NUVEEN FLAGSHIP MULTISTATE TRUST II, 485APOS, 1999-04-29

NUVEEN FLAGSHIP MULTISTATE TRUST II
485APOS, 1999-04-29

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<PAGE>

As filed with the Securities and Exchange Commission on April 29, 1999.
1933 Act Registration No. 333-14729
1940 Act Registration No. 811-07755
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Pre-Effec-tive Amend-ment No. [_]
Post-Effec-tive Amend-ment No. 4 [X]

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
Amendment No. 4 [X]

(Check appropriate box or boxes)

Nuveen Flagship Multistate Trust II
(Exact name of Registrant as Specified in Charter)

333 West Wacker Drive, Chicago,
Illinois
60606
(Address of Principal Executive (Zip Code)
Office)

Registrant's Telephone Number, including Area Code: (312) 917-7700

Gifford R. Zimmerman, Esq.--Vice President and Secretary
333 West Wacker Drive
Chicago, Illinois 60606
(Name and Address of Agent for Service)

With a copy to:
Thomas S. Harman
Morgan, Lewis & Bockius LLP
1800 M Street, N.W.
Washington, D.C. 20036

It is proposed that this filing will become effective (check appropriate box):

[_] Immediately upon filing pursu- [_] on (date) pursuant to paragraph
ant to paragraph (b) (a)(1)
[_] 75 days after filing pursuant to
paragraph (a)(2)
[X] 60 days after filing pursuant [_] on (date) pursuant to paragraph
to paragraph (a)(1) (a)(2) of Rule 485.

If appropriate, check the following box:

[_] This post-effective amendment designates a new effective date for a previ-
ously filed post-effective amendment.

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

CONTENTS

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

FILE NO. 333-14729

AND

REGISTRATION STATEMENT

UNDER THE INVESTMENT COMPANY ACT OF 1940

FILE NO. 811-07755

This Registration Statement comprises the following papers and contents:

The Facing Sheet

Cross-Reference Sheet

Part A-The Prospectus

Part B-The Statement of Additional Information

Copy of Annual Reports and Semi-Annual Reports to
Shareholders (the financial statements from which are
incorporated by reference into the Statement of Additional
Information)

Part C-Other Information

Signatures

Index to Exhibits

Exhibits
<PAGE>

NUVEEN FLAGSHIP MULTISTATE TRUST II

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

CROSS REFERENCE SHEET

Part A--Prospectus

<TABLE>
<CAPTION>
Item in
Part A
of Form N-
1A Prospectus Location
---------- -------------------
<S> <C>
1 Cover Page Cover Page
2 Synopsis Expense Information
3 Condensed Financial Information Financial Highlights
4 General Description of Registrant Fund Strategies
5 Management of the Fund General Information
5A Management's Discussion of Fund Incorporated by Reference to Annual and
Performance Semi-Annual Reports to Shareholders; Taxes
and Tax Reporting
6 Capital Stock and Other How to Select a Purchase Option; Taxes and
Securities Tax Reporting
7 Purchase of Securities Being Investing in the Funds
Offered
8 Redemption or Repurchase How to Sell Fund Shares
9 Pending Legal Proceedings Not Applicable
</TABLE>
<PAGE>

Part B--Statement of Additional Information

<TABLE>
<CAPTION>
Item in
Part B
of Form N- Location in Statement
1A of Additional Information
---------- -------------------------
<S> <C>
10 Cover Page Cover Page
11 Table of Contents Cover Page
12 General Information and History Not Applicable
13 Investment Objectives and Investment Policies and Investment
Policies Portfolio
14 Management of the Fund Management
15 Control Persons and Principal Management
Holders of Securities
16 Investment Advisory and Other Investment Adviser and Investment
Services Management Agreement; Portfolio
Transactions Distribution and Service Plan;
Independent Public Accountants and
Custodian
17 Brokerage Allocation and Other Portfolio Transactions
Practices
18 Capital Stock and Other See "How to Select a Purchase Option" and
Securities "Taxes and Tax Reporting" in the Prospectus
19 Purchase, Redemption and Pricing Additional Information on the Purchase and
of Securities Redemption of Fund Shares; Net Asset Value
20 Tax Status Tax Matters
21 Underwriters Additional Information on the Purchase and
Redemption of Fund Shares; See "Investing
in the Funds" and "Fund Service Providers"
in the Prospectus
22 Calculation of Performance Data Performance Information
23 Financial Statements Incorporated by Reference to Annual and
Semi-Annual Reports to Shareholders
</TABLE>

<PAGE>

PART A--PROSPECTUS

NUVEEN FLAGSHIP MULTISTATE TRUST II

333 West Wacker Drive

Chicago, Illinois 60606
<PAGE>

NUVEEN
Municipal
Bond Funds

June , 1999

Prospectus

Dependable, tax-free income
to help you keep more of
what you earn.

[PHOTO APPEARS HERE]

Connecticut

New Jersey

New York

New York Insured

NOT FDIC- May lose value
INSURED No bank guarantee

Like all mutual fund shares these securities have not been approved or
disapproved by the Securities and Exchange Commission or any state securities
commission, nor has the Securities and Exchange Commission or any state
securities commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
<PAGE>

Table of Contents

Section 1 The Funds

Nuveen Flagship Connecticut Municipal Bond Fund 2
........................................................................................................
Nuveen Flagship New Jersey Municipal Bond Fund 4
........................................................................................................
Nuveen Flagship New York Municipal Bond Fund 6
........................................................................................................
Nuveen New York Insured Municipal Bond Fund 8
........................................................................................................

Section 2 How We Manage Your Money

This section gives you a detailed discussion of our investment and risk management strategies.

Who Manages the Funds 10
........................................................................................................
Management Fees 10
........................................................................................................
What Securities We Invest In 11
........................................................................................................
How We Select Investments 12
........................................................................................................
What the Risks Are 12
........................................................................................................
How We Manage Risk 13
........................................................................................................

Section 3 How You Can Buy and Sell Shares

This section provides the information you need to move money into or out of your account.

How to Choose a Share Class 15
........................................................................................................
How to Reduce Your Sales Charge 17
........................................................................................................
How to Buy Shares 17
........................................................................................................
Systematic Investing 18
........................................................................................................
Systematic Withdrawal 19
........................................................................................................
Special Services 19
........................................................................................................
How to Sell Shares 20
........................................................................................................

Section 4 General Information

This section summarizes the funds' distribution policies and other general fund information.

Distributions and Taxes 22
........................................................................................................
Distribution and Service Plans 23
........................................................................................................
Net Asset Value 24
........................................................................................................
Fund Service Providers 24
........................................................................................................

Section 5 Financial Highlights

This section provides the funds' financial performance for the past 5 years. 25
........................................................................................................
Appendix Additional State Information 26
........................................................................................................
</TABLE>

We have used the icons below throughout this prospectus to make it easy for you
to find the type of information
you need.

.. Investment Strategy

.. Risks

.. Fees, Charges
and Expenses

.. Shareholder
Instructions

.. Performance and
Current Portfolio
Information
<PAGE>

June , 1999

Section 1 The Funds

Nuveen Flagship Connecticut Municipal Bond Fund

Nuveen Flagship New Jersey Municipal Bond Fund

Nuveen Flagship New York Municipal Bond Fund

Nuveen New York Insured Municipal Bond Fund

Prospectus

This prospectus is intended to provide important information to help you
evaluate whether one of the Nuveen Mutual Funds listed above may be right for
you. Please read it carefully before investing and keep it for future reference.

To learn more about how Nuveen Mutual Funds can help you achieve your financial
goals, talk with your financial adviser. Or call us at (800) 257-8787 for more
information.

A Century of Investment Experience

Since our founding in 1898, John Nuveen & Co. Incorporated has been synonymous
with investments that withstand the test of time. Today we offer a broad range
of quality investments designed for individuals seeking to build and maintain
wealth.

Section 1 The Funds 1
<PAGE>

Nuveen Flagship Connecticut Municipal Bond Fund

Fund Overview

Investment Objective

The investment objective of the fund is to provide you with as high a level of
current interest income exempt from regular federal, state and, in some cases,
local income taxes as is consistent with preservation of capital.

How the Fund Pursues Its Objective

The fund purchases only quality municipal bonds that are rated investment grade
(AAA/Aaa to BBB/Baa) at the time of purchase by independent rating agencies. The
fund may buy non-rated municipal bonds if the fund's investment adviser judges
them to be investment grade.

The fund's investment adviser uses a value-oriented strategy and looks for
higher-yielding and undervalued municipal bonds that offer the potential for
above-average total return.

What are the Risks of Investing in the Fund?

The principal risks of investing in the fund are interest rate risk and credit
risk. Interest rate risk is the risk that interest rates will rise, causing bond
prices to fall. Credit risk is the risk that an issuer of a municipal bond will
be unable to make interest and principal payments. In general, lower rated bonds
carry greater credit risk. The fund may bear additional risk because it invests
primarily in Connecticut bonds. The fund is non-diversified, and may invest more
of its assets in a single issuer than a diversified fund. Greater concentration
may increase risk. As with any mutual fund investment, loss of money is a risk
of investing.

The fund seeks to limit risk by buying investment grade quality bonds in a
variety of industry sectors.

Is This Fund Right For You?

The fund may be a suitable investment for you if you seek to:

.. Earn regular monthly tax-free dividends;

.. Preserve investment capital over time;

.. Reduce taxes on investment income;

.. Set aside money systematically for retirement, estate planning or college
funding.

You should not invest in this fund if you seek to:

.. Pursue an aggressive, high-growth investment strategy;

.. Invest through an IRA or 401(k) plan;

.. Avoid fluctuations in share price.

How the Fund Has Performed

The fund's investment adviser is Nuveen Advisory Corp., Nuveen's Premier
Adviser/SM/ for municipal bond investing. The chart and table below illustrate
annual fund returns for each of the past ten years as well as annualized fund,
peer group and market benchmark returns for the one-, five- and ten-year periods
ending December 31, 1998. This information is intended to help you assess the
variability of fund returns over the past ten years (and consequently, the
potential rewards and risks of a fund investment).

Total Returns/1/
[BAR CHART APPEARS HERE]

Class A Annual Returns
<TABLE>
<S> <C>
1989 8.6%
1990 6.6%
1991 11.7%
1992 7.9%
1993 11.7%
1994 -6.1%
1995 17.0%
1996 3.8%
1997 11.9%
1998
</TABLE>

During the ten years ending December 31, 1998, the highest and lowest quarterly
returns were 6.96% and -5.67%, respectively for the quarters ending 3/31/95 and
3/31/94. The bar chart and highest/lowest quarterly returns do not reflect sales
charges, which would reduce returns, while the 1-, 5- and 10-year average annual
return table does.

Average Annual Total Returns for
the Periods Ending December 31, 1998
....................................

Class 1 Year 5 Year 10 Year
- ------------------------------------------------------
<S> <C> <C> <C>
Class A (Offer) 7.19% 6.42% 7.91%
Class A (NAV) 11.86% 7.33% 8.37%
Class B 7.19% 6.57% 7.90%
Class C 11.18% 6.69% 7.75%
Class R 11.69% 7.29% 8.35%
LB Market
Benchmark/2/ 9.19% 7.36% 8.58%
Lipper
Peer Group/3/ 9.15% 6.93% 8.41%
</TABLE>

2 Section 1 The Funds
<PAGE>

What are the Costs of Investing?

Shareholder Transaction Expenses/4/

Paid Directly From Your Investment
<S> <C> <C> <C> <C>
Share Class A B C R/5/
- --------------------------------------------------------------------------------
Maximum Sales Charge Imposed
on Purchases 4.20%/6/ None None None
.................................................................................
Maximum Sales Charge Imposed
on Reinvested Dividends None None None None
.................................................................................
Exchange Fees None None None None
.................................................................................
Deferred Sales Charge/7/ None/8/ 5%/9/ 1%/10/ None
.................................................................................
Annual Fund Operating Expenses/11/

Paid From Fund Assets

Share Class A B C R
- --------------------------------------------------------------------------------

Management Fees .55% .55% .55% .55%
.................................................................................

12b-1 Distribution and Service Fees .20% .95% .75% --%
.................................................................................
Other Expenses .12% .12% .12% .12%
- --------------------------------------------------------------------------------

Total Annual Fund Operating
- ---------------------------
Expenses Gross+ .87% 1.62% 1.42% .67%
- --------------

+After Expense Reimbursements
- -----------------------------
.................................................................................
Reimbursements (.21%) (.24%) (.21%) (.22%)
- --------------------------------------------------------------------------------
.................................................................................

Total Annual Fund Operating Expense Net .66% 1.38% 1.21% .45%
- --------------------------------------------------------------------------------
.................................................................................
</TABLE>

The following example is intended to help you compare the cost of investing in
the fund with the cost of investing in other mutual funds. It assumes you invest
$10,000 in the fund for the time period indicated and then either redeem or do
not redeem your shares at the end of a period. The example assumes that your
investment has a 5% return each year and that the fund's operating expenses
remain the same. Your actual returns and costs may be higher or lower.

<TABLE>
<CAPTION>
Redemption No Redemption
Share Class A B C R A B C R
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year $ 505 $ 560 $ 145 $ 68 $ 505 $ 165 $ 145 $ 68
................................................................................
3 Years $ 686 $ 830 $ 449 $214 $ 686 $ 511 $ 449 $214
................................................................................
5 Years $ 882 $ 996 $ 776 $373 $ 882 $ 881 $ 776 $373
................................................................................
10 Years $1,448 $1,721 $1,702 $835 $1,448 $1,721 $1,702 $835
................................................................................
</TABLE>

How the Fund Is Invested (as of 2/28/99)

Portfolio Statistics

<S> <C>
Weighted Average Maturity 21.3 years
.................................................................................
Weighted Average Duration 8.4 years
.................................................................................
Weighted Average Credit Quality AA
.................................................................................
Number of Issues 91
.................................................................................

Credit Quality
AAA 59%
.................................................................................
AA 15%
.................................................................................
A 22%
.................................................................................
BBB 4%
.................................................................................
</TABLE>

Industry Diversification (Top 5)

[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Tax Obligation Limited (18%)
Other (30%)
Housing - Single-Family (10%)
Health Care (9%)
U.S. Guaranteed (20%)
Housing - Multi Family (13%)
</TABLE>

1. Class A total returns reflect actual performance for all periods; Class B, C
and R total returns reflect actual performance for periods since class
inception (see "Financial Highlights" for dates), and Class A performance for
periods prior to class inception, adjusted for the differences in fees
between the classes (see "What are the Costs of Investing?"). The year-to-
date return as of / /99 was 1.89%.

2. Market Benchmark returns reflect the performance of the Lehman Brothers
Municipal Bond Index, an unmanaged index comprised of a broad range of
investment-grade municipal bonds.

3. Peer Group returns represent the average annualized returns of the funds in
the Lipper Connecticut Municipal Debt Category. Returns assume reinvestment
of dividends and do not reflect any applicable sales charges.

4. As a percent of offering price unless otherwise noted. Authorized Dealers and
other firms may charge additional fees for shareholder transactions or for
advisory services. Please see their materials for details.

5. Class R shares may be purchased only under limited circumstances, or by
specified classes of investors. See "How You Can Buy and Sell Shares."

6. Reduced Class A sales charges apply to purchases of $50,000 or more. See
"How You Can Buy and Sell Shares."

7. As a percentage of lesser of purchase price or redemption proceeds.

8. Certain Class A purchases at net asset value of $1 million or more may be
subject to a contingent deferred sales charge (CDSC) if redeemed within 18
months of purchase. See "How You Can Buy and Sell Shares."

9. Class B shares redeemed within six years of purchase are subject to a CDSC of
5% during the first year, 4% during the second and third years, 3% during the
fourth, 2% during the fifth and 1% during the sixth year.

10. Class C shares redeemed within one year of purchase are subject to a 1%
CDSC.

11. Long-term holders of Class B and Class C shares may pay more in Rule 12b-1
fees and CDSCs than the economic equivalent of the maximum front-end sales
charge permitted under the National Association of Securities Dealers
Conduct Rules.

Section 1 The Funds 3
<PAGE>

Nuveen Flagship New Jersey Municipal Bond Fund

Fund Overview

Investment Objective

How the Fund Pursues Its Objective

The fund's investment adviser uses a value-oriented strategy and looks for
higher-yielding and undervalued municipal bonds that offer the potential for
above-average total return.

What are the Risks of Investing in the Fund?

The principal risks of investing in the fund are interest rate risk and credit
risk. Interest rate risk is the risk that interest rates will rise, causing bond
prices to fall. Credit risk is the risk that an issuer of a municipal bond will
be unable to make interest and principal payments. In general, lower rated bonds
carry greater credit risk. The fund may bear additional risk because it invests
primarily in New Jersey bonds. The fund is non-diversified, and may invest more
of its assets in a single issuer than a diversified fund. Greater concentration
may increase risk. As with any mutual fund investment, loss of money is a risk
of investing.

The fund seeks to limit risk by buying investment grade quality bonds in a
variety of industry sectors.

Is This Fund Right For You?

The fund may be a suitable investment for you if you seek to:

.. Earn regular monthly tax-free dividends;

.. Preserve investment capital over time;

.. Reduce taxes on investment income;

.. Set aside money systematically for retirement, estate planning or college
funding.

You should not invest in this fund if you seek to:

.. Pursue an aggressive, high-growth investment strategy;

.. Invest through an IRA or 401(k) plan;

.. Avoid fluctuations in share price.

How the Fund Has Performed

Total Returns/1/
[BAR CHART APPEARS HERE]

Class A Annual Returns
<TABLE>
<S> <C>
1989 8.6%
1990 6.6%
1991 11.7%
1992 7.9%
1993 11.7%
1994 -6.1%
1995 17.0%
1996 3.8%
1997 11.9%
1998
</TABLE>

Average Annual Total Returns for
the Periods Ending December 31, 1998
....................................

4 Section 1 The Funds
<PAGE>

What are the Costs of Investing?

Shareholder Transaction Expenses/4/

Paid From Fund Assets

Share Class A B C R
- --------------------------------------------------------------------------------

Management Fees .55% .55% .55% .55%
.................................................................................

Total Annual Fund Operating
- ---------------------------
Expenses Gross+ .87% 1.62% 1.42% .67%
- --------------

How the Fund Is Invested (as of 2/28/99)

Portfolio Statistics

Industry Diversification (Top 5)

[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Tax Obligation Limited (18%)
Other (30%)
Housing - Single-Family (10%)
Health Care (9%)
U.S. Guaranteed (20%)
Housing - Multi Family (13%)
</TABLE>

2. Market Benchmark returns reflect the performance of the Lehman Brothers
Municipal Bond Index, an unmanaged index comprised of a broad range of
investment-grade municipal bonds.

3. Peer Group returns represent the average annualized returns of the funds in
the Lipper Georgia Municipal Debt Category. Returns assume reinvestment of
dividends and do not reflect any applicable sales charges.

5. Class R shares may be purchased only under limited circumstances, or by
specified classes of investors. See "How You Can Buy and Sell Shares."

6. Reduced Class A sales charges apply to purchases of $50,000 or more. See
"How You Can Buy and Sell Shares."

7. As a percentage of lesser of purchase price or redemption proceeds.

10. Class C shares redeemed within one year of purchase are subject to a 1%
CDSC.

Section 1 The Funds 5
<PAGE>

Nuveen Flagship New York Municipal Bond Fund

Fund Overview

Investment Objective

How the Fund Pursues Its Objective

The fund's investment adviser uses a value-oriented strategy and looks for
higher-yielding and undervalued municipal bonds that offer the potential for
above-average total return.

What are the Risks of Investing in the Fund?

The principal risks of investing in the fund are interest rate risk and credit
risk. Interest rate risk is the risk that interest rates will rise, causing bond
prices to fall. Credit risk is the risk that an issuer of a municipal bond will
be unable to make interest and principal payments. In general, lower rated bonds
carry greater credit risk. The fund may bear additional risk because it invests
primarily in New York bonds. As with any mutual fund investment, loss of money
is a risk of investing.

The fund seeks to limit risk by buying investment grade quality bonds in a
variety of industry sectors.

Is This Fund Right For You?

The fund may be a suitable investment for you if you seek to:

.. Earn regular monthly tax-free dividends;

.. Preserve investment capital over time;

.. Reduce taxes on investment income;

.. Set aside money systematically for retirement, estate planning or college
funding.

You should not invest in this fund if you seek to:

.. Pursue an aggressive, high-growth investment strategy;

.. Invest through an IRA or 401(k) plan;

.. Avoid fluctuations in share price.

How the Fund Has Performed

Total Returns/1/
[BAR CHART APPEARS HERE]

Class A Annual Returns
<TABLE>
<S> <C>
1989 8.6%
1990 6.6%
1991 11.7%
1992 7.9%
1993 11.7%
1994 -6.1%
1995 17.0%
1996 3.8%
1997 11.9%
1998
</TABLE>

Average Annual Total Returns for
the Periods Ending December 31, 1998
....................................

6 Section 1 The Funds
<PAGE>

What are the Costs of Investing?

Shareholder Transaction Expenses/4/

Paid From Fund Assets

Share Class A B C R
- --------------------------------------------------------------------------------

Management Fees .55% .55% .55% .55%
.................................................................................

Total Annual Fund Operating
- ---------------------------
Expenses Gross+ .87% 1.62% 1.42% .67%
- --------------

How the Fund Is Invested (as of 2/28/99)

Portfolio Statistics

Industry Diversification (Top 5)

[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Tax Obligation Limited (18%)
Other (30%)
Housing - Single-Family (10%)
Health Care (9%)
U.S. Guaranteed (20%)
Housing - Multi Family (13%)
</TABLE>

2. Market Benchmark returns reflect the performance of the Lehman Brothers
Municipal Bond Index, an unmanaged index comprised of a broad range of
investment-grade municipal bonds.

5. Class R shares may be purchased only under limited circumstances, or by
specified classes of investors. See "How You Can Buy and Sell Shares."

6. Reduced Class A sales charges apply to purchases of $50,000 or more. See
"How You Can Buy and Sell Shares."

7. As a percentage of lesser of purchase price or redemption proceeds.

10. Class C shares redeemed within one year of purchase are subject to a 1%
CDSC.

Section 1 The Funds 7
<PAGE>

Nuveen New York Insured Municipal Bond Fund

Fund Overview

Investment Objective

How the Fund Pursues Its Objective

The fund's investment adviser uses a value-oriented strategy and looks for
higher-yielding and undervalued municipal bonds that offer the potential for
above-average total return.

What are the Risks of Investing in the Fund?

The principal risks of investing in the fund are interest rate risk and credit
risk. Interest rate risk is the risk that interest rates will rise, causing bond
prices to fall. Credit risk is the risk that an issuer of a municipal bond will
be unable to make interest and principal payments. In general, lower rated bonds
carry greater credit risk. The fund may bear additional risk because it invests
primarily in New York bonds. The fund is non-diversified, and may invest more of
its assets in a single issuer than a diversified fund. Greater concentration may
increase risk. As with any mutual fund investment, loss of money is a risk of
investing.

The fund seeks to limit risk by buying investment grade quality bonds in a
variety of industry sectors, and primarily buys insured municipal bonds.

Is This Fund Right For You?

The fund may be a suitable investment for you if you seek to:

.. Earn regular monthly tax-free dividends;

.. Preserve investment capital over time;

.. Reduce taxes on investment income;

.. Set aside money systematically for retirement, estate planning or college
funding.

You should not invest in this fund if you seek to:

.. Pursue an aggressive, high-growth investment strategy;

.. Invest through an IRA or 401(k) plan;

.. Avoid fluctuations in share price.

How the Fund Has Performed

Total Returns/1/
[BAR CHART APPEARS HERE]

Class A Annual Returns
<TABLE>
<S> <C>
1988 12.5%
1989 8.6%
1990 6.6%
1991 11.7%
1992 7.9%
1993 11.7%
1994 -6.1%
1995 17.0%
1996 3.8%
1997 11.9%
</TABLE>

Average Annual Total Returns for
the Periods Ending December 31, 1998
....................................

8 Section 1 The Funds
<PAGE>

What are the Costs of Investing?

Shareholder Transaction Expenses/4/

Paid From Fund Assets

Share Class A B C R
- --------------------------------------------------------------------------------

Management Fees .55% .55% .55% .55%
.................................................................................

Total Annual Fund Operating
- ---------------------------
Expenses .87% 1.62% 1.42% .67%
- --------
</TABLE>

How the Fund Is Invested (as of 2/28/99)

Portfolio Statistics

<S> <C>
Weighted Average Maturity 21.3 years
.................................................................................
Weighted Average Duration 8.4 years
.................................................................................
Number of Issues 91
.................................................................................

Credit Quality
Insured 59%
.................................................................................
Escrowed 15%
.................................................................................
</TABLE>

Industry Diversification (Top 5)

[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Tax Obligation Limited (18%)
Other (30%)
Housing - Single-Family (10%)
Health Care (9%)
U.S. Guaranteed (20%)
Housing - Multi Family (13%)
</TABLE>

2. Market Benchmark returns reflect the performance of the Lehman Brothers
Municipal Bond Index, an unmanaged index comprised of a broad range of
investment-grade municipal bonds.

5. Class R shares may be purchased only under limited circumstances, or by
specified classes of investors. See "How You Can Buy and Sell Shares."

6. Reduced Class A sales charges apply to purchases of $50,000 or more. See
"How You Can Buy and Sell Shares."

7. As a percentage of lesser of purchase price or redemption proceeds.

10. Class C shares redeemed within one year of purchase are subject to a 1%
CDSC.

Section 1 The Funds 9
<PAGE>

Section 2 How We Manage Your Money

To help you understand the funds better, this section includes a detailed
discussion of our investment and risk management strategies. For a more complete
discussion of these matters, please consult the Statement of Additional
Information.

Who Manages the Funds

Nuveen Advisory Corp., 333 West Wacker Drive, Chicago, IL 60606, ("Nuveen
Advisory"), serves as the investment adviser to the funds. In this capacity,
Nuveen Advisory is responsible for the selection and on-going monitoring of the
municipal bonds in each fund's investment portfolio, managing the funds'
business affairs and providing certain clerical, bookkeeping and other
administrative services. Nuveen Advisory serves as investment adviser to
investment portfolios with more than $ billion in municipal assets under
management.

Overall investment management strategy and operating policies for the funds are
set by the Investment Policy Committee of Nuveen Advisory. The Investment Policy
Committee is comprised of the principal executive officers and portfolio
managers of Nuveen Advisory and meets regularly to review economic conditions,
the outlook for the financial markets in general and the status of the municipal
markets in particular. Day-to-day operation of each fund and the execution of
its specific investment strategies is the responsibility of the designated
portfolio manager described below.

J. Thomas Futrell has been the portfolio manager for the New Jersey Fund since
July 1998. Mr. Futrell has been a portfolio manager for Nuveen Advisory since
1986, and currently manages investments for twelve Nuveen-sponsored investment
companies. Richard Huber has been the portfolio manager for the Connecticut Fund
since April 1999. Mr. Huber became a Vice President of Flagship Financial Inc.
in 1991, and subsequently became a Vice President of Nuveen Advisory upon the
acquisition of Flagship Resources Inc. by The John Nuveen Company in January
1997. Mr. Huber currently manages investments for five Nuveen-sponsored
investment companies. Stephen S. Peterson has been the portfolio manager for the
New York and New York Insured Funds since April 1999. Mr. Peterson has been a
portfolio manager for Nuveen Advisory since 1991, and currently manages
investments for ten Nuveen-sponsored investment companies.

Management Fees

For providing these services, Nuveen Advisory is paid an annual management fee.
The following schedule applies to each fund described in this prospectus:

10 Section 2 How We Manage Your Money
<PAGE>

Management Fees

For providing these services, Nuveen Advisory is paid an annual management fee.
The following schedule applies to each fund described in this prospectus:

Average Daily Net Asset Value Management Fee

For the first $125 million 0.5500%
................................................................................
For the next $125 million 0.5375%
................................................................................
For the next $250 million 0.5250%
................................................................................
For the next $500 million 0.5125%
................................................................................
For the next $1 billion 0.5000%
................................................................................
For assets over $2 billion 0.4750%
................................................................................

For the most recent fiscal year, the funds paid after expense reimbursements the
following management fees to Nuveen Advisory, as a percentage of average net
assets:

Nuveen Flagship Connecticut Municipal Bond Fund .34%
................................................................................
Nuveen Flagship New Jersey Municipal Bond Fund .42%
................................................................................
Nuveen Flagship New York Municipal Bond Fund .55%
................................................................................
Nuveen New York Insured Municipal Bond Fund .52%
................................................................................

What Securities We Invest In

Each fund's investment objective may not be changed without shareholder
approval. The following investment policies may be changed by the Board of
Trustees without shareholder approval unless otherwise noted in this prospectus
or the Statement of Additional Information.

Municipal Obligations

The funds invest primarily in municipal bonds that pay interest that is exempt
from regular federal, state and, in some cases, local income tax. Income from
these bonds may be subject to the federal alternative minimum tax.

States, local governments and municipalities issue municipal bonds to
raise money for various public purposes such as building public facilities,
refinancing outstanding obligations and financing general operating
expenses.

The funds may purchase municipal bonds that represent lease obligations. These
carry special risks because the issuer of the bonds may not be obligated to
appropriate money annually to make payments under the lease. In order to reduce
this risk, the funds will only purchase these bonds where the issuer has a
strong incentive to continue making appropriations until maturity.

Quality Municipal Bonds

The funds purchase only quality municipal bonds that are either rated investment
grade (AAA/Aaa to BBB/Baa) by independent rating agencies at the time of
purchase or are non-rated but judged to be investment grade

Section 2 How We Manage Your Money 11
<PAGE>

by the funds' investment adviser. If suitable municipal bonds from a specific
state are not available at attractive prices and yields, a fund may invest in
municipal bonds of U.S. territories (such as Puerto Rico and Guam) which are
exempt from regular federal, state and local income taxes. The New Jersey, New
York, and New York Insured Funds may not invest more than 20% of their net
assets in these territorial municipal bonds.

Portfolio Maturity

Each fund buys municipal bonds with different maturities in pursuit of its
investment objective, but maintains under normal market conditions an investment
portfolio with an overall weighted average portfolio maturity of 15 to 30 years.

Insurance

The New York Insured Fund primarily purchases insured municipal bonds. Under
normal market conditions, the New York Insured Fund will invest at least 65% of
its assets in insured municipal bonds, and at least 80% of its net assets in
insured municipal bonds or municipal bonds backed by an escrow or trust account
that contains sufficient U.S. government-backed securities to assure timely
payment of interest and principal. Insured municipal bonds are either covered by
individual, permanent insurance policies (obtained either at the time of
issuance or subsequently), or covered "while in fund" under a master portfolio
insurance policy purchased by a fund. Insurance guarantees only the timely
payment of interest and principal on the bonds; it does not guarantee the value
of either individual bonds or fund shares.

Portfolio insurance policies are effective only so long as the fund continues to
own the covered bond, and the price the fund would receive upon sale of such a
bond would not benefit from the insurance. Insurers under master portfolio
insurance policies currently include MBIA Insurance Corp., AMBAC Assurance
Corporation, Financial Security Assurance, Inc., and Financial Guaranty
Insurance Company. The fund's investment adviser may obtain master policies from
other insurers, but only from insurers that specialize in insuring municipal
bonds and whose claims-paying ability is rated Aaa or AAA by Moody's and S&P.
Insurers are responsible for making their own assessment of the insurability of
a municipal bond.

The New York Insured Fund can invest up to 20% of its net assets in uninsured
municipal bonds that are backed by an escrow containing sufficient U.S.
Government or U.S. Government agency securities to ensure timely payment of
principal and interest. Such bonds are normally regarded as having the credit
characteristics of the underlying U.S. Government-backed securities.

Short-term Investments

Under normal market conditions, each fund may invest up to 20% of net assets in
short-term, high quality municipal bonds. See "How We Manage Risk--Hedging and
Other Defensive Investment Strategies." The funds may invest in short-term, high
quality taxable securities if suitable short-term municipal bonds are not
available at reasonable prices and yields. For more information on eligible
short-term investments, see the Statement of Additional Information.

Delayed Delivery Transactions

The funds may buy or sell securities on a when-issued or delayed-delivery basis,
paying for or taking delivery of the securities at a later date, normally within
15 to 45 days of the trade. Such transactions involve an element of risk because
the value of the security to be purchased may decline before the settlement
date.

How We Select Investments

Nuveen Advisory selects municipal obligations for the funds based upon its
assessment of a bond's relative value in terms of current yield, price, credit
quality and future prospects. Nuveen Advisory is supported by Nuveen's award-
winning team of specialized research analysts who review municipal securities
available for purchase, monitor the continued creditworthiness of each fund's
municipal investments, and analyze economic, political and demographic trends
affecting the municipal markets. We utilize these resources to identify
municipal obligations with favorable characteristics we believe are not yet
recognized by the market. We then select those higher-yielding and undervalued
municipal obligations that we believe represent the most attractive values.

Portfolio Turnover

A fund buys and sells portfolio securities in the normal course of its
investment activities. The proportion of the fund's investment portfolio that is
sold and replaced with new securities during a year is known as the fund's
portfolio turnover rate. The funds intend to keep portfolio turnover relatively
low in order to reduce trading costs and the realization of taxable capital
gains. Each fund, however, may make limited short-term trades to take advantage
of market opportunities or reduce market risk.

What the Risks Are

Risk is inherent in all investing. Investing in a mutual fund N even the most
conservative N involves risk, including the risk that you may receive little or
no return on your investment or even that you may lose part or all of your
investment. Therefore, before investing you should consider carefully the
following risks that you assume when you invest in

12 Section 2 How We Manage Your Money
<PAGE>

What the Risks Are

Risk is inherent in all investing. Investing in a mutual fund--even the most
conservative--involves risk, including the risk that you may receive little or
no return on your inveestment or even that you may lose part or all of your
investment. Therefore, before investing you should consider carefully the
following risks that you assume when you invest in these funds. Because of these
and other risks, you should consider an investment in any of these funds to be a
long-term investment.

Interest rate risk: the risk that the value of the fund's portfolio will decline
because of rising market interest rates (bond prices move in the opposite
direction of interest rates). The longer the average maturity (duration) of a
fund's portfolio, the greater its interest rate risk. See "What Securities We
Invest In--Portfolio Maturity."

Income risk: the risk that the income from the fund's portfolio will decline
because of falling market interest rates. This can result when the fund invests
the proceeds from new share sales, or from matured or called bonds, at market
interest rates that are below the portfolio's current earnings rate.

Credit risk: the risk that an issuer of a bond is unable to meet its obligation
to make interest and principal payments due to changing market conditions.
Generally, lower rated bonds provide higher current income but are considered to
carry greater credit risk than higher rated bonds. Year 2000 issues may affect
the ability of municipal issuers to meet their payment obligations to their bond
holders, and may adversely affect their credit ratings. Municipal issuers may
have greater Year 2000 risks than other issuers.

State Concentration risk: because the funds primarily purchase municipal bonds
from a specific state, each fund also bears investment risk from the economic,
political or regulatory changes that could adversely affect municipal bond
issuers in that state and therefore the value of the fund's investment
portfolio. See "Appendix--Additional State Information." These risks may be
greater for the Connecticut and New Jersey Funds, which as "non-diversified"
funds may concentrate their investments in municipal bonds of certain issuers to
a greater extent than the New York Funds described in this prospectus, which are
diversified funds.

Inflation risk: the risk that the value of assets or income from investments
will be less in the future as inflation decreases the value of money. As
inflation increases, the value of the fund's assets can decline as can the value
of the fund's distributions.

How We Manage Risk

In pursuit of its investment objective, each fund assumes investment risk,
chiefly in the form of interest rate and credit risk. The funds limit this
investment risk generally by restricting the type and maturities of municipal
bonds they purchase, and by diversifying their investment portfolios
geographically as well as across different industry sectors.

Section 2 How We Manage Your Money 13
<PAGE>

Investment Limitations

The funds have adopted certain investment limitations (based on total assets)
that cannot be changed without shareholder approval and are designed to limit
your investment risk and maintain portfolio diversification. Each fund may not
have more than:

.. 25% in any one industry such as electric utilities or health care.

.. 10% in borrowings (33% if used to meet redemptions).

As diversified funds, the New York and New York Insured Fund also may not have
more than:

.. 5% in securities of any one issuer (except U.S. government
securities or for 25% of each fund's assets).

Hedging and Other Defensive Investment Strategies

Each fund may invest up to 100% in cash equivalents and short-term investments
as a temporary defensive measure in response to adverse market conditions, or to
keep cash on hand fully invested. During these periods, the weighted average
maturity of a fund's investment portfolio may fall below the defined range
described under "Portfolio Maturity."

Each fund may also use various investment strategies designed to limit the risk
of bond price fluctuations and to preserve capital. These hedging strategies
include using financial futures contracts, options on financial futures, or
options based on either an index of long-term tax-free securities or on debt
securities whose prices, in the opinion of the funds' investment adviser,
correlate with the prices of the funds' investments. The funds, however, have no
present intent to use these strategies.

14 Section 2 How We Manage Your Money
<PAGE>

Section 3 How You Can Buy and Sell Shares

You can choose from four classes of fund shares, each with a different
combination of sales charges, fees, eligibility requirements and other features.
Your financial adviser can help you determine which class is best for you. We
offer a number of features for your convenience. Please see the Statement of
Additional Information for further details.

How to Choose a Share Class

In deciding whether to purchase Class A, Class B, Class C or Class R shares, you
should consider:

.. the amount of your purchase;

.. any current holdings of fund shares;

.. how long you expect to hold the shares;

.. the amount of any up-front sales charge;

.. whether a contingent deferred sales charge
(CDSC) would apply upon redemption;

.. the amount of any distribution or service
fees that you may incur while you own the shares;

.. whether you will be reinvesting income or
capital gain distributions in additional shares;

.. whether you qualify for a sales charge
waiver or reduction.

For a summary of the charges and expenses for each class, please see "What are
the Costs of Investing?".

Class A Shares

You can buy Class A shares at the offering price, which is the net asset value
per share plus an up-front sales charge. You may qualify for a reduced sales
charge, or the sales charge may be waived, as described in "How to Reduce Your
Sales Charge." Class A shares are also subject to an annual service fee of .20%
which compensates your financial adviser for providing ongoing service to you.
The up-front Class A sales charge for all funds described in the prospectus is
as follows:
<TABLE>
<CAPTION>
Authorized Dealer
Sales Charge as % of Sales Charge as % of Commission as % of
Amount of Purchase Public Offering Price Net Amount Invested Public Offering Price
<S> <C> <C> <C>
Less than $50,000 4.20% 4.38% 3.70%
......................................................................................................
$50,000 but less than $100,000 4.00% 4.18% 3.50%
......................................................................................................
$100,000 but less than $250,000 3.50% 3.63% 3.00%
......................................................................................................
$250,000 but less than $500,000 2.50% 2.56% 2.00%
......................................................................................................
$500,000 but less than $1,000,000 2.00% 2.04% 1.50%
......................................................................................................
$1,000,000 and over --(1) -- 1.00%(1)
......................................................................................................
</TABLE>

(1) You can buy $1 million or more of Class A shares at net asset value without
an up-front sales charge. Nuveen pays Authorized Dealers a commission equal to
the sum of 1% (0.75% and 0.50%, respectively, for Intermediate and Limited Term
Funds) of the first $2.5 million, plus 0.50% of the next 2.5 million, plus 0.25%
(0.50% for Intermediate Funds) of any amount over $5 million. Unless the
Authorized Dealer waived the commission, you may be assessed a contingent
deferred sales charge (CDSC) of 1% (0.75% and 0.50%, respectively, for
Intermediate and Limited Term Funds) if you redeem any of your shares within 18
months of purchase. The CDSC is calculated on the lower of your pruchase price
or redemption proceeds.

Section 3 How You Can Buy and Sell Shares 15
<PAGE>

Class B Shares

You can buy Class B shares at the offering price, which is the net asset value
per share without any up-front sales charge so that the full amount of your
purchase is invested in the fund. However, you will pay annual distribution and
service fees of .95% of average daily assets. The annual .20% service fee
compensates your financial adviser for providing ongoing service to you. The
annual .75% distribution fee compensates Nuveen for paying your financial
adviser a 4% up-front sales commission, which includes an advance of the first
year's service fee. If you sell your shares within six years of purchase, you
will have to pay a CDSC based on either your purchase price or what you sell
your shares for, whichever amount is lower, according to the following schedule.
You do not pay a CDSC on any Class B shares you purchase by reinvesting
dividends.

Class B shares automatically convert to Class A shares eight years after
you buy them so that the distribution fees you pay over the life of your
investment are limited. You will continue to pay an annual service fee on any
converted Class B shares.

Years Since Purchase 0-1 1-2 2-3 3-4 4-5 5-6

CDSC 5% 4% 4% 3% 2% 1%
.................................................................................

Class C Shares

You can buy Class C shares at the offering price, which is the net asset value
per share without any up-front sales charge so that the full amount of your
purchase is invested in the fund. However, you will pay annual distribution and
service fees of 1%. The annual .20% service fee compensates your financial
adviser for providing ongoing service to you. The annual .55% distribution fee
reimburses Nuveen for paying your financial adviser an ongoing sales commission.
Nuveen advances the first year's service and distribution fees. If you sell your
shares within 12 months of purchase, you may have to pay a 1% CDSC based on
either your purchase price or what you sell your shares for, whichever amount is
lower.

Class R Shares

Under limited circumstances, you may purchase Class R shares at the offering
price, which is the net asset value on the day of purchase. In order to qualify,
you must be eligible under one of the programs described in "How to Reduce Your
Sales Charge" (below) or meet certain other purchase size criteria. Class R
shares are not subject to sales charges or ongoing service or distribution fees.
Class R shares have lower ongoing expenses than the other classes.

16 Section 3 How You Can Buy and Sell Shares
<PAGE>

How to Reduce Your Sales Charge

We offer a number of ways to reduce or eliminate the up-front sales charge on
Class A shares or to qualify to purchase Class R shares.

<TABLE>
<CAPTION>
Class A Sales Charge Class A Sales Charge Class R Eligibility
Reductions Waivers
<S> <C> <C>
.. Rights of accumulation . Nuveen Defined Portfolio . Certain employees and
.. Letter of intent or Exchange-Traded directors of Nuveen or
.. Group purchase Fund reinvestment employees of authorized
. Retirement plans dealers
. Certain employees and . Bank trust departments
directors of Nuveen or
employees of authorized
dealers
. Bank trust departments
</TABLE>

In addition, Class A shares at net asset value and Class R shares may be
purchased through registered investment advisers, certified financial planners
and registered broker-dealers who charge asset-based or comprehensive "wrap"
fees for their services. Please refer to the Statement of Additional Information
for detailed program descriptions and eligibility requirements. Additional
information is available from your financial adviser or by calling (800) 257-
8787. Your financial adviser can also help you prepare any necessary application
forms. You or your financial adviser must notify Nuveen at the time of each
purchase if you are eligible for any of these programs. The funds may modify or
discontinue these programs at any time.

How to Buy Shares

You may open an account with $3,000 per fund share class and make additional
investments at any time with as little as $50. There is no minimum if you are
reinvesting Nuveen Defined Portfolio distributions. The share price you pay will
depend on when Nuveen receives your order. Orders received before the close of
trading on a business day will receive that day's closing share price, otherwise
you will receive the next business day's price. A business day is any day the
New York Stock Exchange is open for business and normally ends at 4 P.M. New
York time.

Through a Financial Adviser

You may buy shares through your financial adviser, who can handle all
the details for you, including opening a new account. Financial advisers can
also help you review your financial needs and formulate long-term investment
goals and objectives. In addition, financial advisers generally can help you
develop a customized financial plan, select investments and monitor and review
your portfolio on an ongoing basis to help assure your investments continue to
meet your needs as circumstances change. Financial advisers are paid either from
fund sales charges and fees or by charging you a separate fee in lieu of a sales
charge for ongoing investment advice and services. If you do not have a
financial adviser, call (800) 257-8787 and Nuveen can refer you to one in your
area.

