JP MORGAN FUNDS, 497, 1998-01-05

JP MORGAN FUNDS
497, 1998-01-05

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<PAGE>

PROSPECTUS

J.P. Morgan Institutional Tax Exempt Money Market Fund
60 State Street
Boston, Massachusetts 02109
For information call (800) 766-7722

J.P. Morgan Institutional Tax Exempt Money Market Fund (the "Fund") seeks
to provide a high level of current income exempt from federal income tax
and maintain a high level of liquidity. It is designed for investors who
seek current income exempt from federal income tax, stability of capital
and liquidity.

The Fund is a diversified no-load mutual fund for which there are no sales
charges or exchange or redemption fees. The Fund is a series of the J.P.
Morgan Institutional Funds, an open-end management investment company or-
ganized as a Massachusetts business trust (the "Trust").

UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIO OF SECURITIES, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJEC-
TIVE BY INVESTING ALL OF ITS INVESTABLE ASSETS IN THE TAX EXEMPT MONEY
MARKET PORTFOLIO (THE "PORTFOLIO"), A CORRESPONDING DIVERSIFIED OPEN-END
MANAGEMENT INVESTMENT COMPANY HAVING THE SAME INVESTMENT OBJECTIVE AS THE
FUND. THE FUND INVESTS IN THE PORTFOLIO THROUGH A TWO-TIER MASTER-FEEDER
INVESTMENT FUND STRUCTURE. SEE SPECIAL INFORMATION CONCERNING INVESTMENT
STRUCTURE ON PAGE 4.

The Portfolio is advised by Morgan Guaranty Trust Company of New York
("Morgan" or "Advisor").

This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing and it should be re-
tained for future reference. Additional information about the Fund has
been filed with the Securities and Exchange Commission in a Statement of
Additional Information dated January 2, 1998 (as supplemented from time to
time). This information is incorporated herein by reference and is avail-
able without charge upon written request from the Fund's Distributor,
Funds Distributor, Inc. ("FDI"), 60 State Street, Suite 1300, Boston, Mas-
sachusetts 02109, Attention: J.P. Morgan Institutional Funds, or by call-
ing (800) 221-7930.

INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, MORGAN GUARANTY TRUST COMPANY OF NEW YORK 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 GOVERNMEN-
TAL 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 RE-
DEEMED, THE VALUE MAY BE HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY IN-
VESTED BY THE INVESTOR. ALTHOUGH THE FUND SEEKS TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE, THERE CAN BE NO ASSURANCE THAT IT WILL BE
ABLE TO CONTINUE TO DO SO.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SE-
CURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.

THE DATE OF THIS PROSPECTUS IS JANUARY 2, 1998
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Investors for Whom the Fund is Designed.................................... 1
Financial Highlights....................................................... 3
Special Information Concerning Investment Structure........................ 4
Investment Objective and Policies.......................................... 5
Additional Investment Information and Risk
Factors................................................................... 6
Investment Restrictions.................................................... 8
Management of the Trust and the Portfolio.................................. 9
Shareholder Servicing...................................................... 11
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Purchase of Shares......................................................... 11
Redemption of Shares....................................................... 12
Exchange of Shares......................................................... 13
Dividends and Distributions................................................ 13
Net Asset Value............................................................ 14
Organization............................................................... 14
Taxes...................................................................... 15
Additional Information..................................................... 16
</TABLE>
<PAGE>

J.P. Morgan Institutional Tax Exempt Money Market Fund

INVESTORS FOR WHOM THE FUND IS DESIGNED

The Fund is designed for investors who seek current income exempt from federal
income tax, stability of capital and liquidity. See Taxes. The Fund seeks to
achieve its investment objective by investing all of its investable assets in
The Tax Exempt Money Market Portfolio, a diversified open-end management in-
vestment company having the same investment objective as the Fund. Since the
investment characteristics and experience of the Fund will correspond directly
with those of the Portfolio, the discussion in this Prospectus focuses on the
investments and investment policies of the Portfolio.

THE J.P. MORGAN INSTITUTIONAL TAX EXEMPT MONEY MARKET FUND SEEKS TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE; THERE CAN BE NO ASSURANCE THAT IT
WILL BE ABLE TO CONTINUE TO DO SO.

The Fund requires a minimum initial investment of $10 million. The minimum sub-
sequent investment is $25,000. See Purchase of Shares. If a shareholder reduces
his or her investment in the Fund to less than $10 million for more than 30
days, the investment may be subject to mandatory redemption. See Redemption of
Shares-Mandatory Redemption by the Fund.

This Prospectus describes the financial history, investment objective and poli-
cies, management and operation of the Fund to enable investors to decide if the
Fund suits their needs. The Fund operates in a two-tier master-feeder invest-
ment fund structure. The Trustees believe that the Fund may achieve economies
of scale over time by utilizing this investment structure.

The following table illustrates that investors in the Fund incur no shareholder
transaction expenses; their investment in the Fund is subject only to the oper-
ating expenses set forth below for the Fund and the Portfolio, as a percentage
of average net assets of the Fund. The Trustees of the Trust believe that the
aggregate per share expenses of the Fund and the Portfolio will be approxi-
mately equal to and may be less than the expenses that the Fund would incur if
it retained the services of an investment adviser and invested its assets di-
rectly in portfolio securities. Fund and Portfolio expenses are discussed below
under the headings Management of the Trust and the Portfolio and Shareholder
Servicing.

SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<S> <C>
Sales Load Imposed on Purchases*........................................... None
Sales Load Imposed on Reinvested Dividends................................. None
Deferred Sales Load........................................................ None
Redemption Fees............................................................ None
Exchange Fees.............................................................. None
</TABLE>
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* Certain Eligible Institutions (defined below) may impose fees in connection
with the purchase of the Fund's shares through such institutions.

1
<PAGE>

EXPENSE TABLE

ANNUAL OPERATING EXPENSES*

<TABLE>
<S> <C>
Advisory Fees............................................................. 0.18%
Rule 12b-1 Fees........................................................... None
Other Expenses (after waiver and expense reimbursement)................... 0.06%
-----
Total Operating Expenses (after waiver and expense reimbursement)......... 0.24%
=====
</TABLE>

* The expense table has been restated to reflect current
expenses/waivers/reimbursements. The fees and expenses in the table are ex-
pressed as a percentage of the Fund's average net assets, and assume that the
current arrangements were in effect throughout the fiscal year ended August
31, 1997. Morgan has agreed to waive and/or reimburse all Fund expenses (ex-
cept for those allocated to the Fund by the Portfolio and extraordinary ex-
penses) through at least December 31, 1998. Total Operating Expenses may vary
but in any event will not exceed 0.35% of the Fund's average daily net assets
through December 31, 1998. See Management of the Trust and Portfolio--
Expenses. Without such reimbursement/waiver, Other Expenses and Total Operat-
ing Expenses for the fiscal year would have been .21% and 0.39%, respectively.

EXAMPLE

An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:

<TABLE>
<S> <C>
1 Year...................................................................... $ 2
3 Years..................................................................... $ 8
5 Years..................................................................... $14
10 Years.................................................................... $31
</TABLE>

The above expense table is designed to assist investors in understanding the
various direct and indirect costs and expenses that investors in the Fund
bear. The fees and expenses included in Other Expenses are the fees paid to
Morgan under the Administrative Services Agreements and the Shareholder Ser-
vicing Agreement, organization expenses, the fees paid to Pierpont Group, Inc.
under the Fund Services Agreements, the fees paid to FDI under the Co-Adminis-
tration Agreements, the fees paid to State Street Bank and Trust Company as
custodian and transfer agent, and other usual and customary expenses of the
Fund and the Portfolio. For a more detailed description of contractual fee ar-
rangements, including expense reimbursements, see Management of the Trust and
the Portfolio and Shareholder Servicing. In connection with the above example,
please note that $1,000 is less than the Fund's minimum investment requirement
and that there are no redemption or exchange fees of any kind. See Purchase of
Shares and Redemption of Shares. THE EXAMPLE IS HYPOTHETICAL; IT IS INCLUDED
SOLELY FOR ILLUSTRATIVE PURPOSES. IT SHOULD NOT BE CONSIDERED A REPRESENTATION
OF FUTURE PERFORMANCE; ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.

2
<PAGE>

FINANCIAL HIGHLIGHTS

The following selected data for a share outstanding for the indicated periods
should be read in conjunction with the financial statements and related notes
which are contained in the Fund's annual report and are incorporated by refer-
ence into the Statement of Additional Information. The following selected data
have been audited by independent accountants. The Fund's annual report includes
a discussion of those factors, strategies and techniques that materially af-
fected the Fund's performance during the period of the report, as well as cer-
tain related information. A copy of the Fund's annual report will be made
available without charge upon request.

<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 12, 1993
FOR THE FISCAL YEAR ENDED AUGUST 31, (COMMENCEMENT
------------------------------------------------ OF OPERATIONS) TO
1997 1996 1995 1994 AUGUST 31, 1993
--------- --------- --------- --------- -----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Begin-
ning of Period......... $1.00 $1.00 $1.00 $1.00 $1.00
--------- --------- --------- -------- -------
Income from Investment
Operations:
Net Investment Income. 0.0330 0.0331 0.0352 0.0228 0.0040
Net Realized Loss on
Investment........... (0.0000)(a) (0.0000)(a) (0.0002) (0.0000)(a) (0.0000)(a)
--------- --------- --------- -------- -------
Total from Investment
Operations............. 0.0330 0.0331 0.0350 0.0228 0.0040
--------- --------- --------- -------- -------
Less Distributions to
Shareholders from:
Net Investment Income. (0.0330) (0.0331) (0.0352) (0.0228) (0.0040)
Net Realized Gain..... -- -- -- (0.0000)(a) --
--------- --------- --------- -------- -------
Total Distributions to
Shareholders........... (0.0330) (0.0331) (0.0352) (0.0228) (0.0040)
--------- --------- --------- -------- -------
Net Asset Value, End of
Period................. $1.00 $1.00 $1.00 $1.00 $1.00
========= ========= ========= ======== =======
Total Return............ 3.35% 3.36% 3.57% 2.30% 0.40%(b)
Ratios and Supplemental
Data:
Net Assets at End of
Period
(in thousands)....... $ 290,943 $ 163,569 $ 100,142 $46,083 $35,004
Ratios to Average Net
Assets:
Expenses............ 0.29% 0.35% 0.35% 0.35% 0.35%(c)
Net Investment In-
come............... 3.29% 3.28% 3.49% 2.34% 2.25%(c)
Decrease Reflected
in Expense Ratio
due to Expense
Reimbursement...... 0.10% 0.07% 0.15% 0.65% 1.08%(c)
</TABLE>
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(a) Less than $0.0001.
(b) Not annualized.
(c) Annualized.

3
<PAGE>

SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE

Unlike other mutual funds which directly acquire and manage their own portfo-
lio 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 the Portfolio, a separate registered investment company with the
same investment objective as the Fund. The investment objective of the Fund or
Portfolio may be changed only with the approval of the holders of the out-
standing shares of the Fund and the Portfolio. The master-feeder investment
fund structure has been developed relatively recently, so shareholders should
carefully consider this investment approach.

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 concern-
ing 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 Trust-
ees 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 in-
vestment objective and restrictions as the Fund or the retaining of an invest-
ment adviser to manage the Fund's assets in accordance with the investment
policies described below with respect to the Portfolio.

Certain changes in the Portfolio's investment objective, policies or restric-
tions, or a failure by the Fund's shareholders to approve a change in the
Portfolio's investment objective or 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 distribu-
tion) from the Portfolio which may or may not be readily marketable. The dis-
tribution 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 re-
demption requests, such as borrowing.

Smaller funds investing in the Portfolio may be materially affected by the ac-
tions 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. Addition-
ally, because the Portfolio would become smaller, it may become less diversi-
fied, resulting in potentially increased portfolio risk (however, these possi-
bilities also exist for traditionally structured funds which have large or in-
stitutional investors who may withdraw from a fund). Also, funds with a
greater pro rata ownership in the Portfolio could have effective voting con-
trol 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 in-
vestor 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 effect on the outcome of such matters.

4
<PAGE>

For more information about the Portfolio's investment objective, policies and
restrictions, see Investment Objective and Policies, Additional Investment In-
formation and Risk Factors and Investment Restrictions. For more information
about the Portfolio's management and expenses, see Management of the Trust and
the Portfolio. For more information about changing the investment objective,
policies and restrictions of the Fund or the Portfolio, see Investment Restric-
tions.

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund and the Portfolio is described below, to-
gether with the policies they employ in their efforts to achieve this objec-
tive. Additional information about the investment policies of the Fund and the
Portfolio appears in the Statement of Additional Information under Investment
Objectives and Policies. There can be no assurance that the investment objec-
tive of the Fund or the Portfolio will be achieved.

The Fund's investment objective is to provide a high level of current income
that is exempt from federal income tax and maintain a high level of liquidity.
The Fund is designed for investors who seek current income exempt from federal
income tax, stability of capital and liquidity. See Taxes. The Fund attempts to
achieve its objective by investing all of its investable assets in The Tax Ex-
empt Money Market Portfolio, a diversified open-end management investment com-
pany having the same investment objective as the Fund.

The Portfolio attempts to achieve its investment objective by investing primar-
ily in the following municipal securities which earn interest exempt from fed-
eral income tax in the opinion of bond counsel for the issuer and which have
effective maturities not greater than thirteen months and by maintaining a dol-
lar-weighted average portfolio maturity of not more than 90 days. The market
value of obligations in which the Portfolio invests is not guaranteed and may
rise and fall in response to changes in interest rates. During normal market
conditions, the Portfolio will invest substantially all, and not less than 80%,
of its net assets in tax exempt obligations. The Portfolio generally will not
invest in taxable securities, although 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 up to 20% of its total assets in such securi-
ties.

MUNICIPAL BONDS. 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 instrumen-
talities. These obligations may be general obligation bonds secured by the is-
suer'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 rev-
enue sources, but not generally backed by the issuer's taxing power. These in-
clude industrial development bonds 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 these bonds in projects of similar
type or in the same state.

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 de-
mand 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, in its capacity as
Advisor to the Portfolio and as fiduciary for other clients. 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 per-
centage limitation on these investments. For more information about municipal
notes, see Investment Objectives and Policies in the Statement of Additional
Information.

5
<PAGE>

QUALITY INFORMATION. The Portfolio will limit its investments to those securi-
ties which, in accordance with guidelines adopted by the Trustees, present
minimal credit risks. In addition, the Portfolio will not purchase any munici-
pal obligation unless (i) it is rated with the highest rating assigned to
short-term debt securities (or, in the case of New York State municipal notes,
with one of the two highest ratings assigned to short-term debt securities) by
at least two nationally recognized statistical rating organizations such as
Moody's and Standard & Poor's, (ii) it is rated by only one agency with such
rating, or (iii) it is not rated and is determined to be of comparable quali-
ty. Determinations of comparable quality shall be made in accordance with pro-
cedures established by the Trustees. For a more detailed discussion of appli-
cable quality requirements, see Investment Objectives and Policies in the
Statement of Additional Information. These standards must be satisfied at the
time an investment is made. If the quality of the investment later declines
below the quality required for purchase, the Portfolio shall dispose of the
investment, subject in certain circumstances to a finding by the Trustees that
disposing of the investment would not be in the Portfolio's best interest. The
credit quality of variable rate demand notes and other municipal obligations
is frequently enhanced by various arrangements with domestic or foreign finan-
cial institutions, such as letters of credit, guarantees and insurance, and
these arrangements are considered, along with the credit quality of such in-
stitutions, when investment quality is evaluated. Favorable or unfavorable
changes in the credit quality of these institutions may cause gains or losses
to the Portfolio and affect the Fund's share price.

The Portfolio may purchase municipal obligations together with puts. In addi-
tion, the Portfolio may purchase municipal obligations on a when-issued or de-
layed delivery basis, enter into repurchase and reverse repurchase agreements,
loan its portfolio securities and purchase synthetic variable rate instru-
ments. For a discussion of these transactions, see Additional Investment In-
formation and Risk Factors.

ADDITIONAL INVESTMENT INFORMATION AND RISK FACTORS

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase secu-
rities on a when-issued or delayed delivery basis. Delivery of and payment for
these securities may take as long as a month or more after the date of the
purchase commitment. The value of these securities is subject to market fluc-
tuation during this period and for fixed income investments no interest ac-
crues to the Portfolio until settlement. At the time of settlement a when-is-
sued security may be valued at less than its purchase price. The Portfolio
maintains with the Custodian a separate account with a segregated portfolio of
securities in an amount at least equal to these commitments. When entering
into a when-issued or delayed delivery transaction, the Portfolio will rely on
the other party to consummate the transaction; if the other party fails to do
so, the Portfolio may be disadvantaged. It is the current policy of the Port-
folio not to enter into when-issued commitments exceeding in the aggregate 15%
of the market value of the Portfolio's total assets less liabilities other
than the obligations created by these commitments.

REPURCHASE AGREEMENTS. The Portfolio may engage in repurchase agreement trans-
actions with brokers, dealers or banks that meet the credit guidelines estab-
lished by the Portfolio's Trustees. In a repurchase agreement, the Portfolio
buys a security from a seller that has agreed to repurchase it at a mutually
agreed upon date and price, reflecting the interest rate effective for the
term of the agreement. The term of these agreements is usually from overnight
to one week. A repurchase agreement may be viewed as a fully collateralized
loan of money by the Portfolio to the seller. The Portfolio always receives
securities as collateral with a market value at least equal to the purchase
price plus accrued interest and this value is maintained during the term of
the agreement. If the seller defaults and the collateral value declines, the
Portfolio might incur a loss. If bankruptcy proceedings are commenced with re-
spect to the seller, the Portfolio's realization upon the disposition of col-
lateral may be delayed or limited. Investments in certain repurchase agree-
ments and certain other investments which may be considered illiquid are lim-
ited. See Illiquid Investments; Privately Placed and other Unregistered Secu-
rities below.

6
<PAGE>

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 secu-
rities 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 ter-
minated. 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 con-
nection with a loan. In addition, the Portfolio will consider all facts and
circumstances, including the creditworthiness of the borrowing financial insti-
tution, and the Portfolio will not make any loans in excess of one year. Loans
of portfolio securities may be considered extensions of credit by the Portfo-
lio. The risks to the Portfolio with respect to borrowers of its portfolio se-
curities are similar to the risks to the Portfolio with respect to sellers in
repurchase agreement transactions. See Repurchase Agreements above. The Portfo-
lio will not lend its securities to any officer, Trustee, Director, employee or
other affiliate of the Portfolio, the Advisor or the Distributor, unless other-
wise permitted by applicable law.

REVERSE REPURCHASE AGREEMENTS. The Portfolio is permitted to enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Portfolio sells a
security and agrees to repurchase it at a mutually agreed upon date and price,
reflecting the interest rate effective for the term of the agreement. For pur-
poses of the Investment Company Act of 1940, as amended (the "1940 Act"), it is
considered a form of borrowing by the Portfolio and, therefore, is a form of
leverage. Leverage may cause any gains or losses of the Portfolio to be magni-
fied. For more information, see Investment Objectives and Policies in the
Statement of Additional Information.

TAXABLE INVESTMENTS. 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 or local income
taxes. The Portfolio may make taxable investments pending investment of pro-
ceeds from sales of its interests or portfolio securities, pending settlement
of purchases of portfolio securities, to maintain liquidity or when it is ad-
visable in Morgan's opinion because of adverse market conditions. 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 judgement of Morgan, tax exempt securi-
ties satisfying the Portfolio's investment objectives may not be purchased, the
Portfolio may, for defensive purposes only, temporarily invest up to 20% of its
total assets in money market securities, the interest on which is subject to
federal, state, or 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 agree-
ments.

PUTS. The Portfolio may purchase without limit municipal bonds or notes to-
gether with the right to resell them at an agreed price or yield within a spec-
ified period prior to maturity. This right to resell is known as a put. The ag-
gregate price paid for securities with puts may be higher than the price which
otherwise would be paid. Consistent with the investment objective of the Port-
folio and subject to the supervision of the Trustees, the purpose of this prac-
tice is to permit the Portfolio to be fully invested in tax exempt securities
while maintaining the necessary liquidity to purchase securities on a when-is-
sued basis, to meet unusually large withdrawals and to purchase at a later date
securities other than those subject to the put. The principal risk of puts is
that the put writer may default on its obligation to repurchase. Morgan will
monitor each writer's ability to meet its obligations under puts.

The amortized cost method is used by the Portfolio to value all municipal secu-
rities; no value is assigned to any puts.

7
<PAGE>

(subject to certain conditions) on the part of the purchaser to tender it peri-
odically 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, which may require the disposition of the bond
which could be at a loss.

ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED SECURITIES. The
Portfolio may not acquire any illiquid securities if, as a result thereof, more
than 10% of the Portfolio's net assets would be in illiquid investments. Sub-
ject to this non-fundamental policy limitation, the Portfolio may acquire in-
vestments that are illiquid or have limited liquidity, such as private place-
ments 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 re-
ceives upon resale may be lower than the price paid or received for similar se-
curities with a more liquid market. Accordingly the valuation of these securi-
ties will reflect any limitations on their liquidity.

The Portfolio may also purchase Rule 144A securities sold to institutional in-
vestors without registration under the 1933 Act. These securities may be deter-
mined to be liquid in accordance with guidelines established by the Advisor and
approved by the Trustees. The Trustees will monitor the Advisor's implementa-
tion of these guidelines on a periodic basis.

INVESTMENT RESTRICTIONS

As a diversified investment company, 75% of the assets of the Portfolio are
subject to the following fundamental limitations: (a) the Portfolio may not in-
vest more than 5% of its total assets in the securities of any one issuer, ex-
cept U.S. government securities, and (b) the Portfolio may not own more than
10% of the outstanding voting securities of any one issuer.

The investment objective of the Fund and the Portfolio, together with the in-
vestment restrictions described below and in the Statement of Additional Infor-
mation, except as noted, are deemed fundamental policies, i.e., they may be
changed only with the approval of the holders of a majority of the outstanding
voting securities of the Fund and the Portfolio. The Fund has the same invest-
ment restrictions as the Portfolio, except that the Fund may invest all of its
investable assets in another open-end investment company with the same invest-
ment objective and restrictions (such as the Portfolio). References below to
the Portfolio's investment restrictions also include the Fund's investment re-
strictions.

The Portfolio may not (i) borrow money, except from banks for temporary, ex-
traordinary or emergency purposes and then only in amounts up to 10% of the
value of Portfolio's total assets, taken at cost at the time of borrowing, or
purchase securities while borrowings exceed 5% of its total assets; or mort-
gage, pledge or hypothecate any assets except in connection with any such
borrowings in amounts up to 10% of the value of the Portfolio's net assets at
the time of borrowing; or (ii) acquire industrial revenue bonds if as a result
more than 5% of the Portfolio's total assets would be invested in industrial
revenue bonds where payment of principal and interest is the responsibility of
companies with fewer than three years of operating history.

For a more detailed discussion of the above investment restrictions, as well as
a description of certain other investment restrictions, see Investment Restric-
tions in the Statement of Additional Information.

8
<PAGE>

MANAGEMENT OF THE TRUST AND THE PORTFOLIO

TRUSTEES. Pursuant to the Declarations of Trust for the Trust and for the Port-
folio, the Trustees decide upon matters of general policy and review the ac-
tions of the Advisor and other service providers. The Trustees of the Trust and
of the Portfolio are identified below.

<TABLE>
<S> <C>
Frederick S. Addy................... Former Executive Vice President and Chief
Financial Officer, Amoco Corporation
William G. Burns.................... Former Vice Chairman of the Board and Chief
Financial Officer, NYNEX Corporation
Arthur C. Eschenlauer............... Former Senior Vice President, Morgan
Guaranty Trust Company of New York
Matthew Healey...................... Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc.
Michael P. Mallardi................. Former Senior Vice President, Capital
Cities/ABC, Inc., and President, Broadcast
Group
</TABLE>

A majority of the disinterested Trustees have adopted written procedures rea-
sonably 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 trust-
ees. See Trustees and Officers in the Statement of Additional Information for
more information about the Trustees and Officers of the Fund and the Portfolio.

The Portfolio and the Trust have each entered into a Fund Services Agreement
with Pierpont Group, Inc. to assist the Trustees in exercising their overall
supervisory responsibilities for the Portfolio's and the Trust's affairs. The
fees to be paid under the agreements approximate the reasonable cost of Pier-
pont Group, Inc. in providing these services to the Trust, the Portfolio and
certain other registered investment companies subject to similar agreements
with Pierpont Group, Inc. Pierpont Group, Inc. was organized in 1989 at the re-
quest of the Trustees of The Pierpont Family of Funds for the purpose of pro-
viding these services at cost to those funds. See Trustees and Officers in the
Statement of Additional Information. The principal offices of Pierpont Group,
Inc. are located at 461 Fifth Avenue, New York, New York 10017.

ADVISOR. The Fund has not retained the services of an investment adviser be-
cause the Fund seeks to achieve its investment objective by investing all of
its investable assets in the Portfolio. The Portfolio has retained the services
of Morgan as Investment Advisor. Morgan, with principal offices 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 a wholly owned subsidiary of J.P.
Morgan & Co. Incorporated ("J.P. Morgan"), a bank holding company organized un-
der the laws of Delaware. Through offices in New York City and abroad, J.P.
Morgan, through the Advisor and other subsidiaries, offers a wide range of
services to governmental, institutional, corporate and individual customers and
acts as investment adviser to individual and institutional clients with com-
bined assets under management of over $240 billion. Morgan provides investment
advice and portfolio management services to the Portfolio. Subject to the su-
pervision of the Portfolio's Trustees, Morgan makes the Portfolio's day-to-day
investment decisions, arranges for the execution of portfolio transactions and
generally manages the Portfolio's investments. See Investment Advisor in the
Statement of Additional Information.

The following persons are primarily responsible for the day-to-day management
and implementation of Morgan's process for the Portfolio (the inception date of
each person's responsibility for the Portfolio and her or his business experi-
ence for the past five years is indicated parenthetically): Daniel B. Mulvey,
Vice President (since August, 1995, employed by Morgan since September 1992)
and Richard W. Oswald, Vice President (since October 1996, employed by Morgan
since 1996 and by CBS prior to October 1996).

9
<PAGE>

As compensation for the services rendered and related expenses borne by Morgan
under the Investment Advisory Agreement with the Portfolio, the Portfolio has
agreed to pay Morgan a fee, which is computed daily and may be paid monthly,
at the annual rate of 0.20% of the Portfolio's average daily net assets up to
$1 billion, and 0.10% of average daily net assets in excess of $1 billion.

Under separate agreements, Morgan also provides administrative and related
services to the Fund and the Portfolio and shareholder services to sharehold-
ers of the Fund. See Administrative Services Agent and Shareholder Servicing
below. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARAN-
TEED OR ENDORSED BY, MORGAN GUARANTY TRUST COMPANY OF NEW YORK OR ANY OTHER
BANK.

CO-ADMINISTRATOR. Pursuant to Co-Administration Agreements with the Trust and
the Portfolio, FDI serves as the Co-Administrator for the Fund and the Portfo-
lio. FDI (i) provides office space, equipment and clerical personnel for main-
taining the organization and books and records of the Fund 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 in-
vestors; and (vi) maintains related books and records. See Administrative
Services Agent below.

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

ADMINISTRATIVE SERVICES AGENT. Pursuant to Administrative Services Agreements
with the Trust and the Portfolio, 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 perfor-
mance data, oversight of service providers and certain regulatory and Board of
Trustees matters.

Under the Administrative Services Agreements, each of the Fund and the Portfo-
lio 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 Portfolio, the other portfolios in which series of the Trust
or the J.P. Morgan Funds invest and J.P. Morgan Series Trust in accordance
with the following annual schedule: 0.09% on the first $7 billion of their ag-
gregate average daily net assets and 0.04% of such aggregate average daily net
assets in excess of $7 billion, less the complex-wide fees payable to FDI.

DISTRIBUTOR. FDI, a registered broker-dealer, also serves as the Distributor
of shares of the Fund and as exclusive placement agent for the Portfolio, FDI
is a wholly owned indirect subsidiary of Boston Institutional Group, Inc.
FDI's principal business address is 60 State Street, Suite 1300, Boston, Mas-
sachusetts 02109.

CUSTODIAN. State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02110, serves as the Fund's and the Portfolio's
custodian and fund accounting and transfer agent and the Fund's dividend dis-
bursing agent. State Street also keeps the books of account for the Fund and
the Portfolio.

10
<PAGE>

EXPENSES. In addition to the fees payable to Morgan, FDI and Pierpont Group,
Inc. under the various agreements discussed under Trustees, Advisor, Co-Admin-
istrator and Administrative Services Agent above and Shareholder Servicing be-
low, the Fund and the Portfolio are responsible for usual and customary ex-
penses associated with their respective operations. Such expenses include or-
ganization expenses, legal fees, accounting and audit expenses, insurance
costs, the compensation and expenses of the Trustees, registration fees under
federal securities laws, and extraordinary expenses applicable to the Fund or
the Portfolio. For the Fund, such expenses also include transfer, registrar and
dividend disbursement costs, the expenses of printing and mailing reports, no-
tices and proxy statements to Fund shareholders, and registration fees under
state securities laws. For the Portfolio, such expenses also include custodian
fees and brokerage expenses.

Morgan has agreed that it will reimburse the Fund as described on page 2
through at least December 31, 1998. This limit does not cover extraordinary ex-
penses during the period. There is no assurance that Morgan will continue this
waiver beyond the specified period.

SHAREHOLDER SERVICING

Pursuant to a Shareholder Servicing Agreement with the Trust, Morgan acts as
shareholder servicing agent for its customers and other Fund investors who are
customers of an eligible institution which is a customer of Morgan (an "Eligi-
ble Institution"). The Fund pays Morgan for these services at an annual rate
(expressed as a percentage of the average daily net asset values of Fund shares
owned by or for shareholders for whom Morgan is acting as shareholder servicing
agent) of 0.05% of the Fund's average daily net assets. Under the terms of the
Shareholder Servicing Agreement with the Fund, Morgan may delegate one or more
of its responsibilities to other entities at Morgan's expense.

The Fund's shares may be sold to or through Eligible Institutions, including
financial institutions and broker-dealers, that may be paid fees by Morgan or
its affiliates for services provided to their clients that invest in the Fund.
See Eligible Institutions. Organizations that provide recordkeeping or other
services to certain employee benefit or retirement plans that include the Fund
as an investment alternative may also be paid a fee.

Shareholders should address all inquiries to J.P. Morgan Funds Services, Morgan
Guaranty Trust Company of New York, 522 Fifth Avenue, New York, New York 10036
or call (800) 766-7722.

The business days of the Fund and the Portfolio are the days the New York Stock
Exchange is open.

