and 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:

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

Advisory services Percentage of the master
portfolio's average net assets
Short Term Bond 0.25%
Bond 0.30%
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
(fee shared with Funds pro-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 each 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 the fund's average
net assets

Administrative services Fund's pro-rata portion of 0.09%
(fee shared with of the first $7 billion of average
Funds Distributor, Inc.) net assets in J.P. Morgan-advised
portfolios, plus 0.04% of average
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 the date January 1, 2000 and dates thereafter. 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 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. While the funds cannot predict at
this time the degree of impact, it is possible that foreign markets will be less
prepared than those in the U.S.

FUND DETAILS 19

<PAGE>

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

RISK AND REWARD ELEMENTS
This table discusses the main elements that make up each fund's overall risk and
reward characteristics. It also outlines each fund's policies toward various
investments, 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, o Bonds have generally outperformed money o Under normal circumstances the funds plan to remain
yield, and total return market investments over the long term, fully invested in bonds and other fixed income
will fluctuate in with less risk than stocks securities as noted in the table on pages 22-23
response to bond
market
movements o Most bonds will rise in value when o The funds seek to limit risk and enhance total return
interest rates fall or yields through careful management, sector
o The value of most bonds allocation, individual securities selection, and
will fall when interest o Mortgage-backed and asset-backed duration management
rates rise; the longer a securities can offer attractive returns
bond's maturity and the o During severe market downturns, the funds have the
lower its credit option of investing up to 100% of assets in
quality, the more its investment-grade short-term securities
value typically falls
o J.P. Morgan monitors interest rate trends, as well as
o Adverse market geographic and demographic information related to
conditions may from time mortgage-backed securities and mortgage prepayments
to time cause a fund to
take temporary defensive
positions that are
inconsistent with its
principal investment
strategies and may
hinder a fund from
achieving its
investment objective

o Mortgage-backed and asset-
backed securities (securities
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 o Investment-grade bonds have a lower o Each fund maintains its own policies for balancing
would leave a fund with risk of default credit quality against potential yields and gains in
unpaid interest or light of its investment goals
principal o Junk bonds offer higher yields and
higher potential gains o J.P. Morgan develops its own ratings of unrated
o Junk bonds (those rated securities and makes a credit quality determination
BB/Ba or lower) have a for unrated securities
higher risk of default,
tend to be less liquid,
and may be more
difficult to value
</TABLE>

<PAGE>

o A fund could lose money o Foreign bonds, which represent a major o Foreign bonds are a primary investment only for the
because of foreign portion of the world's fixed income Global Strategic Income fund and may be a significant
government actions, securities, offer attractive potential investment for the Short Term Bond and Bond funds;
political instability, performance and opportunities for the Tax Exempt Bond, New York Tax Exempt Bond and
or lack of adequate and diversification California Bond funds are not permitted to invest any
accurate information assets in foreign bonds
o Favorable exchange rate movements could
o Currency exchange rate generate gains or reduce losses o To the extent that a fund invests in foreign bonds,
movements could reduce it may manage the currency exposure of its foreign
gains or create losses o Emerging markets can offer higher investments relative to its benchmark, and may hedge
returns a portion of its foreign currency exposure into the
o Currency and investment U.S. dollar from time to time (see also
risks tend to be higher "Derivatives"); these currency management techniques
in emerging markets may not be available for certain emerging markets
investments
When-issued and
delayed delivery
securities

o When a fund buys o A fund can take advantage of attractive o Each fund uses segregated accounts to offset leverage
securities before issue transaction opportunities
risk or for delayed
delivery, it could be
exposed to leverage
risk if it does
not use segregated
accounts
</TABLE>

20 FUND DETAILS

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

o A fund could o A fund could outperform its benchmark o J.P. Morgan focuses its active management on those
underperform its due to these same choices areas where it believes its commitment to research
benchmark due to its can most enhance returns and manage risks in a
sector, securities or consistent way
duration choices

Derivatives

o Derivatives such as o Hedges that correlate well with o The funds use derivatives, such as futures, options,
futures, options, swaps underlying positions can reduce or swaps and forward foreign currency contracts for
and forward foreign eliminate losses at low cost hedging and for risk management (i.e., to adjust
currency contracts that duration or yield curve exposure, or to establish or
are used for hedging the o A fund could make money and protect adjust exposure to particular securities, markets, or
portfolio or specific against losses if management's analysis currencies); risk management may include management
securities may not fully proves correct of a fund's exposure relative to its benchmark; the
offset the underlying Tax Exempt Bond, New York Tax Exempt Bond and
positions(1) and this o Derivatives that involve leverage could California Bond funds are permitted to enter into
could result in losses generate substantial gains at low cost futures and options transactions, however, these
to the fund that would transactions result in taxable gains or losses so it
not have otherwise is expected that these funds will utilize them
occurred infrequently; forward foreign currency contracts are
not permitted to be used by the Tax Exempt Bond, New
o Derivatives used for York Tax Exempt Bond and California Bond funds
risk management may
not have the intended o The funds only establish hedges that they expect will
effects and may result be highly correlated with underlying positions
in losses or missed
opportunities o While the funds may use derivatives that incidentally
involve leverage, they do not use them for the
o The counterparty to a specific purpose of leveraging their portfolios
derivatives contract
could default

o Certain types of
derivatives involve
costs to the funds which
can reduce returns

o Derivatives that involve
leverage could magnify
losses

Securities lending

o When a fund lends a o A fund may enhance income through the o J.P. Morgan maintains a list of approved borrowers
security, there is a investment of the collateral received
risk that the loaned from the borrower o The fund receives collateral equal to at least 100%
securities may not be of the current value of securities
loaned returned if the
borrower defaults o The lending agents indemnify a fund against borrower
default
o The collateral will be
subject to the risks of o J.P. Morgan's collateral investment guidelines limit
the securities in which the quality and duration of collateral investment to
it is invested minimize losses

o Upon recall, the borrower must return the securities
loaned within the normal settlement period
</TABLE>

<PAGE>

o A fund could have o These holdings may offer more o No fund may invest more than 15% of net assets in
difficulty valuing these attractive yields or potential growth illiquid holdings
holdings precisely than comparable widely traded
securities o To maintain adequate liquidity to meet redemptions,
o A fund could be unable each fund may hold investment-grade short-term
to sell these holdings securities (including repurchase agreements and
at the time or price reverse repurchase agreements) and, for temporary or
desired extraordinary purposes, may borrow from banks up to
33 1/3% of the value of its total assets
Short-term trading

o Increased trading would o A fund could realize gains in a short o The funds may use short-term trading to take
raise a fund's period of time advantage of attractive or unexpected opportunities
transaction costs or to meet demands generated by shareholder activity.
o A fund could protect against losses if The turnover rate for each fund for its most recent
o Increased short-term a bond is overvalued and its value fiscal year end is as follows: Short Term Bond
capital gains later falls (381%), Bond (115%), Global Strategic Income (142%),
distributions would Tax Exempt Bond, for the eleven months ended 7/31/99
raise shareholders' (29%), New York Tax Exempt Bond, for the four months
income tax liability ended 7/31/99 (8%), and California Bond (40%)

</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 21

<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 domestic or foreign 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 domestic or foreign
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 fund agrees to purchase a security
and resell it to the seller on a particular date and at a specific price.
- --------------------------------------------------------------------------------
Reverse repurchase agreements Contracts whereby the fund sells a security and
agrees to repurchase it from the buyer on a particular date and at a specific
price. Considered a form of borrowing.
- --------------------------------------------------------------------------------
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 domestic or foreign 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.
- --------------------------------------------------------------------------------

<PAGE>

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.

22 FUND DETAILS

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

O Permitted (and if applicable, percentage limitation) percentage of
total assets - bold percentage of net assets - italic
X Permitted, but not typically used + Permitted, but no current intention of use
- -- Not permitted

<TABLE>
<CAPTION>
Short Term Global Strategic Tax Exempt New
York Tax California
Principal Types of Risk Bond Bond Income Bond Exempt
Bond Bond
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>

credit, interest rate, market, prepayment O O O X X X
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, liquidity, political O(1) O(1) O X Domestic X
Domestic X Domestic
Only
Only Only
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market,
political O(1) O(1) X O
O O
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market,
political, valuation O(1) O(1) X --
- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market,
political, valuation O(1) O(1) O --
- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
credit, environmental, extension, interest rate,
liquidity, market, natural event, political,
prepayment, valuation O O O
+ + +
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, extension, interest rate, leverage,
market, political, prepayment O(1) O O --
- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
currency, extension, interest rate, leverage,
liquidity, market, political, prepayment O(1)33 1/3% O(1)33 1/3% O 33 1/3% --
- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, extension, interest rate,
liquidity, political, prepayment O(1) O(1) O --
- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market, valuation O O O O
O O
- ------------------------------------------------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market,
natural event, prepayment, valuation O O O --
- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
credit O O O X
X X
- ------------------------------------------------------------------------------------------------------------------------------------
credit O(3) O(3) O(3) X(3)
X(3) X(3)
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, interest rate, market, political O(1) O(1) O --
- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, interest rate, leverage,
market, political O(1) O(1) O O
- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
credit, interest rate, leverage, liquidity, market -- -- -- O
O O
- ------------------------------------------------------------------------------------------------------------------------------------
credit, interest rate, market, natural event,
political X X -- O(2)
O(2) O(2)
- ------------------------------------------------------------------------------------------------------------------------------------
interest rate O O O O
O O
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market,
political, valuation O(1) O(1) O O
O O
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

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 a natural disaster, such as a hurricane or similar
event, will 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 the California Bond Fund's assets must be in California
municipal securities, at least 65% of the New York Tax Exempt Bond Fund's
assets must be in New York municipal securities, and at least 80% of the New
York Tax Exempt and Tax Exempt Bond Funds' assets must be in tax exempt
securities.
(3) All forms of borrowing (including securities lending and reverse repurchase
agreements) in the aggregate may not exceed 33 1/3% of the fund's total
assets.

FUND DETAILS 23

<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.

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

Per-share data For periods ended
- -----------------------------------------------------------------------------------------------------------------------------------
10/31/94 10/31/95 10/31/96 10/31/97 10/31/98 4/30/99
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ($) 9.99 9.60 9.83 9.85 9.84 9.96
- -----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.47 0.58 0.55 0.61 0.59 0.27
Net realized and unrealized gain (loss)
on investment ($) (0.39) 0.24 0.02 (0.01) 0.12 (0.09)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.08 0.82 0.57 0.60 0.71 0.18
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.47) (0.59) (0.55) (0.61) (0.59) (0.27)
Net realized gain ($) -- -- -- -- -- (0.04)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders ($) (0.47) (0.59) (0.55) (0.61) (0.59) (0.31)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 9.60 9.83 9.85 9.84 9.96 9.83
- -----------------------------------------------------------------------------------------------------------------------------------

Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------------------
Total return (%) 0.87 8.81 6.01 6.27 7.40 1.87(1)
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 47,679 18,916 17,810 27,375 232,986 243,292
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Net expenses (%) 0.45 0.45 0.37 0.25 0.25 0.27(2)
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income (%) 4.96 6.09 5.69 6.19 5.84 5.49(2)
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses without
reimbursement (%) 0.78 0.67 1.37 0.96 0.62 0.52(2)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Not annualized.
(2) Annualized.

24 FUND DETAILS

<PAGE>
- --------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL BOND FUND
<TABLE>
<CAPTION>

(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ($) 10.14 9.23 9.98 9.84 10.01 10.10
- -----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.55 0.63 0.61 0.65 0.64 0.29
Net realized and unrealized gain (loss)
on investment ($) (0.88) 0.75 (0.11) 0.18 0.15 (0.20)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) (0.33) 1.38 0.50 0.83 0.79 0.09
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.55) (0.63) (0.61) (0.64) (0.63) (0.29)
Net realized gain ($) (0.03) .-- (0.03) (0.02) (0.07) (0.12)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders ($) (0.58) (0.63) (0.64) (0.66) (0.70) (0.41)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 9.23 9.98 9.84 10.01 10.10 9.78
- -----------------------------------------------------------------------------------------------------------------------------------

Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------------------
Total return (%) (3.33) 15.50 5.21 8.78 8.18 0.94(1)
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 253,174 438,610 836,066 912,054 1,001,411 1,099,383
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Net expenses (%) 0.50 0.47 0.50 0.50 0.49 0.50(2)
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income (%) 6.00 6.62 6.28 6.59 6.32 5.99(2)
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses without
reimbursement (%) 0.69 0.52 0.53 0.50 0.50 0.50(2)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Not annualized.
(2) Annualized.

<PAGE>

- ------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND
<TABLE>
<CAPTION>

Per-share data For periods ended
- ------------------------------------------------------------------------------------------------
10/31/97(1) 10/31/98 4/30/99
(unaudited)
<S> <C> <C> <C> <C>
Net asset value, beginning of period ($) 10.00 10.16 9.72
- ------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.46 0.75 0.31
Net realized and unrealized gain (loss)
on investment ($) 0.15 (0.45) 0.12
- ------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.61 0.30 0.43
- ------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.45) (0.70) (0.30)
Net realized gain ($) -- (0.02) --
Return of capital -- (0.02) --
- ------------------------------------------------------------------------------------------------
Total distributions to shareholders ($) (0.45) (0.74) (0.30)
- ------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 10.16 9.72 9.85
- ------------------------------------------------------------------------------------------------

Ratios and supplemental data
- ------------------------------------------------------------------------------------------------
Total return (%) 6.15(2) 2.91 4.45(2)
- ------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 105,051 223,700 265,865
- ------------------------------------------------------------------------------------------------
Ratio to average net assets:
Net expenses (%) 0.65(3) 0.65 0.65(3)
- ------------------------------------------------------------------------------------------------
Net investment income (%) 7.12(3) 6.59 6.65(3)
- ------------------------------------------------------------------------------------------------
Expenses without
reimbursement (%) 1.18(3) 0.83 0.78(3)
- ------------------------------------------------------------------------------------------------
</TABLE>

(1) The fund commenced operations on 3/17/97.
(2) Not annualized.
(3) Annualized.

FUND DETAILS 25
<PAGE>

- -------------------------------------------------------------------------------
J.P. MORGAN institutional TAX EXEMPT BOND FUND
<TABLE>
<CAPTION>

For the 11
Per-share data For periods ended months ended
- -----------------------------------------------------------------------------------------------------------------------------------
8/31/94 8/31/95 8/31/96 8/31/97 8/31/98 7/31/99
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ($) 10.07 9.75 10.01 9.92 10.12 10.38
- -----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.48 0.49 0.48 0.48 0.47 0.41
Net realized and unrealized gain (loss)
on investment ($) (0.32) 0.26 (0.07) 0.20 0.26 (0.30)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.16 0.75 0.41 0.68 0.73 0.11
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.48) (0.49) (0.48) (0.48) (0.47) (0.41)
Net realized gain ($) -- -- (0.02) (0.00)(1) -- (0.01)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders ($) (0.48) (0.49) (0.50) (0.48) (0.47) (0.42)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 9.75 10.01 9.92 10.12 10.38 10.07
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------------------
Total return (%) 1.61 8.00 4.13 7.06 7.37 1.01(2)
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 16,415 59,867 121,131 201,614 316,594 388,933
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Net expenses (%) 0.50 0.50 0.50 0.50 0.50 0.50(3)
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income (%) 4.70 5.09 4.82 4.83 4.58 4.37(3)
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses without reimbursement (%) 1.98 0.71 0.60 0.56 0.53(3) 0.53(3)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Less than $0.01 per share.
(2) Not annualized.
(3) Annualized.

