EXHIBIT 17(c)

BLACKROCK FUNDS(SM)

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information provides supplementary information
pertaining to shares representing interests in the Money Market, Municipal Money
Market, U.S. Treasury Money Market, Ohio Municipal Money Market, Pennsylvania
Municipal Money Market, North Carolina Municipal Money Market, Virginia
Municipal Money Market, New Jersey Municipal Money Market, Large Cap Value
Equity, Large Cap Growth Equity, Index Equity, Small Cap Value Equity, Mid-Cap
Value Equity, Micro-Cap Equity, International Equity, International Emerging
Markets, International Small Cap Equity, Balanced, Small Cap Growth Equity, Mid-
Cap Growth Equity, Select Equity, Managed Income, Tax-Free Income, Intermediate
Government Bond, Delaware Tax-Free Income, Kentucky Tax-Free Income, Ohio Tax-
Free Income, Pennsylvania Tax-Free Income, Low Duration Bond, Intermediate Bond,
Government Income, International Bond, New Jersey Tax-Free Income, Core Bond,
GNMA and High Yield Bond Portfolios (collectively, the "Portfolios") of
BlackRock Funds(SM) (the "Fund"). The Money Market, Municipal Money Market, U.S.
Treasury Money Market, Ohio Municipal Money Market, Pennsylvania Municipal Money
Market, North Carolina Municipal Money Market, Virginia Municipal Money Market
and New Jersey Municipal Money Market Portfolios are called "Money Market
Portfolios," the Municipal Money Market, Ohio Municipal Money Market,
Pennsylvania Municipal Money Market, North Carolina Municipal Money Market,
Virginia Municipal Money Market and New Jersey Municipal Money Market Portfolios
are called "Municipal Money Market Portfolios," the Large Cap Value Equity,
Large Cap Growth Equity, Index Equity, Small Cap Value Equity, Mid-Cap Value
Equity, Micro-Cap Equity, International Equity, International Emerging Markets,
International Small Cap Equity, Balanced, Small Cap Growth Equity, Mid-Cap
Growth Equity and Select Equity Portfolios are called "Equity Portfolios" and
the Managed Income, Tax-Free Income, Intermediate Government Bond, Delaware Tax-
Free Income, Kentucky Tax-Free Income, Ohio Tax-Free Income, Pennsylvania Tax-
Free Income, Low Duration Bond, Intermediate Bond, Government Income,
International Bond, New Jersey Tax-Free Income, Core Bond, GNMA and High Yield
Bond Portfolios are called "Bond Portfolios." The Equity Portfolios and the Bond
Portfolios are also called "Non-Money Market Portfolios." This Statement of
Additional Information is not a prospectus, and should be read only in
conjunction with the Prospectuses of the Fund dated January 28, 1999, each as
amended from time to time (the "Prospectuses"). Certain information contained in
the Fund's and The U.S. Large Company Series of The DFA Investment Trust
Company's annual reports to shareholders is incorporated by reference herein.
Prospectuses and current shareholder reports of the Fund may be obtained from
the Fund's distributor at no charge by calling toll-free (800) 441-7379. This
Statement of Additional Information is dated January 28, 1999.

TABLE OF CONTENTS

Page

INVESTMENT POLICIES....................................................................... 1
SPECIAL CONSIDERATIONS FOR STATE-SPECIFIC PORTFOLIOS...................................... 23
ADDITIONAL INVESTMENT LIMITATIONS......................................................... 44
TRUSTEES AND OFFICERS THE FUND............................................................ 48
SHAREHOLDER AND TRUSTEE LIABILITY OF THE FUND............................................. 55
INVESTMENT ADVISORY, ADMINISTRATION,DISTRIBUTION AND SERVICING ARRANGEMENTS............... 55
EXPENSES.................................................................................. 75
PORTFOLIO TRANSACTIONS.................................................................... 75
PURCHASE AND REDEMPTION INFORMATION....................................................... 79
VALUATION OF PORTFOLIO SECURITIES......................................................... 96
PERFORMANCE INFORMATION................................................................... 98
TAXES..................................................................................... 127
ADDITIONAL INFORMATION CONCERNING SHARES.................................................. 135
MISCELLANEOUS............................................................................. 136
FINANCIAL STATEMENTS...................................................................... 140
APPENDIX A................................................................................ A-1
APPENDIX B................................................................................ B-1

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR THE
PROSPECTUSES IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUSES AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUSES DO NOT
CONSTITUTE AN OFFERING BY THE FUND OR BY THE FUND'S DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.

INVESTMENT POLICIES

The following supplements information contained in the Prospectuses
concerning the Portfolios' investment policies. Except as indicated, the
information below relates only to those Portfolios that are authorized to invest
in the instruments or securities described below.

The Index Equity Portfolio invests all of its investable assets in The U.S.
Large Company Series (the "Index Master Portfolio") of The DFA Investment Trust
Company (the "Trust"). Accordingly, the following discussion relates to: (i) the
investment policies of all the Portfolios including the Index Equity Portfolio;
and (ii) where indicated the investment policies of the Index Master Portfolio.

ADDITIONAL INFORMATION ON INVESTMENT STRATEGY

EQUITY PORTFOLIOS. Equity securities include common stock and preferred
stock (including convertible preferred stock); bonds, notes and debentures
convertible into common or preferred stock; stock purchase warrants and rights;
equity interests in trusts and partnerships; and depositary receipts.

The Large Cap Value Equity, Large Cap Growth Equity, Mid-Cap Value Equity
and Mid-Cap Growth Equity Portfolios will invest primarily in securities of
established companies. For this purpose, an established company is one which,
together with its predecessors, has at least three years of continuous operating
history.

INDEX EQUITY AND INDEX MASTER PORTFOLIOS. During normal market conditions, the
Index Master Portfolio (in which all of the assets of the Index Equity Portfolio
are invested) invests at least 95% of the value of its total assets in
securities included in the Standard & Poor's 5007 Composite Stock Price Index
(the "S&P 500 Index")*. The Index Master Portfolio intends to invest in all of
the stocks that comprise the S&P 500 Index in approximately the same proportions
as they are represented in the Index. The Index Master Portfolio operates as an
index portfolio and, therefore, is not actively managed (through the use of
economic, financial or market analysis). Adverse performance will ordinarily not
result in the elimination of a stock from the Portfolio. The Portfolio will
remain fully invested in common stocks even when stock prices are generally
falling. Ordinarily, portfolio securities will not be sold except to reflect
additions or deletions of the stocks that comprise the S&P 500 Index, including
mergers, reorganizations and similar transactions and, to the extent necessary,
to provide cash to pay redemptions of the Portfolio's shares. The investment
performance of the Index Master Portfolio and the Index Equity Portfolio is
expected to approximate the investment performance of the S&P 500 Index, which
tends to be cyclical in nature, reflecting periods when stock prices generally
rise or fall.

Neither the Index Equity Portfolio nor the Index Master Portfolio are
sponsored, endorsed, sold or promoted by S&P. S&P makes no representation or
warranty, express or implied, to the owners of the Index Equity Portfolio or the
Index Master Portfolio or any member of the public regarding the advisability of
investing in securities generally or in the Index Equity Portfolio or the Index
Master Portfolio particularly or the ability of the S&P 500 Index to track
general stock market performance. S&P's only relationship to the Index Equity
Portfolio and the Index Master Portfolio is the licensing of certain trademarks
and trade names

____________________

"Standard & Poor's(R)," "S&P(R)," "S&P500(R)," "Standard & Poor's 500(R)"
and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use by the Fund and The DFA Investment Trust Company.

of S&P and of the S&P 500 Index which is determined, composed and calculated by
S&P without regard to the Index Equity Portfolio or the Index Master Portfolio.
S&P has no obligation to take the needs of the Index Equity Portfolio or the
Index Master Portfolio or their respective owners into consideration in
determining, composing or calculating the S&P 500 Index. S&P is not responsible
for and has not participated in the determination of the prices and amount of
the Index Equity Portfolio or the Index Master Portfolio or the timing of the
issuance or sale of the Index Equity Portfolio or the Index Master Portfolio or
in the determination or calculation of the equation by which the Index Equity
Portfolio or the Index Master Portfolio is to be converted into cash. S&P has no
obligation or liability in connection with the administration, marketing or
trading of the Index Equity Portfolio or Index Master Portfolio.

S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN, AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

BALANCED PORTFOLIO. Fixed income securities purchased by the Balanced
Portfolio may include domestic and dollar-denominated foreign debt securities,
including bonds, debentures, notes, equipment lease and trust certificates,
mortgage-related and asset-backed securities, guaranteed investment contracts
(GICs), obligations issued or guaranteed by the U.S. Government or its agencies
or instrumentalities and state and local municipal obligations. These securities
will be rated at the time of purchase within the four highest rating groups
assigned by Moody's Investors Service, Inc. ("Moody's"), Standard & Poors
Ratings Group ("S&P") or another nationally recognized statistical rating
organization. If unrated, the securities will be determined at the time of
purchase to be of comparable quality by the sub-adviser. Securities rated "Baa"
by Moody's or "BBB" by S&P, respectively, are generally considered to be
investment grade although they have speculative characteristics. If a fixed
income security is reduced below Baa by Moody's or BBB by S&P, the Portfolio's
sub-adviser will dispose of the security in an orderly fashion as soon as
practicable. Investments in securities of foreign issuers, which present
additional investment considerations as described below under "Foreign
Investments," will be limited to 5% of the Portfolio's total assets.

The Balanced Portfolio may also purchase zero-coupon bonds (i.e.,
discount debt obligations that do not make periodic interest payments) and state
and local government obligations. Zero-coupon bonds are subject to greater
market fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest. Municipal
obligations may be purchased when the Portfolio's sub-adviser believes that
their return, on a pre-tax basis, will be comparable to the returns of other
permitted investments. Dividends paid by the Portfolio that are derived from
interest on municipal obligations will be taxable to shareholders.

BOND PORTFOLIOS. Each Bond Portfolio will normally invest at least 80% of
the value of its total assets in debt securities. The Pennsylvania Tax-Free
Income Portfolio, New Jersey Tax-Free Income Portfolio and Ohio Tax-Free Income
Portfolio, Delaware Tax-Free Income Portfolio and Kentucky Tax-Free Income
Portfolio (the "State-Specific Tax-Free Portfolios") and the Tax-Free Income
Portfolio (together with the State-Specific Tax-Free Portfolios, the "Tax-Free
Portfolios") will invest, during normal market conditions, at least 80% of their
net assets in obligations issued by or on behalf of states, territories and
possessions of the United States, the District of Columbia and their political
sub-divisions, agencies, instrumentalities and authorities and related tax-
exempt derivative securities the interest on which the portfolio manager
believes is exempt from regular Federal income tax and is not an item of tax
preference for purposes of the Federal alternative minimum tax ("Municipal
Obligations"). Each State-Specific Tax-Free Portfolio also intends to invest at
least 65% of its net assets (65% of its total assets with respect to the
Delaware and Kentucky Tax-Free Income Portfolios) in Municipal Obligations of
issuers located in the particular state indicated by its name ("State-Specific
Obligations"). In addition, the New Jersey Tax-Free Income Portfolio intends to
invest at least 80% of its total assets in New Jersey state-specific obligations
and in securities issued by the U.S. Government, its agencies and
instrumentalities ("U.S. Government Obligations").

The Low Duration Bond Portfolio will seek to maintain a duration for its
portfolio in a range of +/-20% of the current duration of the Merrill Lynch 1-3
Year Treasury Index. The Government Income Portfolio will seek to maintain an
interest rate sensitivity within a range comparable to that of 7 to 10 year U.S.
Treasury bonds.

MONEY MARKET PORTFOLIOS.

The investment objective of the Money Market Portfolio is to provide as
high a level of current interest income as is consistent with maintaining
liquidity and stability of principal. The Portfolio may invest in a broad range
of short-term, high quality, U.S. dollar-denominated instruments, such as
government, bank, commercial and other obligations, that are available in the
money markets. In particular, the Portfolio may invest in:

(a) U.S. dollar-denominated obligations issued or supported by the credit
of U.S. or foreign banks or savings institutions with total assets in
excess of $1 billion (including obligations of foreign branches of
such banks);

(b) high quality commercial paper and other obligations issued or
guaranteed by U.S. and foreign corporations and other issuers rated
(at the time of purchase) A-2 or higher by S&P, Prime-2 or higher by
Moody's, Duff 2 or higher by Duff & Phelps Credit Co. ("D&P"), F-2 or
higher by Fitch Investors Service, Inc. ("Fitch") or TBW-2 or higher
by Thomson BankWatch, Inc. ("TBW"), as well as high quality corporate
bonds rated (at the time of purchase) AA or higher by S&P, D&P, Fitch
or TBW or AA or higher by Moody's;

(c) unrated notes, paper and other instruments that are of comparable
quality as determined by the Portfolio's sub-adviser under guidelines
established by the Fund's Board of Trustees;

(d) asset-backed securities (including interests in pools of assets such
as mortgages, installment purchase obligations and credit card
receivables);

(e) securities issued or guaranteed as to principal and interest by the
U.S. Government or by its agencies or instrumentalities and related
custodial receipts;

(f) dollar-denominated securities issued or guaranteed by foreign
governments or their political subdivisions, agencies or
instrumentalities;

(g) guaranteed investment contracts issued by highly-rated U.S. insurance
companies;

(h) securities issued or guaranteed by state or local governmental bodies;
and

(i) repurchase agreements relating to the above instruments.

The investment objective of the U.S. Treasury Money Market Portfolio is to
provide as high a level of current interest income as is consistent with
maintaining liquidity and stability of principal. It pursues this objective by
investing exclusively in short-term bills, notes and other obligations issued or
guaranteed by the U.S. Treasury and repurchase agreements relating to such
obligations.

The investment objective of the Municipal Money Market Portfolio is to
provide as high a level of current interest income exempt from Federal income
taxes as is consistent with maintaining liquidity and stability of principal. It
pursues this objective by investing substantially all of its assets in short-
term obligations issued by or on behalf of states, territories and possessions
of the United States, the District of Columbia, and their political
subdivisions, agencies, instrumentalities and authorities ("Municipal
Obligations").

The investment objective of the New Jersey Municipal Money Market
Portfolio, North Carolina Municipal Money Market Portfolio, Ohio Municipal Money
Market Portfolio, Pennsylvania Municipal Money Market Portfolio and Virginia
Municipal Money Market Portfolio (the "State-Specific Municipal Portfolios") is,
for each Portfolio, to seek as high a level of current income exempt from
Federal, and to the extent possible, state income tax of the specific state in
which a Portfolio concentrates, as is consistent with maintaining liquidity and
stability of principal.

The Municipal Money Market Portfolio and the State-Specific Municipal
Portfolios (together, the "Municipal Portfolios") seek to achieve their
investment objectives by primarily investing in:

(a) fixed and variable rate notes and similar debt instruments rated MIG-
2, VMIG-2 or Prime-2 or higher by Moody's, SP-2 or A-2 or higher by
S&P, D-2 or higher by D&P or F-2 or higher by Fitch;

(b) tax-exempt commercial paper and similar debt instruments rated Prime-2
or higher by Moody's, A-2 or higher by S&P, Duff 2 or higher by D&P or
F-2 or higher by Fitch;

(d) unrated notes, paper or other instruments that are of comparable
quality as determined by the Portfolios' sub-adviser under guidelines
established by the Fund's Board of Trustees; and

(e) municipal bonds and notes which are guaranteed as to principal and
interest by the U.S. Government or an agency or instrumentality
thereof or which otherwise depend directly or indirectly on the credit
of the United States.

All securities acquired by the Portfolios will be determined at the time of
purchase by the Portfolios' sub-adviser, under guidelines established by the
Fund's Board of Trustees, to present minimal credit risks and will be "Eligible
Securities" as defined by the SEC. Eligible Securities are (a) securities that
either (i) have short-term debt ratings at the time of purchase in the two
highest rating categories by at least two unaffiliated nationally recognized
statistical rating organizations ("NRSROs") (or one NRSRO if the security is
rated by only one NRSRO), or (ii) are comparable in priority and security with
an instrument issued by an issuer which has such ratings, and (b) securities
that are unrated (including securities of issuers that have long-term but not
short-term ratings) but are of comparable quality as determined in accordance
with guidelines approved by the Board of Trustees.

Each Portfolio is managed so that the average maturity of all instruments
held by it (on a dollar-weighted basis) will not exceed 90 days. In no event
will a Portfolio purchase securities which mature more than 397 days from the
date of purchase (except for certain variable and floating rate instruments and
securities collateralizing repurchase agreements). Securities in which the
Portfolios invest may not earn as high a level of income as longer term or lower
quality securities, which generally have greater market risk and more
fluctuation in market value.

ADDITIONAL INFORMATION ON PORTFOLIO INVESTMENTS

Reverse REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Equity and Bond
Portfolio (including the Index Master Portfolio) is authorized to borrow money.
If the securities held by a Portfolio should decline in value while borrowings
are outstanding, the net asset value of the Portfolio's outstanding shares will
decline in value by proportionately more than the decline in value suffered by
the Portfolio's securities. Borrowings may be made by each Portfolio through
reverse repurchase agreements under which the Portfolio sells portfolio
securities to financial institutions such as banks and broker-dealers and agrees
to repurchase them at a particular date and price. Such Agreements are
considered to be borrowings under the Investment Company Act of 1940 (the "1940
Act"). A Portfolio may use the proceeds of reverse repurchase agreements to
purchase other securities either maturing, or under an agreement to resell, on a
date simultaneous with or prior to the expiration of the reverse repurchase
agreement. The Index Master Portfolio does not intend to invest in reverse
repurchase agreements. The Bond Portfolios (except the Tax-Free Portfolios) and
the Balanced Portfolio may utilize reverse repurchase agreements when it is
anticipated that the interest income to be earned from the investment of the
proceeds of the transaction is greater than the interest expense of the
transaction. This use of reverse repurchase agreements may be regarded as
leveraging and, therefore, speculative. Reverse repurchase agreements involve
the risks that the interest income earned in the investment of the proceeds will
be less than the interest expense, that the market value of the securities sold
by a Portfolio may decline below the price of the securities the Portfolio is
obligated to repurchase and that the securities may not be returned to the
Portfolio. During the time a reverse repurchase agreement is outstanding, a
Portfolio will maintain a segregated account with the Fund's custodian
containing cash, U.S. Government or other appropriate liquid securities having a
value at least equal to the repurchase price. A Portfolio's reverse repurchase
agreements, together with any other borrowings, will not exceed, in the
aggregate, 33 1/3% of the value of its total assets (33% in the case of the
Index Master Portfolio). In addition, the Bond Portfolios (except the Tax-Free
Portfolios) and the Balanced Portfolio may borrow up to an additional 5% of its
total assets for temporary purposes. Whenever borrowings exceed 5% of a
Portfolio's total assets, the Equity Portfolios (other than the Index Master
Portfolio and the Balanced Portfolio) will not make any investments.

Each Money Market Portfolio may enter into reverse repurchase agreements
for temporary purposes (such as to obtain cash to meet redemption requests when
the liquidation of portfolio securities is deemed disadvantageous or
inconvenient).

VARIABLE AND FLOATING RATE INSTRUMENTS. The Balanced and Bond Portfolios
may purchase rated and unrated variable and floating rate instruments. These
instruments may include variable amount master demand notes that permit the
indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate. The Portfolios may invest up to 10% of their
total assets in leveraged inverse floating rate debt instruments ("inverse
floaters"). The interest rate of an inverse floater resets in the opposite
direction from the market rate of interest to which it is indexed. An inverse
floater may be considered to be leveraged to the extent that its interest rate
varies by a magnitude that exceeds the magnitude of the change in the index rate
of interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. Issuers of unrated
variable and floating rate instruments must satisfy the same criteria as set
forth above for a Portfolio. The absence of an active secondary market with
respect to particular variable and floating rate instruments, however, could
make it difficult for a Portfolio to dispose of a variable or floating rate
instrument if the issuer defaulted on its payment obligation or during periods
when the Portfolio is not entitled to exercise its demand rights.

Each Money Market Portfolio may purchase rated and unrated variable and
floating rate instruments, which may have a stated maturity in excess of 13
months but will, in any event, permit a Portfolio to demand payment of the
principal of the instrument at least once every 13 months upon not more than
thirty days' notice (unless the instrument is guaranteed by the U.S. Government
or an agency or instrumentality thereof). These instruments may include
variable amount master demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
Issuers of unrated variable and floating rate instruments must satisfy the same
criteria as set forth above for the particular Portfolio. The absence of an
active secondary market with respect to particular variable and floating rate
instruments, however, could make it difficult for a Portfolio to dispose of a
variable or floating rate instrument if the issuer defaulted on its payment
obligation or during periods when the Portfolio is not entitled to exercise its
demand rights.

With respect to purchasable variable and floating rate instruments, the
adviser or sub-adviser will consider the earning power, cash flows and liquidity
ratios of the issuers and guarantors of such instruments and, if the instruments
are subject to a demand feature, will monitor their financial status to meet
payment on demand. Such instruments may include variable amount master demand
notes that permit the indebtedness thereunder to vary in addition to providing
for periodic adjustments in the interest rate. The absence of an active
secondary market with respect to particular variable and floating rate
instruments could make it difficult for a Portfolio to dispose of a variable or
floating rate note if the issuer defaulted on its payment obligation or during
periods that the Portfolio is not entitled to exercise its demand rights, and
the Portfolio could, for these or other reasons, suffer a loss with respect to
such instruments. In determining average-weighted portfolio maturity, an
instrument will be deemed to have a maturity equal to either the period
remaining until the next interest rate adjustment or the time the Portfolio
involved can recover payment of principal as specified in the instrument,
depending on the type of instrument involved. Each of the Equity Portfolios of
the Fund does not intend to invest more than 5% of its net assets in variable
and floating rate instruments.

BANK LOANS. The High Yield Bond Portfolio may invest in fixed and floating
rate loans ("Loans") arranged through private negotiations between a corporate
borrower or a foreign sovereign entity and one or more financial institutions
("Lenders"). The High Yield Bond Portfolio may invest in such Loans in the form
of participations in Loans ("Participations") and assignments of all or a
portion of Loans from third parties ("Assignments"). The High Yield Bond
Portfolio considers these investments to be investments in debt securities for
purposes of its investment policies. Participations typically will result in the
High Yield Bond Portfolio having a contractual relationship only with the
Lender, not with the borrower. The Portfolio will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations, the
Portfolio generally will have no right to enforce compliance by the borrower
with the terms of the loan agreement relating to the Loans, nor any rights of
set-off against the borrower, and the Portfolio may not benefit directly from
any collateral supporting the Loan in which it has purchased the Participation.
As a result, the Portfolio will assume the credit risk of both the borrower and
the Lender that is selling the Participation. In the event of the insolvency of
the Lender selling the Participation, the Portfolio may be treated as a general
creditor of the Lender and may not benefit from any set-off between the Lender
and the borrower. The Portfolio will acquire Participations only if the Lender
interpositioned between the Portfolio and the borrower is determined by the
Portfolio's sub-adviser to be creditworthy. When the Portfolio purchases
Assignments from Lenders, the Portfolio will

acquire direct rights against the borrower on the Loan, except that under
certain circumstances such rights may be more limited than those held by the
assigning Lender.

The High Yield Bond Portfolio may have difficulty disposing of Assignments
and Participations. In certain cases, the market for such instruments is not
highly liquid, and therefore the Portfolio anticipates that in such cases such
instruments could be sold only to a limited number of institutional investors.
The lack of a highly liquid secondary market will have an adverse impact on the
value of such instruments and on the Portfolio's ability to dispose of
particular Assignments or Participations in response to a specific economic
event, such as deterioration in the creditworthiness of the borrower. The Fund's
Board of Trustees has adopted procedures for the Portfolio to determine whether
Assignments and Participations purchased by the Portfolio are liquid or illiquid
for purposes of the Portfolio's limitation on investment in illiquid securities.
Pursuant to those procedures, these securities will not be considered illiquid
so long as it is determined by the Portfolio's sub-adviser that an adequate
trading market exists for these securities. To the extent that liquid
Assignments and Participations that the Portfolio holds become illiquid, due to
the lack of sufficient buyers or market or other conditions, the percentage of
the Portfolio's assets invested in illiquid assets would increase.

PREFERRED STOCK. The High Yield Bond Portfolio may invest in preferred
stocks. Preferred stock has a preference over common stock in liquidation (and
generally dividends as well) but is subordinated to the liabilities of the
issuer in all respects. As a general rule, the market value of preferred stock
with a fixed dividend rate and no conversion element varies inversely with
interest rates and perceived credit risk, while the market price of convertible
preferred stock generally also reflects some element of conversion value.
Because preferred stock is junior to debt securities and other obligations of
the issuer, deterioration in the credit quality of the issuer will cause greater
changes in the value of a preferred stock than in a more senior debt security
with similar stated yield characteristics. Unlike interest payments on debt
securities, preferred stock dividends are payable only if declared by the
issuer's board of directors. Preferred stock also may be subject to optional or
mandatory redemption provisions.

CONVERTIBLE SECURITIES. The High Yield Bond Portfolio may invest in
convertible securities. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock or other equity security of the same or a
different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to nonconvertible income
securities in that they ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar
issuers, but lower yields than comparable nonconvertible securities. The value
of a convertible security is influenced by changes in interest rates, with
investment value declining as interest rates increase and increasing as interest
rates decline. The credit standing of the issuer and other factors also may have
an effect on the convertible security's investment value. Convertible securities
rank senior to common stock in a corporation's capital structure but are usually
subordinated to comparable nonconvertible securities. Convertible securities may
be subject to redemption at the option of the issuer at a price established in
the convertible security's governing instrument. The High Yield Bond Portfolio
will treat investments in convertible debt securities as debt securities for
purposes of its investment policies.

PAY-IN-KIND BONDS. The High Yield Bond Portfolio may invest in Pay-in-kind,
or PIK, bonds. PIK bonds are bonds which pay interest through the issuance of
additional debt or equity securities. Similar to zero coupon obligations, pay-
in-kind bonds also carry additional risk as holders of these types of securities
realize no cash until the cash payment date unless a portion of such securities
is sold and, if the issuer defaults, the High Yield Bond Portfolio may obtain no
return at all on its investment. The market price of pay-in-kind bonds is
affected by interest rate changes to a greater extent, and therefore tends to be
more volatile, than that of securities which pay interest in cash. Additionally,
current federal tax law requires the holder of certain pay-in-kind bonds to
accrue income with respect to these securities prior to the receipt of cash
payments. To maintain its qualification as a regulated investment company and
avoid liability for federal income and excise taxes, the High Yield Bond
Portfolio may be required to distribute income accrued with respect to these
securities and may have to dispose of portfolio securities under disadvantageous
circumstances in order to generate cash to satisfy these distribution
requirements.

MONEY MARKET OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN
BRANCHES OF U.S. BANKS. Each Portfolio may purchase bank obligations, such as
certificates of deposit, notes, bankers' acceptances and time deposits,
including instruments issued or supported by the credit of U.S. or foreign banks
or savings institutions having total assets at the time of

purchase in excess of $1 billion. These obligations may be general obligations
of the parent bank or may be limited to the issuing branch or subsidiary by the
terms of a specific obligation or by government regulation. The assets of a bank
or savings institution will be deemed to include the assets of its domestic and
foreign branches for purposes of each Portfolio's investment policies.
Investments in short-term bank obligations may include obligations of foreign
banks and domestic branches of foreign banks, and also foreign branches of
domestic banks. Each of the Equity Portfolios of the Fund does not intend to
invest more than 5% of its net assets in bank obligations.

The Index Master Portfolio may purchase obligations of U.S. banks and
savings and loan associations and dollar-denominated obligations of U.S.
subsidiaries and branches of foreign banks, such as certificates of deposit
(including marketable variable rate certificates of deposit) and bankers'
acceptances. Bank certificates of deposit will only be acquired by the Index
Master Portfolio if the bank has assets in excess of $1 billion.

To the extent consistent with their investment objectives, the Money Market
and Bond Portfolios (except the Tax-Free Portfolios) may invest in debt
obligations of domestic or foreign corporations and banks, and may acquire
commercial obligations issued by Canadian corporations and Canadian counterparts
of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated
commercial paper of a foreign issuer. The Bond Portfolios and the Money Market
Portfolio may also make interest-bearing savings deposits in commercial and
savings banks in amounts not in excess of 5% of their respective total assets.

MORTGAGE RELATED AND ASSET-BACKED SECURITIES. The Balanced and Bond
Portfolios (except the Tax-Free Portfolios) may make significant investments in
residential and commercial mortgage-related and other asset-backed securities
(i.e., securities backed by home equity loans, installment sale contracts,
credit card receivables or other assets) issued by governmental entities and
private issuers.

Asset-backed securities are generally issued as pass-through certificates,
which represent undivided fractional ownership interests in an underlying pool
of assets, or as debt instruments, which are also known as collateralized
obligations, and are generally issued as the debt of a special purpose entity
organized solely for the purpose of owning such assets and issuing such debt.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties.

Non-mortgage asset-backed securities involve risks that are not presented
by mortgage-related securities. Primarily, these securities do not have the
benefit of the same security interest in the underlying 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 which give
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 an
effective security interest in all of the obligations backing such receivables.
Therefore, there is a possibility that recoveries on repossessed collateral may
not, in some cases, be able to support payments on these securities.

The yield and maturity characteristics of mortgage-related and other asset-
backed securities differ from traditional debt securities. A major difference is
that the principal amount of the obligations may normally be prepaid at any time
because the underlying assets (i.e., loans) generally may be prepaid at any
time. In calculating the average weighted maturity of a Portfolio, the maturity
of mortgage-related and other asset-backed securities held by the Portfolio will
be based on estimates of average life which take prepayments into account. The
average life of a mortgage-related instrument, in particular, is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities as the result of scheduled principal payments and mortgage
prepayments. In general, the collateral supporting non-mortgage asset-backed
securities is of shorter maturity than mortgage loans and is less likely to
experience substantial prepayments. Like other fixed-income securities, when
interest rates rise the value of an asset-backed security generally will
decline; however, when interest rates decline, the value of an asset-backed
security with prepayment features may not increase as much as that of other
fixed-income securities.

The relationship between prepayments and interest rates may give some high-
yielding mortgage- related and asset-backed securities less potential for growth
in value than conventional bonds with comparable maturities. In addition, in
periods of falling interest rates, the rate of prepayments tends to increase.
During such periods, the reinvestment of prepayment proceeds by a

Portfolio will generally be at lower rates than the rates that were carried by
the obligations that have been prepaid. Because of these and other reasons, an
asset-backed security's total return and maturity may be difficult to predict
precisely. To the extent that a Portfolio purchases asset-backed securities at a
premium, prepayments (which may be made without penalty) may result in loss of
the Portfolio's principal investment to the extent of premium paid.

The Portfolios may from time to time purchase in the secondary market
certain mortgage pass-through securities packaged and master serviced by PNC
Mortgage Securities Corp. ("PNC Mortgage") or Midland Loan Services, Inc.
("Midland") (or Sears Mortgage if PNC Mortgage succeeded to rights and duties of
Sears Mortgage) or mortgage-related securities containing loans or mortgages
originated by PNC Bank or its affiliates. It is possible that under some
circumstances, PNC Mortgage, Midland or their affiliates could have interests
that are in conflict with the holders of these mortgage-backed securities, and
such holders could have rights against PNC Mortgage, Midland or their
affiliates.

The GNMA Portfolio will invest primarily in GNMAs, and may make significant
investments in other residential and commercial mortgage-related and other
asset-backed securities (i.e., securities backed by home equity loans,
installment sale contracts, credit card receivables or other assets) issued by
governmental entities and private issuers.

The GNMA Portfolio may acquire several types of mortgage-related
securities. GNMAs are typically mortgage pass-through certificates, which
provide the holder with a pro rata interest in the underlying mortgages.

To maintain greater flexibility, the GNMA Portfolio may invest in
instruments which have the characteristics of futures contracts. These
instruments may take a variety of forms, such as debt securities with interest
or principal payments determined by reference to the value of a commodity at a
future point in time. The risks of such investments could reflect the risks of
investing in futures and securities, including volatility and illiquidity.

Although under normal market conditions they do not expect to do so, each
Money Market Portfolio may invest in mortgage-related securities issued by the
U.S. Government or its agencies or instrumentalities or issued by private
companies.

There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities guaranteed
by the Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA to
borrow funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-related securities issued by the Federal National Mortgage Association
("FNMA") include FNMA guaranteed Mortgage Pass-Through Certificates (also known
as "Fannie Maes") which are solely the obligations of the FNMA, are not backed
by or entitled to the full faith and credit of the United States and are
supported by the right of the issuer to borrow from the Treasury. FNMA is a
government-sponsored organization owned entirely by private stockholders. Fannie
Maes are guaranteed as to timely payment of principal and interest by FNMA.
Mortgage-related securities issued by the Federal Home Loan Mortgage Corporation
("FHLMC") include FHLMC Mortgage Participation Certificates (also known as
"Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of the United
States, created pursuant to an Act of Congress, which is owned entirely by
Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States or
by any Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder
to timely payment of interest, which is guaranteed by the FHLMC. FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When FHLMC does not guarantee timely
payment of principal, FHLMC may remit the amount due on account of its guarantee
of ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.

The Bond Portfolios and the Balanced Portfolio may invest in multiple class
pass-through securities, including collateralized mortgage obligations ("CMOs")
and real estate mortgage investment conduit ("REMIC") pass-through or
participation certificates ("REMIC Certificates"). These multiple class
securities may be issued by U.S. Government agencies or instrumentalities,
including FNMA and FHLMC, or by trusts formed by private originators of, or
investors in, mortgage loans. In general, CMOs and REMICs are debt obligations
of a legal entity that are collateralized by, and multiple class pass-through
securities represent

direct ownership interests in, a pool of residential or commercial mortgage
loans or mortgage pass-through securities (the "Mortgage Assets"), the payments
on which are used to make payments on the CMOs or multiple pass-through
securities. Investors may purchase beneficial interests in CMOs and REMICs,
which are known as "regular" interests or "residual" interests. The residual in
a CMO or REMIC structure generally represents the interest in any excess cash
flow remaining after making required payments of principal of and interest on
the CMOs or REMICs, as well as the related administrative expenses of the
issuer. Residual interests generally are junior to, and may be significantly
more volatile than, "regular" CMO and REMIC interests. The Portfolios do not
currently intend to purchase residual interests. The markets for CMOs and REMICs
may be more illiquid than those of other securities.

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

The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.

Additional structures of CMOs or REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.

A wide variety of REMIC Certificates may be issued in the parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates which generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying Mortgage Assets. These tranches tend to have market prices and
yields that are much more volatile than the PAC classes.

FNMA REMIC Certificates are issued and guaranteed as to timely distribution of
principal and interest by FNMA. In addition, FNMA will be obligated to
distribute on a timely basis to holders of FNMA REMIC Certificates required
installments of principal and interest and to distribute the principal balance
of each class of REMIC Certificates in full, whether or not sufficient funds are
otherwise available.

For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of interest,
and also guarantees the ultimate payment of principal as payments are required
to be made on the underlying mortgage participation certificates ("Pcs"). Pcs
represent undivided interests in specified level payment, residential mortgages
or participations therein purchased by FHLMC and placed in a PC pool. With
respect to principal payments on Pcs, FHLMC generally guarantees ultimate
collection of all principal of the related mortgage loans without offset or
deduction. FHLMC also guarantees timely payment of principal on certain Pcs,
referred to as "Gold Pcs."

U.S. GOVERNMENT OBLIGATIONS. The Balanced and Bond Portfolios (and, to the
extent consistent with their investment objectives, the Money Market Portfolios)
may purchase obligations issued or guaranteed by the U.S. Government and U.S.

Government agencies and instrumentalities. Obligations of certain agencies and
instrumentalities of the U.S. Government are supported by the full faith and
credit of the U.S. Treasury. Others are supported by the right of the issuer to
borrow from the U.S. Treasury; and still others are supported only by the credit
of the agency or instrumentality issuing the obligation. No assurance can be
given that the U.S. Government will provide financial support to U.S.
Government-sponsored instrumentalities if it is not obligated to do so by law.
Certain U.S. Treasury and agency securities may be held by trusts that issue
participation certificates (such as Treasury income growth receipts ("TIGRs")
and certificates of accrual on Treasury certificates ("CATs")). The Balanced
Portfolio may purchase these certificates, as well as Treasury receipts and
other stripped securities, which represent beneficial ownership interests in
either future interest payments or the future principal payments on U.S.
Government obligations. These instruments are issued at a discount to their
"face value" and may (particularly in the case of stripped mortgage-backed
securities) exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors.

Examples of the types of U.S. Government obligations which the Portfolios may
hold include U.S. Treasury bills, Treasury instruments and Treasury bonds and
the obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal
Land Banks, the Federal Housing Administration, the Farmers Home Administration,
the Export-Import Bank of the United States, the Small Business Administration,
FNMA, GNMA, the General Services Administration, the Student Loan Marketing
Association, the Central Bank for Cooperatives, FHLMC, the Federal Intermediate
Credit Banks, the Maritime Administration, the International Bank for
Reconstruction and Development (the "World Bank"), the Asian-American
Development Bank and the Inter-American Development Bank. Each of the Equity
Portfolios of the Fund does not intend to invest more than 5% of its net assets
in U.S. Government obligations.

The Index Master Portfolio may purchase (i) debt securities issued by the U.S.
Treasury which are direct obligations of the U.S. Government, including bills,
notes and bonds, and (ii) obligations issued or guaranteed by U.S. Government-
sponsored instrumentalities and federal agencies, including FNMA, Federal Home
Loan Bank and the Federal Housing Administration.

SUPRANATIONAL ORGANIZATION OBLIGATIONS. The Portfolios may purchase debt
securities of supranational organizations such as the European Coal and Steel
Community, the European Economic Community and the World Bank, which are
chartered to promote economic development. Each of the Equity Portfolios of the
Fund does not intend to invest more than 5% of its net assets in supranational
organization obligations.

LEASE OBLIGATIONS. The Portfolios (other than the Index Master Portfolio) may
hold participation certificates in a lease, an installment purchase contract, or
a conditional sales contract ("lease obligations").

The Sub-Adviser will monitor the credit standing of each municipal borrower
and each entity providing credit support and/or a put option relating to lease
obligations. In determining whether a lease obligation is liquid, the Sub-
Adviser will consider, among other factors, the following: (i) whether the lease
can be cancelled; (ii) the degree of assurance that assets represented by the
lease could be sold; (iii) the strength of the lessee's general credit (e.g.,
its debt, administrative, economic, and financial characteristics); (iv) the
likelihood that the municipality would discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an "event of
nonappropriation"); (v) legal recourse in the event of failure to appropriate;
(vi) whether the security is backed by a credit enhancement such as insurance;
and (vii) any limitations which are imposed on the lease obligor's ability to
utilize substitute property or services other than those covered by the lease
obligation.

The Municipal Money Market Portfolios will only invest in lease obligations
with puts that (i) may be exercised at par on not more than seven days notice,
and (ii) are issued by institutions deemed by the sub-adviser to present minimal
credit risks. Such obligations will be considered liquid. However, a number of
puts are not exercisable at the time the put would otherwise be exercised if the
municipal borrower is not contractually obligated to make payments (e.g., an
event of nonappropriation with a "nonappropriation" lease obligation). Under
such circumstances, the lease obligation while previously considered liquid
would become illiquid, and a Portfolio might lose its entire investment in such
obligation.

Municipal leases, like other municipal debt obligations, are subject to the
risk of non-payment. The ability of issuers of municipal leases to make timely
lease payments may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal,
state and local governmental units. Such non-payment

would result in a reduction of income to a Portfolio, and could result in a
reduction in the value of the municipal lease experiencing non-payment and a
potential decrease in the net asset value of a Portfolio. Issuers of municipal
securities might seek protection under the bankruptcy laws. In the event of
bankruptcy of such an issuer, a Portfolio could experience delays and
limitations with respect to the collection of principal and interest on such
municipal leases and a Portfolio may not, in all circumstances, be able to
collect all principal and interest to which it is entitled. To enforce its
rights in the event of a default in lease payments, the Fund might take
possession of and manage the assets securing the issuer's obligations on such
securities, which may increase a Portfolio's operating expenses and adversely
affect the net asset value of a Portfolio. When the lease contains a non-
appropriation clause, however, the failure to pay would not be a default and a
Portfolio would not have the right to take possession of the assets. Any income
derived from a Portfolio's ownership or operation of such assets may not be tax-
exempt. In addition, a Portfolio's intention to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended, may
limit the extent to which a Portfolio may exercise its rights by taking
possession of such assets, because as a regulated investment company a Portfolio
is subject to certain limitations on its investments and on the nature of its
income.

COMMERCIAL PAPER. The Money Market Portfolios may purchase commercial paper
rated in one of the two highest rating categories of a nationally recognized
statistical rating organization ("NRSRO"). The Non-Money Market Portfolios,
except the High Yield Bond Portfolio and the Index Master Portfolio, may
purchase commercial paper rated (at the time of purchase) "A-1" by S&P or
"Prime-1" by Moody's or, when deemed advisable by a Portfolio's adviser or sub-
adviser, "high quality" issues rated "A-2" or "Prime-2" by S&P or Moody's,
respectively. The High Yield Bond Portfolio may purchase commercial paper of any
rating. The Index Master Portfolio may purchase commercial paper rated (at the
time of purchase) "A-1" or better by S&P or "Prime-1" by Moody's, or, if not
rated, issued by a corporation having an outstanding unsecured debt issue rated
"Aaa" by Moody's or "AAA" by S&P, and having a maximum maturity of nine months.
These ratings symbols are described in Appendix A.

Commercial paper purchasable by each Portfolio includes "Section 4(2) paper,"
a term that includes debt obligations issued in reliance on the "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933. Section 4(2) paper is restricted as to disposition under
the Federal securities laws, and is frequently sold (and resold) to
institutional investors such as the Fund through or with the assistance of
investment dealers who make a market in the Section 4(2) paper, thereby
providing liquidity. Certain transactions in Section 4(2) paper may qualify for
the registration exemption provided in Rule 144A under the Securities Act of
1933. Each of the Equity Portfolios of the Fund does not intend to invest more
than 5% of its net assets in commercial paper.

REPURCHASE AGREEMENTS. Each Equity and Bond Portfolio may agree to purchase
securities from financial institutions subject to the seller's agreement to
repurchase them at an agreed upon time and price ("repurchase agreements").
Repurchase agreements are, in substance, loans. Default by or bankruptcy of a
seller would expose a Portfolio to possible loss because of adverse market
action, expenses and/or delays in connection with the disposition of the
underlying obligations.

Each Money Market Portfolio may enter into repurchase agreements. The
securities held subject to a repurchase agreement by a Money Market Portfolio
may have stated maturities exceeding 13 months, so long as the repurchase
agreement itself matures in less than 13 months.

The repurchase price under the repurchase agreements generally equals the
price paid by a Portfolio involved plus interest negotiated on the basis of
current short-term rates (which may be more or less than the rate on securities
underlying the repurchase agreement). The financial institutions with which a
Portfolio may enter into repurchase agreements will be banks and non-bank
dealers of U.S. Government securities that are listed on the Federal Reserve
Bank of New York's list of reporting dealers, if such banks and non-bank dealers
are deemed creditworthy by the Portfolio's adviser or sub-adviser. A Portfolio's
adviser or sub-adviser will continue to monitor creditworthiness of the seller
under a repurchase agreement, and will require the seller to maintain during the
term of the agreement the value of the securities subject to the agreement to
equal at least the repurchase price (including accrued interest). In addition,
the Portfolio's adviser or sub-adviser will require that the value of this
collateral, after transaction costs (including loss of interest) reasonably
expected to be incurred on a default, be equal to or greater than the repurchase
price (including accrued premium) provided in the repurchase agreement. The
accrued premium is the amount specified in the repurchase agreement or the daily
amortization of the difference between the purchase price and the repurchase
price specified in the repurchase agreement. The Portfolio's adviser or sub-
adviser will mark-to-market daily the value of the securities. Securities
subject to repurchase agreements will be held by the Fund's custodian (or sub-
custodian) in the

Federal Reserve/Treasury book-entry system or by another authorized securities
depository. Repurchase agreements are considered to be loans by the Portfolios
under the 1940 Act.

The use of repurchase agreements involves certain risks. For example, if the
seller of securities under a repurchase agreement defaults on its obligation to
repurchase the underlying securities, as a result of its bankruptcy or
otherwise, a Portfolio will seek to dispose of such securities, which action
could involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, a
Portfolio's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that a Portfolio may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the custodian at all times
in an amount at least equal to the repurchase price, including accrued interest.
If the seller fails to repurchase the securities, a Portfolio may suffer a loss
to the extent proceeds from the sale of the underlying securities are less than
the repurchase price.

The Index Master Portfolio may enter into repurchase agreements, but will not
enter into a repurchase agreement with a duration of more than seven days if, as
a result, more than 10% of the value of its total assets would be so invested.
The Index Master Portfolio will also only invest in repurchase agreements with a
bank if the bank has at least $1 billion in assets and is approved by the
Investment Committee of Dimensional Fund Advisors Inc, ("DFA"). DFA will monitor
the market value of transferred securities plus any accrued interest thereon so
that the value of such securities will at least equal the repurchase price. The
securities underlying the repurchase agreements will be limited to U.S.
Government and agency obligations described under "U.S. Government Obligations"
above.

INVESTMENT GRADE DEBT OBLIGATIONS. Each of the Money Market Portfolios may
invest in securities in the two highest rating categories of NRSROs. The Non-
Money Market Portfolios, except the Index Master Portfolio and the Intermediate
Government Bond, Government Income and GNMA Portfolios, may invest in
"investment grade securities," which are securities rated in the four highest
rating categories of an NRSRO. The Intermediate Government Bond, Government
Income and GNMA Portfolios may invest in debt securities rated Aaa by Moody's or
AAA by S&P. It should be noted that debt obligations rated in the lowest of the
top four ratings (i.e., "Baa" by Moody's or "BBB" by S&P) are considered to have
some speculative characteristics and are more sensitive to economic change than
higher rated securities.

The Index Master Portfolio may invest in non-convertible corporate debt
securities which are issued by companies whose commercial paper is rated "Prime-
1" by Moody's or "A-1" by S&P and dollar-denominated obligations of foreign
issuers issued in the U.S. If the issuer's commercial paper is unrated, then the
debt security would have to be rated at least "AA" by S&P or "Aa2" by Moody's.
If there is neither a commercial paper rating nor a rating of the debt security,
then the Index Master Portfolio's investment adviser must determine that the
debt security is of comparable quality to equivalent issues of the same issuer
rated at least "AA" or "Aa2."

See Appendix A to this Statement of Additional Information for a description
of applicable securities ratings.

NON-INVESTMENT GRADE SECURITIES. Each of the High Yield Bond and Low Duration
Bond Portfolios may invest in non-investment grade or "high yield" fixed income
or convertible securities commonly known to investors as "junk bonds."

High yield securities are bonds that are issued by a company whose credit
rating (based on rating agencies' evaluation of the likelihood of repayment)
necessitates offering a higher coupon and yield on its issues when selling them
to investors who may otherwise be hesitant in purchasing the debt of such a
company. While generally providing greater income and opportunity for gain, non-
investment grade debt securities may be subject to greater risks than securities
which have higher credit ratings, including a high risk of default, and their
yields will fluctuate over time. High yield securities will generally be in the
lower rating categories of recognized rating agencies (rated "Ba" or lower by
Moody's or "BB" or lower by S&P) or will be non-rated. The credit rating of a
high yield security does not necessarily address its market value risk, and
ratings may from time to time change, positively or negatively, to reflect
developments regarding the issuer's financial condition. High yield securities
are considered to be speculative with respect to the capacity of the issuer to
timely repay principal and pay interest or dividends in accordance with the
terms of the obligation and may have more credit risk than higher rated
securities.

While the market values of high yield securities tend to react less to
fluctuations in interest rates than do those of higher rated securities, the
values of high yield securities often reflect individual corporate developments
and have a high sensitivity to economic changes to a greater extent than do
higher rated securities. Issuers of high yield securities are often in the
growth stage

of their development and/or involved in a reorganization or takeover. The
companies are often highly leveraged (have a significant amount of debt relative
to shareholders' equity) and may not have available to them more traditional
financing methods, thereby increasing the risk associated with acquiring these
types of securities. In some cases, obligations with respect to high yield
securities are subordinated to the prior repayment of senior indebtedness, which
will potentially limit a Portfolio's ability to fully recover principal or to
receive interest payments when senior securities are in default. Thus, investors
in high yield securities have a lower degree of protection with respect to
principal and interest payments then do investors in higher rated securities.

During an economic downturn, a substantial period of rising interest rates or
a recession, highly leveraged issuers of high yield securities may experience
financial distress possibly resulting in insufficient revenues to meet their
principal and interest payment obligations, to meet projected business goals and
to obtain additional financing. An economic downturn could also disrupt the
market for lower-rated securities and adversely affect the value of outstanding
securities, the Portfolio's net asset value and the ability of the issuers to
repay principal and interest. If the issuer of a security held by a Portfolio
defaulted, the Portfolio may not receive full interest and principal payments
due to it and could incur additional expenses if it chose to seek recovery of
its investment.

The secondary markets for high yield securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and
participants in the markets are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds. In
addition, the trading volume for high yield securities is generally lower than
that for higher rated securities and the secondary markets could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. Under certain economic and/or
market conditions, a Portfolio may have difficulty disposing of certain high
yield securities due to the limited number of investors in that sector of the
market. An illiquid secondary market may adversely affect the market price of
the high yield security, which may result in increased difficulty selling the
particular issue and obtaining accurate market quotations on the issue when
valuing a Portfolio's assets. Market quotations on high yield securities are
available only from a limited number of dealers, and such quotations may not be
the actual prices available for a purchase or sale.

The high yield markets may react strongly to adverse news about an issuer or
the economy, or to the perception or expectation of adverse news, whether or not
it is based on fundamental analysis. Additionally, prices for high yield
securities may be affected by legislative and regulatory developments. These
developments could adversely affect a Portfolio's net asset value and investment
practices, the secondary market for high yield securities, the financial
condition of issuers of these securities and the value and liquidity of
outstanding high yield securities, especially in a thinly traded market. For
example, federal legislation requiring the divestiture by federally insured
savings and loan associations of their investments in high yield bonds and
limiting the deductibility of interest by certain corporate issuers of high
yield bonds adversely affected the market in recent years.

When the secondary market for high yield securities becomes more illiquid, or
in the absence of readily available market quotations for such securities, the
relative lack of reliable objective data makes it more difficult to value a
Portfolio's securities, and judgment plays a more important role in determining
such valuations. Increased illiquidity in the junk bond market, in combination
with the relative youth and growth of the market for such securities, also may
affect the ability of a Portfolio to dispose of such securities at a desirable
price. Additionally, if the secondary markets for high yield securities
contract due to adverse economic conditions or for other reasons, certain of a
Portfolio's liquid securities may become illiquid and the proportion of the
Portfolio's assets invested in illiquid securities may significantly increase.

The rating assigned by a rating agency evaluates the safety of a non-
investment grade security's principal and interest payments, but does not
address market value risk. Because such ratings of the ratings agencies may not
always reflect current conditions and events, in addition to using recognized
rating agencies and other sources, the sub-adviser performs its own analysis of
the issuers whose non-investment grade securities the Portfolio holds. Because
of this, the Portfolio's performance may depend more on the sub-adviser's own
credit analysis than in the case of mutual funds investing in higher-rated
securities. For a description of these ratings, see Appendix A.

In selecting non-investment grade securities, the sub-adviser considers
factors such as those relating to the creditworthiness of issuers, the ratings
and performance of the securities, the protections afforded the securities and
the diversity of the Portfolio. The sub-adviser continuously monitors the
issuers of non-investment grade securities held by the Portfolio for their
ability to

make required principal and interest payments, as well as in an effort to
control the liquidity of the Portfolio so that it can meet redemption requests.
If a security's rating is reduced below the minimum credit rating that is
permitted for a Portfolio, the Portfolio's sub-adviser will consider whether the
Portfolio should continue to hold the security.

In the event that a Portfolio investing in high yield securities experiences
an unexpected level of net redemptions, the Portfolio could be forced to sell
its holdings without regard to the investment merits, thereby decreasing the
assets upon which the Portfolio's rate of return is based.

The costs attributable to investing in the high yield markets are usually
higher for several reasons, such as higher investment research costs and higher
commission costs.

The High Yield Bond Portfolio may invest in securities rated in the category
"C" and above or determined by the sub-adviser to be of comparable quality.
Securities rated "C" are considered highly speculative and may be used to cover
a situation where the issuer has filed a bankruptcy petition but debt service
payments are continued. While such debt will likely have some quality and
protective characteristics, those are outweighed by large uncertainties or major
risk exposure to adverse conditions.

MEZZANINE INVESTMENTS. The High Yield Bond Portfolio may invest in certain
high yield securities known as mezzanine investments, which are subordinated
debt securities which are generally issued in private placements in connection
with an equity security (e.g., with attached warrants). Such mezzanine
investments may be issued with or without registration rights. Similar to other
high yield securities, maturities of mezzanine investments are typically seven
to ten years, but the expected average life is significantly shorter at three to
five years. Mezzanine investments are usually unsecured and subordinate to other
obligations of the issuer.

COLLATERALIZED BOND OBLIGATIONS. The High Yield Bond Portfolio may invest in
collateralized bond obligations ("CBOs"), which are structured products backed
by a diversified pool of high yield public or private fixed income securities.
The pool of high yield securities is typically separated into tranches
representing different degrees of credit quality. The top tranche of CBOs, which
represents the highest credit quality in the pool, has the greatest
collateralization and pays the lowest interest rate. Lower CBO tranches
represent lower degrees of credit quality and pay higher interest rates to
compensate for the attendant risks. The bottom tranche specifically receives the
residual interest payments (i.e., money that is left over after the higher tiers
have been paid) rather than a fixed interest rate. The return on the bottom
tranche of CBOs is especially sensitive to the rate of defaults in the
collateral pool.

WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio (other than the
Index Master Portfolio) may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment," including "TBA" (to be
announced) basis. These transactions involve a commitment by a Portfolio to
purchase or sell particular securities with payment and delivery taking place at
a future date (perhaps one or two months later), and permit a Portfolio to lock
in a price or yield on a security it owns or intends to purchase, regardless of
future changes in interest rates or market action. When-issued and forward
commitment transactions involve the risk, however, that the price or yield
obtained in a transaction may be less favorable than the price or yield
available in the market when the securities delivery takes place.

When a Portfolio agrees to purchase securities on this basis, the custodian
will set aside liquid assets equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment, and in such a case the Portfolio may be required
subsequently to place additional assets in the separate account in order to
ensure that the value of the account remains equal to the amount of the
Portfolio's commitments. It may be expected that the market value of a
Portfolio's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. Because a Portfolio's liquidity and ability to manage its portfolio might
be affected when it sets aside cash or portfolio securities to cover such
purchase commitments, each Portfolio expects that its forward commitments and
commitments to purchase when-issued or TBA securities will not exceed 25% of the
value of its total assets absent unusual market conditions.

If deemed advisable as a matter of investment strategy, a Portfolio may
dispose of or renegotiate a commitment after it has been entered into, and may
sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. In these cases the Portfolio
may realize a taxable capital gain or loss.

When a Portfolio engages in when-issued, TBA or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.

The market value of the securities underlying a commitment to purchase
securities, and any subsequent fluctuations in their market value, is taken into
account when determining the market value of a Portfolio starting on the day the
Portfolio agrees to purchase the securities. The Portfolio does not earn
interest on the securities it has committed to purchase until they are paid for
and delivered on the settlement date.

RIGHTS OFFERINGS AND WARRANTS TO PURCHASE. Each Equity Portfolio (except the
Index Master Portfolio, which may only acquire warrants as a result of corporate
actions involving its holdings of other equity securities) and the High Yield
Bond Portfolio (in connection with its purchase of mezzanine investments) may
participate in rights offerings and may purchase warrants, which are privileges
issued by corporations enabling the owners to subscribe to and purchase a
specified number of shares of the corporation at a specified price during a
specified period of time. Subscription rights normally have a short life span
to expiration. The purchase of rights or warrants involves the risk that a
Portfolio could lose the purchase value of a right or warrant if the right to
subscribe to additional shares is not exercised prior to the rights' and
warrants' expiration. Also, the purchase of rights and/or warrants involves the
risk that the effective price paid for the right and/or warrant added to the
subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security. A Portfolio will not invest more than 5% of
its net assets, taken at market value, in warrants, or more than 2% of its net
assets, taken at market value, in warrants not listed on the New York or
American Stock Exchanges. Warrants acquired by a Portfolio in units or attached
to other securities are not subject to this restriction.

FOREIGN INVESTMENTS. Investing in foreign securities involves considerations
not typically associated with investing in securities of companies organized and
operated in the United States. Because foreign securities generally are
denominated and pay dividends or interest in foreign currencies, the value of a
Portfolio that invests in foreign securities as measured in U.S. dollars will be
affected favorably or unfavorably by changes in exchange rates.

A Portfolio's investments in foreign securities may also be adversely affected
by changes in foreign political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, limitation on the removal of funds or
assets, or imposition of (or change in) exchange control regulations. In
addition, changes in government administrations or economic or monetary policies
in the U.S. or abroad could result in appreciation or depreciation of portfolio
securities and could favorably or adversely affect a Portfolio's operations.

In general, less information is publicly available with respect to foreign
issuers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting
requirements applicable to issuers in the United States. While the volume of
transactions effected on foreign stock exchanges has increased in recent years,
it remains appreciably below that of the New York Stock Exchange. Accordingly, a
Portfolio's foreign investments may be less liquid and their prices may be more
volatile than comparable investments in securities in U.S. companies. In
addition, there is generally less government supervision and regulation of
securities exchanges, brokers and issuers in foreign countries than in the
United States.

The International Bond Portfolio will invest primarily, and the High Yield
Bond Portfolio may invest, in debt securities of foreign issuers and foreign
currencies. Each of the Managed Income and Core Bond Portfolios may invest up to
10% of its total assets and the Low Duration Bond Portfolio may invest up to 20%
of its total assets in debt securities of foreign issuers. These investments may
be on either a currency hedged or unhedged basis, and may hold from time to time
various foreign currencies pending investment or conversion into U.S. dollars.
Some of these instruments may have the characteristics of futures contracts. In
addition, each Bond Portfolio may engage in foreign currency exchange
transactions to seek to protect against changes in the level of future exchange
rates which would adversely affect the Portfolio's performance. These
investments and transactions involving foreign securities, currencies, options
(including options that relate to foreign currencies), futures, hedging and
cross-hedging are described below and under "Interest Rate and Currency
Transactions" and "Options and Futures Contracts."

To maintain greater flexibility, a Bond Portfolio may invest in instruments
which have the characteristics of futures contracts. These instruments may take
a variety of forms, such as debt securities with interest or principal payments
determined by reference

to the value of a currency or commodity at a future point in time. The risks of
such investments could reflect the risks of investing in futures, currencies and
securities, including volatility and illiquidity.

Foreign investments of the Bond Portfolios may include: (a) debt obligations
issued or guaranteed by foreign sovereign governments or their agencies,
authorities, instrumentalities or political subdivisions, including a foreign
state, province or municipality; (b) debt obligations of supranational
organizations such as the World Bank, Asian Development Bank, European
Investment Bank, and European Economic Community; (c) debt obligations of
foreign banks and bank holding companies; (d) debt obligations of domestic banks
and corporations issued in foreign currencies; (e) debt obligations denominated
in the European Currency Unit (ECU); and (f) foreign corporate debt securities
and commercial paper. Such securities may include loan participations and
assignments, convertible securities and zero-coupon securities.

The International Emerging Markets Portfolio will invest its assets in
countries with emerging economies or securities markets. The High Yield Bond
Portfolio may invest up to 10% of its total assets in securities of emerging
markets issuers, although typically it will not hold any of these investments.
The International Bond Portfolio may also invest in emerging markets issuers.
Political and economic structures in many of these countries may be undergoing
significant evolution and rapid development, and these countries may lack the
social, political and economic stability characteristic of more developed
countries. Some of these countries may have in the past failed to recognize
private property rights and have at times nationalized or expropriated the
assets of private companies. As a result the risks described above, including
the risks of nationalization or expropriation of assets, may be heightened. In
addition, unanticipated political or social developments may affect the value of
investments in these countries and the availability to a Portfolio of additional
investments in emerging market countries. The small size and inexperience of the
securities markets in certain of these countries and the limited volume of
trading in securities in these countries may make investments in the countries
illiquid and more volatile than investments in Japan or most Western European
countries. There may be little financial or accounting information available
with respect to issuers located in certain emerging market countries, and it may
be difficult to assess the value or prospects of an investment in such issuers.

The expense ratios of the Portfolios investing significantly in foreign
securities can be expected to be higher than those of Portfolios investing
primarily in domestic securities. The costs attributable to investing abroad are
usually higher for several reasons, such as the higher cost of investment
research, higher cost of custody of foreign securities, higher commissions paid
on comparable transactions on foreign markets and additional costs arising from
delays in settlements of transactions involving foreign securities.

BRADY BONDS. The High Yield Bond Portfolio's emerging market debt securities
may include emerging market governmental debt obligations commonly referred to
as Brady Bonds. Brady Bonds are debt securities, generally denominated in U.S.
dollars, issued under the framework of the Brady Plan, an initiative announced
by U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor
nations (primarily emerging market countries) to restructure their outstanding
external indebtedness (generally, commercial bank debt). Brady Bonds are
created through the exchange of existing commercial bank loans to foreign
entities for new obligations in connection with debt restructuring. A
significant amount of the Brady Bonds that the High Yield Bond Portfolio may
purchase have no or limited collateralization, and the High Yield Bond Portfolio
will be relying for payment of interest and (except in the case of principal
collateralized Brady Bonds) principal primarily on the willingness and ability
of the foreign government to make payment in accordance with the terms of the
Brady Bonds. A substantial portion of the Brady Bonds and other sovereign debt
securities in which the Portfolio may invest are likely to be acquired at a
discount.

ADRS, EDRS AND GDRS. Each Equity Portfolio (other than the Index Master
Portfolio) may invest in both sponsored and unsponsored American Depository
Receipts ("ADRs"), European Depository Receipts ("EDRs"), Global Depository
Receipts ("GDRs") and other similar global instruments. ADRs typically are
issued by an American bank or trust company and evidence ownership of underlying
securities issued by a foreign corporation. EDRs, which are sometimes referred
to as Continental Depository Receipts, are receipts issued in Europe, typically
by foreign banks and trust companies, that evidence ownership of either foreign
or domestic underlying securities. GDRs are depository receipts structured like
global debt issues to facilitate trading on an international basis. Unsponsored
ADR, EDR and GDR programs are organized independently and without the
cooperation of the issuer of the underlying securities. As a result, available
information concerning the issuer may not be as current as for sponsored ADRs,
EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more
volatile than if such instruments were sponsored by the issuer. Investments in
ADRs, EDRs and GDRs present additional investment considerations as described
under "Foreign Investments."

THE EURO. On January 1, 1999, 11 European countries implemented a new
currency unit, the Euro, which is expected to reshape financial markets, banking
systems and monetary policies in Europe and other parts of the world. The
countries that initially converted or tied their currencies to the Euro are
Austria, Belgium, France, Germany, Luxembourg, the Netherlands, Ireland,
Finland, Italy, Portugal and Spain. Implementation of this plan means that
financial transactions and market information, including share quotations and
company accounts, in participating countries will be denominated in Euros.
Participating governments will issue their bonds in Euros, and monetary policy
for participating countries will be uniformly managed by a new central bank, the
European Central Bank.

Although it is not possible to predict the impact of the Euro implementation
plan on the Portfolios, the transition to the Euro may change the economic
environments and behavior of investors, particularly in European markets. For
example, investors may begin to view those countries using the Euro as a single
entity, and the Portfolios' sub-advisers may need to adapt its investment
strategy accordingly. The process of implementing the Euro also may adversely
affect financial markets world-wide and may result in changes in the relative
strength and value of the U.S. dollar or other major currencies, as well as
possible adverse tax consequences. The transition to the Euro is likely to have
a significant impact on fiscal and monetary policy in the participating
countries and may produce unpredictable effects on trade and commerce generally.
These resulting uncertainties could create increased volatility in financial
markets world-wide.

OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment
objective, each Equity and Bond Portfolio (other than the Index Master
Portfolio) may write (i.e. sell) covered call options, buy put options, buy call
options and write secured put options for the purpose of hedging or earning
additional income, which may be deemed speculative or, with respect to the
International Bond, International Equity, International Emerging Markets and
International Small Cap Equity Portfolios, cross-hedging. For the payment of a
premium, the purchaser of an option obtains the right to buy (in the case of a
call option) or to sell (in the case of a put option) the item which is the
subject of the option at a stated exercise price for a specific period of time.
These options may relate to particular securities, securities indices, or the
yield differential between two securities, or, in the case of the International
Bond, International Equity, International Emerging Markets and International
Small Cap Equity Portfolios, foreign currencies, and may or may not be listed on
a securities exchange and may or may not be issued by the Options Clearing
Corporation. A Portfolio will not purchase put and call options when the
aggregate premiums on outstanding options exceed 5% of its net assets at the
time of purchase, and will not write options on more than 25% of the value of
its net assets (measured at the time an option is written). Options trading is a
highly specialized activity that entails greater than ordinary investment risks.
In addition, unlisted options are not subject to the protections afforded
purchasers of listed options issued by the Options Clearing Corporation, which
performs the obligations of its members if they default.

To the extent consistent with its investment objective, each Equity and Bond
Portfolio may also invest in futures contracts and options on futures contracts
(interest rate futures contracts or index futures contracts, as applicable) to
commit funds awaiting investment or maintain cash liquidity or, except with
respect to the Index Master Portfolio, for other hedging purposes. These
instruments are described in Appendix B to this Statement of Additional
Information. The value of a Portfolio's contracts may equal or exceed 100% of
its total assets, although a Portfolio will not purchase or sell a futures
contract unless immediately afterwards the aggregate amount of margin deposits
on its existing futures positions plus the amount of premiums paid for related
futures options entered into for other than bona fide hedging purposes is 5% or
less of its net assets.

To maintain greater flexibility, the High Yield Bond Portfolio may invest in
instruments which have the characteristics of futures contracts. These
instruments may take a variety of forms, such as debt securities with interest
or principal payments determined by reference to the value of a commodity at a
future point in time. The risks of such investments could reflect the risks of
investing in futures and securities, including volatility and illiquidity.

Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of securities, the cash value of a securities index or a stated quantity of a
foreign currency. A Portfolio may sell a futures contract in order to offset an
expected decrease in the value of its portfolio positions that might otherwise
result from a market decline or currency exchange fluctuation. A Portfolio may
do so either to hedge the value of its securities portfolio as a whole, or to
protect against declines occurring prior to sales of securities in the value of
the securities to be sold. In addition, a Portfolio may utilize futures
contracts in anticipation of changes in the composition of its holdings or in
currency exchange rates.

A Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Portfolio purchases an option on
a futures contract, it has the right to assume a position as a purchaser or a
seller of a futures contract at a specified exercise price during the option
period. When a Portfolio sells an option on a futures contract, it becomes
obligated to sell or buy a futures contract if the option is exercised. In
connection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid assets or will otherwise
cover its position in accordance with applicable SEC requirements.

The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the
instruments held by a Portfolio and the price of the futures contract or option;
(b) possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures contract when desired; (c) losses caused
by unanticipated market movements, which are potentially unlimited; (d) the sub-
adviser's inability to predict correctly the direction of securities prices,
interest rates, currency exchange rates and other economic factors; and (e) the
possibility that the counterparty will default in the performance of its
obligations.

The Fund intends to comply with the regulations of the Commodity Futures
Trading Commission exempting the Portfolios from registration as a "commodity
pool operator."

Options trading is a highly specialized activity which entails greater than
ordinary investment risks. Options on particular securities may be more volatile
than the underlying securities, and therefore, on a percentage basis, an
investment in the underlying securities themselves. A Portfolio will write call
options only if they are "covered." In the case of a call option on a security,
the option is "covered" if a Portfolio owns the security underlying the call or
has an absolute and immediate right to acquire that security without additional
cash consideration (or, if additional cash consideration is required, liquid
assets in such amount as are held in a segregated account by its custodian) upon
conversion or exchange of other securities held by it. For a call option on an
index, the option is covered if a Portfolio maintains with its custodian liquid
assets equal to the contract value. A call option is also covered if a Portfolio
holds a call on the same security or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call written
provided the difference is maintained by the Portfolio in liquid assets in a
segregated account with its custodian.

When a Portfolio purchases a put option, the premium paid by it is recorded as
an asset of the Portfolio. When a Portfolio writes an option, an amount equal to
the net premium (the premium less the commission) received by the Portfolio is
included in the liability section of the Portfolio's statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the mean between the last bid and asked
prices. If an option purchased by a Portfolio expires unexercised the Portfolio
realizes a loss equal to the premium paid. If the Portfolio enters into a
closing sale transaction on an option purchased by it, the Portfolio will
realize a gain if the premium received by the Portfolio on the closing
transaction is more than the premium paid to purchase the option, or a loss if
it is less. If an option written by a Portfolio expires on the stipulated
expiration date or if the Portfolio enters into a closing purchase transaction,
it will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option is sold) and the deferred
credit related to such option will be eliminated. If an option written by a
Portfolio is exercised, the proceeds of the sale will be increased by the net
premium originally received and the Portfolio will realize a gain or loss.

There are several risks associated with transactions in options on securities
and indexes. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange") may be absent for reasons which include the following: there may be
insufficient trading interest in certain options; restrictions may be imposed by
an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the

Options Clearing Corporation as a result of trades on that Exchange would
continue to be exercisable in accordance with their terms.

INTEREST RATE TRANSACTIONS AND CURRENCY SWAPS. The Balanced and Bond
Portfolios may enter into interest rate swaps and may purchase or sell interest
rate caps and floors. The Portfolios may enter into these transactions
primarily to preserve a return or spread on a particular investment or portion
of their holdings, as a duration management technique or to protect against an
increase in the price of securities a Portfolio anticipates purchasing at a
later date. The Portfolios intend to use these transactions as a hedge and not
as a speculative investment.

In addition, the International Bond Portfolio may engage in foreign currency
exchange transactions to protect against uncertainty in the level of future
exchange rates. The Portfolio may engage in foreign currency exchange
transactions in connection with the purchase and sale of portfolio securities
(transaction hedging) and to protect the value of specific portfolio positions
(position hedging). The Portfolio may purchase or sell a foreign currency on a
spot (or cash) basis at the prevailing spot rate in connection with the
settlement of transactions in portfolio securities denominated in that foreign
currency, and may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and purchase and sell foreign
currency futures contracts (futures contracts). The Portfolio may also purchase
exchange-listed and over-the-counter call and put options on futures contracts
and on foreign currencies, and may write covered call options on up to 100% of
the currencies in its portfolio. In order to protect against currency
fluctuations, the International Bond Portfolio may enter into currency swaps.
Currency swaps involve the exchange of the rights of the Portfolio and another
party to make or receive payments in specified currencies.

The Bond and Balanced Portfolios may enter into interest rate swaps, caps and
floors on either an asset-based or liability-based basis, depending on whether a
Portfolio is hedging its assets or its liabilities. Interest rate swaps involve
the exchange by a Portfolio with another party of their respective commitments
to pay or receive interest (e.g., an exchange of floating rate payments for
fixed rate payments). The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate floor. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The
International Bond Portfolio may also enter into currency swaps, which involve
the exchange of the rights of a Portfolio and another party to make or receive
payments in specified currencies.

A Portfolio will usually enter into interest rate swaps on a net basis, i.e.,
the two payment streams are netted out, with the Portfolio receiving or paying,
as the case may be, only the net amount of the two payments. In contrast,
currency swaps usually involve the delivery of the entire principal value of one
designated currency in exchange for the other designated currency.

A Portfolio will accrue the net amount of the excess, if any, of its
obligations over its entitlements with respect to each interest rate or currency
swap on a daily basis and will deliver an amount of liquid assets having an
aggregate net asset value at least equal to the accrued excess to a custodian
that satisfies the requirements of the 1940 Act. If the other party to an
interest rate swap defaults, a Portfolio's risk of loss consists of the net
amount of interest payments that the Portfolio is contractually entitled to
receive. Because currency swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated
currency, 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. A Portfolio will not enter into any interest rate or currency swap
unless the unsecured commercial paper, senior debt or claims paying ability of
the other party is rated either "A" or "A-1" or better by S&P, Duff & Phelps or
Fitch, or "A" or "P-1" or better by Moody's.

A Portfolio will enter into currency or interest rate swap, cap and floor
transactions only with institutions deemed the creditworthy by the Portfolio's
adviser or sub-adviser. If there is a default by the other party to such a
transaction, a Portfolio will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid. Caps and floors are
more recent innovations and, accordingly, they are less liquid than swaps.

FOREIGN CURRENCY TRANSACTIONS. Forward foreign currency exchange contracts
involve an obligation to purchase or sell a specified currency at a future date
at a price set at the time of the contract. Forward currency contracts do not
eliminate fluctuations in the values of portfolio securities but rather allow a
Portfolio to establish a rate of exchange for a future point in time. A
Portfolio may use forward foreign currency exchange contracts to hedge against
movements in the value of foreign currencies (including the "ECU" used in the
European Community) relative to the U.S. dollar in connection with specific
portfolio transactions or with respect to portfolio positions. A Portfolio may
enter into forward foreign currency exchange contracts when deemed advisable by
its adviser or sub-adviser under two circumstances. First, when entering into a
contract for the purchase or sale of a security, a Portfolio may enter into a
forward foreign currency exchange contract for the amount of the purchase or
sale price to protect against variations, between the date the security is
purchased or sold and the date on which payment is made or received, in the
value of the foreign currency relative to the U.S. dollar or other foreign
currency.

Second, when a Portfolio's adviser or sub-adviser anticipates that a
particular foreign currency may decline relative to the U.S. dollar or other
leading currencies, in order to reduce risk, the Portfolio may enter into a
forward contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Portfolio's securities denominated
in such foreign currency. With respect to any forward foreign currency
contract, it will not generally be possible to match precisely the amount
covered by that contract and the value of the securities involved due to the
changes in the values of such securities resulting from market movements between
the date the forward contract is entered into and the date it matures. In
addition, while forward contracts may offer protection from losses resulting
from declines in the value of a particular foreign currency, they also limit
potential gains which might result from increases in the value of such currency.
A Portfolio will also incur costs in connection with forward foreign currency
exchange contracts and conversions of foreign currencies and U.S. dollars.

A Portfolio may also engage in proxy hedging transactions to reduce the effect
of currency fluctuations on the value of existing or anticipated holdings of
portfolio securities. Proxy hedging is often used when the currency to which
the Portfolio is exposed is difficult to hedge or to hedge against the dollar.
Proxy hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Portfolio's securities are, or are
expected to be, denominated, and to buy U.S. dollars. Proxy hedging involves
some of the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to the Portfolio if the
currency being hedged fluctuates in value to a degree or in a direction that is
not anticipated. In addition, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that a Portfolio is engaging in proxy hedging. A Portfolio may
also cross-hedge currencies by entering into forward contracts to sell one or
more currencies that are expected to decline in value relative to other
currencies to which the Portfolio has or in which the Portfolio expects to have
portfolio exposure. For example, a Portfolio may hold both French government
bonds and German government bonds, and the Adviser or Sub-Adviser may believe
that French francs will deteriorate against German marks. The Portfolio would
sell French francs to reduce its exposure to that currency and buy German marks.
This strategy would be a hedge against a decline in the value of French francs,
although it would expose the Portfolio to declines in the value of the German
mark relative to the U.S. dollar.

In general, currency transactions are subject to risks different from those of
other portfolio transactions, and can result in greater losses to a Portfolio
than would otherwise be incurred, even when the currency transactions are used
for hedging purposes.

A separate account of a Portfolio consisting of liquid assets equal to the
amount of the Portfolio's assets that could be required to consummate forward
contracts entered into under the second circumstance, as set forth above, will
be established with the Fund's custodian. For the purpose of determining the
adequacy of the securities in the account, the deposited securities will be
valued at market or fair value. If the market or fair value of such securities
declines, additional cash or securities will be placed in the account daily so
that the value of the account will equal the amount of such commitments by the
Portfolio.

STAND-BY COMMITMENTS. Under a stand-by commitment for a Municipal Obligation,
a dealer agrees to purchase at the Portfolio's option a specified Municipal
Obligation at a specified price. Stand-by commitments for Municipal Obligations
may be exercisable by a Portfolio at any time before the maturity of the
underlying Municipal Obligations and may be sold, transferred or assigned only
with the instruments involved. It is expected that such stand-by commitments
will generally be available without the payment of any direct or indirect
consideration. However, if necessary or advisable, a Portfolio may pay for such
a stand-by commitment either separately in cash or by paying a higher price for
Municipal Obligations which are acquired subject to the commitment for Municipal
Obligations (thus reducing the yield to maturity otherwise available for the
same securities). The total

amount paid in either manner for outstanding stand-by commitments for Municipal
Obligations held by a Portfolio will not exceed 1/2 of 1% of the value of such
Portfolio's total assets calculated immediately after each stand-by commitment
is acquired.

Stand-by commitments will only be entered into with dealers, banks and broker-
dealers which, in a sub-adviser's opinion, present minimal credit risks. A
Portfolio will acquire stand-by commitments solely to facilitate portfolio
liquidity and not to exercise its rights thereunder for trading purposes.
Stand-by commitments will be valued at zero in determining net asset value.
Accordingly, where a Portfolio pays directly or indirectly for a stand-by
commitment, its cost will be reflected as an unrealized loss for the period
during which the commitment is held by such Portfolio and will be reflected as a
realized gain or loss when the commitment is exercised or expires.

MUNICIPAL INVESTMENTS. The two principal classifications of Municipal
Obligations are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities include private activity bonds
which are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
Municipal Obligations may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which created
the issuer.

Also included within the general category of Municipal Obligations are
participation certificates in a lease, an installment purchase contract, or a
conditional sales contract ("lease obligations") entered into by a state or
political subdivision to finance the acquisition or construction of equipment,
land, or facilities. Although lease obligations are not general obligations of
the issuer for which the state or other governmental body's unlimited taxing
power is pledged, certain lease obligations are backed by a covenant to
appropriate money to make the lease obligation payments. However, under certain
lease obligations, the state or governmental body has no obligation to make
these payments in future years unless money is appropriated on a yearly basis.
Although "non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. These securities represent a relatively new type of financing that
is not yet as marketable as more conventional securities.

Each Tax-Free and Municipal Portfolio may acquire "stand-by commitments" with
respect to Municipal Obligations held by it. Under a stand-by commitment, a
dealer agrees to purchase, at the Portfolio's option, specified Municipal
Obligations at a specified price. The acquisition of a stand-by commitment may
increase the cost, and thereby reduce the yield, of the Municipal Obligations to
which the commitment relates. The Tax-Free and Municipal Portfolios may also
invest in tax-exempt derivative securities relating to Municipal Obligations,
including tender option bonds, participations, beneficial interests in trusts
and partnership interests.

The amount of information regarding the financial condition of issuers of
Municipal Obligations may be less extensive than the information for public
corporations, and the secondary market for Municipal Obligations may be less
liquid than that for taxable obligations. Accordingly, the ability of a
Portfolio to buy and sell Municipal Obligations may, at any particular time and
with respect to any particular securities, be limited. In addition, Municipal
Obligations purchased by the Portfolios include obligations backed by letters of
credit and other forms of credit enhancement issued by domestic and foreign
banks, as well as other financial institutions. Changes in the credit quality
of these institutions could cause loss to a Tax-Free Portfolio and affect its
share price.

Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from Federal and state income tax are rendered by
counsel to the respective issuers and sponsors of the obligations at the time of
issuance. The Fund and its service providers will rely on such opinions and
will not review independently the underlying proceedings relating to the
issuance of Municipal Obligations, the creation of any tax-exempt derivative
securities, or the bases for such opinions.

TAX-EXEMPT DERIVATIVES. The Municipal Money Market Portfolios and the Tax-
Free Income, Ohio Tax-Free Income, Pennsylvania Tax-Free Income, New Jersey Tax-
Free Income, Delaware Tax-Free Income and Kentucky Tax-Free Income

Portfolios (collectively, the "Money and Non-Money Market Municipal Portfolios")
may hold tax-exempt derivatives which may be in the form of tender option bonds,
participations, beneficial interests in a trust, partnership interests or other
forms. A number of different structures have been used. For example, interests
in long-term fixed-rate municipal debt obligations, held by a bank as trustee or
custodian, are coupled with tender option, demand and other features when the
tax-exempt derivatives are created. Together, these features entitle the holder
of the interest to tender (or put) the underlying municipal debt obligation to a
third party at periodic intervals and to receive the principal amount thereof.
In some cases, municipal debt obligations are represented by custodial receipts
evidencing rights to receive specific future interest payments, principal
payments, or both, on the underlying securities held by the custodian. Under
such arrangements, the holder of the custodial receipt has the option to tender
the underlying securities at their face value to the sponsor (usually a bank or
broker dealer or other financial institution), which is paid periodic fees equal
to the difference between the securities' fixed coupon rate and the rate that
would cause the securities, coupled with the tender option, to trade at par on
the date of a rate adjustment. The Money and Non-Money Market Municipal
Portfolios may hold tax-exempt derivatives, such as participation interests and
custodial receipts, for municipal debt obligations which give the holder the
right to receive payment of principal subject to the conditions described above.
The Internal Revenue Service has not ruled on whether the interest received on
tax-exempt derivatives in the form of participation interests or custodial
receipts is tax-exempt, and accordingly, purchases of any such interests or
receipts are based on the opinions of counsel to the sponsors of such derivative
securities. Neither the Fund nor its investment adviser or sub-advisers will
review the proceedings related to the creation of any tax-exempt derivatives or
the basis for such opinions.

SECURITIES LENDING. A Portfolio may seek additional income by lending
securities on a short-term basis. The securities lending agreements will
require that the loans be secured by collateral in cash, U.S. Government
securities or (except for the Index Master Portfolio) irrevocable bank letters
of credit maintained on a current basis equal in value to at least the market
value of the loaned securities. A Portfolio may not make such loans in excess
of 33 1/3% of the value of its total assets. Securities loans involve risks of
delay in receiving additional collateral or in recovering the loaned securities,
or possibly loss of rights in the collateral if the borrower of the securities
becomes insolvent.

A Portfolio would continue to accrue interest on loaned securities and would
also earn income on investment collateral for such loans. Any cash collateral
received by a Portfolio in connection with such loans may be invested in a broad
range of high quality, U.S. dollar-denominated money market instruments that
meet Rule 2a-7 restrictions for money market funds. Specifically, cash
collateral may be invested in any of the following instruments: (a) securities
issued or guaranteed as to principal and interest by the U.S. Government or by
its agencies or instrumentalities and related custodial receipts; (b) "first
tier" quality commercial paper and other obligations issued or guaranteed by
U.S. and foreign corporations and other issuers rated (at the time of purchase)
in the highest rating category by at least two NRSRO's, or one if only rated by
one NRSRO; (c) U.S. dollar-denominated obligations issued or supported by the
credit of U.S. or foreign banks or savings institutions with total assets in
excess of $1 billion (including obligations of foreign branches of such banks)
(i.e. CD's, BA's and time deposits); (d) repurchase agreements relating to the
above instruments, as well as corporate debt; and (e) unaffiliated money market
funds. Any such investments must be rated "first tier" and must have a maturity
of 397 days or less from the date of purchase.

While the Index Master Portfolio may earn additional income from lending
securities, such activity is incidental to the investment objective of the Index
Master Portfolio. The value of securities loaned may not exceed 33 1/3% of the
value of the Index Master Portfolio's total assets. In connection with such
loans, the Index Master Portfolio will receive collateral consisting of cash or
U.S. Government securities, which will be maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities. In
addition, the Index Master Portfolio will be able to terminate the loan at any
time, will receive reasonable interest on the loan, as well as amounts equal to
any dividends, interest or other distributions on the loaned securities. In the
event of the bankruptcy of the borrower, the Trust could experience delay in
recovering the loaned securities. Management of the Trust believes that this
risk can be controlled through careful monitoring procedures.

YIELDS AND RATINGS. The yields on certain obligations are dependent on a
variety of factors, including general market conditions, conditions in the
particular market for the obligation, the financial condition of the issuer, the
size of the offering, the maturity of the obligation and the ratings of the
issue. The ratings of Moody's, Duff & Phelps Credit Co. ("Duff & Phelps"),
Fitch Investor Services, Inc. ("Fitch") and S&P represent their respective
opinions as to the quality of the obligations they undertake to rate. Ratings,
however, are general and are not absolute standards of quality. Consequently,
obligations with the same rating, maturity and interest rate may have different
market prices. Subsequent to its purchase by a Portfolio, a rated

security may cease to be rated. A Portfolio's adviser or sub-adviser will
consider such an event in determining whether the Portfolio should continue to
hold the security.

INVESTMENT COMPANIES. In connection with the management of their daily cash
positions, the Equity Portfolios (other than the Index Master Portfolio) may
invest in securities issued by other investment companies which invest in short-
term debt securities and which seek to maintain a $1.00 net asset value per
share. Such Portfolios may also invest in securities issued by other investment
companies with similar investment objectives. The Bond Portfolios may invest in
securities issued by other investment companies within the limits prescribed by
the 1940 Act. The International Equity, International Emerging Markets and
International Small Cap Equity Portfolios may purchase shares of investment
companies investing primarily in foreign securities, including so-called
"country funds." Country funds have portfolios consisting exclusively of
securities of issuers located in one foreign country. The Index Equity
Portfolio may also invest in Standard & Poor's Depository Receipts (SPARS) and
shares of other investment companies that are structured to seek a similar
correlation to the performance of the S&P 500 Index. Securities of other
investment companies will be acquired within limits prescribed by the Investment
Company Act of 1940 (the "1940 Act"). As a shareholder of another investment
company, a Portfolio would bear, along with other shareholders, its pro rata
portion of the other investment company's expenses, including advisory fees.
These expenses would be in addition to the advisory fees and other expenses the
Portfolio bears directly in connection with its own operations.

The Money Market Portfolios may invest in securities issued by other
investment companies which invest in short-term, high quality debt securities
and which determine their net asset value per share based on the amortized cost
or penny-rounding method of valuation. Securities of other investment companies
will be acquired by a Portfolio within the limits prescribed by the 1940 Act.
As a shareholder of another investment company, a Portfolio would bear, along
with other shareholders, its pro rata portion of the other investment company's
expenses, including advisory fees. These expenses would be in addition to the
advisory fees and other expenses the Portfolio bears directly in connection with
its own operations.

Each Portfolio, other than the Index Equity Portfolio, currently intends to
limit its investments so that, as determined immediately after a securities
purchase is made: (i) not more than 5% of the value of its total assets will be
invested in the securities of any one investment company; (ii) not more than 10%
of the value of its total assets will be invested in the aggregate in securities
of investment companies as a group; and (iii) not more than 3% of the
outstanding voting stock of any one investment company will be owned by the
Portfolio or by the Fund as a whole.

STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their
investment objectives, the Bond Portfolios may purchase Treasury receipts and
other "stripped" securities that evidence ownership in either the future
interest payments or the future principal payments on U.S. Government and other
obligations. These participations, which may be issued by the U.S. Government
(or a U.S. Government agency or instrumentality) or by private issuers such as
banks and other institutions, are issued at a discount to their "face value,"
and may include stripped mortgage-backed securities ("SMBS"). Stripped
securities, particularly SMBS, may exhibit greater price volatility than
ordinary debt securities because of the manner in which their principal and
interest are returned to investors. The International Bond Portfolio also may
purchase "stripped" securities that evidence ownership in the future interest
payments or principal payments on obligations of foreign governments.

SMBS are usually structured with two or more classes that receive different
proportions of the interest and principal distributions from a pool of mortgage-
backed obligations. A common type of SMBS will have one class receiving all of
the interest, while the other class receives all of the principal. However, in
some cases, one class will receive some of the interest and most of the
principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, a Portfolio may fail to fully recoup
its initial investment. The market value of SMBS can be extremely volatile in
response to changes in interest rates. The yields on a class of SMBS that
receives all or most of the interest are generally higher than prevailing market
yields on other mortgage-related obligations because their cash flow patterns
are also volatile and there is a greater risk that the initial investment will
not be fully recouped.

Each Bond Portfolio and the Balanced Portfolio may invest in zero-coupon
bonds, which are normally issued at a significant discount from face value and
do not provide for periodic interest payments. Zero-coupon bonds may experience
greater volatility in market value than similar maturity debt obligations which
provide for regular interest payments. Additionally, current federal tax law
requires the holder of certain zero-coupon bonds to accrue income with respect
to these securities prior to the receipt of

cash payments. To maintain its qualification as a regulated investment company
and avoid liability for federal income and excise taxes, a Portfolio may be
required to distribute income accrued with respect to these securities and may
have to dispose of portfolio securities under disadvantageous circumstances in
order to generate cash to satisfy these distribution requirements. See "Taxes."

GUARANTEED INVESTMENT CONTRACTS. The Bond Portfolios and the Money Market
Portfolio may make limited investments in guaranteed investment contracts
("GICs") issued by highly rated U.S. insurance companies. Under these
contracts, a Portfolio makes cash contributions to a deposit fund of the
insurance company's general account. The insurance company then credits to the
Portfolio, on a monthly basis, interest which is based on an index (such as the
Salomon Brothers CD Index), but is guaranteed not to be less than a certain
minimum rate. Each Portfolio does not expect to invest more than 5% of its net
assets in GICs at any time during the current fiscal year.

DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in
the mortgage market and to enhance current income, the Balanced Portfolio and
each Bond Portfolio (except the Tax-Free Portfolios) may enter into dollar roll
transactions. A dollar roll transaction involves a sale by the Portfolio of a
mortgage-backed or other security concurrently with an agreement by the
Portfolio to repurchase a similar security at a later date at an agreed-upon
price. The securities that are repurchased will bear the same interest rate and
stated maturity as those sold, but pools of mortgages collateralizing those
securities may have different prepayment histories than those sold. During the
period between the sale and repurchase, a Portfolio will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of the
sale will be invested in additional instruments for the Portfolio, and the
income from these investments will generate income for the Portfolio. If such
income does not exceed the income, capital appreciation and gain or loss that
would have been realized on the securities sold as part of the dollar roll, the
use of this technique will diminish the investment performance of a Portfolio
compared with what the performance would have been without the use of dollar
rolls. At the time a Portfolio enters into a dollar roll transaction, it will
place in a segregated account maintained with its custodian cash, U.S.
Government securities or other liquid securities having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure that its value is maintained. A Portfolio's dollar rolls,
together with its reverse repurchase agreements and other borrowings, will not
exceed, in the aggregate, 33 1/3% of the value of its total assets.

Dollar roll transactions involve the risk that the market value of the
securities a Portfolio is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or
repurchase securities may be restricted. Successful use of mortgage dollar
rolls may depend upon the sub-adviser's ability to correctly predict interest
rates and prepayments. There is no assurance that dollar rolls can be
successfully employed.

SHORT SALES. The Balanced and Bond Portfolios may only make short sales of
securities "against-the-box." A short sale is a transaction in which a Portfolio
sells a security it does not own in anticipation that the market price of that
security will decline. The Portfolios may make short sales both as a form of
hedging to offset potential declines in long positions in similar securities and
in order to maintain portfolio flexibility. In a short sale "against-the-box,"
at the time of sale, the Portfolio owns or has the immediate and unconditional
right to acquire the identical security at no additional cost. When selling
short "against-the-box," a Portfolio forgoes an opportunity for capital
appreciation in the security.

INTEREST RATE AND EXTENSION RISK. The value of fixed income securities in the
Balanced and Bond Portfolios can be expected to vary inversely with changes in
prevailing interest rates. Fixed income securities with longer maturities,
which tend to produce higher yields, are subject to potentially greater capital
appreciation and depreciation than securities with shorter maturities. The
Portfolios are not restricted to any maximum or minimum time to maturity in
purchasing individual portfolio securities, and the average maturity of a
Portfolio's assets will vary. Although the Bond Portfolios' sub-adviser will
normally attempt to structure each Portfolio to have a comparable duration to
its benchmark as stated for that section, there can be no assurance that it will
be able to do so at all times.

LIQUIDITY MANAGEMENT. Each Money Market Portfolio may hold uninvested cash
reserves pending investment during temporary defensive periods or if, in the
opinion of the Portfolios' sub-adviser, suitable obligations are unavailable.
During normal market periods, no more than 20% of a Portfolio's assets will be
held uninvested. Uninvested cash reserves will not earn income.

As a temporary defensive measure if its sub-adviser determines that market
conditions warrant, each Equity Portfolio (other than the Index Master
Portfolio) may invest without limitation in high quality money market
instruments. The Equity Portfolios may also invest in high quality money market
instruments pending investment or to meet anticipated redemption requests. The
Balanced Portfolio may also invest in these securities in furtherance of its
investment objective. The Index Master Portfolio may invest a portion of its
assets, normally not more than 5% of its net assets, in certain short-term fixed
income obligations in order to maintain liquidity or to invest temporarily
uncommitted cash balances. High quality money market instruments include U.S.
government obligations, U.S. government agency obligations, dollar denominated
obligations of foreign issuers, bank obligations, including U.S. subsidiaries
and branches of foreign banks, corporate obligations, commercial paper,
repurchase agreements and obligations of supranational organizations.
Generally, such obligations will mature within one year from the date of
settlement, but may mature within two years from the date of settlement.

ILLIQUID SECURITIES. No Equity or Bond Portfolio will invest more than 15%
(10% with respect to the Index Master Portfolio) and no Money Market Portfolio
will invest more than 10% of the value of its net assets in securities that are
illiquid. GICs, variable and floating rate instruments that cannot be disposed
of within seven days, and repurchase agreements and time deposits that do not
provide for payment within seven days after notice, without taking a reduced
price, are subject to these limits. Each Equity, Bond and Money Market
Portfolio may purchase securities which are not registered under the Securities
Act of 1933 (the "1933 Act") but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the 1933 Act. These securities will
not be considered illiquid so long as it is determined by the adviser or sub-
adviser that an adequate trading market exists for the securities. This
investment practice could have the effect of increasing the level of illiquidity
in a Portfolio during any period that qualified institutional buyers become
uninterested in purchasing these restricted securities.

PORTFOLIO TURNOVER RATES. A Portfolio's annual portfolio turnover rate will
not be a factor preventing a sale or purchase when the adviser or sub-adviser
believes investment considerations warrant such sale or purchase. Portfolio
turnover may vary greatly from year to year as well as within a particular year.
High portfolio turnover rates (i.e., 100% or more) will generally result in
higher transaction costs to a Portfolio and may result in the realization of
short-term capital gains that are taxable to shareholders as ordinary income.

SPECIAL CONSIDERATION REGARDING THE OHIO TAX-FREE INCOME PORTFOLIO. The Ohio
Tax-Free Income Portfolio will not trade its securities for the purpose of
seeking profits. For purposes of this policy, the Portfolio may vary its
portfolio securities if (i) there has been an adverse change in a security's
credit rating or in that of its issuer or in the adviser's or sub-adviser's
credit analysis of the security or its issuer; (ii) there has been, in the
opinion of the adviser and sub-adviser, a deterioration or anticipated
deterioration in general economic or market conditions affecting issuers of Ohio
Municipal Obligations, or a change or anticipated change in interest rates;
(iii) adverse changes or anticipated changes in market conditions or economic or
other factors temporarily affecting the issuers of one or more portfolio
securities make necessary or desirable the sale of such security or securities
in anticipation of the Portfolio's repurchase of the same or comparable
securities at a later date; or (iv) the adviser or sub-adviser engages in
temporary defensive strategies.

SPECIAL CONSIDERATIONS FOR STATE-SPECIFIC PORTFOLIOS

The following information regarding the State-Specific Portfolios is derived
from official statements of certain issuers published in connection with their
issuance of securities and from other publicly available information, and is
believed to be accurate. No independent verification has been made of any of
the following information.

SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN OHIO STATE-SPECIFIC
OBLIGATIONS. The Ohio Municipal Money Market and Ohio Tax-Free Income
Portfolios (the "Ohio Portfolios") will each invest most of its net assets in
securities issued by or on behalf of (or in certificates of participation in
lease-purchase obligations of) the State of Ohio, political subdivisions of the
State, or agencies or instrumentalities of the State or its political
subdivisions ("Ohio State-Specific Obligations"). The Ohio Portfolios are
therefore susceptible to general or particular economic, political or regulatory
factors that may affect issuers of Ohio State-Specific Obligations. The
following information constitutes only a brief summary of some of the many
complex factors that may have an effect. The information does not apply to
"conduit" obligations on which the public issuer itself has no financial
responsibility. The following information is derived from official statements
of certain Ohio issuers published in connection with their issuance of
securities and from other publicly available information, and is believed to be
accurate. No independent verification has been made of any of the following
information.

Generally, the creditworthiness of Ohio State-Specific Obligations of local
issuers is unrelated to that of obligations of the State itself, and the State
has no responsibility to make payments on those local obligations.

There may be specific factors that at particular times apply in connection
with investment in particular Ohio State-Specific Obligations or in those
obligations of particular Ohio issuers. It is possible that the investment may
be in particular Ohio State-Specific Obligations, or in those of particular
issuers, as to which those factors apply. However, the information below is
intended only as a general summary, and is not intended as a discussion of any
specific factors that may affect any particular obligation or issuer.

Ohio is the seventh most populous state. The 1990 Census count of 10,847,000
indicated a 0.5% population increase from 1980. The Census estimate for 1996 is
11,173,000.

While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.

In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average monthly
State rate was 5.7%, compared to the 5.5% national figure. However, for the last
seven years the State rates were below the national rates (4.6% versus 4.9% in
1997). The unemployment rate and its effects vary among geographic areas of the
State.

There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio State-
Specific Obligations held in the Ohio Portfolios or the ability of particular
obligors to make timely payments of debt service on (or lease payments relating
to) those Obligations.

The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July 1 to June 30
fiscal year (FY) or fiscal biennium in a deficit position. Most State
operations are financed through the General Revenue Fund (GRF), for which the
personal income and sales-use taxes are the major sources. Growth and depletion
of GRF ending fund balances show a consistent pattern related to national
economic conditions, with the ending FY balance reduced during less favorable
and increased during more favorable economic periods. The State has well-
established procedures for, and has timely taken, necessary actions to ensure
resource/expenditure balances during less favorable economic periods. Those
procedures included general and selected reductions in appropriations spending.

The 1992-93 biennium presented significant challenges to State finances
successfully addressed. To allow time to resolve certain budget differences an
interim appropriations act was enacted effective July 1, 1991; it included GRF
debt service and lease rental appropriations for the entire 1992-93 biennium,
while continuing most other appropriations for a month. Pursuant to the general
appropriations act for the entire biennium, passed on July 11, 1991, $200
million was transferred from the Budget Stabilization Fund (BSF, a cash and
budgetary management fund) to the GRF in FY 1992.

Based on updated results and forecasts in the course of that FY, both in light
of a continuing uncertain nationwide economic situation, there was projected,
and then timely addressed an FY 1992 imbalance in GRF resources and
expenditures. In response, the Governor ordered most State agencies to reduce
GRF spending in the last six months of FY 1992 by a total of approximately $184
million; the $100.4 million BSF balance and additional amounts from certain
other funds were transferred late in the FY to the GRF; and adjustments were
made in the timing of certain tax payments.

A significant GRF shortfall (approximately $520 million) was then projected
for FY 1993. It was addressed by appropriate legislative and administrative
actions, including the Governor's ordering $300 million in selected GRF spending
reductions and subsequent executive and legislative action (a combination of tax
revisions and additional spending reductions). The June 30, 1993 ending GRF
fund balance was approximately $111 million, of which, as a first step to BSF
replenishment, $21 million was deposited in the BSF.

None of the spending reductions were applied to appropriations needed for debt
service on or lease rentals relating to any State obligations.

The 1994-95 biennium presented a more affirmative financial picture. Based on
June 30, 1994 balances, an additional $260 million was deposited in the BSF.
The biennium ended June 30, 1995 with a GRF ending fund balance of $928 million,
of which $535.2 million was transferred into the BSF. The significant GRF fund
balance, after leaving in the GRF an unreserved and undesignated balance of $70
million, was transferred to the BSF, and other funds including school assistance
funds and, in anticipation of possible federal program changes, a human services
stabilization fund.

From a higher than forecast 1996-97 mid-biennium GRF fund balance, $100
million was transferred for elementary and secondary school computer network
purposes and $30 million to a new State transportation infrastructure fund.
Approximately $400.8 million served as a basis for temporary 1996 personal
income tax reductions aggregating that amount. The 1996-97 biennium-ending GRF
fund balance was $834.9 million. Of that, $250 million went to school building
construction and renovation, $94 million to the school computer network, $44.2
million for school textbooks and instructional materials and a distance learning
program, and $34 million to the BSF, and the $263 million balance to a State
income tax reduction fund.

The GRF appropriations act for the current 1998-99 biennium was passed on June
25, 1997 and promptly signed (after selective vetoes) by the Governor. All
necessary GRF appropriations for State debt service and lease rental payments
then projected for the biennium were included in that act. Subsequent
legislation increased the fiscal year 1999 GRF appropriation level for
elementary and secondary education, with the increase to be funded in part by
mandated small percentage reductions in State appropriations for various State
agencies and institutions. Expressly exempt from those reductions are all
appropriations for debt service, including lease rental payments.

The BSF had a December 2, 1998 balance of over $906 million.

The State's incurrence or assumption of debt without a vote of the people is,
with limited exceptions, prohibited by current State constitutional provisions.
The State may incur debt, limited in amount to $750,000, to cover casual
deficits or failures in revenues or to meet expenses not otherwise provided for.
The Constitution expressly precludes the State from assuming the debts of any
local government or corporation. (An exception is made in both cases for any
debt incurred to repel invasion, suppress insurrection or defend the State in
war.)

By 14 constitutional amendments approved from 1921 to date (the latest adopted
in 1995), Ohio voters authorized the incurrence of State debt and the pledge of
taxes or excises to its payment. At December 2, 1998, $1.12 billion (excluding
certain highway bonds payable primarily from highway use receipts) of this debt
was outstanding. The only such State debt at that date still authorized to be
incurred were portions of the highway bonds, and the following: (a) up to $100
million of obligations for coal research and development may be outstanding at
any one time ($26.7 million outstanding); (b) $240 million of obligations
previously authorized for local infrastructure improvements, no more than $120
million of which may be issued in any calendar year (over $1 billion
outstanding); and (c) up to $200 million in general obligation bonds for parks,
recreation and natural resources purposes which may be outstanding at any one
time ($85.1 million outstanding, with no more than $50 million to be issued in
any one year).

The electors in 1995 approved a constitutional amendment extending the local
infrastructure bond program (authorizing an additional $1.2 billion of State
full faith and credit obligations to be issued over 10 years for the purpose),
and authorizing additional highway bonds (expected to be payable primarily from
highway use receipts). The latter supersedes the prior $500 million
outstanding authorization, and authorizes not more than $1.2 billion to be
outstanding at any time and not more than $220 million to be issued in a fiscal
year.

The Constitution also authorizes the issuance of State obligations for certain
purposes, the owners of which do not have the right to have excises or taxes
levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, over $5.2 billion of
which were outstanding or awaiting delivery at December 2, 1998.

The State estimates that aggregate FY 1998 rental payments under various
capital lease and lease purchase agreements were approximately $9.1 million. In
recent years, State agencies have also participated in transportation and office
building projects that may have some local as well as State use and benefit, in
connection with which the State enters into lease purchase agreements with terms
ranging from 7 to 20 years. Certificates of participation, or special
obligation bonds of the State or a local agency, are issued that represent
fractionalized interests in or are payable from the State's anticipated
payments. The State estimates highest future FY payments under those agreements
(as of December 2, 1998) to be approximately $27.3 million (of which $23.6
million is payable from sources other than the GRF, such as federal highway
money distributions). State payments under all those agreements are subject to
biennial appropriations, with the lease terms being two years subject to renewal
if appropriations are made.

A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing.
The General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).

A 1994 constitutional amendment pledges the full faith and credit and taxing
power of the State to meeting certain guarantees under the State's tuition
credit program which provides for purchase of tuition credits, for the benefit
of State residents, guaranteed to cover a specified amount when applied to the
cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded essentially
from program revenues.)

State and local agencies issue obligations that are payable from revenues from
or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.

Local school districts in Ohio receive a major portion (state-wide aggregate
approximately 44% in recent years) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 119 districts (as
of December 2, 1998) from voter-authorized income taxes, for significant
portions of their budgets. Litigation, similar to that in other states, is
pending questioning the constitutionality of Ohio's system of school funding.
The Ohio Supreme Court has concluded that aspects of the system (including basic
operating assistance and the loan program referred to below) are
unconstitutional, and ordered the State to provide for and fund a system
complying with the Ohio Constitution, staying its order to permit time for
responsive corrective actions. The parties await eventual trial court decision
on the adequacy of steps taken to date by the State to enhance school funding
consistent with the Supreme Court decision. A small number of the State's 612
local school districts have in any year required special assistance to avoid
year-end deficits. A program has provided for school district cash need
borrowing directly from commercial lenders, with diversion of State subsidy
distributions to repayment if needed. Recent borrowings under this program
totalled $71.1 million for 29 districts in FY 1995 (including $29.5 million for
one), $87.2 million for 20 districts in FY 1996 (including $42.1 million for
one), $113.2 million for 12 districts in FY 1997 (including $90 million to one
for restructuring its prior loans), and $23.4 million for 10 districts in FY
1998.

Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they also
receive local government support and property tax relief moneys distributed by
the State.

For those few municipalities and school districts that on occasion have faced
significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to

eliminate deficits and cure any defaults. (Similar procedures have recently been
extended to counties and townships.) Since inception for municipalities in 1979,
these "fiscal emergency" procedures have been applied to 26 cities and villages;
for 19 of them the fiscal situation was resolved and the procedures terminated
(two cities are in preliminary "fiscal watch" status). As of December 2, 1998, a
1996 school district "fiscal emergency" provision was applied to six districts,
and 10 were on preliminary "fiscal watch" status.

At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions and
other local taxing districts. The Constitution has since 1934 limited to 1% of
true value in money the amount of the aggregate levy (including a levy for
unvoted general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general obligations
of subdivisions are payable from property taxes that are unlimited as to amount
or rate.

SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN PENNSYLVANIA STATE-SPECIFIC
OBLIGATIONS. The concentration of investments in Pennsylvania State-Specific
Obligations by the Pennsylvania Municipal Money Market and Pennsylvania Tax-Free
Income Portfolios raises special investment considerations. In particular,
changes in the economic condition and governmental policies of the Commonwealth
of Pennsylvania and its municipalities could adversely affect the value of those
Portfolios and their portfolio securities. This section briefly describes
current economic trends in Pennsylvania.

Although the General Fund of the Commonwealth (the principal operating fund
of the Commonwealth) experienced deficits in fiscal 1990 and 1991, tax increases
and spending decreases resulted in surpluses the following six years. As of June
30, 1997, the General Fund had a surplus of $1,365 million. A relatively high
proportion of persons 65 and older in the Commonwealth, court ordered increases
in healthcare reimbursement rates and higher correctional program costs place
increased pressures on the tax resources of the Commonwealth and its
municipalities. The Commonwealth's debt burden remains moderate. Employment
growth has shifted to the trade and service sectors, with losses in more high-
paid manufacturing positions. A new governor took office in January 1995, but
the Commonwealth has continued to show fiscal restraint.

Pennsylvania has historically been dependent on heavy industry, although
declines over the past thirty years in the coal, steel and railroad industries
have led to diversification of the Commonwealth's economy. Recent sources of
economic growth in Pennsylvania are in the service sector, including trade,
medical and health services, education and financial institutions. Agriculture
continues to be an important component of the Commonwealth's economic structure,
with nearly one-third of the Commonwealth's total land area devoted to cropland,
pasture and farm woodlands.

The population of Pennsylvania experienced a slight increase in the period
1988 through 1997, and has a high proportion of persons 65 or older. The
Commonwealth is highly urbanized, with almost 79% of the 1990 census population
residing in metropolitan statistical areas. The two largest metropolitan
statistical areas, those containing the Cities of Philadelphia and Pittsburgh,
together comprise approximately 44% of the Commonwealth's total population.

The Commonwealth utilizes the fund method of accounting and over 150 funds
have been established for purposes of recording receipts and disbursements of
the Commonwealth, of which the General Fund is the largest. Most of the
Commonwealth's operating and administrative expenses are payable from the
General Fund. The major tax sources for the General Fund are the sales tax, the
personal income tax and the corporate net income tax. Major expenditures of the
Commonwealth include funding for education, public health and welfare and
transportation.

The constitution of the Commonwealth provides that operating budget
appropriations of the Commonwealth may not exceed the estimated revenues and
available surplus in the fiscal year for which funds are appropriated. Annual
budgets are enacted for the General Fund (the principal operating fund of the
Commonwealth) and for certain special revenue funds which together represent the
majority of expenditures of the Commonwealth. Although a negative balance was
experienced applying generally accepted accounting principles ("GAAP") in the
General Fund for fiscal 1990 and 1991, tax increases and spending decreases have
resulted in surpluses in subsequent years; and as of June 30, 1997, the General
Fund had a surplus of $1,365 million. The deficit in the Commonwealth's
unreserved/undesignated funds also had been eliminated.

Certain litigation is pending against the Commonwealth that could adversely
affect the ability of the Commonwealth to pay debt service on its obligations
including suits relating to the following matters: (a) the ACLU has filed suit
in Federal court

demanding additional funding for child welfare services; the Commonwealth
settled a similar suit in the Commonwealth Court of Pennsylvania and is seeking
the dismissal of the federal suit, inter alia, because of that Appeals, the
----- ----
district court granted class certification to the ACLU. The parties are
negotiating a settlement; (b) in 1987, the Supreme Court of Pennsylvania held
the statutory scheme for county funding of the judicial system to be in conflict
with the constitution of the Commonwealth, but stayed judgment pending enactment
by the legislature of funding consistent with the opinion, and the legislature
has yet to consider legislation implementing the judgment. In 1992, a new action
in mandamus was filed seeking to compel the Commonwealth to comply with the
original decision; (c) litigation has been filed in both state and Federal court
by an association of rural and small schools and several individual school
districts and parents challenging the constitutionality of the Commonwealth's
system for funding local school districts -- the Federal case has been stayed
pending resolution of the state case. The State court dismissed the petitioner's
claim, and held that the Commonwealth's system of school funding is
Constitutional. Petitioners have appealed; (d) both the Commonwealth and the
City of Philadelphia are involved in cases currently before the Pennsylvania
Supreme Court that may result in their being required to fund remedies for the
unintentional racial segregation in the Philadelphia public schools; and (e) the
School District of Philadelphia and others have brought suit in Federal court to
declare the Commonwealth's system of funding public schools to be racially
discriminatory and therefore illegal.

The City of Philadelphia (the "City") experienced severe financial
difficulties during the early 1990's which impaired its access to public credit
markets. The City experienced a series of General Fund deficits for fiscal
years 1988 through 1992. Legislation was enacted in 1991 to create an
Intergovernmental Cooperation Authority (the "Authority") to provide deficit
reduction financing and fiscal oversight for Philadelphia. In order for the
Authority to issue bonds on behalf of the City, the City and the Authority
entered into an intergovernmental cooperation agreement providing the Authority
with certain oversight powers with respect to the fiscal affairs of the City.
Philadelphia currently is operating under a five year plan approved by the
Authority on June 8, 1998. The unaudited balance of the City's General Fund as
of June 30, 1998 was approximately $169.8 million.

The Authority's power to issue further bonds to finance capital projects or
deficit expired on December 31, 1994, and its power to issue debt to finance a
cash flow deficit expired December 31, 1996. Its ability to refund outstanding
bonds is unrestricted. The Authority had $1,055 million in special revenue
bonds outstanding as of June 30, 1998.

Most recently, Moody's has rated the long-term general obligation bonds of
the Commonwealth "Aa3," Standard & Poor's has rated such bonds "AA" and Fitch
has rated such bonds "AA." There can be no assurance that the economic
conditions on which these ratings are based will continue or that particular
bond issues may not be adversely affected by changes in economic or political
conditions.

SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN NORTH CAROLINA STATE-
SPECIFIC OBLIGATIONS. The concentration of investments in North Carolina State-
Specific Obligations by the North Carolina Municipal Money Market Portfolio
raises special investment considerations. In particular, changes in the economic
condition and governmental policies of North Carolina and its political
subdivisions, agencies, instrumentalities, and authorities could adversely
affect the value of the Portfolio and its portfolio securities. This section
briefly describes current economic trends in North Carolina.

The State of North Carolina has three major operating funds: the General
Fund, the Highway Fund and the Highway Trust Fund. North Carolina derives most
of its revenue from taxes, including individual income tax, corporation income
tax, sales and use taxes, corporation franchise tax, alcoholic beverage tax,
insurance tax and tobacco products tax. State sales taxes on food, as well as
the inheritance and soft drink taxes, are being phased out. North Carolina
receives other non-tax revenues which are also deposited in the General Fund.
The most important are Federal funds collected by North Carolina agencies,
university fees and tuition, interest earned by the North Carolina Treasurer on
investments of General Fund moneys and revenues from the judicial branch. The
proceeds from the motor fuel tax, highway use tax and motor vehicle license tax
are deposited in the Highway Fund and the Highway Trust Fund.

Fiscal year 1997 ended with a positive General Fund balance of
approximately $874.8 million. Along with additional reserves, $135 million was
reserved in the Reserve for Repair and Renovation of State Facilities, in
addition to a supplemental reserve of $39.3 million for repairs and renovations
(bringing the total reserve to $221.2 million after prior withdrawals). An
additional $49.4 million was transferred to the Clean Water Management Trust
Fund (bringing the total reserve to $49.4 million after prior withdrawals) and
$115 million and $156 million were reserved in newly-created Disaster Relief and
Intangible Tax Refund Reserves, respectively. The Disaster Relief Reserve was
used to cover disaster relief funds spent during fiscal year 1997. An additional
$61 million was reserved for the State to acquire the shares of the North
Carolina Railroad Company not held by the State. No additional amounts were
transferred to the Savings Reserve for the year (the existing balance of $500.9
million having met the statutory reserve requirements). After additional
reserves, the unreserved General Fund balance at the end of fiscal year 1997 was
approximately $318.7 million.

Fiscal year 1998 ended with a positive General Fund balance of
approximately $784.2 million. Along with additional reserves, $145 million was
reserved in the Repairs and Renovations Reserve Account (bringing the total
reserve to $174.2 million after prior withdrawals). An additional $47.4 million
was placed in the Clean Water Management Trust Fund. The General Assembly
reserved $55 million to fund public school employee performance bonuses,
longevity payments, school bus purchases and school technology purchases. $21.6
million was transferred to the Savings Rescue Account to meet the statutory cap
at $522.5 million. After additional reserves, the unreserved General Fund
balance at the end of fiscal year 1998 was approximately $515.2 million.

The foregoing results are presented on a budgetary basis. Accounting
principles used to develop data on a budgetary basis differ significantly from
those principles used to present financial statements in accordance with
generally accepted accounting principles (GAAP). Based on a modified accrual
basis (GAAP), the General Fund balance at June 30, 1997 and 1998 was
approximately $1,704 million and $1,665 million, respectively.

On October 28, 1998, the North Carolina General Assembly adopted the
biennium budget for 1998 to 2000. The $12.6 billion budget for fiscal year 1999
included over $100 million in new spending for the state's universities and
community colleges, over $90 million in new spending for health and human
services, including $42.5 million for expansion of North Carolina's Smart Start
program for preschool children, and almost $30 million in new spending on law
enforcement. The legislature also approved teacher pay raises averaging 6.5
percent.

The General Assembly also took action to reduce some taxes, including
elimination of the sales tax on food (estimated cost $185.5 million 1999-2000)
and the inheritance tax (estimated cost $52.5 million 1999-2000).

The North Carolina budget is based upon a number of existing and assumed
State and non-State factors, including State and national economic conditions,
international activity, Federal government policies and legislation and the
activities of the State's General Assembly. Such factors are subject to change
which may be material and affect the budget. The Congress of the United States
is considering a number of matters affecting the federal government's
relationship with State governments that, if enacted into law, could affect
fiscal and economic policies of the states, including North Carolina.

During recent years North Carolina has moved from an agricultural to a
service and goods producing economy. According to the North Carolina Employment
Security Commission (the "Commission"), in July 1997, North Carolina ranked
tenth among the states in non-agricultural employment and eighth in
manufacturing employment. According to the Commission, for the past several
years, North Carolina's unemployment rate has consistently been below the
national average. The Commission estimated North Carolina's seasonally adjusted
unemployment rate in October 1998 to be 3.3% of the labor force, as compared
with an unemployment rate of 4.2% nationwide.

The following are certain cases pending in which the State of North
Carolina faces the risk of either a loss of revenue or an unanticipated
expenditure which, in the opinion of the North Carolina Department of State
Treasurer, would not materially adversely affect the State's ability to meet its
financial obligations:

1. Swanson v. State of North Carolina C State Tax Refunds - Federal
Retirees. In Davis v. Michigan (1989), the United States Supreme Court ruled
-----------------
that a Michigan income tax statute which taxed federal retirement benefits while
exempting those paid by state and local governments violated the constitutional
doctrine of intergovernmental tax immunity. At the time of the Davis decision,
-----
North Carolina law contained similar exemptions in favor of state and local
retirees. Those exemptions were repealed prospectively, beginning with the 1989
tax year. All public pension and retirement benefits are now entitled to a
$4,000 annual exclusion.

Following Davis, federal retirees filed a class action suit in federal
-----
court in 1989 seeking damages equal to the North Carolina income tax paid on
federal retirement income by the class members (Swanson). A companion suit was
-------
filed in state court in 1990. The complaints alleged that the amount in
controversy exceeded $140 million. The North Carolina Department of Revenue
estimate of refunds and interest liability is $280.89 million as of June 30,
1994. In 1991, the North Carolina Supreme Court ruled in favor of the State in
the state court action, concluding that Davis could only be applied
-----
prospectively and that the taxes collected from the federal retirees were thus
not improperly collected. In 1993, the United States Supreme Court vacated that
decision and remanded the case back to the North Carolina Supreme Court. The
North Carolina Supreme Court then ruled in favor of the State on the grounds
that the federal retirees had failed to comply with state procedures for
challenging unconstitutional taxes. Plaintiffs petitioned the United States
Supreme Court for review of that decision, which petition was denied. The United
States District Court ruled in favor of the defendants in the companion federal
case, and a petition for reconsideration was denied. Plaintiffs appealed to the
United States Court of Appeals, which concurred with the lower court's ruling.
The United States Supreme Court rejected an appeal, ruling that the lawsuit was
a state matter, leaving the North Carolina Supreme Court's ruling in force.
Despite these victories in court, the General Assembly in its 1996 Special
Session adopted legislation allowing for a refund of taxes for federal retirees.
Effective for tax years beginning on or after January 1, 1996, federal retirees
are entitled to a North Carolina income tax credit for taxes paid on their
pension benefits during tax years 1985 through 1988. In the alternative, a
partial refund may be claimed in lieu of a credit for eligible taxpayers.

2. Patton v. State of North Carolina and Bailey v. State of North
Carolina C State Tax Refunds - Federal and State Retirees.

An additional lawsuit was filed in 1995 in State Court by federal
pensioners to recover State income taxes paid on federal retirement benefits
(Patton). Theis case grew out of a claim by federal pensioners in the original
------
federal court case in Swanson. In the new lawsuit, the plaintiffs allege that
-------
when the State granted an increase in retirement benefits to State retirees in
the same legislation that equalized tax treatment between state and federal
retirees, the increased benefits to State retirees constituted an indirect
violation of Davis. The lawsuit seeks a refund of taxes paid by federal retirees
-----
on federal retirement benefits received in the years 1989 through 1993 and
refunds or monetary relief sufficient to equalize the alleged on-going
discriminatory treatment for those years.

State and local governmental retirees filed a class action suit in 1990 as
a result of the repeal of the income tax exemptions for state and local
government retirement benefits. The original suit was dismissed after the North
Carolina Supreme Court ruled in 1991 that the plaintiffs had failed to comply
with state law requirements for challenging unconstitutional taxes and the
United States Supreme Court denied review. In 1992, many of the same plaintiffs
filed a new lawsuit alleging essentially the same claims, including breach of
contract, unconstitutional impairment of contract rights by the State in taxing
benefits that were allegedly promised to be tax-exempt and violation of several
state constitutional provisions.

On May 31, 1995 the Superior Court issued an order ruling in favor of the
plaintiffs. Under the terms of the order, the Superior Court found that the act
of the General Assembly that repealed the tax exemption on State and local
government retirement benefits is null, void, and unenforceable and that
retirement benefits which were vested before August 1989 are exempt from
taxation. The North Carolina Attorney General has appealed this order, which
appeal is pending in the North Carolina Supreme Court.

In June 1998, the plaintiff classes in the Bailey and Patton cases reached
a tentative settlement with the State of North Carolina. Under the terms of the
settlement, the General Assembly will appropriate $400,000,000 in the 1998-1999
fiscal year, and $399,000,000 by July 15, 1999 in the 1999-2000 fiscal year, to
a settlement fund. Amounts in the fund will be paid to the state, local and
federal retirees in the cases. The terms of the settlement provide that such
payments will completely extinguish all of the state's liability to the retirees
arising from the taxation of state, local and federal retirement income and
benefits from 1989 through 1997.

The tentative court settlement was made subject to the appropriation of
funds by the General Assembly, and to court approval following notice to the
class members. The $400,000,000 appropriation was made by action of the General
Assembly in September, 1998, and on October 7, 1998, the court entered an order
approving the settlement. In order to achieve final consummation of the
settlement, the General Assembly must appropriate the $399,000,000 amount for
the 1 999-2000 fiscal year at its 1999 session, which begins in January,
1999.

In its 1996 Short Session, the North Carolina General Assembly approved
additional North Carolina general obligation bonds in the amount of $950 million
for highways and $1.8 billion for schools. These bonds were approved by the
voters of the State in November, 1996. In 1997 and 1998, North Carolina issued
a total of $900 million of the authorized school bonds (Public School Building
Bonds). In November 1997, North Carolina issued $250 million of the authorized
highway bonds (Highway Bonds). The offering of the remaining $1.6 billion of
these authorized bonds is anticipated to occur over the next one to four
years.

On November 3, 1998, North Carolina voters approved the issuance of
$800,000,000 in clean water bonds and $200,000,000 natural gas facilities bonds.
The clean water bonds will provide grants and loans for needed water and sewer
improvement projects for the state's municipalities, and fund programs to reduce
pollution in the state's waterways. The natural gas bond issue will provide
grants, loans and other financing for local distribution companies or state or
local government agencies to build natural gas facilities, in part to help
attract industry to the state's rural regions.

Currently, Moody's, S&P and Fitch rate North Carolina general obligation
bonds "Aaa," "AAA," and "AAA," respectively. See Appendix A.

SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN VIRGINIA STATE-SPECIFIC
OBLIGATIONS. The Virginia State-Specific Money Market Portfolio will invest
primarily in Virginia State-Specific Obligations. For this reason, the
Portfolio is affected by political, economic, regulatory or other developments
that constrain the taxing, revenue-collecting and spending authority of Virginia
issuers or otherwise affect the ability of Virginia issuers to pay interest,
principal or any premium. The following information constitutes only a brief
summary of certain of these developments and does not purport to be a complete
description of them. The information has been obtained from recent official
statements prepared by the Commonwealth of Virginia relating to its securities,
and no independent investigation has been undertaken to verify its accuracy.
Moreover, the information relates only to the state itself and not to the
numerous special purpose or local government units whose issues may also be held
by the Portfolio. The credits represented by such issues may be affected by a
wide variety of local factors or structuring concerns, and no disclosure is made
here relating to such matters.

The rate of economic growth in the Commonwealth of Virginia has increased
steadily over the past decade. Per capita income in Virginia has been
consistently above national levels during that time. The services sector in
Virginia generates the largest number of jobs, followed by wholesale and retail
trade, manufacturing and state and local government. Because of Northern
Virginia, with its proximity to Washington, D.C. and Hampton Roads, which has
the nation's largest concentration of military installations, the Federal
government has a greater economic impact on Virginia relative to its size than
any state other than Alaska and Hawaii.

According to statistics published by the U.S. Department of Labor, Virginia
typically has one of the lowest unemployment rates in the nation. This is
generally attributed to the balance among the various sectors represented in the
economy. Virginia is one of twenty states with a right-to-work law and is
generally regarded as having a favorable business climate marked by few strikes
or work stoppages. Virginia is also one of the least unionized among the
industrialized states.

Virginia's state government operates on a two-year budget. The Constitution
vests the ultimate responsibility and authority for levying taxes and
appropriating revenue in the General Assembly, but the Governor has broad
authority to manage the budgetary process. Once an appropriation act becomes
law, revenue collections and expenditures are constantly monitored by the
Governor, assisted by the Secretary of Finance and the Department of Planning
and Budget, to ensure that a balanced budget is maintained. If projected revenue
collections fall below amounts appropriated at any time, the Governor must
reduce expenditures and withhold allotments of appropriations (other than for
debt service and other specified purposes) to restore balance. An amendment to
the Constitution, effective January 1, 1993, established a Revenue Stabilization
Fund. This Fund is used to offset a portion of anticipated shortfalls in
revenues in years when appropriations based on previous forecasts exceed
expected revenues in subsequent forecasts. The Revenue Stabilization Fund
consists of an amount not to exceed 10 percent of Virginia's average annual tax
revenues derived from taxes on income and retail sales for the three preceding
fiscal years.

General Fund revenues are principally comprised of direct taxes. In recent
fiscal years, most of the total tax revenues have been derived from five major
taxes imposed by Virginia on individual and fiduciary income, sales and use,
corporate income, public service corporations and premiums of insurance
companies.

In September 1991, the Debt Capacity Advisory Committee was created by the
Governor through an executive order. The committee is charged with annually
estimating the amount of tax-supported debt that may prudently be authorized,
consistent with the financial goals, capital needs and policies of Virginia.
The committee annually reviews the outstanding debt of all agencies,
institutions, boards and authorities of Virginia for which Virginia has either a
direct or indirect pledge of tax revenues or moral obligation. The Committee
provides its recommendations on the prudent use of such obligations to the
Governor and the General Assembly.

The Constitution of Virginia prohibits the creation of debt by or on behalf
of Virginia that is backed by Virginia's full faith and credit, except as
provided in Section 9 of Article X. Section 9 of Article X contains several
different provisions for the issuance of general obligation and other debt, and
Virginia is well within its limit for each:

Section 9(a)(2) provides that the General Assembly may incur general
obligation debt to meet certain types of emergencies, subject to limitations on
amount and duration; to meet casual deficits in the revenue or in anticipation
of the collection of

revenues of Virginia; and to redeem a previous debt obligation of Virginia.
Total indebtedness issued pursuant to this Section may not exceed 30 percent of
an amount equal to 1.15 times the annual tax revenues derived from taxes on
income and retail sales, as certified by the Auditor of Public Accounts for the
preceding fiscal year.

Section 9(b) provides that the General Assembly may authorize the creation
of general obligation debt for capital projects. Such debt is required to be
authorized by an affirmative vote of a majority of each house of the General
Assembly and approved in a statewide election. The outstanding amount of such
debt is limited to an amount equal to 1.15 times the average annual tax revenues
derived from taxes on income and retail sales, as certified by the Auditor of
Public Accounts for the three preceding fiscal years less the total amount of
bonds outstanding. The amount of 9(b) debt that may be authorized in any single
fiscal year is limited to 25 percent of the limit on all 9(b) debt less the
amount of 9(b) debt authorized in the current and prior three fiscal years.

Section 9(c) provides that the General Assembly may authorize the creation
of general obligation debt for revenue-producing capital projects (so-called
"double-barrel" debt). Such debt is required to be authorized by an affirmative
vote of two-thirds of each house of the General Assembly and approved by the
Governor. The Governor must certify before the enactment of the authorizing
legislation and again before the issuance of the debt that the net revenues
pledged are expected to be sufficient to pay principal of and interest on the
debt. The outstanding amount of 9(c) debt is limited to an amount equal to 1.15
times the average annual tax revenues derived from taxes on income and retail
sales, as certified by the Auditor of Public Accounts for the three preceding
fiscal years. While the debt limits under Sections 9(b) and 9(c) are each
calculated as the same percentage of the same average tax revenues, these debt
limits are separately computed and apply separately to each type of debt.

Section 9(d) provides that the restrictions of Section 9 are not applicable
to any obligation incurred by Virginia or any of its institutions, agencies or
authorities if the full faith and credit of Virginia is not pledged or committed
to the payment of such obligation. There are currently outstanding various types
of such 9(d) revenue bonds. Certain of these bonds, however, are paid in part or
in whole from revenues received as appropriations by the General Assembly from
general tax revenues, while others are paid solely from revenues of the
applicable project. The repayment of debt issued by the Virginia Public Building
Authority, the Virginia Port Authority, the Virginia College Building Authority
Equipment Leasing Program, The Innovative Technology Authority and the Virginia
Biotechnology Research Park Authority is supported in large part by General Fund
appropriations.

The Commonwealth Transportation Board is a substantial issuer of bonds for
highway projects. These bonds are secured by and are payable from funds
appropriated by the General Assembly from the Transportation Trust Fund for such
purpose. The Transportation Trust Fund was established by the General Assembly
in 1986 as a special non-reverting fund administered and allocated by the
Transportation Board to provide increased funding for construction, capital and
other needs of state highways, airports, mass transportation and ports. The
Virginia Port Authority has also issued bonds that are secured by a portion of
the Transportation Trust Fund.

Virginia is involved in numerous leases that are subject to appropriation
of funding by the General Assembly. Virginia also finances the acquisition of
certain personal property and equipment through installment purchase agreements.

Bonds issued by the Virginia Housing Development Authority, the Virginia
Resources Authority and the Virginia Public School Authority are designed to be
self-supporting from their individual loan programs. A portion of the Virginia
Housing Development Authority and Virginia Public School Authority bonds and all
of the Virginia Resources Authority bonds are secured in part by a moral
obligation pledge of Virginia. Should the need arise, Virginia may consider
funding deficiencies in the respective debt service reserves for such moral
obligation debt. To date, none of these authorities has advised Virginia that
any such deficiencies exist.

Local government in Virginia is comprised of 95 counties, 40 incorporated
cities, and 190 incorporated towns. Virginia is unique among the several states
in that cities and counties are independent, and their land areas do not
overlap. The largest expenditures by local governments in Virginia are for
education, but local governments also provide other services such as water and
sewer, police and fire protection and recreational facilities. The Virginia
Constitution imposes numerous restrictions on local indebtedness, affecting both
its incurrence and amount.

In Davis v. Michigan (decided March 28, 1989), the United States Supreme
Court ruled unconstitutional states' exempting from state income tax the
retirement benefits paid by the state or local governments without exempting
retirement benefits paid by the Federal government. At that time, Virginia
exempted state and local retirement benefits but not Federal retirement
benefits. At a Special Session held in April 1989, the General Assembly repealed
the exemption of state and local retirement benefits. Following Davis, at least
five suits, some with multiple plaintiffs, for refunds of Virginia income taxes,
were filed by Federal retirees. These suits were consolidated under the name of
Harper v. Virginia Department of Taxation.

In a Special Session, the Virginia General Assembly on July 9, 1994, passed
emergency legislation to provide payments in five annual installments to Federal
retirees in a settlement of the retirees' claims as a result of Davis. In 1995
and 1996, the General Assembly passed legislation allowing more retirees to
participate in the settlement. As of June 30, 1997, the estimated total cost to
Virginia for the settlement was approximately $316.2 million.

On September 15, 1995, the Supreme Court of Virginia rendered its decision
in Harper, reversing the judgment of the trial court, entering final judgment in
favor of the taxpayers, and directing that the amounts unlawfully collected be
refunded with statutory interest. Virginia issued refund checks on November 9,
1995, and interest stopped accruing as of November 3, 1995. The cost of
refunding all Virginia income taxes paid on Federal government pensions for
taxable years 1985, 1986, 1987 and 1988 to Federal government pensioners who
opted out of the settlement was approximately $78.7 million, including interest
earnings.

The total cost of refunding all Virginia income taxes paid on Federal
pensions on account of the settlement (approximately $316.2 million) and the
judgment ($78.7 million) is approximately $394.9 million, of which $329 million
($250.2 million in respect of the settlement and the entire $78.7 million in
respect of the judgment) has been paid as of June 30, 1998, leaving $66 million
payable in respect of the settlement. During the 1998 Session of the Virginia
General Assembly, legislation was approved providing for early payment on the
remaining balance on September 20, 1998 (subject to appropriation), provided
that undesignated and unreserved general fund balances were met on August 15,
1998. Since such balances were not met, a special installment payment of the
remaining balance (approximately $34.88 million) was made on September 30, 1998,
with a payment of the final balance ($31.1 million) occurring no later than
March 31, 1999.

Most recently, Moody's has rated the long-term general obligation bonds of
Virginia Aaa, and Standard & Poor's has rated such bonds AAA. There can be no
assurance that the economic conditions on which these ratings are based will
continue or that particular bond issues may not be adversely affected by changes
in economic or political conditions.

SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN NEW JERSEY STATE-SPECIFIC
OBLIGATIONS. The following information constitutes only a brief summary, does
not purport to be a complete description and is largely based on information
drawn from official statements relating to securities offerings of New Jersey
municipal obligations available as of the date of this Statement of Additional
Information. The accuracy and completeness of the information contained in such
offering statements has not been independently verified.