Section 3 How You Can Buy and Sell Shares 17

<PAGE>

By Mail

You may open an account and buy shares by mail by completing the enclosed
application and mailing it along with your check to: Nuveen Investor Services,
P.O. Box 5186, Bowling Green Station, New York, NY 10274-5186.

Systematic Investing

Once you have established a fund account, systematic investing allows
you to make regular investments through automatic deductions from your bank
account (simply complete the appropriate section of the account application
form) or directly from your paycheck. To invest directly from your paycheck,
contact your financial adviser or call Nuveen at (800) 257-8787. Systematic
investing may also make you eligible for reduced sales charges.

The chart below illustrates the benefits of systematic investing based on a
$3,000 initial investment and subsequent monthly investments of $100 over 20
years. The example assumes you earn a return of 4%, 5% or 6% annually on your
investment and that you reinvest all dividends. These annual returns do not
reflect past or projected fund performance.

[GRAPH APPEARS HERE]

One of the benefits of systematic investing is dollar cost averaging. Because
you regularly invest a fixed amount of money over a period of years regardless
of the share price, you buy more shares when the price is low and fewer shares
when the price is high. As a result, the average share price you pay should be
less than the average share price of fund shares over the same period. To be
effective, dollar cost averaging requires that you invest over a long period of
time, and does not assure that you will profit.

Systematic Investment Plan

You can make regular investments of $50 or more per month by authorizing us to
draw preauthorized checks on your bank account. You can stop the withdrawals at
any time. There is no charge for this plan.

18 Section 3 How You Can Buy and Sell Shares

<PAGE>

Payroll Direct Deposit Plan

You can, with your employer's consent, make regular investments of $25 or more
per pay period (meeting the monthly minimum of $50) by authorizing your employer
to deduct this amount automatically from your paycheck. You can stop the
deductions at any time. There is no charge for this plan.

Systematic Withdrawal

If the value of your fund account is at least $10,000, you may request to have
$50 or more withdrawn automatically from your account. You may elect to receive
payments monthly, quarterly, semi-annually or annually, and may choose to
receive a check, have the monies transferred directly into your bank account
(see "Special Services--Fund Direct" below), paid to a third party or sent
payable to you at an address other than your address of record. You must
complete the appropriate section of the account application or Account Update
Form to participate in the fund's systematic withdrawal plan.

You should not establish systematic withdrawals if you intend to make concurrent
purchases of Class A, B or C shares because you may unnecessarily pay a sales
charge or CDSC on these purchases.

Special Services

To help make your investing with us easy and efficient, we offer you the
following services at no extra cost.

Exchanging Shares

You may exchange fund shares into an identically registered account at any time
for the same class of another Nuveen mutual fund available in your state. Your
exchange must meet the minimum purchase requirements of the fund into which you
are exchanging. Because an exchange is treated for tax purposes as a concurrent
sale and purchase, and any gain may be subject to tax, you should consult your
tax adviser about the tax consequences of any contemplated exchange.

The exchange privilege is not intended to allow you to use a fund for short-term
trading. Because excessive exchanges may interfere with portfolio management,
raise fund operating expenses or otherwise have an adverse effect on other
shareholders, each fund reserves the right to revise or suspend the exchange
privilege, limit the amount or number of exchanges, or reject any exchange.

Reinstatement Privilege

If you redeem fund shares, you may reinvest all or part of your redemption
proceeds up to one year later without incurring any additional charges. You may
only reinvest into the same share class you redeemed. If you paid a CDSC, we
will refund your CDSC and reinstate your holding period. You may use this
reinstatement privilege only once for any redemption.

Section 3 How You Can Buy and Sell Shares 19
<PAGE>

Fund Direct

You may link your fund account to your bank account and transfer money
electronically between these accounts and perform a variety of account
transactions, including buying shares by telephone and systematic investment.
You may also have dividends, distributions, redemption payments or systematic
withdrawals sent directly to your bank account.

Your financial adviser can help you complete the forms for these services, or
you can call Nuveen at (800) 257-8787 for copies of the necessary forms.

How to Sell Shares

You may use one of the following ways to sell (redeem) your shares on any day
the New York Stock Exchange is open. You will receive the share price next
determined after Nuveen has received your properly completed redemption request.
Your redemption request must be received before the close of trading for you to
receive that day's price. While the funds do not charge a redemption fee, you
may be assessed a CDSC, if applicable. When you redeem Class A, Class B, or
Class C shares subject to a CDSC, the fund will first redeem any shares that are
not subject to a CDSC or that represent an increase in the value of your fund
account due to capital appreciation, and then redeem the shares you have owned
for the longest period of time, unless you ask the fund to redeem your shares in
a different order. No CDSC is imposed on shares you buy through the reinvestment
of dividends and capital gains. The holding period is calculated on a monthly
basis and begins on the first day of the month in which you buy shares. When you
redeem shares subject to a CDSC, the CDSC is calculated on the lower of your
purchase price or redemption proceeds, deducted from your redemption proceeds,
and paid to Nuveen. The CDSC may be waived under certain special circumstances
as described in the Statement of Additional Information.

Through Your Financial Adviser

You may sell your shares through your financial adviser who can prepare the
necessary documentation. Your financial adviser may charge for this.

By Telephone

If you have authorized telephone redemption privileges, you can redeem your
shares by telephone up to $50,000. You may not redeem by telephone shares held
in certificate form. Checks will be issued only to the shareholder of record and
mailed to the address of record. If you have established electronic funds
transfer privileges, you may have redemption proceeds transferred electronically
to your bank account. We will normally mail your check the next business day.
Nuveen and Chase Global Funds Services will be liable for losses resulting from
unauthorized telephone redemptions only if they do not follow reasonable
procedures designed to verify the identity of the caller. You should immediately
verify your trade confirmations when you receive them.

By Mail

You can sell your shares at any time by sending a written request to the
appropriate fund, Nuveen Investor Services, P.O. Box 5186, Bowling Green
Station, New York, NY 10274-5186. Your request must include the following
information:

. The fund's name;

. Your name and account number;

An Important Note About Involuntary Redemption

From time to time, the funds may establish minimum account size requirements.
The funds reserve the right to liquidate your account upon 30 day's written
notice if the value of your account falls below an established minimum. The
funds presently have set a minimum balance of $100 unless you have an active
Nuveen Defined Portfolio reinvestment account. You will not be assessed a CDSC
on an involuntary redemption.

20 Section 3 How You Can Buy and Sell Shares
<PAGE>

. The dollar or share amount you wish to redeem;

. The signature of each owner exactly as it appears on the account;

. The name of the person to whom you want your redemption proceeds paid (if
other than to the shareholder of record);

. The address where you want your redemption proceeds sent (if other than
the address of record);

. Any certificates you have for the shares; and

. Any required signature guarantees.

We will normally mail your check the next business day, but in no event more
than seven days after we receive your request. If you purchased your shares by
check, your redemption proceeds will not be mailed until your check has cleared.
Guaranteed signatures are required if you are redeeming more than $50,000, you
want the check payable to someone other than the shareholder of record or you
want the check sent to another address (or the address of record has been
changed within the last 60 days). Signature guarantees must be obtained from a
bank, brokerage firm or other financial intermediary that is a member of an
approved Medallion Guarantee Program or that is otherwise approved by a fund. A
notary public cannot provide a signature guarantee.

Section 3 How You Can Buy and Sell Shares 21
<PAGE>

Section 4 General Information

To help you understand the tax implications of investing in the funds, this
section includes important details about how the funds make distributions to
shareholders. We discuss some other fund policies, as well.

Distributions and Taxes

The funds pay tax-free dividends monthly and any taxable capital gains or other
taxable distributions once a year in December. The funds declare dividends
monthly to shareholders of record as of the ninth of each month, payable the
first business day of the following month.

Payment and Reinvestment Options

The funds automatically reinvest your dividends in additional fund shares unless
you request otherwise. You may request to have your dividends paid to you by
check, deposited directly into your bank account, paid to a third party, sent to
an address other than your address of record or reinvested in shares of another
Nuveen mutual fund. For further information, contact your financial adviser or
call Nuveen at (800) 257-8787.

Taxes and Tax Reporting

Because the funds invest in municipal bonds, the regular monthly dividends you
receive will be exempt from regular federal income tax. All or a portion of
these dividends, however, may be subject to the federal alternative minimum tax
(AMT).

Although the funds do not seek to realize taxable income or capital gains, the
funds may realize and distribute taxable income or capital gains from time to
time as a result of each fund's normal investment activities. Each fund will
distribute in December any taxable income or capital gains realized over the
preceding year. Net short-term gains are taxable as ordinary income. Net long-
term capital gains are taxable as long-term capital gains regardless of how long
you have owned your investment. Taxable dividends do not qualify for a dividends
received deduction if you are a corporate shareholder.

Early in each year, you will receive a statement detailing the amount and nature
of all dividends and capital gains, including any percentage of your fund
dividends attributable to municipal obligations, that you were paid during the
prior year. You will receive this statement from the firm where you purchased
your fund shares if you hold your investment in street name. Nuveen will send
you this statement if you hold your shares in registered form. The tax status of
your dividends is not affected by whether you reinvest your dividends or receive
them in cash. If you receive social security benefits, you should be aware that
any tax-free income is taken into account in calculating the amount of these
benefits that may be subject to federal income tax.

22 Section 4 General Information
<PAGE>

Tax laws are subject to change, so we urge you to consult your tax adviser about
your particular tax situation and how it might be affected by current tax law.

Please note that if you do not furnish us with your correct Social Security
number or employer identification number, federal law requires us to withhold
federal income tax from your distributions and redemption proceeds at a rate of
31%.

Buying or Selling Shares Close to a Record Date

Buying fund shares shortly before the record date for a taxable dividend is
commonly known as "buying the dividend." The entire dividend may be taxable to
you even though a portion of the dividend effectively represents a return of
your purchase price. Similarly, if you sell or exchange fund shares shortly
before the record date for a tax-exempt dividend, a portion of the price you
receive may be treated as a taxable capital gain even though it reflects tax-
free income earned but not yet distributed by the fund.

Taxable Equivalent Yields

The taxable equivalent yield is the current yield you would need to earn on a
taxable investment in order to equal a stated tax-free yield on a municipal
investment. To assist you to more easily compare municipal investments like the
funds with taxable alternative investments, the table below presents the taxable
equivalent yields for a range of hypothetical tax-free yields and tax rates:

Taxable Equivalent Of Tax-Free Yields
<TABLE>
Tax-Free Yield
Tax Rate 4.00% 4.50% 5.00% 5.50% 6.00%
<S> <C> <C> <C> <C> <C>
28.0% 5.56% 6.25% 6.94% 7.64% 8.33%
...........................................................
31.0% 5.80% 6.52% 7.25% 7.97% 8.70%
...........................................................
36.0% 6.25% 7.03% 7.81% 8.59% 9.37%
...........................................................
39.6% 6.62% 7.45% 8.28% 9.11% 9.93%
...........................................................
</TABLE>
The yields and tax rates shown above are hypothetical and do not predict your
actual returns or effective tax rate. For more detailed information, see the
statement of additional information or consult your tax adviser.

Distribution and Service Plans

John Nuveen & Co. Incorporated serves as the selling agent and distributor of
the funds' shares. In this capacity, Nuveen manages the offering of the funds'
shares and is responsible for all sales and promotional activities. In order to
reimburse Nuveen for its costs in connection with these activities, including
compensation paid to authorized dealers, each fund has adopted a distribution
and service plan under Rule 12b-1 under the Investment Company Act of 1940. (See
"How to Choose a Share Class" for a description of the distribution and service
fees paid under this plan.)

Nuveen receives the distribution fee for Class B and Class C shares primarily
for providing compensation to authorized dealers, including Nuveen, in
connection with the distribution of shares. Nuveen uses the service fee for
Class A, Class B, and Class C shares to compensate authorized dealers, including
Nuveen, for providing account services to

Section 4 General Information 23
<PAGE>

shareholders. These services may include establishing and maintaining
shareholder accounts, answering shareholder inquiries, and providing other
personal services to shareholders. These fees also compensate Nuveen for other
expenses, including printing and distributing prospectuses to persons other than
shareholders, and preparing, printing, and distributing advertising and sales
literature and reports to shareholders used in connection with the sale of
shares. Because these fees are paid out of the funds' assets on an on-going
basis, over time these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.

Nuveen periodically undertakes sales promotion programs with authorized dealers
and may pay them the full applicable sales charge as a commission. In addition,
Nuveen may provide support at its own expense to authorized dealers in
connection with sales meetings, seminars, prospecting seminars and other events
at which Nuveen presents it products and services. Under certain circumstances,
Nuveen also will share with authorized dealers up to half the costs of
advertising that features the products and services of both parties. The
statement of additional information contains further information about these
programs.

Net Asset Value

The price you pay for your shares is based on the fund's net asset value per
share which is determined as of the close of trading (normally 4:00 p.m. eastern
time) on each day the New York Stock Exchange is open for business. Net asset
value is calculated for each class by taking the fair value of the class' total
assets, including interest or dividends accrued but not yet collected, less all
liabilities, and dividing by the total number of shares outstanding. The result,
rounded to the nearest cent, is the net asset value per share. All valuations
are subject to review by the funds' Board of Trustees or its delegate.

In determining net asset value, expenses are accrued and applied daily and
securities and other assets for which market quotations are available are valued
at market value. The prices of municipal bonds are provided by a pricing service
and based on the mean between the bid and asked price. When price quotes are not
readily available (which is usually the case for municipal securities), the
pricing service establishes fair market value based on prices of comparable
municipal bonds.

Fund Service Providers

The custodian of the assets of the funds is The Chase Manhattan Bank, 4 New York
Plaza, New York, NY 10004-2413. Chase also provides certain accounting services
to the funds. The funds' transfer, shareholder services and dividend paying
agent, Chase Global Funds Services Company, P.O. Box 5186, New York, NY 10274-
5186, performs bookkeeping, data processing and administrative services for the
maintenance of shareholder accounts.

Nuveen Advisory and Chase Global Funds Services each rely on computer systems to
manage the funds' investments, process shareholder transactions and provide
shareholder account maintenance. Because of the way computers historically have
stored dates, some of these systems currently may not be able to correctly
process activity occurring in the year 2000. Nuveen Advisory is working with the
funds' service providers to adapt their systems to address this "Year 2000"
issue. Nuveen Advisory and the funds expect, but there can be no absolute
assurance, that the necessary work will be completed on a timely basis.

24 Section 4 General Information
<PAGE>

Section 5 Financial Highlights

The following tables are intended to help you better understand each fund's
recent past performance. The tables are excerpted from each fund's latest
financial statements audited by Arthur Andersen LLP. You may obtain the complete
statements along with the auditor's report by requesting from Nuveen a free copy
of the fund's latest annual shareholder report.

Selected data for a share outstanding throughout each period is as follows:

Class (Inception Date)

<TABLE>
<CAPTION>
Investment Operations Less Distributions
------------------------------ --------------------------

CONNECTICUT Net
Realized/
Unrealized
Beginning Net Invest- Net Ending
Net Invest- ment Invest- Net
Year Ended Asset ment Gain ment Capital Asset Total
February 28/29, Value Income(a) (Loss) Total Income Gains Total Value Return (b)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A (7/87)**
1999 $10.85 $.53 $ .06 $ .59 $(.54) $ -- $(.54) $10.90 5.51%
1998 10.51 .56 .34 .90 (.56) -- (.56) 10.85 8.75
1997 (c) 10.23 .42 .28 .70 (.42) -- (.42) 10.51 6.96
1996 (d) 10.38 .57 (.14) .43 (.58) -- (.58) 10.23 4.18
1995 (d) 10.17 .58 .22 .80 (.59) -- (.59) 10.38 8.21
1994 (d) 10.66 .59 (.39) .20 (.60) (.09) (.69) 10.17 1.70
Class B (2/97)
1999 10.83 .46 .05 .51 (.46) -- (.46) 10.88 4.77
1998 10.51 .48 .32 .80 (.48) -- (.48) 10.83 7.76
1997 (e) 10.53 .04 (.02) .02 (.04) -- (.04) 10.51 .19
Class C (10/93)**
1999 10.83 .48 .05 .53 (.48) -- (.48) 10.88 4.94
1998 10.49 .50 .34 .84 (.50) -- (.50) 10.83 8.17
1997 (c) 10.22 .38 .27 .65 (.38) -- (.38) 10.49 6.43
1996 (d) 10.36 .52 (.14) .38 (.52) -- (.52) 10.22 3.71
1995 (d) 10.16 .53 .20 .73 (.53) -- (.53) 10.36 7.53
1994 (f) 11.06 .33 (.84) (.51) (.33) (.06) (.39) 10.16 (6.48)*
Class R (2/97)
1999 10.87 .56 .06 .62 (.56) -- (.56) 10.93 5.83
1998 10.51 .58 .36 .94 (.58) -- (.58) 10.87 9.17
1997 (e) 10.55 .01 (.05) (.04) -- -- -- 10.51 (.38)
==========================================================================================================

</TABLE>

<TABLE>
<CAPTION>
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Ratio Ratio
of Net of Net
Ratio of Investment Ratio of Investment
Expenses Income Expenses Income
to Average to Average to Average to Average
Ending Net Assets Net Assets Net Assets Net Assets
Net Before Before After After Portfolio
Year Ended Asset Reimburse- Reimburse- Reimburse- Reimburse- Turnover
February 28/29, (000) ment ment ment(a) ment(a) Rate
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A (7/87)**
1999 $220,721 .89% 4.89% .86% 4.92% 7%
1998 216,436 .85 5.15 .78 5.22 12
1997 (c) 209,873 1.02* 5.18* .79* 5.41* 20
1996 (d) 202,219 1.03 5.23 .74 5.52 24
1995 (d) 203,210 1.03 5.54 .73 5.84 25
1994 (d) 202,607 1.03 5.14 .65 5.52 30
Class B (2/97)
1999 11,223 1.64 4.14 1.61 4.17 7
1998 3,713 1.61 4.34 1.52 4.43 12
1997 (e) 102 1.59* 6.61* 1.12* 7.08* 20
Class C (10/93)**
1999 16,198 1.44 4.34 1.41 4.37 7
1998 11,586 1.41 4.59 1.33 4.67 12
1997 (c) 7,087 1.57* 4.65* 1.34* 4.88* 20
1996 (d) 7,243 1.58 4.67 1.29 4.96 24
1995 (d) 5,536 1.58 4.97 1.28 5.27 25
1994 (f) 4,360 1.77* 4.22* 1.22* 4.77* 30
Class R (2/97)
1999 979 .69 5.10 .66 5.13 7
1998 590 .66 5.29 .57 5.38 12
1997 (e) -- -- 10.97* -- 10.97* 20
==============================================================================================
</TABLE>

* Annualized.
** Information included prior to the nine months ended February 28, 1997,
reflects the financial highlights of the predecessor fund, Flagship
Connecticut Double Tax Exempt.
(a) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory or its predecessor Flagship Financial.
(b) Total returns are calculated on net asset value without any sales charge and
are not annualized for periods less than one year except where noted.
(c) For the nine months ended February 28.
(d) For the fiscal year ended May 31.
(e) From commencement of class operations as noted.
(f) From commencement of class operations as noted through May 31.

Selected data for a share outstanding throughout each period is as follows:
Class (Inception Date)
Investment Operations Less Distributions
----------------------------------------------- -----------------------------------
NEW JERSEY Net
Realized/
Beginning Net Unrealized Net Ending
Net Invest- Invest- Invest- Net
Year Ended Asset ment ment ment Capital Asset
February 28/29, Value Income (a) Gain (Loss) Total Income Gains Total Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A (9/94)**
1999 $ 10.61 $ .53 $ (.01) $ .52 $ (.53) $ -- $ (.53) $ 10.60
1998 10.26 .55 .36 .91 (.56) -- (.56) 10.61
1997 (c) 10.22 .05 .04 .09 (.05) -- (.05) 10.26
1997 (d) 10.40 .48 (.15) .33 (.51) -- (.51) 10.22
1996 (d) 9.73 .51 .69 1.20 (.53) -- (.53) 10.40
1995 (e) 10.03 .21 (.21) -- (.21) (.09) (.30) 9.73
Class B (2/97)
1999 10.61 .45 (.01) .44 (.45) -- (.45) 10.60
1998 10.26 .48 .35 .83 (.48) -- (.48) 10.61
1997 (c) 10.22 .05 .03 .08 (.04) -- (.04) 10.26
Class C (9/94)**
1999 10.59 .47 (.01) .46 (.47) -- (.47) 10.58
1998 10.25 .50 .34 .84 (.50) -- (.50) 10.59
1997 (c) 10.20 .04 .05 .09 (.04) -- (.04) 10.25
1997 (d) 10.38 .41 (.16) .25 (.43) -- (.43) 10.20
1996 (d) 9.71 .44 .68 1.12 (.45) -- (.45) 10.38
1995 (e) 9.77 .16 (.05) .11 (.17) -- (.17) 9.71
Class R (12/91)**
1999 10.62 .55 (.02) .53 (.55) -- (.55) 10.60
1998 10.27 .58 .35 .93 (.58) -- (.58) 10.62
1997 (c) 10.23 .05 .04 .09 (.05) -- (.05) 10.27
1997 (d) 10.41 .49 (.14) .35 (.53) -- (.53) 10.23
1996 (d) 9.74 .55 .68 1.23 (.56) -- (.56) 10.41
1995 (d) 10.71 .52 (.88) (.36) (.52) (.09) (.61) 9.74

Ratios/Supplemental Data
---------------------------------------------------------------------------------------------

Ratio Ratio
of Net of Net
Ratio of Investment Ratio of Investment
Expenses Income to Expenses Income to
to Average Average to Average Average
Net Assets Net Assets Net Assets Net Assets
Before Before After After Portfolio
Total Ending Net Reimburse- Reimburse- Reimburse- Reimburse- Turnover
Return (b) Assets (000) ment ment ment(a) ment(a) Rate
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C> <C>
Class A (9/94)**
1999 5.00% $53,442 1.02% 4.62% .66% 4.98% 10%
1998 9.06 35,782 1.01 4.92 .60 5.33 16
1997 (c) .85 27,879 1.01* 5.43* .55* 5.89* --
1997 (d) 3.31 17,072 1.13 4.85 1.00 4.98 10
1996 (d) 12.63 10,661 1.25 4.85 1.00 5.10 39
1995 (e) .02 2,741 1.31* 5.03* 1.00* 5.34* 32
Class B (2/97)
1999 4.23 11,368 1.76 3.88 1.39 4.25 10
1998 8.25 2,981 1.77 4.16 1.36 4.57 16
1997 (c) .78 74 1.77* 5.71* 1.27* 6.21* --
Class C (9/94)**
1999 4.48 10,290 1.57 4.07 1.21 4.43 10
1998 8.40 5,733 1.56 4.37 1.16 4.77 16
1997 (c) .90 2,712 1.56* 4.89* 1.10* 5.35* --
1997 (d) 2.53 2,611 1.88 4.09 1.75 4.22 10
1996 (d) 11.80 1,065 1.96 4.16 1.75 4.37 39
1995 (e) 1.16 464 2.00* 4.37* 1.75* 4.62* 32
Class R (12/91)**
1999 5.13 46,033 .82 4.82 .47 5.17 10
1998 9.29 44,817 .81 5.12 .40 5.53 16
1997 (c) .86 42,651 .81* 5.63* .35* 6.09* --
1997 (d) 3.55 42,905 .89 5.10 .75 5.24 10
1996 (d) 12.88 43,304 .98 5.20 .75 5.43 39
1995 (d) (3.27) 39,582 .89 5.18 .75 5.32 32
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>
* Annualized.
** Information included prior to the one month ended February 28, 1997,
reflects the financial highlights of the predecessor fund, Nuveen New
Jersey Tax-Free Value.
(a) After waiver of certain management fees or reimbursement of expenses, if
any, by Nuveen Advisory.
(b) Total returns are calculated on net asset value without any sales charge
and are not annualized for periods less than one year.
(c) For the one month ended February 28.
(d) For the fiscal year ended January 31.
(e) From commencement of class operations as noted through January 31.

Selected data for a share outstanding throughout each period is as follows:

Class (Inception Date)

Investment Operations Less Distributions
-------------------------------------- -----------------------------------
NEW YORK Net
Realized/
Beginning Net Unrealized Net Ending
Net Invest- Invest- Invest- Net
Year Ended Asset ment ment ment Capital Asset
February 28/29, Value Income (a) Gain (Loss) Total Income Gains Total Value
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A (9/94)**
1999 $ 10.97 $ .55 $ .06 $ .61 $ (.55) $ -- $ (.55) $ 11.03
1998 10.53 .57 .44 1.01 (.57) -- (.57) 10.97
1997 10.61 .59 (.07) .52 (.56) (.04) (.60) 10.53
1996 10.12 .56 .48 1.04 (.55) -- (.55) 10.61
1995 (c) 10.23 .28 (.07) .21 (.27) (.05) (.32) 10.12
Class B (2/97)
1999 10.98 .47 .06 .53 (.47) -- (.47) 11.04
1998 10.53 .49 .45 .94 (.49) -- (.49) 10.98
1997 (c) 10.48 .05 .04 .09 (.04) -- (.04) 10.53
Class C (9/94)**
1999 11.01 .49 .05 .54 (.49) -- (.49) 11.06
1998 10.56 .51 .45 .96 (.51) -- (.51) 11.01
1997 10.64 .55 (.11) .44 (.48) (.04) (.52) 10.56
1996 10.11 .48 .53 1.01 (.48) -- (.48) 10.64
1995 (c) 10.11 .23 .04 .27 (.22) (.05) (.27) 10.11
Class R (12/86)**
1999 11.00 .58 .05 .63 (.57) -- (.57) 11.06
1998 10.55 .59 .45 1.04 (.59) -- (.59) 11.00
1997 10.64 .59 (.05) .54 (.59) (.04) (.63) 10.55
1996 10.15 .58 .49 1.07 (.58) -- (.58) 10.64
1995 10.72 .58 (.53) .05 (.57) (.05) (.62) 10.15
- ------------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
Ratios/Supplemental Data
----------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C> <C>
Class A (9/94)**
1999 5.69% $ 80,549 .94% 4.88% .79% 5.03% 28%
1998 9.84 78,038 .90 5.14 .77 5.27 30
1997 5.07 71,676 .95 5.39 .89 5.45 37
1996 10.52 15,732 1.02 5.28 .99 5.31 47
1995 (c) 2.21 3,189 1.56* 5.31* 1.00* 5.87* 29
Class B (2/97)
1999 4.88 12,121 1.68 4.16 1.57 4.27 28
1998 9.10 4,311 1.67 4.32 1.50 4.49 30
1997 (c) .87 124 1.65* 5.86* 1.44* 6.07* 37
Class C (9/94)**
1999 5.00 8,858 1.49 4.33 1.35 4.47 28
1998 9.31 6,233 1.46 4.57 1.32 4.71 30
1997 4.31 3,965 1.64 4.73 1.57 4.80 37
1996 10.13 646 1.99 4.29 1.73 4.55 47
1995 (c) 2.80 86 7.97* (1.06)* 1.75* 5.16* 29
Class R (12/86)**
1999 5.88 157,209 .74 5.08 .59 5.23 28
1998 10.11 160,142 .70 5.34 .57 5.47 30
1997 5.26 152,598 .71 5.55 .69 5.57 37
1996 10.80 154,776 .76 5.55 .74 5.57 47
1995 .75 149,454 .74 5.79 .74 5.79 29
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>
* Annualized.
** Information included prior to the fiscal year ended February 28, 1997,
reflects the financial highlights of the predecessor fund, Nuveen New York
Tax-Free Value.
(a) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory.
(b) Total returns are calculated on net asset value without any sales charge
and are not annualized for periods less than one year.
(c) From commencement of class operations as noted.

Selected data for a share outstanding throughout each period is as follows:

Investment Operations Less Distributions
--------------------------------------- -----------------------------------
NEW YORK INSURED Net
Realized/
Beginning Net Unrealized Net Ending
Net Invest- Invest- Invest- Net
Year Ended Asset ment ment ment Capital Asset
February 28/29, Value Income (a) Gain (Loss) Total Income Gains Total Value
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A (9/94)
1999 $ 10.76 $ .51 $ .01 $ .52 $ (.52) $ (.03) $ (.55) $ 10.73
1998 10.50 .53 .26 .79 (.53) -- (.53) 10.76
1997 10.61 .55 (.14) .41 (.52) -- (.52) 10.50
1996 10.15 .52 .49 1.01 (.52) (.03)** (.55) 10.61
1995 (c) 10.16 .25 .04 .29 (.26) (.04) (.30) 10.15
Class B (2/97)
1999 10.76 .44 -- .44 (.43) (.03) (.46) 10.74
1998 10.50 .45 .26 .71 (.45) -- (.45) 10.76
1997 (c) 10.53 .03 (.02) .01 (.04) -- (.04) 10.50
Class C (9/94)
1999 10.74 .46 .02 .48 (.46) (.03) (.49) 10.73
1998 10.48 .47 .26 .73 (.47) -- (.47) 10.74
1997 10.61 .47 (.16) .31 (.44) -- (.44) 10.48
1996 10.12 .44 .53 .97 (.45) (.03)** (.48) 10.61
1995 (c) 10.03 .21 .13 .34 (.21) (.04) (.25) 10.12
Class R (12/86)
1999 10.76 .53 .02 .55 (.54) (.03) (.57) 10.74
1998 10.49 .55 .27 .82 (.55) -- (.55) 10.76
1997 10.61 .55 (.13) .42 (.54) -- (.54) 10.49
1996 10.15 .55 .49 1.04 (.55) (.03)** (.58) 10.61
1995 10.63 .56 (.44) .12 (.56) (.04) (.60) 10.15
- ------------------------------------------------------------------------------------------------------------------------------------

Ratios/Supplemental Data
---------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C> <C>
Class A (9/94)
1999 4.91% $ 52,448 .92% 4.78% .92% 4.78% 16%
1998 7.76 44,721 .88 4.98 .88 4.98 17
1997 4.02 35,957 .92 5.04 .92 5.04 29
1996 10.19 24,747 .93 4.97 .93 4.97 17
1995 (c) 3.01 7,258 1.13* 5.33* 1.05* 5.41* 11
Class B (2/97)
1999 4.19 13,374 1.67 4.04 1.67 4.04 16
1998 6.96 5,982 1.65 4.24 1.65 4.24 17
1997 (c) .07 1,279 1.64* 5.17* 1.64* 5.17* 29
Class C (9/94)
1999 4.53 4,103 1.47 4.25 1.47 4.25 16
1998 7.16 2,310 1.43 4.43 1.43 4.43 17
1997 3.06 2,015 1.67 4.28 1.67 4.28 29
1996 9.71 1,369 1.69 4.21 1.69 4.21 17
1995 (c) 285 285 2.32* 4.13* 1.80* 4.65* 11
Class R (12/86)
1999 301,805 .72 4.98 .72 4.98 16
1998 8.04 313,647 .68 5.18 .68 5.18 17
1997 4.15 319,208 .68 5.28 .68 5.28 29
1996 10.51 343,348 .67 5.26 .67 5.26 17
1995 1.37 345,121 .65 5.57 .65 5.57 11
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>
* Annualized.
** The amounts shown include distributions in excess of capital gains of $.0024
per share.
(a) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory.
(b) Total returns are calculated on net asset value without any sales charge
and are not annualized for periods less than one year.
(c) From commencement of class operations as noted.

Section 5 Financial Highlights 25

<PAGE>

Appendix Additional State Information

Because the funds primarily purchase municipal bonds from a specific state, each
fund also bears investment risks from economic, political, or regulatory changes
that could adversely affect municipal bond issuers in that state and therefore
the value of the fund's investment portfolio. The following discussion of
special state considerations was obtained from official offering statements of
these issuers and has not been independently verified by the funds. The
discussion includes general state tax information related to an investment in
fund shares. Because tax laws are complex and often change, you should consult
your tax adviser about the state tax consequences of a specific fund investment.
See the Statement of Additional Information for further information.

Connecticut
Connecticut is in the midst of a slow economic recovery from a recession that
began in 1989 and ended in late 1992. Almost 65% of the state's recessionary
employment loss has been recovered and the 1997 unemployment rate was 5.1%.
While Connecticut ranks first among the states in per capita personal income
($36,263 in 1997), there are strong regional disparities in income. Connecticut
has the highest tax-supported debt to personal income ratio in the nation,
according to Moody's. Moderate economic growth is expected over the next
several years.

Fiscal year 1997's general fund surplus allowed for a transfer of $96 million
into the state's budget reserve (or rainy day) fund. This transfer brought the
total balance of the fund to $336.9 million, still $130 million short of the
state's 5% of net general fund appropriations. The largest factor affecting
future revenue estimates is the effect of previously enacted corporate, personal
income, and inheritance tax cuts, which are being phased in. Revenue reduction
is expected to increase by $400 million from fiscal year 1999 to fiscal year
2002. The state's general obligation bonds are rated Aa3 by Moody's and AA- by
S&P.

Tax Treatment:
The Connecticut Fund's regular monthly dividends will not be subject to the
Connecticut personal income tax to the extent they are paid out of income earned
on or capital gains realized from the sale of Connecticut municipal bonds or out
of income earned on obligations of U.S. territories and possessions. The portion
of the Connecticut Fund's monthly dividends that is attributable to income
earned on other obligations will be subject to the Connecticut personal income
tax. You also will be subject to Connecticut personal income tax to the extent
the Connecticut Fund distributes any taxable income or realized capital gains
(other than capital gains on Connecticut municipal bonds), or if you sell or
exchange Connecticut Fund shares and realize a capital gain on the transaction.

The treatment of corporate shareholders of the Connecticut Fund differs from
that described above. Corporate shareholders should refer to the statement of
additional information for more detailed information and are urged to consult
their tax adviser.

New York
New York State has historically been one of the wealthiest states in the
nation. For decades, however, the State's economy has grown more slowly than
that of the nation as a whole, gradually eroding the State's relative economic
affluence. Statewide, urban centers have experienced significant changes
involving migration of the more affluent to the suburbs and an influx of
generally less affluent residents. Regionally, the older Northeast cities have
suffered because of the relative success that the South and the West have had in
attracting people and business. The State has for many years had a very high
State and local tax burden relative to other states. The burden of State and
local taxation, in combination with the many other causes of regional economic
dislocation, has contributed to the decisions of some businesses and
individuals to relocate outside, or not locate within, the State.

The State's economy remains more reliant on the securities industry than is
the national economy. As a result, the State remains susceptible to downturns
in that industry, which could cause adverse changes in wage and employment
levels. 1997 per capita personal income was $30,752 and the 1997 unemployment
rate was 6.4%.

The State has projected continued moderate economic growth within New York
during 1998 and 1999, although growth rates will lessen gradually during the
course of the two years. Personal income growth is expected to be modest but
below 1997 levels largely because increases in 1998 year-end bonuses are
expected to be lower.

The State expects to end its 1997-98 fiscal year with an operating surplus of
approximately $1.8 billion. The State Legislature enacted the State's 1997-98
fiscal year budget on August 4, 1997, more than four months after the start of
that fiscal year.

As of January 20, 1998, the updated 1997-98 State Financial Plan (the "Plan")
projected total general fund receipts of $35.2 billion and disbursements of
$35.2 billion, representing increases in receipts and disbursements of $2.15
billion and $2.27 billion over 1996-97 fiscal year. The Plan projected a General
Fund balance of approximately $465 million at the close of the 1997-98 fiscal
year.

The Governor issued a proposed State budget for the 1998-99 fiscal year on
January 20, 1998, which projected a balanced general fund and receipts and
disbursements of $36.22 billion and $36.18 billion, respectively. As of May
11, 1998, the State legislature had not yet enacted, nor had the Governor and
the legislature reached an agreement on, the budget for the 1998-99 fiscal
year commencing on April 1, 1998. The Governor and the State's legislature
have agreed on or proposed a series of short-term stopgap spending measures to
fund state payrolls and advances to certain municipalities and certain state
programs. The delay in the enactment of the budget may negatively affect
certain proposed actions and reduce projected savings.

On June 4, 1997, New York City adopted a 1998 fiscal year budget, which
provided for $33.4 billion in spending. Due to increased tax revenues resulting
from increased Wall Street profits and tourism, New York City has estimated
that it may end the 1998 fiscal year with a surplus of $2.0 billion. On April
24, 1998, the Mayor outlined his proposed $34.1 billion Executive Budget. The
Mayor's proposed budget called for $595 million in additional spending cuts at
City agencies and a continuation of the personal income tax surcharge which is
due to expire. The 1998-99 budget proposal includes several tax reductions
including the elimination of the City's sales tax on all clothing and shoe
purchases under $110.

The Governor and the legislature have not agreed upon the level of State aid
to the City during the 1999 fiscal year and there can be no assurances that
further cuts will not be necessary to close additional budget gaps once a
state budget is adopted. If State or Federal aid in later years is less than
the level projected in the Mayor's proposal, projected savings may be
negatively impacted and the Mayor may be required to propose significant
additional spending reductions or tax increases to balance the City's budget for
the 1999 and later fiscal years. If the State, the State Agencies, New York
City, other municipalities or school districts were to suffer serious financial
difficulties jeopardizing their respective access to the public credit markets,
or increasing the risk of a default, the market price of Municipal Obligations
issued by such entities could be adversely affected.

On March 5, 1997, New York Governor George Pataki signed legislation creating
The New York City Transitional Finance Authority, which is authorized to issue
up to $7.5 billion in bonds for capital spending by New York City. The City
had faced limitations on its borrowing capacity after 1998 under the State's
Constitution that would have prevented it from borrowing additional funds, as
a result of the decrease in real estate values within the City. The first
issuance of TFA debt occurred in October 1997.

Tax Treatment.
The New York Funds' regular monthly dividends will not be subject to New York
state or New York city personal income taxes to the extent they are paid out of
income earned on New York municipal bonds or out of income earned on obligations
of U.S. territories and possessions that is exempt from federal taxation. The
portion of the New York Funds' monthly dividends that is attributable to income
earned on other obligations will be subject to the New York state or the New
York city personal income taxes. You also will be subject to New York state and
New York city personal income taxes to the extent the New York Funds distribute
any taxable income or realized capital gains, or if you sell or exchange shares
of the New York Funds and realize a capital gain on the transaction.

The treatment of corporate and unincorporated business shareholders of the New
York Funds differs from that described above. Corporate shareholders should
refer to the statement of additional information for more detailed information
and are urged to consult their tax adviser.

New Jersey
New Jersey has a diversified economic base comprised of various manufacturing,
construction and service industries. New Jersey ranks second among the states in
per capita personal income which was $32,654 in 1997. While the national
recession adversely affected the State's employment rate, New Jersey's economy
has since been accelerating and 1997 unemployment rate was 5.1%.

The 1997 fiscal year audited general fund and available revenues were $17.4
billion against appropriations of $16.4 billion. The general fund surplus
totaled $281 million in fiscal year 1997. New Jersey's general obligation bonds
are rated Aa1 by Moody's and AA+ by Standard and Poor's.

Tax Treatment.
The New Jersey Fund's regular monthly dividends will not be subject to New
Jersey gross income tax to the extent they are paid out of income earned on or
capital gains realized from the sale of New Jersey municipal bonds or U.S.
government securities. You will be subject to New Jersey gross income tax,
however, to the extent the New Jersey Fund distributes any taxable income. If
you realize a capital gain on the sale or exchange of shares of the New Jersey
Fund, you will not be subject to New Jersey gross income tax. If you realize a
capital loss on the sale or exchange of shares of the New Jersey Fund, you may
not use the loss to offset other New Jersey taxable capital gains.

The treatment of corporate shareholders of the New Jersey Fund differs from
that described above. Corporate shareholders should refer to the statement of
additional information for more detailed information and are urged to consult
their tax adviser.

Appendix 26
<PAGE>

Nuveen Mutual Funds

Nuveen offers a variety of mutual funds designed to help you reach your
financial goals. The funds below are grouped by investment objectives.

Growth

Nuveen Rittenhouse Growth Fund

Growth and Income

European Value Fund
Growth and Income Stock Fund
Balanced Stock and Bond Fund
Balanced Municipal and Stock Fund

Tax-Free Income

National Municipal Bond Funds
Long-term
Insured Long-term
Intermediate-term
Limited-term

State Municipal Bond Funds
Arizona
California/1/
Colorado
Connecticut
Florida
Georgia
Kansas
Kentucky

Louisiana
Maryland
Massachusetts/1/
Michigan
Missouri
New Jersey
New Mexico
New York/1/

North Carolina
Ohio
Pennsylvania
Tennessee
Virginia
Wisconsin

Several additional sources of information are available to you. The Statement of
Additional Information (SAI), incorporated by reference into this prospectus,
contains detailed information on fund policies and operation. Shareholder
reports contain management's discussion of market conditions, investment
strategies and performance results as of the fund's latest semi-annual or annual
fiscal year end. Call Nuveen at (800) 257-8787 to request a free copy of any of
these materials or other fund information.

You may also obtain this and other fund information directly from the Securities
and Exchange Commission (SEC). The SEC may charge a copying fee for this
information. Visit the SEC on-line at http://www.sec.gov or in person at the
SEC's Public Reference Room in Washington, D.C. Call the SEC at (800) SEC-0330
for room hours and operation. You may also request fund information by writing
to the SEC's Public Reference Section, Washington, D.C. 20549. The funds'
Investment Company file number is 811-07943.

1. Long-term and insured long-term portfolios.

XXX-XXX X-XX

NUVEEN

John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, IL 60606-1286

(800) 257-8787
www.nuveen.com

<PAGE>

NUVEEN
Municipal
Bond Funds

June 30, 1999

Prospectus

Dependable, tax-free income
to help you keep more of
what you earn.

[PHOTO APPEARS HERE]

California

California Insured

NOT FDIC- May lose value
INSURED No bank guarantee

Table of Contents

Section 1 The Funds

Nuveen California Municipal Bond Fund 2
........................................................................................................
Nuveen California Insured Municipal Bond Fund 4
........................................................................................................

Section 2 How We Manage Your Money

This section gives you a detailed discussion of our investment and risk management strategies.

Who Manages the Funds 6
........................................................................................................
Management Fees 7
........................................................................................................
What Securities We Invest In 7
........................................................................................................
How We Select Investments 8
........................................................................................................
What the Risks Are 9
........................................................................................................
How We Manage Risk 9
........................................................................................................

Section 3 How You Can Buy and Sell Shares

This section provides the information you need to move money into or out of your account.

How to Choose a Share Class 11
........................................................................................................
How to Reduce Your Sales Charge 13
........................................................................................................
How to Buy Shares 13
........................................................................................................
Systematic Investing 14
........................................................................................................
Systematic Withdrawal 15
........................................................................................................
Special Services 15
........................................................................................................
How to Sell Shares 16
........................................................................................................

Section 4 General Information

This section summarizes the funds' distribution policies and other general fund information.

Distributions and Taxes 18
........................................................................................................
Distribution and Service Plans 19
........................................................................................................
Net Asset Value 20
........................................................................................................
Fund Service Providers 20
........................................................................................................

Section 5 Financial Highlights

This section provides the funds' financial performance for the past 5 years. 21
........................................................................................................
Appendix Additional State Information 22
........................................................................................................
</TABLE>

We have used the icons below throughout this prospectus to make it easy for you
to find the type of information
you need.

.. Investment Strategy

.. Risks

.. Fees, Charges
and Expenses

.. Shareholder
Instructions

.. Performance and
Current Portfolio
Information
<PAGE>

June 30, 1999

Section 1 The Funds

Nuveen California Municipal Bond Fund

Nuveen California Insured Municipal Bond Fund

Prospectus

To learn more about how Nuveen Mutual Funds can help you achieve your financial
goals, talk with your financial adviser. Or call us at (800) 257-8787 for more
information.

A Century of Investment Experience

Section 1 The Funds 1
<PAGE>

Nuveen California Municipal Bond Fund

Fund Overview

Investment Objective

How the Fund Pursues Its Objective

The fund's investment adviser uses a value-oriented strategy and looks for
higher-yielding and undervalued municipal bonds that offer the potential for
above-average total return.