<PAGE>

- -------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL NEW YORK TAX EXEMPT BOND FUND
<TABLE>
<CAPTION>

For the four
Per-share data For fiscal periods ended months ended
- -----------------------------------------------------------------------------------------------------------------------------------
3/31/95(1) 3/31/96 3/31/97 3/31/98 3/31/99 7/31/99
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ($) 10.00 10.11 10.34 10.31 10.67 10.72
- -----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.42 0.49 0.48 0.48 0.45 0.14
Net realized and unrealized gain (loss)
on investment ($) 0.11 0.25 (0.02) 0.40 0.13 (0.28)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.53 0.74 0.46 0.88 0.58 (0.14)
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.42) (0.49) (0.48) (0.48) (0.45) (0.14)
Net realized gain ($) -- (0.02) (0.01) (0.04) (0.08) (0.02)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders ($) (0.42) (0.51) (0.49) (0.52) (0.53) (0.16)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 10.11 10.34 10.31 10.67 10.72 10.42
- -----------------------------------------------------------------------------------------------------------------------------------

Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------------------
Total return (%) 5.492 7.40 4.54 8.64 5.51 (1.25)(2)
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 20,621 47,926 90,792 111,418 204,986 161,373
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Net expenses (%) 0.50(3) 0.50 0.50 0.50 0.50 0.50(3)
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income (%) 4.65(3) 4.67 4.70 4.54 4.15 4.01(3)
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses without reimbursement (%) 1.05(3) 0.67 0.64 0.59 0.57 0.59(3)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

26 FUND DETAILS

<PAGE>
- -------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND
<TABLE>
<CAPTION>

Per-share data For fiscal periods ended April 30
- ----------------------------------------------------------------------------------------------
1997(1) 1998 1999
<S> <C> <C> <C>
Net asset value, beginning of period ($) 10.00 9.90 10.20
- ----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.16 0.42 0.41
Net realized and unrealized gain (loss)
on investment ($) (0.10) 0.30 0.25
- ----------------------------------------------------------------------------------------------
Total from investment operations ($) 0.06 0.72 0.66
- ----------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.16) (0.42) (0.41)
Net realized gain ($) -- -- (0.05)
- ----------------------------------------------------------------------------------------------
Total distributions to shareholders ($) (0.16) (0.42) (0.46)
- ----------------------------------------------------------------------------------------------
Net asset value, end of period ($) 9.90 10.20 10.40
- ----------------------------------------------------------------------------------------------

Ratios and supplemental data
- ----------------------------------------------------------------------------------------------
Total return (%) 0.56(2) 7.35 6.55
- ----------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 14,793 46,280 64,102
- ----------------------------------------------------------------------------------------------
Ratio to average net assets:
Net expenses (%) 0.45(3) 0.45 0.49
- ----------------------------------------------------------------------------------------------
Net investment income (%) 4.43(3) 4.11 3.92
- ----------------------------------------------------------------------------------------------
Expenses without
reimbursement (%) 3.46(3) 0.79 0.71
- ----------------------------------------------------------------------------------------------
Portfolio turnover (%) 40 44 40
- ----------------------------------------------------------------------------------------------
</TABLE>

(1) The fund commenced operations on 12/23/96.
(2) Not annualized.
(3) Annualized.

FUND DETAILS 27

<PAGE>

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

(THIS PAGE IS INTENTIONALLY LEFT BLANK)

<PAGE>

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

(THIS PAGE IS INTENTIONALLY LEFT BLANK)

<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 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.

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 TAX EXEMPT BOND FUND

STATEMENT OF ADDITIONAL INFORMATION

DECEMBER 1, 1999

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS DATED DECEMBER 1, 1999, 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
FUND DATED JULY 31, 1999. THE PROSPECTUS AND THE FINANCIAL STATEMENTS, INCLUDING
THE INDEPENDENT ACCOUNTANTS' 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 . . . . . . . . . . . . 23
Investment Advisor . . . . . . . . . . . . . . 27
Distributor . . . . . . . . . . . . . . . . . 29
Co-Administrator . . . . . . . . . . . . . . . 30
Services Agent . . . . . . . . . . . . . . . . 30
Custodian and Transfer Agent . . . . . . . . . 31
Shareholder Servicing . . . . . . . . . . . . 31
Financial Professionals . . . . . . . . . . . 32
Independent Accountants . . . . . . . . . . . 33
Expenses . . . . . . . . . . . . . . . . . . . 33
Purchase of Shares . . . . . . . . . . . . . . 34
Redemption of Shares . . . . . . . . . . . . . 34
Exchange of Shares . . . . . . . . . . . . . . 35
Dividends and Distributions . . . . . . . . . 35
Net Asset Value . . . . . . . . . . . . . . . 36
Performance Data . . . . . . . . . . . . . . . 36
Portfolio Transactions . . . . . . . . . . . . 38
Massachusetts Trust . . . . . . . . . . . . . 39
Description of Shares . . . . . . . . . . . . 40
Special Information Concerning Investment
Structure . . . . . . . . . . . . . . . . . . 42
Taxes . . . . . . . . . . . . . . . . . . . . 43
Additional Information . . . . . . . . . . . 45
Financial Statements . . . . . . . . . . . . . 47
Appendix A - Description of Securities
Ratings . . . . . . .. . . . . . . . . . . . A-1

<PAGE>

GENERAL

This Statement of Additional Information relates only to the J.P.
Morgan Institutional 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"). 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 Tax Exempt Bond Portfolio (the
"Portfolio"), a corresponding 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 following discussion supplements the information regarding the
Fund's investment objective and the policies to be employed to achieve this
objective by the Portfolio as set forth above and in the Prospectus. Since the
investment characteristics and expenses of the Fund correspond directly with
those of the Portfolio, the discussion in the Statement of Additional
Information focuses on the investments and investment policies of the Portfolio.
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 Fund is designed for investors who seek tax exempt yields greater
than those generally available from a portfolio of short term tax exempt
obligations and who are willing to incur the greater price fluctuation of
longer-term instruments. Additionally, the Fund is designed to be an economical
and convenient means of making substantial investments in debt obligations that
are exempt from federal income tax. The Fund's investment objective is to
provide a high level of current income exempt from federal income tax consistent
with moderate risk of capital. See "Taxes." The Fund attempts to achieve its
investment objective by investing all of its investable assets in the Portfolio,
a diversified open-end management investment company having the same investment
objective as the Fund.

<PAGE>

The Portfolio attempts to achieve its investment objective by investing
primarily in securities of states, territories and possessions of the United
States and their political subdivisions, agencies and instrumentalities, the
interest of which is exempt from federal income tax in the opinion of bond
counsel for the issuer, but it may invest up to 20% of its total assets in
taxable obligations. During normal market conditions, the Portfolio will invest
at least 80% of its net assets in tax exempt obligations. Interest on these
securities may be subject to state and local taxes. For more detailed
information regarding tax matters, including the applicability of the
alternative minimum tax, see "Taxes". The Portfolio attempts to invest its
assets in tax exempt municipal securities; however, under certain circumstances
the Portfolio is permitted to invest up to 20% of the value of its total assets
in securities, the interest income on which may be subject to federal, state and
local income taxes. The Portfolio will invest in taxable securities only if
there are no tax exempt securities available for purchase or if the expected
return from an investment in taxable securities exceeds the expected return on
available tax exempt securities. In abnormal market conditions, if, in the
judgment of the Advisor, tax exempt securities satisfying the Portfolio's
investment objective may not be purchased, the Portfolio may, for defensive
purposes only, temporarily invest more than 20% of its net assets in debt
securities the interest on which is subject to federal, state and local income
taxes. The taxable investments permitted for the Portfolio include obligations
of the U.S. Government and its agencies and instrumentalities, bank obligations,
commercial paper and repurchase agreements and other debt securities which meet
the Portfolio's quality requirements. See "Taxes". The Portfolio seeks to
maintain a current yield that is greater than that obtainable from a portfolio
of short term tax exempt obligations, subject to certain quality restrictions.
See "Quality and Diversification Requirements."

The Advisor believes that based upon current market conditions, the
Portfolio will consist of a portfolio of securities with a duration of four to
seven years. In view of the duration of the Portfolio, under normal market
conditions, the Portfolio's yield can be expected to be higher and its net asset
value less stable than those of a money market fund. Duration is a measure of
the weighted average maturity of the bonds held in the Portfolio and can be used
as a measure of the sensitivity of the Portfolio's market value to changes in
interest rates. The maturities of the individual securities in the Portfolio may
vary widely, however, as the Advisor adjusts the Portfolio's holdings of
long-term and short-term debt securities to reflect its assessment of
prospective changes in interest rates, which may adversely affect current
income.

The value of the Portfolio's investments will generally fluctuate
inversely with changes in prevailing interest rates. The value of the
Portfolio's investments will also be affected by changes in the creditworthiness
of issuers and other market factors. The quality criteria applied in the
selection of portfolio securities are intended to minimize adverse price changes
due to credit considerations. The value of the Portfolio's municipal securities
can also be affected by market reaction to legislative consideration of various
tax reform proposals. Although the net asset value of the Portfolio fluctuates,
the Portfolio attempts to preserve the value of its investments to the extent
consistent with its objective.

Tax Exempt Obligations

The Portfolio may invest in bonds issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies, authorities and instrumentalities.
These obligations may be general obligation bonds secured by the issuer's pledge
of its full faith credit and taxing power for the payment of principal and
interest, or they may be revenue bonds payable from specific revenue sources,
but not generally backed by the issuer's taxing power. These include industrial
development bonds

<PAGE>

where payment is the responsibility of the private industrial user of
the facility financed by the bonds. The Portfolio may invest more than 25% of
its assets in industrial development bonds, but may not invest more than 25% of
its assets in industrial development bonds in projects of similar type or in the
same state.

The Portfolio will invest in tax exempt obligations. A description of the
various types of tax exempt obligations which may be purchased by the Portfolio
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.

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 Portfolio 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 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 Portfolio
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 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.

<PAGE>

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 Portfolio 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 Portfolio 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 Portfolio to be liquid
because they are payable upon demand. The Portfolio has no specific percentage
limitations on investments in master demand obligations.

Premium Securities. During a period of declining interest rates, many
municipal securities in which the Portfolio invests likely will bear coupon
rates higher than current market rates, regardless of whether the securities
were initially purchased at a premium. In general, such securities have market
values greater than the principal amounts payable on maturity, which would be
reflected in the net asset value of the Portfolio's shares. The values of such
"premium" securities tend to approach the principal amount as they near
maturity.

Puts. The Portfolio 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 Portfolio's investment
objective and subject to the supervision of the Trustees, the purpose of this
practice is to permit the Portfolio 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 Portfolio, the expiration dates of the available puts, any
future

<PAGE>

commitments for securities purchases, alternative investment
opportunities, the desirability of retaining the underlying securities in the
Portfolio's portfolio and the yield, quality and maturity dates of the
underlying securities.

The Portfolio values any municipal bonds and notes subject to puts with
remaining maturities of less than 60 days by the amortized cost method. If the
Portfolio 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 Portfolio, 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 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 Portfolio'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 Portfolio'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
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
becomes more than a minimal credit risk. In the event that a dealer should
default on its obligation to repurchase an underlying security, the Portfolio 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 Portfolio with the result that, while the put is
outstanding, the Portfolio 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 Portfolio.

Non-Municipal Securities

The Portfolio may invest in bonds and other debt securities of domestic
issuers to the extent consistent with its investment objective and policies. The
Portfolio may invest in U.S. Government, bank and corporate debt obligations, as
well as asset-backed securities and repurchase agreements. The Portfolio will
purchase such securities only when the Advisor believes that they would enhance
the after tax returns of a shareholder of the Fund in the highest federal income
tax brackets. Under normal circumstances, the Portfolio's holdings of
non-municipal securities will not exceed 20% of its total assets. A description
of these investments appears below. See "Quality

<PAGE>

and Diversification Requirements." For information on short-term
investments in these securities, see "Money Market Instruments."

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 Portfolio 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 Portfolio may invest are subject to the
Portfolio'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 Portfolio will invest in money market instruments, to the extent
consistent with its investment objective and policies, that meet the quality
requirements described below. Under normal circumstances, the Portfolio will
purchase these securities to invest temporary cash balances or to maintain
liquidity to meet withdrawals. However, the Portfolio 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 Portfolio appears below. Also see "Quality and Diversification
Requirements."

<PAGE>

U.S. Treasury Securities. The Portfolio 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 Portfolio 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 Portfolio 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 Portfolio
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.

Bank Obligations. The Portfolio 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 and are organized under the laws of the United States or any state, (ii)
foreign branches of these banks and (iii) U.S. branches of foreign banks of
equivalent size (Yankees). The Portfolio may not invest in obligations of
foreign branches of foreign banks. The Portfolio will not invest in obligations
for which the Advisor, or any of its affiliated persons, is the ultimate obligor
or accepting bank.

Commercial Paper. The Portfolio may invest in commercial paper,
including master demand obligations. For a description of master demand
obligations see "Tax Exempt Obligations - Municipal Notes" above. 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 Portfolio may invest in
such

<PAGE>

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
Portfolio's quality restrictions. See "Quality and Diversification
Requirements." Although there is no secondary market for master demand
obligations, such obligations are considered by the Portfolio to be liquid
because they are payable upon demand. It is possible that the issuer of a master
demand obligation could be a client of Morgan to whom Morgan, an affiliate of
the Advisor, in its capacity as a commercial bank, has made a loan.

Repurchase Agreements. The Portfolio may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Trustees. In a repurchase agreement, the Portfolio 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 Portfolio 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
Portfolio to the seller. The period of these repurchase agreements will usually
be short, from overnight to one week, and at no time will the Portfolio 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
Portfolio 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 Portfolio in each agreement plus accrued
interest, and the Portfolio 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 Portfolio 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 Portfolio may be delayed or
limited.

The Portfolio 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 Portfolio 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 Portfolio until settlement takes place. At the time the
Portfolio 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 Portfolio 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

<PAGE>

delivery dates for such transactions, the Portfolio will meet its
obligations from maturities or sales of the securities held in the segregated
account and/or from cash flow. If the Portfolio 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 Portfolio may be disadvantaged if the other party
to the transaction defaults.

Investment Company Securities. Securities of other investment companies
may be acquired by 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
Portfolio'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 Portfolio, 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 Portfolio to invest in affiliated investment companies. If the requested
relief is granted, the Portfolio would then be permitted to invest in affiliated
Portfolios, subject to certain conditions specified in the applicable order.

The Securities and Exchange Commission ("SEC") has granted the
Portfolio an exemptive order permitting it to invest its uninvested cash in any
of the following affiliated money market funds: J.P. Morgan Institutional Prime
Money Market Fund, J.P. Morgan Institutional Tax Exempt Money Market Fund, J.P.
Morgan Institutional Federal Money Market Fund and J.P. Morgan Institutional
Treasury Money Market Fund. The order sets forth the following conditions: (1)
the Portfolio may invest in one or more of the permitted money market funds up
to an aggregate limit of 25% of its assets; and (2) the Advisor will waive
and/or reimburse its advisory fee from the Portfolio in an amount sufficient to
offset any doubling up of investment advisory and shareholder servicing fees.