State Finance/Economic Information.
----------------------------------

New Jersey is the ninth largest state in population and the fifth smallest in
land area. With an average of 1,077 people per square mile, it is the most
densely populated of all the states. New Jersey's economic base is diversified,
consisting of a variety of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture.

Business investment expenditures and consumer spending have increased
substantially in New Jersey. Capital and consumer spending may continue to rise
due to the sustained character of economic growth and the interest-sensitive
homebuilding industry may continue to provide stimulus in New Jersey. It is
expected that the employment and income growth that has and is taking place will
lead to further growth in consumer outlays. Reasons for continued optimism in
New Jersey include increasing employment levels and a higher-than-national level
of per capita personal income. Also, several expansions of existing hotel-
casinos and plans for several new casinos in Atlantic City will mean additional
job creation.

While growth is likely to be slower than in the nation, the locational
advantages that have served New Jersey well for many years will still be there.
Structural changes that have been going on for years can be expected to
continue, with job creation concentrated most heavily in the service
industries.

New Jersey's Budget and Appropriation System. New Jersey operates on a
--------------------------------------------
fiscal year ending on June 30. The General fund is the fund into which all New
Jersey revenues not otherwise restricted by statute are deposited and from which
appropriations are made. The largest part of the total financial operations of
New Jersey is accounted for in the General Fund, which includes revenues
received from taxes and unrestricted by statute, most federal revenues, and
certain miscellaneous revenue items. The Appropriation Acts enacted by the New
Jersey Legislature and approved by the Governor provide the basic framework for
the operation of the General Fund. The undesignated General Fund balance at year
end for fiscal year 1995 was $569.2 million, for fiscal year 1996 was $442.0
million and for fiscal year 1997 was 280.5 million. For fiscal year 1998, the
balance in the undesignated General Fund is estimated to be $143.9 million,
subject to change upon completion of the year-end audit. The estimated balance
for fiscal year 1999 is $198.9 million, based on the amounts contained in the
fiscal year 1999 Appropriations Act. The fund balances are available for
appropriation in succeeding fiscal years.

Should revenues be less than the amount anticipated in the budget for a
fiscal year, the Governor may by statutory authority prevent any expenditure
under any appropriation. No supplemental appropriation may be enacted after
adoption of an appropriation act except where there are sufficient revenues on
hand or anticipated to meet such appropriation. In the past when actual revenues
have been less than

the amount anticipated in the budget, the Governor has exercised plenary powers
leading to, among other actions, a hiring freeze for all New Jersey departments
and discontinuation of programs for which appropriations were budgeted but not
yet spent.

General Obligation Bonds. New Jersey finances capital projects primarily
------------------------
through the sale of its general obligation bonds. These bonds are backed by the
full faith and credit of New Jersey. Tax revenues and certain other fees are
pledged to meet the principal and interest payments required to pay the debt
fully.

The aggregate outstanding general obligation bonded indebtedness of New
Jersey as of June 30, 1998 was $3.5729 billion. The appropriation for the debt
service obligation on outstanding indebtedness is $501.1 million for fiscal year
1998.

In addition to payment from bond proceeds, capital construction can also be
funded by appropriation of current revenues on a pay-as-you-go basis. In fiscal
year 1999 the amount appropriated to this purpose is $615.6 million.

Tax and Revenue Anticipation Notes. In fiscal year 1992 New Jersey
----------------------------------
initiated a program under which it issued tax and revenue anticipation notes to
aid in providing effective cash flow management to fund imbalances which occur
in the collection and disbursement of the General Fund and Property Tax Relief
Fund revenues. Such tax and revenue anticipation notes do not constitute a
general obligation of New Jersey or a debt or liability within the meaning of
the New Jersey Constitution. Such notes constitute special obligations of New
Jersey payable solely from moneys on deposit in the General Fund and Property
Tax Relief Fund and are legally available for such payment.

"Moral Obligation" Financing. The authorizing legislation for certain New
----------------------------
Jersey entities provides for specific budgetary procedures with respect to
certain obligations issued by such entities. Pursuant to such legislation, a
designated official is required to certify any deficiency in a debt service
reserve fund maintained to meet payments of principal

of and interest on the obligations, and a New Jersey appropriation in the amount
of the deficiency is to be made. However, the New Jersey Legislature is not
legally bound to make such an appropriation. Bonds issued pursuant to
authorizing legislation of this type are sometimes referred to as "moral
obligation" bonds. There is no statutory limitation on the amount of "moral
obligations" bonds which may be issued by eligible New Jersey entities. As of
June 30, 1998, outstanding "moral obligation" bonded indebtedness issued by New
Jersey entities totaled $658,084,400 and maximum annual debt service subject to
"moral obligation" is $81,577,873.

New Jersey Housing and Mortgage Finance Agency. Neither the New Jersey
----------------------------------------------
Housing and Mortgage Finance Agency nor its predecessors, the New Jersey Housing
Finance Agency and the New Jersey Mortgage Finance Agency, have had a deficiency
in a debt service reserve fund which required New Jersey to appropriate funds to
meet its "moral obligation". It is anticipated that this agency's revenues will
continue to be sufficient to cover debt service on its bonds.

South Jersey Port Corporation. New Jersey has previously provided the South
-----------------------------
Jersey Port Corporation (the "Corporation") with funds to cover all debt service
and property tax requirements, when earned revenues are anticipated to be
insufficient to cover these obligations. For calendar years 1990 through 1998,
New Jersey has made appropriations totalling $47,785,848.25 which covered
deficiencies in revenues of the Corporation, for debt service and property tax
payments.

Higher Education Assistance Authority. The Higher Education Assistance
-------------------------------------
Authority ("HEAA") has not had a revenue deficiency which required New Jersey to
appropriate funds to meet its "moral obligation". It is anticipated that the
HEAA's revenues will be sufficient to cover debt service on its bonds.

Obligations Guaranteed by New Jersey. The New Jersey Sports and Exposition
------------------------------------
Authority ("NJSEA") has issued New Jersey guaranteed bonds of which $111,910,000
are outstanding as of June 30, 1998. To date, the NJSEA has not had a revenue
deficiency requiring New Jersey to make debt service payments pursuant to its
guarantee. It is anticipated that the NJSEA's revenues will continue to be
sufficient to pay debt service on these bonds without recourse to New Jersey's
guarantee.

Obligations Supported by New Jersey Revenue Subject to Annual Appropriation.
---------------------------------------------------------------------------
New Jersey has entered into a number of leases and contracts described below
(collectively, the "Agreements") with several governmental authorities to secure
the financing of various New Jersey projects. Under the terms of the
Agreements, New Jersey has agreed to make payments equal to the debt service on,
and other costs related to, the obligations sold to finance the projects. New
Jersey's obligation to make payments under the Agreements is subject to and
dependent upon annual appropriations being made by the New Jersey Legislature
for such purposes. The New Jersey Legislature has no legal obligation to enact
such appropriations, but has done so to date for all such obligations.

New Jersey Economic Development Authority. Pursuant to legislation, the New
-----------------------------------------
Jersey Economic Development Authority ("EDA") has been authorized to issue
Economic Recovery Bonds, State Pension Funding Bonds and Market Transition
Facility Bonds. The Economic Recovery Bonds have been issued pursuant to
legislation enacted during 1992 to finance various economic development
purposes. Pursuant to that legislation, the EDA and the New Jersey Treasurer
entered into an agreement through which the EDA has agreed to undertake the
financing of certain projects and the New Jersey Treasurer has agreed to credit
to the Economic Recovery Fund from the General Fund amounts equivalent to
payments due to New Jersey under an agreement with the Port Authority of New
York and New Jersey subject to appropriation by the New Jersey Legislature.

The State Pension Funding Bonds have been issued pursuant to legislation
enacted in June 1997 to pay a portion of New Jersey's unfunded accrued pension
liability for its retirement system, which together with amounts derived from
the revaluation of pension assets pursuant to companion legislation enacted at
the same time, will be sufficient to fully fund the unfunded accrued pension
liability.

The Market Transition Facility Bonds have been issued pursuant to legislation
enacted in June 1994 to pay the current and anticipated liabilities and expenses
of the Market Transition Facility, which issued private passenger automobile
insurance policies for drivers who could not be insured by private insurance
companies on a voluntary basis.

In addition, New Jersey has entered into a number of leases with the EDA
relating to the financing of certain real property, office buildings and
equipment for (i) the New Jersey Performing Arts Center; (ii) Liberty State Park
in the City of Jersey City; (iii) various office buildings located in Trenton
known as the Trenton Office Complex; (iv) a facility located in Trenton; and (v)
certain energy saving equipment installed in various New Jersey office
buildings. The rental payments required to be made by New Jersey under these
lease agreements are sufficient to pay debt service on the bonds issued by the
EDA to finance the acquisition and construction of such projects and other
amounts payable to the EDA, including certain administrative expenses of the
EDA.

New Jersey Building Authority. Legislation enacted in 1981 established the New
-----------------------------
Jersey Building Authority ("NJBA") to undertake the acquisition, construction,
renovation and rehabilitation of various New Jersey office buildings, historic
buildings, and correctional facilities. The NJBA finances the cost of such
projects through the issuance of bonds, the payment of debt service on which is
made pursuant to a lease between the NJBA and New Jersey.

New Jersey Educational Facilities Authority. The New Jersey Educational
-------------------------------------------
Facilities Authority issues bonds pursuant to three separate legislative
programs, enacted in 1993 and 1997, to finance (i) the purchase of equipment to
be leased to institutions of higher learning; (ii) grants to New Jersey's public
and private institutions of higher education for the development, construction
and improvement of instructional, laboratory, communication and research
facilities; and (iii) grants to public and private institutions of higher
education to develop a technology infrastructure within and among the State's
institutions of higher education.

New Jersey Sports and Exposition Authority. Legislation enacted in 1992
------------------------------------------
authorizes the New Jersey Sports and Exposition Authority (the "NJSEA") to issue
bonds for various purposes payable from a contract between the NJSEA and the New
Jersey Treasurer (the "NJSEA State Contract"). Pursuant to the NJSEA State
Contract, the NJSEA undertakes certain projects and the New Jersey Treasurer
credits to the NJSEA amounts from the General Fund sufficient to pay debt
service and other costs related to the bonds.

State Transportation System Bonds. In July 1994, New Jersey created the New
---------------------------------
Jersey Transportation Trust Fund Authority (the "TTFA"), an instrumentality of
New Jersey pursuant to the New Jersey Transportation Trust Fund Authority Act of
1984, as amended (the "TTFA Act") for the purpose of funding a portion of New
Jersey's share of the cost of improvements to its transportation system.
Pursuant to the TTFA Act, the principal amount of the TTFA's bonds, notes or
other obligations which may be issued in any fiscal year generally may not
exceed $700 million plus amounts carried over from prior fiscal years. The debt
issued by the TTFA are

special obligations of the TTFA payable from a contract among the TTFA, the New
Jersey Treasurer and the Commissioner of Transportation.

New Jersey Transit Corporation Hudson-Bergen Light Rail Transit System. The
----------------------------------------------------------------------
TTFA has entered into a Standby Deficiency Agreement (the "Standby Deficiency
Agreement") with the trustee for grant anticipation notes (see "GANS") issued by
New Jersey Transit Corporation ("NJT") for the financing of the construction of
the Hudson-Bergen Light Rail Transit System. The GANS are primarily payable
from federal grant monies. To the extent that the GANS are not paid by NJT from
federal grant monies, the GANS are payable by the TTFA pursuant to the Standby
Deficiency Agreement. To date, federal grant payments have been sufficient such
that the TTFA has not been required to make payments pursuant to the Standby
Deficiency Agreement.

State of New Jersey Certificates of Participation. Beginning in April 1984,
-------------------------------------------------
New Jersey, acting through the Director of the Division of Purchase and
Property, has entered into a series of lease purchase agreements which provide
for the acquisition of equipment, services and real property to be used by
various departments and agencies of New Jersey. Certificates of Participation
in such lease purchase agreements have been issued. A Certificate of
Participation represents a proportionate interest of the owner thereof in the
lease payments to be made by New Jersey under the terms of the lease purchase
agreement.

New Jersey Supported School and County College Bonds. Legislation provides for
----------------------------------------------------
future appropriations for New Jersey Aid to local school districts equal to debt
service on bonds issued by such local school districts for construction and
renovation of school facilities (P.L. 1968, c. 177; P.L. 1971, c. 10; and P.L.
1978, c. 74) and for New Jersey Aid to counties equal to debt service on bonds
issued by counties for construction of county college facilities (P.L. 1971, c
12, as amended). The New Jersey Legislature has no legal obligations to make
such appropriations, but has done so to date for all obligations issued under
these laws.

Community Mental Health Loan Program. The EDA issues revenue bonds from time
------------------------------------
to time on behalf of non-profit community mental health service providers. The
payment of debt service on these revenue bonds as well as the payment of certain
other provider expenses is made by New Jersey pursuant to service contracts
between the State Department of Human Services and these providers. The
contracts have one year terms, subject to annual renewal.

State Pension Funding Bonds. Legislation enacted in June 1997 authorizes the
---------------------------
EDA to issue bonds to pay a portion of New Jersey's unfunded accrued pension
liability for New Jersey's retirement system (the "Unfunded Accrued Pension
Liability"), which together with amounts derived from the revaluation of pension
assets pursuant to companion legislation enacted at the same time, will be
sufficient to fully fund the Unfunded Accrued Pension Liability. The Unfunded
Accrued Pension Liability represents pension benefits earned in prior years
which, pursuant to standard actuarial practices, are not yet fully funded. On
June 30, 1997, the EDA issued $2,803,042,498.56 aggregate principal amount of
State Pension Funding Bonds, Series 1997A-1997C. The EDA and the New Jersey
Treasurer have entered

into an agreement which provides for the payment to the EDA of monies sufficient
to pay debt service on the bonds. Such payments are subject to and dependent
upon appropriations being made by the New Jersey Legislature.

Municipal Finance. New Jersey's local finance system is regulated by various
-----------------
statutes designated to assure that all local governments and their issuing
authorities remain on a sound financial basis. Regulatory and remedial statutes
are enforced by the Division of Local Government Services (the "Division") in
the New Jersey State Department of Community Affairs.

Counties and Municipalities. The Local Budget Law (N.J.S.A. 40A:4-1 et seq.)
---------------------------
imposes specific budgetary procedures upon counties and municipalities ("local
units"). Every local unit must adopt an operating budget which is balanced on a
cash basis, and items of revenue and appropriation must be examined by the
Director of the Division of Local Government Services in the Department of
Community Affairs (the "Director"). The accounts of each local unit must be
independently audited by a registered municipal accountant. New Jersey law
provides that budgets must be submitted in a form promulgated by the Division
and further provides for limitations on estimates of tax collection and for
reserves in the event of any shortfalls in collections by the local unit. The
Division reviews all municipal and county annual budgets prior to adoption for
compliance with the Local Budget Law. The Director is empowered to require
changes for compliance with law as a condition of approval; to disapprove
budgets not in accordance with law; and to prepare the budget of a local unit,
within the limits of the adopted budget of the previous year with suitable
adjustments for legal compliance, if the local unit fails to adopt a budget in
accordance with law. This process insures that every municipality and county
annually adopts a budget balanced on a cash basis, within limitations on
appropriations or tax levies, respectively, and making adequate provision for
principal of and interest on indebtedness falling due in the fiscal year,
deferred charges and other statutory expenditure requirements. The Director
also oversees changes to local budgets after adoption as permitted by law, and
enforces regulations pertaining to execution of adopted budgets and financial
administration. In addition to the exercise of regulatory and oversight
functions, the Division offers expert technical assistance to local units in all
aspects of financial administration, including revenue collection and cash
management procedures, contracting procedures, debt management and
administrative analysis.

The Local Government Cap Law (N.J.S.A. 40A:4-45.1 et seq.) (the "Cap Law")
generally limits the year-to-year increase of the total appropriations of any
municipality and the tax levy of any county to either 5 percent or an index rate
determined annually by the Director, whichever is less. However, where the
index percentage rate exceeds 5 percent, the Cap Law permits the governing body
of any municipality or county to approve the use of a higher percentage rate up
to the index rate. Further, where the index percentage rate is less than 5
percent, the Cap Law also permits the governing body of any municipality or
county to approve the use of a higher percentage rate up to 5 percent.
Regardless of the rate utilized, certain exceptions exist to the Cap Law's
limitation on increases in appropriations. The principal exceptions to these
limitations are municipal and county appropriations to pay debt service
requirements; to comply with certain other New Jersey or federal mandates;
appropriations of private and public dedicated funds; amounts approved by
referendum; and, in the case of municipalities only, to fund the preceding
year's cash deficit or to reserve for shortfalls in tax collections, and amounts
required pursuant to contractual obligations for specified services. The Cap
Law was re-enacted in 1990 with amendments and made a permanent part of the
municipal finance system.

New Jersey law also regulates the issuance of debt by local units. The Local
Budget Law limits the amount of tax anticipation notes that may be issued by
local units and requires the repayment of such notes within 120 days of the end
of the fiscal year (six months in the case of the counties) in which issued.
The Local Bond Law (N.J.S.A. 40A:2-1 et seq.) governs the issuance of bonds and
notes by the local units. No local unit is permitted to issue bonds for the
payment of current expenses (other than Fiscal Year Adjustment Bonds described
more fully below). Local units may not issue bonds to pay outstanding bonds,
except for refunding purposes, and then only with the approval of the Local
Finance Board. Local units may issue bond anticipation notes for temporary
periods not exceeding in the aggregate approximately ten years from the date of
issue. The debt that any local unit may authorize is limited to a percentage of
its equalized valuation basis, which is the average of the equalized value of
all taxable real property and improvements within the geographic boundaries of
the local unit, as annually determined by the Director of the Division of
Taxation, for each of the three most recent years. In the calculation of debt
capacity, the Local Bond Law and certain other statutes permit the deduction of
certain classes of debt ("statutory deduction") from all authorized debt of the
local unit ("gross capital debt") in computing whether a local unit has exceeded
its statutory debt limit. Statutory deductions from gross capital debt consist
of bonds or notes (i) authorized for school purposes by a regional school
district or by a municipality or a school district with boundaries

coextensive with such municipality to the extent permitted under certain
percentage limitations set forth in the School Bond Law (as hereinafter
defined); (ii) authorized for purposes which are self liquidating, but only to
the extent permitted by the Local Bond Law; (iii) authorized by a public body
other than a local unit the principal of and interest on which is guaranteed by
the local unit, but only to the extent permitted by law; (iv) that are bond
anticipation notes; (v) for which provision for payment has been made; or (vi)
authorized for any other purpose for which a deduction is permitted by law.
Authorized net capital debt (gross capital debt minus statutory deductions) is
limited to 3.5 percent of the equalized valuation basis in the case of
municipalities and 2 percent of the equalized valuation basis in the case of
counties. The debt limit of a county or municipality, with certain exceptions,
may be exceeded only with the approval of the Local Finance Board.

Chapter 75 of the Pamphlet Laws of 1991, signed into law on March 28, 1991, of
New Jersey required certain municipalities and permits all other municipalities
to adopt the New Jersey fiscal year in place of the existing calendar fiscal
year. Municipalities that change fiscal years must adopt a six month transition
year budget funded by Fiscal Year Adjustment Bonds. Notes issued in
anticipation of Fiscal Year Adjustment Bonds, including renewals, can only be
issued for up to one year unless the Local Finance Board permits the
municipality to renew them for a further period of time. The Local Finance
Board must confirm the actual deficit experienced by the municipality. The
municipality may then issue Fiscal Year Adjustment Bonds to finance the deficit
on a permanent basis.

School Districts. New Jersey's school districts operate under the same
----------------
comprehensive review and regulation as do its counties and municipalities.
Certain exceptions and differences are provided, but New Jersey supervision of
school finance closely parallels that of local governments.

All New Jersey school districts are coterminous with the boundaries of one or
more municipalities. They are characterized by the manner in which the board of
education, the governing body of the school districts takes office. Type I
school districts, most commonly found in cities, have a board of education
appointed by the mayor or the chief executive officer of the municipality
constituting the school district. In a Type II school district, the board of
education is elected by the voters of the district. Nearly all regional and
consolidated school districts are Type II school districts.

The New Jersey Department of Education has been empowered with the necessary
and effective authority to abolish an existing school board and create a State-
operated school district where the existing school board has failed or is unable
to take the corrective actions necessary to provide a thorough and efficient
system of education in that school district pursuant to N.J.S.A. 18A:7A-15 et
seq. (the "School Intervention Act"). The State-operated school district, under
the direction of a New Jersey appointed superintendent, has all of the powers
and authority of the local board of education and of the local district
superintendent. Pursuant to the authority granted under the School Intervention
Act, on October 4, 1989, the New Jersey Board of Education ordered the creation
of a State-operated school district in the city of Jersey City. Similarly, on
August 7, 1991, the New Jersey Board of Education ordered the creation of a
State-operated school district in the City of Paterson, and on July 5, 1995 the
creation of a State-operated school district in the City of Newark.

School Budgets. In every school district having a board of school estimate,
--------------
the board of school estimate examines the budget request and fixes the
appropriate amounts for the next year's operating budget after a public hearing
at which the taxpayers and other interested persons shall have an opportunity to
raise objections and to be heard with respect to the budget. This board
certifies the budget to the municipal governing bodies and to the local board of
education. If the local board of education disagrees, it must appeal to the New
Jersey Commissioner of Education (the "Commissioner") to request changes.

In a Type II school district without a board of school estimate, the elected
board of education develops the budget proposal and, after public hearing,
submits it to the voters of such district for approval. Previously authorized
debt service is not subject to referendum in the annual budget process. If
approved, the budget goes into effect. If defeated, the governing body of each
municipality in the school district has until May 19 in any year to determine
the amount necessary to be appropriated for each item appearing in such budget.
Should the governing body fail to certify any amount determined by the board of
education to be necessary, the board of education may appeal the action to the
Commissioner.

The State laws governing the distribution of State aid to local school
districts limit the annual increase of a school district's net current expense
budget. The Commissioner certifies the allowable amount of increase for each
school district but may grant a higher level of increase in certain limited
instances. A school district may also submit a proposal to the voters to raise
amounts above the allowable amount of increase. If defeated, such a proposal is
subject to further review or appeal to the Commissioner only if the Commissioner
determines that additional funds are required to provide a thorough and
efficient education.

In State-operated school districts the New Jersey District Superintendent has
the responsibility for the development of the budget subject to appeal by the
governing body of the municipality to the commissioner and the Director of the
Division of Local Government Services in the New Jersey Department of Community
Affairs. Based upon his review, the Director is required to certify the amount
of revenues which can be raised locally to support the budget of the State-
operated district. Any difference between the amount which the Director
certifies and the total amount of local revenues required by the budget approved
by the commissioner is to be paid by New Jersey in the fiscal year in which the
expenditure are made subject to the availability of appropriations.

School District Bonds. School district bonds and temporary notes are issued
---------------------
in conformity with N.J.S.A. 18A:24-1 et seq. (the "School Bond Law"), which
closely parallels the Local Bond Law (for further information relating to the
Local Bond Law, see "Municipal Finance-Counties and Municipalities" herein).
Although school districts are exempted from the 5 percent down payment provision
generally applied to bonds issued by municipalities and counties, they are
subject to debt limits (which vary depending on the type of school system
provided) and to New Jersey regulation of their borrowing. The debt limitation
on school district bonds depends upon the classification of the school district,
but may be as high as 4 percent of the average equalized valuation basis on the
constituent municipality. In certain cases involving school districts in cities
with populations exceeding 150,000, the debt limit is 8 percent of the average
equalized valuation basis of the constituent municipality, and in cities with
population in excess of 80,000 the debt limit is 6 percent of the aforesaid
average equalized valuation.

School bonds are authorized by (i) an ordinance adopted by the governing body
of a municipality within a Type I school district; (ii) adoption of a proposal
by resolution by the board of education of a Type II school district having a
board of school estimate; (iii) adoption of a proposal by resolution by the
board of education and approval of the proposal by the legal voters of any other
Type II school district; or (iv) adoption of a proposal by resolution by a
capital project control board for projects in a State operated school district.
If school bonds will exceed the school district borrowing capacity, a school
district (other than a regional school district) may use the balance of the
municipal borrowing capacity. If the total amount of debt exceeds the school
district's borrowing capacity, the Commissioner and the Local Finance Board must
approve the proposed authorization before it is submitted to the voters. All
authorizations of debt in a Type II school district without a board of school
estimate require an approving referendum, except where, after hearing, the
Commissioner and the New Jersey Board of Education determine that the issuance
of such debt is necessary to meet the constitutional obligation to provide a
thorough and efficient system of public schools. When such obligations are
issued, they are issued by, and in the name of, the school district.

In Type I and II school districts with a board of school estimate, that board
examines the capital proposal of the board of education and certifies the amount
of bonds to be authorized. When it is necessary to exceed the borrowing
capacity of the municipality, the approval of a majority of the legally
qualified voters of the municipality is required, together with the approval of
the Commissioner and the Local Finance Board. When such bonds are issued by a
Type I school district, they are issued by the municipality and identified as
school bonds. When bonds are issued by a Type II school district having a board
of school estimate, they are issued by, and in the name of, the school
district.

All authorizations of debt must be reported to the Division of Local
Government Services by a supplemental debt statement prior to final
approval.

School District Lease Purchase Financings. In 1982, school districts were
-----------------------------------------
given an alternative to the traditional method of bond financing capital
improvements pursuant to N.J.S.A. 18A:20-4.2(f) (the "Lease Purchase Law"). The
Lease Purchase Law permits school districts to acquire a site and school
building through a lease purchase agreement with a private lessor corporation.
The lease purchase agreement does not require voter approval. The rent payments
attributable to the lease purchase agreement are subject to annual appropriation
by the school district and are required to be included in the annual current
expense budget of the school district. Furthermore, the rent payments
attributable to the lease

purchase agreement do not constitute debt of the school district and therefore
do not impact on the school district's debt limitation. Lease purchase
agreements in excess of five years require the approval of the Commissioner and
the Local Finance Board.

Qualified Bonds. In 1976, legislation was enacted (P.L. 1976, c. 38 and c.
---------------
39) which provides for the issuance by municipalities and school districts of
"qualified bonds". Whenever a local board of education or the governing body of
a municipality determines to issue bonds, it may file an application with the
Local Finance Board, and, in the case of a local board of education, the
Commissioner, to qualify bonds pursuant to P.L. 1976 c. 38 or c. 39. Upon
approval of such an application, the New Jersey Treasurer shall, in the case of
qualified bonds for school districts, withhold from the school aid payable to
such municipality or school district and, in the case of qualified bonds for
municipalities, withhold from the amount of business personal property tax
replacement revenues, gross receipts tax revenues, municipal purposes tax
assistance fund distributions, New Jersey urban aid, New Jersey revenue sharing,
and any other funds appropriated as New Jersey aid and not otherwise dedicated
to specific municipal programs, payable to such municipalities, an amount
sufficient to cover debt service on such bonds. These "qualified bonds" are not
direct, guaranteed or moral obligations of New Jersey, and debt service on such
bonds will be provided by New Jersey only if the above mentioned appropriations
are made by New Jersey. Total outstanding indebtedness for "qualified bonds"
consisted of $327,981,850 by various school districts as of June 30, 1998 and
$932,410,709 by various municipalities as of June 30, 1998.

New Jersey School Bond Reserve Act. The New Jersey School Bond Reserve Act
----------------------------------
(N.J.S.A. 18A:56-17 et seq) establishes a school bond reserve within the
constitutionally dedicated Fund for the Support of Free Public Schools. Under
this law the reserve is maintained at an amount equal to 1.5 percent of the
aggregate outstanding bonded indebtedness of counties, municipalities or school
districts for school purposes (exclusive of bonds whose debt service is provided
by New Jersey appropriations), but not in excess of monies available in such
Fund. If a municipality, county or school district is unable to meet payment of
the principal of or interest on any of its school bonds, the trustee of the
school bond reserve will purchase such bonds at the face amount thereof or pay
the holders thereof the interest due or to become due. There has never been an
occasion to call upon this Fund. New Jersey provides support of certain bonds
of counties, municipalities and school districts through various statutes.

Local Financing Authorities. The Local Authorities Fiscal Control Law
---------------------------
(N.J.S.A. 40A:5A-1 et seq.) provides for state supervision of the fiscal
operations and debt issuance practices of independent local authorities and
special taxing districts by the New Jersey Department of Community Affairs. The
Local Authorities Fiscal Control Law applies to all autonomous public bodies
created by counties or municipalities, which are empowered to issue bonds, to
impose facility or service charges, or to levy taxes in their districts. This
encompasses most autonomous local authorities (sewerage, municipal utilities,
parking, pollution control, improvement, etc.) and special taxing districts
(fire, water, etc.). Authorities which are subject to differing New Jersey or
federal financial restrictions are exempted, but only to the extent of that
difference.

Financial control responsibilities over local authorities and special
districts are assigned to the Local Finance Board and the Director of the
Division of Local Government Services. The Local Finance Board exercises
approval over creation of new authorities and special districts as well as their
dissolution. The Local Finance Board reviews, conducts public hearings and
issues findings and recommendations on any proposed project financing of an
authority or district, and on any proposed financing agreement between a
municipality or county and an authority or special district. The Local Finance
Board prescribes minimum audit requirements to be followed by authorities and
special districts in the conduct of their annual audits. The Director of the
Division of Local Government Services reviews and approves annual budgets of
authorities and special districts.

LITIGATION. At any given time, there are various numbers of claims and cases
pending against the State of New Jersey, New Jersey agencies and employees,
seeking recovery of monetary damages that are primarily paid out of the fund
created pursuant to the New Jersey Tort Claims Act (N.J.S.A. 59:1-1 et seq.).
New Jersey does not formally estimate its reserve representing potential
exposure for these claims and cases. New Jersey is unable to estimate its
exposure for these claims and cases.

New Jersey routinely receives notices of claim seeking substantial sums of
money. The majority of those claims have historically proven to be of
substantially less value than the amount originally claimed. Under the New
Jersey Tort Claims Act,

any tort litigation against New Jersey must be preceded by a notice of claim,
which affords New Jersey the opportunity for a six-month investigation prior to
the filing of any suit against it. At any given time, there are various numbers
of claims and cases pending against the University of Medicine and Dentistry and
its employees, seeking recovery of monetary damages that are primarily paid out
of the Self Insurance Reserve Fund created pursuant to the New Jersey Tort
Claims Act. An independent study estimated an aggregate potential exposure of
$85,300,000 for tort and medical malpractice claims pending as of December 31,
1997. In addition, at any given time, there are various numbers of contract and
other claims against the University of Medicine and Dentistry, seeking recovery
of monetary damages or other relief which, if granted, would require the
expenditure of funds. New Jersey is unable to estimate its exposure for these
claims.

Other lawsuits presently pending or threatened in New Jersey has the potential
for either a significant loss of revenue or a significant unanticipated
expenditures include the following:

Interfaith Community Organization v. Shinn, a suit filed by a coalition of
churches and church leaders in Hudson County against the Governor, the
Commissioners of the Department of Environmental Protection and the Department
of Health, concerning chromium contamination in Liberty State Park in Jersey
City.

American Trucking Associations, Inc. and Tri-State Motor Transit Co. v. State
of New Jersey, challenging the constitutionality of annual hazardous and solid
waste licensure fees collected by the Department of Environmental Protection,
seeking permanent injunction enjoining future collection of fees and refund of
all renewal fees, fines and penalties collected.

Buena Regional Commercial Township et al. v. New jersey Department of
Education et al. This lawsuit was filed on behalf of 17 rural school districts
seeking the same type of relief as has been mandated to be provided to the poor
urban school districts in Abbot v. Burke, which included, without limitation,
sufficient funds to allow the school districts to spend at the average of
wealthy suburban school districts, to implement additional programs and to
upgrade school facilities. The Buena school districts are seeking to be treated
as special needs districts and to receive parity funding the with Abbot school
districts as a remedial measure. They also are seeking additional funding as
may be necessary to provide an educational equivalent to that being provided in
the Abbot districts.

Berner Stabaus, et al. v. State of New Jersey, et al. Plaintiffs, 25 middle
income school districts, have filed a complaint alleging that New Jersey's
system of funding for their schools is violative of the constitutional rights of
equal protection and a thorough and efficient education.

Affiliated FM Insurance Company v. State of New Jersey, an action by certain
members of the New Jersey Property-Liability Insurance Guaranty Association
challenging the constitutionality of assessments used for the Market Transition
Fund and seeking repayment of assessments paid since 1990.

On July 28, 1997, the court denied plaintiff's application for emergent relief,
denied New Jersey's motion for summary disposition and granted plaintiff's
motion to accelerate. The Appellate Division has affirmed the assessment.
Appellant's petition for certification to the New Jersey Supreme Court has been
denied.

C.F. v. Terhune (formerly Fauver) a class action in federal district court by
prisoners with serious mental disorders who are confined within the facilities
of the New Jersey Department of Corrections seeking injunctive relief in the
form of changes to the manner in which the mental health services are provided
to inmates.

Cleary v. Waldman, the plaintiffs claim that the Medicare Catastrophic
Coverage Act, providing funds to spouses of institutionalized individuals
sufficient funds to live in the community, requires that a certain system be
used to provide the funds and another system is being used instead. Estimate of
exposure if the Court were to find for the plaintiffs are in the area of $50
million per year from both New Jersey and Federal sources combined. Plaintiffs
motion for a preliminary injunction was denied and is being appealed.
Subsequently, plaintiffs filed for class certification which was granted.

United Hospitals v. State of New Jersey 18 New Jersey hospitals are
challenging the Medicaid reimbursements made since February 1995 claiming that
New Jersey failed to comply with certain federal requirements, the
reimbursements regulations are arbitrary, capricious and unreasonable, rates
were incorrectly calculated, the hospitals were denied due process, the Medicaid
reimbursement provisions violate the New Jersey Constitution, and Medicaid State
Plan was violated by the New Jersey Department of Human Services implementation
of hospital rates in 1995 and 1996.

Trump Hotels & Casino Resorts, Inc. v. Mirage Resorts Incorporated, the
plaintiff is suing Mirage Resorts and New Jersey in an attempt to enjoin their
efforts to build a highway and tunnel funded by Mirage Resorts and $55 million
in bonds collateralized by future casino obligations, claiming that the project
violates the New Jersey Constitution provision that requires all revenues the
state receives from gaming operations to benefit the elderly and disabled. The
plaintiff also claims (i) the failure to disclose this constitutional infirmity
is a material omission within the meaning of Rule 10B-5 of the Securities and
Exchange Act of 1934, (ii) the defendants have sought to avoid the requirements
of the Clean Water Act, Clean Air Act, Federal Highway Act and the New Jersey
Coastal Area Facility Review Act. On May 1, 1997, the federal district court
granted the defendants' motion to dismiss and the Third Circuit has affirmed the
District Court's determinations. In a related action, State of New Jersey v.
Trump Hotels & Casino Resorts, Inc., New Jersey filed a declaratory judgment
action seeking a declaration that the use of certain funds New Jersey statutory
provisions existed that permitted use of certain funds to be used for other
purposes than the elderly or disabled. Declaratory judgment was entered in
favor of New Jersey on May 14, 1997 and the Appellate Division has affirmed the
decision on April 8, 1998.

United Alliance v. State of New Jersey, plaintiffs allege that the Casino
Reinvestment Development Authority funding mechanisms are illegal including the
gross receipts tax, the parking tax, and the Atlantic City fund. This matter
has been placed on the inactive list. Five additional cases have been filed in
opposition to the road and tunnel project which also contain related challenges.
Merolla and Brandy v. Casino Reinvestment Development Authority, Middlesex
County v. Casino Reinvestment Development Authority, Gallagher v. Casino
Reinvestment Development Authority and George Harms v. State of New Jersey.
Summary judgment has been granted in favor of the New Jersey or its agencies in
Merolla, Middlesex and Gallagher but the plaintiffs have filed an appeal.

Blecker v. State of New Jersey, a class action filed on behalf of providers of
medicare Part B services to Qualified Medicare Beneficiaries seeking
reimbursement for Medicare co-insurance and deductibles not paid by the New
Jersey Medicaid program from 1988 to February 10, 1995. Plaintiffs claim a
breach of contract and violation of federal civil rights laws. On August 11,
1997, New Jersey filed a motion to dismiss the matter and on September 15, 1997,
it filed a motion for summary judgement. Both motions were granted on April 3,
1998 and the plaintiff has filed an appeal.

Camden County Energy Recovery Associates v. New Jersey Department of
Environmental Protection, the plaintiff owns and operates a resource facility in
Camden County and has filed suit seeking to have the solid waste reprocurement
process halted to clarify bid specification. The court did not halt the bid
process but did require clarifications. Co-defendant Pollution Control
Financing Authority of Camden County counterclaimed, seeking reformation of the
contract between it and the plaintiff and cross-claimed against New Jersey for
contribution and indemnification.

Communications Workers of America, et al. v. James A. DiEleuterio, Jr., et al.
Appellants in this case have filed an appeal from the decision of the New Jersey
Treasurer to award a contract for the design, construction, and operation and
maintenance of the New Jersey motor vehicle inspection system. New Jersey
estimates that unless the new inspection system is operational by December 12,
1999, New Jersey may be exposed to significant federal sanctions, including the
loss of federal transportation funds and the federal imposition of stricter
pollution standards that will restrict economic development in New Jersey.

Sojourner A. et al. v. Dept. of Human Services. The plaintiffs in this action
filed a complaint and motion for preliminary injunction, seeking damages and
declaratory and injunctive relief overturning, on New Jersey Constitutional
grounds, the "family cap" provisions of the New Jersey Work First New Jersey Act
N.J.S.A. 44:10-1 et seq.

SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN DELAWARE STATE-SPECIFIC
OBLIGATIONS. The concentration of investments in Delaware State-Specific
Obligations by the Delaware Tax-Free Income Portfolio raises special investment
considerations. In particular, changes in the economic condition and
governmental policies of Delaware and its political subdivisions, agencies,
instrumentalities and authorities could adversely affect the value of the
Delaware Tax-Free Income Portfolio. This section briefly describes current
economic trends in Delaware. The information set forth in this section relates
only to the State itself and not to the special purpose or local government
units whose issues may also be held by the Delaware Tax-Free Income Portfolio.
The credits represented by such issuers may be affected by a wide variety of
local factors or structuring concerns, and no disclosure is made herein relating
to such matters.

Delaware has enjoyed expansion throughout most sectors of its economy during
the 1990s. Much of Delaware's success in maintaining a healthy economy over
this time period can be attributed to efforts to diversify its economic base.
Delaware's employment base has expanded beyond its historical emphasis in
chemical and automobile manufacturing to include strong banking and service
sectors. According to recent Dun & Bradstreet figures, Delaware has the lowest
business failure rate in the United States.

Delaware has experienced above-average population growth through the 1990s.
Net immigration accounts for a significant share of the growth. Delaware's
total personal income grew 7.1% in 1996, compared with 4.9% for the Mid-Atlantic
region and 5.6% for the nation. Delaware's non-agricultural employment accounts
for approximately 98% of the workforce. In 1997, a 3.2% increase in non-
agricultural employment occurred (greater than the 1.7% increase for the mid-
Atlantic region and the 2.3% increase for the nation). The State's unemployment
rate for 1997 was 4% lower than both the Mid-Atlantic region rate and the
national rate.

The State's general obligation debt outstanding was $626.7 million on December
31, 1997, with approximately 80% scheduled to mature within ten years and
approximately 95% scheduled to mature within fifteen years. The State's general
obligation debt outstanding was $686.1 million on June 30, 1998. Delaware's
debt burden reflects the centralized role of the State government in undertaking
capital projects typically funded at local government levels elsewhere, such as
highways, correctional facilities and schools. There is no state constitutional
debt limit applicable to Delaware. However, Delaware has instituted several
measures designed to manage and reduce its indebtedness. In 1991, the State
enacted legislation putting a three-part debt limit in place, one part of which
restricts new debt authorization to 5% of the budgetary General Fund revenue as
projected on June 30 for the next fiscal year. Delaware voluntarily retires its
general obligation debt. Delaware has

implemented and maintained a "pay-as-you-go" financing program for capital
projects. In fiscal 1986, 1989 and 1996, available cash was used to defease an
aggregate of $69.4 million of high coupon general obligation debt. In fiscal
1997, $10 million of previously authorized general obligation bonds were
deauthorized. Delaware has also undertaken a series of bond refundings to lower
the overall debt service on its obligations.

Delaware budgets and controls its financial activities on the cash basis of
accounting. State law requires Delaware to record its financial transactions in
either of two major categories -- the budgetary General Fund or the budgetary
Special Funds. The General Fund provides for the cost of the State's general
operations and is credited with all tax and other revenue of Delaware not
dedicated to Special Funds. All disbursements from the General Fund must be
authorized by appropriations of the Delaware General Assembly. The Special Funds
are designated for specific purposes, and the appropriate fund is credited with
the tax or other revenue allocated to such fund and is charged with the related
disbursements. The principal receipts credited to the appropriate Special Fund
are unemployment insurance taxes, transportation-related taxes for the
Transportation Trust Fund, certain taxes on insurance companies and property
taxes levied by local school districts.

The Delaware Constitution limits annual appropriations by majority vote of
both houses of the General Assembly to 98% of estimated budgetary General Fund
revenue plus the unencumbered budgetary General Fund balance, if any, from the
previous year. The State Constitution also provides for the deposit of the
excess of any unencumbered budgetary General Funds at the end of the fiscal year
into a reserve account (the "Budget Reserve Account"), provided that the amount
of the Budget Reserve Account does not exceed 5% of the estimated appropriations
used to determine the appropriation limit for that fiscal year. Transfers of
$100.9 million were made to fund the Budget Reserve Account in fiscal 1998. The
Budget Reserve Account provides a cushion and money from the account can be
accessed only with the approval of a three-fifths vote of each house of the
General Assembly and only to fund an unanticipated budgetary General Fund
deficit or to provide funds required as a result of the enactment of legislation
causing a reduction in revenue.

Delaware concluded fiscal year 1998 with a cumulative cash balance of $539
million. This balance reflects an increase from the fiscal year 1997 cumulative
cash balance of $392.8 million. At the conclusion of fiscal year 1998, the
Budget Reserve Account contained an unencumbered cash balance of $214.2 million.
These results are presented on a budgetary basis. Accounting principles applied
to develop data on a budgetary basis differ from those principles used to
present financial statements in conformity with generally accepted accounting
principles (GAAP).

The principal source of Delaware revenue is personal income tax. Delaware
does not levy ad valorem taxes on real or personal property and does not impose
a general sales or use tax. In May 1980, the Delaware Constitution was amended
to limit tax and license fee increases and the imposition of new taxes or fees.
Any tax or license fee increase or new tax or license fee must be passed by a
three-fifths vote of each house of the General Assembly, rather than by a simple
majority vote.

Certain litigation is pending against the State. From time to time Delaware
has been and may continue to be a defendant in various suits alleging matters
such as wrongful discharge, use of excessive force by State police officers,
sexual assault, civil rights violations and discrimination claims. The State
believes that it has valid defenses to all currently pending actions; however,
the State has potential liability exposure.

Delaware is exposed to risks and losses related to employee health and
accident, worker's compensation, environmental and a portion of property and
casualty claims. Delaware does not purchase commercial insurance to cover these
risks because of prohibitive costs. The State covers all claim settlements or
judgments from its budgetary General Fund. It continues to carry commercial
insurance for all other risks.

SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN KENTUCKY STATE-SPECIFIC
OBLIGATIONS. Kentucky is a leader among the states in the production of coal
and tobacco. The Coal Severance Tax is a significant revenue producer for the
Commonwealth and its political subdivisions, and any substantial decrease in the
amount of coal or other minerals produced could

result in revenue shortfalls. Additionally, any federal legislation or
litigation adversely affecting the tobacco and/or cigarette industries would
have a negative impact on Kentucky's economy. There is significant
diversification in Kentucky's manufacturing sector, which includes, among other
things, tobacco processing plants, distilleries and durable goods production. No
single segment of the Commonwealth's economy consists of as much as one-fourth
of the overall state domestic product. The Commonwealth continues to experience
a high unemployment rate in non-urbanized areas. Although revenue obligations of
the Commonwealth or its political subdivisions may be payable from a specific
project, there can be no assurances that economic difficulties and the resulting
impact on state and local government finances will not adversely affect the
market value of Kentucky State-Specific Obligations or the ability of the
respective entities to pay debt service.

Because of constitutional limitations, the Commonwealth cannot enter into a
financial obligation of more than two year's duration, and, until recently, no
other municipal issuer within the Commonwealth could enter into a financial
obligation of more than one year's duration. As a consequence, the payment and
security arrangements applicable to Kentucky State-Specific Obligations differ
significantly from those generally applicable to municipal revenue obligations
in other states.

The Kentucky General Assembly enacted legislation in 1996 pursuant to an
amendment to the Kentucky Constitution permitting local governments to issue
general obligation indebtedness without voter approval, but subject to
prescribed limitations on the maximum amount of indebtedness that may be
incurred based on the assessed value of taxable property within the jurisdiction
and other limitations and conditions. A final judgment of the Kentucky courts
upheld the validity of the constitutional amendment, and local governments have
now begun to issue general obligation indebtedness.

The Kentucky Tax-Free Income Portfolio will invest primarily in Kentucky
State-Specific Obligations. Such obligations generally include tax-free
securities issued by the Commonwealth of Kentucky ("Kentucky" or the
"Commonwealth"), its counties and various other local authorities to finance
such long-term public purpose projects as schools, universities, housing,
transportation, utilities, hospitals and water and sewer facilities throughout
the Commonwealth.

Kentucky is a leader among the states in the production of coal. Tobacco is
the dominant agricultural product, and Kentucky ranks second among the U.S. in
the total cash value of tobacco raised. Potential federal regulation of the
tobacco industry, including action by Congress and the recent settlement
agreement between the states and the tobacco industry may impact the tobacco
industry, though the degree of the impact cannot be predicted with any
certainty.

The Commonwealth's economy in many ways resembles a scaled-down version of
the U.S. economy in its diversity. The Kentucky economy, once dominated by coal,
horses, bourbon and tobacco has become more diversified and now includes
manufacturing of industrial machinery, automobiles and automobile parts,
consumer appliances, and nondurable goods such as apparel. In addition,
Kentucky's non-manufacturing industries have grown in recent years, with gains
in air transportation, health and business services, and retail trade. The
Commonwealth's parks, horse breeding and racing industry, symbolized by the
Kentucky Derby, play an important role in expanding the tourism industry in the
Commonwealth. Kentucky now ranks fourth among all U.S. auto-producing states and
four of the current top-selling vehicles manufactured in the U.S. are
manufactured in Kentucky.

No single segment of the economy of Kentucky accounts for as much as one
fourth of the overall Commonwealth domestic product. The economy is diversified
to the extent that an economic decline in a single segment would not necessarily
lead to the non-payment of debt service on Kentucky State-Specific Obligations.
A national economic decline, however, could impact the ability of issuers to pay
debt service, if the decline impacted various segments within the Commonwealth.

Economic problems include a continuing high unemployment rate in the non-
urbanized areas of the Commonwealth. The Coal Severance Tax is a significant
revenue producer for the Commonwealth and its political subdivisions, and any
substantial decrease in the amount of coal or other minerals produced could
result in revenue shortfalls. Additionally, any Federal legislation adversely
affecting the tobacco industry would have a negative impact on Kentucky's
economy. Although revenue obligations of the Commonwealth or its political
subdivisions may be payable from a specific project, there can be no assurances
that further economic difficulties and the resulting impact on state and local
government finances will not adversely affect the market value of the
obligations issued by the Commonwealth and its political subdivisions or the
ability of the respective entities to pay debt service on their obligations.

The Commonwealth relies heavily upon sales and use taxes, individual income
taxes, property taxes, corporate income taxes, insurance premium taxes,
alcoholic beverage taxes, corporate license taxes, cigarette taxes, mineral
severance taxes, motor fuel

taxes, motor vehicle usage taxes and horse racing taxes for its revenue. The
cities, counties and other local governments are essentially limited to property
taxes, occupational license taxes, utility taxes, transit and restaurant meals
taxes and various license fees for their revenue. Kentucky State-Specific
Obligations are subject to the risks of general economic and other factors as
well.

There are several general types of Kentucky State-Specific Obligations.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and/or taxing power for the payment of principal and interest.
General obligation securities of the Commonwealth are rare since they must be
authorized by a two-thirds vote of the electorate of the issuer. As a
consequence, the Commonwealth cannot enter into a final obligation of more than
two years duration. Local governments have only recently begun to issue to
general obligation indebtedness. Revenue obligations are payable from and
secured by a particular revenue stream, such as lease rentals, utility usage and
connection charges, student registration or housing fees, bridge or highway
tolls, parking fees and sports event gate receipts. Although industrial building
revenue obligations are issued by municipal authorities, they are secured by
revenue derived from some form of contractual arrangement with a non-
governmental user. Some revenue obligations, including industrial building
revenue obligations, are secured by a mortgage on the real property. Improvement
assessment obligations are obligations secured by a special assessment (e.g., a
sewer charge) that the governmental issuer imposes on each owner of property
benefitted by the improvement (e.g., a sanitary sewer project). The assessments
are similar to taxes and have a priority which is similar to a tax lien.
Refunded or defeased bonds are secured by an escrow fund, which usually is
invested in United States government securities and occasionally in bank
certificates of deposit or similar instruments. Housing obligations are usually
secured by mortgages pledged for the payment of the obligations. Local housing
authorities sometimes issue obligations that are secured by rentals from the
operation of a housing project. Housing obligations may also have additional
security in the form of federal guarantees of the mortgages or rentals
constituting the primary security.

There are variations in the security of Kentucky State-Specific Obligations,
both within a particular classification and between classifications, depending
on numerous factors. For example, most local school construction is financed
from obligations nominally issued by a larger city or county government, which
holds legal title to the school, subject to a year-to-year renewable leaseback
arrangement with the local school district. However, there is no reported
instance in which a Kentucky school bond has gone into default. Similar
arrangements are used to finance many city and county construction projects but
in these cases, the obligations are nominally issued in the name of a public
corporation, which holds title to the project and leases the project back to the
city or county on a year-to-year renewable basis. In such situations, the rent
that the nominal issuer receives from the actual user of the property financed
by the obligations is the only source of any security for the payment of the
obligations.

Overview of the Commonwealth's Debt Authorities. The Commonwealth's
-----------------------------------------------
indebtedness is comprised of obligations which are either direct obligations of
the Commonwealth or obligations of one of the debt-issuing entities created by
the legislature to finance various projects or programs. Direct debt is general
obligation debt that pledges the full faith, credit, and taxing powers of the
Commonwealth as security for the repayment of the debt. There are currently no
general obligations outstanding.

The second type of debt incurred by the Commonwealth is project revenue debt.
Project revenue debt pledges as security for repayment of the debt only the
revenues produced by the projects funded from the debt. Project revenue
obligations are not a direct obligation of the Commonwealth. Project revenues
are, in some cases, derived partially, or solely, from legislative
appropriations which are subject to biennial renewal. In other cases, revenues
generated from the project financed by the debt are used to make the debt
service payments in full.

The third type of debt incurred by the Commonwealth is moral obligation debt.
These obligations are not direct obligations of the Commonwealth and no
appropriations of the Commonwealth are pledged to pay the debt service. Rather
these entities covenant to request funds from the Governor and the legislature
in the event of a shortfall in the debt service. The entities which utilize
this process are discussed in the following section.

Debt Issuing Entities of the Commonwealth. Project revenue debt has been
-----------------------------------------
incurred by seventeen of the commissions, corporations, authorities, or boards
created by the Commonwealth. Seven of the debt issuing authorities issue
obligations to finance projects that are not repaid by Commonwealth revenues.
These are the Kentucky Housing Corporation, the Kentucky Infrastructure
Authority, the Kentucky Higher Education Student Loan Corporation, the School
Facilities Construction Commission, the Kentucky Economic Development Finance
Authority, the Kentucky Local Correctional Facilities Construction Authority and
the Kentucky Agricultural Finance Corporation. None of these entities, except
for some of the obligations of the School Facilities Construction Commission and
the Kentucky Infrastructure Authority, receive appropriations for the payment of
debt service. Project revenues are used to repay debt service for these debt
authorities. The legislature has placed specific debt limitations on the
principal debt outstanding of the Kentucky Housing Corporation ($1.125 billion),
the Kentucky Higher Education Student Loan Corporation ($553 million) and the
Kentucky Agricultural Finance Corporation ($500 million). The debt of the
Kentucky Local Correctional Facilities Construction Authority is limited to the
level of debt service supported by a fee collected from certain cases in the
District Courts of the Commonwealth. Currently, no debt limitation exists for
the Kentucky Economic Development Finance Authority.

The remaining debt issuing entities of the Commonwealth receive a
appropriations biennially for the payment of debt service. The appropriation to
the School Facilities Construction Commission is used to subsidize the debt
service payments, in whole or in part, made by local school districts on local
school construction projects. The subsidy has varied by project. Two financing
programs of the Kentucky Infrastructure Authority, the Governmental Agencies
Program and the Multiple Projects Construction Loan Program, receive no
appropriations and have a debt ceiling. The three other financing programs of
the Kentucky Infrastructure Authority, the Federally Assisted Wastewater
Program, the Infrastructure Revolving Fund Program and the Solid Waste Revolving
Loan and Grant Program, have been appropriated monies. The State Property and
Buildings Commission, the Turnpike Authority of Kentucky and the State
Universities cannot incur debt for any project without prior approval of the
projects and appropriation of debt service by the legislature.

In 1997, the Commonwealth created the Kentucky Asset/Liability Commission to
develop and implement programs to assist in the management of the Commonwealth's
net interest margin, and it may issue tax and revenue anticipation notes
project notes, and funding notes to achieve its purpose.

Default Record. Neither the Commonwealth nor any of its agencies have ever
--------------
defaulted in the payment of principal or interest on general obligation
indebtedness or project revenue obligations.

ADDITIONAL INVESTMENT LIMITATIONS

Each Portfolio is subject to the investment limitations enumerated in this
subsection which may be changed with respect to a particular Portfolio only by a
vote of the holders of a majority of such Portfolio's outstanding shares (as
defined below under "Miscellaneous"). The Index Master Portfolio's fundamental
investment limitations are described separately.

MONEY MARKET PORTFOLIOS:

1) Each of the Money Market, Municipal Money Market and U.S. Treasury Money
Market Portfolios may not purchase securities of any one issuer (other than
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or certificates of deposit for any such securities) if more
than 5% of the value of the Portfolio's total assets (taken at current value)
would be invested in the securities of such issuer, or more than 10% of the
issuer's outstanding voting securities would be owned by the Portfolio or the
Fund, except that up to 25% of the value of the Portfolio's total assets (taken
at current value) may be invested without regard to these limitations. For
purposes of this limitation, a security is considered to be issued by the entity
(or entities) whose assets and revenues back the security. A guarantee of a
security is not deemed to be a security issued by the guarantor when the value
of all securities issued and guaranteed by the guarantor, and owned by the
Portfolio, does not exceed 10% of the value of the Portfolio's total assets.

2) No Portfolio may borrow money or issue senior securities, except that
each Portfolio may borrow from banks and (other than a Municipal Money Market
Portfolio) enter into reverse repurchase agreements for temporary purposes in
amounts up to one-third of the value of its total assets at the time of such
borrowing; or mortgage, pledge or hypothecate any assets, except in connection
with any such borrowing and then in amounts not in excess of one-third of the
value of the Portfolio's total assets at the time of such borrowing. No
Portfolio will purchase securities while its aggregate borrowings (including
reverse repurchase

agreements and borrowings from banks) in excess of 5% of its total assets are
outstanding. Securities held in escrow or separate accounts in connection with a
Portfolio's investment practices are not deemed to be pledged for purposes of
this limitation.

3) Each of the Municipal Money Market, U.S. Treasury Money Market, Ohio
Municipal Money Market, Pennsylvania Municipal Money Market, North Carolina
Municipal Money Market, Virginia Municipal Money Market and New Jersey Municipal
Money Market Portfolios may not purchase securities which would cause 25% or
more of the value of its total assets at the time of purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry. The Money Market Portfolio, on the other hand,
may not purchase any securities which would cause, at the time of purchase, less
than 25% of the value of its total assets to be invested in the obligations of
issuers in the banking industry, or in obligations, such as repurchase
agreements, secured by such obligations (unless the Portfolio is in a temporary
defensive position) or which would cause, at the time of purchase, more than 25%
of the value of its total assets to be invested in the obligations of issuers in
any other industry. In applying the investment limitations stated in this
paragraph, (i) there is no limitation with respect to the purchase of (a)
instruments issued (as defined in Investment Limitation number 1 above) or
guaranteed by the United States, any state, territory or possession of the
United States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, (b) instruments issued by domestic
banks (which may include U.S. branches of foreign banks) and (c) repurchase
agreements secured by the instruments described in clauses (a) and (b); (ii)
wholly-owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (iii) utilities will be divided according to
their services, for example, gas, gas transmission, electric and gas, electric
and telephone will be each considered a separate industry.

4) Each of the Ohio Municipal Money Market, Pennsylvania Municipal Money
Market, North Carolina Municipal Money Market, Virginia Municipal Money Market
and New Jersey Municipal Money Market Portfolios will invest at least 80% of its
net assets in AMT Paper and instruments the interest on which is exempt from
regular Federal income tax, except during defensive periods or during periods of
unusual market conditions.

5) The Municipal Money Market Portfolio will invest at least 80% of its net
assets in instruments the interest on which is exempt from regular Federal
income tax and is not an item of tax preference for purposes of Federal
alternative minimum tax, except during defensive periods or during periods of
unusual market conditions.

NON-MONEY MARKET PORTFOLIOS:

Each of the Non-Money Market Portfolios (other than the Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, New Jersey Tax-Free Income, Delaware Tax Free
Income and Kentucky Tax-Free Income Portfolios) may not:

1) Purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or
certificates of deposit for any such securities) if more than 5% of the value of
the Portfolio's total assets would (taken at current value) be invested in the
securities of such issuer, or more than 10% of the issuer's outstanding voting
securities would be owned by the Portfolio or the Fund, except that up to 25% of
the value of the Portfolio's total assets may (taken at current value) be
invested without regard to these limitations. For purposes of this limitation,
a security is considered to be issued by the entity (or entities) whose assets
and revenues back the security. A guarantee of a security shall not be deemed
to be a security issued by the guarantors when the value of all securities
issued and guaranteed by the guarantor, and owned by the Portfolio, does not
exceed 10% of the value of the Portfolio's total assets.

Each of the Non-Money Market Portfolios may not:

2) Purchase any securities which would cause 25% or more of the value of the
Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
(i) instruments issued (as defined in Investment Limitation No. 1 above) or
guaranteed by the United States, any state, territory or possession of the
United States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, and (ii) repurchase agreements
secured by the instruments described in clause (i); (b) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents; and
(c) utilities will be divided according to their services; for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry.

Each Non-Money Market Portfolio (other than the Managed Income, Intermediate
Government Bond, Low Duration Bond, Intermediate Bond, Government Income,
International Bond, Core Bond, High Yield Bond, Balanced and GNMA Portfolios)
may not:

3) Borrow money or issue senior securities, except that each Portfolio may
borrow from banks and enter into reverse repurchase agreements for temporary
purposes in amounts up to one-third of the value of its total assets at the time
of such borrowing; or mortgage, pledge or hypothecate any assets, except in
connection with any such borrowing and then in amounts not in excess of one-
third of the value of the Portfolio's total assets at the time of such
borrowing. No Portfolio will purchase securities while its aggregate borrowings
(including reverse repurchase agreements and borrowings from banks) in excess of
5% of its total assets are outstanding. Securities held in escrow or separate
accounts in connection with a Portfolio's investment practices are not deemed to
be pledged for purposes of this limitation.

None of the Managed Income, Intermediate Government Bond, Low Duration Bond,
Intermediate Bond, Government Income, Core Bond, International Bond, High Yield
Bond, Balanced and GNMA Portfolios may:

4) Issue senior securities, borrow money or pledge its assets, except that a
Portfolio may borrow from banks or enter into reverse repurchase agreements or
dollar rolls in amounts aggregating not more than 33 1/3% of the value of its
total assets (calculated when the loan is made) to take advantage of investment
opportunities and may pledge up to 33 1/3% of the value of its total assets to
secure such borrowings. Each Portfolio is also authorized to borrow an
additional 5% of its total assets without regard to the foregoing limitations
for temporary purposes such as clearance of portfolio transactions and share
redemptions. For purposes of these restrictions, the purchase or sale of
securities on a "when-issued," delayed delivery or forward commitment basis, the
purchase and sale of options and futures contracts and collateral arrangements
with respect thereto are not deemed to be the issuance of a senior security, a
borrowing or a pledge of assets.

ALL PORTFOLIOS:

No Portfolio may:

1. Purchase or sell real estate, except that each Portfolio may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate.

2. Acquire any other investment company or investment company security
except in connection with a merger, consolidation, reorganization or acquisition
of assets or where otherwise permitted by the 1940 Act.

3. Act as an underwriter of securities within the meaning of the Securities
Act of 1933 except to the extent that the purchase of obligations directly from
the issuer thereof, or the disposition of securities, in accordance with the
Portfolio's investment objective, policies and limitations may be deemed to be
underwriting.

4. Write or sell put options, call options, straddles, spreads, or any
combination thereof, except for transactions in options on securities,
securities indices, futures contracts and options on futures contracts and, in
the case of the International Bond Portfolio, currencies.

5. Purchase securities of companies for the purpose of exercising control.

6. Purchase securities on margin, make short sales of securities or maintain
a short position, except that (a) this investment limitation shall not apply to
a Portfolio's transactions in futures contracts and related options or a
Portfolio's sale of securities short against the box, and (b) a Portfolio may
obtain short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.

7. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that each Portfolio may, to the
extent appropriate to its investment policies, purchase securities (publicly
traded securities in the case of each Money Market Portfolio) of companies
engaging in whole or in part in such activities and may enter into futures
contracts and related options.

8. Make loans, except that each Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities.

9. Purchase or sell commodities except that each Portfolio may, to the
extent appropriate to its investment policies, purchase securities of companies
engaging in whole or in part in such activities, may engage in currency
transactions and may enter into futures contracts and related options.

10. Notwithstanding the investment limitations of the Index Equity Portfolio,
the Index Equity Portfolio may invest all of its assets in shares of an open-end
management investment company with substantially the same investment objective,
policies and limitations as the Portfolio.

Although the foregoing investment limitations would permit the Money Market
Portfolios to invest in options, futures contracts and options on futures
contracts, and to sell securities short against the box, those Portfolios do not
currently intend to trade in such instruments or engage in such transactions
during the next twelve months (except to the extent a portfolio security may be
subject to a "demand feature" or "put" as permitted under SEC regulations for
money market funds). Prior to making any such investments, a Money Market
Portfolio would notify its shareholders and add appropriate descriptions
concerning the instruments and transactions to its Prospectus.

INDEX MASTER PORTFOLIO:

The investment limitations of the Index Master Portfolio, the Portfolio in
which the Index Equity Portfolio invests all of its investable assets, are
separate from those of the Index Equity Portfolio. The Index Master Portfolio
may not:

1. Invest in commodities or real estate, including limited partnership
interests therein, although it may purchase and sell securities of companies
which deal in real estate and securities which are secured by interests in real
estate, and may purchase or sell financial futures contracts and options
thereon;

2. Make loans of cash, except through the acquisition of repurchase
agreements and obligations customarily purchased by institutional investors;

3. As to 75% of the total assets of the Index Master Portfolio, invest in
the securities of any issuer (except obligations of the U.S. Government and its
instrumentalities) if, as a result, more than 5% of the Index Master Portfolio's
total assets, at market, would be invested in the securities of such issuer;

4. Purchase or retain securities of an issuer if those officers and trustees
of the Trust or officers and directors of the Trust's investment adviser owning
more than 2 of 1% of such securities together own more than 5% of such
securities;

5. Borrow, except from banks and as a temporary measure for extraordinary or
emergency purposes and then, in no event, in excess of 5% of the Index Master
Portfolio's gross assets valued at the lower of market or cost; provided that it
may borrow amounts not exceeding 33% of its net assets from banks and pledge not
more than 33% of such assets to secure such loans;

6. Pledge, mortgage, or hypothecate any of its assets to an extent greater
than 10% of its total assets at fair market value, except as described in (5)
above;

7. Invest more than 10% of the value of its total assets in illiquid
securities which include certain restricted securities, repurchase agreements
with maturities of greater than seven days, and other illiquid investments;

8. Engage in the business of underwriting securities issued by others;

9. Invest for the purpose of exercising control over management of any
company;

10. Invest its assets in securities of any investment company, except in
connection with a merger, acquisition of assets, consolidation or
reorganization;

11. Invest more than 5% of its total assets in securities of companies which
have (with predecessors) a record of less than three years' continuous
operation;

12. Acquire any securities of companies within one industry if, as a result
of such acquisition, more than 25% of the value of its total assets would be
invested in securities of companies within such industry;

13. Write or acquire options (except as described in (1) above) or interests
in oil, gas or other mineral exploration, leases or development programs;

14. Purchase warrants; however, it may acquire warrants as a result of
corporate actions involving its holdings of other equity securities;

15. Purchase securities on margin or sell short; or

16. Acquire more than 10% of the voting securities of any issuer.

17. Issue senior securities (as such term is defined in Section 18(f) of the
1940 Act), except as permitted under the 1940 Act.

The investment limitations described in (1) and (15) above do not
prohibit the Index Master Portfolio from making margin deposits to the extent
permitted under applicable regulations. Although (2) above prohibits cash
loans, the Index Master Portfolio is authorized to lend portfolio securities.
With respect to (7) above, pursuant to Rule 144A under the 1993 Act, the Index
Master Portfolio may purchase certain unregistered (i.e. restricted) securities
upon a determination that a liquid institutional market exists for the
securities. If it is decided that a liquid market does exist, the securities
will not be subject to the 10% limitation on holdings of illiquid securities
stated in (7) above. While maintaining oversight, the Board of Trustees of the
Trust has delegated the day-to-day function of making liquidity determinations
to DFA, the Index Master Portfolio's adviser. For Rule 144A securities to be
considered liquid, there must be at least two dealers making a market in such
securities. After purchase, the Board of Trustees of the Trust and DFA will
continue to monitor the liquidity of Rule 144A securities.

Subject to future regulatory guidance, for purposes of those investment
limitations identified above that are based on total assets, "total assets"
refers to the assets that the Index Master Portfolio owns, and does not include
assets which the Index Master Portfolio does not own but over which it has
effective control. For example, when applying a percentage investment
limitation that is based on total assets, the Index Master Portfolio will
exclude from its total assets those assets which represent collateral received
by the Index Master Portfolio for its securities lending transactions.