What are the Risks of Investing in the Fund?

The principal risks of investing in the fund are interest rate risk and credit
risk. Interest rate risk is the risk that interest rates will rise, causing bond
prices to fall. Credit risk is the risk that an issuer of a municipal bond will
be unable to make interest and principal payments. In general, lower rated bonds
carry greater credit risk. The fund may bear additional risk because it invests
primarily in California bonds. As with any mutual fund investment, loss of money
is a risk of investing.

The fund seeks to limit risk by buying investment grade quality bonds in a
variety of industry sectors.

Is This Fund Right For You?

The fund may be a suitable investment for you if you seek to:

.. Earn regular monthly tax-free dividends;

.. Preserve investment capital over time;

.. Reduce taxes on investment income;

.. Set aside money systematically for retirement, estate planning or college
funding.

You should not invest in this fund if you seek to:

.. Pursue an aggressive, high-growth investment strategy;

.. Invest through an IRA or 401(k) plan;

.. Avoid fluctuations in share price.

How the Fund Has Performed

Total Returns/1/
[BAR CHART APPEARS HERE]

Class A Annual Returns
<TABLE>
<S> <C>
1989 8.6%
1990 6.6%
1991 11.7%
1992 7.9%
1993 11.7%
1994 -6.1%
1995 17.0%
1996 3.8%
1997 11.9%
1998
</TABLE>

Average Annual Total Returns for
the Periods Ending December 31, 1998
....................................

2 Section 1 The Funds
<PAGE>

What are the Costs of Investing?

Shareholder Transaction Expenses/4/

Paid From Fund Assets

Share Class A B C R
- --------------------------------------------------------------------------------

Management Fees .55% .55% .55% .55%
.................................................................................

Total Annual Fund Operating
- ---------------------------
Expenses Gross+ .87% 1.62% 1.42% .67%
- --------------

How the Fund Is Invested (as of 2/28/99)

Portfolio Statistics

Industry Diversification (Top 5)

[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Tax Obligation Limited (18%)
Other (30%)
Housing - Single-Family (10%)
Health Care (9%)
U.S. Guaranteed (20%)
Housing - Multi Family (13%)
</TABLE>

2. Market Benchmark returns reflect the performance of the Lehman Brothers
Municipal Bond Index, an unmanaged index comprised of a broad range of
investment-grade municipal bonds.

3. Peer Group returns represent the average annualized returns of the funds in
the Lipper California Municipal Debt Category. Returns assume reinvestment of
dividends and do not reflect any applicable sales charges.

5. Class R shares may be purchased only under limited circumstances, or by
specified classes of investors. See "How You Can Buy and Sell Shares."

6. Reduced Class A sales charges apply to purchases of $50,000 or more. See
"How You Can Buy and Sell Shares."

7. As a percentage of lesser of purchase price or redemption proceeds.

10. Class C shares redeemed within one year of purchase are subject to a 1%
CDSC.

Section 1 The Funds 3
<PAGE>

Nuveen California Insured Municipal Bond Fund

Fund Overview

Investment Objective

The investment objective of the fund is to provide you with as high a level of
current interest income exempt from regular federal, state and, in some cases
local, income taxes as is consistent with preservation of capital.

How the Fund Pursues Its Objective

The fund's investment adviser uses a value-oriented strategy and looks for
higher-yielding and undervalued municipal bonds that offer the potential for
above-average total return.

What are the Risks of Investing in the Fund?

The principal risks of investing in the fund are interest rate risk and credit
risk. Interest rate risk is the risk that interest rates will rise, causing bond
prices to fall. Credit risk is the risk that an issuer of a municipal bond will
be unable to make interest and principal payments. In general, lower rated bonds
carry greater credit risk. The fund may bear additional risk because it invests
primarily in California bonds. As with any mutual fund investment, loss of money
is a risk of investing.

The fund seeks to limit risk by buying investment grade quality bonds in a
variety of industry sectors.

Is This Fund Right For You?

The fund may be a suitable investment for you if you seek to:
.. Earn regular monthly tax-free dividends;
.. Preserve investment capital over time;
.. Reduce taxes on investment income;
.. Set aside money systematically for
retirement, estate planning or college funding.
You should not invest in this fund if you seek to:
.. Pursue an aggressive, high-growth
investment strategy;
.. Invest through an IRA or 401(k) plan;
.. Avoid fluctuations in share price.

How the Fund Has Performed

The fund's investment adviser is Nuveen Advisory Corp., Nuveen's Premier
Adviser/SM/ for municipal bond investing. The chart and table below illustrate
annual fund returns for each of the past eight years as well as annualized fund,
peer group and market benchmark returns for the one-, five-year and inception
periods ending December 31, 1998. This information is intended to help you
assess the variability of fund returns over the past eight years (and
consequently, the potential rewards and risks of a fund investment).

Total Returns/1/

Class A Annual Returns

1989 8.6%
1990 6.6%
1991 11.7%
1992 7.9%
1993 11.7%
1994 -6.1%
1995 17.0%
1996 3.8%
1997 11.9%
1998

Average Annual Total Returns for
the Periods Ending December 31, 1998
....................................

Class 1 Year 5 Year 10 year
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (Offer) 7.19% 6.42% 7.91%
Class A (NAV) 11.86% 7.33% 8.37%
Class B 7.19% 6.57% 7.90%
Class C 11.18% 6.69% 7.75%
Class R 11.69% 7.29% 8.35%
- --------------------------------------------------------------------------------
LB Market
Benchmark/2/ 9.19% 7.36% 8.58%
Lipper
Peer Group/3/ 9.15% 6.93% 8.41%
</TABLE>

4 Section 1 The Funds
<PAGE>

What are the Costs of Investing?

Shareholder Transaction Expenses/4/

Paid Directly From Your Investment

Share Class A B C R/5/
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge Imposed
on Purchases 4.20%/6/ None None None
...........................................................................
Maximum Sales Charge Imposed
on Reinvested Dividends None None None None
...........................................................................
Exchange Fees None None None None
...........................................................................
Deferred Sales Charge/7/ None/8/ 5%/9/ 1%/10/ None
...........................................................................

Annual Fund Operating Expenses/11/

Paid From Fund Assets

Share Class A B C R
- --------------------------------------------------------------------------
Management Fees .55% .55% .55% .55%
............................................................................
12b-1 Distribution and Service Fees .20% .95% .75% N%
............................................................................
Other Expenses .13% .12% .12% .12%
............................................................................
Total Annual Fund Operating
Expenses--Gross+ .88% 1.62% 1.42% .67%

+ After Expense Reimbursements
............................................................................
Reimbursements (.13%) (.17%) (.13%) (.15%)
............................................................................
Total Annual Fund Operating Expenses--Net .75% 1.45% 1.29% .52%
............................................................................
</TABLE>

The following example is intended to help you compare the cost of investing in
the fund with the cost of investing in other mutual funds. It assumes you
invest $10,000 in the fund for the time period indicated and then either redeem
or do not redeem your shares at the end of a period. The example assumes that
your investment has a 5% return each year and that the fund's operating expenses
remain the same. Your actual returns and costs may be higher or lower.

Redemption No Redemption

Share Class A B C R A B C R
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year $ 506 $ 560 $ 145 $ 68 $ 506 $ 165 $ 145 $ 68
...........................................................................................................
3 Years $ 689 $ 830 $ 449 $214 $ 689 $ 511 $ 449 $214
...........................................................................................................
5 Years $ 887 $ 996 $ 776 $373 $ 887 $ 881 $ 776 $373
...........................................................................................................
10 Years $1,459 $1,724 $1,702 $835 $1,459 $1,724 $1,702 $835
...........................................................................................................
</TABLE>

How the Fund Is Invested (as of 2/28/99)

Portfolio Statistics

Weighted Average Maturity 21.7 years
.................................................................................
Weighted Average Duration 7.7 years
.................................................................................
Weighted Average Credit Quality AA+
.................................................................................
Number of Issues 77
.................................................................................

Credit Quality

AAA 71%
.................................................................................
AA 8%
.................................................................................
A 12%
.................................................................................
BBB/NR 9%
.................................................................................

Industry Diversification (Top 5)

[PIE CHART APPEARS HERE]

Other (33%)
Housing-Single Family (12%)
Health Care (18%)
U.S. Guaranteed (11%)
Tax Obligation-General (14%)
Tax Obligation-Limited (12%)

2. Market Benchmark returns reflect the performance of the Lehman Brothers
Municipal Bond Index, an unmanaged index comprised of a broad range of
investment-grade municipal bonds.

3. Peer Group returns represent the average annualized returns of the funds in
the Lipper California Debt Category. Returns assume reinvestment of dividends
and do not reflect any applicable sales charges.

5. Class R shares may be purchased only under limited circumstances, or by
specified classes of investors. See "How You Can Buy and Sell Shares."

6. Reduced Class A sales charges apply to purchases of $50,000 or more. See
"How You Can Buy and Sell Shares."

7. As a percentage of lesser of purchase price or redemption proceeds.

10. Class C shares redeemed within one year of purchase are subject to a 1%
CDSC.

Section 1 The Funds 5
<PAGE>

Section 2 How We Manage Your Money

Who Manages the Funds

William M. Fitzgerald has been the portfolio manager for the California Funds
since July 1998. Mr. Fitzgerald has been a portfolio manager for Nuveen Advisory
since 1990, and currently manages investments for fourteen Nuveen-sponsored
investment companies.

Management Fees

For providing these services, Nuveen Advisory is paid an annual management fee.
The following schedule applies to each fund described in this prospectus:

6 Section 2 How We Manage Your Money
<PAGE>

Management Fees

For providing these services, Nuveen Advisory is paid an annual management fee.
The following schedule applies to each fund described in this prospectus:

Average Daily Net Asset Value Management Fee

For the most recent fiscal year, the funds paid after expense reimbursements the
following management fees to Nuveen Advisory, as a percentage of average net
assets:

Nuveen California Municipal Bond Fund .34%
................................................................................
Nuveen California Insured Municipal Bond Fund .42%
................................................................................

What Securities We Invest In

Municipal Obligations

Quality Municipal Bonds

Section 2 How We Manage Your Money 7
<PAGE>

by the funds' investment adviser. If suitable municipal bonds from a specific
state are not available at attractive prices and yields, a fund may invest in
municipal bonds of U.S. territories (such as Puerto Rico and Guam) which are
exempt from regular federal, state and local income taxes. The funds may not
invest more than 20% of their net assets in these territorial municipal bonds.

Portfolio Maturity

Insurance

The California Insured Fund primarily purchases insured municipal bonds. The
California Insured Fund primarily purchases insured municipal bonds. See
"Insurance" below. Under normal market conditions, the California Insured Fund
will invest at least 65% of its assets in insured municipal bonds, and at least
80% of its net assets in insured municipal bonds or municipal bonds backed by an
escrow or trust account that contains sufficient U.S. government-backed
securities to assure timely payment of interest and principal. Insured municipal
bonds are either covered by individual, permanent insurance policies (obtained
either at the time of issuance or subsequently), or covered "while in fund"
under a master portfolio insurance policy purchased by a fund. Insurance
guarantees only the timely payment of interest and principal on the bonds; it
does not guarantee the value of either individual bonds or fund shares.

Short-term Investments

Delayed Delivery Transactions

How We Select Investments

Portfolio Turnover

What the Risks Are

8 Section 2 How We Manage Your Money
<PAGE>

What the Risks Are

Risk is inherent in all investing. Investing in a mutual fund--even the most
conservative--involves risk, including risk thta you may receive little or no
return on your inveestment or even that you may lose part or all of your
investment. Therefore, before investing you should consider carefully the
following risks that you assume when you invest in these funds. Because of these
and other risks, you should consider an investment in any of these funds to be a
long-term investment.

How We Manage Risk

Section 2 How We Manage Your Money 9
<PAGE>

Investment Limitations

.. 25% in any one industry such as electric utilities or health care.

.. 10% in borrowings (33% if used to meet redemptions).

.. 5% in securities of any one issuer (except U.S. government
securities or for 25% of each fund's assets).

Hedging and Other Defensive Investment Strategies

10 Section 2 How We Manage Your Money
<PAGE>

Section 3 How You Can Buy and Sell Shares

How to Choose a Share Class

In deciding whether to purchase Class A, Class B, Class C or Class R shares, you
should consider:

.. the amount of your purchase;

.. any current holdings of fund shares;

.. how long you expect to hold the shares;

.. the amount of any up-front sales charge;

.. whether a contingent deferred sales charge
(CDSC) would apply upon redemption;

.. the amount of any distribution or service
fees that you may incur while you own the shares;

.. whether you will be reinvesting income or
capital gain distributions in additional shares;

.. whether you qualify for a sales charge
waiver or reduction.

For a summary of the charges and expenses for each class, please see "What are
the Costs of Investing?".

Class A Shares

(1) You can buy $1 million or more of Class A shares at net asset value without
an up-front sales charge. Nuveen pays Authorized Dealers a commission equal to
the sum of 1% (0.75% and 0.50%, respectively, for Intermediate and Limited Term
Funds) of the first $2.5 million, plus 0.50% of the next $2.5 million, plus
0.25% (0.50% for Intermediate Funds) of any amount over $5 million. Unless the
Authorized Dealer waived the commission, you may be assessed a contingent
deferred sales charge (CDSC) of 1% (0.75% and 0.50%, respectively, for
Intermediate and Limited Term Funds) if you redeem any of your shares within 18
months of purchase. The CDSC is calculated on the lower of your purchase price
or redemption proceeds.

Section 3 How You Can Buy and Sell Shares 11
<PAGE>

Class B Shares

Years Since Purchase 0-1 1-2 2-3 3-4 4-5 5-6

CDSC 5% 4% 4% 3% 2% 1%
.................................................................................

Class C Shares

Class R Shares

12 Section 3 How You Can Buy and Sell Shares
<PAGE>

How to Reduce Your Sales Charge

We offer a number of ways to reduce or eliminate the up-front sales charge on
Class A shares or to qualify to purchase Class R shares.

<TABLE>
<CAPTION>
Class A Sales Charge Class A Sales Charge Class R Eligibility
Reductions Waivers
<S> <C> <C>
.. Rights of accumulation . Nuveen Defined Portfolio . Certain employees and
.. Letter of intent or Exchange - Traded Fund directors of Nuveen or
.. Group purchase reinvestment employees of authorized
. Purchases using dealers
redemptions from . Bank trust departments
unrelated funds
. Retirement plans
. Certain employees and
directors of Nuveen or
employees of authorized
dealers
. Bank trust departments
</TABLE>

How to Buy Shares

Through a Financial Adviser

Section 3 How You Can Buy and Sell Shares 13

<PAGE>

By Mail

Systematic Investing

[GRAPH APPEARS HERE]

Systematic Investment Plan

14 Section 3 How You Can Buy and Sell Shares

<PAGE>

Payroll Direct Deposit Plan

Systematic Withdrawal

You should not establish systematic withdrawals if you intend to make concurrent
purchases of Class A, B or C shares because you may unnecessarily pay a sales
charge or CDSC on these purchases.

Special Services

To help make your investing with us easy and efficient, we offer you the
following services at no extra cost.

Exchanging Shares

Reinstatement Privilege

Section 3 How You Can Buy and Sell Shares 15
<PAGE>

Fund Direct

Your financial adviser can help you complete the forms for these services, or
you can call Nuveen at (800) 257-8787 for copies of the necessary forms.

How to Sell Shares

Through Your Financial Adviser

You may sell your shares through your financial adviser who can prepare the
necessary documentation. Your financial adviser may charge for this.

By Telephone

By Mail

. The fund's name;

. Your name and account number;

An Important Note About Involuntary Redemption

16 Section 3 How You Can Buy and Sell Shares
<PAGE>

. The dollar or share amount you wish to redeem;

. The signature of each owner exactly as it appears on the account;

. The name of the person to whom you want your redemption proceeds paid (if
other than to the shareholder of record);

. The address where you want your redemption proceeds sent (if other than
the address of record);

. Any certificates you have for the shares; and

. Any required signature guarantees.

Section 3 How You Can Buy and Sell Shares 17
<PAGE>

Section 4 General Information

Distributions and Taxes

Payment and Reinvestment Options

Taxes and Tax Reporting

18 Section 4 General Information
<PAGE>

Tax laws are subject to change, so we urge you to consult your tax adviser about
your particular tax situation and how it might be affected by current tax law.

Buying or Selling Shares Close to a Record Date

Taxable Equivalent Yields

Distribution and Service Plans

Section 4 General Information 19
<PAGE>

Nuveen periodically undertakes sales promotion programs with authorized dealers
and may pay them the full applicable sales charge as a commission. In addition,
Nuveen may provide support at its own expense to authorized dealers in
connection with sales meetings, seminars, prospecting seminars and other events
at which Nuveen presents its products and services. Under certain circumstances,
Nuveen also will share with authorized dealers up to half the costs of
advertising that features the products and services of both parties. The
statement of additional information contains further information about these
programs.

Net Asset Value

Fund Service Providers

20 Section 4 General Information
<PAGE>

Section 5 Financial Highlights

Selected data for a share outstanding throughout each period is as follows:

Class (Inception Date)
Investment Operations Less Distributions
------------------------------ ------------------------
Net
CALIFORNIA Realized/
Unrealized
Beginning Net Invest- Net Ending
Net Invest- ment Invest- Net
Year Ended Asset ment Gain ment Capital Asset Total
February 28/29, Value Income (a) (Loss) Total Income Gains Total Value Return (b)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A (9/94)
1999 $ 10.91 $ .54 $ .03 $ .57 $ (.54) $(.05) $ (.59) $ 10.89 5.28%
1998 10.58 .55 .37 .92 (.55) (.04) (.59) 10.91 8.87
1997 10.58 .55 (.01) .54 (.54) -- (.54) 10.58 5.29
1996 10.10 .55 .47 1.02 (.54) -- (.54) 10.58 10.36
1995 (c) 10.21 .27 (.03) .24 (.28) (.07) (.35) 10.10 2.52
Class B (3/97)
1999 10.92 .47 .01 .48 (.46) (.05) (.51) 10.89 4.44
1998 (c) 10.56 .46 .41 .87 (.47) (.04) (.51) 10.92 8.39
Class C (9/94)
1999 10.92 .49 .02 .51 (.48) (.05) (.53) 10.90 4.70
1998 10.58 .49 .38 .87 (.49) (.04) (.53) 10.92 8.36
1997 10.58 .47 (.01) .46 (.46) -- (.46) 10.58 4.53
1996 10.10 .47 .47 .94 (.46) -- (.46) 10.58 9.53
1995 (c) 10.04 .22 .13 .35 (.22) (.07) (.29) 10.10 3.71
Class R (7/86)
1999 10.93 .56 .03 .59 (.56) (.05) (.61) 10.91 5.50
1998 10.61 .57 .36 .93 (.57) (.04) (.61) 10.93 8.99
1997 10.60 .57 .01 .58 (.57) -- (.57) 10.61 5.67
1996 10.13 .58 .46 1.04 (.57) -- (.57) 10.60 10.54
1995 10.74 .58 (.53) .05 (.59) (.07) (.66) 10.13 .78
- -------------------------------------------------------------------------------------------------------------
<CAPTION>

Class (Inception Date)
Ratio/Supplemental Date
--------------------------------------------------------------------------------
Ratio Ratio
of Net of Net
Ratio of Investment Ratio of Investment
CALIFORNIA Expenses Income Expenses Income to
to Average to Average to Average Average
Ending Net Assets Net Assets Net Assets Net Assets
Net Before Before After After Portfolio
Year Ended Assets Reimburse- Reimburse- Reimburse- Reimburse- Turnover
February 28/29, (000) ment ment ment (a) ment (a) Rate
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A (9/94)
1999 $ 36,568 .90% 4.97% .90% 4.97% 34%
1998 29,125 .90 5.11 .90 5.11 45
1997 20,571 .94 5.16 .94 5.16 74
1996 12,709 1.00 5.23 .96 5.27 36
1995 (c) 3,146 1.41* 5.40* 1.00* 5.81* 32
Class B (3/97)
1999 7,353 1.65 4.23 1.65 4.23 34
1998 (c) 2,324 1.66* 4.31* 1.66* 4.31* 45
Class C (9/94)
1999 10,353 1.45 4.43 1.45 4.43 34
1998 4,061 1.45 4.56 1.45 4.56 45
1997 1,003 1.67 4.44 1.67 4.44 74
1996 684 1.84 4.39 1.71 4.52 36
1995 (c) 200 2.41* 4.37* 1.75* 5.03* 32
Class R (7/86)
1999 220,109 .71 5.16 .71 5.16 34
1998 216,309 .70 5.31 .70 5.31 45
1997 214,253 .70 5.41 .70 5.41 74
1996 216,390 .71 5.53 .71 5.53 36
1995 208,080 .71 5.83 .71 5.83 32
- -------------------------------------------------------------------------------------------------
</TABLE>

* Annualized.

(a) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory.

(b) Total returns are calculated on net asset value without any sales charge
and are not annualized for periods less than one year.

Investment Operations Less Distributions
----------------------------------- ---------------------------
Net
CALIFORNIA INSURED Realized/
Unrealized
Beginning Net Invest- Net Ending
Net Invest- ment Invest- Net
Year Ended Asset ment Gain ment Capital Asset Total
February 28/29, Value Income (a) (Loss) Total Income Gains Total Value Return (b)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A (9/94)
1999 $ 11.06 $ .52 $ .06 $ .58 $ (.53) $ (.01)** $(.54) $ 11.10 5.31%
1998 10.70 .54 .36 .90 (.54) -- (.54) 11.06 8.66
1997 10.76 .55 (.08) .47 (.53) -- (.53) 10.70 4.57
1996 10.25 .53 .51 1.04 (.53) -- (.53) 10.76 10.32
1995 (c) 10.22 .26 .07 .33 (.27) (.03) (.30) 10.25 3.33
Class B (3/97)
1999 11.06 .44 .06 .50 (.44) (.01)** (.45) 11.11 4.61
1998 (c) 10.67 .45 .40 .85 (.46) -- (.46) 11.06 8.13
Class C (9/94)
1999 10.98 .46 .06 .52 (.46) (.01)** (.47) 11.03 4.81
1998 10.63 .47 .35 .82 (.47) -- (.47) 10.98 7.96
1997 10.67 .46 (.05) .41 (.45) -- (.45) 10.63 3.99
1996 10.15 .45 .51 .96 (.44) -- (.44) 10.67 9.67
1995 (c) 10.06 .21 .13 .34 (.22) (.03) (.25) 10.15 3.45
Class R (7/86)
1999 11.04 .54 .06 .60 (.55) (.01)** (.56) 11.08 5.49
1998 10.68 .56 .36 .92 (.56) -- (.56) 11.04 8.86
1997 10.74 .56 (.07) .49 (.55) -- (.55) 10.68 4.81
1996 10.23 .56 .50 1.06 (.55) -- (.55) 10.74 10.63
1995 10.67 .56 (.41) .15 (.56) (.03) (.59) 10.23 1.68
<CAPTION>

Ratios/Supplemental Data
----------------------------------------------------------------------------
Ratio Ratio
of Net of Net
Ratio of Investment Ratio of Investment
CALIFORNIA Expenses Income Expenses Income to
INSURED to Average to Average to Average Average
Ending Net Assets Net Assets Net Assets Net Assets
Net Before Before After After Portfolio
Year Ended Assets Reimburse- Reimburse- Reimburse- Reimburse- Turnover
February 28/29, (000) ment ment ment (a) ment (a) Rate
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A (9/94)
1999 $47,300 .93% 4.72% .93% 4.72% 25%
1998 36,203 .90 4.93 .90 4.93 26
1997 27,598 .94 5.05 .94 5.05 51
1996 17,250 .98 4.99 .97 5.00 38
1995 (c) 4,753 1.24* 5.26* 1.05* 5.45* 25
Class B (3/97)
1999 8,825 1.68 3.96 1.68 3.96 25
1998 (c) 2,967 1.66* 4.16* 1.66* 4.16* 26
Class C (9/94)
1999 6,994 1.48 4.17 1.48 4.17 25
1998 3,226 1.45 4.37 1.45 4.37 26
1997 1,719 1.67 4.32 1.67 4.32 51
1996 1,040 1.74 4.23 1.71 4.26 38
1995 (c) 222 2.44* 4.05* 1.80* 4.69* 25
Class R (7/86)
1999 185,428 .74 4.92 .74 4.92 25
1998 191,554 .70 5.14 .70 5.14 26
1997 195,553 .69 5.30 .69 5.30 51
1996 205,642 .70 5.29 .70 5.29 38
1995 198,928 .70 5.60 .70 5.60 25
- -------------------------------------------------------------------------------------------------
</TABLE>

* Annualized.

** The amounts shown include distributions in excess of capital gains of $.003
per share.

(a) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory.

(b) Total returns are calculated on net asset value without any sales charge
and are not annualized for periods less than one year.

Section 5 Financial Highlights 21
<PAGE>

Appendix Additional State Information

Because the funds primarily purchase municipal bonds from a specific state, each
fund also bears investment risks from economic, political or regulatory changes
that could adversely affect municipal bond issuers in that state and therefore
the value of the fund's investment portfolio. The following discussion of
special state considerations was obtained from official offering statements of
these issuers and has not been independently verified by the funds. The
discussion includes general state tax information related to an investment in
fund shares. Because tax laws are complex and often change, you should consult
your tax adviser about the state tax consequences of a specific fund investment.
See the Statement of Additional Information for further information.

California

California's economy, the largest in the nation, is undergoing a slow, steady
growth following a recession from mid-1990 to late 1993 in which the
construction, manufacturing and financial services industries were adversely
affected, job losses were severe, and substantial, broad-based revenue
shortfalls affected both the state and local governments. The state's 1997
unemployment rate was 6.3% and average personal income was $26,570. California's
general obligation bonds are rated A1 by Moody's and A+ by Standard and Poor's.

The taxing authority of California's governmental entities is limited due to the
adoption of "Proposition 13" and other amendments to the California
Constitution. Proposition 13, adopted by voters in 1978, limits to 1% of full
cash value the rate of ad valorem property taxes on real property and generally
restricts the reassessment of property to 2% per year, except upon new
construction or change of ownership (subject to a number of exemptions). Because
the basic 1% ad valorem tax levy is applied against the assessed value of
property as of the owner's date of acquisition, the amount of tax on similarly
situated properties varies widely. The state and local governments are also
subject to annual "appropriations limits" imposed by Article XIIIB of the
California Constitution, which limits the state and local governments from
spending the proceeds of tax revenues, regulatory licenses, user charges or
other fees beyond imposed appropriations limits which are adjusted annually to
reflect changes in cost of living and population. Revenues in excess of the
limitations are measured over a two year cycle. Local governments must return
any excess to taxpayers by rate reductions; the state must refund 50% of any
excess, with the other 50% paid to schools and community colleges. A 1986
initiative statute called "Proposition 62" requires either a majority or 2/3
voter approval for any increase in general or special taxes. Court decisions had
struck down most of Proposition 62, but the California Supreme Court upheld its
constitutionality in September 1995. Many aspects of the decision, such as
whether it applies retroactively, remain unclear, but its future effect will be
to further limit the fiscal flexibility of many local governments. The complex
and ambiguous nature of the foregoing limitations makes it impossible to fully
determine their impact on California Municipal Obligations or the ability of the
state and local governments to pay debt service of California Municipal
Obligations.

On November 5, 1996, California voters approved Proposition 218 which added
Articles XIIIC and XIIID to the California Constitution, imposing certain vote
requirements and other limitations on the imposition of new or increased and in
some cases existing taxes, assessments and property-related fees and charges.
Proposition 218 also extends the initiative power to include the reduction or
repeal of any local taxes, assessments, fees and charges. This extension of the
initiative power is not limited to taxes imposed on or after the effective date
of Proposition 218, and could result in the retroactive repeal or reduction in
any existing taxes, assessments, fees or charges. If such a repeal or reduction
occurs in a particular California entity, the financial condition of that entity
may be adversely impacted and rating downgrades and/or defaults may result.
Additionally, the voter approval requirement reduces the financial flexibility
of local governments to deal with fiscal problems by limiting the ability to
increase taxes, assessments, fees or charges. In some cases, this loss of
flexibility may, and in fact has, been cited as the reason for rating
downgrades. No assurances can be given that California entities will be able to
raise taxes to meet future spending requirements. In addition, at this time it
is not clear exactly how Proposition 218 will be interpreted by a court.

California is estimated to end its 1996-97 fiscal year with a general fund
surplus of approximately $763 million, of which $312 million is reserved for
economic uncertainties reducing the accumulated budget deficit to approximately
$1.14 billion. As a result of the improved revenues, the state's cash position
has substantially recovered. Only $3 billion of cash flow borrowing was needed
during 1996-97, and about $3 billion is projected for 1997-98, with no external
borrowing over the end of the fiscal year. The Governor's proposed budget for
1997-98 projects $52.0 billion of revenues and transfers, and $51.7 billion of
expenditures, resulting in a budget reserve at June 30, 1998 of about $580
million. A number of issues related to the 1997-98 budget still have to be
resolved including additional school funding and the Governor's proposals for
future health and welfare cuts.

California's finances have dramatically improved since 1994 and the economy has
further diversified. However, should the financial condition of California
deteriorate again, its credit ratings could be further reduced, and the market
value and marketability of all outstanding notes and bonds issued by
California, its public authorities or local governments could be adversely
affected.

Tax Treatment

The funds' regular monthly dividends will not be subject to California personal
income taxes to the extent they are paid out of income earned on California
municipal obligations or U.S. government securities. You will be subject to
California personal income taxes, however, to the extent the funds distribute
any taxable income or realized capital gains, or if you sell or exchange shares
of the funds and realize capital gain on the transaction.

The treatment of corporate shareholders of the funds differs from that described
above. Corporate shareholders should refer to the statement of additional
information for more detailed information.

Appendix 22
<PAGE>

Nuveen Mutual Funds

Nuveen offers a variety of mutual funds designed to help you reach your
financial goals. The funds below are grouped by investment objectives.

Growth

Nuveen Rittenhouse Growth Fund

Growth and Income

European Value Fund
Growth and Income Stock Fund
Balanced Stock and Bond Fund
Balanced Municipal and Stock Fund

Tax-Free Income

National Municipal Bond Funds
Long-term
Insured Long-term
Intermediate-term
Limited-term

State Municipal Bond Funds
Arizona
California/1/
Colorado
Connecticut
Florida
Georgia
Kansas
Kentucky

Louisiana
Maryland
Massachusetts/1/
Michigan
Missouri
New Jersey
New Mexico
New York/1/

North Carolina
Ohio
Pennsylvania
Tennessee
Virginia
Wisconsin

1. Long-term and insured long-term portfolios.

XXX-XXX X-XX

NUVEEN

John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, IL 60606-1286

(800) 257-8787
www.nuveen.com

<PAGE>

NUVEEN
Municipal
Bond Funds

June 30, 1999

Prospectus

Dependable, tax-free income
to help you keep more of
what you earn.

Massachusetts
Massachusetts Insured

[PHOTO APPEARS HERE]

NOT FDIC- May lose value
INSURED No bank guarantee

Table of Contents

Section 1 The Funds

This section provides you with an overview of the funds including investment
objectives, portfolio holdings and historical performance information.
<TABLE>
<CAPTION>
<S> <C>
Introduction 1
........................................................................................................
Nuveen Massachusetts Municipal Bond Fund 2
........................................................................................................
Nuveen Massachusetts Insured Municipal Bond Fund 4
........................................................................................................

Section 2 How We Manage Your Money

This section gives you a detailed discussion of our investment and risk management strategies.

Section 3 How You Can Buy and Sell Shares

This section provides the information you need to move money into or out of your account.

Section 4 General Information

This section summarizes the funds' distribution policies and other general fund information.

Section 5 Financial Highlights

We have used the icons below throughout this prospectus to make it easy for you
to find the type of information you need.

.. Investment Strategy

.. Risks

.. Fees, Charges
and Expenses

.. Shareholder
Instructions

.. Performance and
Current Portfolio
Information
<PAGE>

June 30, 1999

Section 1 The Funds

Nuveen Massachusetts Municipal Bond Fund

Nuveen Massachusetts Insured Municipal Bond Fund

Prospectus

To learn more about how Nuveen Mutual Funds can help you achieve your financial
goals, talk with your financial adviser. Or call us at (800) 257-8787 for more
information.

A Century of Investment Experience

Section 1 The Funds 1
<PAGE>

Nuveen Massachusetts Municipal Bond Fund

Fund Overview

Investment Objective

How the Fund Pursues Its Objective

The fund's investment adviser uses a value-oriented strategy and looks for
higher-yielding and undervalued municipal bonds that offer the potential for
above-average total return.

What are the Risks of Investing in the Fund?

The principal risks of investing in the fund are interest rate risk and credit
risk. Interest rate risk is the risk that interest rates will rise, causing bond
prices to fall. Credit risk is the risk that an issuer of a municipal bond will
be unable to make interest and principal payments. In general, lower rated bonds
carry greater credit risk. The fund may bear additional risk because it invests
primarily in Massachusetts bonds. The fund is non-diversified, and may invest
more of its assets in a single issuer than a diversified fund. Greater
concentration may increase risk. As with any mutual fund investment, loss of
money is a risk of investing.

The fund seeks to limit risk by buying investment grade quality bonds in a
variety of industry sectors.

Is This Fund Right For You?

The fund may be a suitable investment for you if you seek to:

.. Earn regular monthly tax-free dividends;

.. Preserve investment capital over time;

.. Reduce taxes on investment income;

.. Set aside money systematically for retirement, estate planning or college
funding.

You should not invest in this fund if you seek to:

.. Pursue an aggressive, high-growth investment strategy;

.. Invest through an IRA or 401(k) plan;

.. Avoid fluctuations in share price.

How the Fund Has Performed

Total Returns/1/
[BAR CHART APPEARS HERE]

Class A Annual Returns
<TABLE>
<S> <C>
1989 8.6%
1990 6.6%
1991 11.7%
1992 7.9%
1993 11.7%
1994 -6.1%
1995 17.0%
1996 3.8%
1997 11.9%
1998
</TABLE>

Average Annual Total Returns for
the Periods Ending December 31, 1998
....................................

2 Section 1 The Funds
<PAGE>

What are the Costs of Investing?

Shareholder Transaction Expenses/4/

Paid From Fund Assets

Share Class A B C R
- --------------------------------------------------------------------------------

Management Fees .55% .55% .55% .55%
.................................................................................

Total Annual Fund Operating
- ---------------------------
Expenses Gross+ .87% 1.62% 1.42% .67%
- --------------

How the Fund Is Invested (as of 2/28/99)

Portfolio Statistics

Industry Diversification (Top 5)

[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Tax Obligation Limited (18%)
Other (30%)
Housing - Single-Family (10%)
Health Care (9%)
U.S. Guaranteed (20%)
Housing - Multi Family (13%)
</TABLE>

2. Market Benchmark returns reflect the performance of the Lehman Brothers
Municipal Bond Index, an unmanaged index comprised of a broad range of
investment-grade municipal bonds.

3. Peer Group returns represent the average annualized returns of the funds in
the Lipper Massachusetts Municipal Debt Category. Returns assume reinvestment
of dividends and do not reflect any applicable sales charges.

5. Class R shares may be purchased only under limited circumstances, or by
specified classes of investors. See "How You Can Buy and Sell Shares."

6. Reduced Class A sales charges apply to purchases of $50,000 or more. See
"How You Can Buy and Sell Shares."

7. As a percentage of lesser of purchase price or redemption proceeds.

10. Class C shares redeemed within one year of purchase are subject to a 1%
CDSC.

Section 1 The Funds 3
<PAGE>

Nuveen Massachusetts Insured Municipal Bond Fund

Fund Overview

Investment Objective

How the Fund Pursues Its Objective

The fund's investment adviser uses a value-oriented strategy and looks for
higher-yielding and undervalued municipal bonds that offer the potential for
above-average total return.

What are the Risks of Investing in the Fund?

The principal risks of investing in the fund are interest rate risk and credit
risk. Interest rate risk is the risk that interest rates will rise, causing bond
prices to fall. Credit risk is the risk that an issuer of a municipal bond will
be unable to make interest and principal payments. In general, lower rated bonds
carry greater credit risk. The fund may bear additional risk because it invests
primarily in Massachusetts bonds. The fund is non-diversified, and may invest
more of its assets in a single issuer than a diversified fund. Greater
concentration may increase risk. As with any mutual fund investment, loss of
money is a risk of investing.

The fund seeks to limit risk by buying investment grade quality bonds in a
variety of industry sectors.

Is This Fund Right For You?

The fund may be a suitable investment for you if you seek to:

.. Earn regular monthly tax-free dividends;

.. Preserve investment capital over time;

.. Reduce taxes on investment income;

.. Set aside money systematically for retirement, estate planning or college
funding.

You should not invest in this fund if you seek to:

.. Pursue an aggressive, high-growth investment strategy;

.. Invest through an IRA or 401(k) plan;

.. Avoid fluctuations in share price.

How the Fund Has Performed

Total Returns/1/
[BAR CHART APPEARS HERE]

Class A Annual Returns
<TABLE>
<S> <C>
1989 8.6%
1990 6.6%
1991 11.7%
1992 7.9%
1993 11.7%
1994 -6.1%
1995 17.0%
1996 3.8%
1997 11.9%
1998
</TABLE>

Average Annual Total Returns for
the Periods Ending December 31, 1998
....................................

4 Section 1 The Funds
<PAGE>

What are the Costs of Investing?

Shareholder Transaction Expenses/4/

Paid From Fund Assets

Share Class A B C R
- --------------------------------------------------------------------------------

Management Fees .55% .55% .55% .55%
.................................................................................

Total Annual Fund Operating
- ---------------------------
Expenses Gross+ .87% 1.62% 1.42% .67%
- --------------

How the Fund Is Invested (as of 2/28/99)

Portfolio Statistics

Industry Diversification (Top 5)

[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Tax Obligation Limited (18%)
Other (30%)
Housing - Single-Family (10%)
Health Care (9%)
U.S. Guaranteed (20%)
Housing - Multi Family (13%)
</TABLE>

2. Market Benchmark returns reflect the performance of the Lehman Brothers
Municipal Bond Index, an unmanaged index comprised of a broad range of
investment-grade municipal bonds.

5. Class R shares may be purchased only under limited circumstances, or by
specified classes of investors. See "How You Can Buy and Sell Shares."

6. Reduced Class A sales charges apply to purchases of $50,000 or more. See "How
You Can Buy and Sell Shares."

7. As a percentage of lesser of purchase price or redemption proceeds.

10. Class C shares redeemed within one year of purchase are subject to a 1%
CDSC.

Section 1 The Funds 5

<PAGE>

Section 2 How We Manage Your Money

Who Manages the Funds

J. Thomas Futrell has been the portfolio manager for the Massachusetts Funds
since July 1998. Mr. Futrell has been a portfolio manager for Nuveen Advisory
since 1986, and currently manages investments for twelve Nuveen-sponsored
investment companies.

Management Fees

For providing these services, Nuveen Advisory is paid an annual management fee.
The following schedule applies to each fund described in this prospectus:

6 Section 2 How We Manage Your Money
<PAGE>

Management Fees

For providing these services, Nuveen Advisory is paid an annual management fee.
The following schedule applies to each fund described in this prospectus:

Average Daily Net Asset Value Management Fee

For the most recent fiscal year, the funds paid after expense reimbursements the
following management fees to Nuveen Advisory, as a percentage of average net
assets:

Nuveen Massachusetts Municipal Bond Fund .34%
................................................................................
Nuveen Massachusetts Insured Municipal Bond Fund .42%
................................................................................

What Securities We Invest In

Municipal Obligations

Quality Municipal Bonds

Section 2 How We Manage Your Money 7
<PAGE>

Portfolio Maturity

Insurance

The Massachusetts Insured Fund primarily purchases insured municipal bonds. The
Massachusetts Insured Fund primarily purchases insured municipal bonds. See
"Insurance" below. Under normal market conditions, the Massachusetts Insured
Fund will invest at least 65% of its assets in insured municipal bonds, and
least 80% of its net assets in insured municipal bonds or municipal bonds backed
by an escrow or trust account that contains sufficient U.S. government-backed
securities to assure timely payment of interest and principal. Insured municipal
bonds are either covered by individual, permanent insurances policies (obtained
either at the time of issuance or subsequently), or covered "while in fund"
under a master portfolio insurance policy purchased by a fund. Insurance
guarantees only the timely payment of interest and principal on the bonds; it
does not guarantee the value of either individual bonds or fund shares.
Portfolio insurance policies are effective only so long as the fund continues to
own the covered bond, and the price the fund would receive upon sale of such a
bond would not benefit from the insurance. Insurers under master portfolio
insurance policies currently include MBIA Insurance Corp., AMBAC Assurance
Corporation, Financial Security Assurance, Inc. and Financial Guaranty Insurance
Company. The fund's investment adviser may obtain master policies from other
insurers, but only from insurers that specialize in insurance municipal bonds
and whose claims-paying ability is rated Aaa or AAA by Moody's or S&P. Insurers
are responsible for making their own assessment of the insurability of a
municipal bond.

An insured fund can invest up to 20% of its net assets in uninsured municipal
bonds that are backed by an escrow containing sufficient U.S. Government or U.S.
Government agency securities to ensure timely payment of principal and interest.
Such bonds are normally regarded as having the credit characteristics of the
underlying U.S. Government-backed securities.

Short-term Investments

Delayed Delivery Transactions

How We Select Investments

Portfolio Turnover

What the Risks Are

8 Section 2 How We Manage Your Money
<PAGE>

What the Risks Are

State Concentration risk: because the funds primarily purchase municipal bonds
from a specific state, each fund also bears investment risk from the economic,
political or regulatory changes that could adversely affect municipal bond
issuers in that state and therefore the value of the fund's investment
portfolio. See "Appendix--Additional State Information." These risks may be
greater for the funds, which as "non-diversified" funds may concentrate their
investments in municipal bonds of certain issuers to a greater extent than a
diversified fund.

How We Manage Risk

Section 2 How We Manage Your Money 9
<PAGE>

Investment Limitations

.. 25% in any one industry such as electric utilities or health care.

.. 10% in borrowings (33% if used to meet redemptions).

Hedging and Other Defensive Investment Strategies

10 Section 2 How We Manage Your Money
<PAGE>

Section 3 How You Can Buy and Sell Shares

How to Choose a Share Class

In deciding whether to purchase Class A, Class B, Class C or Class R shares, you
should consider:

.. the amount of your purchase;

.. any current holdings of fund shares;

.. how long you expect to hold the shares;

.. the amount of any up-front sales charge;

.. whether a contingent deferred sales charge
(CDSC) would apply upon redemption;

.. the amount of any distribution or service
fees that you may incur while you own the shares;

.. whether you will be reinvesting income or
capital gain distributions in additional shares;

.. whether you qualify for a sales charge
waiver or reduction.

For a summary of the charges and expenses for each class, please see "What are
the Costs of Investing?".

Class A Shares

(1) You can buy $1 million or more of Class A shares at net asset value without
an up-front sales charge. Nuveen pays Authorized Dealers a commission equal to
the sum of 1% (0.75% and 0.50%, respectively, for Intermediate and Limited Term
Funds) of the first $2.5 million, plus 0.50% of the next $2.5 million, plus
0.25% (0.50% for Intermediate Funds) of any amount over $5 million. Unless the
Authorized Dealer waived the commission, you may be assessed a contingent
deferred sales charge (CDSC) of 1% (0.75% and 0.50%, respectively, for
Intermediate and Limited Term Funds) if you redeem any of your shares within 18
months of purchase. The CDSC is calculated on the lower of your purchase price
or redemption proceeds.

Section 3 How You Can Buy and Sell Shares 11
<PAGE>

Class B Shares

Years Since Purchase 0-1 1-2 2-3 3-4 4-5 5-6

CDSC 5% 4% 4% 3% 2% 1%
.................................................................................

