BOSTON 1784 FUNDS, 497, 1999-04-07

BOSTON 1784 FUNDS
497, 1999-04-07

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Statement of Rule 497(c)
Additional Information File Nos. 33-58004
September 15, 1998, as and 811-7474
supplemented April 1, 1999

BOSTON 1784 FUNDSSM

Money Market Funds:

Boston 1784 Tax-Free Money Market Fund
Boston 1784 U.S. Treasury Money Market Fund
Boston 1784 Institutional U.S. Treasury Money Market Fund
Boston 1784 Prime Money Market Fund
Boston 1784 Institutional Prime Money Market Fund

Bond Funds:

Boston 1784 Short-Term Income Fund
Boston 1784 Income Fund
Boston 1784 U.S. Government Medium-Term Income Fund

Tax-Exempt Funds:

Boston 1784 Tax-Exempt Medium-Term Income Fund
Boston 1784 Connecticut Tax-Exempt Income Fund
Boston 1784 Florida Tax-Exempt Income Fund
Boston 1784 Massachusetts Tax-Exempt Income Fund
Boston 1784 Rhode Island Tax-Exempt Income Fund

Stock Funds:

Boston 1784 Asset Allocation Fund
Boston 1784 Growth and Income Fund
Boston 1784 Growth Fund
Boston 1784 International Equity Fund

This Statement of Additional Information provides information regarding
the activities and operations of the no-load mutual funds listed above, and
should be read in conjunction with the Funds' Prospectuses dated September 15,
1998 and April 1, 1999. You may obtain a Prospectus without charge by calling
1-800-BKB-1784.

Certain financial information which is included in the Annual Reports to
Shareholders of Boston 1784 Funds is incorporated by reference into this
Statement of Additional Information. Copies of the Funds' Annual Reports may be
obtained without charge by calling 1-800-BKB-1784.

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY A CURRENT PROSPECTUS.

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TABLE OF CONTENTS

Page

1. Trust History 2
2. Description of the Trust and its Investments and Risks 2
Classification 2
Investment Strategies and Risks 3
Fund Policies 21
Temporary Defensive Position 25
Portfolio Turnover 25
3. Management 26
Trustees 26
Management Information 27
Compensation 30
4. Control Persons and Principal Holders of Securities 30
Principal Holders 30
5. Investment Advisory and Other Services 31
Investment Advisers 31
ServiceMarks 33
Distributor 34
Administrator 35
Dividend Disbursing Agent and Transfer Agent 36
Custodian 36
Counsel and Independent Accountant 36
6. Brokerage Allocation and Other Practices 36
Brokerage Transactions 36
Brokerage Selection 37
7. Description of Shares; Voting Rights and Liabilities 39
8. Purchase, Redemption and Pricing of Shares 40
Determination of Net Asset Value 40
Purchase and Redemption of Shares 41
Systematic Withdrawal Plan 42
Redemption in Kind 43
9. Taxes 43
Tax Status of the Funds 43
Taxation of Fund Distributions 43
Disposition of Shares 45
Additional Information for Shareholders of the Tax-Exempt Funds 45
Additional Information Relating to Fund Investments 45
Additional Information Relating to Foreign Investments 46
Foreign Shareholders 47
Backup Withholding 47
10. Performance Information 47
Calculation of Yield 47
Calculation of Total Return 49
11. Financial Statements 54

Appendix A: Certain Information concerning Connecticut, Florida,
Massachusetts and Rhode Island
Appendix B: Description of Securities Ratings
Appendix C: Taxable Equivalent Yields

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1. TRUST HISTORY

BOSTON 1784 FUNDSSM (the "Trust") is an open-end management investment
company established under Massachusetts law as a Massachusetts business trust
on February 5, 1993. Prior to May 27, 1997, Boston 1784 Funds was known as 1784
Funds. On that date the Trust and each Fund added "Boston" to their names.

2. DESCRIPTION OF THE TRUST AND ITS INVESTMENTS AND RISKS

CLASSIFICATION

The Declaration of Trust permits the Trust to offer separate portfolios,
or funds, of shares of beneficial interest and different classes of shares of
each fund. Boston 1784 Funds currently has nineteen active series. Each Fund
(other than the state Tax-Exempt Funds) is a diversified mutual fund.

This Statement of Additional Information relates to the following funds of
the Trust (the "Funds"):

Money Market Funds:

Bond Funds:

Boston 1784 Short-Term Income Fund
Boston 1784 Income Fund
Boston 1784 U.S. Government Medium-Term Income Fund

Tax-Exempt Funds:

Stock Funds:

Boston 1784 Asset Allocation Fund
Boston 1784 Growth and Income Fund
Boston 1784 Growth Fund
Boston 1784 International Equity Fund

BankBoston, N.A. ("BankBoston") is the investment adviser of each Fund.
Kleinwort Benson Investment Management Americas, Inc. is the investment adviser
of the International Equity Fund with BankBoston (BankBoston and Kleinwort are

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each referred to as an "Adviser"). SEI Investments Distribution Co. is the
distributor of shares of each Fund.

As required by law, each of the Trust, BankBoston and the Trust's
administrator and distributor have adopted codes of ethics concerning certain
activities of officers, trustees or directors and employees. Copies of these
codes of ethics have been filed with the Securities and Exchange Commission.

INVESTMENT STRATEGIES AND RISKS

The principal investment policies and strategies of each of the Funds are
described in the Prospectus by which shares of that Fund are offered. Of
course, a Fund's portfolio managers may decide, as a matter of investment
strategy, not to use the investments and investment techniques described below
at any particular time. The permitted investments and investment techniques
described below, in alphabetical order, supplements the information contained
in the Prospectus.

Each Tax-Exempt Fund has a fundamental policy of investing at least 80
percent of its net assets under normal market conditions in obligations issued
by or on behalf of the states, territories and possessions of the United States
and the District of Columbia and their respective political subdivisions,
agencies and instrumentalities, the interest on which, in the opinion of
counsel for the issuer, is exempt from federal income tax and not included as a
preference item under the alternative minimum tax (collectively, "municipal
securities"). A Tax-Exempt Fund may comply with this policy (or with any other
policy of such Fund as to investing in securities the interest on which is
exempt from taxation in a particular state or which are not subject to
intangible personal property taxes of any state) by investing in a partnership,
trust, regulated investment company or other entity which invests in such
municipal securities, in which case the applicable Fund's investment in such
entity shall be deemed an investment in the underlying municipal securities in
the same proportion as such entity's investment in such municipal securities
bears to its net assets.

Appendix A contains information concerning Connecticut, Florida,
Massachusetts and Rhode Island. Each of the Connecticut, Florida, Massachusetts
and Rhode Island Tax-Exempt Income Funds is particularly susceptible to events
affecting issuers in its state.

Appendix B describes the ratings assigned to securities by certain
securities rating organizations.

Appendix C describes the yield investors need to achieve from a taxable
investment to equal the yield from a tax-exempt investment. The taxable
equivalent yields tables do not predict the yield of any Fund.

AMERICAN, EUROPEAN AND CONTINENTAL DEPOSITARY RECEIPTS

Each of the Funds may invest in depositary receipts. American Depositary
Receipts ("ADRs") are securities, typically issued by a U.S. financial
institution, that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer. European Depositary Receipts ("EDRs"),
which are sometimes referred to as Continental Depositary Receipts ("CDRs"),
are securities, typically issued by a non-U.S. financial institution, that
evidence ownership interests in a security or a pool of securities issued by
either a U.S. or foreign issuer. ADRs, EDRs and CDRs may be available for
investment through "sponsored" or "unsponsored" facilities. A sponsored

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facility is established jointly by the issuer of the security underlying the
receipt and a depositary, whereas an unsponsored facility may be established by
a depositary without participation by the issuer of the receipt's underlying
security. Holdings of an unsponsored depositary receipt generally bear all the
costs of the unsponsored facility and the depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass voting rights
through to the holders of the receipts in respect to the deposited securities.

ASSET-BACKED SECURITIES

Each of the Funds (other than Boston 1784 Institutional U.S. Treasury
Money Market Fund and Boston 1784 U.S. Treasury Money Market Fund) may invest
in asset-backed securities including company receivables, truck and auto loans,
leases, and credit card receivables. These issues may be traded
over-the-counter and typically have a short to intermediate maturity structure
depending on the paydown characteristics of the underlying financial assets
which are passed through to the security holder.

Asset-backed securities present certain risks. For instance, in the case
of credit card receivables, these securities may not have the benefit of any
security interest in the related collateral. Credit card 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 owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there
is the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (e.g., loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.

Asset-backed securities are often backed by a pool of assets representing
the obligations of a number of different parties. To lessen the effect of
failures by obligors on underlying assets to make payments, the securities may
contain elements of credit support which fall into two categories: (i)
liquidity protection and (ii) protection against losses resulting from ultimate
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool of
assets, to ensure that the receipt of payments on the underlying pool occurs in
a timely fashion. Protection against losses resulting from ultimate default
ensures payment through insurance policies or letters of credit obtained by the
issuer or sponsor from third parties. A Fund will not pay any additional or
separate fees for credit support. The degree of credit support provided for
each issue is generally based on historical information respecting the level of
credit risk associated with the underlying assets. Delinquency or loss in
excess of that anticipated or failure of the credit support could adversely
affect the return on an investment in such a security.

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BANK OBLIGATIONS

Bank obligations include certificates of deposit, time deposits (including
Eurodollar time deposits), and bankers' acceptances and other short-term debt
obligations issued by domestic banks, foreign subsidiaries or foreign branches
of domestic banks, domestic and foreign branches of foreign banks, domestic
savings and loan associations, and other banking institutions. The Funds have
established certain minimum credit quality standards for bank obligations in
which they invest.

Bank obligations are susceptible to adverse events affecting the banking
industry. Banks are sensitive to changes in money market and general economic
conditions, as well as decisions by regulators that can affect their
profitability.

The Funds (other than Boston 1784 Institutional U.S. Treasury Money Market
Fund and Boston 1784 U.S. Treasury Money Market Fund) are not prohibited from
investing in obligations of banks which are clients of SEI Investments Company
("SEI"). However, the purchase of shares of the Funds by such banks or by their
customers will not be a consideration in determining which bank obligations the
Funds will purchase.

BANKERS' ACCEPTANCES

Each of the Funds may invest in bankers' acceptances. A banker's
acceptance is a bill of exchange or time draft drawn on and accepted by a
commercial bank. It is used by corporations to finance the shipment and storage
of goods and to furnish dollar exchange. Maturities are generally six months or
less.

CERTIFICATES OF DEPOSIT

Each of the Funds may invest in certificates of deposit. A certificate of
deposit is a negotiable interest-bearing instrument with a specific maturity.
Certificates of deposit are issued by banks and savings and loan institutions
in exchange for the deposit of funds and normally can be traded in the
secondary market prior to maturity.

COMMERCIAL PAPER

Each of the Funds may invest in commercial paper. Commercial paper is the
term used to designate unsecured short-term promissory notes issued by
corporations and other entities. Maturities on these issues vary from one to
270 days.

COMMON AND PREFERRED STOCK

Each of the Funds may invest in common and preferred stock. Common stocks
are generally more volatile than other securities. Preferred stocks share some
of the characteristics of both debt and equity investments and are generally
preferred over common stocks with respect to dividends and in liquidation.

CONVERTIBLE SECURITIES

Each of the Funds may invest in convertible securities. Convertible
securities have characteristics similar to both fixed income and equity
securities. Because of the conversion feature, the market value of convertible
securities tends to move together with the market value of the underlying

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stock. The value of convertible securities is also affected by prevailing
interest rates, the credit quality of the issuer, and any call provisions.
Convertible securities include both debt obligations and preferred stock.

CURRENCY SWAPS

Each of the Funds may engage in currency swaps. Currency swaps involve the
exchange of rights to make or receive payments in specified currencies.
Currency swaps usually involve the delivery of the entire principal value of
one designated currency. Therefore, the entire principal value of a currency
swap is subject to the risk that the other party to the swap will default on
its contractual delivery obligations. The use of currency swaps is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Adviser or Advisers to a Fund are incorrect in their forecasts of market values
and currency exchange rates, the investment performance of the Fund would be
less favorable than it would have been if this investment technique were not
used.

FOREIGN CURRENCY EXCHANGE TRANSACTIONS

Each of the Funds may engage in foreign currency exchange transactions.
Since investments in foreign companies usually involve currencies of foreign
countries, the value of the assets of a Fund with investments in foreign
companies as measured in U.S. dollars may be affected favorably or unfavorably
by changes in foreign currency exchange rates and exchange control regulations.
Although such Fund's assets are valued daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. A Fund may conduct its foreign currency exchange transactions
on a spot basis or for settlement on a future date (i.e., a "forward foreign
currency" contract or "forward" contract). A Fund may convert currency on a
spot basis from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer. The Funds do not currently intend to speculate in
foreign currency exchange rates or forward contracts.

A forward contract involves an obligation 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, agreed upon by the parties at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no fees or
commissions are charged at any stage for trades.

When a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security. By entering into a forward contract for the purchase or
sale, for a fixed amount of U.S. dollars, of the amount of foreign currency
involved in the underlying security transaction, a Fund will be able to protect
itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during
the period between the date the security is purchased or sold and the date on
which payment is made or received.

When the Adviser or an Adviser to a Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract to sell, for a fixed amount

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of U.S. dollars, the amount of foreign currency approximating the value of some
or all of the Fund's securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the
securities involved is not generally possible since the future value of such
securities in foreign currencies changes as a consequence of market movements
in the value of those securities between the date the forward contract is
entered into and the date it matures. The projection of a short-term hedging
strategy is highly uncertain. A Fund does not enter into such forward contracts
or maintain a net exposure to such contracts where the consummation of the
contracts would obligate the Fund to deliver an amount of foreign currency in
excess of the value of the Fund's securities or other assets denominated in the
applicable currency. Under normal circumstances, consideration of the prospect
for currency parities is incorporated in the longer term investment decisions
made with regard to overall diversification strategies. However, each Adviser
to such Funds believes that it is important to have the flexibility to enter
into such forward contracts when it determines that the best interests of such
Funds will be served.

A Fund generally does not enter into a forward contract with a term
greater than one year. At the maturity of a forward contract, the Fund either
sells the security and makes delivery of the foreign currency, or it retains
the security and terminates its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency.

If a Fund retains the security and engages in an offsetting transaction,
the Fund incurs a gain or loss (as described below) to the extent that there
has been movement in forward contract prices. If the Fund engages in an
offsetting transaction, it may subsequently enter into a new forward contract
to sell the foreign currency. Should forward prices decline during the period
between the date the Fund enters into a forward contract for the sale of the
foreign currency and the date it enters into an offsetting contract for the
purchase of foreign currency, the Fund will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of the currency
it has agreed to purchase. Should forward prices increase, the Fund will suffer
a loss to the extent that the price of the currency it has agreed to purchase
exceeds the price of the currency it has agreed to sell.

It is impossible to forecast with precision the market value of Fund
securities at the expiration of the contract. Accordingly, it may be necessary
for the Fund to purchase additional foreign currency for the Fund on the spot
market (and cause the Fund to bear the expense of such purchase) if the market
value of the security is less than the amount of foreign currency the Fund is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
security if its market value exceeds the amount of foreign currency the Fund is
obligated to deliver.

The Funds' dealings in foreign currency contracts are limited to the
transactions described above. Of course, no Fund is required to enter into such
transactions with regard to the Fund's foreign currency-denominated securities
and will not do so unless deemed appropriate by the Adviser or an Adviser to
such Fund. It should also be realized that this method of protecting the value
of a Fund's securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities.
Additionally, although such contracts tend to minimize the risk of loss due to
a decline in the value of the hedged currency, they also tend to limit any
potential gain which might result should the value of such currency increase.

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FOREIGN SECURITIES

Each of the Funds (other than Boston 1784 Institutional U.S. Treasury
Money Market Fund and Boston 1784 U.S. Treasury Money Market Fund) may invest
in certain obligations or securities of foreign issuers. Boston 1784
International Equity Fund intends to invest a substantial portion of its assets
in securities and obligations of foreign issuers. Permissible investments
include obligations of foreign branches of U.S. banks and of foreign banks,
including certificates of deposit and time deposits (including Eurodollar time
deposits).

Investing in securities issued by companies whose principal business
activities are outside the United States may involve significant risks not
present in domestic investments. For example, the value of securities
denominated in foreign currencies and of dividends and interest paid with
respect to such securities, will fluctuate based on the relative strength of
the U.S. dollar. In addition, there is generally less publicly available
information about foreign companies, particularly those not subject to the
disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing and financial
reporting requirements comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitation on the removal of funds or other assets of a
Fund, political or financial instability or diplomatic and other developments
which would affect such investments. Further, economies of particular countries
or areas of the world may differ favorably or unfavorably from the economy of
the U.S.

It is anticipated that in most cases the best available market for foreign
securities would be on exchanges or in over-the-counter markets located outside
the U.S. Foreign stock markets, while growing in volume and sophistication, are
generally not as developed as those in the U.S., and securities of some foreign
issuers (particularly those located in developing countries) may be less liquid
and more volatile than securities of comparable U.S. companies. Foreign
security trading practices, including those involving securities settlement
where a Fund's assets may be released prior to receipt of payment, may expose a
Fund to increased risk in the event of a failed trade or the insolvency of a
foreign broker-dealer. In addition, foreign brokerage commissions are generally
higher than commissions on securities traded in the U.S. and may be
non-negotiable. In general, there is less overall governmental supervision and
regulation of foreign securities exchanges, brokers and listed companies than
in the U.S.

The current policy of Boston 1784 International Equity Fund is not to
invest more than 10 percent of its assets in investment companies and
investment trusts which primarily hold foreign securities except that the Fund
may invest all of its investable assets in a diversified, open-end management
investment company having the same investment objective and policies and
substantially the same investment restrictions as those applicable to the Fund
(a "Qualifying Portfolio"). Investments in such entities may entail the risk
that the market value of such investments may be substantially less than their
net asset value and that there would be duplication of investment management
and other fees and expenses.

A Fund may invest in foreign securities that impose restrictions on
transfer within the United States or to United States persons. Although
securities subject to such transfer restrictions may be marketable abroad, they
may be less liquid than foreign securities of the same class that are not
subject to such restrictions.

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Foreign issuers of securities or obligations are often subject to
accounting treatment and engage in business practices different from those
respecting domestic issuers of similar securities or obligations. Foreign
branches of U.S. banks and foreign banks may be subject to less stringent
reserve requirements than those applicable to domestic branches of U.S. banks.

The Stock Funds, Boston 1784 Income Fund and Boston 1784 Short-Term Income
Fund may invest in securities issued by entities based in developing countries
throughout the world. All of the risks of investing in securities of foreign
issuers are heightened for securities of issuers in developing countries. Such
investments may also entail higher custodial fees and sales commissions than
domestic investments.

FORWARD COMMITMENTS OR PURCHASES ON A WHEN-ISSUED BASIS

Each Fund may invest up to 25 percent of its assets in forward commitments
or commitments to purchase securities on a when-issued basis. Forward
commitments or purchases of securities on a when-issued basis are transactions
where the price of the securities is fixed at the time of the commitment and
delivery and payment normally take place beyond conventional settlement time
after the date of commitment to purchase. The Funds will make commitments to
purchase obligations on a when-issued basis only with the intention of actually
acquiring the securities, but may sell them before the settlement date. The
when-issued securities are subject to market fluctuation, and no interest
accrues on the security to the purchaser during this period. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the purchaser enters into the commitment. Purchasing
obligations on a when-issued basis is a form of leveraging and can involve a
risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. In that case,
there could be an unrealized loss at the time of delivery.

While awaiting delivery of securities purchased on a when-issued basis, a
Fund will establish a segregated account consisting of cash and liquid
securities equal to the amount of the commitments to purchase securities on
such basis. If the value of these assets declines, the Fund will place
additional assets of the type described in the preceding sentence in the
account on a daily basis so that the value of the assets in the account is
equal to the amount of such commitments.

FUTURES CONTRACTS

Subject to applicable laws, each of the Funds may enter into bond and
interest rate futures contracts. The Funds intend to use futures contracts only
for bona fide hedging purposes. Futures contracts provide for the future sale
by one party and purchase by another party of a specified amount of a specified
security at a specified future time and at a specified price. A "sale" of a
futures contract entails a contractual obligation to deliver the underlying
securities called for by the contract, and a "purchase" of a futures contract
entails a contractual obligation to acquire such securities, in each case in
accordance with the terms of the contract. Futures contracts must be executed
through a futures commission merchant, or brokerage firm, which is a member of
an appropriate exchange designated as a "contract market" by the Commodity
Futures Trading Commission ("CFTC").

When a Fund purchases or sells a futures contract, the Trust must allocate
assets of that Fund as an initial deposit on the contract. The initial deposit
may be as low as approximately 5 percent or less of the value of the contract.
The futures contract is marked to market daily thereafter and the Fund may be

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required to pay or entitled to receive additional "variation margin", based on
decrease or increase in the value of the futures contract.

Futures contracts call for the actual delivery or acquisition of
securities, or in the case of futures contracts based on indices, the making or
acceptance of a cash settlement at a specified future time; however, the
contractual obligation is usually fulfilled before the date specified in the
contract by closing out the futures contract position through the purchase or
sale, on a commodities exchange, of an identical futures contract. Positions in
futures contracts may be closed out only if a liquid secondary market for such
contract is available, and there can be no assurance that such a liquid
secondary market will exist for any particular futures contract.

A Fund's ability to hedge effectively through transactions in futures
contracts depends on, among other factors, its Adviser's or Advisers', as
applicable, judgment as to the expected price movements in the securities
underlying the futures contracts. In addition, it is possible in some
circumstances that a Fund would have to sell securities from its portfolio to
meet "variation margin" requirements at a time when it may be disadvantageous
to do so.

GUARANTEED INVESTMENT CONTRACTS (GIC)

A GIC is a contract between an insurance company and, generally, an
institutional investor that guarantees the investor a specified interest rate
for a specific period and the return of the investor's principal. Each of the
Funds may invest in GICs, but no Fund will invest more than 20% of its total
assets in GICs.

LOAN PARTICIPATIONS

Loan participations are interests in loans which are administered by the
lending bank or agent for a syndicate of lending banks, and sold by the lending
bank or syndicate member. The Funds may only purchase interests in loan
participations issued by a bank in the United States with assets exceeding $1
billion and for which the underlying loan is issued by borrowers in whose
obligations the Funds may invest. Because the intermediary bank does not
guarantee a loan participation in any way, a loan participation is subject to
the credit risk generally associated with the underlying corporate borrower. In
addition, in the event the underlying corporate borrower defaults, a Fund may
be subject to delays, expenses and risks that are greater than those that would
have been involved if the Fund had purchased a direct obligation (such as
commercial paper) of the borrower. Under the terms of a loan participation, the
purchasing Fund may be regarded as a creditor of the intermediary bank so that
the Fund may also be subject to the risk that the issuing bank may become
insolvent.

MONEY MARkET FUNDS

A money market fund is an investment company that limits its investments
to high quality money market instruments with a weighted average maturity of 90
days or less. Each of the Funds (other than Boston 1784 U.S. Treasury Money
Market Fund, Boston 1784 Institutional U.S. Treasury Money Market Fund and
Boston 1784 Institutional Prime Money Market Fund) may invest in money market
funds, but not more than 5 percent of its assets in any one money market fund
or more than 10 percent of its assets in other investment companies, including
money market funds. When a Fund invests in a money market fund, a shareholder
bears not only his or her proportionate share of the Fund's expenses, but also
indirectly his or her share of the expenses of the money market fund, including
management fees.

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MORTGAGE "DOLLAR ROLL" TRANSACTIONS

Boston 1784 Short-Term Income Fund and Boston 1784 Income Fund may enter
into mortgage "dollar roll" transactions pursuant to which a Fund sells
mortgage-backed securities for delivery in the future and simultaneously
contracts to repurchase substantially similar securities on a specified future
date. During the roll period, the Fund forgoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost interest
by the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. The Fund may also be
compensated by receipt of a commitment fee.

In a mortgage dollar roll, the Fund takes the risk that the market price
of the mortgage-backed security will drop below the future purchase price. To
the extent the Fund invests the proceeds from the sale of the mortgage-backed
security in other portfolio securities, the Fund is engaging in a form of
leverage which could have the effect of magnifying the Fund's gains or losses.

MORTGAGE-BACKED SECURITIES

Each of the Funds may invest in mortgage-backed securities, which are
securities representing interests in pools of mortgage loans. Interests in
pools of mortgage-related securities differ from other forms of debt securities
which normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. The market value and interest yield of these instruments
can vary due to market interest rate fluctuations and early prepayments of
underlying mortgages.

The principal governmental issuers or guarantors of mortgage-backed
securities are the Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), and Federal Home Loan Mortgage
Corporation ("FHLMC"). Obligations of GNMA are backed by the full faith and
credit of the United States Government while obligations of FNMA and FHLMC are
supported by the respective agency only.

Each of the Funds (other than the Money Market Funds) may also invest in
mortgage-backed securities not issued by government issuers which are rated in
one of the three top categories by Standard and Poor's Rating Services ("S&P"),
Moody's Investors Service, Inc. ("Moody's") or Fitch IBCA, Inc. ("Fitch IBCA"),
or, if not rated by S&P, Moody's or Fitch IBCA, of comparable quality as
determined by the Adviser or Advisers to the Fund. Two principal types of
mortgage-backed securities are collateralized mortgage obligations ("CMOs") and
real estate mortgage investment conduits ("REMICs"). REMICs, which were
authorized under the Tax Reform Act of 1986, are private entities formed for
the purpose of holding a fixed pool of mortgages secured by an interest in real
property. REMICs are similar to CMOs in that they issue multiple classes of
securities.

<PAGE>

CMOs are securities collateralized by mortgages, mortgage pass-through
certificates, mortgage pay-through bonds (bonds representing an interest in a
pool of mortgages where the cash flow generated from the mortgage collateral
pool is dedicated to bond repayment), and mortgage-backed bonds (general
obligations of the issuers payable out of the issuers' general funds and
additionally secured by a first lien on a pool of single family detached
properties). Many CMOs are issued with a number of classes or series which have
different maturities and are retired in sequence.

Investors purchasing such CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligations is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-through certificates to be prepaid prior
to their stated maturity. Although some of the mortgages underlying CMOs may be
supported by various types of insurance, and some CMOs may be backed by GNMA
certificates or other mortgage pass-through certificates issued or guaranteed
by U.S. Government agencies or instrumentalities, the CMOs themselves are not
generally guaranteed.

Even if the U.S. government or one of its agencies guarantees principal
and interest payments of a mortgage-backed security, the market price of a
mortgage-backed security is not insured and may be subject to market
volatility. When interest rates decline, mortgage-backed securities experience
higher rates of prepayment because the underlying mortgages are refinanced to
take advantage of the lower rates. The prices of mortgage-backed securities may
not increase as much as prices of other debt obligations when interest rates
decline, and mortgage-backed securities may not be an effective means of
locking in a particular interest rate. In addition, any premium paid for a
mortgage-backed security may be lost when it is prepaid. When interest rates go
up, mortgage-backed securities experience lower rates of prepayment. This has
the effect of lengthening the expected maturity of a mortgage-backed security.
As a result, prices of mortgage-backed securities may decrease more than prices
of other debt obligations when interest rates go up.

OPTIONS

Each of the Stock Funds, Tax-Exempt Funds and Bond Funds may write covered
call options from time to time on its assets as determined by the Adviser or
Advisers to such Fund to be appropriate in seeking to achieve such Fund's
investment objective, provided that the aggregate value of such options may not
exceed 10 percent of such Fund's net assets as of the time such Fund enters
into such options. The Stock Funds, Boston 1784 Short-Term Income Fund and
Boston 1784 Income Fund may write covered call options, for hedging purposes
and in order to generate additional income. The Tax-Exempt Funds and Boston
1784 U.S. Government Medium-Term Income Fund may write covered call options,
for hedging purposes only and will not engage in option writing strategies for
speculative purposes.

The purchaser of a call option has the right to buy, and the writer (in
this case a Fund) of a call option has the obligation to sell, an underlying
security at a specified exercise price during a specified option period. The
advantage to a Fund of writing covered calls is that the Fund receives a
premium for writing the call, which is additional income. However, if the
security rises in value and the call is exercised, the Fund may not participate
fully in the market appreciation of the security.

<PAGE>

During the option period, a covered call option writer may be assigned an
exercise notice by the broker/dealer through whom such call option was sold,
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time at which the writer effects a closing purchase
transaction.

A closing purchase transaction is one in which a Fund, when obligated as a
writer of an option, terminates its obligation by purchasing an option of the
same series as the option previously written. A closing purchase transaction
cannot be effected with respect to an option once the Fund writing the option
has received an exercise notice for such option. Closing purchase transactions
will ordinarily be effected to realize a profit on an outstanding call option,
to prevent an underlying security from being called, to permit the sale of the
underlying security or to enable a Fund to write another call option on the
underlying security with either a different exercise price or different
expiration date or both. The Fund may realize a net gain or loss from a closing
purchase transaction depending upon whether the net amount of the original
premium received on the call option is more or less than the cost of effecting
the closing purchase transaction. Any loss incurred in a closing purchase
transaction may be partially or entirely offset by the premium received from a
sale of a different call option on the same underlying security. Such a loss
may also be wholly or partially offset by unrealized appreciation in the market
value of the underlying security. Conversely, a gain resulting from a closing
purchase transaction could be offset in whole or in part by a decline in the
market value of the underlying security.

If a call option expires unexercised, a Fund will realize a short-term
capital gain in the amount of the premium on the option, less the commission
paid. Such a gain, however, may be offset by depreciation in the market value
of the underlying security during the option period. If a call option is
exercised, the Fund will realize a gain or loss from the sale of the underlying
security equal to the difference between (a) the cost of the underlying
security and (b) the proceeds of the sale of the security, plus the amount of
the premium on the option, less the commission paid.

The market value of a call option generally reflects the market price of
the underlying security. Other principal factors affecting market value include
supply and demand, interest rates, the price volatility of the underlying
security and the time remaining until the expiration date.

Each of the Stock Funds, Tax-Exempt Funds and Bond Funds will write call
options only on a covered basis, which means that the Fund will own the
underlying security subject to a call option at all times during the option
period. Unless a closing purchase transaction is effected, the Fund would be
required to continue to hold a security which it might otherwise wish to sell,
or deliver a security it would want to hold. Options written by a Fund will
normally have expiration dates between one and nine months from the date
written. The exercise price of a call option may be below, equal to or above
the current market value of the underlying security at the time the option is
written.

A Fund may also purchase put and call options. Put options are purchased
to hedge against a decline in the value of securities held in the Fund's
portfolio. If such a decline occurs, the put options will permit the Fund to
sell the securities underlying such options at the exercise price, or to close
out the options at a profit. The premium paid for a put or a call option plus
any transaction costs will reduce the benefit, if any, realized by the Fund
upon exercise of the option, and, unless the price of the underlying security
rises or declines sufficiently, the option may expire worthless to the Fund. In

<PAGE>

addition, in the event that the price of the security in connection with which
an option was purchased moves in a direction favorable to the Fund, the
benefits realized by the Fund as a result of such favorable movement will be
reduced by the amount of the premium paid for the option and related
transaction costs.

OPTIONS ON FUTURES CONTRACTS

The Funds may, subject to any applicable laws, purchase and write options
on futures contracts for hedging purposes only. The holder of a call option on
a futures contract has the right to purchase the futures contract, and the
holder of a put option on a futures contract has the right to sell the futures
contract, in either case at a fixed exercise price up to a stated expiration
date or, in the case of certain options, on a stated date. Options on futures
contracts, like futures contracts, are traded on contract markets.

The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities deliverable on exercise of the
futures contract. A Fund will receive an option premium when it writes the
call, and, if the price of the futures contract at expiration of the option is
below the option exercise price, the Fund will retain the full amount of this
option premium, which provides a partial hedge against any decline that may
have occurred in the Fund's portfolio holdings. Similarly, the writing of a put
option on a futures contract constitutes a partial hedge against increasing
prices of the securities deliverable upon exercise of the futures contract. If
a Fund writes an option on a futures contract and that option is exercised, the
Fund may incur a loss, which loss will be reduced by the amount of the option
premium received, less related transaction costs. A Fund's ability to hedge
effectively through transactions in options on futures contracts depends on,
among other factors, the degree of correlation between changes in the value of
securities held by the Fund and changes in the value of its futures positions.
This correlation cannot be expected to be exact, and the Fund bears a risk that
the value of the futures contract being hedged will not move in the same
amount, or even in the same direction, as the hedging instrument. Thus it may
be possible for a Fund to incur a loss on both the hedging instrument and the
futures contract being hedged.

The ability of a Fund to engage in options and futures strategies depends
also upon the availability of a liquid market for such instruments; there can
be no assurance that such a liquid market will exist for such instruments.

OPTIONS ON STOCK INDICES

The Stock Funds may engage in transactions involving options on stock
indices. A stock index assigns relative values to the common stocks included in
the index, and the index fluctuates with changes in the market values of the
underlying common stocks. The Funds will not engage in transactions in options
on stock indices for speculative purposes but only to protect appreciation
attained, to offset capital losses and to take advantage of the liquidity
available in the option markets. The aggregate premium paid on all options on
stock indices will not exceed 5 percent of a Fund's total assets.

Options on stock indices are similar to options on stocks but have
different delivery requirements. Stock options provide the right to take or
make delivery of the underlying stock at a specified price. A stock index
option gives the holder the right to receive a cash "exercise settlement
amount" equal to (i) the amount by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of exercise, multiplied by
(ii) a fixed "index multiplier." Receipt of this cash amount will depend upon

<PAGE>

the closing level of the stock index upon which the option is based being
greater than (in the case of a call) or less than (in the case of a put) the
exercise price of the option. The amount of cash received will be equal to such
difference between the closing price of the index and exercise price of the
option expressed in dollars times a specified multiple. The writer of the
option is obligated, in return for the option premium received, to make
delivery of this amount. Gain or loss to a Fund on transactions in stock index
options will depend on price movements in the stock market generally (or in a
particular industry or segment of the market) rather than price movements of
individual securities.

As with stock options, a Fund may offset its position in stock index
options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.

A stock index fluctuates with changes in the market values of the stock
included in the index. Some stock index options are based on a broad market
index such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index, or a narrower market index such as the Standard & Poor's 100.
Indices are also based on an industry or market segment such as the AMEX Oil
and Gas Index or the Computer and Business Equipment Index. Options on stock
indices are currently traded on the following exchanges, among others: The
Chicago Board Options Exchange, New York Stock Exchange and American Stock
Exchange.