Reverse Repurchase Agreements. The Portfolio may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Portfolio 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 Portfolio to be
magnified. The Portfolio will invest the proceeds of borrowings under reverse
repurchase agreements. In addition, except for liquidity purposes, the Portfolio
will enter into a reverse repurchase agreement only when the expected return
from the investment of the proceeds is greater than the expense of the
transaction. The Portfolio will not invest the proceeds of a reverse repurchase
agreement for a period which exceeds the duration of the reverse repurchase
agreement. The Portfolio 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 Portfolio's limitations on reverse repurchase
agreements and bank borrowings.

Loans of Portfolio Securities. Subject to applicable investment
restrictions, the Portfolio is permitted to lend its securities in an amount up
to 33-1/3% of the Portfolio's net assets. The Portfolio 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 Portfolio any income accruing
thereon. Loans will be subject to termination by the Portfolio 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 Portfolio and its
respective investors. The Portfolio 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 the Portfolio will not make any loans in excess of
one year. The Portfolio will not lend its 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 Portfolio may not acquire any illiquid securities if, as a
result thereof, more than 15% of the Portfolio's net assets would be in illiquid
investments. Subject to this non-fundamental policy limitation, the Portfolio
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 Portfolio. The price the Portfolio 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 Portfolio 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 Portfolio is subject to a risk that
should the Portfolio decide to sell them when a ready buyer is not available at
a price the Portfolio deems representative of their value, the value of the
Portfolio's net assets could be adversely affected. Where an illiquid security
must be registered under the 1933 Act, before it may be sold, the Portfolio 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
Portfolio may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
the Portfolio might obtain a less favorable price than prevailed when it decided
to sell.

Synthetic Instruments. The Portfolio 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 Portfolio 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 Portfolio will be that of holding a long-term bond.

Quality and Diversification Requirements

The Portfolio 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 Portfolio: (1) the Portfolio 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 Portfolio may not own more than 10% of the outstanding voting securities of
any one issuer. As for the other 25% of the Portfolio'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 Portfolio 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 Portfolio 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."

For purposes of diversification and concentration under the 1940 Act,
identification of the issuer of municipal bonds or notes depends on the terms
and conditions of the obligation. 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 Portfolio 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
Portfolio 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."

It is the current policy of the Portfolio 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 are rated B or better by Moody's or Standard & Poor's. See
"Below Investment Grade Debt" below. In each case, the Portfolio 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
Portfolio may continue to hold the investment.

The Portfolio invests principally in a diversified portfolio of
"investment grade" tax exempt securities. On the date of investment, with
respect to at least 90% of its total assets, (i) municipal bonds must be rated
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, (ii) municipal notes must be
rated MIG-1 by Moody's or SP-1 by Standard & Poor's (or, in the case of New York
State municipal notes, MIG-1 or MIG-2 by Moody's or SP-1 or SP-2 by Standard &
Poor's) and (iii) at the time the Portfolio invests in any commercial paper,
bank obligation, repurchase agreement, or any other money market instruments,
the investment must have received a short term rating of investment grade or
better (currently Prime-3 or better by Moody's or A-3 or better by Standard &
Poor's) or the investment must have been issued by an issuer that received a
short term investment grade rating or better with respect to a class of
investments or any investment within that class that is comparable in priority
and security with the investment being purchased by the Portfolio. If no such
ratings exists, the investment must be of comparable investment quality in the
Advisor's opinion, but will not be eligible for purchase if the issuer or its
parent has long term outstanding debt rated below BBB. With respect to the
remaining 10% of its assets, any investment must be rated B or better by Moody's
or Standard & Poor's, or of comparable quality. The Portfolio may invest in
other tax exempt securities which are not rated 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 Portfolio 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.

Below Investment Grade Debt. Certain lower rated securities purchased
by the Portfolio, 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 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 Portfolio's
portfolio securities for purposes of determining the Portfolio'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 Portfolio 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 Portfolio may use futures contracts and options for hedging and
risk management purposes. The Portfolio may not use futures contracts and
options for speculation.

The Portfolio 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 Portfolio'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
Portfolio's overall strategy in a manner deemed appropriate to the Advisor and
consistent with the Portfolio'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.

<PAGE>

The Portfolio 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 Portfolio 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 Portfolio's
turnover rate.

The Portfolio 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 Portfolio'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
Portfolio's total assets. In addition, the Portfolio 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 Portfolio.

Options

Purchasing Put and Call Options. By purchasing a put option, the
Portfolio 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
Portfolio 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 Portfolio may terminate its position in a put option it
has purchased by allowing it to expire or by exercising the option. The
Portfolio 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 Portfolio will lose the entire premium paid. If the Portfolio
exercises a put option on a security, it will sell the instrument underlying the
option at the strike price. If the Portfolio 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 the Portfolio 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 Portfolio assumes the
obligation to pay the strike price for the instrument underlying the

<PAGE>

option if the party to the option chooses to exercise it. The Portfolio
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 Portfolio has written, however, the
Portfolio 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.

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 Portfolio 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. The Portfolio may purchase or sell put and call
options on any securities index based on securities in which the Portfolio 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 Portfolio, 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 Portfolio's investments generally will not match
the composition of an index.

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

Exchange Traded and OTC Options. All options purchased or sold by the
Portfolio 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 Trustees. While exchange-traded options are obligations of the
Options Clearing Corporation, in the case of OTC options, the Portfolio relies
on the dealer from which it purchased the option to perform if the option is
exercised. Thus, when the Portfolio purchases an OTC option, it

<PAGE>

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 Portfolio as well as loss of the
expected benefit of the transaction.

Provided that the Portfolio has arrangements with certain qualified
dealers who agree that the Portfolio may repurchase any option it writes for a
maximum price to be calculated by a predetermined formula, the Portfolio 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

When the Portfolio 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
Portfolio 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 Portfolio 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 Portfolio wishes to close out a particular
position.

When the Portfolio 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 Portfolio's exposure to positive and negative price fluctuations in
the underlying instrument, much as if it had purchased the underlying instrument
directly. When the Portfolio 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 Portfolio 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
Portfolio 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 Portfolio to close out its futures positions. Until it closes out a futures
position, the Portfolio will be obligated to continue to pay variation margin.
Initial and variation margin payments do not constitute purchasing on margin for
purposes of the Portfolio's investment restrictions. In the event of the
bankruptcy of an FCM that holds margin on behalf of the Portfolio, the Portfolio
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
Portfolio.

<PAGE>

The Portfolio 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 Portfolio's assets could impede
portfolio management or the Portfolio's ability to meet redemption requests or
other current obligations.

Options on Futures Contracts. The Portfolio 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 the Portfolio are paid by the Portfolio 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 Portfolio 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 Portfolio 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
Portfolio's current or anticipated investments exactly. The Portfolio may invest
in options and futures contracts based on securities with different issuers,
maturities, or other characteristics from the securities in which it

<PAGE>

typically invests, which involves a risk that the options or futures
position will not track the performance of the Portfolio'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
Portfolio'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 Portfolio may 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 Portfolio'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.

Asset Coverage for Futures Contracts and Options Positions. Although
the Fund will not be a commodity pool, certain derivatives subject the Fund to
the rules of the Commodity Futures Trading Commission which limit the extent to
which the Fund can invest in such derivatives. The Fund may invest in futures
contracts and options with respect thereto for hedging purposes without limit.
However, the Fund may not invest in such contracts and options for other
purposes if the sum of the amount of initial margin deposits and premiums paid
for unexpired options with respect to such contracts, other than for bona fide
hedging purposes, exceeds 5% of the liquidation value of the Fund's assets,
after taking into account unrealized profits and unrealized losses on such
contracts and options; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation.

<PAGE>

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 a Fund's ability to meet redemption
requests or other current obligations.

Swaps and Related Swap Products. The Portfolio 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").

The Portfolio 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 Portfolio anticipates purchasing at a later date, or to gain
exposure to certain markets in the most economical way possible. The Portfolio
will not sell interest rate caps, floors or collars if it does not own
securities with coupons which provide the interest that the Portfolio 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.

<PAGE>

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

The amount of the Portfolio's potential gain or loss on any swap
transaction is not subject to any fixed limit. Nor is there any fixed limit on
the Portfolio's potential loss if it sells a cap or collar. If the Portfolio
buys a cap, floor or collar, however, the Portfolio'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 Portfolio 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 Portfolio or that the
Portfolio 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 Portfolio.

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 Portfolio 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 Portfolio 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
Portfolio's accrued obligations under the swap agreement over the accrued amount
the Portfolio is entitled to receive under the agreement. If the Portfolio
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 Portfolio's accrued obligations under the agreement.

The Portfolio 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 Portfolio 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.

<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 the Portfolio'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 Portfolio 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 Portfolio'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
Portfolio may engage in such transactions.

Risk Management

The Portfolio 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 Portfolio to
purchase futures contracts on long term debt securities. 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 Portfolio's turnover rates for the fiscal years ended August 31, 1997 and
1998 and for the eleven months ended July 31, 1999: 25%, 16% and 29%,
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.

<PAGE>

The investment restrictions below have been adopted by the Fund and 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.

The Fund and its corresponding Portfolio:

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

2. May not purchase any security which would cause the Portfolio 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
Portfolio, 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 Portfolio 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;

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 Portfolio 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 Portfolio's
investment objective and policies and to the extent permitted by applicable law.

<PAGE>

Non-Fundamental Investment Restrictions. The investment restrictions
described below are not fundamental policies of the Fund and Portfolio and may
be changed by the Trustees. These non-fundamental investment policies require
that the Fund and Portfolio:

(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 Portfolio'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.

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, Former 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.

<PAGE>

MATTHEW HEALEY1 - Trustee, Chairman and Chief Executive Officer, Chairman,
Pierpont Group, Inc. ("Pierpont Group"), 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.

- --------
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.

The Trustees of the Trust are the same as the Trustees of the
Portfolio. In accordance with applicable state requirements, 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
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, 1998 are set forth below.

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

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 1998 1998(**)
- -------------------------------- -------------------- --------------------------
Frederick S. Addy, Trustee $11,772.77 $75,000
- -------------------------------- -------------------- --------------------------
William G. Burns, Trustee $11,772.77 $75,000
- -------------------------------- -------------------- --------------------------
Arthur C. Eschenlauer, Trustee $11,772.77 $75,000
- -------------------------------- -------------------- --------------------------
Matthew Healey, Trustee(***), $11,772.77 $75,000
Chairman and Chief Executive
Officer
- -------------------------------- -------------------- --------------------------
Michael P. Mallardi, Trustee $11,772.77 $75,000
- -------------------------------- -------------------- --------------------------

(*) Includes the Portfolio, and 18 other portfolios (collectively, the "Master
Portfolios") for which JPMIM acts as investment advisor.

<PAGE>

(**) No investment company within the fund complex has a pension or retirement
plan. Currently there are 17 investment companies (14 investment companies
comprising the Master Portfolios, the J.P. Morgan Funds, the Trust and J.P.
Morgan Series Trust) in the fund complex.

(***) During 1998, Pierpont Group, Inc. paid Mr. Healey, in his role as Chairman
of Pierpont Group, Inc., compensation in the amount of $157,400, contributed
$23,610 to a defined contribution plan on his behalf and paid $17,700 in
insurance premiums for his benefit.

The Trustees decide upon 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 to assist
the Trustees in exercising their overall supervisory responsibilities over the
affairs of the Portfolio and the Trust. Pierpont Group 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. The Trust and the Portfolio have agreed to pay Pierpont Group
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 are located at 461 Fifth Avenue, New York, NY 10017.

The aggregate fees paid to Pierpont Group by the Fund and Portfolio
during the indicated fiscal years are set forth below:

Fund -- For the fiscal years ended August 31, 1996, 1997, 1998 and for the
eleven months ended July 31, 1999: $4,527, $5,670, $7,931, and $8,137,
respectively.

Portfolio -- For the fiscal years ended August 31, 1996, 1997, 1998 and for the
eleven months ended July 31, 1999: $24,602, $18,912, $21,294 and $17,915,
respectively.

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. 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.

<PAGE>

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 advised or administered by 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. His date of birth is March 31,
1969.

JOHN P. COVINO; Vice President and Assistant Treasurer. Vice President and
Treasury Group Manager of Treasury Servicing and Administration of FDI. Prior to
November 1998, Mr. Covino was employed by Fidelity Investments where he held
multiple positions in their Institutional Brokerage Group. Prior to joining
Fidelity, Mr. Covino was employed by SunGard Brokerage systems where he was
responsible for the technology and development of the accounting product group.
His date of birth is October 8, 1963.

JACQUELINE HENNING; Assistant Secretary and Assistant Treasurer of the
Portfolio only. Managing Director, State Street Cayman Trust Company, Ltd. since
October 1994. 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
27, 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.
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. 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.
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. Her
date of birth is April 22, 1964.

<PAGE>

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.

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. 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 advisor because
it 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 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 Portfolio's investment
advisor.

JPMIM, a wholly owned subsidiary of J.P. Morgan & Co. Incorporated
("J.P. Morgan"), is a registered investment advisor 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 $326 billion.

J.P. Morgan has a long history of service as advisor, 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.

<PAGE>

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 380
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 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."

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 benchmark for the Portfolio is currently Lehman
Brothers 1-16 Year Municipal Bond Index.

The Portfolio is managed by employees 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.

The table below sets forth the advisory fees paid by the Portfolio to
the Advisor for the fiscal periods indicated.

For the fiscal years ended August 31, 1996, 1997, 1998 and for the
eleven months ended July 31, 1999: $1,354,145, $1,620,498, 2,017,415, and
$2,295,351, respectively.

<PAGE>

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 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. On November 12, 1999, the Gramm-Leach-Bliley Act was signed into
law, the relevant provisions of which go into effect March 11, 2000. Until March
11, 2000, federal banking law, specifically the Glass-Steagall Act and the Bank
Holding Company Act, generally prohibits banks and bank holding companies and
their subadvisories, such as the Advisor, from engaging in the business of
underwriting or distributing securities. Pursuant to interpretations issued
under these laws by the Board of Governors of the Federal Reserve System, such
entities also may not sponsor, organize or control a registered open-end
investment company continuously engaged in the issuance of its shares (together
with underwriting and distributing securities, the "Prohibited Activities"),
such as the Trust. These laws and interpretations do not prohibit a bank 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 laws in effect until March 11, 2000. Effective March 11, 2000,
the sections of the Glass-Steagall Act which prohibited the Prohibited
Activities are repealed, and the Bank Holding Company Act is amended to permit
bank holding companies which satisfy certain capitalization, managerial and
other criteria (the "Criteria") to engage in the Prohibited Activities; bank
holding companies which do not satisfy the Criteria may continue to engage in
any activity that was permissible for a bank holding company under the Bank
Holding Company Act as of November 11, 1999. Because the services to be
performed for the Portfolio under the Advisory Agreement were permissible for a
bank holding company as of November 11, 1999, the Advisor believes that it also
may perform such services after March 11, 2000 whether or not the Advisor's
parent satisfies the Criteria. 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.

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 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

<PAGE>

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) 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 each 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 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 the administrative fees paid to FDI for the
fiscal periods indicated.

Fund -- For the period August 1, 1996 through August 31, 1996: $370. For the
fiscal years ended August 31, 1997, 1998 and for the eleven months ended July
31, 1999: $5,376, 5,939 and $5,627.

Portfolio -- For the period August 1, 1996 through August 31, 1996: $920. For
the fiscal years ended August 31, 1997, 1998 and for the eleven months ended
July 31, 1999: $10,663, 9,832 and $7,665.