Class C Shares

Class R Shares

12 Section 3 How You Can Buy and Sell Shares
<PAGE>

How to Reduce Your Sales Charge

We offer a number of ways to reduce or eliminate the up-front sales charge on
Class A shares or to qualify to purchase Class R shares.

<TABLE>
<CAPTION>
Class A Sales Charge Class A Sales Charge Class R Eligibility
Reductions Waivers
<S> <C> <C>
.. Rights of accumulation . Nuveen Defined Portfolio . Certain employees and
.. Letter of intent or Exchange - Traded Fund directors of Nuveen or
.. Group purchase reinvestment employees of authorized
. Purchases using dealers
redemptions from . Bank trust departments
unrelated funds
. Retirement plans
. Certain employees and
directors of Nuveen or
employees of authorized
dealers
</TABLE> . Bank trust departments

How to Buy Shares

Through a Financial Adviser

Section 3 How You Can Buy and Sell Shares 13

<PAGE>

By Mail

Systematic Investing

[GRAPH APPEARS HERE]

Systematic Investment Plan

14 Section 3 How You Can Buy and Sell Shares

<PAGE>

Payroll Direct Deposit Plan

Systematic Withdrawal

You should not establish systematic withdrawals if you intend to make concurrent
purchases of Class A, B or C shares because you may unnecessarily pay a sales
charge or CDSC on these purchases.

Special Services

To help make your investing with us easy and efficient, we offer you the
following services at no extra cost.

Exchanging Shares

Reinstatement Privilege

Section 3 How You Can Buy and Sell Shares 15
<PAGE>

Fund Direct

Your financial adviser can help you complete the forms for these services, or
you can call Nuveen at (800) 257-8787 for copies of the necessary forms.

How to Sell Shares

Through Your Financial Adviser

You may sell your shares through your financial adviser who can prepare the
necessary documentation. Your financial adviser may charge for this.

By Telephone

By Mail

. The fund's name;

. Your name and account number;

An Important Note About Involuntary Redemption

16 Section 3 How You Can Buy and Sell Shares
<PAGE>

. The dollar or share amount you wish to redeem;

. The signature of each owner exactly as it appears on the account;

. The name of the person to whom you want your redemption proceeds paid (if
other than to the shareholder of record);

. The address where you want your redemption proceeds sent (if other than
the address of record);

. Any certificates you have for the shares; and

. Any required signature guarantees.

Section 3 How You Can Buy and Sell Shares 17
<PAGE>

Section 4 General Information

Distributions and Taxes

Payment and Reinvestment Options

Taxes and Tax Reporting

18 Section 4 General Information

<PAGE>

Tax laws are subject to change, so we urge you to consult your tax adviser about
your particular tax situation and how it might be affected by current tax law.

Buying or Selling Shares Close to a Record Date

Taxable Equivalent Yields

Distribution and Service Plans

Section 4 General Information 19

<PAGE>

Net Asset Value

Fund Service Providers

20 Section 4 General Information

<PAGE>

Section 5 Financial Highlights

Selected data for a share outstanding throughout each period is as follows:

Class (Inception Date)
<TABLE>
<CAPTION>
Investment Operations Less Distributions
----------------------------- ---------------------------

MASSACHUSETTS Net
Realized/
Unrealized
Beginning Net Invest- Net Ending
Net Invest- ment Invest- Net
Year Ended Asset ment Gain ment Capital Asset Total
February 28/29, Value Income(a) (Loss) Total Income Gains Total Value Return (b)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A (9/94)
1999 $10.08 $.51 $(.01) $.50 $(.51) $ -- $(.51) $10.07 5.05%
1998 9.89 .52 .19 .71 (.52) -- (.52) 10.08 7.38
1997 9.94 .53 (.07) .46 (.51) -- (.51) 9.89 4.73
1996 9.56 .51 .39 .90 (.52) -- (.52) 9.94 9.62
1995 (c) 9.54 .25 .03 .28 (.26) -- (.26) 9.56 3.05
Class B (3/97)
1999 10.10 .43 .01 .44 (.44) -- (.44) 10.10 4.40
1998 (c) 9.88 .45 .22 .67 (.45) -- (.45) 10.10 6.93
Class C (10/94)
1999 10.02 .45 -- .45 (.45) -- (.45) 10.02 4.62
1998 9.83 .47 .19 .66 (.47) -- (.47) 10.02 6.85
1997 9.89 .45 (.08) .37 (.43) -- (.43) 9.83 3.90
1996 9.51 .44 .39 .83 (.45) -- (.45) 9.89 8.87
1995 (c) 9.28 .19 .25 .44 (.21) -- (.21) 9.51 4.86
Class R (12/86)
1999 10.05 .52 .01 .53 (.53) -- (.53) 10.05 5.36
1998 9.86 .54 .19 .73 (.54) -- (.54) 10.05 7.60
1997 9.91 .54 (.06) .48 (.53) -- (.53) 9.86 4.99
1996 9.54 .54 .38 .92 (.55) -- (.55) 9.91 9.80
1995 9.94 .54 (.40) .14 (.54) -- (.54) 9.54 1.64
==========================================================================================================
</TABLE>

<TABLE>
<CAPTION>
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Ratio Ratio
of Net of Net
Ratio of Investment Ratio of Investment
Expenses Income Expenses Income
to Average to Average to Average to Average
Ending Net Assets Net Assets Net Assets Net Assets
Net Before Before After After Portfolio
Year Ended Asset Reimburse- Reimburse- Reimburse- Reimburse- Turnover
February 28/29, (000) ment ment ment(a) ment(a) Rate
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A (9/94)
1999 $15,134 1.02% 4.94% .95% 5.01% 10%
1998 9,291 1.00 5.20 .95 5.25 17
1997 7,200 1.01 5.22 .99 5.24 10
1996 4,290 1.17 5.04 1.00 5.21 6
1995 (c) 1,067 1.87* 4.88* 1.00* 5.75* 17
Class B (3/97)
1999 3,226 1.77 4.23 1.71 4.29 10
1998 (c) 763 1.77* 4.41* 1.70* 4.48* 17
Class C (10/94)
1999 3,696 1.57 4.41 1.50 4.48 10
1998 1,924 1.55 4.64 1.50 4.69 17
1997 913 1.74 4.50 1.73 4.51 10
1996 638 2.24 3.96 1.75 4.45 6
1995 (c) 147 3.40* 3.46* 1.75* 5.11* 17
Class R (12/86)
1999 75,750 .82 5.12 .75 5.19 10
1998 72,934 .80 5.40 .75 5.45 17
1997 72,912 .77 5.46 .75 5.48 10
1996 76,773 .82 5.42 .75 5.49 6
1995 71,568 .77 5.75 .75 5.77 17
==============================================================================================
</TABLE>

* Annualized.
(a) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory.
(b) Total returns are calculated on net asset value without any sales charge and
are not annualized for periods less than one year.
(c) From commencement of class operations as noted.

Selected data for a share outstanding throughout each period is as follows:

Class (Inception Date)

<TABLE>
<CAPTION>
Investment Operations Less Distributions
------------------------------ --------------------------

MASSACHUSETTS INSURED Net
Realized/
Unrealized
Beginning Net Invest- Net Ending
Net Invest- ment Invest- Net
Year Ended Asset ment Gain ment Capital Asset Total
February 28/29, Value Income(a) (Loss) Total Income Gains Total Value Return(b)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A (9/94)
1999 $10.57 $.51 $ .02 $.53 $(.51) $ -- $(.51) $10.59 5.09%
1998 10.38 .52 .19 .71 (.52) -- (.52) 10.57 7.04
1997 10.49 .53 (.12) .41 (.52) -- (.52) 10.38 4.02
1996 10.06 .51 .44 .95 (.52) -- (.52) 10.49 9.59
1995(c) 10.03 .25 .04 .29 (.26) -- (.26) 10.06 2.99
Class B (3/97)
1999 10.57 .43 .02 .45 (.43) -- (.43) 10.59 4.32
1998(c) 10.36 .44 .21 .65 (.44) -- (.44) 10.57 6.45
Class C (9/94)
1999 10.54 .45 .02 .47 (.45) -- (.45) 10.56 4.51
1998 10.35 .46 .19 .65 (.46) -- (.46) 10.54 6.45
1997 10.47 .45 (.13) .32 (.44) -- (.44) 10.35 3.17
1996 10.04 .43 .44 .87 (.44) -- (.44) 10.47 8.80
1995(c) 9.91 .20 .14 .34 (.21) -- (.21) 10.04 3.52
Class R (12/86)
1999 10.57 .53 .01 .54 (.52) -- (.52) 10.59 5.26
1998 10.38 .54 .19 .73 (.54) -- (.54) 10.57 7.23
1997 10.50 .54 (.12) .42 (.54) -- (.54) 10.38 4.16
1996 10.06 .54 .44 .98 (.54) -- (.54) 10.50 9.99
1995 10.45 .55 (.39) .16 (.55) -- (.55) 10.06 1.77
=======================================================================================================
</TABLE>

<TABLE>
<CAPTION>
Ratios/Supplemental Data
-------------------------------------------------------------------------
Ratio Ratio
of Net of Net
Ratio of Investment Ratio of Investment
Expenses Income Expenses Income
to Average to Average to Average to Average
Ending Net Assets Net Assets Net Assets Net Assets
Net Before Before After After Portfolio
Year Ended Assets Reimburse- Reimburse- Reimburse- Reimburse- Turnover
February 28/29, (000) ment ment ment(a) ment(a) Rate
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A (9/94)
1999 $11,208 1.01% 4.77% 1.01% 4.77% 11%
1998 8,679 1.03 4.98 1.03 4.98 23
1997 7,459 1.04 5.02 1.04 5.02 10
1996 5,291 1.09 4.92 1.07 4.94 1
1995(c) 1,956 1.36* 5.13* 1.15* 5.34* 10
Class B (3/97)
1999 1,650 1.75 4.03 1.75 4.03 11
1998(c) 666 1.80* 4.20* 1.80* 4.20* 23
Class C (9/94)
1999 1,675 1.56 4.22 1.56 4.22 11
1998 1,293 1.58 4.43 1.58 4.43 23
1997 957 1.78 4.29 1.78 4.29 10
1996 706 1.81 4.20 1.81 4.20 1
1995(c) 338 2.07* 4.41* 1.90* 4.58* 10
Class R (12/86)
1999 57,281 .81 4.97 .81 4.97 11
1998 56,707 .83 5.18 .83 5.18 23
1997 57,076 .80 5.26 .80 5.26 10
1996 60,102 .81 5.21 .81 5.21 1
1995 57,137 .79 5.54 .79 5.54 10
============================================================================================
</TABLE>
* Annualized.

(a) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory.
(b) Total returns are calculated on net asset value without any sales charge and
are not annualized for periods less than one year.
(c) From commencement of class operations as noted.

Section 5 Financial Highlights 21

<PAGE>

Appendix Additional State Information

Massachusetts

Massachusetts is experiencing an economic recovery based largely on growth in
the services, trade, finance, insurance, real estate and construction
industries. Nonetheless, the state's economic growth is expected to lag behind
the rest of the nation until the year 2000 due to restructuring in the computer,
defense and health care sectors of the state's economy

The state's fiscal 1996 revenues were approximately $17.3 billion against
expenditures of $16.9 billion. The fiscal 1997 budget approved by the governor
on June 30, 1996, provides for approximately $17,296 billion in revenues. In
February 1997, Massachusetts' unemployment rate was 4.0%. In 1997, personal
income in Massachusetts was $31,524 compared to the national average of $25,598.
The state's uninsured general obligation bonds are rated Aa3 by Moody's and AA-
by Standard and Poor's.

Tax Treatment

The Fund's regular monthly dividends will not be subject to Massachusetts
personal income taxes to the extent they are paid out of income earned on
Massachusetts municipal bonds or on certain U.S. government obligations that are
exempt from state taxation under Federal law. You will be subject to
Massachusetts personal income taxes, however, to the extent the funds distribute
any taxable income, or if you sell or exchange fund shares and realize a capital
gain on the transaction.

The treatment of corporate shareholders of the funds differs from described
above. Corporate shareholders should refer to the statement of additional
information for more detailed information and are urged to consult their tax
adviser.

Appendix 22
<PAGE>

Nuveen Mutual Funds

Nuveen offers a variety of mutual funds designed to help you reach your
financial goals. The funds below are grouped by investment objectives.

Growth

Nuveen Rittenhouse Growth Fund

Growth and Income

European Value Fund
Growth and Income Stock Fund
Balanced Stock and Bond Fund
Balanced Municipal and Stock Fund

Tax-Free Income

National Municipal Bond Funds
Long-term
Insured Long-term
Intermediate-term
Limited-term

State Municipal Bond Funds
Arizona
California/1/
Colorado
Connecticut
Florida
Georgia
Kansas
Kentucky

Louisiana
Maryland
Massachusetts/1/
Michigan
Missouri
New Jersey
New Mexico
New York/1/

North Carolina
Ohio
Pennsylvania
Tennessee
Virginia
Wisconsin

1. Long-term and insured long-term portfolios.

XXX-XXX X-XX

NUVEEN

John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, IL 60606-1286

(800) 257-8787
www.nuveen.com

<PAGE>

June , 1999

NUVEEN FLAGSHIP MULTISTATE TRUST II

Nuveen California Municipal Bond Fund

Nuveen California Insured Municipal Bond Fund

Nuveen Flagship Connecticut Municipal Bond Fund

Nuveen Flagship New Jersey Municipal Bond Fund

Nuveen Flagship New York Municipal Bond Fund

Nuveen Massachusetts Municipal Bond Fund

Nuveen Massachusetts Insured Municipal Bond Fund

Nuveen New York Insured Municipal Bond Fund

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information is not a prospectus. This Statement
of Additional Information should be read in conjunction with the Prospectus of
the Nuveen Flagship Multistate Trust II dated June , 1999. The Prospectus may
be obtained without charge from certain securities representatives, banks, and
other financial institutions that have entered into sales agreements with John
Nuveen & Co. Incorporated, or from the Funds, by mailing a written request to
the Funds, c/o John Nuveen & Co. Incorporated, 333 West Wacker Drive, Chicago,
Illinois 60606 or by calling (800) 257-8787.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Policies and Investment Portfolio............................... S-2
Management................................................................. S-47
Investment Adviser and Investment Management Agreement..................... S-58
Portfolio Transactions..................................................... S-60
Net Asset Value............................................................ S-60
Tax Matters................................................................ S-61
Performance Information.................................................... S-69
Additional Information on the Purchase and Redemption of Fund Shares....... S-78
Distribution and Service Plan.............................................. S-85
Independent Public Accountants and Custodian............................... S-87
Financial Statements....................................................... S-87
Appendix A--Ratings of Investments......................................... A-1
Appendix B--Description of Hedging Techniques.............................. B-1
</TABLE>

The audited financial statements for each Fund's most recent fiscal year
appear in the Funds' Annual Reports. The Annual Reports accompany this
Statement of Additional Information.
<PAGE>

INVESTMENT POLICIES AND INVESTMENT PORTFOLIO

Investment Policies

The investment objective and certain fundamental investment policies of each
Fund are described in the Prospectus. Each of the Funds, as a fundamental
policy, may not, without the approval of the holders of a majority of the
shares of that Fund:

(1) Invest in securities other than Municipal Obligations and short-term
securities, as described in the Prospectus. Municipal Obligations are
municipal bonds that pay interest that is exempt from regular federal,
state and, in some cases, local income taxes.

(2) Invest more than 5% of its total assets in securities of any one
issuer, except this limitation shall not apply to securities of the United
States Government, and to the investment of 25% of such Fund's assets. This
limitation shall apply only to the New York Municipal Bond Fund, the New
York Insured Municipal Bond Fund, the California Municipal Bond Fund, and
the California Insured Municipal Bond Fund.

(3) Borrow money, except from banks for temporary or emergency purposes
and not for investment purposes and then only in an amount not exceeding
(a) 10% of the value of its total assets at the time of borrowing or (b)
one-third of the value of the Fund's total assets including the amount
borrowed, in order to meet redemption requests which might otherwise
require the untimely disposition of securities. While any such borrowings
exceed 5% of such Fund's total assets, no additional purchases of
investment securities will be made by such Fund. If due to market
fluctuations or other reasons, the value of the Fund's assets falls below
300% of its borrowings, the Fund will reduce its borrowings within 3
business days. To do this, the Fund may have to sell a portion of its
investments at a time when it may be disadvantageous to do so.

(4) Pledge, mortgage or hypothecate its assets, except that, to secure
borrowings permitted by subparagraph (2) above, it may pledge securities
having a market value at the time of pledge not exceeding 10% of the value
of the Fund's total assets.

(5) Issue senior securities as defined in the Investment Company Act of
1940, except to the extent such issuance might be involved with respect to
borrowings described under item (3) above or with respect to transactions
involving futures contracts or the writing of options within the limits
described in the Prospectus and this Statement of Additional Information.

(6) Underwrite any issue of securities, except to the extent that the
purchase or sale of Municipal Obligations in accordance with its investment
objective, policies and limitations, may be deemed to be an underwriting.

(7) Purchase or sell real estate, but this shall not prevent any Fund
from investing in Municipal Obligations secured by real estate or interests
therein or foreclosing upon and selling such security.

(8) Purchase or sell commodities or commodities contracts or oil, gas or
other mineral exploration or development programs, except for transactions
involving futures contracts within the limits described in the Prospectus
and this Statement of Additional Information.

(9) Make loans, other than by entering into repurchase agreements and
through the purchase of Municipal Obligations or temporary investments in
accordance with its investment objective, policies and limitations.

S-2
<PAGE>

(10) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions.

(11) Write or purchase put or call options, except to the extent that the
purchase of a stand-by commitment may be considered the purchase of a put,
and except for transactions involving options within the limits described
in the Prospectus and this Statement of Additional Information.

(12) Invest more than 25% of its total assets in securities of issuers in
any one industry; provided, however, that such limitations shall not be
applicable to Municipal Obligations issued by governments or political
subdivisions of governments, and obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities.

(13) Purchase or retain the securities of any issuer other than the
securities of the Fund if, to the Fund's knowledge, those trustees of the
Trust, or those officers and directors of Nuveen Advisory Corp. ("Nuveen
Advisory"), who individually own beneficially more than 1/2 of 1% of the
outstanding securities of such issuer, together own beneficially more than
5% of such outstanding securities.

In addition, each Fund, as a non-fundamental policy, may not invest more than
15% of its net assets in "illiquid" securities, including repurchase agreements
maturing in more than seven days.

For the purpose of applying the limitations set forth in paragraph (2) above,
an issuer shall be deemed the sole issuer of a security when its assets and
revenues are separate from other governmental entities and its securities are
backed only by its assets and revenues. Similarly, in the case of a non-
governmental user, such as an industrial corporation or a privately owned or
operated hospital, if the security is backed only by the assets and revenues of
the non-governmental user, then such non-governmental user would be deemed to
be the sole issuer. Where a security is also backed by the enforceable
obligation of a superior or unrelated governmental entity or other entity
(other than a bond insurer), it shall also be included in the computation of
securities owned that are issued by such governmental or other entity.

Where a security is guaranteed by a governmental entity or some other
facility, such as a bank guarantee or letter of credit, such a guarantee or
letter of credit would be considered a separate security and would be treated
as an issue of such government, other entity or bank. Where a security is
insured by bond insurance, it shall not be considered a security issued or
guaranteed by the insurer; instead the issuer of such security will be
determined in accordance with the principles set forth above. The foregoing
restrictions do not limit the percentage of the Fund's assets that may be
invested in securities insured by any single insurer.

The foregoing restrictions and limitations, as well as a Fund's policies as
to ratings of portfolio investments, will apply only at the time of purchase of
securities, and the percentage limitations will not be considered violated
unless an excess or deficiency occurs or exists immediately after and as a
result of an acquisition of securities, unless otherwise indicated.

The foregoing fundamental investment policies, together with the investment
objective of each Fund, cannot be changed without approval by holders of a
"majority of the Fund's outstanding voting shares." As defined in the
Investment Company Act of 1940, this means the vote of (i) 67% or more of the
Fund's shares present at a meeting, if the holders of more than 50% of the
Fund's shares are present or represented by proxy, or (ii) more than 50% of the
Fund's shares, whichever is less.

The Nuveen Flagship Multistate Trust II (the "Trust") is an open-end
management series investment company organized as a Massachusetts business
trust on July 1, 1996. Each of the Funds is an open-end management investment
company organized as a series of the Nuveen Flagship Multistate Trust II. The
Trust is an open-end management series company under SEC Rule 18f-2. Each Fund
is a separate series issuing its own

S-3
<PAGE>

shares. The Trust currently has nine series: the Nuveen Flagship New York
Municipal Bond Fund (formerly the Nuveen New York Tax-Free Value Fund, a series
of the Nuveen Tax-Free Bond Fund, Inc.); the Nuveen New York Insured Municipal
Bond Fund (formerly the Nuveen New York Insured Tax-Free Value Fund, a series
of the Nuveen Insured Tax-Free Bond Fund, Inc.); the Nuveen Flagship New Jersey
Municipal Bond Fund (formerly the Nuveen New Jersey Tax-Free Value Fund, a
series of the Nuveen Multistate Tax-Free Trust); the Nuveen California
Municipal Bond Fund (formerly the Nuveen California Tax-Free Value Fund, a
series of the Nuveen California Tax-Free Fund, Inc.); the Nuveen California
Insured Municipal Bond Fund (formerly the Nuveen California Insured Tax-Free
Value Fund, a series of the Nuveen California Tax-Free Fund, Inc.); the Nuveen
Flagship Connecticut Municipal Bond Fund (formerly the Flagship Connecticut
Double Tax Exempt Fund, a series of the Flagship Tax Exempt Funds Trust); the
Nuveen Massachusetts Municipal Bond Fund (formerly the Nuveen Massachusetts
Tax-Free Value Fund, a series of the Nuveen Tax-Free Bond Fund, Inc.); and the
Nuveen Massachusetts Insured Municipal Bond Fund (formerly the Nuveen
Massachusetts Insured Tax-Free Value Fund, a series of the Nuveen Insured Tax-
Free Bond Fund, Inc.). The Nuveen Flagship California Intermediate Municipal
Bond Fund has also been organized as a series of the Trust, but has issued no
shares to date. Certain matters under the Investment Company Act of 1940 which
must be submitted to a vote of the holders of the outstanding voting securities
of a series company shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding voting
securities of each Fund affected by such matter.

The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and requires that
notice of this disclaimer be given in each agreement, obligation or instrument
entered into or executed by the Trust or the Trustees. The Declaration of Trust
further provides for indemnification out of the assets and property of the
Trust for all loss and expense of any shareholder personally liable for the
obligations of the Trust. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
both inadequate insurance existed and the Trust itself were unable to meet its
obligations. The Trust believes the likelihood of these circumstances is
remote.

Portfolio Securities

As described in the Prospectus, each of the Funds invests substantially all
of its assets (at least 80%) in a portfolio of Municipal Obligations free from
regular federal, state and, in some cases, local income tax in each Fund's
respective state, which generally will be Municipal Obligations issued within
the Fund's respective state. In general, Municipal Obligations include debt
obligations issued by states, cities and local authorities to obtain funds for
various public purposes, including construction of a wide range of public
facilities such as airports, bridges, highways, hospitals, housing, mass
transportation, schools, streets and water and sewer works. Industrial
development bonds and pollution control bonds that are issued by or on behalf
of public authorities to finance various privately-rated facilities are
included within the term Municipal Obligations if the interest paid thereon is
exempt from federal income tax.

The investment assets of each Fund will consist of (1) Municipal Obligations
which are rated at the time of purchase within the four highest grades (Baa or
BBB or better) by Moody's Investors Service, Inc. ("Moody's"), by Standard and
Poor's Corporation ("S&P") or by Fitch Investors Service, Inc. ("Fitch"), (2)
unrated Municipal Obligations which, in the opinion of Nuveen Advisory, have
credit characteristics equivalent to bonds rated within the four highest grades
by Moody's, S&P or Fitch, and (3) temporary investments as described below, the
income from which may be subject to state income tax or to both federal and
state income taxes. See Appendix A for more information about ratings by
Moody's, S&P, and Fitch.

S-4
<PAGE>

As described in the Prospectus, each Fund may invest in Municipal Obligations
that constitute participations in a lease obligation or installment purchase
contract obligation (hereafter collectively called "lease obligations") of a
municipal authority or entity. Although lease obligations do not constitute
general obligations of the municipality for which the municipality's taxing
power is pledged, a lease obligation is ordinarily backed by the municipality's
covenant to budget for, appropriate and make the payments due under the lease
obligation. However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Although nonappropriation lease obligations are
secured by the leased property, disposition of the property in the event of
foreclosure might prove difficult. A Fund will seek to minimize the special
risks associated with such securities by only investing in those
nonappropriation leases where Nuveen Advisory has determined that the issuer
has a strong incentive to continue making appropriations and timely payment
until the security's maturity. Some lease obligations may be illiquid under
certain circumstances. Lease obligations normally provide a premium interest
rate which along with regular amortization of the principal may make them
attractive for a portion of the assets of the Funds.

Obligations of issuers of Municipal Obligations are subject to the provisions
of bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors. In addition, the obligations of such issuers may become subject to
the laws enacted in the future by Congress, state legislatures or referenda
extending the time for payment of principal and/or interest, or imposing other
constraints upon enforcement of such obligations or upon municipalities to levy
taxes. There is also the possibility that, as a result of legislation or other
conditions, the power or ability of any issuer to pay, when due, the principal
of and interest on its Municipal Obligations may be materially affected.

Insurance

Each insured Municipal Obligation held by the Nuveen New York Insured
Municipal Bond Fund, the Nuveen California Insured Municipal Bond Fund, and the
Nuveen Massachusetts Insured Municipal Bond Fund (the "Funds") will either be
(1) covered by an insurance policy applicable to a specific security and
obtained by the issuer of the security or a third party at the time of original
issuance ("Original Issue Insurance"), (2) covered by an insurance policy
applicable to a specific security and obtained by the Fund or a third party
subsequent to the time of original issuance ("Secondary Market Insurance"), or
(3) covered by a master municipal insurance policy purchased by the Funds
("Portfolio Insurance"). The Funds currently maintain a policy of Portfolio
Insurance with MBIA Insurance Corporation, AMBAC Assurance Corporation,
Financial Security Assurance, Inc., and Financial Guaranty Insurance Company,
and may in the future obtain other policies of Portfolio Insurance, depending
on the availability of such policies on terms favorable to the Fund. However,
the Funds may determine not to obtain such policies and to emphasize
investments in Municipal Obligations insured under Original Issue Insurance or
Secondary Market Insurance. In any event, the Funds will only obtain policies
of Portfolio Insurance issued by insurers whose claims-paying ability is rated
Aaa by Moody's Investors Service, Inc. ("Moody's") or AAA by Standard & Poor's
Corporation ("S&P"). Municipal Obligations covered by Original Issue Insurance
or Secondary Market Insurance are themselves typically assigned a rating of Aaa
or AAA, as the case may be, by virtue of the Aaa or AAA claims-paying ability
of the insurer and would generally be assigned a lower rating if the ratings
were based primarily upon the credit characteristics of the issuer without
regard to the insurance feature. By way or contrast, the ratings, if any,
assigned to Municipal Obligations insured under Portfolio Insurance will be
based primarily upon the credit characteristics of the issuers without regard
to the insurance feature, and will generally carry a rating that is below Aaa
or AAA. While in the portfolio of a Fund, however, a Municipal Obligation
backed by Portfolio Insurance will effectively be of the same quality as a
Municipal Obligation issued by an issuer of comparable credit characteristics
that is backed by Original Issue Insurance or Secondary Market Insurance.

S-5
<PAGE>

The Funds' policy of investing in Municipal Obligations insured by insurers
whose claims-paying ability is rated Aaa or AAA will apply only at the time of
the purchase of a security, and a Fund will not be required to dispose of
securities in the event Moody's or S&P, as the case may be, downgrades its
assessment of the claims-paying ability of a particular insurer or the credit
characteristics of a particular issuer. In this connection, it should be noted
that in the event Moody's or S&P or both should down grade its assessment of
the claims-paying ability of a particular insurer, it could also be expected to
downgrade the ratings assigned to Municipal Obligations insured under Original
Issue Insurance or Secondary Market Insurance issued by such insurer, and
Municipal Obligations insured under Portfolio Insurance issued by such insurer
would also be of reduced quality in the portfolio of the Fund. Moody's and S&P
continually assess the claims-paying ability of insurers and the credit
characteristics of issuers, and there can be no assurance that they will not
downgrade their assessments subsequent to the time a Fund purchases securities.

In addition to insured Municipal Obligations, a Fund may invest in Municipal
Obligations that are entitled to the benefit of an escrow or trust account
which contains securities issued or guaranteed by the U.S. Government or U.S.
Government agencies, backed by the full faith and credit of the United States,
and sufficient in amount to ensure the payment of interest and principal on the
original interest payment and maturity dates ("collateralized obligations").
These collateralized obligations generally will not be insured and will
include, but are not limited to, Municipal Obligations that have been (1)
advance refunded where the proceeds of the refunding have been used to purchase
U.S. Government or U.S. Government agency securities that are placed in escrow
and whose interest or maturing principal payments, or both, are sufficient to
cover the remaining scheduled debt service on the Municipal Obligations, and
(2) issued under state or local housing finance programs which use the issuance
proceeds to fund mortgages that are then exchanged for U.S. Government or U.S.
Government agency securities and deposited with a trustee as security for the
Municipal Obligations. These collateralized obligations are normally regarded
as having the credit characteristics of the underlying U.S. Government or U.S.
Government agency securities. Collateralized obligations will not constitute
more than 20% of a Fund's assets.

Each insured Municipal Obligation in which a Fund invests will be covered by
Original Issue Insurance, Secondary Market Insurance or Portfolio Insurance.
There is no limitation on the percentage of a Fund's assets that may be
invested in Municipal Obligations insured by any given insurer.

Original Issue Insurance. Original Issue Insurance is purchased with respect
to a particular issue of Municipal Obligations by the issuer thereof or a third
party in conjunction with the original issuance of such Municipal Obligations.
Under such insurance, the insurer unconditionally guarantees to the holder of
the Municipal Obligation the timely payment of principal and interest on such
obligation when and as such payments shall become due but shall not be paid by
the issuer, except that in the event of any acceleration of the due date of the
principal by reason of mandatory or optional redemption (other than
acceleration by reason of a mandatory sinking fund payment), default or
otherwise, the payments guaranteed may be made in such amounts and at such
times as payments of principal would have been due had there not been such
acceleration. The insurer is responsible for such payments less any amounts
received by the holder from any trustee for the Municipal Obligation issuers or
from any other source. Original Issue Insurance does not guarantee payment on
an accelerated basis, the payment of any redemption premium (except with
respect to certain premium payments in the case of certain small issue
industrial development and pollution control Municipal Obligations), the value
of the shares of the Fund, the market value of Municipal Obligations, or
payments of any tender purchase price upon the tender of the Municipal
Obligations. Original Issue Insurance also does not insure against nonpayment
of principal of or interest on Municipal Obligations resulting from the
insolvency, negligence or any other act or omission of the trustee or other
paying agent for such obligations.

S-6
<PAGE>

In the event that interest on or principal of a Municipal Obligation covered
by insurance is due for payment but is unpaid by the issuer thereof, the
applicable insurer will make payments to its fiscal agent (the "Fiscal Agent")
equal to such unpaid amounts of principal and interest not later than one
business day after the insurer has been notified that such nonpayment has
occurred (but not earlier than the date such payment is due). The Fiscal Agent
will disburse to the Fund the amount of principal and interest which is then
due for payment but is unpaid upon receipt by the Fiscal Agent of (i) evidence
of the Fund's right to receive payment of such principal and interest and (ii)
evidence, including any appropriate instruments of assignment, that all of the
rights to payment of such principal or interest then due for payment shall
thereupon vest in the insurer. Upon payment by the insurer of any principal or
interest payments with respect to any Municipal Obligations, the insurer shall
succeed to the rights of a Fund with respect to such payment.

Original Issue Insurance remains in effect as long as the Municipal
Obligations covered thereby remain outstanding and the insurer remains in
business, regardless of whether a Fund ultimately disposes of such Municipal
Obligations. Consequently, Original Issue Insurance may be considered to
represent an element of market value with respect to the Municipal Obligations
so insured, but the exact effect, if any, of this insurance on such market
value cannot be estimated.

Secondary Market Insurance. Subsequent to the time of original issuance of a
Municipal Obligation, a Fund or a third party may, upon the payment of a single
premium, purchase insurance on such Municipal Obligation. Secondary Market
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance and remains in effect as long as the Municipal
Obligation covered thereby remain outstanding, the holder of such Municipal
Obligation does not voluntarily relinquish the Secondary Market Insurance and
the insurer remains in business, regardless of whether the Fund ultimately
disposes of such Municipal Obligation.

One of the purposes of acquiring Secondary Market Insurance with respect to a
particular Municipal Obligation would be to enable a Fund to enhance the value
of such Municipal Obligation. A Fund, for example, might seek to purchase a
particular Municipal Obligation and obtain Secondary Market Insurance with
respect thereto if, in the opinion of Nuveen Advisory, the market value of such
Municipal Obligation, as insured, would exceed the current value of the
Municipal Obligation without insurance plus the cost of the Secondary Market
Insurance. Similarly, if a Fund owns but wishes to sell a Municipal Obligation
that is then covered by Portfolio Insurance, the Fund might seek to obtain
Secondary Market Insurance with respect thereto if, in the opinion of Nuveen
Advisory, the net proceeds of a sale by the Fund of such obligation, as
insured, would exceed the current value of such obligation plus the cost of the
Secondary Market Insurance.

Portfolio Insurance. Portfolio Insurance guarantees the payment of principal
and interest on specified eligible Municipal Obligations purchased by a Fund.
Except as described below, Portfolio Insurance generally provides the same type
of coverage as is provided by Original Issue Insurance or Secondary Market
Insurance. Municipal Obligations insured under one Portfolio Insurance policy
would generally not be insured under any other policy purchased by a Fund. A
Municipal Obligation is eligible for coverage under a policy if it meets
certain requirements of the insurer. Portfolio Insurance is intended to reduce
financial risk, but the cost thereof and compliance with investment
restrictions imposed under the policy will reduce the yield to shareholders of
a Fund.

If a Municipal Obligation is already covered by Original Issue Insurance or
Secondary Market Insurance, then such Municipal Obligation is not required to
be additionally insured under any policy of Portfolio Insurance that a Fund may
purchase. All premiums respecting Municipal Obligations covered by Original
Issue Insurance or Secondary Market Insurance are paid in advance by the issuer
or other party obtaining the insurance.

S-7
<PAGE>

Portfolio Insurance policies are effective only as to Municipal Obligations
owned by and held by a Fund, and do not cover Municipal Obligations for which
the contract for purchase fails. A "when-issued" Municipal Obligation will be
covered under a Portfolio Insurance policy upon the settlement date of the
issue of such "when-issued" Municipal Obligation. In determining whether to
insure Municipal Obligations held by a Fund, an insurer will apply its own
standards, which correspond generally to the standards it has established for
determining the insurability of new issues of Municipal Obligations. See
"Original Issue Insurance" above.

Each Portfolio Insurance policy will be noncancellable and will remain in
effect so long as a Fund is in existence, the Municipal Obligations covered by
the policy continue to be held by the Fund, and the Fund pays the premiums for
the policy. Each insurer will generally reserve the right at any time upon 90
days' written notice to a Fund to refuse to insure any additional securities
purchased by the Fund after the effective date of such notice. The Board of
Trustees will generally reserve the right to terminate each policy upon seven
days' written notice to an insurer if it determines that the cost of such
policy is not reasonable in relation to the value of the insurance to the Fund.

Each Portfolio Insurance policy will terminate as to any Municipal Obligation
that has been redeemed from or sold by a Fund on the date of such redemption or
the settlement date of such sale, and an insurer shall not have any liability
thereafter under a policy as to any such Municipal Obligation, except that if
the date of such redemption or the settlement date of such sale occurs after a
record date and before the related payment date with respect to any such
Municipal Obligation, the policy will terminate as to such Municipal Obligation
on the business day immediately following such payment date. Each policy will
terminate as to all Municipal Obligations covered thereby on the date on which
the last of the covered Municipal Obligations mature, are redeemed or are sold
by a Fund.

One or more policies of Portfolio Insurance may provide a Fund, pursuant to
an irrevocable commitment of the insurer, with the option to exercise the right
to obtain permanent insurance ("Permanent Insurance") with respect to a
Municipal Obligation that is to be sold by the Fund. The Fund would exercise
the right to obtain Permanent Insurance upon payment of a single, predetermined
insurance premium payable from the proceeds of the sale of such Municipal
Obligation. It is expected that the Fund will exercise the right to obtain
Permanent Insurance for a Municipal Obligation only if, in the opinion of
Nuveen Advisory, upon such exercise the net proceeds from the sale by the Fund
of such obligation, as insured, would exceed the proceeds from the sale of such
obligation without insurance.

The Permanent Insurance premium with respect to each such obligation is
determined based upon the insurability of each such obligation as of the date
of purchase by the Fund and will not be increased or decreased for any change
in the creditworthiness of such obligation unless such obligation is in default
as to payment or principal or interest, or both. In such event, the Permanent
Insurance premium shall be subject to an increase predetermined at the date of
purchase by the Fund.

Each Fund generally intends to retain any insured securities covered by
Portfolio Insurance that are in default or in significant risk of default and
to place a value on the insurance, which ordinarily will be the difference
between the market value of the defaulted security and the market value of
similar securities of minimum investment grade (i.e., rated BBB) that are not
in default. In certain circumstances, however, Nuveen Advisory may determine
that an alternative value for the insurance, such as the difference between the
market value of the defaulted security and either its par value or the market
value of securities of a similar nature that are not in default or in
significant risk of default, is more appropriate. To the extent that the Fund
holds such defaulted securities, it may be limited in its ability to manage its
investment portfolio and to purchase other Municipal Obligations. Except as
described above with respect to securities covered by Portfolio Insurance that

S-8
<PAGE>

are in default or subject to significant risk of default, the Funds will not
place any value on the insurance in valuing the Municipal Obligations that it
holds.

Because each Portfolio Insurance policy will terminate as to Municipal
Obligations sold by a Fund on the date of sale, in which event the insurer will
be liable only for those payments of principal and interest that are then due
and owing (unless Permanent Insurance is obtained by the Fund), the provision
for this insurance will not enhance the marketability of securities held by a
Fund, whether or not the securities are in default or in significant risk of
default. On the other hand, since Original Issue Insurance and Secondary Market
Insurance generally will remain in effect as long as Municipal Obligations
covered thereby are outstanding, such insurance may enhance the marketability
of such securities, even when such securities are in default or in significant
risk of default, but the exact effect, if any, on marketability cannot be
estimated. Accordingly, the Funds may determine to retain or, alternatively, to
sell Municipal Obligations covered by Original Issue Insurance or Secondary
Market Insurance that are in default or in significant risk of default.

Premiums for a Portfolio Insurance policy are paid monthly, and are adjusted
for purchases and sales of Municipal Obligations covered by the policy during
the month. The yield on a Fund is reduced to the extent of the insurance
premiums it pays. Depending upon the characteristics of the Municipal
Obligations held by a Fund, the annual premium rate for policies of Portfolio
Insurance is estimated to range from .15% to .30% of the value of the Municipal
Obligations covered under the policy. Because the majority of the Municipal
Obligations in the Funds were not covered by policies of Portfolio Insurance
during the year ended February 28, 1997, premium expenses as a percentage of
the value of Municipal Obligations held by the Funds for such period were .00%.

Set forth below is information about the various municipal bond insurers with
whom the Funds currently maintain policies of Portfolio Insurance.

AMBAC Assurance Corporation

Ambac Assurance Corporation ("Ambac Assurance") is a Wisconsin-domiciled
stock insurance corporation regulated by the Office of the Commissioner of
Insurance of the State of Wisconsin and licensed to do business in 50 states,
the District of Columbia, the Territory of Guam and the Commonwealth of Puerto
Rico, with admitted assets of approximately $3,290,000,000 (audited) and
statutory capital of approximately $1,920,000,000 (audited) as of December 31,
1998. Statutory capital consists of Ambac Assurance's policyholders' surplus
and statutory contingency reserve. Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc., Moody's Investors Service and
Fitch IBCA, Inc. have each assigned a triple-A financial strength rating to
Ambac Assurance.

Ambac Assurance has obtained a ruling from the Internal Revenue Service to
the effect that the insuring of an obligation by Ambac Assurance will not
affect the treatment for federal income tax purposes of interest on such
obligation and that insurance proceeds representing maturing interest paid by
Ambac Assurance under policy provisions substantially identical to those
contained in its municipal bond insurance policy shall be treated for federal
income tax purposes in the same manner as if such payments were made by the
issuer of the Bonds.

Ambac Assurance makes no representation regarding the Bonds or the
advisability of investing in the Bonds and makes no representation regarding,
nor has it participated in the presentation of, the Official Statement other
than the information supplied by Ambac Assurance and presented under the
heading "AMBAC Assurance Corporation".

S-9
<PAGE>

Financial Security Assurance Inc. ("Financial Security")

Financial Security is a monoline insurance company incorporated under the
laws of the State of New York. Financial Security is licensed to engage in the
financial guaranty insurance business in all 50 states, the District of
Columbia and Puerto Rico.

Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprise Holdings, Inc.,
XL Capital Ltd., MediaOne Group Inc. and The Tokio Marine and Fire Insurance
Co., Ltd. No shareholder is obligated to pay any debts of or any claims against
Financial Security. Financial Security is domiciled in the State of New York
and is subject to regulation by the State of New York Insurance Department. As
of December 31, 1998, the total policyholders' surplus and contingency reserves
and the total unearned premium reserve, respectively, of Financial Security and
its consolidated subsidiaries were, in accordance with statutory accounting
principles, approximately $1,037,710,000 (audited) and $595,900,000 (audited),
the total shareholders' equity and the total unearned premium reserve,
respectively, of Financial Security and its consolidated subsidiaries were, in
accordance with generally accepted accounting principles, approximately
$1,104,591,000 (audited) and $504,603,000 (unaudited). Copies of Financial
Security's financial statements may be obtained by writing to Financial
Security at 350 Park Avenue, New York, New York 10022, Attention:
Communications Department. Financial Security's telephone number is (212) 826-
0100. Financial Security's financial statements are included as exhibits to the
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q filed with the
Securities and Exchange Commission by Holdings and may be reviewed at Holdings'
website: www.fsa.com.

MBIA Insurance Corporation ("MBIA")

The Insurer is the principal operating subsidiary of MBIA Inc., a New York
Stock Exchange listed company. MBIA Inc. is not obligated to pay the debts of
or claims against the Insurer. The Insurer is domiciled in the State of New
York and licensed to do business in and subject to regulation under the laws of
all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United
States and the Territory of Guam. The Insurer has two European branches, one in
the Republic of France and the other in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentrations
of investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by the Insurer, changes in control and
transactions among affiliates. Additionally, the Insurer is required to
maintain contingency reserves on its liabilities in certain amounts and for
certain periods of time.

As of December 31, 1997 the Insurer had admitted assets of $5.3 billion
(audited), total liabilities of $3.5 billion (audited), and total capital and
surplus of $1.8 billion (audited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. As of March 31, 1998, the Insurer had admitted assets of $5.4
billion (unaudited), total liabilities of $3.6 billion (unaudited), and total
capital and surplus of $1.8 billion (unaudited) determined in accordance with
statutory accounting practices prescribed or permitted by insurance regulatory
authorities.

Furthermore, copies of the Insurer's year end financial statements prepared
in accordance with statutory accounting practices are available without charge
from the Insurer. A copy of the Annual Report on Form 10-K of MBIA Inc. is
available from the Insurer or the Securities and Exchange Commission. The
address of the Insurer is 113 King Street, Armonk, New York 10504. The
telephone number of the Insurer is (914) 273-4545.