A Fund's ability to hedge effectively all or a portion of its securities
through transactions in options on stock indices depends on the degree to which
price movements in the underlying index correlate with price movements in the
securities held by the Fund. Since the Fund will not duplicate all of the
components of an index, the correlation will not be exact. Consequently, the
Fund bears the risk that the prices of the securities being hedged will not
move in the same amount as the hedging instrument. It is also possible that
there may be a negative correlation between the index or other securities
underlying the hedging instrument and the hedged securities which would result
in a loss on both such securities and the hedging instrument.

Positions in stock index options may be closed out only on an exchange
which provides a secondary market. There can be no assurance that a liquid
secondary market will exist for any particular stock index option. Thus, it may
not be possible to close such an option. The inability to close options
positions could have an adverse impact on a Fund's ability to effectively hedge
its securities. The Fund will enter into an option position only if there
appears to the Adviser or an Adviser of such Fund, at the time of investment,
to be a liquid secondary market for such options.

OTHER INVESTMENT COMPANIES

Subject to applicable statutory and regulatory limitations, assets of each
Fund may be invested in shares of other investment companies and foreign
investment trusts. Each Fund may invest up to 5% of its assets in closed-end
investment companies that primarily hold securities of non-U.S. issuers. A
Fund's purchase of investment company securities may result in the duplication
of fees and expenses.

RECEIPTS

Each of the Funds may invest in receipts. Receipts are interests in
separately traded interest and principal component parts of U.S. Treasury
obligations that are issued by banks and brokerage firms and are created by
depositing U.S. Treasury obligations into a special account at a custodian

<PAGE>

bank. The custodian holds the interest and principal payments for the benefit
of the registered owners of the certificates or receipts. Receipts include
Treasury Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs") and
Certificates of Accrual on Treasury Securities ("CATS"). TRs, TIGRs and CATS
are sold as zero coupon securities.

REPURCHASE AGREEMENTS

Each of the Funds may invest in repurchase agreements collateralized by
securities in which that Fund may otherwise invest. Repurchase agreements are
agreements by which a Fund obtains a security and simultaneously commits to
return the security to the seller (a primary securities dealer recognized by
the Federal Reserve Bank of New York or a national member bank as defined in
Section 3(d)(1) of the Federal Deposit Insurance Act, as amended) at an agreed
upon price (including principal and interest) on an agreed upon date within a
number of days (usually not more than seven) from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest which is unrelated to the coupon rate or maturity of the underlying
security. A repurchase agreement involves the obligation of the seller to pay
the agreed upon price, which obligation is in effect secured by the value of
the underlying security. Pursuant to an exemptive order from the Securities and
Exchange Commission, the Funds' may enter into repurchase agreements on a
pooled basis.

Repurchase agreements are considered to be loans by a Fund for purposes of
its investment limitations. The repurchase agreements entered into by the Funds
will provide that the underlying security at all times shall have a value at
least equal to 100 percent of the resale price stated in the agreement; the
Adviser or an Adviser to each Fund will monitor compliance with this
requirement. Under all repurchase agreements entered into by any Fund, the
underlying collateral must be held by the Fund's Custodian or sub-custodian.
However, if the seller under a repurchase agreement defaults, the Fund
investing in that repurchase agreement could realize a loss on the sale of the
underlying security to the extent that the proceeds of the sale (including
accrued interest) are less than the resale price provided in the repurchase
agreement (including interest). In addition, even though the Bankruptcy Code
provides protection for most repurchase agreements, if the seller should be
involved in bankruptcy or insolvency proceedings, a Fund may face delays and
incur costs in selling the underlying security or may suffer a loss of
principal and interest.

RESTRICTED SECURITIES

Restricted securities are securities that may not be sold to the public
without registration under the Securities Act of 1933 (the "1933 Act") absent
an exemption from registration. Boston 1784 Prime Money Market Fund, Boston
1784 Institutional Prime Money Market Fund, each Stock Fund and each Bond Fund
may invest up to 20 percent of its total assets in restricted securities
provided it is determined by the Adviser or an Adviser to that Fund that at the
time of investment such securities are not illiquid (generally, an illiquid
security is one that cannot be disposed of within seven days in the ordinary
course of business at its full value), based on guidelines which are the
responsibility of and are periodically reviewed by the Board of Trustees. Under
these guidelines, the Adviser or an Adviser will consider the frequency of
trades and quotes for the security, the number of dealers in, and potential
purchasers for, the securities, dealer undertakings to make a market in the
security, and the nature of the security and of the marketplace trades. In
purchasing such restricted securities, the intention of the Adviser or an
Adviser is to rely upon the exemption from registration provided by Rule 144A
promulgated under the 1933 Act. Restricted securities not determined to be
liquid may be purchased subject to each Fund's limitation on all illiquid
securities (15 percent of net assets for each Stock, Bond and Tax-Exempt Fund
and 10 percent for each Money Market Fund).

<PAGE>

A Fund may purchase restricted securities that are not registered for sale
to the general public if it is determined that there is a dealer or
institutional market in the securities. In that case, the securities will not
be treated as illiquid for purposes of the Fund's investment limitation
described above. The Trustees will review these determinations. These
securities are known as "Rule 144A securities" because they are traded under
SEC Rule 144A among qualified institutional buyers.

REVERSE REPURCHASE AGREEMENTS

Each of the Funds may enter into reverse repurchase agreements. Reverse
repurchase agreements involve the sale of securities held by a Fund and the
agreement by the Fund to repurchase the securities at an agreed-upon price,
date and interest payment. When a Fund enters into reverse repurchase
transactions, securities of a dollar amount equal in value to the securities
subject to the agreement will be maintained in a segregated account with the
Fund's custodian. The segregation of assets could impair the Fund's ability to
meet its current obligations or impede investment management if a large portion
of the Fund's assets are involved. Reverse repurchase agreements are considered
to be a form of borrowing. In the event of the bankruptcy of the other party to
a reverse repurchase agreement, a Fund could experience delays in recovering
the securities sold. To the extent that, in the meantime, the value of the
securities sold has increased, the Fund could experience a loss.

SECURITIES LENDING

Each Fund may lend securities pursuant to agreements requiring that the
loans be continuously secured by cash, securities of the U.S. government or its
agencies, or any combination of cash and such securities, as collateral equal
to 100% of the market value at all times of the securities lent. Such loans
will not be made if, as a result, the aggregate amount of all outstanding
securities loans for the Fund exceed one-third of a Fund's total assets. A Fund
will continue to receive interest or dividends on the securities lent while
simultaneously earning interest on the investment of the cash collateral in
U.S. government securities. However, a Fund will normally pay a rebate to the
borrowers and related expenses from the interest earned on invested collateral.
There may be risks of delay in receiving additional collateral or risks of
delay in recovery of the securities or even loss of rights in the collateral
should the borrower of the securities fail financially. However, loans are made
only to borrowers deemed by the Adviser or an Adviser to a Fund to be of good
standing and when, in the judgment of the Adviser, the consideration which can
be earned currently from such securities loans justifies the attendant risk.
Any loan may be terminated by either party upon reasonable notice to the other
party. When a loan is terminated, the Fund must return the collateral received,
and the liquidation of any investments made with cash collateral may result in
a loss to the Fund. A Fund may use the Distributor or a broker/dealer affiliate
of an Adviser as a borrower or lending agent in these transactions.

SECURITIES RATED BAA OR BBB

Each of the Funds may purchase securities rated Baa by Moody's or BBB by
Standard & Poor's which may have poor protection of payment of principal and
interest.

<PAGE>

STRIPS

Each of the Funds may invest in Separately Traded Interest and Principal
Securities ("STRIPS"), which are component parts of U.S. Treasury Securities
traded through the Federal Reserve Book-Entry System. The Adviser or an Adviser
to a Fund will purchase only those STRIPS that it determines or they determine
are liquid or, if illiquid, do not violate such Fund's investment policy
concerning investments in illiquid securities. Consistent with Rule 2a-7,
BankBoston, as the Adviser to the Money Market Funds, will purchase for Money
Market Funds only those STRIPS that have a remaining maturity of 397 days or
less. No Money Market Fund may invest more than 5 percent of its total assets
in STRIPS. While there is no limitation on the percentage of any other Fund's
assets that may be comprised of STRIPS, the Adviser or Advisers to each Fund
will monitor the level of such holdings to avoid the risk of impairing
shareholders' redemption rights. The interest-only component is extremely
sensitive to the rate of principal payments on the underlying obligation. The
market value of the principal-only component generally is unusually volatile in
response to changes in interest rates.

TAX-EXEMPT SECURITIES

MUNICIPAL NOTES AND BONDS

Boston 1784 Tax-Free Money Market Fund, Boston 1784 Prime Money Market
Fund, Boston 1784 Institutional Prime Money Market Fund, Boston 1784 Short-Term
Income Fund, Boston 1784 Income Fund and each of the Tax-Exempt Funds may
invest in municipal notes, which include but are not limited to general
obligation notes, tax anticipation notes (notes sold to finance working capital
needs of the issuer in anticipation of receiving taxes on a future date),
revenue anticipation notes (notes sold to provide needed cash prior to receipt
of expected non-tax revenues from a specific source), bond anticipation notes,
certificates of indebtedness, demand notes and construction loan notes. A
Fund's investment in any of the notes described above will be limited to those
obligations which are rated (i) MIG-2 or VMIG-2 or better at the time of
investment by Moody's, (ii) SP-2 or better at the time of investment by S&P, or
(iii) F-2 or better at the time of investment by Fitch IBCA, or which, if not
rated by Moody's, S&P or Fitch IBCA, are of at least comparable quality, as
determined by the Adviser to the Fund. Municipal bonds, in which these same
Funds may invest, must be rated AA or better by S&P or Fitch IBCA (BBB or
better for the Tax-Exempt Funds, Short Term Income Fund and Income Fund) or Aa
or better by Moody's (Baa or better for the Tax-Exempt Funds, Short Term Income
Fund and Income Fund) at the time of investment or, if not rated by Moody's,
S&P or Fitch IBCA, must be determined by the Adviser to the Funds to have
essentially the same characteristics and quality as bonds having the above
ratings. Bonds rated BBB by S&P or Fitch IBCA or Baa by Moody's may have
speculative characteristics. The Adviser to these Funds may purchase industrial
development and pollution control bonds for these Funds if the interest paid
thereon is exempt from federal income tax. These bonds are issued by or on
behalf of public authorities to raise money to finance various
privately-operated facilities for business and manufacturing, housing, sports,
and pollution control. These bonds may also be used to finance public
facilities such as airports, mass transit systems, ports, and parking. The
payment of the principal and interest on such bonds is dependent solely on the
ability of the facility's user to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment.

Municipal securities also include participations in municipal leases.
These are undivided interests in a portion of an obligation in the form of a
lease or installment purchase issued by a state or local government to acquire

<PAGE>

equipment or facilities. Municipal leases frequently have special risks not
normally associated with general obligation bonds or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title to the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by
the appropriate legislative body on a yearly or other periodic basis. Although
the obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or foreclosure
might, in some cases, prove difficult. In light of these concerns, the Trust
has adopted and follows procedures for determining whether municipal lease
securities purchased by a Fund are liquid and for monitoring the liquidity of
municipal lease securities held in the Fund's portfolio. The procedures require
that a number of factors be used in evaluating the liquidity of a municipal
lease security, including the frequency of trades and quotes for the security,
the number of dealers willing to purchase or sell the security and the number
of other potential purchasers, the willingness of dealers to undertake to make
a market in the security, the nature of the marketplace in which the security
trades, the credit quality of the security, and other factors which the Adviser
to the Fund may deem relevant.

TAX-EXEMPT COMMERCIAL PAPER in which a Tax-Exempt Fund, Boston 1784
Tax-Free Money Market, Boston 1784 Prime Money Market Fund and Boston 1784
Institutional Prime Money Market Fund may invest will be limited to investments
in obligations which are rated at least A-2 by S&P, Prime-2 by Moody's, or F-2
by Fitch IBCA, at the time of investment or which are of comparable quality as
determined by the Adviser to the Fund.

Each of the Tax-Exempt Funds, Boston 1784 Tax-Free Money Market Fund,
Boston 1784 Prime Money Market Fund and Boston 1784 Institutional Prime Money
Market Fund may invest in FLOATING RATE NOTES. Investments in such floating
rate instruments will normally involve industrial development or revenue (now
known as "private activity") bonds which provide that the rate of interest is
set as a specific percentage of a designated base rate (such as the prime rate)
at a major commercial bank, and that a Fund can demand payment of the
obligation at all times or at stipulated dates on short notice (not to exceed
30 days) at par plus accrued interest. For purposes of determining the maturity
of these obligations, the Fund may use the longer of (a) the period required
before the Fund is entitled to prepayment under such obligations or (b) the
period remaining until the next interest rate adjustment date. Such obligations
are frequently secured by letters of credit or other credit support
arrangements provided by banks. The quality of the underlying credit or of the
bank, as the case may be, must in the Fund Adviser's opinion be equivalent to
the long-term bond or commercial paper ratings on securities in which the Fund
may invest. The Adviser to the Fund will monitor the earning power, cash flow
and liquidity ratios of the issuers of floating rate instruments and the
ability of an issuer of a demand instrument to pay principal and interest on
demand. The Adviser to the Fund may also purchase other types of tax-exempt
instruments for these Funds as long as they are of a quality equivalent to the
bonds or commercial paper in which these Funds may invest.

STANDBY COMMITMENTS

Funds investing in municipal securities may acquire such securities
subject to a "standby commitment". The Adviser to these Funds has the authority
to purchase for these Funds securities at a price which would result in a yield
to maturity lower than that generally offered by the seller at the time of

<PAGE>

purchase when they can simultaneously acquire the right to sell the securities
back to the seller, the issuer, or a third party (the "writer") at an
agreed-upon price at any time during a stated period or on a certain date. Such
a right is generally denoted as a "standby commitment" or a "put". The purpose
of engaging in transactions involving puts is to maintain flexibility and
liquidity to permit the Fund to meet redemptions and remain as fully invested
as possible in municipal securities. The Funds reserve their right to engage in
put transactions. The right to put the securities depends on the writer's
ability to pay for the securities at the time the put is exercised. Each Fund
would limit its put transactions to institutions which the Adviser to such Fund
believes present minimum credit risks. Each Adviser would use its best efforts
initially to determine and to continue to monitor the financial strength of the
sellers of the options by evaluating their financial statements and such other
information as is available in the marketplace. It may, however, be difficult
to monitor the financial strength of the writers because adequate current
financial information may not be available. In the event that any writer is
unable to honor a put for financial reasons, the Fund would be a general
creditor (i.e., on a parity with all other unsecured creditors) of the writer.
Furthermore, particular provisions of the contract between the Fund and the
writer may excuse the writer from repurchasing the securities; for example, a
change in the published rating of the underlying municipal securities or any
similar event that has an adverse effect on the issuer's credit or a provision
in the contract that the put will not be exercised except in certain special
cases, for example, to maintain fund liquidity. The Fund could, however, at any
time sell the underlying security in the open market or wait until the security
matures, at which time it should realize the full par value of the security.

Municipal securities purchased subject to a put may be sold to third
persons at any time, even though the put is outstanding, but the put itself,
unless it is an integral part of the security as originally issued, may not be
marketable or otherwise assignable. Therefore, the put would have value only to
the Fund. Sale of the securities to third parties or lapse of time with the put
unexercised may terminate the right to put the securities. Prior to the
expiration of any put option, the Fund could seek to negotiate terms for the
extension of such an option. If such a renewal cannot be negotiated on terms
satisfactory to the Fund, the Fund could, of course, sell the security. The
maturity of the underlying security will generally be different from that of
the put. There will be no limit to the percentage of Fund securities that a
Fund may purchase subject to puts but the amount paid directly or indirectly
for puts which are not integral parts of a security as originally issued held
in a Fund will not exceed 1/2 of 1 percent of the value of the total assets of
such Fund calculated immediately after any such put is acquired.

For the purpose of determining the "maturity" of securities purchased
subject to an option to put, and for the purpose of determining the
dollar-weighted average maturity of a Fund including such securities,
"maturity" will be considered to be the first date on which the Fund has the
right to demand payment from the writer of the put although the final maturity
of the security is later than such date.

TIME DEPOSITS

Each of the Funds may invest in time deposits. A time deposit is a
non-negotiable receipt issued by a bank in exchange for the deposit of funds.
Like a certificate of deposit, it earns a specified rate of interest over a
definite period of time; however, it cannot be traded in the secondary market.
Time deposits with a withdrawal penalty are considered to be illiquid
securities.

<PAGE>

VARIABLE AMOUNT MASTER DEMAND NOTES

Each Fund (other than Boston 1784 Institutional U.S. Treasury Money Market
Fund and Boston 1784 U.S. Treasury Money Market Fund) may invest in variable
amount master demand notes which may or may not be backed by bank letters of
credit. These notes permit the investment of fluctuating amounts at varying
market rates of interest pursuant to direct arrangements between the Trust, as
lender, on behalf of a Fund and the borrower. Such notes provide that the
interest rate on the amount outstanding varies on a daily, weekly or monthly
basis depending upon a stated short-term interest rate index. Both the lender
and the borrower have the right to reduce the amount of outstanding
indebtedness at any time. There is no secondary market for the notes. It is not
generally contemplated that such instruments will be traded.

WARRANTS

A warrant is an instrument issued by a corporation which gives the holder
the right to subscribe to a specified amount of the corporation's capital stock
at a set price for a specified period of time. Each of the Stock Funds may
invest up to 5% of its net assets in warrants. Included in this limitation, but
not to exceed 2% of the Fund's net assets, may be warrants not listed on the
New York Stock Exchange or American Stock Exchange. The Short-Term Income Fund
and Income Fund may each invest in warrants in an amount not exceeding 2% of
its net assets, except that this limitation does not apply to warrants acquired
in units or attached to securities. Such warrants may not be listed on the New
York Stock Exchange or American Stock Exchange.

ZERO COUPON SECURITIES

Each of the Funds may invest in zero coupon securities. A zero coupon
security pays no interest or principal to its holder during its life. A zero
coupon security is sold at a discount, frequently substantial, and redeemed at
face value at its maturity date. The market prices of zero coupon securities
are generally more volatile than the market prices of securities of similar
maturity that pay interest periodically, and zero coupon securities are likely
to react more to interest rate changes than non-zero coupon securities with
similar maturity and credit qualities.

FUND POLICIES

FUNDAMENTAL POLICIES

The following are fundamental policies of each of the Funds and may not be
changed with respect to any Fund without approval by holders of a majority of
the outstanding voting securities of that Fund, which as used in this Statement
of Additional Information means the vote of the lesser of (i) 67 percent or
more of the outstanding voting securities of the Fund present at a meeting at
which the holders of more than 50 percent of the outstanding voting securities
of the Fund are present or represented by proxy, or (ii) more than 50 percent
of the outstanding voting securities of the Fund. The term "voting securities"
as used in this paragraph has the same meaning as in the Investment Company Act
of 1940, as amended (the "1940 Act").

1. A Fund may not purchase any securities which would cause more than 25
percent of the total assets of the Fund to be invested in the securities
of one or more issuers conducting their principal business activities in

<PAGE>

the same industry. This limitation does not apply to investments in
obligations issued or guaranteed by the U.S. Government or its agencies
and instrumentalities and repurchase agreements involving such securities
and, for each of the Money Market Funds, to investments in obligations
issued by domestic banks, foreign branches of domestic banks and U.S.
branches of foreign banks, to the extent that a Fund may under the 1940
Act, reserve freedom of action to concentrate its investments in such
securities, and in the case of Boston 1784 Tax-Free Money Market Fund,
tax-exempt securities issued by governments or political subdivisions of
governments. Each of the Money Market Funds has reserved its freedom of
action to concentrate its investments in government securities and bank
instruments described in the foregoing sentence. This limitation also does
not apply to an investment of all of the investable assets of each of
Boston 1784 Prime Money Market Fund, Boston 1784 Institutional Prime Money
Market Fund, Boston 1784 Florida Tax-Exempt Income Fund, Boston 1784
Growth Fund and Boston 1784 International Equity Fund in a diversified,
open-end management investment company having the same investment
objective and policies and substantially the same investment restrictions
as those applicable to such Fund (in each case, a "Qualifying Portfolio").
For purposes of this limitation, (i) utility companies will be divided
according to their services; for example, gas, gas transmission, electric
and telephone will each be considered a separate industry; (ii) financial
service companies will be classified according to the end users of their
services; for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; (iii) supranational
entities will be considered to be a separate industry; and (iv) loan
participations are considered to be issued by both the issuing bank and
the underlying corporate borrower.

2. A Fund may not make loans, except that a Fund may (a) purchase or hold
debt instruments in accordance with its investment objective and policies;
(b) enter into repurchase agreements; and (c) engage in securities lending
as described in the Prospectuses and in this Statement of Additional
Information.

3. A Fund may not acquire more than 10 percent of the voting securities of
any one issuer (except securities issued or guaranteed by the United
States, its agencies or instrumentalities and repurchase agreements
involving such securities) or invest more than 5 percent of the total
assets of the Fund in the securities of an issuer (except securities
issued or guaranteed by the United States, its agencies or
instrumentalities and repurchase agreements involving such securities);
provided, that (a) the foregoing limitation shall not apply to Boston 1784
Massachusetts Tax-Exempt Income Fund, Boston 1784 Connecticut Tax-Exempt
Income Fund, Boston 1784 Rhode Island Tax-Exempt Income Fund or Boston
1784 Florida Tax-Exempt Income Fund; (b) the foregoing limitation shall
not apply to 25 percent of the total assets of each of the Stock Funds,
Bond Funds, Boston 1784 Tax-Exempt Medium-Term Income Fund, Boston 1784
Tax-Free Money Market Fund, Boston 1784 Prime Money Market Fund or Boston
1784 Institutional Prime Money Market Fund; and (c) the foregoing
limitation does not apply to an investment of all of the investable assets
of Boston 1784 Prime Money Market Fund, Boston 1784 Institutional Prime
Money Market Fund, Boston 1784 Florida Tax-Exempt Income Fund, Boston 1784
Growth Fund, or Boston 1784 International Equity Fund in a Qualifying
Portfolio.

4. A Fund may not invest in companies for the purpose of exercising control.

5. A Fund may not borrow, except that a Fund may borrow money from banks and
may enter into reverse repurchase agreements, in either case in an amount
not to exceed 33-1/3 percent of that Fund's total assets and then only as

<PAGE>

a temporary measure for extraordinary or emergency purposes (which may
include the need to meet shareholder redemption requests). This borrowing
provision is included solely to facilitate the orderly sale of Fund
securities to accommodate heavy redemption requests if they should occur
and is not for investment purposes. A Fund will not purchase any
securities for its portfolio at any time at which its borrowings equal or
exceed 5 percent of its total assets (taken at market value), and any
interest paid on such borrowings will reduce income.

6. In the case of Boston 1784 Asset Allocation Fund, Boston 1784 Growth and
Income Fund, Money Market Funds (other than Boston 1784 Prime Money Market
Fund and Boston 1784 Institutional Prime Money Market Fund), Boston 1784
U.S. Government Medium-Term Income Fund, Boston 1784 Tax-Exempt
Medium-Term Income Fund and Boston 1784 Massachusetts Tax-Exempt Income
Fund, such a Fund may not pledge, mortgage or hypothecate assets except to
secure temporary borrowings permitted by (5) above in aggregate amounts
not to exceed 10 percent of total assets taken at current value at the
time of the incurrence of such loan, except as permitted with respect to
securities lending.

7. A Fund may not purchase or sell real estate, including real estate limited
partnership interests, commodities and commodities contracts, but
excluding interests in a pool of securities that are secured by interests
in real estate. However, subject to its permitted investments, any Fund
may invest in companies which invest in real estate commodities or
commodities contracts. Each of the Funds may invest in futures contracts
and options thereon to the extent described in the Prospectuses and
elsewhere in this Statement of Additional Information.

8. A Fund may not make short sales of securities, maintain a short position
or purchase securities on margin, except that the Trust may obtain
short-term credits as necessary for the clearance of security
transactions.

9. A Fund may not act as an underwriter of securities of other issuers,
except as it may be deemed an underwriter under federal securities laws in
selling a security held by the Fund.

10. A Fund may not purchase securities of other investment companies except as
permitted by the 1940 Act and the rules and regulations thereunder. Under
these rules and regulations, each of the Funds is prohibited, subject to
certain exceptions, from acquiring the securities of other investment
companies if, as a result of such acquisition, (a) such Fund owns more
than 3 percent of the total voting stock of the company; (b) securities
issued by any one investment company represent more than 5 percent of the
total assets of such Fund; or (c) securities (other than treasury stock)
issued by all investment companies represent more than 10 percent of the
total assets of such Fund, provided, that with respect to the Boston 1784
Prime Money Market Fund, Boston 1784 Institutional Prime Money Market
Fund, Boston 1784 Florida Tax-Exempt Income Fund, Boston 1784 Growth Fund
and Boston 1784 International Equity Fund, the limitations do not apply to
an investment of all of the investable assets of such Fund in a Qualifying
Portfolio. These investment companies typically incur fees that are
separate from those fees incurred directly by a Fund. A Fund's purchase of
such investment company securities results in the layering of expenses,
such that shareholders would indirectly bear a proportionate share of the
operating expenses of such investment companies, including advisory fees.

<PAGE>

The Funds have obtained an exemptive order from the Securities and
Exchange Commission which permits the Funds (other than the Money Market
Funds) to purchase shares of one or more affiliated investment companies
that are money market funds, subject to certain conditions contained in
the application for such exemptive order.

It is the position of the Securities and Exchange Commission's Staff that
certain non-governmental issuers of CMOs and REMICs constitute investment
companies pursuant to the 1940 Act and either (a) investments in such
instruments are subject to the limitations set forth above or (b) the
issuers of such instruments have received orders from the Securities and
Exchange Commission exempting such instruments from the definition of
investment company.

11. A Fund may not issue senior securities (as defined in the 1940 Act) except
in connection with permitted borrowings as described above or as permitted
by rule, regulation or order of the Securities and Exchange Commission.

12. A Fund may not write or purchase puts, calls, or other options or
combinations thereof, except that each Fund may write covered call options
with respect to any or all of the securities it holds, subject to any
limitations described in the Prospectuses or elsewhere in this Statement
of Additional Information and each Fund may purchase and sell other
options as described in the Prospectuses.

NON-FUNDAMENTAL POLICIES

The following policies are not fundamental and may be changed with respect
to any Fund without approval by the shareholders of that Fund:

No Fund may invest in warrants, except that (i) each of the Stock Funds
may invest in warrants in an amount not exceeding 5 percent of the Fund's net
assets as valued at the lower of cost or market value; included in these
amounts, but not to exceed 2 percent of the Fund's net assets, may be warrants
not listed on the New York Stock Exchange or American Stock Exchange; and (ii)
Boston 1784 Short-Term Income Fund and Boston 1784 Income Fund may each invest
in warrants in an amount not exceeding 2 percent of its net assets; this
limitation does not apply to warrants acquired in units or attached to
securities. Such warrants may not be listed on the New York Stock Exchange or
American Stock Exchange.

No Fund may invest in illiquid securities in an amount exceeding, in the
aggregate, 15 percent of that Fund's net assets (10 percent for Money Market
Funds), provided that this limitation does not apply to an investment of all of
the investable assets of the Boston 1784 Prime Money Market Fund, Boston 1784
Institutional Prime Money Market Fund, Boston 1784 Florida Tax-Exempt Income
Fund, Boston 1784 Growth Fund, or Boston 1784 International Equity Fund in a
Qualifying Portfolio. The foregoing limitation does not apply to restricted
securities, including those issued pursuant to Rule 144A under the 1933 Act, if
it is determined by or under procedures established by the Board of Trustees of
the Trust that, based on trading markets for the specific restricted security
in question, such security is not illiquid.

No Fund may purchase or retain securities of an issuer if, to the
knowledge of the Trust, an officer, trustee, partner or director of the Trust
or any investment adviser of the Trust owns beneficially more than 1/2 of 1
percent of the shares or securities of such issuer and all such officers,
trustees, partners and directors owning more than 1/2 of 1 percent of such
shares or securities together own more than 5 percent of such shares or
securities.

<PAGE>

No Fund may invest in interests in oil, gas or other mineral exploration
or development programs. No Fund may invest in oil, gas or mineral leases.

No Fund may purchase securities of any company which has (with
predecessors) a record of less than 3 years continuing operations if as a
result more than 5 percent of total assets (taken at fair market value) of the
Fund would be invested in such securities, except that the foregoing limitation
shall not apply to (a) obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities; (b) municipal securities which are rated by
at least one nationally-recognized bond rating service; or (c) an investment of
all of the investable assets of the Boston 1784 Prime Money Market Fund, Boston
1784 Institutional Prime Money Market Fund, Boston 1784 Florida Tax-Exempt
Income Fund, Boston 1784 Growth Fund, or Boston 1784 International Equity Fund
in a Qualifying Portfolio.

The foregoing percentages will apply at the time of the purchase of a security
and shall not be considered violated unless an excess occurs or exists
immediately after and as a result of a purchase of such security.

TEMPORARY DEFENSIVE POSITION

During periods of unusual economic or market conditions or for temporary
defensive purposes or liquidity, each Fund may invest without limit in cash and
in U.S. dollar-denominated high quality money market and short-term
instruments. These investments may result in a lower yield than would be
available from investments with a lower quality or longer term.

PORTFOLIO TURNOVER

Set forth below are the portfolio turnover rates for each of the Funds
(with the exception of the money market funds) for the fiscal years indicated.
A rate of 100% indicates that the equivalent of all of the Fund's assets have
been sold and reinvested in a year. The amount of brokerage commissions will
tend to increase as the level of portfolio activity increases. 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.

<PAGE>

<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------------------------------------------

Portfolio Turnover Rates Portfolio Turnover
Fund 1997 Rates 1998
- ------------------------------------------------------------------------------------------

Boston 1784 Short-Term Income Fund 128.11% 83.84%

Boston 1784 Income Fund 78.63% 79.09%

Boston 1784 U.S. Government
Medium-Term Income Fund 98.22% 73.65%

Boston 1784 Tax-Exempt Medium
Term Income Fund 33.24% 34.06%

Boston 1784 Connecticut Tax-
Exempt Income Fund 4.28% 16.81%

Boston 1784 Florida Tax-Exempt
Income Fund(1) 2.90% 21.35%

Boston 1784 Massachusetts Tax-
Exempt Fund 9.47% 6.45%

Boston 1784 Rhode Island Tax-
Exempt Income Fund 8.18% 13.79%
- ------------------------------------------------------------------------------------------

Boston 1784 Asset Allocation Fund 23.60% 47.83%

Boston 1784 Growth and Income
Fund 15.35% 39.03%

Boston 1784 Growth Fund 57.46% 48.60%

Boston 1784 International Equity
Fund(2) 22.88% 103.47%
- ------------------------------------------------------------------------------------------
</TABLE>

(1) The Florida Tax-Exempt Income Fund commenced operations on June 30, 1997.
(2) The turnover rate for International Equity Fund increased significantly
during the Fund's last fiscal year due primarily to a change in approach in the
management of the emerging markets sector of the Fund's portfolio and the
collapse of certain Asian economies during the period.

3. MANAGEMENT

TRUSTEES

The management and affairs of the Trust are supervised by the Trustees
under the laws of the Commonwealth of Massachusetts. Subject to the provisions
of the Declaration of Trust, the business of the Trust shall be managed by the
Trustees, and they shall have all powers necessary or convenient to carry out
that responsibility.

<PAGE>

MANAGEMENT INFORMATION

The Trustees and executive officers of the Trust and their principal
occupations during the past five years are set forth below. Their titles may
have varied during that period. An asterisk indicates a Trustee who may be
deemed to be an "interested person" (as defined in the 1940 Act) of the Trust.