<PAGE>

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 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 each 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 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.

The table below sets forth the fees paid to Morgan as Services Agent.

Fund -- For the fiscal years ended August 31, 1996, 1997, 1998 and for the
eleven months ended July 31, 1999: $16,596, $51,270, $74,789 and $92,862,
respectively.

Portfolio -- For the fiscal years ended August 31, 1996, 1997, 1998 and for the
eleven months ended July 31, 1999: $80,281, $169,209, $198,156 and $203,283,
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

<PAGE>

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; 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 table below sets forth the shareholder servicing fees paid by the
Fund to Morgan for the fiscal periods indicated. See the Prospectus and below
for applicable expense limitations.

Fund -- For the fiscal years ended August 31, 1996, 1997, 1998 and for the
eleven months ended July 31, 1999: $59,743, $122,850, $197,279, and $349,831,
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, JPMIM and Morgan believe that they may properly perform these
services and the other activities described in the Prospectus 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 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

<PAGE>

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 J.P. 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 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, 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 the registration 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.

J.P. 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, J.P.
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

<PAGE>

average daily net assets. This limit does not cover extraordinary expenses. This
reimbursement arrangement will continue through at least November 28, 2000.

The table below sets forth the fees and other expenses J.P. Morgan
reimbursed under the expense reimbursement arrangements described above or
pursuant to prior expense reimbursement arrangements for the fiscal periods
indicated.

Fund -- For the fiscal years ended August 31, 1996, 1997, 1998 and for the
eleven months ended July 31, 1999: $89,119, $90,108, $71,607 and $102,510,
respectively.

Portfolio -- For the fiscal years ended August 31, 1996, 1997, 1998 and for the
eleven months ended July 31, 1999: N/A, N/A, N/A and N/A.

PURCHASE OF SHARES

Additional Minimum Balance Information. If your account balance falls
below the minimum for 30 days as a result of selling shares (and not because of
performance), the 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, the Fund reserves the right to close out your account and
send the proceeds to the address of record.

Method of Purchase. 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 J.P. Morgan or a Financial
Professional include customers of their affiliates and references to
transactions by customers with J.P. 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 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 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.

<PAGE>

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 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 it will not redeem in-kind except in
circumstances in which the Fund is permitted to redeem in kind.

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 reservesthe 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 of the Fund for shares of 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. The Fund generally intends to pay
redemption proceeds in cash, however, since it reserves the right at its sole
discretion to pay redemptions over $250,000 in-kind as a portfolio of
representative stocks rather than in cash, the Fund reserves the right to deny
an exchange request in excess of that amount. See "Redemption of Shares".
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

<PAGE>

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 Fund's business days.

The net asset value of the Fund is equal to the value of the Fund's
investment in the Portfolio (which is equal to the Fund's pro rata share of the
total investment of the Portfolio 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 in valuing its assets.

<PAGE>

or prices of securities of comparable quality, coupon, maturity and
type, indications as to values from dealer, operating data, and general market
conditions. Unlisted securities may be valued at the quoted bid price in the
over-the-counter market provided by a principal market maker or dealer. If
prices are not supplied by the portfolio's independent pricing service or
principal market maker or dealer, such securities are priced using fair values
in accordance with procedures adopted by the portfolio's Trustees. All
short-term securities with a remaining maturity of sixty days or less are valued
by the amortized cost method.

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.

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.

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.

The historical yield information for the fund at July 31, 1999: 30-day
yield (net of expenses): 4.27%; 30-day tax equivalent yield at 39.6% tax rate:
7.07%.

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.

As required by regulations of the SEC, the annualized 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 annualized 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.

<PAGE>

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

Historical performance information for the period or portion thereof
prior to the establishment of the Fund will be that of its corresponding
predecessor, the J.P. Morgan Tax Exempt Bond Fund, as permitted by applicable
SEC staff interpretations, since the J.P. Morgan Tax Exempt Bond Fund commenced
operations before the Portfolio.

The historical return information for the Fund at July 31, 1999: Average
annual total return, 1 year: 2.58%; average annual total return, 5 years: 5.54%;
average annual total return, 10 years: 6.35%; aggregate total return, 1 year:
2.58%; aggregate total return, 5 years: 30.97%; aggregate total return, 10
years: 85.05%.

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.

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; (5) descriptions of
investment strategies; (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

<PAGE>

discount. On occasion, certain securities may be purchased directly
from an issuer, in which case no commissions or discounts are paid.

Portfolio transactions 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 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.

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 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
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.

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.

<PAGE>

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

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 the 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 the Fund represents a separate series of
shares of beneficial interest. See "Massachusetts Trust."

<PAGE>

of each shareholder in the Fund (or in the assets of other series, if
applicable). Each share represents an equal proportional interest in the 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 the 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.

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.

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

<PAGE>

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 authorized the issuance and sale to the public of
shares of 22 series of the 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.

As of October 31, 1999, to the knowledge of management, there were no
beneficial owners of more than 5% of the outstanding 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 a separate open-end management investment
company which seeks to achieve its investment objective by investing all of its
investable assets in the 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 matter 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.

<PAGE>

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 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.

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 following discussion of tax consequences is based on U.S. federal
tax laws in effect on the date of this Statement of Additional Information.
These laws and regulations are subject to change by legislative or
administrative action, possibly on a retroactive basis.

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, 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 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

<PAGE>

(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, the 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, 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 generally
will 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 is properly designated as consisting 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, other than
the alternative minimum tax under certain circumstances. 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.

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. 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 20%
rate of tax.

<PAGE>

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 the 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.

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. Long-term capital gain of an
individual holder is subject to maximum tax rate of 20%. 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. Investors are urged to consult their tax advisors concerning the
limitations on the deductibility of capital losses. 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 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.

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.
Other Taxation. The Trust is organized as a Massachusetts business
trust and, under current law, neither the Trust nor the Fund is liable for any
income or franchise tax in The Commonwealth of Massachusetts, provided that the
Fund continues to qualify as a regulated investment company under Subchapter M
of the Code. The Fund 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.

<PAGE>

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.

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 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
Portfolio or the Distributor to make such offer in such jurisdictions.

The Year 2000 Initiative

With the new millennium rapidly approaching, organizations will
continue to examine 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.

<PAGE>

and is preparing 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. For
potential failure scenarios where the risks are deemed significant and where
such risk is considered to have a higher probability of occurrence, J.P. Morgan
is attempting to develop business recovery/contingency plans. These plans will
define the infrastructure that should be put in place for managing a failure
during the millennium event itself.

Costs associated with efforts to prepare J.P. Morgan's systems for the
year 2000 approximated $93.3 million in 1997, $132.7 million in 1998 and $36.6
million for the first eight months of 1999. Over the next month, 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 $300 million, for internal
systems renovation and testing, testing equipment and both internal and external
resources working on the project. The costs associated with J.P. Morgan becoming
year-2000 compliant will be borne by J.P. Morgan and not the Fund.

FINANCIAL STATEMENTS

The following financial statements and the report thereon of
PricewaterhouseCoopers LLP are incorporated herein by reference to the Fund's
July 31, 1999 annual report filing made with the SEC on October 6, 1999
(Accession Number 0001047469-99-037885) made pursuant to Section 30(b) of the
1940 Act and Rule 30b2-1 thereunder. The financial reports are available without
charge upon request by calling J.P. Morgan Funds Services at (800) 521-5411. The
Fund's financial statements include the financial statements of the Portfolio.

<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.

<PAGE>

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.

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.

A-2 - This designation indicates that the degree of safety regarding timely
payment is satisfactory.

A-3 - This designation indicates that the degree of safety regarding timely
payment is adequate.

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.

<PAGE>

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.

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.

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

Prime-1 - Issuers rated Prime-1 (or related supporting institutions)
have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on Portfolios 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.

<PAGE>

Prime-2 Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.

Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings
and profitability may result in changes in the level of debt
protection measurements and may require relatively high
financial leverage.
Adequate alternate liquidity is maintained.

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 Portfolios 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.

<PAGE>

J.P. MORGAN INSTITUTIONAL FUNDS

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

STATEMENT OF ADDITIONAL INFORMATION

DECEMBER 1, 1999

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS DATED DECEMBER 1, 1999, 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
FUND DATED JULY 31, 1999. THE PROSPECTUS AND THESE FINANCIAL STATEMENTS,
INCLUDING THE INDEPENDENT ACCOUNTANTS' 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 . . . . . . . . . . . . . . . 31
Services Agent . . . . . . . . . . . . . . . . 32
Custodian and Transfer Agent . . . . . . . . . 32
Shareholder Servicing . . . . . . . . . . . . 33
Financial Professionals . . . . . . . . . . . . 34
Independent Accountants . . . . . . . . . . . 34
Expenses . . . . . . . . . . . . . . . . . . . 34
Purchase of Shares . . . . . . . . . . . . . . 35
Redemption of Shares . . . . . . . . . . . . . 36
Exchange of Shares . . . . . . . . . . . . . . 36
Dividends and Distributions . . . . . . . . . 37
Net Asset Value . . . . . . . . . . . . . . . 37
Performance Data . . . . . . . . . . . . . . . 38
Portfolio Transactions . . . . . . . . . . . . 40
Massachusetts Trust . . . . . . . . . . . . . 41
Description of Shares . . . . . . . . . . . . 42
Special Information Concerning Investment
Structure. . . . . . . . . . . . . . . . . . 44
Taxes . . . . . . . . . . . . . . . . . . . . 45
Additional Information . . . . . . . . . . . 48
Financial Statements . . . . . . . . . . . . . 49
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.

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."

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

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. Since the investment characteristics and expenses of the Fund
correspond directly with those of the Portfolio, the discussion in the Statement
of Additional Information focuses on the investments and investment policies of
the Portfolio. 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 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

<PAGE>

New York income tax. In certain circumstances, the Fund may invest in
taxable debt obligations to the extent consistent with its objective.

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 Portfolio 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
Portfolio 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

<PAGE>

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". 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 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

<PAGE>

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 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>

Premium Securities. During a period of declining interest rates, many
municipal securities in which the Fund invests likely will bear coupon rates
higher than current market rates, regardless of whether the securities were
initially purchased at a premium. In general, such securities have market 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

<PAGE>

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
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>

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 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 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

<PAGE>

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
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.

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 and are
organized under the laws of the United States or any state, (ii) foreign
branches of these banks of equivalent size (Euros) and (iii) U.S. branches of
foreign banks of equivalent size (Yankees). The Fund may not invest in
obligations of foreign branches of foreign banks. The Fund will not invest in
obligations for which the Advisor, or any of its affiliated persons, is the
ultimate obligor or accepting bank.

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.

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

<PAGE>

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 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.

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

<PAGE>

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 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, 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 the Fund to be magnified.
The Fund will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, except for liquidity purposes, the Fund will enter into
a reverse repurchase agreement only when the expected return from the investment
of the proceeds is greater than the 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

<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 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 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

<PAGE>

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 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 commercial paper, bank obligation, repurchase
agreement, or any other money market instruments, the investment must have
received a short term rating of investment grade or better (currently Prime-3 or
better by Moody's or A-3 or better by Standard & Poor's) or the investment must
have been issued by an issuer that received a short term investment grade rating
or better with respect to a class of investments or any investment within that
class that is comparable in priority and security with the investment being
purchased by the Fund. If no such ratings exists, the investment must be of
comparable

<PAGE>

investment quality in the Advisor's opinion, but will not be eligible
for purchase if the issuer or its parent has long term outstanding debt rated
below BBB.

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.

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 and risk
management purposes. The Fund 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

<PAGE>

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.

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, 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.

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

<PAGE>

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).

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.

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.

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

<PAGE>

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.

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 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

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

<PAGE>

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.

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.

<PAGE>

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.

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 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.)

<PAGE>

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.

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").

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 a Fund may be required to pay.

<PAGE>

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 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 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.

<PAGE>

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.

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 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

<PAGE>

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.

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's turnover rates for the fiscal years ended March 31,
1997, 1998, 1999 and for the four months ended July 31, 1999 were 35%, 51%, 44%
and 8%. 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 below have been adopted by the Fund and
Portfolio. Except where otherwise noted, these investment restrictions are

<PAGE>

"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.

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;

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:

<PAGE>

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.

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.

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. Former 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.

<PAGE>

MATTHEW HEALEY1 - 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.

- --------
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 affiliation with JPMIM. 2 The fund's inception date was
April 11, 1994, commencement of investment operations was April 15, 1994.

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.

Trustee compensation expenses paid by the Trust for the calendar year
ended December 31, 1998 are set forth below.

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

$20,055 $75,000
Frederick S. Addy, Trustee
- -------------------------------- -------------------- --------------------------
- -------------------------------- -------------------- --------------------------

William G. Burns, Trustee $20,055 $75,000
- -------------------------------- -------------------- --------------------------
- -------------------------------- -------------------- --------------------------

Arthur C. Eschenlauer, Trustee $20,055 $75,000
- -------------------------------- -------------------- --------------------------
- -------------------------------- -------------------- --------------------------

Matthew Healey, Trustee(***), $20,055 $75,000
Chairman and Chief Executive
Officer
- -------------------------------- -------------------- --------------------------
- -------------------------------- -------------------- --------------------------

Michael P. Mallardi, Trustee $20,055 $75,000
- -------------------------------- -------------------- --------------------------

(*) Includes the Portfolio and 18 other Portfolios (collectively the "Master
Portfolios") for which JPMIM acts as investment adviser.

<PAGE>

(**) No investment company within the fund complex has a pension or retirement
plan. Currently there are 17 investment companies (14 investment companies
comprising the Master Portfolios, the Trust, the J.P. Morgan Funds and J.P.
Morgan Series Trust) in the fund complex.

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, 1997, 1998, 1999 and for the
four months ended July 31, 1999: $2,907, $3,447, $4,066 and $1,428,
respectively.

Portfolio -- For the fiscal years ended March 31, 1997, 1998, 1999 and for
the four months ended July 31, 1999: $5,302, $5,740, $6,630 and $2,300,
respectively.

Officers

<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.

<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.

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 benchmark for the Portfolio in which the Fund
invests is currently: Lehman Brothers 1-16 Year Municipal Bond Index.

<PAGE>

For the fiscal years ended March 31, 1997, 1998, 1999 and for the four
months ended July 31, 1999, the advisory fees paid by the Portfolio were
$380,380, $513,516, $796,521 and $298,444, respectively.

DISTRIBUTOR

<PAGE>

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.

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 years ended March 31, 1998, 1999 and for the four months ended July
31, 1999: $2,809, $2,990 and $882, respectively.

<PAGE>

Portfolio -- For the period August 1, 1996 through March 31, 1997: $1,914. For
the fiscal years ended March 31, 1998, 1999 and for the four months ended July
31, 1999: $2,869, $3,052 and $880, respectively.

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, 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.

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.

The table below sets forth for the Fund and the Portfolio the fees
paid to Morgan as Services Agent.

<PAGE>

Fund -- For the fiscal years ended March 31, 1997, 1998, 1999 and for the
four months ended July 31, 1999: $21,188, $31,005, $45,134 and $15,661,
respectively.

Portfolio -- For the fiscal years ended March 31, 1997, 1998, 1999 and for
the four months ended July 31, 1999: $37,675, $52,013, $73,366 and $25,575,
respectively.

CUSTODIAN AND TRANSFER AGENT

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; monitoring the activities of the Fund's transfer agent; and
providing other related services.