PURCHASE OF SHARES

METHOD OF PURCHASE. Investors may open accounts with the Fund only through the
Distributor. All purchase transactions in Fund accounts are processed by Morgan
as shareholder servicing agent and the Fund is authorized to accept any in-
structions relating to a Fund account from Morgan as agent for the customer.
All purchase orders must be accepted by the Distributor. Investors must be cus-
tomers of either Morgan or of an Eligible Institution or participants in em-
ployer-sponsored retirement plans that have designated the Fund as an invest-
ment option for the plans. Prospective investors who are not already customers
of Morgan may apply to become customers of Morgan for the sole purpose of Fund
transactions. There are no charges associated with becoming a Morgan customer
for this purpose. Morgan reserves the right to determine the customers that it
will accept, and the Trust reserves the right to determine the purchase orders
that it will accept.

The Fund requires a minimum initial investment of $10 million and a minimum
subsequent investment of $25,000. These minimum investment requirements may be
waived for certain investors, including investors for whom the Advisor

11
<PAGE>

is a fiduciary, who maintain related accounts with the Fund, other J.P. Morgan
Institutional Funds or the Advisor, who make investments for a group of cli-
ents, such as financial advisors, trust companies and investment advisors, or
who maintain retirement accounts with the Funds.

PURCHASE PRICE AND SETTLEMENT. The Fund's shares are sold on a continuous ba-
sis without a sales charge at the net asset value per share next determined
after receipt of an order. Prospective investors may purchase shares with the
assistance of an Eligible Institution that may establish its own terms, condi-
tions and charges.

To purchase shares in the Fund, investors should request their Morgan repre-
sentative (or a representative of their Eligible Institution) to assist them
in placing a purchase order with the Fund's Distributor and to transfer imme-
diately available funds to the Fund's Distributor on the same day. Any share-
holder may also call J.P. Morgan Funds Services at (800) 766-7722 for assis-
tance in placing an order for Fund shares. Purchase orders must be received by
12:00 noon New York time and immediately available Funds must be received by
4:00 P.M. New York time on a business day for the purchase to be effective and
dividends to be earned on the same day. The Fund does not accept orders after
4:00 P.M. If purchase orders are received after 12:00 noon or funds are re-
ceived after 4 P.M. New York time for any reason, including that the day is a
Federal Reserve holiday, the purchase is not effective and dividends are not
earned until the next business day.

ELIGIBLE INSTITUTIONS. The services provided by Eligible Institutions may in-
clude establishing and maintaining shareholder accounts, processing purchase
and redemption transactions, arranging for bank wires, performing shareholder
sub-accounting, answering client inquiries regarding the Trust, assisting cli-
ents in changing dividend options, account designations and addresses, provid-
ing 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 Eligible Institution, transmitting proxy state-
ments, periodic reports, updated prospectuses and other communications to
shareholders and, with respect to meetings of shareholders, collecting, tabu-
lating and forwarding executed proxies and obtaining such other information
and performing such other services as Morgan or the Eligible Institution's
clients may reasonably request and agree upon with the Eligible Institution.

Although there is no sales charge levied directly by the Fund, Eligible Insti-
tutions may establish their own terms and conditions for providing their serv-
ices and may charge investors a transaction-based or other fee for their serv-
ices. Such charges may vary among Eligible Institutions but in all cases will
be retained by the Eligible Institution and not remitted to the Fund or Mor-
gan.

REDEMPTION OF SHARES

METHOD OF REDEMPTION. To redeem shares in the Fund, an investor may instruct
Morgan or his or her Eligible Institution, as appropriate, to submit a redemp-
tion request to the Fund or may telephone J.P. Morgan Funds Services directly
at (800) 766-7722 and give the Shareholder Service Representative a preas-
signed shareholder Personal Identification Number and the amount of the re-
demption. The Fund executes effective redemption requests at the next deter-
mined net asset value per share. See Net Asset Value. See Additional Informa-
tion below for an explanation of the telephone redemption policy of the J.P.
Morgan Institutional Funds.

A redemption request received on a business day prior to 12:00 noon New York
time is effective on that day. A redemption request received after that time
becomes effective on the next day. Proceeds of an effective redemption are
generally deposited the same day in immediately available funds to the share-
holder's account at Morgan or at his Eligible Institution or, in the case of
certain Morgan customers, are mailed by check or wire transferred in accor-
dance with the customer's instructions. If a redemption request becomes effec-
tive on a day when the New York Stock Exchange is open but which is a Federal
Reserve holiday, the proceeds are paid the next business day. See Further Re-
demption Information.

12
<PAGE>

MANDATORY REDEMPTION BY THE FUND. If the value of a shareholder's holdings in
the Fund falls below the Fund's initial investment amount of $10 million for
more than 30 days because of a redemption of shares, the Fund may redeem the
remaining shares in the account 60 days after written notice to the shareholder
unless the account is increased to the Fund's minimum investment amount or
more.

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 sharehold-
er's taxpayer identification number and address. As discussed under Taxes be-
low, the Fund may be required to im-pose "back-up" withholding of federal in-
come tax on dividends, distributions and redemption proceeds when non-corporate
investors have not provided a certified taxpayer identification number. In ad-
dition, if a shareholder sends a check for the purchase of Fund shares and
shares are purchased before the check has cleared, the transmittal of redemp-
tion proceeds from the shares will occur upon clearance of the check which may
take up to 15 days.

The Fund reserves the right to suspend the right of redemption and to postpone
the date of payment upon redemption for up to seven days and for such other pe-
riods as the 1940 Act or the Securities and Exchange Commission may permit. See
Redemption of Shares in the Statement of Additional Information.

EXCHANGE OF SHARES

An investor may exchange shares from the Fund into any other J.P. Morgan Insti-
tutional Fund or J.P. Morgan Fund or series of J.P. Morgan Series Trust 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 pro-
spectus of the fund into which they are exchanging and may only exchange be-
tween 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 pur-
chases of another fund and the usual purchase and redemption procedures and re-
quirements are applicable to exchanges. See Purchase of Shares and Redemption
of Shares in this Prospectus and in the prospectuses for the other J.P. Morgan
Institutional Funds, J.P. Morgan Funds and J.P. Morgan Series Trust. See also
Additional Information below for an explanation of the telephone exchange pol-
icy of the J.P. Morgan Institutional Funds.

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. The Fund reserves the right to discontinue, alter or limit its
exchange privilege at any time. For investors in certain states, state securi-
ties laws may restrict the availability of the exchange privilege.

DIVIDENDS AND DISTRIBUTIONS

All of the Fund's net investment income is declared as a dividend daily and
paid monthly. If an investor's shares are redeemed during a month, accrued but
unpaid dividends are paid with the redemption proceeds. The net investment in-
come of the Fund for dividend purposes consists of its pro rata share of the
net income of the Portfolio less the Fund's expenses. Dividends and distribu-
tions are payable to shareholders of record at the time of declaration. The net
investment income of the Fund for each business day is determined immediately
prior to the determination of net asset value. Net investment income for other
days is determined at the time net asset value is determined on the prior busi-
ness day. Shares of the Fund earn dividends on the business day their purchase
is effective, but not on the business day redemption proceeds are paid. See
Purchase of Shares and Redemption of Shares.

Net short-term capital gains, if any, will be distributed in accordance with
the requirements of the Internal Revenue Code of 1986, as amended (the "Code"),
and may be reflected in the Fund's daily dividends. Substantially all the real-
ized

13
<PAGE>

net long-term capital gains, if any, of the Fund are declared and paid on an
annual basis, except that an additional capital gains distribution may be made
in a given year to the extent necessary to avoid the imposition of federal ex-
cise tax on the Fund.

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 Eligible Institution
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.

NET ASSET VALUE

Net asset value per share for the Fund is determined by subtracting from the
value of the Fund's total assets (i.e., the value of its investment in the
Portfolio and other assets) the amount of its liabilities and dividing the re-
mainder by the number of its outstanding shares, rounded to the nearest cent.
Expenses, including the fees payable to Morgan, are accrued daily. The Portfo-
lio values all portfolio securities by the amortized cost method. This method
attempts to maintain for the Fund a constant net asset value per share of
$1.00. No assurances can be given that this goal can be attained. See Net Asset
Value in the Statement of Additional Information for more information on valua-
tion of portfolio securities for the Portfolio.

The Fund computes its net asset value once daily at 4:00 P.M. New York time on
Monday through Friday, except that the net asset value is not computed for the
Fund on the holidays listed under Net Asset Value in the Statement of Addi-
tional Information.

ORGANIZATION

The Trust was organized on November 4, 1992 as an unincorporated business trust
under Massachusetts law and is an entity commonly known as a "Massachusetts
business trust". The Declaration of Trust permits the Trustees to issue an un-
limited number of full and fractional shares ($0.001 par value) of one or more
series. To date 25 series of shares have been authorized and are available for
sale to the public. Only shares of the Fund are offered through this Prospec-
tus. No series of shares has any preference over any other series of shares.
See Massachusetts Trust in the Statement of Additional Information.

The Declaration of Trust for the Trust provides that no Trustee, shareholder,
officer, employee, or agent of the Fund shall be held to any personal liabili-
ty, nor shall resort be had to their private property for the satisfaction of
any obligation or claim or otherwise in connection with the affairs of the
Fund, but that the Trust property only shall be liable.

Shareholders of the Fund are entitled to one vote for each share and to the ap-
propriate fractional vote for each fractional share. There is no cumulative
voting. Shares have no preemptive or conversion rights. Shares are fully paid
and non-assessable by the Fund. The Trust does not intend to hold meetings of
shareholders annually. The Trustees may call meetings of shareholders for ac-
tion by shareholder vote as may be required by either the 1940 Act or the Dec-
laration of Trust. The Trustees will call a meeting of shareholders to vote on
removal of a Trustee upon the written request of the record holders of ten per-
cent of Trust shares and will assist shareholders in communicating with each
other as prescribed in Section 16(c) of the 1940 Act. For further organization
information, including certain shareholder rights, see Description of Shares in
the Statement of Additional Information.

14
<PAGE>

separate accounts and common and commingled trust funds) will each be liable
for all obligations of the Portfolio. However, the risk of the Fund incurring
financial loss on account of such liability is limited to circumstances in
which both inadequate insurance existed and the Portfolio itself was unable to
meet its obligations. Accordingly, the Trustees of the Trust believe that nei-
ther the Fund nor its shareholders will be adversely affected by reason of the
Fund's investing in the Portfolio.

TAXES

The following discussion of tax consequences is based on U.S. federal tax laws
in effect on the date of this Prospectus. These laws and regulations are sub-
ject to change by legislative or administrative action. Investors are urged to
consult their own tax advisors with respect to specific questions as to feder-
al, state or local taxes. See Taxes in the Statement of Additional Information.
Annual statements as to the current federal tax status of distributions, if ap-
plicable, are mailed to shareholders after the end of the taxable year for the
Fund.

The Trust intends that the Fund will continue to qualify as a separate regu-
lated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended. For the Fund to qualify as a regulated investment company,
the Portfolio, in addition to other requirements, limits its investments so
that at the close of each quarter of its taxable year (a) no more than 25% of
its total assets are invested in the securities of any one issuer, except U.S.
Government securities, and (b) with regard to 50% of its total assets, no more
than 5% of its total assets are invested in the securities of a single issuer,
except U.S. Government securities. As a regulated investment company, the Fund
should not be subject to federal income taxes or federal excise taxes if sub-
stantially all of its net investment income and capital gains less any avail-
able capital loss carryforwards are distributed to shareholders within allow-
able time limits. The Portfolio intends to qualify as an association treated as
a partnership for federal income tax purposes. As such, the Portfolio should
not be subject to tax. The Fund's status as a regulated investment company is
dependent on, among other things, the Portfolio's continued qualification as a
partnership for federal income tax purposes.

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.

The Fund intends to qualify to pay exempt-interest dividends to its sharehold-
ers 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. Exempt-in-
terest dividends received from the Fund will be treated for federal income tax
purposes as tax exempt interest income. In view of the Fund's investment poli-
cies, it is expected that a substantial portion of the Fund's 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 tax-
able securities under certain circumstances. See Taxable Investments.

Interest on certain tax exempt municipal obligations issued after August 7,
1986 is a preference item for purposes of the alternative minimum tax applica-
ble to individuals and corporations. Under tax regulations to be issued, the
portion of an exempt-interest dividend of a regulated investment company that
is allocable to these obligations will be treated as a preference item for pur-
poses of the alternative minimum tax.

Corporations should, however, be aware that interest on all municipal securi-
ties will be included in calculating (i) adjusted current earnings for purposes
of the alternative minimum tax applicable to them, (ii) the additional tax im-
posed on certain corporations by the Superfund Revenue Act of 1986, and (iii)
the foreign branch profits tax imposed on effec tively connected earnings and
profits of United States branches of foreign corporations. Furthermore, special
tax provi-

15
<PAGE>

sions may apply to certain financial institutions and property and casualty in-
surance companies, and they should consult their tax advisors before purchasing
shares of the Fund.

Interest on indebtedness incurred or continued by a shareholder (whether a cor-
poration or an individual) to purchase or carry shares of the Fund is not de-
ductible. The Treasury has been given authority to issue regulations which
would disallow the interest deduction if incurred to purchase or carry shares
of the Fund owned by the taxpayer's spouse, minor child or entity controlled by
the taxpayer. Entities or persons who are "substantial users" (or related per-
sons) of facilities financed by tax exempt bonds should consult their tax advi-
sors before purchasing shares of the Fund.

Distributions of taxable net investment income and realized net short-term cap-
ital gains in excess of net long-term capital losses are taxable as ordinary
income to shareholders of the Fund whether such distributions are taken in cash
or reinvested in additional shares. Distributions of this type to corporate
shareholders of the Fund are not eligible for the dividends-received deduction.
As a result of the enactment of the Taxpayer Relief Act of 1997 (the "Act"),
long-term capital gain of an individual is generally subject to a maximum rate
of 28% in respect of a capital asset held directly by such individual for more
than one year but not more than eighteen months, and the maximum rate is re-
duced to 20% in respect of a capital asset held in excess of 18 months. The Act
authorizes the Treasury department to promulgate regulations that would apply
these rules in the case of long-term capital gain distributions made by the
Fund.

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 cap-
ital gain or loss if the shares have been held for more than one year, and oth-
erwise as short-term capital gain or loss. However, any loss realized by a
shareholder upon the redemption or exchange of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
long-term capital gain distributions received by the shareholder with respect
to such shares. In addition, any loss realized by a shareholder upon the re-
demption or exchange of shares in the Fund held six months or less will be dis-
allowed to the extent of any exempt-interest dividends received by the share-
holder with respect to the shares. See "Taxes in the Statement of Additional
Information."

ADDITIONAL INFORMATION

The Fund sends to its shareholders annual and semi-annual reports. The finan-
cial statements appearing in annual reports are audited by independent accoun-
tants. Shareholders also will be sent confirmations of each purchase and re-
demption and monthly statements, reflecting all other account activity, includ-
ing dividends and any distributions reinvested in additional shares or credited
as cash.

All shareholders are given the privilege to initiate transactions automatically
by telephone upon opening an account. However, an investor should be aware that
a transaction authorized by telephone and reasonably believed to be genuine by
the Fund, Morgan, his Eligible Institution or the Distributor may subject the
investor to risk of loss if such instruction is subsequently found not to be
genuine. The Fund will employ reasonable procedures, including requiring in-
vestors to give their Personal Identification Number and tape recording of tel-
ephone instructions, to confirm that instructions communicated from investors
by telephone are genuine; if it does not, the Fund, the Shareholder Servicing
Agent or a shareholder's Eligible Institution may be liable for any losses due
to unauthorized or fraudulent instructions.

16
<PAGE>

The Fund may make historical performance information available and may compare
its performance to other investments or relevant indexes, including data from
Lipper Analytical Services, Inc., Micropal Inc., Morningstar Inc., Ibbotson
Associates, Donoghue's Money Market and Tax Free Money Market fund averages
and other industry publications. The Fund may advertise "yield," "effective
yield," and "tax equivalent yield". Yield refers to the net income generated
by an investment in the Fund over a stated seven-day period. This income is
then annualized-i.e., the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. Effective yield is calculated simi-
larly to the yield, but, when annualized, the income earned by an investment
in the Fund is assumed to be reinvested; the effective yield will be slightly
higher than the yield because of the compounding effect of this assumed rein-
vestment. Tax equivalent yield is calculated similarly to the yield for the
Fund, except that the yield is increased using a stated income tax rate to
demonstrate the taxable yield necessary to produce an after-tax equivalent to
the Fund.

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 op-
erations, if less) assuming that all distributions and dividends by the Fund
were reinvested on the reinvestment dates during the period and less all re-
curring fees. These methods of calculating yield and total return are required
by regulations of the Securities and Exchange Commission. Yield and total re-
turn data similarly calculated, unless otherwise indicated, over other speci-
fied periods of time may also be used. See Performance Data in the Statement
of Additional Information. All performance figures are based on historical
earnings and are not intended to indicate future performance. Shareholders may
obtain performance information by calling Morgan at (800) 766-7722.

17
<PAGE>

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

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

PROS381-981

J.P. Morgan Institutional Tax Exempt Money Market Fund

PROSPECTUS

January 2, 1998

******************************************************************************

J.P. MORGAN INSTITUTIONAL FUNDS

J.P. MORGAN INSTITUTIONAL TAX EXEMPT MONEY MARKET FUND

STATEMENT OF ADDITIONAL INFORMATION

JANUARY 2, 1998

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED FOR THE FUND LISTED ABOVE, AS SUPPLEMENTED FROM TIME TO TIME, WHICH MAY BE
OBTAINED UPON REQUEST FROM FUNDS DISTRIBUTOR, INC., ATTENTION: J.P. Morgan
INSTITUTIONAL FUNDS (800) 221-7930.

<PAGE>

Table of Contents

Page

General . . . . . . . . . . . . . . . . . . . 2
Investment Objective and Policies . . . . . . 2
Investment Restrictions . . . . . . . . . . . 11
Trustees and Officers . . . . . . . . . . . . 13
Investment Advisor . . . . . . . . . . . . . . 17
Distributor . . . . . . . . . . . . . . . . . 19
Co-Administrator . . . . . . . . . . . . . . . 19
Services Agent . . . . . . . . . . . . . . . . 20
Custodian and Transfer Agent . . . . . . . . . 21
Shareholder Servicing . . . . . . . . . . . . 21
Independent Accountants . . . . . . . . . . . 22
Expenses . . . . . . . . . . . . . . . . . . . 22
Purchase of Shares . . . . . . . . . . . . . . 23
Redemption of Shares . . . . . . . . . . . . . 23
Exchange of Shares . . . . . . . . . . . . . . 24
Dividends and Distributions . . . . . . . . . 24
Net Asset Value . . . . . . . . . . . . . . . 24
Performance Data . . . . . . . . . . . . . . . 25
Portfolio Transactions . . . . . . . . . . . . 26
Massachusetts Trust . . . . . . . . . . . . . 28
Description of Shares . . . . . . . . . . . . 29
Taxes . . . . . . . . . . . . . . . . . . . . 31
Additional Information . . . . . . . . . . . 36
Financial Statements . . . . . . . . . . . . . 36
Appendix A - Description of Securities
Ratings . . . . . . . . . . . . . . . . . . . A-37

<PAGE>

GENERAL

This Statement of Additional Information relates only to the J.P.
Morgan Institutional Tax Exempt Money Market 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. The Fund operates through a two-tier master-feeder investment fund
structure.

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

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 by the Portfolio as set forth above and in the Prospectus. The
investment objective of the Fund and the investment objective of the Portfolio
are identical. 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 to be an economical and convenient means of making
substantial investments in instruments that are exempt from federal income tax.
The Fund's investment objective is to provide a high level of current income
that is exempt from federal income tax and maintain a high level of liquidity.
See "Taxes." The Fund attempts to achieve this objective by investing all of its
investable assets in The Tax Exempt Money Market Portfolio (the "Portfolio"), a
diversified open-end management investment company having the same investment
objective as the Fund.

The Portfolio attempts to achieve its investment objective by
maintaining a dollar-weighted average portfolio maturity of not more than 90
days and by investing in U.S. dollar-denominated securities described in the
Prospectus and this Statement of Additional Information that meet certain rating
criteria, present minimal credit risks, have effective maturities of not more
than thirteen months and earn interest wholly exempt from federal income tax in
the opinion of bond counsel for the issuer. The Portfolio generally will not
invest in taxable securities, although it may temporarily invest up to 20% of
total assets in such securities in abnormal market conditions for defensive
purposes only, if in the judgment of the Adviosr, tax exempt securities
satisfying the Fund's investment objective may not be purchased. For purposes of
this calculation, obligations that generate income that may be treated as a
preference item for purposes of the alternative minimum tax shall not be
considered taxable securities. See "Quality and Diversification Requirements."
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."

Money Market Instruments

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

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

Additional U.S. Government Obligations. The Fund may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. Securities which are backed by the full faith
and credit of the United States include obligations of the Government National
Mortgage Association, the Farmers Home Administration, and the Export-Import
Bank. In the case of securities not backed by the full faith and credit of the
United States, the Fund must look principally to the federal agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments. Securities in which the Fund may
invest that are not backed by the full faith and credit of the United States
include, but are not limited to: (i) obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan
Banks and the U.S. Postal Service, each of which has the 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, unless otherwise noted in the Prospectus or
below, 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
or of foreign 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. See "Foreign Investments." The
Fund will not invest in obligations for which the Advisor, or any of its
affiliated persons, is the ultimate obligor or accepting bank.

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 Guaranty Trust Company of New York
acting as agent, for no additional fee, in its capacity as investment advisor to
the Portfolio and as fiduciary for other clients for whom it exercises
investment discretion. The monies loaned to the borrower come from accounts
managed by the Advisor or its affiliates, pursuant to arrangements with such
accounts. Interest and principal payments are credited to such accounts. The
Advisor, acting as a fiduciary on behalf of its clients, has the right to
increase or decrease the amount provided to the borrower under an obligation.
The borrower has the right to pay without penalty all or any part of the
principal amount then outstanding on an obligation together with interest to the
date of payment. Since these obligations typically provide that the interest
rate is tied to the Federal Reserve commercial paper composite rate, the rate on
master demand obligations is subject to change. Repayment of a master demand
obligation to participating accounts depends on the ability of the borrower to
pay the accrued interest and principal of the obligation on demand which is
continuously monitored by the Advisor. 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, unless otherwise noted in the
Prospectus or below, may enter into repurchase agreements with brokers, dealers
or banks that meet the credit guidelines approved by the Fund's Trustees. In a
repurchase agreement, the Fund buys a security from a seller that has agreed to
repurchase the same security at a mutually agreed upon date and price. The
resale price normally is in excess of the purchase price, reflecting an agreed
upon interest rate. This interest rate is effective for the period of time the
Fund is invested in the agreement and is not related to the coupon rate on the
underlying security. A repurchase agreement may also be viewed as a fully
collateralized loan of money by the Fund to the seller. The period of these
repurchase agreements will usually be short, from overnight to one week, and at
no time will the Fund invest in repurchase agreements for more than thirteen
months. The securities which are subject to repurchase agreements, however, may
have maturity dates in excess of thirteen months from the effective date of the
repurchase agreement. The Fund will always receive securities as collateral
whose market value is, and during the entire term of the agreement remains, at
least equal to 100% of the dollar amount invested by the Fund in 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. The Fund will be fully collateralized within the meaning of
paragraph (a)(4) of Rule 2a-7 under the Investment Company Act of 1940, as
amended (the "1940 Act"). If the seller defaults, 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 with remaining
effective maturities of not more than thirteen months, including without
limitation corporate and foreign bonds, and other obligations described in the
Prospectus or this Statement of Additional Information.

Tax Exempt Obligations

As discussed in the Prospectus, the Fund may invest in tax exempt
obligations to the extent consistent with the Fund's investment objective and
policies. A description of the various types of tax exempt obligations which may
be purchased by the Fund appears in the Prospectus and 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. 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.

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. For a description of the attributes of master demand
obligations, see "Money Market Instruments" above. Although there is no
secondary market for master demand obligations, such obligations are considered
by the Fund to be liquid because they are payable upon demand. The Fund has no
specific percentage limitations on investments in master demand obligations.

The Fund may purchase securities of the type described above if they
have effective maturities within thirteen months. As required by regulation of
the Securities and Exchange Commission (the "SEC"), this means that on the date
of acquisition the final stated maturity (or if called for redemption, the
redemption date) must be within thirteen months or the maturity must be deemed
to be no more than thirteen months because of a maturity shortening mechanism,
such as a variable interest rate, coupled with a conditional or unconditional
right to resell the investment to the issuer or a third party. See "Variable
Rate Demand Notes" and "Puts." A substantial portion of the Fund's portfolio is
subject to maturity shortening mechanisms consisting of variable interest rates
coupled with unconditional rights to resell the securities to the issuers either
directly or by drawing on a domestic or foreign bank letter of credit or other
credit support arrangement. See "Foreign Investments."

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 which are subject to puts
at amortized cost. No value is assigned to the put. The cost of any such put is
carried as an unrealized loss from the time of purchase until it is exercised or
expires. 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.

Since the value of the put is partly dependent on the ability of the
put writer to meet its obligation to repurchase, the Fund's policy is to enter
into put transactions only with municipal securities dealers who are approved by
the Advisor. Each dealer will be approved on its own merits, and it is the
Fund's general policy to enter into put transactions only with those dealers
which are determined to present minimal credit risks. In connection with such
determination, the Trustees will review regularly the Advisor's 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. 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 Fund is unable to
predict whether all or any portion of any loss sustained could subsequently be
recovered from such dealer.

The Trust has been advised by counsel that the Fund will be considered
the owner of the securities subject to the puts so that the interest on the
securities is tax exempt income to the Fund. Such advice of counsel is based on
certain assumptions concerning the terms of the puts and the attendant
circumstances.

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 Portfolio 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. It is the current policy of the Fund's not to enter into
when-issued commitments exceeding in the aggregate 15% of the market value of
the Portfolio's total assets, less liabilities other than the obligations
created by when-issued commitments.

Investment Company Securities. Securities of other investment companies
may be acquired by the Fund and the Portfolio to the extent permitted under the
1940 Act. These limits require that, as determined immediately after a purchase
is made, (i) not more than 5% of the value of the Fund's total assets will be
invested in the securities of any one investment company, (ii) not more than 10%
of the value of its total assets will be invested in the aggregate in securities
of investment companies as a group, and (iii) not more than 3% of the
outstanding voting stock of any one investment company will be owned by a 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
(its corresponding 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.

Reverse Repurchase Agreements. The Fund, unless otherwise noted in the
Prospectus or below, may enter into reverse repurchase agreements. In a reverse
repurchase agreement, the Fund sells a security and agrees to repurchase the
same security at a mutually agreed upon date and price. 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. The Fund will invest the
proceeds of borrowings under reverse repurchase agreements. In addition, the
Fund will enter into a reverse repurchase agreement only when the interest
income to be earned from the investment of the proceeds is greater than the
interest expense of the transaction. The Fund will not invest the proceeds of a
reverse repurchase agreement for a period which exceeds the duration of the
reverse repurchase agreement. The Fund will establish and maintain with the
Custodian a separate account with a segregated portfolio of securities in an
amount at least equal to its purchase obligations under its reverse repurchase
agreements. See "Investment Restrictions" for the Fund's limitations on reverse
repurchase agreements and bank borrowings.

Loans of Portfolio Securities. The Fund may lend its securities if such
loans are secured continuously by cash or equivalent collateral or by a letter
of credit in favor of the Fund at least equal at all times to 100% of the market
value of the securities loaned, plus accrued interest. While such securities are
on loan, the borrower will pay the Fund any income accruing thereon. Loans will
be subject to termination by the Fund in the normal settlement time, generally
three business days after notice, or by the borrower on one day's notice.
Borrowed securities must be returned when the loan is terminated. Any gain or
loss in the market price of the borrowed securities which occurs during the term
of the loan inures to the Fund and its respective investors. The Fund may pay
reasonable finders' and custodial fees in connection with a loan. In addition,
the Fund will consider all facts and circumstances including the
creditworthiness of the borrowing financial institution, and the Fund will not
make any loans in excess of one year. The Fund will not lend its securities to
any officer, Trustee, Director, employee or other affiliate of the Fund, the
Advisor or the Distributor, unless otherwise permitted by applicable law. If
interest rates rise during the term of a reverse repurchase agreement, entering
into the reverse repurchase agreement may have a negative impact on the Fund's
ability to maintain a net asset value of $1.00 per share.

Privately Placed and Certain Unregistered Securities. The Fund may
invest in privately placed, restricted, Rule 144A or other unregistered
securities as described in the Prospectus.

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 Securities Act of 1933, as amended (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 Instruments. The Fund may invest in certain synthetic
variable rate instruments as described in the Prospectus. 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,
(ii) the risk to the Fund will be that of holding a long-term bond, and (iii) in
the case of the Fund, the disposition of the bond may be required which could be
at a loss.

Quality and Diversification Requirements

The Fund intends to meet the diversification requirements of the 1940
Act. To meet these requirements, 75% of the assets of the Fund are subject to
the following fundamental limitations: (1) the Fund may not invest more than 5%
of its total assets in the securities of any one issuer, except obligations of
the U.S. Government, its agencies and instrumentalities, and (2) the Fund may
not own more than 10% of the outstanding voting securities of any one issuer. As
for the other 25% of the Fund's assets not subject to the limitation described
above, there is no limitation on investment of these assets under the 1940 Act,
so that all of such assets may be invested in securities of any one issuer,
subject to the limitation of any applicable state securities laws or as
described below. Investments not subject to the limitations described above
could involve an increased risk to a Fund should an issuer, or the state or its
related entities, be unable to make interest or principal payments or should the
market value of such securities decline.

At the time the Fund invests in any taxable commercial paper, master
demand obligations, 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 Morgan's opinion.

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 Fund may own so long as
it does not invest more than 5% of its total assets that are subject to the
diversification limitation in the securities of such issuer, except obligations
issued or guaranteed by the U.S. Government. Consequently, the Fund may invest
in a greater percentage of the outstanding securities of a single issuer than
would an investment company which invests in voting securities. See "Investment
Restrictions."

In order to attain the Fund's objective of maintaining a stable net
asset value, the Portfolio for the Tax Exempt Money Market Fund will limit its
investments to securities that present minimal credit risks and securities
(other than New York State municipal notes) that are rated within the highest
rating assigned to short-term debt securities (or, in the case of New York State
municipal notes, within one of the two highest ratings assigned to short-term
debt securities) by at least two NRSROs or by the only NRSRO that has rated the
security. Securities which originally had a maturity of over one year are
subject to more complicated, but generally similar rating requirements. The Fund
may also purchase unrated securities that are of comparable quality to the rated
securities described above. Additionally, if the issuer of a particular security
has issued other securities of comparable priority and security and which have
been rated in accordance with the criteria described above that security will be
deemed to have the same rating as such other rated securities.