<TABLE>
<CAPTION>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------
Position(s)
Held with Principal Occupation(s) During Past
Name, Address, and Age Trust 5 Years
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
DAVID H. CARTER Trustee Main Board Director, Touche
(date of birth March 21, 1933) Remnant & Co. (investment advisor),
Tochenham Farm, Wootton Bassett 1982-1988; Managing Director,
Wiltshire SN47PB Bearbull (UK) Ltd., London
England (investment advisor), 1988-January
1993.
- ---------------------------------------------------------------------------------------------
TARRANT CUTLER Trustee Senior Executive Vice President,
(date of birth June 12, 1926) Massachusetts Financial Services
5 Masconomo Street Company, retired in 1991.
Manchester, Massachusetts 01944
- ---------------------------------------------------------------------------------------------
KENNETH A. FROOT Trustee The Industrial Bank of Japan
(date of birth July 5, 1957) Professor of Finance and Director of
Harvard University Graduate Research, Harvard University
School of Business, Boston, Graduate School of Business, since
Massachusetts 02163 1993; Thomas Henry Carroll-Ford
Visiting Professor of Business
Administration, Harvard University
Graduate School of Business, 1991-
1993;Associate Professor of
Management with Tenure, Sloan
School of Management,
Massachusetts Institute of
Technology,1991-May 1992; Ford
International Development Chair,
Sloan School, 1987-1990; Research
Associate, National Bureau of
Economic Research,1990-present.
- ---------------------------------------------------------------------------------------------
SARA L. JOHNSON Trustee Chief Regional Economist (since
(date of birth November 16, 1951) 1995) and principal (since 1992),
30 Eaton Court, Wellesley Hills, Director of Regional Forecasting,
Massachusetts 02181 Managing Economist for Regional
Information Group's Eastern Regions
(1988-1991) and Senior Economist,
U.S. Economic Service (1983-1988),
DRI/McGraw Hill; formerly, Trustee
of BayFunds.
- ---------------------------------------------------------------------------------------------

<PAGE>

- ---------------------------------------------------------------------------------------------
KATHRYN FLACKE MUNCIL Trustee Chief Financial Officer, Fort William
(date of birth November 30, 1958) Henry Corporation, since 1993;
c/o Fort William Henry Treasurer, Spaulding Investment
Corporation, 48 Canada Street, Company (real estate development,
Lake George, New York 12845 investment and property
management), 1985-1993.
- ---------------------------------------------------------------------------------------------
*ROBERT A. NESHER President & Mr. Nesher currently performs
(date of birth August 17, 1946) Chief various services on behalf of SEI for
1 Freedom Valley Drive, Oaks, Executive which he is compensated. Director
Pennsylvania 19456 Officer and Executive Vice President of SEI
1986 to July 1994. Director and
Executive Vice President of the
Administrator and Distributor 1981
to July 1994.
- ---------------------------------------------------------------------------------------------
ALVIN J. SILK Trustee Co-Chairman, Marketing Area and
(date of birth December 31, 1935) Lincoln Filene Professor of Business
Graduate School of Business Administration, Graduate School of
Administration, Harvard Business Administration, Harvard
University, Soldiers Field Road, University (1988-present); formerly,
Boston, Massachusetts 02163 Trustee of BayFunds; formerly,
Erwin H. Schell Professor of
Management, Sloan School of
Management,Massachusetts
Institute of Technology;formerly,
Director,BayBank Systems, Inc.;
Trustee, Marketing Science Institute;
Director, Reed and Barton, Inc.
- ---------------------------------------------------------------------------------------------
TODD CIPPERMAN Vice Vice President and Assistant
(date of birth February 14, 1966) President & Secretary of SEI, the Administrator
1 Freedom Valley Drive, Oaks, Assistant and the Distributor since 1995.
Pennsylvania 19456 Secretary Associate, Dewey Ballantine (law
firm)(1994-1995). Associate,
Winston & Strawn (law firm)(1991-
1994).
- ---------------------------------------------------------------------------------------------
ROGER P. JOSEPH Secretary Partner, Bingham Dana LLP,
(date of birth October 3, 1951) counsel to the Trust, since 1983.
150 Federal Street, Boston,
Massachusetts 02110
- ---------------------------------------------------------------------------------------------
STEPHEN G. MEYER Controller Vice President and Controller, Chief
(date of birth July 12, 1965) Accounting Officer of SEI since 1992
1 Freedom Valley Drive, Oaks, (date of birth July 12, 1965). Senior
Pennsylvania 19456 Associate, Coopers & Lybrand L.L.P.
from 1990 to 1992. Internal Audit,
Vanguard Group of Investments
prior to 1990.
- ---------------------------------------------------------------------------------------------

<PAGE>

- ---------------------------------------------------------------------------------------------
JOSEPH O'DONNELL Vice Vice President of the Administrator
(date of birth November 13, 1954) President & and the Distributor since 1998. Vice
1 Freedom Valley Drive, Oaks, Assistant President and General Counsel of
Pennsylvania 19456 Secretary FPS Services Inc. from 1995-1998.
Secretary,Staff Counsel and
Compliance Administrator,
Provident Mutual Family of Funds,
1989-1993.
- ---------------------------------------------------------------------------------------------
SANDRA K. ORLOW Vice Vice President and Assistant
(date of birth October 18, 1953) President & Secretary of the Administrator and
1 Freedom Valley Drive, Oaks, Assistant Distributor since 1983.
Pennsylvania 19456 Secretary
- ---------------------------------------------------------------------------------------------
KEVIN P. ROBINS Vice Senior Vice President of SEI, the
(date of birth April 15, 1961) President & Administrator and the Distributor,
1 Freedom Valley Drive, Oaks, Assistant since 1994. Vice President of SEI,
Pennsylvania 19456 Secretary the Administrator and the
Distributor, from 1991 to 1994. Vice
President of SEI, the Administrator
and the Distributor, from 1992 to
1994. Associate, Morgan, Lewis &
Bockius (law firm) prior to 1992.
- ---------------------------------------------------------------------------------------------
JAMES R. FOGGO Vice Vice President and Assistant
(date of birth June 30, 1964) President & Secretary of the Administrator and
Assistant the Distributor since 1998.
Secretary Associate, Paul Weiss, Rifkind,
Wharton & Garrison (law firm),
1998. Associate, Baker & McKenzie
(law firm), 1998-1995. Associate,
Battle & Fowler, LLP (law firm),
1993-1995. Operations Manager,
The Shareholder Services Group,
Inc., 1986-1990.
- ---------------------------------------------------------------------------------------------
KATHY HELIG Vice Treasurer of SEI since 1997; Vice
(date of birth December 21, 1958) President & President of SEI since 1991; Director
Assistant of Taxes of SEI, 1987-1991. Tax
Secretary Manager, Arthur Anderson L.L.P.
prior to 1987.
- ---------------------------------------------------------------------------------------------
LYNDA J. STRIGEL Vice Vice President and Assistant
(date of birth October 30, 1948) President & Secretary of the Administrator and
Assistant the Distributor since 1998. Senior
Secretary Asset Management Counsel, Barnett
Banks, Inc., 1997-1998. Partner,
Groom and Nordberg, Chartered,
1996-1997. Associate General
Counsel, Riggs Bank, N.A., 1991-
1995.
- ---------------------------------------------------------------------------------------------
LYDIA A. GARVALIS Vice Vice President and Assistant
(date of birth June 5, 1964) President & Secretary of the Administrator and
Assistant the Distributor since 1998. Assistant
Secretary General Counsel and Director of
Arbitration, Philadelphia Stock
Exchange, 1989-1998.
- -------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

COMPENSATION

The following table sets forth certain information regarding the
compensation of the Trust's Trustees for the fiscal year ended May 31, 1998.

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Pension or Total
Retirement Estimated Compensation
Aggregate Benefits Accrued Annual Benefits from the Trust
Compensation as Part of Fund Upon and the Funds
Name of Trustee from the Trust Expenses Retirement Paid to Trustee
- -----------------------------------------------------------------------------------------------

David H. Carter $29,000 $0 $0 $29,000
Tarrant Cutler 29,000 0 0 29,000
Kenneth A. Froot 29,000 0 0 29,000
Sara L. Johnson 29,000 0 0 29,000
Kathryn F. Muncil 29,000 0 0 29,000
Robert A. Nesher 0 0 0 0
Alvin J. Silk 29,000 0 0 29,000

</TABLE>

The Officers of the Trust receive no compensation from the Trust for
serving in such capacity. Compensation of officers and Trustees of the Trust
who are employed by the Administrator is paid by the Administrator.

The Declaration of Trust provides that the Trust will indemnify its
Trustees and officers as described below under "Trustee and Shareholder
Liability--Limitation of Trustees' Liability".

4. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

PRINCIPAL HOLDERS

As of December 31, 1998, all Trustees and officers of the Trust as a group
owned less than 1% percent of each Fund's outstanding shares. The Trust pays
the fees for unaffiliated Trustees.

As of December 31, 1998, Berkshire Realty Enterprise LP, One Beacon
Street, 14th Floor, Boston, MA 02108-3107, owned of record 5.95% of the
outstanding shares of Boston 1784 Institutional Prime Money Market Fund.

As of December 31, 1998, Calton, Inc., 500 Craig Road, Manalapan, NJ
07726, owned of record 7.43% of the outstanding shares of Boston 1784
Institutional Prime Money Market Fund.

As of December 31, 1998, Corelink Financial Inc., 1855 Gateway Blvd. Suite
750, Concord, CA 94520-3290, owned of record 5.31% of the outstanding shares of
Boston 1784 Growth Fund.

<PAGE>

As of December 31, 1998, National Financial Services Corp., P.O. Box 3908
Church Street Station, New York, NY 10008-3908, owned of record the following
percentages of the outstanding shares of the following Funds:

Boston 1784 Tax-Free Money Market Fund - 5.21%
Boston 1784 U.S. Treasury Money Market Fund - 19.58%
Boston 1784 Prime Money Market Fund - 12.57%
Boston 1784 Short-Term Income Fund - 5.88%
Boston 1784 Massachusetts Tax-Exempt Income Fund - 16.76%
Boston 1784 Rhode Island Tax-Exempt Income Fund - 8.68%
Boston 1784 Asset Allocation Fund - 28.12%
Boston 1784 Growth and Income Fund - 10.58%
Boston 1784 Connecticut Tax-Exempt Income Fund - 8.69%

As of December 31, 1998, BankBoston, N.A., 100 Federal Street, Boston,
Massachusetts 02110, and its affiliates, owned of record the following
percentages of the outstanding shares of the following Funds:

Boston 1784 Tax-Free Money Market Fund - 82.73%
Boston 1784 Prime Money Market Fund - 10.99%
Boston 1784 Institutional U.S. Treasury Money Market Fund - 62.17%
Boston 1784 Institutional Prime Money Market Fund - 32.17%
Boston 1784 Tax-Exempt Medium-Term Income Fund - 88.60%
Boston 1784 Massachusetts Tax-Exempt Income Fund - 65.41%
Boston 1784 Rhode Island Tax-Exempt Income Fund - 80.54%
Boston 1784 Connecticut Tax-Exempt Income Fund - 77.02%
Boston 1784 Florida Tax-Exempt Income Fund - 96.47%
Boston 1784 U.S. Government Medium-Term Income Fund - 89.41%
Boston 1784 Short-Term Income Fund - 72.97%
Boston 1784 Income Fund - 85.02%
Boston 1784 Asset Allocation Fund - 34.18%
Boston 1784 Growth and Income Fund - 70.85%
Boston 1784 Growth Fund - 69.51%
Boston 1784 International Equity Fund - 89.94%

5. INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISERS

The Trust has entered into separate advisory agreements (each, an
"Advisory Agreement") with BankBoston, a wholly-owned subsidiary of BankBoston
Corporation, and, for Boston 1784 International Equity Fund, with Kleinwort
Benson Investment Management Americas Inc. ("Kleinwort"), the U.S.-registered
investment management subsidiary of the London-based Kleinwort Group plc, a
merchant banking group, which in turn is a subsidiary of Dresdner Bank A.G.

The Advisory Agreement with BankBoston for the Funds other than Boston
1784 International Equity Fund is dated as of June 1, 1993 and the Advisory
Agreement with BankBoston for Boston 1784 International Equity Fund is dated as
of November 28, 1994. The Advisory Agreement with Kleinwort for Boston 1784
International Equity Fund is dated as of October 27, 1995. BankBoston and

<PAGE>

Kleinwort are referred to in this Statement of Additional Information,
collectively, as the "Advisers" and each, individually, as an "Adviser."

BankBoston is entitled to receive investment advisory fees, which are
accrued daily and payable monthly, of .40% of each Money Market Fund's average
daily net assets (.20% for the Institutional U.S. Treasury Money Market Fund
and the Institutional Prime Money Market Fund), .74% of each Bond and each
Tax-Exempt Fund's average daily net assets (.50% for the Short-Term Income
Fund) and .74% of each Stock Fund's average daily net assets (other than the
International Equity Fund).

For the International Equity Fund, BankBoston and Kleinwort each are
entitled to receive an investment advisory fee of .50% of the Fund's average
net assets, for a total of 1.00% of the Fund's average daily net assets. This
fee is higher than the fee paid by most investment companies in general.

BankBoston has agreed to waive its investment advisory fees to the extent
necessary to limit the total operating expenses of each Fund to a specified
level. BankBoston also may contribute to the Funds from time to time to help
them maintain competitive expense ratios. These arrangements are voluntary and
may be terminated at any time.

For the fiscal years ended May 31, 1996, 1997 and 1998, the Trust paid the
following fees (after fee waivers) on behalf of the Funds:

- --------------------------------------------------------------------------------------------
BankBoston BankBoston BankBoston
Investment Investment Investment
Fund Advisory Fees Advisory Fees Advisory Fees
1996 1997 1998
(thousands) (thousands) (thousands)
- --------------------------------------------------------------------------------------------

Boston 1784 Tax-Free Money Market Fund $1,996 $2,663 $3,896
Boston 1784 U.S. Treasury Money Market
Fund 276 879 1,485
Boston 1784 Institutional U.S. Treasury
Money Market Fund 651 3,052 6,468
Boston 1784 Institutional Prime Money
Market Fund N/A(1) N/A(1) 227
Boston 1784 Prime Money Market Fund 7(2) 142(3) 488
Boston 1784 Short-Term Income Fund 348 708 960
Boston 1784 Income Fund 1,257 1,829 2,721
Boston 1784 U.S. Government Medium
Term Income Fund 906 1,199 1,730
Boston 1784 Tax-Exempt Medium-Term
Income Fund 1,116 1,387 2,075
Boston 1784 Connecticut Tax-Exempt
Income Fund 418 573 869
Boston 1784 Florida Tax-Exempt Income
Fund N/A(1) N/A(1) 327
Boston 1784 Massachusetts Tax-Exempt
Fund 548 768 1,316
Boston 1784 Rhode Island Tax-Exempt
Income Fund 208 280 478
Boston 1784 Asset Allocation Fund 90 177 318
Boston 1784 Growth and Income Fund 1,997 2,650 3,785
Boston 1784 Growth Fund 0 1,050 2,110
- --------------------------------------------------------------------------------------------
Boston 1784 International Equity Fund 636 2,111 2,404
- --------------------------------------------------------------------------------------------

Total $10,454 $19,468 31,657
- --------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

(1) The Boston 1784 Institutional Prime Money Market Fund and Boston 1784
Florida Tax-Exempt Income Fund had no operations during the periods indicated.

(2) The Prime Money Market Fund is the successor through a reorganization
with the BayFunds Money Market Portfolio. The BayFunds Money Market Portfolio
was a portfolio of BayFunds, an open-end investment company registered under
the 1940 Act and reorganized with the Prime Money Market Fund on December 9,
1996. Prior to the reorganization, BayBank, N.A. was the investment adviser of
the BayFunds Money Market Portfolio. For its fiscal year ended December 31,
1996, the Fund paid investment advisory fees of $837,000 (of which $6,700 was
paid to BankBoston following the reorganization with the BayFunds Money Market
Portfolio).

(3) The Prime Money Market Fund changed its fiscal year from December 31 to
May 31. The investment advisory fee of $142,000 reflects payments made by the
Fund for the period from January 1, 1997 to May 31, 1997.

The foregoing table does not reflect contributions to the Funds made by
BankBoston in order to assist the Funds in maintaining competitive expense
ratios.

For the fiscal year ended May 31, 1996, the Trust paid $1,222,419 to
Kleinwort under the Advisory Agreement to which Kleinwort is a party, with
respect to Boston 1784 International Equity Fund. For the fiscal years ended
May 31, 1997 and 1998, respectively, the Trust paid $2,111,000 and $2,404,000
to Kleinwort under the same Advisory Agreement.

The continuance of each Advisory Agreement, after the first two years,
must be specifically approved at least annually (i) by the vote of the
Trustees, and (ii) by the vote of a majority of the Trustees who are neither
parties to the Advisory Agreement nor "interested persons" of any party
thereto, cast in person at a meeting called for the purpose of voting on such
approval. Each Advisory Agreement will terminate automatically in the event of
its assignment, and is terminable at any time without penalty by the Trustees
of the Trust or with respect to any Fund, by a majority of the outstanding
shares of that Fund, on not less than 30 nor more than 60 days' written notice
to the applicable Adviser, or by the applicable Adviser on 90 days' written
notice to the Trust.

Each Advisory Agreement provides that neither the Adviser nor its
personnel shall be liable (1) for any error of judgment or mistake of law; (2)
for any loss arising out of any investment; or (3) for any act or omission in
the execution of security transactions for the Trust or any Fund, except that
the Adviser and its personnel shall not be protected against any liability to
the Trust, any Fund or its Shareholders by reason of willful misfeasance, bad
faith or gross negligence on its or their part in the performance of its or
their duties or from reckless disregard of its or their obligations or duties
thereunder.

SERVICEMARKS

The servicemark BOSTON 1784 FUNDSSM is a registered servicemark of, and
this servicemark and the "eagle" logo are used by permission of, BankBoston. In
the event that the Advisory Agreements with BankBoston are terminated, the
Trust has agreed to discontinue use of the servicemark and logo.

<PAGE>

DISTRIBUTOR

SEI Investments Distribution Co. (formerly known as SEI Financial Services
Company) (the "Distributor"), a wholly-owned subsidiary of SEI, and the Trust
are parties to a distribution agreement ("Distribution Agreement"), dated as of
June 1, 1993 and amended and restated as of October 27, 1995. The Distributor
has its principal business offices at 1 Freedom Valley Drive, Oaks,
Pennsylvania 19456.

The Trust has adopted a distribution plan dated as of June 1, 1993, with
respect to each of the Stock Funds, the Bond Funds and the Tax-Exempt Funds and
separate distribution plans dated as of September 14, 1995 with respect to
Class C and Class D shares of Boston 1784 U.S. Treasury Money Market Fund. Each
of these plans ("Plans") has been adopted pursuant to Rule 12b-1 under the 1940
Act. The Distributor receives no compensation for distribution of shares of
Boston 1784 Tax-Free Money Market Fund, Boston 1784 Prime Money Market Fund,
Boston 1784 Institutional Prime Money Market Fund or Boston 1784 Institutional
U.S. Treasury Money Market Fund, or for the distribution of Class A Shares of
Boston 1784 U.S. Treasury Money Market Fund.

The Distribution Agreement and the Plans provide that the Trust will pay
the Distributor a fee, calculated daily and paid monthly, at an annual rate of
(i) 0.25% of the average daily net assets of each of the Stock Funds, the Bond
Funds and the Tax-Exempt Funds; (ii) 0.25% of the average daily net assets of
the Class C shares of Boston 1784 U.S. Treasury Money Market Fund; and (iii)
0.75% of the average daily net assets of the Class D shares of Boston 1784 U.S.
Treasury Money Market Fund. The Distributor can use these fees to compensate
broker/dealers and service providers (including each Adviser and its
affiliates) which provide administrative and/or distribution services to
holders of these shares or their customers who beneficially own these shares.
No fees have been paid to the Distributor under the Plans or the Distribution
Agreement since the Funds' inception.

The Distribution Agreement is renewable annually and may be terminated by
the Distributor, by the Trustees of the Trust who are not interested persons
and have no financial interest in the Plans or any related agreement
("Qualified Trustees"), or, with respect to any particular Fund or class of
shares, by a majority vote of the outstanding shares of such Fund or such class
of shares, as applicable, for which the Distribution Agreement is in effect
upon not more than 60 days' written notice by either party.

The Trust has adopted each of the Plans in accordance with the provisions
of Rule 12b-1 under the 1940 Act, which regulates circumstances under which an
investment company may, directly or indirectly, bear expenses relating to the
distribution of its shares. Continuance of each of the Plans must be approved
annually by a majority of the Trustees of the Trust and by a majority of the
Qualified Trustees. Continuance of the Plan with respect to each of the Stock
Funds, the Bond Funds, and the Tax-Exempt Funds was approved by the Trustees in
March, 1999. Each of the Plans requires that quarterly written reports of money
spent under such Plan and of the purposes of such expenditures be furnished to
and reviewed by the Trustees. Expenditures may include (1) the cost of
prospectuses, reports to Shareholders, sales literature and other materials for
potential investors; (2) advertising; (3) expenses incurred in connection with
the promotion and sale of the Trust's shares, including the Distributor's
expenses for travel, communication, and compensation and benefits for sales
personnel; and (4) any other expenses reasonably incurred in connection with
the distribution and marketing of the shares subject to approval of a majority
of the Qualified Trustees. No Plan may be amended to materially increase the

<PAGE>

amount which may be spent under the Plan without approval by a majority of the
outstanding shares of the Funds or the class of shares which are subject to
such Plan. All material amendments of the Plans require approval by a majority
of the Trustees of the Trust and of the Qualified Trustees.

From time to time, the Distributor may provide incentive compensation to
its own employees and employees of banks (including BankBoston), broker-dealers
and investment counselors in connection with the sale of shares of the funds.
Promotional incentives may be cash or other compensation, including
merchandise, airline vouchers, trips and vacation packages, will be offered
uniformly to all program participants and will be predicated upon the amount of
shares of the Funds sold by the participant.

ADMINISTRATOR

The Trust and SEI Investments Mutual Funds Services (formerly known as SEI
Fund Resources) (the "Administrator") are parties to an administration
agreement (the "Administration Agreement"). The Administration Agreement
provides that the Administrator shall not be liable for any error of judgment
or mistake of law or for any loss suffered by the Trust in connection with the
matters to which the Administration Agreement relates, except a loss that
results from willful misfeasance, bad faith or gross negligence on the part of
the Administrator in the performance of its duties or from reckless disregard
by it of its duties and obligations under the Administration Agreement. The
Administration Agreement continues until November 22, 1998 and indefinitely
thereafter unless terminated.

Under the Agreement, the Administrator provides administrative and fund
accounting services to the Funds, including regulatory reporting, office
facilities, and equipment and personnel. The Administrator receives a fee for
these services, which is calculated daily and paid monthly, at an annual rate
of .085% of the first $5 billion of the Funds' combined average daily net
assets and .045% of combined average daily net assets in excess of $5 billion.
SEI has agreed to waive portions of its fee from time to time. The
Administrator may retain sub-administrators, including BankBoston, whose fees
would be paid by the Administrator.

For the fiscal year ended May 31, 1996, the Trust paid $2,440,000 to the
Administrator under the Administration Agreement. For the fiscal years ended
May 31, 1997 and 1998, respectively, the Trust paid $3,912,000 and $5,426,000
to the Administrator under the existing Administration Agreement.

SEI Investments Mutual Funds Services (formerly known as SEI Fund
Resources) is a Delaware business trust whose sole beneficiary is SEI
Investments Management Corporation (formerly known as SEI Financial Management
Corporation). SEI Investments Management Corporation, a wholly-owned subsidiary
of SEI Investments Company ("SEI"), was organized as a Delaware corporation in
1969 and has its principal business offices at 1 Freedom Valley Drive, Oaks,
Pennsylvania 19456. Alfred P. West, Jr., Carmen V. Romeo, and Henry H. Greer
constitute the Board of Directors of the Administrator. Mr. West is the
Chairman of the Board and Chief Executive Officer of the Administrator. Mr.
West serves as the Chairman of the Board of Directors, and Chief Executive
Officer of SEI. SEI and its subsidiaries are leading providers of funds
evaluation services, trust accounting systems, and brokerage and information
services to financial institutions, institutional investors and money managers.
The Administrator and its affiliates also serve as administrator to the
following other mutual funds: SEI Daily Income Trust, SEI Liquid Asset Trust,
SEI Tax Exempt Trust, SEI Index Funds, SEI Institutional International Trust,
SEI Institutional Managed Trust, The Advisors' Inner Circle Fund, The Pillar

<PAGE>

Funds, CUFund, STI Classic Funds, First American Funds, Inc., First American
Investment Funds, Inc., The Arbor Fund, The PBHG Funds, Inc., PBHG Insurance
Series Fund, Inc., PBHG Advisor Funds, Inc., The Achievement Funds Trust,
Bishop Street Funds, CrestFunds, Inc., STI Classic Variable Trust, Monitor
Funds, TIP Funds, TIP Institutional Funds, ARK Funds, SEI Asset Allocation
Trust, SEI Institutional Investments Trust, First American Strategy Funds,
Inc., HighMark Funds, Expedition Funds, Oak Associates Funds, the Armada Funds,
and the Nevis Fund, Inc.

DIVIDEND DISBURSING AGENT AND TRANSFER AGENT

Boston Financial Data Services, 2 Heritage Drive, North Quincy,
Massachusetts 02171 is the Funds' dividend disbursing agent. State Street Bank
and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, is the
transfer agent.

CUSTODIAN

Prior to September 30, 1998, BankBoston, N.A., acted as custodian of the
Funds' assets pursuant to a Custodian Agreement dated as of June 1, 1993
between BankBoston, N.A. and the Trust. On September 30, 1998, BankBoston
assigned its rights and obligations under the Custodian Agreement to Investors
Bank and Trust Company. Investors Bank & Trust Company (the "Custodian"),
Hancock Towers, 200 Clarendon Street, 16th Floor, Boston, Massachusetts 02116,
acts as custodian of the Funds' assets. The Custodian's responsibilities
include holding and administering the Funds' cash and securities, handling the
receipt and delivery of securities, furnishing a statement of all transactions
and entries for the account of each Fund, and furnishing the Funds with such
other reports covering securities held by it or under its control as may be
agreed upon from time to time. The Custodian and its agents (including foreign
sub-custodians) may make arrangements with Depository Trust Company and other
foreign or domestic depositories or clearing agencies, including the Federal
Reserve Bank and any foreign depository or clearing agency, whereby certain
securities may be deposited for the purpose of allowing transactions to be made
by bookkeeping entry without physical delivery of such securities, subject to
such restrictions as may be agreed upon by the Custodian and the Funds. Fund
securities may be held by a sub-custodian bank approved by the Trustees. The
Custodian does not determine the investment policies of the Funds or decide
which securities the Funds will buy or sell. For its services, the Custodian
will receive such compensation as may from time to time be agreed upon by it
and the Trust.

COUNSEL AND INDEPENDENT ACCOUNTANTS

Bingham Dana LLP, 150 Federal Street, Boston Massachusetts 02110, is
counsel for each Fund. PricewaterhouseCoopers LLP, 2400 Eleven Penn Center,
Philadelphia, Pennsylvania 19103, serves as independent auditor for each Fund
providing audit and accounting services including: (i) examination of the
annual financial statements, (ii) assistance and consultation with respect to
the preparation of filings with the Securities and Exchange Commission, and
(iii) preparation of annual income tax returns.

6. BROKERAGE ALLOCATION AND OTHER PRACTICES

BROKERAGE TRANSACTIONS

Specific decisions to purchase or sell securities for a Fund are made by a
portfolio manager who is an employee of BankBoston, and who is appointed and
supervised by the senior officers of BankBoston, or in the case of Boston 1784
International Equity Fund, by portfolio managers who are employees of
BankBoston or of Kleinwort, and who are appointed and supervised by the senior

<PAGE>

officers of BankBoston or by senior officers of Kleinwort. A portfolio manager
may serve other clients of either of the Advisers or of an affiliate of either
of the Advisers in a similar capacity.

Subject to policies established by the Trustees, the Adviser to the Funds
(Kleinwort, in the case of the International Equity Fund) is responsible for
placing the orders to execute transactions for such Fund. In placing orders, it
is the policy of the Trust for each Adviser to seek to obtain the best net
results taking into account such factors as price (including the applicable
dealer spread), the size, type and difficulty of the transaction involved, the
firm's general execution and operational facilities, and the firm's risk in
positioning the securities involved. While each Adviser seeks reasonably
competitive spreads or commissions, the Trust will not necessarily be paying
the lowest spread or commission available.

The money market securities in which the Funds invest are traded primarily
in the over-the-counter market. Bonds and debentures are usually traded
over-the-counter, but may be traded on an exchange. Where possible, each
Adviser will deal directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere. Such dealers usually are acting as principal for their own
account. On occasion, securities may be purchased directly from the issuer.
Money market securities are generally traded on a net basis and do not normally
involve either brokerage commissions or transfer taxes. The cost of executing
transactions for the Funds will primarily consist of dealer spreads and
underwriting commissions.

For the fiscal years ended May 31, 1996, 1997 and 1998, the Trust paid the
following aggregate amount of brokerage commissions on behalf of the Funds:

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

Brokerage Brokerage Brokerage
Fund Commissions Commissions Commissions
1996 1997 1998
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Boston 1784 Asset Allocation Fund $ 12,818.55 $ 17,370.50 $ 17,061.84
- -----------------------------------------------------------------------------------------
Boston 1784 Growth and Income
Fund 165,071.38 152,899.49 344,969.84
- -----------------------------------------------------------------------------------------
Boston 1784 Growth Fund 12,951.00 163,410.76 227,975.43
- -----------------------------------------------------------------------------------------
Boston 1784 International Equity
Fund 659,011.71 823,922.21 1,969,530.48
- -----------------------------------------------------------------------------------------

Total $849,852.64 $1,157,602.96 $ 2,559,537.59
- -----------------------------------------------------------------------------------------
</TABLE>

BROKERAGE SELECTION

Each Adviser selects brokers or dealers to execute transactions for the
purchase or sale of securities for the Funds on the basis of the Adviser's
judgment of their professional capability to provide the service. The primary
consideration is to have brokers or dealers execute transactions at the best
price and execution. Best price and execution refers to many factors, including
the price paid or received for a security, the commission charged, the
promptness and reliability of execution, the confidentiality and placement
accorded the order and other factors affecting the overall benefit obtained by
the account on the transaction. Each Adviser's determination of what are
reasonably competitive rates is based upon the professional knowledge of the

<PAGE>

Adviser's portfolio managers as to rates paid and charged for similar
transactions throughout the securities industry. In some instances, a Fund pays
a minimal share transaction cost when the transaction presents no difficulty.
Some trades are made on a net basis where a Fund either buys securities
directly from the dealer or sells them to the dealer. In these instances, there
is no direct commission charged but there is a spread (the difference between
the buy and sell price) which is the equivalent of a commission.

Each Adviser may allocate, out of all commission business generated by the
funds and accounts under its management, brokerage business to brokers or
dealers who provide brokerage and research services. These research services
include advice, either directly or through publications or writings, as to the
value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; furnishing analyses and reports concerning issuers, securities or
industries; providing information on economic factors and trends; assisting in
determining portfolio strategy; providing computer software used in security
analyses; and providing fund performance evaluation and technical market
analyses. Such services are used by that Adviser in connection with its
investment decision-making process with respect to one or more portfolios under
its management and may not be used exclusively with respect to the fund or
account generating the brokerage. Not all brokerage and research services are
useful or of value in advising any particular Fund.

As provided in the Securities Exchange Act of 1934 (the "1934 Act"),
higher commissions may be paid to broker/dealers who provide brokerage and
research services than to broker/dealers who do not provide such services if
such higher commissions are deemed reasonable in relation to the value of the
brokerage and research services provided. Although transactions are directed to
broker/dealers who provide such brokerage and research services, the
commissions paid to such broker/dealers are not, in general, expected to be
higher than commissions that would be paid to broker/dealers not providing such
services. Further, in general, any such commissions are reasonable in relation
to the value of the brokerage and research services provided.

BankBoston may place a combined order for two or more Funds (or for a Fund
and another account under BankBoston's management) engaged in the purchase or
sale of the same security if, in BankBoston's judgment, joint execution is in
the best interest of each participant and will result in best price and
execution. Transactions involving commingled orders are allocated in a manner
deemed equitable to each Fund or account. It is believed that the ability of
the Funds to participate in volume transactions is generally beneficial.
Although it is recognized that the joint execution of orders could adversely
affect the price or volume of the security that a particular Fund may obtain,
it is the opinion of BankBoston and the Board of Trustees of the Trust that the
advantages of combined orders outweigh the possible disadvantages of separate
transactions.

Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and subject to seeking best price and execution, an
Adviser may place orders for a Fund with broker/dealers who have agreed to
defray certain Trust expenses such as custodian fees, and may, at the request
of the Distributor, give consideration to sales of shares of the Trust as a
factor in the selection of brokers and dealers to execute Fund transactions.

It is expected that an Adviser may execute brokerage or other agency
transactions through the Distributor, any Adviser or an affiliate of any
Adviser, for a commission in conformity with the 1940 Act, the 1934 Act, rules
promulgated by the Securities and Exchange Commission and such policies as the
Board of Trustees of the Trust may determine. Under these provisions, the

<PAGE>

Distributor or such Adviser or an affiliate of such Adviser is permitted to
receive and retain compensation for effecting transactions for a Fund on an
exchange if a written contract is in effect between the Distributor and the
Trust expressly permitting the Distributor or such Adviser or an affiliate of
such Adviser to receive and retain such compensation. These rules further
require that commissions paid to the Distributor, any Adviser, or any such
affiliate of any Adviser by the Trust for such exchange transactions not exceed
"usual and customary" brokerage commissions. The rules define "usual and
customary" commissions to include amounts which are "reasonable and fair
compared to the commission, fee or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time." In addition, an Adviser may direct commission
business to one or more designated broker/dealers in connection with such
broker/dealer's provision of services to the Trust or the Funds or payment of
certain Trust expenses, such as custody, pricing and professional fees. The
Trustees, including those who are not "interested persons" of the Trust, have
adopted procedures for evaluating the reasonableness of commissions paid to the
Distributor, the Adviser and affiliates of any Adviser and will review these
procedures periodically.

7. DESCRIPTION OF SHARES; VOTING RIGHTS AND LIABILITIES

The Trust's Declaration of Trust permits the Trust to offer separate
portfolios, or funds, of shares of beneficial interest (with no par value). The
Declaration of Trust authorizes the issuance of an unlimited number of shares
of each series and authorizes the division of shares of each series into
classes. Each share of each series represents an equal proportionate interest
in that series, with each other share of the same class. Shareholders of each
series are entitled, upon liquidation or dissolution, to a pro rata share in
the net assets of that series that are available for distribution to
shareholders, except to the extent of different expenses borne by different
classes. Shareholders have no preemptive right or other right to receive,
purchase or subscribe for any additional shares or other securities issued by
the Trust. Currently, the Trust has nineteen active series of shares, each of
which is a Fund. Boston 1784 U.S. Treasury Money Market Fund has three classes
of shares authorized: Class A, Class C and Class D. Class A shares are
described in the prospectus for the Boston 1784 U.S. Treasury Money Market
Fund. Class C and D shares have been authorized but are not currently being
offered. All consideration received by the Trust for shares of any series and
all assets in which such consideration is invested belong to that series and
are subject to the liabilities related thereto. Share certificates will not be
issued.

Shares of each series of the Trust are entitled to vote separately to
approve advisory agreements or changes in investment policies, but shares of
all series of the Trust vote together in the election or selection of Trustees
and accountants.

The Declaration of Trust may be amended as authorized by vote of
shareholders of the Trust. Matters not affecting all series or classes of
shares shall be voted on only by the shares of the series or classes affected.
Shares of the Trust may be voted in person or by proxy, and any action taken by
shareholders may be taken without a meeting by written consent of a majority of
shareholders entitled to vote on the matter.

The Trust is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations and liabilities. However, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of the
Trust and provides for indemnification and reimbursement of expenses out of

<PAGE>

Trust property for any shareholder held personally liable for the obligations
of the Trust. The Declaration of Trust also provides that the Trust may
maintain appropriate insurance (e.g., fidelity bonding and errors and omissions
insurance) for the protection of the Trust, its shareholders, Trustees,
officers, employees and agents covering possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.

The Declaration of Trust provides that the Trustees shall not be
responsible or liable in any event for any neglect or wrongdoing of any
officer, agent, employee, investment adviser or administrator, principal
underwriter or custodian, nor shall any Trustee be responsible for the act or
omission of any other Trustee, and no Trustee shall be liable to the Trust or
any Shareholder. The Declaration of Trust also provides that the Trust will
indemnify its Trustees and officers against liabilities and expenses incurred
in connection with actual or threatened litigation in which they may be
involved because of their offices with the Trust unless it is determined, in
the manner provided in the Declaration of Trust, that they have not acted in
good faith in the reasonable belief that their actions were in the best
interests of the Trust. However, nothing in the Declaration of Trust shall
protect or indemnify a Trustee against any liability for his or her willful
misfeasance, bad faith, gross negligence or reckless disregard of his or her
duties.