Unless otherwise indicated, all limitations applicable to the Index
Master Portfolio's investments apply only at the time that a transaction is
undertaken. Any subsequent change in a rating assigned by any rating service to
a security or change in the percentage of the Index Master Portfolio=s assets
invested in certain securities or other instruments resulting from market
fluctuations or other changes in the Index Master Portfolio's total assets will
not require the Index Master Portfolio to dispose of an investment until DFA
determines that it is practicable to sell or close out the investment without
undue market or tax consequences. In the event that ratings services assign
different ratings to the same security, DFA will determine which rating it
believes best reflects the security's quality and risk at that time, which may
be the higher of the several assigned ratings.

Because the structure of the Index Master Portfolio is based on the
relative market capitalizations of eligible holdings, it is possible that the
Index Master Portfolio might include at least 5% of the outstanding voting
securities of one or more issuers. In such circumstances, the Trust and the
issuer would be deemed "affiliated persons" under the 1940 Act, and certain
requirements of the Act regulating dealings between affiliates might become
applicable.

TRUSTEES AND OFFICERS

THE FUND

The business and affairs of the Fund are managed under the direction of its
Board of Trustees. The trustees and executive officers of the Fund, and their
business addresses and principal occupations during the past five years, are:

PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ----------------------

William O. Albertini
Bell Atlantic Global Trustee Executive Vice President and Chief Financial
Wireless Officer since August, 1997, Bell Atlantic Global
1717 Arch Street Wireless (global wireless communications);
29th Floor East Executive Vice President, Chief Financial Officer
Philadelphia, PA 19103 and Director from February 1995-August 1997, Vice
Age: 55 President and Chief Financial Officer from
January 1991 - February 1995, Bell Atlantic
Corporation (a diversified telecommunications
company); Director, Groupo Iusacell, S.A. de C.V.
(cellular communications company) since June
1994; Director, American Waterworks, Inc. (water
utility) since May 1990; Trustee, The Carl E. &
Emily I. Weller Foundation since October 1991.

Raymond J. Clark* Trustee, President Treasurer of Princeton University since 1987;
Office of the Treasurer and Treasurer Trustee, The Compass Capital Group of Funds from
Princeton University 1987 to 1996; Trustee, Chemical Bank, New Jersey
3 New South Building Advisory Board from 1994 until 1995; Trustee,
P.O. Box 35 American Red Cross - Mercer County Chapter since
Princeton, NJ 08540 1995; Trustee, Medical Center of Princeton; and
Age: 63 Trustee, United Way-Greater Mercer County from
1996-1997.

Robert M. Hernandez Trustee Director since 1991, Vice Chairman and Chief
USX Corporation Financial Officer since 1994, Executive Vice
600 Grant Street President -Accounting and Finance and Chief
6105 USX Tower Financial Officer from 1991 to 1994, USX
Pittsburgh, PA 15219 Corporation (a diversified company principally
Age: 54 engaged in energy and steel businesses); Director
and Chairman of the Executive Committee, ACE
Limited (insurance company); Trustee, Allegheny
University Hospitals, Allegheny General; and
Allegheny University Hospitals-West, Director,
Marinette Marine Corporation; Director, Transtar,
Inc. (transportation company) since 1996; and
Director and Chairman of the Board, RTI
International Metals, Inc.

Anthony M. Santomero Vice Chairman of Deputy Dean from 1990 to 1994, Richard K. Mellon
The Wharton School the Board Professor of Finance since April 1984, Director,
University of Pennsylvania Wharton Financial Institutions Center since July
Room 2344 1995, and Dean's Advisory Council Member since
Steinberg Hall-Dietrich July 1984, The Wharton School, University of
Hall Pennsylvania; Associate Editor, Journal of Banking
Philadelphia, and Finance since June 1978; Associate Editor,
PA 19104-6367 Journal of Economics and Business since October

_________________

* This trustee may be deemed an "interested person" of the Fund as defined in
the 1940 Act.

PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ----------------------

Age: 52 1979; Associate Editor, Journal of Money, Credit
and Banking since January 1980; Research Associate,
New York University Center for Japan - U.S. Business
and Economic Studies since July 1989; Editorial
Advisory Board, Open Economics Review since
November 1990; Director, The Zweig Fund and The
Zweig Total Return Fund; Director of Municipal
Fund for California Investors, Inc. and Municipal
Fund for New York Investors, Inc.

David R. Wilmerding, Jr. Chairman of the Chairman, Gee, Wilmerding & Associates, Inc.
One Aldwyn Center Board (investment advisers) since February 1989;
Villanova, PA 19085 Director, Beaver Management Corporation (land
Age: 63 management corporation); Managing General
Partner, Chestnut Street Exchange Fund; Director,
Independence Square Income Securities, Inc.;
Director, The Mutual Fire, Marine and Inland
Insurance Company; Director, U.S. Retirement
Communities, Inc.; Director, Trustee or Managing
General Partner of a number of investment
companies advised by BIMC and its affiliates.

Karen H. Sabath Assistant Secretary Managing Director, BlackRock Advisors, Inc. since
BlackRock Advisors, Inc. February 1998; President, Compass Capital Group,
345 Park Avenue Inc. from 1995 to March 1998; Managing Director
New York, NY 10154 of BlackRock Financial Management, Inc. since
Age: 33 1993; prior to 1993, Vice President of BlackRock
Financial Management, Inc.

Ellen L. Corson Assistant Treasurer Vice President and Director of Mutual Fund
PFPC Inc. Accounting and Administration, PFPC Inc. since
103 Bellevue Parkway November 1997; Assistant Vice President, PFPC
Wilmington, DE 19809 Inc. from March 1997 to November 1997; Senior
Age: 34 Accounting Officer, PFPC Inc. from March 1993 to
March 1997.

Brian P. Kindelan Secretary Vice President and Senior Counsel, BlackRock
BlackRock Financial Financial Management, Inc. since April 1998;
Management, Inc. Senior Counsel, PNC Bank Corp. from May 1995 to
1600 Market Street April 1998; Associate, Stradley, Ronon, Stevens &
28th Fl. Young, LLP from March 1990 to May 1995.
Philadelphia, PA 19103
Age: 39

The Fund pays trustees who are not affiliated with BlackRock Advisors, Inc.
("BlackRock") or BlackRock Distributors, Inc. ("BDI" or the "Distributor")
$20,000 annually ($30,000 annually in the event that the assets of the Fund
exceed $40 billion) and $350 per Portfolio for each full in-person meeting of
the Board that they attend. The Fund pays the Chairman and Vice Chairman of the
Board an additional $10,000 and $5,000 per year, respectively, for their service
in such capacities. Trustees who are not affiliated with BlackRock or the
Distributor are reimbursed for any expenses incurred in attending meetings of
the Board of Trustees or any committee thereof. The term of office of each
trustee will automatically terminate when such trustee reaches 72 years of age.
No officer, director or employee of BlackRock, BlackRock Institutional
Management Corporation ("BIMC"),

BlackRock Financial Management, Inc. ("BFM"), BlackRock International, Ltd.
("BIL"), PFPC Inc. ("PFPC") (with BlackRock, the "Administrators"), BDI, or PNC
Bank, National Association ("PNC Bank") currently receives any compensation from
the Fund. As of the date of this Statement of Additional Information, the
trustees and officers of the Fund, as a group, owned less than 1% of the
outstanding shares of each class of each Portfolio.

The table below sets forth the compensation actually received from the Fund
and the Fund Complex of which the Fund is a part by the trustees for the fiscal
year ended September 30, 1998:

PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED FROM REGISTRANT AND
COMPENSATION ACCRUED AS PART ANNUAL BENEFITS FUND COMPLEX
NAME OF PERSON, POSITION FROM REGISTRANT OF FUND EXPENSES UPON RETIREMENT PAID TO TRUSTEES
- ------------------------ --------------- ------------------- --------------- -------------------

Anthony M. Santomero, Vice $57,675 N/A N/A (3)/2/ $70,175
Chairman of the Board

David R. Wilmerding, Jr., $62,675 N/A N/A (3)/2/ $76,675
Chairman of the Board

William O. Albertini, Trustee $52,675 N/A N/A (1)/2/ $52,675

Raymond J. Clark, Trustee $52,675 N/A N/A (1)/2/ $52,675

Robert M. Hernandez, Trustee $52,675 N/A N/A (1)/2/ $52,675

____________________

1. A Fund Complex means two or more investment companies that hold themselves
out to investors as related companies for purposes of investment and
investment services, or have a common investment adviser or have an
investment adviser that is an affiliated person of the investment adviser of
any of the other investment companies.

2. Total number of investment company boards trustees served on within the Fund
Complex.

THE TRUST

The names, addresses and dates of birth of the trustees and officers of the
Trust and a brief statement of their present positions and principal occupations
during the past five years are set forth below. As used below, "DFA Entities"
refers to the following: Dimensional Fund Advisors Inc., Dimensional Fund
Advisors Ltd., DFA Australia Limited, DFA Investment Dimensions Group Inc.
(Registered Investment Company), Dimensional Emerging Markets Value Fund Inc.
(Registered Investment Company), Dimensional Investment Group Inc. (Registered
Investment Company) and DFA Securities Inc.

PRINCIPAL OCCUPATION
TRUSTEES POSITION WITH TRUST DURING LAST FIVE YEARS
-------- ------------------- ----------------------

David G. Booth* Trustee, President and President, Chairman-Chief Executive Officer and
Santa Monica, CA Chairman-Chief Executive Director of all DFA Entities, except Dimensional
Birthdate: 12/2/46 Officer Fund Advisors Ltd., of which he is Chairman and
Director

George M. Trustee Leo Melamed Professor of Finance, Graduate
Constantinides School of Business, University of Chicago.
Chicago, IL Director, DFA Investment Dimensions Group Inc.,
Birthdate: 9/22/47 Dimensional Investment Group Inc. and
Dimensional Emerging Markets Value Fund Inc.

John P. Gould Trustee Steven G. Rothmeier Distinguished Service
Chicago, IL Professor of Economics, Graduate School of
Birthdate: 1/19/39 Business, University of Chicago. Trustee, First
Prairie Funds (registered investment companies).
Director, DFA Investment Dimensions Group Inc.,
Dimensional Investment Group Inc., Dimensional
Emerging Markets Value Fund Inc. and Harbor
Investment Advisors. Executive Vice President,
Lexecon Inc. (economics, law, strategy and
finance consulting).

Roger G. Ibbotson Trustee Professor in Practice of Finance, Yale School of
New Haven, CT Management. Director, DFA Investment Dimensions
Birthdate: 5/27/43 Group Inc., Dimensional Investment Group Inc.,
Dimensional Emerging Markets Value Fund Inc.,
Hospital Fund, Inc. (investment management
services) and BIRR Portfolio Analysis, Inc.
(software products). Chairman, Ibbotson
Associates, Inc., Chicago, IL (software, data,
publishing and consulting).

Merton H. Miller Trustee Robert R. McCormick Distinguished Service
Chicago, IL Professor Emeritus, Graduate School of Business,
Birthdate: 5/16/23 University of Chicago. Director, DFA Investment
Dimensions Group Inc., Dimensional Investment
Group Inc. and Dimensional Emerging Markets
Value Fund Inc. Public Director, Chicago
Mercantile Exchange.

* Interested Trustee of the Trust.

PRINCIPAL OCCUPATION
TRUSTEES POSITION WITH TRUST DURING LAST FIVE YEARS
-------- ------------------- ----------------------

Myron S. Scholes Trustee Limited Partner, Long-Term Capital Management
Greenwich, CT L.P. (money manager). Frank E. Buck Professor
Birthdate: 7/1/42 Emeritus of Finance, Graduate School of Business
and Professor of Law, Law School, Senior
Research Fellow, Hoover Institution, (all)
Stanford University. Director, DFA Investment
Dimensions Group Inc., Dimensional Investment
Group Inc., Dimensional Emerging Markets Value
Fund Inc., Benham Capital Management Group of
Investment Companies and Smith Breedon Group of
Investment Companies.

Rex A. Sinquefield* Trustee, Chairman Chairman-Chief Investment Officer and Director
Santa Monica, CA and Chief Investment Officer of all DFA Entities, except Dimensional Fund
Birthdate: 9/7/44 Advisors Ltd., of which he is Chairman, Chief
Executive Officer and Director.

Arthur Barlow Vice President Vice President of all DFA Entities.
Santa Monica, CA
Birthdate: 11/7/55

Truman Clark Vice President Vice President of all DFA Entities. Consultant
Santa Monica, CA until October 1995 and Principal and Manager of
Birthdate: 4/8/41 Product Development, Wells Fargo Nikko
Investment Advisors from 1990-1994.

Robert Deere Vice President Vice President of all DFA Entities.
Santa Monica, CA
Birthdate: 10/8/57

* Interested Trustee of the Trust.

PRINCIPAL OCCUPATION
TRUSTEES POSITION WITH TRUST DURING LAST FIVE YEARS
-------- ------------------- ----------------------

Irene R. Diamant Vice President and Secretary Vice President and Secretary of all DFA
Santa Monica, CA Entities, except Dimensional Fund Advisors Ltd.,
Birthdate: 7/16/50 for which she is Vice President.

Richard Eustice Vice President and Vice President of all DFA entities.
Santa Monica, CA Assistant Secretary
8/5/65

Eugene Fama, Jr. Vice President Vice President of all DFA Entities.
Santa Monica, CA
Birthdate: 1/21/61

Kamyab Hashemi-Nejad, Vice President, Controller Vice President, Controller and Assistant
Santa Monica, CA and Assistant Treasurer Treasurer of all DFA Entities.
Birthdate: 1/22/61

Stephen P. Manus, Vice President Managing Director, ANB Investment Management and
Santa Monica, CA Trust Company from 1985-1993; President, ANB
Birthdate: 12/26/50 Investment Management and Trust Company from
1993-1997. Vice President of all DFA Entities.

Karen McGinley, Vice President Vice President of all DFA Entities.
Santa Monica, CA
Birthdate: 3/10/66

Catherine L. Newell, Vice President and Associate, Morrison & Foerster, LLP from
Santa Monica, CA Assistant Secretary 1989-1996. Vice President and Assistant
Birthdate: 5/7/64 Secretary of all DFA Entities, except
Dimensional Fund Advisors Ltd., for which she is
a Vice President.

David Plecha Vice President Vice President of all DFA Entities.
Santa Monica, CA
Birthdate: 10/26/61

George Sands Vice President Vice President of all DFA Entities.
Santa Monica, CA
Birthdate: 2/8/56

Michael T. Scardina Vice President, Vice President, Chief Financial Officer, and
Santa Monica, CA Chief Financial Officer, Treasurer of all DFA Entities.
Birthdate: 10/12/55 and Treasurer

Jeanne C. Sinquefield, Executive Vice President Executive Vice President of all DFA Entities.
Ph.D.
Santa Monica, CA
Birthdate: 12/2/46

Scott Thornton Vice President Vice President of all DFA Entities.
Santa Monica, CA
Birthdate: 3/1/63

PRINCIPAL OCCUPATION
TRUSTEES POSITION WITH TRUST DURING LAST FIVE YEARS
-------- ------------------- ----------------------

Weston Wellington,
Santa Monica, CA Vice President Vice President of all DFA Entities. Vice
Birthdate: 3/1/51 President, Director of Research, LPL Financial
Services, Inc., Boston, MA, 1987-1994.

Rex A. Sinquefield, Trustee, Chairman and Chief Investment Officer of the Trust,
and Jeanne C. Sinquefield, Executive Vice President of the Trust, are husband
and wife. David G. Booth and Rex A. Sinquefield, both of whom are trustees and
officers of the Trust and directors, officers and shareholders of DFA, may be
deemed controlling persons of DFA.

Set forth below is a table listing, for each trustee of the Trust entitled to
receive compensation, the compensation received from the Trust during the fiscal
year ended November 30, 1998 and the total compensation received from all four
registered investment companies for which Dimensional Fund Advisors Inc. ("DFA")
served as investment adviser during that same fiscal year.

TOTAL
PENSION OR COMPENSATION
AGGREGATE RETIREMENT ESTIMATED FROM
COMPENSATION BENEFITS ACCRUED ANNUAL BENEFITS TRUST AND TRUST
FROM AS PART OF TRUST UPON COMPLEX* PAID TO
NAME OF PERSON, POSITION TRUST EXPENSES RETIREMENT TRUSTEES
- ---------------------------------------- -------------- ------------------ ----------------- -----------------

George M. Constantinides, Trustee $5,000 N/A N/A $30,000
John P. Gould, Trustee $5,000 N/A N/A $30,000
Roger G. Ibbotson, Trustee $5,000 N/A N/A $30,000
Merton H. Miller, Trustee $5,000 N/A N/A $30,000
Myron S. Scholes, Trustee $5,000 N/A N/A $30,000

SHAREHOLDER AND TRUSTEE LIABILITY OF THE FUND

Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. However, the Fund's Declaration of Trust provides that shareholders
shall not be subject to any personal liability in connection with the assets of
the Fund for the acts or obligations of the Fund, and that every note, bond,
contract, order or other undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not personally liable thereunder. The
Declaration of Trust provides for indemnification out of the trust property of
any shareholder held personally liable solely by reason of his being or having
been a shareholder and not because of his acts or omissions or some other
reason. The Declaration of Trust also provides that the Fund shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Fund, and shall satisfy any judgment thereon.

The Declaration of Trust further provides that all persons having any claim
against the trustees or Fund shall look solely to the trust property for
payment; that no trustee of the Fund shall be personally liable for or on
account of any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration or preservation of the trust
property or the conduct of any business of the Fund; and that no trustee shall
be personally liable to any person for any action or failure to act except by
reason of his own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties as a trustee.

________________

* Trust Complex means all registered investment companies for which DFA, the
Trust's investment adviser, performs advisory or administration services and
for which the individuals listed above serve as directors/trustees.

With the exception stated, the Declaration of Trust provides that a trustee is
entitled to be indemnified against all liabilities and expenses reasonably
incurred by him in connection with the defense or disposition of any proceeding
in which he may be involved or with which he may be threatened by reason of his
being or having been a trustee, and that the Fund will indemnify officers,
representatives and employees of the Fund to the same extent that trustees are
entitled to indemnification.

INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS

ADVISORY AND SUB-ADVISORY AGREEMENTS. The advisory and sub-advisory services
provided by BlackRock, BIMC, BFM, BIL and, with respect to the Index Master
Portfolio, Dimensional Fund Advisors Inc. ("DFA"), and the fees received by
BlackRock and DFA for such services, are described in the Prospectuses.

For their advisory and subadvisory services, BlackRock, BIMC, BFM, BIL and
DFA, as applicable, are entitled to fees, computed daily on a portfolio-by-
portfolio basis and payable monthly, at the maximum annual rates set forth
below.

MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH EQUITY PORTFOLIO EXCEPT
THE INDEX EQUITY, MID- CAP VALUE EQUITY, MID-CAP GROWTH EQUITY, MICRO-CAP
EQUITY AND THE INTERNATIONAL PORTFOLIOS (BEFORE WAIVERS)

INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE TO BFM

first $1 billion .550% .400%
$1 billion C $2 billion .500 .350
$2 billion C $3 billion .475 .325
greater than $3 billion .450 .300

MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE MID-CAP VALUE EQUITY AND
MID-CAP GROWTH EQUITY PORTFOLIOS (BEFORE WAIVERS)

INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE TO BFM

first $1 billion .800% .650%
$1 billion C $2 billion .700 .550
$2 billion C $3 billion .675 .500
greater than $3 billion .625 .475

MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE
INTERNATIONAL EQUITY PORTFOLIO (BEFORE WAIVERS)

INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE TO BIL

first $1 billion .750% .600%
$1 billion C $2 billion .700 .550
$2 billion C $3 billion .675 .525
greater than $3 billion .650 .500

MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE
INTERNATIONAL EMERGING MARKETS PORTFOLIO (BEFORE WAIVERS)

INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE TO BIL

first $1 billion 1.250% 1.100%
$1 billion C $2 billion 1.200 1.050
$2 billion C $3 billion 1.155 1.005
greater than $3 billion 1.100 .950

MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE
INTERNATIONAL SMALL CAP EQUITY PORTFOLIO (BEFORE WAIVERS)

INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE TO BIL

first $1 billion 1.00% .85%
$1 billion C $2 billion .95 .80
$2 billion C $3 billion .90 .75
greater than $3 billion .85 .70

MAXIMUM ANNUAL CONTRACTUAL FEE RATE
FOR THE MICRO-CAP EQUITY PORTFOLIO (BEFORE WAIVERS)

INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE TO BFM

first $1 billion 1.10% .950%
$1 billion C $2 billion 1.05 .900
$2 billion C $3 billion 1.025 .875
greater than $3 billion 1.00 .850

MAXIMUM ANNUAL CONTRACTUAL FEE RATE
FOR THE BOND PORTFOLIOS (BEFORE WAIVERS)

EACH PORTFOLIO EXCEPT THE
INTERNATIONAL BOND, GNMA, DE INTERNATIONAL BOND, GNMA, DE
TAX-FREE INCOME AND KY TAX-FREE TAX-FREE INCOME AND KY
INCOME PORTFOLIOS TAX-FREE INCOME PORTFOLIOS
---------------------------------- ----------------------------------
INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEES TO BFM ADVISORY FEE FEES TO BFM
- ------------------------ ---------------- ---------------- ---------------- ----------------

first $1 billion .500% .350% .550% .400%
$1 billion C $2 billion .450 .300 .500 .350
$2 billion C $3 billion .425 .275 .475 .325
greater than $3 billion .400 .250 .450 .300

MAXIMUM ANNUAL CONTRACTUAL FEE RATE
FOR THE MONEY MARKET PORTFOLIOS (BEFORE WAIVERS)

INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE TO BIMC

first $1 billion .450% .400%
$1 billion C $2 billion .400 .350
$2 billion C $3 billion .375 .325
greater than $3 billion .350 .300

BlackRock, a majority-owned indirect subsidiary of PNC Bank Corp., renders
advisory services to each of the Portfolios, except the Index Equity Portfolio,
pursuant to an Investment Advisory Agreement. From the commencement of
operations of each Portfolio (other than the New Jersey Municipal Money Market,
New Jersey Tax-Free Income, Core Bond, Low Duration Bond and International Bond
Portfolios) until January 4, 1996 (June 1, 1996 in the case of the Index Equity
Portfolio), BIMC served as adviser.

From July 1, 1991 to December 31, 1995, Midlantic Bank, N.A. ("Midlantic
Bank") served as investment adviser to the predecessor portfolios of the
International Bond, New Jersey Tax-Free Income and New Jersey Municipal Money
Market Portfolios. From January 1, 1996 through January 12, 1996 (February 12,
1996 with respect to the predecessor portfolio of the International Bond
Portfolio): (i) BlackRock and Morgan Grenfell Investment Services Limited
("Morgan Grenfell") served as investment adviser and sub-adviser, respectively,
to the predecessor portfolio to the International Bond Portfolio; (ii) BIMC
served as investment adviser to the predecessor portfolio to the New Jersey
Municipal Money Market Portfolio; and (iii) BFM served as investment adviser to
the predecessor portfolio to the New Jersey Tax-Free Income Portfolio pursuant
to interim advisory and sub-advisory agreements approved by the shareholders of
the Compass Capital Group of Funds. From December 9, 1992 to January 13, 1996,
BFM served as investment adviser to the predecessor portfolio of the Core Bond
Portfolio. From July 17, 1992 to January 13, 1996, BFM served as investment
adviser to the predecessor portfolio of the Low Duration Bond Portfolio.

BFM renders sub-advisory services to the Balanced, Large Cap Value Equity,
Mid-Cap Value Equity, Small Cap Value Equity, Select Equity, Large Cap Growth
Equity, Mid-Cap Growth Equity, Small Cap Growth Equity, Micro-Cap Equity,
Managed Income, Intermediate Government Bond, Tax-Free Income, Ohio Tax-Free
Income, Pennsylvania Tax-Free Income, Low Duration Bond, Intermediate Bond, New
Jersey Tax-Free Income, Delaware Tax-Free Income, Kentucky Tax-Free Income, Core
Bond, Government Income, International Bond, High Yield Bond and GNMA Portfolios
pursuant to Sub-Advisory Agreements. BIL renders sub-advisory services to the
International Equity, International Emerging Markets and International Small Cap
Equity Portfolios pursuant to Sub-Advisory Agreements. BIMC renders sub-
advisory services to the Money Market, U.S. Treasury Money Market, Municipal
Money Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market,
North Carolina Municipal Money Market, Virginia Municipal Money Market and New
Jersey Municipal Money Market Portfolios pursuant to Sub-Advisory Agreements.
DFA renders advisory services to the Index Master Portfolio, the registered
investment company in which the Index Equity Portfolio invests all of its
assets, pursuant to an Investment Management Agreement. The Investment Advisory
Agreement with BlackRock, the Investment Management Agreement with DFA and the
above-referenced Sub-Advisory Agreements are collectively referred to as the
"Advisory Contracts."

Provident Capital Management, Inc. (a predecessor entity of BFM) ("PCM")
served as sub-adviser to the International Equity and International Emerging
Markets Portfolios from commencement of operations (April 27, 1992 in the case
of the International Equity Portfolio; June 17, 1994 in the case of the
International Emerging Markets Portfolio) to April 19, 1996.

PNC Bank served as sub-adviser for the Money Market Portfolio from October 4,
1989 (commencement of operations) to January 4, 1996; for the Municipal Money
Market Portfolio from September 10, 1993 to January 4, 1996; for the U.S.
Treasury Money Market Portfolio from November 1, 1989 (commencement of
operations) to January 4, 1996; for the Ohio Municipal Money Market Portfolio
from June 1, 1993 (commencement of operations) to January 4, 1996; for the
Pennsylvania Municipal Money Market Portfolio from June 1, 1993 (commencement of
operations) to January 4, 1996; for the North Carolina Municipal Money Market
Portfolio from May 4, 1993 (commencement of operations) to January 4, 1996; for
the Virginia Municipal Money Market Portfolio from July 25, 1994 (commencement
of operations) to January 4, 1996; and for the New Jersey Municipal Money Market
Portfolio from January 13, 1996 to June 6, 1996. From April 4, 1990
(commencement of operations) to January 4, 1996, PNC Bank served as sub-adviser
to the Balanced Portfolio. From March 1, 1993 to January 4, 1996, PNC Equity
Advisors Company (a predecessor entity of BlackRock) ("PEAC") served as sub-
adviser to the Select Equity Portfolio. From March 29, 1995 to June 1, 1996,
PEAC served as sub-adviser to the Index Equity Portfolio. From July 1, 1996
through December 31, 1996, Morgan Grenfell served as sub-adviser to the
International Bond Portfolio.

Under the relevant Advisory Contracts, BlackRock, BIMC, BFM and BIL are not
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund or a Portfolio in connection with the performance of the Advisory
Contracts. Under the Advisory Contracts, BlackRock, BIMC, BFM, BIL and DFA are
liable for a loss resulting from willful misfeasance, bad faith or gross
negligence in the performance of their respective duties or from reckless
disregard of their respective duties and

obligations thereunder. Each of the Advisory Contracts (except the Advisory
Contract relating to the Index Master Portfolio) is terminable as to a Portfolio
by vote of the Fund's Board of Trustees or by the holders of a majority of the
outstanding voting securities of the relevant Portfolio, at any time without
penalty, on 60 days' written notice to BlackRock, BIMC, BFM or BIL, as the case
may be. BlackRock, BIMC, BFM and BIL may also terminate their advisory
relationship with respect to a Portfolio on 60 days' written notice to the Fund.
The Advisory Contract relating to the Index Master Portfolio is terminable by
vote of the Trust's Board of Trustees or by the holders of a majority of the
outstanding voting securities of the Index Master Portfolio at any time without
penalty on 60 days' written notice to DFA. DFA may also terminate its advisory
relationship with respect to the Index Master Portfolio on 90 days' written
notice to the Trust. Each of the Advisory Contracts terminates automatically in
the event of its assignment.

For the period from October 1, 1997 (May 1, 1998 in the case of the Micro-
Cap Equity Portfolio; May 11, 1998 in the case of the Delaware Tax-Free Income
and Kentucky Tax-Free Income Portfolios; and May 18, 1998 in the case of the
GNMA Portfolio) through September 30, 1998, the Fund paid BlackRock advisory
fees, and BlackRock waived advisory fees and reimbursed expenses, as
follows:

FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS REIMBURSEMENTS
- --------------------------------------------------- --------------------- ------------------- ----------------------

Money Market....................................... $ 4,995,812 $ 6,990,461 $0
U.S. Treasury Money Market......................... 1,455,174 3,050,276 0
Municipal Money Market............................. 589,271 1,560,040 0
New Jersey Municipal Money Market.................. 117,098 509,669 0
North Carolina Municipal Money Market.............. 67,431 780,226 0
Ohio Municipal Money Market........................ 119,244 460,253 0
Pennsylvania Municipal Money Market................ 782,010 1,948,681 0
Virginia Municipal Money Market.................... 15,607 307,363 0
Low Duration Bond.................................. 472,357 1,018,534 0
Intermediate Government Bond....................... 814,750 524,055 0
Intermediate Bond.................................. 1,123,779 996,975 0
Core Bond.......................................... 1,296,895 2,294,530 0
Government Income.................................. 17,520 110,545 0
Managed Income..................................... 3,810,648 1,717,518 0
International Bond................................. 203,495 66,216 0
GNMA............................................... 112,096 130,075 0
Tax-Free Income.................................... 465,903 352,304 0
Pennsylvania Tax-Free Income....................... 1,444,081 1,038,853 0
New Jersey Tax-Free Income......................... 319,096 296,294 0
Ohio Tax-Free Income............................... 107,019 136,991 0
Delaware Tax-Free Income........................... 197,418 57,976 0
Kentucky Tax-Free Income........................... 321,405 134,676 0
Large Cap Value Equity............................. 10,148,888 4,823 0
Large Cap Growth Equity............................ 5,401,230 1,583 0
Mid-Cap Value Equity............................... 1,595,030 77,992 0
Mid-Cap Growth Equity.............................. 1,592,876 78,173 0
Small Cap Value Equity............................. 3,420,178 25,656 0
Small Cap Growth Equity............................ 5,973,190 0 0
Micro-Cap Equity................................... 42 60,524 0
International Equity............................... 6,687,983 402,953 0
International Small Cap Equity..................... 55,673 142,318 0

FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS REIMBURSEMENTS
- --------------------------------------------------- --------------------- ------------------- ----------------------

International Emerging Markets..................... 1,613,829 129,596 0
Select Equity...................................... 6,235,046 0 0
Balanced........................................... 2,666,850 8,135 0

Totals............................................. $64,238,904 $25,414,264 $0

For the period from October 1, 1996 (December 27, 1996 in the case of the
Mid-Cap Growth Equity and Mid-Cap Value Equity Portfolios; and September 26,
1997 in the case of the International Small Cap Equity Portfolio) through
September 30, 1997, the Fund paid BlackRock advisory fees, and BlackRock waived
advisory fees and reimbursed expenses, as follows:

FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS REIMBURSEMENTS
- --------------------------------------------------- --------------------- ------------------- ----------------------

Money Market...................................... $2,648,951 $8,355,021 $ 0
U.S. Treasury Money Market........................ 865,528 3,842,169 0
Municipal Money Market............................ 247,591 1,482,338 0
New Jersey Municipal Money Market................. 67,821 483,238 0
North Carolina Municipal Money Market............. 94,458 602,236 0
Ohio Municipal Money Market....................... 66,919 434,972 0
Pennsylvania Municipal Money Market............... 378,571 2,048,282 0
Virginia Municipal Money Market................... 4,280 267,307 18,025
Low Duration Bond................................. 599,206 517,845 0
Intermediate Government Bond...................... 462,943 308,628 0
Intermediate Bond................................. 973,237 648,825 0
Core Bond......................................... 1,040,492 1,005,843 0
Government Income................................. 465 84,527 47,550
Managed Income.................................... 2,629,559 1,126,954 0
International Bond................................ 220,526 12,573 0
Tax-Free Income................................... 158,143 123,004 0
Pennsylvania Tax-Free Income...................... 268,228 178,819 0
New Jersey Tax-Free Income........................ 254,415 179,069 0
Ohio Tax-Free Income.............................. 10,355 43,390 0
Large Cap Value Equity............................ 6,487,065 480,085 0
Large Cap Growth Equity........................... 3,718,080 233,396 0
Mid-Cap Value Equity.............................. 499,380 4,043 0
Mid-Cap Growth Equity............................. 499,026 4,087 0
Small Cap Value Equity............................ 2,036,977 6,910 0
Small Cap Growth Equity........................... 3,169,739 32,560 0
International Equity.............................. 4,101,006 556,548 0
International Small Cap Equity.................... 0 0 0
International Emerging Markets.................... 1,786,671 152,118 0
Select Equity..................................... 2,562,623 154,197 0
Balanced.......................................... 1,486,866 92,278 0

For the period from October 1, 1995 through January 4, 1996, the Fund paid
BIMC advisory fees, and BIMC waived advisory fees and reimbursed expenses, as
follows:

FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS REIMBURSEMENTS
- --------------------------------------------------- --------------------- ------------------- ----------------------

Money Market....................................... $321,268 $1,818,401 $0

FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS REIMBURSEMENTS
- --------------------------------------------------------- ------------------ ------------- -----------------

Municipal Money Market.................................... 46,804 304,226 0
U.S. Treasury Money Market................................ 114,639 745,150 0
Ohio Municipal Money Market............................... 11,052 71,841 0
Pennsylvania Municipal Money Market....................... 64,257 417,675 0
North Carolina Municipal Money Market..................... 11,026 71,666 0
Virginia Municipal Money Market........................... 0 7,024 0
Managed Income............................................ 520,724 223,168 0
Government Income......................................... 0 17,234 0
Tax-Free Income........................................... 3,933 11,137 0
Intermediate Government Bond.............................. 114,345 130,122 0
Ohio Tax-Free Income...................................... 723 10,100 0
Pennsylvania Tax-Free Income.............................. 43,145 37,663 0
Intermediate Bond......................................... 136,544 119,059 0
Large Cap Value Equity.................................... 829,764 147,027 0
Large Cap Growth Equity................................... 361,240 95,914 0
Small Cap Growth Equity................................... 304,284 23,327 0
Select Equity............................................. 369,071 97,791 0
Index Equity.............................................. 4,647 88,292 0
Small Cap Value Equity.................................... 320,588 24,942 0
International Equity...................................... 697,319 127,354 0
International Emerging Markets............................ 144,937 11,380 0
Balanced.................................................. 201,642 53,929 0

For the period from January 5, 1996 (February 1, 1996 in the case of the New
Jersey Tax-Free Income and New Jersey Municipal Money Market Portfolios;
February 13, 1996 in the case of the International Bond Portfolio; and April 1,
1996 in the case of the Core Bond and Low Duration Bond Portfolios) through
September 30, 1996 (June 1, 1996 in the case of the Index Equity Portfolio), the
Fund paid BlackRock (BIMC in the case of the Index Equity Portfolio) advisory
fees, and BlackRock (BIMC in the case of the Index Equity Portfolio) waived
advisory fees and reimbursed expenses, as follows:

FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
- ------------------------------------------------------ ------------------ ------------- ------------------

Money Market........................................... $1,443,913 $6,290,596 $ 0
Municipal Money Market................................. 158,379 1,029,459 0
U.S. Treasury Money Market............................. 691,448 3,584,858 0
Ohio Municipal Money Market............................ 32,275 209,784 0
Pennsylvania Municipal Money Market.................... 240,350 1,562,271 0
North Carolina Municipal Money Market.................. 45,997 298,983 0
Virginia Municipal Money Market........................ 0 180,685 14,604
New Jersey Municipal Money Market...................... 32,663 212,365 0
Managed Income......................................... 1,796,762 770,041 0
Government Income...................................... 0 52,817 7,027
Tax-Free Income........................................ 109,211 74,939 0
Intermediate Government Bond........................... 425,069 283,380 0
Ohio Tax-Free Income................................... 4,764 31,253 3,479
Pennsylvania Tax-Free Income........................... 185,302 123,326 0
Intermediate Bond...................................... 514,322 342,880 0
New Jersey Tax-Free Income............................. 184,448 122,966 0
International Bond..................................... 133,797 4,580 0
Core Bond.............................................. 424,691 283,127 0
Low Duration Bond...................................... 338,287 225,525 0
Large Cap Value Equity................................. 4,159,395 421,173 0

FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
- ------------------------------------------------------ ------------------ ------------- ------------------

Large Cap Growth Equity................................ 2,109,685 210,969 0
Small Cap Growth Equity................................ 1,596,126 7,204 0
Select Equity.......................................... 1,457,052 145,705 0
Index Equity........................................... 28,380 174,535 0
Small Cap Value Equity................................. 1,223,651 0 0
International Equity................................... 2,836,323 202,595 0
International Emerging Markets......................... 740,140 63,810 0
Balanced............................................... 917,400 91,740 0

For the period from October 1, 1997 (May 1, 1998 in the case of the Micro-Cap
Equity Portfolio; May 11, 1998 in the case of the Delaware Tax-Free Income and
Kentucky Tax-Free Income Portfolios and May 18, 1998 in the case of the GNMA
Portfolio) through September 30, 1998, BlackRock paid sub-advisory fees to the
specified Portfolios' sub-advisers, after waivers, and such sub-advisers waived
sub-advisory fees, as follows:

FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS
- --------------------------------------------------------------- ------------------- ---------------

Money Market.................................................... $ 1,473,942 $ 0
U.S. Treasury Money Market...................................... 501,588 0
Municipal Money Market.......................................... 258,731 0
New Jersey Municipal Money Market............................... 84,548 0
North Carolina Municipal Money Market........................... 95,193 0
Ohio Municipal Money Market..................................... 89,640 0
Pennsylvania Municipal Money Market............................. 321,314 0
Virginia Municipal Money Market................................. 31,202 0
Low Duration Bond............................................... 148,896 0
Intermediate Government Bond.................................... 97,580 0
Intermediate Bond............................................... 137,758 0
Core Bond....................................................... 269,603 0
Government Income............................................... 6,476 0
Managed Income.................................................. 478,498 0
International Bond.............................................. 29,036 0
GNMA............................................................ 31,017 0
Tax-Free Income................................................. 75,876 0
Pennsylvania Tax-Free Income.................................... 275,140 0
New Jersey Tax-Free Income...................................... 82,241 0
Ohio Tax-Free Income............................................ 21,499 0
Delaware Tax-Free Income........................................ 20,245 0
Kentucky Tax-Free Income........................................ 52,134 0
Large Cap Value Equity.......................................... 2,157,328 0
Large Cap Growth Equity......................................... 1,392,973 0
Mid-Cap Value Equity............................................ 226,692 0
Mid-Cap Growth Equity........................................... 310,057 0
Small Cap Value Equity.......................................... 659,000 0
Small Cap Growth Equity......................................... 1,671,007 0
Micro-Cap Equity................................................ 6,568 0
International Equity............................................ 896,720 0

FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS
- ---------------------------------------------------------------- --------------- ----------------

International Small Cap Equity.................................. 14,026 0
International Emerging Markets.................................. 83,941 0
Select Equity................................................... 1,400,970 0
Balanced........................................................ 799,193 0

For the period from October 1, 1996 (December 27, 1996 in the case of the
Mid-Cap Growth Equity and Mid-Cap Value Equity Portfolios; and September 26,
1997 in the case of the International Small Cap Equity Portfolio) through
September 30, 1997, BlackRock paid sub-advisory fees to the specified
Portfolios' sub-advisers, after waivers, and such sub-advisers waived sub-
advisory fees as follows:

FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS
- -------------------------------------------------------- --------------- ----------------

Money Market............................................ $1,300,023 $9,370,873
U.S. Treasury Money Market.............................. 577,321 3,631,808
Municipal Money Market.................................. 212,376 1,325,338
New Jersey Municipal Money Market....................... 75,204 414,553
North Carolina Municipal Money Market................... 81,568 536,785
Ohio Municipal Money Market............................. 62,070 384,055
Pennsylvania Municipal Money Market..................... 298,167 1,859,027
Virginia Municipal Money Market......................... 350 241,044
Low Duration Bond....................................... 36,930 745,005
Intermediate Government Bond............................ 14,450 525,649
Intermediate Bond....................................... 15,164 1,120,194
Core Bond............................................... 104,500 1,327,935
Government Income....................................... 0 59,494
Managed Income.......................................... 86,420 2,542,897
International Bond...................................... 79,789 89,738
Tax-Free Income......................................... 48,652 148,151
Pennsylvania Tax-Free Income............................ 34,191 278,742
New Jersey Tax-Free Income.............................. 26,000 277,439
Ohio Tax-Free Income.................................... 38,606 0
Large Cap Value Equity.................................. 583,448 4,590,272
Large Cap Growth Equity................................. 172,041 2,701,759
Mid-Cap Value Equity.................................... 15,821 413,497
Mid-Cap Growth Equity................................... 15,422 413,851
Small Cap Value Equity.................................. 383,789 1,102,690
Small Cap Growth Equity................................. 725,498 1,603,447
International Equity.................................... 269,395 3,456,696
International Small Cap Equity.......................... 0 727
International Emerging Markets.......................... 107,739 1,598,368
Select Equity........................................... 105,481 1,870,387
Balanced................................................ 297,047 851,422

For the period from October 1, 1995 through January 4, 1996, BIMC paid sub-
advisory fees to the specified Portfolios' sub-advisers, after waivers, and such
sub-advisers waived sub-advisory fees as follows:

FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS
- --------------------------------------------------------------- -------------- ------------

Money Market................................................... $ 0 $235,363
Municipal Money Market......................................... 0 38,613
U.S. Treasury Money Market..................................... 0 94,577
Ohio Municipal Money Market.................................... 0 9,118
Pennsylvania Municipal Money Market............................ 0 53,013
North Carolina Municipal Money Market.......................... 0 9,096
Virginia Municipal Money Market................................ 0 773
Managed Income................................................. 497,581 82,654
Government Income.............................................. 0 12,063
Tax-Free Income................................................ 3,693 9,207
Intermediate Government Bond................................... 73,585 97,542
Ohio Tax-Free Income........................................... 3,258 4,318
Pennsylvania Tax-Free Income................................... 24,323 32,242
Intermediate Bond.............................................. 76,937 101,986
Large Cap Value Equity......................................... 213,057 0
Large Cap Growth Equity........................................ 333,722 0
Small Cap Growth Equity........................................ 239,156 0
Select Equity.................................................. 340,809 0
Index Equity................................................... 12,385 73,920
Small Cap Value Equity......................................... 252,237 0
International Equity........................................... 659,738 0
International Emerging Markets................................. 137,559 0
Balanced....................................................... 186,567 0

For the period from January 5, 1996 (February 1, 1996 in the case of the
New Jersey Tax-Free Income and New Jersey Municipal Money Market Portfolios;
February 13, 1996 in the case of the International Bond Portfolio; and April 1,
1996 in the case of the Core Bond and Low Duration Bond Portfolios) through
September 30, 1996 (June 1, 1996 in the case of the Index Equity Portfolio),
BlackRock (BIMC in the case of the Index Equity Portfolio) paid sub-advisory
fees to the specified Portfolios' sub-advisers, after waivers, and such sub-
advisers waived sub-advisory fees as follows:

FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS
- ------------------------------------------------------------ -------------- ------------

Money Market................................................ $1,443,913 $5,342,421
Municipal Money Market...................................... 158,382 897,064
U.S. Treasury Money Market.................................. 694,221 3,095,647
Ohio Municipal Money Market................................. 32,275 182,796
Pennsylvania Municipal Money Market......................... 240,350 1,361,445
North Carolina Municipal Money Market....................... 45,997 260,560
Virginia Municipal Money Market............................. 0 160,601
New Jersey Municipal Money Market........................... 32,663 149,411
Managed Income.............................................. 1,488,836 248,415

FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS
- -----------------------------------------------------------------------------

Government Income............................ 0 36,973
Tax-Free Income.............................. 95,609 50,559
Intermediate Government Bond................. 412,698 2,499
Ohio Tax-Free Income......................... 1,428 23,786
Pennsylvania Tax-Free Income................. 170,395 84,589
Intermediate Bond............................ 402,873 188,333
New Jersey Tax-Free Income................... 153,707 61,483
International Bond........................... 106,486 0
Core Bond.................................... 353,907 141,564
Low Duration Bond............................ 281,905 112,763
Large Cap Value Equity....................... 3,314,383 0
Large Cap Growth Equity...................... 1,686,503 0
Small Cap Growth Equity...................... 1,164,980 0
Select Equity................................ 1,164,368 0
Index Equity................................. 20,642 123,200
Small Cap Value Equity....................... 888,986 0
International Equity......................... 2,431,134 0
International Emerging Markets............... 707,475 0
Balanced..................................... 733,223 0

For the services it provides as investment adviser to the Index Master
Portfolio, DFA is paid a monthly fee calculated at the annual rate of .025% of
the Index Master Portfolio's average daily net assets. For the fiscal years
ending November 30, 1996, 1997 and 1998, the Index Master Portfolio paid
advisory fees to DFA totaling $62,405, $160,156 and $293,240, respectively. The
Index Equity Portfolio did not invest in the Index Master Portfolio until June
2, 1996.

The predecessor portfolio to the New Jersey Tax-Free Income Portfolio was
advised by Midlantic Bank from July 1, 1991 through December 31, 1995, and by
BlackRock from January 1, 1996 through January 12, 1996. For the period from
January 1, 1996 through January 12, 1996, the predecessor portfolio to the New
Jersey Tax-Free Income Portfolio paid $20,165 in advisory fees to BFM. For the
period from March 1, 1995 through December 31, 1995 and for the fiscal years
ended February 28, 1995 and 1994, the predecessor portfolio to the New Jersey
Tax-Free Income Portfolio paid $496,305, $607,485 and $159,582, respectively, in
investment advisory fees to Midlantic Bank pursuant to its prior investment
advisory contract. In addition, during the period from March 1, 1995 through
December 31, 1995 and during the fiscal year ended February 28, 1995, Midlantic
Bank waived $0 and $2,451, respectively, in investment advisory fees. During
the period from January 13, 1996 through January 31, 1996, the New Jersey Tax-
Free Income Portfolio paid BlackRock $12,779 in investment advisory fees, and
BlackRock waived $8,520 in investment advisory fees. During the period from
January 13, 1996 through January 31, 1996, BlackRock paid BFM $8,945 in sub-
advisory fees with respect to the New Jersey Tax-Free Income Portfolio and BFM
waived $5,964 in sub-advisory fees.

The predecessor portfolio to the International Bond Portfolio was advised by
Midlantic Bank from July 1, 1991 through December 31, 1995, and by BlackRock
from January 1, 1996 through February 12, 1996. For the period from February 1,
1996 through February 12, 1996, the predecessor portfolio to the International
Bond Portfolio paid $4,134 in advisory fees to BlackRock and BlackRock waived
advisory fees and reimbursed expenses totaling $0 and $0, respectively. For the
period from February 1, 1996 through February 12, 1996, BlackRock paid Morgan
Grenfell $4,898 in sub-advisory fees with respect to the predecessor portfolio
to the International Bond Portfolio, and Morgan Grenfell waived sub-advisory
fees totaling $0. For the period from January 1, 1996 through January 31, 1996,
the predecessor portfolio to the International Bond Portfolio paid $24,832

in advisory fees to BlackRock. For the period from January 1, 1996 through
January 31, 1996, BlackRock paid Morgan Grenfell $20,176 in sub-advisory fees
with respect to the predecessor portfolio to the International Bond Portfolio.
For the period from March 1, 1995 through December 31, 1995 and for the fiscal
year ended February 28, 1995, the predecessor portfolio to the International
Bond Portfolio paid $305,176 and $361,620, respectively, in investment advisory
fees to Midlantic Bank pursuant to its prior investment advisory contract.

The predecessor portfolio to the New Jersey Municipal Money Market Portfolio
was advised by Midlantic Bank from July 1, 1991 through December 31, 1995, and
by BIMC from January 1, 1996 through January 12, 1996. For the period from
January 1, 1996 through January 12, 1996, the predecessor portfolio to the New
Jersey Municipal Money Market Portfolio paid $8,000 in advisory fees to BIMC.
For the period from March 1, 1995 through December 31, 1995, the predecessor
portfolio to the New Jersey Municipal Money Market Portfolio paid $155,696 in
investment advisory fees to Midlantic Bank pursuant to its prior investment
advisory contract. During the period from January 13, 1996 through January 31,
1996, the New Jersey Municipal Money Market Portfolio paid BIMC $2,128 in
investment advisory fees, and BIMC waived $13,826 in investment advisory fees.
During the period from January 13, 1996 through January 31, 1996, PNC Bank
waived all of the sub-advisory fees (in the amount of $1,125) with respect to
the New Jersey Municipal Money Market Portfolio.

The predecessor portfolio to the Core Bond Portfolio was advised by BFM. For
the period from July 1, 1995 through January 12, 1996, the predecessor portfolio
to the Core Bond Portfolio paid BFM $53,125 in investment advisory fees and BFM
waived $21,255 in investment advisory fees. For the fiscal years ended June 30,
1995 and 1994, BFM waived its investment advisory fee with respect to the
predecessor portfolio to the Core Bond Portfolio in the amounts of $56,894 and
$34,010, respectively, and reimbursed expenses amounting to $137,364 and
$137,179, respectively. During the period from January 13, 1996 through March
31, 1996, the Core Bond Portfolio paid BlackRock $182,709 in investment advisory
fees, and BlackRock waived $121,806 in investment advisory fees. During the
period from January 13, 1996 through March 31, 1996, BlackRock paid BFM $127,896
in sub-advisory fees with respect to the Core Bond Portfolio, and BFM waived
$85,264 in sub-advisory fees.

The predecessor portfolio to the Low Duration Bond Portfolio was advised by
BFM. For the period from July 1, 1995 through January 12, 1996, the predecessor
portfolio to the Low Duration Bond Portfolio paid BFM $56,481 in investment
advisory fees and BFM waived $11,186 in investment advisory fees. For the
fiscal years ended June 30, 1995 and 1994, BFM waived its investment advisory
fee with respect to the predecessor portfolio to the Low Duration Bond Portfolio
in the amounts of $102,707 and $110,232, respectively, and reimbursed expenses
amounting to $61,195 and $55,582, respectively. During the period from January
13, 1996 through March 31, 1996, the Low Duration Bond Portfolio paid BlackRock
$149,488 in investment advisory fees, and BlackRock waived $99,659 in investment
advisory fees. During the period from January 13, 1996 through March 31, 1996,
BlackRock paid BFM $104,642 in sub-advisory fees with respect to the Low
Duration Bond Portfolio, and BFM waived $69,761 in sub-advisory fees.

ADMINISTRATION AGREEMENT. BlackRock and PFPC serve as the Fund's co-
administrators pursuant to an administration agreement (the "Administration
Agreement"). PFPC has agreed to maintain office facilities for the Fund;
furnish the Fund with statistical and research data, clerical, accounting, and
bookkeeping services; provide and supervise the operation of an automated data
processing system to process purchase and redemption orders; provide information
and distribute written communications to shareholders; handle shareholder
problems and calls; research issues raised by financial intermediaries relating
to investments in a Portfolio's shares; review and provide advice with respect
to communications for a Portfolio's shares; monitor the investor programs that
are offered in connection with a Portfolio's shares; provide oversight and
related support services that are intended to ensure the delivery of quality
service to the holders of the Portfolio's shares; and provide certain other
services required by the Fund. The Administrators may from time to time
voluntarily waive administration fees with respect to a Portfolio and may
voluntarily reimburse the Portfolios for expenses.

Under the Administration Agreement, BlackRock is responsible for: (i) the
supervision and coordination of the performance of the Fund's service providers;
(ii) the negotiation of service contracts and arrangements between the Fund and
its service providers; (iii) acting as liaison between the trustees of the Fund
and the Fund's service providers; and (iv) providing ongoing business management
and support services in connection with the Fund's operations. Pursuant to the
terms of the Administration Agreement, BlackRock has delegated certain of its
duties thereunder to BDI.

The Administration Agreement provides that BlackRock and PFPC will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund or a Portfolio in connection with the performance of the Administration
Agreement, except a loss resulting from willful misfeasance, bad faith or gross
negligence in the performance of their respective duties or from reckless
disregard of their respective duties and obligations thereunder. In addition,
the Fund will indemnify each of BAI and PFPC and their affiliates against any
loss arising in connection with their provision of services under the
Administration Agreement, except that neither BAI nor PFPC nor their affiliates
shall be indemnified against any loss arising out of willful misfeasance, bad
faith, gross negligence or reckless disregard of their duties under the
Administration Agreement.

PFPC serves as the administrative services agent for the Index Master
Portfolio pursuant to an Administration and Accounting Services Agreement. The
services provided by PFPC are subject to supervision by the executive officers
and the Board of Trustees of the Trust, and include day-to-day keeping and
maintenance of certain records, calculation of the offering price of the shares,
preparation of reports and acting as liaison with the Trust's custodians and
dividend and disbursing agents. For its services, PFPC is entitled to
compensation from the Index Master Portfolio at the annual rate of .015% of the
Index Master Portfolio's average daily net assets. The Index Equity Portfolio
bears its pro rata portion of the Index Master Portfolio's administrative
services expenses.

From February 1, 1993 until January 13, 1996, PFPC and Provident Distributors,
Inc. ("PDI") served as co-administrators to the Fund. From January 16, 1996
until September 30, 1997, PFPC and BDI served as co-administrators to the Fund.
From December 1, 1995 to September 30, 1997, Compass Capital Group, Inc. ("CCG")
served as co-administrator to the Fund. BlackRock became co-administrator to
the Fund on January 28, 1998. For the purposes of the following fee
information, CCG and BDI are also considered "Administrators."

For the period from October 1, 1997 (May 1, 1998 in the case of the Micro-Cap
Equity Portfolio; May 11, 1998 in the case of the Delaware Tax-Free Income and
Kentucky Tax-Free Income Portfolios; and May 18, 1998 in the case of the GNMA
Portfolio) through September 30, 1998, the Fund paid the Administrators combined
administration fees (after waivers), and the Administrators waived combined
administration fees and reimbursed expenses, as follows:

FEES PAID
(AFTER WAIVERS) WAIVERS REIMBURSEMENTS
--------------- ------- --------------

Money Market................................... $ 3,868,646 $ 2,843 $0
U.S. Treasury Money Market..................... 1,466,150 57,355 0
Municipal Money Market......................... 772,350 0 0
New Jersey Municipal Money Market.............. 223,282 3,124 0
North Carolina Municipal Money Market.......... 253,209 51,557 0
Ohio Municipal Money Market.................... 207,860 726 0
Pennsylvania Municipal Money Market............ 956,857 0 0
Virginia Municipal Money Market................ 78,661 38,462 0
Low Duration Bond.............................. 454,591 182,710 0
Intermediate Government Bond................... 424,492 166,417 0
Intermediate Bond.............................. 757,472 153,769 0
Core Bond...................................... 1,372,756 119,595 0
Government Income.............................. 19,344 35,146 0
Managed Income................................. 1,984,691 294,140 0
International Bond............................. 98,952 5,267 0
GNMA........................................... 68,501 31,374 0
Tax-Free Income................................ 259,703 102,782 0
Pennsylvania Tax-Free Income................... 892,483 158,366 0
New Jersey Tax-Free Income..................... 190,198 77,833 0
Ohio Tax-Free Income........................... 76,296 27,711 0
Delaware Tax-Free Income....................... 82,578 24,917 0
Kentucky Tax-Free Income....................... 142,042 49,754 0

FEES PAID
(AFTER WAIVERS) WAIVERS REIMBURSEMENTS
------------------- -------------- ------------------

Large Cap Value Equity............................. 3,731,258 0 0
Large Cap Growth Equity............................ 2,021,620 0 0
Mid-Cap Value Equity............................... 413,908 39,124 0
Mid-Cap Growth Equity.............................. 413,572 39,770 0
Small Cap Value Equity............................. 1,317,733 6,509 0
Small Cap Growth Equity............................ 2,230,497 0 0
Micro-Cap Equity................................... 118 12,502 0
International Equity............................... 1,874,280 84,764 0
International Small Cap Equity..................... 22,772 19,575 0
International Emerging Markets..................... 294,225 14,409 0
Select Equity...................................... 2,343,503 0 0
Index Equity....................................... 270,743 958,992 0
Balanced........................................... 1,041,218 0 0

Totals............................................. 30,626,561 2,759,493 0

For the period from October 1, 1996 (December 27, 1996 in the case of the
Mid-Cap Growth Equity and Mid-Cap Value Equity Portfolios; and September 26,
1997 in the case of the International Small Cap Equity Portfolio) through
September 30, 1997, the Fund paid the Administrators combined administration
fees (after waivers), and the Administrators waived combined administration fees
and reimbursed expenses, as follows:

FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS REIMBURSEMENTS
- ------------------------------------------------------ ------------------- -------------- ------------------

Money Market....................................... $3,006,036 $161,687 $0
U.S. Treasury Money Market......................... 1,391,777 83,462 0
Municipal Money Market............................. 510,438 66,205 0
New Jersey Municipal Money Market.................. 134,020 49,666 0
North Carolina Municipal Money Market.............. 149,859 81,039 0
Ohio Municipal Money Market........................ 136,900 30,397 0
Pennsylvania Municipal Money Market................ 701,182 105,262 0
Virginia Municipal Money Market.................... 13,709 76,820 0
Low Duration Bond.................................. 266,343 180,478 0
Intermediate Government Bond....................... 136,304 172,324 0
Intermediate Bond.................................. 359,159 291,462 0
Core Bond.......................................... 628,096 188,359 0
Government Income.................................. 910 33,087 0
Managed Income..................................... 696,869 755,201 0
International Bond................................. 56,066 28,697 0
Tax-Free Income.................................... 36,907 75,552 0
Pennsylvania Tax-Free Income....................... 84,673 94,146 0
New Jersey Tax-Free Income......................... 77,981 95,412 0
Ohio Tax-Free Income............................... 9,942 11,556 0
Large Cap Value Equity............................. 2,173,719 195,769 0
Large Cap Growth Equity............................ 1,146,084 247,130 0
Mid-Cap Value Equity............................... 106,481 19,571 0
Mid-Cap Growth Equity.............................. 106,838 19,149 0
Small Cap Value Equity............................. 713,311 29,928 0

FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS REIMBURSEMENTS
- ------------------------------------------------------ ------------------- -------------- ------------------

Small Cap Growth Equity............................ 1,156,894 0 0
International Equity............................... 1,149,080 68,733 0
International Small Cap Equity..................... 0 0 0
International Emerging Markets..................... 379,822 596 0
Select Equity...................................... 794,449 189,515 0
Index Equity....................................... 134,085 549,869 0
Balanced........................................... 501,727 72,507 0

For the period from October 1, 1995 through January 13, 1996, the Fund paid
CCG, PFPC and PDI combined administration fees (after waivers), and CCG, PFPC
and PDI waived combined administration fees and reimbursed expenses, as follows:

FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
- ------------------------------------------------------ ------------------- -------------- ------------------

Money Market........................................ $645,001 $51,681 $0
Municipal Money Market.............................. 117,010 8,088 0
U.S. Treasury Money Market.......................... 242,075 52,266 0
Ohio Municipal Money Market......................... 17,189 12,366 0
Pennsylvania Municipal Money Market................. 143,962 28,455 0
North Carolina Municipal Money Market............... 11,644 17,455 0
Virginia Municipal Money Market..................... 0 12,768 0
Managed Income...................................... 226,271 82,078 0
Government Income................................... 353 6,893 0
Tax-Free Income..................................... 1,455 4,890 0
Intermediate Government Bond........................ 69,369 33,385 0
Ohio Tax-Free Income................................ 604 3,942 0
Pennsylvania Tax-Free Income........................ 23,054 10,922 0
Intermediate Bond................................... 70,091 37,396 0
Large Cap Value Equity.............................. 287,181 75,970 0
Large Cap Growth Equity............................. 142,578 32,289 0
Small Cap Growth Equity............................. 105,681 19,886 0
Select Equity....................................... 150,292 28,337 0
Index Equity........................................ 32,455 65,337 0
Small Cap Value Equity.............................. 127,936 4,181 0
International Equity................................ 200,396 30,791 0
International Emerging Markets...................... 26,329 0 0
Balanced............................................ 73,163 24,504 0

For the period from January 14, 1996 (February 1, 1996 in the case of the
New Jersey Tax-Free Income and New Jersey Municipal Money Market Portfolios;
February 13, 1996 in the case of the International Bond Portfolio; and April 1,
1996 in the case of the Core Bond and Low Duration Bond Portfolios) through
September 30, 1996, the Fund paid the Administrators combined administration
fees (after waivers), and the Administrators waived combined administration fees
and reimbursed expenses, as follows:

FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
- ------------------------------------------------------ ------------------- -------------- ------------------

Money Market...................................... $2,319,935 $460,119 $ 0
Municipal Money Market............................ 303,192 171,943 0
U.S. Treasury Money Market........................ 1,325,463 264,620 0
Ohio Municipal Money Market....................... 57,595 37,497 0
Pennsylvania Municipal Money Market............... 576,488 139,781 0
North Carolina Municipal Money Market............. 57,612 78,873 0
Virginia Municipal Money Market................... 0 60,792 4,868
New Jersey Municipal Money Market................. 47,930 52,585 0
Managed Income.................................... 740,845 412,076 0
Government Income................................. 1,394 22,902 0
Tax-Free Income................................... 47,371 37,838 0
Intermediate Government Bond...................... 207,399 118,488 0
Ohio Tax-Free Income.............................. 10,045 6,523 0
Pennsylvania Tax-Free Income...................... 85,441 56,528 0
Intermediate Bond................................. 221,810 172,503 0
New Jersey Tax-Free Income........................ 68,934 69,374 0
International Bond................................ 27,454 28,993 0
Core Bond......................................... 196,853 128,743 0
Low Duration Bond................................. 175,769 83,391 0
Large Cap Value Equity............................ 1,589,313 235,958 0
Large Cap Growth Equity........................... 729,234 236,170 0
Small Cap Growth Equity........................... 652,784 17,700 0
Select Equity..................................... 471,931 198,312 0
Index Equity...................................... 55,265 345,636 0
Small Cap Value Equity............................ 511,980 3,984 0
International Equity.............................. 727,738 201,501 0
International Emerging Markets.................... 147,927 0 0
Balanced.......................................... 339,671 80,233 0

The predecessor portfolios to the New Jersey Municipal Money Market,
International Bond and New Jersey Tax-Free Income Portfolios received
administrative services from SEI Financial Management Corporation ("SEI").
During the period from March 1, 1995 through January 12, 1996 and during the
fiscal year ended February 28, 1995, the predecessor portfolio to the New Jersey
Municipal Money Market Portfolio paid $73,663 and $44,863, respectively, in
administration fees to SEI pursuant to the prior administration agreement, and
SEI waived $0 and $26,345, respectively, in administration fees. During the
period from January 13, 1996 through January 31, 1996, the New Jersey Municipal
Money Market Portfolio paid the Administrators $3,050 in administration fees,
and the Administrators waived $3,691 in administration fees. During the period
from March 1, 1995 through January 12, 1996 and during the fiscal year ended
February 28, 1995, the predecessor portfolio to the New Jersey Tax-Free Income
Portfolio paid $154,232 and $105,029, respectively, in administrative fees to
SEI pursuant to the prior administration agreement, and SEI waived $4 and
$77,951, respectively, in administrative fees. During the period from January
13, 1996 through January 31, 1996, the New Jersey Tax-Free Income Portfolio paid
the Administrators $4,443 in administration fees, and the Administrators waived
$5,347 in administration fees. During the period from March 1, 1995 through
January 12, 1996 and during the fiscal year ended February 28, 1995, the
predecessor portfolio to the International Bond Portfolio paid $77,924 and
$81,364, respectively, in administrative fees to SEI pursuant to the prior
administration agreement. During the period from January 13, 1996 through
January 31, 1996, the predecessor portfolio to the International Bond Portfolio
paid the Administrators $2,141 in administrative fees. During the period from
February 1, 1996 through February 12, 1996, the

predecessor portfolio to the International Bond Portfolio paid the
Administrators $2,357 in administrative fees, and the Administrators waived fees
and reimbursed expenses totaling $1,212 and $0, respectively.

The predecessor portfolios to the Low Duration Bond and Core Bond Portfolios
received administrative services from State Street Bank and Trust Company
("State Street"). During the period from July 1, 1995 through January 12, 1996
and during the fiscal year ended June 30, 1995, the predecessor portfolio to the
Core Bond Portfolio paid $29,752 and $73,257, respectively, in administrative
fees to State Street pursuant to the prior administration agreement, and State
Street waived $0 and $0, respectively, in administrative fees. During the period
from January 13, 1996 through March 31, 1996, the Core Bond Portfolio paid the
Administrators $79,269 in administration fees, and the Administrators waived
$60,808 in administration fees. During the period from July 1, 1995 through
January 12, 1996 and during the fiscal year ended June 30, 1995, the predecessor
portfolio to the Low Duration Bond Portfolio paid $31,578 and $69,234,
respectively, in administrative fees to State Street pursuant to the prior
administration agreement. During the period from January 13, 1996 through March
31, 1996, the Low Duration Bond Portfolio paid the Administrators $74,552 in
administration fees, and the Administrators waived $40,055 in administration
fees.

The Fund and its service providers may engage third party plan administrators
who provide trustee, administrative and recordkeeping services for certain
employee benefit, profit-sharing and retirement plans as agent for the Fund with
respect to such plans, for the purpose of accepting orders for the purchase and
redemption of shares of the Fund.

CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. Pursuant to the terms of a
custodian agreement (the "Custodian Agreement") between the Fund and PNC Bank,
as of January 1, 1999 PNC Bank has assigned its rights and delegated its duties
as the Fund's custodian to its affiliate, PFPC Trust Company ("PTC"). Under the
Custodian Agreement, PTC or a sub-custodian (i) maintains a separate account or
accounts in the name of each Portfolio, (ii) holds and transfers portfolio
securities on account of each Portfolio, (iii) accepts receipts and makes
disbursements of money on behalf of each Portfolio, (iv) collects and receives
all income and other payments and distributions on account of each Portfolio's
securities and (v) makes periodic reports to the Board of Trustees concerning
each Portfolio's operations. PTC is authorized to select one or more banks or
trust companies to serve as sub-custodian on behalf of the Fund, provided that,
with respect to sub-custodians other than sub-custodians for foreign securities,
PTC remains responsible for the performance of all its duties under the
Custodian Agreement and holds the Fund harmless from the acts and omissions of
any sub-custodian. Citibank, N.A. serves as the international sub-custodian for
various Portfolios of the Fund.

For its services to the Fund under the Custodian Agreement, PTC receives a
fee which is calculated based upon each investment portfolio's average gross
assets, with a minimum monthly fee of $1,000 per investment portfolio. PTC is
also entitled to out-of-pocket expenses and certain transaction charges. PTC has
undertaken to waive its custody fees with respect to the Index Equity Portfolio,
which invests substantially all of its assets in the Index Master
Portfolio.