In addition, the Board of Trustees has adopted procedures which (i)
require the Fund to maintain a dollar-weighted average portfolio maturity of not
more than 90 days and to invest only in securities with a remaining maturity of
not more than thirteen months and (ii) require the Fund, in the event of certain
downgrading of or defaults on portfolio holdings, to dispose of the holding,
subject in certain circumstances to a finding by the Trustees that disposing of
the holding would not be in the Fund's best interest.

The credit quality of variable rate demand notes and other municipal
obligations is frequently enhanced by various credit support arrangements with
domestic or foreign financial institutions, such as letters of credit,
guarantees and insurance, and these arrangements are considered when investment
quality is evaluated. The rating of credit-enhanced municipal obligations by a
NRSRO may be based primarily or exclusively on the credit support arrangement.

INVESTMENT RESTRICTIONS

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

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

The Fund and the Portfolio may not:

1. Borrow money, except from banks for temporary, extraordinary or emergency
purposes and then only in amounts up to 10% of the value of the Fund's total
assets, taken at cost at the time of such borrowing; or mortgage, pledge or
hypothecate any assets except in connection with any such borrowing in amounts
up to 10% of the value of the Fund's net assets at the time of such borrowing.
The Fund will not purchase securities while borrowings exceed 5% of the Fund's
total assets, provided, however, that the Fund may increase its interest in an
open-end management investment company with the same investment objective and
restrictions as the Fund's while such borrowings are outstanding. This borrowing
provision, for example, facilitates the orderly sale of portfolio securities in
the event of abnormally heavy redemption requests or in the event of redemption
requests during periods of tight market supply. This provision is not for
leveraging purposes;

2. Invest more than 25% of its total assets in securities of governmental units
located in any one state, territory, or possession of the United States. The
Fund may invest more then 25% of its total assets in industrial development and
pollution control obligations whether or not the users of facilities financed by
such obligations are in the same industry;1

3. Purchase industrial revenue bonds if, as a result of such purchase, more than
5% of total Fund assets would be invested in industrial revenue bonds where
payment of principal and interest are the responsibility of companies with fewer
than three years of operating history;

4. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Fund's total
assets would be invested in securities or other obligations of any one such
issuer, provided, however, that the Fund may invest all or part of its
investable assets in an open-end management investment company with the same
investment objective and restrictions as the Fund's. Each state and each
political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member will be a separate issuer if
the security is backed only by the assets and revenues of that issuer. If the
security is guaranteed by another entity, the guarantor will be deemed to be the
issuer. This limitation shall not apply to securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities or to permitted
investments of up to 25% of the Fund's total assets;2

5. Make loans, except through the purchase or holding of debt obligations,
repurchase agreements, or loans of portfolio securities in accordance with the
Fund's investment objective and policies (see "Investment Objectives and
Policies"); 6. Purchase or sell puts, calls, straddles, spreads, or any
combination thereof except to the extent that securities subject to a demand
obligation, stand-by commitments and puts may be purchased (see "Investment
Objectives and Policies"); real estate; commodities; commodity contracts; or
interests in oil, gas, or mineral exploration or development programs. However,
the Fund may purchase municipal bonds, notes or commercial paper secured by
interests in real estate;

7. 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 securities or of securities
for delayed delivery;

8. Acquire securities of other investment companies, except as permitted by the
1940 Act;

9. Act as an underwriter of securities; or

10. Issue senior securities, except as may otherwise be permitted by the
foregoing investment restrictions or under the 1940 Act or any rule, order or
interpretation thereunder.

Non-Fundamental Investment Restriction - The investment restriction
described below is not a fundamental policy of the Fund or Portfolio and may be
changed by their respective Trustees. This non-fundamental investment policy
requires that the Fund may not:

(i) 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 10% of the Fund's
net assets would be in investments that are illiquid.

Notwithstanding any other fundamental or non-fundamental investment
restriction or policy, the Fund reserves the right, without the approval of
shareholders, to invest all of its assets in the securities of a single open-end
registered investment company with substantially the same investment objective,
restrictions and policies as the Fund.

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 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. ADDYAATrustee; Retired; Executive Vice President and Chief
Financial Officer since prior to April 1994, Amoco Corporation. His address is
5300 Arbutus Cove, Austin, TX 78746, and his date of birth is January 1, 1932.

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

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

MATTHEW HEALEY (*)AATrustee, Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc., since prior to 1992. His address is Pine Tree
Club Estates, 10286 Saint Andrews Road, Boynton Beach, FL 33436, and his date of
birth is August 23, 1937.

MICHAEL P. MALLARDIAATrustee; Retired; Senior Vice President, Capital
Cities/ABC, Inc. and President, Broadcast Group since prior to April 1996. His
address is 10 Charnwood Drive, Suffern, NY 10910, and his date of birth is March
17, 1934.
- ----------------------
(*) Mr. Healey is an "interested person" of the Trust, the Advisor and each
Portfolio as that term is defined in the 1940 Act.

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 Fund,
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 accrued by the Trust for the calendar year
ended December 31, 1996 are set forth below.

TOTAL TRUSTEE COMPENSATION
ACCRUED BY THE
AGGREGATE TRUSTEE MASTER PORTFOLIOS(*), J.P.
COMPENSATION MORGAN FUNDS,J.P. MORGAN SERIES
ACCRUED BY THE TRUST TRUST AND THE TRUST DURING
NAME OF TRUSTEE DURING 1996 1996 (***)

Frederick S. Addy, Trustee $12,593 $65,000

William G. Burns, Trustee $12,593 $65,000

Arthur C. Eschenlauer, Trustee $12,593 $65,000

Matthew Healey, Trustee(**), $12,593 $65,000
Chairman and Chief Executive
Officer

Michael P. Mallardi, Trustee $12,593 $65,000
- ---------------------------------------------
(*) Includes the Portfolio and 23 other portfolios (collectively the "Master
Portfolios") for which Morgan acts as investment advisor..

(**) During 1996, Pierpont Group, Inc. paid Mr. Healey, in his role as Chairman
of Pierpont Group, Inc., compensation in the amount of $140,000, contributed
$21,000 to a defined contribution plan on his behalf and paid $21,500 in
insurance premiums for his benefit.

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

The Trustees, in addition to reviewing actions of the Trust's and the
Portfolio's various service providers, decide upon matters of general policy.
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
Pierpont Family of Funds, and the Trustees are the equal and sole shareholders
of Pierpont Group, Inc. The Trust and the Portfolio have agreed to pay Pierpont
Group, Inc. a fee in an amount representing its reasonable costs in performing
these services to the Trust, the Portfolio and certain other registered
investment companies subject to similar agreements with Pierpont Group, Inc.
These costs are periodically reviewed by the Trustees. The Principal offices of
Pierpont Group, Inc. are located at 461 Fifth Avenue, New York, NY 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 year ended August 31, 1995: $8,400. For the fiscal year
ended August 31, 1996: 8,391. For the fiscal year ended August 31, 1997: $6,074

Portfolio -- For the fiscal year ended August 31, 1995: $110,325. For the fiscal
year ended August 31, 1996: $62,310. For the fiscal year ended August 31, 1997:
$43,285

Officers

The Trust's and Portfolio's executive officers (listed below), other
than the Chief Executive Officer, 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, FL 33436. His date of birth is August 23, 1937.

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 the Dreyfus
Corporation ("Dreyfus") or its affiliates. From December 1991 to July 1994, she
was President and Chief Compliance Officer of FDI. Her date of birth is August
1, 1957.

DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant Vice
President and Manager of Treasury Services and Administration of FDI and an
officer of certain investment companies advised or administered by Dreyfus or
its affiliates. Prior to April 1997, Mr. Conroy was Supervisor of Treasury
Services and Administration of FDI. From April 1993 to January 1995, Mr. Conroy
was a Senior Fund Accountant for Investors Bank & Trust Company. Prior to March
1993, Mr. Conroy was employed as a fund accountant at The Boston Company, Inc.
His date of birth is March 31, 1969.

RICHARD W. INGRAM; President and Treasurer. Executive Vice President
and Director of Client Services and Treasury Administration of FDI, Senior Vice
President of Premier Mutual and an officer of RCM Capital Funds, Inc., RCM
Equity Funds, Inc., Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or Harris Trust and
Savings Bank ("Harris") or their respective affiliates. Prior to April 1997, Mr.
Ingram was Senior Vice President and Director of Client Service and Treasury
Administration of FDI. From March 1994 to November 1995, Mr. Ingram was Vice
President and Division Manager of First Data Investor Services Group, Inc. From
1989 to 1994, Mr. Ingram was Vice President, Assistant Treasurer and Tax
Director - Mutual Funds of The Boston Company, Inc. His date of birth is
September 15, 1955.

KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Assistant Vice
President of FDI and an officer of RCM Capital Funds, Inc. and RCM Equity Funds,
Inc., Waterhouse Investors Cash Management Fund, Inc. and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994,
Ms. Jacoppo-Wood was a senior paralegal at The Boston Company Advisors, Inc.
("TBCA"). Her date of birth is December 29, 1966.

ELIZABETH A. KEELEY; Vice President and Assistant Secretary. Vice President
and Senior Counsel of FDI and Premier Mutual and an officer of RCM Capital
Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors Cash Management Fund,
Inc. and certain investment companies advised or administered by Dreyfus or
Harris or their respective affiliates. Prior to August 1996, Ms. Keeley was
Assistant Vice President and Counsel of FDI and Premier Mutual. Prior to
September 1995, Ms. Keeley was enrolled at Fordham University School of Law and
received her JD in May 1995. Address: 200 Park Avenue, New York, New York 10166.
Her date of birth is September 14, 1969.

CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Associate General Counsel of FDI and Premier Mutual and an officer
of Waterhouse Investors Cash Management Fund, Inc. and certain investment
companies advised or administered by Harris or its affiliates. From April 1994
to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From
1992 to 1994, Mr. Kelley was employed by Putnam Investments in legal and
compliance capacities. His date of birth is December 24, 1964.

MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual, an
officer of RCM Capital Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors
Cash Management Fund, Inc. and certain investment companies advised or
administered by Dreyfus or Harris or their respective affiliates. From 1989 to
1994, Ms. Nelson was an Assistant Vice President and Client Manager for The
Boston Company, Inc. Her date of birth is April 22, 1964.

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

JOSEPH F. TOWER III; Vice President and Assistant Treasurer. Executive Vice
President, Treasurer and Chief Financial Officer, Chief Administrative Officer
and Director Of FDI. Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of Premier Mutual and an
officer of Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or its affiliates. Prior
to April 1997, Mr. Tower was Senior Vice President, Treasurer and Chief
Financial Officer, Chief Administrative Officer and Director of FDI. From July
1988 to November 1993, Mr. Tower was Financial Manager of The Boston Company,
Inc. His date of birth is June 13, 1962.

INVESTMENT ADVISOR

The investment advisor to the Portfolio is Morgan Guaranty Trust
Company of New York, a wholly owned subsidiary of J.P. Morgan & Co. Incorporated
("J.P. Morgan"), a bank holding company organized under the laws of the State of
Delaware. The Advisor, 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. The Advisor 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, the Advisor 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.

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 over $240 billion.

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

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, Melbourne and Singapore to cover companies, industries and
countries on site. In addition, the investment management divisions employ
approximately 300 capital market researchers, portfolio managers and traders.
The Advisor's fixed income investment process is based on analysis of real
rates, sector diversification and quantitative and credit analysis.

The investment advisory services the Advisor provides to the Portfolio
are not exclusive under the terms of the Advisory Agreement. The Advisor is free
to and does render similar investment advisory services to others. The Advisor
serves as investment advisor to personal investors and other investment
companies and acts as fiduciary for trusts, estates and employee benefit plans.
Certain of the assets of trusts and estates under management are invested in
common trust funds for which the Advisor serves as trustee. The accounts which
are managed or advised by the Advisor have varying investment objectives and the
Advisor invests assets of such accounts in investments substantially similar to,
or the same as, those which are expected 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."

J.P. Morgan Investment Management Inc., also a wholly owned subsidiary
of J.P. Morgan, is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, which 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 the Advisor serves as trustee. J.P. Morgan
Investment Management Inc. advises the Advisor on investment of the commingled
pension trust funds.

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

As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Investment
Advisory Agreement, the Portfolio and the Fund has agreed to pay the Advisor a
fee, which is computed daily and may be paid monthly, equal to the annual rate
of 0.20% of the Portfolio's average daily net assets up to $1 billion and 0.10%
of net assets in excess of $1 billion.

For the fiscal year ended August 31, 1995, 1996, and 1997 the advisory
fees paid by the Portfolio to the Advisor were $2,150,291, $2,154,248 and
$2,267,159, respectively. See "Expenses" in the Prospectus and below for
applicable expense limitations.

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

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

Under separate agreements, Morgan also 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 each of the Fund's shares. In that
capacity, FDI has been granted the right, as agent of the Trust, to solicit and
accept orders for the purchase of the Fund's shares in accordance with the terms
of the Distribution Agreement between the Trust and FDI. Under the terms of the
Distribution Agreement between FDI and the Trust, FDI receives no compensation
in its capacity as the Trust's distributor.

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

CO-ADMINISTRATOR

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

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. See "Expenses"
in the Prospectus and below for applicable expense limitations.

Portfolio -- For the period August 1, 1996 through August 31, 1996: $2,284. For
the fiscal year ended August 31, 1997: $25,082.

Fund -- For the period August 1, 1996 through August 31, 1996: $525. For the
fiscal year ended August 31, 1997: $6,410.

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.

See "Expenses" in the Prospectus and below for applicable expense limitations.

Portfolio -- For the fiscal year ended August 31, 1994: $62,565. For the fiscal
year ended August 31, 1995: $72,729. For the period September 1, 1995 through
July 31, 1996: $110,848.

Fund -- For the fiscal year ended August 31, 1994: $5,854. For the fiscal year
ended August 31, 1995: $22,290. For the period September 1, 1995 through July
31, 1996: $23,755.

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 amended Administrative 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% on 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, 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
Portfolios' aggregate average daily net assets in excess of $7 billion. Prior to
December 29, 1995, the Trust and the Portfolio had entered into Financial and
Fund Accounting Services Agreements with Morgan, the provisions of which
included certain of the activities described above and, prior to September 1,
1995, also included reimbursement of usual and customary expenses.

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

Portfolio -- For the fiscal year ended August 31, 1995: $169,754. For the fiscal
year ended August 31, 1996: $205,419. For the fiscal year ended August 31, 1997:
$397,340.

Fund -- For the fiscal year ended August 31, 1995: $(56,396)*. For the fiscal
year ended August 31, 1996: $30,085. For the fiscal year ended August 31, 1997:
$60,316.
- ------------------------------------

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

CUSTODIAN AND TRANSFER AGENT

State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02110, serves as the Trust's and 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. In addition, the
Custodian has entered into subcustodian agreements on behalf of Portfolio with
Bankers Trust Company for the purpose of holding TENR Notes and with Bank of New
York and Chemical Bank, N.A. for the purpose of holding certain variable rate
demand notes. The Custodian maintains portfolio transaction records. As transfer
agent and dividend disbursing agent, State Street is responsible for maintaining
account records detailing the ownership of Fund shares and for crediting income,
capital gains and other changes in share ownership to shareholder accounts.

SHAREHOLDER SERVICING

The Trust on behalf of the Fund has entered into a Shareholder
Servicing Agreement with Morgan pursuant to which Morgan acts as shareholder
servicing agent for its customers and for other Fund investors who are customers
of an Eligible Institution. 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 a Fund; assisting customers in
designating and changing dividend options, account designations and addresses;
providing necessary personnel and facilities to coordinate the establishment and
maintenance of shareholder accounts and records with the Fund's transfer agent;
transmitting purchase and redemption orders to the Funds' transfer agent and
arranging for the wiring or other transfer of funds to and from customer
accounts in connection with orders to purchase or redeem Fund shares; verifying
purchase and redemption orders, transfers among and changes in accounts;
informing the Distributor of the gross amount of purchase orders for Fund
shares; and monitoring the activities of the Fund's transfer agent; providing
other related services.

Under the Shareholder Servicing Agreement, the Fund has agreed to pay
Morgan for these services a fee at the annual rate of 0.05% (expressed as a
percentage of the average daily net asset values of Fund shares owned by or for
shareholders for whom Morgan is acting as shareholder servicing agent). Morgan
acts as shareholder servicing agent for all shareholders.

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

The shareholder servicing fees paid by the Fund to Morgan net of fee
waivers and reimbursements for the fiscal years ended August 31, 1995, 1996, and
1997, were $96,667, $103,262 and $97,098, of which $50,458 was waived for the
period February 10, 1997 through August 31, 1997.

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 in acting as Advisor to the Portfolio under the
Investment Advisory Agreement, may raise issues under these laws. However,
Morgan believes that it 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.

INDEPENDENT ACCOUNTANTS

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

EXPENSES

In addition to the fees payable to Pierpont Group, Inc., Morgan and FDI
under various agreements discussed under "Trustees and Officers," "Investment
Advisor," "Co-Administrator and 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 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. Under fee arrangements prior
to September 1, 1995, Morgan as Services Agent was responsible for
reimbursements to the Trust and the Portfolio and the usual and customary
expenses described above (excluding organization and extraordinary expenses,
custodian fees and brokerage expenses). For additional information regarding
waivers or expense subsidies, see "Management of the Trust and the Portfolio" in
the Prospectus.

PURCHASE OF SHARES

Investors may open Fund accounts and purchase shares as described in
the Prospectus under "Purchase of Shares." References in the Prospectus and this
Statement of Additional Information to customers of Morgan or an Eligible
Institution include customers of their affiliates and references to transactions
by customers with Morgan or an Eligible Institution 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 Morgan, appropriate
investments for the Fund's corresponding Portfolio. In addition, securities
accepted in payment for shares must: (i) meet the investment objective and
policies of the Portfolio; (ii) be acquired by the Fund for investment and not
for resale (other than for resale to the Portfolio); and(iii) be liquid
securities which are not restricted as to transfer either by law or liquidity of
market. The Fund reserves the right to accept or reject at its own option any
and all securities offered in payment for its shares.

Prospective investors may purchase shares with the assistance of an
Eligible Institution, and the Eligible Institution 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 under
"Redemption of Shares." Shareholders redeeming shares of the Fund should be
aware that the Fund attempts to maintain a stable net asset value of $1.00 per
share; however, there can be no assurance that it will be able to continue to do
so, and in that case the net asset value of the Fund's shares might deviate from
$1.00 per share. Accordingly, a redemption request might result in payment of a
dollar amount which differs from the number of shares redeemed. See "Net Asset
Value" in the Prospectus and below.

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 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
Portfolio, in lieu of cash, in conformity with the applicable rule of the SEC.
If shares are redeemed in kind, the redeeming shareholder might incur
transaction costs in converting the assets into cash. The method of valuing
portfolio securities is described under "Net Asset Value," and such valuation
will be made as of the same time the redemption price is determined. The Trust,
on behalf of the Fund, has elected to be governed by Rule 18f-1 under the 1940
Act pursuant to which the Portfolio is obligated to redeem shares soley 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.

Further Redemption Information. 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.

EXCHANGE OF SHARES

An investor may exchange shares from the Fund into any other J.P.
Morgan Institutional Fund, J.P. Morgan Fund, or shares of J.P. Morgan Series
Trust, as described under "Exchange of Shares" in the Prospectus. For complete
information, the Prospectus as it relates to the Fund into which a transfer is
being made should be read prior to the transfer. Requests for exchange are made
in the same manner as requests for redemptions. See "Redemption of Shares."
Shares of the Fund to be acquired are purchased for settlement when the proceeds
from redemption become available. The Trust reserves the right to discontinue,
alter or limit the 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.

Net investment income of the Fund consists of accrued interest or
discount and amortized premium, less the accrued expenses of the Fund applicable
to that dividend period including the fees payable to Morgan.

Determination of the net income for the Fund is made at the times
described in the Prospectus; in addition, net investment income for days other
than business days is determined at the time net asset value is determined on
the prior business day.

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 once daily on Monday through
Friday as described under "Net Asset Value" 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.
In the event that trading in the money markets is scheduled to end earlier than
the close of the New York Stock Exchange in observance of these holidays, the
Fund and Portfolio would expect to close for purchases and redemptions an hour
in advance of the end of trading in the money markets. 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. On any business day when the Public Securities Association ("PSA")
recommends that the securities market close early, the Fund reserves the right
to cease accepting purchase and redemption orders for same business day credit
at the time PSA recommends that the securities market close. On days the Fund
closes early, purchase and redemption orders received after the PSA-recommended
closing time will be credited the next business day. 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 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 in valuing its assets.

The portfolio's securities are valued by the amortized cost method.
The purpose of this method of calculation is to attempt to maintain a constant
net asset value per share of the Fund of $1.00. No assurances can be given that
this goal can be attained. The amortized cost method of valuation values a
security at its cost at the time of purchase and thereafter assumes a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. If a
difference of more than 1/2 of 1% occurs between valuation based on the
amortized cost method and valuation based on market value, the Trustees will
take steps necessary to reduce such deviation, such as changing the Fund's
dividend policy, shortening the average portfolio maturity, realizing gains or
losses, or reducing the number of outstanding Fund shares. Any reduction of
outstanding shares will be effected by having each shareholder contribute to a
Fund's capital the necessary shares on a pro rata basis. Each shareholder will
be deemed to have agreed to such contribution in these circumstances by his
investment in the Fund. See "Taxes.

PERFORMANCE DATA

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

Yield Quotations. As required by regulations of the SEC, current yield
for the Fund is computed by determining the net change exclusive of capital
changes in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of a seven-day calendar period, dividing the net
change in account value of the account at the beginning of the period, and
multiplying the return over the seven-day period by 365/7. For purposes of the
calculation, net change in account value reflects the value of additional shares
purchased with dividends from the original share and dividends declared on both
the original share and any such additional shares, but does not reflect realized
gains or losses or unrealized appreciation or depreciation. Effective yield for
the Fund is computed by annualizing the seven-day return with all dividends
reinvested in additional Fund shares. The tax equivalent yield is computed by
first computing the yield as discussed above. Then the portion of the yield
attributable to securities the income of which was exempt for federal income tax
purposes is determined. This portion of the yield is then divided by one minus
the stated assumed federal income tax rate for individuals and then added to the
portion of the yield that is not attributable to securities, the income of which
was tax exempt.

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

Fund (12/15/97): 7-day current yield: 3.49%; 7-day tax equivalent yield at 39.6%
tax rate: 5.78%; 7-day effective yield: 3.55%.

Historical performance information for any period or portion thereof
prior to the establishment of a Fund will be that of its corresponding
predecessor J.P. Morgan fund, as permitted by applicable SEC staff
interpretations, if the J.P. Morgan Fund commenced operations before the
corresponding J.P. Morgan Institutional Fund.

Below is set forth historical return information for the Fund for the
periods indicated:

8/31/87: Average annual total return, 1 year: 3.35%; Average annual total
return, 5 years: 2.95%; average annual total return, 10 years: 3.89%; aggregate
total return, 1 year: 3.35%; aggregate total return, 5 years: 15.84%; aggregate
total return, 10 years: 46.23%.

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 a Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in the Fund with certain bank deposits or other
investments that pay a fixed yield or return for a stated period of time.

Comparative performance information may be used from time to time in
advertising the Fund' 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.

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 Objectives and Policies."

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

Portfolio transactions for the Portfolio will be undertaken principally
to accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates. The Portfolio may engage in short-term trading
consistent with its objective. See "Investment Objective and Policies --
Portfolio Turnover". The Portfolio will not seek profits through short-term
trading, but the Portfolio may dispose of any portfolio security prior to its
maturity if it believes such disposition is appropriate even if this action
realizes profits or losses.

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

The Portfolio has a policy of investing only in securities with
maturities of less than thirteen months, which policy will result in high
portfolio turnover. Since brokerage commissions are not normally paid on
investments which the Portfolio makes, turnover resulting from such investments
should not adversely affect the net asset value or net income of the Portfolio.

Subject to the overriding objective of obtaining the best possible
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.

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.

MASSACHUSETTS TRUST

The Trust is a trust fund of the type commonly known as 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. The Declaration of
Trust and the By-Laws of the Trust are designed to make the Trust similar in
most respects to a Massachusetts business corporation. The principal distinction
between the two forms concerns shareholder liability described below.

Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust which is not the case for a corporation. However, the Trust's
Declaration of Trust provides that the shareholders shall not be subject to any
personal liability for the acts or obligations of the Fund and that every
written agreement, obligation, instrument or undertaking made on behalf of the
Fund shall contain a provision to the effect that the shareholders are not
personally liable thereunder.

No personal liability will attach to the shareholders under any
undertaking containing such provision when adequate notice of such provision is
given, except possibly in a few jurisdictions. With respect to all types of
claims in the latter jurisdictions, (i) tort claims, (ii) contract claims where
the provision referred to is omitted from the undertaking, (iii) claims for
taxes, and (iv) certain statutory liabilities in other jurisdictions, a
shareholder may be held personally liable to the extent that claims are not
satisfied by the Fund. However, upon payment of such liability, the shareholder
will be entitled to reimbursement from the general assets of the Fund. The
Trustees intend to conduct the operations of the Trust in such a way so as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Fund.

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
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 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."

The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares ($0.001 par value) of one or more series
and classes within any series and to divide or combine the shares (of any
series, if applicable) without changing the proportionate beneficial interest of
each shareholder in a Fund (or in the assets of other series, if applicable). To
date shares of 28 series have been authorized of which 25 are currently
available for sale to the public. Each share represents an equal proportional
interest in a Fund with each other share. Upon liquidation of a Fund, holders
are entitled to share pro rata in the net assets of a Fund available for
distribution to such shareholders. See "Massachusetts Trust." Shares of a Fund
have no preemptive or conversion rights and are fully paid and nonassessable.
The rights of redemption and exchange are described in the Prospectus and
elsewhere in this Statement of Additional Information.

The shareholders of the Trust are entitled to a full vote for each full
share held and to a fractional vote for each fractional share. 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 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 24 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
"Redemption of Shares" in the Prospectus.

As of December 5, 1997, the following owned of record or, to the
knowledge of management, beneficially owned more than 5% of the outstanding
shares of J.P. Morgan Institutional Tax Exempt Money Market Fund:

Morgan Guaranty Trust Co of NY as agent for Trust for Harriet F (23.57);
Morgan Guaranty Trust Co of NY as agent for Frank Batten (5.42%);
Mariah Carey-Rye Songs-Attn: Susan Steinsapir (6.92%) and
Ellen Haebler Skove (9,80%)

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.

TAXES

The Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. As a regulated investment company, a
Fund must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock, securities or foreign
currency and other income (including but not limited to gains from options,
futures, and forward contracts) derived with respect to its business of
investing in such stock, securities or foreign currency; (b) derive less than
30% of its gross income from the sale or other disposition of stock, securities,
options, futures or forward contracts (other than options, futures or forward
contracts on foreign currencies) held less than three months, or foreign
currencies (or options, futures or forward contracts on foreign currencies) held
less than three months, but only if such currencies (or options, futures or
forward contracts on foreign currencies) are not directly related to a Fund's
principal business of investing in stocks or securities (or options and futures
with respect to stocks or securities); and (c) diversify its holdings so that,
at the end of each 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, securities of other regulated investment companies, and other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the Fund's total assets, and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities or securities of other regulated investment companies). Effective as
of an investor's first taxable year beginning after August 5, 1997, the 30% of
gross income test described in (b) above will no longer apply to the Funds
wishing to satisfy the requirements of subchapter M of the Code.

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 gain that it distributes to its shareholders, provided that
at least 90% of its net investment income and realized net short-term capital
gain in excess of net long-term capital loss for the taxable year is distributed
in accordance with the Code's timing requirements.

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

For federal income tax purposes, dividends that are declared by a Fund
in October, November or December as of a record date in such month and actually
paid in January of the following year will be treated as if they were paid on
December 31 of the year declared. Therefore, such dividends 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. See "Investment
Objective(s) and Policies" in the Prospectus.

Distributions of net investment income, certain foreign currency gains,
and realized net short-term capital gain in excess of net long-term capital loss
(other than exempt interest dividends) are generally taxable to shareholders of
the Fund as ordinary income whether such distributions are taken in cash or
reinvested in additional shares. Distributions to corporate shareholders of the
Fund are not eligible for the dividends received deduction. If dividend payments
exceed income earned by the Fund, the excess distribution would be considered a
return of capital rather than a dividend payment. The Fund intends to pay
dividends in such a manner so as to minimize the possibility of a return of
capital. Distributions of net long-term capital gain (i.e., net long-term
capital gain in excess of net short-term capital loss) are taxable to
shareholders of the Fund as long-term capital gain, regardless of whether such
distributions are taken in cash or reinvested in additional shares and
regardless of how long a shareholder has held shares in the Fund. As a result of
the enactment of the Taxpayer Relief Act of 1997 (the "Act"), long-term capital
gain of an individual is generally subject to a maximum rate of 28% in respect
of a capital asset held directly by such individual for more than one year but
not more than eighteen months, and the maximum rate is reduced to 20% in respect
of a capital asset held in excess of 18 months. The Act authorizes the Treasury
department to promulgate regulations that would apply these rules in the case of
long-term capital gain distributions made by the Fund. The Treasury Department
has indicated that, under such regulations, individual shareholders will be
taxed at a minimum rate of 28% in respect of capital gains distributions
designated as 28% rate gain distributions and will be taxed at a maximum rate of
20% in respect of capital gains distributions designated as 20% rate gain
distributions, regardless of how long such shareholders have held their shares
in the Fund. See "Taxes" in the Prospectus for a discussion of the federal
income tax treatment of any gain or loss realized on the redemption or exchange
of the Fund's shares. Additionally, any loss realized on a redemption or
exchange of shares of the Fund will be disallowed to the extent the shares
disposed of are replaced within a period of 61 days beginning 30 days before
such disposition, such as pursuant to reinvestment of a dividend in shares of
the Fund.

To maintain a constant $1.00 per share net asset value, the Trustees of
the Fund may direct that the number of outstanding shares be reduced pro rata.
If this adjustment is made, it will reflect the lower market value of portfolio
securities and not realized losses. The adjustment may result in a shareholder
having more dividend income than net income in his account for a period. When
the number of outstanding shares of a Fund is reduced, the shareholder's basis
in the shares of the Fund may be adjusted to reflect the difference between
taxable income and net dividends actually distributed. This difference may be
realized as a capital loss when the shares are liquidated. Subject to certain
limited exceptions, capital losses cannot be used to offset ordinary income. See
"Net Asset Value."

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 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.
Except as described below, if an option written by the Portfolio lapses or is
terminated through a closing transaction, such as a repurchase by the Portfolio
of the option from its holder, the Portfolio will realize a short-term capital
gain or loss, depending on whether the premium income is greater or less than
the amount paid by the Portfolio in the closing transaction. If securities are
purchased by 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.