8. PURCHASE, REDEMPTION AND PRICING OF SHARES

DETERMINATION OF NET ASSET VALUE

The net asset value of the shares of each Fund (including shares of each
class of Boston 1784 U.S. Treasury Money Market Fund) is determined on each day
on which both the New York Stock Exchange is open, except for Columbus Day and
Veterans' Day ("Business Days"). This determination is made once during each
such day, as of 12:00 noon Eastern Time ("ET") with respect to shares of Boston
1784 Prime Money Market Fund and Boston 1784 Tax-Free Money Market Fund, as of
3:00 p.m. ET with respect to the Boston 1784 U.S. Treasury Money Market Fund,
Boston 1784 Institutional U.S. Treasury Money Market Fund and Boston 1784
Institutional Prime Money Market Fund (noon when the New York Stock Exchange
closes early), and as of 4:00 p.m. ET with respect to each other Fund. The New
York Stock Exchange is normally closed on the following national holidays: New
Year's Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving, and Christmas. Net asset value per
share of each Fund is calculated by adding the value of securities and other
assets of that Fund, subtracting liabilities and dividing by the number of its
outstanding shares. Net asset value per share of each class of Boston 1784 U.S.
Treasury Money Market Fund is calculated by adding the value of securities and
other assets attributable to that class, subtracting liabilities attributable
to that class and dividing by the number of outstanding shares of that class.

Securities of the Money Market Funds will be valued by the amortized cost
method, which involves valuing a security at its cost on the date of purchase
and thereafter (absent unusual circumstances) assuming a constant amortization
to maturity of any discount or premium, regardless of the impact of
fluctuations in general market rates of interest on the value of the
instrument. While this method provides certainty in valuation, it may result in
periods during which a security's value, as determined by this method, is
higher or lower than the price a Fund would receive if it sold the instrument.
During periods of declining interest rates, the daily yield of these Funds may

<PAGE>

tend to be higher than a like computation made by a company with identical
investments utilizing a method of valuation based upon market prices and
estimates of market prices for all of its fund securities. Thus, if the use of
amortized cost by a Fund resulted in a lower aggregate fund value on a
particular day, a prospective investor in that Fund would be able to obtain a
somewhat higher yield than would result from investment in a company utilizing
solely market values, and existing investors in the Fund would experience a
lower yield. The converse would apply in a period of rising interest rates.

The use by the Money Market Funds of amortized cost and the maintenance by
these Funds of a net asset value at $1.00 are permitted by Rule 2a-7 under the
1940 Act, provided that certain conditions are met. The regulations also
require the Trustees to establish procedures which are reasonably designed to
stabilize the net asset value per share at $1.00 for these Funds. Such
procedures include the determination of the extent of deviation, if any, of
these Funds' current net asset value per share calculated using available
market quotations from these Funds' amortized cost prices per share at such
intervals as the Trustees deem appropriate and reasonable in light of market
conditions and periodic reviews of the amount of the deviation and the methods
used to calculate such deviation. In the event that such deviation exceeds 1/2
of 1%, the Trustees are required to consider promptly what action, if any,
should be initiated, and, if the Trustees believe that the extent of any
deviation may result in material dilution or other unfair results to
shareholders of these Funds, the Trustees are required to take such corrective
action as they deem appropriate to eliminate or reduce such dilution or unfair
results to the extent reasonably practicable. Such actions may include the sale
of Fund instruments prior to maturity to realize capital gains or losses or to
shorten average fund maturity; withholding dividends; redeeming shares in kind;
or establishing a net asset value per share by using available market
quotations. In addition, if any of these Funds incurs a significant loss or
liability, the Trustees have the authority to reduce pro rata the number of
shares of that Fund in the account of each shareholder of such Fund and to
offset each such shareholder's pro rata portion of such loss or liability from
that shareholder's accrued but unpaid dividends or from future dividends of the
affected Fund.

In valuing each of the Stock, Bond and Tax-Exempt Funds' assets, bonds and
other fixed income securities are valued on the basis of valuations furnished
by a pricing service, use of which has been approved by the Board of Trustees
of the Trust. In making such valuations, the pricing services may employ
methodologies that utilize actual market transactions, broker-dealer supplied
valuations or other electronic data processing techniques. Equity securities
listed on a domestic securities exchange for which quotations are readily
available, including securities traded over the counter, are valued, by a
pricing service, at the last quoted sale price on the principal exchange on
which they are traded on the valuation date, or, if there is no such reported
sale on the valuation date, at the most recent quoted bid price. Equity
securities which are primarily traded on a foreign exchange are generally
valued, by a pricing service, at the preceding closing value on the exchange.
Securities for which market quotations are not readily available are valued at
their fair value as determined in good faith by the Board of Trustees of the
Trust, or pursuant to procedures adopted by the Board subject to review by the
Board of the resulting valuations.

PURCHASE AND REDEMPTION OF SHARES

Shares of the Fund are sold on a continuous basis and may be purchased
from the Distributor or a broker-dealer or financial institution that has an
agreement with the Distributor. Purchases may be made Monday through Friday,
except on certain holidays. Shares are purchased at net asset value the next
time it is calculated after your investment is received and accepted by the

<PAGE>

Distributor. The Trust reserves the right to suspend sales of shares of any
Fund for any period during which the New York Stock Exchange, an Adviser, the
Administrator or the Custodian is not open for business.

On any business day, you may redeem all or a portion of your shares. Your
transaction will be processed at net asset value the next time it is calculated
after your redemption request in good order is received. If the shares being
redeemed were purchased by check, by telephone or through an automatic
investment program, the Funds may delay the mailing of your redemption check
for up to 10 business days after purchase to allow the purchase to clear. A
redemption is treated as a sale for tax purposes, and could result in taxable
gain or loss in a non-tax-sheltered account.

The Trust reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the New York Stock Exchange is restricted, or during the existence of an
emergency (as determined by the Securities and Exchange Commission by rule or
regulation) as a result of which disposal or valuation of a Fund's securities
is not reasonably practicable, or for such other periods as the Securities and
Exchange Commission has permitted by order.

Purchase and redemption of shares of Boston 1784 U.S. Treasury Money
Market Fund by Connecticut municipalities and other Connecticut municipal
corporations and authorities, pursuant to the provisions of Section 7-400 of
the Connecticut General Statutes, as from time-to-time amended ("Conn. Gen.
Stat. ss. 7-400"), may be made only through the use of (i) a bank, savings bank
or savings and loan association incorporated under the laws of the State of
Connecticut, (ii) a federally chartered bank, savings bank or savings and loan
association having its principal place of business in the State of Connecticut,
or (iii) such other agent as may be permitted by Conn. Gen. Stat. ss. 7-400.

SYSTEMATIC WITHDRAWAL PLAN

A shareholder (other than a shareholder of Boston 1784 Institutional U.S.
Treasury Money Market Fund or Boston 1784 Institutional Prime Money Market Fund
and holders of Class C or Class D shares of Boston 1784 U.S. Treasury Money
Market Fund) may direct the shareholder servicing agent to send him or her
regular monthly, quarterly, semi-annual or annual payments, as designated on
the Account Application and based upon the value of his or her account. Each
payment under a Systematic Withdrawal Plan ("SWP") must be at least $100,
except in certain limited circumstances. Such payments are drawn from the
proceeds of the redemption of shares held in the shareholder's account (which
would be a return of principal and, if reflecting a gain, would be taxable). To
the extent that redemptions for such periodic withdrawals exceed dividend
income reinvested in the account, such redemptions will reduce, and may
eventually exhaust, the number of shares in the shareholder's account. All
dividend and capital gain distributions for an account with a SWP will be
reinvested in additional full and fractional shares of the applicable Fund at
the net asset value in effect at the close of business on the record date for
such distributions.

To initiate a SWP, shares having an aggregate value of at least $10,000
must be held on deposit by the shareholder servicing agent. The shareholder, by
written instruction to the shareholder servicing agent, may deposit into the
account additional shares of the applicable Fund, change the payee, or change
the dollar amount of each payment. The shareholder servicing agent may charge
the account for services rendered and expenses incurred beyond those normally
assumed by the applicable Fund with respect to the liquidation of shares.

No charge is currently assessed against the account, but one could be
instituted by the shareholder servicing agent on 60 days' notice in writing to

<PAGE>

the shareholder in the event that the applicable Fund ceases to assume the cost
of these services. Any Fund may terminate any SWP for an account if the value
of the account falls below $5,000 as a result of share redemptions (other than
as a result of a SWP) or an exchange of shares of the Fund for shares of
another Fund. Any such plan may be terminated at any time by either the
shareholder or the applicable Fund.

REDEMPTION IN KIND

It is currently the Trust's policy to pay for the redemptions of shares of
the Funds in cash. The Trust retains the right, however, subject to the Rule
18f-1 notice described below, to alter this policy to provide for redemptions
in whole or in part by a distribution in kind of securities held by the Funds,
in lieu of cash. Shareholders may incur brokerage charges and tax liabilities
on the sale of any such securities so received in payment of redemptions.

The Trust filed a Notification of Election pursuant to Rule 18f-1 under
the Investment Company Act of 1940 with the Securities and Exchange Commission
which commits the Boston 1784 Massachusetts Tax-Exempt Income Fund, Boston 1784
Connecticut Tax-Exempt Income Fund, Boston 1784 Rhode Island Tax-Exempt Income
Fund and Boston 1784 Tax-Exempt Medium-Term Income Fund to pay in cash all
requests for redemptions by any shareholder of record, limited in amount with
respect to each shareholder during any 90-day period to the lesser of: (i)
$250,000, or (ii) one percent of the net asset value of the Fund at the
beginning of such period.

9. TAXES

TAX STATUS OF THE FUNDS

Each of the Funds is organized as a series of a Massachusetts business
trust and is treated as a separate entity for federal income tax purposes under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
Each Fund has elected to be treated, and intends to qualify each year, as a
"regulated investment company" under Subchapter M by meeting all applicable
requirements of Subchapter M, including requirements as to the nature of the
Fund's gross income, the amount of Fund distributions (as a percentage of both
the Fund's overall income and, in the case of the Tax-Exempt Funds and the
Tax-Free Money Market Funds, its tax-exempt income), and the composition of the
Fund's portfolio assets. Because each Fund intends to distribute all of its net
investment income and net realized capital gains to shareholders in accordance
with the timing requirements imposed by the Code, it is not expected that the
Funds will be required to pay any federal income or excise taxes, although a
Fund's foreign-source income may be subject to foreign taxes. If a Fund should
fail to qualify as a "regulated investment company" in any year, the Fund would
incur a regular corporate federal income tax upon its taxable income and the
Fund's distributions would generally be taxable as ordinary dividend income to
its shareholders.

No Fund will be subject to any Massachusetts income or excise taxes as
long as it qualifies as a separate regulated investment company under the Code.

TAXATION OF FUND DISTRIBUTIONS

Distributions -- General. Shareholders of Funds other than the Tax-Exempt
Funds and the Tax-Free Money Market Fund will have to pay federal income taxes
and may be subject to state or local income taxes on the dividends and capital
gain distributions they receive from those Funds. Dividends from ordinary

<PAGE>

income and any distributions from net short-term capital gains are taxable to
shareholders as ordinary income for federal income tax purposes, whether paid
in cash or in additional shares. Distributions of net capital gains (the excess
of net long-term capital gains over net short-term capital losses), whether
paid in cash or in additional shares, are taxable to shareholders as long-term
capital gains for federal income tax purposes without regard to the length of
time the shareholders have held their shares. Such capital gains will generally
be taxable to shareholders as if the shareholders had directly realized gains
from the same sources from which they were realized by the Fund. The Money
Market Funds are not expected to make any capital gain distributions.

Because the Funds other than the Stock Funds do not expect to earn any
dividend income, it is expected that none of their distributions will qualify
for the dividends received deduction for corporations. A portion of the Stock
Funds' ordinary income dividends (but none of their capital gain distributions)
is normally eligible for the dividends received deduction for corporations if
the recipient otherwise qualifies for that deduction with respect to its
holding of Fund shares. Availability of the deduction for particular corporate
shareholders is subject to certain limitations, and deducted amounts may be
subject to the alternative minimum tax or result in certain basis adjustments.

Any Fund dividend that is declared in October, November, or December of a
calendar year, that is payable to shareholders of record in such a month, and
that is paid the following January will be treated as if received by the
shareholders on December 31 of the year in which the dividend is declared. Each
Fund will notify shareholders regarding the federal tax status of distributions
after the end of each calendar year.

Distributions of net capital gains and net short-term capital gains from
any Bond Fund or Tax-Exempt Fund, and any distributions from a Stock Fund, will
reduce the distributing Fund's net asset value per share. Shareholders who buy
shares just before the record date for any such distribution may pay the full
price for the shares and then effectively receive a portion of the purchase
price back as a taxable distribution.

Distributions of a Fund that are derived from interest on obligations of
the U.S. Government and certain of its agencies and instrumentalities (but
generally not from capital gains realized upon the disposition of such
obligations) may be exempt from state and local taxes. Each Fund intends to
advise shareholders of the extent, if any, to which their respective
distributions consist of such interest. Shareholders are urged to consult their
tax advisers regarding the possible exclusion of such portion of their
dividends for state and local income tax purposes.

Distributions by the Tax-Exempt Funds and the Tax-Free Money Market Fund.
The portion of each Tax-Exempt Fund's and the Tax-Free Money Market Fund's
distributions of net investment income that is attributable to interest from
tax-exempt securities will be designated by that Fund as an "exempt-interest
dividend" under the Code and will generally be exempt from federal income tax
in the hands of shareholders so long as at least 50% of the total value of the
Fund's assets consists of tax-exempt securities at the close of each quarter of
the Fund's taxable year. However, distributions of tax-exempt interest earned
from certain securities may be treated as an item of tax preference for
shareholders under the federal alternative minimum tax, and all exempt-interest
dividends may increase a corporate shareholder's alternative minimum tax. The
percentage of income designated as tax-exempt will be applied uniformly to all
distributions by the Fund of net investment income made during each fiscal year
of the Fund and may differ from the percentage of distributions consisting of
tax-exempt interest in any particular month. Shareholders are required to
report exempt-interest dividends received from the Fund on their federal income
tax returns.

<PAGE>

Shareholders of the Tax-Exempt Funds and the Tax-Free Money Market Fund
will have to pay federal income taxes and may be subject to state or local
income taxes on the non exempt-interest dividends (including dividends from
earnings from taxable securities and repurchase transactions) and capital gain
distributions they receive from the Funds under rules corresponding to those
set forth in the preceding section. The exemption of exempt-interest dividends
for federal income tax purposes does not necessarily result in exemption under
the tax laws of any state or local taxing authority.

DISPOSITION OF SHARES

In general, any gain or loss realized upon a taxable disposition of shares
of a Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as short-term capital gain or loss; a
long-term capital gain realized by an individual, estate, or trust may be
eligible for reduced tax rates if the shares were held for more than 18 months.
In the case of the Tax-Exempt Funds and the Tax-Free Money Market Fund, any
loss realized upon a disposition of shares in a Fund held for six months or
less will be disallowed to the extent of any exempt-interest dividends received
with respect to those shares. In the case of all the Funds, any loss realized
upon the disposition of shares in the Fund held for six months or less will (if
not disallowed as described in the preceding sentence) be treated as a
long-term capital loss to the extent of any distributions of net capital gain
made with respect to those shares. Any loss realized upon a disposition of
shares may also be disallowed under rules relating to wash sales.

ADDITIONAL INFORMATION FOR SHAREHOLDERS OF THE TAX-EXEMPT FUNDS

Interest on indebtedness incurred by shareholders to purchase or carry
shares of a Tax-Exempt Fund (or of the Tax-Free Money Market Fund) will not be
deductible for federal income tax purposes. Exempt-interest dividends are taken
into account in calculating the amount of social security and railroad
retirement benefits that may be subject to federal income tax. Entities or
persons who are "substantial users" (or persons related to "substantial users")
of facilities financed by private activity bonds should consult their tax
advisers before purchasing shares of a Tax-Exempt Fund or the Tax-Free Money
Market Fund.

ADDITIONAL INFORMATION RELATING TO FUND INVESTMENTS

Except in the case of the Money Market Funds, the Funds' current dividend
and accounting policies will affect the amount, timing, and character of
distributions to shareholders, and may make an economic return of capital
taxable to shareholders. Any investment by a Fund in zero-coupon bonds, certain
stripped securities including STRIPS, and certain securities purchased at a
market discount will cause the Fund to recognize income prior to the receipt of
cash payments with respect to those securities. In order to distribute this
income and avoid a tax on the Fund, a Fund may be required to liquidate
portfolio securities that it might otherwise have continued to hold,
potentially resulting in additional taxable gain or loss to the Fund.

An investment by a Fund in residual interests of a CMO that has elected to
be treated as a REMIC can create complex tax problems, especially if the Fund
has state or local governments or other tax-exempt organizations as
shareholders.

<PAGE>

Fund transactions in options, futures contracts, forward contracts,
short sales "against the box," swaps and related transactions will be subject
to special tax rules that may affect the amount, timing, and character of Fund
income and distributions to shareholders. For example, certain positions held
by a Fund on the last business day of each taxable year will be marked to
market (treated as if closed out) on that day, and any gain or loss associated
with the positions will be treated as 60% long-term and 40% short-term capital
gain or loss. Certain positions held by a Fund that substantially diminish its
risk of loss with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause deferral
of Fund losses, adjustments in the holding periods of Fund securities, and
conversion of short-term into long-term capital losses. Certain tax elections
exist for straddles that may alter the effects of these rules. The Funds will
limit their activities in options, futures contracts, forward contracts, swaps
and related transactions to the extent necessary to meet the requirements of
Subchapter M of the Code.

ADDITIONAL INFORMATION RELATING TO FOREIGN INVESTMENTS

Special tax considerations apply with respect to a Fund's foreign
investments. Investment income received by a Fund from sources within foreign
countries may be subject to foreign taxes. The Funds (other than the
International Equity Fund) do not expect to be able to pass through to
shareholders foreign tax credits or deductions with respect to such foreign
taxes. The United States has entered into tax treaties with many foreign
countries that may entitle the Funds to a reduced rate of tax or an exemption
from tax on such income. The Funds intend to qualify for treaty reduced rates
where available. It is not possible, however, to determine a Fund's effective
rate of foreign tax in advance since the amount of the Fund's assets to be
invested within various countries is not known.

If the International Equity Fund holds more than 50% of its assets in
foreign stock and securities at the close of its taxable year, it may elect to
pass through to its shareholders foreign income taxes paid. If it so elects,
shareholders will be required to treat their pro rata portion of the foreign
income taxes paid by the Fund as part of the amounts distributed to them by the
Fund and thus their portion must be included in their gross income for federal
income tax purposes. Shareholders who itemize deductions would be allowed to
claim a deduction or credit (but not both) on their federal income tax returns
for such amounts, subject to certain limitations. Shareholders who do not
itemize deductions would (subject to such limitations) be able to claim a
credit but not a deduction. No deduction will be permitted to individuals in
computing their alternative minimum tax liability. If the Fund does not qualify
or elect to pass through to the Fund's shareholders foreign income taxes paid
by it, its shareholders will not be able to claim any deduction or credit for
any part of the foreign taxes paid by the Fund.

Foreign exchange gains and losses realized by a Fund will generally be
treated as ordinary income and losses. Use of foreign currencies for
non-hedging purposes may be limited in order to avoid a tax on the applicable
Fund. Occasionally, a Fund may invest in stock of foreign issuers deemed to be
"passive foreign investment companies" for U.S. tax purposes. Any Fund making
such an investment may be liable for U.S. income taxes on certain distributions
and realized capital gains from stock of such issuers. Any Fund making such an
investment also may elect to mark to market its investments in "passive foreign
investment companies" on the last day of each taxable year, which may cause the
Fund to recognize ordinary income prior to the receipt of cash payments with
respect to those investments. In order to distribute that income and avoid a
tax on the Fund, such a Fund may be required to liquidate portfolio securities
that it might otherwise have continued to hold.

<PAGE>

FOREIGN SHAREHOLDERS

Taxable dividends and certain other payments to persons who are not
citizens or residents of the United States or U.S. entities ("Non-U.S.
Persons") are generally subject to U.S. tax withholding at a rate of 30%,
although the 30% rate may be reduced to the extent provided by an applicable
tax treaty. The Funds intend to withhold tax payments at the rate of 30% (or
the lower treaty rate) on taxable dividends and other payments to Non-U.S.
Persons that are subject to such withholding. Any amounts overwithheld may be
recovered by such persons by filing a claim for refund with the U.S. Internal
Revenue Service within the time period appropriate to such claims.
Distributions received from the Funds by Non-U.S. Persons also may be subject
to tax under the laws of their own jurisdictions.

BACKUP WITHHOLDING

Each of the Funds is required in certain circumstances to apply backup
withholding at the rate of 31% on taxable dividends and (except in the case of
the Money Market Funds) redemption proceeds paid to any shareholder (including
a Non-U.S. Person) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding.

The foregoing is only a brief summary of some of the important tax
considerations generally affecting the taxation of shareholders that are
subject to personal income tax. Potential investors, including in particular,
investors who may be subject to other taxes, such as corporate franchise tax,
corporate income tax and taxes of other jurisdictions, should consult their own
tax advisers.

10. PERFORMANCE INFORMATION

CALCULATION OF YIELD

From time to time, the Trust advertises the "current yield" and "effective
yield" (also referred to as "effective compound yield") of the Money Market
Funds. Both yield figures are based on historical earnings and are not intended
to indicate future performance. The "current yield" of a Fund refers to the
income generated by an investment in that Fund over a seven-day period (which
period will be stated in the advertisement). This income is then "annualized."
That is, 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. The "effective yield" is calculated similarly
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 reinvestment.

The current yield of these Funds will be calculated daily based upon the
seven days ending on the date of calculation ("base period"). The yield is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing shareholder account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing such net change
by the value of the account at the beginning of the same period to obtain the
base period return and multiplying the result by (365/7). Realized and
unrealized gains and losses are not included in the calculation of the yield.

<PAGE>

The effective compound yield of these Funds is determined by computing 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 the
period, subtracting a hypothetical charge reflecting deductions from
shareholder accounts, and dividing the difference by the value of the account
at the beginning of the base period to obtain the base period return, and then
compounding the base period return by adding 1, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result, according to the
following formula:

Effective Yield = (Base Period Return + 1)(365/7)-1.

The current and the effective yields reflect the reinvestment of net
income earned daily on fund assets.

The yield of the Money Market Funds fluctuates, and the annualization of a
week's dividend is not a representation by the Trust as to what an investment
in a Fund will actually yield in the future. Actual yields will depend on such
variables as asset quality, average asset maturity, the type of instruments the
Fund invests in, changes in interest rates on money market instruments, changes
in the expenses of the Fund and other factors.

Yields are one basis upon which investors may compare these Funds with
other money market funds. However, yields of other money market funds and other
investment vehicles may not be comparable because of the factors set forth
above and differences in the methods used in valuing fund instruments.

From time to time the Trust may advertise a 30-day yield for each of the
Stock and Bond Funds. These figures will be based on historical earnings and
are not intended to indicate future performance. The yield of these Funds
refers to the annualized net investment income per share generated by an
investment in the Funds over a specified 30-day period. The yield is calculated
by assuming that the income generated by the investment during that 30-day
period is generated over one year and is shown as a percentage of the
investment. In particular, yield will be calculated according to the following
formula:

Yield = 2 [((a-b)/cd + 1)6-1]

Where:

a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursement);
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends;
d = the maximum offering price per share on the last day of the
period.

The Trust may also advertise a tax-equivalent yield for the Tax-Free Money
Market Fund and each of the Tax-Exempt Funds. The tax-equivalent yield is
determined by calculating the rate of return that would have to be achieved on
a fully-taxable investment to produce the after-tax equivalent of a Fund's
yield, assuming certain tax brackets for a shareholder. The tax-equivalent
yield quotation of a Fund will be calculated by dividing that portion of the
Fund's yield that is tax-exempt by 1 minus a stated income tax rate and adding
the quotient to that portion, if any, of the Fund's yield that is not

<PAGE>

tax-exempt. The tax-equivalent effective yield is determined by dividing that
portion of the Fund's effective yield that is tax-exempt by 1 minus a stated
income tax rate and adding the quotient to that portion, if any, of the Fund's
effective yield that is not tax-exempt.

CALCULATION OF TOTAL RETURN

From time to time the Trust may advertise total return for a Fund. The
total return of a Fund refers to the average compounded rate of return on a
hypothetical investment for designated time periods (including, but not limited
to, the period from which the Fund commenced operations through the specified
date), and assumes that the entire investment is redeemed at the end of each
period. In particular, total return will be calculated according to the
following formula:

P (1 + T)n = ERV

Where:

P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value (as of the end of the designated time
period) of a hypothetical $1,000 payment made at the beginning of
the designated time period.

Total returns calculated for the Florida Tax-Exempt Income Fund for any
period which includes periods prior to the commencement of the Fund's
operations reflect the performance of a common trust fund managed by BankBoston
that contributed all of its assets to the Fund at the Fund's commencement of
operations. The performance of the common trust fund was calculated in
accordance with recommended standards of the Association for Investment
Management and Research. The common trust fund had investment objectives,
policies and practices materially equivalent to those of the Florida Tax-Exempt
Income Fund. All total return percentages for periods prior to the commencement
of operations of the Florida Tax-Exempt Income Fund reflect historical rates of
return of the common trust fund for those periods adjusted to assume that all
current Fund charges, expenses and fees were then deducted. The common trust
fund was neither registered under the 1940 Act (and therefore was not subject
to certain investment restrictions imposed by the 1940 Act) nor subject to the
requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended, as to the nature of gross income, the amount of distributions and the
composition and holding period of portfolio assets. If the common trust fund
had been registered under the 1940 Act, its investment performance might have
been adversely affected. The prior performance of the common trust fund
represents historical performance for similarly managed accounts and is not
indicative of the corresponding Fund's future performance.

Set forth below is total rate of return information, assuming that
dividends and capital gains distributions, if any, were reinvested, for the
Tax-Exempt, Bond and Stock Funds for the periods indicated.

<PAGE>

REDEEMABLE VALUE OF A
HYPOTHETICAL $1,000
ANNUALIZED TOTAL INVESTMENT AT THE
FUND AND PERIOD RATE OF RETURN END OF THE PERIOD

BOSTON 1784 TAX-EXEMPT
MEDIUM-TERM INCOME FUND

June 14, 1993 (commencement
of operations) to May 31, 1998 6.57% $1,371.53

One year ended May 31, 1998 9.24% $1,092.42

BOSTON 1784 CONNECTICUT TAX-
EXEMPT INCOME FUND

August 1, 1994 (commencement
of operations) to May 31, 1998
7.34% $1,311.50
One year ended May 31, 1998
9.29% $1,092.87

BOSTON 1784 FLORIDA TAX-
EXEMPT INCOME FUND(1)

January 1, 1991 (date of initial
public investment in the common
trust fund) to May 31, 1998 6.92% $1,642.67

Five years ended May 31, 1998 5.57% $1,311.37

Three years ended May 31, 1998 6.31% $1,201.36

One year ended May 31, 1998 8.52% $1,085.17

BOSTON 1784 MASSACHUSETTS
TAX-EXEMPT INCOME FUND

June 14, 1993 (commencement
of operations) to May 31, 1998 5.78% $1,321.79

One year ended May 31, 1998 8.91% $1,089.15

BOSTON 1784 RHODE ISLAND TAX-
EXEMPT INCOME FUND

August 1, 1994 (commencement
of operations) to May 31, 1998
6.93% $1,292.57
One year ended May 31, 1998
8.28% $1,082.83

<PAGE>

BOSTON 1784 U.S. GOVERNMENT
MEDIUM-TERM INCOME FUND

June 7, 1993 (commencement of
operations) to May 31, 1998 5.43% $1,301.59

One year ended May 31, 1998 8.56% $1,085.58

BOSTON 1784 SHORT-TERM
INCOME FUND

July 1, 1994 (commencement of
operations) to May 31, 1998 6.37% $1,273.73

One year ended May 31, 1998 6.98% $1,069.84

BOSTON 1784 INCOME FUND

July 1, 1994 (commencement of
operations) to May 31, 1998 7.72% $1,338.08

One year ended May 31, 1998 8.88% $1,088.76

BOSTON 1784 ASSET ALLOCATION
FUND

June 14, 1993 (commencement of
operations) to May 31, 1998 13.45% $1,870.67

One year ended May 31, 1998 20.51% $1,205.08

BOSTON 1784 GROWTH AND
INCOME FUND

June 7, 1993 (commencement of
operations) to May 31, 1998 18.90% $2,368.49

One year ended May 31, 1998 26.71% $1,267.07

BOSTON 1784 GROWTH FUND

March 28, 1996 (commencement
of operations) to May 31, 1998
15.99% $1,380.81
One year ended May 31, 1998
12.64% $1,126.38

<PAGE>

BOSTON 1784 INTERNATIONAL
EQUITY FUND

January 3, 1995
(commencement of operations)
to May 31, 1998 11.75% $1,460.23

One year ended May 31, 1998 6.19% $1,061.94

(1) Without giving effect to fee waivers and reimbursements currently in
effect the annualized total rate of return for Boston 1784 Florida Tax-Exempt
Income Fund for the one, three and five year periods ended May 31, 1998 and for
the period from January 1, 1991 (date of initial public investment in common
trust fund) to May 31, 1998, would have been 8.52%, 6.31%, 5.57% and 6.92%,
respectively.

The annualized yield of each of the Tax-Exempt, Bond and Stock Funds for
the 30-day period ended on May 31, 1998 was as follows: Boston 1784 Short-Term
Income Fund 5.44%; Boston 1784 Income Fund 5.56%; Boston 1784 U.S. Government
Medium-Term Income Fund 5.41%; Boston 1784 Tax-Exempt Medium-Term Income Fund
4.30%; Boston 1784 Connecticut Tax-Exempt Income Fund 4.16%; Boston 1784
Massachusetts Tax-Exempt Income Fund 4.19%; Boston 1784 Rhode Island Tax-Exempt
Income Fund 4.23%; Boston 1784 Asset Allocation Fund 2.38%; Boston 1784 Growth
and Income Fund 0.17%; and Boston 1784 Growth Fund 0.38%.

The annualized tax-equivalent yield of each of the Tax-Exempt Funds for
the 30-day period ended on May 31, 1998 was as follows: Boston 1784 Tax-Exempt
Medium-Term Income Fund 7.12%; Boston 1784 Connecticut Tax-Exempt Income Fund
7.21%, Boston 1784 Massachusetts Tax-Exempt Income Fund 7.88%; and Boston 1784
Rhode Island Tax-Exempt Income Fund 7.86%.

Set forth below is total rate of return information, assuming that
dividends and capital gains distributions, if any, were reinvested, for the
Money Market Funds for the periods indicated.

REDEEMABLE VALUE OF A
HYPOTHETICAL $1,000
ANNUALIZED TOTAL INVESTMENT AT THE
FUND AND PERIOD RATE OF RETURN END OF THE PERIOD

BOSTON 1784 TAX-FREE
MONEY MARKET FUND

June 14, 1993
(commencement
of operations) to May 31, 1998 3.16% $1,167.19

One year ended May 31, 1998 3.33% $1,033.35

<PAGE>

BOSTON 1784 U.S. TREASURY
MONEY MARKET FUND

June 7, 1993 (commencement
of operations) to May 31,
1998 4.51% $1,245.77

One year ended May 31, 1998
5.02% $1,050.23

BOSTON 1784 INStITUTIONAL
U.S. TREASURY MONEY
MARKET FUND

June 30, 1993
(commencement of
operations) to May 31, 1998 4.84% $1,264.14

One year ended May 31, 1998

5.36% $1,053.63

BOSTON 1784 PRIME MONEY
MARKET FUND(1)

August 1, 1991 (date of initial
public investment) to May 31,
1998 4.40% $1,351.33

Five years ended May 31,
1998 4.62% $1,253.15

Three years ended May 31,
1998 5.16% $1,163.02

One year ended May 31, 1998
5.16% $1,051.65

BOSTON 1784 INSTITUTIONAL
PRIME MONEY MARKET FUND

November 5, 1997 (date of
initial public investment) to
May 31, 1998 5.55% $1,031.08

(1) The Prime Money Market Fund is the successor through a reorganization
with the BayFunds Money Market Portfolio. The BayFunds Money Market Portfolio
was a portfolio of BayFunds, an open-end investment company registered under
the 1940 Act and reorganized with the Prime Money Market Fund on December 9,
1996.

The annualized yield and tax-equivalent yield of Boston 1784 Tax-Free
Money Market Fund for the seven-day period ended May 31, 1998 were 3.36% and
5.56%, respectively, and the effective compound annualized yield and
tax-equivalent effective yield of Boston 1784 Tax-Free Money Market Fund for
such period were 3.41% and 5.65%, respectively.

<PAGE>

The annualized yield of Boston 1784 U.S. Treasury Money Market Fund for
the seven-day period ended May 31, 1998 was 4.92% and the effective compound
annualized yield of Boston 1784 U.S. Treasury Money Market Fund for such period
was 5.04%.

The annualized yield of Boston 1784 Institutional U.S. Treasury Money
Market Fund for the seven-day period ended May 31, 1998 was 5.24% and the
effective compound annualized yield of Boston 1784 Institutional U.S. Treasury
Money Market Fund for such period was 5.37%.

The annualized yield of Boston 1784 Prime Money Market Fund for the
seven-day period ended May 31, 1998 was 5.03% and the effective compound
annualized yield of Boston 1784 Prime Money Market Fund for such period was
5.16%.

The annualized yield of Boston 1784 Institutional Prime Money Market Fund
for the seven-day period ended May 31, 1998 was 5.35% and the effective
compound annualized yield of Boston 1784 Institutional Prime Money Market Fund
for such period was 5.49%.

A Fund's performance may from time to time be compared to that of other
mutual funds tracked by mutual fund rating services, broad groups of comparable
mutual funds or unmanaged indices, which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs. In
reports and other communications to shareholders or in advertising and sales
literature, the Funds may also present statistics on current and historical
rates of Money Market Deposits Accounts and Statement Savings prepared by
outside services such as Bank Rate Monitor, Inc. The Funds may also show the
historical performance of other investment vehicles or groups of other mutual
funds, and compare this performance to the historical performance of the Funds,
and may compare tax equivalent yields to taxable yields. Any given
"performance" or performance comparison should not be considered as
representative of any performance in the future. In addition, there may be
differences between the Funds and the various indexes and reporting services
which may be quoted by the Funds.