PFPC, which has its principal offices at 400 Bellevue Parkway, Wilmington, DE
19809 and is an affiliate of PNC Bank, serves as the transfer and dividend
disbursing agent for the Fund pursuant to a Transfer Agency Agreement (the
"Transfer Agency Agreement"), under which PFPC (i) issues and redeems Service,
Investor, Institutional and BlackRock classes of shares in each Portfolio, (ii)
addresses and mails all communications by each Portfolio to record owners of its
shares, including reports to shareholders, dividend and distribution notices and
proxy materials for its meetings of shareholders, (iii) maintains shareholder
accounts and, if requested, sub-accounts and (iv) makes periodic reports to the
Board of Trustees concerning the operations of each Portfolio. PFPC may, on 30
days' notice to the Fund, assign its duties as transfer and dividend disbursing
agent to any other affiliate of PNC Bank Corp. For its services with respect to
the Fund's Institutional and Service Shares under the Transfer Agency Agreement,
PFPC receives fees at the annual rate of .03% of the average net asset value of
outstanding Institutional and Service Shares in each Portfolio, plus per account
fees and disbursements. For its services with respect to the Fund's BlackRock
Shares under the Transfer Agency Agreement, PFPC receives fees at the annual
rate of .01% of the average net asset value of outstanding BlackRock Shares in
each Portfolio, plus per account fees and disbursements. For its services under
the Transfer Agency Agreement with respect to Investor Shares, PFPC receives per
account fees, with minimum annual fees of $24,000 for each series of Investor
Shares in each Portfolio, plus disbursements. Until further notice, the
transfer agency fees for each series of Investor Shares in each Portfolio will
not exceed the annual rate of .10% of the series' average daily net assets.

PTC serves as the Trust's custodian and PFPC serves as the Trust's transfer
and dividend disbursing agent. The Index Equity Portfolio bears its pro rata
portion of the Index Master Portfolio's custody and transfer and dividend
disbursing fees and expenses.

DISTRIBUTOR AND DISTRIBUTION AND SERVICE PLAN. The Fund has entered into a
distribution agreement with the Distributor under which the Distributor, as
agent, offers shares of each Portfolio on a continuous basis. The Distributor
has agreed to use appropriate efforts to effect sales of the shares, but it is
not obligated to sell any particular amount of shares. The Distributor's
principal business address is Four Falls Corporate Center, 6th Floor, West
Conshohocken, PA 19428-2961.

Pursuant to the Fund's Amended and Restated Distribution and Service Plan
(the "Plan"), the Fund may pay the Distributor and/or BlackRock or any other
affiliate of PNC Bank fees for distribution and sales support services.
Currently, as described further below, only Investor A Shares, Investor B Shares
and Investor C Shares bear the expense of distribution fees under the Plan. In
addition, the Fund may pay BlackRock fees for the provision of personal services
to shareholders and the processing and administration of shareholder accounts.
BlackRock, in turn, determines the amount of the service fee and shareholder
processing fee to be paid to brokers, dealers, financial institutions and
industry professionals (collectively, "Service Organizations"). The Plan
provides, among other things, that: (i) the Board of Trustees shall receive
quarterly reports regarding the amounts expended under the Plan and the purposes
for which such expenditures were made; (ii) the Plan will continue in effect for
so long as its continuance is approved at least annually by the Board of
Trustees in accordance with Rule 12b-1 under the 1940 Act; (iii) any material
amendment thereto must be approved by the Board of Trustees, including the
trustees who are not "interested persons" of the Fund (as defined in the 1940
Act) and who have no direct or indirect financial interest in the operation of
the Plan or any agreement entered into in connection with the Plan (the "12b-1
Trustees"), acting in person at a meeting called for said purpose; (iv) any
amendment to increase materially the costs which any class of shares may bear
for distribution services pursuant to the Plan shall be effective only upon
approval by a vote of a majority of the outstanding shares of such class and by
a majority of the 12b-1 Trustees; and (v) while the Plan remains in effect, the
selection and nomination of the Fund's trustees who are not "interested persons"
of the Fund shall be committed to the discretion of the Fund's non-interested
trustees.

The Plan is terminable as to any class of shares without penalty at any time
by a vote of a majority of the 12b-1 Trustees, or by vote of the holders of a
majority of the shares of such class.

With respect to Investor A Shares, the front-end sales charge and the
distribution fee payable under the Plan (at a maximum annual rate of .10% of the
average daily net asset value of each Portfolio's outstanding Investor A Shares)
are used to pay commissions and other fees payable to Service Organizations and
other broker/dealers who sell Investor A Shares.

With respect to Investor B Shares, Service Organizations and other
broker/dealers receive commissions from the Distributor for selling Investor B
Shares, which are paid at the time of the sale. The distribution fees payable
under the Plan (at a maximum annual rate of .75% of the average daily net asset
value of each Portfolio's outstanding Investor B Shares) are intended to cover
the expense to the Distributor of paying such up-front commissions, as well as
to cover ongoing commission payments to broker/dealers. The contingent deferred
sales charge is calculated to charge the investor with any shortfall that would
occur if Investor B Shares are redeemed prior to the expiration of the
conversion period, after which Investor B Shares automatically convert to
Investor A Shares.

With respect to Investor C Shares, Service Organizations and other
broker/dealers receive commissions from the Distributor for selling Investor C
Shares, which are paid at the time of the sale. The distribution fees payable
under the Plan (at a maximum annual rate of .75% of the average daily net asset
value of each Portfolio's outstanding Investor C Shares) are intended to cover
the expense to the Distributor of paying such up-front commissions, as well as
to cover ongoing commission payments to the broker/dealers. The contingent
deferred sales charge is calculated to charge the investor with any shortfall
that would occur if Investor C Shares are redeemed within 12 months of purchase.

The Fund is not required or permitted under the Plan to make distribution
payments with respect to Service, Institutional or BlackRock Shares. However,
the Plan permits BDI, BlackRock, PFPC and other companies that receive fees from
the Fund to make payments relating to distribution and sales support activities
out of their past profits or other sources available to them. The Distributor,
BlackRock and their affiliates may pay affiliated and unaffiliated financial
institutions, broker/dealers and/or

their salespersons certain compensation for the sale and distribution of shares
of the Fund or for services to the Fund. These payments ("Additional Payments")
would be in addition to the payments by the Fund described in this Statement of
Additional Information for distribution and shareholder servicing and
processing. These Additional Payments may take the form of "due diligence"
payments for a dealer's examination of the Portfolios and payments for providing
extra employee training and information relating to Portfolios; "listing" fees
for the placement of the Portfolios on a dealer's list of mutual funds available
for purchase by its customers; "finders" or "referral" fees for directing
investors to the Fund; "marketing support" fees for providing assistance in
promoting the sale of the Funds' shares; and payments for the sale of shares
and/or the maintenance of share balances. In addition, the Distributor,
BlackRock and their affiliates may make Additional Payments to affiliated and
unaffiliated entities for subaccounting, administrative and/or shareholder
processing services that are in addition to the shareholder servicing and
processing fees paid by the Fund. The Additional Payments made by the
Distributor, BlackRock and their affiliates may be a fixed dollar amount, may be
based on the number of customer accounts maintained by a financial institution
or broker/dealer, or may be based on a percentage of the value of shares sold
to, or held by, customers of the affiliated and unaffiliated financial
institutions or dealers involved, and may be different for different
institutions and dealers. Furthermore, the Distributor, BlackRock and their
affiliates may contribute to various non-cash and cash incentive arrangements to
promote the sale of shares, and may sponsor various contests and promotions
subject to applicable NASD regulations in which participants may receive prizes
such as travel awards, merchandise and cash. The Distributor, BlackRock and
their affiliates may also pay for the travel expenses, meals, lodging and
entertainment of broker/dealers, financial institutions and their salespersons
in connection with educational and sales promotional programs subject to
applicable NASD regulations.

Service Organizations may charge their clients additional fees for account-
related services.

The Fund intends to enter into service arrangements with Service Organizations
pursuant to which Service Organizations will render certain support services to
their customers ("Customers") who are the beneficial owners of Service, Investor
A, Investor B and Investor C Shares. Such services will be provided to
Customers who are the beneficial owners of Shares of such classes and are
intended to supplement the services provided by the Fund's Administrators and
transfer agent to the Fund's shareholders of record. In consideration for
payment of a service fee of up to .25% (on an annualized basis) of the average
daily net asset value of the Investor A, Investor B and Investor C Shares owned
beneficially by their Customers and .15% (on an annualized basis) of the average
daily net asset value of the Service Shares beneficially owned by their
Customers, Service Organizations may provide general shareholder liaison
services, including, but not limited to (i) answering customer inquiries
regarding account status and history, the manner in which purchases, exchanges
and redemptions of shares may be effected and certain other matters pertaining
to the Customers' investments; and (ii) assisting Customers in designating and
changing dividend options, account designations and addresses. In consideration
for payment of a shareholder processing fee of up to a separate .15% (on an
annualized basis) of the average daily net asset value of Service, Investor A,
Investor B and Investor C Shares owned beneficially by their Customers, Service
Organizations may provide one or more of these additional services to such
Customers: (i) providing necessary personnel and facilities to establish and
maintain Customer accounts and records; (ii) assistance in aggregating and
processing purchase, exchange and redemption transactions; (iii) placement of
net purchase and redemption orders with the Distributor; (iv) arranging for
wiring of funds; (v) transmitting and receiving funds in connection with
Customer orders to purchase or redeem shares; (vi) processing dividend payments;
(vii) verifying and guaranteeing Customer signatures in connection with
redemption orders and transfers and changes in Customer-designated accounts, as
necessary; (viii) providing periodic statements showing Customers' account
balances and, to the extent practicable, integrating such information with other
Customer transactions otherwise effected through or with a Service Organization;
(ix) furnishing (either separately or on an integrated basis with other reports
sent to a shareholder by a Service Organization) monthly and year-end statements
and confirmations of purchases, exchanges and redemptions; (x) transmitting on
behalf of the Fund, proxy statements, annual reports, updating prospectuses and
other communications from the Fund to Customers; (xi) receiving, tabulating and
transmitting to the Fund proxies executed by Customers with respect to
shareholder meetings; (xii) providing subaccounting with respect to shares
beneficially owned by Customers or the information to the Fund necessary for
subaccounting; (xiii) providing sub-transfer agency services; and (xiv)
providing such other similar services as the Fund or a Customer may request.

The Fund may pay Janney Montgomery Scott ("AJMS") a fee of up to .10% (on an
annualized basis) of the average daily net asset value of Investor A Shares of
each of the Ohio Municipal Money Market, Pennsylvania Municipal Money Market,
North Carolina Municipal Money Market, Virginia Municipal Money Market and New
Jersey Municipal Money Market Portfolios

beneficially owned by JMS customers. This fee is intended to compensate JMS for
distribution of, and sales support activities regarding, Investor A Shares of
these Portfolios.

For the twelve months ended September 30, 1998 (from May 1, 1998 through
September 30, 1998 in the case of the Micro-Cap Equity Portfolio; from May 11,
1998 through September 30, 1998 in the case of the Delaware Tax-Free Income and
Kentucky Tax-Free Income Portfolios; and from May 18, 1998 through September 30,
1998 in the case of the GNMA Portfolio), the Portfolios' share classes bore the
following distribution, shareholder servicing and shareholder processing fees
under the Portfolios' current plans:

DISTRIBUTION SHAREHOLDER SHAREHOLDER
PORTFOLIOS - INVESTOR A SHARES FEES SERVICING FEES PROCESSING FEES
- ----------------------------------------------- -------------- ---------------- -----------------

Money Market................................... N/A $753,581 $452,135
U.S. Treasury Money Market..................... N/A 160,095 96,057
Municipal Money Market......................... N/A 17,069 10,241
New Jersey Municipal Money Market.............. N/A 81,401 73,921
North Carolina Municipal Money Market.......... N/A 665 399
Ohio Municipal Money Market.................... N/A 47,144 28,452
Pennsylvania Municipal Money Market............ N/A 278,841 231,985
Virginia Municipal Money Market................ N/A 2,044 2,044
Low Duration Bond.............................. N/A 3,911 2,346
Intermediate Government Bond................... N/A 14,736 8,842
Intermediate Bond.............................. N/A 3,073 1,844
Core Bond...................................... N/A 8,835 5,301
Government Income.............................. N/A 13,760 8,256
Managed Income................................. N/A 34,473 20,683
International Bond............................. N/A 3,438 2,063
GNMA........................................... N/A 104 62
Tax-Free Income................................ N/A 15,523 9,314
Pennsylvania Tax-Free Income................... N/A 82,835 49,701
New Jersey Tax-Free Income..................... N/A 3,275 1,965
Ohio Tax-Free Income........................... N/A 6,550 3,930
Delaware Tax-Free Income....................... N/A 2,153 1,292
Kentucky Tax-Free Income....................... N/A 233 140
Large Cap Value Equity......................... N/A 131,245 78,747
Large Cap Growth Equity........................ N/A 75,068 45,041
Mid-Cap Value Equity........................... N/A 8,997 5,398
Mid-Cap Growth Equity.......................... N/A 8,529 5,117
Small Cap Value Equity......................... N/A 95,165 56,875
Small Cap Growth Equity........................ N/A 142,335 85,400
Micro-Cap Equity............................... N/A 5,416 3,250
International Equity........................... N/A 65,793 39,476
International Small Cap Equity................. N/A 2,088 1,253
International Emerging Markets................. N/A 7,634 4,580
Select Equity.................................. N/A 70,010 42,006
Index Equity................................... N/A 92,367 55,420
Balanced....................................... N/A 232,960 139,776

DISTRIBUTION SHAREHOLDER SHAREHOLDER
PORTFOLIOS - INVESTOR B SHARES FEES SERVICING FEES PROCESSING FEES
- ----------------------------------------------- -------------- ---------------- -----------------

Money Market................................... $3,756 $1,252 $0
U.S. Treasury Money Market..................... 0 0 0
Municipal Money Market......................... 0 0 0
New Jersey Municipal Money Market.............. 0 0 0
North Carolina Municipal Money Market.......... 0 0 0

Ohio Municipal Money Market.................... 0 0 0
Pennsylvania Municipal Money Market............ 0 0 0
Virginia Municipal Money Market................ 0 0 0
Low Duration Bond.............................. 1,480 493 295
Intermediate Government Bond................... 926 305 186
Intermediate Bond.............................. 186 62 37
Core Bond...................................... 62,169 20,723 12,434
Government Income.............................. 141,683 47,228 28,337
Managed Income................................. 17,200 5,733 3,440
International Bond............................. 9,678 3,226 1,936
GNMA........................................... 144 48 29
Tax-Free Income................................ 11,718 3,906 2,344
Pennsylvania Tax-Free Income................... 107,314 35,771 21,463
New Jersey Tax-Free Income..................... 6,491 2,164 1,298
Ohio Tax-Free Income........................... 6,249 2,083 1,250
Delaware Tax-Free Income....................... 3,712 1,237 742
Kentucky Tax-Free Income....................... 0 0 0
Large Cap Value Equity......................... 211,592 68,864 41,319
Large Cap Growth Equity........................ 84,001 28,000 16,833
Mid-Cap Value Equity........................... 42,884 14,295 8,577
Mid-Cap Growth Equity.......................... 27,977 9,326 5,595
Small Cap Value Equity......................... 142,116 47,371 28,423
Small Cap Growth Equity........................ 326,219 108,740 65,244
Micro-Cap Equity............................... 17,359 5,786 3,472
International Equity........................... 50,717 16,906 10,143
International Small Cap Equity................. 12,947 4,316 2,589
International Emerging Markets................. 9,573 3,191 1,915
Select Equity.................................. 239,920 79,973 47,984
Index Equity................................... 535,354 178,187 106,925
Balanced....................................... 266,223 88,741 53,245

DISTRIBUTION SHAREHOLDER SHAREHOLDER
PORTFOLIOS - INVESTOR C SHARES FEES SERVICING FEES PROCESSING FEES
- ----------------------------------------------- -------------- ---------------- -----------------

Money Market................................... $1,846 $ 615 $ 0
U.S. Treasury Money Market..................... 0 0 0
Municipal Money Market......................... 220 73 0
New Jersey Municipal Money Market.............. 0 0 0
North Carolina Municipal Money Market.......... 0 0 0
Ohio Municipal Money Market.................... 0 0 0
Pennsylvania Municipal Money Market............ 0 0 0
Virginia Municipal Money Market................ 0 0 0
Low Duration Bond.............................. 1,478 493 296
Intermediate Government Bond................... 1,160 383 230
Intermediate Bond.............................. 0 0 0
Core Bond...................................... 4,351 1,451 870
Government Income.............................. 9,560 3,187 1,912
Managed Income................................. 0 0 0
International Bond............................. 6,934 2,311 1,387
GNMA........................................... 0 0 0
Tax-Free Income................................ 1,144 381 229
Pennsylvania Tax-Free Income................... 82 28 16
New Jersey Tax-Free Income..................... 0 0 0

Ohio Tax-Free Income........................................... 376 125 75
Delaware Tax-Free Income....................................... 1,370 457 274
Kentucky Tax-Free Income....................................... 0 0 0
Large Cap Value Equity......................................... 17,578 5,859 3,516
Large Cap Growth Equity........................................ 3,353 1,118 671
Mid-Cap Value Equity........................................... 1,154 385 231
Mid-Cap Growth Equity.......................................... 1,140 380 228
Small Cap Value Equity......................................... 36,169 12,056 7,234
Small Cap Growth Equity........................................ 105,766 35,255 21,153
Micro-Cap Equity............................................... 3,863 1,288 773
International Equity........................................... 2,024 667 400
International Small Cap Equity................................. 2,907 969 587
International Emerging Markets................................. 3,843 182 109
Select Equity.................................................. 10,573 3,524 2,115
Index Equity................................................... 318,410 106,002 63,618
Balanced....................................................... 2,426 809 485

DISTRIBUTION SHAREHOLDER SHAREHOLDER
PORTFOLIOS - SERVICE SHARES FEES SERVICING FEES PROCESSING FEES
- --------------------------------------------------------------------------------------------------------------

Money Market................................................... N/A $2,543,502 $2,543,502
U.S. Treasury Money Market..................................... N/A 1,135,869 1,135,869
Municipal Money Market......................................... N/A 541,231 541,231
New Jersey Municipal Money Market.............................. N/A 138,250 138,250
North Carolina Municipal Money Market.......................... N/A 36,664 36,664
Ohio Municipal Money Market.................................... N/A 105,160 105,160
Pennsylvania Municipal Money Market............................ N/A 351,723 351,723
Virginia Municipal Money Market................................ N/A 8,850 8,850
Low Duration Bond.............................................. N/A 114,731 114,731
Intermediate Government Bond................................... N/A 80,491 80,491
Intermediate Bond.............................................. N/A 91,232 91,232
Core Bond...................................................... N/A 242,150 242,150
Government Income.............................................. N/A 0 0
Managed Income................................................. N/A 494,750 494,750
International Bond............................................. N/A 9,736 9,736
GNMA........................................................... N/A 0 0
Tax-Free Income................................................ N/A 87,979 87,979
Pennsylvania Tax-Free Income................................... N/A 86,818 86,818
New Jersey Tax-Free Income..................................... N/A 123,465 123,465
Ohio Tax-Free Income........................................... N/A 11,589 11,589
Delaware Tax-Free Income....................................... N/A 0 0
Kentucky Tax-Free Income....................................... N/A 0 0
Large Cap Value Equity......................................... N/A 960,862 960,862
Large Cap Growth Equity........................................ N/A 449,661 449,661
Mid-Cap Value Equity........................................... N/A 58,632 58,632
Mid-Cap Growth Equity.......................................... N/A 57,336 57,336
Small Cap Value Equity......................................... N/A 198,650 198,650
Small Cap Growth Equity........................................ N/A 333,768 333,768
Micro-Cap Equity............................................... N/A 39 39
International Equity........................................... N/A 327,833 327,833
International Small Cap Equity................................. N/A 534 534
International Emerging Markets................................. N/A 76,187 76,187
Select Equity.................................................. N/A 377,268 377,268
Index Equity................................................... N/A 362,079 362,079
Balanced....................................................... N/A 288,661 288,661

EXPENSES

Expenses are deducted from the total income of each Portfolio before dividends
and distributions are paid. These expenses include, but are not limited to, fees
paid to BlackRock, PFPC, transfer agency fees, fees and expenses of officers and
trustees who are not affiliated with BlackRock, the Distributor or any of their
affiliates, taxes, interest, legal fees, custodian fees, auditing fees,
distribution fees, shareholder processing fees, shareholder servicing fees, fees
and expenses in registering and qualifying the Portfolios and their shares for
distribution under federal and state securities laws, expenses of preparing
prospectuses and statements of additional information and of printing and
distributing prospectuses and statements of additional information to existing
shareholders, expenses relating to shareholder reports, shareholder meetings and
proxy solicitations, fidelity bond and trustees and officers liability insurance
premiums, the expense of independent pricing services and other expenses which
are not expressly assumed by BlackRock or the Fund's service providers under
their agreements with the Fund. Any general expenses of the Fund that do not
belong to a particular investment portfolio will be allocated among all
investment portfolios by or under the direction of the Board of Trustees in a
manner the Board determines to be fair and equitable.

PORTFOLIO TRANSACTIONS

In executing portfolio transactions, the adviser and sub-advisers seek to
obtain the best price and most favorable execution for a Portfolio, taking into
account such factors as the price (including the applicable brokerage commission
or dealer spread), size of the order, difficulty of execution and operational
facilities of the firm involved. While the adviser and sub-advisers generally
seek reasonably competitive commission rates, payment of the lowest commission
or spread is not necessarily consistent with obtaining the best price and
execution in particular transactions. Payments of commissions to brokers who are
affiliated persons of the Fund, or the Trust with respect to the Index Master
Portfolio, (or affiliated persons of such persons) will be made in accordance
with Rule 17e-1 under the 1940 Act. With respect to the Index Master Portfolio,
commissions paid on such transactions would be commensurate with the rate of
commissions paid on similar transactions to brokers that are not so affiliated.

No Portfolio has any obligation to deal with any broker or group of brokers
in the execution of Portfolio transactions. The adviser and sub-advisers may,
consistent with the interests of a Portfolio, select brokers on the basis of the
research, statistical and pricing services they provide to a Portfolio and the
adviser's or sub-adviser's other clients. Information and research received from
such brokers will be in addition to, and not in lieu of, the services required
to be performed by the adviser and sub-advisers under their respective
contracts. A commission paid to such brokers may be higher than that which
another qualified broker would have charged for effecting the same transaction,
provided that the adviser or sub-adviser determines in good faith that such
commission is reasonable in terms either of the transaction or the overall
responsibility of the adviser or sub-adviser to a Portfolio and its other
clients and that the total commissions paid by a Portfolio will be reasonable in
relation to the benefits to a Portfolio over the long-term. With respect to the
Index Master Portfolio, it will seek to acquire and dispose of securities in a
manner which would cause as little fluctuation in the market prices of stocks
being purchased or sold as possible in light of the size of the transactions
being effected, and brokers will be selected with this goal in view. DFA
monitors the performance of brokers which effect transactions for the Index
Master Portfolio to determine the effect that the Index Master Portfolio's
trading has on the market prices of the securities in which the Index Master
Portfolio invests. DFA also checks the rate of commission being paid by the
Index Master Portfolio to its brokers to ascertain that they are competitive
with those charged by other brokers for similar services. Transactions also may
be placed with brokers who provide DFA with investment research, such as reports
concerning individual issuers, industries and general economic and financial
trends and other research services. The Investment Management Agreement permits
DFA knowingly to pay commissions on such transactions which are greater than
another broker might charge if DFA, in good faith, determines that the
commissions paid are reasonable in relation to the research or brokerage
services provided by the broker or dealer when viewed in terms of either a
particular transaction or DFA's overall responsibilities to the Trust.

Commission rates for brokerage transactions on foreign stock exchanges are
generally fixed. In addition, the adviser or sub-adviser may take into account
the sale of shares of the Fund in allocating purchase and sale orders for
portfolio securities to brokers (including brokers that are affiliated with them
or Distributor).

For the year or period ended September 30, 1998, the following Portfolios
paid brokerage commissions as follows:

PORTFOLIOS Brokerage Commissions
- ---------------------------------------------------------------------------------------------------------------------

Large Cap Value Equity................................................................ $1,667,505
Large Cap Growth Equity............................................................... 1,078,365
Mid-Cap Value Equity.................................................................. 503,594
Mid-Cap Growth Equity................................................................. 603,189
Small Cap Value Equity................................................................ 866,282
Small Cap Growth Equity............................................................... 1,081,442
Micro-Cap Equity...................................................................... 14,712
International Equity.................................................................. 2,629,819
International Small Cap Equity........................................................ 82,564
International Emerging Markets........................................................ 421,405
Select Equity......................................................................... 787,916
Balanced.............................................................................. 69,206

For the year or period ended September 30, 1997, the following Portfolios paid
brokerage commissions as follows:

PORTFOLIOS BROKERAGE COMMISSIONS
- -------------------------------------------------------------------------------------------------------------------------

Large Cap Value Equity................................................................ $1,309,867
Large Cap Growth Equity............................................................... 1,033,730
Mid-Cap Value Equity.................................................................. 199,394
Mid-Cap Growth Equity................................................................. 152,521
Small Cap Value Equity................................................................ 612,318
Small Cap Growth Equity............................................................... 413,189
International Equity.................................................................. 1,884,858
International Small Cap Equity........................................................ 57,239
International Emerging Markets........................................................ 570,670
Select Equity......................................................................... 317,435
Balanced.............................................................................. 75,685

For the year or period ended September 30, 1996, the following Portfolios paid
brokerage commissions as follows:

PORTFOLIOS BROKERAGE COMMISSIONS
- ---------------------------------------------------------------------------------------------------------------------

Large Cap Value Equity................................................................ $1,455,318
Large Cap Growth Equity............................................................... 696,494
Small Cap Growth Equity............................................................... 165,153
Select Equity......................................................................... 443,114
Index Equity.......................................................................... 44,380
Small Cap Value Equity................................................................ 380,356
International Equity.................................................................. 1,912,522
Balanced.............................................................................. 95,277
International Emerging Markets........................................................ 588,860

For the Index Master Portfolio's fiscal years ended November 30, 1996, 1997
and 1998, the Index Master Portfolio paid brokerage commissions totaling
$72,562, $116,563 and $15,841, respectively.

Over-the-counter issues, including corporate debt and U.S. Government
securities, are normally traded on a "net" basis without a stated commission,
through dealers acting for their own account and not as brokers. The Portfolios
will primarily

engage in transactions with these dealers or deal directly with the issuer
unless a better price or execution could be obtained by using a broker. Prices
paid to a dealer with respect to both foreign and domestic securities will
generally include a "spread," which is the difference between the prices at
which the dealer is willing to purchase and sell the specific security at the
time, and includes the dealer's normal profit.

Purchases of money market instruments by a Portfolio are made from dealers,
underwriters and issuers. The Portfolios do not currently expect to incur any
brokerage commission expense on such transactions because money market
instruments are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer. Each Money Market
Portfolio intends to purchase only securities with remaining maturities of 13
months or less as determined in accordance with the rules of the SEC. As a
result, the portfolio turnover rates of a Money Market Portfolio will be
relatively high. However, because brokerage commissions will not normally be
paid with respect to investments made by a Money Market Portfolio, the turnover
rates should not adversely affect the Portfolio's net asset values or net
income.

Securities purchased in underwritten offerings include a fixed amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. When securities are purchased or sold directly from or
to an issuer, no commissions or discounts are paid.

The adviser or sub-advisers may seek to obtain an undertaking from issuers of
commercial paper or dealers selling commercial paper to consider the repurchase
of such securities from a Portfolio prior to maturity at their original cost
plus interest (sometimes adjusted to reflect the actual maturity of the
securities), if it believes that a Portfolio's anticipated need for liquidity
makes such action desirable. Any such repurchase prior to maturity reduces the
possibility that a Portfolio would incur a capital loss in liquidating
commercial paper, especially if interest rates have risen since acquisition of
such commercial paper.

Investment decisions for each Portfolio and for other investment accounts
managed by the adviser or sub-advisers are made independently of each other in
light of differing conditions. However, the same investment decision may be
made for two or more such accounts. In such cases, simultaneous transactions
are inevitable. Purchases or sales are then averaged as to price and allocated
as to amount in a manner deemed equitable to each such account. While in some
cases this practice could have a detrimental effect upon the price or value of
the security as far as a Portfolio is concerned, in other cases it could be
beneficial to a Portfolio. A Portfolio will not purchase securities during the
existence of any underwriting or selling group relating to such securities of
which BlackRock, BIMC, BFM, PNC Bank, PTC, BIL, the Administrators, the
Distributor or any affiliated person (as defined in the 1940 Act) thereof is a
member except pursuant to procedures adopted by the Board of Trustees in
accordance with Rule 10f-3 under the 1940 Act. In no instance will portfolio
securities be purchased from or sold to BlackRock Advisors, Inc., BIMC, BFM, PNC
Bank, PTC, BIL, PFPC, the Distributor or any affiliated person of the foregoing
entities except as permitted by SEC exemptive order or by applicable law.

The portfolio turnover rate of a Portfolio is calculated by dividing the
lesser of a Portfolio's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities held by the Portfolio during the year. The Index Master Portfolio
ordinarily will not sell portfolio securities except to reflect additions or
deletions of stocks that comprise the S&P 500 Index, including mergers,
reorganizations and similar transactions and, to the extent necessary, to
provide cash to pay redemptions of the Index Master Portfolio's shares.

The Fund is required to identify any securities of its regular brokers or
dealers (as defined in Rule 10b-1 under the 1940 Act) or their parents held by
the Fund as of the end of its most recent fiscal year. As of September 30,
1998, the following Portfolios held the following securities:

PORTFOLIO Security Value
- ------------------------------------------------------------------------------------------------------------

Money Market
- ------------
Bear Stearns & Company Variable Rate Obligation $ 12,004,916
Lehman Brothers, Inc. Commercial Paper 138,302,472
Merrill Lynch & Co. Commercial Paper 98,703,149
Morgan Stanley & Co., Inc. Variable Rate Obligation 10,002,416
Paine Webber, Jackson & Curtis, Inc. Paine Webber Liquid Institutional Reserves
Money Market Fund 5,396,776
U.S. Treasury Money Market
- --------------------------
Bear Stearns & Company Repurchase Agreement 40,000,000
Greenwich Capital Repurchase Agreement 40,000,000
Goldman, Sachs & Co. Repurchase Agreement 40,000,000
J.P. Morgan Securities Corporation Repurchase Agreement 40,000,000
Lehman Brothers Repurchase Agreement 40,000,000
Merrill Lynch & Co. Repurchase Agreement 40,000,000
Morgan Stanley & Co., Inc. Repurchase Agreement 205,800,000
SBC Warburg, Dillon, Reed Repurchase Agreement 40,000,000

Low Duration Bond
- -----------------
Bear Stearns & Company Multiple Class Mortgage Pass-Through 5,287,611
J.P. Morgan Securities Corporation Commercial Mortgage-Backed Security 2,000,625
Lehman Brothers, Inc. Corporate Bond 1,573,183
Merrill Lynch & Co. Mortgage Pass-Through 7,274,576
Morgan Stanley & Co., Inc. Commercial Mortgage-Backed Security 2,728,849

Immediate Government Bond
- -------------------------
CS First Boston Corporation Commercial Mortgage-Backed Security 18,957
Merrill Lynch & Co. Commercial Mortgage-Backed Security 3,475,748

PORTFOLIO Security Value
- ------------------------------------------------------------------------------------------------------------

Morgan Stanley Co., Inc. Commercial Mortgage-Backed Security 4,470,236

PORTFOLIO Security Value
- ------------------------------------------------------------------------------------------------------------

Intermediate Bond
- -----------------
Bear Stearns & Company Corporate Bond 5,154,060
Donaldson, Lufkin & Jenrette Securities Corp. Commercial Mortgage-Backed Security 9,435,049
J.P. Morgan Securities Corporation Commercial Mortgage-Backed Security 4,001,250
J.P. Morgan Securities Corporation Corporate Bond 3,340,027
Lehman Brothers Corporate Bond 4,123,880
Merrill Lynch & Co. Mortgage Pass-Through 2,865,214
Morgan Stanley Co., Inc. Commercial Mortgage-Backed Security 9,745,910

Core Bond
- ---------
CS First Boston Corporation Commercial Mortgage-Backed Security 2,659,677
CS First Boston Corporation Multiple Class Mortgage Pass-Through 5,866,836
Donaldson, Lufkin & Jenrette Securities Corp. Commercial Mortgage-Backed Security 10,825,974
Goldman, Sachs & Co. Commercial Mortgage-Backed Security 3,141,422
Goldman, Sachs & Co. Corporate Bond 3,836,438
J.P. Morgan Securities Corporation Commercial Mortgage-Backed Security 1,983,483
J.P. Morgan Securities Corporation Corporate Bond 90,271
Lehman Brothers, Inc. Corporate Bond 12,887,227
Merrill Lynch & Co. Mortgage Pass-Through 5,588,570
Merrill Lynch & Co. Corporate Bond 4,276,153

Government Income
- -----------------
Donaldson, Lufkin & Jenrette Securities Corp. Commercial Mortgage-Backed Security 300,765
Goldman, Sachs & Co. Commercial Mortgage-Backed Security 504,037
Merrill Lynch & Co. Commercial Mortgage-Backed Security 70,197
Morgan Stanley, Dean Witter & Co., Inc. Commercial Mortgage-Backed Security 450,503

GNMA
- ----
Morgan Stanley & Co., Inc. Commercial Mortgage-Backed Security 756,819

Managed Income
- --------------
CS First Boston Corporation Commercial Mortgage-Backed Security 4,115,812
Donaldson, Lufkin & Jenrette Securities Corp. Commercial Mortgage-Backed Security 19,750,249
Goldman, Sachs & Company Corporate Bonds 18,054,906
J.P. Morgan Securities Corporation Commercial Mortgage-Backed Security 2,479,353
Lehman Brothers, Inc. Corporate Bond 14,838,083
Merrill Lynch & Co. Corporate Bond 8,705,026
Merrill Lynch & Co. Mortgage Pass-Throughs 20,072,154
Morgan Stanley, Dean Witter & Co., Inc. Commercial Mortgage-Backed Security 2,136,379
Paine Webber, Jackson & Curtis, Inc. Corporate Bond 5,020,292

Large Cap Value Equity
- ----------------------
Morgan Stanley & Co., Inc. Common Stock 28,389,900

Select Equity
- -------------

PORTFOLIO Security Value
- ------------------------------------------------------------------------------------------------------------

Morgan Stanley & Co., Inc. Common Stock 13,357,987

Balanced
- --------
Bear Stearns & Co. Corporate Bond 1,061,130
J.P. Morgan Securities Corporation Commercial Mortgage-Backed Security 495,871
Lehman Brothers, Inc. Corporate Bond 3,790,388
Merrill Lynch & Co. Commercial Mortgage-Backed Security 3,869,950
Merrill Lynch & Co. Corporate Bond 2,036,263
Morgan Stanley & Co., Inc. Common Stock 6,269,900

PURCHASE AND REDEMPTION INFORMATION

INVESTOR SHARES

PURCHASE OF SHARES. The minimum investment for the initial purchase of
shares is $500; there is a $50 minimum for subsequent investments. Purchases
through the Automatic Investment Plan are subject to a lower initial purchase
minimum. In addition, the minimum initial investment for employees of the Fund,
the Fund's investment adviser, sub-advisers, Distributor or transfer agent or
employees of their affiliates is $100, unless payment is made through a payroll
deduction program in which case the minimum investment is $25.

Effective August 15, 1998, the Small Cap Growth Equity Portfolio will be
closed to new investors, with the exception of investors who purchase through
the following PNC Bank departments: Charitable and Endowment Management; Private
Bank; and Institutional Trust, including defined benefit, defined contribution
and Vested Interest7 plans. In addition, the Portfolio will continue to be open
to wrap and retirement programs that are already invested in the Portfolio and
to certain payroll deduction programs. Shareholders of the Portfolio as of
August 15, 1998 will be permitted to make additional investments in current
accounts.

PURCHASES THROUGH BROKERS. It is the responsibility of brokers to transmit
purchase orders and payment on a timely basis. If payment is not received
within the period described above, the order will be canceled, notice thereof
will be given, and the broker and its customers will be responsible for any loss
to the Fund or its shareholders. Orders of less than $500 may be mailed by a
broker to the transfer agent.

PURCHASES THROUGH THE TRANSFER AGENT. Investors may also purchase Investor
Shares by completing and signing the Account Application Form and mailing it to
the transfer agent, together with a check in at least the minimum initial
purchase amount payable to BlackRock Funds. The Fund does not accept third
party checks for initial or subsequent investments. An Account Application Form
may be obtained by calling (800) 441-7762. The name of the Portfolio with
respect to which shares are purchased must also appear on the check or Federal
Reserve Draft. Investors may also wire Federal funds in connection with the
purchase of shares. The wire instructions must include the name of the
Portfolio, specify the class of Investor Shares and include the name of the
account registration and the shareholder account number. Before wiring any
funds, an investor must call PFPC at (800) 441-7762 in order to confirm the wire
instructions.

OTHER PURCHASE INFORMATION. Shares of each Portfolio of the Fund are sold on
a continuous basis by BDI as the Distributor. BDI maintains its principal
offices at Four Falls Corporate Center, 6th Floor, West Conshohocken, PA 19428-
2961. Purchases may be effected on weekdays on which the New York Stock
Exchange is open for business (a "Business Day"). Payment for orders which are
not received or accepted will be returned after prompt inquiry. The issuance of
shares is recorded on the books of the Fund. No certificates will be issued for
shares. Payments for shares of a Portfolio may, in the discretion of the Fund's
investment adviser, be made in the form of securities that are permissible
investments for that Portfolio. The Fund reserves the right to reject any
purchase order, to modify or waive the minimum initial or subsequent investment
requirement and to suspend and resume the sale of any share class of any
Portfolio at any time.

In the event that a shareholder acquiring Investor A Shares on or after May
1, 1998 at a future date meets the eligibility standards for purchasing
Institutional Shares (other than due to fluctuations in market value), then the
shareholders Investor A

Shares will, upon the direction of the Fund's distributor, automatically be
converted to Institutional Shares of the Portfolio having the same aggregate net
asset value as the shares converted.

Unless a sales charge waiver applies, Investor B shareholders of a Bond or
Equity Portfolio pay a contingent deferred sales charge if they redeem during
the first six years after purchase, and Investor C shareholders pay a contingent
deferred sales charge if they redeem during the first twelve months after
purchase. Investors expecting to redeem during these periods should consider
the cost of the applicable contingent deferred sales charge in addition to the
aggregate annual Investor B or Investor C distribution fees, as compared with
the cost of the initial sales charges applicable to the Investor A Shares.

Investor B Shares of the Portfolios purchased on or before January 12, 1996
are subject to a CDSC of 4.50% of the lesser of the original purchase price or
the net asset value of Investor B Shares at the time of redemption. This
deferred sales charge is reduced for shares held more than one year. Investor B
Shares of a Portfolio purchased on or before January 12, 1996 convert to
Investor A Shares of the Portfolio at the end of six years after purchase. For
more information about Investor B Shares purchased on or before January 12, 1996
and the deferred sales charge payable on their redemption, call PFPC at (800)
441-7762.

DEALER REALLOWANCES

The following are the front-end sales loads reallowed to dealers as a
percentage of the offering price of the Funds' Non-Money Market Investor A
Shares.

LOW DURATION BOND PORTFOLIO:
Reallowance or
PLACEMENT FEES
Amount of Transaction TO DEALERS (AS % OF
AT OFFERING PRICE OFFERING PRICE)*

Less than $25,000 2.50%
$25,000 but less than $50,000 2.25
$50,000 but less than $100,000 2.00
$100,000 but less than $250,000 1.75
$250,000 but less than $500,000 1.25
$500,000 but less than $1,000,000 0.75
$1 million but less than $3 million 0.75
$3 million but less than $15 million 0.50
$15 million and above 0.25

INTERMEDIATE GOVERNMENT BOND, INTERMEDIATE BOND, CORE BOND, GNMA, TAX-FREE
INCOME, PENNSYLVANIA TAX -FREE INCOME, NEW JERSEY TAX-FREE INCOME, OHIO TAX-FREE
INCOME, DELAWARE TAX-FREE INCOME AND KENTUCKY TAX-FREE INCOME PORTFOLIOS:

Reallowance or
PLACEMENT FEES
Amount of Transaction TO DEALERS (AS % OF
AT OFFERING PRICE OFFERING PRICE)*

Less than $25,000 3.50%
$25,000 but less than $50,000 3.25
$50,000 but less than $100,000 3.00
$100,000 but less than $250,000 2.50

$250,000 but less than $500,000 1.50
$500,000 but less than $1,000,000 0.75
$1 million but less than $3 million 0.75
$3 million but less than $15 million 0.50
$15 million and above 0.25

* The Distributor may pay placement fees to dealers as shown on purchases
of Investor A Shares of $1,000,000 or more.

GOVERNMENT INCOME AND MANAGED INCOME PORTFOLIOS:
Reallowance or
PLACEMENT FEES
Amount of Transaction TO DEALERS (AS % OF
AT OFFERING PRICE OFFERING PRICE)*

less than $25,000 4.00 %
$25,000 but less than $50,000 3.75
$50,000 but less than $100,000 3.50
$100,000 but less than $250,000 3.00
$250,000 but less than $500,000 2.00
$500,000 but less than $1,000,000 1.25
$1 million but less than $3 million 1.00
$3 million but less than $15 million 0.50
$15 million and above 0.25

INTERNATIONAL BOND AND HIGH YIELD BOND PORTFOLIOS:
Reallowance or
PLACEMENT FEES
Amount of Transaction TO DEALERS (AS % OF
AT OFFERING PRICE OFFERING PRICE)*

Less than $25,000 4.50%
$25,000 but less than $50,000 4.25
$50,000 but less than $100,000 4.00
$100,000 but less than $250,000 3.50
$250,000 but less than $500,000 2.50
$500,000 but less than $1,000,000 1.50
$1 million but less than $3 million 1.00
$3 million but less than $15 million 0.50
$15 million and above 0.25

* The Distributor may pay placement fees to dealers as shown on purchases of
Investor A Shares of $1,000,000 or more.

ALL EQUITY PORTFOLIOS EXCEPT THE MICRO-CAP EQUITY PORTFOLIO, INTERNATIONAL
EQUITY, INTERNATIONAL EMERGING MARKETS AND INTERNATIONAL SMALL CAP EQUITY
PORTFOLIOS AND INDEX EQUITY PORTFOLIO:

REALLOWANCE OR
PLACEMENT FEES
AMOUNT OF TRANSACTION TO DEALERS (AS % OF
AT OFFERING PRICE OFFERING PRICE)*

Less than $25,000 4.00%
$25,000 but less than $50,000 3.75
$50,000 but less than $100,000 3.50
$100,000 but less than $250,000 3.00
$250,000 but less than $500,000 2.00
$500,000 but less than $1,000,000 1.25
$1 million but less than $3 million 1.00
$3 million but less than $15 million 0.50
$15 million and above 0.25

MICRO-CAP EQUITY, INTERNATIONAL EQUITY, INTERNATIONAL EMERGING MARKETS AND
INTERNATIONAL SMALL CAP EQUITY PORTFOLIOS:

REALLOWANCE OR
PLACEMENT FEES
AMOUNT OF TRANSACTION TO DEALERS (AS % OF
AT OFFERING PRICE OFFERING PRICE)*

No front-end sales loads are reallowed to dealers on sales of Index Equity
Portfolio Investor A Shares.

* The Distributor may pay placement fees to dealers as shown on purchases of
Investor A Shares of $1,000,000 or more.

During special promotions, the entire sales charge may be reallowed to
dealers. Dealers who receive 90% or more of the sales charge may be deemed to
be "underwriters" under the 1933 Act. The amount of the sales charge not
reallowed to dealers may be paid to broker-dealer affiliates of PNC Bank Corp.
who provide sales support services. The Distributor, BlackRock, Inc. and/or
their affiliates may also pay additional compensation, out of their assets and
not as an additional charge to the Portfolios, to dealers in connection with the
sale and distribution of shares (such as additional payments based on new
sales), and may, subject to applicable NASD regulations, contribute to various
non-cash and cash incentive arrangements to promote the sale of shares, as well
as sponsor various educational programs, sales contests and promotions in which
participants may receive reimbursement of expenses, entertainment and prizes
such as travel awards, merchandise and cash.

The following special purchase plans result in the waiver or reduction of
sales charges for Investor A, B or C shares of each of the Equity and Bond
Portfolios.

SALES CHARGE WAIVERS FOR EACH OF THE EQUITY AND BOND PORTFOLIOS-INVESTOR A
SHARES

QUALIFIED PLANS. In general, the sales charge (as a percentage of the
offering price) payable by qualified employee benefit plans ("Qualified Plans")
having at least 20 employees eligible to participate in purchases of Investor A
Shares of the Portfolios aggregating less than $500,000 will be 1.00%. No sales
charge will apply to purchases by such Qualified Plans of Investor A Shares
aggregating $500,000 and above. The sales charge payable by Qualified Plans
having less than 20 employees eligible to participate in purchases of Investor A
Shares of the Portfolio aggregating less than $500,000 will be 2.50% (1.50% with
respect to the Index Equity Portfolio). The above schedule will apply to
purchases by such Qualified Plans of Investor A Shares aggregating $500,000 and
above.

The Fund has established different waiver arrangements with respect to the
sales charge on Investor A Shares of the Portfolios for purchases through
certain Qualified Plans participating in programs whose sponsors or
administrators have entered into arrangements with the Fund.

Investor A Shares of the Non-Money Market Portfolios will be made available
to plan participants at net asset value with the waiver of the initial sales
charge on purchases through an eligible 401(k) plan participating in a Merrill
Lynch 401(k) Program (an "ML 401(k) Plan") if:

(i) the ML 401(k) Plan is record kept on a daily valuation basis by
Merrill Lynch and, on the date the ML 401(k) Plan sponsor signs the Merrill
Lynch Recordkeeping Service Agreement, the ML 401(k) Plan has $3 million or
more in assets invested in broker/dealer funds not advised or managed by
Merrill Lynch Asset Management, L.P. ("MLAM") that are made available
pursuant to a Services Agreement between Merrill Lynch and the fund's
principal underwriter or distributor and in funds advised or managed by MLAM
(collectively, the "Applicable Investments"); or

(ii) the ML 401(k) Plan is recordkept on a daily valuation basis by an
independent recordkeeper whose services are provided through a contract or
alliance arrangement with Merrill Lynch, and on the date the ML 401(k) Plan
sponsor signs the Merrill Lynch Recordkeeping Service Agreement, the ML
401(k) Plan has $3 million or more in assets, excluding money market funds,
invested in Applicable Investments; or

(iii) the ML 401(k) Plan has 500 or more eligible employees, as
determined by the Merrill Lynch plan conversion manager, on the date the ML
401(k) Plan sponsor signs the Merrill Lynch Recordkeeping Service Agreement.

OTHER. The following persons associated with the Fund, the Distributor, the
Fund's investment adviser, sub-advisers or transfer agent and their affiliates
may buy Investor A Shares of each of the Bond and Equity Portfolios without
paying a sales charge to the extent permitted by these firms: (a) officers,
directors and partners (and their spouses and minor children); (b) employees and
retirees (and their spouses and minor children); (c) registered representatives
of brokers who have entered into selling agreements with the Distributor; (d)
spouses or children of such persons; and (e) any trust, pension, profit-sharing
or other benefit plan for any of the persons set forth in (a) through (c). The
following persons may also buy Investor A Shares without paying a sales charge:
(a) persons investing through an authorized payroll deduction plan; (b) persons
investing through an authorized investment plan for organizations which operate
under Section 501(c)(3) of the Internal Revenue Code; (c) registered investment
advisers, trust companies and bank trust departments exercising discretionary
investment authority with respect to amounts to be invested in a Portfolio,
provided that the aggregate amount invested pursuant to this exemption in
Investor A Shares that would otherwise be subject to front-end sales charges
equals at least $250,000; and (d) persons participating in a "wrap account" or
similar program under which they pay advisory fees to a broker-dealer or other
financial institution. Investors who qualify for any of these exemptions from
the sales charge must purchase Investor A Shares.

REDUCED SALES CHARGES FOR EACH OF THE EQUITY AND BOND PORTFOLIOS-INVESTOR A
SHARES

Because of reductions in the front-end sales charge for purchases of Investor
A Shares aggregating $25,000 or more, it may be advantageous for investors
purchasing large quantities of Investor Shares to purchase Investor A Shares.
In any event, the Fund will not accept any purchase order for $1,000,000 or more
of Investor B Shares or Investor C Shares.

QUANTITY DISCOUNTS. Larger purchases may reduce the sales charge price.
Upon notice to the investor's broker or the transfer agent, purchases of
Investor A Shares made at any one time by the following persons may be
considered when calculating the sales charge: (a) an individual, his or her
spouse and their children under the age of 21; (b) a trustee or fiduciary of a
single trust estate or single fiduciary account; or (c) any organized group
which has been in existence for more than six months, if it is not organized for
the purpose of buying redeemable securities of a registered investment company,
and if the purchase is made through a central administrator, or through a single
dealer, or by other means which result in economy of sales effort or expense.
An organized group does not include a group of individuals whose sole
organizational connection is participation as credit card holders of a company,
policyholders of an insurance company, customers of either a bank or
broker/dealer or clients of an investment adviser. Purchases made by an
organized group may include, for example, a trustee or other fiduciary
purchasing for a single fiduciary account or other employee benefit plan
purchases made through a payroll deduction plan.

RIGHT OF ACCUMULATION. Under the Right of Accumulation, the current value of
an investor's existing Investor A Shares in any of the Non-Money Market
Portfolios that are subject to a front-end sales charge or the total amount of
an investor's initial investment in such shares, less redemptions (whichever is
greater) may be combined with the amount of the investor's current purchase in
determining the applicable sales charge. In order to receive the cumulative
quantity reduction, previous purchases of Investor A Shares must be called to
the attention of PFPC by the investor at the time of the current purchase.

REINVESTMENT PRIVILEGE. Upon redemption of Investor A Shares of a Non-Money
Market Portfolio (or Investor A Shares of another Non-Money Market Portfolio of
the Fund), a shareholder has a one-time right, to be exercised within 60 days,
to reinvest the redemption proceeds without any sales charges. PFPC must be
notified of the reinvestment in writing by the

100

purchaser, or by his or her broker, at the time purchase is made in order to
eliminate a sales charge. An investor should consult a tax adviser concerning
the tax consequences of use of the reinvestment privilege.

LETTER OF INTENT. An investor may qualify for a reduced sales charge
immediately by signing a Letter of Intent stating the investor's intention to
invest during the next 13 months a specified amount in Investor A Shares of a
Non-Money Market Portfolio which, if made at one time, would qualify for a
reduced sales charge. The Letter of Intent may be signed at any time within 90
days after the first investment to be included in the Letter of Intent. The
initial investment must meet the minimum initial investment requirement and
represent at least 5% of the total intended investment. The investor must
instruct PFPC upon making subsequent purchases that such purchases are subject
to a Letter of Intent. All dividends and capital gains of a Portfolio that are
invested in additional Investor A Shares of the same Portfolio are applied to
the Letter of Intent.

During the term of a Letter of Intent, the Fund's transfer agent will hold
Investor A Shares representing 5% of the indicated amount in escrow for payment
of a higher sales load if the full amount indicated in the Letter of Intent is
not purchased. The escrowed Investor A Shares will be released when the full
amount indicated has been purchased. Any redemptions made during the 13-month
period will be subtracted from the amount of purchases in determining whether
the Letter of Intent has been completed.

If the full amount indicated is not purchased within the 13-month period, the
investor will be required to pay an amount equal to the difference between the
sales charge actually paid and the sales charge the investor would have had to
pay on his or her aggregate purchases if the total of such purchases had been
made at a single time. If remittance is not received within 20 days of the
expiration of the 13-month period, PFPC, as attorney-in-fact, pursuant to the
terms of the Letter of Intent, will redeem an appropriate number of Investor A
Shares held in escrow to realize the difference.

PURCHASES OF INVESTOR B SHARES. Investor B Shares of the Non-Money Market
Portfolios are subject to a deferred sales charge if they are redeemed within
six years of purchase. Dealers will generally receive commissions equal to 4.00%
of Investor B Shares sold by them plus ongoing fees under the Fund's Amended and
Restated Distribution and Service Plan. Dealers may not receive a commission in
connection with sales of Investor B Shares to certain retirement plans sponsored
by the Fund, BlackRock or its affiliates, but may receive fees under the Amended
and Restated Distribution and Service Plan. These commissions and payments may
be different than the reallowances, placement fees and commissions paid to
dealers in connection with sales of Investor A Shares and Investor C Shares.

PURCHASES OF INVESTOR C SHARES. Investor C Shares of the Non-Money Market
Portfolios are subject to a deferred sales charge of 1.00% based on the lesser
of the offering price or the net asset value of the Investor C Shares on the
redemption date if redeemed within twelve months after purchase. Dealers will
generally receive commissions equal to 1.00% of the Investor C Shares sold by
them plus ongoing fees under the Fund's Amended and Restated Distribution and
Service Plan. Dealers may not receive a commission in connection with sales of
Investor C Shares to certain retirement plans sponsored by the Fund, BlackRock
or its affiliates, but may receive fees under the Amended and Restated
Distribution and Service Plan. These commissions and payments may be different
than the reallowances, placement fees and commissions paid to dealers in
connection with sales of Investor A Shares and Investor B Shares.

EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE- INVESTOR B AND INVESTOR
C SHARES. The contingent deferred sales charge on Investor B Shares and
Investor C Shares of the Non-Money Market Portfolios is not charged in
connection with: (1) exchanges described in "Exchange Privilege" below; (2)
redemptions made in connection with minimum required distributions from IRA,
403(b)(7) and Qualified Plan accounts due to the shareholder reaching age 702;
(3) redemptions made with respect to certain retirement plans sponsored by the
Fund, BlackRock or its affiliates; (4) redemptions in connection with a
shareholder's death or disability (as defined in the Internal Revenue Code)
subsequent to the purchase of Investor B Shares or Investor C Shares; (5)
involuntary redemptions of Investor B Shares or Investor C Shares in accounts
with low balances as described in "Redemption of Shares" below; and (6)
redemptions made pursuant to the Systematic Withdrawal Plan, subject to the
limitations set forth under "Systematic Withdrawal Plan" below. In addition, no
contingent deferred sales charge is charged on Investor B Shares or Investor C
Shares acquired through the reinvestment of dividends or distributions. The
Fund also waives the contingent deferred sales charge on redemptions of Investor
B Shares of the Portfolio purchased through certain Qualified Plans
participating in programs whose sponsors or administrators have entered into
arrangements with the Fund.

101

Investor B Shares of the Non-Money Market Portfolios will be made available
to plan participants at net asset value with the waiver of the contingent
deferred sales charge if the shares were purchased through an ML 401(k) Plan if:

(ii) the ML 401(k) Plan is recordkept on a daily valuation basis by
an independent recordkeeper whose services are provided through a contract or
alliance arrangement with Merrill Lynch, and on the date the ML 401(k) Plan
sponsor signs the Merrill Lynch Recordkeeping Service Agreement, the ML
401(k) Plan has less than $3 million in assets, excluding money market funds,
invested in Applicable Investments; or

(iii) the ML 401(k) Plan has less than 500 eligible employees, as
determined by the Merrill Lynch plan conversion manager, on the date the ML
401(k) Plan sponsor signs the Merrill Lynch Recordkeeping Service Agreement.

ML 401(k) Plans recordkept on a daily basis by Merrill Lynch or an
independent recordkeeper under a contract with Merrill Lynch that are currently
investing in Investor B shares of Non-Money Market Portfolios of the Fund
convert to Investor A shares once the ML 401(k) Plan has reached $5 million
invested in Applicable Investments. The ML 401(k) Plan will receive a plan-
level share conversion.

When an investor redeems Investor B Shares or Investor C Shares, the
redemption order is processed to minimize the amount of the contingent deferred
sales charge that will be charged. Investor B Shares and Investor C Shares are
redeemed first from those shares that are not subject to the deferred sales load
(i.e., shares that were acquired through reinvestment of dividends or
distributions) and after that from the shares that have been held the longest.

SHAREHOLDER FEATURES

EXCHANGE PRIVILEGE. Investor A, Investor B and Investor C Shares of each
Portfolio may be exchanged for shares of the same class of other portfolios of
the Fund which offer that class of shares, based on their respective net asset
values. Exchanges of Investor A Shares may be subject to the difference between
the sales charge previously paid on the exchanged shares and the higher sales
charge (if any) payable with respect to the shares acquired in the exchange.
Unless an exemption applies, a front-end sales charge will be charged in
connection with exchanges of Investor A Shares of the Money Market Portfolios
for Investor A Shares of the Fund's Non-Money Market Portfolios. Similarly,
exchanges of Investor B or Investor C Shares of a Money Market Portfolio for
Investor B or Investor C Shares of a Non-Money Market Portfolio of the Fund will
also be subject to a CDSC, unless an exemption applies. Investor A Shares of
the Portfolios are only exchangeable for Investor A Shares of the Fund's other
Portfolios, Investor B Shares of the Portfolios are only exchangeable for
Investor B Shares of the Fund's other Portfolios, and Investor C Shares of the
Portfolios are only exchangeable for Investor C Shares of the Fund's other
Portfolios. In determining the holding period for calculating the contingent
deferred sales charge payable on redemption of Investor B and Investor C Shares,
the holding period of the Investor B or Investor C Shares originally held will
be added to the holding period of the Investor B or Investor C Shares acquired
through exchange. No exchange fee is imposed by the Fund.

Investor A Shares of Money Market Portfolios of the Fund that were (1)
acquired through the use of the exchange privilege and (2) can be traced back to
a purchase of shares in one or more investment portfolios of the Fund for which
a sales charge was paid, can be exchanged for Investor A Shares of a portfolio
subject to differential sales charges as applicable.

The exchange of Investor B and Investor C Shares will not be subject to a
CDSC, which will continue to be measured from the date of the original purchase
and will not be affected by exchanges.

A shareholder wishing to make an exchange may do so by sending a written
request to PFPC at the address given above. Shareholders are automatically
provided with telephone exchange privileges when opening an account, unless they
indicate on the Application that they do not wish to use this privilege.
Shareholders holding share certificates are not eligible to exchange Investor A
Shares by phone because share certificates must accompany all exchange requests.
To add this feature to an existing account that previously did not provide this
option, a Telephone Exchange Authorization Form must be filed with PFPC. This
form is available from PFPC. Once this election has been made, the shareholder
may simply contact PFPC by telephone at (800)

102

441-7762 to request the exchange. During periods of substantial economic or
market change, telephone exchanges may be difficult to complete and shareholders
may have to submit exchange requests to PFPC in writing.

If the exchanging shareholder does not currently own shares of the investment
portfolio whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain options and broker of
record as the account from which shares are exchanged, unless otherwise
specified in writing by the shareholder with all signatures guaranteed by an
eligible guarantor institution as defined above. In order to participate in the
Automatic Investment Program or establish a Systematic Withdrawal Plan for the
new account, however, an exchanging shareholder must file a specific written
request.

Any share exchange must satisfy the requirements relating to the minimum
initial investment requirement, and must be legally available for sale in the
state of the investor's residence. For Federal income tax purposes, a share
exchange is a taxable event and, accordingly, a capital gain or loss may be
realized. Before making an exchange request, shareholders should consult a tax
or other financial adviser and should consider the investment objective,
policies and restrictions of the investment portfolio into which the shareholder
is making an exchange. Brokers may charge a fee for handling exchanges.

The Fund reserves the right to modify or terminate the exchange privilege at
any time. Notice will be given to shareholders of any material modification or
termination except where notice is not required.

The Fund reserves the right to reject any telephone exchange request.
Telephone exchanges may be subject to limitations as to amount or frequency, and
to other restrictions that may be established from time to time to ensure that
exchanges do not operate to the disadvantage of any portfolio or its
shareholders. The Fund, the Administrators and the Distributor will employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine. The Fund, the Administrators and the Distributor will not be liable
for any loss, liability, cost or expense for acting upon telephone instructions
reasonably believed to be genuine in accordance with such procedures. Exchange
orders may also be sent by mail to the shareholder's broker or to PFPC at P.O.
Box 8907, Wilmington, Delaware 19899-8907.

By use of the exchange privilege, the investor authorizes the Fund's transfer
agent to act on telephonic or written exchange instructions from any person
representing himself to be the investor and believed by the Fund's transfer
agent to be genuine. The records of the Fund's transfer agent pertaining to
such instructions are binding. The exchange privilege may be modified or
terminated at any time upon 60 days' notice to affected shareholders. The
exchange privilege is only available in states where the exchange may legally be
made.

A front-end sales charge or a contingent deferred sales charge will be
imposed (unless an exemption from either sales charge applies) when Investor
Shares of a Money Market Portfolio are redeemed and the proceeds are used to
purchase Investor A Shares, Investor B Shares or Investor C Shares of a Non-
Money Market Portfolio.

Automatic Investment Plan ("AIP"). Investor Share Shareholders and certain
Service Share Shareholders who were shareholders of the Compass Capital Group of
Funds at the time of its combination with the PNC(R) Fund in 1996 may arrange
for periodic investments in that Portfolio through automatic deductions from a
checking or savings account by completing the AIP Application Form which may be
obtained from PFPC. The minimum pre-authorized investment amount is $50.

Systematic Withdrawal Plan ("SWP"). The Fund offers a Systematic Withdrawal
Plan which may be used by Investor Share Shareholders and certain Service Share
Shareholders who were shareholders of the Compass Capital Group of Funds at the
time of its combination with the PNC(R) Fund in 1996 who wish to receive regular
distributions from their accounts. Upon commencement of the SWP, the account
must have a current value of $10,000 or more in a Portfolio. Shareholders may
elect to receive automatic cash payments of $50 or more either monthly, every
other month, quarterly, three times a year, semi-annually, or annually.
Automatic withdrawals are normally processed on the 25th day of the applicable
month or, if such day is not a Business Day, on the next Business Day and are
paid promptly thereafter. An investor may utilize the SWP by completing the SWP
application Form which may be obtained from PFPC.

Shareholders should realize that if withdrawals exceed income dividends their
invested principal in the account will be depleted. To participate in the SWP,
shareholders must have their dividends automatically reinvested and may not hold
share certificates. Shareholders may change or cancel the SWP at any time, upon
written notice to PFPC. Purchases of additional Investor A Shares of the Fund
concurrently with withdrawals may be disadvantageous to investors because of the
sales charges involved and, therefore, are discouraged. No contingent deferred
sales charge will be assessed on the redemptions of Investor B or Investor C
Shares made through the SWP that do not exceed 12% of an account's net asset
value on an annualized basis. For example, monthly, quarterly and semi-annual
SWP redemptions of Investor B or Investor C Shares will not be subject to the
CDSC if they do not exceed 1%, 3% and 6%, respectively, of an account's net
asset value on the redemption date. SWP redemptions of Investor B or Investor C
Shares in excess of this limit are still subject to the applicable CDSC.

REDEMPTION OF SHARES. Except as noted below, a request for redemption must
be signed by all persons in whose names the shares are registered. Signatures
must conform exactly to the account registration. If the proceeds of the
redemption would exceed $25,000, or if the proceeds are not to be paid to the
record owner at the record address, or if the shareholder is a corporation,
partnership, trust or fiduciary, signature(s) must be guaranteed by any eligible
guarantor institution.

A signature guarantee is designed to protect the shareholders and the
Portfolio against fraudulent transactions by unauthorized persons. A signature
guarantee may be obtained from a domestic bank or trust company, recognized
broker, dealer, clearing agency, savings association who are participants in a
medallion program by the Securities Transfer Association, credit unions,
national securities exchanges and registered securities associations. The three
recognized medallion programs are Securities Transfer Agent Medallion Program
(STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock Exchange,
Inc. Medallion Signature Program (MSP). Signature Guarantees which are not a
part of these programs will not be accepted. Please note that a notary public
stamp or seal is not acceptable.

103

certificates with the redemption request. Additional documentary evidence of
authority is required by PFPC in the event redemption is requested by a
corporation, partnership, trust, fiduciary, executor or administrator.

Investor A shareholders of the Money Market Portfolios may redeem their
shares through the checkwriting privilege. Upon receipt of the checkwriting
application and signature card by PFPC, checks will be forwarded to the
investor. The minimum amount of a check is $100. If more than one shareholder
owns the account, each shareholder must sign each check, unless an election has
been made to permit check writing by a limited number of signatures and such
election is on file with PFPC. Investor A Shares represented by a check
redemption will continue to earn daily income until the check is presented for
payment. PNC bank, as the investor=s agent, will cause the Fund to redeem a
sufficient number of Investor A Shares owned to cover the check. When redeeming
Investor A Shares by check, an investor should make certain that there is an
adequate number of Investor A Shares in the account to cover the amount of the
check. If an insufficient number of Investor A Shares is held or if checks are
not properly endorsed, they may not be honored and a service charge may be
incurred. Checks may not be presented for cash payments at the offices of PNC
Bank. This limitation does not affect checks used for the payment of bills or
cash at other banks.

PAYMENT OF REDEMPTION PROCEEDS. The Fund may suspend the right of redemption
or postpone the date of payment upon redemption for such periods as are
permitted under the 1940 Act, and may redeem shares involuntarily or make
payment for redemption in securities or other property when determined
appropriate in light of the Fund's responsibilities under the 1940 Act.

The Fund reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption or repurchase of a Portfolio's
shares by making payment in whole or in part in securities chosen by the Fund
and valued in the same way as they would be valued for purposes of computing a
Portfolio's net asset value. If payment is made in securities, a shareholder
may incur transaction costs in converting these securities into cash. The Fund
has elected, however, to be governed by Rule 18f-1 under the 1940 Act so that a
Portfolio is obligated to redeem its shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value during any 90-day period for any one
shareholder of a Portfolio.

With respect to the Index Master Portfolio, when the Trustees of the Trust
determine that it would be in the best interests of the Index Master Portfolio,
the Index Master Portfolio may pay the redemption price in whole or in part by a
distribution of portfolio securities from the Index Master Portfolio of the
shares being redeemed in lieu of cash in accordance with Rule 18f-1 under the
1940 Act. Investors, such as the Index Equity Portfolio, may incur brokerage
charges and other transaction costs selling securities that were received in
payment of redemptions.

Under the 1940 Act, a Portfolio may suspend the right to redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange (the "NYSE") is closed (other than customary weekend and
holiday closings), or during which trading on the NYSE is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (A Portfolio may
also suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)

The Fund may redeem shares involuntarily to reimburse a Portfolio for any
loss sustained by reason of the failure of a shareholder to make full-payment
for shares purchased by the shareholder or to collect any charge relating to a
transaction effected for the benefit of a shareholder. The Fund reserves the
express right to redeem shares of each Portfolio involuntarily at any time if
the Fund's Board of Trustees determines, in its sole discretion, that failure to
do so may have adverse consequences to the holders of shares in the Portfolio.
Upon such redemption the holders of shares so redeemed shall have no further
right with respect thereto other than to receive payment of the redemption
price.