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

Forward currency contracts, options and futures contracts entered into
by the Portfolio may create "straddles" for U.S. federal income tax purposes and
this may affect the character and timing of gains or losses realized by the
Portfolio on forward currency contracts, options and futures contracts or on the
underlying securities. Certain straddles treated as short sales for tax purposes
may also result in the loss of the holding period of underlying securities for
purposes of the 30% of gross income test described above, and therefore, the
Portfolio's ability to enter into forward currency contracts, options and
futures contracts may be limited under current law. Effective as of August 5,
1997, the 30% gross income test will no longer apply to the Fund.

Certain options, futures and foreign currency contracts 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. However, gain or loss recognized on certain foreign currency
contracts will be treated as ordinary income or loss.

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

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

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 a Fund and its shareholders in those states which have income
tax laws might differ from treatment under the federal income tax laws.
Shareholders should consult their own tax advisors with respect to any state or
local taxes.

Other Taxation. The Trust is organized as a Massachusetts business
trust and, under current law, neither the Trust nor 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

As used in this Statement of Additional Information and the Prospectus,
the term "majority of the outstanding voting securities" means the vote of (i)
67% or more of the Fund's shares or the Portfolio's outstanding voting
securities present at a meeting, if the holders of more than 50% of the Fund's
outstanding shares or the Portfolio's outstanding voting securities are present
or represented by proxy, or (ii) more than 50% of the Fund's outstanding shares
or the Portfolio's outstanding voting securities, whichever is less.

Telephone calls to the Fund, Morgan or Eligible Institutions 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
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 Fund or
the Distributor to make such offer in such jurisdictions.

<PAGE>

FINANCIAL STATEMENTS

The following financial statements and the report thereon of Price
Waterhouse LLP of the Fund are incorporated herein by reference from its annual
report filing made with the SEC pursuant to Section 30(b) of the 1940 Act and
Rule 30b2-1 thereunder. The following financial report is available without
charge upon request by calling JP Morgan Funds Services at (800) 766-7722. The
Fund's financial statements include the financial statements of the Portfolio.

Date of Semi-Annual Report; Date of Annual Report;
Date Semi-Annual Report Filed;Date Annual Report Filed;
and Accession Number and Accession Number
Name of Fund

J.P. Morgan Institutional N/A 08/31/97
Tax Exempt Money Market 10/30/97
Fund 0001016969-97-000079
- ------------------------------------------------- -----------------------------

<PAGE>

APPENDIX A

Description of Security Ratings

STANDARD & POOR'S

Corporate and Municipal Bonds

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

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

BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits 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 is regarded as having less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.

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

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

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

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

Commercial Paper, including Tax Exempt

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

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

Short-Term Tax-Exempt Notes

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

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

MOODY'S

Corporate and Municipal Bonds

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

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

A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements 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 funds employed.
- - Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
- - Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- - Well established access to a range
of financial markets and assured sources of alternate liquidity.

Short-Term Tax Exempt Notes

MIG-1 - The short-term tax-exempt note rating MIG-1 is the highest rating
assigned by Moody's for notes judged to be the best quality. Notes with this
rating enjoy strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both.

MIG-2 - MIG-2 rated notes are of high quality but with margins of protection not
as large as MIG-1.

- --------
1 Pursuant to an interpretation of the staff of the SEC, the Fund may not
invest more than 25% of its assets in industrial development bonds in projects
of similar type or in the same state. The Fund shall comply with this
interpretation until such time as it may be modified by the staff of the SEC.

2 For purposes of interpretation of Investment Restriction No. 4
"guaranteed by another entity" includes credit substitutions, such as letters of
credit or insurance, unless the Advisor determines that the security meets the
Fund's credit standards without regard to the credit substitution.
*****************************************************************************

<PAGE>

PROSPECTUS

J.P. Morgan Institutional Tax Exempt Bond Fund
60 State Street Boston, Massachusetts 02109
For information call (800) 766-7722

J.P. Morgan Institutional Tax Exempt Bond Fund (the "Fund") seeks to pro-
vide a high level of current income exempt from federal income tax consis-
tent with moderate risk of capital and maintenance of liquidity. It is de-
signed for investors who seek tax exempt yields greater than those gener-
ally available from a portfolio of short-term tax exempt obligations and
who are willing to incur the greater price fluctuation of longer-term in-
struments.

UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIO OF SECURITIES, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJEC-
TIVE BY INVESTING ALL OF ITS INVESTABLE ASSETS IN THE TAX EXEMPT BOND
PORTFOLIO (THE "PORTFOLIO"), A CORRESPONDING DIVERSIFIED OPEN-END MANAGE-
MENT INVESTMENT COMPANY HAVING THE SAME INVESTMENT OBJECTIVE AS THE FUND.
THE FUND INVESTS IN THE PORTFOLIO THROUGH A TWO-TIER MASTER-FEEDER INVEST-
MENT FUND STRUCTURE. SEE SPECIAL INFORMATION CONCERNING INVESTMENT
STRUCTURE(R) ON PAGE 4.

The Portfolio is advised by Morgan Guaranty Trust Company of New York
("Morgan" or "Advisor").

This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing and it should be re-
tained for future reference. Additional information about the Fund has
been filed with the Securities and Exchange Commission in a Statement of
Additional Information dated January 2, 1998 (as supplemented from time to
time). This information is incorporated herein by reference and is avail-
able without charge upon written request from the Fund's Distributor,
Funds Distributor Inc. ("FDI"), 60 State Street, Suite 1300, Boston, Mas-
sachusetts 02109, Attention: J.P. Morgan Institutional Funds, or by call-
ing (800) 221-7930.

INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, MORGAN GUARANTY TRUST COMPANY OF NEW YORK 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 GOVERNMEN-
TAL 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 RE-
DEEMED, THE VALUE MAY BE HIGHER OR LOWER, THAN THE AMOUNT ORIGINALLY IN-
VESTED BY THE INVESTOR.

THE DATE OF THIS PROSPECTUS IS JANUARY 2, 1998
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Investors for Whom the Fund is Designed.................................... 1
Financial Highlights....................................................... 3
Special Information Concerning Investment Structure........................ 4
Investment Objective and Policies.......................................... 5
Additional Investment Information and Risk Factors......................... 6
Investment Restrictions.................................................... 9
Management of the Trust and the Portfolio.................................. 9
Shareholder Servicing...................................................... 12
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Purchase of Shares......................................................... 12
Redemption of Shares....................................................... 13
Exchange of Shares......................................................... 14
Dividends and Distributions................................................ 14
Net Asset Value............................................................ 14
Organization............................................................... 15
Taxes...................................................................... 15
Additional Information..................................................... 17
Appendix................................................................... 18
</TABLE>
<PAGE>

J.P. Morgan Institutional Tax Exempt Bond Fund

INVESTORS FOR WHOM THE FUND IS DESIGNED

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 in-
struments. The Fund seeks to achieve its investment objective by investing all
of its investable assets in The Tax Exempt Bond Portfolio, a diversified man-
agement investment company having the same investment objective as the Fund.
Since the investment characteristics and experience of the Fund will correspond
directly with those of the Portfolio, the discussion in this Prospectus focuses
on the investments and investment policies of the Portfolio. The net asset
value of shares in the Fund fluctuates with changes in the value of the invest-
ments in the Portfolio.

The Fund requires a minimum initial investment of $5 million. The minimum sub-
sequent investment is $25,000. See Purchase of Shares. If a shareholder reduces
his or her investment in the Fund to less than $5 million for more than 30
days, the investment may be subject to mandatory redemption. See Redemption of
Shares-Mandatory Redemption by the Fund.

SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases*........................................... None
Sales Load Imposed on Reinvested Dividends................................. None
Deferred Sales Load........................................................ None
Redemption Fees............................................................ None
Exchange Fees.............................................................. None
</TABLE>
- -------
* Certain Eligible Institutions (defined below) may impose fees in connection
with the purchase of the Fund's shares through such institutions.

1
<PAGE>

EXPENSE TABLE

ANNUAL OPERATING EXPENSES*

<TABLE>
<S> <C>
Advisory Fees............................................................. 0.30%
Rule 12b-1 Fees........................................................... None
Other Expenses (after expense reimbursement).............................. 0.20%
-----
Total Operating Expenses (after expense reimbursement).................... 0.50%
=====
</TABLE>

* Fees and expenses are expressed as a percentage of the average net assets of
the Fund after expense reimbursements for the fiscal year ended August 31,
1997 and through December 31, 1998. See Management of the Trust and the
Portfolio. Without reimbursements, Other Expenses and Total Operating Expenses
for the Fund would be equal to 0.26% and 0.56% respectively, for the most
recently completed fiscal year.

EXAMPLE

An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:

<TABLE>
<S> <C>
1 Year...................................................................... $ 5
3 Years..................................................................... $16
5 Years..................................................................... $28
10 Years.................................................................... $63
</TABLE>

2
<PAGE>

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL YEAR JULY 12, 1993
ENDED AUGUST 31, (COMMENCEMENT
--------------------------------------- OF OPERATIONS) TO
1997 1996 1995 1994 AUGUST 31, 1993
-------- -------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 9.92 $ 10.01 $ 9.75 $ 10.07 $10.00
-------- -------- ------- ------- ------
Income from Investment
Operations:
Net Investment Income... 0.48 0.48 0.49 0.48 0.06
Net Realized and
Unrealized Gain (Loss)
on Investment.......... 0.20 (0.07) 0.26 (0.32) 0.07
-------- -------- ------- ------- ------
Total from Investment
Operations............. 0.68 0.41 0.75 0.16 0.13
-------- -------- ------- ------- ------
Less Distributions to
Shareholders from:
Net Investment Income... (0.48) (0.48) (0.49) (0.48) (0.06)
Net Realized Gain....... (0.00)(a) (0.02) -- -- --
-------- -------- ------- ------- ------
Total Distributions to
Shareholders........... (0.48) (0.50) (0.49) (0.48) (0.06)
-------- -------- ------- ------- ------
Net Asset Value, End of
Period................. $ 10.12 $ 9.92 $ 10.01 $ 9.75 $10.07
======== ======== ======= ======= ======
Total Return............ 7.06% 4.13% 8.00% 1.61% 1.39%(b)
======== ======== ======= ======= ======
Ratios and Supplemental
Data:
Net Assets, End of
Period (in thousands).. $201,614 $121,131 $59,867 $16,415 $ --+
Ratios to Average Net
Assets:
Expenses................ 0.50% 0.50% 0.50% 0.50% --
Net Investment Income... 4.83% 4.82% 5.09% 4.70% 3.56%(c)
Decrease Reflected in
Expense Ratio due to
Expense Reimbursement . 0.06% 0.10% 0.21% 1.48% 2.50%(c)
</TABLE>
- -------

(a)Less than $0.0001.

(b) Not annualized.

3
<PAGE>

SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE

4
<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

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 and
maintenance of liquidity. See Taxes. The Fund attempts to achieve its invest-
ment objective by investing all of its investable assets in The Tax Exempt Bond
Portfolio, a diversified open-end management investment company having the same
investment objective as the Fund.

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 in-
struments.

The Portfolio attempts to achieve its investment objective by investing primar-
ily in municipal securities which earn interest exempt from federal income tax
in the opinion of bond counsel for the issuer. During normal market conditions,
the Portfolio will invest at least 80% of its net assets in tax exempt obliga-
tions. Interest on these securities may be subject to state and local taxes.
For more detailed information regarding tax matters, including the applicabil-
ity of the alternative minimum tax, see Taxes.

Morgan 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
Fund'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 aver-
age 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 Morgan 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 Portfolio intends to manage its portfolio actively in pursuit of its in-
vestment objective. Portfolio transactions are undertaken principally to accom-
plish the Portfolio's objective in relation to expected movements in the gen-
eral level of interest rates, but the Portfolio may also engage in short-term
trading consistent with its objective. To the extent the Portfolio engages in
short-term trading, it may incur increased transaction costs. See Taxes below.
The portfolio turnover rate for the Portfolio for the fiscal year ended August
31, 1997 was 25%.

The value of the Portfolio's investments will generally fluctuate inversely
with changes in prevailing interest rates. The value of the Portfolio's invest-
ments will also be affected by changes in the creditworthiness of issuers and
other market factors. The quality criteria applied in the selection of portfo-
lio 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 Portfolio fluctuates, the Portfolio
attempts to preserve the value of its investments to the extent consistent with
its objective.

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 sourc-
es, but not generally backed by the issuer's taxing power. These include indus-
trial development bonds where payment is the responsibility of the private in-
dustrial user of the facility financed by the bonds. The Portfolio may invest
more than 25% of its

5
<PAGE>

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.

MONEY MARKET INSTRUMENTS. 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 be-
tween the municipal issuer and Morgan acting as agent, for no additional fee,
in its capacity as Advisor to the Portfolio and as fiduciary for other cli-
ents. Although master demand obligations are not marketable to third parties,
the Portfolio considers them to be liquid because they are payable on demand.
For more information about municipal notes, see Investment Objectives and Pol-
icies in the Statement of Additional Information.

The Portfolio will invest in money market instruments 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 Portfolio will purchase these securi-
ties to invest temporary cash balances or to maintain liquidity to meet with-
drawals. However, the Portfolio may also invest in money market instruments as
a temporary defensive measure taken during, or in anticipation of, adverse
market conditions.

QUALITY INFORMATION. It is the current policy of the Portfolio that under nor-
mal 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 Investors Service,
Inc. ("Moody's") or BBB or better by Standard & Poor's Ratings Group ("Stan-
dard & Poor's"). The remaining 10% of total assets may be invested in securi-
ties that are rated B or better by Moody's or Standard & Poor's. 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 in-
vestment later declines, the Portfolio may continue to hold the investment.

In certain circumstances, the Portfolio may also invest up to 20% of the value
of its total assets in taxable securities. In addition, the Portfolio may pur-
chase municipal obligations together with puts, securities on a when-issued or
delayed delivery basis, enter into repurchase and reverse repurchase agree-
ments, purchase synthetic variable rate instruments, loan its portfolio secu-
rities, purchase certain privately placed securities and enter into certain
hedging transactions that may involve options on securities and securities in-
dexes, futures contracts and options futures contracts. For a discussion of
these transactions, see Additional Investment Information and Risk Factors.

ADDITIONAL INVESTMENT INFORMATION AND RISK FACTORS

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 princi-
pal and interest and to greater market fluctuations. While generally providing
higher coupons or interest rates than investments in higher quality securi-
ties, 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 cor-
porate and industry developments to a greater extent than higher quality secu-
rities, which react primarily to fluctuations in the general level of interest
rates. To the extent that the Portfolio invests in such lower quality securi-
ties, the achievement of its investment objective may be more dependent on the
Advisor's own credit analysis.

6
<PAGE>

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 securi-
ties, 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 secu-
rities for purposes of determining the Fund's net asset value. See Appendix A
in the Statement of Additional Information for more detailed information on
these ratings.

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 value of the Portfolio's net assets. The Portfolio may lend its securi-
ties 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 in-
come 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 con-
sider all facts and circumstances, including the creditworthiness of the bor-
rowing financial institution, and the Portfolio will not make any loans in ex-
cess of one year.

Loans of portfolio securities may be considered extensions of credit by the
Portfolio. The risks to the Portfolio with respect to borrowers of its portfo-
lio securities are similar to the risks to the Portfolio with respect to sell-
ers in repurchase agreement transactions. See Repurchase Agreements above. The
Portfolio will not lend its securities to any officer, Trustee, Director, em-
ployee or other affiliate of the Portfolio, the Advisor or the Distributor,
unless otherwise permitted by applicable law.

7
<PAGE>

REVERSE REPURCHASE AGREEMENTS. The Portfolio is permitted to enter into re-
verse repurchase agreements. In a reverse repurchase agreement, the Portfolio
sells a security and agrees to repurchase it at a mutually agreed upon date
and price, reflecting the interest rate effective for the term of the agree-
ment. For purposes of the Investment Company Act of 1940, as amended (the
"1940 Act"), it is considered a form of borrowing by the Portfolio and, there-
fore, is a form of leverage. Leverage may cause any gains or losses of the
Portfolio to be magnified. For more information, see Investment Objectives and
Policies in the Statement of Additional Information.

TAXABLE INVESTMENTS. 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 or local income
taxes. The Portfolio may make taxable investments pending investment of pro-
ceeds from sales of its interests or portfolio securities, pending settlement
of purchases of portfolio securities, to maintain liquidity or when it is ad-
visable in Morgan's opinion because of adverse market conditions. The Portfo-
lio will invest in taxable securities only if there are no tax exempt securi-
ties available for purchase or if the expected return from an investment in
taxable securities exceeds the expected return on available tax exempt securi-
ties. In abnormal market conditions, if, in the judgment of Morgan, tax exempt
securities satisfying the Portfolio's investment objective may not be pur-
chased, 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 or local income taxes. The taxable investments per-
mitted for the Portfolio include obligations of the U.S. Government and its
agencies and instrumentalities, bank obligations, commercial paper, repurchase
agreements and other debt securities which meet the Portfolio's quality re-
quirements. See Taxes.

PUTS. The Portfolio may purchase without limit municipal bonds or notes to-
gether with the right to resell them at an agreed price or yield within a
specified period prior to maturity. This right to resell is known as a put.
The aggregate price paid for securities with puts may be higher than the price
which otherwise would be paid. Consistent with the investment objective of the
Portfolio 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 securi-
ties while maintaining the necessary liquidity to purchase securities on a
when-issued basis, to meet unusually large withdrawals, to purchase at a later
date securities other than those subject to the put and to facilitate Morgan's
ability to manage the Portfolio actively. The principal risk of puts is that
the put writer may default on its obligation to repurchase. Morgan will moni-
tor each writer's ability to meet its obligations under puts.

The amortized cost method is used by the Portfolio to value all municipal se-
curities with maturities of less than 60 days; when these securities are sub-
ject to puts separate from the underlying securities, no value is assigned to
the puts. The cost of any such put is carried as an unrealized loss from the
time of purchase until it is exercised or expires. See the Statement of Addi-
tional Information for the valuation procedure if the Portfolio were to invest
in municipal securities with maturities of 60 days or more that are subject to
separate puts.

SYNTHETIC VARIABLE RATE INSTRUMENTS. The Portfolio may invest in certain syn-
thetic variable rate instruments. Such instruments generally involve the de-
posit 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. Mor-
gan will review the structure of synthetic variable rate instruments to iden-
tify 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.

8
<PAGE>

Subject to this non-fundamental policy limitation, the Portfolio may acquire
investments that are illiquid or have limited liquidity, such as private place-
ments 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 re-
ceives upon resale may be lower than the price paid or received for similar se-
curities with a more liquid market. Accordingly the valuation of these securi-
ties will reflect any limitations on their liquidity.

FUTURES AND OPTIONS TRANSACTIONS. The Portfolio is permitted to enter into the
futures and options transactions described in the Appendix to this Prospectus
for hedging purposes.

INVESTMENT RESTRICTIONS

The Portfolio may not (i) borrow money, except from banks for extraordinary or
emergency purposes and then only in amounts up to 10% of the value of the Port-
folio's total assets, taken at cost at the time of borrowing, or purchase secu-
rities while borrowings exceed 5% of its total assets; or mortgage, pledge or
hypothecate any assets except in connection with any such borrowings in amounts
up to 10% of the value of the Portfolio's net assets at the time of borrowing;
or (ii) acquire industrial revenue bonds if as a result more than 5% of the
Portfolio's total assets would be invested in industrial revenue bonds where
payment of principal and interest is the responsibility of companies with fewer
than three years of operating history.

MANAGEMENT OF THE TRUST AND THE PORTFOLIO

9
<PAGE>

ADVISOR. The Fund has not retained the services of an investment adviser be-
cause the Fund seeks to achieve its investment objective by investing all of
its investable assets in the Portfolio. The Portfolio has retained the services
of Morgan as Investment Advisor. Morgan, with principal offices 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 a wholly owned subsidiary of J.P.
Morgan & Co. Incorporated, ("J.P. Morgan"), a bank holding company organized
under the laws of Delaware. Through offices in New York City and abroad, J.P.
Morgan, through the Advisor and other subsidiaries, offers a wide range of
services to governmental, institutional, corporate and individual customers and
acts as in-vestment adviser to individual and institutional clients with
combined assets under management of over $240 billion. Morgan provides
investment advice and portfolio management services to the Portfolio. Subject to
the supervision of the Portfolio's Trustees, Morgan makes the Portfolio's
day-to-day investment decisions, arranges for the execution of portfolio
transactions and generally manages the Portfolio's investments. See Investment
Advisor in the Statement of Additional Information.

Morgan uses a sophisticated, disciplined, collaborative process for managing
all asset classes. For fixed income portfolios, this process focuses on the
systematic analysis of real interest rates, sector diversification and quanti-
tative and credit analysis. Morgan has managed portfolios of domestic fixed in-
come securities on behalf of its clients for over fifty years. The portfolio
managers making investments in domestic fixed income securities work in con-
junction with fixed income, credit, capital market and economic research ana-
lysts, as well as traders and administrative officers.

The following persons are primarily responsible for the day-to-day management
and implementation of Morgan's process for the Portfolio and its predecessor
entity (the inception date of each person's responsibility for the Portfolio
(or its predecessor) and his or her business experience for the past five years
is indicated parenthetically): Robert Meiselais, Vice President (since January,
1992, employed by Morgan since prior to 1992) and Elaine Young, Vice President
(since July, 1997, employed by Morgan since August 1994).

10
<PAGE>

For their services under the Co-Administration Agreements, each of the Fund
and the Portfolio, has agreed to pay FDI fees equal to an 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 the Portfolio is based on the ratio of its
net assets to the aggregate net assets of the Trust and certain other regis-
tered investment companies subject to similar agreements with FDI.

EXPENSES. In addition to the fees payable to Morgan, FDI and Pierpont Group,
Inc. under the various agreements discussed under Trustees, Advisor, Co-Admin-
istrator and Administrative Services Agent above and Shareholder Servicing be-
low, the Fund and the Portfolio are responsible for usual and customary ex-
penses associated with their respective operations. Such expenses include or-
ganization expenses, legal fees, accounting and audit expenses, insurance
costs, the compensation and expenses of the Trustees, registration fees under
federal securities laws, and extraordinary expenses applicable to the Fund or
the Portfolio. For the Fund, such expenses also include transfer, registrar
and dividend disbursement costs, the expenses of printing and mailing reports,
notices and proxy statements to Fund shareholders, and registration fees under
state securities laws. For the Portfolio, such expenses also include custodian
fees and brokerage expenses.

11
<PAGE>

Morgan has agreed that it will reimburse the Fund through at least December 31,
1998 to the extent necessary to maintain the Fund's total operating expenses
(which includes 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 ex-
traordinary expenses during the period. There is no assurance that Morgan will
continue this waiver beyond the specified period.

SHAREHOLDER SERVICING

Pursuant to a Shareholder Servicing Agreement with the Trust, Morgan acts as
shareholder servicing agent for its customers and other Fund investors who are
customers of an eligible institution which is a customer of Morgan (an "Eligi-
ble Institution"). The Fund pays Morgan for these services at an annual rate
(expressed as a percentage of the average daily net asset values of Fund shares
owned by or for shareholders for whom Morgan is acting as shareholder servicing
agent) of 0.075% of the Fund's average daily net assets. Under the terms of the
Shareholder Servicing Agreement with the Fund, Morgan may delegate one or more
of its responsibilities to other entities at Morgan's expense.

Shareholders should address all inquiries to J.P. Morgan Funds Services, Morgan
Guaranty Trust Company of New York, 522 Fifth Avenue, New York, New York 10036
or call (800) 766-7722.

The business days of the Fund and the Portfolio are the days the New York Stock
Exchange is open.

PURCHASE OF SHARES

METHOD OF PURCHASE. Investors may open accounts with the Fund only through the
Distributor. All purchase transactions in Fund accounts are processed by Morgan
as shareholder servicing agent and the Fund is authorized to accept any in-
structions relating to a Fund account from Morgan as shareholder servicing
agent for the customer. All purchase orders must be accepted by the Distribu-
tor. Investors must be customers of either Morgan or of an Eligible Institution
or participants in employer-sponsored retirement plans that have designated the
Fund as an investment option for the plans. Prospective investors who are not
already customers of Morgan may apply to become customers of Morgan for the
sole purpose of Fund transactions. There are no charges associated with becom-
ing a Morgan customer for this purpose. Morgan reserves the right to determine
the customers that it will accept, and the Trust reserves the right to deter-
mine the purchase orders that it will accept.

The Fund requires a minimum initial investment of $5 million and a minimum sub-
sequent investment of $25,000. These minimum investment requirements may be
waived for certain investors, including investors for whom the Advisor is a fi-
duciary, who maintain related accounts with the Fund, other J.P. Morgan Insti-
tutional Funds or the Advisor, who make investments for a group of clients,
such as financial advisors, trust companies and investment advisors, or who
maintain retirement accounts with the Funds.

PURCHASE PRICE AND SETTLEMENT. The Fund's shares are sold on a continuous basis
without a sales charge at the net asset value per share next determined after
receipt of an order. Prospective investors may purchase shares with the assis-
tance of an Eligible Institution that may establish its own terms, conditions
and charges.

To purchase shares in the Fund, investors should request their Morgan represen-
tative (or a representative of their Eligible Institution) to assist them in
placing a purchase order with the Fund's Distributor. Any shareholder may also
call J.P. Morgan Funds Services at (800) 766-7722 for assistance in placing an
order for Fund shares. If the Fund or its agent

12
<PAGE>

receives a purchase order prior to 4:00 P.M. New York time on any business day,
the purchase of Fund shares is effective and is made at the net asset value de-
termined that day. If the Fund or its agent receives a purchase order after
4:00 P.M. New York time, the purchase is effective and is made at net asset
value determined on the next business day. All purchase orders for Fund shares
must be accompanied by instructions to Morgan (or an Eligible Institution) to
transfer immediately available funds to the Fund's Distributor on settlement
date. The settlement date is generally the business day after the purchase is
effective. The purchaser will begin to receive the daily dividends on the set-
tlement date. See Dividends and Distributions.

ELIGIBLE INSTITUTIONS. The services provided by Eligible Institutions may in-
clude establishing and maintaining shareholder accounts, processing purchase
and redemption transactions, arranging for bank wires, performing shareholder
sub- accounting, answering client inquiries regarding the Trust, assisting cli-
ents in changing dividend options, account designations and addresses, provid-
ing 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 Eligible Institution, transmitting proxy state-
ments, periodic reports, updated prospectuses and other communications to
shareholders and, with respect to meetings of shareholders, collecting, tabu-
lating and forwarding executed proxies and obtaining such other information and
performing such other services as Morgan or the Eligible Institution's clients
may reasonably request and agree upon with the Eligible Institution. Although
there is no sales charge levied directly by the Fund, Eligible Institutions 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 Eligible Institutions but in all cases will be retained
by the Eligible Institution and not remitted to the Fund or Morgan.

REDEMPTION OF SHARES

METHOD OF REDEMPTION. To redeem shares in the Fund, an investor may instruct
Morgan or his or her Eligible Institution, as appropriate, to submit a redemp-
tion request to the Fund or may telephone J.P. Morgan Funds Services directly
at (800) 766-7722 and give the Shareholder Service Representative a preassigned
shareholder Personal Identification Number and the amount of the redemption.
The Fund executes effective redemption requests at the next determined net as-
set value per share. See Net Asset Value. See Additional Information below for
an explanation of the telephone redemption policy of the J.P. Morgan Institu-
tional Funds.

A redemption request received by the Fund or its agent prior to 4:00 P.M. New
York time is effective on that day. A redemption request received after that
time becomes effective on the next business day. Proceeds of an effective re-
demption are generally deposited on settlement date in immediately available
funds to the shareholder's account at Morgan or at his Eligible Institution or,
in the case of certain Morgan customers, are mailed by check or wire trans-
ferred in accordance with the customer's instructions. The redeemer will con-
tinue to receive dividends on these shares through the day before the settle-
ment date. Settlement date is generally the next business day after a redemp-
tion is effective and, subject to Further Redemption Information below, in any
event is within seven days. See Dividends and Distributions.

MANDATORY REDEMPTION BY THE FUND. If the value of a shareholder's holdings in
the Fund falls below the applicable minimum initial investment amount for more
than 30 days because of a redemption of shares, the Fund may redeem the remain-
ing shares in the account 60 days after written notice to the shareholder un-
less the account is increased to the minimum investment amount or more.

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 sharehold-
er's taxpayer identification number and address. As discussed under Taxes be-
low, the Fund may be required to impose "back-up" withholding of federal income
tax on dividends, distributions and redemption proceeds when non-corporate in-
vestors have not provided a certified taxpayer identification number. In addi-
tion, 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 pro-
ceeds from the shares will occur upon clearance of the check which may take up
to 15 days.

13
<PAGE>

EXCHANGE OF SHARES

An investor may exchange shares from the Fund into any J.P. Morgan Institu-
tional Fund or J.P. Morgan Fund or series of J.P. Morgan Series Trust 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 pro-
spectus of the fund into which they are exchanging and may only exchange be-
tween 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 pur-
chases of another fund and the usual purchase and redemption procedures and re-
quirements are applicable to exchanges. See Purchase of Shares and Redemption
of Shares in this Prospectus and in the prospectuses for the other J.P. Morgan
Institutional Funds, J.P. Morgan Funds and J.P. Morgan Series Trust. See also
Additional Information below for an explanation of the telephone exchange pol-
icy of the J.P. Morgan Institutional Funds.

DIVIDENDS AND DISTRIBUTIONS

The Fund intends to distribute substantially all of its net investment income.
The net investment income of the Fund is declared as a dividend daily immedi-
ately prior to the determination of the net asset value of the Fund on that day
and paid monthly. If an investor's shares are redeemed during a month, accrued
but unpaid dividends are paid with the redemption proceeds. The net investment
income of the Fund for dividend purposes consists of its pro rata share of the
net income of the Portfolio less the Fund's expenses. Expenses of the Fund and
the Portfolio, including the fees payable to Morgan, are accrued daily. Shares
will accrue dividends as long as they are issued and outstanding. Shares are
issued and outstanding as of the settlement date of a purchase order to the
settlement date of a redemption order.

Substantially all the realized net capital gains, if any, of the Fund are de-
clared and paid on an annual basis, except that an additional capital gains
distribution may be made in a given year to the extent necessary to avoid the
imposition of federal excise tax on the Fund.

NET ASSET VALUE

14
<PAGE>

The Fund computes its net asset value once daily at 4:15 P.M. New York time on
Monday through Friday, except that the net asset value is not computed for the
Fund on the holidays listed under Net Asset Value in the Statement of Addi-
tional Information.

ORGANIZATION

The Trust was organized on November 4, 1992 as an unincorporated business trust
under Massachusetts law and is an entity commonly known as a "Massachusetts
business trust". The Declaration of Trust permits the Trustees to issue an un-
limited number of full and fractional shares ($0.001 par value) of one or more
series. To date, 25 series of shares have been authorized and are available for
sale to the public. Only shares of the Fund are offered through this Prospec-
tus. No series of shares has any preference over any other series of shares.
See Massachusetts Trust in the Statement of Additional Information.