The Insurer's policy unconditionally and irrevocably guarantees to the Nuveen
Insured Municipal Bond Fund the full and complete payment required to be made
by or on behalf of the issuer to the applicable paying agent or its successor
of an amount equal to (i) the principal of (either at the stated maturity or by
advancement of maturity pursuant to a mandatory sinking fund payment) and
interest on, the Municipal Obligations as such

S-10
<PAGE>

payments shall become due but shall not be so paid (except that in the event of
any acceleration of the due date of such principal by reason of mandatory or
optional redemption or acceleration resulting from default or otherwise, other
than any advancement of maturity pursuant to a mandatory sinking fund payment,
the payments guaranteed by the Insurer's policy shall be made in such amounts
and at such times as such payments of principal would have been due had there
not been any such acceleration) and (ii) the reimbursement of any such payment
which is subsequently recovered from the Fund pursuant to a final judgment by a
court of competent jurisdiction that such payment constitutes an avoidable
preference to the Fund within the meaning of any applicable bankruptcy law (a
"Preference").

The Insurer's policy does not insure against loss of any prepayment premium
which may at any time be payable with respect to any Municipal Obligation. The
Insurer's policy does not, under any circumstance, insure against loss relating
to: (i) optional or mandatory redemptions (other than mandatory sinking fund
redemptions); (ii) any payments to be made on an accelerated basis; (iii)
payments of the purchase price of Municipal Obligations upon tender thereof; or
(iv) any Preference relating to (i) through (iii) above. The Insurer's policy
also does not insure against nonpayment of principal of or interest on the
Municipal Obligations resulting from the insolvency, negligence or any other
act or omission of any paying agent for the Municipal Obligations.

With respect to small issue industrial development bonds and pollution
control revenue bonds covered by the policy, the Insurer guarantees the full
and complete payments required to be made by or on behalf of an issuer of such
bonds if there occurs pursuant to the terms of the bonds an event which results
in the loss of the tax-exempt status of interest on such bonds, including
principal, interest or premium payments payable thereon, if any, as and when
required to be made by or on behalf of the issuer pursuant to the terms of such
bonds.

When the Insurer receives from the paying agent or the Fund, (1) telephonic
or telegraphic notice (subsequently confirmed in writing by registered or
certified mail), or (2) written notice by registered or certified mail, that a
required payment of any insured amount which is then due has not been made, the
Insurer on the due date of such payment or within one business day after
receipt of notice of such nonpayment, whichever is later, will make a deposit
of funds, in an account with State Street Bank and Trust Company, N.A., in New
York, New York, or its successor, sufficient for the payment of any such
insured amounts which are then due. Upon presentment and surrender of such
Municipal Obligations or presentment of such other proof of ownership of the
Municipal Obligations, together with any appropriate instruments of assignment
to evidence the assignment of the insured amounts due on the Municipal
Obligations as are paid by the Insurer, and appropriate instruments to effect
the appointment of the Insurer as agent for the Fund in any legal proceeding
related to payment of insured amounts on Municipal Obligations, such
instruments being in a form satisfactory to State Street Bank and Trust
Company, N.A., State Street Bank and Trust Company, N.A. shall disburse to the
Fund or the paying agent payment of the insured amounts due on such Municipal
Obligations, less any amount held by the paying agent for the payment of such
insured amounts and legally available therefor.

Financial Guaranty Insurance Company ("Financial Guaranty")

The Portfolio Insurance Policy is non-cancellable except for failure to pay
the premium. The premium rate for each purchase of a security covered by the
Portfolio Insurance Policy is fixed for the life of the Insured Bond. The
insurance premiums are payable monthly by the Fund and are adjusted for
purchases, sales and payments prior to maturity of Insured Bonds during the
month. In the event of a sale of any Insured Bond by the Fund or payment
thereof prior to maturity, the Portfolio Insurance policy terminates as to such
Insured Bond.

Under the provisions of the Portfolio Insurance Policy, Financial Guaranty
unconditionally and irrevocably agrees to pay to State Street Bank and Trust
Company, or its successor, as its agent (the "Fiscal Agent"), that portion of
the principal of and interest on the Insured Bonds which shall become due for
payment but shall be

S-11
<PAGE>

unpaid by reason of nonpayment by the issuer of the Insured Bonds. The term
"due for payment" means, when referring to the principal of an Insured Bond,
its stated maturity date or the date on which it shall have been called for
mandatory sinking fund redemption and does not refer to any earlier date on
which payment is due by reason of call for redemption (other than by mandatory
sinking fund redemption), acceleration or other advancement of maturity and
means, when referring to interest on an Insured Bond, the stated date for
payment of interest. In addition, the Portfolio Insurance Policy covers
nonpayment by the issuer that results from any payment of principal or interest
made by such issuer on the Insured Bond to the Fund which has been recovered
from the Fund or its shareholders pursuant to the United States Bankruptcy Code
by a trustee in bankruptcy in accordance with a final, nonappealable order of a
court having competent jurisdiction.

Financial Guaranty will make such payments to the Fiscal Agent on the date
such principal or interest becomes due for payment or on the business day next
following the day on which Financial Guaranty shall have received notice of
nonpayment, whichever is later. The Fiscal Agent will disburse the Trustee the
face amount of principal and interest which is then due for payment but is
unpaid by reason of nonpayment by the issuer, but only upon receipt by the
Fiscal Agent of (i) evidence of the Trustee's right to receive payment of the
principal or interest due for payment and (ii) evidence, including any
appropriate instruments of assignment, that all of the rights to payment of
such principal or interest due for payment thereupon shall vest in Financial
Guaranty. Upon such disbursement, Financial Guaranty shall become the owner of
the Insured Bond, appurtenant coupon or right to payment of principal or
interest on such Insured Bond and shall be fully subrogated to all of the
Trustee's rights thereunder, including the right to payment, thereof.

In determining whether to insure municipal securities held in the Fund,
Financial Guaranty will apply its own standards which are not necessarily the
same as the criteria used in regard to the selection of securities by the Fund.

Certain of the municipal securities insured under the Portfolio Insurance
Policy may also be insured under an insurance policy obtained by the issuer of
such municipal securities. The premium for any insurance policy or policies
obtained by an issuer or Insured Bonds has been paid in advance by such issuer
and any such policy or policies are non-cancellable and will continue in force
so long as the Insured Bonds so insured are outstanding. Financial Guaranty has
also agreed, if requested by the Funds on or before the fifth day preceding the
1st day of any month, to insure to maturity Insured Bonds sold by the Trustee
during the month immediately following such request of the Funds. The premium
for any such insurance to maturity provided by Financial Guaranty is paid by
the Fund and any such insurance is non-cancellable and will continue in force
so long as the Bonds so insured are outstanding.

Financial Guaranty is a wholly-owned subsidiary of FGIC Corporation (the
"Corporation"), a Delaware holding company. The Corporation is a subsidiary of
General Electric Capital Corporation. Financial Guaranty is a monoline
financial guaranty insurer domiciled in the State of New York and subject to
regulation by the State of New York Insurance Department. As of March 31, 1998,
the total capital and surplus of Financial Guaranty was $1,267,900,134.
Financial Guaranty prepares financial statements on the basis of both statutory
accounting principles and generally accepted accounting principles. Copies of
such financial statements may be obtained by writing to Financial Guaranty at
115 Broadway, New York, New York 10006, Attention: Communications Department
(telephone number: (212) 312-3000) or to the New York State Insurance
Department at 25 Beaver Street, New York, New York 10004-2319, Attention:
Financial Condition Property/Casualty Bureau (telephone number: (212) 480-
5187).

The policies of insurance obtained by the Fund from Financial Guaranty and
the negotiations in respect thereof represent the only relationship between
Financial Guaranty and the Fund. Otherwise neither Financial Guaranty nor its
parent, FGIC Corporation, or any affiliate thereof has any significant
relationship, direct or indirect, with the Fund or the Board of Trustees of the
Fund.

S-12
<PAGE>

The above municipal bond insurers have insurance claims-paying ability
ratings of AAA from S&P and Aaa from Moody's. Financial Guaranty also has an
insurance claims-paying ability rating of AAA from Fitch.

An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with its terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P.
Capacity to honor insurance contracts is adjudged by S&P to be extremely strong
and highly likely to remain so over a long period of time. A Moody's insurance
claims-paying ability rating is an opinion of the ability of an insurance
company to repay punctually senior policyholder obligations and claims. An
insurer with an insurance claims-paying ability rating of Aaa is adjudged by
Moody's to be of the best quality. In the opinion of Moody's, the policy
obligations of an insurance company with an insurance claims-paying ability
rating of Aaa carry the smallest degree of credit risk and, while the financial
strength of these companies is likely to change, such changes as can be
visualized are most unlikely to impair the company's fundamentally strong
position.

An insurance claims-paying ability rating by S&P or Moody's does not
constitute an opinion on any specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take into account deductibles,
surrender or cancellation penalties or the timeliness of payment, nor does it
address the ability of a company to meet nonpolicy obligations (i.e., debt
contracts).

The assignment of ratings by S&P or Moody's to debt issues that are fully or
partially supported by insurance policies, contracts or guarantees is a
separate process form the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination for such debt issues.

S&P's and Moody's ratings are not recommendations to buy, sell or hold the
Municipal Obligations insured by policies issued by AMBAC Assurance, Financial
Security, MBIA or Financial Guaranty and such ratings may be subject to
revision or withdrawal at any time by the rating agencies. Any downward
revision or withdrawal of either or both ratings may have an adverse effect on
the market price of the Municipal Obligations insured by policies issued by
AMBAC Assurance, Financial Security, MBIA or Financial Guaranty.

S&P's ratings of AMBAC Assurance, Financial Security, MBIA and Financial
Guaranty should be evaluated independent of Moody's ratings. Any further
explanation as to the significance of the ratings may be obtained only from the
applicable rating agency. See Appendix A for more information about ratings by
Moody's, S&P, and Fitch.

Portfolio Trading and Turnover

The Funds will make changes in their investment portfolio from time to time
in order to take advantage of opportunities in the municipal market and to
limit exposure to market risk. The Funds may also engage to a limited extent in
short-term trading consistent with their investment objective. Securities may
be sold in anticipation of market decline or purchased in anticipation of
market rise and later sold. In addition, a security may be sold and another of
comparable quality purchased at approximately the same time to take advantage
of what Nuveen Advisory believes to be a temporary disparity in the normal
yield relationship between the two securities. Each Fund may make changes in
its investment portfolio in order to limit its exposure to changing market
conditions. Changes in a Fund's investments are known as "portfolio turnover."
While it is impossible to predict future portfolio turnover rates, the annual
portfolio turnover rate for each of the Funds is generally not expected to
exceed 75%. However, each Fund reserves the right to make changes in its
investments whenever it deems such action advisable and, therefore, a Fund's
annual portfolio turnover rate may exceed 75% in particular years depending
upon market conditions.

S-13
<PAGE>

The portfolio turnover rates for the 1997 and 1998 fiscal year-ends of the
Funds were:

<TABLE>
<CAPTION>
Fiscal
Year
1998 1999
---- ----
<S> <C> <C>
Nuveen Flagship New York Municipal Bond Fund.................... 30%
Nuveen New York Insured Municipal Bond Fund..................... 17%
Nuveen Flagship New Jersey Municipal Bond Fund.................. 16%
Nuveen California Municipal Bond Fund........................... 45%
Nuveen California Insured Municipal Bond Fund................... 26%
Nuveen Flagship Connecticut Municipal Bond Fund................. 12%
Nuveen Massachusetts Municipal Bond Fund........................ 17%
Nuveen Massachusetts Insured Municipal Bond Fund................ 23%
</TABLE>

When-issued Securities

Each Fund may purchase and sell Municipal Obligations on a when-issued or
delayed delivery basis. When-issued and delayed delivery transactions arise
when securities are purchased or sold with payment and delivery beyond the
regular settlement date. (When-issued transactions normally settle within 15-45
days.) On such transactions the payment obligation and the interest rate are
fixed at the time the buyer enters into the commitment. The commitment to
purchase securities on a when-issued or delayed delivery basis may involve an
element of risk because the value of the securities is subject to market
fluctuation, no interest accrues to the purchaser prior to settlement of the
transaction, and at the time of delivery the market value may be less than
cost. At the time a Fund makes the commitment to purchase a Municipal
Obligation on a when-issued or delayed delivery basis, it will record the
transaction and reflect the amount due and the value of the security in
determining its net asset value. Likewise, at the time a Fund makes the
commitment to sell a Municipal Obligation on a delayed delivery basis, it will
record the transaction and include the proceeds to be received in determining
its net asset value; accordingly, any fluctuations in the value of the
Municipal Obligation sold pursuant to a delayed delivery commitment are ignored
in calculating net asset value so long as the commitment remains in effect. The
Funds will maintain designated readily marketable assets at least equal in
value to commitments to purchase when-issued or delayed delivery securities,
such assets to be segregated by the Custodian specifically for the settlement
of such commitments. The Funds will only make commitments to purchase Municipal
Obligations on a when-issued or delayed delivery basis with the intention of
actually acquiring the securities, but the Funds reserve the right to sell
these securities before the settlement date if it is deemed advisable. If a
when-issued security is sold before delivery any gain or loss would not be tax-
exempt. The Funds commonly engage in when-issued transactions in order to
purchase or sell newly-issued Municipal Obligations, and may engage in delayed
delivery transactions in order to manage its operations more effectively.

Special Considerations Relating to Municipal Obligations of Designated States

As described in the Prospectus, except for investments in temporary
investments, each of the Funds will invest substantially all of its assets (at
least 80%) in Municipal Obligations, generally Municipal Obligations issued in
its respective state. Each Fund is therefore more susceptible to political,
economic or regulatory factors adversely affecting issuers of Municipal
Obligations in its state. Brief summaries of these factors are contained in the
Prospectus. Set forth below is additional information that bears upon the risk
of investing in Municipal Obligations issued by public authorities in the
states of currently offered Funds. This information was obtained from official
statements of issuers located in the respective states as well as from other
publicly available official documents and statements. The Funds have not
independently verified any of the information contained in such statements and
documents. The information below is intended only as a general summary, and is
not intended as a discussion of any specific factor that may affect any
particular obligation or issuer.

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Factors Pertaining to New York

Except to the extent the New York Municipal Bond Fund and the New York
Insured Municipal Bond Fund (the "New York Funds") invest in temporary
investments, the New York Funds will invest substantially all of their assets
in New York Municipal Obligations. The New York Funds are therefore susceptible
to political, economic or regulatory factors affecting New York State and
governmental bodies within New York State. Some of the more significant events
and conditions relating to the financial situation in New York are summarized
below. The following information provides only a brief summary of the complex
factors affecting the financial situation in New York, is derived from sources
that are generally available to investors and is believed to be accurate. It is
based on information drawn from official statements and prospectuses issued by,
and other information reported by, the State of New York (the "State"), by its
various public bodies (the "Agencies"), and by other entities located within
the State, including the City of New York (the "City"), in connection with the
issuance of their respective securities.

There can be no assurance that current or future statewide or regional
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of New York
Municipal Obligations held in the portfolio of the New York Funds or the
ability of particular obligors to make timely payments of debt service on (or
relating to) those obligations.

(1) The State: The State has historically been one of the wealthiest states
in the nation. For decades, however, the State economy has grown more slowly
than that of the nation as a whole, gradually eroding the State's relative
economic affluence. Statewide, urban centers have experienced significant
changes involving migration of the more affluent to the suburbs and an influx
of generally less affluent residents. Regionally, the older Northeast cities
have suffered because of the relative success that the South and the West have
had in attracting people and business. The State has for many years had a very
high State and local tax burden relative to other states. The burden of State
and local taxation, in combination with the many other causes of regional
economic dislocation, has contributed to the decisions of some businesses and
individuals to relocate outside, or not locate within, the State.

Slowdown of Regional Economy. A national recession commenced in mid-1990. The
downturn continued throughout the State's 1990-91 fiscal year and was followed
by a period of weak economic growth during the 1991 and 1992 calendar years.
For calendar year 1993, the economy grew faster than in 1992, but still at a
very moderate rate as compared to other recoveries. Moderate economic growth
continued in calendar year 1994. Economic growth slowed within New York during
1995 and 1996. Personal income and employment growth in the State improved in
1997, although at lower levels than in the national economy. The State has
forecasted continued moderate growth in 1998 and 1999, although growth rates
are expected to lessen gradually during the course of the two years. The
State's economic growth continues to lag behind the nation's, due in part to
restructuring in the healthcare, social service and banking sectors and
continued spending restraint in government. Many uncertainties exist in
forecasts of both the national and State economies and there can be no
assurance that the State's economy will perform at a level sufficient to meet
the State's projections of receipts and disbursements.

1998-99 Fiscal Year. The Governor issued a proposed Executive Budget for the
1998-99 fiscal year (the "Proposed Budget") on January 20, 1998, which
projected a balanced general fund and receipts and disbursements of $36.22
billion and $36.18 billion, respectively. As of May 11, 1998, the State
legislature had not yet enacted, nor had the Governor and the legislature
reached an agreement on, the budget for the 1998-99

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fiscal year, which commenced on April 1, 1998. The Governor and the State's
legislature have agreed on or proposed a series of short-term stopgap spending
measures to fund state payrolls and advances to certain municipalities and
certain state programs. The delay in the enactment of the budget may negatively
affect certain proposed actions and reduce projected savings.

As compared to the 1997-98 Financial Plan, the governor's budget proposes
year-to-year in general fund spending of 2.89 percent. Current law and
programmatic requirements are primarily responsible for the year-to-year growth
in general fund spending. New spending is partially offset by reductions in
capital projects transfers due to the financing of a certain program from
resources available in 1997-98, welfare assistance savings, lower spending in
certain areas and lower transfers.

The Proposed Budget and the 1998-99 Financial Plan may be impacted negatively
by uncertainties relating to the economy and tax collections. In particular,
should the national economy grow more slowly than forecasted by the State,
revenues received by the State would be adversely affected. In addition,
proposed retroactive changes to the federal tax treatment of capital gains
would flow through to the State and could significantly reduce tax receipts.

1997-98 Fiscal Year. The State is projecting that it will end the 1997-98
fiscal year with a $1.8 billion cash surplus. Almost all of the surplus was
derived from higher-than-expected tax receipts, reflecting continued growth in
the State's economy and another strong year in the financial markets.

Future Fiscal Years. There can be no assurance that the State will not face
substantial potential budget gaps in the future resulting from a significant
disparity between tax revenues projected from a lower recurring receipts base
and the spending required to maintain State programs at current levels. To
address any potential budgetary imbalance, the State may need to take
significant actions to align recurring receipts and disbursements. The
Governor's budget for fiscal year 1998-99 projects that the State will end
1998-99 with a closing balance in the general fund of $500 million and faces
budget gaps of $1.5 billion and $3.75 billion that may need to be closed for
fiscal years 1999-2000 and 2000-01, respectively.

Indebtedness. As of March 31, 1997, the total amount of State general
obligation debt stood at $4.7 billion.

The Governor's budget for fiscal year 1998-99 projects approximately $2.5
billion of borrowings by the state for capital purposes. The projections of the
State regarding its borrowings for any fiscal year are subject to change if
actual receipts fall short of State projections or if other circumstances
require.

In June 1990, legislation was enacted creating the New York Local Government
Assistance Corporation ("LGAC"), a public benefit corporation empowered to
issue long-term obligations to fund certain payments to local governments
traditionally funded through the State's annual seasonal borrowing. The
Corporation is authorized to issue up to $4.7 billion in bonds plus amounts
necessary to fund a capital reserve, costs of issuance and, in certain cases,
capitalized interest. As of March 31, 1996, LGAC had issued all of its
authorization. Any issuance of bonds by the Corporation in the future will be
for refunding purposes only.

Financing of capital programs by other public authorities of the State is
also obtained from lease-purchase and contractual-obligation financing
arrangements (nonvoter approved), the debt service for which is paid from State
appropriations. As of March 31, 1997, there were $20.8 billion of such other
financing arrangements outstanding and additional financings of this nature by
public authorities including LGAC. In addition, certain

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agencies had issued and have outstanding approximately $3.3 billion of "moral
obligation financings" as of March 31, 1997, which are to be repaid from
project revenues. There has never been a default on moral obligation debt of
the State.

Ratings. In connection with the March 1998 State issuance of general
obligation bonds, Moody's rating of the State's general obligation bonds stood
at A2 and S&P's rating stood at A. On August 28, 1997, S&P upgraded its rating
on the State's general obligation bonds form A- to A.

Previously, Moody's lowered its rating to A on June 6, 1990, its rating
having been A1 since May 27, 1986. S&P lowered its rating from A to A- on
January 13, 1992. S&P's previous ratings were A from March 1990 to January
1992, AA- from August 1987 to March 1990 and A+ from November 1982 to August
1987.

(2) The City and the Municipal Assistance Corporation ("MAC"): The City
accounts for approximately 40% of the State's population and personal income,
and the City's financial health affects the State in numerous ways.

In response to the City's fiscal crisis in 1975, the State took a number of
steps to assist the City in returning to fiscal stability. Among other actions,
the State Legislature (i) created MAC to assist with long-term financing for
the City's short-term debt and other cash requirements and (ii) created the
State Financial Control Board (the "Control Board") to review and approve the
City's budgets and four-year financial plans (the financial plans also apply to
certain City-related public agencies).

Economic activity in the City has experienced periods of growth and recession
and can be expected to experience periods of growth and recession in the
future. Changes in the economic activity in the City, particularly employment,
per capita personal income and retail sales, may have an impact on the City.
Overall, the City's economic improvement accelerated significantly in fiscal
year 1997. Much of the increase can be traced to the performance of the
securities industry, but the City's economy also produced gains in the retail
trade sector, the hotel and tourism industry, and business services, with
private sector employment higher than previously forecasted. The City's current
Financial Plan assumes that, after strong growth in 1997-1998, moderate
economic growth will exist through calendar year 2002, with moderating job
growth and wage increases. However, there can be no assurance that the economic
projections assumed in the Financial Plan will occur or that the tax revenues
projected in the Financial Plan to be received in the amounts anticipated.

Fiscal Year 1999 and the 1998-2002 Financial Plan. On January 29, 1998, the
Mayor released his preliminary $34.3 billion budget for fiscal year 1999. The
Mayor announced on April 24, 1998 that the preliminary budget for the 1999
fiscal year will be modified to utilize the incurred surplus from the 1998
fiscal year to reduce sales taxes, increase spending on certain programs and to
repay a portion of the City's debt.

On April 24, 1998, the Mayor also announced revisions to the proposed 1998-
2002 Financial Plan (the "Plan"), which now projects budget gaps of $1.5
billion, $2.1 billion and $1.6 billion for fiscal years 2000, 2001 and 2002,
respectively. The City Comptroller and State Comptroller have each stated that
the fiscal year 1999 budget includes moderate revenue risks. The State
Comptroller has projected budget gaps for fiscal years 2000, 2001 and 2002 that
are each in excess of the City's estimate.

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An extended delay by the State in adopting its 1998-99 fiscal year budget or
the failure of the State legislature to extend the income tax surcharge would
negatively impact upon the City's financial condition and ability to close
budget gaps for fiscal years 1999 and thereafter.

Given the foregoing, there can be no assurance that the City will continue to
maintain a balanced budget during fiscal year 1999 or thereafter, or that it
can maintain a balanced budget without additional tax or other revenue
increases or reductions in City services, which could adversely affect the
City's economic base.

Pursuant to State law, the City prepares a four-year annual financial plan,
which is reviewed and revised on a quarterly basis and which includes the
City's capital, revenue and expense projections. The City is required to submit
its financial plans to review bodies, including the Control Board. If the City
were to experience certain adverse financial circumstances, including the
occurrence or the substantial likelihood and the imminence of the occurrence of
an annual operating deficit of more than $100 million or the loss of access to
the public credit markets to satisfy the City's capital and seasonal financial
requirements, the Control Board would be required by State law to exercise
certain powers, including prior approval of City financial plans, proposed
borrowings and certain contracts.

The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. If the State experiences
revenue shortfalls or spending increases beyond its projections during its
1998-99 fiscal year or subsequent years, such developments could result in
reductions in projected State aid to the City. In addition, there can be no
assurance that State budgets for the 1999-2000 or future fiscal years will be
adopted by the April 1 statutory deadline and that there will not be adverse
effects on the City's cash flow and additional City expenditures as a result of
such delays.

The City projections set forth in the Plan are based on various assumptions
and contingencies which are uncertain and which may not materialize. Changes in
major assumptions could significantly affect the City's ability to balance its
budget as required by State law and to meet its annual cash flow and financing
requirements. Such assumptions and contingencies include the timing of any
regional and local economic recovery, the absence of wage increases in excess
of the increases assumed in its financial plan, employment growth, provision of
State and Federal aid and mandate relief, State legislative approval of future
State budgets, levels of education expenditures as may be required by State
law, adoption of future City budgets by the New York City Council, approval by
the Governor or the State Legislature and the cooperation of MAC with respect
to various other actions proposed in the Plan and changes in federal tax law.

The City's ability to maintain a balanced operating budget is dependent on
whether it can identify additional expenditure reductions and action by the
State legislature to achieve balanced operating budgets for fiscal year 1999
and thereafter. Any such proposed expenditure reductions will be difficult to
implement because of their size and the substantial expenditure reductions
already imposed on City operations in recent years.

Attaining a balanced budget is also dependent upon the City's ability to
market its securities successfully in the public credit markets. The City's
four-year capital plan contemplates capital spending of $25.5 billion through
the 2002 fiscal year, which will be financed through issuance of general
obligation bonds, Transitional Finance Authority Bonds, Water Authority Revenue
Bonds and Covered Organization obligations, and will be used primarily to
reconstruct and rehabilitate the City's infrastructure and physical assets and
to make capital investments. A significant portion of such bond financing is
used to reimburse the City's general fund for capital expenditures already
incurred. In addition, the City issues revenue and tax anticipation notes to
finance its

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seasonal working capital requirements. The terms and success of projected
public sales of City general obligation bonds and notes will be subject to
prevailing market conditions at the time of the sale, and no assurance can be
given that the credit markets will absorb the projected amounts of public bond
and note sales. In addition, future developments concerning the City and public
discussion of such developments, the City's future financial needs and other
issues may affect the market for outstanding City general obligation bonds and
notes. If the City were unable to sell its general obligation bonds and notes,
it would be prevented from meeting its planned operating and capital
expenditures.

On March 5, 1997, New York Governor George Pataki signed legislation creating
The New York City Transitional Finance Authority, which beginning in fiscal
year 1998 is authorized to issue up to $7.5 billion in bonds for capital
spending by the City. Absent creation of this authority, the City would have
faced limitations on its borrowing capacity after 1998 under the State's
Constitution. As of May 11, 1998, the Authority had issued $2.15 billion in
bonds. The bonds are secured by a primary lien on the City's personal income
tax receipts as well as a secondary lien on sales tax receipts.

The City is a defendant in a significant number of lawsuits and is subject to
numerous claims and investigations, including, but not limited to, actions
commenced and claims asserted against the City arising out of alleged
constitutional violations, torts, breaches of contracts, and other violations
of law and condemnation proceedings. While the ultimate outcome and fiscal
impact, if any, on the proceedings and claims are not currently predictable,
adverse determinations in certain of them might have a material adverse effect
upon the City's ability to carry out its financial plan. As of June 30, 1997,
the City estimated its potential future liability on outstanding claims to be
$3.5 billion.

In April 1996, certain unions, elected officials and others filed an action
in the Supreme Court of the State of New York, County of New York, against the
Mayor which asserted that the City failed to subsidize HHC at the minimum
funding levels required for the 1994 through 1997 fiscal years. On July 15,
1997, the Court permitted the plaintiffs to amend the complaint and seek an
order requiring the City to pay to HHC at least $949 million, $931 million and
$831 million for the 1994, 1995 and 1996 fiscal years, respectively, and an
amount to be determined by the Court for the 1997 fiscal year. The Court denied
plaintiff's motion to preliminarily enjoin the defendant from further reducing
the City's subsidy to HHC for the 1996 and 1997 fiscal years from the amount
originally budgeted for the 1996 fiscal year.

Fiscal Year 1998. New York City adopted its 1998 fiscal year budget in June
1997, which provided for spending of $33.4 billion. Due to increased tax
revenues resulting from increased profits on Wall Street and tourism, the City
expects to end fiscal year 1998 with a surplus of $2.0 billion.

Fiscal Years 1991 through 1997. The City achieved balanced operating results
in accordance with generally accepted accounting principles for fiscal years
1991 through 1997. The City was required to close substantial budget gaps in
these fiscal years in order to maintain balanced operating results.

Ratings. As of May 11, 1998, Moody's S&P, and Fitch rate the City's
outstanding general obligation bonds A3, BBB+, and A-, respectively. On
February 3, 1998, S&P placed its BBB+ rating of City bonds on Creditwatch with
positive implications. Moody's rating of City bonds was revised in February
1998 to A3 from Baal.

As of December 31, 1997, the City MAC and TFA had, respectively, $26.6
billion and $3.6 billion and $2.15 billion of outstanding net long-term and
short-term indebtedness.

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(3) The State Agencies: Certain Agencies of the State have faced substantial
financial difficulties which could adversely affect the ability of such
Agencies to make payments of interest on, and principal amounts of, their
respective bonds. The difficulties have in certain instances caused the State
(under so-called "moral obligation" provisions, which are non-binding statutory
provisions for State appropriations to maintain various debt service reserve
funds) to appropriate funds on behalf of the Agencies. Moreover, it is expected
that the problems faced by these Agencies will continue and will require
increasing amounts of State assistance in future years. Failure of the State to
appropriate necessary amounts or to take other action to permit those Agencies
having financial difficulties to meet their obligations could result in a
default by one or more of the Agencies. Such default, if it were to occur,
would be likely to have a significant adverse affect on investor confidence in,
and therefore the market price of, obligations of the defaulting Agencies. In
addition, any default in payment on any general obligation of any Agency whose
bonds contain a moral obligation provision could constitute a failure of
certain conditions that must be satisfied in connection with Federal guarantees
of City and MAC obligations and could thus jeopardize the City's long-term
financing plans.

As of March 31, 1997, the State reported that its public benefit corporations
had an aggregate of $36.9 billion of outstanding debt, some of which was State-
supported and State-related debt.

(4) State Litigation: The State is a defendant in numerous legal proceedings
pertaining to matters incidental to the performance of routine governmental
operations. Such litigation includes, but is not limited to, claims asserted
against the State arising from alleged torts, alleged breaches of contracts,
condemnation proceedings and other alleged violations of State and Federal
laws. Included in the State's outstanding litigation are a number of cases
challenging the constitutionality or the adequacy and effectiveness of a
variety of significant social welfare programs primarily involving the State's
mental hygiene programs. Adverse judgments in these matters generally could
result in injunctive relief coupled with prospective changes in patient care
which could require substantial increased financing of the litigated programs
in the future.

The State is also engaged in a variety of claims wherein significant monetary
damages are sought. Actions commenced by several Indian nations claim that
significant amounts of land were unconstitutionally taken from the Indians in
violation of various treaties and agreements during the eighteenth and
nineteenth centuries. The claimants seek recovery of approximately six million
acres of land, as well as compensatory and punitive damages.

(5) Other Municipalities: Certain localities in addition to New York City
could have financial problems leading to requests for additional State
assistance. The potential impact on the State of such actions by localities is
not included in projections of State receipts and expenditures in the State's
1998-99 fiscal year.

Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board for the City of Yonkers (the
"Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the State Legislature to assist Yonkers could result in allocation
of State resources in amounts that cannot yet be determined.

Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City authorized by State law to issue debt to finance deficits
during the period that such deficit financing is outstanding. In December 1995,
in reaction to continuing financial problems, the Troy Municipal Assistance
Corp., which was created in 1995, imposed a 1996 budget plan upon

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Troy, New York. Such revenue bonds have not to date been refinanced. A similar
municipal assistance corporation has also been established for Newburgh. In
addition, several other New York cities, including Utica, Rome, Schenectady,
Syracuse and Niagara Falls have faced continuing budget deficits, as federal
and state aid and local tax revenues have declined while government expenses
have increased. The financial problems being experienced by the State's smaller
urban centers place additional strains upon the State's financial condition.

Certain proposed Federal expenditure reductions could reduce, or in some
cases eliminate, Federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities to
increase local revenues to sustain those expenditures. Federal welfare reform
legislation may increase the local burden for welfare benefits. In addition,
proposed changes in the treatment of capital gains for federal income tax
purposes could reduce the receipts of the State and City. If the State, New
York City or any of the Agencies were to suffer serious financial difficulties
jeopardizing their respective access to the public credit markets, the
marketability of notes and bonds issued by localities within the State,
including notes or bonds in the Fund, could be adversely affected. Localities
also face anticipated and potential problems resulting from certain pending
litigation, judicial decisions, and long-range economic trends. The longer-
range potential problems of declining urban population, increasing
expenditures, and other economic trends could adversely affect certain
localities and require increasing State assistance in the future.

(6) Other Issuers of New York Municipal Obligations. There are a number of
other state agencies, instrumentalities and political subdivisions of the State
that issue Municipal Obligations, some of which may be conduit revenue
obligations payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the credit quality of
the securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.

Factors Pertaining to New Jersey

Except to the extent the New Jersey Municipal Bond Fund and the New Jersey
Intermediate Municipal Bond Fund (the "New Jersey Funds") invest in temporary
investments, the New Jersey Funds will invest substantially all of their assets
in New Jersey Municipal Obligations. The New Jersey Funds are therefore
susceptible to political, economic or regulatory factors affecting New Jersey
and governmental bodies within New Jersey. The following information provides
only a brief summary of the complex factors affecting the financial situation
in New Jersey, is derived from sources that are generally available to
investors and is believed to be accurate. It is based in part on information
obtained from various State and local agencies in New Jersey or contained in
Official Statements for various New Jersey Municipal Obligations. There can be
no assurance that current or future statewide or regional economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of New Jersey Obligations
in the Funds or the ability of particular obligors to make timely payments of
debt service on (or relating to) those obligations.

The State and Its Economy. The State is the ninth largest state in population
and the fifth smallest in land area. With an average of 1,094 people per square
mile, it is the most densely populated of all the states. The State's economic
base is diversified, consisting of a variety of manufacturing, construction and
service industries, supplemented by rural areas with selective commercial
agriculture. Historically, New Jersey's average per capita income has been well
above the national average, and in 1997 the State ranked second among the
states in per capita personal income ($32,654).

The New Jersey Economic Policy Council, a statutory arm of the New Jersey
Department of Commerce and Economic Development, has reported in New Jersey
Economic Indicators, a monthly publication of the New Jersey Department of
Labor, Division of Labor Market and Demographic Research, that in 1988 and 1989
employment in New Jersey's manufacturing sector failed to benefit from the
export boom experienced by many

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Midwest states and the State's service sectors, which had fueled the State's
prosperity since 1982, lost momentum. In the meantime, the prolonged fast
growth in the State in the mid 1980s resulted in a tight labor market
situation, which has led to relatively high wages and housing prices. This
means that, while the incomes of New Jersey residents are relatively high, the
State's business sector has become more vulnerable to competitive pressures.

The onset of the national recession (which officially began in July 1990
according to the National Bureau of Economic Research) caused an acceleration
of New Jersey's job losses in construction and manufacturing. In addition, the
national recession caused an employment downturn in such previously growing
sectors as wholesale trade, retail trade, finance, utilities and trucking and
warehousing. Reflecting the downturn, the rate of unemployment in the State
rose from a low of 3.6% during the first quarter of 1989 to an estimated 6.6%
in April 1996, which is greater than the national average of 5.4% in April
1996. Improvement has been slow, with New Jersey's unemployment rate dropping
to 5.1% in March 1998 versus the natural average of 4.7%.

Going forward, moderate growth is expected to continue through fiscal year
1998. New Jersey's economy has recently benefitted from newly emerging
information-based fields attracted by the State's high technology labor
resources. Meanwhile, corporate restructuring in such fields as chemicals,
telecommunications and financial services has abated. Total employment is
expected to grow at an average rate of 0.8% through calendar year 1999.

Debt Service. The primary method for State financing of capital projects is
through the sale of the general obligation bonds of the State. These bonds are
backed by the full faith and credit of the State tax revenues and certain other
fees are pledged to meet the principal and interest payments and if provided,
redemption premium payments, if any, required to repay the bonds. General
obligation debt must be approved by voter referendum and is used primarily to
finance various environmental, transportation, correctional and institutional
projects. As of June 30, 1997, the state's outstanding general obligation debt
totaled $3.4 billion. The debt service obligation for such outstanding
indebtedness was $447 million in fiscal year 1997.

New Jersey's Budget and Appropriation System. The State operates on a fiscal
year beginning July 1 and ending June 30. The State closed recent fiscal years
with surpluses in the general fund (the fund into which all State revenues not
otherwise restricted by statute are deposited and from which appropriations are
made) of $761 million in 1992, $937 million in 1993, $926 million in 1994, $569
million in 1995, $442 million in 1996 and $281 million in 1997. It is estimated
that fiscal year 1998 will end with a surplus of $269 million.

In order to provide additional revenues to balance future budgets, to
redistribute school aid and to contain real property taxes, on June 27, 1990,
and July 12, 1990, Governor Florio signed into law legislation which was
estimated to raise approximately $2.8 billion in additional taxes (consisting
of $1.5 billion in sales and use taxes and $1.3 billion in income taxes), the
biggest tax hike in New Jersey history. There can be no assurance that receipts
and collections of such taxes will meet such estimates.

The first part of the tax hike took effect on July 1, 1990, with the increase
in the State's sales and use tax rate from 6.0% to 7.0% and the elimination of
exemptions for certain products and services not previously subject to the tax,
such as telephone calls, disposable paper products (which has since been
reinstated), soaps and detergents, janitorial services, alcoholic beverages and
cigarettes. At the time of enactment, it was projected that these taxes would
raise approximately $1.5 billion in additional revenue. Projections and
estimates of receipts from sales and use taxes, however, have been subject to
variance in recent fiscal years.

The second part of the tax hike took effect on January 1, 1991, in the form
of an increased state income tax on individuals. At the time of enactment, it
was projected that this increase would raise approximately $1.3 billion in
additional income taxes to fund a new school aid formula, a new homestead
rebate program and state assumption of welfare and social services costs.
Projections and estimates of receipts from income taxes, however,

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have also been subject to variance in recent fiscal years. Under the
legislation, income tax rates increased from their previous range of 2.0% to
3.5% to a new range of 2.0% to 7.0%, with the higher rates applying to married
couples with incomes exceeding $70,000 who file joint returns, and to
individuals filing single returns with incomes of more than $35,000.

The Florio administration had contended that the income tax package would
help reduce local property tax increases by providing more state aid to
municipalities. Under the income tax legislation the State assumed
approximately $289.0 million in social services costs that previously were paid
by counties and municipalities and funded by property taxes. In addition, under
the new formula for funding school aid, an extra $1.1 billion was proposed to
be sent by the State to school districts beginning in 1991, thus reducing the
need for property tax increases to support education programs.

Effective July 1, 1992, the State's sales and use tax rate decreased from 7%
to 6%. Effective January 1, 1994, an across-the-board 5% reduction in the
income tax rates was enacted and effective January 1, 1995, further reductions
ranging from 1% up to 10% in income tax rates took effect.

As part of the Fiscal Year 1996 Budget, the State enacted several additional
tax cuts. For the Gross Income Tax, a 15 percent reduction of personal income
tax rates became effective on January 1, 1996. This cut was in addition to the
tax rate reductions that were implemented during Fiscal Year 1994 and Fiscal
Year 1995. Effective April 1, 1996, yellow pages advertisements were exempt
from the State's Sales Tax. Effective July 1, 1996, a reduction in the
Corporation Business Tax rate from 9.0 percent to 7.5 percent applied to those
corporations that have an allocated net income of $100,000 or less. Also
effective July 1, 1996, corporations' sales were double weighted in calculating
receipt factors in determining a multistate corporation's New Jersey State
Corporation Business Tax liability.

During June, 1997 the Pension Security Plan was passed which enacted various
reform measures including a major provision fully funding the State's $3.2
billion unfunded pension liability as well as the projected $1 billion unfunded
liability by bringing assets to full market value, recognizing surplus assets
within the normal contribution accounts and issuing $2.75 billion of pension
obligation bonds to refinance the remaining State liability at low interest
rates. Amortization of the pension obligation bonds will occur through 2019 at
a cost of $10.3 billion. This restructuring allows the State to save $47.5
billion over the 2020-56 period originally set up in the prior pension policy.
The Pension Security Plan also reallocates surplus assets to reduce the State's
normal contribution by $601 million for fiscal years 1997 and 1998.

On July 12, 1994, the New Jersey Supreme Court declared the State's Quality
Education Act of 1990 unconstitutional and gave the Chief Executive and the
Legislature until Fiscal Year 1998 to achieve "substantial equivalence" between
spending on pupils in poor urban districts and spending on their counterparts
in wealthy suburban districts. Fiscal Year 1998 marks the implementation of a
new school funding formula specified by the Comprehensive Education Improvement
and Financing Act of 1996. State school aid will total $5.3 billion, a net
increase of nearly $438 million. However, late in 1997, the State Supreme Court
found that the new law still provided insufficient funding and recommended that
the State increase annual funding by $312 million.

In October of 1997, the Supreme Court declined to hear appeals regarding the
unconstitutionality of the State's flow control legislation and thus opened the
State's solid waste market of competition. New Jersey's solid waste facilities
have approximately $1.5 billion of debt outstanding and have faced rating
downgrades since 1996 as a result of the federal court ruling that the State's
flow control legislation was illegal. The State has taken several actions in
order to help New Jersey counties raise more money to pay off their debt,
including the imposition of an environmental investment charge on either trash
haulers or businesses or residences that generate the trash and the inclusion
of $20 million in FY97 and FY98 budgets. A legislative proposal to provide a
more large-scale county bailout has not yet been approved.

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The State's fiscal year 1998 revenue projections are based on moderate
overall economic growth. Total general fund and available revenues are
projected to be $17.3 billion. Included in the revenue forecast is a reduction
of residential property taxes paid by homeowners and tenants, and a refundable
tax credit for property taxpayers. Effective January 1, 1997, 75% of a
homeowner's, tenant's, or property taxpayer's property taxes, not in excess of
$7,500, can be deducted. Fiscal 1998 also provides for changes in the rate for
S Corporations to 2%, or one-half percent for S Corporations with $100,000 or
less annual income. Total appropriations for fiscal 1998 total $16.8 billion.

Litigation. The State is a party in numerous legal proceedings pertaining to
matters incidental to the performance of routine governmental operations. Such
litigation includes, but is not limited to, claims asserted against the State
arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included in
the State's outstanding litigation are cases challenging the following: the
funding of teachers' pension funds, the adequacy of Medicaid reimbursement for
hospital services, the hospital assessment authorized by the Health Care Reform
Act of 1992, various provisions, and the constitutionality, of the Fair
Automobile Insurance Reform Act of 1990, the State's role in a consent order
concerning the construction of a resource facility in Passaic County, actions
taken by the Bureau of Securities against an individual, the State's actions
regarding alleged chromium contamination of State-owned property in Hudson
County, the issuance of emergency redirection orders and a draft permit by the
Department of Environmental Protection and Energy, refusal of the State to
share with Camden County federal funding the State recently received for
disproportionate share hospital payments made to county psychiatric facilities,
the State's failure to reimburse certain hospitals' charity care costs, and the
constitutionality of annual A-901 hazardous and solid waste licensure renewal
fees collected by the Department of Environmental Protection and Energy.
Adverse judgments in these and other matters could have the potential for
either a significant loss of revenue or a significant unanticipated expenditure
by the State.

At any given time, there are various numbers of claims and cases pending
against the State, State 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. In addition, at any given time, there are various
numbers of contract claims against the State and State agencies seeking
recovery of monetary damages. The State is unable to estimate its exposure for
these claims.