COMPUTATION OF PUBLIC OFFERING PRICES FOR INVESTOR A SHARES OF THE NON-MONEY
MARKET PORTFOLIOS. An illustration of the computation of the public offering
price per Investor A Share of the respective Non-Money Market Portfolios, based
on the value of such Portfolios' net assets as of September 30, 1998 follows:

104

LOW INTERMEDIATE INTERMEDIATE CORE GOVERNMENT
DURATION GOVERNMENT BOND BOND INCOME
BRAND PORTFOLIO BOND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------- -------------- ------------ --------- -----------

Net Assets................................. $2,849,832 $7,971,816 $1,648,048 $5,108,250 6,045,305

Outstanding Shares......................... 284,206 760,875 170,349 504,846 557,445
========== ========== ========== ========== ==========

Net Asset Value Per Share.................. $ 10.03 $ 10.48 $ 9.67 $ 10.12 $ 10.84
Maximum Sales Charge, 4.00% of offering
price (4.17% of net asset value per
share)*.................................. .31 .44 .40 .42 .51
---------- ---------- ---------- ---------- ----------
Offering to Public......................... $ 10.34 $ 10.92 $ 10.07 $ 10.54 $ 11.35
========== ========== ========== ========== ==========

_____________________
* 3.00%/3.09% for Low Duration Bond Portfolio; 4.50%/4.71% for Government
Income Portfolio.

PENNSYLVANIA NEW JERSEY
MANAGED INTERNATIONAL TAX-FREE TAX-FREE TAX-FREE
INCOME BOND GNMA INCOME INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- ------------- --------- --------- ---------- -----------

Net Assets........................... $14,896,948 $1,705,546 $534,964 $6,440,125 $34,711,436 $1,431,926

Outstanding Shares................... 1,399,501 151,735 52,918 549,031 3,112,945 118,608
=========== ========== ======== ========== =========== ==========

Net Asset Value Per Share............ $ 10.64 $ 11.24 $ 10.11 $ 11.73 $ 11.15 $ 12.07
Maximum Sales Charge, 4.00% of
offering price (4.17% of net asset
value per share)*................... .50 .59 .48 .49 .46 .50
----------- ---------- -------- ---------- ----------- ----------
Offering to Public................... $ 11.14 $ 11.83 $ 10.59 $ 12.22 $ 11.61 $ 12.57
=========== ========== ======== ========== =========== ==========

_____________________

* 4.50%/4.71% for Managed Income and for GNMA Portfolios; 5.00%/5.26% for
International Bond Portfolio.

OHIO LARGE CAP LARGE CAP MID-CAP
TAX-FREE DELAWARE VALUE GROWTH VALUE
INCOME TAX-FREE KENTUCKY TAX-FREE EQUITY EQUITY EQUITY
PORTFOLIO INCOME PORTFOLIO INCOME PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- ---------------- ----------------- ---------- --------- ---------

Net Assets...................... $2,774,273 $2,545,965 $974,980 $51,150,997 $33,339,983 $3,983,378

Outstanding Shares.............. 255,026 246,371 94,577 3,483,278 1,845,833 375,407
========== ========== ======== =========== =========== ==========

Net Asset Value Per Share....... $ 10.88 $ 10.33 $ 10.31 $ 14.68 $ 18.06 $ 10.61

Maximum Sales Charge, 4.50% of
offering price (4.71% of net
asset value per share)*........ .45 .43 .43 .69 .85 .50
---------- ---------- -------- ----------- ----------- ----------
Offering to Public.............. $ 11.33 $ 10.76 $ 10.74 $ 15.37 $ 18.91 $ 11.11
========== ========== ======== =========== =========== ==========

MID-CAP
GROWTH
EQUITY
PORTFOLIO
---------

Net Assets...................... $4,089,848

Outstanding Shares.............. 371,177
==========

Net Asset Value Per Share....... $ 11.02

Maximum Sales Charge, 4.50% of
offering price (4.71% of net
asset value per share)*........ .52
----------
Offering to Public.............. $ 11.54
==========

_____________________

* 4.00%/4.17% for Ohio Tax-Free Income, Delaware Tax-Free Income and Kentucky
Tax-Free Income Portfolios.

105

SMALL CAP INTERNATIONAL INTERNATIONAL
SMALL CAP GROWTH INTERNATIONAL SMALL CAP EMERGING
VALUE EQUITY EQUITY EQUITY EQUITY MARKETS
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-----------------------------------------------------------------------

Net Assets............................... $34,286,072 $48,190,163 $26,637,346 $848,493 $1,835,321

Outstanding Shares....................... 2,304,673 2,814,694 2,027,205 88,952 420,881
=========== =========== =========== ======== ==========

Net Asset Value Per Share................ $ 14.88 $ 17.12 $ 13.14 $ 9.54 $ 4.36
Maximum Sales Charge, 5.00% of offering .70 .81 .69 .50 .23
price ----------- ----------- ----------- -------- ----------
(5.26% of net asset value per share)*..
Offering to Public....................... $ 15.58 $ 17.93 $ 13.83 $ 10.04 $ 4.59
=========== =========== =========== ======== ==========

________________
* 4.50%/4.71% for Small Cap Value Equity and Small Cap Growth Equity
Portfolios.

SELECT INDEX
MICRO-CAP EQUITY EQUITY EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------------------------------

Net Assets...................................... $6,100,311 $35,359,044 $42,891,252 $96,795,124

Outstanding Shares.............................. 650,470 2,079,728 2,183,440 5,280,298
========== =========== =========== ===========

Net Asset Value Per Share....................... $ 9.38 $ 17.00 $ 19.64 $ 18.33
Maximum Sales Charge, 4.50% of offering price .49 .80 .61 .86
(4.71% of net asset value per share)*.......... ---------- ----------- ----------- -----------
Offering to Public.............................. $ 9.87 $ 17.80 $ 20.25 $ 19.19
========== =========== =========== ===========

__________________

* 5.00%/5.269% for Micro-Cap Equity Portfolio; 3.00%/3.09% for Index Equity
Portfolio.

Total front-end sales charges paid by shareholders of Investor A Shares of
the Portfolios for the year or period ended September 30, 1998 (for the period
from May 1, 1998 through September 30, 1998 in the case of the Micro-Cap Equity
Portfolio; and for the period from May 11, 1998 through September 30, 1998 in
the case of the Delaware Tax-Free Income Portfolio and the Kentucky Tax-Free
Income Portfolio; and for the period from May 18, 1998 through September 30,
1998 in the case of the GNMA Portfolio) were as follows:

FRONT-END
PORTFOLIOS SALES CHARGES
- ---------------------------------------------------------------------------------------------------------------------

Low Duration Bond......................................................... $ 3,210
Intermediate Government Bond.............................................. 6,951
Intermediate Bond......................................................... 4,428
Core Bond................................................................. 39,660
Government Income......................................................... 51,567
Managed Income............................................................ 47,124
International Bond........................................................ 21,051
GNMA...................................................................... 607
Tax-Free Income........................................................... 10,786
Pennsylvania Tax-Free Income.............................................. 73,272
New Jersey Tax-Free Income................................................ 5,120
Ohio Tax-Free Income...................................................... 3,344
Delaware Tax-Free Income.................................................. 33,955
Kentucky Tax-Free Income.................................................. 0
Large Cap Value Equity.................................................... 243,863
Large Cap Growth Equity................................................... 150,956
Mid-Cap Value Equity...................................................... 70,975
Mid-Cap Growth Equity..................................................... 41,375
Small Cap Value Equity.................................................... 244,947
Small Cap Growth Equity................................................... 275,225
Micro-Cap Equity.......................................................... 172,918
International Equity...................................................... 57,797
International Small Cap Equity............................................ 15,651
International Emerging Markets............................................ 10,774
Select Equity............................................................. 367,339
Index Equity.............................................................. 258,498
Balanced.................................................................. 295,492

106

FRONT-END
PORTFOLIOS SALES CHARGES
- ---------------------------------------------------------------------------------------------------------

Kentucky Tax-Free Income.................................................. 0
Large Cap Value Equity.................................................... 243,863
Large Cap Growth Equity................................................... 150,956
Mid-Cap Value Equity...................................................... 70,975
Mid-Cap Growth Equity..................................................... 41,375
Small Cap Value Equity.................................................... 244,947
Small Cap Growth Equity................................................... 275,225
Micro-Cap Equity.......................................................... 172,918
International Equity...................................................... 57,797
International Small Cap Equity............................................ 15,651
International Emerging Markets............................................ 10,774
Select Equity............................................................. 367,339
Index Equity.............................................................. 258,498
Balanced.................................................................. 295,492

Total front-end sales charges paid by shareholders of Investor A Shares of
the Portfolios for the year or period ended September 30, 1997 (for the period
from December 27, 1996 through September 30, 1997 in the case of the Mid-Cap
Growth Equity and Mid-Cap Value Equity Portfolios; and for the period from
September 26, 1997 through September 30, 1997 in the case of the International
Small Cap Equity Portfolio) were as follows:

FRONT-END
PORTFOLIOS SALES CHARGES
- ---------------------------------------------------------------------------------------------------------

Low Duration Bond......................................................... $ 3,758
Intermediate Government Bond.............................................. 11,644
Intermediate Bond......................................................... 7,367
Core Bond................................................................. 39,657
Government Income......................................................... 32,856
Managed Income............................................................ 68,493
International Bond........................................................ 29,718
Tax-Free Income........................................................... 19,830
Pennsylvania Tax-Free Income.............................................. 80,642
New Jersey Tax-Free Income................................................ 4,104
Ohio Tax-Free Income...................................................... 5,336
Large Cap Value Equity.................................................... 277,224
Large Cap Growth Equity................................................... 146,897
Mid-Cap Value Equity...................................................... 55,834
Mid-Cap Growth Equity..................................................... 46,954
Small Cap Value Equity.................................................... 107,051
Small Cap Growth Equity................................................... 668,832
International Equity...................................................... 104,956
International Small Cap Equity............................................ 0
International Emerging Markets............................................ 49,056
Select Equity............................................................. 272,796
Index Equity.............................................................. 159,501
Balanced.................................................................. 223,646

107

Total front-end sales charges paid by shareholders of Investor A Shares
of the Portfolios for the year or period ended September 30, 1996 (for the
period from February 1, 1996 through September 30, 1996 in the case of the New
Jersey Tax-Free Income and International Bond Portfolios; for the period from
April 1, 1996 through September 30, 1996 in the case of the Low Duration Bond
and Core Bond Portfolios) were as follows:

FRONT-END
PORTFOLIOS SALES CHARGES
- ---------------------------------------------------------------------------------------------------------

Managed Income............................................................... $ 43,417
Tax-Free Income.............................................................. 9,109
Intermediate Government Bond................................................. 22,989
Ohio Tax-Free Income......................................................... 4,649
Pennsylvania Tax-Free Income................................................. 81,436
Intermediate Bond............................................................ 8,598
Large Cap Value Equity....................................................... 141,011
Large Cap Growth Equity...................................................... 95,694
Small Cap Growth Equity...................................................... 344,911
Select Equity................................................................ 44,112
Index Equity................................................................. 78,263
Small Cap Value Equity....................................................... 51,676
International Equity......................................................... 85,795
Balanced..................................................................... 143,547
International Emerging Markets............................................... 18,147
Government Income............................................................ 30,034
Core Bond.................................................................... 8,481
New Jersey Tax Free Income................................................... 17,606
Low Duration Bond............................................................ 6,294
International Bond........................................................... $ 7,565

For the period from January 13, 1996 through January 31, 1996, the total
front-end sales charges paid by the shareholders of Investor A Shares of the New
Jersey Tax-Free Income Portfolio were $435. For the period from January 13,
1996 through March 31, 1996, the total front-end sales charges paid by the
shareholders of Investor A Shares of the Low Duration Bond and Core Bond
Portfolios were $3,848 and $1,723, respectively.

INSTITUTIONAL AND BLACKROCK SHARES

PURCHASE OF SHARES. Institutional Shares are offered to institutional
investors, including (a) registered investment advisers with a minimum
investment of $500,000 and (b) the trust departments of PNC Bank and its
affiliates (collectively, "PNC") on behalf of clients for whom PNC (i) acts in a
fiduciary capacity (excluding participant-direct employee benefit plans) or
otherwise has investment discretion or (ii) acts as custodian with respect to at
least $2,000,000 in assets, and individuals with a minimum investment of
$2,000,000. The minimum initial investment for institutions is $5,000. There
is no minimum subsequent investment requirement.

BlackRock Shares are offered to institutional investors with a minimum
investment of $5,000,000. There is no minimum subsequent investment
requirement.

Payment for Institutional and BlackRock Shares must normally be made in
Federal funds or other funds immediately available to the Fund's custodian.
Payment may also, in the discretion of the Fund, be made in the form of
securities that are permissible investments for the respective Portfolios. The
Fund does not accept third party checks for initial or subsequent investments.

In the event that a shareholder acquiring Institutional Shares on or after
May 1, 1998 ceases to meet the eligibility standards for purchasing
Institutional Shares (other than due to fluctuations in market value), then the
shareholder's Institutional

108

Shares will, upon the direction of the Fund's distributor, automatically be
converted to shares of another class of the Portfolio having the same aggregate
net asset value as the shares converted. If, at the time of conversion, an
institution offering Service Shares of the Portfolio is acting on the
shareholder's behalf, then the shareholder's Institutional Shares will be
converted to Service Shares of the Portfolio. If not, then the shareholder's
Institutional Shares will be converted to Investor A Shares of the Portfolio.
Service Shares are currently authorized to bear additional service and
processing fees at the aggregate annual rate of .30% of average daily net
assets, while Investor A Shares are currently authorized to bear additional
service, processing and distribution fees at the aggregate annual rate of .50%
of average daily net assets.

The Fund may in its discretion waive or modify the minimum investment
amount, may reject any order for Institutional and BlackRock Shares and may
suspend and resume the sale of shares of any Portfolio at any time.

REDEMPTION OF SHARES. Payment for redeemed shares for which a redemption
order is received by PFPC before 4:00 p.m. (Eastern Time) on a Business Day is
normally made in Federal funds wired to the redeeming Institution on the next
Business Day, provided that the Fund's custodian is also open for business.
Payment for redemption orders received after 4:00 p.m. (Eastern Time) or on a
day when the Fund's custodian is closed is normally wired in Federal funds on
the next Business Day following redemption on which the Fund's custodian is open
for business. The Fund reserves the right to wire redemption proceeds within
seven days after receiving a redemption order if, in the judgment of BlackRock,
an earlier payment could adversely affect a Portfolio. No charge for wiring
redemption payments is imposed by the Fund.

During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. Redemption requests may also be
mailed to PFPC at P.O. Box 8907, Wilmington, Delaware 19899-8907.

The Fund may also suspend the right of redemption or postpone the date of
payment upon redemption for such periods as are permitted under the 1940 Act,
and may redeem shares involuntarily or make payment for redemption in securities
or other property when determined appropriate in light of the Fund's
responsibilities under the 1940 Act.

Institutional Shares of the Portfolios may be purchased by customers of
broker-dealers and agents which have established a servicing relationship with
the Fund on behalf of their customers. These broker-dealers and agents may
impose additional or different conditions on the purchase or redemption of
Portfolio shares by their customers and may charge their customers transaction,
account or other fees on the purchase and redemption of Portfolio shares. Each
broker-dealer or agent is responsible for transmitting to its customers a
schedule of any such fees and information regarding any additional or different
conditions regarding purchases and redemptions. Shareholders who are customers
of such broker-dealers or agents should consult them for information regarding
these fees and conditions.

SERVICE SHARES

PURCHASE OF SHARES. Purchase orders for each Portfolio except the U.S.
Treasury Money Market Portfolio may be placed by telephoning PFPC at (800) 441-
7450 no later than 12:00 noon (Eastern Time) on a Business Day. Orders received
before 12:00 noon (Eastern Time) will be executed at 12:00 noon (Eastern Time).
If payment for such orders is not received by 4:00 p.m. (Eastern Time), the
order will be canceled and notice thereof will be given to the Institution
placing the order. Orders received after 12:00 noon (Eastern Time) will not be
accepted.

Purchase orders for the U.S. Treasury Money Market Portfolio may be placed
by telephoning PFPC at (800) 441-76450 no later than 4:00 p.m. (Eastern time) on
a Business Day. Orders received before 12:00 noon (Eastern Time) will be
executed at 12:00 noon (Eastern Time); orders received after 12:00 noon (Eastern
Time) but before 4:00 p.m. (Eastern Time) will be executed at 4:00 p.m. (Eastern
Time). If payment for such orders is not received by 4:00 p.m. (Eastern Time),
the order will be canceled and notice thereof will be given to the Institution
placing the order. Orders will not be accepted after 4:00 p.m. (Eastern Time).
Under certain circumstances, the Fund may reject large individual purchase
orders received after 12:00 noon (Eastern Time.)

In the event that a shareholder acquiring Service Shares on or after May 1,
1998 (other than a former shareholder of The Compass Capital Group as described
above) ceases to meet the eligibility standards for purchasing Service Shares,
then the shareholder's Service Shares will, upon the direction of the Fund's
distributor, automatically be converted to Investor A Shares of the Portfolio
having the same aggregate net asset value as the shares converted. Investor A
Shares are currently authorized

109

to bear additional service and distribution fees at the aggregate annual rate of
.20% of average daily net assets. In the event that a shareholder acquiring
Service Shares on or after May 1, 1998 subsequently satisfies the eligibility
standards for purchasing Institutional Shares (other than due to fluctuations in
market value), then the shareholder's Service Shares will, upon the direction of
the Fund's distributor, automatically be converted to Institutional Shares of
Portfolio having the same aggregate net asset value as the shares converted.

The Fund may in its discretion waive or modify the minimum investment
amount, may reject any order for Service Shares and may suspend and resume the
sale of shares of any Portfolio at any time.

REDEMPTION OF SHARES. Payment for redeemed shares for which a redemption
order is received by PFPC before 12:00 noon (Eastern Time) on a Business Day is
normally made in Federal funds wired to the redeeming Institution on the same
Business Day, provided that the fund's custodian is also open for business.
Payment for redemption orders received between 12:00 noon (Eastern Time) and
4:00 p.m. (Eastern Time) or on a day when the Fund's custodian is closed is
normally wired in Federal funds on the next Business Day following redemption on
which the Fund's custodian is open for business. The Fund reserves the right to
wire redemption proceeds within seven days after receiving a redemption order
if, in the judgment of BlackRock, Inc., an earlier payment could adversely
affect a Portfolio. No charge for wiring redemption payments is imposed by the
Fund, although Institutions may charge their customer accounts for redemption
services. Information relating to such redemption services and charges, if any,
should be obtained by customers from their Institution.

During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. Redemption requests may also be
mailed to PFPC at 400 Bellevue Parkway, Wilmington, DE 19809.

The Fund may redeem Service Shares in any Portfolio account if the account
balance drops below $5,000 as the result of redemption requests and the
shareholder does not increase the balance to at least $5,000 upon thirty days'
written notice. If a customer has agreed with an Institution to maintain a
minimum balance in his or her account with the Institution, and the balance in
the account falls below that minimum, the customer may be obligated to redeem
all or part of his or her shares in the Portfolio to the extent necessary to
maintain the minimum balance required.

Except as noted below, a request for redemption must be signed by all
persons in whose names the shares are registered. Signatures must conform
exactly to the account registration. If the proceeds of the redemption would
exceed $25,000, or if the proceeds are not to be paid to the record owner at the
record address, or if the shareholder is a corporation, partnership, trust or
fiduciary, signature(s) must be guaranteed by any eligible guarantor
institution. Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations.

Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. Shareholders holding share certificates must
send their certificates with the redemption request. Additional documentary
evidence of authority is required by PFPC in the event redemption is requested
by a corporation, partnership, trust, fiduciary, executor or administer.

If shareholder has given authorization for expedited redemption, shares can
be redeemed by telephone and the proceeds sent by check to the shareholder or by
Federal wire transfer to a single previously designated bank account. Once
authorization is on file, PFPC will honor requests by any person by telephone at
(800) 441-7762 or other means. The minimum amount that may be sent by check is
$500, while the minimum amount that may be wired is $10,000. The Fund reserves
the right to change these minimums or to terminate these redemptions privileges.
If the proceeds of a redemption would exceed $25,000, the redemption request
must be in writing and will be subject to the signature guarantee requirement
described above. This privilege may not be used to redeem shares in
certificated form.

110

Persons who were shareholders of an investment portfolio of Compass Capital
Group of Funds at the time of the portfolio's combination with The PNC Fund may
also purchase and redeem Service Shares of the same Portfolio and for the same
account in which they held shares on that date through the procedures described
in this section.

DIVIDENDS AND DISTRIBUTIONS

EQUITY PORTFOLIOS. Each of the Equity Portfolios of the Fund will
distribute substantially all of its net investment income and net realized
capital gains, if any, to shareholders. The net investment income of each of
the Equity Portfolios is declared quarterly as a dividend to investors who are
shareholders of the Portfolio at the close of business on the day of
declaration. All dividends are paid not later than ten days after the end of
each quarter. Any net realized capital gains (including net short-term capital
gains) will be distributed by each Portfolio of the Fund at least annually. The
period for which dividends are payable and the time for payment are subject to
change by the Fund's Board of Trustees.

Distributions are reinvested at net asset value in additional full and
fractional shares of the same class on which the distributions are paid, unless
a shareholder elects to receive distributions in cash. This election, or any
revocation thereof, must be made in writing to PFPC, and will become effective
with respect to distributions paid after its receipt by PFPC.

The Index Equity Portfolio seeks its investment objective by investing all
of its assets in the Index Master Portfolio (which is taxable as a partnership
for federal income tax purposes). The Index Equity portfolio is allocated its
distributive share of the income, gains (including capital gains), losses,
deductions and credits of the Index Master Portfolio. The Index Equity
Portfolio's distributive share of such items, plus gain, if any, on the
redemption of shares of the Index Master Portfolio, less the Index Equity
Portfolio's expenses incurred in operations will constitute the Index Equity
Portfolio's net income from which dividends are distributed as described
above.

BOND PORTFOLIOS. Each of the Bond Portfolios will distribute substantially
all of its net investment income and net realized capital gains, if any, to
shareholders. All distributions are reinvested at net asset value in the form
of additional full and fractional shares of the same class of shares of the
relevant Portfolio unless a shareholder elects otherwise. Such election, or any
revocation thereof, must be made in writing to PFPC, and will become effective
with respect to dividends paid after its receipt by PFPC. Each Portfolio
declares a dividend each day on "settled" shares (i.e., shares for which the
particular Portfolio has received payment in Federal funds) on the first
Business Day after a purchase order is placed with the Fund. Payments by check
are normally converted to Federal funds within two Business Days of receipt.
Over the course of a year, substantially all of the Portfolio's net investment
income will be declared as dividends. The amount of the daily dividend for each
Portfolio will be based on periodic projections of its net investment income.
All dividends are paid within ten days after the end of each month. Net
realized capital gains (including net short-term capital gains), if any, will be
distributed by each Portfolio at least annually.

MONEY MARKET PORTFOLIOS. Shareholders are entitled to dividends and
distributions arising from the net income and capital gains, if any, earned on
investments held by the Money Market Portfolio in which they invest. Each Money
Market Portfolio's net income is declared daily as a dividend. Shareholders
whose purchase orders are executed at 12:00 noon (Eastern Time), 4:00 p.m.
(Eastern Time) for the U.S. Treasury Money Market Portfolio, receive dividends
for that day. On the other hand, shareholders whose redemption orders have been
received by 12:00 noon (Eastern Time) do not receive dividends for that day,
while shareholders of each Portfolio whose redemption orders are received after
12:00 noon (Eastern Time) do receive dividends for that day.

Dividends are paid monthly by check, or by wire transfer if requested in
writing by the shareholder, within five business days after the end of the
month. Net short-term capital gains, if any, will be distributed at least
annually. The period for which dividends are payable and the time for payment
are subject to change by the Fund's Board of Trustees. The Portfolios do not
expect to realize net long-term capital gains.

Dividends are reinvested in additional full and fractional Investor Shares
of the same class on which the dividends are paid, unless a shareholder elects
to receive dividends in cash. Such election, or any revocation thereof, must be
made in writing to PFPC, and will become effective with respect to dividends
paid after receipt by PFPC.

111

VALUATION OF PORTFOLIO SECURITIES

In determining the market value of portfolio investments, the Fund may
employ outside organizations, which may use, without limitation, a matrix or
formula method that takes into consideration market indexes, matrices, yield
curves and other specific adjustments. This may result in the securities being
valued at a price different from the price that would have been determined had
the matrix or formula method not been used. All cash, receivables and current
payables are carried on the Fund's books at their face value. Other assets, if
any, are valued at fair value as determined in good faith under the supervision
of the Board of Trustees.

MONEY MARKET PORTFOLIOS. The net asset value for each class of each share
of the Money Market Portfolios for the purpose of pricing purchase and
redemption orders is determined twice each day, once as of 12:00 noon (Eastern
Time) and once as of 4:00 p.m. (Eastern Time) on each day the NYSE is open for
business (a "Business Day"). Each Portfolio's net asset value per share is
calculated by adding the value of all securities, cash and other assets of the
respective classes of the Portfolio, subtracting the liabilities and dividing
the result by the number of outstanding shares of such classes. The net asset
value per share of each class of each Portfolio is determined independently of
the other classes and the other Portfolios.

The Fund seeks to maintain for each of the Money Market Portfolios a net
asset value of $1.00 per share for purposes of purchase and redemptions and
values their portfolio securities on the basis of the amortized cost method of
valuation.

Under this method the market value of an instrument is approximated by
amortizing the difference between the acquisition cost and value at maturity of
the instrument on a straight-line basis over the remaining life of the
instrument. The effect of changes in the market value of a security as a result
of fluctuating interest rates is not taken into account. The market value of
debt securities usually reflects yields generally available on securities of
similar quality. When such yields decline, market values can be expected to
increase, and when yields increase, market values can be expected to decline.

As indicated, the amortized cost method of valuation may result in the
value of a security being higher or lower than its market price, the price a
Money Market Portfolio would receive if the security were sold prior to
maturity. The Fund's Board of Trustees has established procedures for the
purpose of maintaining a constant net asset value of $1.00 per share for each
Money Market Portfolio, which include a review of the extent of any deviation of
net asset value per share, based on available market quotations, from the $1.00
amortized cost per share. Should that deviation exceed 2 of 1% for a Money
Market Portfolio, the Fund's Board of Trustees will promptly consider whether
any action should be initiated to eliminate or reduce material dilution or other
unfair results to shareholders. Such action may include redeeming shares in
kind, selling portfolio securities prior to maturity, reducing or withholding
dividends, shortening the average portfolio maturity, reducing the number of
outstanding shares without monetary consideration, and utilizing a net asset
value per share as determined by using available market quotations.

Each Money Market Portfolio will maintain a dollar-weighted average
portfolio maturity of 90 days or less, will not purchase any instrument with a
deemed maturity under Rule 2a-7 of the 1940 Act greater than 13 months, and will
limit portfolio investments, including repurchase agreements, to those
instruments that the adviser or sub-adviser determines present minimal credit
risks pursuant to guidelines adopted by the Fund's Board of Trustees. There can
be no assurance that a constant net asset value will be maintained for any Money
Market Portfolio.

EQUITY PORTFOLIOS. Net asset value is calculated separately for each class
of shares of each Equity Portfolio as of the close of regular trading hours on
the NYSE (currently 4:00 p.m. Eastern Time) on each Business Day by dividing the
value of all securities, cash and other assets owned by a Portfolio that are
allocated to a particular class of shares, less the liabilities charged to that
class, by the total number of outstanding shares of the class.

Valuation of securities held by each Equity Portfolio is as follows:
securities traded on a national securities exchange or on the NASDAQ National
Market System are valued at the last reported sale price that day; securities
traded on a national securities exchange or on the NASDAQ National Market System
for which there were no sales on that day and securities traded on other over-
the-counter markets for which market quotations are readily available are valued
at the mean of the bid and asked prices; an option or futures contract is valued
at the last sales price prior to 4:00 p.m. (Eastern Time), as quoted on the
principal exchange or board of trade on which such option or contract is traded,
or in the absence of a sale, the mean between the last bid and asked prices
prior to 4:00 p.m. (Eastern Time); and securities for which market quotations
are not readily available are valued at fair market value as determined in good
faith by or under the direction of the Fund's Board of Trustees. The amortized
cost

112

method of valuation will also be used with respect to debt obligations with
sixty days or less remaining to maturity unless the investment adviser and/or
sub-adviser under the supervision of the Board of Trustees determines such
method does not represent fair value.

Valuation of securities of foreign issuers is as follows: to the extent
sale prices are available, securities which are traded on a recognized stock
exchange, whether U.S. or foreign, are valued at the latest sale price on that
exchange prior to the time when assets are valued or prior to the close of
regular trading hours on the NYSE. In the event that there are no sales, the
mean between the last available bid and asked prices will be used. If a
security is traded on more than one exchange, the latest sale price on the
exchange where the stock is primarily traded is used. An option or futures
contract is valued at the last sales price prior to 4:00 p.m. (Eastern Time), as
quoted on the principal exchange or board of trade on which such option or
contract is traded, or in the absence of a sale, the mean between the last bid
and asked prices prior to 4:00 p.m. (Eastern Time). In the event that
application of these methods of valuation results in a price for a security
which is deemed not to be representative of the market value of such security,
the security will be valued by, under the direction of or in accordance with a
method specified by the Board of Trustees as reflecting fair value. The
amortized cost method of valuation will be used with respect to debt obligations
with sixty days or less remaining to maturity unless the investment adviser
and/or sub-adviser under the supervision of the Board of Trustees determines
such method does not represent fair value. All other assets and securities held
by the Portfolios (including restricted securities) are valued at fair value as
determined in good faith by the Board of Trustees or by someone under its
direction. Any assets which are denominated in a foreign currency are
translated into U.S. dollars at the prevailing market rates.

Certain of the securities acquired by the International Equity,
International Emerging Markets and International Small Cap Equity Portfolios may
be traded on foreign exchanges or over-the-counter markets on days on which a
Portfolio's net asset value is not calculated. In such cases, the net asset
value of the Portfolio's shares may be significantly affected on days when
investors can neither purchase nor redeem shares of the Portfolio.

A Portfolio may use a pricing service, bank or broker/dealer experienced in
such matters to value the Portfolio's securities.

The valuation of securities held by the Index Master Portfolio is discussed
in its Registration Statement.

BOND PORTFOLIOS. Net asset value is calculated separately for each class
of shares of each Bond Portfolio as of the close of regular trading hours on the
NYSE on each Business Day by dividing the value of all securities, cash and
other assets owned by a Portfolio that are allocated to a particular class of
shares, less the liabilities charged to that class, by the total number of
outstanding shares of the class.

Valuation of securities held by each Bond Portfolio is as follows: domestic
securities traded on a national securities exchange or on the NASDAQ National
Market system are valued at the last reported sale price that day; domestic
securities traded on a national securities exchange or on the NASDAQ National
Market System for which there were no sales on that day are valued at the mean
of the bid and asked prices; foreign securities traded on a recognized stock
exchange, whether U.S. or foreign, are valued at the latest sale price on that
exchange prior to the time when assets are valued or prior to the close of
regular trading hours on the NYSE (if a security is traded on more than one
exchange, the latest sale price on the exchange where the stock is primarily
traded is used); foreign securities traded on a recognized stock exchange for
which there were no sales on that day are valued at the mean of the bid and
asked prices; other securities are valued on the basis of valuations provided by
a pricing service approved by the Board of Trustees, provided that if the
investment adviser or sub-adviser concludes that the price provided by a pricing
service does not represent the fair value of a security, such security will be
valued at fair value determined by the adviser or sub-adviser based on
quotations or the equivalent thereof received from dealers; an option or futures
contract is valued at the last sales price prior to 4:00 p.m. (Eastern Time), as
quoted on the principal exchange or board of trade on which such option or
futures contract is traded, or in the absence of a sale, the mean between the
last bid and asked prices prior to 4:00 p.m. (Eastern Time); the amortized cost
method of valuation is used with respect to debt obligations with sixty days or
less remaining to maturity; and securities for which market quotations are not
readily available are valued at fair market value as determined in good faith by
or under the direction of the Fund's Board of Trustees. Any securities which
are denominated in a foreign currency are translated into U.S. dollars at the
prevailing market rates.

113

Certain of the securities acquired by the International Bond Portfolio may
be traded on foreign exchanges or over-the-counter markets on days on which the
Portfolio's net asset value is not calculated. In such cases, the net asset
value of the Portfolio's shares may be significantly affected on days when
investors can neither purchase nor redeem shares of the Portfolio.

PERFORMANCE INFORMATION

A Portfolio may quote performance in various ways. All performance
information supplied by a Portfolio in advertising is historical and is not
intended to indicate future returns.

Each of the Money Market Portfolios may advertise its "yield", "effective
yield" and total return for each class of Investor Shares. These performance
figures are based on historical earnings and are not intended to indicate future
performance. "Yield" refers to the income generated by an investment in a
particular class of a Portfolio's Investor shares over a seven-day period. 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. "Effective yield" is
calculated similarly but, when annualized, the income earned by an investment in
a particular class of a Portfolio's Investor Shares is assumed to be reinvested.
The "effective yield" will be slightly higher than the "yield" because of the
compounded effect of this assumed reinvestment. A Municipal Portfolio's "tax
equivalent yield" may also be quoted, which shows the level of taxable yield
needed to produce an after-tax equivalent to the Portfolio's tax-free yield for
a particular class of Investor Shares.

The performance of each class of Investor Shares of a Portfolio may be
compared to the performance of mutual funds with similar investment objectives
and to relevant indices, as well as to ratings or rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, the yield of a particular class
of Investor Shares of a Portfolio may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Weisenberger
Investment Company Service. Performance information may also include
evaluations of the Portfolios published in nationally recognized ranking
services, and information as reported by financial publications such as Business
Week, Fortune, Institutional Investor, Money Magazine, Forbes, Barron's, The
Wall Street Journal and The New York Times, or in publications of a local or
regional nature.

Performance quotations for shares of a Portfolio represent past performance
and should not be considered as representative of future results. The yield of
any investment is generally a function of portfolio quality and maturity, type
of investment and operating expenses. Yields will fluctuate and are not
necessarily representative of future results. Any fees charged by affiliates of
the Portfolio's investment adviser or other institutions directly to their
customers' accounts in connection with investments in the Portfolios will not be
included in the Portfolios' calculations of yield and performance.

Each Money Market Portfolio's current and effective yields for Service,
Investor A, Investor B, Investor C and Institutional Shares are computed
separately using standardized methods required by the SEC. The annualized yield
for a class of Service, Investor A, Investor B, Investor C or Institutional
Shares is computed by: (a) determining the net change in the value of a
hypothetical account having a balance of one share at the beginning of a seven-
calendar day period; (b) dividing the net change by the value of the account at
the beginning of the period to obtain the base period return; and (c)
annualizing the results (i.e., multiplying the base period return by 365/7).
----
The net change in the value of the account reflects the value of additional
shares purchased with dividends declared and all dividends declared on both the
original share and such additional shares, but does not include realized gains
and losses or unrealized appreciation and depreciation. Compound effective
yields are computed by adding 1 to the base period return (calculated as
described above) raising the sum to a power equal to 365/7 and subtracting 1.
In addition, a standardized "tax-equivalent current yield" may be quoted for
Service, Investor A, Investor B, Investor C and Institutional Shares in the
Municipal Money Market, Ohio Municipal Money Market, Pennsylvania Municipal
Money Market, North Carolina Municipal Money Market, Virginia Municipal Money
Market and New Jersey Municipal Money Market Portfolios, which is computed
separately for each class by: (a) dividing that portion of the Fund's yield (as
calculated above) that is exempt from Federal or State income tax by one minus a
stated Federal or state income tax rate; and (b) adding the quotient to that
portion of the Fund's yield that is not tax-exempt. A standardized "tax
equivalent effective yield quotation" may be computed separately for each class
by:(a) dividing the portion of the Portfolio's effective yield for shares (as
calculated above) that is exempt from Federal or state income tax by one minus a
stated Federal or state income tax rate; and (b) adding the figure resulting
from (a) above to that portion, if any, of the effective yield that is not
exempt from Federal and state income tax.

114

The annualized yield information for each Money Market Portfolio for the
seven-day period ended September 30, 1998 before waivers was as follows:

TAX-EQUIVALENT TAX-EQUIVALENT
CURRENT YIELD EFFECTIVE YIELD
(ASSUMES A (ASSUMES A
FEDERAL INCOME FEDERAL INCOME
PORTFOLIOS YIELD EFFECTIVE YIELD TAX RATE OF 28%) TAX RATE OF 28%)
- ---------------------------------------------------------------------------------------------------------------------------------

Money Market
Institutional Shares 5.02 % 5.15 % 6.97 % 7.15 %
Service Shares 4.72 4.83 6.56 6.17
Investor A Shares 4.64 4.75 6.44 6.60
Investor B Shares 3.95 4.03 5.49 5.60
Investor C Shares 3.95 4.03 5.49 5.60
U.S. Treasury Money Market
Institutional Shares 4.74 % 4.85 % 6.58 % 6.74 %
Service Shares 4.44 4.54 6.17 6.31
Investor A Shares 4.34 4.43 6.03 6.15
Municipal Money Market
Institutional Shares 3.05 % 3.10 % 4.24 % 4.31 %
Service Shares 2.75 2.79 3.82 3.88
Investor A Shares 2.58 2.61 3.58 3.63
Investor C Shares 1.98 2.00 2.75 2.78
New Jersey Municipal Money Market
Institutional Shares 3.04 % 3.09 % 4.22 % 4.29 %
Service Shares 2.74 2.78 3.81 3.86
Investor A Shares 2.53 2.56 3.51 3.56
North Carolina Municipal Money Market
Institutional Shares 3.12 % 3.17 % 4.33 % 4.40 %
Service Shares 2.82 2.86 3.92 3.97
Investor A Shares 2.64 2.67 3.67 3.71
Ohio Municipal Money Market
Institutional Shares 3.21 % 3.26 % 4.46 % 4.53 %
Service Shares 2.91 2.95 4.04 4.10
Investor A Shares 2.73 2.77 3.79 3.85
Pennsylvania Municipal Money Market
Institutional Shares 3.13 % 3.18 % 4.35 % 4.42 %
Service Shares 2.83 2.87 3.93 3.99
Investor A Shares 2.67 2.71 3.71 3.76
Virginia Municipal Money Market
Institutional Shares 3.25 % 3.30 % 4.51 % 4.58 %
Service Shares 2.95 2.99 4.10 4.15
Investor A Shares 2.68 2.72 3.72 3.78

The Investor B Class had not commenced operations as of September 30, 1998,
except with respect to the Money Market Portfolio. The Investor C Class had not
commenced operations as of September 30, 1998, except with respect to the Money
Market Portfolio and the Municipal Money Market Portfolio.

The annualized yield information for each Money Market Portfolio for the
seven-day period ended September 30, 1998 after waivers was as follows:

115

Money Market
Institutional Shares 5.26% 5.40% 7.31% 7.50%
---- ---- ---- ----
Service Shares 4.96 5.08 6.89 7.06
---- ---- ---- ----
Investor A Shares 4.88 5.00 6.78 6.94
---- ---- ---- ----
Investor B Shares 4.19 4.28 5.82 5.94
---- ---- ---- ----
Investor C Shares 4.19 4.28 5.82 5.94
---- ---- ---- ----
U.S. Treasury Money Market
Institutional Shares 5.05% 5.18% 7.01% 7.19%
---- ---- ---- ----
Service Shares 4.75 4.86 6.60 6.75
---- ---- ---- ----
Investor A Shares 4.65 4.76 6.46 6.61
---- ---- ---- ----
Municipal Money Market
Institutional Shares 3.37% 3.43% 4.68% 4.76%
---- ---- ---- ----
Service Shares 3.07 3.12 4.26 4.33
---- ---- ---- ----
Investor A Shares 2.90 2.94 4.03 4.08
---- ---- ---- ----
Investor C Shares 2.30 2.33 3.19 3.24
---- ---- ---- ----
New Jersey Municipal Money Market
Institutional Shares 3.41% 3.47% 4.74% 4.82%
---- ---- ---- ----
Service Shares 3.11 3.16 4.32 4.39
---- ---- ---- ----
Investor A Shares 2.90 2.94 4.03 4.08
---- ---- ---- ----
North Carolina Municipal Money Market
Institutional Shares 3.57% 3.63% 4.96% 5.04%
---- ---- ---- ----
Service Shares 3.27 3.32 4.54 4.61
---- ---- ---- ----
Investor A Shares 3.09 3.14 4.29 4.36
---- ---- ---- ----
Ohio Municipal Money Market
Institutional Shares 3.57% 3.63% 4.96% 5.04%
---- ---- ---- ----
Service Shares 3.27 3.32 4.54 4.61
---- ---- ---- ----
Investor A Shares 3.09 3.14 4.29 4.36
---- ---- ---- ----
Pennsylvania Municipal Money Market
Institutional Shares 3.45% 3.51% 4.79% 4.88%
---- ---- ---- ----
Service Shares 3.15 3.20 4.38 4.44
---- ---- ---- ----
Investor A Shares 2.99 3.03 4.15 4.21
---- ---- ---- ----
Virginia Municipal Money Market
Institutional Shares 3.72% 3.79% 5.17% 5.26%
---- ---- ---- ----
Service Shares 3.42 3.48 4.75 4.83
---- ---- ---- ----
Investor A Shares 3.15 3.20 4.38 4.44
---- ---- ---- ----

The fees which may be imposed by institutions on their Customers are not
reflected in the calculations of yields for the Money Market Portfolios. Yields
on Institutional Shares will generally be higher than yields on Service Shares;
yields on Service Shares will generally be higher than yields on Investor A
Shares; and yields on Investor A Shares will generally be higher than yields on
Investor B Shares and Investor C Shares.

From time to time, in advertisements, sale literature, reports to
shareholders and other materials, the yields of a Money Market Portfolio's
Service, Investor A, Investor B, Investor C or Institutional Shares may be
quoted and compared to those of other mutual funds with similar investment
objectives and relevant securities indexes. For example, the yield of a
Portfolio's Service, Investor A, Investor B, Investor C or Institutional Shares
may be compared to the Donoghue's Money Fund Average,

116

which is an average compiled by IBC/Donoghue's MONEY FUND REPORT(R), a widely-
recognized independent publication that monitors the performance of money market
funds, the average yields reported by the Bank Rate Monitor from money market
deposit accounts offered by the 50 leading banks and thrift institutions in the
top five standard metropolitan statistical areas, or to the data prepared by
Lipper Analytical Services, Inc., a widely-recognized independent service that
monitors the performance of mutual funds. Yield may also be compared to yields
set forth in the weekly statistical release H.15(519) or the monthly statistical
release designated G.13(415) published by the Board of Governors of the Federal
Reserve system. In addition, each Money Market Portfolio may quote from time to
time its total return in accordance with SEC regulations.

TOTAL RETURN. For purposes of quoting and comparing the performance of
shares of the Non-Money Market Portfolios to the performance of other mutual
funds and to stock or other relevant indexes in advertisements, sales
literature, communications to shareholders and other materials, performance may
be stated in terms of total return. The total return for each class of a Non-
Money Market Portfolio will be calculated independently of the other classes
within that Portfolio. Under the rules of the SEC, funds advertising
performance must include total return quotes calculated according to the
following formula:

ERV /1/n/

T = [(-----) - 1]
P

Where: T = average annual total return.

ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.

P = hypothetical initial payment of $1,000.

n = period covered by the computation, expressed in terms
of years.

In calculating the ending redeemable value for Investor A Shares of the
Fund's Non-Money Market Portfolios, the maximum front-end sales charge is
deducted from the initial $1,000 payment and all dividends and distributions by
the particular Portfolio are assumed to have been reinvested at net asset value
on the reinvestment dates during the period. In calculating the ending
redeemable value for Investor B Shares of the Non-Money Market Portfolios, the
maximum contingent deferred sales charge is deducted at the end of the period
and all dividends and distributions by the particular Portfolio are assumed to
have been reinvested at net asset value on the reinvestment dates during the
period. In calculating the ending redeemable value for Investor C Shares of the
Fund's Non-Money Market Portfolios, the maximum contingent deferred sales charge
is deducted at the end of the period, and all dividends and distributions by the
particular Portfolio are assumed to have been reinvested at net asset value on
the reinvestment dates during the period. Total return, or "T" in the formula
above, is computed by finding the average annual compounded rates of return over
the specified periods that would equate the initial amount invested to the
ending redeemable value.

Performance information presented for the following Non-Money Market
Portfolios includes performance information for a corresponding predecessor
portfolio which transferred its assets and liabilities to the related Non-Money
Market Portfolio pursuant to a reorganization consummated on January 13, 1996
(February 13, 1996 with respect to the International Bond Portfolio):

COMMENCEMENT OF
NON-MONEY MARKET PREDECESSOR OPERATIONS OF
PORTFOLIO PORTFOLIO PREDECESSOR PORTFOLIO
- --------- --------- ---------------------

New Jersey Tax-Free Income Compass Capital Group July 1, 1991
Portfolio New Jersey Municipal Bond Fund

117

COMMENCEMENT OF
NON-MONEY MARKET PREDECESSOR OPERATIONS OF
PORTFOLIO PORTFOLIO PREDECESSOR PORTFOLIO
- --------- --------- ---------------------

International Bond Portfolio Compass Capital Group July 1, 1991
International Fixed Income
Fund

Core Bond Portfolio BFM Institutional Trust December 9, 1992
Core Fixed Income Portfolio

Low Duration Bond Portfolio BFM Institutional Trust July 17, 1992
Short Duration Portfolio

In connection with the conversion of various common trust funds maintained
by PNC Bank and PNC Bank, Delaware ("PNC-DE"), an affiliate of PNC Bank, into
the Fund between May 1 and May 15, 1998 (the "CTF Conversion"), the Delaware
Tax-Free Income Portfolio was established to receive the assets of the DE Tax-
Free Income Fund of PNC-DE, the Kentucky Tax-Free Income Portfolio was
established to receive the assets of the KY Tax-Free Income Fund of PNC Bank and
the GNMA Portfolio was established to receive the assets of the GNMA Fund of PNC
Bank. Performance information presented for the following Non-Money Market
Portfolios includes performance information for a corresponding predecessor
common trust fund which transferred its assets and liabilities to the related
Non-Money Market Portfolio pursuant to the CTF Conversion:

COMMENCEMENT OF
NON-MONEY MARKET PREDECESSOR OPERATIONS OF
PORTFOLIO PORTFOLIO PREDECESSOR PORTFOLIO
- --------- ----------- ---------------------

Delaware Tax-Free Income PNC-DE Tax-Free Income Fund October 20, 1965
Portfolio

Kentucky Tax Free Income PNC KY Tax-Free Income Fund September 6, 1966
Portfolio

GNMA Portfolio PNC GNMA Fund June 1, 1990

Performance information presented for the Delaware Tax-Free Income
Portfolio, the Kentucky Tax-Free Income Portfolio and the GNMA Portfolio is
based upon the performance of the DE Tax-Free Income Fund, the KY Tax-Free
Income Fund and the GNMA Fund, respectively, for periods prior to the CTF
Conversion.

Each Non-Money Market Portfolio presents performance information for each
class thereof since the commencement of operations of that Portfolio (or the
related predecessor portfolio), rather than the date such class was introduced.
As a result, where a Portfolio includes performance information of a related
predecessor portfolio, the Fund Inception Date indicated in the following tables
is the inception date of the related predecessor portfolio. Performance
information for each class introduced after the commencement of operations of
the related Portfolio (or predecessor portfolio) is therefore based on the
performance history of a predecessor class or predecessor classes. If a class
of shares in a Portfolio (the "Subsequent Class") has more than one predecessor
class, the performance data predating the introduction of the Subsequent Class
is based initially on the performance of the Portfolio's first operational
predecessor class (the "Initial Class"); thereafter, the performance of the
Subsequent Class is based upon the performance of any other predecessor class or
classes which were introduced after the Initial Class and which had total
operating expenses more similar to those of the Subsequent Class. Performance
information is restated to reflect the current maximum front-end sales charge
(in the case of Investor A Shares) or the maximum contingent deferred sales
charge (in the case of Investor B Shares) when presented inclusive of sales
charges. Additional performance information is presented which does not reflect
the deduction of sales charges. Historical expenses reflected in performance
information are

118

based upon the distribution, shareholder servicing and processing fees and other
expenses actually incurred during the periods presented and have not been
restated, in cases in which the performance information for a particular class
includes the performance history of a predecessor class or predecessor classes,
to reflect the ongoing expenses currently borne by the particular class.

Based on the foregoing, the average annual total returns for each Non-Money
Market Portfolio for periods ended September 30, 1998 were as follows*:

119

INVESTOR A SHARES
-----------------

INVESTOR A SHARES TOTAL RETURN
TOTAL RETURN (NAV) (LOAD ADJUSTED)
-------------------------------------------------------------------------------------------------------
10 YEAR ANN. (OR
SINCE FUND
FUND INCEPTION CLASS INTRO INCEPTION ANN.,
DATE DATE 1 YEAR 3 YEAR ANN. 5 YEAR ANN. IF SHORTER) 1 YEAR
-------------------------------------------------------------------------------------------------------

Large Cap Value Equity 04/20/92 05/02/92 (2.63) 17.15 15.78 15.32 (7.03)
Large Cap Growth Equity 11/01/89 03/14/92 11.16 20.50 14.92 13.42 6.17
Mid Cap Value Equity 12/27/96 12/27/96 (14.06) N/A N/A 5.81 (17.91)
Mid Cap Growth Equity 12/27/96 12/27/96 (8.42) N/A N/A 6.20 (12.53)
Small Cap Value 04/13/92 06/02/92 (17.43) 4.66 10.98 13.16 (21.14)
Small Cap Growth 09/14/93 09/15/93 (22.31) 9.05 13.16 14.07 (25.82)
Micro Cap Equity 05/01/98 05/01/98 N/A N/A N/A (14.17) N/A
International Equity 04/27/92 06/02/92 (7.56) 4.38 5.04 7.82 (12.20)
International Small Cap Equity 09/26/97 09/26/97 (3.98) N/A N/A (4.21) (8.74)
International Emerging Markets 06/17/94 06/17/94 (53.79) (18.37) N/A (16.65) (56.12)
Select Equity 09/13/93 10/13/93 3.62 20.59 17.01 16.76 (1.02)
Index Equity 04/20/92 06/02/92 8.37 21.73 18.98 16.78 5.12
Balanced 05/14/90 05/14/90 10.19 17.12 13.89 13.31 5.22
Low Duration Bond 07/17/92 01/12/96 6.78 5.89 5.64 5.53 3.58
Intermediate Government Bond 04/20/92 05/11/92 9.32 7.06 5.46 6.42 4.96
Intermediate Bond 09/17/93 05/20/94 8.30 6.97 5.36 5.34 3.92
Core Bond 12/09/92 01/31/96 10.04 7.93 6.77 7.59 5.64
Government Income 10/03/94 10/04/94 11.13 8.64 N/A 10.03 6.17
GNMA 06/01/90 05/18/98 8.35 7.55 6.33 8.03 4.03
Managed Income 11/01/89 02/05/92 8.74 7.41 5.65 7.87 3.85
International Bond 07/01/91 04/22/96 11.98 11.57 9.38 9.92 6.38
Tax-Free Income 05/14/90 05/14/90 8.34 8.28 6.19 8.06 4.03
Pennsylvania Tax-Free Income 12/01/92 12/01/92 8.04 7.26 5.70 6.85 3.71
New Jersey Tax-Free Income 07/01/91 01/26/96 8.10 6.84 5.52 7.45 3.78
Ohio Tax-Free Income 12/01/92 12/01/92 8.05 7.24 5.57 6.33 3.71
Delaware Tax-Free Income 10/20/65 05/11/98 7.32 5.81 4.70 5.81 3.01
Kentucky Tax-Free Income 09/06/66 05/11/98 7.48 5.92 4.96 6.42 3.15

TOTAL RETURN (LOAD ADJUSTED)
-------------------------------------
10 YEAR ANN. (OR
SINCE FUND
INCEPTION ANN.,
3 YEAR ANN. 5 YEAR ANN. IF SHORTER)
----------------------------------------------------

Large Cap Value Equity 15.36 14.72 14.50
Large Cap Growth Equity 18.67 13.86 12.83
Mid Cap Value Equity N/A N/A 3.08
Mid Cap Growth Equity N/A N/A 3.46
Small Cap Value 9.08 9.96 12.35
Small Cap Growth 7.38 12.12 13.03
Micro Cap Equity N/A N/A (24.12)
International Equity 2.60 3.97 6.96
International Small Cap Equity N/A N/A (8.97)
International Emerging Markets (19.76) N/A (17.65)
Select Equity 18.76 16.30 15.70
Index Equity 20.50 18.26 16.23
Balanced 15.33 12.84 12.69
Low Duration Bond 4.82 5.00 5.02
Intermediate Government Bond 5.61 4.60 5.74
Intermediate Bond 5.52 4.50 4.49
Core Bond 6.47 5.90 6.84
Government Income 7.00 N/A 8.77
GNMA 6.11 5.47 7.50
Managed Income 5.77 4.68 7.32
International Bond 9.68 8.26 9.14
Tax-Free Income 6.82 5.33 7.53
Pennsylvania Tax-Free Income 5.82 4.84 6.10
New Jersey Tax-Free Income 5.40 4.66 6.84
Ohio Tax-Free Income 5.79 4.71 5.58
Delaware Tax-Free Income 4.39 3.84 5.38
Kentucky Tax-Free Income 4.49 4.11 5.98

121

_______________________
* Operations not yet commenced.

122

105 INVESTOR B SHARES
- --- -----------------

INVESTOR B SHARES
TOTAL RETURN (NAV)
---------------------------------------------------
FUND INCEPTION CLASS INTRO 3 YEAR
DATE DATE 1 YEAR ANN. 5 YEAR ANN.
-------------- ----------- -------- ------- ------------

Large Cap Value Equity............................ 4/20/92 1/18/96 (3.45) 16.35 15.31
Large Cap Growth Equity........................... 11/1/89 1/24/96 10.33 19.65 14.43
Mid Cap Value Equity.............................. 12/27/96 12/27/96 (14.66) N/A N/A
Mid cap Growth Equity............................. 12/27/96 12/27/96 (9.19) N/A N/A
SmallCap Value Equity............................. 4/13/92 10/3/94 (18.08) 9.94 10.35
SmallCap Growth Equity............................ 9/14/93 1/18/96 (22.89) 8.25 12.66
Micro-Cap Equity.................................. 5/1/98 5/1/98 N/A N/A N/A
International Equity.............................. 4/27/92 10/3/94 (8.19) 3.68 4.49
International Small Cap Equity.................... 9/26/97 9/26/97 (4.73) N/A N/A
International Emerging Markets.................... 6/17/94 4/25/96 (54.13) (18.82) N/A
Select Equity..................................... 9/13/93 3/27/96 2.90 19.83 16.57
Index Equity...................................... 4/20/92 2/7/96 7.63 20.98 18.54
Balanced.......................................... 5/14/90 10/3/94 9.40 16.26 13.24
Low Duration Bond................................. 7/17/92 11/18/96 5.99 5.41 5.35
Intermediate Government Bond...................... 4/20/92 10/11/96 8.51 6.55 5.15
Intermediate Bond................................. 9/17/93 2/5/98 7.83 6.81 5.27
Core Bond......................................... 12/9/92 3/18/96 9.20 7.24 6.37
Government Income................................. 10/3/94 10/3/94 10.31 7.85 N/A
GNMA.............................................. 6/1/90 5/18/98 7.57 6.75 5.55
Managed Income.................................... 11/1/89 7/15/97 7.94 7.12 5.48
International Bond................................ 7/1/91 4/19/96 11.15 10.88 8.97
Tax-Free Income................................... 5/14/90 7/18/96 7.53 7.69 5.83
Pennsylvania Tax-Free Income...................... 12/1/92 10/3/94 7.56 6.57 5.14
New Jersey Tax-Free Income........................ 7/1/91 7/2/96 7.30 6.24 5.16
Ohio Tax-Free Income.............................. 12/1/92 10/13/94 7.25 6.44 4.92
Delaware Tax-Free Income.......................... 10/20/65 5/11/98 6.54 5.02 3.92
Kentucky Tax-Free Income.......................... 9/6/66 5/11/98 6.69 5.14 4.18

TOTAL RETURN (LOAD ADJUSTED)
--------------------------------------------------------------------------
10 YEAR ANN.
10 YEAR ANN. (OR (OR SINCE FUND
SINCE FUND INCEPTION
INCEPTION ANN., ANN.,
IF SHORTER) 1 YEAR 3 YEAR ANN. 5 YEAR ANN. IF SHORTER)
----------------- ------- ----------- ----------- --------------

Large Cap Value Equity............................ 14.95 (7.79) 14.98 14.84 14.95
Large Cap Growth Equity........................... 13.15 5.37 18.24 13.97 13.15
Mid Cap Value Equity.............................. 5.25 (18.50) N/A N/A 2.84
Mid Cap Growth Equity............................. 5.55 (13.27) N/A N/A 3.13
SmallCap Value Equity............................. 12.68 (21.74) 8.64 9.91 12.68
SmallCap Growth Equity............................ 13.57 (26.36) 6.97 12.21 13.34
Micro-Cap Equity.................................. (14.39) N/A N/A N/A (23.17)
International Equity.............................. 7.38 (12.30) 2.45 4.07 7.38
International Small Cap Equity.................... (4.95) (9.02) N/A N/A (8.70)
International Emerging Markets.................... (16.65) (56.12) (19.76) N/A (17.65)
Select Equity..................................... 16.32 (1.73) 18.41 16.10 16.09
Index Equity...................................... 16.45 2.79 19.55 18.06 16.45
Balanced.......................................... 12.92 4.48 14.88 12.78 12.92
Low Duration Bond................................. 5.30 1.22 4.16 4.92 5.30
Intermediate Government Bond...................... 6.17 3.63 5.29 4.73 6.17
Intermediate Bond................................. 5.25 2.98 5.55 4.85 5.04
Core Bond......................................... 7.24 4.29 5.98 5.94 7.05
Government Income................................. 9.25 5.35 6.39 N/A 8.00
GNMA.............................................. 7.22 2.73 5.49 5.12 7.22
Managed Income.................................... 7.78 3.08 5.86 5.06 7.78
International Bond................................ 9.63 6.15 9.57 8.53 9.63
Tax-Free Income................................... 7.84 2.69 6.42 5.40 7.84
Pennsylvania Tax-Free Income...................... 6.38 2.72 5.31 4.71 6.20
New Jersey Tax-Free Income........................ 7.20 2.47 4.99 4.74 7.20
Ohio Tax-Free Income.............................. 5.78 2.42 5.19 4.50 5.59
Delaware Tax-Free Income.......................... 5.02 1.75 3.78 3.50 5.02
Kentucky Tax-Free Income.......................... 5.63 1.89 3.89 3.76 5.63

- -----------------
* Operations not yet commenced.

123

INVESTOR C SHARES
-----------------

INVESTOR C SHARES
TOTAL RETURN (NAV)
-----------------------------------------------------------------
10 YEAR ANN. (OR
SINCE FUND
FUND INCEPTION CLASS INTRO INCEPTION ANN.,
DATE DATE 1 YEAR 3 YEAR ANN. 5 YEAR ANN. IF SHORTER)

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

Large Cap Value Equity........................ 04/20/92 08/16/96 (3.45) 16.35 15.31 14.95
Large Cap Growth Equity....................... 11/01/89 01/24/97 10.33 19.65 14.43 13.15
Mid Cap Value Equity.......................... 12/27/96 12/27/96 (14.66) N/A N/A 5.25
Mid Cap Growth Equity......................... 12/27/96 12/27/96 (9.19) N/A N/A 5.55
Small Cap Value Equity........................ 04/13/92 10/01/96 (18.08) 9.94 10.35 12.68
Small Cap Growth Equity....................... 09/14/93 09/06/96 (22.89) 8.25 12.66 13.57
Micro-Cap Equity.............................. 05/01/98 05/01/98 N/A N/A N/A (14.39)
International Equity.......................... 04/27/92 12/05/96 (8.19) 3.68 4.49 7.38
International Small Cap Equity................ 09/26/97 09/26/97 (4.73) N/A N/A (4.95)
International Emerging Markets................ 06/17/94 03/21/97 (54.13) (18.82) N/A (16.65)
Select Equity................................. 09/13/93 09/27/96 2.90 19.83 16.57 16.32
Index Equity.................................. 04/20/92 08/14/96 7.63 20.98 18.54 16.45
Balanced...................................... 05/14/90 12/20/96 9.40 16.26 13.24 12.92
Low Duration Bond............................. 07/17/92 02/24/97 5.99 5.41 5.35 5.30
Intermediate Government Bond.................. 04/20/92 10/08/96 8.51 6.55 5.15 6.17
Core Bond..................................... 12/09/92 02/28/97 9.20 7.24 6.37 7.24
Government Income............................. 10/03/94 02/28/97 10.31 7.85 N/A 9.25
GNMA.......................................... 06/01/90 05/18/98 7.57 6.75 5.55 7.22
International Bond............................ 07/01/91 09/11/96 11.15 10.88 8.97 9.63
Tax-Free Income............................... 05/14/90 02/28/97 7.53 7.69 5.83 7.84
Pennsylvania Tax-Free Income.................. 12/01/92 08/14/98 7.56 6.57 5.14 6.38
Ohio Tax-Free Income.......................... 12/01/92 08/25/98 7.25 6.44 4.92 5.78
Delaware Tax-Free Income...................... 10/20/65 05/11/98 6.54 5.02 3.92 5.02
Kentucky Tax-Free Income...................... 09/06/66 05/11/98 6.69 5.14 4.18 5.63

TOTAL RETURN (LOAD ADJUSTED)
-------------------------------------------------------
10 YEAR ANN. (OR
SINCE FUND
INCEPTION ANN.,
1 YEAR 3 YEAR ANN. 5 YEAR ANN. IF SHORTER)
------- ----------- ----------- ----------------

Large Cap Value Equity........................ (4.42) N/A N/A N/A
Large Cap Growth Equity....................... 9.23 N/A N/A N/A
Mid Cap Value Equity.......................... (15.51) N/A N/A 5.25
Mid Cap Growth Equity......................... (10.10) N/A N/A 5.55
Small Cap Value Equity........................ (18.90) N/A N/A N/A
Small Cap Growth Equity....................... (23.66) N/A N/A N/A
Micro-Cap Equity.............................. N/A N/A N/A N/A
International Equity.......................... (9.11) N/A N/A N/A
International Small Cap Equity................ (5.68) N/A N/A (4.95)
International Emerging Markets................ (54.59) N/A N/A N/A
Select Equity................................. 1.87 N/A N/A N/A
Index Equity.................................. 6.55 N/A N/A N/A
Balanced...................................... 8.31 N/A N/A N/A
Low Duration Bond............................. 4.93 N/A N/A N/A
Intermediate Government Bond.................. 19.75 N/A N/A N/A
Core Bond..................................... 8.11 N/A N/A N/A
Government Income............................. 9.21 N/A N/A N/A
GNMA.......................................... 6.49 N/A N/A N/A
International Bond............................ 10.04 N/A N/A N/A
Tax-Free Income............................... 6.45 N/A N/A N/A
Pennsylvania Tax-Free Income.................. 6.48 N/A N/A N/A
Ohio Tax-Free Income.......................... 6.18 N/A N/A N/A
Delaware Tax-Free Income...................... 5.47 N/A N/A N/A
Kentucky Tax-Free Income...................... 5.62 N/A N/A N/A

________________
* Operations not yet commenced.

124

SERVICE SHARES
--------------

Service Shares
Total Return (NAV)
------------------------------
Fund Inception Class Intro
Date Date 1 Year
--------------- ------------- ------------

Large Cap Value Equity....................................... 04/20/92 07/29/93 (2.50)
Large Cap Growth Equity...................................... 11/01/89 07/28/93 11.33
Mid Cap Value Equity......................................... 12/27/96 12/27/96 (13.94)
Mid Cap Growth Equity........................................ 12/27/96 12/27/96 (8.32)
Small Cap Value Equity....................................... 04/13/92 07/29/93 (17.33)
Small Cap Growth Equity...................................... 09/14/93 09/15/93 (22.4)
Micro-Cap Equity............................................. 05/01/98 05/01/98 N/A
International Equity......................................... 04/27/92 07/29/93 (7.34)
International Small Cap Equity............................... 09/26/97 09/26/97 (3.62)
International Emerging Markets............................... 06/17/94 06/17/94 (53.62)
Select Equity................................................ 09/13/93 09/15/93 3.77
Index Equity................................................. 04/20/92 07/29/93 8.54
Balanced..................................................... 05/14/90 07/29/93 10.43
Low Duration Bond............................................ 07/17/92 01/12/96 6.96
Intermediate Government Bond................................. 04/20/92 07/29/93 9.50
Intermediate Bond............................................ 09/17/93 09/23/93 8.48
Core Bond.................................................... 12/09/92 01/12/96 10.24
GNMA......................................................... 06/01/90 05/18/98 8.53
Managed Income............................................... 11/01/89 07/29/93 8.93
International Bond........................................... 07/01/91 07/01/91 12.17
Tax-Free Income.............................................. 05/14/90 07/29/93 8.52
Pennsylvania Tax-Free Income................................. 12/01/92 07/29/93 8.19
New Jersey Tax-Free Income................................... 07/01/91 07/01/91 8.28
Ohio Tax-Free Income......................................... 12/01/92 07/29/93 8.23
Delaware Tax-Free Income..................................... 10/20/65 05/11/98 7.50
Kentucky Tax-Free Income..................................... 09/06/66 05/11/98 7.66

Service Shares
Total Return (NAV)
---------------------------------------------------
10 Year Ann. (or
Since Fund
Inception Ann.,
3 Year Ann. 5 Year Ann. if shorter)
----------- ----------- ----------------

Large Cap Value Equity....................................... 17.32 15.95 15.44
Large Cap Growth Equity...................................... 20.67 15.10 13.53
Mid Cap Value Equity......................................... N/A N/A 6.03
Mid Cap Growth Equity........................................ N/A N/A 6.42
Small Cap Value Equity....................................... 10.91 11.11 13.28
Small Cap Growth Equity...................................... 9.18 13.31 14.21
Micro-Cap Equity............................................. N/A N/A (13.95)
International Equity......................................... 4.56 5.21 7.96
International Small Cap Equity............................... N/A N/A (3.85)
International Emerging Markets............................... (18.19) N/A (53.73)
Select Equity................................................ 20.77 17.16 16.93
Index Equity................................................. 21.86 19.14 16.91
Balanced..................................................... 17.30 14.04 13.40
Low Duration Bond............................................ 6.05 5.73 5.61
Intermediate Government Bond................................. 7.23 5.57 6.50
Intermediate Bond............................................ 7.10 5.48 5.46
Core Bond.................................................... 8.10 6.88 7.68
GNMA......................................................... 7.73 6.51 8.21
Managed Income............................................... 7.60 5.87 7.99
International Bond........................................... 11.73 9.47 9.98
Tax-Free Income.............................................. 8.47 6.38 8.18
Pennsylvania Tax-Free Income................................. 7.42 5.81 6.95
New Jersey Tax-Free Income................................... 7.01 5.62 7.51
Ohio Tax-Free Income......................................... 7.41 5.62 6.36
Delaware Tax-Free Income..................................... 5.98 4.87 5.98
Kentucky Tax-Free Income..................................... 6.10 5.14 6.60

_____________________
* Operations not yet commenced.

125

INSTITUTIONAL SHARES
--------------------

INSTITUTIONAL SHARES
TOTAL RETURN (NAV)
-------------------------------------------------------------------
FUND INCEPTION CLASS INTRO
DATE DATE 1 YEAR 3 YEAR ANN. 5 YEAR ANN.
-------------- ----------- ------ ----------- -----------

Large Cap Value Equity....................................... 04/20/92 04/20/92 (2.27) 17.64 16.26
Large Cap Growth Equity...................................... 11/01/89 11/01/89 11.76 21.04 15.40
Mid Cap Value Equity......................................... 12/27/96 12/27/96 (13.68) N/A N/A
Mid Cap Growth Equity........................................ 12/27/96 12/27/96 (8.05) N/A N/A
Small Cap Value Equity....................................... 04/13/92 04/13/92 17.03 11.26 11.44
Small Cap Growth Equity...................................... 09/14/93 09/14/93 (21.93) 9.69 13.74
Micro-Cap Equity............................................. 05/01/98 05/01/98 N/A N/A N/A
International Equity......................................... 04/27/92 04/27/92 (7.03) 4.88 5.53
International Small Cap Equity............................... 09/26/97 09/26/97 (3.57) N/A N/A
International Emerging Markets............................... 06/17/94 06/17/94 (53.59) (17.98) N/A
Select Equity................................................ 09/13/93 09/13/93 4.07 21.13 17.49
Index Equity................................................. 04/20/92 04/20/92 8.91 22.24 19.48
Balanced..................................................... 05/14/90 05/01/92 10.82 17.65 14.38
Low Duration Bond............................................ 07/17/92 07/17/92 7.28 6.35 5.91
Intermediate Government Bond................................. 04/20/92 04/20/92 9.83 7.55 5.87
Intermediate Bond............................................ 09/17/93 09/17/93 8.81 7.42 5.78
Core Bond.................................................... 12/09/92 12/09/92 10.57 8.37 7.03
GNMA......................................................... 06/01/90 05/18/98 8.88 8.06 6.84
Managed Income............................................... 11/01/89 11/01/89 9.25 7.91 6.16
International Bond........................................... 07/01/91 06/10/96 12.51 12.00 9.63
Tax-Free Income.............................................. 05/14/90 01/21/93 8.85 8.79 6.69
Pennsylvania Tax-Free Income................................. 12/01/92 12/01/92 8.51 7.74 6.11
New Jersey Tax-Free Income................................... 07/01/91 05/04/98 8.38 7.04 5.64
Ohio Tax-Free Income......................................... 12/01/92 12/01/92 8.56 7.73 5.92
Delaware Tax-Free Income..................................... 10/20/65 05/11/98 7.82 6.30 5.19
Kentucky Tax-Free Income..................................... 09/06/66 05/11/98 7.99 6.42 5.45

INSTITUTIONAL SHARES
TOTAL RETURN (NAV)
----------------------------------------------------
10 YEAR ANN. (OR
SINCE FUND
INCEPTION ANN.,
IF SHORTER)
--------------------

Large Cap Value Equity....................................... 15.68
Large Cap Growth Equity...................................... 13.71
Mid Cap Value Equity......................................... 6.35
Mid Cap Growth Equity........................................ 6.75
Small Cap Value Equity....................................... 13.54
Small Cap Growth Equity...................................... 14.64
Micro-Cap Equity............................................. (13.95)
International Equity......................................... 8.21
International Small Cap Equity............................... (3.81)
International Emerging Markets............................... (16.23)
Select Equity................................................ 17.24
Index Equity................................................. 17.18
Balanced..................................................... 13.60
Low Duration Bond............................................ 5.76
Intermediate Government Bond................................. 6.74
Intermediate Bond............................................ 5.76
Core Bond.................................................... 7.81
GNMA......................................................... 8.53
Managed Income............................................... 8.17
International Bond........................................... 10.09
Tax-Free Income.............................................. 8.37
Pennsylvania Tax-Free Income................................. 7.18
New Jersey Tax-Free Income................................... 7.53
Ohio Tax-Free Income......................................... 6.62
Delaware Tax-Free Income..................................... 6.30
Kentucky Tax-Free Income..................................... 6.92

_______________________
* Operations not yet commenced.

126

BLACKROCK SHARES
----------------

BLACKROCK SHARES
TOTAL RETURN (NAV)
------------------------------------------------------------------------------
10 YEAR ANN.
SINCE FUND
INCEPTION
FUND INCEPTION CLASS INTRO 1 YEAR 3 YEAR ANN. 5 YEAR ANN. ANN., IF
DATE DATE SHORTER)
-------------- ----------- ------- ----------- ----------- -----------

Low Duration Bond........................... 07/17/92 06/03/97 7.44 6.43 5.96 5.79
Intermediate Bond........................... 09/17/93 05/01/98 8.86 7.44 5.79 5.77
Core Bond................................... 12/09/92 05/01/97 10.74 8.43 7.07 7.85

127

*Notes
-----

Performance information presented for Investor A, Investor B, Investor
C and Service Shares of a Portfolio prior to their introduction dates
does not reflect shareholder servicing and processing and/or
distribution fees and certain other expenses borne by these share
classes which, if reflected, would reduce the performance quoted.
Performance information presented assumes the reinvestment of
dividends and distributions. Performance information presented for
Investor A, Investor B, Investor C and Service Shares of a Portfolio
prior to their introduction as indicated in the table above is based
upon historical expenses of the predecessor class or classes which do
not reflect the actual expenses that an investor would incur as a
holder of shares of these classes of the Portfolios. The ongoing fees
and expenses borne by Investor B Shares and Investor C Shares are
greater than those borne by Investor A Shares; the ongoing fees and
expenses borne by a Portfolio's Investor A, Investor B and Investor C
Shares are greater than those borne by the Portfolio's Service Shares;
the ongoing fees and expenses borne by a Portfolio's Investor A,
Investor B, Investor C and Service Shares are greater than those borne
by the Portfolio's Institutional Shares; and the ongoing fees and
expenses borne by a Portfolio's Investor A, Investor B, Investor C,
Service and Institutional Shares are greater than those borne by the
Portfolio's BlackRock Shares. Performance information presented for
Institutional Shares of the Balanced, Tax-Free Income, New Jersey Tax-
Free Income and International Bond Portfolios prior to their
introduction dates is based upon historical expenses of predecessor
classes which are higher than the actual expenses that an investor
would incur as a holder of Institutional Shares of the above-mentioned
Portfolios. Accordingly, the performance information may be used in
assessing each Portfolio's performance history but does not reflect
how the distinct classes would have performed on a relative basis
prior to the introduction of these classes, which would require an
adjustment to the ongoing expenses.