The shareholder servicing fees paid by the Fund to Morgan for the
fiscal years ended March 31, 1997, 1998, 1999 and for the four months ended July
31, 1999: $53,364, $76,492, $152,227 and $60,929, respectively.

<PAGE>

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.

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.

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.

<PAGE>

INDEPENDENT ACCOUNTANTS

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
customary expenses described above (excluding organization and extraordinary
expenses, custodian fees and brokerage expenses).

J.P. Morgan has agreed that it will reimburse the Fund until November
28, 2000, as described in the Prospectus, 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.

The table below sets forth for the Fund the fees and other expenses
J.P. Morgan reimbursed under the expense reimbursement arrangement described
above or pursuant to prior expense reimbursement arrangement for the fiscal
periods indicated.

Fund -- For the fiscal years ended March 31, 1997, 1998, 1999 and for the
four months ended July 31, 1999: $100,739, $90,130, $110,632 and $57,604,
respectively.

Portfolio -- For the fiscal years ended March 31, 1997, 1998, 1999 and for
the four months ended July 31, 1999: N/A, N/A, N/A and N/A, respectively.

PURCHASE OF SHARES

<PAGE>

minimum 60 days after notification, the Fund reserves the right to
close out your account and send the proceeds to the address of record.

Method of Purchase. 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 J.P. Morgan or a Financial
Professional include customers of their affiliates and references to
transactions by customers with J.P. 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 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.

<PAGE>

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 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. The Funds generally intend to pay
redemption proceeds in cash, however, since they reserve the right at their sole
discretion to pay redemptions over $250,000 in-kind as a portfolio of
representative stocks rather than in cash, each Fund reserves the right to deny
an exchange request in excess of that amount. See "Redemption of Shares".
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.

<PAGE>

Each Fund reserves the right to discontinue, alter or limit the
automatic reinvestment privilege at any time.

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 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.

The Fund values securities that are listed on an exchange using prices
supplied daily by an independent pricing service that are based on the last
traded price on a national securities exchange or in the absence of recorded
trades, at the readily available mean of the bid and asked prices on such
exchange, if such exchange or market constitutes the broadest and most
representative market for the security. Securities listed on a foreign exchange
are valued at the last traded price or, in the absence of recorded trades, at
the readily available mean of the bid and asked prices on such exchange
available before the time when net assets are valued. Independent pricing
service procedures may also include the use of prices based on yields or prices
of securities of comparable quality, coupon, maturity and type, indications as
to values from dealer, operating data, and general market conditions. Unlisted
securities may be valued at the quoted bid price in the over-the-counter market
provided by a principal market maker or dealer. If prices are not supplied by
the portfolio's independent pricing service or principal market maker or dealer,
such securities are priced using fair values in accordance with procedures
adopted by the portfolio's Trustees. All short-term securities with a remaining
maturity of sixty days or less are valued by the amortized cost method.

PERFORMANCE DATA

<PAGE>

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 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 historical yield information for the Fund at July 31, 1999: 30-day
yield: 4.34%; 30-day tax equivalent yield at 39.6% tax rate: 7.19%.

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.

The historical return information for the Fund at July 31, 1999: Average
annual total return, 1 year: 2.70%; average annual total return, 5 years: 5.62%;
average annual total return, commencement of investment operations2

<PAGE>

(April 15, 1994) to period end: 5.69%; aggregate total return, 1 year:
2.70%; aggregate total return, 5 years: 31.45%; aggregate total return,
commencement of investment operations (April 15, 1994) to period end: 34.02%.

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 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."

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."

<PAGE>

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.

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.

<PAGE>

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

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.

DESCRIPTION OF SHARES

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). 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

<PAGE>

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.

<PAGE>

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 authorized the issuance and sale to the public of
shares of 22 series of the 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 October 31, 1999, the following owned of record or, to the knowledge
of management, beneficially owned more than 5% of the outstanding shares of the
Fund:

Charles Schwab & Co., Inc. FBO Customers (10.34%); Morgan as
Agent for Trust of LHP Klotz FBO R Klotz (9.28%); Morgan as Agent
for G. Attfield and A. Hubbard (8.03%); and Morgan as Agent for
G. Attfield and A. Hubbard (7.73%).

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.

<PAGE>

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 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.

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 following discussion of tax consequences is based on U.S. federal
tax laws in effect on the date of this Statement of Additional Information.

<PAGE>

These laws and regulations are subject to change by legislative or
administrative action, possibly on a retroactive basis.

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).

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 (other than the
alternative minimum tax under certain circumstances). 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. 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.

<PAGE>

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 20% rate of tax.

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 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.

<PAGE>

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.

Other Taxation. The Trust is organized as a Massachusetts business
trust and, under current law, neither the Trust nor the Fund is liable for any
income or franchise tax in The Commonwealth of Massachusetts, provided that 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 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.

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.

<PAGE>

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

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 has substantially completed
renovation, testing, and validation of its key systems and is preparing 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. For potential failure
scenarios where the risks are deemed significant and where such risk is
considered to have a higher probability of occurrence, J.P. Morgan is attempting
to develop business recovery/contingency plans. These plans will define the
infrastructure that should be put in place for managing a failure during the
millennium event itself.

<PAGE>

FINANCIAL STATEMENTS

The financial statements and the report thereon of
PricewaterhouseCoopers LLP are incorporated herein by reference to the Fund's
July 31, 1999 annual report filing made with the SEC on October 4, 1999 pursuant
to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder (Accession Number
0001047469-99-037583). 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.

<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.

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.

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Commercial Paper, including Tax Exempt

A-1 - This designation indicates that the degree of safety regarding timely
payment is very strong.

A-2 - This designation indicates that the degree of safety regarding timely
payment is satisfactory.

A-3 - This designation indicates that the degree of safety regarding timely
payment is adequate.

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

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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.

Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.

<PAGE>

Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations.
The effect of industry characteristics and market compositions may
be more pronounced. Variability in earnings and profitability may
result in changes in the level of debt protection measurements and
may require relatively high financial leverage. Adequate alternate
liquidity is maintained.

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.

<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 Annual Information
Statement of the State of New York dated June 26, 1998 and a supplement thereto
dated November 4, 1998. 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

<PAGE>

State output. Principal agricultural products of the State include milk
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.

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

Economic growth during both 1998 and 1999 is expected to be slower than
it was during 1997. The financial and economic turmoil which started in Asia and
has spread to other parts of the world is expected to continue to negatively
affect U.S. trade balances throughout most of 1999. In addition, growth in
domestic consumption, which has been a major driving force behind the nation's
strong economic performance in recent years, is expected to slow in 1999 as
consumer confidence retreats from historic highs and the stock market ceases to
provide large amounts of extra discretionary income. However, the lower
short-term interest rates which are expected to be in force during 1999 should
help prevent a recession. The revised forecast projects real GDP growth of 3.4
percent in 1998, moderately below the 1997 growth rate. In 1999, real GDP growth
is expected to fall further, to 1.6 percent. The growth of nominal GDP is
projected to decline from 5.9 percent in 1997 to 4.6 percent in 1998 and 3.7
percent in 1999. The inflation rate is expected to drop to 1.7 percent in 1998
before rising to 2.7 percent in 1999. The annual rate of job growth is expected
to be 2.5 percent in 1998, almost equaling the strong growth rate experienced in
1997. In 1999, however, employment growth is forecast to slow markedly, to 1.9
percent. Growth in personal income and wages is expected to slow in 1998 and
again in 1999.

State Economy

Continued growth is projected in 1998 and 1999 for employment, wages,
and personal income, although, for 1999, a significant slowdown in the growth
rates of personal income and wages are expected. The growth of personal income
is projected to rise from 4.7 percent in 1997 to 5.0 percent in 1998, but then
drop to 3.4 percent in 1999, in part because growth in bonus payments is
expected to moderate significantly, a distinct shift from the unusually high
increases of the last few years. Overall employment growth is expected to be 2.0
percent in 1998, the strongest in a decade, but is expected to drop to 1.0
percent in 1999, reflecting the slowing growth of the national economy,
continued spending restraint in government, less robust profitability in the

<PAGE>

financial sector and continued restructuring in the manufacturing, health
care, and banking sectors.

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.

1998-99 Fiscal Year

The State's current fiscal year began on April 1, 1998 and ends on
March 31, 1999 and is referred to herein as the State's 1998-99 fiscal year. The
Legislature adopted the debt service component of the State budget for the
1998-99 fiscal year on March 30, 1998 and the remainder of the budget on April
18, 1998. In the period prior to adoption of the budget for the current fiscal
year, the Legislature also enacted appropriations to permit the State to
continue its operations and provide for other purposes. On April 25, 1998, the
Governor vetoed certain items that the Legislature added to the Executive
Budget. The Legislature had not overridden any of the Governor's vetoes as of
the start of the legislative recess on June 19, 1998 (under the State
Constitution, the Legislature can override one or more of the Governor's vetoes
with the approval of two-thirds of the members of each house).

General Fund disbursements in 1998-99 are now projected to grow by
$2.43 billion over 1997-98 levels, or $690 million more than proposed in the
Governor's Executive Budget, as amended. The change in General Fund
disbursements from the Executive Budget to the enacted budget reflects
legislative additions (net of the value of the Governor's vetoes), actions taken
at the end of the regular legislative session, as well as spending that was
originally anticipated to occur in 1997-98 but is now expected to occur in
1998-99. The State projects that the 1998-99 State Financial Plan is balanced on
a cash basis, with an estimated reserve for future needs of $761 million.

The State's enacted budget includes several new multi-year tax
reduction initiatives, including acceleration of State-funded property and local
income tax relief for senior citizens under the School Tax Relief Program
(STAR), expansion of the child care income-tax credit for middle-income
families, a phased-in reduction of the general business tax, and reduction of
several other taxes and fees, including an accelerated phase-out of assessments
on medical providers. The enacted budget also provides for significant increases
in spending for public schools, special education programs, and for the State
and City university systems. It also allocates $50 million for a new Debt
Reduction Reserve Fund (DRRF) that may eventually be used to pay debt service
costs on or to prepay outstanding State-supported bonds.

The 1998-99 State Financial Plan projects a closing balance in the
General Fund of $1.42 billion that is comprised of a reserve of $761 million
available for future needs, a balance of $400 million in the Tax Stabilization
Reserve Fund (TSRF), a balance of $158 million in the Community Projects Fund
(CPF), and a balance of $100 million in the

<PAGE>

Contingency Reserve Fund (CRF). The TSRF can be used in the event of an
unanticipated General Fund cash operating deficit, as provided under the State
Constitution and State Finance Law. The CPF is used to finance various
legislative and executive initiatives. The CRF provides resources to help
finance any extraordinary litigation costs during the fiscal year.

Many complex political, social and economic forces influence the
State's economy and finances, which may in turn affect the State's Financial
Plan. These forces may affect the State unpredictably from fiscal year to fiscal
year and are influenced by governments, institutions, and organizations that are
not subject to the State's control. The State Financial Plan is also necessarily
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 herein, and those projections may be changed materially
and adversely from time to time. See "Special Considerations" below for a
discussion of risks and uncertainties faced by the State.

Second Update (current fiscal year)

On October 30, 1998, the State issued the second of its three quarterly
updates to the 1998-99 Financial Plan. In the Mid-Year Update, the State
continues to project that the State Financial Plan for 1998-99 will remain in
balance. The State now projects total receipts in 1998-99 of $37.84 billion, an
increase of $29 million over the amount projected in the First Quarterly Update.
The State has made no changes to its July disbursement projections, with total
disbursements of $36.78 billion expected for the current fiscal year. The
additional receipts increase the State's projected surplus (reserve for future
needs) by $29 million over the July estimate, to $1.04 billion.

The Financial Plan now projects a closing balance in the General Fund
of $1.7 billion. The balance is comprised of the $1.04 billion reserve for
future needs, $400 million in the Tax Stabilization Reserve Fund, $100 million
in the Contingency Reserve Fund (after a planned deposit of $32 million in
1998-99), and $158 million in the Community Projects Fund.

The State ended the first six months of 1998-99 fiscal year with a
General Fund cash balance of $5.02 billion, roughly $143 million higher than
projected in the cash flow accompanying the July Update to the Financial Plan.
Total receipts, including transfers from other funds, were approximately $52
million higher than expected, with the increase comprised of additional tax
revenues ($22 million) and transfers from other funds ($30 million). Total
spending through the first six months of the fiscal year was $16.28 billion, or
$91 million lower than projected in July. This variance resulted primarily from
higher spending in Grants to Local Governments ($27 million), offset by lower
spending in State Operations ($124 million). These variances are timing-related
and should not affect total disbursements for the fiscal year.

<PAGE>

Outyear Projections Of Receipts And Disbursements

State law requires the Governor to propose a balanced budget each year.
In recent years, the State has closed projected budget gaps of $5.0 billion
(1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than $1
billion (1998-99). The State, as a part of the 1998-99 Executive Budget
projections submitted to the Legislature in February 1998, projected a 1999-00
General Fund budget gap of approximately $1.7 billion and a 2000-01 gap of $3.7
billion. As a result of changes made in the 1998-99 enacted budget, the 1999-00
gap is now expected to be roughly $1.3 billion, or about $400 million less than
previously projected, after application of reserves created as part of the
1998-99 budget process. Such reserves would not be available against subsequent
year imbalances.

Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of
higher-than-projected tax receipts and in lower-than-expected entitlement
spending. However, the State's projections in 1999-00 currently assume actions
to achieve $600 million in lower disbursements and $250 million in additional
receipts from the settlement of State claims against the tobacco industry.
Consistent with past practice, the projections do not include 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. The State
expects that the 1999-00 Financial Plan will achieve savings from initiatives by
State agencies to deliver services more efficiently, workforce management
efforts, maximization of federal and non-General Fund spending offsets, and
other actions necessary to bring projected disbursements and receipts into
balance.

The State will formally update its outyear projections of receipts and
disbursements for the 2000-01 and 2001-02 fiscal years as a part of the 1999-00
Executive Budget process, as required by law. The revised expectations for years
2000-01 and 2001-02 will reflect the cumulative impact of tax reductions and
spending commitments enacted over the last several years as well as new 1999-00
Executive Budget recommendations. The STAR program, which dedicates a portion of
personal income tax receipts to fund school tax reductions, has a significant
impact on General Fund receipts. STAR is projected to reduce personal income tax
revenues available to the General Fund by an estimated $1.3 billion in 2000-01.
Measured from the 1998-99 base, scheduled reductions to estate and gift, sales
and other taxes, reflecting tax cuts enacted in 1997-98 and 1998-99, will lower
General Fund taxes and fees by an estimated $1.8 billion in 2000-01.
Disbursement projections for the outyears currently assume additional outlays
for school aid, Medicaid, welfare reform, mental health community reinvestment,
and other multi-year spending commitments in law. See "Special Considerations"
below for a description of other risks and uncertainties associated with the
State Financial Plan process.

Special Considerations

The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. These 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. Because of the uncertainty and
unpredictability of these factors, their impact

<PAGE>

cannot, as a practical matter, be included in the assumptions
underlying the State's projections at this time.

The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of State
and national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, the extent of
corporate and governmental restructuring, the condition of the financial sector,
federal fiscal and monetary policies, the level of interest rates, and the
condition of the world economy, which could have an adverse effect on the State.
There can be no assurance that the State economy will not experience results in
the current fiscal year that are worse than predicted, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.