Debt Ratings. For many years prior to 1991, both Moody's and S&P had rated
New Jersey general obligation bonds Aaa and AAA, respectively. On July 3, 1991,
however, S&P downgraded New Jersey general obligation bonds to AA+. On June 4,
1992, S&P placed New Jersey general obligation bonds on CreditWatch with
negative implications, citing as its principal reason for its caution the
denial by the federal government of New Jersey's request for $450 million in
retroactive Medicaid payments for psychiatric hospitals. These funds were
critical to closing a $1 billion gap in the State's $15 billion budget for
fiscal year 1992 which ended on June 30, 1992. Under New Jersey state law, the
gap in the budget must be closed before the new budget year began on July 1,
1992. S&P suggested the State could close fiscal year 1992's budget gap and
help fill fiscal year 1993's hole by a reversion of $700 million of pension
contributions to its general fund under a proposal to change the way the State
calculates its pension liability.

On July 6, 1992, S&P reaffirmed its AA+ rating for New Jersey general
obligation bonds and removed the debt from its CreditWatch list, although it
stated that New Jersey's long-term financial outlook was negative. S&P was
concerned that the State was entering fiscal year 1993 with only a $26 million
surplus and remained concerned about whether the State economy would recover
quickly enough to meet lawmakers' revenue projections. It also remained
concerned about the recent federal ruling leaving in doubt how much the State
was due in retroactive Medicaid reimbursements and a ruling by a federal judge,
now on appeal, of the State's method for paying for uninsured hospital
patients. However, on July 27, 1994, S&P announced that it was

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changing the State's outlook from negative to stable due to a brightening of
the State's prospects as a result of Governor Whitman's effort to trim spending
and cut taxes, coupled with an improving economy. S&P reaffirmed its AA+ rating
at the same time. On July 1, 1996, S&P reaffirmed the State's long-term
ratings.

On August 24, 1992, Moody's downgraded New Jersey general obligation bonds to
Aa1, stating that the reduction reflected a developing pattern of reliance on
nonrecurring measures to achieve budgetary balance, four years of financial
operations marked by revenue shortfalls and operating deficits, and the
likelihood that serious financial pressures would persist. On August 5, 1994,
and again on August 18, 1995 Moody's reaffirmed its Aa1 rating, citing on the
positive side New Jersey's broad-based economy, high income levels, history of
maintaining a positive financial position and moderate (albeit rising) debt
ratios, and, on the negative side, a continued reliance on one-time revenues
and a dependence on pension-related savings to achieve budgetary balance. On
May 1, 1996, Moody's reaffirmed the State's long-term ratings.

Factors Pertaining to California

Except to the extent the California Municipal Bond Fund and the California
Insured Municipal Bond Fund (the "California Funds") invest in temporary
investments, the California Funds will invest substantially all of their assets
in California Municipal Obligations. The Funds are therefore susceptible to
political, economic or regulatory factors affecting issuers of California
Municipal Obligations.

These include the possible adverse effects of certain California
constitutional amendments, legislative measures, voter initiatives and other
matters that are described below. The following information provides only a
brief summary of the complex factors affecting the financial situation in
California (the "State") and is derived from sources that are generally
available to investors and is believed to be accurate. No independent
verification has been made of the accuracy or completeness of any of the
following information. It is based in part on information obtained from various
State and local agencies in California or contained in Official Statements for
various California Municipal Obligations.

During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved since 1994. The ratings of certain related debt of other issuers for
which California has an outstanding lease purchase, guarantee or other
contractual obligation (such as for state-insured hospital bonds) are generally
linked directly to California's rating. Should the financial condition of
California deteriorate again, its credit ratings could be further reduced, and
the market value and marketability of all outstanding notes and bonds issued by
California, its public authorities or local governments could be adversely
affected.

Economic Overview
Total personal income in the State, at an estimated $800 billion in 1996,
accounts for almost 13% of all personal income in the nation. Total employment
is over 15.6 million, the majority of which is in the service, trade and
manufacturing sectors.

Unemployment has declined dramatically from its 10% recession peak and is
rapidly approaching the national level. Economic indicators show a steady and
strong recovery underway in California since the start of 1994, particularly in
the export-related industries, services, electronics, entertainment and
tourism. The recovery in export-related industries has been dampened somewhat
by the economic crisis in Asia.

Constitutional Limitations on Taxes, Other Charges and Appropriations
Limitation on Property Taxes. Certain California Municipal Obligations may be
obligations of issuers which rely in whole or in part, directly or indirectly,
on ad valorem property taxes as a source of revenue. The

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taxing powers of California local governments and districts are limited by
Article XIIIA of the California Constitution, enacted by the voters in 1978 and
commonly known as "Proposition 13." Briefly, Article XIIIA limits to 1% of full
cash value the rate of ad valorem property taxes on real property and generally
restricts the reassessment of property to 2% per year, except upon new
construction or change of ownership (subject to a number of exemptions). Taxing
entities may, however, raise ad valorem taxes above the 1% limit to pay debt
service on voter-approved bonded indebtedness.

Under Article XIIIA, the basic 1% ad valorem tax levy is applied against the
assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, but it was upheld by the U.S. Supreme
Court in 1992.

Article XIIIA prohibits local governments from raising revenues through ad
valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax." Court
decisions, however, allowed a non-voter approved levy of "general taxes" which
were not dedicated to a specific use.

Limitation on Other Taxes, Fees and Charges. On November 5, 1996, the voters
of the State approved Proposition 218, called the "Right to Vote on Taxes Act."
Proposition 218 added Articles XIIIC and XIIID to the State Constitution, which
contain a number of provisions affecting the ability of local agencies to levy
and collect both existing and future taxes, assessments, fees and charges.

Article XIIIC requires that all new or increased local taxes be submitted to
the electorate before they become effective. Taxes for general governmental
purposes require a majority vote and taxes for specific purposes require a two-
thirds vote. Further, any general purpose tax which was imposed, extended or
increased without voter approval after December 31, 1994 must be approved by a
majority vote within two years.

Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment,
imposed by a [local government] upon a parcel or upon a person as an incident
of property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform
to requirements prohibiting, among other things, fees and charges which
generate revenues exceeding the funds required to provide the property related
service or are used for unrelated purposes. There are new notice, hearing and
protest procedures for levying or increasing property related fees and charges,
and, except for fees or charges for sewer, water and refuse collection services
(or fees for electrical and gas service, which are not treated as "property
related" for purposes of Article XIIID), no property related fee or charge may
be imposed or increased without majority approval by the property owners
subject to the fee or charge or, at the option of the local agency, two-thirds
voter approval by the electorate residing in the affected area.

In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments,
fees and charges. Consequently, local voters could, by future initiative,
repeal, reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.

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The interpretation and application of Proposition 218 will ultimately be
determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainty the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.

Appropriations Limits. The State and its local governments are subject to an
annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No limit is imposed
on appropriations of funds which are not "proceeds of taxes," such as
reasonable user charges or fees, and certain other non-tax funds, including
bond proceeds.

Among the expenditures not included in the Article XIIIB appropriations limit
are (1) the debt service cost of bonds issued or authorized prior to January 1,
1979, or subsequently authorized by the voters, (2) appropriations arising from
certain emergencies declared by the Governor, (3) appropriations for certain
capital outlay projects, (4) appropriations by the State of post-1989 increases
in gasoline taxes and vehicle weight fees, and (5) appropriations made in
certain cases of emergency.

The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such adjustments
were liberalized in 1990 to follow more closely growth in the State's economy.

"Excess" revenues are measured over a two year cycle. Local governments must
return any excess to taxpayers by rate reductions. The State must refund 50% of
any excess, with the other 50% paid to schools and community colleges. With
more liberal annual adjustment factors since 1988, and depressed revenues since
1990 because of the recession, few governments are currently operating near
their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years. During fiscal year 1986-87, State receipts from proceeds of taxes
exceeded its appropriations limit by $1.1 billion, which was returned to
taxpayers. Since that year, appropriations subject to limitation have been
under the State limit. State appropriations were $7.0 billion under the limit
for fiscal year 1996-97.

Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of
the California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact of
these Articles on California Municipal Obligations or on the ability of the
State or local governments to pay debt service on such California Municipal
Obligations. It is not possible, at the present time, to predict the outcome of
any pending litigation with respect to the ultimate scope, impact or
constitutionality of these Articles, or the impact of any such determinations
upon State agencies or local governments, or upon their ability to pay debt
service on their obligations. Future initiatives or legislative changes in laws
or the California Constitution may also affect the ability of the State or
local issuers to repay their obligations.

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Obligations of the State of California
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. Under the
California Constitution, debt service on outstanding general obligation bonds
is the second charge to the General Fund after support of the public school
system and public institutions of higher education. As of June 30, 1997, the
State had outstanding approximately $17.95 billion of long-term general
obligation bonds, plus $781 million of general obligation commercial paper
which will be refunded by long-term bonds in the future, and $6.1 billion of
lease-purchase debt supported by the State General Fund. The State also had
about $7.5 billion of authorized and unissued general obligation bonds. In FY
1996-97, debt service on general obligation bonds and lease purchase bonds was
approximately 5.0% of General Fund revenues.

Recent Financial Results
The principal sources of General Fund revenues in 1996-97 were the California
personal income tax (27% of total revenues), the sales and use tax (24%) and
bank and corporation taxes (7%). The State maintains a Special Fund for
Economic Uncertainties (the "SFEU"), derived from General Fund revenues, as a
reserve to meet cash needs of the General Fund, but which is required to be
replenished as soon as sufficient revenues are available. During the 1997
fiscal year the SFEU was fully depleted. However, the robust economy should
afford the State the ability to appropriate funds to the SFEU in the near term.

General. Throughout the 1980's, State spending increased rapidly as the State
population and economy also grew rapidly, including increased spending for many
assistance programs to local governments, which were constrained by Proposition
13 and other laws. The largest State program is assistance to local public
school districts. In 1988, an initiative (Proposition 98) was enacted which
(subject to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college districts a
minimum share of State General Fund revenues (currently about 35%).

Since the start of the 1990-91 fiscal year, the State has faced adverse
economic, fiscal, and budget conditions. The economic recession seriously
affected State tax revenues. It also caused increased expenditures for health
and welfare programs. Since the start of the 1990-91 fiscal year, the State has
faced adverse economic, fiscal and budget conditions. The economic recession
seriously affected State tax revenues. It also caused increased expenditures
for health and welfare programs. As a result of the strengthening State
economy, General Fund revenue growth is now outpacing the costs associated with
many of the larger programs supported by the General Fund. However, the State
will face additional challenges in coming years by the expected need to
substantially increase capital and operating funds for State infrastructure
needs, as well as corrections resulting from a "Three Strikes" law enacted in
1994.

Recent Budgets. As a result of these factors, among others, from the late
1980's until 1992-93, the State had a period of nearly chronic budget
imbalance, with expenditures exceeding revenues in four out of six years, and
the State accumulated and sustained a budget deficit in the budget reserve, the
SFEU approaching $2.8 billion at its peak at June 30, 1993. Starting in the
1990-91 Fiscal Year and for each year thereafter, each budget required
multibillion dollar actions to bring projected revenues and expenditures into
balance and to close large "budget gaps" which were identified. The Legislative
and Governor eventually agreed on a number of different steps to produce Budget
Acts in the Years 1991-92 to 1995-96 (although not all of these actions were
taken in each year):

.. significant cuts in health and welfare program expenditures;

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.. transfers of program responsibilities and some funding sources from the
State to local governments, coupled with some reduction in mandates on lo-
cal government;

.. transfer of about $3.6 billion in annual local property tax revenues from
cities, counties, redevelopment agencies and some other districts to local
school districts, thereby reducing state funding for schools;

.. reduction in growth of support for higher education programs, coupled with
increases in student fees;

.. revenue increases (particularly in the 1992-92 Fiscal Year budget), most of
which were for a short duration;

.. increased reliance on aid from the federal government to offset the costs
of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal
aid than the State Administration had requested); and

.. various one-time adjustment and accounting changes.

Despite these budget actions, the effects of the recession led to large
unanticipated deficits in the SFEU, as compared to projected positive balances.
By the start of the 1993-94 Fiscal Year, the accumulated deficit was so large
(almost $2.8 billion) that it was impractical to budget to retire it in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, to carry the final retirement
of the deficit into 1995-96.

The combination of stringent budget actions cutting State expenditures, and
the turnaround of the economy by late 1993, finally led to the restoration of
positive financial results. While General Fund revenues and expenditures were
essentially equal in FY 1992-93 (following two years of excess expenditures
over revenues), the General Fund had positive operating results in FY 1993-94,
1994-95, and 1995-96 which have reduced the accumulated budget deficit to about
$70 million as of June 30, 1996.

A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt
a budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed
the State to carry out its normal annual cash flow borrowing to replenish its
cash reserves, the State Controller was forced to issue approximately $3.8
billion of registered warrants ("IOUs") over a 2-month period to pay a variety
of obligations representing prior years' or continuing appropriations, and
mandates from court orders.

The State's cash condition became so serious that from late spring 1992 until
1995, the State had to rely on issuance of short term notes which matured in a
subsequent fiscal year to finance its ongoing deficit, and pay current
obligations. With the repayment of the last of these deficit notes in April,
1996, the State does not plan to rely further on external borrowing across
fiscal years, but will continue its normal cash flow borrowings during a fiscal
year.

The 1997-98 Budget Act was signed by the Governor on August 18, 1997,
together with related implementating bills. The total budget package authorized
State expenditures of $67.2 billion. This total spending includes $52.8 billion
from the General Fund (an 8 percent increase from 1996-97) and $14.4 billion
from special funds (a 6.1 percent increase). The 1997-98 Budget Act included
significant increases in education spending and a major reform to the State's
welfare program. In other areas, the budget includes relatively few

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new initiatives and fairly limited changes to program funding. This was due to
the decision to repay the Public Employee's Retirement System (PERS) $1.2
billion. The repayment resulted from a court ruling which declared
unconstitutional the General Fund's deferral of State contributions to the
retirement fund in the early 1990s.

The following are principal features of the 1997-98 Budget Act:

1. No tax cuts were included in the final budget. The Legislature rejected the
Governor's proposal for a reduction in personal and corporate income tax
rates.

2. Major increases in K-12 education. The budget would use the increased fund-
ing to expand the class size reduction program to a fourth grade and signif-
icantly increase local revenue limit funding.

3. The University of California, California State University and California
Community Colleges would receive additional funding with no fee increases.

4. A major welfare reform program CalWORKs (California Work Opportunity and Re-
sponsibility to Kids Program) was funded. It includes time limits on aid for
adults, participation requirements for adults, expanded child care and job
training service, and various county fiscal incentives.

5. The budget funded inmate caseload and contains no money for new prisons. In
addition, the budget assumed $94 million more in federal funds than the
amount in the Governor's budget to offset the State's cost of supervising
undocumented felons.

The Department of Finance has reported that, based on stronger than expected
revenues during the first nine months of the 1997-98 fiscal year, reflecting
the continued strength of the State's economic recovery, General Fund revenues
are $301 million above projections.

Proposed 1998-99 Budget. On January 9, 1998, the Governor released his
proposed budget for FY 1998-99. Assuming continuing strength in the economy,
the Governor projects General Fund revenues (including transfers) to be $55.4
billion and proposes expenditures to be $55.4 billion, to leave a budget
reserve in the SFEU of $296 million at June 30, 1999. The Governor proposed
further programs emphasizing education, public safety, and economic
development.

Although the State's strong economy is producing record revenues to the State
government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a
growing population with many immigrants. These factors which limit State
spending growth also put pressure on local governments. There can be no
assurances that, if economic conditions weaken, or other factors intercede, the
State will not experience budget gaps in the future.

Bond Rating
The ratings on California's long-term general obligation bonds were reduced
in the early 1990s from "AAA" levels which had existed prior to the recession.
In 1997, Fitch raised their rating of California's general obligation bonds,
which as of May 1998, were assigned ratings of "A+" by Standard & Poor's, "A1"
by Moody's and "AA-" from Fitch.

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There can be no assurance that such ratings will be maintained in the future.
It should be noted that the creditworthiness of obligations issued by local
California issuers may be unrelated to the creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of the State to make payment on such local obligations in the event of default.

Legal Proceedings
The State is involved in certain legal proceedings (described in the State's
recent financial statements) that, if decided against the State, may require
the State to make significant future expenditures or may substantially impair
revenues. Trial courts have recently entered tentative decisions or injunctions
which would overturn several parts of the state's recent budget compromises.
The matters covered by these lawsuits include reductions in welfare payments
and the use of certain cigarette tax funds for health costs. All of these cases
are subject to further proceedings and appeals, and if California eventually
loses, the final remedies may not have to be implemented in one year.

Obligations of Other Issuers
Other Issuers of California Municipal Obligations
There are a number of state agencies, instrumentalities and political
subdivisions of the State that issue Municipal Obligations, some of which may
be conduit revenue obligations payable from payments from private borrowers.
These entities are subject to various economic risks and uncertainties, and the
credit quality of the securities issued by them may vary considerably from the
credit quality of obligations backed by the full faith and credit of the State.

State Assistance. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of
the State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at approximately
75% of General Fund expenditures in recent years, including the effect of
implementing reductions in certain aid programs. To reduce State General Fund
support for school districts, the 1992-93 and 1993-94 Budget Acts caused local
governments to transfer $3.9 billion of property tax revenues to school
districts, representing loss of the post-Proposition 13 "bailout" aid. Local
governments have in return received greater revenues and greater flexibility to
operate health and welfare programs. To the extent the State should be
constrained by its Article XIIIB appropriations limit, or its obligation to
conform to Proposition 98, or other fiscal considerations, the absolute level,
or the rate of growth, of State assistance to local governments may continue to
be reduced. Any such reductions in State aid could compound the serious fiscal
constraints already experienced by many local governments, particularly
counties. At least one rural county (Butte) publicly announced that it might
enter bankruptcy proceedings in August 1990, although such plans were put off
after the Governor approved legislation to provide additional funds for the
county. Other counties have also indicated that their budgetary condition is
extremely grave. Los Angeles County, the largest in the State, was forced to
make significant cuts in services and personnel, particularly in the health
care system, in order to balance its budget in 1995-96 and 1996-97. Los Angeles
County's debt was downgraded by Moody's and S&P in the summer of 1995. Orange
County, which emerged from Federal Bankruptcy Court protection in June 1996,
has significantly reduced county services and personnel, and faces strict
financial conditions following large investment fund losses in 1994 which
resulted in bankruptcy.

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Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which were to be enacted by
June, 1997 in order to comply with federal welfare reform law. It is not yet
known what the overall impact will be on local government finances.

Assessment Bonds. California Municipal Obligations which are assessment bonds
may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured
by land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.

California Long Term Lease Obligations. Based on a series of court decisions,
certain long-term lease obligations, though typically payable from the general
fund of the State or a municipality, are not considered "indebtedness"
requiring voter approval. Such leases, however, are subject to "abatement" in
the event the facility being leased is unavailable for beneficial use and
occupancy by the municipality during the term of the lease. Abatement is not a
default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs. The
most common cases of abatement are failure to complete construction of the
facility before the end of the period during which lease payments have been
capitalized and uninsured casualty losses to the facility (e.g., due to
earthquake). In the event abatement occurs with respect to a lease obligation,
lease payments may be interrupted (if all available insurance proceeds and
reserves are exhausted) and the certificates may not be paid when due.
Litigation is brought from time to time which challenges the constitutionality
of such lease arrangements.

Other Considerations
The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by healthcare and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.

Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.

Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the issuers of tax
allocation securities) no longer receive an increase in tax increment when
taxes on property in the project area are increased to repay voter-approved
bonded indebtedness.

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The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or other revenue-raising
measures or which either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not possible, at present, to predict the extent to which
any such legislation will be enacted. Nor is it possible, at present, to
determine the impact of any such legislation on California Municipal
Obligations in which the Fund may invest, future allocations of state revenues
to local governments or the abilities of state or local governments to pay the
interest on, or repay the principal of, such California Municipal Obligations.

Substantially all of California is within an active geologic region subject
to major seismic activity. Northern California in 1989 and Southern California
in 1994 experienced major earthquakes causing billions of dollars in damages.
The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any California Municipal Obligation in the Fund could be
affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained
by the inability of (i) an issuer to have obtained earthquake insurance
coverage at reasonable rates; (ii) an insurer to perform on its contracts of
insurance in the event of widespread losses; or (iii) the federal or State
government to appropriate sufficient funds within their respective budget
limitations.

Factors Pertaining to Connecticut

Except to the extent the Connecticut Municipal Bond Fund (the "Connecticut
Fund") invests in temporary investments, the Connecticut Fund will invest
substantially all of its net assets in Connecticut Municipal Obligations. The
Connecticut Fund is therefore susceptible to political, economic or regulatory
factors affecting issuers of Connecticut Municipal Obligations. The following
briefly summarizes the current financial situation of the State of Connecticut
(the "State"). It is derived from sources that are generally available to
investors and is based in part on information obtained from various agencies in
sources that are generally available to investors and is based in part on
information obtained from various agencies in Connecticut. There can be no
assurance that current or future statewide or regional economic difficulties,
and the resulting impact on State or local government finances generally, will
not adversely affect the market value of Connecticut Obligations in the Fund or
the ability of particular obligors to make timely payments of debt service on
(or relating to) those obligations.

Connecticut's economy, historically based on the insurance, defense
manufacturing, finance and real estate industries, is slowly recovering from
one of the most severe recessions in the country which was due in part to
reductions in defense spending and the downsizing of the foregoing industries.
Statistics show that Connecticut has recovered from almost 65% of its
recessionary employment loss with small business fueling much of the growth in
the services, wholesale, and retail trade industries. Unemployment has been
declining steadily since the recovery reaching 5.1% in 1997 and 3.8% in
February 1998 versus a national rate of 4.9% and 4.6%, respectively. The
State's urban centers, however, still struggle with above average rates of
unemployment. Casinos are expected to continue to attract tourists and
contribute to the state's slow but steady economic growth. While Connecticut
ranks first among the states in per capita personal income ($36,263 in 1997),
there are strong regional disparities in income. According to statistics
contained In January 1998's Comptroller Report, the ten municipalities with the
lowest per capita income levels have an average per capita income that is 3.5
times lower than the top 10 municipalities. Connecticut has the highest tax-
supported debt to personal income ratio in the nation. These large and growing
debt levels are expected to limit the state's future financial flexibility.

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Despite larger than anticipated levels of appropriations, Connecticut's
growing economy generated enough revenues to close fiscal year 1997 with a
general fund surplus of $252 million. Overall government operations closed
fiscal year 1997 with a $95 million deficit, its lowest level in 10 years.
Fiscal year 1997's general funds surplus allowed for a transfer of $96 million
into the state's budget reserve (or rainy day) fund. This transfer brought the
total balance of the fund to $336.9 million, still $130 million short of the
state's 5% of net general fund appropriations. The adopted budget for fiscal
1998 anticipates general fund revenues and expenditures equal to $9.3 billion.
Recent comptroller reports have revised general fund revenues/expenditures and
now project a general fund surplus of $405 million for fiscal year 1998. For
fiscal year 1999, the adopted budget anticipates general fund revenues and
expenditures equal to $9.5 billion. The State expects that continued economic
growth will continue to drive revenues above expectations. The state's general
obligation bonds are rated Aa3 by Moody's and AA- by S&P.

Factors Pertaining to Massachusetts

Except to the extent the Massachusetts Municipal Bond Fund and the
Massachusetts Insured Municipal Bond Fund (the "Massachusetts Funds") invest in
temporary investments, the Massachusetts Funds will invest substantially all of
their net assets in Massachusetts Municipal Obligations. The Massachusetts
Funds are therefore susceptible to political, economic or regulatory factors
affecting issuers of Massachusetts Municipal Obligations. Without intending to
be complete, the following briefly summarizes the current financial situation,
as well as some of the complex factors affecting the financial situation, in
the Commonwealth of Massachusetts (the "Commonwealth"). It is derived from
sources that are generally available to investors and is based in part on
information obtained from various agencies in Massachusetts. No independent
verification has been made of the accuracy or completeness of the following
information.

There can be no assurance that current or future statewide or regional
economic difficulties, and the resulting impact on Commonwealth or local
government finances generally, will not adversely affect the market value of
Massachusetts Obligations in the Funds or the ability of particular obligors to
make timely payments of debt service on (or relating to) those obligations.

1998 Fiscal Year Budget. The budget for 1998 provides for total expenditures
and appropriations of approximately $18.8 billion, a 2.8% increase over FY97
expenditures. The budget incorporates tax cuts valued by the Dept of Revenue at
$61 million and provides for an accelerated pension funding schedule.
Supplemental appropriations have been approved for FY98 in the amount of
approximately $94.0 million, including transfer of $34.8 million to the
Massachusetts Water Pollution Abatement Trust for state revolving fund
programs. Estimated budgeted revenues and other revenue sources are projected
to reach $20.0 billion, up 3.5% over fiscal 1997 level. Tax revenues are
projected to reach $13.2 billion, a mere 2.3% increase over fiscal 1997 level
as a result of tax cuts. A surplus of $116 million is expected at fiscal year
end.

Tax law changes effective in FY98 will: increase anticipated revenues by $19
million from miscellaneous fees to be collected as a result of the convention
center legislation approved on November 17, 1997, reduce tax revenues by an
estimated $25 million as a result of the exemption of military pensions from
state income tax, which was approved by Acting Governor Cellucci on November 6,
1997, and reduce tax revenues by an estimated $140 million as a result of a
change in sales tax payment schedule.

Under legislation enacted in 1996, Franklin County government terminated on
July 1, 1997. Legislation approved by Governor Weld on July 11, 1997 abolished
Middlesex County government on that day and provided for the abolition of
county government in Hampden and Worcester Counties on July 1, 1998. These
Counties' debt and liabilities will be assumed by the Commonwealth and
amortized over a period of up to 25 years from assessments on the cities and
towns within the County.

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On October 20, 1997, Acting Governor Cellucci announced that the Department
of Revenue will issue regulations changing the payment schedules for
approximately 15,000 sales, meals and room occupancy taxpayers that pay over
$25,000 in tax per year. Under the new simplified rules, beginning January 1,
1998, these taxpayers will be required to file a tax return and make a tax
payment on the 20th of each month for taxable sales made during the preceding
month. Under the old rules, affected taxpayers were required to forward tax
payments on the 27th of each month for taxable sales made from the 23rd of the
preceding month to the 22nd of the current month, as well as file a quarterly
tax return. While these new regulations will not affect the amount of tax owed,
the Department of Revenue estimates that the Commonwealth will realize a
reduction in fiscal 1998 revenues of $120 million to $160 million, which has
been incorporated into the January 16, 1998 revenue estimates. This reduction
will be a one-time event.

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

The fiscal 1998 budget is based on numerous spending and revenue estimates
the achievement of which cannot be assured.

1997 Fiscal Year
Revenues exceeded expenditures for the 7th consecutive year. Budgeted
revenues and other sources totaled $19.3 billion, up 11.6% over FY96. Total
revenues exceeded total expenditures by $281.8 million. Tax revenues grew 6.8%
to $12.9 billion. During the fiscal year, legislation was enacted and approved
to raise statutory ceiling on State's Stabilization (or Rainy Day) fund from 5%
of tax revenues to 5% of total budgetary income. As a result, the Stabilization
fund balance now stands at $799.3 million.

During FY97, the legislature mandated several transfers to be charged to
FY97, including: $229.8 million to a Capital Investment Trust Fund to finance
certain specified capital expenditures, $100 million to the Stabilization Fund
(in addition to the $134.3 million transfer required by state finance law),
$128 million to a Caseload Increase Mitigation Fund to finance Dept of
Transitional Assistance programs in the even caseloads increase beyond what is
budgeted, and $20.2 million to the Massachusetts Water Pollution Abatement
Trust for state capitalization grants for the state revolving fund programs.

On March 11, 1997, the Legislature's Committee on Counties approved
legislation that would abolish Middlesex County government immediately upon
final approval of the legislation and transfer its functions to the
Commonwealth. The county's debts and liabilities which are in force on July 1,
1997 would be assumed by the Commonwealth and amortized over a period of up to
25 years from assessments on the cities and towns within the county. The
legislation would also bar the sale of public property to satisfy judgments
against the county. The legislation is now being considered by the House
Committee on Ways and Means.

On March 12, 1997, the Legislature's Committee on Transportation approved
legislation to establish a Metropolitan Highway System, in substantially the
form in which it had been filed by the Governor on January 6, 1997. A provision
in the legislation added by the committee would mandate a new "asset assesment
study" to determine, within one year, whether the Massachusetts Port Authority
could afford to contribute as much as $300 million toward the cost of the Ted
Williams Tunnel/Central Artery project, rather than the $200 million

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contribution proposed by the Governor and contemplated by the legislation. The
study is to be conducted by the Executive Office for Administration and
Finance, the State Auditor, the Division of Capital Planning and Operations and
the Port Authority. The legislation approved by the Transportation Committee
does not authorize any additional state spending for the project. The
Governor's proposals for additional spending authorizations are contained in a
transportation bond bill which is still being considered by the committee. The
bill approved by the Transportation Committee has been scheduled in both the
House of Representatives and Senate for expedited debate and enactment on March
13, 1997.

1996 Fiscal Year. Budgeted revenues and other sources, including non-tax
revenues, collected in fiscal 1996 were approximately $17.328 billion,
approximately $944 million or 5.7% above fiscal 1995 revenues of approximately
$16.387 billion. Fiscal 1996 tax revenue collections were approximately $12.049
billion, approximately $365 million above the Department of Revenue's revised
financial year 1996 tax revenue estimate of $11.684 billion and $886 million,
or 7.9% above fiscal 1995 tax revenues of $11.163 billion.

Budgeted expenditures and other uses of funds in fiscal 1996 were
approximately $16.881 billion, approximately $630.6 million or 3.9% above
fiscal 1995 budgeted expenditures and uses of $16.251 billion. The Commonwealth
ended fiscal 1996 with an operating gain of approximately $446.4 million and an
ending fund balance of approximately $1.172 billion.

On August 8, 1996, the Governor approved legislation making two changes in
the apportionment formula for the business corporations tax payable by certain
mutual fund service corporations. Effective January 1, 1997, the legislation
changes the computation of the sales factor. Instead of sourcing sales from the
state where the seller bears the cost of performing the services relating to
the sale, the corporations will source sales to the state of domicile of the
ultimate consumer of the service. Effective July 1, 1997, the legislation
changes the current three-factor formula to a single sales factor formula, just
as the November, 1995 legislation did for certain federal defense contractors
and, over time, for manufacturing firms. The new law requires the affected
corporations to increase their numbers of employees by 5% per year for five
years, subject to exceptions for adverse economic conditions affecting the
stock market or the amount of assets under their management. The Department of
Revenue estimates that the changes will result in a revenue reduction of
approximately $10 million in fiscal 1997 and approximately $30 million to $53
million on an annualized basis thereafter, starting in fiscal 1998.

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

The Executive Office for Administration and Finance is currently evaluating
the impact of the federal welfare reform legislation enacted on August 22, 1996
on the Commonwealth's spending and revenue associated with public assistance
programs. Current estimates indicate no fiscal 1997 spending impact associated
with the passage of the federal reform. While current estimates also indicate
an $86.3 million increase in federal revenues for the Commonwealth in fiscal
1997, this has not yet been incorporated into the Commonwealth's estimates for
fiscal 1997 federal revenues.

1995 Fiscal Year. Budgeted revenues and other sources, including non-tax
revenues, collected in fiscal 1995 were approximately $16.387 billion,
approximately $837 million, or 5.4%, above fiscal 1994 revenues of

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$15.550 billion. Fiscal 1995 tax revenues collections were approximately
$11.163, billion approximately $12 million above the Department of Revenue's
revised fiscal year 1995 tax revenue estimate of $10.151 billion and $556
million, or 5.2%, above fiscal year tax revenues of $10.607 billion.

Budgeted expenditures and other uses of funds in fiscal 1995 were
approximately $16.251 billion, approximately $728 million, or 4.7%, above
fiscal 1994 budgeted expenditures and uses of $15.523 billion. The Commonwealth
ended fiscal 1995 with an operating gain of $137 million and an ending fund
balance of $726 million.

On November 8, 1994, the voters in the statewide general election approved an
initiative petition that would slightly increase the portion of the gasoline
tax revenue credited to the Highway Fund, one of the Commonwealth's three major
budgetary funds, prohibit the transfer of money from the Highway Fund to other
funds for non-highway purposes and not permit including the Highway Fund
balance in the computation "consolidated net surplus" for purposes of state
finance laws. The initiative petition also provides that no more than 15% of
gasoline tax revenues may be used for mass transportation purposes, such as
expenditures related to the Massachusetts Bay Transit Authority. The Executive
Office of Administration and Finance is analyzing the effect, if any, this
initiative petition, which became law on December 8, 1994, may have on the
fiscal 1995 budget and it currently does not expect it to have any materially
adverse impact. This is not a constitutional amendment and is subject to
amendment or repeal by the Legislature, which may also, notwithstanding the
terms of the petition, appropriate moneys from the Highway Fund in such amounts
and for such purposes as it determines, subject only to a constitutional
restriction that such moneys be used for highways or mass transit purposes. The
Legislature has twice postponed the effective date of the provision that would
exclude Highway Fund balance from the computation of "consolidated net
surplus." The most recent postponement changed the effective date of the
provision to July 1, 1998.

1994 Fiscal Year. Fiscal 1994 tax revenue collections were approximately
$10.607 billion, $87 million below the Department of Revenue's fiscal year 1994
tax revenue estimate of $10.694 billion and $677 million above fiscal 1993 tax
revenues of $9.930 billion. Budgeted revenues and other sources, including non-
tax revenues, collected in fiscal 1994 were approximately $15.550 billion. To-
tal revenues and other sources increased by approximately 5.7% from fiscal 1993
to fiscal 1994 while tax revenues increased by 6.8% for the same period. Bud-
geted expenditures and other uses of funds in fiscal 1994 were approximately
$15.523 billion, which is $826.5 million or approximately 5.6% higher than fis-
cal 1993 budgeted expenditures and other uses.

As of June 30, 1994, the Commonwealth showed a year-end cash position of
approximately $757 million, as compared to a projected position of $599
million.

In June, 1993, the Legislature adopted and the Governor signed into law
comprehensive education reform legislation. This legislation required an
increase in expenditures for education purposes above fiscal 1993 base spending
of $1.288 billion of approximately $175 million in fiscal 1994. The Executive
Office for Administration and Finance expects the annual increases in
expenditures above the fiscal 1993 base spending of $1.288 billion to be
approximately $396 million in fiscal 1995, $625 million in fiscal 1996 and $868
million in fiscal 1997. Additional annual increases are also expected in later
fiscal years. The fiscal 1995 budget as signed by the Governor includes $896
million in appropriations to satisfy this legislation.

1993 Fiscal Year. The Commonwealth's budgeted expenditures and other uses
were approximately $14.696 billion in fiscal 1993, which is approximately
$1.280 billion or 9.6% higher than fiscal 1992

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expenditures and other uses. Final fiscal 1993 budgeted expenditures were $23
million lower than the initial July 1992 estimates of fiscal 1993 budgeted
expenditures. Budgeted revenues and other sources for fiscal 1993 totalled
approximately $14.710 billion, including tax revenues of $9.930 billion. Total
revenues and other sources increased by approximately 6.9% from fiscal 1992 to
fiscal 1993, while tax revenues increased by 4.7% for the same period. Overall,
fiscal 1993 ended with a surplus of revenues and other sources over
expenditures and other uses of $13.1 million and aggregate ending fund balances
in the budgeted operating funds of the Commonwealth of approximately $562.5
million. After payment in full of the distribution of local aid to the
Commonwealth's cities and towns ("Local Aid") and the retirement of short term
debt, the Commonwealth showed a year end cash position of approximately $622.2
million, as compared to a projected position of $485.1 million.

1992 Fiscal Year. The Commonwealth's budgeted expenditures and other uses
were approximately $13.4 billion in fiscal 1992, which is $238.7 million or
1.7% lower than fiscal 1991 budgeted expenditures. Final fiscal 1992 budgeted
expenditures were $300 million more than the initial July 1991 estimates of
budgetary expenditures, due in part to increases in certain human services
programs, including an increase of $268.7 million for the Medicaid program and
$50.0 million for mental retardation consent decree requirements. Budgeted
revenues and other sources for fiscal 1992 totalled approximately $13.7 billion
(including tax revenues of approximately $9.5 billion), reflecting an increase
of approximately 0.7% from fiscal 1991 to 1992 and an increase of 5.4% in tax
revenues for the same period. Overall, fiscal 1992 is estimated to have ended
with an excess of revenues and other sources over expenditures and other uses
of $312.3 million. After payment in full of Local Aid in the amount of $514.0
million due on June 30, 1992, retirement of the Commonwealth's outstanding
commercial paper (except for approximately $50 million of bond anticipation
notes) and certain other short term borrowings, as of June 30, 1992, the end of
fiscal 1992, the Commonwealth showed a year-end cash position of approximately
$731 million, as compared with the Commonwealth's cash balance of $182.3
million at the end of fiscal 1991.

Employment. Reversing a trend of relatively low unemployment during the early
and mid 1980's, the Massachusetts unemployment rate beginning in 1990 increased
significantly to where the Commonwealth's unemployment rate exceeded the
national unemployment rate. During 1990, the Massachusetts unemployment rate
increased from 4.5% in January to 6.1% in July to 6.7% in August. During 1991,
the Massachusetts unemployment rate averaged 9.0% while the average United
States unemployment rate was 6.7%. The Massachusetts unemployment rate during
1992 averaged 8.5% while the average United States unemployment rate was 7.4%.
Since 1993, the average monthly unemployment rate has declined steadily. The
Massachusetts unemployment rate in November 1997 was 3.9%, as compared with the
United States unemployment rate of 4.6% for the same period. Other factors
which may significantly and adversely affect the employment rate in the
Commonwealth include reductions in federal government spending on defense-
related industries. Due to this and other considerations, there can be no
assurance that unemployment in the Commonwealth will not increase in the
future.

Debt Ratings. S&P currently rates the Commonwealth's uninsured general
obligation bonds at AA-. At the same time, S&P currently rates state and agency
notes at SP1. From 1989 through 1992, the Commonwealth had experienced a steady
decline in its S&P rating, with its decline beginning in May 1989, when S&P
lowered its rating on the Commonwealth's general obligation bonds and other
Commonwealth obligations from AA+ to AA and continuing a series of further
reductions until March 1992, when the rating was affirmed at BBB.

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Moody's currently rates the Commonwealth's uninsured general obligation bonds
at Aa3. From 1989 through 1992, the Commonwealth had experienced a steady
decline in its rating by Moody's since May 1989. In May 1989, Moody's lowered
its rating on the Commonwealth's notes from MIG-1 to MIG-2, and its rating on
the Commonwealth's commercial paper from P-1 to P-2. On June 21, 1989, Moody's
reduced the Commonwealth's general obligation rating from Aa to A. On November
15, 1989, Moody's reduced the rating on the Commonwealth's general obligations
from A to Baa1, and on March 9, 1990, Moody's reduced the rating of the
Commonwealth's general obligation bonds from Baa1 to Baa.

There can be no assurance that these ratings will continue.

In recent years, the Commonwealth and certain of its public bodies and
municipalities have faced serious financial difficulties which have affected
the credit standing and borrowing abilities of Massachusetts and its respective
entities and may have contributed to higher interest rates on debt obligations.
The continuation of, or an increase in, such financial difficulties could
result in declines in the market values of, or default on, existing obligations
including Massachusetts Obligations in the Fund. Should there be during the
term of the Fund a financial crisis relating to Massachusetts, its public
bodies or municipalities, the market value and marketability of all outstanding
bonds issued by the Commonwealth and its public authorities or municipalities
including the Massachusetts Obligations in the Fund and interest income to the
Fund could be adversely affected.

Total Bond and Note Liabilities. The total general obligation bond
indebtedness of the Commonwealth (including Dedicated Income Tax Debt and
Special Obligation Debt) as of April 1, 1998 was approximately $10.349 billion.
The total bond and note liabilities of the Commonwealth as of April 1, 1998,
including guaranteed bond and contingent liabilities was approximately $14.526
billion.

Debt Service. During the 1980's, capital expenditures were increased
substantially, which has had a short term impact on the cash needs of the
Commonwealth and also accounts for a significant rise in debt service during
that period. In November, 1988, the Executive Office for Administration and
Finance established an administrative limit on state-financed capital spending
in the Capital Projects Funds of $925 million per fiscal year. Capital
expenditures were $694.1 million, $575.9 million, $760.6 million, $902.2
million, $908.5 million and $956.3 million in fiscal 1992, fiscal 1993, fiscal
1994, fiscal 1995, fiscal 1996 and fiscal 1997, respectively. Commonwealth-
financed capital expenditures are projected to be approximately $1.05 billion
in fiscal 1998.

The growth of capital expenditures during the 1980's accounts for the
significant rise in annual debt service expenditures since fiscal 1989.
Payments for debt service on Commonwealth general obligation bonds and notes in
fiscal 1992 were $898.3 million, representing a 4.7% decrease from $942.3
million in fiscal 1991, which resulted from a $261 million one-time reduction
achieved through the issuance of refunding bonds in September and October,
1991. Debt service expenditures for fiscal 1993, fiscal 1994, fiscal 1995,
fiscal 1996 and fiscal 1997 were $1.140 billion, $1.149 billion, $1.231
billion, $1.184 billion, and $1.275 billion, respectively, and are projected to
be $1.224 billion for fiscal 1998. The amounts noted represent debt service
payments on Commonwealth debt (including Fiscal Recovery Bonds and special
obligation bonds). The amounts noted do not include debt service contract
assistance payments to the Massachusetts Bay Transportation Authority ($302.6
million projected in fiscal 1998), the Massachusetts Convention Center ($24.6
million projected in fiscal 1998), the Massachusetts Government Land Bank ($6
million projected in fiscal 1998) and the Massachusetts Water Pollution
Abatement Trust (up to $46 mm in each fiscal year) and grants to municipalities
under the school building assistance program to defray a portion of the debt
service costs on local school bonds ($187.3 million projected in fiscal 1998).

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In January 1990, legislation was passed to impose a limit on debt service
beginning in fiscal 1991, providing that no more than 10% of the total
appropriations in any fiscal year may be expended for payment of interest and
principal on general obligation debt (excluding the Fiscal Recovery Bonds). The
percentage of total appropriations expended from the budgeted operating funds
for debt service for fiscal 1997 is 5.7%, which is projected to rise to 6.3% in
fiscal 1998.

Certain Liabilities. Among the material future liabilities of the
Commonwealth are significant unfunded general liabilities of its retirement
systems and a program to fund such liabilities; a program whereby, starting in
1978, the Commonwealth began assuming full financial responsibility for all
costs of the administration of justice within the Commonwealth; continuing
demands to raise aggregate aid to cities, towns, schools and other districts
and transit authorities above current levels; and Medicaid expenditures which
have increased each year since the program was initiated. The Commonwealth has
signed consent decrees to continue improving mental health care and programs
for the mentally retarded in order to meet federal standards, including those
governing receipt of federal reimbursements under various programs, and the
parties in those cases have worked cooperatively to resolve the disputed
issues.

As a result of comprehensive legislation approved in January, 1988, the
Commonwealth is required to fund future pension liabilities currently and to
amortize the Commonwealth's unfunded liabilities over 30 years. The funding
schedule must provide for annual payments in each of the ten years ending
fiscal 1998 which are at least equal to the total estimated pay-as-you-go
pension costs in each year. As a result of this requirement, the funding
requirements for fiscal 1996, 1997 and 1998 are estimates to be increased to
approximately $1.007 billion, $1.061 billion and $1.065 billion, respectively.

Litigation. The Commonwealth is engaged in various lawsuits involving
environmental and related laws, including an action brought on behalf of the
U.S. Environmental Protection Agency alleging violations of the Clean Water Act
and seeking to enforce the clean-up of Boston Harbor. The MWRA, successor in
liability to the Metropolitan District Commission, has assumed primary
responsibility for developing and implementing a court-approved plan for the
construction of the treatment facilities necessary to achieve compliance with
federal requirements. Under the Clean Water Act, the Commonwealth may be liable
for costs of compliance in these or any other Clean Water cases if the MWRA or
a municipality is prevented from raising revenues necessary to comply with a
judgment. The MWRA currently projects that the total cost of construction of
the treatment facilities required under the court's order is approximately
$3.142 billion in current dollars, with approximately $901 million to be spent
on or after June 30, 1997.