Shareholders of the Fund are entitled to one vote for each share and to the ap-
propriate fractional vote for each fractional share. There is no cumulative
voting. Shares have no preemptive or conversion rights. Shares are fully paid
and non- assessable by the Fund. The Trust does not intend to hold meetings of
shareholders annually. The Trustees may call meetings of shareholders for ac-
tion by shareholder vote as may be required by either the 1940 Act or the Dec-
laration of Trust. The Trustees will call a meeting of shareholders to vote on
removal of a Trustee upon the written request of the record holders of ten per-
cent of Trust shares and will assist shareholders in communicating with each
other as prescribed in Section 16(c) of the 1940 Act. For further organization
information, including certain shareholder rights, see Description of Shares in
the Statement of Additional Information.

The Portfolio is organized as a trust under the laws of the State of New York.
The Portfolio's Declaration of Trust provides that the Fund and other entities
investing in the Portfolio (e.g., other investment companies, insurance company
separate accounts and common and commingled trust funds) will each be liable
for all obligations of the Portfolio. However, the risk of the Fund incurring
financial loss on account of such liability is limited to circumstances in
which both inadequate insurance existed and the Portfolio itself was unable to
meet its obligations. Accordingly, the Trustees of the Trust believe that nei-
ther the Fund nor its shareholders will be adversely affected by reason of the
Fund's investing in the Portfolio.

TAXES

15
<PAGE>

available capital loss carryforwards are distributed to shareholders within al-
lowable time limits. The Portfolio intends to qualify as an association treated
as a partnership for federal income tax purposes. As such, the Portfolio should
not be subject to tax. The Fund's status as a regulated investment company is
dependent on, among other things, the Portfolio's continued qualification as a
partnership for federal income tax purposes.

Corporations should, however, be aware that interest on all municipal securi-
ties will be included in calculating (i) adjusted current earnings for purposes
of the alternative minimum tax applicable to them, (ii) the additional tax im-
posed on certain corporations by the Superfund Revenue Act of 1986, and (iii)
the foreign branch profits tax imposed on effectively connected earnings and
profits of United States branches of foreign corporations. Furthermore, special
tax provisions may apply to certain financial institutions and property and ca-
sualty insurance companies, and they should consult their tax advisors before
purchasing shares of the Fund.

Distributions of net long-term capital gains in excess of net short-term capi-
tal losses are taxable to shareholders of the Fund as long-term capital gains
regardless of how long a shareholder has held shares in the Fund and regardless
of whether taken in cash or reinvested in additional shares. Long-term capital
gains distributions to corporate shareholders are not eligible for the divi-
dends-received deduction. As a result of the enactment of the Taxpayer Relief
Act of 1997 (the "Act"), long-term capital gain of an individual is generally
subject to a maximum rate of 28% in respect of a capital asset held directly by
such individual for more than one year but not more than eighteen months, and
the maximum rate is reduced to 20% in respect of a capital asset held in excess
of 18 months. The Act authorizes the Treasury department to promulgate regula-
tions that would apply these rules in the case of long-term capital gain dis-
tributions made by the Fund.

16
<PAGE>

Any distribution of capital gains will have the effect of reducing the net as-
set value of Fund shares held by a shareholder by the same amount as the dis-
tribution. If the net asset value of the shares is reduced below a sharehold-
er's cost as a result of such a distribution, the distribution, although con-
stituting 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. However, any loss realized by a
shareholder upon the redemption or exchange of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of
any long-term capital gain distributions received by the shareholder with re-
spect to such shares. In addition, any loss realized by a shareholder upon the
redemption or exchange of shares in the Fund held six months or less will be
disallowed to the extent of any exempt-interest dividends received by the
shareholder with respect to these shares. See Taxes in the Statement of Addi-
tional Information.

ADDITIONAL INFORMATION

The Fund sends to its shareholders annual and semi-annual reports. The finan-
cial statements appearing in annual reports are audited by independent accoun-
tants. Shareholders also will be sent confirmations of each purchase and re-
demption and monthly statements, reflecting all other account activity, in-
cluding dividends and any distributions reinvested in additional shares or
credited as cash.

All shareholders are given the privilege to initiate transactions automati-
cally by telephone upon opening an account. However, an investor should be
aware that a transaction authorized by telephone and reasonably believed to be
genuine by the Fund, Morgan, his Eligible Institution or the Distributor may
subject the investor to risk of loss if such instruction is subsequently found
not to be genuine. The Fund will employ reasonable procedures, including re-
quiring investors to give their Personal Identification Number and tape re-
cording of telephone instructions, to confirm that instructions communicated
from investors by telephone are genuine; if it does not, the Fund, the Share-
holder Servicing Agent or a shareholder's Eligible Institution may be liable
for any losses due to unauthorized or fraudulent instructions.

The Fund may make historical performance information available and may compare
its performance to other investments or relevant indexes, including data from
Lipper Analytical Services, Inc., Micropal Inc., Morningstar Inc., Ibbotson
Associates, the Lehman Brothers Quality Intermediate Municipal Bond Index and
other industry publications. The Fund may advertise "yield" and "tax equiva-
lent yield". Yield refers to the net income generated by an investment in the
Fund over a stated 30-day period. This income is then annualized-i.e., the
amount of income generated by the investment during the 30-day period is as-
sumed to be generated each 30-day period for twelve periods and is shown as a
percentage of the investment. The income earned on the investment is also as-
sumed to be reinvested at the end of the sixth 30-day period. The tax equiva-
lent yield is calculated similarly to the yield for the Fund, except that the
yield is increased using a stated income tax rate to demonstrate the taxable
yield necessary to produce an after-tax equivalent to the Fund.

17
<PAGE>

APPENDIX

The Portfolio is permitted to enter into the futures and options transactions
described below.

The Portfolio may (a) purchase and sell exchange traded and over-the-counter
(OTC) put and call options on fixed income securities and indexes of fixed in-
come securities, (b) purchase and sell futures contracts on fixed income secu-
rities and indexes of fixed income securities and (c) purchase put and call op-
tions on futures contracts on fixed income securities and indexes of fixed in-
come securities.

The Portfolio may use futures contracts and options for hedging 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, in-
cluding buying futures contracts, writing puts and calls, 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 re-
turn characteristics of the Portfolio's overall strategy in a manner deemed ap-
propriate to the Advisor and consistent with the Portfolio's objective and pol-
icies. 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 Portfolio's return. While the use of these instruments by the
Portfolio may reduce certain risks associated with owning its portfolio securi-
ties, 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 Portfolio's
return. Certain strategies limit the Portfolio's possibilities to realize gains
as well as limiting its exposure to losses. The Portfolio could also experience
losses if the prices of its options and futures positions were poorly corre-
lated 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 con-
nection with its futures and options transactions and these transactions could
significantly increase the Portfolio's turnover rate.

OPTIONS

PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the Portfolio ob-
tains 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 al-
lowing 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 liq-
uid market exists. If the option is allowed to expire, the Portfolio will lose
the entire premium it paid. If the Portfolio exercises a put option on a secu-
rity, 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.

18
<PAGE>

The buyer of a typical put option can expect to realize a gain if the price of
the underlying instrument falls substantially. However, if the price of the in-
strument underlying the option does not fall enough to offset the cost of pur-
chasing 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 in-
creases 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 receipt of the premium, the Portfolio assumes the obligation to pay
the strike price for the instrument underlying the option if the other party to
the option chooses to exercise it. The Portfolio may seek to terminate its po-
sition 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 pre-
mium 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 re-
ceived 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 op-
tion. The characteristics of writing call options are similar to those of writ-
ing 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 and sell (write) 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, ex-
cept 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 securi-
ties or segment of the securities market rather than price fluctuations in a
single security. The Portfolio, in purchasing or selling index options, is sub-
ject 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 the 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.

19
<PAGE>

FUTURES CONTRACTS

When the Portfolio purchases a futures contract, it agrees to purchase a speci-
fied 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 under-
lying 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 con-
tract 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 under-
lying instrument, much as if it had purchased the underlying instrument direct-
ly. 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 off-
set 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.

The Portfolio will segregate liquid, high quality 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.

For further information about the Portfolio's use of futures and options and a
more detailed discussion of associated risks, see Investment Objectives and
Policies in the Statement of Additional Information.

20
<PAGE>

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

PROS374-981

J.P. Morgan Institutional Tax Exempt Bond Fund

PROSPECTUS

January 2, 1998

******************************************************************************

<PAGE>

PROSPECTUS

J.P. Morgan Institutional International Bond Fund
60 State Street
Boston, Massachusetts 02109
For information call (800) 766-7722

J.P. Morgan Institutional International Bond Fund (the "Fund") seeks to provide
a high total return, consistent with moderate risk of capital, from a portfolio
of international fixed income securities. It is designed for investors who seek
exposure to the international bond markets in their investment portfolios.

The Fund is a non-diversified no-load mutual fund for which there are no sales
charges or exchange or redemption fees. The Fund is a series of the J.P. Morgan
Institutional Funds, an open-end management investment company organized as a
Massachusetts business trust (the "Trust").

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 NON-U.S. FIXED INCOME 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 ON PAGE 3.

The Portfolio is advised by Morgan Guaranty Trust Company of New York ("Morgan"
or the "Advisor").

This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing and it should be retained
for future reference. Additional information about the Fund has been filed with
the Securities and Exchange Commission in a Statement of Additional Information
dated January 2, 1998 (as supplemented from time to time). This information is
incorporated herein by reference and is available without charge upon written
request from the Fund's Distributor, Funds Distributor, Inc. ("FDI"), 60 State
Street, Suite 1300, Boston, Massachusetts 02109, Attention: J.P. Morgan
Institutional Funds, or by calling (800) 221-7930.

INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, MORGAN GUARANTY TRUST COMPANY OF NEW YORK 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.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

THE DATE OF THIS PROSPECTUS IS JANUARY 2, 1998
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Investors for Whom the Fund is Designed.................................... 1
Financial Highlights....................................................... 3
Special Information Concerning Investment
Structure................................................................. 3
Investment Objective and Policies.......................................... 4
Additional Investment Information and Risk Factors......................... 6
Investment Restrictions.................................................... 10
Management of the Trust and the Portfolio.................................. 11
Shareholder Servicing...................................................... 13
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Purchase of Shares......................................................... 13
Redemption of Shares....................................................... 14
Exchange of Shares......................................................... 15
Dividends and Distributions................................................ 15
Net Asset Value............................................................ 16
Organization............................................................... 16
Taxes...................................................................... 17
Additional Information..................................................... 18
Appendix................................................................... A-1
</TABLE>

<PAGE>

J.P. Morgan Institutional International Bond Fund

INVESTORS FOR WHOM THE FUND IS DESIGNED

The Fund is designed for investors who seek to broaden their investments by
adding exposure to international bonds. The Fund seeks to achieve its
investment objective by investing all of its investable assets in The Non-U.S.
Fixed Income Portfolio, a non-diversified open-end management investment
company having the same investment objective as the Fund. Since the investment
characteristics and experience of the Fund will correspond directly with those
of the Portfolio, the discussion in this Prospectus focuses on the investments
and investment policies of the Portfolio. The net asset value of shares in the
Fund fluctuates with changes in the value of the investments in the Portfolio.

The Portfolio may make various types of investments in seeking its objective.
Among the permissible investments and investment techniques for the Portfolio
are futures contracts, options and forward contracts on foreign currencies. The
potential risks of investing in these derivative instruments are discussed in
Additional Investment Information and Risk Factors and the Appendix. The
Portfolio may also purchase certain privately placed securities. The
Portfolio's investments in securities of foreign issuers, including issuers in
emerging markets, involve foreign investment risks and may be more volatile and
less liquid than domestic securities. For further information about these
investments, see Investment Objective and Policies below.

The Fund requires a minimum initial investment of $1 million. The minimum
subsequent investment is $25,000. See Purchase of Shares. If a shareholder
reduces his or her investment in the Fund to less than $1 million for more than
30 days, the investment may be subject to mandatory redemption. See Redemption
of Shares--Mandatory Redemption by the Fund.

This Prospectus describes the investment objective and policies, management and
operation of the Fund to enable investors to decide if the Fund suits their
needs. The Fund operates in a two-tier master-feeder investment fund structure.
The Trustees believe that the Fund may achieve economies of scale over time by
utilizing this investment structure.

The following table illustrates that investors in the Fund incur no shareholder
transaction expenses; their investment in the Fund is subject only to the
operating expenses set forth below for the Fund and the Portfolio, as a
percentage of average net assets of the Fund. The Trustees of the Trust believe
that the aggregate per share expenses of the Fund and the Portfolio will be
approximately equal to and may be less than the expenses that the Fund would
incur if it retained the services of an investment adviser and invested its
assets directly in portfolio securities. Fund and Portfolio expenses are
discussed below under the headings Management of the Trust and the Portfolio
and Shareholder Servicing.

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases*........................................... None
Sales Load Imposed on Reinvested Dividends................................. None
Deferred Sales Load........................................................ None
Redemption Fees............................................................ None
Exchange Fees.............................................................. None
</TABLE>
- -------
* Certain Eligible Institutions (defined below) may impose fees in connection
with the purchase of the Fund's shares through such institutions.

1
<PAGE>

EXPENSE TABLE

ANNUAL OPERATING EXPENSES*

<TABLE>
<S> <C>
Advisory Fees............................................................. 0.35%
Rule 12b-1 Fees........................................................... None
Other Expenses (after expense reimbursement).............................. 0.15%
----
Total Operating Expenses (after expense reimbursement).................... 0.50%
</TABLE>

*Fees and expenses are expressed as a percentage of the average net assets of
the Fund after expense reimbursement for the fiscal year ended September 30,
1997 through January 31, 1999. See Management of the Trust and the Portfolio.
Without current reimbursements, Other Expenses and Total Operating Expenses
would be equal to 2.06% and 2.41%, respectively, for the most recently com-
pleted fiscal year.

EXAMPLE

An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:

The above expense table is designed to assist investors in understanding the
various direct and indirect costs and expenses that investors in the Fund bear.
The fees and expenses included in Other Expenses are the fees paid to Morgan
under the Administrative Services Agreements and the Shareholder Servicing
Agreement, organization expenses, the fees paid to Pierpont Group, Inc. under
the Fund Services Agreements, the fees paid to Funds Distributor, Inc. under
the Co-Administration Agreements, the fees paid to State Street Bank and Trust
Company as custodian and transfer agent, and other usual and customary expenses
of the Fund and the Portfolio. For a more detailed description of contractual
fee arrangements, including expense reimbursements, see Management of the Trust
and the Portfolio and Shareholder Servicing. In connection with the above exam-
ple, please note that $1,000 is less than the Fund's minimum investment re-
quirement and that there are no redemption or exchange fees of any kind. See
Purchase of Shares and Redemption of Shares. THE EXAMPLE IS HYPOTHETICAL; IT IS
INCLUDED SOLELY FOR ILLUSTRATIVE PURPOSES. IT SHOULD NOT BE CONSIDERED A REPRE-
SENTATION OF FUTURE PERFORMANCE; ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE
SHOWN.

2
<PAGE>

FINANCIAL HIGHLIGHTS

The following selected data for a share outstanding for the indicated periods
should be read in conjunction with the financial statements and related notes
which are contained in the Fund's annual report and are incorporated by refer-
ence into the Statement of Additional Information. The following selected data
have been audited by independent accountants. The Fund's annual report in-
cludes a discussion of those factors, strategies and techniques that materi-
ally affected the Fund's performance during the period of the report, as well
as certain related information. A copy of the Fund's annual report will be
made available without charge upon request.

<TABLE>
<CAPTION>
For the Period
December 1, 1994
For the Fiscal For the Fiscal (commencement
Year Ended Year Ended of operations) to
September 30, 1997 September 30, 1996 September 30, 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $11.30 $ 11.12 $10.00
------ ------- ------
Income from Investment
Operations:
Net Investment Income. 2.21 0.31 0.49
Net Realized and
Unrealized Gain on
Investment
and Foreign Currency
(Loss) Allocated from
Portfolio............ (1.11) 0.95 0.78
------ ------- ------
Total from Investment
Operations............. 1.10 1.26 1.27
------ ------- ------
Less Distributions to
Shareholders from
Net Investment Income. (2.78) -- (0.15)
Net Realized Gain..... (0.97) (1.08) --
------ ------- ------
Total Distributions to
Shareholders........... (3.75) (1.08) (0.15)
------ ------- ------
Net Asset Value, End of
Period................. $ 8.65 $ 11.30 $11.12
====== ======= ======
Total Return............ 12.52% 12.09% 12.83%(a)
====== ======= ======
Ratios and Supplemental
Data:
Net Assets, End of
Period (in
thousands)........... $7,126 $13,310 $4,233
Ratio to Average Net
Assets:
Expenses............ 0.50% 0.65% 0.60%(b)
Net Investment
Income............. 4.88% 5.28% 5.82%(b)
Decrease Reflected
in Expense Ratio
due to
Expense
Reimbursement...... 1.91% 1.02% 1.90%(b)(c)
</TABLE>
- -------

(a)Not annualized.

(b)Annualized.

(c)After consideration of certain state limitations.

SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE

3
<PAGE>

own fund using a different pricing structure than the Fund. Such different
pricing structures may result in differences in returns experienced by invest-
ors 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 invest-
ment 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
described below with respect to the Portfolio.

Certain changes in the Portfolio's investment objective, policies or restric-
tions, or a failure by the Fund's shareholders to approve a change in the Port-
folio's investment objective or restrictions, may require withdrawal of the
Fund's interest in the Portfolio. Any such withdrawal could result in a distri-
bution 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 ac-
tions 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. Addition-
ally, because the Portfolio would become smaller, it may become less diversi-
fied, resulting in potentially increased portfolio risk (however, these possi-
bilities also exist for traditionally structured funds which have large or in-
stitutional 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 op-
eration of the Portfolio upon the withdrawal of another investor in the Portfo-
lio), 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 in-
structions 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
effect on the outcome of such matters.

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund and the Portfolio is described below,
together with the policies they employ in their efforts to achieve this
objective. Additional information about the investment policies of the Fund and
the Portfolio appears in the Statement of Additional Information under
Investment Objectives and Policies. There can be no assurance that the
investment objective of the Fund or the Portfolio will be achieved.

The Fund's investment objective is to provide a high total return, consistent
with moderate risk of capital, from a portfolio of international fixed income
securities. Total return will consist of income plus realized and unrealized
capital gains and losses. The Fund attempts to achieve its objective by invest-
ing all of its investable assets in The Non-U.S. Fixed

4
<PAGE>

Income Portfolio, a non-diversified open-end management investment company hav-
ing the same investment objective as the Fund. The Portfolio seeks to achieve
its objective by investing in the types of fixed income securities described
below. The expected total return of a portfolio of fixed income securities may
not be as high as that of a portfolio of equity securities.

The Fund is designed for investors who seek exposure to the international bond
markets in their investment portfolios.

Morgan actively manages the Portfolio's allocation across countries, its dura-
tion and the selection of specific securities within countries. Based on funda-
mental economic and capital markets research, quantitative valuation techniques
and experienced judgment, Morgan allocates the Portfolio's assets primarily
among the developed countries of the world outside the United States. Morgan
adjusts the Portfolio's duration in light of market conditions and the Advi-
sor's interest rate outlook for the countries in which it invests. The Advisor
selects securities among the broad sectors of the fixed income market includ-
ing, but not limited to, debt obligations of governments and their agencies,
supranational organizations, corporations and banks, taking into consideration
such factors as their relative value, the likelihood of a change in credit rat-
ing, and the liquidity of the issue. Under normal circumstances, the Advisor
intends to keep the Portfolio essentially fully invested with at least 65% of
the Portfolio's assets invested in bonds of foreign issuers. These investments
will be made in at least three foreign countries. For further information on
international investments, see Additional Information and Risk Factors.

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. Typically, the Portfolio's duration
will range between one year shorter and one year longer than the duration of
the non-U.S. fixed income universe, as represented by Salomon Brothers Non-U.S.
World Government Bond Index (currency hedged), the Portfolio's benchmark. Cur-
rently the benchmark's duration is approximately five years. The maturities of
the individual bonds in the Portfolio may vary widely, however.

The Portfolio may invest in securities denominated in foreign currencies, the
U.S. dollar or multinational currency units such as the ECU. The Advisor will
generally attempt to hedge the Portfolio's foreign currency exposure into the
U.S. dollar. However, the Advisor may from time to time decide to keep foreign
currency positions unhedged or engage in foreign currency transactions if,
based on fundamental research, technical factors and the judgment of experi-
enced currency managers, it believes the foreign currency exposure will benefit
the Portfolio. For further information on foreign currency exchange transac-
tions, see Additional Investment Information and Risk Factors.

The Portfolio intends to manage its portfolio actively in pursuit of its in-
vestment objective. Portfolio transactions are undertaken principally to accom-
plish the Portfolio's objective in relation to expected movements in the gen-
eral level of interest rates in each country, but the Portfolio may also engage
in short-term trading consistent with its objective. To the extent the Portfo-
lio engages in short-term trading, it may realize short-term capital gains or
losses and incur increased transaction costs. See Taxes below. The portfolio
turnover rate for the fiscal year ended September 30, 1997 was 346%.

CORPORATE BONDS. The Portfolio may invest in a broad range of debt obligations
of foreign issuers. These include debt securities of foreign corporations; debt
obligations of foreign banks and bank holding companies; and debt obligations
issued or guaranteed by supranational organizations such as the World Bank, the
European Investment Bank and the Asian Development Bank. To a limited extent,
the Portfolio may also invest in non-U.S. dollar denominated securities of U.S.
issuers.

GOVERNMENT SECURITIES. The Portfolio may invest in debt obligations issued or
guaranteed by a foreign sovereign government or one of its agencies, authori-
ties, instrumentalities or political subdivisions including a foreign state,
province or municipality.

5
<PAGE>

MONEY MARKET INSTRUMENTS. The Portfolio may invest in money market instruments
of foreign or domestic issuers denominated in U.S. dollars and other curren-
cies. Under normal circumstances the Portfolio will purchase these securities
as a part of its management of the Portfolio's duration, to invest temporary
cash balances or to maintain liquidity to meet redemptions. However, the Port-
folio may also invest in money market instruments without limitation as a tem-
porary defensive measure taken in the Advisor's judgment during, or in antici-
pation of, adverse market conditions. For more detailed information about these
money market investments, see Investment Objectives and Policies in the State-
ment of Additional Information.

QUALITY INFORMATION. Under normal circumstances at least 65% of the Portfolio's
total assets will consist of securities that at the time of purchase are rated
at least A by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Ratings Group ("Standard & Poor's") or that are unrated and in the Advisor's
opinion are of comparable quality. In the case of the remaining 35% of the
Portfolio's investments, the Portfolio may purchase securities that are rated
Baa or better by Moody's or BBB or better by Standard & Poor's or are unrated
and in the Advisor's opinion 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. 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. See Appendix A in the Statement
of Additional Information for more detailed information on these ratings.

NON-DIVERSIFICATION. The Portfolio is registered as a non-diversified invest-
ment company which means that the Portfolio is not limited by the Investment
Company Act of 1940, as amended (the "1940 Act"), in the proportion of its as-
sets that may be invested in the obligations of a single issuer. Thus, the
Portfolio 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 Portfolio, 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 below.

The Portfolio may also purchase securities on a when-issued or delayed delivery
basis, enter into repurchase and reverse repurchase agreements, loan its port-
folio securities, purchase certain privately placed securities and enter into
forward foreign currency exchange contracts. In addition, the Portfolio may use
options on securities and indexes of securities, futures contracts and options
on futures contracts for hedging and risk management purposes. Forward foreign
currency exchange contracts, options and futures contracts are derivative in-
struments. For a discussion of these investments and investment techniques, see
Additional Investment Information and Risk Factors.

ADDITIONAL INVESTMENT INFORMATION AND RISK FACTORS

CONVERTIBLE SECURITIES. The convertible securities in which the Portfolio may
invest include any debt securities or preferred stock which may be converted
into common stock or which carry the right to purchase common stock. Convert-
ible securities entitle the holder to exchange the securities for a specified
number of shares of common stock, usually of the same company, at specified
prices within a certain period of time.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase securi-
ties on a when-issued or delayed delivery basis. Delivery of and payment for
these securities may take as long as a month or more after the date of the pur-
chase commitment. The value of these securities is subject to market fluctua-
tion during this period and for fixed income investments no interest accrues to
the Portfolio until settlement. At the time of settlement, a when-issued secu-
rity may be valued at less than its purchase price. The Portfolio maintains
with the Custodian a separate account with a segregated portfolio of securities
in an amount at least equal to these commitments. When entering into a when-is-
sued or delayed delivery transaction, the Portfolio will rely on the other
party to consummate the transaction; if the other party fails to do so, the
Portfolio may be disadvantaged. It is the current policy of the Portfolio not
to enter into when-issued commitments exceeding in the aggregate 15% of the
market value of the Portfolio's total assets less liabilities other than the
obligations created by these commitments.

6
<PAGE>

FOREIGN INVESTMENT INFORMATION. The Portfolio invests primarily in foreign se-
curities. Investment in securities of foreign issuers and in obligations of
foreign branches of domestic banks involves somewhat different investment
risks from those affecting securities of U.S. domestic issuers. There may be
limited publicly available information with respect to foreign issuers, and
foreign issuers are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to domes-
tic companies. Interest paid by foreign issuers may be subject to withholding
and other foreign taxes which may decrease the net return on foreign invest-
ments as compared to interest paid to the Portfolio by domestic companies.

Investors should realize that the value of the Portfolio's investments in for-
eign securities may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation, na-
tionalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign countries.
In addition, changes in government administrations or economic or monetary
policies in the United States or abroad could result in appreciation or depre-
ciation of portfolio securities and could favorably or unfavorably affect the
Portfolio's operations. Furthermore, the economies of individual foreign na-
tions may differ from the U.S. economy, whether favorably or unfavorably, in
areas such as growth of gross national product, rate of inflation, capital re-
investment, resource self-sufficiency and balance of payments position; it may
also be more difficult to obtain and enforce a judgment against a foreign is-
suer. Any foreign investments made by the Portfolio must be made in compliance
with U.S. and foreign currency restrictions and tax laws restricting the
amounts and types of foreign investments.

7
<PAGE>

In addition, while the volume of transactions effected in foreign bond markets
has increased in recent years, in most cases it remains appreciably below that
of domestic markets. Accordingly, the Portfolio's foreign investments may be
less liquid and their prices may be more volatile than comparable investments
in securities of U.S. issuers. Moreover, the settlement periods for foreign se-
curities, which are often longer than those for securities of U.S. issuers, may
affect portfolio liquidity. In addition, there is generally less government su-
pervision and regulation of brokers, financial institutions and issuers located
in foreign countries than in the United States.

Although the Portfolio invests primarily in securities of established issuers
based in developed foreign countries, it may also invest in securities of is-
suers in emerging markets countries. Investments in securities of issuers in
emerging markets countries may involve a high degree of risk and many may be
considered speculative. These investments carry all of the risks of investing
in securities of foreign issuers outlined in this section to a heightened de-
gree. These heightened risks include (i) greater risks of expropriation, con-
fiscatory taxation, nationalization, and less social, political and economic
stability; (ii) the small current size of the markets for securities of emerg-
ing markets issuers and the currently low or nonexistent volume of trading, re-
sulting in lack of liquidity and in price volatility; (iii) certain national
policies which may restrict the Portfolio's investment opportunities including
restrictions on investing in issuers or industries deemed sensitive to relevant
national interests; and (iv) the absence of developed legal structures gov-
erning private or foreign investment and private property.

Since the Portfolio's investments in foreign securities involve foreign curren-
cies, the value of its assets as measured in U.S. dollars may be affected fa-
vorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. See Foreign Currency Exchange Trans-
actions.

FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the Portfolio buys and sells
securities and receives interest in currencies other than the U.S. dollar, the
Portfolio enters into foreign currency exchange transactions. The Portfolio ei-
ther enters into these transactions on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market or uses forward con-
tracts to purchase or sell foreign currencies. The cost of the Portfolio's spot
currency exchange transactions is generally the difference between the bid and
offer spot rate of the currency being purchased or sold.

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

The Portfolio may enter into foreign currency exchange transactions in an at-
tempt to protect against changes in foreign currency exchange rates between the
trade and settlement dates of specific securities transactions or anticipated
securities transactions. The Portfolio may also enter into forward contracts to
hedge against a change in foreign currency exchange rates that would cause a
decline in the value of existing investments denominated or principally traded
in a foreign currency. To do this, the Portfolio would enter into a forward
contract to sell the foreign currency in which the investment is denominated or
principally traded in exchange for U.S. dollars or in exchange for another for-
eign currency. The Portfolio will only enter into forward contracts to sell a
foreign currency in exchange for another foreign currency if the Advisor ex-
pects the foreign currency purchased to appreciate against the U.S. dollar.

Although these transactions are intended to minimize the risk of loss due to a
decline in the value of the hedged cur- rency, at the same time they limit any
potential gain that might be realized should the value of the hedged currency
increase. In addition, forward contracts that convert a foreign currency into
another foreign currency will cause the

8
<PAGE>

Portfolio to assume the risk of fluctuations in the value of the currency pur-
chased against the hedged currency and the U.S. dollar. The precise matching of
the forward contract amounts and the value of the securities involved will not
generally be possible because the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
such securities between the date the forward contract is entered into and the
date it matures. The projection of currency market movements is extremely dif-
ficult, and the successful execution of a hedging strategy is highly uncertain.

REVERSE REPURCHASE AGREEMENTS. The Portfolio is permitted to enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Portfolio sells a
security and agrees to repurchase it at a mutually agreed upon date and price,
reflecting the interest rate effective for the term of the agreement. For pur-
poses of the 1940 Act, it is considered a form of borrowing by the Portfolio
and, therefore, is a form of leverage. Leverage may cause any gains or losses
of the Portfolio to be magnified. See Investment Restrictions for investment
limitations applicable to reverse repurchase agreements and other borrowings.
For more information, see Investment Objectives and Policies in the Statement
of Additional Information.

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. Sub-
ject to this non-fundamental policy limitation, the Portfolio may acquire in-
vestments that are illiquid or have limited liquidity, such as private place-
ments 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 re-
ceives upon resale may be lower than the price paid or received for similar se-
curities with a more liquid market. Accordingly the valuation of these securi-
ties will reflect any limitations on their liquidity.

FUTURES AND OPTIONS TRANSACTIONS. The Portfolio may (a) purchase and sell
(write) exchange traded and over-the-counter put and call options on fixed in-
come securities or indexes of fixed income securities, (b) purchase and sell
futures contracts on indexes of fixed income securities, and (c) purchase and
sell (write) put and call options on futures contracts on indexes of fixed in-
come 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 man-
agement 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, writing puts and calls, 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.

