We have audited the accompanying statement of net assets available for benefits and benefit obligations of the Public Employees Federation Membership Benefits Program (the Program) as of May 31, 1998, and the related statement of changes in net assets available for benefits and benefit obligations for the year then ended. These financial statements are the responsibility of the Program's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of the Program as of May 31, 1997 were audited by other auditors, whose report dated November 10, 1997 expressed an unqualified opinion on those statements.

We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 1998 financial statements referred to above present fairly, in all material respects, the financial status of the Program as of May 31, 1998, and the changes in its financial status for the year then ended in conformity with generally accepted accounting principles.

Our audit was performed for the purpose of forming an opinion on the basic 1998 financial statements taken as a whole. The accompanying Additional Information is presented for the purpose of additional analysis and is not a required part of the basic financial statements. The Additional Information is the responsibility of the Program's management. Such Additional Information has been subjected to the auditing procedures applied in the audit of the basic 1998 financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic 1998 financial statements taken as a whole. The accompanying Additional Information for the year ended May 31, 1997 was subjected to the auditing procedures applied in the audit of the basic 1997 financial statements by other auditors whose report dated November 10, 1997 stated that such information was fairly stated in all material respects in relation to the basic 1997 financial statements taken as a whole.

As discussed in Note 3 to the financial statements, the Program no longer reports a reserve for claims fluctuation in its financial statements. Accordingly, the 1997 financial statements have been restated and an adjustment has been made to the Program's net assets as of June 1, 1996.
Thomas Havey & Co., LLP
September 22, 1999

Notes to Financial Statements - May 31, 1998 and 1997

NOTE 1. DESCRIPTION OF THE PROGRAM

The following description of the Public Employees Federation Membership Benefits Program (the Program) provides only general information. Members should refer to the various benefit booklets for more complete information on Program benefits.
The Program was established by the New York State Public Employees Federation, AFL-CIO (PEF) under the terms of an Agreement and Declaration of Trust. The Program provides members of PEF who voluntarily choose to participate, with a variety of benefits including group life and disability insurance. The Program is funded entirely by contributions from participating members and investment income.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Program has also issued consolidated financial statements with its wholly owned subsidiary, PEF Travel Corp. Such consolidated financial statements are the general purpose financial statements of the Program.

Basis of Accounting ­ The accompanying financial statements have been prepared on the accrual basis of accounting.

Reclassification ­ Certain account balances in the 1997 financial statements have been reclassified to conform to the current year presentation.

Estimates ­ The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.

Investment Valuation ­ Investments in United States Government and Government Agency obligations and equities are stated at fair value as determined by quoted market prices. The short-term investment fund is stated at cost which equals fair value. The limited partnership investment is accounted for using the equity method, which approximates fair value.

Depreciation ­ Property assets are stated at cost less accumulated depreciation. Depreciation is computed over the following estimated useful lives of the related assets by the straight-line method:
Furniture and fixtures 5 Years
Automobile 5 Years
Telephone 7 Years
Leasehold improvements 10 Years

Depreciation expense amounted to $11,131 in 1998 and $6,048 in 1997.

Estimated Future Death Benefits ­ Estimated future death benefits have been calculated by the Program's actuary to reflect the present value of the death benefit of all participating members age 70 and over, by applying accepted actuarial principles and assuming that insurance will remain in force until the member dies. The obligation is reduced by the annual premiums paid by insured members in this category.

Estimated Waiver of Premium Benefits ­ The Program self-insures the waiver of premium for certain members who become disabled. The reserve represents the actuarially determined expected obligation for disabled members based upon the amount of insurance coverage in effect for such individuals.
NOTE 3. PRIOR PERIOD ADJUSTMENT

The Program's net assets have been adjusted as of June 1, 1996 to reflect the elimination of a previously reported reserve for claims fluctuation. Such reserve was established to provide for possible increases in insurance premiums to the Program resulting from unfavorable insurance experience. However, the criteria for establishing the incurrence of a liability for a loss contingency were not met as of the 1997 financial statement date. As such, the accompanying 1997 financial statements have been restated, resulting in an additional $797,100 decrease in net assets for 1997. The Program's net assets represent the amount of funds that are, in whole or in part, available for such possible increases in insurance premiums.

NOTE 4. CONCENTRATION OF CASH

The Program attempts to limit its financial exposure by maintaining its cash at more than one financial institution. Deposit balances are insured by either the Federal Deposit Insurance Corporation or the National Credit Union Association up to $100,000. As of May 31, 1998 the Program's cash in excess of NCUA insurance coverage totaled approximately $34,000.

NOTE 5. INVESTMENTS

Individual investments that represent more than 5% of the Program's total assets consist of the following:

1998: SEI Cash Plus Treasury
Description: Variable rate, due upon demand
Cost: $ 1,109,822
Fair Value: $ 1,109,822

1997: U.S. Treasury Strips
Description: 0.0% due 08/15/99
Cost: $ 295,395
Fair Value: $ 524,160

In October 1993, the Program invested $450,000 as the limited partner in a limited partnership with British American Development Corporation, the general partner. The purpose of the limited partnership is to acquire, develop, improve, lease, operate and hold certain real property located in Colonie, New York.

NOTE 6. EQUITY INTEREST IN SUBSIDIARY

The Program is the sole shareholder of the PEF Travel Corp. (the Corporation), which was acquired to provide additional benefits to members of PEF in the form of travel arrangement assistance and discounts. The Program accounts for its interest in the Corporation under the equity method. Details of the equity interest in subsidiary account balance are as follows:

NOTE 7. PROPERTY ASSETS

Property assets, at cost, consist of the following:

NOTE 8. RELATED PARTY TRANSACTIONS

The Program operates in the same office building as PEF. Certain administrative expenses are paid for by PEF and are then either charged directly to the Program or are allocated to the Program based upon estimates made by management. Such administrative expenses charged to the Program by PEF totaled $675,738 in 1998 and $616,443 in 1997.

NOTE 9. LEASE COMMITMENTS

The Program leases office space from PEF under the terms of an operating lease that expires on February 14, 2008. Future minimum rental payments required under this lease are as follows:
Years Ending May 31,
1999: $ 22,920
2000: $ 22,920
2001: $ 22,920
2002: $ 22,920
2003: $ 22,920
Thereafter: $108,870
Total: $223,470

Rent expense amounted to $22,920 in both 1998 and 1997.

NOTE 10. TERMINATION OF THE PROGRAM

In the event of termination, the Program's trustees shall apply the money and property of the Program to pay or provide for the payment of any and all of its obligations. Any remaining surplus shall be distributed in a manner that best effectuates the purposes of the Program. No part of the corpus or income of the Program may be used for purposes other than for the exclusive benefit of the members, or for the administrative expenses of the Program.

NOTE 11. TAX STATUS

The Internal Revenue Service has advised the Program, in a letter dated June 19, 1992, that the Program is exempt from federal income taxes under the provisions of Section 501(c)(5) of the Internal Revenue Code.

NOTE 12. YEAR 2000 DATE CONVERSION

Like all entities, the Program is exposed to risks associated with the Year 2000 Issue, which affect computer software and hardware; transactions with vendors and other entities; and equipment dependent on microchips. The Program is in the process of identifying and remediating potential Year 2000 problems. It is not possible for any entity to guarantee the results of its own remediation efforts or to accurately predict the impact of the Year 2000 Issue on third parties with whom the Program does business. If remediation efforts of the Program or third parties with whom it does business are not successful, the Year 2000 problem could have negative effects on the Program in the near term.

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