Projections of total State receipts in the Financial Plan are based on
the State tax structure in effect during the fiscal year and on assumptions
relating to basic economic factors and their historical relationships to State
tax receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or revenue
sources is generally made by estimating the change in yield of such tax or
revenue source caused by economic and other factors, rather than by estimating
the total yield of such tax or revenue source from its estimated tax base. The
forecasting methodology, however, ensures that State fiscal year collection
estimates for taxes that are based on a computation of annual liability, such as
the business and personal income taxes, are consistent with estimates of total
liability under such taxes.

Projections of total State disbursements are based on assumptions
relating to economic and demographic factors, levels of disbursements for
various services provided by local governments (where the cost is partially
reimbursed by the State), and the results of various administrative and
statutory mechanisms in controlling disbursements for State operations. Factors
that may affect the level of disbursements in the fiscal year include
uncertainties relating to the economy of the nation and the State, the policies
of the federal government, and changes in the demand for and use of State
services.

An additional risk to the State Financial Plan arises from the
potential impact of certain litigation and of federal disallowances now pending
against the State, which could adversely affect the State's projections of
receipts and disbursements. The State Financial Plan assumes no significant
litigation or federal disallowance or other federal actions that could affect
State finances, but has significant reserves in the event of such an action.

The Division of the 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 herein. In
the past, the State has taken management actions to address potential Financial
Plan shortfalls, and DOB believes it could take similar actions should variances
occur in its projections for the current fiscal year.

<PAGE>

Despite recent budgetary surpluses recorded by the State, actions
affecting the level of receipts and disbursements, the relative strength of the
State and regional economy, and actions by the federal government have helped to
create projected structural budget gaps for the State. These gaps result from a
significant disparity between recurring revenues and the costs of maintaining or
increasing the level of support for State programs. To address a potential
imbalance in any given fiscal year, the State would be required to take actions
to increase receipts and/or or reduce disbursements as it enacts the budget for
that year, and, under the State Constitution, the Governor is required to
propose a balanced budget each year. There can be no assurance, however, that
the Legislature will enact the Governor's proposals or that the State's actions
will be sufficient to preserve budgetary balance in a given fiscal year or to
align recurring receipts and disbursements in future fiscal years. For example,
the fiscal effects of tax reductions adopted in the last several fiscal years
(including 1998-99) are projected to grow more substantially beyond the 1998-99
fiscal year, with the incremental annual cost of all currently enacted tax
reductions estimated at over $4 billion by the time they are fully effective in
State fiscal year 2002-03. These actions will place pressure on future budget
balance in New York State.

1998-99 State Financial Plan

Four governmental fund types comprise the State Financial Plan: the General
Fund, the Special Revenue Funds, the Capital Projects Funds, and the Debt
Service Funds.

General Fund

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
almost all State taxes and other resources not dedicated to particular purposes.
In the State's 1998-99 fiscal year, the General Fund is expected to account for
approximately 47.6 percent of all Governmental Funds disbursements and 70.1
percent of total State Funds disbursements. General Fund moneys are also
transferred to other funds, primarily to support certain capital projects and
debt service payments in other fund types. Total receipts and transfers from
other funds are projected to be $37.56 billion, an increase of $3.01 billion
from the 1997-98 fiscal year. Total General Fund disbursements and transfers to
other funds are projected to be $36.78 billion, an increase of $2.43 billion
from the 1997-98 fiscal year.

Projected General Fund Receipts

Total General Fund receipts in 1998-99 are projected to be $37.56
billion, an increase of over $3 billion from the $34.55 billion recorded in
1997-98. This total includes $34.36 billion in tax receipts, $1.40 billion in
miscellaneous receipts, and $1.80 billion in transfers from other funds.

The transfer of a portion of the surplus recorded in 1997-98 to 1998-99
exaggerates the "real" growth in State receipts from year to year by depressing
reported 1997-98 figures and inflating 1998-99 projections. Conversely, the
incremental cost of tax reductions newly effective in 1998-99 and the impact of
statutes earmarking certain tax

<PAGE>

receipts to other funds work to depress apparent growth below the
underlying growth in receipts attributable to expansion of the State's economy.
On an adjusted basis, State tax revenues in the 1998-99 fiscal year are
projected to grow at approximately 7.5 percent, following an adjusted growth of
roughly nine percent in the 1997-98 fiscal year. The discussion below summarizes
the State's projections of General Fund taxes and other revenues for the 1998-99
Fiscal year.

The Personal Income Tax is imposed on the income of individuals,
estates and trusts and is based with certain modifications on federal
definitions of income and deductions. This tax continues to account for over
half of the State's General Fund receipts base. Net personal income tax
collections are projected to reach $21.24 billion, nearly $3.5 billion above the
reported 1997-98 collection total. Since 1997 represented the completion of the
20 percent income tax reduction program enacted in 1995, growth from 1997 to
1998 will be unaffected by major income tax reductions. Adding to the projected
annual growth is the net impact of the transfer of the surplus from 1997-98 to
the current year which affects reported collections by over $2.4 billion on a
year-over-year basis, as partially offset by the diversion of slightly over $700
million in income tax receipts to the STAR fund to finance the initial year of
the school tax reduction program. The STAR program was enacted in 1997 to
increase the State share of school funding and reduce residential school taxes.
Adjusted for these transactions, the growth in net income tax receipts is
roughly $1.7 billion, an increase of over 9 percent. This growth is largely a
function of over 8 percent growth in income tax liability projected for 1998 as
well as the impact of the 1997 tax year settlement on 1998-99 net collections.

User taxes and fees are comprised of three-quarters of the State four
percent sales and use tax (the balance, one percent, flows to support Local
Government Assistance Corporation (LGAC) debt service requirements), cigarette,
alcoholic beverage, container, and auto rental taxes, and a portion of the motor
fuel excise levies. Also included in this category are receipts from the motor
vehicle registration fees and alcoholic beverage license fees. A portion of the
motor fuel tax and motor vehicle registration fees and all of the highway use
tax are earmarked for dedicated transportation funds.

Receipts from user taxes and fees are projected to total $7.14 billion,
an increase of $107 million from reported collections in the prior year. The
sales tax component of this category accounts for all of the 1998-99 growth, as
receipts from all other sources decline $100 million. The growth in yield of the
sales tax in 1998-99, after adjusting for tax law and other changes, is
projected at 4.7 percent. The yields of most of the excise taxes in this
category show a long-term declining trend, particularly cigarette and alcoholic
beverage taxes. These General Fund declines are exacerbated in 1998-99 by
revenue losses from scheduled and newly enacted tax reductions, and by an
increase in earmarking of motor vehicle registration fees to the Dedicated
Highway and Bridge Trust Fund.

Business taxes include franchise taxes based generally on net income of
general business, bank and insurance corporations, as well as
gross-receipts-based taxes on utilities and gallonage-based petroleum business
taxes. Beginning in 1994, a 15 percent surcharge on these levies began to be
phased out and, for most taxpayers, there is no surcharge liability for taxable
periods ending in 1997 and thereafter.

<PAGE>

Total business tax collections in 1998-99 are now projected to be $4.96
billion, $91 million less than received in the prior fiscal year. The category
includes receipts from the largely income-based levies on general business
corporations, banks and insurance companies, gross receipts taxes on energy and
telecommunication service providers and a per-gallon imposition on petroleum
business. The year-over-year decline in projected receipts in this category is
largely attributable to statutory changes between the two years. These include
the first year of utility-tax rate cuts and the Power for Jobs tax reduction
program for energy providers, and the scheduled additional diversion of General
Fund petroleum business and utility tax receipts to other funds. In addition,
profit growth is also expected to slow in 1998.

Other taxes include estate, gift and real estate transfer taxes, a tax
on gains from the sale or transfer of certain real estate (this tax was repealed
in 1996), a pari-mutuel tax and other minor levies. They are now projected to
total $1.02 billion -- $75 million below last year's amount. Two factors account
for a significant part of the expected decline in collections from this
category. First, the effects of the elimination of the real property gains tax
collections; second, a decline in estate tax receipts, following the explosive
growth recorded in 1997-98, when receipts expanded by over 16 percent.

Miscellaneous receipts include investment income, abandoned property
receipts, medical provider assessments, minor federal grants, receipts from
public authorities, and certain other license and fee revenues. Total
miscellaneous receipts are projected to reach $1.40 billion, down almost $200
million from the prior year, reflecting the loss of non-recurring receipts in
1997-98 and the growing effects of the phase-out of the medical provider
assessments.

Transfers from other funds to the General Fund consist primarily of tax
revenues in excess of debt service requirements, particularly the one percent
sales tax used to support payments to LGAC. Transfers from other funds are
expected to total $1.8 billion, or $222 million less than total receipts from
this category during 1997-98. Total transfers of sales taxes in excess of LGAC
debt service requirements are expected to increase by approximately $51 million,
while transfers from all other funds are expected to fall by $273 million,
primarily reflecting the absence, in 1998-99, of a one-time transfer of nearly
$200 million for retroactive reimbursement of certain social services claims
from the federal government.

Projected General Fund Disbursements

General Fund disbursements in 1998-99, including transfers to support
capital projects, debt service and other funds are estimated at $36.78 billion.
This represents an increase of $2.43 billion or 7.1 percent from 1997-98. Nearly
one-half of the growth is for educational purposes, reflecting increased support
for public schools, special education programs and the State and City university
systems. The remaining increase is primarily for Medicaid, mental hygiene, and
other health and social welfare programs, including children and family
services. The 1998-99 Financial Plan also includes funds for the current
negotiated salary increases for State employees, as well as increased transfers
for debt service.

Grants to Local Governments is the largest category of General Fund
disbursements and includes financial assistance to local governments and
not-for-profit corporations, as well as entitlement

<PAGE>

benefits to individuals. The 1998-99 Financial Plan projects spending
of $25.14 billion in this category, an increase of $1.88 billion or 8.1 percent
over the prior year. The largest annual increases are for educational programs,
Medicaid, other health and social welfare programs, and community projects
grants.

The 1998-99 budget provides $9.65 billion in support of public schools.
The year-to-year increase of $769 million is comprised of partial funding for a
1998-99 school year increase of $847 million as well as the remainder of the
1997-98 school year increase that occurs in State fiscal year 1998-99. Spending
for all other educational programs, which includes the State and City university
systems, the Tuition Assistance Programs, and handicapped programs, is estimated
at $3.00 billion, an increase of $270 million over 1997-98 levels.

Medicaid costs are estimated at $5.60 billion, an increase of $144
million from the prior year. After adjusting 1997-98 for the $116 million
prepayment of an additional Medicaid cycle, Medicaid spending is projected to
increase $260 million or 4.9 percent. Disbursements for all other health and
social welfare programs are projected to total $3.63 billion, an increase of
$131 million from 1997-98. This includes an increase in support for children and
families and local public health programs, offset by a decline in welfare
spending of $75 million that reflects continuing State and local efforts to
reduce welfare fraud, declining caseloads, and the impact of State and federal
welfare reform legislation.

Remaining disbursements primarily support community-based mental
hygiene programs, community and public health programs, local transportation
programs, and revenue sharing payments to local governments. Revenue sharing and
other general purpose aid to local governments are projected at $837 million, an
increase of approximately $37 million from 1997-98.

State operations spending reflects the administrative costs of
operating the State's agencies, including the prison system, mental hygiene
institutions, the State University system (SUNY), the Legislature, and the court
system. Personal service costs account for approximately 73 percent of spending
in this category. Since January 1995, the State's workforce has been reduced by
about 10 percent and is projected to remain at its current level of
approximately 191,000 persons in 1998-99.

State operations spending is projected at $6.70 billion, an increase of
$511 million of 8.3 percent from the prior year. This increase is primarily due
to an additional payroll cycle in 1998-99, a 3.5 percent general salary increase
on October 1, 1998 for most State employees, the loss of federal receipts that
would otherwise lower General Fund spending in mental hygiene programs, and a
projected 15.6 percent increase in the Judiciary's budget.

General State charges account primarily for the costs of providing
fringe benefits for State employees, including contributions to pension systems,
the employer's share of social security contributions, employer contributions
toward the cost of health insurance, and the costs of providing worker's
compensation and unemployment insurance benefits. This category also reflects
certain fixed costs such as payments in lieu of taxes, and payments of judgments
against the State or its public officers.

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Disbursements in this category are estimated at $2.22 billion, a
decrease of $50 million from the prior year. This annual decline reflects
projected decreases in pension costs and Court of Claims payments, offset by
modest 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 Fund sources.

Debt service paid from the General Fund reflects debt service on
short-term obligations of the State, and includes only interest costs on the
State's commercial paper program. The 1998-99 debt service estimate is $11
million, reflecting relative stability in short-term interest rates. The State's
short-term TRAN borrowing program was eliminated in 1995.

Transfers to other funds from the General Fund are made primarily to
finance certain portions of State capital projects spending and debt service on
long-term bonds where these costs are not funded from other sources.

Transfers in support of debt service are projected at $2.13 billion in
1998-99, an increase of $110 million from 1997-98. The increase reflects the
impact of certain prior year bond sales (net of refunding savings), and certain
bond sales planned to occur during the 1998-99 fiscal year. The State Financial
Plan also establishes a transfer of $50 million to the new Debt Reduction
Reserve Fund. The Fund may be used, subject to enactment of new appropriations,
to pay the debt service costs on or to prepay State-supported bonds.

Transfers in support of capital projects provide General Fund support
for projects not otherwise financed through bond proceeds, dedicated taxes and
other revenues, or federal grants. These transfers are projected at $200 million
for 1998-99, comparable to last year.

Remaining transfers from the General Fund to other funds are estimated
to decline $59 million in 1998-99 to $327 million. This decline is primarily the
net impact of one-time transfers in 1997-98 to the State University Tuition
Stabilization Fund and to the Lottery Fund to support school aid, offset by a
1998-99 increase in the State subsidy to the Roswell Park Cancer Research
Institute.

Non-recurring Resources

The Division of the Budget estimates that the 1998-99 State Financial
Plan contains actions that provide non-recurring resources or savings totaling
approximately $64 million, the largest of which is a retroactive reimbursement
of federal welfare claims.

The 1998-99 Financial Plan projects a closing fund balance in the
General Fund of $1.42 billion. This fund balance is composed of a reserve of
$761 million available for future needs, a $400 million balance in the TSRF, a
$158 million balance in the CPF, and a balance of $100 million in the CRF, after
a projected deposit of $32 million in 1998-99.

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Other Governmental Funds

In addition to the General Fund, the State Financial Plan includes
Special Revenue Funds, Capital Projects Funds and Debt Service Funds which are
discussed below. Amounts below do not include other sources and uses of funds
transferred to or from other fund types.

Special Revenue Funds

Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes.
Although activity in this fund type is expected to comprise approximately 41
percent of total governmental funds receipts in the 1998-99 fiscal year,
three-quarters of that activity relates to federally-funded programs.

Total disbursements for programs supported by Special Revenue Funds are
projected at $29.97 billion, an increase of $2.32 billion or 8.4 percent from
1997-98. Federal grants account for approximately three-quarters of all spending
in the Special Revenue fund type. Disbursements from federal funds are estimated
at $21.78 billion, an increase of $1.12 billion or 5.4 percent. The single
largest program in this fund group is Medicaid, which is projected at $13.65
billion, an increase of $465 million or 3.5 percent above last year. Federal
support for welfare programs is projected at $2.53 billion, similar to 1997-98.
The remaining growth in federal funds is primarily due to the new Child Health
Plus program, estimated at $197 million in 1998-99. This program will expand
health insurance coverage to children of indigent families.