11. FINANCIAL STATEMENTS

FOR THE PRIME MONEY MARKET FUND

The Statement of Net Assets at May 31, 1998, the Statements of Operations
for the period ended May 31, 1998, the Statements of Changes in Net Assets for
the periods ended May 31, 1997 and May 31, 1998, the Financial Highlights for
the periods ended December 31, 1996, May 31, 1997 and May 31, 1998, the Notes
to the Financial Statements and the Report of Independent Accountants, each of
which is included in the Annual Reports to Shareholders of the Trust (Accession
Numbers 0000935069-98-000115 and 0000935069-98-000114), are incorporated by
reference into this Statement of Additional Information and have been so
incorporated in reliance upon the report of PricewaterhouseCoopers LLP,
independent accountants, as experts in accounting and auditing. The Financial
Highlights for the periods ended December 31, 1993, December 31, 1994 and
December 31, 1995 are included in the Annual Reports to Shareholders of the
Trust and are incorporated by reference into this Statement of Additional
Information and have been so incorporated in reliance upon the report of Ernst
& Young, LLP, independent auditors, given upon the authority of said firm as
experts in accounting and auditing. A copy of the Annual Report accompanies
this Statement of Additional Information.

<PAGE>

FOR THE REMAINDER OF THE FUNDS

<PAGE>

APPENDIX A

CERTAIN INFORMATION CONCERNING
CONNECTICUT, FLORIDA, MASSACHUSETTS AND RHODE ISLAND

1. CONNECTICUT

SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN
CONNECTICUT MUNICIPAL SECURITIES

The following is a summary of certain information contained in the
Preliminary Official Statement of Connecticut dated December 4, 1998, as
modified December 15, 1998. The summary does not purport to be a complete
description and is current as of the date of the corresponding information
statement. The Funds are not responsible for the accuracy or timeliness of this
information.

Connecticut municipal securities may fluctuate in value in response to a
variety of factors, including the economic strength of State and local
governments and the availability of federal funding.

ECONOMIC OVERVIEW

Connecticut's economy is diverse. Manufacturing employment has been on a
downward trend since the mid-1980s, while non-manufacturing employment has
recovered most of its losses from its peak in the late 1980s. Manufacturing is
diversified, with transportation equipment (primarily aircraft engines,
helicopters, and submarines) the dominant industry. Connecticut is a leading
producer of aircraft engines and parts, submarines, and helicopters. The
largest employers in these industries are United Technologies Corporation,
including its Pratt and Whitney Aircraft Division, with headquarters in East
Hartford, and Sikorsky Aircraft Division in Stratford, as well as General
Dynamics Corporation's Electric Boat Division in Groton.

During the past ten years, Connecticut's manufacturing employment was at
its highest in 1988 at over 372,230 workers. Since that year, employment in
manufacturing has been on a downward trend, declining 25.8 percent or a loss of
96,030 jobs by 1997 from 1988 levels. A number of factors, such as the
overvalued dollar of the mid 1980s, heightened foreign competition, a sharp
decrease in defense spending, and improved productivity played a significant
role in affecting the overall level of manufacturing employment. However, in
1997, total manufacturing jobs in Connecticut registered a gain of 1,400 jobs
or 0.5% over 1996.

Over the past several decades the non-manufacturing sector of the State's
economy has risen in economic importance, from just over 50 percent of total
State employment in 1950 to approximately 83 percent by 1997. This trend has
decreased the State's dependence on manufacturing. The State's
non-manufacturing sector expanded by 2.4 percent in 1997 as compared to 2.0
percent in 1996 and 1.9 percent in 1995. This trend, which began in 1993,
reversed three years of decline starting in 1990. During the 1990's,
Connecticut's growth in non-manufacturing employment has lagged that of the New
England region and the nation as a whole.

<PAGE>

The non-manufacturing sector is comprised of industries that typically
provide a service. The four major industries in terms of employment are:
services, retail and wholesale trade, state and local government, as well as
finance, insurance and real estate ("FIRE"), which collectively comprise about
90 percent of employment in the non-manufacturing sector.

After enjoying an extraordinary boom during the mid-1980s, Connecticut, as
well as the rest of the Northeast, experienced an economic slowdown before the
onset of the national recession which occurred at the beginning of the 1990s.
Reflecting the downturn, the unemployment rate in the State rose from a low of
3 percent in 1988 to just above the national average of 7.5 percent during
1992.

FISCAL CONDITION IN RECENT YEARS

The State finances most of its operation through its General Fund. The
major components of General Fund revenues are State taxes, including the
personal income tax, the sales and use tax, and the corporation business tax.
Miscellaneous fees, receipts, transfers, and unrestricted Federal grants
account for most of the other General Fund revenue. A cumulative
budgetary-basis deficit in the General Fund as of June 30, 1991 in the amount
of $965,711,525 was funded by the issuance of General Obligation Economic
Recovery Notes. In fiscal year 1996-97 an appropriation was made to pay when
due the remaining debt service due on the Economic Recovery Notes. The final
payment is due in fiscal year 1998-99.

GENERAL FUND BUDGETS 1997-98, AND 1998-99

Per Section 3-115 of the Connecticut General Statutes and Article IV,
Section 24 of the State Constitution, the State's official budgetary basis
fiscal position for the fiscal year ended June 30, 1998 is reported by the
Comptroller. This report indicates 1997-98 fiscal year General Fund
expenditures of $9,829.3 million, General Fund revenues of $10,142.2 million
and a surplus of $312.9 million, (excluding Restricted Federal and Other
Grants).

Per Section 4-30a of the Connecticut General Statutes, any unappropriated
surplus, up to five percent of General Fund expenditures, shall be deposited
into the Budget Reserve Fund. After the transfer of $161.7 million which is
required to meet the five percent of General Fund expenditures, the balance of
$151.2 million will be used pursuant to Article XXVIII of the Amendments to the
Constitution of Connecticut to reduce bonded indebtedness.

1997-1998 OPERATIONS

Per Section 3-115 of the Connecticut General Statutes, the State's fiscal
position is reported monthly by the Comptroller. This report compares revenues
already received and the expenditures already made to estimated expenditures to
be made during the balance of the fiscal year. This report projects an
operating surplus of $170.7 million, as a result of an increase in estimated
revenues that more than offset the increase in estimated expenditures.
Estimated revenues have been revised upward by $172.2 million from the enacted
budget plan.

Per Section 4-30a of the Connecticut General Statutes, any unappropriated
surplus, up to five percent of General Fund expenditures, shall be deposited
into the Budget Reserve Fund. After transferring the amount which is required
to meet the five percent of General Fund expenditures, the balance will be used
pursuant to Article XXVIII of the Amendments to the Constitution of Connecticut
to reduce bonded indebtedness.

<PAGE>

COMPONENTS OF REVENUE

PERSONAL INCOME TAX

Beginning with the income year commencing on or after January 1, 1991, the
State imposed a personal income tax on the income of residents of the State
(including resident trusts and estates), part-year residents and certain
non-residents who have taxable income derived from or connected with sources
within Connecticut. For tax years commencing on or after January 1, 1992, the
tax imposed is at the rate of 4.5 percent on Connecticut taxable income.
Depending on federal income tax filing status and Connecticut adjusted gross
income, personal exemptions ranging from $12,000 to $24,000 are available to
taxpayers. In addition, tax credits ranging from 1 percent to 75 percent of a
taxpayer's Connecticut tax liability are also available depending upon federal
income tax filing status and Connecticut adjusted gross income. Such exemptions
and tax credits are phased out at certain higher income levels. Neither the
personal exemption nor the tax credit described above is available to a trust
or an estate. Legislation enacted in 1995 effected a graduated rate structure
beginning in tax year 1996. Under this revised structure, the top rate remains
at 4.5 percent with a rate of 3 percent on the first $4,500 of taxable income
for joint filers and the first $2,250 for single filers. For tax year 1997, the
3 percent rate is expanded to the first $9,000 of taxable income for joint
filers and the first $4,500 for single filers. Legislation enacted during the
1997 session expands the amount of taxable income subject to the lower 3
percent rate. By tax year 1999, the first $20,000 of taxable income for a joint
filer and the first $10,000 of taxable income for a single filer will be taxed
at the 3 percent rate. In addition, the maximum $100 income tax credit for
property taxes paid will be expanded to a maximum of $350 per filer. Taxpayers
also are subject to the Connecticut minimum tax based on their liability, if
any, for payment of the federal alternative minimum tax. Legislation enacted in
1998 provided for rebates from $50 to $150 to certain taxpayers filing income
tax returns for the taxable year commencing January 1, 1997, and who have paid
property tax which first came due and was paid in such income year.

SALES AND USE TAX

The Sales Tax is imposed, subject to certain limitations, on the gross
receipts from certain transactions within the State of persons engaged in
business in the State, including (a) sales at retail of tangible personal
property, (b) the rendering of certain services, (c) the leasing or rental of
tangible personal property, (d) the producing, fabricating, processing,
printing, or imprinting of tangible personal property to special order or with
materials furnished by the consumer, (e) the furnishing, preparing or serving
of food, meals, or drinks, and (f) the transfer of occupancy of hotel or
lodging house rooms for a period not exceeding thirty consecutive calendar
days. The Use Tax is imposed on the consideration paid for certain services or
purchases or rentals of tangible personal property used within the State
pursuant to a transaction not subject to the Sales Tax. A separate rate of 12
percent is charged on the occupancy of hotel rooms. Effective October 1, 1991,
the tax rate for the Sales and Use Taxes was reduced from eight percent to six
percent. Various exemptions from the Sales and Use Taxes are provided, based on
the nature, use or price of the property or services involved or the identity
of the purchaser. Tax returns and accompanying payments with respect to
revenues from these taxes are generally due monthly on or before the last day
of the month next succeeding the taxable month.

<PAGE>

CORPORATION BUSINESS TAX

The Corporation Business Tax is imposed on any corporation, joint stock
company or association, any dissolved corporation that continues to conduct
business, any electric distribution company or fiduciary of any of the
foregoing which carries on or has the right to carry on business within the
State or owns or leases property or maintains an office within the State or is
a general partner in a partnership or a limited partner in a limited
partnership, except an investment partnership, that does business, owns or
leases property or maintains an office within the State. Section 12-214, as
amended, provides for certain financial services companies to be exempt from
this tax. For income years commencing on or after January 1, 1999, this
exemption extends to domestic insurance companies. The Corporation Business Tax
provides for three methods of computation. The taxpayer's liability is the
greatest amount computed under any of the three methods.

The first method of computation is a tax measured by the net income of a
taxpayer (the "Income-Base Tax"). Net income, except as applied to insurance
companies means federal gross income with limited variations less certain
deductions, most of which correspond to the deductions allowed under the
Internal Revenue Code of 1986, as amended from time to time. In the case of
life insurance companies subject to the Corporation Business Tax, net income
means life insurance company taxable income, as determined for federal income
tax purposes, with certain adjustments. The Income-Base Tax had been levied at
the rate of 10.5 percent until January 1, 1998 when it was decreased to 9.5
percent. Legislation enacted in 1993 and subsequent years instituted a phase
down in the corporation tax rate so that by the income year commencing on or
after January 1, 2000 the corporate rate will be 7.5 percent. The second method
of computing the Corporation Business Tax, from which the domestic insurance
companies are exempted, is an alternative tax on capital. This alternative tax
is determined either as a specific maximum dollar amount or at a flat rate on a
defined base, usually related in whole or in part to its capital stock and
balance sheet surplus, profit and deficit. The third method of computing the
Corporation Business Tax is the minimum tax which is a flat $250. Corporations
must compute their tax under all three methods and pay the tax under the
highest computation.

OTHER TAXES

Other tax revenues are derived from the inheritance taxes, taxes on gross
receipts of hospitals and public service corporations, taxes on net direct
premiums of insurance companies, taxes on oil companies, cigarette and
alcoholic beverage excise taxes, real estate conveyance taxes, taxes on
admissions, dues and cabarets and other miscellaneous tax sources.

FEDERAL GRANTS

Federal grants in aid are normally conditioned to some degree, depending
upon the particular program being funded, on resources provided by the State.
More than 99 percent of unrestricted federal grant revenue is expenditure
driven. The largest federal grants in fiscal 1998 were made for the purposes of
providing medical assistance payments to the indigent and Aid to Families with
Dependent Children. The State also receives certain restricted federal grants
which are not reflected in annual appropriations but which nonetheless are
accounted for in the General Fund. In addition, the State receives certain
federal grants which are not accounted for in the General Fund but are
allocated to the Transportation Fund, various Capital Project Funds and other
funds.

<PAGE>

OTHER NON-TAX REVENUES

Other non-tax revenues are derived from special revenue transfers; Indian
gaming payments; licenses, permits and fees; sales of commodities and services;
rents, fines and escheats; investment income; and other miscellaneous revenue
sources.

YEAR 2000 READINESS

CONNECTICUT'S CURRENT STATE OF READINESS

The State has coordinated a review of its Year 2000 exposures through its
Department of Information Technology ("DOIT"). To date, DOIT has assessed
approximately 1360 computer systems (of the State's approximately 15000
systems) of which 770 have been categorized as mission critical. As of October
31, 1998, 63% of the programs in mission critical systems requiring remediation
had been converted, and 27% of the testing cycles required to validate
compliance in mission critical systems had been completed. A target date of
March 31, 1999 has been established for completion of remediation and testing
activities for mission critical systems, however, some agency project plans
anticipate completion dates in the second and third quarters.

The State Legislature approved $15.0 million in bonding in 1997-98 for
equipment and related costs of the Year 2000 issue. An additional $80 million
was appropriated to DOIT as part of the 1998-1999 Midterm Budget Adjustments.

The State presently believes that, with modifications to existing software
and converting to new software, the Year 2000 problem will not pose significant
operations problems for the State's computer systems as so modified or
converted. While the State expects its Year 2000 plan to be completed on a
timely basis, there is a risk that the plan will not be completed on time and
that there may not be enough time to adequately test all computer systems for
Year 2000 problems. There is a related risk that testing does not
satisfactorily reveal all Year 2000 software or hardware problems. Also, there
can be no assurance that the systems of other companies on which the State's
systems or service commitments may rely will be completed in a timely fashion.
If the necessary remediations are not completed in a timely fashion, the Year
2000 problem may have a material impact on the operations of the State.

LITIGATION

The State of Connecticut, its officers and employees, are defendants in
numerous lawsuits. The ultimate disposition of and final consequences of these
lawsuits are not presently determinable. The Attorney General's Office has
reviewed the status of pending lawsuits and reports that it is the opinion of
the Attorney General that such pending litigation will not be determined so as
to result, individually or in the aggregate, in a final judgment against the
State which would materially adversely affect its financial position, except
that in the cases described below the fiscal impact of an adverse decision
might be significant but is not determinable at this time.

The cases described in this section generally do not include any
individual case where the fiscal impact of an adverse judgment is expected to
be less than $15 million, but adverse judgments in a number of such cases
could, in the aggregate and in certain circumstances, have a significant
impact.

<PAGE>

CONNECTICUT CRIMINAL DEFENSE LAWYERS ASSOCIATION V. FORST is an action
brought in 1989 in Federal District Court alleging a pervasive campaign by the
State and various State Police officials of illegal electronic surveillance,
wiretapping and bugging for a number of years at Connecticut State Police
facilities. The plaintiffs seek compensatory damages, punitive damages, as well
as other damages and costs and attorneys' fees, as well as temporary and
permanent injunctive relief. In November 1991, the court issued an order which
will allow the plaintiffs to represent a class of all persons who participated
in wire or oral communications to, from, or within State Police facilities
between January 1, 1974 and November 9, 1989 and whose communications were
intercepted, recorded and/or used by the defendants in violation of the law.
This class includes a subclass of the Connecticut State Police Union, current
and former Connecticut State Police officers who are not defendants in this or
any consolidated case, and other persons acting on behalf of the State Police
who participated in oral or wire communications to, from or within State Police
facilities between such dates.

SHEFF V. O'NEILL is a Superior Court action brought in 1989 on behalf of
black and Hispanic school children in the Hartford school district. The
plaintiffs sought a declaratory judgment that the public schools in the greater
Hartford metropolitan area are segregated de facto by race and ethnicity and
are inherently unequal to their detriment. They also sought injunctive relief
against state officials to provide them with an "integrated education". On
April 12, 1995, the Superior Court entered judgment for the State. On July 9,
1996, the State Supreme Court reversed the Superior Court judgment and remanded
the case with direction to render a declaratory judgment in favor of the
plaintiffs. The Court directed the legislature to develop appropriate measures
to remedy the racial and ethnic segregation in the Hartford public schools. The
Supreme Court also directed the Superior Court to retain jurisdiction of this
matter. The 1997 General Assembly enacted P.A. 97-290, An Act Enhancing
Educational Choices and Opportunities in response to the Supreme Court
decision. In response to a motion filed by the plaintiffs, the Superior Court
recently ordered the State to show cause as to whether there has been
compliance with the Supreme Court's ruling.

THE CONNECTICUT TRAUMATIC BRAIN INJURY ASSOCIATION, INC. V. HOGAN is a
Federal District Court civil rights action brought in 1990 on behalf of all
persons with retardation or traumatic brain injury who have been, or may be,
placed in Norwich, Fairfield Hills or Connecticut Valley Hospitals. The
plaintiffs claim that the treatment and training they need is unavailable in
state hospitals for the mentally ill and that placement in those hospitals
violates their constitutional rights. The plaintiffs seek relief which would
require that the plaintiff classmembers be transferred to community residential
settings with appropriate support services. This case has been settled as to
all persons with mental retardation by their eventual discharge from Norwich
and Fairfield Hills Hospital. The case is still proceeding as to those persons
with traumatic brain injury and the class of plaintiffs has been expanded to
include persons with acquired brain injury who are in the custody of the
Department of Mental Health and Addiction Services. The Court in 1998 expanded
the class of plaintiffs to include persons who are or have been in the custody
of the Department of Mental Health and Addiction Services at any time during
the pendency of the case without reference to a particular facility.

JOHNSON V. ROWLAND is a Superior Court action brought in 1998 in the name
of several public school students and the Connecticut municipalities in which
the students reside, seeking declaratory judgment that the State's current
system of financing public education through local property taxes and State
payments to municipalities determined under a Statutory Education Cost Sharing
("ECS") formula violates the Connecticut Constitution. Additionally, the suit

<PAGE>

seeks various injunctive orders requiring the State to, among other things,
cease implementation of the present system, modify the ECS formula and fund the
ECS formula at the level contemplated in the original 1988 public act which
established the ECS.

Several suits have been filed since 1977 in the Federal District Court and
the Connecticut Superior Court on behalf of alleged INDIAN TRIBES in various
parts of the State, claiming monetary recovery as well as ownership to land in
issue. Some of these suits have been settled or dismissed. The plaintiff group
in the remaining suits is the alleged Golden Hill Paugussett Tribe and the
lands involved are generally located in Bridgeport, Trumbull, Orange, Shelton
and Seymour. There may be additional suits filed by other alleged Indian Tribes
claiming ownership of land located in the State of Connecticut but to which the
State is not a party. One such claim involves the alleged Schaghticoke Indian
Tribe claiming privately and town held lands in the Town of Kent.

2. FLORIDA

SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN
FLORIDA MUNICIPAL SECURITIES

The following is a summary of certain information contained in the
Official Statement Relating to $226,375,000 State of Florida State Board of
Education, Public Education Capital Outlay Refunding Bonds, 1998 Series D,
dated December 15, 1998. The summary does not purport to be a complete
description and is current as of the date of the statement. The Funds are not
responsible for the accuracy or timeliness of this information.

NATIONAL AND STATE ECONOMIC OUTLOOK

The national economic forecast indicates slower growth during the next
two fiscal years. Real GDP is expected to increase 2.6 percent in 1998-99 and
2.2 percent in 1999-00. Real business investment is anticipated to expand 4.6
percent in 1988-99 and 2.6 percent next year, while real consumption should
increase 4.0 percent this year and 2.6 percent next year. Underlying the
official national economic forecast are key assumptions regarding fiscal
policy, monetary policy, and prices. On the monetary side, the Federal Reserve
is expected to undertake a series of interest rate cuts to avoid financial
turmoil and recession in the U.S. Inflation, as measured by the Consumer Price
Index, is expected to remain under control, averaging 2.0 percent in 1998-99
and 2.6 percent in 1999-00. The federal budget deficit is forecasted to be
$64.7 billion this year and $69.4 billion next year.

In other areas of the U.S. economy, construction activity will begin to
soften in 1998-99 and continue to decrease slightly in 1998-99. Housing starts
should reach 1.6 million units this year and 1.5 million next year. The stock
market, as measured by the S&P Index, is expected to increase slightly in
1998-99 and in 1999-00. Total employment will expand 1.1 percent in 1998-99 and
4.6 percent the next year. The unemployment rate is expected to average 4.5
percent this year and 4.6 percent next year.

While the Florida economy will also slow, it is expected to continue
outperforming the U.S. Total non-farm employment is expected to increase 3.4
percent in 1998-99 and 2.9 percent in 1999-00, reaching almost 7.0 million.
Trade and services account for more than half of all nonfarm jobs. Service jobs
are forecasted to grow 5.5% in 1998-99, and 4.4% in 1999-00. Trade jobs will
grow 2.8% the first year and 2.8% the next year.

<PAGE>

An important element of Florida's economic outlook is the construction
sector. Florida's single and multi-family private housing starts are projected
to reach a combined total of 144,000 units in 1998-99 and 143,000 units the
following year. Multi-family starts have been slow to recover from the early
90's recession, but they are showing strength with an expected 46,500 starts in
1998-99, and 46,300 starts in 1999-00. Single family starts are forecasted to
be 97,600 in 1998-99, and 38,300 starts in 1999-00. Single family starts are
forecasted to be 88,100 in 1998-99, and 96,700 the next year. Total
construction expenditures will increase 8.6 percent and 2.5 percent during the
two years.

Tourist arrivals are forecasted to increase 2.0 percent in 1998-99 and 1.7
percent the following year. Air tourists will increase 3.2 percent and 3.9
percent, while auto tourists will increase 0.6 percent and -1.0 percent, during
this time. By the end of 1998-99, 49.7 million domestic and international
tourists are expected to visit the State. In 1999-00 tourist visits should
reach 50.6 million.

Real personal income in Florida is forecasted to increase 4.9 percent in
1998-99 and 3.5 percent in 1999-00. During this time, real personal income per
capita will grow at 3.1 percent in 1998-99 and 1.8 percent in 1999-00.

FLORIDA FINANCIAL OUTLOOK

For fiscal year 1998-99, the estimated General Revenue plus Working
Capital and Budget Stabilization funds available total $19,463,7 million, a 5.1
percent increase over 1997-98. The $17,692.4 million in Estimated Revenues
represent a 4.4 percent increase over the analogous figure in 1997-98. With
combined General Revenue, Working Capital Fund, and Budget Stabilization Fund
appropriations at $18,185.0 million, including a $100.9 million transfer to the
Budget Stabilization Fund, unencumbered reserves at the end of 1998-99 are
estimated at $1,379.6 million.

For fiscal year 1999-00, the estimated General Revenues plus Working
Capital and Budget Stabilization funds available total $19,923.7 million, a 2.4
percent increase over 1998-99. The $18,386.1 million in Estimated Revenues
represent a 3.9 percent increase over the analogous figure in 1998-99.

REVENUES AND EXPENDITURES

Financial operations of the State of Florida covering all receipts and
expenditures are maintained through the use of four fund types: the General
Revenue Fund, Trust Funds, the Working Capital Fund, and the Budget
Stabilization Fund.

In fiscal year 1996-97, an estimated 67 percent of total direct revenues
to these funds were derived from State taxes and fees. Federal funds and other
special revenues accounted for the remaining revenues. Major sources of tax
revenues to the General Revenue Fund are the sales and use tax, corporate
income tax, intangible personal property tax, beverage tax, and estate tax
which amounted to 68 percent, 8 percent, 4 percent, 3 percent and 3 percent,
respectively, of total General Revenue funds available.

State expenditures are categorized for budget and appropriation purposes
by the type of fund and spending unit, which are further subdivided by line
item. In fiscal year 1996-97, appropriations from the General Revenue Fund for
education, health and welfare, and public safety amounted to approximately 53
percent, 26 percent, and 14 percent, respectively, of total General Revenue
funds available.

<PAGE>

SALES AND USE TAX

The largest single source of tax receipts in Florida is the sales and use
tax. The sales tax is 6 percent of the sales price of tangible personal
property sold at retail in the State. The use tax is also 6 percent of the cost
price of tangible personal property when the same is not sold but is used, or
stored for use in the State. The use tax also applies to the use in the State
of tangible personal property purchased outside Florida which would have been
subject to the sales tax if purchased from a Florida dealer.

All receipts of the sales and use tax, with the exception of the tax on
gasoline and special fuels, are credited to either the General Revenue Fund,
the Solid Waste Management Trust Fund, or counties and cities. For the State
fiscal year which ended June 30, 1997, total receipts from this source were
$12,089 million, an increase of 5.5 percent from the prior fiscal year.

MOTOR FUEL TAX

The second largest source of State tax receipts, including those
distributed to local governments, is the tax on motor fuels. Preliminary data
show collections from this source in State fiscal year ending June 30, 1997
were $2,012 million. However, these revenues are almost entirely dedicated
trust funds for specific purposes and are not included in the State General
Revenue Fund.

ALCOHOLIC BEVERAGE TAX

Florida's alcoholic beverage tax is an excise tax on beer, wine, and
liquor. The tax is one of the State's major tax sources, with revenues totaling
$447.2 million in State fiscal year ending June 30, 1997. Two percent of
collections are deposited into the Alcoholic Beverage and Tobacco Trust Fund,
while the remainder of revenues are deposited into the General Revenue Fund.

The 1990 Legislature established a surcharge on alcoholic beverages. This
charge is levied on alcoholic beverages sold for consumption on premises. The
surcharge is ten cents per ounce of liquor, ten cents per four ounces of wine,
and four cents per twelve ounces of beer. In fiscal year 1996-97, a total of
$106.6 million was collected. Of these collections, the Children and Adolescent
Substance Abuse Trust Fund receives 9.8 percent, while the remainder is
deposited to the credit of the General Revenue Fund.

CORPORATE INCOME TAX

Pursuant to an amendment to Article VII, Section 5, of the State
Constitution, the Legislature of the State of Florida adopted, effective
January 1, 1972, the "Florida Income Tax Code" imposing a tax upon the net
income of corporations, organizations, associations, and other artificial
entities for the privilege of conducting business, deriving income, or existing
within the State. This tax does not apply to natural persons who engage in a
trade or business or profession under their own or any fictitious name, whether
individually as proprietorships or in partnerships with others, estates of
decedents or incompetents, or testamentary trusts.

All receipts of the corporate income tax are credited to the General
Revenue Fund. For the fiscal year which ended June 30, 1997, receipts from this
source were $1,362.3 million, an increase of 17.2 percent from fiscal year
1995-96.

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DOCUMENTARY STAMP TAX

Deeds and other documents relating to realty are taxed at 70 cents per
$100 of consideration, while Corporate shares, bonds, certificates of
indebtedness, promissory notes, wage assignments, and retail charge accounts
are taxed at 35 cents per $100 of face value, or actual value if issued without
face value. Documentary stamp tax collections totaled $844.2 million during
fiscal year 1996-97, posting a 8.9 percent increase from the previous fiscal
year.

GROSS RECEIPTS TAX

The tax rate is 2.5 percent of the gross receipts of providers of
electric, natural gas, and telecommunications services.

All gross receipts utilities tax collections are credited to the Public
Education Capital Outlay and Debt Service Trust Fund. In fiscal year 1996-97,
gross receipts utilities tax collections totaled $575.7 million, an increase of
6.0 percent over the previous fiscal year.

INTANGIBLE PERSONAL PROPERTY TAX

This tax is levied on two distinct bases. First, stocks, bonds, including
bonds secured by liens on Florida realty, notes, governmental lease holds,
interests in limited partnerships registered with the Securities and Exchange
Commission, and other miscellaneous intangible personal property not secured by
liens on Florida realty are taxed annually at a rate of 2 mills. Second, there
is a non-recurring 2 mill tax on mortgages and other obligations secured by
liens on Florida realty.

The Department of Revenue uses part of the proceeds for administrative
costs. Of the remaining tax proceeds, 33.5 percent is distributed to the County
Revenue Sharing Trust Fund and 66.5 percent is distributed to the General
Revenue Fund.

In fiscal year 1996-97 total intangible personal property tax collections
were $952.4 million, a 6.3 percent increase from the prior year.

ESTATE TAX

An estate tax is imposed on the estate for the privilege of transferring
property at death. The tax on estates of resident decedents is equal to the
amount allowable as a credit against federal estate tax for state death taxes
paid, less any amount paid to other states. Thus, the Florida estate tax on
resident decedents will not increase the total tax liability of the estate. The
tax on estates of nonresident decedents is equal to the amount allowable as a
credit against federal estate tax for state death taxes paid multiplied by the
ratio of the value of the property taxable in Florida over the value of the
entire gross estate.

All receipts of the estate tax are credited to the General Revenue Fund.
For the fiscal year which ended June 30, 1997, receipts from this source were
$546.9 million, an increase of 30 percent from fiscal year 1995-96.

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LOTTERY

In November 1986 the voters of the State of Florida approved a
constitutional amendment which allows State operated lotteries. Section 15,
Article X of the Florida Constitution provides for State lotteries, with the
proceeds being dedicated exclusively to education. The 1987 Legislature passed
Chapter 24, Florida Statutes, creating the Department of the Lottery to operate
the State Lottery and setting forth the allocation of the revenues. Of the
revenues generated by the Lottery, 50 percent is to be returned to the public
as prizes; at least 38 percent is to be deposited in the Educational
Enhancement Trust Fund (for public education); and no more than 12 percent can
be spent on the administrative cost of operating the lottery.

Fiscal year 1996-97 produced gross revenues of $2.09 billion of which
education received approximately $792.3 million.

YEAR 2000

The Governor's Office of Planning and Budgeting, the Senate and the House
of Representatives created a Year 2000 Task Force in 1997 to provide direction
to State agencies for addressing potential year 2000 date change problems. The
Year 2000 Task Force, which meets monthly, is comprised of representatives of
the Governor's Office of Planning and Budgeting, the Department of Management
Services and the Department of Banking and Finance. The Task Force also
includes ex-officio representatives from the Senate and the House of
Representatives.

The Year 2000 Task Force has established a monthly progress reporting
system to monitor remediation in all State agencies, with a special emphasis on
top priority systems and agencies where the impact of potential difficulties is
the highest, based on the number of citizens affected, projected failure date,
if any, and cost to renovate. The top priority systems include systems relating
to sales taxes, central accounting, intangibles taxes and payroll. At the end
of October 1998, agency progress reports showed that Florida had completed 85%
of the total agency work estimated to be required to remediate year 2000 date
calculations in State-developed or contracted systems and that the top priority
systems had 80% of the required work completed. The State has allocated $81
million for the remediation of state agency computer systems. The State expects
to complete the remediation of all state agency computer systems by June 1999.
A statewide reserve fund has been established to address unanticipated
remediation or testing issues.

LITIGATION

Due to its size and broad range of activities, the State is involved in
numerous routine legal actions. The departments involved believe that the
results of such litigation pending or anticipated will not materially affect
the State of Florida's financial position.

COASTAL PETROLEUM V. STATE OF FLORIDA, Case No. 90-3195, 2nd Judicial
Circuit. This is an inverse condemnation case claiming that the action of the
Trustees and Legislature constitute a taking of Coastal's leases for which
compensation is due. The Circuit judge granted the State's motion for summary
judgment, finding that as a matter of law, the State had not deprived Coastal
of any royalty rights. Coastal appealed to the First District Court of Appeals,
but the case was remanded to Circuit Court for trial. On August 6, 1996, final
judgment was made in favor of the State. Coastal has filed for a review by the
Florida Supreme Court. The State is awaiting a decision by the Court.

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FLORIDA DEPARTMENT OF TRANSPORTATION V. 745 PROPERTY INVESTMENTS, CSX
TRANSPORTATION, INC. AND CONTINENTAL EQUITIES, Case No. 94-17739 CA 27, Dade
County Circuit Court. This case involves the Florida Department of
Transportation (FDOT) and CSX Transportation, Inc. FDOT has filed an action
against the adjoining property owners seeking a declaratory judgment from the
Dade County Circuit Court that the Department is not the owner of the property
that is subject to a claim by the U.S. Environmental Protection Agency (EPA).
The case was dismissed and FDOT's appeal of the order of dismissal is pending
in the Third District Court of Appeal.

The EPA is seeking clean-up costs, pursuant to the Comprehensive
Environmental Response Compensation and Liability Act, regarding property which
the EPA alleges is owned by the FDOT (and formerly owned by CSX Transportation,
Inc.). The EPA has agreed to await the outcome of the Department's declaratory
action before proceeding further. If the Department is unsuccessful in its
actions, the possible clean-up costs could exceed $25 million.

JENKINS V. FLORIDA DEPARTMENT OF HEALTH AND REHABILITATIVE SERVICES, Case
No. 79-102-CIV-J-16, United States District Court. This is a class action suit
on behalf of clients of residential placement for the developmentally disabled
seeking refunds for services where children were entitled to free education
under the Education for Handicapped Act. The district court held that the State
could not charge maintenance fees for children between the ages of 5 and 17
based on the Education for Handicapped Act. All appeals have been exhausted.
The State's potential cost of refunding these charges could exceed $42 million.
However, attorneys are in the process of negotiating a settlement amount.

NATHAN M. HAMEROFF, M.D. ET AL. V. AGENCY FOR HEALTH CARE ADMINISTRATION,
ET AL., Case No. 95-5936, Leon County Circuit Court. The plaintiffs challenge
the constitutionality of the Public Medical Assistance Trust Fund (PMATF)
annual assessment on net operating revenue of free-standing out-patient
facilities offering sophisticated radiology services. A trial has not been
scheduled. If the State is unsuccessful in its actions, the potential refund
liability could amount to approximately $70 million.

WALDEN V. DEPARTMENT OF CORRECTIONS, Case No. 95-40357-WS (USDC N.D.
Fla.). This action is brought by one captain and one lieutenant in the
Department of Corrections seeking declaratory judgment that they (and
potentially 700 similarly situated others) are not exempt employees under the
Fair Labor Standards Act (FLSA) and, therefore, are entitled to overtime
compensation at a rate of not less than one and one-half times their regular
rate of pay for overtime hours worked since April 1, 1992, forward and
including liquidated damages. The U.S. District Court for the Northern District
of Florida entered an order dismissing the case for lack of jurisdiction on
June 24, 1996. Plaintiffs filed a lawsuit against the Department (Case No.
96-3955) in July 1996 at the State level (Circuit Court, Second Judicial
Circuit), making the same allegations at that level which plaintiffs previously
made before the U.S. District Court for the Northern District of Florida. On
December 20, 1996, that Court determined that it has jurisdiction over the FLSA
claim. On December 10, 1997 the Court entered final summary judgment. The
Plaintiffs were not awarded overtime pay at time and one-half nor liquidated
damages; however, they were awarded attorneys fees and costs.