9
<PAGE>

the Portfolio's return. While the use of these instruments by the Portfolio 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 incor-
rectly, options and futures strategies may lower the Portfolio's return. Cer-
tain strategies limit the Portfolio's possibilities to realize gains as well as
limiting its exposure to losses. 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 il-
liquid 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 secu-
rities 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 Port-
folio'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 as-
set value of the Portfolio. For more detailed information about these transac-
tions, see the Appendix to this Prospectus and Risk Management in the Statement
of Additional Information.

INVESTMENT RESTRICTIONS

The Portfolio may not purchase securities or other obligations of issuers con-
ducting their principal business activity in the same industry if its invest-
ments in such industry would exceed 25% of the value of the Portfolio's total
assets, except this limitation shall not apply to investments in U.S. Govern-
ment securities. (For the purposes of this 25% limitation, the staff of the SEC
considers i) all supranational organizations as a group to be a single industry
and ii) each foreign government and its political subdivisions to be a single
industry.) In addition, the Portfolio may not borrow money except that the
Portfolio may (a) borrow money from banks for temporary or emergency purposes
(not for leveraging purposes) and (b) enter into reverse repurchase agreements
for any purpose, provided that (a) and (b) in total do not exceed 33 1/3% of
the Portfolio's total assets less liabilities (other than borrowings); and the
Portfolio may not issue senior securities except as permitted by the 1940 Act
or any rule, order or interpretation thereunder. See Additional Investment In-
formation and Risk Factors--Loans of Portfolio Securities and Reverse Repur-
chase Agreements.

10
<PAGE>

MANAGEMENT OF THE TRUST AND THE PORTFOLIO

<TABLE>
<S> <C>
Frederick S. Addy........... Former Executive Vice President and Chief Financial
Officer, Amoco Corporation
William G. Burns............ Former Vice Chairman of the Board and Chief
Financial Officer, NYNEX Corporation
Arthur C. Eschenlauer....... Former Senior Vice President, Morgan Guaranty Trust
Company of New York
Matthew Healey.............. Chairman and Chief Executive Officer; Chairman,
Pierpont Group, Inc.
Michael P. Mallardi......... Former Senior Vice President, Capital Cities/ABC,
Inc. and President, Broadcast Group
</TABLE>

Morgan uses a sophisticated, disciplined, collaborative process for managing
all asset classes. For fixed income portfolios, this process focuses on the
systematic analysis of real interest rates, sector diversification, quantita-
tive and credit analysis, and, for foreign fixed income securities, country se-
lection. Morgan has managed portfolios of international fixed income securities
on behalf of its clients since 1977. The portfolio managers making investments
in international fixed income securities work in conjunction with fixed income,
credit, capital market and economic research analysts, as well as traders and
administrative officers.

11
<PAGE>

The following persons are primarily responsible for the day-to-day management
and implementation of Morgan's process for the Portfolio (the inception date
of each person's responsibility for the Portfolio and his business experience
for the past five years is indicated parenthetically): Dominic J. Pegler, Vice
President (since April, 1996, employed by Morgan since April, 1996, previously
an economist at Bank of England) and Maria Ryan, Associate (since January,
1997, employed by Morgan since prior to 1992).

CO-ADMINISTRATOR. Pursuant to Co-Administration Agreements with the Trust and
the Portfolio, Funds Distributor, Inc. ("FDI") serves as the Co-Administrator
for the Fund and the Portfolio. FDI (i) provides office space, equipment and
clerical personnel for maintaining the organization and books and records of
the Fund and the Portfolio; (ii) provides officers for the Trust and the Port-
folio; (iii) prepares and files documents required for notification of state
securities administrators; (iv) reviews and files marketing and sales litera-
ture; (v) files Portfolio regulatory documents and mails Portfolio communica-
tions to Trustees and investors; and (vi) maintains related books and records.
See Administrative Services Agent below.

ADMINISTRATIVE SERVICES AGENT. Pursuant to Administrative Services Agreements
with the Trust and the Portfolio, 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 perfor-
mance data, overnight of service providers and certain regulatory and Board of
Trustees matters.

Under the Administrative Services Agreements, each of the Fund and the Portfo-
lio 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 Portfolio, the other Portfolios in which series of the Trust
or the J.P. Morgan Funds invest and J.P. Morgan Series Trust and in accordance
with the following annual schedule: 0.09% on the first $7 billion of their ag-
gregate average daily net assets and 0.04% of such aggregate average daily net
assets in excess of $7 billion, less the complex-wide fees payable to FDI.

DISTRIBUTOR. FDI, a registered broker-dealer, also serves as the Distributor
of shares of the Fund and as exclusive placement agent for the Portfolio. FDI
is a wholly owned indirect subsidiary of Boston Institutional Group, Inc.
FDI's principal business address is 60 State Street, Suite 1300, Boston, Mas-
sachusetts 02109.

CUSTODIAN. State Street Bank and Trust company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02110, serves as the Fund's and the Portfolio's
custodian and fund accounting and transfer Agent and the Fund's dividend dis-
bursing agent. State Street also keeps the books of account for the Fund and
the Portfolio.

12
<PAGE>

Morgan has agreed that it will reimburse the Fund through at least January 31,
1999 to the extent necessary to maintain the Fund's total operating expenses
(which includes 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 ex-
traordinary expenses during the period. There is no assurance that Morgan will
continue this waiver beyond the specified period.

SHAREHOLDER SERVICING

Pursuant to a Shareholder Servicing Agreement with the Trust, Morgan acts as
shareholder servicing agent for its customers and other Fund investors who are
customers of an eligible institution which is a customer of Morgan (an "Eligi-
ble Institution"). The Fund pays Morgan for these services at an annual rate
(expressed as a percentage of the average daily net asset value of Fund shares
owned by or for shareholders for whom Morgan is acting as shareholder servicing
agent) of 0.10% of the Fund's average daily net assets. Under the terms of the
Shareholder Servicing Agreement with the Fund, Morgan may delegate one or more
of its responsibilities to other entities at Morgan's expense.

Shareholders should address all inquiries to J.P. Morgan Funds Services, Morgan
Guaranty Trust Company of New York, 522 Fifth Avenue, New York, New York 10036
or call (800) 766-7722.

The business days of the Fund and the Portfolio are the days the New York Stock
Exchange is open.

PURCHASE OF SHARES

METHOD OF PURCHASE. Investors may open accounts with the Fund only through the
Distributor. All purchase transactions in Fund accounts are processed by Morgan
as shareholder servicing agent and the Fund is authorized to accept any in-
structions relating to a Fund account from Morgan as agent for the customer.
All purchase orders must be accepted by the Distributor. Investors must be cus-
tomers of either Morgan or of an Eligible Institution or employer-sponsored re-
tirement plans that have designated the Fund as an investment option for the
plans. Prospective investors who are not already customers of Morgan may apply
to become customers of Morgan for the sole purpose of Fund transactions. There
are no charges associated with becoming a Morgan customer for this purpose.
Morgan reserves the right to determine the customers that it will accept, and
the Trust reserves the right to determine the purchase orders that it will ac-
cept.

The Fund requires a minimum initial investment of $1 million and a minimum sub-
sequent investment of $25,000. These minimum investment requirements may be
waived for certain investors, including investors for whom the Advisor is a

13
<PAGE>

fiduciary, who maintain related accounts with the Fund, other J.P. Morgan In-
stitutional Funds or the Advisor, who make investments for a group of clients,
such as financial advisors, trust companies and investment advisors, or who
maintain retirement accounts with the Funds.

To purchase shares in the Fund, investors should request their Morgan repre-
sentative (or a representative of their Eligible Institution) to assist them
in placing a purchase order with the Fund's Distributor. Any shareholder may
also call J.P. Morgan Funds Services at (800) 766-7722 for assistance in plac-
ing an order for Fund shares. If the Fund or its agent receives a purchase or-
der prior to 4:00 P.M. New York time on any business day, the purchase of Fund
shares is effective and is made at the net asset value determined that day. If
the Fund or its agent receives a purchase order after 4:00 P.M. New York time,
the purchase is effective and is made at the net asset value determined on the
next business day. All purchase orders for Fund shares must be accompanied by
instructions to Morgan (or an Eligible Institution) to transfer immediately
available funds to the Fund's Distributor on settlement date. The settlement
date is generally the business day after the purchase is effective. The pur-
chaser will begin to receive the daily dividend on the settlement date. See
Dividends and Distributions.

ELIGIBLE INSTITUTIONS. The services provided by Eligible Institutions may in-
clude establishing and maintaining shareholder accounts, processing purchase
and redemption transactions, arranging for bank wires, performing shareholder
subaccounting, answering client inquiries regarding the Trust, assisting cli-
ents in changing dividend options, account designations and addresses, provid-
ing 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 Eligible Institution, transmitting proxy state-
ments, periodic reports, updated prospectuses and other communications to
shareholders and, with respect to meetings of shareholders, collecting, tabu-
lating and forwarding executed proxies and obtaining such other information
and performing such other services as Morgan or the Eligible Institution's
clients may reasonably request and agree upon with the Eligible Institution.

REDEMPTION OF SHARES

METHOD OF REDEMPTION. To redeem shares in the Fund, an investor may instruct
Morgan or his Eligible Institution, as appropriate, to submit a redemption re-
quest to the Fund or may telephone J.P. Morgan Funds Services directly at
(800) 766-7722 and give the Shareholder Service Representative a preassigned
shareholder Personal Identification Number and the amount of the redemption.
The Fund executes effective redemption requests at the next determined net as-
set value per share. See Net Asset Value. The redeemer will continue to re-
ceive dividends on these shares through the day before the settlement date.
See Additional Information below for an explanation of the telephone redemp-
tion policy of the J.P. Morgan Institutional Funds.

A redemption request received by the Fund or its agent prior to 4:00 P.M. New
York time is effective on that day. A redemption request received after that
time becomes effective on the next business day. Proceeds of an effective re-
demption are generally deposited on settlement date in immediately available
funds to the shareholder's account at Morgan or at his Eligible Institution
or, in the case of certain Morgan customers, are mailed by check or wire
transferred in accordance with the customer's instructions. Settlement date is
generally the next business day after a redemption is effective and, subject
to Further Redemption Information below, in any event is within seven days.
See Dividends and Distributions.

14
<PAGE>

MANDATORY REDEMPTION BY THE FUND. If the value of a shareholder's holdings in
the Fund falls below the applicable minimum initial investment amount of $1
million for more than 30 days because of a redemption of shares, the Fund may
redeem the remaining shares 60 days after written notice to the shareholder un-
less the account is increased to the Fund's minimum investment amount or more.

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 sharehold-
er's taxpayer identification number and address. As discussed under Taxes be-
low, the Fund may be required to impose "back-up" withholding of federal income
tax on dividends, distributions and redemption proceeds when non-corporate in-
vestors have not provided a certified taxpayer identification number. In addi-
tion, 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 pro-
ceeds from the shares will occur upon clearance of the check which may take up
to 15 days.

EXCHANGE OF SHARES

An investor may exchange shares from the Fund into any other J.P. Morgan Insti-
tutional Fund or J.P. Morgan Fund or series of J.P. Morgan Series Trust 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 pro-
spectuses of the fund into which they are exchanging and may only exchange be-
tween 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 pur-
chases of another fund and the usual purchase and redemption procedures and re-
quirements are applicable to exchanges. See Purchase of Shares and Redemption
of Shares in this Prospectus and in the prospectuses for the other J.P. Morgan
Institutional Funds, J.P. Morgan Funds and J.P. Morgan Series Trust. See also
Additional Information below for an explanation of the telephone exchange pol-
icy of the J.P. Morgan Institutional Funds.

DIVIDENDS AND DISTRIBUTIONS

The Fund intends to distribute substantially all of its net investment income.
The net investment income of the Fund is declared as a dividend daily immedi-
ately prior to the determination of the net asset value of the Fund on that day
and paid monthly. If an investor's shares are redeemed during a month, accrued
but unpaid dividends are paid with the redemption proceeds. The net investment
income for the Fund for dividend purposes consists of its pro rata share of the
net income of the Portfolio less the Fund's expenses. Expenses of the Fund and
the Portfolio, including the fees payable to Morgan, are accrued daily. Shares
will accrue dividends as long as they are issued and outstanding. Shares are
issued and outstanding as of the settlement date of a purchase order through
the day before the settlement date of a redemption order.

Substantially all the realized net capital gains of the Fund are declared and
paid on an annual basis, except that an additional capital gains distribution
may be made in a given year to the extent necessary to avoid the imposition of
federal excise tax on the Fund.

15
<PAGE>

NET ASSET VALUE

ORGANIZATION

The Trust was organized on November 4, 1992 as an unincorporated business
trust under Massachusetts law and is an entity commonly known as a "Massachu-
setts business trust." The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares ($0.001 par value) of one or
more series. To date, 25 series of shares have been authorized and are avail-
able for sale to the public. Only shares of the Fund are offered through this
Prospectus. No series of shares has any preference over any other series of
shares. See Massachusetts Trust in the Statement of Additional Information.

Shareholders of the Fund are entitled to one vote for each share and to the
appropriate fractional vote for each fractional share. There is no cumulative
voting. Shares have no preemptive or conversion rights. Shares are fully paid
and nonassessable by the Fund. The Trust does not intend to hold meetings of
shareholders annually. The Trustees may call meetings of shareholders for ac-
tion by shareholder vote as may be required by either the 1940 Act or the Dec-
laration of Trust. The Trustees will call a meeting of shareholders to vote on
removal of a Trustee upon the written request of the record holders of ten
percent of Trust shares and will assist shareholders in communicating with
each other as prescribed in Section 16(c) of the 1940 Act. For further organi-
zation information, including certain shareholder rights, see Description of
Shares in the Statement of Additional Information.

The Portfolio is organized as a trust under the laws of the State of New York.
The Portfolio's Declaration of Trust provides that the Fund and other entities
investing in the Portfolio (e.g., other investment companies, insurance com-
pany separate accounts and common and commingled trust funds) will each be li-
able for all obligations of the Portfolio. However, the risk of the Fund in-
curring financial loss on account of such liability is limited to circum-
stances in which both inadequate insurance existed and the Portfolio itself
was unable to meet its obligations. Accordingly, the Trustees of the Trust be-
lieve that neither the Fund nor its shareholders will be adversely affected by
reason of the Fund's investing in the Portfolio.

16
<PAGE>

TAXES

The Trust intends that the Fund will continue to qualify as a separate regu-
lated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended. For the Fund to qualify as a regulated investment company,
the Portfolio limits its investments so that at the close of each quarter of
its taxable year (a) no more than 25% of its total assets are invested in the
securities of any one issuer, except U.S. Government securities, and (b) with
regard to 50% of its total assets, no more than 5% of its total assets are in-
vested in the securities of a single issuer, except U.S. Government securities.
As a regulated investment company, the Fund should not be subject to federal
income taxes or federal excise taxes if substantially all of its net investment
income and capital gains less any available capital loss carryforwards are dis-
tributed to shareholders within allowable time limits. The Portfolio intends to
qualify as an association treated as a partnership for federal income tax pur-
poses. As such, the Portfolio should not be subject to tax. The Fund's status
as a regulated investment company is dependent on, among other things, the
Portfolio's continued qualification as a partnership for federal income tax
purposes.

Distributions of net investment income and realized net short-term capital
gains in excess of net long-term capital losses are taxable as ordinary income
to shareholders of the Fund whether such distributions are taken in cash or re-
invested in additional shares. Distributions of this type to corporate share-
holders of the Fund will not qualify for the dividends- received deduction be-
cause the income of the Fund will not consist of dividends paid by U.S. corpo-
rations.

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 re-
duced below a shareholder's cost as a result of such a distribution, the dis-
tribution, 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 cap-
ital gain or loss if the shares have been held for more than one year, and oth-
erwise as short-term capital gain or loss. However, any loss realized by a
shareholder upon the redemption or exchange of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
long-term capital gain distributions received by the shareholder with respect
to such shares. See Taxes in the Statement of Additional Information.

17
<PAGE>

The Fund is subject to foreign withholding taxes with respect to income re-
ceived from sources within certain foreign countries. So long as more than 50%
of the value of the Fund's total assets at the close of any taxable year con-
sists of securities of foreign corporations, the Fund may elect to treat any
such foreign income taxes paid by it as paid directly by its shareholders. The
Fund will make such an election only if it deems it to be in the best inter-
ests of its shareholders and will notify shareholders in writing each year if
it makes the election and of the amount of foreign income taxes and gross in-
come derived from sources within any foreign country or possession of the
United States, if any, to be treated as paid by the shareholders. If the Fund
makes the election, each shareholder will be required to include in income his
proportionate share of the amount of foreign income taxes paid by the Fund and
will be entitled to claim either a credit (which is subject to certain limita-
tions) or, if the shareholder itemizes deductions, a deduction for his share
of the foreign income taxes in computing his federal income tax liability. (No
deduction will be permitted to individuals in computing their alternative min-
imum tax liability.)

Distributions of foreign exchange gains resulting from certain transactions,
including the sale of foreign currencies and bonds, are taxed as ordinary in-
come. Consequently, the Fund's dividends may be more or less than the interest
earned by the Fund. If these transactions result in reducing the Fund's net
income, a portion of the dividends may be classed as a return of capital
(which lowers a shareholder's tax basis).

ADDITIONAL INFORMATION

The Fund sends to its shareholders annual and semi-annual reports. The finan-
cial statements appearing in annual reports are audited by independent accoun-
tants. Shareholders also will be sent confirmations of each purchase and re-
demption and monthly statements, reflecting all other account activity, in-
cluding dividends and any distributions reinvested in additional shares or
credited as cash.

All shareholders are given the privilege to initiate transactions automati-
cally by telephone upon opening an account. However, an investor should be
aware that a transaction authorized by telephone and reasonably believed to be
genuine by the Fund, Morgan, his Eligible Institution or the Distributor may
subject the investor to risk of loss if such instruction is subsequently found
not to be genuine. The Fund will employ reasonable procedures, including re-
quiring investors to give their Personal Identification Number and tape re-
cording of telephone instructions, to confirm that instructions communicated
from investors by telephone are genuine; if it does not, the Fund, the Share-
holder Servicing Agent, or a shareholder's Eligible Institution may be liable
for any losses due to unauthorized or fraudulent instructions.

The Fund may also 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. These methods of calculating yield and total return are re-
quired by regulations of the Securities and Exchange Commission. Yield and to-
tal return data similarly calculated, unless otherwise indicated, over other
specified periods of time may also be used. See Performance Data in the State-
ment of Additional Information. All performance figures are based on histori-
cal earnings and are not intended to indicate future performance. Shareholders
may obtain performance information by calling Morgan at (800) 766-7722.

18
<PAGE>

APPENDIX

The Portfolio may (a) purchase and sell (write) exchange traded and over-the-
counter ("OTC") put and call options on fixed income securities or indexes of
fixed income securities, (b) purchase and sell futures contracts on indexes of
fixed income securities, and (c) purchase and sell (write) put and call options
on futures contracts on indexes of fixed income securities. Each of these in-
struments 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 man-
agement purposes. See Risk Management in the Statement of Additional Informa-
tion. The Portfolio may not use futures contracts and options for speculation.

OPTIONS

A-1
<PAGE>

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 abil-
ity to participate in security price increases.

OPTIONS ON INDEXES. The Portfolio may purchase put and call options on any se-
curities index based on securities in which the Portfolio may invest. Options
on securities indexes are similar to options on securities, except that the ex-
ercise of securities index options is settled by cash payment and does not in-
volve 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 be-
cause the Portfolio's investments generally will not match the composition of
an index.

FUTURES CONTRACTS

A-2
<PAGE>

ments 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.

The Portfolio will segregate liquid assets in connection with its use of op-
tions and futures contracts to the extent required by the staff of the Securi-
ties and Exchange Commission. Securities held in a segregated account cannot be
sold while the futures contract or option is outstanding, unless they are re-
placed with other suitable assets. As a result, there is a possibility that
segregation of a large percentage of the Portfolio's assets could impede port-
folio management or the Portfolio's ability to meet redemption requests or
other current obligations.

A-3
<PAGE>

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

PROS383-981

J.P. Morgan Institutional
International Bond Fund

PROSPECTUS

January 2, 1998

******************************************************************************

J.P. MORGAN INSTITUTIONAL FUNDS

J.P. MORGAN INSTITUTIONAL TAX EXEMPT BOND FUND
J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND

STATEMENT OF ADDITIONAL INFORMATION

JANUARY 2, 1998

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED FOR THE FUND OR FUNDS LISTED ABOVE, AS SUPPLEMENTED FROM TIME TO TIME,
WHICH MAY BE OBTAINED UPON REQUEST FROM FUNDS DISTRIBUTOR, INC., ATTENTION: J.P.
MORGAN INSTITUTIONAL FUNDS (800) 221-7930.

<PAGE>

Table of Contents

Page

General . . . . . . . . . . . . . . . . . . . 2
Investment Objectives and Policies . . . . . . 2
Investment Restrictions . . . . . . . . . . . 16
Trustees and Officers . . . . . . . . . . . . 19
Investment Advisor . . . . . . . . . . . . . . 23
Distributor . . . . . . . . . . . . . . . . . 26
Co-Administrator . . . . . . . . . . . . . . . 26
Services Agent . . . . . . . . . . . . . . . . 27
Custodian and Transfer Agent . . . . . . . . . 28
Shareholder Servicing . . . . . . . . . . . . 29
Independent Accountants . . . . . . . . . . . 30
Expenses . . . . . . . . . . . . . . . . . . . 30
Purchase of Shares . . . . . . . . . . . . . . 30
Redemption of Shares . . . . . . . . . . . . . 31
Exchange of Shares . . . . . . . . . . . . . . 32
Dividends and Distributions . . . . . . . . . 32
Net Asset Value . . . . . . . . . . . . . . . 32
Performance Data . . . . . . . . . . . . . . . 33
Portfolio Transactions . . . . . . . . . . . . 35
Massachusetts Trust . . . . . . . . . . . . . 36
Description of Shares . . . . . . . . . . . . 37
Taxes . . . . . . . . . . . . . . . . . . . . 39
Additional Information . . . . . . . . . . . 43
Financial Statements . . . . . . . . . . . . . 45
Appendix A - Description of Securities
Ratings . . . . . . . . . . . . . . . . . . . A-46

<PAGE>

GENERAL

This Statement of Additional Information relates only to the J.P.
Morgan Institutional Tax Exempt Bond Fund and the J.P. Morgan Institutional
International Bond Fund (collectively, the "Funds"). Each of the Funds 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 Funds, the Trust consists of other
series representing separate investment funds (each a "J.P. Morgan Institutional
Fund"). The other J.P.Morgan Institutional Funds are covered by separate
Statements of Additional Information.

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

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

INVESTMENT OBJECTIVES AND POLICIES

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

J.P. Morgan Institutional Tax Exempt Bond Fund (the "Tax Exempt Bond
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 Tax Exempt Bond Fund's investment objective is to provide a high level
of current income exempt from federal income tax consistent with moderate risk
of capital and maintenance of liquidity. See "Taxes." The Fund attempts to
achieve its investment objective by investing all of its investable assets in
The Tax Exempt Bond Portfolio (the "Portfolio"), a diversified open-end
management investment company having the same investment objective as the Tax
Exempt Bond Fund.

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. The Tax Exempt Bond Fund 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 JPM Institutional International Bond Fund (the "International Bond
Fund") is designed to be an economical and convenient means of making
substantial investments in a broad range of international fixed income
securities. The International Bond Fund's investment objective is to provide a
high total return, consistent with moderate risk of capital, from a portfolio of
international fixed income securities. The International Bond Fund attempts to
achieve its objective by investing all of its investable assets in The Non-U.S.
Fixed Income Portfolio (the "Portfolio"), a non-diversified open-end management
investment company having the same investment objective as the International
Bond Fund.

The Portfolio attempts to achieve its investment objective by investing
primarily in high grade, non-dollar-denominated corporate and government debt
obligations of foreign issuers described in the Prospectus and this Statement of
Additional Information.

Investment Process for the Non-U.S. Fixed Income Portfolio

Duration management: The duration decision is central to Morgan's
investment process and begins with an analysis of economic conditions and real
yields in the countries that make up the Portfolio's universe. Based on this
analysis, fixed income portfolio managers forecast three potential paths
(optimistic, pessimistic, and most likely) that interest rates in each market
could follow over the next three and twelve months. These forecasts are
converted into return curves that enable Morgan to estimate the risk-return
profile of different portfolio durations. In each market, duration is set at its
"optimal" level-that is, at the level that Morgan believes will generate the
highest excess return per unit of excess risk, as measured against the Salomon
Brothers World Government Bond Index.

Country allocation: Morgan allocates the Portfolio's assets primarily
among the developed countries of the world outside the United States. Country
allocations are determined through an optimization procedure that ranks markets
according to the risks and returns inherent in their "optimal" durations.
Country weightings also reflect liquidity and credit quality considerations. To
help contain risk, Morgan typically limits the country-weighted duration of the
Portfolio to a range between one year shorter and one year longer than that of
the benchmark.

Sector/security selection: Holdings primarily consist of government and
government-guaranteed bonds, but also include publicly and privately traded
corporates, debt obligations of banks and bank holding companies and of
supranational organizations, and convertible securities. Sectors are over- or
under-weighted when Morgan perceives significant valuation distortions in their
yield spreads. Securities are selected by the portfolio manager, with
substantial input from fixed income analysts and traders as well as from
Morgan's extended network of equity analysts. Credit analysts monitor the
quality of current and prospective holdings and, in conjunction with the credit
committee, recommend purchases and sales.

Money Market Instruments

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

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

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

Foreign Government Obligations. The International Bond Fund, subject to its
applicable investment policies, may also invest in short-term obligations of
foreign sovereign governments or of their agencies, instrumentalities,
authorities or political subdivisions. These securities may be denominated in
the U.S. dollar or in another currency. See "Foreign Investments."

Bank Obligations. Each of the funds, unless otherwise noted in the
Prospectus or below, 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 or of foreign banks of equivalent size (Euros) and (iii)
U.S. branches of foreign banks of equivalent size (Yankees). See "Foreign
Investments." Tax Exempt Bond Fund may not invest in obligations of foreign
branches of foreign banks The Funds will not invest in obligations for which the
Advisor, or any of its affiliated persons, is the ultimate obligor or accepting
bank. The International Bond Fund may also invest in obligations of
international banking institutions designated or supported by national
governments to promote economic reconstruction, development or trade between
nations (e.g., the European Investment Bank, the Inter-American Development
Bank, or the World Bank).

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

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

Each of the Funds may make investments in other debt securities with
remaining effective maturities of not more than thirteen months, including
without limitation corporate and foreign bonds, asset-backed securities and
other obligations described in the Prospectus or this Statement of Additional
Information. The Tax Exempt Bond Fund may not invest in foreign bonds or
asset-backed securities.

Corporate Bonds and Other Debt Securities

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

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

Tax Exempt Obligations

As discussed in the Prospectus, the Tax Exempt Bond Fund may invest in tax
exempt obligations to the extent consistent with each Fund's investment
objective and policies. A description of the various types of tax exempt
obligations which may be purchased by the Funds appears in the Prospectus and
below. See "Quality and Diversification Requirements."

Municipal Notes. 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 each 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 each Fund to receive the par value of the
obligation upon demand or notice.

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

Puts. The Tax Exempt Bond 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 each Fund's investment
objective and subject to the supervision of the Trustees, the purpose of this
practice is to permit each 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 each 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 each
Fund's portfolio and the yield, quality and maturity dates of the underlying
securities.

The Tax Exempt Bond Fund value any municipal bonds and notes subject to
puts with remaining maturities of less than 60 days by the amortized cost
method. If the Tax Exempt Bond 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 Tax Exempt
Bond 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
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 Tax Exempt Bond Fund's
policy is to enter into put transactions only with municipal securities dealers
who are approved by the Advisor. Each dealer will be approved on its own merits,
and it is each 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 Trustees will review regularly the
Advisor's 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. In the case of the Tax Exempt Bond Fund, 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 Funds are
unable to predict whether all or any portion of any loss sustained could
subsequently be recovered from such dealer.

The Trust has been advised by counsel that the Funds will be considered
the owner of the securities subject to the puts so that the interest on the
securities is tax exempt income to the Funds. Such advice of counsel is based on
certain assumptions concerning the terms of the puts and the attendant
circumstances.

Foreign Investments

The International Bond Fund may invest in certain foreign securities.
The Fund may invest in securities of foreign corporations included in Solomon
Brothers Non-U.S. World Government Bond Index (currency hedge). The Fund does
not expect to invest more than 5% of its total assets at the time of purchase in
securities of foreign issuers.

Since investments in foreign securities may involve foreign currencies,
the value of a Fund's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. The Funds may enter into forward
commitments for the purchase or sale of foreign currencies in connection with
the settlement of foreign securities transactions or to manage the Funds'
currency exposure as described in the Prospectus.

For a description of the risks associated with investing in foreign
securities, see "Additional Investment Information (Practices) and Risk Factors
(Risks)" in the Prospectus.

Additional Investments

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

Investment Company Securities. Securities of other investment companies
may be acquired by each of the Funds and their corresponding Portfolios to the
extent permitted under the 1940 Act. These limits require that, as determined
immediately after a purchase is made, (i) not more than 5% of the value of a
Fund's total assets will be invested in the securities of any one investment
company, (ii) not more than 10% of the value of its total assets will be
invested in the aggregate in securities of investment companies as a group, and
(iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by a Fund, provided however, that a Fund may invest all of
its investable assets in an open-end investment company that has the same
investment objective as the Fund (its corresponding Portfolio). As a shareholder
of another investment company, a Fund or Portfolio would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory and
other expenses that a Fund or Portfolio bears directly in connection with its
own operations.

Reverse Repurchase Agreements. Each of the Funds, unless otherwise
noted in the Prospectus or below, 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. 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. The Funds
will invest the proceeds of borrowings under reverse repurchase agreements. In
addition, a Fund will enter into a reverse repurchase agreement only when the
interest income to be earned from the investment of the proceeds is greater than
the interest expense of the transaction. A Fund will not invest the proceeds of
a reverse repurchase agreement for a period which exceeds the duration of the
reverse repurchase agreement. Each Fund will establish and maintain with the
Custodian a separate account with a segregated portfolio of securities in an
amount at least equal to its purchase obligations under its reverse repurchase
agreements. See "Investment Restrictions" for each Fund's limitations on reverse
repurchase agreements and bank borrowings.

Loans of Portfolio Securities. Each of the Funds may lend its
securities if such loans are secured continuously by cash or equivalent
collateral or by a letter of credit in favor of the Fund at least equal at all
times to 100% of the market value of the securities loaned, plus accrued
interest. While such securities are on loan, the borrower will pay the Fund any
income accruing thereon. Loans will be subject to termination by the Funds in
the normal settlement time, generally three business days after notice, or by
the borrower on one day's notice. Borrowed securities must be returned when the
loan is terminated. Any gain or loss in the market price of the borrowed
securities which occurs during the term of the loan inures to a Fund and its
respective investors. The Funds may pay reasonable finders' and custodial fees
in connection with a loan. In addition, a Fund will consider all facts and
circumstances including the creditworthiness of the borrowing financial
institution, and the Funds will not make any loans in excess of one year. The
Funds will not lend their securities to any officer, Trustee, Director, employee
or other affiliate of the Funds, the Advisor or the Distributor, unless
otherwise permitted by applicable law.