State special revenue spending is projected to be $8.19 billion, an
increase of $1.20 billion or 17.2 percent from last year's levels. Most of this
projected increase in spending is due to the $704 million cost of the first
phase of the STAR program, as well as $231 million in additional operating
assistance for mass transportation, and $113 million for the State share of the
new Child Health Plus program.

Capital Projects Funds

Capital Projects Funds account for the financial resources used in the
acquisition, construction, or rehabilitation of major State capital facilities,
and for capital assistance grants to certain local governments or public
authorities. This fund type consists of the Capital Projects Fund, which is
supported by tax receipts transferred from the General Fund, and various other
capital funds established to distinguish specific capital construction purposes
supported by other revenues. In the 1998-99 fiscal year, activity in these funds
is expected to comprise 5.5 percent of total governmental receipts.

Capital Projects Funds spending in fiscal year 1998-99 is projected at
$4.14 billion, an increase of $575 million or 16.1 percent from last year. The
major components of this expected growth are transportation and environmental
programs, including continued increased spending for 1996 Clean Water/Clean Air
Bond Act projects and higher projected disbursements from the Environmental
Protection Fund (EPF). Another significant component of this projected increase
is in the area of public protection, primarily for facility rehabilitation and
construction of additional prison capacity.

<PAGE>

Debt Service Funds

Debt Service Funds are used to account for the payment of principal and
interest on long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements. This
fund type is expected to comprise 3.8 percent of total governmental fund
receipts in the 1998-99 fiscal year. Receipts in these funds in excess of debt
service requirements may be transferred to the General Fund, Capital Projects
Funds and Special Revenue Funds, pursuant to law.

Total disbursements form the Debt Service Fund type are estimated at
$3.36 billion in 1998-99, an increase of $275 million or 8.9 percent from
1997-98 levels. Of the increase, $102 million is for transportation purposes,
including debt service on bonds issued for State and local highway and bridge
programs financed through the New York State Thruway Authority and supported by
the Dedicated Highway and Bridge Trust Fund. Another $45 million is for
education purposes, including State and City University programs financed
through the Dormitory Authority of the State of New York (DASNY). The remainder
is for a variety of programs in such areas as mental health and corrections, and
for general obligation financings.

Year 2000 Compliance

New York State is currently addressing "Year 2000" data processing
compliance issues. The Year 2000 compliance issue ("Y2K") arises because most
computer software programs allocate two digits to the data field for "year" on
the assumption that the first two digits will be "19." Such programs will thus
interpret the year 2000 as the year 1900 absent reprogramming. Y2K could impact
both the ability to enter data into computer programs and the ability of such
programs to correctly process data.

In 1996, the State created the Office for Technology (OFT) to help
address statewide technology issues, including the Year 2000 issue. OFT has
estimated that investments of at least $140 million will be required to bring
approximately 350 State mission-critical and high-priority computer systems not
otherwise scheduled for replacement into Year 2000 compliance, and the State is
planning to spend $100 million in the 1998-99 fiscal year for this purpose.
Mission-critical computer applications are those which impact the health, safety
and welfare of the State and its citizens, and for which failure to be in Y2K
compliance could have a material and adverse impact upon State operations.
High-priority computer applications are those that are critical for a State
agency to fulfill its mission and deliver services, but for which they are
manual alternatives. Work has been completed on roughly 20 percent of these
systems. All remaining unfinished mission-critical and high-priority systems
have at least 40 percent or more of the work completed. Contingency planning is
underway for those systems which may be non-compliant prior to failure dates.
The enacted budget also continues funding for major systems scheduled for
replacement, including the State payroll, civil service, tax and finance and
welfare management systems, for which Year 2000 compliance is included as a part
of the project.

OFT is monitoring compliance on a quarterly basis and is providing
assistance and assigning resources to accelerate compliance for mission-critical
systems, with most compliance testing expected to be completed by mid-1999.
There can be no guarantee, however, that all of the State's mission-critical and
high-priority computer systems will be Year

<PAGE>

2000 compliant and that there will not be an adverse impact upon State
operations or State finances as a result.

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 1995-96 through 1997-98

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.

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 six fiscal years, however, the State has recorded
balanced budgets on a cash basis, with positive fund balances as described
below.

1997-98 Fiscal Year

The State ended its 1997-98 fiscal year in balance on a cash basis,
with a General Fund cash surplus as reported by DOB of approximately $2.04
billion. The cash surplus was derived primarily from higher-than-anticipated
receipts and lower spending on welfare, Medicaid, and other entitlement
programs.

The General Fund had a closing balance of $638 million, an increase of
$205 million from the prior fiscal year. The balance is held in three accounts
within the General Fund: the Tax Stabilization Reserve Fund (TSRF), the
Contingency Reserve Fund (CRF) and the Community Projects Fund (CPF). The TSRF
closing balance was $400 million, following a required deposit of $15 million
(repaying a transfer made in 1991-92) and an extraordinary deposit of $68
million made from the 1997-98 surplus. The CRF closing balance was $68 million,
following a $27 million deposit from the surplus. The CPF, which finances
legislative initiatives, closed the fiscal year with a balance of $170 million,
an increase of $95 million. The General Fund closing balance did not include
$2.39 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 on March 31, 1998.

General Fund receipts and transfers from other funds for the 1997-98
fiscal year (including net tax refund reserve account activity) totaled $34.55
billion, an annual increase of $1.51 billion, or 4.57 percent over 1996-97.
General Fund disbursements and transfers to other funds were $34.35 billion, an
annual increase of $1.45 billion or 4.41 percent.

<PAGE>

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 $1.42 billion. The cash surplus was derived primarily from
higher-than-expected receipts and lower-than-expected spending for social
services programs.

The General Fund closing balance was $433 million, an increase of $146
million from the 1995-96 fiscal year. The balance included $317 million in the
TSRF, after a required deposit of $15 million and an additional deposit of $65
million in 1996-97. In addition, $41 million remained on deposit in the CRF. The
remaining $75 million reflected amounts then on deposit in the Community
Projects Fund. The General Fund closing balance did not include $1.86 billion 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, 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 (including net tax refund reserve account activity). 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. The cash surplus
was derived from higher-than-expected receipts, savings generated through agency
cost controls, and lower-than-expected welfare spending.

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 a $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 did 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.

General Fund receipts and transfers from other funds (including net
refund reserve account activity) 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.

Other Governmental Funds (1995-96 through 1997-98)

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

<PAGE>

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 $26.26
billion to $27.65 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 over the three
year period from $3.97 billion to $3.56 billion 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.

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 costs 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 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 fiscal years 1986-87 through
1996-97 (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. The petitioners did not cross appeal. In Blue
Cross II, by amended judgment dated April 2, 1998, the Supreme Court annulled
the regulation setting the 1996-97 premium rate and directed that all 1996-97
excess malpractice premiums be returned to the payors. The State will not be
obligated in either case to pay moneys to any petitioner.
Adverse determinations would result in refunds from the affected insurers.

<PAGE>

Tax Law

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, alternately, 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 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. The case was argued before the Court of Appeals on March
24, 1998.

Clean Water/Clean Air Bond Act of 1996

In Robert L. Schulz, et al. v. The New York State Executive, et al.
(Supreme Court, Albany County, commenced October 16, 1996), plaintiffs challenge
the enactment of the Clean Water/Clean Air Bond Act of 1996 and its implementing
legislation (1996 Laws of New York, Chapters 412 and 413). Plaintiffs claim,
inter alia, that the Bond Act and its implementing legislation violate
provisions of the State Constitution requiring that such debt be authorized by
law for some single work or purpose distinctly specified therein and forbidding
incorporation of other statutes by reference.

In an opinion dated June 9, 1998, the Court of Appeals affirmed the
July 17, 1997 order of the Appellate Division, Third Department, affirming the
lower court dismissal of this case.

<PAGE>

Line Item Veto

In an action commenced in June 1998 by the Speaker of the Assembly of
the State of New York against the Governor of the State of New York (Silver v.
Pataki, Supreme Court, New York County), the Speaker challenges the Governor's
application of his constitutional line item veto authority to certain portions
of budget bills adopted by the State Legislature contained in Chapters 56, 57
and 58 of the Laws of 1998.

State Programs

Medicaid

Several cases challenge provisions of Chapter 81 of the Laws of 1995 which
alter the nursing home Medicaid reimbursement methodology on and after April 1,
1995. Included are New York State Health Facilities Association, et al. v.
DeBuono, et al., St. Luke's Nursing Center, et al. v. DeBuono, et al., New York
Association of Homes and Services for the Aging v DeBuono et al (three cases),
Healthcare Association of New York State v. DeBuono and Bayberry Nursing Home et
al. v. Pataki, et al. Plaintiffs allege that the changes in methodology have
been adopted in violation of procedural and substantive requirements of State
and federal law.

In a consolidated action commenced in 1992, Medicaid recipients and
home health care providers and organizations challenge promulgation by the State
Department of Social Services (DSS) in June 1992 of a home assessment resource
review instrument (HARRI), which is to be used by DSS to determine eligibility
for and the nature of home care services for Medicaid recipients, and challenge
the policy of DSS of limiting reimbursable hours of service until a patient is
assessed using the HARRI (Dowd, et al. v. Bane, Supreme Court, New York County).

In several cases, plaintiffs seek retroactive claims for reimbursement for
services provided to Medicaid recipients who were also eligible for Medicare
during the period January 1, 1987 to June 2, 1992. Included are Matter of New
York State Radiological Society v. Wing, Appel v. Wing, E.F.S. Medical Supplies
v. Dowling, Kellogg v. Wing, Lifshitz v. Wing, New York State Podiatric Medical
Association v. Wing and New York State Psychiatric Association v. Wing. These
cases were commenced after the State's reimbursement methodology was held
invalid in New York City Health and Hospital Corp. v. Perales. The State
contends that these claims are time-barred. In a judgment dated September 5,
1996, the Supreme Court, Albany County, dismissed Matter of New York State
Radiological Society v. Wing as time-barred. By order dated November 26, 1997,
the Appellate Division, Third Department, affirmed that judgment. By decision
dated June 9, 1998, the Court of Appeals denied leave to appeal.

Several cases, including Port Jefferson Health Care Facility, et al. v.
Wing (Supreme Court, Suffolk County), challenge the constitutionality of Public
Health Law ss. 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 ss.ss. 2807-d(2)(b)(ii) and 2807-d(2)(b)(iii),

<PAGE>

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 DSS regulations is not reasonably related to the cost of
rental housing in New York City and results in homelessness to families 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
Dependent 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 Dependent Children under the interim relief system
established in this case. The State has appealed to the Appellate Division,
First Department from each and every provision of this judgment except that
portion directing the continued provision of interim relief.

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 United
States Court of Appeals for the Second Circuit, based on the District Court's
factual findings, held the State defendants liable under 42 USC ss. 1983 and the
Equal Educational Opportunity Act, 20 USC ss.ss. 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

<PAGE>

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. On November 7, 1997, the State appealed that
judgment to the Second Circuit. The appeal is pending. Additionally, the Court
adopted a requirement that the State pay to Yonkers approximately $9.85 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 was reduced to an order on December 2,
1997 and reduced to a judgment on February 10, 1998. The State appealed that
order to the Second Circuit on December 31, 1997 and amended the notice of
appeal after entry of the judgment. That appeal has been consolidated with the
appeal of the EIP II appeal, and is also pending.

On June 15, 1998, the District Court issued an opinion setting forth
the formula for the allocation of the costs of EIP I and EIP II between the
State and the City for the school years 1997-98 through 2005-06. That opinion
has not yet been reduced to an order.

Real Property Claims

On March 4, 1985 in Oneida Indian Nation of New York, et al. v.
County of Oneida, the United States Supreme Court affirmed a judgment of the
United States Court of Appeals for the Second Circuit holding that the Oneida
Indians have a common-law right of action against Madison and Oneida Counties
for wrongful possession of 872 acres of land illegally sold to the State in
1795. At the same time, however, the Court reversed the Second Circuit by
holding that a third-party claim by the counties against the State for
indemnification was not properly before the federal courts. The case was
remanded to the District Court for an assessment of damages, which action is
still pending. The counties may still seek indemnification in the State courts.

Several other actions involving Indian claims to land in upstate New
York are also pending. Included are Cayuga Indian Nation of New York v. Cuomo,
et al., and Canadian St. Regis Band of Mohawk Indians, et al. v. State of New
York et al., both in the United States District Court for the Northern District
of New York. The Supreme Court's holding in Oneida Indian Nation of New York may
impair or eliminate certain of the State's defenses to these actions but may
enhance others.

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 summary, 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. As of December 31, 1997, 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 $84 billion, only a portion of which constitutes State-supported or
State-related debt.

<PAGE>

The State has numerous public authorities with various
responsibilities, including those which finance, construct and/or operate
revenue producing public facilities. Public authorities generally pay their
operating expenses and debt service costs from revenues generated by the
projects they finance or operate, such as tolls charged for the use of highways,
bridges or tunnels, charges for public power, electric and gas utility services,
rentals charged for housing units, and charges for occupancy at medical care
facilities. 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, the affected
localities may seek additional State assistance if local assistance payments are
diverted. 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.

Beginning in 1998, the Long Island Power Authority (LIPA) assumed
responsibility for the provision of electric utility services previously
provided by Long Island Lighting Company for Nassau, Suffolk and a portion of
Queen Counties, as part of an estimated $7 billion financing plan. As of the
date of this AIS, LIPA has issued over $5 billion in bonds secured solely by
ratepayer charges. LIPA's debt is not considered either State-supported or
State-related debt.

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, 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 also 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

<PAGE>

capital assistance to the MTA. For the 1998-99 fiscal year, State
assistance to the MTA is projected to total approximately $1.3 billion, an
increase of $133 million over the 1997-98 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 (subsequently
amended in August 1997), 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 $5.2 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 receive significant
financial assistance from the State. State aid contributes to the City's ability
to balance its budget and to meet its cash requirements. The State may 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 measured by the GAAP standards in force at that time. The
City prepares a four-year financial plan ("Financial Plan") annually and updates
it periodically, and prepares a comprehensive annual financial report describing
its most recent fiscal year each October.

The City of New York
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 the Municipal Assistance Corporation for the City of New York
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

<PAGE>

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. The Control Board terminated the Control
Period in 1986 when certain statutory conditions were met. State law requires
the Control Board to reimpose a control period upon the occurrence, or
"substantial likelihood and imminence" of the occurrence, of certain events,
including (but not limited to) a City operating budget deficit of more than $100
million of impaired access to the public credit markets.

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 the Financial Plan. The City's Financial Plan
summarizes its 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.

To successfully implement its Financial Plan, the City and certain
entities issuing debt for the benefit of the city must 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 1997, the State created the New York City Transitional Finance Authority
("TFA") to finance a portion of the City's capital program because the City was
approaching its State Constitutional general debt limit. Without the additional
financing capacity of the TFA, projected contracts for City capital projects
would have exceeded the City's debt limit during City fiscal year 1997-98.
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 TFA to be unconstitutional.
On November 25, 1997 the State Supreme Court found the legislation establishing
the TFA to be constitutional and granted the defendants' motion for summary
judgment. The plaintiffs have appealed the decision. 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.