BARNETT BANK V. DEPARTMENT OF REVENUE, Case No. 97-02375, 4th Judicial
Circuit, involves the issue of whether Florida's refund statute for dealer
repossessions authorizes the Department to grant a refund to a financial
institution as the assignee of numerous security agreements governing the sale
of automobiles and other property sold by dealers. The question turns on

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whether the Legislature intended the statute only to provide a refund or credit
to the dealer who actually sold the tangible personal property and collected
and remitted the tax or intended that right to be assignable. Several banks
have applied for refunds; the potential refund to financial institutions
exceeds $30,000,000.

3. MASSACHUSETTS

SPECIAL CONSIDERATIONS REGARDING INVESTMENTS
IN MASSACHUSETTS MUNICIPAL SECURITIES

The following is a summary of certain information contained in the
Information Statement of the Commonwealth of Massachusetts dated May 5, 1998,
as supplemented August 21, 1998. The summary does not purport to be a complete
description and is current as of the date of the corresponding information
statement. The Funds are not responsible for the accuracy or timeliness of this
information.

The ability of the Commonwealth to meet its obligations will be affected
by future social, environmental and economic conditions, among other things, as
well as by questions of legislative policy and the financial conditions of the
Commonwealth. Many of these conditions are not within the control of the
Commonwealth.

1998 FISCAL YEAR

Preliminary results indicate that tax collections for fiscal 1998 totaled
approximately $14.026 billion, an increase of $1.161 billion, or 9.0%, over
fiscal 1997, and approximately $326 million higher than the final estimate for
the year made by the Executive Office for Administration and Finance. On May 5,
1998 the estimate for the year was raised from $13.154 billion to $13.3
billion, and on June 10, 1998 it was raised to $13.7 billion. Projected total
fiscal 1998 expenditures are $18.887 billion, including approximately $123
million in anticipated additional fiscal 1998 supplemental appropriations.
Among the anticipated appropriations are $46.1 million for Medicaid (see
"Medicaid") and $8 million for environmental remediation of certain underground
storage tanks in the Commonwealth. If such remediation efforts are not underway
by December 23, 1998, the Commonwealth may be liable for substantial penalties
imposed by the federal Environmental Protection Agency.

The Legislature has enacted several bills providing for disposition of the
fiscal 1998 surplus, but it has not completed action on final fiscal 1998
appropriations. The final fiscal 1998 supplemental appropriation bill or bills
are expected to authorize certain additional postfiscal 1998 spending to be
charged to fiscal 1998. Acting Governor Cellucci has also filed a bill calling
for a onetime tax cut of $287.5 million to be charged to fiscal 1998.

The fiscal 1998 budget provides for total appropriations of approximately
$18.4 billion, a 2.8% increase over fiscal 1997 expenditures. Governor Weld
vetoed or reduced appropriations totaling $3.3 million. The budget incorporates
tax cuts valued by the Department of Revenue at $61 million and provides for an
accelerated pension funding schedule. Supplemental appropriations have been
approved for fiscal 1998 in the amount of approximately $210.4 million,
including the transfer of approximately $34.8 million to the Massachusetts
Water Pollution Abatement Trust for state revolving fund programs. In addition,
on November 26, 1997, Acting Governor Celluci approved legislation transferring
off-budget the $206.3 million Department of Medical Assistance reserve to
indemnify certain medical facilities against losses that might result from
providing uncompensated care. On January 30, 1998, Acting Governor Celluci

<PAGE>

filed two bills recommending supplemental appropriations for fiscal 1998
totaling $211.8 million. The bills incorporated most of the supplemental
appropriations recommended in bills filed by the Administration on October 6,
1997 and October 17, 1997 which were not enacted by the Legislature. The first
bill totaled $44.6 million in proposed spending to provide for certain
unanticipated obligations of the Commonwealth. The second bill recommended
$167.1 million in proposed spending to provide for one-time expenditures,
matching grants and capital initiatives, including $50 million for the
construction and repair of local roads and bridges, $20 million for the
development of a new human resource compensation management system and $10
million in additional funding for the upgrade of the Commonwealth's information
technology systems in preparation for the year 2000 conversion. On April 29,
1998, Acting Governor Celluci approved a supplemental appropriations bill for
$116.4 million, of which $56.3 million is for expenditures contained in the
bills filed by the Acting Governor on January 30, 1998. The bill includes $21.1
million for snow and ice costs at the Massachusetts Highway Department, $15.4
million for child care services relating to welfare reform and $11 million at
the Department of Social Services for residential group care and adoption.
Projected total fiscal 1998 expenditures are approximately $18.930 billion.

FISCAL 1998 YEAR-END SURPLUS

Legislation approved by Acting Governor Cellucci on July 21, 1998
increased the ceiling effective June 30, 1998, on the amount that can be
maintained in the Stabilization Fund from 5% to 7.5% of budgeted revenues.
Based on current estimates of fiscal 1998 results, this change increased the
statutory ceiling from approximately $984.8 million to approximately $1.477
billion. The current projected fiscal 1998 ending balance in the Stabilization
Fund is $972.2 million, assuming enactment of additional tax cuts aggregating
$287.5 million as proposed by the Acting Governor (see below).

In July, 1998 the Legislature also enacted several bills specifically
providing for disposition of the fiscal 1998 surplus:

The fiscal 1999 budget approved by the Acting Governor on July 30, 1998
contains a Provision calling for the Comptroller to transfer $162.5 million, as
of June 30, 1998, from the General Fund to a newly established Tax Exemption
Escrow Trust Fund. By June 30, 1999 the Comptroller is to transfer $162.5
million plus interest from the new fund back to the General Fund. The effect of
this provision is to charge to fiscal 1998 the approximate cost allocable to
fiscal 1998 of the retroactive income tax reductions approved by the Acting
Governor on July 21, 1998.

On August 5, 1998, Acting Governor Cellucci approved legislation
establishing a new Brownfields Revitalization Fund as of June 30, 1998 and
providing for the transfer of $45 million to that fund, to be used through the
2001 fiscal year to fund a $15 million access to capital program to be
administered by the Massachusetts Office of Business Development and a $30
million Brownfields Redevelopment Fund to be administered by the Massachusetts
Development Finance Agency. The legislation also contains an additional $12
million in fiscal 1998 appropriations, which are made available through fiscal
2001, to fund Brownfieldsrelated costs of the Attorney General and the
Department of Environmental Protection.

On August 10, 1998 Acting Governor Cellucci approved legislation
establishing a Teacher Quality Endowment Fund and transferring $60 million from
the General Fund into the new fund as of June 30, 1998. Earnings from the
investment of moneys credited to the new fund are to be used by the state
Commissioner of Education to pay signing bonuses to incoming teachers and
salary bonuses to existing teachers under a new master teacher corps program.

<PAGE>

The corpus of the fund is to be left intact. The legislation also provided for
the transfer from the General Fund, as of June 30, 1998, of $200 million to the
Tax Reduction Fund (to be applied to a temporary increase in the personal
exemptions applicable to 1998 income taxes) and $150 million to the
Stabilization Fund (in addition to any other transfer required by state finance
law). In addition, the legislation authorized approximately $62.9 million in
additional revenues from the state lottery to be distributed to cities and
towns on account of fiscal 1998.

Also on August 10, 1998 Acting Governor Cellucci gave his partial approval
to legislation providing for a variety of capital appropriations to be charged
to fiscal 1998. The bill enacted by the Legislature called for the transfer, as
of June 30, 1998, of approximately $272.4 million from the General Fund and
approximately $106.9 million from the Highway Fund to a Capital Improvement and
Investment Trust Fund to finance various specified capital expenditures through
fiscal 2000. Acting Governor Cellucci vetoed many of the proposed capital
expenditures, reducing the amount of the General Fund transfer to approximately
$96.2 million and the amount of the Highway Fund transfer to $93 million. The
Governor filed legislation on the same day calling for an additional $287.5
million to be transferred to the Tax Reduction Fund. That bill has been
referred to the House Committee on Ways and Means. Under existing law, the
effect of the vetoes is to increase the amount of the fiscal 1998 surplus that
will be credited to the Stabilization Fund and the Capital Projects Fund.

On August 12, 1998, Acting Governor Cellucci approved a fiscal 1998
supplemental appropriations bill providing for approximately $70.9 million in
fiscal 1998 appropriations to be made available in fiscal 1999 to fund various
collective bargaining agreements.

Cash Flow. The most recent cash flow projections for fiscal 1998 and
fiscal 1999 were released by the State Treasurer and the Secretary of
Administration and Finance on March 25, 1998. The forecast for fiscal 1998 is
based on the fiscal 1998 budget signed by Governor Weld on July 10, 1997, and
includes the value of all fiscal 1998 supplemental budgets enacted by the
Legislature. The fiscal 1999 forecast is based on the proposed fiscal 1999
budget submitted by the Acting Governor on January 27, 1998. Both projections
are based on revenue and spending estimates prepared by the Executive Office
for Administration and Finance and incorporate actual results through January
1998 and monthly projections through June 1999.

Fiscal 1998 is projected to end with a cash balance of $477.9 million,
without regard to any fiscal 1998 activity that may occur after June 30, 1998.
Such balance does not include the balance in the Stabilization Fund ($799.0
million at June 30, 1997) or interest earnings thereon expected during fiscal
1998; it does reflect the required Stabilization Fund transfer related to the
fiscal 1997 of $234.0 million during fiscal 1998. The cash flow statement notes
that general obligation bonds were issued for capital projects in August 1997
in the amount of $250 million and in January 1998 in the amount of $250 million
and projects that an additional $428 million of general obligation bonds will
be issued for such purposes during the remainder of the fiscal year. The
statement also notes that $105 million of special obligation bonds were issued
in October 1997.

The cash flow statement notes that the Massachusetts Turnpike Authority
and the Massachusetts Port Authority are required to make payments to the
Commonwealth in connection with the Central Authority Artery/Ted Williams
Tunnel project and forecasts that the Commonwealth will receive $430 million in
the aggregate during fiscal 1998 from such authorities or from the issuance of
Commonwealth notes in anticipation of payments from such authorities. (The
statement also notes that the Commonwealth has the statutory authority to issue

<PAGE>

bonds to pay such notes.) The statement further forecasts, in connection with
the Central Artery/Ted Williams Tunnel project, that the Commonwealth will
issue $350 million of notes in anticipation of future federal highway grants,
noting that federal funding for such purposes has been extended on an interim
basis through March 31, 1998, and that successor federal funding legislation is
expected to be enacted by late 1998.

Fiscal 1999 is projected to end with a cash balance of $167.7 million. The
cash flow statement projects that an aggregate of $1 billion of general
obligation bonds will be issued for capital projects in fiscal 1999, and that
the Commonwealth will issue $465 million of notes in anticipation of future
federal highway grants in fiscal 1999.

Neither the issuance of transit notes nor commercial paper for operating
purposes is forecast for fiscal 1998 or fiscal 1999.

The ending balances projected for fiscal 1998 and fiscal 1999 are likely
to differ from the ending balances for the Commonwealth's budgeted operating
funds for those years because of timing differences and the effect of
non-budget items.

The cash flow statement for fiscal years 1998 and 1999 which was due on
May 25, 1998 has not been released.

1999 FISCAL YEAR

The House of Representatives approved its version of the fiscal 1999
budget on May 7, 1998, and the Senate approved its version on June 3, 1998.
After passage of two interim, partial budgets to provide for expenditures
during the first 30 days of the fiscal year, the legislative conference
committee appointed to reconcile the two versions of the fiscal 1999 budget
released its report on July 20, 1998, and the budget was enacted by the
Legislature on the same day. Acting Governor Cellucci approved it on July 30,
1998. The Governor vetoed or reduced appropriations totaling approximately
$100.9 million. On July 31, 1998 the Legislature overrode several of those
vetoes, restoring approxiinately$63.1 million of appropriations. After
accounting for the value of vetoes and subsequent overrides, the budget
provides for total appropriations of approximately $19.5 billion.

The fiscal 1999 appropriation for pension funding is approximately $965.3
million. This amount is consistent with the amount requested by the Acting
Governor, but is approximately $93.9 million less than the amount required by
the most recently approved pension funding schedule. The smaller appropriation
is based on the assumption that a revised funding schedule will require reduced
funding because of the 1997 change in law eliminating Commonwealth
responsibility for funding costofliving adjustments incurred by local pension
systems. A revised funding, schedule has not yet been submitted to the
Legislature.

The fiscal 1999 budget is based on a consensus tax revenue forecast of
$14.4 billion, as agreed by both houses of the Legislature in May. The tax cuts
incorporated into the budget, valued by the Department of Revenue at $990
million in fiscal 1999, had the effect of reducing the consensus forecast to
$13.41 billion. Tax collections in July, 1998 totaled $895.5 million, an
increase of $96.4 million, or 12.1%, over July, 1997. On August 19,1998 the
Executive Office for Administration and Finance raised the fiscal 1999 tax
estimate by $200 million to $13.61 billion. This estimate does not reflect the
Acting Governor's recommendation of an additional $287.5 million tax reduction
pursuant to legislation he filed on August 10, 1998.

<PAGE>

LOCAL GOVERNMENT

Below the level of state government are 12 county governments responsible
for various functions, principally the operation of houses of correction and
registries of deeds. There are 14 counties in Massachusetts, but county
government has been abolished in two of them and is scheduled to terminate in
three others. Under legislation enacted in 1996, Franklin County government
terminated on July 1, 1997 in favor of a regional council of governments.
Legislation approved by Governor Weld on July 11, 1997 abolished Middlesex
County government on that date and provided for the abolition of county
government in Hampden and Worcester Counties on July 1, 1998 (or sooner, if
such county defaults on a bond or note). Legislation approved by acting
Governor Cellucci in August, 1998 provided for the abolition of Hampshire,
Essex and Berkshire counties of January 1, 1999, July 1, 1999 and July 1, 2000,
respectively. Under the 1997 legislation, virtually all functions, duties and
responsibilities of the affected counties are transferred to the Commonwealth.
As of the date of abolition of an affected county's government, all valid
liabilities and debts of such county which are in force immediately before such
date become obligations of the Commonwealth, and all assets and revenues of
such county become assets and revenues of the Commonwealth. The Secretary of
Administration and Finance is directed to establish an amortization schedule to
recover the Commonwealth's costs from the cities and towns within each such
country over a period not to exceed 25 years. Governor Weld vetoed provisions
in the legislation that would have placed responsibility for county retirees on
cities and towns rather than the Commonwealth, filed legislation providing for
state assumption of such pension costs. On July 15, 1997, the House of
Representatives overrode Governor Weld's veto of such provisions, but the
Senate has not acted on the Governor's veto message. Governor Weld also vetoed
provisions that would have created county charter commissions in certain
counties, indicating that he favored legislation setting a date certain for the
abolition of all county government and a mechanism by which cities and towns
that wish to do so may establish alternative regional entities. The legislation
approved by Governor Weld in July 1997 established a task force on the
valuation of county assets and liabilities that was charged with compiling an
inventory and providing for the valuation of all property of all counties in
the Commonwealth for the purposes of considering the abolition of county
government and the transfer of its functions, assets and liabilities to the
Commonwealth. The eleven-member task force, consisting of eight members of the
Legislature, the Secretary of Administration and Finance, the Inspector General
and the State Auditor, had a report filing deadline of February 1, 1998; the
task force has convened and has begun planning for the valuation. On July 17,
1997, Governor Weld filed legislation that would abolish all county governments
by July 1, 1999 and that would require the state employees' retirement system
to absorb the pension costs associated with county retirees. The legislation is
being considered by the Legislature's Committee on Counties.

Administration Finance is to conduct an audit of all remaining county
assets and liabilities and report to the Legislature by February 1, 1999. The
Secretary is also to analyze, in consultation with the Public Employee
Retirement Administration Commission, the potential cost to the Commonwealth of
transferring current and retired county employees to the state retirement
system and report to the Legislature by December 31, 1998. Acting Governor
Cellucci vetoed provisions in the legislation that would have placed
responsibility for county retirees on the remaining municipalities making up
the county retirement system.

COMMONWEALTH REVENUES

In order to fund its programs and services, the Commonwealth collects a
variety of taxes and receives revenues from other non-tax sources, including
the federal government and various fees, fines, court revenues, assessments,

<PAGE>

reimbursements, interest earnings and transfers from its non-budgeted funds. In
fiscal 1997, approximately 70.8 percent of the Commonwealth's annual budgeted
revenues were derived from state taxes. In addition, the federal government
provided approximately 16.6 percent of such revenues, with the remaining 12.6
percent provided from departmental revenues and transfers from non-budgeted
funds.

The major components of State taxes are the income tax, which accounted
for approximately 55.8 percent of total tax revenues in fiscal 1997, the sales
and use tax, which accounted for approximately 22.4 percent, and the business
corporations tax, which accounted for approximately 7.5 percent. Other tax and
excise sources accounted for the remaining 14.3 percent of total fiscal 1997
tax revenues.

Income Tax. The Commonwealth assesses personal income taxes at flat rates,
according to classes of income, after specified deductions and exemptions. A
rate of 5.95 percent is applied to income from employment, professions, trades,
businesses, rents, royalties, taxable pensions and annuities and interest from
Massachusetts banks and, as of January 1, 1999, to other interest (although
interest on obligations of the United States and of the Commonwealth and its
political subdivisions is exempt) and dividends; and, as of January 1, 1996, a
rate ranging from 12 percent on capital gains from the sale of assets held for
one year and less to 0 percent on capital gains from the sale of certain assets
held more than six years.

On July 21, 1998, Acting Governor Cellucci approved legislation that
phased in a doubling of the personal exemptions applicable to the "Part B"
("earned") income tax, effective January 1, 1998, with an estimated fiscal 1999
cost of $600 million (which includes costs for January 1, 1998 to June 30,
1998) and an estimated fully annualized cost of $492 million. In addition, the
legislation conformed state tax law to federal law with respect to Roth and
educational IRS's, deferred compensation, capital gains on the sale of a
personal residence, travel and entertainment deductions and the definition of
short-term capital gains. The estimated aggregate fiscal 1999 cost of these
additional changes is less than $5 million, and the estimated aggregate
annualized cost, excluding the Roth IRA, is also less than $5 million. The full
impact of the Roth IRA change will only be felt as those now contributing to
Roth IRA's withdraw their investments, over a period starting more than 20
years from now. The amount of tax cut due to the Roth IRA change depends on
many factors, including the amounts invested, rates of return earned on those
investments and the period over which the earnings are withdrawn. No definite
estimate is currently available for events so far into the future.

In December 1994, the Governor approved legislation modifying the capital
gains tax by phasing out the tax for assets held longer than six years and
increasing the no-tax status threshold for personal income tax purposes. The
capital gains tax charge did not become effective until January 1, 1996.
Accordingly, it is estimated by the Executive Office for Administration and
Finance to have had only a minor effect on fiscal 1996 tax revenues and to have
approximately $41.0 million. The no-tax status change is estimated to have
reduced fiscal 1995 tax revenues by approximately $13.3 million. It is expected
to decrease fiscal 1998 tax revenues by $13.0.

As part of the fiscal 1997 budget the Legislature established a tax
deduction for the amount by which tuition payments to two- or four-year
colleges, net of financial aid, exceed 25 percent of the taxpayer's adjusted
gross income. The Department of Revenue estimates that this deduction resulted
in no revenue reduction in fiscal 1997 and will result in an approximately $14
million reduction on an annualized basis thereafter.

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The fiscal 1998 budget contained three tax cuts with an aggregate fiscal
1998 cost estimated by the Department of Revenue to be $60.9 million--an
increase in the child dependent deduction from $600 to $1,200 for children up
to age 12 ($15.3 million), a tax credit of up to $6,000 over four years for
septic tank improvements ($17 million) and an earned income tax credit
amounting to 10 percent of the federal credit ($28.6 million).

On November 6, 1997, Acting Governor Cellucci approved legislation
exempting military pensions from the state income tax, effective January 1,
1998. The Department of Revenue estimates that this exemption will result in a
fiscal 1998 revenue reduction of $25.0 million and an approximately $18 million
reduction on an annualized basis thereafter.

As part of Acting Governor Celluci's fiscal 1999 budget recommendations,
he proposed a reduction in the tax rate on "Part B" personal income (so-called
"earned" income) from the current level of 5.95% to 5% over three calendar
years. The rate would be reduced to 5.6% effective January 1, 1999, 5.3%
effective January 1, 2000 and 5% effective January 1, 2001. The Executive
Office for Administration and Finance estimates that the static revenue impact
of these changes would be a reduction in personal income tax collections of
approximately $206 million in fiscal 1999, $616 million in fiscal 2000, $1.035
billion in fiscal 2001 and $1.292 billion in fiscal 2002, at which time the
rate reduction would be fully implemented. The Acting Governor also proposed a
reduction in the tax rate on "Part A" personal income (so-called "unearned"
income) from 12 % to 5% over five years. The Executive Office for
Administration and Finance estimates that the static revenue impact of these
changes would be a reduction in personal income tax collections of
approximately $30 million in fiscal 1999, $101 million in fiscal 2000, $173
million in fiscal 2001, $249 million in fiscal 2002, $327 million in fiscal
2003 and $372 million in fiscal 2004, at which time the rate reduction would be
fully implemented. On March 12, 1998 the House of Representatives approved
legislation that would reduce the rate on Part A and Part B income, and raise
the rate on capital gains income, to 5.7%, as well as raising the age of the
children's exemption to age 18 and raising the amount of the exemption from
$1200 to $2400. Such provisions were also included in the proposed fiscal 1999
budget released on April 27, 1998 by the House Committee on Ways and Means.

On July 1, 1998, the proponents of the initiative petition to change the
rate on Part B income to the same rate applicable to Part A income filed
sufficient additional signatures to place the proposal on the November, 1998
ballot. In light of the subsequent enactment of the legislation described
above, the petition would have no effect on the Part B income tax rate unless
the Part A rate were to be changed from its current level of 5.95%.

Two initiative petitions that would reduce income tax rates were certified
by the Attorney General on September 3, 1997 and filed with the State Secretary
in November 1997, to be placed before the 1998 session of the Legislature. One
petition set the rate for Part B personal income at 5.6% for the tax year 1999,
5.3% for tax year 2000 and 5% for tax year 2001 and thereafter, unless the
Legislature set a lower rate for any of those years. The other petition would
change the income tax rate on interest and dividend income (currently 12%) to
whatever rate applies to Part B income, starting in tax year 2000. On January
2, 1998, opponents of the first of these two petitions (relating to Part B
personal income taxes) filed an objection with the state Ballot Law Commission,
challenging the validity of the petition signatures. The Commission ruled in

<PAGE>

the opponents' favor on January 23, 1998, holding that the petition did not
contain a sufficient number of certified signatures. Following that decision,
petition opponents and proponents both filed suit in Superior Court seeking,
respectively, to disqualify additional signatures so as to prevent the petition
from appearing on the ballot, and to add signatures, so as to allow the
petition to appear on the ballot. On May 5, 1998, the Superior Court ruled that
the petitioners had not obtained sufficient signatures to place the petition on
the ballot. Under the state constitution, if the Legislature does not enact the
petition relating to the tax on personal interest and dividend income by May 6,
1998, the sponsors may have the petition placed on the 1998 general election
ballot by collecting an additional 10,821 signatures.

Sales and Use Tax. The Commonwealth imposes a 5 percent sales tax on
retail sales of certain tangible properties (including retail sales of meals)
transacted in the Commonwealth and a corresponding 5 percent use tax on the
storage, use or other consumption of like tangible properties brought into the
Commonwealth. However, food, clothing, prescribed medicine, materials and
produce used in food production, machinery, materials, tools and fuel used in
certain industries, and property subject to other excises (except for
cigarettes) are exempt from sales taxation. The sales and use tax is also
applied to sales of electricity, gas and steam for certain nonresidential use
and to nonresidential and most residential use of telecommunications services.

On October 20, 1997, Acting Governor Cellucci announced that the
Department of Revenue will issue regulations changing the payment for
approximately 15,000 sales, meals and room occupancy taxpayers over $25,000 in
tax per year. While these new regulations will not affect the amount of tax
owed, the Department of Revenue estimates that the Commonwealth will realize a
reduction in fiscal 1998 revenues of $120 million to $160 million, which has
been incorporated into the January 16, 1998 revenue estimates. This reduction
will be a one-time event.

Business Corporations Tax. Business corporations doing business in the
Commonwealth, other than banks, trust companies, insurance companies,
railroads, public utilities and safe deposit companies, are subject to an
excise that has a property measure and an income measure. The value of
Massachusetts tangible property (not taxed locally) or net worth allocated to
the Commonwealth is taxed at $2.60 per $1,000 of value. The net income
allocated to Massachusetts, which is based on net income for federal taxes, is
taxed at 9.5 percent. The minimum tax is $456. Both rates and the minimum tax
include a 14 percent surtax. The reduction in fiscal 1996 tax revenues from
business corporations compared to fiscal 1995 was due primarily to an estimated
$49 million reduction resulting from the application of the "single sales
factor" apportionment formula, described below. The fiscal 1997 tax revenue
collections reflected an additional $44 million reduction for the full-year
impact of the "single sales" apportionment formula and a $10 million reduction
due to the impact of legislation enacted in August 1996, which, effective
January 1, 1997, changed the computation of the sales factor for certain mutual
fund companies.

On November 28, 1995 the Governor approved legislation establishing a
"single sales factor" apportionment formula for the business corporations tax.
The new formula, when fully implemented, will calculate a firm's taxable income
as its net income times the percentage of its total sales that are in
Massachusetts, as opposed to the prior formula that took other factors, such as
payroll and property into account. The new formula was made effective as of
January 1, 1996 to certain federal defense contractors and phased in over five
years for manufacturing firms generally. The Department of Revenue estimated
that the revision reduced revenues by $44 million in fiscal 1996 and by $90
million in fiscal 1997. If the new formula were fully effective for all covered
businesses, the Department estimates that the annual revenue reduction would be
$100 million to $150 million.

<PAGE>

On August 8, 1996, the Governor approved legislation making two changes in
the apportionment formula for the business corporations tax payable by certain
mutual fund service corporations. Effective January 1, 1997, the legislation
changed the computation of the sales factor; instead of sourcing sales from the
state where the seller bears the cost of performing the services relating to
the sale, the corporations will source sales to the state of domicile of the
ultimate consumer of the service. Effective July 1, 1997, the legislation
changed the prior three-factor formula to a single sales factor formula, just
as the November 1995 legislation had done for certain federal defense
contractors and, over time, for manufacturing firms. Under the new law,
affected corporations are required to increase their numbers of employees by 5
percent per year for five years, subject to exceptions for adverse economic
conditions affecting the stock market or the amount of assets under their
management. The Department of Revenue estimates that the changes resulted in a
revenue reduction of approximately $10 million in fiscal 1997 and will result
in revenue reductions of $39 million to $53 million on an annualized basis
thereafter, starting in fiscal 1998. These estimates do not take into account
any increased economic activity stimulated by the tax cuts.

On August 9, 1996, the Governor signed legislation providing a tax credit
to shippers that pay federal harbor maintenance taxes on cargo passing through
Massachusetts ports. The Department of Revenue estimates that there was no
impact on revenues in fiscal 1997 as a result of this tax credit and the
annualized revenue loss will be approximately $3 million to $4 million,
beginning in fiscal 1998.

Bank Tax. Commercial and savings banks are subject to an excise tax of
12.54 percent. On July 27, 1995, the Governor approved legislation that will
reduce the rate over several years to 10.5 percent, the same effective rate
charged to other corporations. The Department of Revenue estimates that the tax
cut, when fully implemented in fiscal year 1999, will result in an annual $32.3
million revenue loss, including the effect of provisions in the proposed
legislation that would apply the tax to out-of-state banks and other financial
institutions that are not currently taxed and that would lead to an estimated
$18 million annual gain.

Insurance Taxes. Life insurance companies are subject to a 2% tax on gross
premiums; domestic companies also pay a 14% tax on net investment income.
Property and casualty insurance companies are subject to a 2% tax on gross
premiums, plus a 14% surcharge for an effective tax rate of 2.28%; domestic
companies also pay a 1% tax rate on gross investment income. On April 30, 1998,
the House of Representatives approved legislation that would over five years
eliminate the 14% surcharge for property and casualty insurers and the tax on
investment income for both types of domestic insurers. The House Committee on
Ways and Means has estimated the fully phased-in aggregate annual value of the
tax reductions to be approximately $50 million.

On August 10, 1998, Acting Governor Cellucci approved legislation that
will reduce insurance company taxes over five years in essentially the manner
provided in the legislation approved by the House of Representatives on April
30, 1998, though the enacted legislation, unlike the House bill, does not
eliminate the 14% surcharge on the gross premium income of property and
casualty insurers. The estimated fiscal 1999 cost of these changes is $5
million, and the estimated fully phased-in aggregate annual value of these tax
reductions is $48 million.

<PAGE>

Other Taxes. Other tax revenues are derived by the Commonwealth from motor
fuels excise taxes, cigarette and alcoholic beverage excise taxes, estate and
deed excises and other tax sources.

On July 24, 1996, the Legislature overrode the Governor's veto of
legislation imposing a 25(cent)-per-pack tax increase on cigarettes, as well as
a 25 percent increase in the tax on smokeless tobacco and a 15 percent tax on
cigars and smoking tobacco, all effective October 1, 1996. The Department of
Revenue estimates that these changes resulted in approximately $74 million in
additional tax revenue for fiscal 1997 and will result in $80 million to $90
million in additional revenue in fiscal 1998. The Department estimates that by
fiscal 2000, when demand for cigarettes will have fully adjusted to the higher
tobacco product prices expected to result from the increased tax, additional
revenues will range from $73 million to $83 million.

In 1992, legislation was enacted by the voters which increased the tobacco
excise tax by 1.25(cent) per cigarette (25(cent) per pack of 20 cigarettes) and
25 percent of the wholesale price of smokeless tobacco, effective January 1,
1993. Under the legislation, the revenues raised by this excise tax were to be
credited to the Health Protection Fund and expended, subject to appropriation
by the Legislature, to pay for health programs and education relating to
tobacco use. Total revenues deposited in the Health Protection Fund in fiscal
1993 and fiscal 1994 were $59.5 million and $116.4 million and have been $114
million on an annualized basis since fiscal 1995.

The Commonwealth is authorized to issue special obligation highway bonds
secured by a pledge of all or a portion of the Highway Fund, including revenues
derived from all or a portion of the motor fuels excise tax. The portion of the
motor fuel tax currently pledged to special obligation bonds is estimated to be
approximately $177 million in fiscal 1998. Additional special obligation bonds
may be issued in the future secured by all or additional portions of the motor
fuels excise tax.

On November 17, 1997, the legislature overrode Acting Governor Cellucci's
veto to enact legislation the Commonwealth to issue special obligation
convention center bonds secured by a pledge of certain taxes related to tourism
and conventions, including a 2.75 percent convention center financing fee
imposed by the legislation on hotel room occupancy in four Massachusetts
cities.

Estate Tax Revisions. The fiscal 1993 budget included legislation which
gradually phased down the current Massachusetts estate tax until it became a
"sponge tax" in 1997. The "sponge tax" is based on the maximum amount of the
credit for the State taxes allowed for federal estate tax purposes. The estate
was phased out by means of annual increases in the basic exemption from the
original $200,000 level. The exemption was increased to $300,000 for 1993,
$400,000 for 1994, $500,000 for 1995 and $600,000 for 1996. In addition, the
legislation included a full marital deduction starting July 1, 1994. The
marital deduction was limited to 50 percent of the Massachusetts adjusted gross
estate until June 30, 1995. The statistic fiscal impact of the phase-out of the
estate tax is estimated to have been approximately $25 million in fiscal 1994,
approximately $73 million in fiscal 1995, approximately $112 million in fiscal
1996 and approximately $139 million in fiscal 1997 and is projected to be
approximately $253 million in fiscal 1998.

FEDERAL AND OTHER NON-TAX REVENUES

Federal revenue is collected through reimbursements for the federal share
of entitlement programs such as Medicaid and, beginning in federal fiscal year

<PAGE>

1997, through block grants for programs such as Transitional Assistance to
Needy Families ("TANF"), formerly Aid to Families with Dependent Children
("AFDC"). The amount of federal revenue to be received is determined by state
expenditures for these programs. The Commonwealth receives reimbursement for
approximately 50 percent of its spending for Medicaid programs. Block grant
funding for TANF is received quarterly and its contingent upon a maintenance of
effort spending level determined annually by the federal government.

Departmental and other non-tax revenues are derived from licenses,
registrations and reimbursements and assessments for services. In fiscal 1996,
a revenue maximization pilot project undertaken by the Comptroller and the
Executive office for Administration and Finance yielded almost $39.9 million in
additional federal reimbursement revenues, net of agency and vendor incentive
payments, at the Department of Mental Health, Department of Mental Retardation,
Department of Social Services and Division of Medical Assistance. In fiscal
1997, $41.3 million in additional non-tax revenues resulted in net revenues of
$39.1 million deposited into the General Fund. In fiscal 1998, an estimated
$46.7 million in additional non-tax revenues is expected to result in $37.1
million of net revenues for the General Fund.

The Commonwealth began in fiscal 1997 to phase in a one-time (rather than
annual) passenger vehicle registration fee of $30 and a reduction in the
passenger vehicle operating license renewal fee from the rate of $30 to $2,
effective May 1, 2001. The Executive Office for Administration and Finance
estimates that these changes had no effect on fiscal 1997 revenues and will
reduce fiscal 1998 revenues by $15.0 million. When all drivers become eligible
for free registration renewals in fiscal 1999, revenues are projected to
decline by approximately $55 million. Revenue reductions due to lifetime
licenses will not begin until fiscal 2001, when they will total approximately
$5 million. In fiscal 2002, when all drivers become eligible for free license
renewals, the revenue reduction is estimated to be approximately $31 million.
(The Commonwealth is still maintaining the requirement that all parking
tickets, moving violation citations, excise taxes and insurance premiums be
paid before license and registration renewals are processed, in order to ensure
that cities and towns do not lose revenue from the change to lifetime licenses
and registration.) In May 1997, the Legislature enacted legislation that would
restore registration, license and permit fees credited to the Highway Fund to
the rates in effect on January 1, 1996 if federal aid to the Central Artery/Ted
Williams Tunnel project falls below $550 million in any fiscal year during the
next six years. Governor Weld vetoed this provision. Under the state
constitution, his veto can be overridden by a two-thirds vote of each house of
the Legislature; neither house has acted on the veto.