For each of the Delaware Tax-Free Income Portfolio, the Kentucky Tax-
Free Income Portfolio and the GNMA Portfolio, performance presented in
the tables above and in each table that follows is based upon the
performance of the respective predecessor fund, adjusted for each
class to reflect historical expenses (absent waivers and
reimbursements).

The original class or classes of shares of each Portfolio were as
follows: Balanced - Investor A Shares; Index Equity - Institutional
Shares; Select Equity - Institutional Shares; Large Cap Growth Equity
- Institutional Shares; Large Cap Value Equity - Institutional Shares;
Small Cap Value Equity - Institutional Shares; Small Cap Growth Equity
- Institutional Shares; International Equity - Institutional Shares;
International Emerging Markets - Investor A, Institutional and
Service Shares; Low Duration Bond - Institutional Shares; Intermediate
Government Bond - Institutional Shares; Intermediate Bond -
Institutional Shares; Core Bond - Institutional Shares; Managed Income
- Institutional Shares; Tax-Free Income - Investor A Shares; New
Jersey Tax-Free Income - Service Shares; Pennsylvania Tax-Free Income
- Investor A and Institutional Shares; Ohio Tax-Free Income - Investor
A and Institutional Shares; Government Income - Investor A Shares;
International Bond - Service Shares; Mid-Cap Growth Equity - Investor
A, Investor B, Investor C, Institutional and Service Shares; Mid-Cap
Value Equity - Investor A, Investor B, Investor C, Institutional and
Service Shares; and International Small Cap Equity - Investor A,
Investor B, Investor C, Institutional and Service Shares.

The performance quoted, except with respect to performance shown for
the GNMA Portfolio, the Delaware Tax-Free Income Portfolio and the
Kentucky Tax-Free Income Portfolio, reflects fee waivers that
subsidize and reduce the total operating expenses of each Portfolio.
The Portfolios' returns would have been lower if there were not such
waivers.

Each class of the Non-Money Market Portfolios may also from time to time
include in advertisements, sales literature, communications to shareholders and
other materials a total return figure that is not calculated according to the

129

formula set forth above in order to compare more accurately the performance of
each class of a Non-Money Market Portfolio's shares with other performance
measures. For example, in comparing the total return of a Non-Money Market
Portfolio's shares with data published by Lipper Analytical Services, Inc., CDA
Investment Technologies, Inc. or Weisenberger Investment Company Service, or
with the performance of the Standard & Poor's 500 Stock Index, EAFE, the Dow
Jones Industrial Average or the Shearson Lehman Hutton Government Corporate Bond
Index, as appropriate, a Non-Money Market Portfolio may calculate the aggregate
total return for its shares of a certain class for the period of time specified
in the advertisement or communication by assuming the investment of $10,000 in
such Non-Money Market Portfolio's shares and assuming the reinvestment of each
dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value. A Non-Money Market Portfolio may not, for these purposes, deduct from the
initial value invested or the ending value any amount representing front-end and
deferred sales charges charged to purchasers of Investor A, Investor B or
Investor C Shares. The Investor A, Investor B and Investor C classes of the
Portfolio will, however, disclose, if appropriate, the maximum applicable sales
charges and will also disclose that the performance data does not reflect sales
charges and that inclusion of sales charges would reduce the performance quoted.

In addition to average annual total returns, a Non-Money Market Portfolio
may quote unaveraged or cumulative total returns reflecting the simple change in
value of an investment over a stated period. Average annual and cumulative
total returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, or a series of
redemptions, over any time period. Total returns may be broken down into their
components of income and capital (including capital gains and changes in share
price) in order to illustrate the relationship of these factors and their
contributions to total return. Total returns may be quoted on a before-tax or
after-tax basis and may be quoted with or without taking sales charges into
account. Excluding the sales charge from a total return calculation produces a
higher total return figure. Total returns, yields, and other performance
information may be quoted numerically or in a table, graph or similar
illustration.

Performance information for each class of the Equity and Bond Portfolios'
shares may be quoted in advertisements and communications to shareholders.
Total return will be calculated on an average annual total return basis for
various periods. Average annual total return reflects the average annual
percentage change in value of an investment in shares of an Equity or Bond
Portfolio over the measuring period. Total return may also be calculated on an
aggregate total return basis. Aggregate total return reflects the total
percentage change in value over the measuring period. Both methods of
calculating total return assume that dividend and capital gain distributions
made by a Portfolio with respect to a class of shares are reinvested in shares
of the same class, and also reflect the maximum sales load charged by the
Portfolio with respect to a class of shares. When, however, a Portfolio
compares the total return of a share class to that of other funds or relevant
indices, total return may also be computed without reflecting the sales load.

The yield of a class of shares of each of the Bond Portfolios is computed
by dividing the Portfolio's net income per share allocated to that class during
a 30-day (or one month) period by the maximum offering price per share on the
last day of the period and annualizing the result on a semi-annual basis. Each
Tax-Free Portfolio's "tax-equivalent yield" may also be quoted, which shows the
level of taxable yield needed to produce an after-tax equivalent to a
Portfolio's tax-free yield. This is done by increasing the Portfolio's yield
(calculated above) by the amount necessary to reflect the payment of Federal
and/or state income tax at a stated tax rate. The yield of a class of shares of
the Balanced Portfolio is computed by dividing the net income allocated to that
class during a 30-day (or one month) period by the maximum offering price per
share on the last day of the period and annualizing the result on a semi-annual
basis.

The performance of a class of a Portfolio's shares may be compared to the
performance of other mutual funds with similar investment objectives and to
relevant indices, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. For example, the performance of a class of each of
the Bond Portfolio's shares may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Weisenberger
Investment Company Service, and with the performance of the Lehman GMNA Index,
the T-Bill Index, the "stocks, bonds and inflation index" published annually by
Ibbotson Associates and the Lehman Government Corporate Bond Index. The
performance of a class of each of the Equity Portfolio's shares may be compared
to data prepared by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. and Weisenberger

130

Investment Company Service, and to the performance of the Dow Jones Industrial
Average, the "stocks bonds and inflation Index" published annually by Ibbotson
Associates, the Lipper International Fund Index, the Lipper Small Cap
International Fund Index, the Lehman Corporate Bond Index and the Financial
Times World Stock Index. Performance information may also include evaluations of
the Portfolios and their share classes published by nationally recognized
ranking services, and information as reported in financial publications such as
Business Week, Fortune, Institutional Investor, Money Magazine, Forbes,
Barron's, The Wall Street Journal and The New York Times, or in publications of
a local or regional nature.

In addition to providing performance information that demonstrates the
actual yield or return of a class of shares of particular Portfolio, a Portfolio
may provide other information demonstrating hypothetical investment returns.
This information may include, but is not limited to, illustrating the
compounding effects of dividends in a dividend investment plan or the impact on
tax-deferring investing.

Performance quotations for shares of a Portfolio represent past performance
and should not be considered representative of future results. The investment
return and principal value of an investment in a Portfolio will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than their
original cost. Since performance will fluctuate, performance data for shares of
a Portfolio cannot necessarily be used to compare an investment in such shares
with bank deposits, savings accounts and similar investment alternatives which
often provide an agreed or guaranteed fixed yield for a stated period of time.
Performance is generally a function of the kind and quality of the instruments
held in a portfolio, portfolio maturity, operating expenses and market
conditions. Any fees charged by brokers or other institutions directly to their
customer accounts in connection with investments in shares will not be included
in the Portfolio performance calculations.

131

132

NON-MONEY MARKET PORTFOLIO YIELD. The Balanced, Managed Income, Tax-Free Income,
Intermediate Government Bond, Ohio Tax-Free Income, Pennsylvania Tax-Free
Income, New Jersey Tax-Free Income, Delaware Tax-Free Income, Kentucky Tax-Free
Income, Low Duration Bond, Intermediate Bond, Government Income, Core Bond,
International Bond, High Yield Bond and GNMA Portfolios may advertise the yields
on their Service, Investor A, Investor B, Investor C, Institutional and
BlackRock Shares. Under the rules of the SEC, each such Portfolio advertising
the respective yields for its Service, Investor A, Investor B, Investor C,
Institutional and BlackRock Shares must calculate yield using the following
formula:

a-b

YIELD = 2[(----- +1)/6/ - 1]

Where: a = dividends and interest earned during the period.

b = expenses accrued for the period (net of
reimbursements).

c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.

133

d = the maximum offering price per share on the last day of
the period.

For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Portfolio is recognized by accruing 1/360th of the stated dividend rate of
the security each day that the security is in the Portfolio. Except as noted
below, interest earned on any debt obligations held by the Portfolio is
calculated by computing the yield to maturity of each obligation held by the
Portfolio based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest) and dividing the result by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest) in order to determine the interest income on the obligation for each
day of the subsequent month that the obligation is held by the Portfolio. For
purposes of this calculation, it is assumed that each month contains 30 days.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date.

With respect to debt obligations purchased at a discount or premium, the
formula generally calls for amortization of the discount or premium. However,
interest earned on tax-exempt obligations that are issued without original issue
discount and have a current market discount is calculated by using the coupon
rate of interest instead of the yield to maturity. In the case of tax-exempt
obligations that are issued with original issue discount but which have
discounts based on current market value that exceed the then-remaining portion
of the original issue discount (market discount), the yield to maturity is the
imputed rate based on the original issue discount calculation. On the other
hand, in the case of tax-exempt obligations that are issued with original issue
discount but which have discounts based on current market value that are less
than the then-remaining portion of the original issue discount (market premium),
the yield to maturity is based on the market value.

With respect to mortgage or other receivables-backed obligations which are
expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an increase or decrease to interest income during the period; and (b) a
Portfolio may elect either (i) to amortize the discount and premium on the
remaining security, based on the cost of the security, to the weighted-average
maturity date, if such information is available, or to the remaining term of the
security, if any, if the weighted-average maturity date is not available, or
(ii) not to amortize discount or premium on the remaining security. The
amortization schedule will be adjusted monthly to reflect changes in the market
values of debt obligations.

Undeclared earned income will be subtracted from the maximum offering price
per share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the base period, has not been declared as
a dividend, but is reasonably expected to be and is declared and paid as a
dividend shortly thereafter. In the case of Investor A Shares of a Non-Money
Market Portfolio, a Portfolio's maximum offering price per share for purposes of
the formula includes the maximum front-end sales charge imposed by the Portfolio
- -- currently as much as 5.00% of the per share offering price.

Each of the Tax-Free Income, Ohio Tax-Free Income, New Jersey Tax-Free
Income, Pennsylvania Tax-Free Income, Delaware Tax-Free Income and Kentucky Tax-
Free Income Portfolios may advertise the tax-equivalent yield for shares of a
specified class. Under the rules of the SEC, a Portfolio advertising its tax-
equivalent yield must calculate such tax-equivalent yield by dividing that
portion of the yield of the Portfolio which is tax-exempt by one minus a stated
income tax rate and adding the product to that portion, if any, of the yield of
the Portfolio which is not tax-exempt.

The annualized yield information for the 30-day period ended September 30,
1998 for the Portfolios referenced below was as follows:

AFTER WAIVERS BEFORE WAIVERS
----------------------------------- -------------------------------
TAX-EQUIVALENT TAX-EQUIVALENT
YIELD (ASSUMES A YIELD (ASSUMES A
FEDERAL INCOME FEDERAL INCOME
PORTFOLIO YIELD TAX RATE OF 28%) YIELD TAX RATE OF 28%)
- ----------------------------------------------- ------------ -------------------- ------------ ----------------

Low Duration Bond
Institutional Shares 5.63% 7.82% 6.03% 8.38%
--------- -------- --------- --------

134

AFTER WAIVERS BEFORE WAIVERS
--------------------------------------------------------------------------
TAX-EQUIVALENT TAX-EQUIVALENT
YIELDS (ASSUMES A YIELDS (ASSUMES A
FEDERAL INCOME FEDERAL INCOME
PORTFOLIO YIELD TAX RATE OF 28% YIELD TAX RATE OF 28%
- ------------------------------------------------ --------------------------------------------------------------------------

Service Shares 5.33 7.40 5.73 7.96
Investor A Shares 5.15 7.15 5.55 7.71
Investor B Shares 4.40 6.11 4.80 6.67
Investor C Shares 4.40 6.11 4.80 6.67
BlackRock Shares 5.78 8.03 6.18 8.58
Intermediate Government Bond
Institutional Shares 5.74% 7.97% 6.00% 8.33%
Service Shares 5.43 7.54 5.69 7.90
Investor A Shares 5.26 7.31 5.52 7.67
Investor B Shares 4.51 6.26 4.77 6.63
Investor C Shares 4.51 6.26 4.77 6.63
Intermediate Bond
Institutional Shares 5.83% 8.10% 6.10% 8.47%
Service Shares 5.53 7.68 5.80 8.06
Investor A Shares 5.35 7.43 5.62 7.81
Investor B Shares 4.60 6.39 4.87 6.76
Black Rock Shares 5.98 8.31 6.25 8.68
Core Bond
Institutional Shares 5.92% 8.22% 6.26% 8.69%
Service Shares 5.62 7.81 5.96 8.28
Investor A Shares 5.29 7.35 5.63 7.82
Investor B Shares 4.25 5.90 4.59 6.38
Investor C Shares 4.70 6.53 5.04 7.00
BlackRock Shares 6.07 8.43 6.41 8.90
Government Income
Investor A Shares 5.76% 8.00% 6.34% 8.81%
Investor B Shares 5.01 6.96 5.59 7.76
Investor C Shares 5.01 6.96 5.59 7.76
Managed Income
Institutional Shares 6.00% 8.33% 6.18% 8.58%
Service Shares 5.70 7.92 5.88 8.17
Investor A Shares 5.53 7.68 5.71 7.93
Investor B Shares 4.77 6.63 4.95 6.88
International Bond
Institutional Shares 5.23% 7.26% 5.38% 7.47%
Service Shares 4.93 6.85 5.08 7.06
Investor A Shares 4.76 6.61 4.91 6.82
Investor B Shares 4.01 5.57 4.16 5.78
Investor C Shares 4.01 5.57 4.16 5.78
GNMA
Institutional Shares 6.15% 8.54% 6.52% 9.06%
Service Shares 5.85 8.13 6.22 8.64
Investor A Shares 5.68 7.89 6.05 8.40
Investor B Shares 4.92 6.83 5.29 7.35
Investor C Shares 4.92 6.83 5.29 7.35
Tax-Free Income
Institutional Shares 4.54% 6.31% 4.82% 6.69%
Service Shares 4.24 5.89 4.52 6.28
Investor A Shares 4.07 5.65 4.35 6.04
Investor B Shares 3.31 4.60 3.59 4.99
Investor C Shares 3.31 4.60 3.59 4.99
Pennsylvania Tax-Free Income

135

After Waivers Before Waivers
--------------------------------------------------------------------------
Tax-Equivalent Tax-Equivalent
Yields (assumes a Yields (assumes a
Federal income Federal income
Portfolio Yield tax rate of 28% Yield tax rate of 28%
- ------------------------------------------------ --------------------------------------------------------------------------

Institutional Shares 4.72% 6.56% 4.96% 6.89%
Service Shares 4.41 6.13 4.65 6.46
Investor A Shares 4.27 5.93 4.51 6.26
Investor B Shares 4.06 5.64 4.30 5.97
Investor C Shares 4.06 5.64 4.30 5.97
New Jersey Tax-Free Income
Institutional Shares 4.67% 6.49% 4.97% 6.90%
Service Shares 4.36 6.06 4.66 6.47
Investor A Shares 4.19 5.82 4.49 6.24
Investor B Shares 3.44 4.78 3.74 5.19
Ohio Tax-Free Income
Institutional Shares 4.73% 6.57% 5.06% 7.03%
Service Shares 4.43 6.15 4.76 6.61
Investor A Shares 4.26 5.92 4.59 6.38
Investor B Shares 3.50 4.86 3.83 5.32
Investor C Shares 3.50 4.86 3.83 5.32
Delaware Tax-Free Income
Institutional Shares 4.62% 6.42% 4.80% 6.67%
Service Shares 4.32 6.00 4.50 6.25
Investor A Shares 4.15 5.76 4.33 6.01
Investor B Shares 3.39 4.71 3.57 4.96
Investor C Shares 3.39 4.71 3.57 4.96
Kentucky Tax-Free Income
Institutional Shares 4.58% 6.36% 4.83% 6.71%
Service Shares 4.27 5.93 4.52 6.28
Investor A Shares 4.10 5.69 4.35 6.04
Investor B Shares 3.35 4.65 3.60 5.00
Investor C Shares 3.35 4.65 3.60 5.00

OTHER INFORMATION REGARDING INVESTMENT RETURNS. In addition to providing
performance information that demonstrates the total return or yield of shares of
a particular class of a Portfolio over a specified period of time, the Fund may
provide certain other information demonstrating hypothetical investment returns.
Such information may include, but is not limited to, illustrating the
compounding effects of dividends in a dividend reinvestment plan or the impact
of tax-free investing. The Fund may demonstrate, using certain specified
hypothetical data, the compounding effect of dividend reinvestment on
investments in a Non-Money Market Portfolio.

The Money and Non-Money Market Municipal Portfolios may illustrate in
advertising, sales literature, communications to shareholders and other
materials the benefits of tax-free investing. For example, Table 1 shows
taxpayers how to translate Federal tax savings from investments the income on
which is not subject to Federal income tax into an equivalent yield from a
taxable investment. Similarly, Tables 2, 3, 4, 5, 6, 7 and 8 show Pennsylvania,
Ohio, North Carolina, Virginia, New Jersey, Delaware and Kentucky shareholders
the approximate yield that a taxable investment must earn at various income
brackets to produce after-tax yields equivalent to those of the Pennsylvania
Municipal Money Market and Pennsylvania Tax-Free Income Portfolios, the Ohio
Municipal Money Market and Ohio Tax-Free Income Portfolios, the North Carolina
Municipal Money Market Portfolio, the Virginia Municipal Money Market Portfolio,
and the New Jersey Municipal Money Market and New Jersey Tax-Free Income
Portfolios, the Delaware Tax-Free Income Portfolio and the Kentucky Tax-Free
Income Portfolio, respectively. The yields below are for illustration purposes
only and are not intended to represent current or future yields for the Money
and Non-Money Market Municipal Portfolios, which may be higher or lower than the
yields shown. The following information regarding tax rates and tax-exempt
yields is as of January 1, 1999.

136

TABLE 1 - FEDERAL ONLY
- ------- ------------

1999 TAXABLE INCOME BRACKET FEDERAL
- --------------------------------------------------- MARGINAL TAX-EXEMPT YIELD
SINGLE RETURN JOINT RETURN TAX RATE* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- --------------------------- -------------------- ------------- --------- ------- ------- ------- ------- ------- --------

$ 0 - $ 25,350 $ 0 - $ 42,350 15.0% 3.529% 4.118% 4.706% 5.294% 5.882% 6.471% 7.059%
$ 25,351 - $ 61,400 $42,351 - $102,300 28.0% 4.167% 4.861% 5.556% 6.250% 6.944% 7.639% 8.333%
$ 61,401 - $128,100 $102,301- $155,950 31.0% 4.348% 5.072% 5.797% 6.522% 7.246% 7.971% 8.696%
$128,101 - $278,450 $155,951- $278,450 36.0% 4.688% 5.469% 6.250% 7.031% 7.812% 8.594% 9.375%
Over $278,450 Over $278,450 39.6% 4.967% 5.795% 6.623% 7.450% 8.278% 9.106% 9.934%

*Rates do not include the phase out of personal exemptions or itemized
deductions. It is assumed that the investor is not subject to the alternative
minimum tax. Where applicable, investors should consider that the benefit of
certain itemized deductions and the benefit of personal exemptions are limited
in the case of higher income individuals. For 1998, taxpayers with adjusted
gross income in excess of a threshold amount of approximately $124,500 are
subject to an overall limitation on certain itemized deductions, requiring a
reduction in such deductions equal to the lesser of (i) 3% of adjusted gross
income in excess of the threshold of approximately $124,500 or (ii) 80% of the
amount of such itemized deductions otherwise allowable. The benefit of each
personal exemption is phased out at the rate of two percentage points for each
$2,700 (or fraction thereof) of adjusted gross income in the phase-out zone.
For single taxpayers the range of adjusted gross income comprising the phase-out
zone for 1998 is estimated to be from $124,500 to $247,000 and for married
taxpayers filing a joint return from $186,800 to $309,300. The Federal tax
brackets, the threshold amounts at which itemized deductions are subject to
reduction, and the range over which personal exemptions are phased out will be
further adjusted for inflation for each year after 1998.

137

TABLE 2 - FEDERAL AND PENNSYLVANIA
- ------- ------------------------

APPROX.
COMBINED
FEDERAL
1999 TAXABLE INCOME BRACKET* AND PA
- -------------------------------------------------- MARGINAL TAX-EXEMPT YIELD
SINGLE RETURN JOINT RETURN TAX RATE* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- -------------------------- ---------------------- ------------ -------- -------- ------ ------- ------ ------- --------

$ 0 - $ 25,350 $ 0 - $ 42,350 17.380% 3.631% 4.236% 4.841% 5.447% 6.052% 6.657% 7.262%
$ 25,351 - $ 61,400 $ 42,351 - $102,300 30.016% 4.287% 5.001% 5.716% 6.430% 7.144% 7.859% 8.573%
$ 61,401 - $128,100 $102,301 - $155,950 32.932% 4.473% 5.219% 5.964% 6.710% 7.455% 8.201% 8.946%
$128,101 - $278,450 $155,951 - $278,450 37.792% 4.823% 5.626% 6.430% 7.234% 8.038% 8.841% 9.645%
Over $278,450 Over $278,450 41.291% 5.110% 5.962% 6.813% 7.665% 8.517% 9.368% 10.220%

*The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions (including the
deduction for state income taxes). If the standard deduction is taken for
Federal income tax purposes, the taxable equivalent yield required to equal a
specified tax-exempt yield is at least as great as that shown in the table. It
is assumed that the investor is not subject to the alternative minimum tax.
Where applicable, investors should consider that the benefit of certain itemized
deductions and the benefit of personal exemptions are limited in the case of
higher income individuals. For 1998, taxpayers with adjusted gross income in
excess of a threshold amount of approximately $124,500 are subject to an overall
limitation on certain itemized deductions, requiring a reduction in such
deductions equal to the lesser of (i) 3% of adjusted gross income in excess of
the threshold of approximately $124,500 (ii) 80% of the amount of such itemized
deductions otherwise allowable. The benefit of each personal exemption is
phased out at the rate of two percentage points for each $2,700 (or fraction
thereof) of adjusted gross income in the phase-out zone. For single taxpayers
the range of adjusted gross income comprising the phase-out zone for 1998 is
estimated to be from $124,500 to $247,000 and for married taxpayers filing a
joint return from $186,800 to $309,300. The Federal tax brackets, the threshold
amounts at which itemized deductions are subject to reduction, and the range
over which personal exemptions are phased out will be further adjusted for
inflation for each year after 1998.

138

TABLE 3 - FEDERAL AND OHIO
- ------- ----------------

STATE OF OHIO
1999 TAX YEAR
- ---------------------------------------------------------------------------
TAX EXEMPT YIELD
------------------------------------------------------------
3 3.5 4 4.5 5 5.5 6
1999 FEDERAL OHIO
TAXABLE INCOME MARGINAL MARGINAL COMBINED TAXABLE EQUIVALENT YIELD
BRACKETS* TAX RATE TAX RATE* RATE SINGLE RETURN
- -------------------------- ------------ ------------ --------- -------------------------------------------------------------

$ 0-25,750 15% 4.457% 18.79% 3.69% 4.31% 4.93% 5.54% 6.16% 6.77% 7.39%
25,751-40,000 28% 4.457% 31.21% 4.36% 5.09% 5.81% 6.54% 7.27% 8.00% 8.72%
40,001-62,450 28% 5.201% 31.74% 4.40% 5.13% 5.86% 6.59% 7.33% 8.06% 8.79%
62,451-80,000 31% 5.201% 34.59% 4.59% 5.35% 6.12% 6.88% 7.64% 8.41% 9.17%
80,001-100,000 31% 5.943% 35.10% 4.62% 5.39% 6.16% 6.93% 7.70% 8.47% 9.25%
100,001-130,250 31% 6.900% 35.76% 4.67% 5.45% 6.23% 7.01% 7.78% 8.56% 9.34%
130,251-200,000 36% 6.900% 40.42% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.07%
200,001-283,150 36% 7.500% 40.80% 5.07% 5.91% 6.76% 7.60% 8.45% 9.29% 10.14%
OVER 283,150 39.6% 7.500% 44.13% 5.37% 6.26% 7.16% 8.05% 8.95% 9.84% 10.74%

139

1999 FEDERAL OHIO
TAXABLE INCOME MARGINAL MARGINAL COMBINED TAXABLE EQUIVALENT YIELD
BRACKETS* TAX RATE* TAX RATE* RATE JOINT RETURN
- ----------------------------- --------------- -------------- ---------- ----------------------------------------------------

$ 0- 40,000 15% 4.457% 18.79% 3.69% 4.31% 4.93% 5.54% 6.16% 6.77% 7.39%
40,001- 43,050 15% 5.201% 19.42% 3.72% 4.34% 4.96% 5.58% 6.20% 6.82% 7.45%
43,051- 80,000 28% 5.201% 31.74% 4.40% 5.13% 5.86% 6.59% 7.33% 8.06% 8.79%
80,001-100,000 28% 5.943% 32.28% 4.43% 5.17% 5.91% 6.64% 7.38% 8.12% 8.86%
100,001-104,050 28% 6.900% 32.97% 4.48% 5.22% 5.97% 6.71% 7.46% 8.21% 8.95%
104,051-158,550 31% 6.900% 35.76% 4.67% 5.45% 6.23% 7.01% 7.78% 8.56% 9.34%
158,551-200,000 36% 6.900% 40.42% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.07%
200,001-283,150 36% 7.500% 40.80% 5.07% 5.91% 6.76% 7.60% 8.45% 9.29% 10.14%
OVER 283,150 39.6% 7.500% 44.13% 5.37% 6.26% 7.16% 8.05% 8.95% 9.84% 10.74%

*The income brackets applicable to the state of Ohio do not correspond to the
Federal taxable income brackets. In addition, Ohio taxable income will likely
be different than Federal taxable income because it is computed by reference to
Federal adjusted gross income with specifically-defined Ohio modifications and
exemptions, and does not consider many of the deductions allowed from Federal
adjusted gross income in computing Federal taxable income. No other state tax
credits, exemptions, or local taxes have been taken into account in arriving at
the combined marginal tax rate. In 1998, due to the state having surplus
revenue, a 9.339% across the board reduction in the Ohio income tax rates for
1998 only was effected pursuant to Ohio Revised Code sections 131.44 and
5747.02. It is not yet known whether a reduction in the Ohio income tax rates
will occur in 1999. A reduction in Ohio income tax rates, such as the 1998
reduction, has the effect of reducing the after-tax advantage of Ohio tax-exempt
securities relative to taxable securities. The income amount shown is income
subject to Federal income tax reduced by adjustments to income, exemptions, and
itemized deductions (including the deduction for state and local income taxes).
If the standard deduction is taken for Federal income tax purposes, the taxable
equivalent yield required to equal a specified tax-exempt yield is at least as
great as that shown in the table. It is assumed that the investor is not
subject to the alternative minimum tax. Where applicable, investors should
consider that the benefit of certain itemized deductions and the benefit of
personal exemptions are limited in the case of higher income individuals. For
1999, taxpayers with adjusted gross income in excess of a threshold amount of
approximately $126,600 are subject to an overall limitation on certain itemized
deductions, requiring a reduction in such deductions equal to the lesser of (i)
3% of adjusted gross income in excess of the threshold of approximately $126,600
or (ii) 80% of the amount of such itemized deductions otherwise allowable. The
benefit of each personal exemption is phased out at the rate of two percentage
points for each $2,750 (or fraction thereof) of adjusted gross income in the
phase-out zone. For single taxpayers the range of adjusted gross income
comprising the phase-out zone for 1999 is estimated to be from $126,600 to
$249,100 and for married taxpayers filing a joint return from $189,950 to
$312,450. The Federal tax brackets, the threshold amounts at which itemized
deductions are subject to reduction, and the range over which personal
exemptions are phased out will be further adjusted for inflation for each year
after 1999.

140

TABLE 4 - FEDERAL AND NORTH CAROLINA
- ------- --------------------------

COMBINED
FEDERAL AND
NORTH NORTH
FEDERAL CAROLINA CAROLINA
1998 TAXABLE INCOME BRACKET MARGINAL MARGINAL MARGINAL TAX-EXEMPT YIELD
- -------------------------------------- ---------------------------------------------------------
SINGLE RETURN JOINT RETURN TAX RATE TAX RATE TAX RATE* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ------------------------------------------------------------------------------------------------------------------------------------

$ 0 - 12,750 $ 0 - 21,250 15.0% 6.00% 20.100% 3.755% 4.380% 5.006% 5.632% 6.258% 6.884% 7.509%

12,751 - 25,350 21,000 - 42,350 15.0% 7.00% 20.950% 3.795% 4.428% 5.060% 5.693% 6.325% 6.598% 7.590%

25,351 - 60,000 42,351 - 100,000 28.0% 7.00% 33.040% 4.480% 5.227% 5.974% 6.720% 7.467% 8.214% 8.961%

60,001 - 61,400 100,001 - 102,300 28.0% 7.75% 33.580% 4.517% 5.269% 6.022% 6.775% 7.528% 8.281% 9.033%

61,401 - 128,100 102,301 - 155,950 31.0% 7.75% 36.348% 4.713% 5.499% 6.284% 7.070% 7.855% 8.641% 9.426%

128,101 - 278,450 155,951 - 278,450 36.0% 7.75% 40.960% 5.081% 5.928% 6.775% 7.622% 8.469% 9.316% 10.163%

Over 278,450 Over 278,450 39.6% 7.75% 44.281% 5.384% 6.282% 7.179% 8.076% 8.974% 9.871% 10.768%

*The taxable income brackets applicable to North Carolina do not correspond to
the Federal taxable income brackets. The taxable income brackets presented in
this table represent the breakpoints for both the Federal and North Carolina
marginal tax rate changes. When applying these brackets, Federal taxable income
may be different than North Carolina taxable income. No state tax credits,
exemptions, or local taxes have been taken into account in arriving at the
combined marginal tax rate. The income amount shown is income subject to Federal
income tax reduced by adjustments to income, exemptions, and itemized deductions
(including the deduction for state and local income taxes). If the standard
deduction is taken for Federal income tax purposes, the taxable equivalent yield
required to equal a specified tax-exempt yield is at least as great as that
shown in the table. It is assumed that the investor is not subject to the
alternative minimum tax. Where applicable, investors should consider that the
benefit of certain itemized deductions and the benefit of personal exemptions
are limited in the case of higher-income individuals. For 1998, taxpayers with
adjusted gross income in excess of the threshold of approximately $124,500 are
subject to an overall limitation on certain itemized deductions, requiring a
reduction in such deductions equal to the lesser of (i) 3% of adjusted gross
income in excess of the threshold of approximately $124,500 or (ii) 80% of the
amount of such itemized deductions otherwise allowable. The benefit of each
personal exemption is phased out at the rate of two percentage points for each
$2,700 (or fraction thereof) of adjusted gross income in the phase-out zone. For
single taxpayers the range of adjusted gross income comprising the phase-out
zone for 1998 is estimated to be from $124,500 to $247,000 and for married
taxpayers filing a joint return from $186,800 to $309,300. The Federal tax
brackets, the threshold amounts at which itemized deductions are subject to
reduction, and the range over which personal exemptions are phased out will be
further adjusted for inflation for each year after 1998.

141

TABLE 5 - FEDERAL AND VIRGINIA
- ------- --------------------

COMBINED
FEDERAL AND
FEDERAL VIRGINIA VIRGINIA
1998 TAXABLE INCOME BRACKET MARGINAL MARGINAL MARGINAL TAX-EXEMPT YIELD
- ---------------------------------------- ------------------------------------------------------
SINGLE RETURN JOINT RETURN TAX RATE TAX RATE TAX RATE* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ------------------------------------------------------------------------------------------------------------------------------------

$ 0 - 25,350 $ 0 - 42,350 15.0% 5.75% 19.888% 3.745% 4.369% 4.993% 5.617% 6.241% 6.865% 7.489%

25,351 - 61,400 42,351 - 102,300 28.0% 5.75% 32.140% 4.421% 5.158% 5.894% 6.631% 7.368% 8.105% 8.842%

61,401 - 128,100 102,301 - 155,950 31.0% 5.75% 34.968% 4.613% 5.382% 6.151% 6.920% 7.688% 8.457% 9.226%

128,101 - 278,450 155,951 - 278,450 36.0% 5.75% 39.680% 4.973% 5.802% 6.631% 7.460% 8.289% 9.118% 9.947%

OVER 278,450 OVER 278,450 39.6% 5.75% 43.073% 5.270% 6.148% 7.027% 7.905% 8.783% 9.661% 10.540%

*The taxable income brackets applicable to Virginia do not correspond to the
Federal taxable income brackets. Because Virginia imposes a maximum tax rate of
5.75% on taxable income over $17,000, the taxable income brackets presented in
this table represent the breakpoints only for the Federal marginal tax rate
changes. When applying these brackets, Federal taxable income may be different
than Virginia taxable income. No state tax credits, exemptions, or local taxes
have been taken into account in arriving at the combined marginal tax rate. The
income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions (including the
deduction for state and local income taxes). If the standard deduction is taken
for Federal income tax purposes, the taxable equivalent yield required to equal
a specified tax-exempt yield is at least as great as that shown in the table. It
is assumed that the investor is not subject to the alternative minimum tax.
Where applicable, investors should consider that the benefit of certain itemized
deductions and the benefit of personal exemptions are limited in the case of
higher income individuals. For 1998, taxpayers with adjusted gross income in
excess of a threshold amount of approximately $124,500 are subject to an overall
limitation on certain itemized deductions, requiring a reduction in such
deductions equal to the lesser of (i) 3% of adjusted gross income in excess of
the threshold of approximately $124,500 or (ii) 80% of the amount of such
itemized deductions otherwise allowable. The benefit of each personal exemption
is phased out at the rate of two percentage points for each $2,700 (or fraction
thereof) of adjusted gross income in the phase-out zone. For single taxpayers
the range of adjusted gross income comprising the phase-out zone for 1998 is
estimated to be from $124,500 to $247,000 and for married taxpayers filing a
joint return from $186,800 to $309,300. The Federal tax brackets, the threshold
amounts at which itemized deductions are subject to reduction, and the range
over which personal exemptions are phased out will be further adjusted for
inflation for each year after 1998.

142

TABLE 6 - FEDERAL AND NEW JERSEY
- ------- ----------------------

APPROXIMATE
FEDERAL NJ COMBINED FEDERAL
1998 TAXABLE MARGINAL MARGINAL AND NJ TAX-EXEMPT YIELD

INCOME BRACKET* TAX RATE TAX RATE MARGINAL TAX RATE 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
- ----------------- ---------- ---------- ----------------- ------ ------ ------ ------ ------ ------ ------ ------ -----
SINGLE RETURN
- -----------------
TAXABLE YIELD - SINGLE RETURN

$ 0 - 20,000 15.0% 1.400% 16.190% 3.580% 4.176% 4.773% 5.369% 5.966% 6.563% 7.159% 7.756% 8.352%
20,001 - 25,350 15.0% 1.750% 16.488% 3.592% 4.191% 4.790% 5.388% 5.987% 6.586% 7.185% 7.783% 8.382%
25,351 - 35,000 28.0% 1.750% 29.260% 4.241% 4.948% 5.655% 6.361% 7.068% 7.775% 8.482% 9.189% 9.895%
35,001 - 40,000 28.0% 3.500% 30.520% 4.318% 5.037% 5.757% 6.477% 7.196% 7.916% 8.636% 9.355% 10.075%
40,001 - 61,400 28.0% 5.525% 31.978% 4.410% 5.145% 5.881% 6.616% 7.351% 8.086% 8.821% 9.556% 10.291%
61,401 - 75,000 31.0% 5.525% 34.812% 4.602% 5.369% 6.136% 6.903% 7.670% 8.437% 9.204% 9.971% 10.738%
75,001 - 128,100 31.0% 6.370% 35.395% 4.644% 5.418% 6.192% 6.965% 7.739% 8.513% 9.287% 10.061% 10.835%
128,101 - 278,450 36.0% 6.370% 40.077% 5.006% 5.841% 6.675% 7.510% 8.344% 9.178% 10.013% 10.847% 11.682%
OVER 278,450 39.6% 6.370% 43.448% 5.305% 6.189% 7.073% 7.957% 8.841% 9.726% 10.610% 11.494% 12.378%

JOINT RETURN
- -------------------
TAXABLE YIELD - JOINT RETURN

$ 0 - 20,000 15.0% 1.400% 16.190% 3.580% 4.176% 4.773% 5.369% 5.966% 6.563% 7.159% 7.756% 8.352%
20,001 - 42,350 15.0% 1.750% 16.488% 3.592% 4.191% 4.790% 5.388% 5.987% 6.586% 7.185% 7.783% 8.382%
42,351 - 50,000 28.0% 1.750% 29.260% 4.241% 4.948% 5.655% 6.361% 7.068% 7.775% 8.482% 9.189% 9.895%
50,001 - 70,000 28.0% 2.450% 29.764% 4.271% 4.983% 5.695% 6.407% 7.119% 7.831% 8.543% 9.255% 9.966%
70,001 - 80,000 28.0% 3.500% 30.520% 4.318% 5.037% 5.757% 6.477% 7.196% 7.916% 8.636% 9.355% 10.075%
80,001 - 102,300 28.0% 5.525% 31.978% 4.410% 5.145% 5.881% 6.616% 7.351% 8.086% 8.821% 9.556% 10.291%
102,301 - 150,000* 31.0% 5.525% 34.812% 4.602% 5.369% 6.136% 6.903% 7.670% 8.437% 9.204% 9.971% 10.738%
150,001 - 155,950 31.0% 6.370% 35.395% 4.644% 5.418% 6.192% 6.965% 7.739% 8.513% 9.287% 10.061% 10.835%
155,951 - 278,450 36.0% 6.370% 40.077% 5.006% 5.841% 6.675% 7.510% 8.344% 9.178% 10.013% 10.847% 11.682%

143

OVER 278,450 39.6% 6.370% 43.448% 5.305% 6.189% 7.073% 7.957% 8.841% 9.726% 10.610% 11.494% 12.378%

144

* The taxable income brackets applicable to New Jersey do not correspond to
the Federal taxable income brackets. Except where indicated, the taxable
income brackets presented in this table represent the breakpoints for both
the Federal and New Jersey marginal tax rate changes. When applying these
brackets, Federal taxable income will be different than New Jersey taxable
income because New Jersey does not start with Federal taxable income in
computing its own state income tax base. No state tax credits, exemptions,
or local taxes have been taken into account in arriving at the combined
marginal tax rate. The income amount shown is income subject to Federal
income tax reduced by adjustments to income, exemptions, and itemized
deductions (including the deduction for state and local income taxes). If
the standard deduction is taken for Federal income tax purposes, the
taxable equivalent yield required to equal a specified tax-exempt yield is
at least as great as that shown in the table. It is assumed that the
investor is not subject to the alternative minimum tax. Where applicable,
investors should consider that the benefit of certain itemized deductions
and the benefit of personal exemptions are limited in the case of higher-
income individuals. For 1998, taxpayers with adjusted gross income in
excess of a threshold amount of approximately $124,500 are subject to an
overall limitation on certain itemized deductions, requiring a reduction in
such deductions equal to the lesser of (i) 3% of adjusted gross income in
excess of the threshold of approximately $124,500 or (ii) 80% of the amount
of such itemized deductions otherwise allowable. The benefit of each
personal exemption is phased out at the rate of two percentage points for
each $2,700 (or fraction thereof) of adjusted gross income in the phase-out
zone. For single taxpayers the range of adjusted gross income comprising
the phase-out zone for 1998 is estimated to be from $124,500 to $247,000,
and for married taxpayers filing a joint return from $186,800 to $309,300.
The Federal tax brackets, the threshold amounts at which itemized
deductions are subject to reduction, and the range over which personal
exemptions are phased out will be further adjusted for inflation for each
year after 1998.

145

TABLE 7 - FEDERAL AND DELAWARE (SINGLE RETURN)
- ------- --------------------

FEDERAL DELAWARE TAX-EXEMPT YIELD
1999 TAXABLE MARGINAL MARGINAL COMBINED --------------------------------------------------------------

INCOME BRACKETS* TAX RATE TAX RATE RATE* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ------------------------------------------------------------------------------------------------------------------------------------

$ 0 - 2,000 15.0% 0.00% 15.00% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06%
2,001 - 5,000 15.0% 2.60% 17.21% 3.62% 4.23% 4.83% 5.44% 6.04% 6.64% 7.25%
5,001 - 10,000 15.0% 4.30% 18.66% 3.69% 4.30% 4.92% 5.53% 6.15% 6.76% 7.38%
10,001 - 20,000 15.0% 5.20% 19.42% 3.72% 4.34% 4.96% 5.58% 6.21% 6.83% 7.45%
20,001 - 25,000 15.0% 5.60% 19.76% 3.74% 4.36% 4.99% 5.61% 6.23% 6.85% 7.48%
25,001 - 25,750 15.0% 5.95% 20.06% 3.75% 4.38% 5.00% 5.63% 6.25% 6.88% 7.51%
25,751 - 60,000 28.0% 5.95% 32.28% 4.43% 5.17% 5.91% 6.65% 7.38% 8.12% 8.86%

146

60,001 - 62,450 28.0% 6.40% 32.61% 4.45% 5.19% 5.94% 6.68% 7.42% 8.16% 8.90%
62,451 - 130,250 31.0% 6.40% 35.42% 4.65% 5.42% 6.19% 6.97% 7.74% 8.52% 9.29%
130,251 - 283,150 36.0% 6.40% 40.10% 5.01% 5.84% 6.68% 7.51% 8.35% 9.18% 10.02%
Over 283,150 39.6% 6.40% 43.47% 5.31% 6.19% 7.08% 7.96% 8.84% 9.73% 10.61%

147

TABLE 7 (CONT.) - FEDERAL AND DELAWARE (JOINT RETURN)

FEDERAL DELAWARE
1999 TAXABLE MARGINAL MARGINAL COMBINED FEDERAL AND DELAWARE TAX-EXEMPT YIELD
------------------------------------------------------------
INCOME BRACKETS* TAX RATE TAX RATE RATE* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- -------------------- -------------- -------------- -----------

148

25,001 - 43,050 15.0% 5.95% 20.06% 3.75% 4.38% 5.00% 5.63% 6.25% 6.88% 7.51%
43,051 - 60,000 28.0% 5.95% 32.28% 4.43% 5.17% 5.91% 6.65% 7.38% 8.12% 8.86%
60,001 - 104,050 28.0% 6.40% 32.61% 4.45% 5.19% 5.94% 6.68% 7.42% 8.16% 8.90%
104,051 - 158,550 31.0% 6.40% 35.42% 4.65% 5.42% 6.19% 6.97% 7.74% 8.52% 9.29%
158,551 - 283,150 36.0% 6.40% 40.10% 5.01% 5.84% 6.68% 7.51% 8.35% 9.18% 10.02%
Over 283,150 39.6% 6.40% 43.47% 5.31% 6.19% 7.08% 7.96% 8.84% 9.73% 10.61%

*The taxable income brackets applicable to Delaware do not correspond to the
Federal taxable income brackets. The taxable income brackets presented in this
table represent the breakpoints for both the Federal and Delaware marginal tax-
rate changes. When applying these brackets, Federal taxable income may be
different from Delaware taxable income. No state tax credits, exemptions or
local taxes have been taken into account in arriving at the combined marginal
tax rate. The income amount shown is income subject to Federal

149

income tax reduced by adjustments to income, exemptions and itemized deductions
(including the deduction for state income taxes). If the standard deduction is
taken for Federal income tax purposes, the taxable-equivalent yield required to
equal a specified tax-exempt yield is at least as great as that shown in the
table. It is assumed that the investor is not subject to the alternative minimum
tax. Where applicable, investors should consider that the benefit of certain
itemized deductions and the benefit of personal exemptions are limited in the
case of higher-income individuals. For 1999, taxpayers with adjusted gross
income in excess of the threshold of $126,600 are subject to an overall
limitation on certain itemized deductions, requiring a reduction in such
deductions equal to the lesser of (i) 3% of adjusted gross income in excess of
the threshold of $126,600, or (ii) 80% of the amount of such itemized deductions
otherwise allowable. The benefit of each personal exemption is phased out at the
rate of two percentage points for each $2,750 (or fraction thereof) of adjusted
gross income in the phase-out zone. For single taxpayers, the range of adjusted
gross income comprising the phase-out zone for 1999 is estimated to be from
$126,600 to $249,100, and for married taxpayers filing a joint return from
$189,950 to $312,450. The Federal tax brackets, the threshold amounts at which
itemized deductions are subject to reduction and the range over which personal
exemptions are phased out will be further adjusted for inflation for each year
after 1999.

150

TABLE 8 - FEDERAL AND KENTUCKY
- ------- --------------------

COMBINED
FEDERAL AND
FEDERAL KENTUCKY KENTUCKY
1999 TAXABLE INCOME BRACKET* MARGINAL MARGINAL MARGINAL TAX-EXEMPT YIELD
- ------------------------------------- ----------------------------------------------------------
SINGLE RETURN JOINT RETURN TAX RATE TAX RATE TAX RATE* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ----------------- ----------------- --------- --------- ------------ ------- ------- ------- ------ ------- ------- -------

$ 0 - 3,000 $ 0 - 3,000 15.0% 2.00% 16.70% 3.601% 4.202% 4.802% 5.402% 6.002% 6.603% 7.203%
3,001 - 4,000 3,001 - 4,000 15.0% 3.00% 17.55% 3.639% 4.245% 4.851% 5.458% 6.064% 6.671% 7.277%
4,001 - 5,000 4,001 - 5,000 15.0% 4.00% 18.40% 3.676% 4.289% 4.902% 5.515% 6.127% 6.740% 7.353%
5,001 - 8,000 5,001 - 8,000 15.0% 5.00% 19.25% 3.715% 4.334% 4.954% 5.573% 6.192% 6.811% 7.430%
8,001 - 25,750 8,001 - 43,050 15.0% 6.00% 20.10% 3.755% 4.380% 5.006% 5.632% 6.258% 6.884% 7.509%
25,751 - 62,450 43,051 - 104,050 28.0% 6.00% 32.32% 4.433% 5.171% 5.910% 6.649% 7.388% 8.126% 8.865%
62,451 - 130,250 104,051 - 158,550 31.0% 6.00% 35.14% 4.625% 5.396% 6.167% 6.938% 7.709% 8.480% 9.251%
130,251 - 283,150 158,551 - 283,150 36.0% 6.00% 39.84% 4.987% 5.818% 6.649% 7.480% 8.311% 9.142% 9.973%
OVER 283,150 OVER 283,150 39.6% 6.00% 43.22% 5.284% 6.165% 7.045% 7.926% 8.807% 9.687% 10.568%

*The taxable income brackets applicable to Kentucky do not correspond to the
Federal taxable income brackets. The taxable income brackets presented in this
table represent the breakpoints for both the Federal and Kentucky marginal tax
rate changes. When applying these brackets, Federal taxable income may be
different than Kentucky taxable income. No state tax credits, exemptions, or
local taxes have been taken into account in arriving at the combined marginal
tax rate. The income amount shown is income subject to Federal income tax
reduced by adjustments to income, exemptions, and itemized deductions (including
the deduction for state taxes). If the standard deduction is taken for Federal
income tax purposes, the taxable equivalent yield required to equal a specified
tax-exempt yield is at least as great as that shown in the table. It is assumed
that the investor is not subject to the alternative minimum tax. Where
applicable, investors should consider that the benefit of certain itemized
deductions and the benefit of personal exemptions are limited in the case

151

of higher-income individuals. For 1999, taxpayers with adjusted gross income in
excess of the threshold of approximately $126,600 are subject to an overall
limitation on certain itemized deductions, requiring a reduction in such
deductions equal to the lesser of (i) 3% of adjusted gross income in excess of
the threshold of approximately $126,600 or (ii) 80% of the amount of such
itemized deductions otherwise allowable. The benefit of each personal exemption
is phased out at the rate of two percentage points for each $2,500 (or fraction
thereof) of adjusted gross income in the phase-out zone. For single taxpayers
the range of adjusted gross income comprising the phase-out zone for 1999 is
estimated to be from $126,600 to $251,000 and for married taxpayers filing a
joint return from $189,950 to $314,500. The Federal tax brackets, the threshold
amounts at which itemized deductions are subject to reduction, and the range
over which personal exemptions are phased out will be further adjusted for
inflation for each year after 1999.

152

MISCELLANEOUS. Yields on shares of a Portfolio may fluctuate daily and do
not provide a basis for determining future yields. Because such yields will
fluctuate, they cannot be compared with yields on savings account or other
investment alternatives that provide an agreed to or guaranteed fixed yield for
a stated period of time. In comparing the yield of one Portfolio to another,
consideration should be given to each Portfolio's investment policies, including
the types of investments made, lengths of maturities of the portfolio
securities, market conditions, operating expenses and whether there are any
special account charges which may reduce the effective yield. The fees which may
be imposed by Service Organizations and other institutions on their customers
are not reflected in the calculations of total returns or yields for the
Portfolios.

When comparing a Portfolio's performance to stock, bond, and money market
mutual fund performance indices prepared by Lipper or other organizations, it is
important to remember the risk and return characteristics of each type of
investment. For example, while stock mutual funds may offer higher potential
returns, they also carry the highest degree of share price volatility. Likewise,
money market funds may offer greater stability of principal, but generally do
not offer the higher potential returns from stock mutual funds.

From time to time, a Portfolio's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals. For
example a Portfolio may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance of
Portfolios to one another in appropriate categories over specific periods of
time may also be quoted in advertising.

Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills, the U.S. rate of
inflation (based on the Consumer Price Index), and combinations of various
capital markets. The performance of these capital markets is based on the
returns of different indices. Portfolios may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the Portfolios. The Portfolios may also compare performance to that of other
compilations or indices that may be developed and made available in the future.

The Fund may also from time to time include discussions or illustrations of
the effects of compounding in advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a Portfolio investment are
reinvested by being paid in additional Portfolio shares, any future income or
capital appreciation of a Portfolio would increase the value, not only of the
original investment in the Portfolio, but also of the additional Portfolio
shares received through reinvestment. The Fund may also include discussions or
illustrations of the potential investment goals of a prospective investor,
(including materials that describe general principles of investing, such as
asset allocation, diversification, risk tolerance, and goal setting,
questionnaires designed to help create a personal financial profile, worksheets
used to project savings needs based on assumed rates of inflation and
hypothetical rates of return and action plans offering investment alternatives)
investment management techniques, policies or investment suitability of a
Portfolio (such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer, automatic account rebalancing, the
advantages and disadvantages of investing in tax-deferred and taxable
investments), economic and political conditions and the relationship between
sectors of the economy and the economy as a whole, the effects of inflation and
historical performance of various asset classes, including but not limited to,
stocks, bonds and Treasury bills. From time to time advertisements, sales
literature, communications to shareholders or other materials may summarize the
substance of information contained in shareholder reports (including the
investment composition of a Portfolio), as well as the views of the Portfolios'
adviser and/or sub-advisers as to current market, economy, trade and interest
rate trends, legislative, regulatory and monetary developments, investment
strategies and related matters believed to be of relevance to a Portfolio. In
addition, selected indices may be used to illustrate historic performance of
select asset classes. The Fund may also include in advertisements, sales
literature, communications to shareholders or other materials, charts, graphs or
drawings which illustrate the potential risks and rewards of investment in
various investment vehicles, including but not limited to, stocks, bonds,
Treasury bills and shares of a Portfolio. In addition,

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advertisements, sales literature, shareholder communications or other materials
may include a discussion of certain attributes or benefits to be derived by an
investment in a Portfolio and/or other mutual funds, benefits, characteristics
or services associated with a particular class of shares, shareholder profiles
and hypothetical investor scenarios, timely information on financial management,
tax and retirement planning and investment alternative to certificates of
deposit and other financial instruments. Such advertisements or communicators
may include symbols, headlines or other material which highlight or summarize
the information discussed in more detail therein. Materials may include lists of
representative clients of the Portfolios' investment adviser and sub-advisers.
Materials may refer to the CUSIP numbers of the various classes of the
Portfolios and may illustrate how to find the listings of the Portfolios in
newspapers and periodicals. Materials may also include discussions of other
Portfolios, products, and services.

Charts and graphs using net asset values, adjusted net asset values, and
benchmark indices may be used to exhibit performance. An adjusted NAV includes
any distributions paid and reflects all elements of return. Unless otherwise
indicated, the adjusted NAVs are not adjusted for sales charges, if any.

A Portfolio may illustrate performance using moving averages. A long-term
moving average is the average of each week's adjusted closing NAV for a
specified period. A short-term moving average is the average of each day's
adjusted closing NAV for a specified period. Moving Average Activity Indicators
combine adjusted closing NAVs from the last business day of each week with
moving averages for a specified period to produce indicators showing when an NAV
has crossed, stayed above, or stayed below its moving average.

A Portfolio may quote various measures of volatility and benchmark
correlation in advertising. In addition, a Portfolio may compare these measures
to those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be. All
measures of volatility and correlation are calculated using averages of
historical data.

Momentum indicators indicate a Portfolio's price movements over specific
periods of time. Each point on the momentum indicator represents the Portfolio's
percentage change in price movements over that period.

A Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels. A Portfolio may be available for purchase
through retirement plans or other programs offering deferral of, or exemption
from, income taxes, which may produce superior after-tax returns over time.

A Portfolio may advertise its current interest rate sensitivity, duration,
weighted average maturity or similar maturity characteristics.

Advertisements and sales materials relating to a Portfolio may include
information regarding the background, experience and expertise of the investment
adviser and/or portfolio manager for the Portfolio.

TAXES

The following is only a summary of certain additional tax considerations
generally affecting the Portfolios and their shareholders that are not described
in the Prospectuses. No attempt is made to present a detailed explanation of the
tax treatment of the Portfolios or their shareholders, and the discussion here
and in the Prospectuses is not intended as a substitute for careful tax
planning. Investors are urged to consult their tax advisers with specific
reference to their own tax situation.

**4 Please note that for purposes of satisfying certain of the requirements
for taxation as a regulated investment company described below, the Index Equity
Portfolio is deemed to own a proportionate share of the assets and gross income
of the Index Master Portfolio in which the Index Equity Portfolio invests all of
its assets. Also, with

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respect to the Index Equity Portfolio, the discussion below that relates to the
taxation of futures contracts and other rules pertaining to the timing and
character of income apply to the Index Master Portfolio.

**5 Each Portfolio of the Fund has elected and intends to qualify for
taxation as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). As a regulated investment
company, each Portfolio generally is exempt from federal income tax on its net
investment income (i.e., its investment company taxable income as that term is
defined in the Code without regard to the deduction for dividends paid) and net
capital gain (i.e., the excess of its net long-term capital gain over its net
short-term capital loss) that it distributes to shareholders, provided that it
distributes an amount equal to at least the sum of (a) 90% of its net investment
income and (b) 90% of its net tax-exempt interest income, if any, for the year
(the "Distribution Requirement") and satisfies certain other requirements of the
Code that are described below. Distributions of net investment income and net
tax-exempt interest income made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year will
satisfy the Distribution Requirement.

**6 In addition to satisfaction of the Distribution Requirement, each
Portfolio must derive at least 90% of its gross income from dividends, interest,
certain payments with respect to securities loans and gains from the sale or
other disposition of stock or securities or foreign currencies (including, but
not limited to, gains from forward foreign currency exchange contacts), or from
other income derived with respect to its business of investing in such stock,
securities, or currencies (the "Income Requirement").

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156

In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the value of each Portfolio's assets must
consist of cash and cash items, U.S. government securities, securities of other
regulated investment companies, and securities of other issuers (as to which a
Portfolio has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which a Portfolio does not hold more than
10% of the outstanding voting securities of such issuer), and no more than 25%
of the value of each Portfolio's total assets may be invested in the securities
of any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which such Portfolio
controls and which are engaged in the same or similar trades or businesses.
(Meeting these requirements would not necessarily prevent the New jersey Tax-
Free Income Portfolio and the New Jersey Money Market Portfolio from qualifying
as both qualified investment funds under New Jersey law and regulated investment
companies under the Code. However, in order for the New Jersey Tax-Free Income
Portfolio and the New Jersey Money Market Portfolio to qualify as both
Aqualified investment funds under New Jersey law and regulated investment
companies@ under the Code, at least 80% of each Portfolio's total assets would
have to be invested only in New Jersey State Specific Obligations or U.S.
Government Obligations.)

**7 Each of the Money and Non-Money Market Municipal Portfolios is designed
to provide investors with tax-exempt interest income. Shares of the Money and
Non-Money Market Municipal Portfolios would not be suitable for tax-exempt
institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and individual retirement accounts
because such plans and accounts are generally tax-exempt and, therefore, not
only would not gain any additional benefit from the Portfolio's dividends being
tax-exempt but also such dividends would be taxable when distributed to the
beneficiary. In addition, the Money and Non-Money Market Municipal Portfolios
may not be an appropriate investment for entities which are "substantial users"
of facilities financed by private activity bonds or "related persons" thereof.
"Substantial user" is defined under U.S. Treasury Regulations to include a non-
exempt person who regularly uses a part of such facilities in his trade or
business and (a) whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities, (b) who occupies more than 5% of the entire
usable area of such facilities, or (c) for whom such facilities or a part
thereof were specifically constructed, reconstructed or acquired. "Related
persons" include

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certain related natural persons, affiliated corporations, a partnership and its
partners and an S corporation and its shareholders.

**8 In order for the Money and Non-Money Market Municipal Portfolios to pay
exempt interest dividends for any taxable year, at the close of each quarter of
the taxable year at least 50% of the value of each such Portfolio must consist
of exempt interest obligations. Exempt interest dividends distributed to
shareholders are not included in the shareholder's gross income for regular
Federal income tax purposes. However, gain realized by such Portfolios from the
disposition of a tax-exempt bond that was acquired after April 30, 1993 for a
price less than the principal amount of the bond is taxable to shareholders as
ordinary income to the extent of accrued market discount. Also, all shareholders
required to file a Federal income tax return are required to report the receipt
of exempt interest dividends and other exempt interest on their returns.
Moreover, while such dividends and interest are exempt from regular Federal
income tax, they may be subject to alternative minimum tax (currently imposed at
the rate of 26% (28% on the taxable excess over $175,000) in the case of non-
corporate taxpayers and at the rate of 20% in the case of corporate taxpayers)
in two circumstances. First, exempt interest dividends derived from certain
"private activity" bonds issued after August 7, 1986, generally will constitute
an item of tax preference for both corporate and non-corporate taxpayers.
Second, exempt interest dividends derived from all bonds, regardless of the date
of issue, must be taken into account by corporate taxpayers in determining
certain adjustments for alternative minimum tax purposes. Receipt of exempt
interest dividends may result in collateral Federal income tax consequences to
certain other taxpayers, including financial institutions, property and casualty
insurance companies, individual recipients of Social Security or Railroad
Retirement benefits, and foreign corporations engaged in trade or business in
the United States. Prospective investors should consult their own tax advisors
as to such consequences.

**9 If a Money or Non-Money Market Municipal Portfolio distributes exempt
interest dividends during the shareholder's taxable year, no deduction generally
will be allowed for any interest expense on indebtedness incurred to purchase or
carry shares of such Portfolio.