The Department of Public Welfare has been sued for the alleged unlawful
denial of personal care attendant services to certain disabled Medicaid
recipients. The Superior Court has denied the plaintiff's motion for
preliminary injunction and has also denied the plaintiff's motion for class
certification. If the plaintiffs were to prevail on their claims and the
Commonwealth were required to provide all of the services sought by the
plaintiffs to all similarly situated persons, it would substantially increase
the annual cost to the Commonwealth if these services are eventually required.
The Department of Public Welfare currently estimates this increase to be as
much as $200 million per year.

There are also actions pending in which recipients of human services
benefits, such as welfare recipients, the mentally retarded, the elderly, the
handicapped, children, residents of state hospitals and inmates of corrections
institutions, seek expanded levels of services and benefits and in which
providers of services to such recipients challenge the rates at which they are
reimbursed by the Commonwealth. To the extent that such actions result in
judgments requiring the Commonwealth to provide expanded services or benefits
or pay increased rates, additional operating and capital expenditures might be
needed to implement such judgments.

S-40
<PAGE>

In 1995, the Spaulding Rehabilitation Hospital ("Spaulding") filed an action
to enforce an agreement to acquire its property by eminent domain in connection
with the Central Artery/Third Harbor Tunnel Project. On 3-13-98, the Superior
Court entered judgement for the Commonwealth & dismissed the complaint.

The Commonwealth faces an additional potential liability of approximately $75
million to $135 million in connection with a taking by the Massachusetts
Highway Department related to the relocation of Northern Avenue in Boston.

In Massachusetts Wholesalers of Malt Beverages v. Commonwealth (Suffolk
Superior Court No. 90-1523), associations of bottlers challenged the 1990
amendments to the bottle bill which escheat abandoned deposits to the
Commonwealth. Plaintiffs claimed a taking; the Commonwealth argued a legitimate
regulation of abandoned amounts. In March, 1993, the Supreme Judicial Court
upheld the amendments except for the initial funding requirement, which the
Court upheld severable. In August, 1994, the Superior Court ruled that the
Commonwealth is liable for certain amounts (plus interest) as a result of the
Supreme Judicial Court's decision. The actual amount will be determined in
further proceedings. In February, 1996, the Commonwealth settled all remaining
issues with one group of plaintiffs, the Massachusetts Soft Drink Association.
Payments to that group will total approximately $7 million. The Legislature
appropriated the funds necessary for these payments in its final supplemental
budget for fiscal 1996. Litigation with the other group of plaintiffs, the
Massachusetts Wholesalers of Malt Beverages, is still pending. The remaining
potential liability is approximately $50 million.

In the First National Bank of Boston v. Commission of Revenue (Appellate Tax
Board No. F232249), the First National Bank of Boston challenges the
constitutionality of the former version of the Commonwealth's bank excise tax.
In 1992, several pre-1992 petitions filed by the bank, which raised the same
issues, were settled prior to a board decision. The bank has now filed claims
with respect to 1993 and 1994. The bank claims that the tax violated the
Commerce Clause of the United States Constitution by including its worldwide
income without apportionment. The Commonwealth's potential liability is $128
million.

In State Street Bank and Trust Company v. Commissioner of Revenue (Appellate
Tax Board Nos. F215497, F232152, F233019 and F233948), State Street Bank and
Trust Company has raised the same claims as the First National Bank of Boston,
outlined above. State Street Bank also claims that it is entitled to
alternative apportionment under the bank excise tax. The Department of Revenue
estimated that the amount of the abatement could have totaled $158 mm. On 2-19-
98, the case was settled for $8.7 million.

In National Association of Government Employees v. Commonwealth, the Superior
Court declared that a line item in the Commonwealth's general appropriations
act for fiscal 1994 that increased the state employees' percentage share of
their group health insurance premiums from 10% to 15% violated the terms of
several collective bargaining agreements, and therefore was invalid under the
United States Constitution as regards employees covered by the agreements. On
February 9, 1995, the Supreme Judicial Court vacated the Superior Court's
decision and declared that the fiscal 1994 line item did not violate the
contracts clause. In June, 1995, the United States Supreme Court denied the
plaintiff's writ of certiorari. Several other unions have filed a companion
suit asserting that the premium increase similarly violated other collective
bargaining agreements. The latter suit is in its initial stages. Prior to the
Supreme Judicial Court's decision the Commonwealth's aggregate liability is
estimated to be approximately $32 million.

A variety of other civil suits pending against the Commonwealth may also
affect its future liabilities. There include challenges to the Commonwealth's
allocation of school aid under Section 9C of Chapter 29 of the General Laws and
to adopt a state employee furlough program. No prediction is possible as to the
ultimate outcome of these proceedings.

S-41
<PAGE>

On March 22, 1995, the Supreme Judicial Court held in Perini Corporation v.
Commission of Revenues that certain deductions from the net worth measure of
the Massachusetts corporate excise tax violate the Commerce Clause of the
United States Constitution. On October 2, 1995, the United States Supreme Court
denied the Commonwealth's petition for writ of certiorari. The Department of
Revenue estimates that tax revenues in the amount of $40 to $55 million may be
abated as a result of the Supreme Judicial Court's decision.

On May 13, 1996, the Court entered an order for judgment and memorandum
concerning relief for tax years ending on or after January 1, 1996. A final
ruling was entered on June 6, 1996. The Department of Revenue is continuing to
analyze the final fiscal impact of the ruling, to date, it has paid
approximately $11 million in accordance with the judgment.

Many factors, in addition to those cited above, have or may have a bearing
upon the financial condition of the Commonwealth, including social and economic
conditions, many of which are not within the control of the Commonwealth.

Expenditure and Tax Limitation Measures. Limits have been established on
state tax revenues by legislation approved by the Governor on October 25, 1986
and by an initiative petition approved by the voters on November 4, 1986. The
Executive Office for Administration and Finance currently estimates that state
tax revenues will not reach the limit imposed by either the initiative petition
or the legislative enactment in fiscal 1992.

Proposition 2 1/2, passed by the voters in 1980, led to large reductions in
property taxes, the major source of income for cities and towns and large
increases in state aid to offset such revenue losses. According to the
Executive Office for Administration and Finance, all of the 351 cities and
towns have now achieved a property tax level of no more than 2.5% of full
property values. Under the terms of Proposition 2 1/2, the property tax levy
can now be increased annually for all cities and towns, almost all by 2.5% of
the prior fiscal year's tax levy plus 2.5% of the value of new properties and
of significant improvements to property. Legislation has also been enacted
providing for certain local option taxes. A voter initiative petition approved
at the statewide general election in November, 1990 further regulates the
distribution of Local Aid of no less than 40% of collections from individual
income taxes, sales and use taxes, corporate excise taxes, and the balance of
the state lottery fund. If implemented in accordance with its terms (including
appropriation of the necessary funds), the petition as approved would shift
several hundred million dollars to direct Local Aid.

Other Tax Measures. To provide revenue to pay debt service on both the
deficit and Medicaid-related borrowings and to fund certain direct Medicaid
expenditures, legislation was enacted imposing an additional tax on certain
types of personal income for 1989 and 1990 taxable years at rates of 0.375% and
0.75%, respectively, effectively raising the tax rate of 1989 from 5% to 5.375%
and for 1990 to 5.75%. Recent legislation has effectively further increased tax
rates to 5.95% for tax year 1990 to 6.25% for tax year 1991 and returning to
5.95% for tax year 1992 and subsequent tax years. The tax is applicable to all
personal income except income derived from dividends, capital gains,
unemployment compensation, alimony, rent, interest, pensions, annuities and
IRA/Keogh distributions. The income tax rate on other interest (excluding
interest on obligations of the United States and of the Commonwealth and its
subdivisions), dividends and net capital gains (after a 50% reduction) was
increased from 10% to 12% for tax year 1990 and subsequent years, by recently
enacted legislation.

As part of Acting Governor Celluci's fiscal 1999 budget recommendations, he
proposed a reduction in the tax rate on "Part B" personal income (so-called
"earned" income) from the current level of 5.95% to 5% over three calendar
years. The rate would be reduced to 5.6% effective January 1, 1999, 5.3%
effective January 1, 2000 and 5% effective January 1, 2001. The Executive
Office for Administration and Finance estimates that the

S-42
<PAGE>

static revenue impact of these changes would be a reduction in personal income
tax collections of approximately $206 million in fiscal 1999, $616 million in
fiscal 2000, $1.035 billion in fiscal 2001 and $1.292 billion in fiscal 2002,
at which time the rate reduction would be fully implemented. The Acting
Governor also proposed a reduction in the tax rate on "Part A" personal income
(so-called "unearned" income) from 12% to 5% over five years. The Executive
Office for Administration and Finance estimates that the static revenue impact
of these changes would be a reduction in personal income tax collections of
approximately $30 million in fiscal 1999, $101 million in fiscal 2000, $173
million in fiscal 2001, $249 million in fiscal 2002, $327 million in fiscal
2003 and $372 million in fiscal 2004, at which time the rate reduction would be
fully implemented. See "1999 fiscal year." On March 12, 1998 the House of
Representatives approved legislation that would reduce the rate on Part A and
Part B income, and raise the rate on capital gains income, to 5.7%, as well as
raising the age of the children's exemption to age 18 and raising the amount of
the exemption from $1,200 to $2,400.

Estate Tax Revisions. The fiscal 1993 budget included legislation which
gradually phases out the current Massachusetts estate tax and replaces it with
a "sponge tax" in 1997. The "sponge tax" is based on the maximum amount of the
credit for state taxes allowed for federal estate tax purposes. The estate tax
is phased out by means of annual increases in the basic exemption from the
current $200,000 level. The exemption is increased to $300,000 for 1993,
$400,000 for 1994, $500,000 for 1995 and $600,000 for 1996. In addition, the
legislation included a full marital deduction starting July 1, 1994.

Other Issuers of Massachusetts Obligations. There are a number of state
agencies, instrumentalities and political subdivisions of the Commonwealth that
issue Municipal Obligations, some of which may be conduit revenue obligations
payable from payments from private borrowers. These entities are subject to
various economic risks and uncertainties, and the credit quality of the
securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the Commonwealth. The brief
summary above does not address, nor does it attempt to address, any
difficulties and the financial situations of those other issuers of
Massachusetts Obligations.

Hedging and Other Defensive Actions

Each Fund may periodically engage in hedging transactions. Hedging is a term
used for various methods of seeking to preserve portfolio capital value of
offsetting price changes in one investment through making another investment
whose price should tend to move in the opposite direction. It may be desirable
and possible in various market environments to partially hedge the portfolio
against fluctuations in market value due to interest rate fluctuations by
investment in financial futures and index futures as well as related put and
call options on such instruments. Both parties entering into an index or
financial futures contract are required to post an initial deposit of 1% to 5%
of the total contract price. Typically, option holders enter into offsetting
closing transactions to enable settlement in cash rather than take delivery of
the position in the future of the underlying security. Each Fund will only sell
covered futures contracts, which means that the Fund segregates assets equal to
the amount of the obligations.

These transactions present certain risks. In particular, the imperfect
correlation between price movements in the futures contract and price movements
in the securities being hedged creates the possibility that losses on the hedge
by a Fund may be greater than gains in the value of the securities in such
series, portfolio. In addition, futures and options markets may not be liquid
in all circumstances. As a result, in volatile markets, a Fund may not be able
to close out the transaction without incurring losses substantially greater
than the initial deposit. Finally, the potential daily deposit requirements in
futures contracts create an ongoing greater potential financial risk than do
options transactions, where the exposure is limited to the cost of the initial
premium. Losses due to hedging transactions will reduce yield. Net gains, if
any, from hedging and other portfolio transactions will be distributed as
taxable distributions to shareholders.

S-43
<PAGE>

No Fund will make any investment (whether an initial premium or deposit or a
subsequent deposit) other than as necessary to close a prior investment if,
immediately after such investment, the sum of the amount of its premiums and
deposits would exceed 5% of such series' net assets. Each series will invest in
these instruments only in markets believed by the investment adviser to be
active and sufficiently liquid. For further information regarding these
investment strategies and risks presented thereby, see Appendix B to this
Statement of Additional Information.

Each Fund reserves the right for liquidity or defensive purposes (such as
thinness in the market for municipal securities or an expected substantial
decline in value of long-term obligations), to temporarily invest up to 20% of
its assets in obligations issued or guaranteed by the U.S. Government and its
agencies or instrumentalities, including up to 5% in adequately collateralized
repurchase agreements relating thereto. Interest on each instrument is taxable
for Federal income tax purposes and would reduce the amount of tax-free
interest payable to shareholders.

Temporary Investments

The Prospectus discusses briefly the ability of the Funds to invest a portion
of their assets in federally tax-exempt or taxable "temporary investments."
Temporary investments will not exceed 20% of a Fund's assets except when made
for defensive purposes. The Funds will invest only in taxable temporary
investments that are either U.S. Government securities or are rated within the
highest grade by Moody's, S&P, or Fitch and mature within one year from the
date of purchase or carry a variable or floating rate of interest. See Appendix
A for more information about ratings by Moody's, S&P, and Fitch.

The Funds may invest in the following federally tax-exempt temporary
investments:

Bond Anticipation Notes (BANs) are usually general obligations of state
and local governmental issuers which are sold to obtain interim financing
for projects that will eventually be funded through the sale of long-term
debt obligations or bonds. The ability of an issuer to meet its obligations
on its BANs is primarily dependent on the issuer's access to the long-term
municipal bond market and the likelihood that the proceeds of such bond
sales will be used to pay the principal and interest on the BANs.

Tax Anticipation Notes (TANs) are issued by state and local governments
to finance the current operations of such governments. Repayment is
generally to be derived from specific future tax revenues. Tax anticipation
notes are usually general obligations of the issuer. A weakness in an
issuer's capacity to raise taxes due to, among other things, a decline in
its tax base or a rise in delinquencies, could adversely affect the
issuer's ability to meet its obligations on outstanding TANs.

Revenue Anticipation Notes (RANs) are issued by governments or
governmental bodies with the expectation that future revenues from a
designated source will be used to repay the notes. In general, they also
constitute general obligations of the issuer. A decline in the receipt of
projected revenues, such as anticipated revenues from another level of
government, could adversely affect an issuer's ability to meet its
obligations on outstanding RANs. In addition, the possibility that the
revenues would, when received, be used to meet other obligations could
affect the ability of the issuer to pay the principal and interest on RANs.

Construction Loan Notes are issued to provide construction financing for
specific projects. Frequently, these notes are redeemed with funds obtained
from the Federal Housing Administration.

Bank Notes are notes issued by local government bodies and agencies as
those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently
issued to meet short-term working capital or capital-project needs. These
notes may have risks similar to the risks associated with TANs and RANs.

S-44
<PAGE>

Tax-Exempt Commercial Paper (Municipal Paper) represents very short-term
unsecured, negotiable promissory notes, issued by states, municipalities
and their agencies. Payment of principal and interest on issues of
municipal paper may be made from various sources, to the extent the funds
are available therefrom. Maturities of municipal paper generally will be
shorter than the maturities of TANs, BANs or RANs. There is a limited
secondary market for issues of municipal paper.

Certain Municipal Obligations may carry variable or floating rates of
interest whereby the rate of interest is not fixed, but varies with changes in
specified market rates or indices, such as a bank prime rate or a tax-exempt
money market index.

While these various types of notes as a group represent the major portion of
the tax-exempt note market, other types of notes are occasionally available in
the marketplace and the Fund may invest in such other types of notes to the
extent permitted under its investment objective, policies and limitations. Such
notes may be issued for different purposes and may be secured differently from
those mentioned above.

The Funds may also invest in the following taxable temporary investments:

U.S. Government Direct Obligations are issued by the United States
Treasury and include bills, notes and bonds.

--Treasury bills are issued with maturities of up to one year. They are
issued in bearer form, are sold on a discount basis and are payable at
par value at maturity.

--Treasury notes are longer-term interest bearing obligations with
original maturities of one to seven years.

--Treasury bonds are longer-term interest-bearing obligations with
original maturities from five to thirty years.

U.S. Government Agencies Securities--Certain federal agencies have been
established as instrumentalities of the United States Government to supervise
and finance certain types of activities. These agencies include, but are not
limited to, the Bank for Cooperatives, Federal Land Banks, Federal Intermediate
Credit Banks, Federal Home Loan Banks, Federal National Mortgage Association,
Government National Mortgage Association, Export-Import Bank of the United
States, and Tennessee Valley Authority. Issues of these agencies, while not
direct obligations of the United States Government, are either backed by the
full faith and credit of the United States or are guaranteed by the Treasury or
supported by the issuing agencies' right to borrow from the Treasury. There can
be no assurance that the United States Government itself will pay interest and
principal on securities as to which it is not legally so obligated.

Certificates of Deposit (CDs)--A certificate of deposit is a negotiable
interest bearing instrument with a specific maturity. CDs are issued by banks
in exchange for the deposit of funds and normally can be traded in the
secondary market, prior to maturity. The Fund will only invest in U.S. dollar
denominated CDs issued by U.S. banks with assets of $1 billion or more.

Commercial Paper--Commercial paper is the term used to designate unsecured
short-term promissory notes issued by corporations. Maturities on these issues
vary from a few days to nine months. Commercial paper may be purchased from
U.S. corporations.

Other Corporate Obligations--The Funds may purchase notes, bonds and
debentures issued by corporations if at the time of purchase there is less than
one year remaining until maturity or if they carry a variable or floating rate
of interest.

S-45
<PAGE>

Repurchase Agreements--A repurchase agreement is a contractual agreement
whereby the seller of securities (U.S. Government or Municipal Obligations)
agrees to repurchase the same security at a specified price on a future date
agreed upon by the parties. The agreed upon repurchase price determines the
yield during a Fund's holding period. Repurchase agreements are considered to
be loans collateralized by the underlying security that is the subject of the
repurchase contract. The Funds will only enter into repurchase agreements with
dealers, domestic banks or recognized financial institutions that in the
opinion of Nuveen Advisory present minimal credit risk. The risk to the Funds
is limited to the ability of the issuer to pay the agreed-upon repurchase price
on the delivery date; however, although the value of the underlying collateral
at the time the transaction is entered into always equals or exceeds the
agreed-upon repurchase price, if the value of the collateral declines there is
a risk of loss of both principal and interest. In the event of default, the
collateral may be sold but a Fund might incur a loss if the value of the
collateral declines, and might incur disposition costs or experience delays in
connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon the collateral by a Fund may be delayed or limited. Nuveen
Advisory will monitor the value of collateral at the time the transaction is
entered into and at all times subsequent during the term of the repurchase
agreement in an effort to determine that the value always equals or exceeds the
agreed upon price. In the event the value of the collateral declined below the
repurchase price, Nuveen Advisory will demand additional collateral from the
issuer to increase the value of the collateral to at least that of the
repurchase price. Each of the Funds will not invest more than 10% of its assets
in repurchase agreements maturing in more than seven days.

S-46
<PAGE>

MANAGEMENT

The management of the Trust, including general supervision of the duties
performed for the Funds under the Investment Management Agreement, is the
responsibility of its Board of Trustees. The Trust currently has eight
trustees, two of whom are "interested persons" (as the term "interested
persons" is defined in the Investment Company Act of 1940) and six of whom are
"disinterested persons." The names and business addresses of the trustees and
officers of the Trust and their principal occupations and other affiliations
during the past five years are set forth below, with those trustees who are
"interested persons" of the Trust indicated by an asterisk.

<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Positions and Principal Occupations
Name and Address Age Offices with Fund During Past Five Years
- --------------------------------------------------------------------------------
<C> <C> <C> <S>
Timothy R. Schwertfeger* 50 Chairman of the Board Chairman since July 1,
333 West Wacker Drive and Director 1996 of The John Nuveen
Chicago, IL 60606 Company, John Nuveen &
Co. Incorporated, Nuveen
Advisory Corp. and
Nuveen Institutional
Advisory Corp., prior
thereto Executive Vice
President and Director
of The John Nuveen
Company and John Nuveen
& Co. Incorporated;
Director of Nuveen
Advisory Corp. (since
1992) and Nuveen
Institutional Advisory
Corp.; Chairman and
Director (since January
1997) of Nuveen Asset
Management, Inc.;
Director (since 1996) of
Institutional Capital
Corporation; Chairman
and Director of
Rittenhouse Financial
Services Inc. (since
1999).

- --------------------------------------------------------------------------------
Robert P. Bremner 58 Director Private Investor and
3725 Huntington Street, N.W. Management Consultant.
Washington, D.C. 20015

- --------------------------------------------------------------------------------
Lawrence H. Brown 64 Director Retired (August 1989) as
201 Michigan Avenue Senior Vice President of
Highwood, IL 60040 The Northern Trust
Company

- --------------------------------------------------------------------------------
Anne E. Impellizzeri 65 Director President and Chief
3 West 29th Street Executive Officer of
New York, NY 10001 Blanton-Peale Institutes
of Religion and Health
(since December 1990).
- --------------------------------------------------------------------------------
Peter R. Sawers 66 Director Adjunct Professor of
22 The Landmark Business and Economics,
Northfield, IL 60093 University of Dubuque,
Iowa; Adjunct Professor,
Lake Forest Graduate
School of Management,
Lake Forest, Illinois.

- --------------------------------------------------------------------------------
William J. Schneider 54 Director Senior Partner and Chief
4000 Miller-Valentine Ct. Operating Officer,
P.O. Box 744 Miller-Valentine
Dayton, OH 45401 Partners; Vice
President, Miller-
Valentine Group, a
development and contract
company; Member
Community Advisory
Board, National City
Bank, Dayton, Ohio.
</TABLE>

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

S-47
<PAGE>

<TABLE>
- ---------------------------------------------------------------------------------
<CAPTION>
Positions and Principal Occupations
Name and Address Age Offices with Fund During Past Five Years
- ---------------------------------------------------------------------------------
<C> <C> <C> <S>
Judith M. Stockdale 50 Director Executive Director,
35 E. Wacker Drive Gaylord and Dorothy
Suite 2600 Donnelley Foundation
Chicago, IL 60601 (since 1994); prior
thereto, Executive
Director, Great Lakes
Protection Fund (from
1990 to 1994).

- --------------------------------------------------------------------------------
Alan G. Berkshire 38 Vice President and Vice President and
333 West Wacker Drive Assistant Secretary General Counsel (since
Chicago, IL 60606 September 1997) and
Secretary (since May
1998) of The John Nuveen
Company, John Nuveen &
Co. Incorporated, Nuveen
Advisory Corp. and
Nuveen Institutional
Advisory Corp., prior
thereto, Partner in the
law firm of Kirkland &
Ellis.

- --------------------------------------------------------------------------------
Michael S. Davern 41 Vice President Vice President of Nuveen
333 West Wacker Drive Advisory Corp. (since
Chicago, IL 60606 January 1997); prior
thereto, Vice President
and Portfolio Manager of
Flagship Financial.

- ---------------------------------------------------------------------------------
Lorna C. Ferguson 53 Vice President Vice President of John
333 West Wacker Drive Nuveen & Co.
Chicago, IL 60606 Incorporated; Vice
President (since January
1998) of Nuveen Advisory
Corp. and Nuveen
Institutional Advisory
Corp.

- ---------------------------------------------------------------------------------
William M. Fitzgerald 35 Vice President Vice President of Nuveen
333 West Wacker Drive Advisory Corp. (since
Chicago, IL 60606 December 1995);
Assistant Vice President
of Nuveen Advisory Corp.
(from September 1992 to
December 1995), prior
thereto Assistant
Portfolio Manager of
Nuveen Advisory Corp.

- ---------------------------------------------------------------------------------
Kathleen M. Flanagan 51 Vice President Vice President of John
333 West Wacker Drive Nuveen & Co.
Chicago, IL 60606 Incorporated.

- ---------------------------------------------------------------------------------
Stephen D. Foy 44 Vice President and Controller Vice President of John
333 West Wacker Drive Nuveen & Co.
Chicago, IL 60606 Incorporated.
- ---------------------------------------------------------------------------------
J. Thomas Futrell 43 Vice President Vice President of Nuveen
333 West Wacker Drive Advisory Corp.
Chicago, IL 60606

- ---------------------------------------------------------------------------------
Richard A. Huber 36 Vice President Vice President of Nuveen
333 West Wacker Drive Institutional Advisory
Chicago, IL 60606 Corp. (since March 1998)
and Nuveen Advisory
Corp. (since January
1997); prior thereto,
Vice President and
Portfolio Manager of
Flagship Financial.

- ---------------------------------------------------------------------------------
Steven J. Krupa 41 Vice President Vice President of Nuveen
333 West Wacker Drive Advisory Corp.
Chicago, IL 60606
</TABLE>

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

S-48
<PAGE>

<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Positions and Principal Occupations
Name and Address Age Offices with Fund During Past Five Years
- -------------------------------------------------------------------------------
<C> <C> <C> <S>
Anna R. Kucinskis 52 Vice President Vice President of John Nuveen
333 West Wacker Drive & Co. Incorporated.
Chicago, IL 60606

- -------------------------------------------------------------------------------
Larry W. Martin 47 Vice President and Vice President, Assistant
333 West Wacker Drive Assistant Secretary Secretary and Assistant
Chicago, IL 60606 General Counsel of John Nuveen
& Co. Incorporated; Vice
President and Assistant
Secretary of Nuveen Advisory
Corp.; Vice President and
Assistant Secretary of Nuveen
Institutional Advisory Corp.;
Assistant Secretary of The
John Nuveen Company.

- -------------------------------------------------------------------------------
Edward F. Neild, IV 33 Vice President Vice President (since
333 West Wacker Drive September 1996), previously
Chicago, IL 60606 Assistant Vice President
(since December 1993) of
Nuveen Advisory Corp.,
Portfolio Manager prior
thereto; Vice President (since
September 1996), previously
Assistant Vice President
(since May 1995) of Nuveen
Institutional Advisory Corp.,
Portfolio Manager prior
thereto; Chartered Financial
Analyst.

- -------------------------------------------------------------------------------
Walter K. Parker 49 Vice President Vice President of Nuveen
333 West Wacker Drive Advisory Corp. (since January
Chicago, IL 60606 1997); prior thereto, Vice
President and Portfolio
Manager (since July 1994) of
Flagship Financial; Portfolio
Manager and CIO Trust Investor
for PNC Bank.

- -------------------------------------------------------------------------------
Stephen S. Peterson 41 Vice President Vice President (since
333 West Wacker Drive September 1997), previously
Chicago, IL 60606 Assistant Vice President
(since September 1996) of
Nuveen Advisory Corp.,
Portfolio Manager prior
thereto.

- -------------------------------------------------------------------------------
Stuart W. Rogers 42 Vice President Vice President of John Nuveen
333 West Wacker Drive & Co. Incorporated.
Chicago, IL 60606

- -------------------------------------------------------------------------------
Thomas C. Spalding, Jr. 47 Vice President Vice President of Nuveen
333 West Wacker Drive Advisory Corp. and Nuveen
Chicago, IL 60606 Institutional Advisory Corp.;
Chartered Financial Analyst.
- -------------------------------------------------------------------------------
H. William Stabenow 63 Vice President and Vice President and Treasurer
333 West Wacker Drive Treasurer of The John Nuveen Company,
Chicago, IL 60606 John Nuveen & Co.
Incorporated, Nuveen Advisory
Corp. and Nuveen Institutional
Advisory Corp.

- -------------------------------------------------------------------------------
William S. Swanson 33 Vice President Vice President of John Nuveen
333 West Wacker Drive & Co. Incorporated (since
Chicago, IL 60606 October 1997), prior thereto,
Assistant Vice President
(since September 1996);
formerly, Associate of John
Nuveen & Co. Incorporated.

- -------------------------------------------------------------------------------
Jan E. Terbrueggen 42 Vice President Vice President Nuveen Advisory
333 West Wacker Drive Corp. (since January 1997);
Chicago, IL 60606 prior thereto, Vice President
and Portfolio Manager of
Flagship Financial.
- -------------------------------------------------------------------------------
</TABLE>

S-49
<PAGE>

<TABLE>
<CAPTION>
Positions and Principal Occupations
Name and Address Age Offices with Fund During Past Five Years
- -------------------------------------------------------------------------------
<C> <C> <C> <S>
Gifford R. Zimmerman 42 Vice President and Vice President, Assistant
333 West Wacker Drive Secretary Secretary and Associate General
Chicago, IL 60606 Counsel formerly Assistant
General Counsel of John Nuveen &
Co. Incorporated; Vice President
and Assistant Secretary of Nuveen
Advisory Corp.; Vice President
and Assistant Secretary of Nuveen
Institutional Advisory Corp.;
Chartered Financial Analyst.
</TABLE>

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

Timothy Schwertfeger and Peter R. Sawers serve as members of the Executive
Committee of the Board of Trustees. The Executive Committee, which meets
between regular meetings of the Board of Trustees, is authorized to exercise
all of the powers of the Board of Trustees.

The trustees of the Trust are directors or trustees, as the case may be, of
42 Nuveen open-end funds and 52 Nuveen closed-end funds advised by Nuveen
Advisory Corp. None of the independent trustees has ever been a director,
officer, or employee of, or a consultant to, Nuveen Advisory, Nuveen or their
affiliates.

The following table sets forth compensation paid by the Trust to each of the
trustees of the Trust and the total compensation paid to each trustee during
the fiscal year ended February 28, 1998. The Trust has no retirement or pension
plans. The officers and trustees affiliated with Nuveen serve without any
compensation from the Trust.

<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From Trust and
from the series Fund Complex
Name of Trustee of this Trust Paid to Trustees
--------------- --------------- ----------------
<S> <C> <C>
Robert P. Bremner........................ $5,438 $58,780
Lawrence H. Brown........................ $5,713 $76,000
Anne E. Impellizzeri..................... $5,428 $71,750
Margaret K. Rosenheim.................... $3,686(1) $47,405(2)
Peter R. Sawers.......................... $5,428 $71,750
William S. Schneider..................... $5,438 $58,780
Judith M. Stockdale...................... $2,601(3) $32,000(3)
</TABLE>
- --------
(1) Includes $358 in interest accrued on deferred compensation from prior
years; former director, retired July, 1997.
(2) Includes $1,655 in interest accrued on deferred compensation from prior
years; former director, retired July, 1997.
(3) First payment was in July, 1997.

Each trustee who is not affiliated with Nuveen or Nuveen Advisory receives a
fee. The Trust requires no employees other than its officers, all of whom are
compensated by Nuveen.

The officers and directors of each Fund, in the aggregate, own less than 1%
of the shares of the Fund.

S-50
<PAGE>

The following table sets forth the percentage ownership of each person, who,
as of 1999, owns of record, or is known by Registrant to own of record
or beneficially 5% or more of any class of a Fund's shares.

<TABLE>
<CAPTION>
Percentage
Name of Fund and Class Name and Address of Owner of Ownership
- ---------------------- ------------------------- ------------
<S> <C> <C>
Nuveen New York Insured Municipal
Bond Fund BHC Securities Inc. 15.30%
Class A Shares................... FAO 70015729
Attn: Mutual Funds
One Commerce Square
2005 Market Street
Suite 1200
Philadelphia, PA 19103N
Nuveen New York Insured Municipal
Bond Fund Donaldson Lufkin Jenrette 16.77
Class C Shares................... Securities Corporation Inc.
PO Box 2052
Jersey City, NJ 07303-9998

PaineWebber for the Benefit of 10.55%
Morgan F Kelly
Rose Moran-Kelly JT TEN
19 Honeyhollow Road
Queensbury, NV 12804-9117

Prudential Securities FBO 8.11
Laurie D Wax Ttee, Irrevocable
Trust of 1995 UA JTD 05/02/95,
FBO Laurie D Wax
Via Di Monteronald, 14 6N

Ruth Preston & 7.96
Sara P. Costello &
Patricia N. Kohl
JT TEN WROS NOT TC
2 Middleton Rd.
Greenport, NY 11944-1115

Debra Arizzi 7.90
9725 92nd St
Ozone Park, NY 11416-2214
</TABLE>

S-51
<PAGE>

<TABLE>
<CAPTION>
Percentage
Name of Fund and Class Name and Address of Owner of Ownership
- ---------------------- ------------------------- ------------
<S> <C> <C>
Nuveen New York Insured
Municipal Bond Fund BHC Securities Inc. 23.96
Class R Shares............ FAO 70001770
Attn: Mutual Funds
One Commerce Square
2005 Market Street
Suite 1200
Philadelphia, PA 19103

Nuveen Flagship New Jersey
Municipal Bond Fund Merrill Lynch, Pierce, Fenner & Smith 13.93
Class A Shares............ for the sole benefit of its customers
Attn Fund Administration
4800 Deer Lake Dr E FL 3
Jacksonville, FL 32246-6484
Nuveen Flagship New Jersey
Municipal Bond Fund William G. Osborne 20.12
Class C Shares............ % Aurachem Corp.
South 3R & Somerset St.
PO Box 471
Harrison, NJ 07029-0471
Alvin H. Frankel Agent for 7.32%
Louise I. Grill
U/POA DTD Jun 17 94
601 Haddon Ave
Collingswood, NJ 08108-3703
Donaldson Lufkin Jenrette 5.33
Securities Corporation Inc
PO Box 2052
Jersey City, NJ 07303-9998
Nuveen California Municipal
Bond Fund NFSC FEBO # OFP-002135 18.87
Class C Shares............ Michele Chiapella
103 Northwood Commons
Chico, CA 95926
</TABLE>

S-52
<PAGE>

<TABLE>
<CAPTION>
Percentage
Name of Fund and Class Name and Address of Owner of Ownership
- ---------------------- ------------------------- ------------
<S> <C> <C>
Thomas K. Larson & 9.83
Melanie P. Larson
JT TEN WROS NOT TC
142 Via Novella
Aptos, CA 95003-5841
Paul R. Hoeber 9.62
611 Bay St. Apt. 4
San Francisco, CA 94133-1619
Charlotte H. Feo Tr 9.50
UA DEC 06 79
Charlotte H. Feo Family Trust
530 Galleon Way
Seal Beach, CA 90740-5939
John C. MacGregor-Scott Tr 9.24
UA JUN 22 87
MacGregor-Scott Rev Fam Trust
720 W Camino Real Ave.
Arcadia, CA 91007-7839
David Neil Daniels & 5.05
Judy Curry Daniels Trs
UA JAN 13 94
Daniels Revocable Trust
305 Tioga Ct
Palo Alto, CA 94306-4543
Nuveen California Municipal Bond
Fund J. Andrew Kitzman & 9.62%
Class A Shares.................... Hazel Lloyd Kitzman COTR
UA JUL 02 82
Kitzman Family Trust
10558 Grandview Dr., #4063
La Mesa, CA 91941-6905
Nuveen California Municipal Bond
Fund Smith Barney Shearson 5.16
Class R Shares.................... 00119601999
388 Greenwich Street
New York, NY 10013
Nuveen California Insured Municipal
Bond Fund John Hancock Clearing Corp 5.29
Class A Shares.................... 1 World Financial Center
200 Liberty St.
New York, NY 10281-1003
</TABLE>

S-53
<PAGE>

<TABLE>
<CAPTION>
Percentage
Name of Fund and Class Name and Address of Owner of Ownership
- ---------------------- ------------------------- ------------
<S> <C> <C>
Nuveen California Insured
Municipal Bonds Funds NFSC FEBO #042-626996 30.08
Class C Shares............ Fleming Trust
William E. Fleming
U/A 04/20/93
7057 Blackhawk Rd P.O. Box 908
Forest Hill, CA 95631
Mildred H. Hachtowski TR 9.99
UA Sep 14 95
Hachtowski Family Trust
3045 Rita Ct
Napa, CA 94558-3317
BA Investment Services Inc. 7.54
FBO 406912971
189 Berry St.
3rd Floor #2640
San Francisco CA 94104
Prudential Securities FBO 5.60
Alan R Josefsberg &
Vickie Josefsberg Jt Ten
2700 N. Cahuenga Blvd. East
Unit 1301
Hollywood, CA 90068-2139
Nuveen Flagship Connecticut
Municipal Bond Fund Merrill Lynch, Pierce, Fenner & Smith 25.48%
Class A Shares............ for the sole benefit of its customers
Attn; Fund Administration
4800 Deer Lake Dr E FL 3
Jacksonville, FL 32246-6484
Nuveen Flagship Connecticut
Municipal Bond Fund John H. Germain TR. 33.97
Class B Shares............ Isabel Germain Trust
U/A DTD 10-16-95
96 Four Mile Rd.
West Hartford, CT 06107-2703
PaineWebber FBO 23.39
Josephine F. Smith
57 Arnold Way
West Hartford, CT 06119-1207
US Clearing Corp. 12.40
FBO 952-13798-L9
26 Broadway
New York, NY 10004-1798
</TABLE>

S-54
<PAGE>

<TABLE>
<CAPTION>
Percentage
Name of Fund and Class Name and Address of Owner of Ownership
- ---------------------- ------------------------- ------------
<S> <C> <C>
Sidney Fagan & 8.75
Lois Fagan JT Ten
856 East Broadway
Milford, CT 06460-6217
Smith Barney Inc. 8.20
00136200806
388 Greenwich Street
New York, NY 10013-2375
Nuveen Flagship Connecticut
Municipal Bond Fund Merrill Lynch, Pierce, Fenner & Smith 35.18
Class C Shares............ for the sole benefit of its customers
Attn: Fund Administration
4800 Deer Lake Dr E Fl 3
Jacksonville, FL 32246-6484
Nuveen Flagship Connecticut
Municipal Bond Fund Smith Barney Inc. 99.85
Class R Shares............ 00138430250
388 Greenwich Street
New York, NY 10013-2375
Nuveen Massachusetts
Municipal Bond Fund NFSC FEBO #006-166235 9.18%
Class A Shares............ Richard J. and Joy S. Gilbert TR
Joanne G. Arnold TTEE
c/o Richard J. Gilbert
20 Winchester Drive
Lexington, MA 02173
Donaldson Lufkin Jenrette 6.00
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Smith Barney Inc. 5.77
00162105158
388 Greenwich Street
New York, New York 10013
Nuveen Massachusetts
Municipal Bond Fund Hudson L. Matson 26.86
Class C Shares............ 39 Griggs Rd.
Sutton, MA 01590-1015
Richard Doucette 6.55
363 Farrwood Dr.
Bradford, MA 01835-8400
</TABLE>

S-55
<PAGE>

<TABLE>
<CAPTION>
Percentage
Name of Fund and Class Name and Address of Owner of Ownership
- ---------------------- ------------------------- ------------
<S> <C> <C>
Wheat First FBO A/C 2591-6003 5.96
Jane W. Curran
4 Lawler Dr.
Easthampton, MA 01027-9715
Mary H. Melville 5.72
4 Paul Revere Rd.
Worcester MA 01609-1210
Charles G. Allen, Jr. Tr. 5.34
UA MAR 05 54
UW Flora A. Generess
FBO Charles G. Allen Jr. Et al
221 James St. #65
Barre, MA 01005-8805
Emily Pelczarski Cust 5.31
FBO Brian Pelczarski
Unif Trans Min Act MA
8 Coram St
Taunton, MA 02780-2512
Emily Pelczarski Cust 5.26%
FBO Laurie Pelczarski
Unif Trans Min Act MA
8 Coram St
Taunton, MA 02780-2512
Irene J. Majko 5.22
134 Brook St
Wellesley, MA 02181-6630
Nuveen Massachusetts Insured
Municipal Bond Fund Gerald W. Mahoney & 8.20
Class A Shares................... Elaine Mahoney Tr
UA 10/05/94
Mahoney Rev. Trust
162 Oakland St.
Fall River, MA 02720-6114
Nuveen Massachusetts Insured
Municipal Bond Fund Raymond James & Assoc Inc. 16.57
Class C Shares................... for Elite Acct # 50099466
FAO George A. D'Auteuil Sr. &
Pauline T. D'Auteuil JT/WROS
9 Church St.
Millbury, MA 01527-3134
Ruth Biller 16.26
51 Oak Rd.
Canton, MA 02021-2625
</TABLE>

S-56
<PAGE>

<TABLE>
<CAPTION>
Percentage
Name of Fund and Class Name and Address of Owner of Ownership
- ---------------------- ------------------------- ------------
<S> <C> <C>
John Sullivan 14.60
6 Margaret St.
Boston, MA 02113-2523
Rose E. Frisch 14.25
3 Hillside Pl.
Cambridge, MA 02140-3617
PaineWebber for the Benefit of 5.97
John J. Brodbine TTEE
Ralph L. Cunningham Trust
DTD 4/27/89
27 School St
Boston, MA 02108-4303
Magdalene S. Kapuscienski &
Gene S. Kapuscienski 5.21
JT TEN WROS NOT TC
15 D Country Club Lane
Milford, MA 01757
Nuveen Massachusetts Insured
Municipal Bond Fund NFSC FEBO # 006-133914 5.10%
Class R Shares................... Robert L. Varney
Janet N. Varney
9 Almira Rd
South Yarmouth, MA 02664
</TABLE>

S-57
<PAGE>

INVESTMENT ADVISER AND INVESTMENT
MANAGEMENT AGREEMENT

Nuveen Advisory Corp. acts as investment adviser for and manages the
investment and reinvestment of the assets of each of the Funds. Nuveen Advisory
also administers the Trust's business affairs, provides office facilities and
equipment and certain clerical, bookkeeping and administrative services, and
permits any of its officers or employees to serve without compensation as
trustees or officers of the Trust if elected to such positions. See "Fund
Service Providers" in the Prospectus.

Pursuant to an investment management agreement between Nuveen Advisory and
the Trust, each of the Funds has agreed to pay an annual management fee at the
rates set forth below:

<TABLE>
<CAPTION>
Average Daily Net Asset Value Fee Management Fee
- --------------------------------- --------------
<S> <C>
For the first $125 million....................................... .5500 of 1%
For the next $125 million........................................ .5375 of 1%
For the next $250 million........................................ .5250 of 1%
For the next $500 million........................................ .5125 of 1%
For the next $1 billion.......................................... .5000 of 1%
For assets over $2 billion....................................... .4750 of 1%
</TABLE>

Nuveen Advisory has agreed to waive all or a portion of its management fee or
reimburse certain expenses of the California, California Insured,
Massachusetts, Massachusetts Insured, New York and New York Insured Municipal
Bond Funds in order to prevent total operating expenses (including Nuveen
Advisory's fee, but excluding interest, taxes, fees incurred in acquiring and
disposing of portfolio securities, any asset-based distribution or service fees
and, to the extent permitted, extraordinary expenses) in any fiscal year from
exceeding .75 (.975 for insured Funds) of 1% of average daily net asset value
of any class of shares of those Funds.

Nuveen Advisory has voluntarily agreed to waive some or all of its fees or
reimburse expenses to prevent total operating expenses (not counting
distribution and service fees) for the year ended July 31, 1997 from exceeding
0.75% of average daily net assets of the New Jersey Fund. For the New Jersey,
Connecticut, and New York Funds, Nuveen Advisory has committed through at least
1998 to continue Flagship's general dividend-setting practices.

For the last three fiscal years, the Funds paid net management fees to Nuveen
Advisory as follows:

<TABLE>
<CAPTION>
Management Fees Net of
Expense Reimbursement Paid to Fee Waivers and Expense
Nuveen Advisory for the Year Reimbursements
Ended For the Year Ended
------------------------------- -------------------------
2/29/96 2/28/97 2/28/98 2/29/96 2/28/97 2/28/98
--------- --------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
New York Municipal Bond
Fund................... 852,809 921,217 956,215 29,700 40,876 317,918
New York Insured
Municipal Bond Fund.... 1,940,010 1,932,218 1,929,254 0 -- --
California Municipal
Bond Fund.............. 1,199,571 1,249,684 1,309,287 3,302 -- --
California Insured
Municipal Bond Fund.... 1,156,993 1,205,656 1,239,386 1,695 -- --
Connecticut Municipal
Bond Fund.............. -- 440,411** 1,033,050 -- 367,429** 171,361
Massachusetts Municipal
Bond Fund.............. 366,859 430,684 414,026 59,879 13,780 38,925
Massachusetts Insured
Municipal Bond Fund.... 346,952 356,539 360,589 788 -- --
</TABLE>

S-58
<PAGE>

<TABLE>
<CAPTION>
Mgmt Fees Waivers
---------------- ----------------
2/28/97 2/28/98 2/28/97 2/28/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
New Jersey Municipal Bond Fund................ 249,860* 116,781 105,204* 325,469
</TABLE>

*For the thirteen month period ended February 28, 1997.