For the budgeted operating funds, interfund transfers include transfers of
profits from the State Lottery and Arts Lottery Funds and reimbursements for
the budgeted costs of the State Lottery Commission, which accounted for $600.2
million, $667.3 million, $709.5 million, $727.5 million and $770.2 million in
fiscal 1993 through 1997, respectively and which are expected to account for
$780.6 million in fiscal 1998.

In 1994, the voters in the statewide general election approved an
initiative petition, effective December 8, 1994, that would slightly increase
the portion of gasoline tax revenue credited to the Highway Fund, one of the
Commonwealth's three major budgeted finds, prohibit the transfer of money from
the Highway Fund to other funds for non-highway purposes and exclude the
Highway Fund balance from the computation of the "consolidated net surplus" for
purposes of state finance laws. The initiative petition also provided that no
more than 15 percent of gasoline tax revenues could be used for mass
transportation purposes, such as expenditures related to the Massachusetts Bay

<PAGE>

Transportation Authority. This law is not a constitutional amendment and is
subject to amendment or repeal by the Legislature, which may also,
notwithstanding the terms of the initiative petition, appropriate moneys from
the Highway Fund in such amounts and for such purposes as it determines,
subject only to a constitutional restriction that such moneys be used for motor
vehicle, highway, or mass transportation purposes. The Legislature has twice
postponed the effective date of the provision that would exclude the Highway
Fund balance from the computation of the "consolidated net surplus". The most
recent postponement changed the effective date of the provision to July 1,
1998.

On August 9, 1996, the Governor approved legislation, authorizing the
State Lottery Commission to participate with other states in a
multi-jurisdictional lottery. Beginning September, 1996, the Commission joined
with the states of Illinois, Georgia, Maryland, Michigan and Virginia in a
multi-state game that is estimated to generate an additional $30 million per
year in net lottery revenues.

LIMITATIONS ON TAX REVENUES

In Massachusetts efforts to limit and reduce levels of taxation have been
under way for several years. Limits were established on state tax revenues by
legislation enacted on October 25, 1986 and by an initiative petition approved
by the voters on November 4, 1986. The two measures are inconsistent in several
respects.

Chapter 62F, which was added to the General Laws by initiative petition in
November, 1986, establishes a State tax revenue growth limit for each fiscal
year equal to the average positive rate of growth in total wages and salaries
in the Commonwealth, as reported by the federal government, during the three
calendar years immediately preceding the end of such fiscal year. Chapter 62F
also requires that allowable state tax revenues be reduced by the aggregate
amount received by local governmental units from any newly authorized or
increased local option taxes or excises. Any excess in State tax revenue
collections for a given fiscal year over the prescribed limit, as determined by
the State Auditor, is to be applied as a credit against the then current
personal income tax liability of all taxpayers in the Commonwealth in
proportion to the personal income tax liability of all taxpayers in the
Commonwealth for the immediately preceding tax year. Unlike Chapter 29B, as
described below, the initiative petition did not exclude principal and interest
payments on Commonwealth debt obligations from the scope of its tax limit.
However, the preamble contained in Chapter 62F provides that "although not
specifically required by anything contained in this chapter, it is assumed that
from allowable State tax revenues as defined herein the Commonwealth will give
priority attention to the funding of state financial assistance to local
governmental units, obligations under the state governmental pensions systems,
and payment of principal and interest on debt and other obligations of the
Commonwealth."

The legislation enacted in October 1986, which added Chapter 29B to the
General Laws, also establishes an allowable state revenue growth factor by
reference to total wages and salaries in the Commonwealth. However, rather than
utilizing a three-year average wage and salary growth rate, as used by Chapter
62F, Chapter 29B utilizes an allowable state revenue growth factor equal to
one-third of the positive percentage gain in Massachusetts wages and salaries,
as reported by the federal government, during the three calendar years
immediately preceding the end of a given fiscal year. Additionally, unlike
Chapter 62F, Chapter 29B allows for an increase in maximum state tax revenues
to fund an increase in local aid and excludes from its definition of state tax
revenues (i) income derived from local option taxes and excises, and (ii)
revenues needed to fund debt service costs. Accordingly, the amount of revenues

<PAGE>

permitted by Chapter 62F will always be less than the amount of revenues
permitted by Chapter 29B. Because the provisions of Chapter 29B are essentially
superceded by those of Chapter 62F, Acting Governor Celluci has proposed, as
part of his fiscal 1999 budget recommendations, that the tax revenue
limitations provisions of Chapter 29B be repealed. The House Committee on Ways
and Means included such recommendation in its proposed fiscal 1999 budget
released on April 27, 1998.

Tax revenues in fiscal 1993 through fiscal 1997 were lower than the limit
set by either Chapter 62F or Chapter 29B, and the Executive Office for
Administration and Finance currently estimates that State tax revenues in
fiscal 1998 will not reach the limit imposed by either of these statutes.

YEAR 2000

In June 1997, the Executive Office for Administration and Finance
established a Year 2000 Program Management Office within its Information
Technology Division. The purpose of the office is to ensure accurate monitoring
of the Commonwealth's progress in achieving "year 2000 compliance", i.e.,
remediating or replacing and redeploying affected systems, as well as to
identify risk areas and risk mitigation activities and serve as a resource for
all state agencies and departments. The program management office has asked
agencies to identify "mission critical" and "essential" systems. Mission
critical systems are those which directly affect the health, safety or
livelihood of citizens, which directly affect state revenues or whose loss
would severely jeopardize agency delivery of services. Essential systems are
those whose loss would cause a disruption of some agency services but would not
prevent the agency from delivering primary services. The most recent report
issued by the program management office on July 22, 1998 for the April-June
1998 quarter indicates that the office is currently monitoring year 2000
compliance efforts for 169 state agencies, including independent agencies and
constitutional offices. The office assigns a quarterly status code - green (low
risk), yellow (medium risk) or red (significantly high risk) - to agencies
based on information collected from telephone and personal interviews. The
criteria for the status codes becomes increasingly more stringent each quarter;
the status codes for the most recent quarter are based on the likelihood for
achieving year 2000 compliance with respect to mission critical systems by
January 31, 1999 and with respect to essential systems by May 31, 1999. Of the
169 state agencies rated for the April-June 1998 quarter, 101 were rated green,
27 were rated yellow and 32 were rated red. Those agencies have identified 261
mission critical systems and 192 essential systems; 173, or 66%, of the mission
critical systems and 115, or 60%, of the essential systems are not yet
compliant. The report notes that approximately 20% of the agencies had
regressed on their compliance efforts, adding to the number of high-risk
systems. There are still agencies that do not have effective compliance
projects in place. Few agencies have begun to address the need for contingency
planning. The report also notes that year 2000 exposure for "embedded systems",
particularly devices used for control systems is high. This exposure affects
only a few agencies, but the impact of failures would be significant, e.g.,
switches and signals for the MBTA, a variety of systems at Logan Airport for
the Port Authority, toll collection and ticket systems for the Turnpike
Authority, water and sewer management and treatment systems for the
Massachusetts Water Resources Authority and traffic signals for the
Massachusetts Highway Department.

Legislation approved by the Acting Governor on August 10, 1998
appropriates $20.4 million for expenditure by the Information Technology
Division to achieve year 2000 compliance for the six Executive Offices and
other departments which report directly to the Governor. This amount, together

<PAGE>

with previously appropriated amounts and expenditures at the departmental level
from existing funds, is anticipated to be sufficient to meet most of the
remediation efforts for such Executive Offices and departments. The Secretary
of Administration and Finance is to report quarterly to the Legislature on the
progress being made to address the year 2000 compliance efforts, and to assess
the sufficiency of funding levels.

LITIGATION

There are pending in state and federal courts within the Commonwealth and
in the Supreme Court of the United States various suits in which the
Commonwealth is a party. In the opinion of the Attorney General, no litigation
is pending or, to his knowledge, threatened which is likely to result, either
individually or in the aggregate, in final judgments against the Commonwealth
that would affect materially its financial condition.

Commonwealth Programs and Services. From time to time actions are brought
against the Commonwealth by the recipients of governmental services,
particularly recipients of human services benefits, seeking expanded levels of
services and benefits and by the providers of such services challenging the
Commonwealth's reimbursement rates and methodologies. To the extent that such
actions result in judgments requiring the Commonwealth to provide expanded
services or benefits or pay increased rates, additional operating and capital
expenditures might be needed to implement such judgments. In June 1993, in an
action challenging the Commonwealth's funding of public primary and secondary
education systems on both federal and state constitutional grounds, Webby v.
Dukakis (now known as McDuffy v. Robertson, Supreme Judicial Court for Suffolk
County No. 90-128), the Supreme Judicial Court ruled that the Massachusetts
Constitution imposes an enforceable duty on the Commonwealth to provide
adequate public education for all children in the Commonwealth and that the
Commonwealth was not at that time fulfilling this constitutional duty. However,
the court also ruled that the Legislature and the Governor were to determine
the necessary response to satisfy the Commonwealth's constitutional duty,
although a single justice of the court could retain jurisdiction to determine
whether, within a reasonable time, appropriate legislative action had been
taken. Comprehensive education reform legislation was approved by the
Legislature and the Governor later in June 1993. On May 10, 1995, the
plaintiffs filed a motion for further relief, arguing that the 1993 legislation
did not provide sufficiently for public education and that its timetable was
too slow. It cannot be determined at this time what further action, if any, the
plaintiffs in McDuffy may take or whether the court will order any further
relief.

Challenges by residents of five state schools for the retarded in Ricci v.
Murphy (U.S. District Court C.A. No. 72-469-T) resulted in a consent decree in
the 1970's which required the Commonwealth to upgrade and rehabilitate the
facilities in question and to provide services and community placements in
western Massachusetts. The District Court issued orders in October 1986 leading
to termination of active judicial supervision. On May 25, 1993, the District
Court entered a final order vacating and replacing all consent decrees and
court orders. In their place, the final order requires lifelong provisions for
individualized services to class members and contains requirements regarding
staffing, maintenance of effort (including funding) and other matters.

In HODGE V. GALLANT (Suffolk Superior Court No. 93-0290G), plaintiffs
allege that the Division of Medical Assistance has unlawfully denied personal
care attendant services to certain disabled Medicaid recipients. The Superior
Court denied plaintiffs' motions for the preliminary injunction and class
certification. If plaintiffs were to prevail on their claims and the
Commonwealth were required to provide all of the services sought by plaintiffs

<PAGE>

to all similarly situated persons, a substantial increase in the annual cost of
the Commonwealth of these services might eventually be required. The Division
of Medical Assistance estimates this increase to be as much as $200 million per
year. The parties have stipulated to the dismissal of the case.

In BEAULIEU V. BELMONT (U.S. District Court No. 95-12382GAO), the
plaintiffs are former residents of the Fernald School, a facility of the
Department of Mental Retardation. They allege that in the 1950's they were fed
radioactive isotopes without their informed consent. They claim violations of
their civil rights, battery, invasion of privacy, loss of consortium and
misrepresentation. The amount of potential liability is estimated to be $25
million.

Environmental Matters. The Commonwealth is engaged in various lawsuits
concerning environmental and related laws, including an action brought by the
U.S. Environmental Protection Agency alleging violations of the Clean Water Act
and seeking to enforce the clean-up of Boston Harbor. UNITED STATES V.
METROPOLITAN DISTRICT COMMISSION (U.S. District Court C.A. No. 85-0489-MA). See
also CONSERVATION LAW FOUNDATION V. METROPOLITAN DISTRICT COMMISSION (U.S.
District Court C.A. No. 83-1614-MA). The Massachusetts Water Resources
Authority (MWRA), successor in liability to the Metropolitan District
Commission (MDC), has assumed primary responsibility for developing and
implementing a court-approved plan and timetable for the construction of the
treatment facilities necessary to achieve compliance with the federal
requirements. During fiscal 1997, the MWRA completed the mining of the 9.5-mile
outfall tunnel, completed the draft combined sewer outflow (CSO) plan and began
design of several CSO projects, completed construction of the first battery of
secondary treatment and began construction of the third and final battery of
secondary treatment. The MWRA currently projects that the total cost of
construction of the waste water facilities required under the court's order,
not including CSO costs, will be approximately $3.142 billion in current
dollars, with approximately $601 million to be spent after June 30, 1997. With
CSO costs, the MWRA anticipates spending approximately $901 million after that
date. Under the Clean Water Act, the Commonwealth may be liable for any cost of
complying with any judgment in these or any other Clean Water Act cases to the
extent the MWRA or a municipality is prevented by state law from raising
revenues necessary to comply with such a judgment.

On February 12, 1998, the U.S. Department of Justice filed a complaint in
federal district court seeking to compel the MWRA to build a water filtration
plant for the metropolitan Boston water supply and, together with the MDC, to
take certain watershed protection measures. The MWRA is gathering data to
determine whether a water filtration plant is necessary and anticipates
completing its inquiry by the fall of 1998. The federal district court has
issued a scheduling order under which it will decide in January 1999 whether
the Safe Water Drinking Act compels the MWRA to build a filtration system or
whether the MWRA can demonstrate that its data entitles it to avoid building
such a system. It is too early to predict what remedy the court will order if
it decides adversely to the MWRA.

Taxes and Other Revenues. In MASSACHUSETTS WHOLESALERS OF MALT BEVERAGES
V. COMMONWEALTH (Suffolk Superior Court No. 90-1523), associations of bottlers
challenged the 1990 amendments to the bottle bill which escheat abandoned
deposits to the Commonwealth. Plaintiffs claimed a taking; the Commonwealth
argued a legitimate regulation of abandoned amounts. In March 1993, the Supreme
Judicial Court upheld the amendments except for the initial funding
requirement, which the Court held severable. In August 1994, the Superior Court
ruled that the Commonwealth is liable for certain amounts (plus interest) as a
result of the Supreme Judicial Court's decision. The actual amount will be

<PAGE>

determined in further proceedings. In February 1996, the Commonwealth settled
all remaining issues with one group of plaintiffs, the Massachusetts Soft Drink
Association. Payments to that group will total approximately $7 million. The
Legislature appropriated the funds necessary for these payments in its final
supplemental budget for fiscal 1996. Litigation with the remaining group of
plaintiffs has been settled. The Legislature appropriated approximately $8
million to implement the terms of the resulting judgment.

In THE FIRST NATIONAL BANK OF BOSTON V. COMMISSIONER OF REVENUE (Appellate
Tax Board No. F232249), The First National Bank of Boston challenges the
constitutionality of the former version of the Commonwealth's bank excise tax.
In 1992, several pre-1992 petitions filed by the bank, which raised the same
issues, were settled prior to a board decision. The bank has now filed claims
with respect to 1993 and 1994. The bank claims that the tax violated the
Commerce Clause of the United States Constitution by including its worldwide
income without appointment. The Department of Revenue estimates that the amount
of abatement, including interest, sought by the First National Bank of Boston,
could total $128 million.

In STATE STREET BANK AND TRUST COMPANY V. COMMISSIONER OF REVENUE
(Appellate Tax Board Nos. F215497, F232152, F233019 and F233948), State Street
Bank and Trust Company has raised the same claims as The First National Bank of
Boston, outlined above. State Street Bank also claims that it is entitled to
alternative apportionment under the bank excise tax. The Department of Revenue
estimates that the amount of abatement, including interest, sought by State
Street Bank and Trust Company, could total $158 million. On February 19, 1998
the case was settled for $8.7 million.

In addition, there are several tax cases pending which could result in
significant refunds if taxpayers prevail. It is the policy of the Attorney
General and the Commissioner of Revenue to defend such actions vigorously on
behalf of the Commonwealth, and the descriptions that follow are not intended
to imply that the Commissioner has conceded any liability whatsoever.

On March 22, 1995, the Supreme Judicial Court issued its opinion in PERINI
CORPORATION V. COMMISSIONER OF REVENUE (Supreme Judicial Court No. 6657). The
court held that certain deductions from the net worth measure of the
Massachusetts corporate excise tax violate the Commerce Clause of the United
States Constitution. The court remanded the case for entry of a declaration and
further proceedings, if necessary, to determine other appropriate remedies. On
October 2, 1995, the United State Supreme Court denied the Commonwealth's
petition for a writ of certiorari. The Supreme Judicial Court, on April 30,
1996, entered a partial final judgment implementing its decision for tax years
ending prior to January 1, 1995. The Department of Revenue estimates that tax
revenues in the amount of $40 million to $55 million may be abated as a result
of the partial final judgment. On May 13, 1996, the Court entered an order for
judgment and memorandum concerning relief for tax years ending on or after
January 1, 1996. A final judgment was entered on June 6, 1996. The Department
of Revenue has paid approximately $17 million to date in abatements in
accordance with the judgment. To date, the total amount for abatements
requested, including those that have been paid, and that are in the process of
being evaluated, is $35 million.

Approximately $75 million in taxes and interest in the aggregate are at
issue in several other cases pending before the Appellate Tax Board or on
appeal to the Appeals Court of the Supreme Judicial Court.

Eminent Domain. In SPAULDING REHABILITATION HOSPITAL CORPORATION V.
MASSACHUSETTS HIGHWAY DEPARTMENT (Suffolk Superior Court. No. 95-4360C), the

<PAGE>

Spaulding Rehabilitation Hospital filed an action to enforce an agreement to
acquire its property by eminent domain, in connection with the Ted Williams
Tunnel/Central Artery project. On March 13, 1998, the Superior Court entered
judgment for the Commonwealth dismissing the complaint. The plaintiff has
appealed the Superior Court's judgment.

Both COMMONWEALTH OF MASSACHUSETTS V. RUGGLES CENTER JOINT VENTURE
(Suffolk Superior Court No. 47-1764-A and Ruggles Center, LLC v. Beacon
Construction Corporation (Suffolk Court No. 96-0637-E) involve an indoor air
quality dispute regarding the former headquarters of the Registry of Motor
Vehicles at Ruggles Center in Boston. In 1997, the Commonwealth commenced suit
against the former building owners, Ruggles Center Joint Venture (RCJV), as
well as the general contractor, the architect, the mechanical engineer and the
manufacturer of the fireproofing, to recover losses associated with the indoor
air quality (IAQ) problems, including the costs of relocating the agency and
workers' compensation payments paid to employees. RCJV has filed a counterclaim
against the Commonwealth alleging breach of lease, breach of the covenant of
good faith and fair dealing and negligence. RCJV claims that it fulfilled all
of its obligations under the lease and its amendment and that the Commonwealth
wrongfully terminated these agreements, and that the Commonwealth's negligence,
or that of its contractors, caused the IAQ problems. RCJV seeks to recover the
costs associated with its efforts to remedy the IAQ problems, additional rent
payments under the lease, and the value of RCJV's equity in the project had the
lease not been terminated. In the second and related case, the building owner
has sued the general contractor to recover on the performance bond. Many
second, third and fourth parties have been impleaded. The Registry of Motor
Vehicles and the Division of Capital Planning and Operations have been named as
fourth-party defendants by the manufacturer of the fireproofing. United States
Mineral Products Co., Inc., which has asserted a claim for indemnification.
Potential liability to the Commonwealth in each case is approximately $25
million. The two cases have been consolidated for discovery. Total potential
liability to the Commonwealth in these cases is approximately $35 million.

DIBIASE V. COMMISSIONER OF INSURANCE (Suffolk Superior Court No.
96-4241-A) is a putative class action suit in which the plaintiffs seek to
invalidate most of Chapter 178A of the Massachusetts General Laws, which is the
savings bank life insurance statute. The suit alleges that the statute's
conversion of the former savings bank life insurance system established by
former Chapter 178 of the Massachusetts General Laws deprived policyholders
under the old system of more than $60 million in "surplus" and $11 million in
former General Insurance Guaranty Fund, the proceeds of both of which
assertedly belonged to them. The defendants have moved to dismiss on statute of
limitations grounds, and the plaintiffs have cross-moved for partial summary
judgment on a claim of alleged procedural due process violations. On October
16, 1997, the Court dismissed the case on statute-of-limitations grounds. The
plaintiff has appealed and the Supreme Judicial Court has ordered direct
appellate review of the case.

BOSTON WHARF CO. V. COMMONWEALTH OF MASSACHUSETTS (Suffolk Superior Court
No. 96-0028) is an eminent domain case concerning a parcel on A Street in South
Boston which is being used for a tunnel in the Central Artery/Ted Williams
Tunnel project. Judgment was entered on April 22, 1998 which requires the
Commonwealth to pay $16 million.

MASSACHUSETTS PORT AUTHORITY, BIRD ISLAND LTD. PARTNERSHIP AND HILTON
HOTELS V. COMMONWEALTH OF MASSACHUSETTS (Suffolk Superior Court Nos. 96-4803-C,
94-6966, 94-2830-E, 94-2831-F, 94-5745-B, 94-5744-A and 96-6789-E) are eminent
domain cases concerning a land acquisition in East Boston for the Central
Artery/Ted Williams Tunnel project. The Commonwealth faces a potential
liability of approximately $35.7 million.

<PAGE>

THOMAS RICH V. COMMONWEALTH OF MASSACHUSETTS (Norfolk Superior Court No.
942319) and Shea v. Commonwealth (Norfolk Superior Court No. 97-1070-B) are
eminent domain cases concerning property in the city of Quincy. The
Commonwealth faces a potential liability of $30 million. The cost of
remediation of contaminated soil will also be an issue.

Pursuant to a verdict on the Trilling Way parcel in P&P REALTY CO., INC.
V. DEPARTMENT OF PUBLIC WORKS (Suffolk Superior Court No. 92-2081), the
Commonwealth will pay $6 million. The Commonwealth's total potential liability
is $22 million.

4. RHODE ISLAND

SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN
RHODE ISLAND MUNICIPAL SECURITIES

The following is a summary of certain information contained in the
Information Statement of the State of Rhode Island and Providence Plantations
dated September 28, 1998. The summary does not purport to be a complete
description and is current as of the date of the information statement. The
Funds are not responsible for the accuracy or timeliness of this information.

Rhode Island municipal securities may fluctuate in value in response to a
variety of factors, including the economic strength of State and local
governments and the availability of federal funding.

ECONOMIC FORECAST

The Revenue Estimating Conference incorporates a range of economic
forecasts and economic information in making revenue estimates. During its May
1998 meeting, forecasts were presented by Data Resources, Inc. (DRI), Regional
Financial Associates (RFA), and The New England Economic Project (NEEP).
Current employment and labor force trends were also presented by the Department
of Labor and Training.

RFA, DRI, and NEEP all forecast that economic growth will continue
throughout fiscal year 1999, albeit at a more moderate pace.

EMPLOYMENT

There was some disparity among the economists with respect to the
employment forecast. In fiscal year 1998, growth was anticipated in the range
of 1.6 percent to 1.9 percent, and fiscal year 1999, growth is expected to fall
in the range of 1.0 percent to 1.4 percent. The disparity may be partially
explained by problems in data sampling.

Benchmark revisions for fiscal year 1997 resulted in annual employment
growth of 1.7 percent, versus the preliminary figure 1.0 percent. RFA revised
its 1998 nonfarm employment growth from 0.6 percent in November, to 1.9 percent
in May.

PERSONAL INCOME

Personal income growth rates vary from 4.8 percent to 5.1 percent in
fiscal year 1998, and 4.1 percent to 5.5 percent in fiscal year 1999. Personal
income tax receipts have increased dramatically due to continued strength in
financial markets.

<PAGE>

WAGE AND SALARY INCOME

A fairly wide range of forecasts was present in wage and salary growth
estimates, from 5.2 percent to 6.1 percent in fiscal year 1998, and 4.7 percent
to 6.4 percent in fiscal year 1999. This disparity also contributes to the
differential in estimated personal income growth. The more optimistic outlook
may reflect the theory that high wage earners are realizing greater salary
gains, as well as larger and more frequent bonuses. The dramatic rise in wage
and salary income since 1996 further indicates that Rhode Island is
increasingly creating higher paying jobs. This is further evidenced by the
shift away from low-paying manufacturing employment toward higher paying
services employment.

GENERAL FUND REVENUES AND EXPENDITURES

The State draws nearly all of its revenue from a series of non-property
related taxes and excises, principally the personal income tax and general
retail sales and use tax, from federal assistance payments and grants-in-aid
and from earnings and receipts from certain State-operated programs and
facilities. The State additionally derives revenue from a variety of special
purpose fees and charges which must be used for specific purposes as required
by State law.

MAJOR SOURCES OF STATE REVENUE

Tax Revenues. Approximately 67.6 percent of all taxes and departmental
receipts in fiscal year 1997 were derived from the Rhode Island personal income
tax and the sales and use tax. They constituted 60.8 percent of all general
revenues.

Personal Income Tax. State law provides for a personal income tax on
residents and non-residents (including estates and trusts) equal to a
percentage of the federal income tax liability attributable to the taxpayer's
Rhode Island income. Effective with the passage of Chapter 6 of the 1991 Rhode
Island Public Laws, the State rate became 27.5 percent of the taxpayer's
federal income tax liability for the period January 1, 1991 and thereafter.
However, Article 30 of the 1993 Appropriations Act provided for a second tier
rate of 32.0 percent on the amount of a taxpayer's federal tax liability which
is in excess of fifteen thousand dollars. This provision remained in effect
through tax year 1993, although the Tax Administrator, using his authority to
adjust rates (as described below), modified the second tier rates in October
1993. This was done to offset the effects of changes in federal tax law
contained in the Omnibus Budget Reconciliation Act of 1993 (H.R. 2264).

A resident's Rhode Island taxable income is equal to his or her federal
income, subject to specified modifications. A non-resident's Rhode Island
income is equal to such non-resident's income less deductions (including such
taxpayer's share of the income and deductions of any partnership, trust,
estate, electing small business corporations, or domestic international sales
corporation), subject to specified modifications which are included in
computing his or her federal adjusted gross income and are derived from or
connected with any property located or deemed to be located in the State and
any income producing activity or occupation carried on in the State. Although
the law provides for certain adjustments to be made to federal taxable income
to arrive at the Rhode Island income of residents and non-residents, the Rhode
Island personal income tax essentially "piggy-backs" federal income tax law and
thus is affected by any modifications to the federal tax base. The fiscal year

<PAGE>

1997 Appropriations Act, however, provided that new federal credits enacted
after January 1, 1996 shall not be allowed as a deduction when computing the
state tax. Current law allows the Tax Administrator to modify income tax rates
as necessary when the Assembly is not in session to adjust for federal tax law
changes to ensure maintenance of the revenue base upon which appropriations are
made. The fiscal year 1998 Appropriations Act reduced the personal income tax
rate from 27.5 percent of federal liability to 27.0 percent, effective January
1, 1998, and from 27.0 percent to 26.5 percent effective January 1, 1999. It
also increased the Investment Tax Credit from 4.0 percent to 10.0 percent, and
increased the Research and Development Tax Credit from 5.0 percent to 22.5
percent effective January 1, 1998. The Rhode Island personal income tax
accounted for approximately 34.3 percent of the State's fiscal year 1997
general revenues.

Sales and Use Tax. The State assesses a tax on all retail sales, subject
to certain exceptions, and on hotel and other public accommodation rentals, as
well as upon the storage, use or other consumption of tangible personal
property in the State. The sales and use tax is imposed upon the retailer at
the rate of 7.0 percent of the gross receipts from taxable sales. Included as
major exemptions from the tax are: (a) food (excluding food sold by
restaurants, drive-ins or other eating places) for human consumption off the
premises of the retailer; (b) clothing; (c) medicines sold on prescription; (d)
fuel used in the heating of homes and residential premises; (e) domestic water
usage; (f) gasoline and other motor fuels otherwise specifically taxed; (g)
sales of tangible property and public utility services when the property or
service becomes a component part of a manufactured product for resale, or when
the property or service is consumed directly in the process of manufacturing or
processing products for resale and such consumption occurs within one year from
the date such property is first used in such production; (h) tools, dies and
molds and machinery and equipment (including replacement parts thereof) used
directly and exclusively in an industrial plant in the actual manufacture,
conversion or processing of tangible personal property to be sold; (i) sales of
air and water pollution control equipment for installation pursuant to an order
by the State Director of Environmental Management; and (j) sales of boats or
vessels.

The fiscal year 1991 Reissuance of Appropriations Act, Article 4, provided
that the sales tax rate would remain at 7.0 percent for the period commencing
July 1, 1990. In addition, subject to annual appropriation by the General
Assembly, the Rhode Island Depositors Economic Protection Corporation Act
dedicated one-half cent of the total levy per dollar to "...be utilized to pay
the debt service of the corporation and otherwise effectuate the purposes of
the corporation" effective July 1, 1991. Legislation enacted by the 1992
Assembly increased the dedication under the Rhode Island Depositors Economic
Protection Corporation Act from one-half to six-tenths of one cent, exclusive
of any receipts resulting from any expansion of the coverage in sale and use
taxes through legislation enacted subsequent to February 1, 1992.

The sales and use tax accounted for approximately 26.5 percent of the
State's fiscal year 1997 general revenues.

Business Corporation Tax. The business corporation tax is imposed on
corporations deriving income from sources within the State or engaging in
activities for the purpose of profit or gain. Article 20 of the 1990 Budget as
amended set a rate of 9.0 percent effective July 1, 1989. In addition, Chapter
27 of the Rhode Island Public Laws of 1990 requires that two installments of
the Business Corporation Tax shall be paid in advance, based upon the estimated
tax declared for taxable years ending December 31, 1990 or thereafter. Passage
of the fiscal year 1991 Reissuance of Appropriations Act provided for a surtax
of 11.0 percent on the amount otherwise due for corporations whose taxable year
ends on or after March 31, 1991 and before January 1, 1993.

<PAGE>

The Corporation tax was amended in 1993 to change the carry-back,
carry-forward provisions from 3 years back, 15 years forward to five years
forward. In addition, the minimum business or franchise tax was raised from
$100 to $250. Two reductions to the business corporation tax were enacted as
part of the fiscal year 1994 Budget; the first repealed the 11.0 percent surtax
for corporations whose taxable years begin on or after January 1, 1994 (an
extension to January 1, 1997 was enacted in 1993), and the second doubled the
Investment Tax Credit from two to four percent for investments made beginning
January 1, 1994. The fiscal year 1998 Appropriation Act modified taxes due
under the Business Corporations Tax by providing for enhanced credits.
Specifically, the budget provided for an increase in the Investment Tax Credit
from 4.0 percent to 10.0 percent for machinery and equipment expenditures and
increased the Research and Development Tax Credit for qualified research
expenses from 5.0 percent to 22.5 percent, both effective January 1, 1998.

Corporations dealing in securities on their own behalf, whose gross
receipts from such activities amount to at least 90.0 percent of their total
gross receipts, have been exempt from the net worth computation but are
required to pay the 9.0 percent income tax. Regulated investment companies and
real estate investment trusts and personal holding companies pay a tax at the
rate of 10(cent) per $100 of gross income or $100, whichever is greater. Such
corporate security dealers, investment companies, investment trusts and
personal holding companies are allowed to deduct from net income 50.0 percent
of the excess of capital gains over capital losses realized during the taxable
year when computing the tax.

Health Care Provider Assessment. The 1992 Legislature enacted a health
care provider assessment on residential facilities for the mentally retarded in
the fiscal year 1992 Supplemental Budget Bill. This was a medicaid provider
specific tax levy of 25.0 percent on gross revenues on community residences for
the mentally retarded. That assessment fell within the guidelines of the
federal legislation enacted in November of 1991 concerning medicaid provider
specific taxes. In mid-September 1994, the levy dropped to 6.0 percent because
of new federal limitations on reimbursements for this tax.

The Legislature also enacted a 2.75 percent tax on gross revenues for
nursing homes and a 1.50 percent tax on gross revenues from free-standing
medicaid facilities not associated with hospitals as part of the fiscal year
1993 budget. This tax was scheduled to end September 30, 1995; however, the
fiscal year 1996 Appropriations Act extended the tax on nursing facilities to
September 30, 1997 and raised the rate to 3.75 percent effective October 1,
1995. The fiscal year 1998 Budget provided for elimination of the previously
enacted sunset date and made the tax permanent.

Taxes on Public Service Corporations. A tax ranging from 1.25 percent to
8.0 percent of gross earnings is assessed annually against any corporation
enumerated in Title 44, Chapter 13 of the General Laws, incorporated under the
laws of the State or doing business in Rhode Island. In the case of
corporations whose principal business is manufacturing, selling or distributing
currents of electricity, the rate of tax imposed is 4.0 percent. For those
corporations manufacturing, selling or distributing illuminating or heating
gas, the rate of tax imposed is 3.0 percent of gross earnings. Corporations
providing telecommunications services were assessed at the rate of 6.0 percent,
until July 1, 1997, at which time the rate was reduced to 5.0 percent. However,
100.0 percent of the amounts paid by a corporation to another corporation for
connecting fees, switching charges and carrier access charges are excluded from
the gross earnings of the paying company. The minimum tax payable is $100. The
tangible personal property within the State of telegraph, cable, and telephone
corporations used exclusively for the corporate business, is exempt from
taxation, subject to certain exceptions.

<PAGE>

Article 14 of the fiscal year 1995 Appropriations Act prescribed a phase
out of the portion of the public service corporations tax imposed on energy
used in manufacturing effective July 1, 1994. The tax on electricity was
lowered one percent for four years, and was fully eliminated on July 1, 1997.
The tax on natural gas was lowered one percent per year for the next three
years, and was fully eliminated on July 1, 1996. The article contained
provisions to ensure that the tax savings would be passed on directly to
manufacturers.

Tax on Insurance Companies. Each insurance company transacting business in
Rhode Island must file a return each year on or before March 1 and pay a tax of
2.0 percent of its gross premiums. These are premiums on insurance contracts
written during the preceding calendar year on Rhode Island businesses. The same
tax applies to an out-of-state insurance company, but the tax cannot be less
than that which would be levied by the State or foreign country on a similar
Rhode Island insurance company or its agent doing business to the same extent
there. Effective December 31, 1989, premiums from marine insurance issued in
Rhode Island became exempt from the tax on gross premiums. The fiscal year 1998
Appropriations Act provided for an increase in the investment tax credit for
insurance companies from 4.0 percent to 10.0 percent for machinery and
equipment expenditures effective January 1, 1998.

Insurance and surety companies are exempt from the business corporation
tax and annual franchise tax, but they are subject to provisions concerning any
estimated taxes which may be due. Through the provisions of Article 33 of the
fiscal year 1990 Appropriations Act, surplus line brokers were included under
the statutes relative to estimated taxes.