Privately Placed and Certain Unregistered Securities. The Funds may
invest in privately placed, restricted, Rule 144A or other unregistered
securities as described in the Prospectus.

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

Synthetic Instruments. The Tax Exempt Bond Fund may invest in certain
synthetic variable rate instruments as described in the Prospectus. 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 a Fund will be that of holding a long-term bond.

Quality and Diversification Requirements

The Tax Exempt Bond Fund intends to meet the diversification
requirements of the 1940 Act. To meet these requirements, 75% of the assets of
these Funds are subject to the following fundamental limitations: (1) the Fund
may not invest more than 5% of its total assets in the securities of any one
issuer, except obligations of the U.S. Government, its agencies and
instrumentalities, and (2) the Fund may not own more than 10% of the outstanding
voting securities of any one issuer. As for the other 25% of the Fund's assets
not subject to the limitation described above, there is no limitation on
investment of these assets under the 1940 Act, so that all of such assets may be
invested in securities of any one issuer, subject to the limitation of any
applicable state securities laws or as described below. Investments not subject
to the limitations described above could involve an increased risk to a Fund
should an issuer, or a state or its related entities, be unable to make interest
or principal payments or should the market value of such securities decline.

Although the International Bond Fund is not limited by the diversification
requirements of the 1940 Act, it 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."

With respect to the Tax Exempt Bond Fund, 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 a Fund may own so long as it
does not invest more than 5% of its total assets that are subject to the
diversification limitation in the securities of such issuer, except obligations
issued or guaranteed by the U.S. Government. Consequently, the Fund may invest
in a greater percentage of the outstanding securities of a single issuer than
would an investment company which invests in voting securities. See "Investment
Restrictions."

Tax Exempt Bond Fund. The Tax Exempt Bond Fund 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) municipal commercial paper must be rated
Prime-1 by Moody's or A-1 by Standard & Poor's or, if not rated by either
Moody's or Standard & Poor's, issued by an issuer either (a) having an
outstanding debt issue rated A or higher by Moody's or Standard & Poor's or (b)
having comparable quality in the opinion of the Advisor and, with respect to the
remaining 10% of its assets, must be rated B or better by Moody's or Standard &
Poor's, or of comparable quality. The Fund 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 Fund invests in any commercial paper, bank obligation
or repurchase agreement, the issuer must have outstanding debt rated A or higher
by Moody's or Standard & Poor's, the issuer's parent corporation, if any, must
have outstanding commercial paper rated Prime-1 by Moody's or A-1 by Standard &
Poor's, or if no such ratings are available, the investment must be of
comparable quality in the Advisor's opinion.

International Bond Fund. The International Bond Fund invest in a
diversified portfolio of securities with the quality ratings described in the
Prospectus. These securities are considered "high grade," "investment grade" and
"below investment grade" as described in Appendix A.

In 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

Exchange Traded and OTC Options. All options purchased or sold by the Portfolios
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 Portfolio's Board of Trustees. While exchange-traded options are
obligations of the Options Clearing Corporation, in the case of OTC options, a
Portfolio relies on the dealer from which it purchased the option to perform if
the option is exercised. Thus, when a Portfolio 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 Portfolio as well as loss of the expected
benefit of the transaction.

Provided that a 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, a 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 and Options on Futures Contracts. The Portfolios permitted to
enter into futures and options transactions may purchase or sell (write) futures
contracts and purchase put and call options, including put and call options on
futures contracts. In addition, the Portfolio for the International Bond may
sell (write) put and call options, including options on futures. 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 and indexes of equity securities.

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

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

Combined Positions. The Portfolios permitted to purchase and write options may
do so 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, certain Portfolios may purchase a put option and write a
call option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.

Correlation of Price Changes. Because there are a limited number of types of
exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match a
Portfolio's current or anticipated investments exactly. A Portfolio 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 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. A 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 a 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 a
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 a 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, a 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. The Portfolios
intend to comply with Section 4.5 of the regulations under the Commodity
Exchange Act, which limits the extent to which a Portfolio can commit assets to
initial margin deposits and option premiums. In addition, the Portfolios will
comply with guidelines established by the SEC with respect to coverage of
options and futures contracts by mutual funds, and if the guidelines so require,
will set aside appropriate liquid assets in a segregated custodial account in
the amount prescribed. Securities held in a segregated account cannot be sold
while the futures contract or option is outstanding, unless they are replaced
with other suitable assets. As a result, there is a possibility that segregation
of a large percentage of a Portfolio's assets could impede portfolio management
or the Portfolio's ability to meet redemption requests or other current
obligations.

Risk Management

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

Portfolio Turnover

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

The Tax Exempt Bond Portfolio (Tax Exempt Bond Fund) -- For the fiscal year
ended August 31, 1995: 47%. For the fiscal year ended August 31, 1996: 25%. For
the fiscal year ended August 31, 1997: 25%.

The Non-U.S. Fixed Income Portfolio (International Bond Fund) -- For the period
October 11, 1994 (commencement of operations) through September 30, 1995: 288%.
For the fiscal year ended September 30, 1996: 330%. For the fiscal year ended
September 30, 1997: 346%.

INVESTMENT RESTRICTIONS

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

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

The Tax Exempt Bond Fund and its corresponding Portfolio may not:

1. Borrow money, except from banks for extraordinary or emergency purposes and
then only in amounts up to 10% of the value of the Fund's total assets, taken at
cost at the time of such borrowing; or mortgage, pledge, or hypothecate any
assets except in connection with any such borrowing in amounts up to 10% of the
value of the Fund's net assets at the time of such borrowing. The Fund will not
purchase securities while borrowings exceed 5% of the Fund's total assets;
provided, however, that the Fund may increase its interest in an open-end
management investment company with the same investment objective and
restrictions as the Fund's while such borrowings are outstanding. This borrowing
provision facilitates the orderly sale of portfolio securities, for example, in
the event of abnormally heavy redemption requests. This provision is not for
investment purposes. Collateral arrangements for premium and margin payments in
connection with the Fund's hedging activities are not deemed to be a pledge of
assets;

2. Purchase securities or other obligations of any one issuer if, immediately
after such purchase, more than 5% of the value of the Fund's total assets would
be invested in securities or other obligations of any one such issuer; provided,
however, that the Fund may invest all or part of its investable assets in an
open-end management investment company with the same investment objective and
restrictions as the Fund's. Each state and each political subdivision, agency or
instrumentality of such state and each multi-state agency of which such state is
a member will be a separate issuer if the security is backed only by the assets
and revenue of that issuer. If the security is guaranteed by another entity, the
guarantor will be deemed to be the issuer.1 This limitation shall not apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or to permitted investments of up to 25% of the Fund's total
assets;

3. Invest more than 25% of its total assets in securities of governmental units
located in any one state, territory, or possession of the United States. The
Fund may invest more than 25% of its total assets in industrial developments and
pollution control obligations whether or not the users of facilities financed by
such obligations are in that same industry;2

4. Purchase industrial revenue bonds if, as a result of such purchase, more than
5% of total Fund assets would be invested in industrial revenue bonds where
payment of principal and interest are the responsibility of companies with fewer
than three years of operating history (including predecessors);

5. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities) or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the Fund's
investment objective and policies (see "Investment Objectives and Policies");

6. Purchase or sell puts, calls, straddles, spreads, or any combination thereof
except to the extent that securities subject to a demand obligation, stand-by
commitments and puts may be purchased (see "Investment Objectives and
Policies"); real estate; commodities; commodity contracts, except for the Fund's
interests in hedging activities as described under "Investment Objectives and
Policies"; or interests in oil, gas, or mineral exploration or development
programs. However, the Fund may purchase municipal bonds, notes or commercial
paper secured by interests in real estate;

7. Purchase securities on margin, make short sales of securities, or maintain a
short position, except in the course of the Fund's hedging activities, unless at
all times when a short position is open the Fund owns an equal amount of such
securities or owns securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short; provided that this
restriction shall not be deemed to be applicable to the purchase or sale of
when-issued or delayed delivery securities;

8. Issue any senior security, except as appropriate to evidence indebtedness
which the Fund is permitted to incur pursuant to Investment Restriction No. 1.
The Fund's arrangements in connection with its hedging activities as described
in "Investment Objectives and Policies" shall not be considered senior
securities for purposes hereof;

9. Acquire securities of other investment companies, except as permitted by the
1940 Act; or

10. Act as an underwriter of securities.

Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC
staff interpretations thereof are amended or modified, each of the International
Bond Fund and its corresponding Portfolio may not:

1. Purchase any security if, as a result, more than 25% of the value of the
Fund's total assets would be invested in securities of issuers having their
principal business activities in the same industry. This limitation shall not
apply to obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities. In addition, and while subject to changing
interpretations, so long as a single foreign government or supranational
organization is considered to be an "industry" for the purposes of this 25%
limitation, the Portfolio will comply therewith. The staff of the SEC considers
all supranational organizations (as a group) to be a single industry for
concentration purposes;

2. Borrow money, except that the Fund may (i) borrow money from banks for
temporary or emergency purposes (not for leveraging purposes) and (ii) enter
into reverse repurchase agreements for any purpose; provided that (i) and (ii)
in total do not exceed 33 1/3% of the value of the Fund's total assets
(including the amount borrowed) less liabilities (other than borrowings). If at
any time any borrowings come to exceed 33 1/3% of the value of the Fund's total
assets, the Fund will reduce its borrowings within three business days to the
extent necessary to comply with the 33 1/3% limitation;

3. Make loans to other persons, except through the purchase of debt obligations,
loans of portfolio securities, and participation in repurchase agreements;

4. Purchase or sell physical commodities or contracts thereon, unless acquired
as a result of the ownership of securities or instruments, but the Fund may
purchase or sell futures contracts or options (including options on futures
contracts, but excluding options or futures contracts on physical commodities)
and may enter into foreign currency forward contracts;

5. Purchase or sell real estate, but the Fund may purchase or sell securities
that are secured by real estate or issued by companies (including real estate
investment trusts) that invest or deal in real estate;

6. Underwrite securities of other issuers, except to the extent the Fund, in
disposing of portfolio securities, may be deemed an underwriter within the
meaning of the 1933 Act;

7. Issue senior securities, except as permitted under the 1940 Act or any rule,
order or interpretation thereunder; and

8. Notwithstanding any other investment restriction of the Fund, the Fund may
invest all of its investable assets in an open-end management investment company
having substantially the same investment objective and restrictions as the Fund.

Non-Fundamental Investment Restrictions - Tax Exempt Bond Fund. The
investment restriction described below is not a fundamental policy of the Fund
or the corresponding Portfolio and may be changed by the respective Trustees.
This non-fundamental investment policy requires that the Fund may not:

(i) 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 Fund's net assets
would be in investments that are illiquid.

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

(i) Acquire securities of other investment companies, except as permitted by the
1940 Act or any rule, order or interpretation thereunder, or in connection with
a merger, consolidation, reorganization, acquisition of assets or an offer of
exchange;

(ii) Acquire any illiquid securities if as a result thereof, more than 15% of
the market value of the Fund's net assets would be in investments that are
illiquid;

(iii) Sell any security short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold or unless it
covers such short sales as required by the current rules or positions of the
Securities and Exchange Commission or its staff. Transactions in futures
contracts and options shall not constitute selling securities short; or

(iv) Purchase securities on margin, but the Fund may obtain such short term
credits as may be necessary for the clearance of transactions.

TRUSTEES AND OFFICERS

Trustees

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

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

The Trustees of the Trust are the same as the Trustees of each of the
Portfolios. 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, each of the Portfolios and The J.P.Morgan
Funds, up to and including creating a separate board of trustees.

Each Trustee is currently paid an annual fee of $75,000 (adjusted as of
April 1, 1997) for serving as Trustee of the Trust, each of the Master
Portfolios (as defined below), 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 accrued by the Trust for the calendar year
ended December 31, 1996 are set forth below.

TOTAL TRUSTEE COMPENSATION
ACCRUED BY THE MASTER
AGGREGATE TRUSTEE PORTFOLIOS(*), J.P. MORGAN
COMPENSATION FUNDS, J.P. MORGAN SERIES
ACCRUED BY THE TRUST TRUST AND THE TRUST DURING
NAME OF TRUSTEE DURING 1996 1996 (***)

Frederick S. Addy, Trustee $12,593 $65,000

William G. Burns, Trustee $12,593 $65,000

Arthur C. Eschenlauer, Trustee $12,593 $65,000

Matthew Healey, Trustee(**), $12,593 $65,000
Chairman and Chief Executive
Officer

Michael P. Mallardi, Trustee $12,593 $65,000

(*) Includes the Portfolios, The Prime Money Market Portfolio, The Federal Money
Market Portfolio, The Tax Exempt Money Market Portfolio, The Short Term Bond
Portfolio, The U.S. Fixed Income Portfolio, The Tax Exempt Bond Portfolio, The
New York Total Return Bond Portfolio, The Non-U.S. Fixed Income Portfolio, The
Diversified Portfolio, The International Equity Portfolio, The Emerging Markets
Equity Portfolio, The Series Portfolio and Series Portfolio II, (collectively
the "Master Portfolios") for which Morgan acts as investment advisor.

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

The Trustees, in addition to reviewing actions of the Trust's and the
Portfolios' various service providers, decide upon matters of general policy.
Each of the Portfolios 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 Portfolios and the Trust.
Pierpont Group, Inc. was organized in July 1989 to provide services for The
Pierpont Family of Funds, and the Trustees are the equal and sole shareholders
of Pierpont Group, Inc. The Trust and the Portfolios have agreed to pay Pierpont
Group, Inc. a fee in an amount representing its reasonable costs in performing
these services to the Trust, the Portfolios and certain other registered
investment companies subject to similar agreements with Pierpont Group, Inc.
These costs are periodically reviewed by the Trustees. The pricipal offices of
Pierpont Group, Inc. are located at 461 Fifth Avenue, New York, NY 10017.

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

Tax Exempt Bond Fund -- For the fiscal year ended August 31, 1995: $3,602. For
the fiscal year ended August 31, 1996: $4,527. For the fiscal year ended August
31, 1997: $5,670.

The Tax Exempt Bond Portfolio -- For the fiscal year ended August 31, 1995:
$38,804. For the fiscal year ended August 31, 1996: $24,602. For the fiscal year
ended August 31, 1997: $18,912.

International Bond Fund -- For the period December 1, 1994 (commencement of
operations) through September 30, 1995: $232. For the fiscal year ended
September 30, 1996: $304. For the fiscal year ended September 30, 1997: $214.

The Non-U.S. Fixed Income Portfolio -- For the period October 11, 1994
(commencement of operations) through September 30, 1995: $20,446. For the fiscal
year ended September 30, 1996: $11,488. For the fiscal year ended September 30,
1997: $6,587.

Officers

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

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

JACQUELINE HENNING; Assistant Secretary and Assistant Treasurer of the
Portfolios only (excluding Tax Exempt Bond). Managing Director, State Street
Cayman Trust Company, Ltd. since October 1994. Prior to October 1994, Mrs.
Henning was head of mutual funds at Morgan Grenfell in Cayman and for five years
was Managing Director of Bank of Nova Scotia Trust Company (Cayman) Limited from
September 1988 to September 1993. Address: P.O. Box 2508 GT, Elizabethan Square,
2nd Floor, Shedden Road, George Town, Grand Cayman, Cayman Islands. Her date of
birth is March 24, 1942.

LENORE J. MCCABE; Assistant Secretary and Assistant Treasurer of the
Portfolios only (excluding Tax Exempt Bond). Assistant Vice President, State
Street Bank and Trust Company since November 1994. Assigned as Operations
Manager, State Street Cayman Trust Company, Ltd. since February 1995. Prior to
November, 1994, employed by Boston Financial Data Services, Inc. as Control
Group Manager. Address: P.O. Box 2508 GT, Elizabethan Square, 2nd Floor, Shedden
Road, George Town, Grand Cayman, Cayman Islands. Her date of birth is May 31,
1961.

INVESTMENT ADVISOR

The investment advisor to the Portfolios is Morgan Guaranty Trust
Company of New York, a wholly owned subsidiary of J.P. Morgan & Co. Incorporated
("J.P. Morgan"), a bank holding company organized under the laws of the State of
Delaware. The Advisor, 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. The Advisor 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, the Advisor 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, Melbourne and Singapore to cover companies, industries and
countries on site. In addition, the investment management divisions employ
approximately 300 capital market researchers, portfolio managers and traders. In
addition, the investment management divisions employ approximately 300 capital
market researchers, portfolio managers and traders. The Advisor's fixed income
investment process is based on analysis of real rates, sector diversification,
and quantitative and credit analysis.

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

Sector weightings are generally similar to a benchmark with the emphasis on
security selection as the method to achieve investment performance superior to
the benchmark. The benchmarks for the Portfolios in which the Funds invest are
currently: The Tax Exempt Bond Portfolio--Lehman Brothers 1-16 Year Municipal
Bond Index; The Non-U.S. Fixed Income Portfolio--Salomon Brothers Non-U.S. World
Government Bond Index (currency hedged).

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

As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Investment
Advisory Agreements, the Portfolio corresponding to each Fund has agreed to pay
the Advisor a fee, which is computed daily and may be paid monthly, equal to the
annual rates of each Portfolio's average daily net assets shown below.

Tax Exempt Bond: 0.30%

Non-U.S. Fixed Income: 0.35%

The table below sets forth for each Fund listed the advisory fees paid
by its corresponding Portfolio to the Advisor for the fiscal periods indicated.
See "Expenses" in the Prospectus and below for applicable expense limitations.

The Tax Exempt Bond Portfolio (Tax Exempt Bond Fund) -- For the fiscal year
ended August 31, 1995: $1,178,720. For the fiscal year ended August 31, 1996:
$1,354,145. For the fiscal year ended August 31, 1997: $1,620,498.

The Non-U.S. Fixed Income Portfolio (International Bond Fund) -- For the period
April 11, 1994 (commencement of operations) through September 30, 1995:
$782,748. For the fiscal year ended September 30, 1996: $737,543. For the fiscal
year ended September 30, 1997: $650,545.

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

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

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

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

DISTRIBUTOR

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

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

CO-ADMINISTRATOR

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

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

The table below sets forth for each Fund listed and its corresponding
Portfolio the administrative fees paid to FDI for the fiscal periods indicated.
See "Expenses" in the Prospectus and below for applicable expense limitations.

The Tax Exempt Bond Portfolio -- For the period August 1, 1996 through August
31, 1996: $920. For the fiscal year ended August 31, 1997: $10,663.
Tax Exempt Bond Fund -- For the period August 1, 1996 through August 31, 1996:
$370. For the period August 31, 1997: $5,376.

The Non-U.S. Fixed Income Portfolio -- For the period August 1, 1996 through
September 30, 1996: $738. For the fiscal year ended September 30, 1997: $4,505.
International Bond Fund -- For the period August 1, 1996 through September 30,
1996: $80. For the fiscal year ended September 30, 1997: $177.

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

The Tax Exempt Bond Portfolio -- For the fiscal year ended August 31, 1994:
$28,345. For the fiscal year ended August 31, 1995: $28,290. For the period
September 1, 1995 through July 31, 1996: $43,154.

Tax Exempt Bond Fund -- For the fiscal year ended August 31, 1994: $1,859. For
the fiscal year ended August 31, 1995: $10,309. For the period September 1, 1995
through July 31, 1996: $12,887

The Non-U.S. Fixed Income Portfolio -- For the period October 11, 1994
(commencement of operations) through September 30, 1995: $13,862. For the period
October 1, 1995 through July 31, 1996: $18,964.

International Bond Fund -- For the period December 1, 1994 (commencement of
operations) through September 30, 1995: $460. For the period October 1, 1995
through July 31, 1996: $689.

SERVICES AGENT

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

Under the Services Agreements, each of the Funds and the Portfolios 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% on the first $7 billion of their aggregate average daily
net assets and 0.04% of their aggregate average daily net assets in excess of $7
billion, less the complex-wide fees payable to FDI. The portion of this charge
payable by each Fund and Portfolio is determined by the proportionate share that
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, certain Funds and their
corresponding Portfolios paid Morgan a fee equal to its proportionate share of
an annual complex-wide charge. This charge was calculated daily based on the
aggregate net assets of the Master Portfolios in accordance with the following
schedule: 0.06% of the first $7 billion of the Master Portfolios' aggregate
average daily net assets, and 0.03% of the Master Portfolios' aggregate average
daily net assets in excess of $7 billion. Prior to December 29, 1995, the Trust
and certain Portfolios had entered into Financial and Fund Accounting Services
Agreements with Morgan, the provisions of which included certain of the
activities described above and, prior to September 1, 1995, also included
reimbursement of usual and customary expenses.

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

The Tax Exempt Bond Portfolio -- For the fiscal year ended August 31, 1995:
$189,892. For the fiscal year ended August 31, 1996: $80,281. For the fiscal
year ended August 31, 1997: $169,209.

Tax Exempt Bond Fund -- For the fiscal year ended August 31, 1995: $(61,012)*.
For the fiscal year ended August 31, 1996: $16,596. For the fiscal year ended
August 31, 1997: $51,270.

The Non-U.S. Fixed Income Portfolio -- For the period October 11, 1994
(commencement of operations) through September 30, 1995: $156,367. For the
fiscal year ended September 30, 1996: $37,344. For the fiscal year ended
September 30, 1997: $57,815.

The International Bond Fund -- For the period December 1, 1994 (commencement of
operations) through September 30, 1995: $(46,217)*. For the fiscal year ended
September 30, 1996: $1,729. For the fiscal year ended September 30, 1997:
$1,669_.

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

CUSTODIAN AND TRANSFER AGENT

State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02110, serves as the Trust's and each of the
Portfolio's custodian and fund accounting agent and each Fund's transfer and
dividend disbursing agent. Pursuant to the Custodian Contracts, State Street is
responsible for maintaining the books of account and records of portfolio
transactions and holding portfolio securities and cash. In addition, the
Custodian has entered into a subcustodian agreement on behalf of the Tax Exempt
Bond Fund Portfolio with Bankers Trust Company for the purpose of holding TENR
Notes and with Bank of New York and Chemical Bank, N.A. for the purpose of
holding certain variable rate demand notes. In the case of foreign assets held
outside the United States, the Custodian employs various subcustodians who were
approved by the Trustees of the Portfolios in accordance with the regulations of
the SEC. The Custodian maintains portfolio transaction records. As transfer
agent and dividend disbursing agent, State Street is responsible for maintaining
account records detailing the ownership of Fund shares and for crediting income,
capital gains and other changes in share ownership to shareholder accounts.

SHAREHOLDER SERVICING

The Trust on behalf of each of the Funds 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 an Eligible Institution. 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 a Fund; assisting customers in
designating and changing dividend options, account designations and addresses;
providing necessary personnel and facilities to coordinate the establishment and
maintenance of shareholder accounts and records with the Funds' transfer agent;
transmitting purchase and redemption orders to the Funds' transfer agent and
arranging for the wiring or other transfer of funds to and from customer
accounts in connection with orders to purchase or redeem Fund shares; verifying
purchase and redemption orders, transfers among and changes in accounts;
informing the Distributor of the gross amount of purchase orders for Fund
shares; monitoring the activities of the Fund's transfer agent; and providing
other related services.

Under the Shareholder Servicing Agreement, each Fund has agreed to pay
Morgan for these services a fee at the following annual rates (expressed as a
percentage of the average daily net asset values of Fund shares owned by or for
shareholders for whom Morgan is acting as shareholder servicing agent): Tax
Exempt Bond, .075% and International Bond, .10% Morgan acts as shareholder
servicing agent for all shareholders.

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

Tax Exempt Bond Fund -- For the fiscal year ended August 31, 1995: $19,310. For
the fiscal year ended August 31, 1996: $59,743. For the fiscal year ended August
31, 1997: $122,850.

International Bond Fund -- For the period December 1, 1994 (commencement of
operations) through September 30, 1995: $1,412. For the fiscal year ended
September 30, 1996: $6,684. For the fiscal year ended September 30, 1997:
$5,328.

As discussed under "Investment Advisor," the Glass-Steagall Act and
other applicable laws and regulations limit the activities of bank holding
companies and certain of their subsidiaries in connection with registered
open-end investment companies. The activities of Morgan in acting as shareholder
servicing agent for Fund shareholders under the Shareholder Servicing Agreement
and providing administrative services to the Funds and the Portfolios under the
Services Agreements and in acting as Advisor to the Portfolios under the
Investment Advisory Agreements, may raise issues under these laws. However,
Morgan believes that it 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 Funds or the Portfolios might occur and a shareholder might no
longer be able to avail himself or herself of any services then being provided
to shareholders by Morgan.

INDEPENDENT ACCOUNTANTS

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

EXPENSES

In addition to the fees payable to Pierpont Group, Inc., Morgan and FDI
under various agreements discussed under "Trustees and Officers," "Investment
Advisor," "Co-Administrator and Distributor," "Services Agent" and "Shareholder
Servicing" above, the Funds and the Portfolios are responsible for usual and
customary expenses associated with their respective operations. Such expenses
include organization expenses, legal fees, accounting 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 Funds or the Portfolios. For the Funds, such expenses also
include transfer, registrar and dividend disbursing costs, the expenses of
printing and mailing reports, notices and proxy statements to Fund shareholders,
and filing fees under state securities laws. For the Portfolios, such expenses
also include applicable registration fees under foreign securities laws,
custodian fees and brokerage expenses. Under fee arrangements prior to September
1, 1995, Morgan as Services Agent was responsible for reimbursements to the
Trust and certain Portfolios and the usual and customary expenses described
above (excluding organization and extraordinary expenses, custodian fees and
brokerage expenses). For additional information regarding waivers or expense
subsidies, see "Management of the Trust and the Portfolio" in the Prospectus.

PURCHASE OF SHARES

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

REDEMPTION OF SHARES

Investors may redeem shares as described in the Prospectus under
"Redemption of Shares." Accordingly, a redemption request might result in
payment of a dollar amount which differs from the number of shares redeemed. See
"Net Asset Value" in the Prospectus and below.

If the Trust, on behalf of a Fund, and its corresponding Portfolio
determine that it would be detrimental to the best interest of the remaining
shareholders of a Fund to make payment wholly or partly in cash, payment of the
redemption price may be made in whole or in part by a distribution in kind of
securities from the Portfolio, in lieu of cash, in conformity with the
applicable rule of the SEC. If shares are redeemed in kind, the redeeming
shareholder might incur transaction costs in converting the assets into cash.
The method of valuing portfolio securities is described under "Net Asset Value,"
and such valuation will be made as of the same time the redemption price is
determined. The Trust on behalf of all of the Funds and their corresponding
Portfolios have elected to be governed by Rule 18f-1 under the 1940 Act pursuant
to which the Funds and the corresponding Portfolios are obligated to redeem
shares solely in cash up to the lesser of $250,000 or one percent of the net
asset value of 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 corresponding Portfolio and therefore shareholders of the Fund
that receive redemptions in kind will receive securities of the Portfolio. The
Portfolios have advised the Trust that the Portfolios will not redeem in kind
except in circumstances in which a Fund is permitted to redeem in kind.

Further Redemption Information. The Trust, on behalf of a Fund, and the
Portfolios 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.

EXCHANGE OF SHARES

An investor may exchange shares from any Fund into any other J.P.
Morgan Institutional Fund, J.P. Morgan Fund, or shares of J.P. MORGAN Series
Trust as described under "Exchange of Shares" in the Prospectus. For complete
information, the Prospectus as it relates to the Fund into which a transfer is
being made should be read prior to the transfer. Requests for exchange are made
in the same manner as requests for redemptions. See "Redemption of Shares."
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 Trust reserves the right to discontinue, alter or limit the exchange
privilege at any time.

DIVIDENDS AND DISTRIBUTIONS

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

NET ASSET VALUE

Each of the Funds computes its net asset value once daily on Monday
through Friday as described under "Net Asset Value" 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. The Funds and the Portfolios may also close for purchases and
redemptions at such other times as may be determined by the Board of Trustees to
the extent permitted by applicable law. The days on which net asset value is
determined are the Funds' business days.

The net asset value of each 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 Portfolios corresponding to each Fund in valuing their assets.

Tax Exempt Bond Fund. In the case of the Tax Exempt Bond Fund,
portfolio securities with a maturity of 60 days or more, including securities
that are listed on an exchange or traded over the counter, are valued using
prices supplied daily by an independent pricing service or services that (i) are
based on the last sale price on a national securities exchange or, in the
absence of recorded sales, at the readily available closing bid price on such
exchange or at the quoted bid price in the OTC market, if such exchange or
market constitutes the broadest and most representative market for the security
and (ii) in other cases, take into account various factors affecting market
value, including yields and prices of comparable securities, indication as to
value from dealers and general market conditions. If such prices are not
supplied by the Portfolio's independent pricing service, such securities are
priced in accordance with procedures adopted by the Trustees. All portfolio
securities with a remaining maturity of less than 60 days are valued by the
amortized cost method. Securities listed on a foreign exchange are valued at the
last quoted sale price available before the time when net assets are valued.
Because of the large number of municipal bond issues outstanding and the varying
maturity dates, coupons and risk factors applicable to each issuer's bonds, no
readily available market quotations exist for most municipal securities. The
Portfolios value municipal securities on the basis of prices from a pricing
service which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and various
relationships between securities in determining values.

International Bond Fund. In the case of the International Bond Fund,
and the fixed income portion of the Diversified Fund, portfolio securities with
a maturity of 60 days or more, including securities that are listed on an
exchange or traded over the counter, are valued using prices supplied daily by
an independent pricing service or services that (i) are based on the last sale
price on a national securities exchange or, in the absence of recorded sales, at
the readily available closing bid price on such exchange or at the quoted bid
price in the OTC market, if such exchange or market constitutes the broadest and
most representative market for the security and (ii) in other cases, take into
account various factors affecting market value, including yields and prices of
comparable securities, indication as to value from dealers and general market
conditions. If such prices are not supplied by the Portfolio's independent
pricing service, such securities are priced in accordance with procedures
adopted by the Trustees. All portfolio securities with a remaining maturity of
less than 60 days are valued by the amortized cost method. Securities listed on
a foreign exchange are valued at the last quoted sale price available before the
time when net assets are valued. Because of the large number of municipal bond
issues outstanding and the varying maturity dates, coupons and risk factors
applicable to each issuer's bonds, no readily available market quotations exist
for most municipal securities. The Portfolios value municipal securities on the
basis of prices from a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values.

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

PERFORMANCE DATA

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

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

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

Tax Exempt Bond Fund (12/15/97): 30-day yield: 4.58%; 30-day tax equivalent
yield at 39.6% tax rate: 7.58%.

International Bond Fund (12/17/97): 30-day yield: 4.48%.

Total Return Quotations. 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.