**10 OHIO TAX CONSIDERATIONS. Individuals and estates that are subject to
Ohio personal income tax or municipal or school district income taxes in Ohio
will not be subject to such taxes on distributions from the Ohio Tax-Free Income
Portfolio or the Ohio Municipal Money Market Portfolio to the extent that such
distributions are properly attributable to interest on Ohio State-Specific
Obligations or obligations issued by the U.S. Government, its agencies,
instrumentalities or territories (if the interest on such obligations is exempt
from state income taxation under the laws of the United States). Corporations
that are subject to the Ohio corporation franchise tax will not have to include
distributions from the Ohio Tax-Free Income Portfolio or the Ohio Municipal
Money Market Portfolio in their net income base for purposes of calculating
their Ohio corporation franchise tax liability to the extent that such
distributions either constitute exempt-interest dividends for Federal income tax
purposes or are properly attributable to interest on Ohio State-Specific
Obligations or the U.S. obligations described above provided, in the case of
U.S. territorial obligations, such interest is excluded from gross income for
federal income tax purposes. However, Shares of the Ohio Tax Free Income
Portfolio and the Ohio Municipal Money Market Portfolio will be included in a
corporation's net worth base for purposes of calculating the Ohio corporation
franchise tax. Distributions properly attributable to gain on the sale, exchange
or other disposition of Ohio State-Specific Obligations will not be subject to
the Ohio personal income tax, or municipal or school district income taxes in
Ohio and will not be included in the net income base of the Ohio corporation
franchise tax. Distributions attributable to other sources will be subject to
the Ohio personal income tax and the Ohio corporation franchise tax. This
discussion of Ohio taxes assumes that the Ohio Tax-Free Income Portfolio and the
Ohio Municipal Money Market Portfolio will each continue to qualify as a
regulated investment company as defined in the Internal Revenue Code and that at
all times at least 50% of the value of the total assets of each of the
Portfolios consists of Ohio State-Specific Obligations or similar obligations of
other states or their subdivisions. In addition, for purposes of this
discussion, "Ohio State-Specific Obligations" means obligations of the State of
Ohio, political subdivisions thereof or agencies or instrumentalities of Ohio or
its political subdivisions.

The Ohio Municipal Money Market and Ohio Tax-Free Income Portfolios are not
subject to the Ohio personal income tax, school district income taxes in Ohio,
the Ohio corporation franchise tax, or the Ohio dealers in intangibles tax,
provided that, with respect to the Ohio corporation franchise tax and the Ohio
dealers in intangibles tax, the Fund

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timely files the annual report required by Section 5733.09 of the Ohio Revised
Code. The Ohio Tax Commissioner, however, has waived this annual filing
requirement for each year (including 1999) since 1990, the first tax year to
which such requirement applied. Distributions with respect to shares of the Ohio
Municipal Money Market and Ohio Tax-Free Income Portfolios properly attributable
to proceeds of insurance paid to those Portfolios that represent maturing or
matured interest on defaulted Obligations held by those Portfolios and that are
excluded from gross income for Federal income tax purposes will not be subject
to Ohio personal income tax or municipal or school district income taxes in
Ohio, nor included in the net income base of the Ohio corporation franchise
tax.

**11 NORTH CAROLINA TAX CONSIDERATIONS. Interest received in the form of
dividends from the North Carolina Municipal Money Market Portfolio is exempt
from North Carolina state income tax to the extent the distributions represent
interest on direct obligations of the U.S. Government or North Carolina State-
Specific Obligations. Distributions derived from interest earned on obligations
of political subdivisions of Puerto Rico, Guam and the U.S. Virgin Islands,
including the governments thereof and their agencies, instrumentalities and
authorities, are also exempt from North Carolina state income tax. Distributions
paid out of interest earned on obligations that are merely backed or guaranteed
by the U.S. Government (e.g., GNMAs, FNMAs), on repurchase agreements
collateralized by U.S. Government securities or on obligations of other states
(which the Portfolio may acquire and hold for temporary or defensive purposes)
are not exempt from North Carolina state income tax.

**12 Any distributions of net realized gain earned by the North Carolina
Municipal Money Market Portfolio on the sale or exchange of certain obligations
of the State of North Carolina or its subdivisions that were issued before July
1, 1995 will also be exempt from North Carolina income tax to the Portfolio's
shareholders. Distributions of gains earned by the North Carolina Municipal
Money Market Portfolio on the sale or exchange of all other obligations will be
subject to North Carolina income tax.

**13 Distributions of exempt-interest dividends, to the extent attributable
to interest on North Carolina State-Specific Obligations and to interest on
direct obligations of the United States (including territories thereof), are not
subject to North Carolina individual or corporate income tax. Distributions of
gains attributable to certain obligations of the State of North Carolina and its
political subdivisions issued prior to July 1, 1995 are not subject to North
Carolina individual or corporate income tax; however, distributions of gains
attributable to such types of obligations that were issued after June 30, 1995
will be subject to North Carolina individual or corporate income tax. An
investment in a Portfolio (including the North Carolina Municipal Money Market
Portfolio) by a corporation subject to the North Carolina franchise tax will be
included in the capital stock, surplus and undivided profits base in computing
the North Carolina franchise tax. Investors in a Portfolio including, in
particular, corporate investors which may be subject to the North Carolina
franchise tax, should consult their tax advisors with respect to the effects on
such tax of an investment in a Portfolio and with respect to their tax situation
in general.

**14 VIRGINIA TAX CONSIDERATIONS. Dividends paid by the Virginia Municipal
Money Market Portfolio and derived from interest on obligations of the
Commonwealth of Virginia or of any political subdivision or instrumentality of
the Commonwealth or derived from interest or dividends on obligations of the
United States excludable from Virginia taxable income under the laws of the
United States, which obligations are issued in the exercise of the borrowing
power of the Commonwealth or the United States and are backed by the full faith
and credit of the Commonwealth or the United States, will generally be exempt
from the Virginia income tax. Dividends derived from interest on debt
obligations of certain territories and possessions of the United States (those
issued by Puerto Rico, the Virgin Islands and Guam) will also be exempt from the
Virginia income tax. Dividends derived from interest on debt obligations other
than those described above will be subject to the Virginia income tax even
though it may be excludable from gross income for Federal income tax
purposes.

**15 Generally, dividends distributed to shareholders by the Portfolio and
derived from capital gains will be taxable to the shareholders. Capital gains
distributed to shareholders derived from Virginia obligations issued pursuant to
special Virginia enabling legislation which provides a specific exemption for
such gains will be exempt from Virginia income tax.

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When taxable income of a regulated investment company is commingled with
exempt income, all distributions of the income are presumed taxable to the
shareholders unless the portion of income that is exempt from Virginia income
tax can be determined with reasonable certainty and substantiated. Generally,
this determination must be made for each distribution to each shareholder. The
Virginia Department of Taxation has adopted a policy of allowing shareholders to
exclude from their Virginia taxable income the exempt portion of distributions
from a regulated investment company even though the shareholders receive
distributions monthly but receive reports substantiating the exempt portion of
such distributions at less frequent intervals. Accordingly, if the Portfolio
receives taxable income, the Portfolio must determine the portion of income that
is exempt from Virginia income tax and provide such information to the
shareholders in accordance with the foregoing so that the shareholders may
exclude from Virginia taxable income the exempt portion of the distribution from
the Portfolio.

**16 As a regulated investment company, the Virginia Municipal Money Market
Portfolio may distribute dividends that are exempt from the Virginia income tax
to its shareholders if the Portfolio satisfies all requirements for conduit
treatment under Federal law and, at the close of each quarter of its taxable
year, at least 50% of the value of its total assets consists of obligations the
interest on which is exempt from taxation under Federal law. If the Portfolio
fails to qualify, no part of its dividends will be exempt from the Virginia
income tax. To the extent any portion of the dividends are derived from taxable
interest for Virginia purposes or from net short-term capital gains, such
portion will be taxable to the shareholders as ordinary income. The character
of long-term capital gains realized and distributed by the Portfolio will follow
through to its shareholders regardless of how long the shareholders have held
their shares. Generally, interest on indebtedness incurred by shareholders to
purchase or carry shares of the Portfolio will not be deductible for Virginia
income tax purposes.

**17 NEW JERSEY TAX CONSIDERATIONS. It is anticipated that the New Jersey
Tax-Free Income Portfolio and the New Jersey Municipal Money Market Portfolio
will qualify as a "qualified investment fund" and as a result, substantially all
distributions paid by the New Jersey Tax-Free Income Portfolio and the New
Jersey Municipal Money Market Portfolio will not be subject to the New Jersey
personal income tax. A qualified investment fund is an investment company or
trust registered with the Securities and Exchange Commission, or any series of
such investment company or trust, which for the calendar year in which the
distribution is paid: (a) has no investments other than interest-bearing
obligations, obligations issued at a discount, and cash and cash items,
including receivables and financial options, futures, forward contracts, or
other similar financial instruments related to interest-bearing obligations,
obligations issued at a discount or bond indexes related thereto; and (b) has at
least 80% of the aggregate principal amount of all of its investments, excluding
financial options, futures, forward contracts, or other similar financial
instruments related to interest-bearing obligations, obligations issued at a
discount or bond indexes related thereto to the extent such instruments are
authorized by the regulated investment company rules of the Code, cash and cash
items, which cash items shall include receivables, in New Jersey State-Specific
Obligations or U.S. Government Obligations.

**18 To be classified as a qualified investment fund for New Jersey
personal income tax purposes, at least 80% of the aggregate principal amount of
the New Jersey Municipal Money Market Portfolio and New Jersey Tax-Free Income
Portfolio must consist of New-Jersey State-Specific Obligations or direct U.S.
Government obligations excluding financial options, futures, forward contracts,
or other similar financial instruments related to interest-bearing obligations,
obligations issued at a discount or bond indexes related thereto to the extent
such instruments are authorized by the regulated investment company rules of the
Internal Revenue Code, cash and cash items, which cash items shall include
receivables; and the Portfolios must have no investments other than interest-
bearing obligations, obligations issued at a discount, and cash and cash items,
which cash items shall include receivables, financial options, futures, forward
contracts, or other similar financial instruments related to interest-bearing
obligations, obligations issued at a discount or bond indexes related thereto.
In addition, to the extent the Portfolios qualify as qualified investment funds,
the Portfolios must satisfy certain reporting obligations and provide certain
information to shareholders.

**19 In accordance with New Jersey law as currently in effect,
distributions paid by a qualified investment fund are excluded from personal
income tax to the extent that the distributions are attributable to interest or
gains from New Jersey State-Specific Obligations or to interest or gains from
direct U.S. Government Obligations. New Jersey

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State-Specific Obligations are obligations issued by or on behalf of New Jersey
or any county, municipality, or other political subdivision of New Jersey. U.S.
Government Obligations are obligations which are statutorily free from New
Jersey State or local taxation under the laws of the United States.
Distributions by a qualified investment fund from most other sources will be
subject to the New Jersey personal income tax. Shares of the New Jersey Tax-Free
Income Portfolio and the New Jersey Municipal Money Market Portfolio are not
subject to property taxation by New Jersey.

**20 The New Jersey personal income tax is not applicable to corporations.
For all corporations subject to the New Jersey Corporation Business Tax,
dividends and distributions from a qualified investment fund are included in the
net income tax base for purposes of computing the Corporation Business Tax.
Furthermore, any gain upon the redemption or sale of shares by a corporate
shareholder is also included in the net income tax base for purposes of
computing the Corporation Business Tax.

**21 DELAWARE TAX CONSIDERATIONS. Individuals, estates and trusts that are
subject to Delaware personal income tax will be subject to such tax on
distributions from the Delaware Tax-Free Income Portfolio (other than
distributions qualifying as "exempt interest dividends" under the Code which are
subject to such tax as discussed below and distributions attributable to
interest paid on certain U.S. government obligations) to the same extent as such
distributions are includible in the gross income of such shareholders for
Federal income tax purposes. Unlike the Code, however, Delaware tax law does not
provide for different tax rates for distributions paid out of "net capital gain"
and other distributions.

** 22 Individuals, estates and trusts that are subject to Delaware personal
income tax will not be subject to such tax on distributions that qualify as
"exempt interest dividends" under the Code to the extent that such distributions
are attributable to interest on Delaware State-Specific Obligations and provided
that the Delaware Tax-Free Income Portfolio sends shareholders a written
statement of the dollar amount or percentage of the exempt interest dividends
that are attributable to interest on Delaware State-Specific Obligations.
Similarly, if the Delaware Tax-Free Income Portfolio qualifies as a regulated
investment company under the Code, individuals, estates and trusts that are
subject to Delaware personal income tax will not be subject to such tax on
distributions that are attributable to interest paid on certain U.S. government
obligations, provided that the Delaware Tax-Free Income Portfolio sends
shareholders a written statement of the dollar amount or percentage of such
distributions that are attributable to interest paid on such U.S. government
obligations. The Fund will send written notices to shareholders annually
regarding the Delaware tax status of distributions made by the Delaware Tax-Free
Income Portfolio.

**23 For corporations and other entities that are subject to Delaware
corporate income tax, distributions will be excluded from the Delaware taxable
income of such shareholders to the same extent as such distributions are
excluded from the Federal taxable income of such shareholders.

**24 So long as the Delaware Tax-Free Income Portfolio qualifies as a
regulated investment company under the Code, individuals, estates or trusts that
are subject to Delaware personal income tax will not be subject to such tax with
respect to (i) "exempt interest dividends" (as defined in the Code) attributable
to interest on Delaware State-Specific Obligations and (ii) dividends
attributable to interest paid on certain U.S. government obligations, provided
that the Delaware Tax-Free Income Portfolio sends shareholders a written
statement of the dollar amount or percentage of total distributions by the
Delaware Tax-Free Income Portfolio that are described in (i) and (ii). Other
distributions made by the Portfolio to its shareholders who are individuals,
estates or trusts subject to Delaware personal income tax will be includible in
the gross income of such shareholders for Delaware personal income tax purposes
to the same extent as such distributions are includible in the gross income of
such shareholders for Federal income tax purposes. Distributions made by the
Delaware Tax-Free Income Portfolio to its shareholders who are corporations or
other entities subject to Delaware corporate income tax will be excluded from
the Delaware taxable income of such shareholders to the same extent as such
distributions are excluded from the Federal taxable income of such
shareholders.

**25 KENTUCKY TAX CONSIDERATIONS. Exempt interest dividends paid by the
Kentucky Tax-Free Income Portfolio that are attributable to Kentucky State-
Specific Obligations will be excludible from a shareholder's gross income for
Kentucky income tax purposes. Further, distributions attributable to interest on
certain U.S. government

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obligations will similarly be excluded from gross income for Kentucky income tax
purposes. All other distributions by the Kentucky Tax-Free Income Portfolio will
be included in a shareholder's gross income for Kentucky income tax purposes.
Kentucky taxes distributions of net capital gain at the same rates as ordinary
income. According to the Kentucky Revenue Code, shares of mutual funds and money
market funds are exempt from Kentucky intangible taxes.

PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder
attributable to interest realized by the Pennsylvania Tax-Free Income Portfolio
or the Pennsylvania Municipal Money Market Portfolio from Pennsylvania State-
Specific Obligations is not taxable to individuals, estates or trusts under the
Personal Income Tax; to corporations under the Corporate Net Income Tax; nor to
individuals under the Philadelphia School District Net Investment Income Tax
("School District Tax").

Income received by a shareholder attributable to gain on the sale or other
disposition by the Pennsylvania Tax-Free Income Portfolio or the Pennsylvania
Municipal Money Market Portfolio of Pennsylvania State-Specific Obligations is
taxable under the Personal Income Tax, the Corporate Net Income Tax, but such
income is not taxable under the School District Tax.

To the extent that gain on the disposition of a share represents gain
realized on Pennsylvania State-Specific Obligations held by the Pennsylvania
Tax-Free Income Portfolio, such gain may be subject to the Personal Income Tax
and Corporate Net Income Tax. Such gain may also be subject to the School
District Tax, except that gain realized with respect to a share held for more
than six months is not subject to the School District Tax.

This discussion does not address the extent, if any, to which shares of the
Pennsylvania Tax-Free Income Portfolio or the Pennsylvania Municipal Money
Market Portfolio, or interest and gain thereon, is subject to, or included in
the measure of, the special taxes imposed by the Commonwealth of Pennsylvania on
banks and other financial institutions or with respect to any privilege, excise,
franchise or other tax imposed on business entities not discussed above
(including the Corporate Capital Stock/Foreign Franchise Tax).

Shareholders of the Pennsylvania Tax-Free Income Portfolio are not subject
to the Pennsylvania County Personal Property Tax to the extent that the
Portfolio is comprised of Pennsylvania State-Specific Obligations and Federal
obligations (if the interest on such obligations is exempt from state and local
taxation under the laws of the United States).

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163

164

Distributions of net investment income will be taxable (other than the
possible allowance of the dividends received deduction described below) to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in shares. Shareholders receiving any
distribution from a Portfolio in the form of additional shares will be treated
as receiving a taxable distribution in an amount equal to the fair market value
of the shares received, determined as of the reinvestment date. The Money and
Non-Money Market Municipal Portfolios may each purchase securities that do not
bear tax-exempt interest. Any income on such securities recognized by the
Portfolio will be distributed and will be taxable to its shareholders.

Each Portfolio intends to distribute to shareholders any of its net capital
gain for each taxable year. Such gain is distributed as a capital gain dividend
and is taxable to shareholders as long-term capital gain, regardless of the
length of time the shareholder has held his shares, whether such gain was
recognized by the Portfolio prior to the date on which a shareholder acquired
shares of the Portfolio and whether the distribution was paid in cash or
reinvested in shares.

Under current law, ordinary income of individuals will be taxable at a
maximum marginal rate of 39.6%, but because of limitations on itemized
deductions otherwise allowable and the phase-out of personal exemptions, the
maximum effective marginal rate of tax for some taxpayers may be higher. Under
recently enacted legislation, long-term capital gains of individuals are taxed
at a maximum rate of 20% with respect to capital assets held for more than one
year (10% for gains otherwise taxed at 15%). Capital gains and ordinary income
of corporate taxpayers are both taxed at a maximum nominal rate of 35%.

Investors should be aware that any loss realized upon the sale, exchange or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent any capital gain dividends have been paid with
respect to such shares. Any loss incurred on the sale or exchange of a
Portfolio's shares, held six months or less, will be disallowed to the extent of
exempt interest dividends paid with respect to such shares, and any loss not so
disallowed will be treated as a long-term capital loss to the extent of capital
gain dividends received with respect to such shares.

Each Non-Money Market Portfolio (other than the Index Master Portfolio) may
engage in hedging or derivatives transactions involving foreign currencies,
forward contracts, options and futures contracts (including options, futures and
forward contracts on foreign currencies) and short sales. Such transactions
will be subject to special provisions of the Code that, among other things, may
affect the character of gains and losses realized by the Portfolio (that is, may
affect whether gains or losses are ordinary or capital), accelerate recognition
of income of the Portfolio and defer recognition of certain of the Portfolio's
losses. These rules could therefore affect the character, amount and timing of
distributions to shareholders. In addition, these provisions (1) will require a
Portfolio to "mark-to-market" certain types of positions in its portfolio (that
is, treat them as if they were closed out) and (2) may cause a Portfolio to
recognize income without receiving cash with which to pay dividends or make
distributions in amounts necessary to satisfy the Distribution Requirement and
avoid the 4% excise tax (described below). Each Portfolio intends to monitor
its transactions, will make the appropriate tax elections and will make the
appropriate entries in its books and records when it acquires any option,
futures contract, forward contract or hedged investment in order to mitigate the
effect of these rules.

If a Portfolio purchases shares in a "passive foreign investment company"
(a "PFIC"), such Portfolio may be subject to U.S. federal income tax on a
portion of any "excess distribution" or gain from the disposition of such shares
even if such income is distributed as a taxable dividend by the Portfolio to its
shareholders. Additional charges in the nature of interest may be imposed on a
Portfolio in respect of deferred taxes arising from such distributions or gains.
If a Portfolio were to invest in a PFIC and elected to treat the PFIC as a
"qualified electing fund" under the Code (a "QEF"), in lieu of the foregoing
requirements, the Portfolio would be required to include in income each year a
portion of the ordinary earnings and net capital gain of the qualified electing
fund, even if not distributed to the Portfolio. Alternatively, a Portfolio can
elect to mark-to-market at the end of each taxable year its shares in a PFIC; in
this case, the Portfolio would recognize as ordinary income any increase in the
value of such shares, and as ordinary loss any

165

decrease in such value to the extent it did not exceed prior increases included
in income. Under either election, a Portfolio might be required to recognize in
a year income in excess of its distributions from PFICs and its proceeds from
dispositions of PFIC stock during that year, and such income would nevertheless
be subject to the Distribution Requirement and would be taken into account for
purposes of the 4% excise tax (described below).

Investment income that may be received by certain of the Portfolios from
sources within foreign countries may be subject to foreign taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which entitle any such Portfolio to a reduced rate of, or exemption
from, taxes on such income. If more than 50% of the value of the total assets at
the close of the taxable year of the International Equity Portfolio,
International Emerging Markets Portfolio, International Small Cap Equity
Portfolio and International Bond Portfolio consist of stock or securities of
foreign corporations, such Portfolio may elect to "pass through" to the
Portfolio's shareholders the amount of foreign taxes paid by such Portfolio. If
a Portfolio so elects, each shareholder would be required to include in gross
income, even though not actually received, his pro rata share of the foreign
taxes paid by the Portfolio, but would be treated as having paid his pro rata
share of such foreign taxes and would therefore be allowed to either deduct such
amount in computing taxable income or use such amount (subject to various Code
limitations) as a foreign tax credit against federal income tax (but not both).
For purposes of the foreign tax credit limitation rules of the Code, each
shareholder would treat as foreign source income his pro rata share of such
foreign taxes plus the portion of dividends received from the Portfolio
representing income derived from foreign sources. No deduction for foreign taxes
could be claimed by an individual shareholder who does not itemize deductions.
In certain circumstances, a shareholder that (i) has held shares of the
Portfolio for less than a specified minimum period during which it is not
protected from risk of loss or (ii) is obligated to make payments related to the
dividends, will not be allowed a foreign tax credit for foreign taxes deemed
imposed on dividends paid on such shares. Additionally, such Portfolio must
also meet this holding period requirement with respect to its foreign stocks and
securities in order for "creditable" taxes to flow-through. Each shareholder
should consult his own tax adviser regarding the potential application of
foreign tax credits.

Ordinary income dividends paid by a Portfolio will qualify for the 70%
dividends-received deduction generally available to corporations to the extent
of the amount of "qualifying dividends" received by a Portfolio from domestic
corporations for the taxable year. A dividend received by a Portfolio will not
be treated as a qualifying dividend (i) if it has been received with respect to
any share of stock that the Portfolio has held for less than 46 days (91 days in
the case of certain preferred stock) during the 90 day period beginning on the
date which is 45 days before the date on which such share becomes ex-dividend
with respect to such dividend (during the 180 day period beginning 90 days
before such date in the case of certain preferred stock), (ii) to the extent
that a Portfolio is under an obligation to make related payments with respect to
positions in substantially similar or related property or (iii) to the extent
the stock on which the dividend is paid is treated as debt-financed. Moreover,
the dividends-received deduction for a corporate shareholder may be disallowed
if the corporate shareholder fails to satisfy the foregoing requirements with
respect to its shares of a Portfolio.

If for any taxable year any Portfolio does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and all
distributions (including amounts derived from interest on Municipal Obligations)
will be taxable as ordinary dividends to the extent of such Portfolio's current
and accumulated earnings and profits. Such distributions will be eligible for
the dividends received deduction in the case of corporate shareholders.

A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to currently distribute specified percentages of their ordinary
taxable income and capital gain net income (excess of capital gains over capital
losses). Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and any capital gain net income
prior to the end of each calendar year to avoid liability for this excise tax.

The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of interest or dividend income
properly, or (iii) who has failed to certify to the Fund when required to do so
that he is not subject to backup withholding or that he is an "exempt
recipient."

166

Shareholders will be advised annually as to the Federal income tax
consequences of distributions made by the Portfolios each year.

The foregoing general discussion of federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.

Although each Portfolio expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, each
Portfolio may be subject to the tax laws of such states or localities.
Shareholders should consult their tax advisors about state and local tax
consequences, which may differ from the federal income tax consequences
described above.

ADDITIONAL INFORMATION CONCERNING SHARES

Shares of each class of each Portfolio of the Fund bear their pro rata
portion of all operating expenses paid by a Portfolio, except transfer agency
fees, certain administrative/servicing fees and amounts payable under the Fund's
Amended and Restated Distribution and Service Plan. Each share of a Portfolio
of the Fund has a par value of $.001, represents an interest in that Portfolio
and is entitled to the dividends and distributions earned on that Portfolio's
assets that are declared in the discretion of the Board of Trustees. The Fund's
shareholders are entitled to one vote for each full share held and proportionate
fractional votes for fractional shares held, and will vote in the aggregate and
not by class, except where otherwise required by law or as determined by the
Board of Trustees.

Shares of the Fund have noncumulative voting rights and, accordingly, the
holders of more than 50% of the Fund's outstanding shares (irrespective of
class) may elect all of the trustees. Shares have no preemptive rights and only
such conversion and exchange rights as the Board may grant in its discretion.
When issued for payment, shares will be fully paid and non-assessable by the
Fund.

There will normally be no meetings of shareholders for the purpose of
electing trustees unless and until such time as required by law. At that time,
the trustees then in office will call a shareholders meeting to elect trustees.
Except as set forth above, the trustees shall continue to hold office and may
appoint successor trustees. The Fund's Declaration of Trust provides that
meetings of the shareholders of the Fund shall be called by the trustees upon
the written request of shareholders owning at least 10% of the outstanding
shares entitled to vote.

Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Fund shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of each
investment portfolio affected by such matter. Rule 18f-2 further provides that
an investment portfolio shall be deemed to be affected by a matter unless the
interests of each investment portfolio in the matter are substantially identical
or the matter does not affect any interest of the investment portfolio. Under
the Rule, the approval of an investment advisory agreement, a distribution plan
subject to Rule 12b-1 under the 1940 Act or any change in a fundamental
investment policy would be effectively acted upon with respect to an investment
portfolio only if approved by a majority of the outstanding shares of such
investment portfolio. However, the Rule also provides that the ratification of
the appointment of independent accountants, the approval of principal
underwriting contracts and the election of Trustees may be effectively acted
upon by shareholders of the Fund voting together in the aggregate without regard
to a particular investment portfolio.

The proceeds received by each Portfolio for each issue or sale of its
shares, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of that Portfolio. The underlying
assets of each Portfolio will be segregated on the books of account, and will be
charged with the liabilities in respect to that Portfolio and with a share of
the general

167

liabilities of the Fund. As stated herein, certain expenses of a Portfolio may
be charged to a specific class of shares representing interests in that
Portfolio.

The Funds' Declaration of Trust authorizes the Board of Trustees, without
shareholder approval (unless otherwise required by applicable law), to: (i)
sell and convey the assets belonging to a class of shares to another management
investment company for consideration which may include securities issued by the
purchaser and, in connection therewith, to cause all outstanding shares of such
class to be redeemed at a price which is equal to their net asset value and
which may be paid in cash or by distribution of the securities or other
consideration received from the sale and conveyance; (ii) sell and convert the
assets belonging to one or more classes of shares into money and, in connection
therewith, to cause all outstanding shares of such class to be redeemed at their
net asset value; or (iii) combine the assets belonging to a class of shares with
the assets belonging to one or more other classes of shares if the Board of
Trustees reasonably determines that such combination will not have a material
adverse effect on the shareholders of any class participating in such
combination and, in connection therewith, to cause all outstanding shares of any
such class to be redeemed or converted into shares of another class of shares at
their net asset value. The Board of Trustees may authorize the liquidation and
termination of any Portfolio or class of shares. Upon any liquidation of a
Portfolio, Shareholders of each class of the Portfolio are entitled to share pro
rata in the net assets belonging to that class available for distribution.

MISCELLANEOUS

THE FUND. The Fund was organized as a Massachusetts business trust on
December 22, 1988 and is registered under the 1940 Act as an open end,
management investment company. Each of the Portfolios except the New Jersey
Municipal Money Market, North Carolina Municipal Money Market, Ohio Municipal
Money Market, Pennsylvania Municipal Money Market, Virginia Municipal Money
Market, Pennsylvania Tax-Free Income, New Jersey Tax-Free Income, Ohio Tax-Free
Income, Delaware Tax-Free Income and Kentucky Tax-Free Income Portfolios is
diversified. Effective January 31, 1998, the Fund changed its name from Compass
Capital Funds(SM) to BlackRock Funds(SM).

MASTER-FEEDER STRUCTURE. The Index Equity Portfolio, unlike many other
investment companies which directly acquire and manage their own portfolio of
securities, seeks to achieve its investment objective by investing all of its
investable assets in the Index Master Portfolio. The Index Equity Portfolio
purchases shares of the Index Master Portfolio at net asset value. The net
asset value of the Index Equity Portfolio shares responds to increases and
decreases in the value of the Index Master Portfolio's securities and to the
expenses at the Index Master Portfolio allocable to the Index Equity Portfolio
(as well as its own expenses). The Index Equity Portfolio may withdraw its
investment in the Index Master Portfolio at any time upon 30 days notice to the
Index Master Portfolio if the Board of Trustees of the Fund determines that it
is in the best interests of the Index Equity Portfolio to do so. Upon
withdrawal, the Board of Trustees would consider what action might be taken,
including the investment of all of the assets of the Index Equity Portfolio in
another pooled investment entity having the same investment objective as the
Index Equity Portfolio or the hiring of an investment adviser to manage the
Index Equity Portfolio's assets in accordance with the investment policies
described above with respect to the Index Equity Portfolio.

The Index Master Portfolio is a separate series of the Trust, which is a
business trust created under the laws of the State of Delaware. The Index
Equity Portfolio and other institutional investors that may invest in the Index
Master Portfolio from time to time (e.g. other investment companies) will each
bear a share of all liabilities of the Index Master Portfolio. Under the
Delaware Business Trust Act, shareholders of the Index Master Portfolio have the
same limitation of personal liability as shareholders of a Delaware corporation.
Accordingly, Fund management believes that neither the Index Equity Portfolio
nor its shareholders will be adversely affected by reason of the Index Equity
Portfolio's investing in the Index Master Portfolio.

The shares of the Index Master Portfolio are offered to institutional
investors in private placements for the purpose of increasing the funds
available for investment and achieving economies of scale that might be
available at higher asset levels. The expenses of such other institutional
investors and their returns may differ from those of the Index Equity Portfolio.
While investment in the Index Master Portfolio by other institutional investors
offers potential

168

benefits to the Index Master Portfolio (and, indirectly, to the Index Equity
Portfolio), economies of scale and related expense reductions might not be
achieved. Also, if an institutional investor were to redeem its interest in the
Index Master Portfolio, the remaining investors in the Index Master Portfolio
could experience higher pro rata operating expenses and correspondingly lower
returns. In addition, institutional investors that have a greater pro rata
ownership interest in the Index Master Portfolio than the Index Equity Portfolio
could have effective voting control over the operation of the Index Master
Portfolio.

Shares in the Index Master Portfolio have equal, non-cumulative voting
rights, except as set forth below, with no preferences as to conversion,
exchange, dividends, redemption or any other feature. Shareholders of the Trust
have the right to vote only (i) for removal of the Trust's trustees, (ii) with
respect to such additional matters relating to the Trust as may be required by
the applicable provisions of the 1940 Act and (iii) on such other matters as the
trustees of the Trust may consider necessary or desirable. In addition,
approval of the shareholders of the Trust is required to adopt any amendments to
the Agreement and Declaration of Trust of the Trust which would adversely affect
to a material degree the rights and preferences of the shares of the Index
Master Portfolio or to increase or decrease their par value. The Index Master
Portfolio's shareholders will also be asked to vote on any proposal to change a
fundamental investment policy (i.e. a policy that may be changed only with the
approval of shareholders) of the Index Master Portfolio. If a shareholder of
the Index Master Portfolio becomes bankrupt, a majority in interest of the
remaining shareholders in the Portfolio must vote within 120 days to approve the
continuing existence of the Index Master Portfolio or the Portfolio will be
liquidated.

When the Index Equity Portfolio, as a shareholder of the Index Master
Portfolio, votes on matters pertaining to the Index Master Portfolio, the Index
Equity Portfolio would hold a meeting of its shareholders and would cast its
votes proportionately as instructed by Index Equity Portfolio shareholders.

The investment objective of the Index Master Portfolio may not be changed
without approval of its shareholders. Shareholders of the Portfolio will
receive written notice thirty days prior to the effective date of any change in
the investment objective of the Master Portfolio. If the Index Master Portfolio
changes its investment objective in a manner which is inconsistent with the
investment objective of the Index Equity Portfolio and the Fund's Board of
Trustees fails to approve a similar change in the investment objective of the
Index Equity Portfolio, the Index Equity Portfolio would be forced to withdraw
its investment in the Index Master Portfolio and either seek to invest its
assets in another registered investment company with the same investment
objective as the Index Equity Portfolio, which might not be possible, or retain
an investment adviser to manage the Index Equity Portfolio's assets in
accordance with its own investment objective, possibly at increased cost. A
withdrawal by the Index Equity Portfolio of its investment in the Index Master
Portfolio could result in a distribution in kind of portfolio securities (as
opposed to a cash distribution) to the Index Equity Portfolio. Should such a
distribution occur, the Index Equity Portfolio could incur brokerage fees or
other transaction costs in converting such securities to cash in order to pay
redemptions. In addition, a distribution in kind to the Index Equity Portfolio
could result in a less diversified portfolio of investments and could adversely
affect the liquidity of the Portfolio. A distribution to the Index Equity
Portfolio will generally only result in a taxable gain for federal income tax
purposes to the extent that any cash distributed exceeds the Index Equity
Portfolio's tax basis in its shares of the Index Master Portfolio.

The conversion of the Index Equity Portfolio into a feeder fund of the
Index Master Portfolio was approved by shareholders of the Index Equity
Portfolio at a meeting held on November 30, 1995. The policy of the Index
Equity Portfolio, and other similar investment companies, to invest their
investable assets in funds such as the Index Master Portfolio is a relatively
recent development in the mutual fund industry and, consequently, there is a
lack of substantial experience with the operation of this policy. There may
also be other investment companies or entities through which you can invest in
the Index Master Portfolio which may have different sales charges, fees and
other expenses which may affect performance. As of the date of this Statement
of Additional Information, one other feeder fund invests all of its investable
assets in the Index Master Portfolio. For information about other funds that
may invest in the Index Master Portfolio, please contact DFA at (310) 395-8005.

169

COUNSEL. The law firm of Simpson Thacher & Bartlett, 425 Lexington Avenue,
New York, New York 10017, serves as the Fund's counsel. The law firm of
Stradley, Ronon, Stevens & Young, LLP, 2600 One Commerce Square, Philadelphia,
Pennsylvania 19103, serves as the Trust's counsel.

INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, with offices located
at 2400 Eleven Penn Center, Philadelphia, Pennsylvania, serves as the Fund's and
the Trust's independent accountants.

FIVE PERCENT OWNERS. The name, address and percentage ownership of each
person that on January 12, 1999 owned of record or beneficially 5% or more of
the outstanding shares of a Portfolio which had commenced operations as of that
date was as follows:

Money Market Portfolio: PNC Bank, Airport Business Center/Int'l Court 2, 200
- ----------------------
Stevens Dr., Lester, PA 19113, 76.677%; BHC Securities Inc., One Commerce
Square, 2005 Market Street, Philadelphia, PA 19103-3212, 12.598%; U.S. Treasury
-------------
Money Market Portfolio: PNC Bank, Airport Business Center/Int'l Court 2, 200
- ----------------------
Stevens Dr., Lester, PA 19113, 54.445%; Chase Bank of Texas, P.O. Box 2558,
Houston, TX 77252-2558, 28.120%; BHC Securities Inc., One Commerce Square, 2005
Market Street, Philadelphia, PA 19103-3212, 6.618%; Large Cap Value Equity
----------------------
Portfolio: PNC Bank, Saxon & Co., Attn: Income Collections, 200 Stevens Dr.,
- ---------
Suite 260, Lester, PA 19113, 88.88%; Intermediate Government Bond Portfolio:
--------------------------------------
PNC Bank, Saxon & Co., Attn: Income Collections, 200 Stevens Dr., Suite 260,
Lester, PA 19113, 96.119%; Municipal Money Market Portfolio: PNC Bank, Airport
--------------------------------
Business Center/Int'l Court 2, 200 Stevens Dr., Lester, PA 19113, 79.331%; PNC
Bank Ohio, Attn: Corporate Services, 201 East Fifth Street, 9th Fl.,
Cincinnati, OH 45202, 6.675%; Small Cap Value Equity Portfolio: PNC Bank, Saxon
--------------------------------
& Co., Attn: Income Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113,
76.309%; National City Bank Kentucky, Humana Retirement/Savings Tr., P.O. Box
94984, Cleveland, OH 44101, 5.083%; Large Cap Growth Equity Portfolio: PNC
---------------------------------
Bank, Saxon & Co., Attn: Income Collections, 200 Stevens Dr., Suite 260,
Lester, PA 19113, 90.195%; Managed Income Portfolio: PNC Bank, Saxon & Co.,
------------------------
Attn: Income Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113,
91.996%; Tax-Free Income Portfolio: PNC Bank, Saxon & Co., Attn: Income
--------------------------
Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113, 92.974%; Balanced
--------
Portfolio: PNC Bank, Saxon & Co., Attn: Income Collections, 200 Stevens Dr.,
- ---------
Suite 260, Lester, PA 19113, 76.895%; International Equity Portfolio: PNC Bank,
------------------------------
Saxon & Co., Attn: Income Collections, 200 Stevens Dr., Suite 260, Lester, PA
19113, 93.721%; Ohio Tax-Free Income Portfolio: PNC Bank, Saxon & Co., Attn:
------------------------------
Income Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113, 94.706%;

Pennsylvania Tax-Free Income Portfolio: PNC Bank, Saxon & Co., Attn: Income
- --------------------------------------
Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113, 92.515%; North
-----
Carolina Municipal Money Market Portfolio: North Carolina Trust Co., 301 North
- -----------------------------------------
Elm St., P.O. Box 1108, Greensboro, NC 27402, 63.092%; Branch Banking and Trust
Company, Wilbranch & Company, Trust Department, P.O. Box 1847, Wilson, NC 27893,
12.543%; First Citizens Bank, McWood & Company, P.O. Box 29522, Raleigh, NC
27626, 5.232%; Central Carolina Bank & Trust Co., P.O. Box 30010, Durham, NC
27702-3010, 12.543%; Ohio Municipal Money Market Portfolio: PNC Bank, Airport
-------------------------------------
Business Center/Int'l Court 2, 200 Stevens Dr., Lester, PA 19113, 39.477%; BHC
Securities Inc., One Commerce Square, 2005 Market St., Philadelphia, PA 19103-
3212, 33.937%; Wayne County National Bank, Wayco & Co., P.O. Box 757/1776 Beall
Avenue, Wooster, OH 44691, 9.024%; Lebanon Citizens National Bank, PO Box 59,
Lebanon, OH 45036, 9.995%; Low Duration Bond Portfolio: PNC Bank, Saxon & Co.,
---------------------------
Attn: Income Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113,
61.068%; Nexell Therapeutics, Inc., 9 Parker, Irvine, CA 92718, 9.612%; Iowa
State University Foundation, Attn: Don Behning, Alumni Suite Memorial Union,
2229 Lincoln Way, Ames, IA 50014-7164, 6.278%; Intermediate Bond Portfolio: PNC
---------------------------
Bank, Saxon & Co., Attn: Income Collections, 200 Stevens Dr., Suite 260,
Lester, PA 19113, 88.65%; Select Equity Portfolio: PNC Bank, Saxon & Co., Attn:
-----------------------
Income Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113,

170

90.061%; Small Cap Growth Equity Portfolio: PNC Bank, Saxon & Co., Attn: Income
---------------------------------
Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113, 66.583%; Pennsylvania
------------
Municipal Money Market Portfolio: PNC Bank, Airport Business Center/Int'l Court
- ---------------------------------
2, 200 Stevens Dr., Lester, PA 19113, 69.162%; Janney Montgomery Scott, 1801
Market Street, 9th Floor, Philadelphia, PA 19103, 11.914%; BHC Securities, Inc.,
One Commerce Square, 2005 Market St, Philadelphia, PA 19103-3212, 9.484%;
Virginia Municipal Money Market Portfolio: First Virginia Bank Inc., Oldom &
- -----------------------------------------
Company, 6400 Arlington Blvd., Falls Church, VA 22042, 46.912%; Main Street
Trust Company, Piedmont Company, Attn: Lynn Calaman, P.O. Box 5228,
Martinsville, VA 24115-5228, 14.476%; Mentor Investment Group, as advisor for
Virginia State Non-Arbitrage Program, 901 East Byrd Street, 6th Fl., Richmond,
VA 23219, 14.760%; North Carolina Trust Company, 301 North Elm Street, P.O. Box
1108, Greensboro, NC 27402, 6.428%; F&M Bank-Peoples Warrtrust & Co., P.O. Box
2800, Warrenton, VA 22186, 5.900%; International Bond Portfolio: PNC Bank, Saxon
----------------------------
& Co., 200 Stevens Dr., Suite 260, Lester, PA 19113, 81.818%; International
-------------
Emerging Markets Portfolio: PNC Bank, Saxon & Co., Attn: Income Collections, 200
- --------------------------
Stevens Dr., Suite 260, Lester, PA 19113, 90.639%; Government Income Portfolio:
---------------------------
Merrill Lynch, Pierce, Fenner & Smith Inc., Financial Data Services 97KN1, 4800
E. Deer Lake Dr., 3rd Fl., Jacksonville, FL 32246, 10.100%; New Jersey Municipal
--------------------
Money Market Portfolio: PNC Bank, Airport Business Center/Int'l Court 2, 200
- ----------------------
Stevens Dr., Lester, PA 19113, 62.436%; Janney Montgomery Scott, 1801 Market
Street, 9th Fl., Philadelphia, PA 19103, 20.978%; New Jersey Tax-Free Income
Portfolio: PNC Bank, Saxon & Co., Attn: Income Collections, 200 Stevens Dr.,
Suite 260, Lester, PA 19113, 79.451%; BHC Securities Inc., One Commerce Square,
2005 Market Street, Philadelphia, PA 19103-3212, 8.049%; Core Bond Portfolio:
-------------------
PNC Bank, Saxon & Co., Attn: Income Collections, 200 Stevens Dr., Suite 260,
Lester, PA 19113, 78.245%; Mid-Cap Value Portfolio: PNC Bank, Saxon & Co., 200
-----------------------
Stevens Dr., Suite 260, Lester, PA 19113, 91.061%; Mid-Cap Growth Portfolio: PNC
Bank, Saxon & Co., Attn: Income Collections, 200 Stevens Dr., Suite 260, Lester,
PA 19113, 92.306%; Index Equity Portfolio: PNC Bank, Saxon & Co., Attn: Income
----------------------
Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113, 62.356%; Merrill
Lynch, Pierce, Fenner & Smith, Inc., Financial Data Services, 4800 E. Deer Lake
Dr., 3rd Fl., Jacksonville, FL 32246, 8.505%; International Small Cap Equity
------------------------------
Portfolio: PNC Bank, Saxon & Co., Attn: Income Collections, 200 Stevens Drive,
- ---------
Suite 260, Lester, PA 19113, 86.045%; Merrill Lynch Pierce Fenner Financial Data
Services, Attn'd Stock Powers, 4800 E. Deer Lake Dr., 3/rd/ Fl., Jacksonville,
FL 32246, 5.000%; Delaware Tax-Free Income Portfolio: PNC Bank, Saxon & Co.,
----------------------------------
Attn: Income Collections, 200 Stevens Dr., Lester, PA 19113, 94.439%; Kentucky
Tax-Free Income Portfolio: PNC Bank, Saxon & Co., Attn: Income Collections, 200
Stevens Dr., Lester, PA 19113, 99.188%; Micro-Cap Equity Portfolio: PNC Bank,
--------------------------
Saxon & Co., Attn: Income Collections, 200 Stevens Dr., Lester, PA 19113,
9.578%; Merrill Lynch, Pierce, Fenner & Smith Inc., Financial Data Services,
4800 E. Deer Lake Dr., 3rd Fl., Jacksonville, FL 32246, 18.632%; GNMA Portfolio:
PNC Bank, Saxon & Co., Attn: Income Collections, 200 Stevens Dr., Lester, PA
19113, 98.836%; High Yield Bond Portfolio: Merrill Lynch, Pierce, Fenner & Smith
-------------------------
Inc., Financial Data Services, 4800 E. Deer Lake Dr., 3rd Fl., Jacksonville, FL
32246, 27.877%.

On January 13, 1999, PNC Bank, which has its principal offices at 1600
Market Street, Philadelphia, Pennsylvania 19103, held of record approximately
72% of the Fund's outstanding shares, and may be deemed a controlling person of
the Fund under the 1940 Act. PNC Bank is a national bank organized under the
laws of the United States. All of the capital stock of PNC Bank is owned by PNC
Bancorp, Inc. All of the capital stock of PNC Bancorp, Inc. is owned by PNC
Bank Corp., a publicly-held bank holding company.

BANKING LAWS. Banking laws and regulations currently prohibit a bank
holding company registered under the Federal Bank Holding Company Act of 1956 or
any bank or non-bank affiliate thereof from sponsoring, organizing, controlling
or distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from underwriting securities, but such banking laws and regulations do not
prohibit such a holding company or affiliate or banks generally from acting as
investment adviser, administrator, transfer

171

agent or custodian to such an investment company, or from purchasing shares of
such a company as agent for and upon the order of customers. BlackRock, BIMC,
BFM, BIL, PNC Bank, PTC and other institutions that are banks or bank affiliates
are subject to such banking laws and regulations.

BlackRock, BIMC, BFM, BIL, PNC Bank and PTC believe they may perform the
services for the Fund contemplated by their respective agreements with the Fund
without violation of applicable banking laws or regulations. It should be
noted, however, that there have been no cases deciding whether bank and non-bank
subsidiaries of a registered bank holding company may perform services
comparable to those that are to be performed by these companies, and future
changes in either Federal or state statutes and regulations relating to
permissible activities of banks and their subsidiaries or affiliates, as well as
further judicial or administrative decisions or interpretations of present and
future statutes and regulations, could prevent these companies from continuing
to perform such services for the Fund. If such were to occur, it is expected
that the Board of Trustees would recommend that the Fund enter into new
agreements or would consider the possible termination of the Fund. Any new
advisory or sub-advisory agreement would normally be subject to shareholder
approval. It is not anticipated that any change in the Fund's method of
operations as a result of these occurrences would affect its net asset value per
share or result in a financial loss to any shareholder.

SHAREHOLDER APPROVALS. As used in this Statement of Additional Information
and in the Prospectuses, a "majority of the outstanding shares" of a class,
series or Portfolio means, with respect to the approval of an investment
advisory agreement, a distribution plan or a change in a fundamental investment
policy, the lesser of (1) 67% of the shares of the particular class, series or
Portfolio represented at a meeting at which the holders of more than 50% of the
outstanding shares of such class, series or Portfolio are present in person or
by proxy, or (2) more than 50% of the outstanding shares of such class, series
or Portfolio.

172

FINANCIAL STATEMENTS

BLACKROCK FUNDS. The audited financial statements and notes thereto in the
Fund's Annual Report to Shareholders for the fiscal year ended September 30,
1998 (the "1998 Annual Report") are incorporated in this Statement of Additional
Information by reference. No other parts of the 1998 Annual Report are
incorporated by reference herein. The financial statements included in the 1998
Annual Report have been audited by the Fund's independent accountants,
PricewaterhouseCoopers LLP, except for the financial highlights for the periods
ended June 30, 1995, 1994 and 1993 for the Core Bond Portfolio and the Short
Government Bond Portfolio (now known as the Low Duration Bond Portfolio)
Portfolios which have been audited by other auditors. The reports of
PricewaterhouseCoopers LLP are incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such reports given
upon their authority as experts in accounting and auditing. Additional copies of
the 1998 Annual Report may be obtained at no charge by telephoning the
Distributor at the telephone number appearing on the front page of this
Statement of Additional Information.

The financial highlights included in the 1998 Annual Report for each of the
two years in the period ended June 30, 1995, and for the period from July 17,
1992 through June 30, 1993 for the Short Government Bond Portfolio (now known as
the Low Duration Bond Portfolio) and the period from December 9, 1992 through
June 30, 1993 for the Core Bond Portfolio have been audited by the former
independent accountants of the Predecessor BFM Portfolios, Deloitte & Touche,
L.L.P., whose report thereon is also incorporated herein by reference. Such
financial statements have been incorporated herein by reference in reliance on
the reports of PricewaterhouseCoopers LLP and Deloitte & Touche, L.L.P. given
upon their authority as experts in accounting and auditing.

INDEX MASTER PORTFOLIO. The audited financial statements and notes thereto
for The U.S. Large Company Series of the Trust for the fiscal year ended
November 30, 1997 (the "1997 Index Master Report") and the unaudited financial
statements and notes thereto for the Trust's U.S. Large Company Series for the
period ended September 30, 1998 (the "1998 Index Master Report") contained in
the Fund's 1998 Annual Report to Shareholders are incorporated by reference into
this Statement of Additional Information. No other parts of the 1997 Index
Master Report or 1998 Index Master Report are incorporated by reference herein.
The financial statements included in the 1997 Index Master Report have been
audited by the Trust's independent accountants, PricewaterhouseCoopers LLP,
whose reports thereon are incorporated herein by reference. Such financial
statements have been incorporated herein by reference in reliance upon such
reports given upon their authority as experts in accounting and auditing.
Additional copies of the 1997 Index Master Report may be obtained at no charge
by telephoning the Trust at (310) 395-8005.

173

APPENDIX A
----------

Commercial Paper Ratings
- ------------------------

A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:

"A-1" - Issue's degree of safety regarding timely payment is strong. Those
issues determined to possess extremely strong safety characteristics are denoted
"A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However, the
relative degree of safety is not as high as for issues designated "A-1."

"A-3" - Issue has an adequate capacity for timely payment. It is, however,
somewhat more vulnerable to the adverse effects of changes in circumstances than
an obligation carrying a higher designation.

"B" - Issue has only a speculative capacity for timely payment.

"C" - Issue has a doubtful capacity for payment.

"D" - Issue is in payment default.

Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper:

"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.

"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory 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, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.

"Prime-3" - Issuer or related supporting institutions have an acceptable
capacity for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.

"Not Prime" - Issuer does not fall within any of the Prime rating
categories.

The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:

"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.

A-1

"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors.
Risk factors are minor.

"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.

"D-2" - Debt possesses good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk factors
are small.

"D-3" - Debt possesses satisfactory liquidity, and other protection factors
qualify issue as investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.

"D-4" - Debt possesses speculative investment characteristics. Liquidity
is not sufficient to ensure against disruption in debt service. Operating
factors and market access may be subject to a high degree of variation.

"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.

Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:

"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.

"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."

"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.

"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.

"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.

"D" - Securities are in actual or imminent payment default.

Fitch may also use the symbol "LOC" with its short-term ratings to indicate
that the rating is based upon a letter of credit issued by a commercial bank.

Thomson BankWatch short-term ratings assess the likelihood of an untimely
or incomplete payment of principal or interest of unsubordinated instruments
having a maturity of one year or less which are issued by United States
commercial banks, thrifts and non-bank banks; non-United States banks; and
broker-dealers. The following summarizes the ratings used by Thomson BankWatch:

"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.

"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."

"TBW-3" - This designation represents the lowest investment grade category
and indicates that while the debt is more susceptible to adverse developments
(both internal and external) than obligations with higher ratings, capacity to
service principal and interest in a timely fashion is considered adequate.

A-2

"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.

IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:

"A1+" - Obligations which posses a particularly strong credit feature are
supported by the highest capacity for timely repayment.

"A1" - Obligations are supported by the highest capacity for timely
repayment.

"A2" - Obligations are supported by a satisfactory capacity for timely
repayment.

"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.

"B" - Obligations for which there is an uncertainty as to the capacity to
ensure timely repayment.

"C" - Obligations for which there is a high risk of default or which are
currently in default.

CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------

The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:

"AAA" - This designation represents the highest rating assigned by Standard
& Poor's to a debt obligation and indicates an extremely strong capacity to pay
interest and repay principal.

"AA" - Debt is considered to have a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.

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

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

"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.

"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.

"B" - Debt has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.

"CCC" - Debt has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay

A-3

principal. The "CCC" rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied "B" or "B-" rating.

"CC" - This rating is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.

"C" - This rating is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.

"CI" - This rating is reserved for income bonds on which no interest is
being paid.

"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.

PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.

"r" - This rating is attached to highlight derivative, hybrid, and certain
other obligations that S & P believes may experience high volatility or high
variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol
should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.

The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:

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

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

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

"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these ratings
provide questionable protection of interest and principal ("Ba" indicates some
speculative elements; "B" indicates a general lack of characteristics of
desirable investment; "Caa" represents a poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.

Con. (---) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments

A-4

to which some other limiting condition attaches. Parenthetical rating denotes
probable credit stature upon completion of construction or elimination of basis
of condition.

(P) - When applied to forward delivery bonds, indicates that the rating is
provisional pending delivery of the bonds. The rating may be revised prior to
delivery if changes occur in the legal documents or the underlying credit
quality of the bonds.

Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Ba1 and B1.

The following summarizes the long-term debt ratings used by Duff & Phelps
for corporate and municipal long-term debt:

"AAA" - Debt is considered to be of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.

"AA" - Debt is considered of high credit quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time because of
economic conditions.

"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.

"BBB" - Debt possesses below average protection factors but such protection
factors are still considered sufficient for prudent investment. Considerable
variability in risk is present during economic cycles.

"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these ratings
is considered to be below investment grade. Although below investment grade,
debt rated "BB" is deemed likely to meet obligations when due. Debt rated "B"
possesses the risk that obligations will not be met when due. Debt rated "CCC"
is well below investment grade and has considerable uncertainty as to timely
payment of principal, interest or preferred dividends. Debt rated "DD" is a
defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.

To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.

The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:

"AAA" - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.

"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."

"A" - Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

"BBB" - Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.

"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess one
of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely

A-5

payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.

To provide more detailed indications of credit quality, the Fitch ratings
from and including "AA" to "BBB" may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major rating
categories.

IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for long-term debt ratings:

"AAA" - Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk substantially.

"AA" - Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions may
increase investment risk, albeit not very significantly.

"A" - Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk.

"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
other categories.

"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation
and indicates that the obligations are currently in default.

IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.

Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:

"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.

"AA" - This designation indicates a very strong ability to repay principal
and interest on a timely basis with limited incremental risk compared to issues
rated in the highest category.

"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.

"BBB" - This designation represents Thomson BankWatch's lowest investment
grade category and indicates an acceptable capacity to repay principal and
interest. Issues rated "BBB" are, however, more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.

"BB," "B," "CCC," and "CC," - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded as
having speculative characteristics regarding the likelihood of timely

A-6

payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.

"D" - This designation indicates that the long-term debt is in default.

PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a
plus or minus sign designation which indicates where within the respective
category the issue is placed.

MUNICIPAL NOTE RATINGS
- ----------------------

A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:

"SP-1" - The issuers of these municipal notes exhibit very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.

"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest.

"SP-3" - The issuers of these municipal notes exhibit speculative capacity
to pay principal and interest.

Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:

"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best quality,
enjoying strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.

"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality, with
margins of protection ample although not so large as in the preceding group.

"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.

"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate quality,
carrying specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.

"SG" - Loans bearing this designation are of speculative quality and lack
margins of protection.

Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.

A-7

APPENDIX B
----------

Certain Portfolios of the Fund may enter into certain futures transactions.
Such transactions are described in this Appendix.

I. Interest Rate Futures Contracts
-------------------------------

Use of Interest Rate Futures Contracts. Bond prices are established in
--------------------------------------
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Portfolio may use interest rate
futures contracts as a defense, or hedge, against anticipated interest rate
changes and not for speculation. As described below, this would include the use
of futures contract sales to protect against expected increases in interest
rates and futures contract purchases to offset the impact of interest rate
declines.

A Portfolio could accomplish a similar result to that which it hopes to
achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market, the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Portfolio, by using futures contracts.

Description of Interest Rate Futures Contracts. An interest rate futures
----------------------------------------------
contract sale would create an obligation by a Portfolio, as seller, to deliver
the specific type of financial instrument called for in the contract at a
specific future time for a specified price. A futures contract purchase would
create an obligation by a Portfolio, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in accordance with the rules of the exchange on which the futures
contract sale or purchase was made.

Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Portfolio
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Portfolio is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Portfolio pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Portfolio entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Portfolio realizes a gain,
and if the purchase price exceeds the offsetting sale price, the Portfolio
realizes a loss.

Interest rate futures contracts are traded in an auction environment on the
floors of several exchanges -- principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership.

A public market now exists in futures contracts covering various financial
instruments including long-term U.S. Treasury Bonds and Notes; Government
National Mortgage Association (GNMA) modified pass-through mortgage backed
securities; three-month U.S. Treasury Bills; and ninety-day commercial paper.
The Portfolios may trade in any interest rate futures contracts for which there
exists a public market, including, without limitation, the foregoing
instruments.

B-1

With regard to each Portfolio, the Adviser also anticipates engaging in
transactions, from time to time, in foreign stock index futures such as the ALL-
ORDS (Australia), CAC-40 (France), TOPIX (Japan) and the FTSE-100 (United
Kingdom).

II. Index Futures Contracts
-----------------------

General. A stock or bond index assigns relative values to the stocks or
-------
bonds included in the index, which fluctuates with changes in the market values
of the stocks or bonds included. Some stock index futures contracts are based on
broad market indexes, such as Standard & Poor's 500 or the New York Stock
Exchange Composite Index. In contrast, certain exchanges offer futures contracts
on narrower market indexes, such as the Standard & Poor's 100 or indexes based
on an industry or market indexes, such as Standard & Poor's 100 or indexes based
on an industry or market segment, such as oil and gas stocks. Futures contracts
are traded on organized exchanges regulated by the Commodity Futures Trading
Commission. Transactions on such exchanges are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.
With regard to each Portfolio, to the extent consistent with its investment
objective, the Adviser anticipates engaging in transactions, from time to time,
in foreign stock index futures such as the ALL-ORDS (Australia), CAC-40
(France), TOPIX (Japan) and the FTSE-100 (United Kingdom).

A Portfolio may sell index futures contracts in order to offset a decrease
in market value of its portfolio securities that might otherwise result from a
market decline. A Portfolio may do so either to hedge the value of its portfolio
as a whole, or to protect against declines, occurring prior to sales of
securities, in the value of the securities to be sold. Conversely, a Portfolio
may purchase index futures contracts in anticipation of purchases of securities.
A long futures position may be terminated without a corresponding purchase of
securities.

In addition, a Portfolio may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a Portfolio expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more restricted
index, such as an index comprised of securities of a particular industry group.
A Portfolio may also sell futures contracts in connection with this strategy, in
order to protect against the possibility that the value of the securities to be
sold as part of the restructuring of the portfolio will decline prior to the
time of sale.

III. Futures Contracts on Foreign Currencies
---------------------------------------

A futures contract on foreign currency creates a binding obligation on one
party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of foreign currency, for an amount fixed in U.S.
dollars (or another currency). Foreign currency futures may be used by a
Portfolio to hedge against exposure to fluctuations in exchange rates between
different currencies arising from multinational transactions.

IV. Margin Payments
---------------

Unlike purchase or sales of portfolio securities, no price is paid or
received by a Portfolio upon the purchase or sale of a futures contract.
Initially, a Portfolio will be required to deposit with the broker or in a
segregated account with a custodian an amount of liquid assets known as initial
margin, based on the value of the contract. The nature of initial margin in
futures transactions is different from that of margin in security transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transactions. Rather, the initial margin is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Portfolio upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-the-market. For example, when a particular Portfolio has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Portfolio will be entitled to receive from the broker a variation margin
payment equal to that increase in value. Conversely, where the Portfolio has
purchased a futures contract and the price of the future contract has declined
in response to a decrease in the underlying instruments, the position would be
less valuable and the Portfolio would be required to make a variation margin
payment to the broker. Prior to expiration of the futures contract, the Adviser
may

B-2

elect to close the position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the
Portfolio's position in the futures contract. A final determination of variation
margin is then made, additional cash is required to be paid by or released to
the Portfolio, and the Portfolio realizes a loss or gain.

V. Risks of Transactions in Futures Contracts
------------------------------------------

There are several risks in connection with the use of futures by a
Portfolio as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the futures and movements in the
price of the instruments which are the subject of a hedge. The price of the
future may move more than or less than the price of the instruments being
hedged. If the price of the futures moves less than the price of the instruments
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the instruments being hedged has moved in an unfavorable
direction, the Portfolio would be in a better position than if it had not hedged
at all. If the price of the instruments being hedged has moved in a favorable
direction, this advantage will be partially offset by the loss on the futures.
If the price of the futures moves more than the price of the hedged instruments,
the Portfolio involved will experience either a loss or gain on the futures
which will not be completely offset by movements in the price of the instruments
which are the subject of the hedge. To compensate for the imperfect correlation
of movements in the price of instruments being hedged and movements in the price
of futures contracts, a Portfolio may buy or sell futures contracts in a greater
dollar amount than the dollar amount of instruments being hedged if the
volatility over a particular time period of the prices of such instruments has
been greater than the volatility over such time period of the futures, or if
otherwise deemed to be appropriate by the Adviser. Conversely, a Portfolio may
buy or sell fewer futures contracts if the volatility over a particular time
period of the prices of the instruments being hedged is less than the volatility
over such time period of the futures contract being used, or if otherwise deemed
to be appropriate by the Adviser. It is also possible that, where a Portfolio
has sold futures to hedge its portfolio against a decline in the market, the
market may advance and the value of instruments held in the Portfolio may
decline. If this occurred, the Portfolio would lose money on the futures and
also experience a decline in value in its portfolio securities.

When futures are purchased to hedge against a possible increase in the
price of securities or a currency before a Portfolio is able to invest its cash
(or cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Portfolio then concludes not to invest its cash at that
time because of concern as to possible further market decline or for other
reasons, the Portfolio will realize a loss on the futures contract that is not
offset by a reduction in the price of the instruments that were to be purchased.

In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the futures and the instruments
being hedged, the price of futures may not correlate perfectly with movement in
the cash market due to certain market distortions. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through off-setting transactions which could distort the normal relationship
between the cash and futures markets. Second, with respect to financial futures
contracts, the liquidity of the futures market depends on participants entering
into off-setting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced thus producing distortions. Third, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in the
cash market and movements in the price of futures, a correct forecast of general
market trends or interest rate movements by the adviser may still not result in
a successful hedging transaction over a short time frame.

Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the
Portfolios intend to purchase or sell futures only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on any exchange or board of trade will exist for
any particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, a Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such

B-3

circumstances, an increase in the price of the securities, if any, may partially
or completely offset losses on the futures contract. However, as described
above, there is no guarantee that the price of the securities will in fact
correlate with the price movements in the futures contract and thus provide an
offset on a futures contract.

Further, it should be noted that the liquidity of a secondary market in a
futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.

Successful use of futures by a Portfolio is also subject to the Adviser's
ability to predict correctly movements in the direction of the market. For
example, if a particular Portfolio has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Portfolio will lose part or all of the benefit to
the increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Portfolio has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of securities may be, but will
not necessarily be, at increased prices which reflect the rising market. A
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.

The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.

VI. Options on Futures Contracts
----------------------------

A Portfolio may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. A Portfolio will be required to deposit initial margin and
variation margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements similar to those described
above. Net option premiums received will be included as initial margin deposits.
As an example, in anticipation of a decline in interest rates, a Portfolio may
purchase call options on futures contracts as a substitute for the purchase of
futures contracts to hedge against a possible increase in the price of
securities which the Portfolio intends to purchase. Similarly, if the value of
the securities held by a Portfolio is expected to decline as a result of an
increase in interest rates, the Portfolio might purchase put options or sell
call options on futures contracts rather than sell futures contracts.

Investments in futures options involve some of the same considerations that
are involved in connection with investments in futures contracts (for example,
the existence of a liquid secondary market). In addition, the purchase or sale
of an option also entails the risk that changes in the value of the underlying
futures contract will not correspond to changes in the value of the option
purchased. Depending on the pricing of the option compared to either the futures
contract upon which it is based, or upon the price of the securities or
currencies being hedged, an option may or may

B-4

not be less risky than ownership of the futures contract or such securities or
currencies. In general, the market prices of options can be expected to be more
volatile than the market prices on the underlying futures contract. Compared to
the purchase or sale of futures contracts, however, the purchase of call or put
options on futures contracts may frequently involve less potential risk to a
Portfolio because the maximum amount at risk is the premium paid for the options
(plus transaction costs). The writing of an option on a futures contract
involves risks similar to those risks relating to the sale of futures contracts.

VII. Other Matters
-------------
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.

B-5

BLACKROCK FUNDS /SM/

SUPPLEMENT TO STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 28, 1999

The section "Investment Policies--Additional Information on Investment
Strategy--Balanced Portfolio" is amended by adding the following after the
first paragraph:

The Balanced Portfolio may invest in the stocks of mid-capitalization
companies, which the portfolio defines as companies with market
capitalizations of from $2 billion to $10 billion. There is more business
risk in investing in mid-capitalization companies than in larger, better
capitalized companies. These organizations will normally have more limited
product lines, markets and financial resources and will be dependent upon a
more limited management group than larger capitalized companies.

The section "Investment Policies--Additional Information on Portfolio
Investments" is amended as follows:

The last sentence of the third paragraph under "Variable and Floating Rate
Instruments" has been deleted.

The last sentence of the first paragraph under "Money Market Obligations of
Domestic Banks, Foreign Banks and Foreign Branches of U.S. Banks" has been
deleted.

The last sentence of the second paragraph under "U.S. Government
Obligations" has been deleted.

The last sentence under "Supranational Organization Obligations" has been
deleted.

The last sentence of the second paragraph under "Commercial Paper" has been
deleted.

The section "Purchase and Redemption Information--Sales Charge Waivers For Each
of the Equity and Bond Portfolios--Investor A Shares" is amended as follows:

The second sentence under "Other" has been amended to read in its entirety
as follows:

The following persons may also buy Investor A Shares without paying a sales
charge: (a) persons investing through an authorized payroll deduction plan;
(b) persons investing through an authorized investment plan for
organizations which operate under Section

501(c)(3) of the Internal Revenue Code; (c) registered investment advisers,
trust companies and bank trust departments exercising discretionary
investment authority with respect to amounts to be invested in a Portfolio,
provided that the aggregate amount invested pursuant to this exemption in
Investor A Shares that would otherwise be subject to front-end sales
charges equals at least $250,000; (d) persons participating in a "wrap
account" or similar program under which they pay advisory fees to a broker-
dealer or other financial institution; and (e) persons participating in an
account or program under which they pay fees to a broker-dealer or other
financial institution for providing transaction processing and other
administrative services, but not investment advisory services.

This Supplement is dated November 22, 1999.