Monitoring Agencies

The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's Financial Plans. The reports analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service
requirements, as well as evaluate compliance by the City and its Covered
Organizations with the Financial Plan. According to recent staff reports, while
economic growth 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.
Recent staff reports also indicate that the City projects a substantial surplus
for City fiscal year 1997-98. Although several sectors of the City's economy
have expanded recently, especially tourism and business and

<PAGE>

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 and that
the City's Financial Plan tends to rely on actions outside its direct control.
These reports have indicated that the City has not yet brought its long-term
expenditure growth in line with recurring revenue growth and that the City is
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.

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 cities of Yonkers and Troy continue to
operate under State-ordered control agencies. The potential impact on the State
of any future requests by localities for additional oversight or financial
assistance is not included in the projections of the State's receipts and
disbursements for the State's 1998-99 fiscal year.

Eighteen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities, and twenty-eight municipalities received more than $32
million in targeted unrestricted aid in the 1997-98 budget. Both of these
emergency aid packages were largely continued through the 1998-99 budget. The
State also dispersed an additional $21 million among all cities, towns and
villages after enacting a 3.9 percent increase in General Purpose State Aid in
1997-98 and continued this increase in 1998-99.

The 1998-99 budget includes an additional $29.4 million in unrestricted
aid targeted to 57 municipalities across the State. Other assistance for
municipalities with special needs totals more than $25.6 million. Twelve upstate
cities will receive $24.2 million in one-time assistance from a cash flow
acceleration of State aid.

The appropriation and allocation of general purpose local government
aid among localities, including New York City, is currently the subject of
investigation by a State commission. While the distribution of general purpose
local government aid was originally based on a statutory formula, in recent
years both the total amount appropriated and the amounts appropriated to
localities have been determined by the Legislature. A State commission was
established to study the distribution and amounts of general purpose local
government aid and recommend a new formula by June 30, 1999, which may change
the way aid is allocated.

Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1996, the total indebtedness of all
localities in the State other than New York City was approximately $20.0
billion. A small portion (approximately $77.2 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 that are

<PAGE>

authorized by State law to issue debt to finance deficits during the
period that such deficit financing is outstanding. Twenty-one localities had
outstanding indebtedness for deficit financing at the close of their fiscal year
ending in 1996.

Like the State, local governments must respond to changing political,
economic and financial influences over which they have little or no control.
Such changes may adversely affect the financial condition of certain local
governments. For example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs which, in turn, may require
local governments to fund these expenditures from their own resources. It is
also possible that the State, New York City, or any of their respective public
authorities may suffer serious financial difficulties that could jeopardize
local access to the public credit markets, which may adversely affect the
marketability of notes and bonds issued by localities within the State.
Localities may also face unanticipated problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Other large-scale
potential problems, such as declining urban populations, increasing
expenditures, and the loss of skilled manufacturing jobs, may also adversely
affect localities and necessitate State assistance.

<PAGE>

PART C

ITEM 23. EXHIBITS.

(a) Declaration of Trust, as amended, was filed as Exhibit No. 1 to
Post-Effective Amendment No. 25 to the Registration Statement filed on September
26, 1996 (Accession Number 0000912057-96-021281).

(a)1 Amendment No. 5 to Declaration of Trust; Amendment and Fifth Amended
and Restated Establishment and Designation of Series of Shares of Beneficial
Interest.*

(a)2 Amendment No. 6 to Declaration of Trust; Amendment and Sixth Amended
and Restated Establishment and Designation of Series of Shares of Beneficial
Interest was filed as Exhibit No. 1(b) to Post-Effective Amendment No. 31 to the
Registration Statement on February 28, 1997 (Accession Number
0001016964-97-000041).

(a)3 Amendment No. 7 to Declaration of Trust; Amendment and Seventh Amended
and Restated Establishment and Designation of Series of Shares of Beneficial
Interest was filed as Exhibit No. 1(c) to Post-Effective Amendment No. 32 to the
Registration Statement on April 15, 1997 (Accession Number
0001016964-97-000053).

(a)4 Amendment No. 8 to Declaration of Trust; Amendment and Eighth Amended
and Restated Establishment and Designation of Series of Shares of Beneficial
Interest was filed as Exhibit No. 1(d) to Post-Effective Amendment No. 40 to the
Registration Statement on October 9, 1997 (Accession Number
0001016964-97-000158).

(a)5 Amendment No. 9 to Declaration of Trust; Amendment and Ninth Amended
and Restated Establishment and Designation of Series of Shares of Beneficial
Interest was filed as Exhibit No. 1(e) to Post-Effective Amendment No. 50 to the
Registration Statement on December 29, 1997 (Accession Number
0001041455-97-000014).

(a)6 Amendment No. 10 to Declaration of Trust; Amendment and Tenth Amended
and Restated Establishment and Designation of Series of Shares of Beneficial
Interest and change voting procedures to dollar-based voting was filed as
Exhibit No. (a)6 to Post-Effective Amendment No. 60 to the Registration
Statement on December 31, 1998(Accession Number 0001041455-98-000097).

(a)7 Amendment No. 11 to Declaration of Trust. Incorporated herein by
reference to Post-Effective Amendment No. 63 to the Registration Statement filed
on April 29, 1999 (Accession Number 00001041455-99-000041).

(b) Restated By-Laws of Registrant.*

(e) Distribution Agreement between Registrant and Funds Distributor, Inc.
("FDI").*

(g) Custodian Contract between Registrant and State Street Bank and Trust
Company ("State Street").*

(h)1 Co-Administration Agreement between Registrant and FDI.*

(h)2 Restated Shareholder Servicing Agreement between Registrant and Morgan
Guaranty Trust Company of New York ("Morgan Guaranty") filed as Exhibit (h)2 to
Post Effective Amendment No. 54 to the Registration Statement on August 25, 1998
(Accession No. 0001041455-98-000053).

(h)3 Transfer Agency and Service Agreement between Registrant and State
Street.*

(h)4 Restated Administrative Services Agreement between Registrant and
Morgan Guaranty.*

(h)5 Fund Services Agreement, as amended, between Registrant and Pierpont
Group, Inc.*

(h)6 Service Plan with respect to Registrant's Service Money Market
Funds.**

(i) Opinion and consent of Sullivan & Cromwell.*

(j) Consent of independent accountants (filed herewith).

(l) Purchase agreements with respect to Registrant's initial shares.*

(n) Financial Data Schedules (not required).

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

* Incorporated herein by reference to Post-Effective Amendment No. 29 to
the Registration Statement filed on December 26, 1996 (Accession Number
0001016964-96-000061).

** Incorporated herein by reference to Post-Effective Amendment No. 33 to
the Registration Statement filed on April 30, 1997 (Accession Number
00001016964-97-000059).

ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND.

Not applicable.

ITEM 25. INDEMNIFICATION.

Reference is made to Section 5.3 of Registrant's Declaration of Trust and
Section 5 of Registrant's Distribution Agreement.

Registrant, its Trustees and officers are insured against certain expenses in
connection with the defense of claims, demands, actions, suits, or proceedings,
and certain liabilities that might be imposed as a result of such actions, suits
or proceedings.

Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "1933 Act"), may be permitted to directors, trustees,
officers and controlling persons of the Registrant and the principal underwriter
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, trustee, officer, or controlling person of the Registrant
and the principal underwriter in connection with the successful defense of any
action, suite or proceeding) is asserted against the Registrant by such
director, trustee, officer or controlling person or principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.

Not Applicable.

ITEM 27. PRINCIPAL UNDERWRITERS.

(a) Funds Distributor, Inc. (the "Distributor") is the principal
underwriter of the Registrant's shares.

Funds Distributor, Inc. acts as principal underwriter for the following
investment companies other than the Registrant:

American Century California Tax-Free and Municipal Funds
American Century Capital Portfolios, Inc.
American Century Government Income Trust
American Century International Bond Funds
American Century Investment Trust
American Century Municipal Trust
American Century Mutual Funds, Inc.
American Century Premium Reserves, Inc.
American Century Quantitative Equity Funds
American Century Strategic Asset Allocations, Inc.
American Century Target Maturities Trust
American Century Variable Portfolios, Inc.
American Century World Mutual Funds, Inc.
BJB Investment Funds
The Brinson Funds
Dresdner RCM Capital Funds, Inc.
Dresdner RCM Equity Funds, Inc.
Founders Funds, Inc.
Harris Insight Funds Trust
HT Insight Funds, Inc. d/b/a Harris Insight Funds
J.P. Morgan Funds
J.P. Morgan Series Trust
J.P. Morgan Series Trust II
LaSalle Partners Funds, Inc.
Monetta Fund, Inc.
Monetta Trust
The Montgomery Funds
The Montgomery Funds II
The Munder Framlington Funds Trust
The Munder Funds Trust
The Munder Funds, Inc.
Orbitex Group of Funds
St. Clair Funds, Inc.
The Skyline Funds
Waterhouse Investors Family of Funds, Inc.
WEBS Index Fund, Inc.

Funds Distributor, Inc. does not act as depositor or investment adviser to
any of the investment companies.

Funds Distributor, Inc. is registered with the Securities and Exchange
Commission as a broker-dealer and is a member of the National Association of
Securities Dealers. Funds Distributor, Inc. is located at 60 State Street, Suite
1300, Boston, Massachusetts 02109. Funds Distributor, Inc. is an indirect
wholly-owned subsidiary of Boston Institutional Group, Inc., a holding company
all of whose outstanding shares are owned by key employees.

(b) The following is a list of the executive officers, directors and
partners of Funds Distributor, Inc.:

Director, President and Chief Executive Officer: Marie E. Connolly
Executive Vice President: George Rio
Executive Vice President: Donald R. Roberson
Executive Vice President: William S. Nichols
Director, Senior Vice President, Treasurer and
Chief Financial Officer: Joseph F. Tower, III
Senior Vice President, General Counsel, Chief
Compliance Officer, Secretary and Clerk Margaret M. Chambers
Senior Vice President: Paula R. David
Senior Vice President: Judith K. Benson
Senior Vice President: Gary S. MacDonald
Director, Chairman of the Board, Executive
Vice President William J. Nutt

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.

PIERPONT GROUP, INC.: 461 Fifth Avenue, New York, New York 10017 (records
relating to its assisting the Trustees in carrying out their duties in
supervising the Registrant's affairs).

MORGAN GUARANTY TRUST COMPANY OF NEW YORK: 60 Wall Street, New York, New York
10260-0060, 522 Fifth Avenue, New York, New York 10036 or 9 West 57th Street,
New York, New York 10019 (records relating to its functions as shareholder
servicing agent and administrative services agent).

STATE STREET BANK AND TRUST COMPANY: 1776 Heritage Drive, North Quincy,
Massachusetts 02171 and 40 King Street West, Toronto, Ontario, Canada M5H 3Y8
(records relating to its functions as fund accountant, custodian, transfer agent
and dividend disbursing agent).

FUNDS DISTRIBUTOR, INC.: 60 State Street, Suite 1300, Boston, Massachusetts
02109 (records relating to its functions as distributor and co-administrator).

ITEM 29. MANAGEMENT SERVICES.

Not Applicable.

ITEM 30. UNDERTAKINGS.

(a) If the information called for by Item 5A of Form N-1A is contained in
the latest annual report to shareholders, the Registrant shall furnish
each person to whom a prospectus is delivered with a copy of the
Registrant's latest annual report to shareholders upon request and
without charge.

(b) The Registrant undertakes to comply with Section 16(c) of the 1940 Act
as though such provisions of the 1940 Act were applicable to the
Registrant, except that the request referred to in the third full
paragraph thereof may only be made by shareholders who hold in the
aggregate at least 10% of the outstanding shares of the Registrant,
regardless of the net asset value of shares held by such requesting
shareholders.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of New York and State of New York on the 29th day of November, 1999.

J.P. MORGAN INSTITUTIONAL FUNDS, The Tax Exempt Bond Portfolio,
The New York Tax Exempt Bond Portfolio

By /s/ Stephanie D. Pierce
----------------------------
Stephanie D. Pierce
Vice President and Assistant Secretary

Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons in the capacities
indicated on November 29, 1999.

George Rio*
- ------------------------------
George Rio
President and Treasurer

Matthew Healey*
- -----------------------------
Matthew Healey
Trustee, Chairman and Chief Executive Officer (Principal Executive Officer)

Frederick S. Addy*
- ------------------------------
Frederick S. Addy
Trustee

William G. Burns*
- ------------------------------
William G. Burns
Trustee

Arthur C. Eschenlauer*
- ------------------------------
Arthur C. Eschenlauer
Trustee

Michael P. Mallardi*
- ------------------------------
Michael P. Mallardi
Trustee

*By /s/ Stephanie D. Pierce
----------------------------
Stephanie D. Pierce
as attorney-in-fact pursuant to a power of attorney.

<PAGE>

INDEX TO EXHIBITS

Exhibit No. Description of Exhibit
- ------------- ------------------------
EX-99.(j) Consent of Independent Accountants

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A of our report dates September 15, 1999, relating to the
financial statements and financial highlights which appears in the July 31, 1999
Annual Report to Shareholders of J.P. Morgan Institutional Tax Exempt Bond Fund
and financial statements and supplementary data of The Tax Exempt Bond
Portfolio, which are also incorporated by reference into the Registration
Statement. We also consent to the references to us under the headings "Financial
Highlights" in the Prospectus and "Independent Accountants" and "Financial
Statements" in the Statement of Additional Information.

We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A or our report dated September 15, 1999, relating to the
financial statements and financial highlights which appears in the July 31, 1999
Annual Report to Shareholders of J.P. Morgan Institutional New York Tax Exempt
Bond Fund and financial statements and supplementary data of The New York Tax
Exempt Bond Portfolio, which are also incorporated by reference into the
Registration Statement. We also consent to the references to us under the
headings "Financial Highlights" in the Prospectus and "Independent Accountants"
and "Financial Statements" in the Statement of Additional Information.

We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A or our report dated September 15, 1999, relating to the
financial statements and financial highlights which appears in the July 31, 1999
Annual Report to Shareholders of J.P. Morgan Tax Exempt Bond Fund and financial
statements and supplementary data of The Tax Exempt Bond Portfolio, which are
also incorporated by reference into the Registration Statement. We also consent
to the references to us under the headings "Financial Highlights" in the
Prospectus and "Independent Accountants" and "Financial Statements" in the
Statement of Additional Information.

We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A or our report dated September 15, 1999, relating to the
financial statements and financial highlights which appears in the July 31, 1999
Annual Report to Shareholders of J.P. Morgan New York Tax Exempt Bond Fund and
financial statements and supplementary data of The New York Tax Exempt Bond
Portfolio, which are also incorporated by reference into the Registration
Statement. We also consent to the references to us under the headings "Financial
Highlights" in the Prospectus and "Independent Accountants" and "Financial
Statements" in the Statement of Additional Information.

We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A or our report dated September 15, 1999, relating to the
financial statements and financial highlights which appears in the July 31, 1999
Annual Report to Shareholders of J.P. Morgan Emerging Markets Debt Fund and
financial statements and supplementary data of The Emerging Markets Debt
Portfolio, which are also incorporated by reference into the Registration
Statement. We also consent to the references to us under the headings "Financial
Highlights" in the Prospectus and "Independent Accountants" and "Financial
Statements" in the Statement of Additional Information.

We hereby consent to the references to us under the heading "Financial
Highlights" in the Prospectus of the J.P. Morgan Institutional Fixed Income
Funds relating to J.P. Morgan Institutional Short Term Bond Fund, J.P. Morgan
Institutional Bond Fund, J.P. Morgan Global Strategic Income Fund and J.P.
Morgan California Bond Fund.

/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
November 29, 1999