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

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

Tax Exempt Bond Fund (8/31/97): Average annual total return, 1 year: 7.06%;
average annual total return, 5 years: 6.04%; average annual total return, 10
years: 6.96%; aggregate total return, 1 year: 7.06%; aggregate total return, 5
years: 34.08%; aggregate total return, 10 years: 95.98%.

International Bond Fund (9/30/97): Average annual total return, 1 year: 12.52%;
average annual total return, 5 years: N/A; average annual total return,
commencement of operations (*) to period end: 13.26%; aggregate total return, 1
year: 12.52%; aggregate total return, 5 years: N/A; aggregate total return
commencement of operations (*) to period end: 41.31%.
- -------------------------

(*) The International Bond Fund commenced operations on December 1, 1994.

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

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.

PORTFOLIO TRANSACTIONS

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

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

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

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

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

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

On those occasions when the Advisor deems the purchase or sale of a
security to be in the best interests of a 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 a 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 a Portfolio. In some instances,
this procedure might adversely affect a Portfolio.

If a Portfolio that writes options effects a closing purchase
transaction with respect to an option written by it, normally such transaction
will be executed by the same broker-dealer who executed the sale of the option.
The writing of options by a Portfolio will be subject to limitations established
by each of the exchanges governing the maximum number of options in each class
which may be written by a single investor or group of investors acting in
concert, regardless of whether the options are written on the same or different
exchanges or are held or written in one or more accounts or through one or more
brokers. The number of options which a Portfolio may write may be affected by
options written by the Advisor for other investment advisory clients. An
exchange may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.

MASSACHUSETTS TRUST

The Trust is a trust fund of the type commonly known as a
"Massachusetts business trust" of which each Fund is a separate and distinct
series. A copy of the Declaration of Trust for the Trust is on file in the
office of the Secretary of The Commonwealth of Massachusetts. The Declaration of
Trust and the By-Laws of the Trust are designed to make the Trust similar in
most respects to a Massachusetts business corporation. The principal distinction
between the two forms concerns shareholder liability described below.

Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust which is not the case for a corporation. However, the Trust's
Declaration of Trust provides that the shareholders shall 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 shall contain a provision to the effect that the shareholders are not
personally liable thereunder.

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

The Trustees have authorized the issuance and sale to the public of
shares of 25 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
"Redemption of Shares" in the Prospectus.

As of December 5, 1997, the following owned of record or, to the
knowledge of management, beneficially owned more than 5% of the outstanding
shares of:

Tax Exempt Bond Fund--Englehard Hanovia Inc. (5.80%);
General Re Employee (5.28%)

International Bond Fund--
Juan Urrutia (5.25%);
Charles Schwab & Co. Inc. Special Custody Account For (50.75%)
National Financial Services Corp for the Exclusive Benefit of (30.09%)
Donaldson Lufkin & Jenrette SECS Corp (8.09%)

TAXES

Each Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. As a regulated investment company, a
Fund must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock, securities or foreign
currency and other income (including but not limited to gains from options,
futures, and forward contracts) derived with respect to its business of
investing in such stock, securities or foreign currency; (b) derive less than
30% of its gross income from the sale or other disposition of stock, securities,
options, futures or forward contracts (other than options, futures or forward
contracts on foreign currencies) held less than three months, or foreign
currencies (or options, futures or forward contracts on foreign currencies) held
less than three months, but only if such currencies (or options, futures or
forward contracts on foreign currencies) are not directly related to a Fund's
principal business of investing in stocks or securities (or options and futures
with respect to stocks or securities); and (c) diversify its holdings so that,
at the end of each 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, securities of other regulated investment companies, and other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the Fund's total assets, and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities or securities of other regulated investment companies). Effective as
of an investor's first taxable year beginning after August 5, 1997, the 30% of
gross income test described in (b) above will no longer apply to the Funds
wishing to satisfy the requirements of subchapter M of the Code.

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

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

The Tax Exempt Bond Fund intends to qualify to pay exempt-interest
dividends to its shareholders by having, at the close of each quarter of its
taxable years, at least 50% of the value of their respective 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 Tax Exempt
Bond 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. See
"Investment Objective(s) and Policies" in the Prospectus.

Distributions of net investment income, certain foreign currency gains,
and realized net short-term capital gain in excess of net long-term capital loss
(other than exempt interest dividends) are generally taxable to shareholders of
the Funds as ordinary income whether such distributions are taken in cash or
reinvested in additional shares. Distributions to corporate shareholders of the
Funds are not eligible for a dividends received deduction. The International
Bond Fund pays a monthly dividend. If dividend payments exceed income earned by
the Fund, the excess distribution would be considered a return of capital rather
than a dividend payment. The Fund intends to pay dividends in such a manner so
as to minimize the possibility of a return of capital. Distributions of net
long-term capital gain (i.e., net long-term capital gain in excess of net
short-term capital loss) are taxable to shareholders of a Fund as long-term
capital gain, regardless of whether such distributions are taken in cash or
reinvested in additional shares and regardless of how long a shareholder has
held shares in the Fund. As a result of the enactment of the Taxpayer Relief Act
of 1997 (the "Act"), long-term capital gain of an individual is generally
subject to a maximum rate of 28% in respect of a capital asset held directly by
such individual for more than one year but not more than eighteen months, and
the maximum rate is reduced to 20% in respect of a capital asset held in excess
of 18 months. The Act authorizes the Treasury department to promulgate
regulations that would apply these rules in the case of long-term capital gain
distributions made by the Fund. The Treasury Department has indicated that,
under such regulations, individual shareholders will be taxed at a minimum rate
of 28% in respect of capital gains distributions designated as 28% rate gain
distributions and will be taxed at a maximum rate of 20% in respect of capital
gains distributions designated as 20% rate gain distributions, regardless of how
long such shareholders have held their shares in the Fund. See "Taxes" in the
Prospectus for a discussion of the federal income tax treatment of any gain or
loss realized on the redemption or exchange of a Fund's shares. Additionally,
any loss realized on a redemption or exchange of shares of a Fund will be
disallowed to the extent the shares disposed of are replaced within a period of
61 days beginning 30 days before such disposition, such as pursuant to
reinvestment of a dividend in shares of the Fund.

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 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.
Except as described below, if an option written by a Portfolio lapses or is
terminated through a closing transaction, such as a repurchase by the Portfolio
of the option from its holder, the Portfolio will realize a short-term capital
gain or loss, depending on whether the premium income is greater or less than
the amount paid by the Portfolio in the closing transaction. If securities are
purchased by a Portfolio pursuant to the exercise of a put option written by it,
the Portfolio will subtract the premium received from its cost basis in the
securities purchased.

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

Forward currency contracts, options and futures contracts entered into
by a Portfolio may create "straddles" for U.S. federal income tax purposes and
this may affect the character and timing of gains or losses realized by the
Portfolio on forward currency contracts, options and futures contracts or on the
underlying securities. Certain straddles treated as short sales for tax purposes
may also result in the loss of the holding period of underlying securities for
purposes of the 30% of gross income test described above, and therefore, a
Portfolio's ability to enter into forward currency contracts, options and
futures contracts may be limited under current law. Effective as of an
investor's first taxable year beginning after August 5, 1997, the 30% of gross
income test will no longer apply to the Fund wishing to satisfy the requirements
of subchapter M of the Code.

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

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

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

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

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

ADDITIONAL INFORMATION

Telephone calls to the Funds, Morgan or Eligible Institutions 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 Portfolios'
Registration Statements filed under the 1940 Act. Pursuant to the rules and
regulations of the SEC, certain portions have been omitted. The Registration
Statements including the exhibits filed therewith may be examined at the office
of the SEC in Washington D.C.

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

<PAGE>

FINANCIAL STATEMENTS

Date of Semi-Annual Report; Date of Annual Report;
Date Semi-Annual Report Filed; Date Annual Report
and Accession Number Filed; and Accession
Name of Fund Number

J.P. Morgan Intstitutional N/A 08/31/97
Tax Exempt Bond Fund 10/30/97
0001016969-97-0000079
J.P. Morgan Intstitutional
International Bond Fund 09/30/97
N/A 12/10/97
0001016969-97-000091

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

<PAGE>

APPENDIX A

Description of Security Ratings

STANDARD & POOR'S

Corporate and Municipal Bonds

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

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.

Commercial Paper, including Tax Exempt

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

Short-Term Tax-Exempt Notes

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

MOODY'S

Corporate and Municipal Bonds

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

Short-Term Tax Exempt Notes

MIG-2 - MIG-2 rated notes are of high quality but with margins of protection not
as large as MIG-1.

- --------
3 For purposes of interpretation of Investment Restriction No. 2,
"guaranteed by another entity" includes credit substitutions, such as letters of
credit or insurance, unless the Advisor determines that the security meets the
Fund's credit standards without regard to the credit substitution.

4 Pursuant to an interpretation of the staff of the SEC, the Fund may not
invest more than 25% of its assets in industrial development bonds in projects
of similar type or in the same state. The Fund shall comply with this
interpretation until such time as it may be modified by the staff of the SEC.

******************************************************************************
<PAGE>

JANUARY 2, 1998 PROSPECTUS

J.P. MORGAN INSTITUTIONAL
DIVERSIFIED FUND

------------------------------
A balanced fund seeking high
total return with reduced risk

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

Shares in the fund are not bank deposits and are not guaranteed or insured by
any bank, government entity, or the FDIC.

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 as an investment or guarantees that the information in this prospectus is
correct or adequate. It is a criminal offense for anyone to state or suggest
otherwise.

Distributed by Funds Distributor, Inc. JPMORGAN

<PAGE>

CONTENTS
- --------------------------------------------------------------------------------

2
- ----
The fund's goal, investment approach, risks, expenses, performance, and
financial highlights

J.P. MORGAN INSTITUTIONAL DIVERSIFIED FUND

Fund description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Investor expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Financial highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

4
- ----
Investing in the J.P. Morgan Institutional Diversified Fund

YOUR INVESTMENT

Investing through a financial professional . . . . . . . . . . . . . . . . . 4
Investing through an employer-sponsored retirement plan. . . . . . . . . . . 4
Investing through an IRA or Rollover IRA . . . . . . . . . . . . . . . . . . 4
Investing directly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Opening an account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Adding to an account . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Selling shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Account and transaction policies . . . . . . . . . . . . . . . . . . . . . . 5
Dividends and distributions. . . . . . . . . . . . . . . . . . . . . . . . . 6
Tax considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

7
- ----
More about risk and the fund's business operations
FUND DETAILS

Master/feeder structure. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Management and administration. . . . . . . . . . . . . . . . . . . . . . . . 7
Risk and reward elements . . . . . . . . . . . . . . . . . . . . . . . . . . 8

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

<PAGE>

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

J.P. MORGAN INSTITUTIONAL DIVERSIFIED FUND

This fund invests in a diversified portfolio of stocks and bonds by investing
through a master portfolio (another fund with the same goal). As a shareholder,
you should anticipate risks and rewards beyond those of a typical bond fund, but
less than those of most stock funds.

WHO MAY WANT TO INVEST

The fund is designed for investors who:

- - are pursuing a long-term goal such as retirement

- - want an investment with the potential to outpace inflation

- - seek less risk than a fund investing completely in stocks

- - prefer to leave asset allocation decisions in the hands of an investment
professional

It is NOT designed for investors who:

- - are looking for the higher long-term potential growth (with the higher risks)
of a fund investing completely in stocks

- - require regular income or stability of principal

- - are pursuing a short-term goal or investing emergency reserves

J.P. MORGAN

Known for its commitment to proprietary research and its disciplined investment
strategies, J.P. Morgan is the asset management choice for many of the world's
most respected corporations, financial institutions, governments, and
individuals. Today, J.P. Morgan employs over 300 analysts and portfolio managers
around the world and has more than $240 billion in assets under management,
including assets managed by the fund's advisor, Morgan Guaranty Trust Company of
New York.

BEFORE YOU INVEST

Investors considering the fund should understand that:

- - The value of the fund's shares will fluctuate over time. You could lose money
if you sell when the fund's share price is lower than when you invested.

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

- - Future returns will not necessarily resemble past performance.

<PAGE>

J.P. MORGAN INSTITUTIONAL
DIVERSIFIED FUND | TICKER SYMBOL: JPDVX
- --------------------------------------------------------------------------------
REGISTRANT NAME: J.P. MORGAN INSTITUTIONAL FUNDS

[GRAPHIC]
GOAL

The fund seeks to provide a high total return from a diversified portfolio
of stocks and bonds.

[GRAPHIC]
INVESTMENT APPROACH

Drawing on a variety of analytical tools, the portfolio management team
allocates assets among various types of stock and bond investments, based on the
model allocation shown at right. The team periodically adjusts the fund's actual
asset allocation according to the relative attractiveness of each asset class.

Within this asset allocation framework, the team selects the fund's securities.
With the stock portion of the portfolio, the fund keeps its economic sector
weightings in line with the markets in which it invests, while actively seeking
the most attractive stocks within each sector. In choosing individual stocks,
the team ranks them according to their relative value using a proprietary model
that incorporates research from J.P. Morgan's worldwide network of analysts.
Foreign stocks are chosen using a similar process, while also considering
country allocation and currency exposure.

With the bond portion of the portfolio, the team uses fundamental, economic, and
capital markets research to select securities. The team actively manages the mix
of U.S. and foreign bonds while typically keeping duration - a common
measurement of sensitivity to interest rate movements - within one year of the
average for the U.S. investment-grade bond universe (currently about five
years).

[GRAPHIC]
POTENTIAL RISKS AND REWARDS

The value of your investment in the fund will fluctuate in response to movements
in the stock and bond markets. The fund's broad diversification among asset
classes and among individual stocks and bonds is more effective in reducing
volatility when asset classes perform differently. Fund performance will also
depend on the management team's asset allocation and securities selection.

Over the long term, investors can anticipate that the fund's total return and
volatility should exceed those of bonds but remain less than those of medium-
and large- capitalization domestic stocks.

The fund's securities are described in more detail on page 8, along with their
main risks, which may cause the fund's share price to decline, and the fund's
strategies to reduce these risks.

MODEL ALLOCATION

[CHART]

52% medium- and large-cap U.S. stocks

35% U.S. and foreign bonds

10% foreign stocks

3% small-cap U.S. stocks

PORTFOLIO MANAGEMENT

The fund's assets are managed by J.P. Morgan, which currently manages over $240
billion, including more than $8 billion using the same strategy
as the fund.

The portfolio management team is led by Gerald Osterberg, vice president, who
has been on the team since the fund's inception in July of 1993 and has been at
J.P. Morgan since 1966, and John M. Devlin, vice president, who joined the team
in December of 1993 and has been at J.P. Morgan since 1986.

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

INVESTOR EXPENSES

The current expenses you should expect to pay as an investor in the fund 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 shown are deducted from fund assets prior to
performance calculations.

Footnotes for this section are shown on next page.

ANNUAL FUND OPERATING EXPENSES(1)(%)

Management fees (actual) 0.55

Marketing (12b-1) fees none

Other expenses(2)
(after reimbursement) 0.10
- --------------------------------------------------
TOTAL OPERATING EXPENSES(2)
(AFTER REIMBURSEMENT) 0.65
- --------------------------------------------------

EXPENSE EXAMPLE

The example below uses the same assumptions as other fund prospectuses: $1,000
initial investment, 5% annual total return, expenses unchanged, all shares sold
at the end of each time period. The example is for comparison only; the fund's
actual return and expenses will be different.

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

YOUR COST($) 7 21 36 81
- --------------------------------------------------

2 J.P. MORGAN INSTITUTIONAL DIVERSIFIED FUND

<PAGE>

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

PERFORMANCE (unaudited)

AVERAGE ANNUAL TOTAL RETURN (%) Shows performance over time, for periods ended
December 31, 1996
- -----------------------------------------------------------------------------------------------------------
1 yr. 3 yrs. Since inception(3)
<S> <C> <C> <C>

J.P. MORGAN INSTITUTIONAL DIVERSIFIED FUND (after expenses) 13.68 13.32 12.82

- -----------------------------------------------------------------------------------------------------------
FUND BENCHMARK(4) (no expenses) 14.10 13.56 12.94
- -----------------------------------------------------------------------------------------------------------
S&P 500 INDEX(5) (no expenses) 22.96 19.68 18.87
- -----------------------------------------------------------------------------------------------------------

YEAR-BY-YEAR TOTAL RETURN (%) Shows changes in returns by calendar year
- ----------------------------------------------------------------------------------------------------------
[GRAPH]

1993(3) 1994 1995 1996
<S> <C> <C> <C> <C>

- - J.P. MORGAN INSTITUTIONAL DIVERSIFIED FUND 1.76 0.93 26.84 13.68

- - Fund Benchmark(4) 1.43 0.46 27.75 14.10

- - S&P 500 Index(5) 2.32 1.32 37.58 22.96

- ----------------------------------------------------------------------------------------------------------
</TABLE>

FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------
PER-SHARE DATA For fiscal periods ended June 30
- ----------------------------------------------------------------------------------------------------------
1994(3) 1995 1996 1997
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ($) 10.00 9.90 11.26 12.02
- ----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.18 0.31 0.40 0.37
Net realized and unrealized gain (loss)
on investment and foreign currency ($) (0.23) 1.37 1.42 1.96
- ----------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS ($) (0.05) 1.68 1.82 2.33
- ----------------------------------------------------------------------------------------------------------
Less distributions to shareholders from:

Net investment income ($) (0.05) (0.26) (0.42) (0.36)
Net realized gain ($) -- (0.06) (0.64) (0.60)
- ----------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS ($) (0.05) (0.32) (1.06) (0.96)
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ($) 9.90 11.26 12.02 13.39
- ----------------------------------------------------------------------------------------------------------

SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (0.56)(6) 17.36 16.91 20.72
- ----------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD ($ thousands) 59,222 164,855 193,219 237,449
- ----------------------------------------------------------------------------------------------------------
RATIO OF EXPENSES TO AVERAGE NET ASSETS (%) 0.65(7) 0.65 0.65 0.65
- ----------------------------------------------------------------------------------------------------------
RATIO OF NET INVESTMENT INCOME TO AVERAGE
NET ASSETS (%) 2.92(7) 3.70 3.34 3.34
- ----------------------------------------------------------------------------------------------------------
DECREASE REFLECTED IN EXPENSE RATIO DUE TO
EXPENSE REIMBURSEMENT (%) 0.97(7) 0.53 0.33 0.33
- ----------------------------------------------------------------------------------------------------------
</TABLE>

The Financial Highlights have been audited by Price Waterhouse LLP, the fund's
independent accountants.

(1) The fund has a master/feeder structure as described on page 7. This table
shows the fund's expenses and its share of master portfolio expenses for
the past fiscal year, expressed as a percentage of the fund's average net
assets and reflecting reimbursement for ordinary expenses over 0.65%.

(2) Without reimbursement, other expenses and total operating expenses would
have been 0.43% and 0.98% respectively. There is no guarantee that
reimbursement will continue beyond 10/31/98.

(3) The fund commenced operations on 9/10/93. Except in the Financial
Highlights, returns reflect performance of the fund from 9/30/93 through
12/31/93.

(4) A composite benchmark of unmanaged indices that corresponds to the fund's
model allocation and that consists of the S&P 500 (52%), Russell 2000 (3%),
Salomon Brothers Broad Investment Grade Bond (35%), and MSCI EAFE (10%)
indices.

(5) The S&P500 Index is an unmanaged index of U.S. stocks widely used as a
measure of overall stock market performance.

(6) Not annualized.

(7) Annualized.

J.P. MORGAN INSTITUTIONAL DIVERSIFIED FUND 3

<PAGE>

YOUR INVESTMENT
- --------------------------------------------------------------------------------

For your convenience, the J.P. Morgan Institutional Funds offer several ways to
initiate and maintain 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. Consult 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:

- - Determine the amount you are investing. The minimum amount for initial
investments in the fund is $3,000,000 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.

- - 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.

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

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

OPENING YOUR ACCOUNT

BY WIRE

- - Mail your completed application to the Shareholder Services Agent.

- - 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.

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

Morgan Guaranty Trust Company of New York
ROUTING NUMBER: 021-000-238
CREDIT: J.P. Morgan Institutional Funds
ACCOUNT NUMBER: 001-57-689
FFC: your account number, name of registered owner(s) and fund name

BY CHECK

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

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

BY EXCHANGE

- - Call the Shareholder Services Agent for an exchange.

ADDING TO YOUR ACCOUNT

BY WIRE

- - Call the Shareholder Services Agent to place a purchase order. FUNDS THAT
ARE WIRED WITHOUT A PURCHASE ORDER WILL BE RETURNED UNINVESTED.

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

BY CHECK

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

- - Mail the check to the Shareholder Services Agent and attach instructions
indicating your account number and how much you wish to invest in which
fund(s).

BY EXCHANGE

- - Call the Shareholder Services Agent for an exchange.

4 YOUR INVESTMENT

<PAGE>

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

SELLING SHARES

BY WIRE

- - 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.

- - 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

- - 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

- - 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.

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

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

- - Mail the letter to the Shareholder Services Agent.

BY EXCHANGE

- - Call the Shareholder Services Agent for an exchange.

ACCOUNT AND TRANSACTION POLICIES

TELEPHONE ORDERS The fund accepts telephone orders from all shareholders. To
guard against fraud, the fund requires shareholders to use a PIN and may record
telephone orders or take other reasonable precautions. However, if the 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 this fund 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.

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

BUSINESS HOURS AND NAV CALCULATIONS The fund's regular business days and
hours are the same as those of the New York Stock Exchange. The fund
calculates its net asset value per share (NAV) every business day at 4:15
p.m. eastern time.

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 4:00
p.m. eastern time every business day and are executed the same day, at that
day's NAV. The fund has the right to suspend redemption of shares and to
postpone payment of proceeds for up to seven days or as permitted by law.

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

SHAREHOLDER SERVICES AGENT
J.P. MORGAN FUNDS SERVICES
522 Fifth Avenue
New York, NY 10036
1-800-766-7722

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

YOUR INVESTMENT 5

<PAGE>

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

TIMING OF SETTLEMENTS When you buy shares, you will become the owner of record
when the fund receives your payment, generally the day following execution. When
you sell shares, the 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 fund sends monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months the fund sends out an annual or semi-annual report, containing
information on the fund's 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), the fund may 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 may close out your account and send the proceeds to the
address of record.

DIVIDENDS AND DISTRIBUTIONS

The fund typically pays income dividends four times a year (usually in March,
June, September, and December) and makes capital gains distributions, if any,
once a year (usually in September). These dividends and distributions consist of
most or all of the fund's net investment income and net realized capital gains.

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

TAX CONSIDERATIONS

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

TRANSACTION TAX STATUS
- --------------------------------------------------------------------------------
Income dividends Ordinary income
- --------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
- --------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
- --------------------------------------------------------------------------------
Sales or exchanges of shares Capital gains or losses
owned for more than one year
- --------------------------------------------------------------------------------

Sales or exchanges of shares Gains are treated as ordinary
owned for one year or less income; losses are subject
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 the fund is about to declare a long-term capital
gains distribution.

Every January, the fund issues tax information on its distributions for the
previous year.

Any investor for whom the 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.

6 YOUR INVESTMENT

<PAGE>

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

MASTER/FEEDER STRUCTURE

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

The master portfolio accepts investments from other feeder funds, and the
feeders bear the master 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 the master portfolio seeks a vote,
the fund will hold a shareholder meeting and cast its vote proportionately, as
instructed by its shareholders. Fund shareholders are entitled to one vote per
fund share.

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

MANAGEMENT AND ADMINISTRATION

The fund and its master portfolio are 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, provides fund officers. J.P. Morgan, as
co-administrator, oversees the fund's other service providers.

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

- --------------------------------------------------------------------------------
ADVISORY SERVICES 0.55% of the master portfolio's
average net assets
- --------------------------------------------------------------------------------
ADMINISTRATIVE SERVICES Master portfolio's and fund's pro-
(fee shared with Funds rata portions of 0.09% of the first
Distributor, Inc.) $7 billion in J.P. Morgan-advised
portfolios, plus 0.04% of average
net assets over $7 billion
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES 0.10% of the fund's average
net assets
- --------------------------------------------------------------------------------

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

FUND DETAILS 7

<PAGE>

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

RISK AND REWARD ELEMENTS

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

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE RISK AND REWARD
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>

MARKET CONDITIONS
- - The fund's share price and the - Stocks and bonds have - Under normal circumstances
performance will fluctuate in generally outperformed more fund plans to remain fully
response to stock and bond stable investments (such as invested, with approximately
market movements short-term bonds and cash 65% in stocks and 35% in
equivalents) over the long bonds; stock investments may
- - The value of the fund's bonds term include U.S. and foreign
(and potentially its common stocks, convertible
convertible securities and - A diversified, balanced securities, preferred stocks,
stocks) could fall when portfolio should mitigate the trust or partnership
interest rates rise; the effects of wide market interests, warrants, rights,
longer a bond's duration and fluctuations, especially when and investment company
the lower its credit quality, stock and bond prices move in securities; bond investments
the more its value typically different directions may include U.S. and foreign
falls corporate and government
- The fund's bonds could rise in bonds, and mortgage-backed and
- - The fund's mortgage-backed and value when interest rates fall asset-backed securities
asset-backed securities could (securities representing an
generate capital losses or - Mortgage-backed and interest in, or secured by, a
periods of low yields if they asset-backed securities can pool of mortgages or other
are paid off substantially offer attractive returns assets such as receivables)
earlier or later than
anticipated - The fund seeks to limit risk
through diversification in a
large number of stocks, and to
a lesser extent bonds
(typically holding more than
1,000 stock and bond
positions)

- The fund seeks to keep the
average duration of its bond
portfolio within one year of
that for the U.S.
investment-grade bond universe

- The fund monitors interest
rate trends, as well as
geographic and demographic
information, related to
mortgage-backed securities and
mortgage prepayments

- During severe market
downturns, the fund has the
option of investing up to 100%
of assets in investment-grade
short-term securities

- -------------------------------------------------------------------------------------------------------------
MANAGEMENT CHOICES
- - The fund could underperform - The fund could outperform its - J.P. Morgan focuses its active
its benchmark due to its asset benchmark due to these same management on asset allocation
allocation and securities choices and securities selection,
choices areas where it believes its
research advantage can enhance
returns
- -------------------------------------------------------------------------------------------------------------
CREDIT QUALITY
- - The default of an issuer would - Investment-grade bonds have a - At least 75% of the fund's
leave the fund with unpaid lower risk of default bonds must be investment-grade
interest or principal (BBB/Baa or better, of which
- Junk bonds offer higher yields 65% must be A or better), and
- - Junk bonds (those rated BB/Ba and higher potential gains no more than 25% BB/Ba or B;
or lower) have a higher risk the fund may include unrated
of default bonds of equivalent quality in
these categories

- The fund does not buy bonds
lower than B
- -------------------------------------------------------------------------------------------------------------
FOREIGN INVESTMENTS
- - Currency exchange rate - Favorable exchange rate - The fund anticipates that
movements could reduce gains movements could generate gains total foreign investments will
or create losses or reduce losses not exceed 30% of assets

- - The fund could lose money - Foreign investments, which - The fund actively manages the
because of foreign government represent a major portion of currency exposure of its
actions, political the world's securities, offer foreign stock and bond
instability, or lack of attractive potential investments relative to its
adequate and accurate performance and opportunities benchmark, and may hedge into
information for diversification the U.S. dollar from time to
time (see also "Derivatives")
</TABLE>

8 FUND DETAILS

<PAGE>

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO
BALANCE RISK AND REWARD
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>

DERIVATIVES
- - Derivatives such as futures, - Hedges that correlate well - The fund uses derivatives for
options, and foreign currency with underlying positions can hedging and for risk
forward contracts that are reduce or eliminate losses at management (i.e., to adjust
used for hedging the portfolio low cost duration or to establish or
or specific securities may not adjust exposure to particular
fully offset the underlying - The fund could make money and securities, markets or
positions(1) protect against losses if currencies); risk management
management's analysis proves may include management of the
- - Derivatives used for risk correct fund's exposure relative to
management may not have the its benchmark
intended effects and may result - Derivatives that involve
in losses or missed leverage could generate - The fund only establishes
opportunities substantial gains at low cost hedges that it expects will be
highly correlated with
- - Derivatives that involve underlying positions
leverage could magnify losses
- While the fund may use
derivatives that incidentally
involve leverage, it does not
use them for the specific
purpose of leveraging the
portfolio
- -------------------------------------------------------------------------------------------------------------
ILLIQUID HOLDINGS
- - The fund could have difficulty - These holdings may offer more - The fund may not invest more
valuing these holdings attractive yields or potential than 15% of net assets in
precisely growth than comparable widely illiquid holdings
traded securities
- - The fund could be unable to - To maintain adequate liquidity
sell these holdings at the to meet redemptions, the fund
time or price it desires may hold investment-grade
short-term securities
(including repurchase
agreements) and, for temporary
or extraordinary purposes, may
borrow from banks up to 30% of
the value of its total assets
- -------------------------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED
DELIVERY SECURITIES
- - When the fund buys securities - The fund can take advantage of - The fund uses segregated
before issue or for delayed attractive transaction accounts to offset leverage
delivery, it could be exposed opportunities risk
to leverage risk if it does
not use segregated accounts
- -------------------------------------------------------------------------------------------------------------
SHORT-TERM TRADING
- - Increased trading would raise - The fund could realize gains - The fund anticipates a
the fund's brokerage and in a short period of time portfolio turnover rate of
related costs approximately 150%
- The fund could protect against
- - Increased short-term capital losses if a stock is - The fund generally avoids
gains distributions would overvalued and its' value short-term trading, except to
raise shareholders' income tax later falls take advantage of attractive
liability or unexpected opportunities or
to meet demands generated by
shareholder activity
</TABLE>

(1) A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash
payment based on the value of a securities index. An option is the right to
buy or sell securities that is granted in exchange for an agreed-upon sum.
A foreign currency forward contract is an obligation to buy or sell a given
currency on a future date and at a set price.

FUND DETAILS 9

<PAGE>

FOR MORE INFORMATION
- --------------------------------------------------------------------------------

For investors who want more information on the fund, 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 the fund's most recently completed fiscal year or
half-year.

STATEMENT OF ADDITIONAL INFORMATION (SAI) Provides a fuller technical and legal
description of the fund's policies, investment restrictions, and business
structure. This prospectus incorporates the SAI by reference.

Copies of the current versions of these documents may be obtained by contacting:

J.P. MORGAN INSTITUTIONAL DIVERSIFIED FUND
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
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 fund's
investment company and 1933 Act registration numbers are 811-07342 and
033-54642.

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.

J.P. MORGAN
- --------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL FUNDS

ADVISOR DISTRIBUTOR
Morgan Guaranty Trust Company of New York Funds Distributor, Inc.
522 Fifth Avenue 60 State Street
New York, NY 10036 Boston, MA 02109
1-800-766-7722 1-800-221-7930

PROS387-981