Tax on Banking Institutions-Excise Tax. For the privilege of existing as a
banking institution during any part of the year, each State bank, trust
company, or loan and investment company in the State must annually pay an
excise tax measured by (1) 9.0 percent of its net income of the preceding year,
or (2) $2.50 per $10,000 or a fraction thereof of its authorized capital stock
as of the last day of the preceding calendar year. The tax payable is the
higher of the two. A national bank within the State must only pay the excise
tax measured by option (1) above. The minimum tax payable is $100. Mutual
savings banks and building and loan associations are subject to tax, effective
January 1, 1998. The fiscal year 1998 Appropriations Act provided for an
increase in the investment tax credit for banking institutions from 4.0 percent
to 10.0 percent for machinery and equipment expenditures effective January 1,
1998.

Tax on Banking Institutions-Interest Bearing Deposits. Chapter 410 of the
Public Laws of 1986 established current tax rates on banking institutions. For
institutions with over $150 million in deposits, the rate was .0695(cent) on
each one hundred dollars ($100) of deposits. For institutions with $150 million
or less in deposits, the rate was .0625(cent) on each one hundred dollars
($100). Under Article 29 of the fiscal year 1993 Appropriations Act, the tax
rates applied to credit unions were set equal to those levied on other banking
institutions and the tax is applied to average daily deposits held for the full
calendar year for all types of banking institutions. Article 34 of the fiscal
year 1996 Appropriations Act reduces the rates on banking institutions with
over $150 million in deposits to .0348 cents on each one hundred dollars of
deposits and .0313 cents on each one hundred dollars of deposits for those
institutions with less than $150 million in deposits for the calendar year. The
rate was set to zero beginning January 1, 1998 and thereafter. The deposits
base includes all but that percentage equivalent to total assets as are

<PAGE>

invested in obligations of the United States and excludes those deposits of a
branch or office located outside the State of Rhode Island or those of an
international banking facility of any banking institution. The fiscal year 1996
Appropriations Act eliminated certain exclusions relative to the tax on credit
unions effective January 1, 1996, but did not make changes relative to the rate
of tax.

Chapter 15 of the 1992 Rhode Island Public Laws changed the timing of the
estimated payments. The legislation placed the bank deposit tax on the same
calendar basis as the other business taxes.

Estate Tax. For decedents who died before January 1, 1986, a tax was
assessed on each decedent's estate at rates ranging from 2.0 percent to 9.0
percent of the net estate depending on its value. The exemption for all estates
is $25,000, and the marital deduction is $175,000. An orphan's deduction is
allowed similar to the deduction allowed under federal law.

Current law, established under the provisions of the 1991 Appropriations
Act, provides for the phasing out of the estate tax, with the minimum tax set
equal to the maximum credit allowable under federal estate tax law. Rates are
equal to 40 percent of the tax otherwise payable for estates of decedents whose
deaths occurred on or after June 1, 1990 and prior to January 1, 1992. For
decedents whose deaths occurred on or after January 1, 1992, the estate tax
equaled the maximum credit allowable under federal estate tax law, providing
for the full implementation of the phase out. The time period for filing a
return was reduced from ten to nine months under this legislation.

Cigarette Tax. Article 17 of the 1990 Appropriations Act established rates
equal to 18.5 mills per cigarette (37 cents per package of 20) effective on
June 29, 1989. The fiscal year 1994 Budget increased the rate from 18.5 mills
per cigarette to 22.0 mills per cigarette (from 37 cents to 44 cents per
package of 20 cigarettes) and to 56 cents per pack, effective July 1, 1994. The
fiscal year 1996 Appropriations Act increased the tax by five cents to 61 cents
per pack effective July 1, 1995. Article 12 of the fiscal year 1998
Appropriations Act raised the tax by 10 cents to 71 cents per pack effective
July 1, 1997.

Gasoline Tax. The tax is due and is not refundable on the sale of all
fuels used or suitable for operating internal combustion engines other than
fuel used: (a) for commercial fishing and other marine purposes other than
operating pleasure craft; (b) in engines, tractors, or motor vehicles not
registered for use or used on public highways by lumbermen, water well drillers
and farmers; (c) for the operation of airplanes; (d) by manufacturers who use
diesel engine fuel for the manufacture of power and who use fuels other than
gasoline and diesel engine fuel as industrial raw material; and (e) for
municipalities and sewer commissions using fuel in the operation of vehicles
not registered for use on public highways.

Chapter 6 of the 1991 Rhode Island Public Laws modified the gasoline tax
floor from 18 cents per gallon to 23 cents per gallon, effective upon passage.
In addition, the minimum tax under the gasoline excise component was changed
from two to three cents per gallon for a total gasoline tax floor of 26 cents
per gallon upon passage of the Act.

The fiscal year 1993 Budget increased the dedicated portion of gas tax
receipts to the Highway Reconstruction and Repair account from five cents to
seven cents and from zero to three cents to the Rhode Island Public Transit
Authority (RIPTA). The 1994 Appropriations Act raised the gasoline tax of 28
cents per gallon, an increase of 2 cents. One cent continues to be deposited as
general revenue through June 30, 1998, and the remaining 27 cents were
deposited in the Intermodal Surface Transportation Fund (ISTF). ISTF funds were
distributed to RIPTA (3 cents), Elderly and Handicapped Transportation (1
cent), and the General Revenue Fund (10 cents), with the remainder used to

<PAGE>

finance the Department of Transportation (13 cents). The fiscal year 1996
Appropriations Act decreased the portion of the tax deposited in General
Revenue by one cent (to 9 cents), and reallocated that portion to the
Department of Transportation. The fiscal year 1998 Appropriations Act again
modified the distribution of ISTF receipts. The share of the gasoline tax
transferred to the general fund decreased by 2 cents (to 7 cents), thereby
increasing the Department of Transportation share by 2 cents (to 16 cents). The
fiscal year 1999 Appropriations Act requires that the full 28 cents of the gas
tax be deposited in the ISTF, and again modified the distribution. Beginning in
fiscal year 1999, the tax is allocated as follows: Department of Elderly
Affairs (1 cent), RIPTA (5 cents), Department of Transportation (17.5 cents),
and Transfer to General Fund (4.5 cents). In fiscal year 2000 and each year
thereafter, the portion allocated for transfer to the general fund will
decrease by one cent and will be dedicated to the Department of Transportation
until the entire gas tax is dedicated to transportation purposes.

Other Taxes. In addition to the above described taxes, the State imposes
various fees, taxes and excises for the registration of domestic and foreign
corporations, the sale of liquor and other alcoholic beverages, the
registration of motor vehicles and the operation of pari-mutuel betting.

Departmental Revenues. The largest category of departmental earnings is
the group defined as licenses and fees, due largely to the assessment of the
hospital licensing fee, which was intended to be a one year fee that yielded
$77.3 million in fiscal year 1995. The fiscal year 1996 Appropriations Act
extended the fee one year but at a lower rate generating $37.5 million. The
fiscal year 1997 Appropriations Act extended the fee for an additional year at
the same rate of 2.2 percent, yielding $37.5 million. The fiscal year 1998
Appropriations Act also extended the fee for an additional year and imposed a
rate of 2.0 percent, which yielded $37.4 million. The fiscal year 1999
Appropriations Act again extends the fee for one year, at the current rate of
2.0 percent of gross patient receipts.

The second largest category of revenue is sales and services, which
includes disproportionate share revenues. Other departmental revenues include
various miscellaneous receipts such as investment earnings on General Fund
balances.

Restricted Receipts. In fiscal year 1997, the State received a total of
$90.1 million in restricted receipts excluding transfers into the General Fund.
These reflect various specialized fees and charges, interest on certain funds
and accounts maintained by the State and private contributions and grants to
certain State programs. Such receipts are restricted under State law to offset
State expenditures for the program under which such receipts are derived. Of
the total restricted receipts received in fiscal year 1997, the most
significant revenues reflected the dedication of sales tax revenues to the
Depositors Economic Protection Corporation (DEPCO) totaling $45.9 million in
cash receipts. The fiscal year 1998 Appropriations Act provided for the
transfer of $15.0 million of DEPCO restricted receipts to general revenue. In
fiscal year 1999, and thereafter, all monies dedicated to DEPCO will be
utilized to accelerate the defeasance of DEPCO debt.

Other Sources. The largest component of Other Sources is the transfer from
the State Lottery. The State Lottery Fund was created in 1974 for the receipt
and disbursement of revenues of the State Lottery Commission from sales of
lottery tickets and license fees. The monies in the fund are allocated for: (1)
establishing a prize fund from which payments of the prize are disbursed to
holders of winning lottery tickets, the total of which prize payments equals,
as nearly as practicable, 45 percent of the total revenue accruing from the
sale of lottery tickets; (2) payment of expenses incurred by the Commission in
the operation of State lotteries; and (3) payment to the State's General Fund

<PAGE>

of all revenues remaining in the State Lottery Fund, provided that the amount
to be transferred into the General Fund must equal not less than 30 percent of
the total revenue received and accrued from the sale of lottery tickets plus
any other income earned from the lottery. The fiscal year 1996 Appropriations
Act increased the percentage of video lottery terminal receipts which are
transferred to the General Fund and increased the payout to keno game players,
which has increased lottery income. Lottery transfers to the general fund
totaled $100.0 million in fiscal year 1997.

The second largest single component of Other Sources is the gas tax
transfer from the Intermodal Surface Transportation Fund. Gasoline tax
recipients not dedicated for use by transportation agencies become available to
the general fund. This amounted to $37.7 million in fiscal year 1997.

The Unclaimed Property Transfer reflects funds which have escheated to the
State. They include unclaimed items such as bank deposits, funds held by life
insurance companies, deposits and refunds held by utilities, dividends and
property held by courts and public agencies. The escheated funds are deposited
by the General Treasurer in the general fund, with deductions made for
administrative costs. Unclaimed property transfers totaled $5.0 million in
fiscal year 1997.

Other Miscellaneous Sources in fiscal year 1997 totaled $40.8 million.
This includes $15.8 million from DEPCO, $5.5 million from the Underground
Storage Tank Fund, $4.5 million of interest earnings, and $5.0 million of
health insurance settlements. In fiscal year 1998 and fiscal year 1999, $34.8
million and $20.7 million are estimated.

Federal Receipts. In fiscal year 1997, the State collected receipts of
$922.4 million from the federal government, representing grants-in-aid and
reimbursements to the State for expenditures for various health, welfare and
educational programs and distribution of various restricted or categorical
grants-in-aid.

Federal grants-in-aid reimbursements are normally conditioned to some
degree, depending on the particular program being funded, on matching resources
by the State ranging from a 50 percent matching expenditure to in-kind
contributions. The largest categories of federal grants and reimbursements are
made for medical assistance payments for the indigent (Title XIX) and Temporary
Assistance to Needy Families (TANF). The federal participatory rates for Title
XIX are recalculated annually, and the major determinant in the rate
calculation is the relative wealth of the State. The federal match rate is 53.4
percent as of October 1, 1997. Effective in fiscal year 1997, TANF funds are
block grants; state eligibility is conditional on maintenance of effort
expenditure floors.

REVENUE ESTIMATES

Revenue estimates are predicated upon the May Revenue Estimating
conference, as well as changes to general revenues reflected in the fiscal year
1998 budget plan adopted by the Legislature on April 2, 1998 and the fiscal
year 1999 Appropriations Act, and other legislation which changes the
distribution of the hotel tax receipts. The Consensus Revenue Estimating
Conference is required by legislation to convene at least twice annually to
forecast generally revenues for the current year and the budget year, based
upon current law and collection trends, as well as the economic forecast.

FISCAL YEAR 1998 REVENUE ESTIMATE

The fiscal year 1998 estimate was revised upward by $64.3 million over the
estimate adopted by the November Revenue Estimating Conference. This is a

<PAGE>

revision of 3.4 percent to the November estimate. The estimate includes
adjustments adopted by the Revenue Estimating Conference and changes included
in the fiscal year 1998 budget plan adopted by the Legislature for 1998.

The largest revision was $43.9 million in personal income taxes over the
enacted estimate. The revisions to the enacted estimate were: $22.2 million
increase in estimated payments, $16.9 million increase in final payments, $6.8
million increase in refunds, and a $11.4 million increase in withholding
payments. The Conference adopted estimated payments of $163.7 million, growth
of 24.9 percent over fiscal year 1997, reflecting market activity. The 28.5
percent increase in final payments appears to also reflect that activity.
Refunds are estimated to be 5.8 percent greater than fiscal year 1997.
Withholding growth is estimated at 6.9 percent.

Total general business taxes estimates were $5.4 million less than the
November estimate. Gains in corporate income tax ($1.1 million), Franchise
Taxes ($0.4 million), Taxes on insurance companies ($8.6 million), and bank
deposits taxes ($0.2 million), partially offset reductions in Public Utilities
Gross Earnings Taxes ($2.6 million), Taxes on Financial Institutions ($12.6
million), and the Health Care Provider Tax ($0.5 million).

Estimated sales tax revenues of $527.0 million reflects 7.7 percent growth
over fiscal year 1997 receipts. The estimate is $11.0 million over the November
estimate. Other major changes in the Sales and Use Tax category include
increases in Motor Vehicle Taxes ($1.8 million) and Cigarettes ($0.8 million).

Other adjustments include: an increase of $0.8 million in inheritance
taxes; an upward revision of $6.8 million for departmental earnings; and a $4.0
million decrease to lottery revenues. The lottery estimate change includes a
$2.8 million decrease to the video lottery terminal estimate, a decrease of
$1.8 million to the enacted estimate for games, and a $0.6 million increase to
the KENO estimate.

The Legislature's revised budget plan resulted in an adjustment of
negative $0.9 million to fiscal year 1998 departmental revenues.

FISCAL YEAR 1999 REVENUE ESTIMATE

The largest source of fiscal year 1999 general revenue is the personal
income tax, with estimated receipts of $731.1 million composing 37.1 percent of
the total. While collections in this component have been reduced significantly
by 1997 tax law changes, growth of 1.5 percent is still anticipated. Adjusted
for these changes, fiscal year 1999 growth equals 4.3 percent.

Sales Tax collections are expected to total $548.0 million in fiscal year
1999. The fiscal year 1999 estimate anticipates 4.0 percent annual growth, and
composes 27.8 percent of total general revenues.

Other sources of "Sales and Use" taxes are expected to vary slightly in
the budget year. Since the Appropriations Act dedicates the full gas tax to
ISTF, the motor fuel tax will realize a loss of $4.5 million, but the gas tax
transfer in "Other Sources" will increase by the same amount subject to other
changes in ISTF allocation. Cigarette Tax collections are expected to realize a
loss of $1.1 million, or negative 1.7 percent, for an annual total of $65.0
million. Motor Vehicle and Alcohol Tax collections are expected to remain at
fiscal year 1998 levels.

<PAGE>

The General Business Taxes, which represent 10.5 percent of total
collections, are expected to increase slightly in fiscal year 1999. The
Business Corporations Tax is expected to decline by approximately 2.0 percent
as a result of tax cuts and other adjustments, for a total of $65.6 million in
revenues. The Franchise and Bank Deposits Taxes are expected to remain flat in
fiscal year 1999, while the Public Utilities Gross Earnings Tax revenues are
expected to decrease by 1.6 percent, with total collections of $60.0 million.
The Financial Institutions account should rebound in fiscal year 1999, with
total revenues reaching $7.0 million. The Health Care Provider Assessment is
expected to increase by 3.4 percent to $24.0 million, keeping in line with
forecast inflation.

Inheritance and Gift Taxes are expected to decline by $3.0 million,
(negative 16.7 percent) in fiscal year 1999. The anticipated loss is
attributable to the Taxpayer Relief Act provisions which will alter the taxable
estate criteria beginning January 1, 1998, and which will likely have the
greatest incremental effect in fiscal year 1999, due to tax return filing
requirements.

The Hospital Licensing Fee enacted by the 1997 General Assembly expires on
June 30, 1998. The fiscal year 1999 Appropriations Act extends the fee, and
includes $37.4 million in fiscal year 1999 General Revenues.

A reduction in "Other Sources" is explained by a smaller portion of the
Gas Tax being transferred to General Revenue, as well as significant reductions
in "Other Miscellaneous Revenues". The fiscal year 1999 Appropriations Act
allocated the full gas tax to the ISTF with 5 cents dedicated to RIPTA, 1 cent
to Elderly Affairs, 17.5 cents to transportation, and the remaining 4.5 cents
to the General Fund.

The fiscal year 1999 Appropriations Act also transfers $4.0 million from
the Resource Recovery Fund to General Revenue.

INDEBTEDNESS

Under the State Constitution, the General Assembly has no power to incur
State debts in excess of $50,000 without the consent of the people, except in
the case of war, insurrection or invasion, or to pledge the faith of the State
to the payment of obligations of others without such consent. By judicial
interpretation, the limitation stated above has been judged to include all
debts of the State for which its full faith and credit are pledged, including
general obligation bonds and notes; bonds and notes guaranteed by the State;
and debts or loans insured by agencies of the State, such as the
Industrial-Recreational Building Authority. However, non-binding agreements of
the State to appropriate monies in aid of obligations of a State agency, such
as the provisions of law governing the capital reserve funds of the Port
Authority and Economic Development Corporation, now known as the Rhode Island
Economic Development Corporation, Housing and Mortgage Finance Corporation, or
to appropriate monies to pay rental obligations under State long-term leases,
such as the State's lease agreements with the Convention Center Authority and
the Resource Recovery Corporation, are not subject to this limitation.

Direct Debt. Direct debt is authorized by the voters as general obligation
bonds and notes. As of June 30, 1998, the State had $767.6 million of bonds
outstanding and $276,347,926 of authorized but unissued direct debt. In July
1998, the State issued an additional $65,720,000 of bonds, resulting in a
balance of authorized but unissued debt of $209,910,479.

<PAGE>

Guaranteed Debt. Guaranteed debt of the State includes bonds and notes
issued by, or on behalf of certain agencies, commissions, and authorities
created by the General Assembly and charged with enterprise undertakings, for
the payment of which debt the full faith and credit of the State are pledged in
the event that the revenues of such entities may at any time be insufficient.
These include the Blackstone Valley District Commission and the Narragansett
Bay Water Quality Management District Commission. As of June 30, 1997, these
entities had bonds outstanding of $22,657,000 and $1,514,000 of authorized but
unissued debt.

YEAR 2000

The State has taken steps to ensure that internal and mechanical Year 2000
issues, which may arise from State operations, will not materially affect the
State's credit-worthiness and ability to make timely payments of debt service.
The approach of the State has been to raise the awareness of technical and
managerial staff and to provide the assistance necessary to mitigate the risk
to the performance of the State's business.

The State has coordinated the efforts to remediate and mitigate the impact
of the Year 2000 computer issue through the office of the Chief Information
Officer. The "Year 2000 Program Office", which was created in December 1996,
performs this coordination.

The Fiscal Year 1998 budget contained $500,000 for Year 2000 compliance.
Approximately half of the funding was extended to departments to repair and
replace critical non-compliant software systems inventoried and assessed by
departments as overseen by the Program Office.

The General Assembly enacted the Governor's requested budget for fiscal
year 1999 of $2.5 million for "Year 2000" technology problems. This budget will
be used to address infrastructure issues and external compliance. Contingency
plans will be necessary for critical operations where compliance cannot be
assured. The year 2000 Program Office will accept requests for emergency
financial assistance in any of these areas, provided that the need, agency
commitment and feasibility of the project have been demonstrated. Requests for
additional appropriations may be required as a result of these requests.

The State cannot guarantee that systems of other companies on which State
government systems rely, or that a failure to convert by another company, or a
conversion that is incompatible with the State's systems, would not have a
material adverse effect on the State. Furthermore, the failure of certain
entities beyond the control of the State, such as the federal government or
other sources of revenue, to address the Year 2000 issue could have a material
adverse impact on the operations or finances of the State.

LITIGATION

The State, its officers and employees are defendants in numerous lawsuits.
With respect to any such litigation, State officials are of the opinion that
the lawsuits are not likely to result either individually or in the aggregate
in final judgments against the State which would materially affect its
financial position. However, the following case should be noted. In Case No.
97-329-Appeal CAPITAL PROPERTIES, INC. ("CPI") V. STATE OF RHODE ISLAND, the
Rhode Island Supreme Court issued an order on April 17, 1998 affirming a
judgment in favor of CPI against the State for $6,100,949 plus interest and
costs. With interest, the judgment totals in excess of $11,700,000 with
interest accruing in an amount in excess of $3,500 per day.

<PAGE>

The judgment arises out of a condemnation of land of CPI by the State in
1987. The State contends there are contractual obligations among the State, CPI
and the City of Providence, Rhode Island which relieve the State of the
obligation to pay the judgment in the case. The State's position is that the
City of Providence and the State agreed to bear equally any judgment entered in
favor of CPI, and that CPI moreover agreed it would forego enforcement of any
judgment against the State in exchange for the State's conveyance to CPI of
land designated as "Parcel 9." Parcel 9 has been previously conveyed by the
State to CPI. Accordingly, it is the position of the State that the applicable
contractual provisions preclude enforcement of the judgment against the State.
The appeal was remanded by the Rhode Island Supreme Court to the Superior Court
without prejudice to any party seeking to enforce any contractual obligations
that may be implicated by enforcement of the judgment against the State. CPI
subsequently obtained a Writ of Mandamus from the Superior Court against the
State requiring immediate payment of the judgment. The State has appealed the
issuance of that Writ to the Rhode Island Supreme Court. The State also brought
a suit against CPI and the City of Providence seeking a court order
acknowledging that the State has already paid one-half the judgment to CPI and
that the other half is the responsibility of the City. If the State is forced
to pay one half the judgement, it is the State's position that the City of
Providence is obligated to reimburse the State that amount.

The State intends to oppose vigorously any enforcement of the judgment .
There are, however, no assurances the State will prevail. If the State fails to
prevail, resources of the State will have to be identified to satisfy this
judgment. No monies are currently budgeted to pay the judgment.

<PAGE>

APPENDIX B

DESCRIPTION OF SECURITIES RATINGS1/

The ratings of Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Rating Services ("S&P"), and Fitch IBCA, Inc. ("Fitch IBCA") represent
their opinions as to the quality of various debt securities, and are not
absolute standards of quality. Debt securities with the same maturity, coupon
and rating may have different yields, while debt securities of the same
maturity and coupon with different ratings may have the same yield. The ratings
below are as described by the rating agencies. Ratings are generally given to
securities at the time of issuance. While the rating agencies may, from time to
time, revise such ratings, they undertake no obligation to do so.

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
FOUR HIGHEST BOND RATINGS

AAA Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and generally are 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 then 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 investments 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,
since 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
greater length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.

Note: Those bonds in the Aa, A and Baa categories which Moody's believes
possess the strongest credit attributes are designated by the symbols Aa1, A1
and Baa1.

- --------

1/As described by the rating agencies. Ratings are generally given to
securities at the time of issuance. While the rating agencies may, from time to
time, revise such ratings, they undertake no obligation to do so.

<PAGE>

DESCRIPTION OF STANDARD & POOR'S RATING SERVICES
FOUR HIGHEST BOND RATINGS

AAA An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.

AA An obligation rated AA differs from the highest rated issues only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is still strong.

A An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories. However, the obligor's capacity to meet its financial commitment on
the obligation is still strong.

BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.

Plus (+) or minus (-): The ratings from AA to BBB may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

DESCRIPTION OF FITCH IBCA, INC.'S
FOUR HIGHEST INTERNATIONAL LONG-TERM CREDIT RATINGS

When assigning ratings, Fitch IBCA considers the historical and
prospective financial condition, quality of management, and the operating
performance of the issuer and of any guarantor, any special features of a
specific issue or guarantee, the issue's relationship to other obligations of
the issuer, as well as developments in the economic and political environment
that might affect the issuer's financial strength and credit quality.

Variable rate demand obligations and other securities which contain a
demand feature will have a dual rating, such as 'AAA/F1+'. The first rating
denotes long-term ability to make principal and interest payments. The second
rating denotes ability to meet a demand feature in full and on time.

AAA Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in the case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.

AA Very high credit quality. 'AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.

A High credit quality. 'A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or
in economic conditions than is the case for higher ratings.

BBB Good credit quality. 'BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.

<PAGE>

"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the 'AAA' long-term
category.

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
TWO HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES

Moody's ratings for state and municipal short-term obligations are
designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, such as long-term secular trends, may be less important over the short
run.

MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.

MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.

DESCRIPTION OF STANDARD & POOR'S RATING SERVICES
TWO HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES

A S&P note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating. Notes maturing beyond three years most likely receive a long-term
debt rating. The following criteria will be used in making that assessment:

Amortization schedule -- the larger the final maturity relative to
other maturities, the more likely it will be treated as a note.

Source of payment -- the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note.

Note rating symbols are as follows:

SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.

SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.

DESCRIPTION OF STANDARD & POOR'S RATING SERVICES
RATINGS OF TAX-EXEMPT DEMAND BONDS

S&P assigns "dual" ratings to all debt issues that have a put or demand
feature as part of their structure.

The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols for the put option (for

<PAGE>

example, "AAA/A-1+"). With short-term demand debt, note rating symbols are used
with the commercial paper rating symbols (for example, "SP-1+/A-1+").

DESCRIPTION OF FITCH IBCA, INC.'S
TWO HIGHEST INTERNATIONAL SHORT-TERM CREDIT RATINGS

A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.

F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.

F2 Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
TWO HIGHEST SHORT-TERM DEBT RATINGS

Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually short-term senior debt obligations having an original maturity
not in excess of one year.

PRIME-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics: (1)
leading market positions in well-established industries; (2) high rates of
return on funds employed; (3) conservative capitalization structure with
moderate reliance on debt and ample asset protection; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash generation;
and (5) well-established access to a range of financial markets and assured
sources of alternate liquidity.

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

DESCRIPTION OF STANDARD & POOR'S RATING SERVICES
TWO HIGHEST COMMERCIAL PAPER RATINGS

A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.

A-1 A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligations is still strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.

<PAGE>

A-2 A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.

<PAGE>
<TABLE>
<CAPTION>
APPENDIX C

TAXABLE EQUIVALENT YIELDS

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

These tables show the yield investors need to achieve from a taxable investment
to equal the yield from a tax-exempt investment. These tables do not predict
the yield of any Fund. They are accurate as of January 5, 1999.

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

FEDERAL
Equivalent yields: Tax-exempt versus taxable securities
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998
Federal
Taxable Income Marginal
Single Joint Rate 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%

$0-25,350 $0-42,350 15.00% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24% 8.82% 9.41%

25,351-61,400 42,351-102 28.00% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 9.72% 10.42% 11.11%

61,401-128,100 102,301-155,950 31.00% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 10.14% 10.87% 11.59%

128,101-278,450 155,951-278,450 36.00% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16% 10.94% 11.72% 12.50%

over 278,450 over 278,450 39.60% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76% 11.59% 12.42% 13.25%

- ---------------------------------------------------------------------------------------------------------
</TABLE>
CONNECTICUT
Equivalent yields: Tax-exempt versus taxable securities
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997
Combined
Connecticut
Taxable Income* State Federal and Federal A Connecticut Tax-Exempt Income Fund Yield of:
Single Joint Rate** Rate TaxBracket**** 4.0% 5.0% 6.0% 7.0% 8.0%

$0-7,500 $0-15,000 3.00%*** 15.00% 17.55% 4.85% 6.06% 7.28% 8.49% 9.70%

7,501-25,350 15,001-42,350 4.50% 15.00% 18.83% 4.93% 6.16% 7.39% 8.62% 9.86%

25,351-61,400 42,351- 4.50% 28.00% 31.24% 5.82% 7.27% 8.73% 10.18% 11.63%
102,300

61,401-128,100 102,301- 4.50% 31.00% 34.11% 6.07% 7.59% 9.11% 10.62% 12.14%
155,950

128,101-278,450 155,951- 4.50% 36.00% 38.88% 6.54% 8.18% 9.82% 11.45% 13.09%
278,450

over 278,450 over 278,450 4.50% 39.60% 42.32% 6.93% 8.67% 10.40% 12.14% 13.87%

* This amount represents taxable income as defined in the Internal Revenue
Code. It is assumed that taxable income as defined in the Internal
Revenue Code is the same as under the Connecticut Personal Income Tax
law, however, Connecticut taxable income may differ due to differences in
exemptions, itemized deductions and other items.
** The Connecticut credits have not been included in the calculation of the
state rates. A credit between 1% and 75% is automatically allowed for
single taxpayers with a CT adjusted gross income ranging from $12,000 to
$52,500. A credit between 1% and 75% is automatically allowed for married
filing joint taxpayers with CT adjusted gross income ranging from $24,000
to $100,500.
*** Per changes of 1997 Regular Session and the trailing Special Sessions of
the Connecticut General Assembly.
**** For federal tax purposes, these combined rates reflect the applicable
marginal rates for 1998, including indexing for inflation. These rates
include the effect of deducting state taxes on your Federal return.

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

<PAGE>

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------

FLORIDA
Equivalent yields: Tax-exempt versus taxable securities

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 Combined
Florida A Tax-Exempt Income Fund Yield of:
Taxable Income* and Federal
Single Joint Tax Bracket** 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%

$0-25,350 $0-42,350 15.00% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24%

25,351-61,400 42,351-102,300 28.00% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 9.72%

61,401-128,100 102,301-155,950 31.00% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 10.14%

128,101-278,450 155,951-278,450 36.00% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16% 10.94%

over 278,450 over 278,450 39.60% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76% 11.59%

</TABLE>

* This amount represents taxable income as defined in the Internal Revenue
Code. It is assumed that taxable income as defined in the Internal Revenue
Code is the same as under the Florida Personal Income Tax law; however,
Florida taxable income may differ due to differences in exemptions,
itemized deductions and other items.
** For federal tax purposes these combined rates reflect the applicable
marginal rates for 1998, including indexing for inflation. These rates
include the effect of deducting state taxes on your federal return.

<PAGE>

- ---------------------------------------------------------------------------------------------------------
MASSACHUSETTS
Equivalent yields: Tax-exempt versus taxable securities

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 Combined
Massachusetts
Taxable Income* State Federal and Federal A Massachusetts Tax-Exempt Income Fund Yield of:
Single Joint Rate Rate Tax Bracket** 4.0% 5.0% 6.0% 7.0% 8.0%

$0-25,350 $0-42,350 12.00% 15.00% 25.20% 5.35% 6.68% 8.02% 9.36% 10.70%

24,351-61,400 42,351-102,300 12.00% 28.00% 36.64% 6.31% 7.89% 9.47% 11.05% 12.63%

61,401-128,100 102,301-155,950 12.00% 31.00% 39.28% 6.59% 8.23% 9.88% 11.53% 13.18%

128,101-278,450 155,951-278,450 12.00% 36.00% 43.68% 7.10% 8.88% 10.65% 12.43% 14.20%

over 278,450 over 278,450 12.00% 39.60% 46.85% 7.53% 9.41% 11.29% 13.17% 15.05%

</TABLE>

* This amount represents taxable income as defined in the Internal Revenue
Code. It is assumed that taxable income as defined in the Internal Revenue
Code is the same as under the Massachusetts Personal Income Tax law,
however, Massachusetts taxable income may vary due to differences in
exemptions, itemized deductions and other items.
** For federal tax purposes these combined rates reflect the applicable
marginal rates for 1998, including indexing for inflation. These rates
include the effect of deducting state taxes on your Federal return.

- ---------------------------------------------------------------------------------------------------------
RHODE ISLAND
Equivalent yields: Tax-exempt versus taxable securities

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998
Combined
Rhode Island
Taxable Income* State Federal and Federal A Rhode Island Tax-Exempt Income Fund Yield of:
Single Joint Rate Rate Tax Bracket** 4.0% 5.0% 6.0% 7.0% 8.0%

$0-25,350 $0-42,350 4.94% 15.00% 19.05% 4.94% 6.18% 7.41% 8.56% 9.88%

25,351-61,400 42,351-102,300 6.21% 28.00% 35.56% 6.21% 7.76% 9.31% 10.86% 12.41%

61,401-128,100 102,301-155,950 6.60% 31.00% 39.37% 6.60% 8.25% 9.90% 11.55% 13.19%

128,101-278,450 155,951-278,450 7.37% 36.00% 45.72% 7.37% 9.21% 11.05% 12.90% 14.74%

over 278,450 over 278,450 8.05% 39.60% 50.29% 8.05% 10.06% 12.07% 14.08% 16.09%
</TABLE>

* This amount represents taxable income as defined in the Internal Revenue
Code. It is assumed that taxable income defined in the Internal Revenue
Code is the same as under the Rhode Island Personal Income Tax law,
however, Rhode Island taxable income may differ due to differences in
exemptions, itemized deductions, and other items.
** For federal tax purposes, these combined rates reflect the applicable
marginal rates for 1998, including indexing for inflation. These rates
include the effect of deducting state taxes on your Federal return.

<PAGE>

BOSTON 1784 FUNDSSM

BOSTON 1784 TAX-FREE MONEY MARKET FUND
BOSTON 1784 U.S. TREASURY MONEY MARKET FUND
BOSTON 1784 INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
BOSTON 1784 PRIME MONEY MARKET FUND
BOSTON 1784 INSTITUTIONAL PRIME MONEY MARKET FUND
BOSTON 1784 SHORT-TERM INCOME FUND
BOSTON 1784 INCOME FUND
BOSTON 1784 U.S. GOVERNMENT MEDIUM-TERM INCOME FUND
BOSTON 1784 TAX-EXEMPT MEDIUM-TERM INCOME FUND
BOSTON 1784 CONNECTICUT TAX-EXEMPT INCOME FUND
BOSTON 1784 FLORIDA TAX-EXEMPT INCOME FUND
BOSTON 1784 MASSACHUSETTS TAX-EXEMPT INCOME FUND
BOSTON 1784 RHODE ISLAND TAX-EXEMPT INCOME FUND
BOSTON 1784 ASSET ALLOCATION FUND
BOSTON 1784 GROWTH AND INCOME FUND
BOSTON 1784 GROWTH FUND
BOSTON 1784 INTERNATIONAL EQUITY FUND

STATEMENT OF ADDITIONAL INFORMATION

SEPTEMBER 15, 1998, AS SUPPLEMENTED APRIL 1, 1999

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

Boston 1784 FundsSM:
o are not insured by the FDIC or any other governmental agency;
o are not guaranteed by BankBoston, N.A. or any
of its affiliates;
o are not deposits or obligations of BankBoston, N.A. or any of
its affiliates; and
o involve investment risks, including possible loss of principal.
BankBoston, N.A. serves as investment adviser and shareholder servicing agent
for Boston 1784 Funds. Investors Bank and Trust Company serves as
custodian for Boston 1784 Funds. Boston 1784 Funds are distributed
by SEI Investments Distribution Co., a party independent
of BankBoston, N.A. and any of its affiliates. Financial
Services Counselors are registered representatives of
BankBoston Investor Services, Inc. (member NASD/SIPC), a wholly-owned
subsidiary of BankBoston, N.A.