**For the nine month period ended February 28, 1997.

In addition to the management fee of Nuveen Advisory, each Fund pays all
other costs and expenses of its operations and a portion of the Trust's general
administrative expenses allocated in proportion to the net assets of each Fund.

Nuveen Advisory is a wholly owned subsidiary of John Nuveen & Co.
Incorporated ("Nuveen"), the Funds' principal underwriter. In 1961, Nuveen
began sponsoring the Nuveen Tax-Exempt Unit Trust and since that time has
issued more than $37 billion in taxable and tax-exempt unit trusts, including
over $12 billion in tax-exempt insured unit trusts. In addition, Nuveen open-
end and closed-end funds held approximately $38 billion in securities under
management as of the date of this Statement. Over 1.3 million individuals have
invested to date in Nuveen's funds and trusts. Founded in 1898, Nuveen is a
subsidiary of The John Nuveen Company which, in turn, is approximately 78%
owned by The St. Paul Companies, Inc. ("St. Paul"). St. Paul is located in St.
Paul, Minnesota and is principally engaged in providing property-liability
insurance through subsidiaries. Effective January 1, 1997, The John Nuveen
Company acquired Flagship Resources Inc., and as part of that acquisition,
Flagship Financial, the adviser to the Flagship Funds, was merged with Nuveen
Advisory.

Nuveen Advisory's portfolio managers call upon the resources of Nuveen's
Research Department. The Nuveen Research Department reviews more than $100
billion in municipal bonds every year.

The Funds, the other Nuveen funds, Nuveen Advisory, and other related
entities have adopted a code of ethics which essentially prohibits all Nuveen
fund management personnel, including Nuveen fund portfolio managers, from
engaging in personal investments which compete or interfere with, or attempt to
take advantage of, a Fund's anticipated or actual portfolio transactions, and
is designed to assure that the interests of Fund shareholders are placed before
the interests of Nuveen personnel in connection with personal investment
transactions.

S-59
<PAGE>

PORTFOLIO TRANSACTIONS

Nuveen Advisory is responsible for decisions to buy and sell securities for
the Fund and for the placement of the Fund's securities business, the
negotiation of the prices to be paid for principal trades and the allocation of
its transactions among various dealer firms. Portfolio securities will normally
be purchased directly from an underwriter or in the over-in-the-counter market
from the principal dealers in such securities, unless it appears that a better
price or execution may be obtained through other means. Portfolio securities
will not be purchased from Nuveen or its affiliates except in compliance with
the 1940 Act.

The Fund expects that substantially all portfolio transactions will be
affected on a principal (as opposed to an agency) basis and, accordingly, does
not expect to pay significant amounts of brokerage commissions. Purchases from
underwriters will include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers will include the spread between the bid
and asked price. It is the policy of Nuveen Advisory to seek the best execution
under the circumstances of each trade. Nuveen Advisory evaluates price as the
primary consideration, with the financial condition, reputation and
responsiveness of the dealer considered secondarily in determining best
execution. Given the best execution obtainable, it will be Nuveen Advisory
practice to select dealers which, in addition, furnish research information
(primarily credit analyses of issuers and general economic reports) and
statistical and other services to Nuveen Advisory. It is not possible to place
a dollar value on information and statistical and other services received from
received from dealers. Since it is only supplementary to Nuveen Advisory own
research efforts, the receipt of research information is not expected to
significantly reduce Nuveen Advisory expenses. While Nuveen Advisory will be
primarily responsible for the placement of the business of the Fund, the
policies and practices of Nuveen Advisory in this regard must be consistent
with the foregoing and will, at all times, be subject to review by the Board of
Trustees.

Nuveen Advisory may manage other investment accounts and investment companies
for other clients which have investment objectives similar to the Fund. Subject
to applicable laws and regulations, Nuveen Advisory seeks to allocate portfolio
transactions equitably whenever concurrent decisions are made to purchase or
sell securities by the Fund and another advisory account. In making such
allocations the main factors to be considered will be the respective investment
objectives, the relative size of the portfolio holdings of the same or
comparable securities, the availability of cash for investment and the size of
investment commitments generally held. While this procedure could have a
detrimental effect on the price or amount of the securities available to the
Fund from time to time, it is the opinion of the Board of Trustees that the
benefits available from Nuveen Advisory organization will outweigh any
disadvantage that may arise from exposure to simultaneous transactions.

Under the 1940 Act, the Fund may not purchase portfolio securities from any
underwriting syndicate of which Nuveen is a member except under certain limited
conditions set forth in Rule 10f-3. The Rule sets forth requirements relating
to, among other things, the terms of an issue of Municipal Obligations
purchased by the Fund, the amount of Municipal Obligations that may be
purchased in any one issue and the assets of the Fund that may be invested in a
particular issue. In addition, purchases of securities made pursuant to the
terms of the Rule must be approved at least quarterly by the Board of Trustees,
including a majority of the trustees who are not interested persons of the
Trust.

NET ASSET VALUE

As stated in the Prospectus, the net asset value of the shares of the Funds
will be determined separately for each class of those Funds' shares by The
Chase Manhattan Bank, the Funds' custodian, as of the close of trading
(normally 4:00 p.m. Eastern Time) on each day on which the New York Stock
Exchange (the "Exchange") is normally open for trading. The Exchange is not
open for trading on New Year's Day, Washington's Birthday,

S-60
<PAGE>

Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The net asset value per share of a class of shares of a Fund
will be computed by dividing the value of the Fund's assets attributable to the
class, less the liabilities attributable to the class, by the number of shares
of the class outstanding.

In determining net asset value for the Funds, each Fund's custodian utilizes
the valuations of portfolio securities furnished by a pricing service approved
by the trustees. Securities for which quotations are not readily available
(which constitute a majority of the securities held by the Funds) are valued at
fair value as determined by the pricing service using methods which include
consideration of the following: yields or prices of municipal bonds of
comparable quality, type of issue, coupon, maturity and rating; indications as
to value from dealers; and general market conditions. The pricing service may
employ electronic data processing techniques and/or a matrix system to
determine valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Trust under the general supervision of the
Board of Trustees.

TAX MATTERS

Federal Income Tax Matters

The following discussion of federal income tax matters is based upon the
advice of Morgan, Lewis & Bockius LLP, counsel to the Trust.

Each Fund intends to qualify under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code") for tax treatment as a regulated investment
company. In order to qualify as a regulated investment company, a Fund must
satisfy certain requirements relating to the source of its income,
diversification of its assets, and distributions of its income to shareholders.
First, a Fund must derive at least 90% of its annual gross income (including
tax-exempt interest) from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities, foreign currencies or other income (including but not limited to
gains from options and futures) derived with respect to its business of
investing in such stock or securities (the "90% gross income test"). Second, a
Fund must diversify its holdings so that, at the close of each quarter of its
taxable year, (i) at least 50% of the value of its total assets is comprised of
cash, cash items, United States Government securities, securities of other
regulated investment companies and other securities limited in respect of any
one issuer to an amount not greater in value than 5% of the value of a Fund's
total assets and to not more than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of the total assets is
invested in the securities of any one issuer (other than United States
Government securities and securities of other regulated investment companies)
or two or more issuers controlled by a Fund and engaged in the same, similar or
related trades or businesses.

As a regulated investment company, a Fund will not be subject to federal
income tax in any taxable year for which it distributes at least 90% of the sum
of (i) its "investment company taxable income" (which includes dividends,
taxable interest, taxable original issue discount and market discount income,
income from securities lending, net short-term capital gain in excess of long-
term capital loss, and any other taxable income other than "net capital gain"
(as defined below) and is reduced by deductible expenses) and (ii) its net tax-
exempt interest (the excess of its gross tax-exempt interest income over
certain disallowed deductions). A Fund may retain for investment its net
capital gain (which consists of the excess of its net long-term capital gain
over its short-term capital loss). However, if a Fund retains any net capital
gain or any investment company taxable income, it will be subject to tax at
regular corporate rates on the amount retained. If a Fund retains any capital
gain, such Fund may designate the retained amount as undistributed capital
gains in a notice to its shareholders who, if subject to federal income tax on
long-term capital gains, (i) will be required to include in income for federal
income tax purposes, as long-term capital gain, their shares of such
undistributed amount, and (ii) will be entitled to credit their

S-61
<PAGE>

proportionate shares of the tax paid by such Fund against their federal income
tax liabilities if any, and to claim refunds to the extent the credit exceeds
such liabilities. For federal income tax purposes, the tax basis of shares
owned by a shareholder of the Fund will be increased by an amount equal under
current law to 65% of the amount of undistributed capital gains included in the
shareholder's gross income. Each Fund intends to distribute at least annually
to its shareholders all or substantially all of its net tax-exempt interest and
any investment company taxable income and net capital gain.

Treasury regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain, i.e., the excess of
net long-term capital gain over net short-term capital loss for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or part of any net capital loss, any
net long-term capital loss or any net foreign currency loss incurred after
October 31 as if they had been incurred in the succeeding year.

Each Fund also intends to satisfy conditions (including requirements as to
the proportion of its assets invested in Municipal Obligations) that will
enable it to designate distributions from the interest income generated by
investments in Municipal Obligations, which is exempt from regular federal
income tax when received by such Fund, as exempt-interest dividends.
Shareholders receiving exempt-interest dividends will not be subject to regular
federal income tax on the amount of such dividends. Insurance proceeds received
by a Fund under any insurance policies in respect of scheduled interest
payments on defaulted Municipal Obligations will be excludable from federal
gross income under Section 103(a) of the Code. In the case of non-appropriation
by a political subdivision, however, there can be no assurance that payments
made by the insurer representing interest on "non-appropriation" lease
obligations will be excludable from gross income for federal income tax
purposes. See "Investment Policies and Investment Portfolio; Portfolio
Securities."

Distributions by a Fund of net interest received from certain taxable
temporary investments (such as certificates of deposit, commercial paper and
obligations of the U.S. Government, its agencies and instrumentalities) and net
short-term capital gains realized by a Fund, if any, will be taxable to
shareholders as ordinary income whether received in cash or additional shares.
If a Fund purchases a Municipal Obligation at a market discount, any gain
realized by the Fund upon sale or redemption of the Municipal Obligation will
be treated as taxable interest income to the extent such gain does not exceed
the market discount, and any gain realized in excess of the market discount
will be treated as capital gains. Any net long-term capital gains realized by a
Fund and distributed to shareholders in cash or additional shares, will be
taxable to shareholders as long-term capital gains regardless of the length of
time investors have owned shares of a Fund. Distributions by a Fund that do not
constitute ordinary income dividends, exempt-interest dividends, or capital
gain dividends will be treated as a return of capital to the extent of (and in
reduction of) the shareholder's tax basis in his or her shares. Any excess will
be treated as gain from the sale of his or her shares, as discussed below.

If a Fund has both tax-exempt and taxable income, it will use the "average
annual" method for determining the designated percentage that is taxable income
and designate the use of such method within 60 days after the end of the Fund's
taxable year. Under this method, one designated percentage is applied uniformly
to all distributions made during the Fund's taxable year. The percentage of
income designated as tax-exempt for any particular distribution may be
substantially different from the percentage of the Fund's income that was tax-
exempt during the period covered by the distribution.

If a Fund engages in hedging transactions involving financial futures and
options, these transactions will be subject to special tax rules, the effect of
which may be to accelerate income to a Fund, defer a Fund's losses, cause
adjustments in the holding periods of a Fund's securities, convert long-term
capital gains into short-term capital gains and convert short-term capital
losses into long-term capital losses. These rules could therefore affect the
amount, timing and character of distributions to shareholders.

S-62
<PAGE>

Because the taxable portion of a Fund's investment income consists primarily
of interest, none of its dividends, whether or not treated as exempt-interest
dividends, is expected to qualify under the Internal Revenue Code for the
dividends received deductions for corporations.

Prior to purchasing shares in a Fund, the impact of dividends or
distributions which are expected to be or have been declared, but not paid,
should be carefully considered. Any dividend or distribution declared shortly
after a purchase of such shares prior to the record date will have the effect
of reducing the per share net asset value by the per share amount of the
dividend or distribution.

Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in one of those months and paid during the following
January, will be treated as having been distributed by a Fund (and received by
the shareholders) on December 31.

The redemption or exchange of the shares of a Fund normally will result in
capital gain or loss to the shareholders. Generally, a shareholder's gain or
loss will be long-term gain or loss if the shares have been held for more than
one year. Present law taxes both long- and short-term capital gains of
corporations at the rates applicable to ordinary income. For non-corporate
taxpayers, however, net capital gains (i.e., the excess of net long-term
capital gain over net short-term capital loss) will be taxed at a maximum
marginal rate of 28%, while short-term capital gains and other ordinary income
will be taxed at a maximum marginal rate of 39.6%. Because of the limitations
on itemized deductions and the deduction for personal exemptions applicable to
higher income taxpayers, the effective tax rate may be higher in certain
circumstances.

All or a portion of a sales charge paid in purchasing shares of a Fund cannot
be taken into account for purposes of determining gain or loss on the
redemption or exchange of such shares within 90 days after their purchase to
the extent shares of a Fund or another fund are subsequently acquired without
payment of a sales charge pursuant to the reinvestment or exchange privilege.
Any disregarded portion of such charge will result in an increase in the
shareholder's tax basis in the shares subsequently acquired. Moreover, losses
recognized by a shareholder on the redemption or exchange of shares of a Fund
held for six months or less are disallowed to the extent of any distribution of
exempt-interest dividends received with respect to such shares and, if not
disallowed, such losses are treated as long-term capital losses to the extent
of any distributions of long-term capital gains made with respect to such
shares. In addition, no loss will be allowed on the redemption or exchange of
shares of a Fund if the shareholder purchases other shares of such Fund
(whether through reinvestment of distributions or otherwise) or the shareholder
acquires or enters into a contract or option to acquire securities that are
substantially identical to shares of a Fund within a period of 61 days
beginning 30 days before and ending 30 days after such redemption or exchange.
If disallowed, the loss will be reflected in an adjustment to the basis of the
shares acquired.

It may not be advantageous from a tax perspective for shareholders to redeem
or exchange shares after tax-exempt income has accrued but before the record
date for the exempt-interest dividend representing the distribution of such
income. Because such accrued tax-exempt income is included in the net asset
value per share (which equals the redemption or exchange value), such a
redemption could result in treatment of the portion of the sales or redemption
proceeds equal to the accrued tax-exempt interest as taxable gain (to the
extent the redemption or exchange price exceeds the shareholder's tax basis in
the shares disposed of) rather than tax-exempt interest.

S-63
<PAGE>

In order to avoid a 4% federal excise tax, a Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
realized capital gains over its realized capital losses (generally computed on
the basis of the one-year period ending on October 31 of such year) and 100% of
any taxable ordinary income and the excess of realized capital gains over
realized capital losses for the prior year that was not distributed during such
year and on which such Fund paid no federal income tax. For purposes of the
excise tax, a regulated investment company may reduce its capital gain net
income (but not below its net capital gain) by the amount of any net ordinary
loss for the calendar year. The Funds intend to make timely distributions in
compliance with these requirements and consequently it is anticipated that they
generally will not be required to pay the excise tax.

If in any year a Fund should fail to qualify under Subchapter M for tax
treatment as a regulated investment company, the Fund would incur a regular
corporate federal income tax upon its income for that year (other than interest
income from Municipal Obligations), and distributions to its shareholders would
be taxable to shareholders as ordinary dividend income for federal income tax
purposes to the extent of the Fund's available earnings and profits.

Because the Funds may invest in private activity bonds, the interest on which
is not federally tax-exempt to persons who are "substantial users" of the
facilities financed by such bonds or "related persons" of such "substantial
users," the Funds may not be an appropriate investment for shareholders who are
considered either a "substantial user" or a "related person" within the meaning
of the Code. For additional information, investors should consult their tax
advisers before investing in a Fund.

Federal tax law imposes an alternative minimum tax with respect to both
corporations and individuals. Interest on certain Municipal Obligations, such
as bonds issued to make loans for housing purposes or to private entities (but
not for certain tax-exempt organizations such as universities and non-profit
hospitals), is included as an item of tax preference in determining the amount
of a taxpayer's alternative minimum taxable income. To the extent that a Fund
receives income from Municipal Obligations subject to the alternative minimum
tax, a portion of the dividends paid by it, although otherwise exempt from
federal income tax, will be taxable to shareholders to the extent that their
tax liability is determined under the alternative minimum tax regime. The Funds
will annually supply shareholders with a report indicating the percentage of
Fund income attributable to Municipal Obligations subject to the federal
alternative minimum tax.

In addition, the alternative minimum taxable income for corporations is
increased by 75% of the difference between an alternative measure of income
("adjusted current earnings") and the amount otherwise determined to be the
alternative minimum taxable income. Interest on all Municipal Obligations, and
therefore all distributions by the Funds that would otherwise be tax-exempt, is
included in calculating a corporation's adjusted current earnings.

Tax-exempt income, including exempt-interest dividends paid by a Fund, will
be added to the taxable income of individuals receiving social security or
railroad retirement benefits in determining whether a portion of that benefit
will be subject to federal income tax.

The Code provides that interest on indebtedness incurred or continued to
purchase or carry shares of any Fund is not deductible. Under rules used by the
IRS for determining when borrowed funds are considered used for the purpose of
purchasing or carrying particular assets, the purchase of shares of a Fund may
be considered to have been made with borrowed funds even though such funds are
not directly traceable to the purchase of shares.

The Funds are required in certain circumstances to withhold 31% of taxable
dividends and certain other payments paid to non-corporate holders of shares
who have not furnished to the Funds their correct taxpayer

S-64
<PAGE>

identification number (in the case of individuals, their social security
number) and certain certifications, or who are otherwise subject to backup
withholding.

The foregoing is a general and abbreviated summary of the provisions of the
Code and Treasury Regulations presently in effect as they directly govern the
taxation of the Fund and its shareholders. For complete provisions, reference
should be made to the pertinent Code sections and Treasury Regulations. The
Code and Treasury Regulations are subject to change by legislative or
administrative action, and any such change may be retroactive with respect to
Fund transactions. Shareholders are advised to consult their own tax advisers
for more detailed information concerning the federal taxation of the Funds and
the income tax consequences to their shareholders.

State Tax Matters

The discussion of tax treatment is based on the assumptions that the Funds
will qualify under Subchapter M of the Code as regulated investment companies
that they will satisfy the conditions which will cause distributions to qualify
as exempt-interest dividends to shareholders when distributed as intended, and
that each Fund will distribute all interest and dividends it receives to its
shareholders. Unless otherwise noted, shareholders in each Fund will not be
subject to state income taxation on distributions that are attributable to
interest earned on the municipal obligations issued by that state or its
subdivisions, or on obligations of the United States. Shareholders generally
will be required to include capital gain distributions in their income for
state tax purposes. In some states, interest on indebtedness incurred or
continued to purchase or carry Fund shares is not deductible. The tax
discussion summarizes general state tax laws which are currently in effect and
are subject to change by legislative or administrative action; any such changes
may be retroactive with respect to the applicable Fund's transactions.
Investors should consult a tax adviser for more detailed information about
state taxes to which they may be subject.

New York

The following is a general, abbreviated summary of certain provisions of the
applicable New York tax law as presently in effect as it directly governs the
taxation of resident individual, corporate, and unincorporated business
shareholders of the New York Funds. This summary does not address the taxation
of other shareholders nor does it discuss any local taxes, other than New York
City taxes, that may be applicable. These provisions are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to New York Fund transactions.

The following is based on the assumptions that the New York Funds will
qualify under Subchapter M of the Code as regulated investment companies, that
they will satisfy the conditions which will cause New York Funds' distributions
to qualify as exempt-interest dividends to shareholders, and that they will
distribute all interest and dividends they receive to the New York Funds'
shareholders.

The New York Funds will be subject to the New York State corporate franchise
tax and the New York City general corporation tax only if they have a
sufficient nexus with New York State or New York City. If they are subject to
such taxes, they do not expect to pay a material amount of either tax.

Distributions by the New York Funds that are attributable to interest on any
obligation of New York and its political subdivisions, or to interest on
obligations of U.S. territories and possessions that are exempt from federal
taxation and state taxation under federal law, will not be subject to the New
York State personal income tax or the New York City personal income or
unincorporated business taxes. Distributions by the New York Funds that are
attributable to interest on obligations of the United States or its
instrumentalities. All other distributions, including distributions
attributable to interest on obligations of the United States or its
instrumentalities and distributions attributable to capital gains, will be
subject to the New York State personal income tax and the New York City
personal income and unincorporated business taxes.

S-65
<PAGE>

All distributions from the New York Funds, regardless of source, will
increase the taxable base of shareholders subject to the New York State
franchise tax or the New York City general corporation tax.

Gain from the sale, exchange, or other disposition of shares of the New York
Funds will be subject to the New York State personal income and franchise taxes
and the New York City personal income, unincorporated business, and general
corporation taxes.

Shares of the New York Funds may be subject to the New York State estate tax
if owned by a New York decedent at the time of death.

New Jersey

The following is a general, abbreviated summary of certain provisions of the
applicable New Jersey tax law as presently in effect as it directly governs the
taxation of resident individual and corporate shareholders of the New Jersey
Funds. This summary does not address the taxation of other shareholders nor
does it discuss any local taxes that may be applicable. These provisions are
subject to change by legislative or administrative action, and any such change
may be retroactive with respect to transactions of the New Jersey Funds.

The following is based on the assumptions that the New Jersey Funds will
qualify under Subchapter M of the Code as regulated investment companies and
under New Jersey law as qualified investment funds, that they will satisfy the
conditions which will cause New Jersey Funds' distributions to qualify as
exempt-interest dividends to shareholders, and that they will distribute all
interest and dividends they receive to the New Jersey Funds' shareholders.

The New Jersey Funds will be subject to the New Jersey corporation business
tax or the New Jersey corporation income tax only if they have a sufficient
nexus with New Jersey. If they are subject to either tax, the New Jersey Funds
do not expect to pay a material amount of either tax.

Distributions by the New Jersey Funds that are attributable to interest or
gains on any obligation of New Jersey or its political subdivisions or to
interest or gains on obligations of the United States, its territories,
possessions, or instrumentalities that are exempt from state taxation under
federal law will not be subject to the New Jersey gross income tax. All other
distributions will be subject to the New Jersey gross income tax.

All distributions from the New Jersey Funds, regardless of source, will
increase the taxable base of shareholders subject to the New Jersey corporation
business tax or the New Jersey corporation income tax.

Gain on the sale, exchange, or other disposition of shares of the New Jersey
Funds will not be subject to the New Jersey gross income tax. Conversely,
losses from such transactions may not be used to offset New Jersey taxable
gains. Gains from such transactions will be subject to the New Jersey
corporation income tax.

Shares of the New Jersey Funds may be subject to the New Jersey inheritance
tax or the New Jersey estate tax if owned by a New Jersey decedent at the time
of death.

Shareholders are advised to consult with their own tax advisers for more
detailed information concerning New Jersey state and local tax matters.

California

The following is a general, abbreviated summary of certain provisions of the
applicable California tax law as presently in effect as it directly governs the
taxation of resident individual and corporate shareholders of the California
Funds. This summary does not address the taxation of other shareholders nor
does it discuss any local taxes that may be applicable. These provisions are
subject to change by legislative or administrative action, and any such change
may be retroactive with respect to transactions of the California Funds.

S-66
<PAGE>

The following is based on the assumptions that the California Funds will
qualify under Subchapter M of the Code as regulated investment companies, that
they will satisfy the conditions which will cause distributions of the
California Funds to qualify as exempt-interest dividends to shareholders, and
that they will distribute all interest and dividends they receive to the
California Funds' shareholders.

The California Funds will be subject to the California corporate franchise
and corporation income tax only if they have a sufficient nexus with
California. If they are subject to the California franchise or corporation
income tax, the California Funds do not expect to pay a material amount of such
tax.

Distributions by the California Funds that are attributable to interest on
any obligation of California and its political subdivisions or to interest on
obligations of the United States, its territories, possessions or
instrumentalities that are exempt from state taxation under federal law will
not be subject to the California personal income tax. All other distributions,
including distributions attributable to capital gains, will be subject to the
California personal income tax.

All distributions of California Funds to corporate shareholders, regardless
of source, will be subject to the California corporate franchise tax.

Gain on the sale, exchange, or other disposition of shares of the California
Funds will be subject to the California personal income and corporate franchise
taxes.

Shares of the California Funds may be subject to the California estate tax if
held by a California decedent at the time of death.

Shareholders are advised to consult with their own tax advisers for more
detailed information concerning California tax matters.

Connecticut

The following is a general, abbreviated summary of certain provisions of the
applicable Connecticut tax law as presently in effect as it directly governs
the taxation of resident individual and corporate shareholders of the
Connecticut Fund. This summary does not address the taxation of other
shareholders nor does it discuss any local taxes that may be applicable. These
provisions are subject to change by legislative or administrative action, and
any such change may be retroactive with respect to Connecticut Fund
transactions.

The following is based on the assumptions that the Connecticut Fund will
qualify under Subchapter M of the Code as a regulated investment company, that
it will satisfy the conditions which will cause Connecticut Fund distributions
to qualify as exempt-interest dividends to shareholders, and that it will
distribute all interest and dividends it receives to the Connecticut Fund's
shareholders.

The Connecticut Fund will be subject to the Connecticut corporation business
tax only if it has a sufficient nexus with Connecticut. If it is subject to
that tax, it does not expect to pay a material amount of such tax.

Distributions from the Connecticut Fund that are attributable to interest or
gain on any obligation of Connecticut and its political subdivisions
("Connecticut Obligations") or to interest on obligations of U.S. territories
and possessions that are exempt from state taxation under federal law will not
be subject to the Connecticut personal income tax. All other distributions,
including distributions attributable to interest on obligations of the United
States or instrumentalities and distributions attributable to capital gain
(other than capital gain on Connecticut Obligations), will be subject to the
Connecticut personal income tax.

S-67
<PAGE>

All distributions from the Connecticut Fund, regardless of source, will be
subject to the Connecticut corporation business tax, but corporate shareholders
may be permitted a dividends received deduction for a portion of Connecticut
Fund distributions received.

Gain on the sale, exchange, or other disposition of shares of the Connecticut
Fund will be subject to the Connecticut personal income tax and the Connecticut
corporation business tax.

Shares of the Connecticut Fund may be subject to the Connecticut succession
tax, the Connecticut transfer tax, and the Connecticut estate tax if owned by,
or subject to a general power of appointment by, a Connecticut decedent at the
time of death.

Shareholders are advised to consult with their own tax advisers for more
detailed information concerning Connecticut and local tax matters.

Massachusetts

The following is a general, abbreviated summary of certain provisions of the
applicable Massachusetts tax law as presently in effect as it directly governs
the taxation of resident individual and corporate shareholders of the
Massachusetts Funds. This summary does not address the taxation of other
shareholders nor does it discuss any local taxes that may be applicable. These
provisions are subject to change by legislative or administrative action, and
any such change may be retroactive with respect to the Massachusetts Funds'
transactions.

The following is based on the assumptions that the Massachusetts Funds will
qualify under Subchapter M of the Code as regulated investment companies, that
they will satisfy the conditions which will cause distributions of the
Massachusetts Funds to qualify as exempt-interest dividends to shareholders,
and that they will distribute all interest and dividends they receive to the
Massachusetts Funds' shareholders.

The Massachusetts Funds are not subject to the Massachusetts corporate excise
tax, the Massachusetts franchise tax, or the Massachusetts income tax.

Distributions by the Massachusetts Funds that qualify, for federal income tax
purposes, either as exempt-interest dividends or as capital gain dividends, and
that are attributable to interest or gain from the sale or exchange of certain
obligations of Massachusetts and its political subdivisions, agencies and
instrumentalities will not be subject to the Massachusetts personal income tax.
In addition, distributions by the Massachusetts Funds that are attributable to
interest on obligations of the United States exempt from state income taxation
under federal law will not be subject to the Massachusetts personal income tax.
All other distributions will be subject to the Massachusetts personal income
tax.

Distributions by the Massachusetts Funds, regardless of source, are subject
to the Massachusetts corporate excise tax.

Gain on the sale, exchange, or other disposition of shares of the
Massachusetts Funds will be subject to the Massachusetts personal income and
corporate excise tax.

Shares of the Massachusetts Funds may be subject to the Massachusetts estate
tax if owned by a Massachusetts decedent at the time of death.

Shareholders are advised to consult with their own tax advisers for more
detailed information concerning Massachusetts state and local tax matters.

S-68
<PAGE>

PERFORMANCE INFORMATION

The historical investment performance of the Funds may be shown in the form
of "yield," "taxable equivalent yield," "average annual total return,"
"cumulative total return" and "taxable equivalent total return" figures, each
of which will be calculated separately for each class of shares.

In accordance with a standardized method prescribed by rules of the
Securities and Exchange Commission ("SEC"), yield is computed by dividing the
net investment income per share earned during the specified one month or 30-day
period by the maximum offering price per share on the last day of the period,
according to the following formula:

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

In the above formula, 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; and d = the maximum offering price per share on the last day
of the period. In the case of Class A shares, the maximum offering price
includes the current maximum front-end sales charge.

In computing yield, the Funds follow certain standardized accounting
practices specified by SEC rules. These practices are not necessarily
consistent with those that the Funds use to prepare their annual and interim
financial statements in conformity with generally accepted accounting
principles. Thus, yield may not equal the income paid to shareholders or the
income reported in a Fund's financial statements.

Taxable equivalent yield is computed by dividing that portion of the yield
which is tax-exempt by the remainder of (1 minus the stated combined federal
and state income tax rate, taking into account the deductibility of state taxes
for federal income tax purposes) and adding the product to that portion, if
any, of the yield that is not tax exempt.

The taxable equivalent yields quoted below are based upon (1) the stated
combined federal and state income tax rates and (2) the yields for the 30-day
period quoted in the left-hand column.

<TABLE>
<CAPTION>
As of February 28, 1999
------------------------------------------
Combined Federal Taxable
Yield and State Tax Rate* Equivalent Yield
----- ------------------- ----------------
<S> <C> <C> <C>
New Jersey Municipal Bond Fund
Class A Shares............... 4.68% 43.4% 8.27%
Class B Shares............... 4.14% 43.4% 7.31%
Class C Shares............... 4.34% 43.4% 7.67%
Class R Shares............... 5.09% 43.4% 8.99%
New York Municipal Bond Fund**
Class A Shares............... 4.27% 43.7% 7.58%
Class B Shares............... 3.71% 43.7% 6.59%
Class C Shares............... 3.91% 43.7% 6.94%
Class R Shares............... 4.66% 43.7% 8.28%
</TABLE>

S-69
<PAGE>

<TABLE>
<CAPTION>
As of February 28, 1998
------------------------------------------
Combined Federal Taxable
Yield and State Tax Rate* Equivalent Yield
----- ------------------- ----------------
<S> <C> <C> <C>
New York Insured Municipal
Bond Fund**
Class A Shares.............. 3.55% 43.7% 6.31%
Class B Shares.............. 2.96% 43.7% 5.26%
Class C Shares.............. 3.16% 43.7% 5.61%
Class R Shares.............. 3.91% 43.7% 6.94%
California Municipal Bond Fund
Class A Shares.............. 4.00% 45.2% 7.30%
Class B Shares.............. 3.42% 45.2% 6.24%
Class C Shares.............. 3.62% 45.2% 6.61%
Class R Shares.............. 4.37% 45.2% 7.97%
California Insured Municipal
Bond Fund
Class A Shares.............. 3.60% 45.2% 6.57%
Class B Shares.............. 3.01% 45.2% 5.49%
Class C Shares.............. 3.21% 45.2% 5.86%
Class R Shares.............. 3.96% 45.2% 7.23%
Massachusetts Municipal Bond
Fund
Class A Shares.............. 3.78% 46.8% 7.11%
Class B Shares.............. 3.19% 46.8% 6.00%
Class C Shares.............. 3.40% 46.8% 6.39%
Class R Shares.............. 4.15% 46.8% 7.80%
Massachusetts Insured
Municipal Bond Fund
Class A Shares.............. 3.41% 46.8% 6.41%
Class B Shares.............. 2.81% 46.8% 5.28%
Class C Shares.............. 3.01% 46.8% 5.66%
Class R Shares.............. 3.76% 46.8% 7.07%
Connecticut Municipal Bond
Fund
Class A Shares.............. 4.00% 42.3% 6.93%
Class B Shares.............. 3.42% 42.3% 5.93%
Class C Shares.............. 3.62% 42.3% 6.27%
Class R Shares.............. 4.38% 42.3% 7.59%
</TABLE>
- --------
* The combined tax rates used in these tables represent the highest or one
of the highest combined tax rates applicable to state taxpayers, rounded
to the nearest .5%; these rates do not reflect the current federal tax
limitations on itemized deductions and personal exemptions, which may
raise the effective tax rate and taxable equivalent yield for taxpayers
above certain income levels.
** Reflects a combined federal, state and New York City tax rate.

S-70
<PAGE>

For additional information concerning taxable equivalent yields, see the
Taxable Equivalent Yields tables in the Prospectus.

The Funds may from time to time in their advertising and sales materials
report a quotation of their current distribution rate. The distribution rate
represents a measure of dividends distributed for a specified period.
Distribution rate is computed by taking the most recent monthly tax-free income
dividend per share, multiplying it by 12 to annualize it, and dividing by the
appropriate price per share (e.g., net asset value for purchases to be made
without a load such as reinvestments from Nuveen UITs, or the maximum public
offering price). The distribution rate differs from yield and total return and
therefore is not intended to be a complete measure of performance. Distribution
rate may sometimes differ from yield because a Fund may be paying out more than
it is earning and because it may not include the effect of amortization of bond
premiums to the extent such premiums arise after the bonds were purchased.

The distribution rates as of the period quoted, based on the maximum public
offering price then in effect for the Funds, and assuming the imposition of the
maximum sales charge for Class A Shares, were as follows:

<TABLE>
<CAPTION>
February 28, 1998
-------------------------------
Distribution Rates
-------------------------------
Class A Class B Class C Class R
------- ------- ------- -------
<S> <C> <C> <C> <C>
New Jersey Municipal Bond Fund........... 4.87% 4.35% 4.59% 5.31%
New York Municipal Bond Fund............. 4.98% 4.43% 4.63% 5.35%
New York Insured Municipal Bond Fund..... 4.76% 4.18% 4.41% 5.13%
California Municipal Bond Fund .......... 4.79% 4.29% 4.45% 5.22%
California Insured Municipal Bond Fund... 4.68% 4.12% 4.32% 5.05%
Massachusetts Municipal Bond Fund........ 4.96% 4.46% 4.67% 5.37%
Massachusetts Insured Municipal Bond
Fund..................................... 4.73% 4.20% 4.38% 5.11%
Connecticut Municipal Bond Fund.......... 4.77% 4.27% 4.43% 5.19%
</TABLE>

Average annual total return quotation is computed in accordance with a
standardized method prescribed by SEC rules. The average annual total return
for a specific period is found by taking a hypothetical, $1,000 investment
("initial investment") in Fund shares on the first day of the period, reducing
the amount to reflect the maximum sales charge, and computing the "redeemable
value" of that investment at the end of the period. The redeemable value is
then divided by the initial investment, and this quotient is taken to the Nth
root (N representing the number of years in the period) and 1 is subtracted
from the result, which is then expressed as a percentage. The calculation
assumes that all income and capital gains distributions have been reinvested in
Fund shares at net asset value on the reinvestment dates during the period.

Total returns for the oldest class of each fund reflect actual performance
for all periods. For other classes, total returns reflect actual performance
for periods since class inception, and the oldest class's performance for
periods prior to inception, adjusted for the differences in sales charges and
fees between the classes.

S-71
<PAGE>

The inception dates for each class of the Funds' shares are as follows:

<TABLE>
<CAPTION>
Inception Dates
-----------------
<S> <C>
New Jersey Municipal Bond Fund
Class A Shares........................................ September 6, 1994
Class B Shares........................................ February 1, 1997
Class C Shares........................................ September 6, 1994
Class R Shares........................................ July 26, 1991
New York Municipal Bond Fund
Class A Shares........................................ September 6, 1994
Class B Shares........................................ February 1, 1997
Class C Shares........................................ September 6, 1994
Class R Shares........................................ December 10, 1986
New York Insured Municipal Bond Fund
Class A Shares........................................ September 6, 1994
Class B Shares........................................ February 1, 1997
Class C Shares........................................ September 6, 1994
Class R Shares........................................ December 10, 1986
California Municipal Bond Fund
Class A Shares........................................ September 6, 1994
Class B Shares........................................ February 1, 1997
Class C Shares........................................ September 6, 1994
Class R Shares........................................ July 1, 1986
California Insured Municipal Bond Fund
Class A Shares........................................ September 6, 1994
Class B Shares........................................ February 1, 1997
Class C Shares........................................ September 6, 1994
Class R Shares........................................ July 1, 1986
Massachusetts Municipal Bond Fund
Class A Shares........................................ September 6, 1994
Class B Shares........................................ February 1, 1997
Class C Shares........................................ September 6, 1994
Class R Shares........................................ December 10, 1986
Massachusetts Insured Municipal Bond Fund
Class A Shares........................................ September 6, 1994
Class B Shares........................................ February 1, 1997
Class C Shares........................................ September 6, 1994
Class R Shares........................................ December 10, 1986
Connecticut Municipal Bond Fund
Class A Shares........................................ July 13, 1987
Class B Shares........................................ February 1, 1997
Class C Shares........................................ October 4, 1993
Class R Shares........................................ February 1, 1997
</TABLE>

S-72
<PAGE>

The annual total return figures for the New York Municipal Bond Fund, the New
York Insured Municipal Bond Fund, the Massachusetts Municipal Bond Fund, the
Massachusetts Insured Municipal Bond Fund, the California Municipal Bond Fund,
the California Insured Municipal Bond Fund and the Connecticut Municipal Bond
Fund, including the effect of the maximum sales charge for Class A shares, and
applicable CDSC for Class B Shares, for the one-year, five-year, and ten-year
periods ended February 28, 1999 and for the period from inception through
February 28, 1999, respectively, were as follows:

<TABLE>
<CAPTION>
Annual Total Returns
-----------------------------------------------------
One year Five years Ten years From inception
ended ended ended through
February 28, February 28, February 28, February 28,
1999 1999 1999 1999
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
New York Municipal Bond
Fund
Class A Shares........ 5.24% 5.51% 7.44% 7.13%
Class B Shares........ 5.10% 5.59% 7.34% 7.03%
Class C Shares........ 9.31% 5.81% 7.19% 6.81%
Class R Shares........ 10.11% 6.74% 8.20% 7.83%
New York Insured
Municipal Bond Fund
Class A Shares........ 3.23% 4.71% 7.11% 6.57%
Class B Shares........ 2.96% 4.70% 6.98% 6.46%
Class C Shares........ 7.16% 4.89% 6.80% 6.21%
Class R Shares........ 8.04% 5.88% 7.84% 7.25%
Massachusetts Municipal
Bond Fund
Class A Shares........ 2.91% 4.88% 7.08% 6.08%
Class B Shares........ 2.82% 4.84% 6.92% 5.93%
Class C Shares........ 6.85% 4.98% 6.74% 5.69%
Class R Shares........ 7.60% 5.96% 7.78% 6.73%
Massachusetts Insured
Municipal Bond Fund
Class A Shares........ 2.50% 4.48% 6.77% 6.19%
Class B Shares........ 2.25% 4.48% 6.65% 6.05%
Class C Shares........ 6.45% 4.64% 6.46% 5.81%
Class R Shares........ 7.23% 5.64% 7.50% 6.86%
California Municipal
Bond Fund
Class A Shares........ 4.33% 4.94% 7.13% 6.97%
Class B Shares........ 4.08% 5.02% 7.02% 6.85%
Class C Shares........ 8.36% 5.18% 6.86% 6.62%
Class R Shares........ 8.99% 6.16% 7.89% 7.65%
California Insured
Municipal Bond Fund
Class A Shares........ 4.09% 4.87% 7.18% 6.82%
Class B Shares........ 3.82% 4.83% 7.03% 6.70%
Class C Shares........ 7.96% 4.94% 6.82% 6.39%
Class R Shares........ 8.86% 6.00% 7.89% 7.46%
Connecticut Municipal
Bond Fund
Class A Shares........ 4.19% 5.07% 7.17% 7.08%
Class B Shares........ 3.76% 5.15% 7.16% 7.07%
Class C Shares........ 8.17% 5.36% 7.02% 6.90%
Class R Shares........ 9.17% 6.06% 7.67% 7.55%
</TABLE>

S-73
<PAGE>

The annual total return figures for the New Jersey Municipal Bond Fund,
including the effect of the maximum sales charge for Class A Shares, and
applicable CDSC for Class B Shares, for the one-year and five-year periods (as
applicable) ended February 28, 1999, and for the period since inception through
February 28, 1999, respectively, were as follows:

<TABLE>
<CAPTION>
Annual Total Returns
-----------------------------------------------------
One year Five years From inception
ended ended through
February 28, 1999 February 28, 1999 February 28, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
New Jersey Municipal
Bond Fund
Class A Shares........ 4.47% 5.32% 6.51%
Class B Shares........ 4.25% 5.33% 6.54%
Class C Shares........ 8.40% 5.50% 6.53%
Class R Shares........ 9.29% 6.50% 7.55%
</TABLE>

Calculation of cumulative total return is not subject to a prescribed
formula. Cumulative total return for a specific period is calculated by first
taking a hypothetical initial investment in Fund shares on the first day of the
period, deducting (in some cases) the maximum sales charge, and computing the
"redeemable value" of that investment at the end of the period. The cumulative
total return percentage is then determined by subtracting the initial
investment from the redeemable value and dividing the remainder by the initial
investment and expressing the result as a percentage. The calculation assumes
that all income and capital gains distributions by the Fund have been
reinvested at net asset value on the reinvestment dates during the period.
Cumulative total return may also be shown as the increased dollar value of the
hypothetical investment over the period. Cumulative total return calculations
that do not include the effect of the sales charge would be reduced if such
charge were included.

S-74
<PAGE>

The cumulative total return figures for the New York Municipal Bond Fund, the
New York Insured Municipal Bond Fund, the Massachusetts Municipal Bond Fund,
the Massachusetts Insured Municipal Bond Fund, the California Municipal Bond
Fund, the California Insured Municipal Bond Fund, and the Connecticut Municipal
Bond Fund, including the effect of the maximum sales charge for the Class A
Shares, and applicable CDSC for Class B Shares, for the one-year, five-year and
ten-year periods ended February 28, 1999, and for the period since inception
February 28, 1999, using the performance of the oldest class for periods prior
to the inception of the newer classes, as described above, respectively, were
as follows:

<TABLE>
<CAPTION>
Cumulative Total Returns
---------------------------------------------------
One year Five years Ten years From
ended ended ended Inception
February 28, February 28, February 28, February 28,
1999 1999 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
New York Municipal Bond
Fund
Class A Shares........ 5.24% 30.76% 105.05% 116.02%
Class B Shares........ 5.10% 31.22% 103.10% 113.93%
Class C Shares........ 9.31% 32.60% 100.20% 108.91%
Class R Shares........ 10.11% 38.57% 119.91% 132.36%
New York Insured
Municipal Bond Fund
Class A Shares........ 3.23% 25.88% 98.69% 103.81%
Class B Shares........ 2.96% 25.83% 96.32% 101.43%
Class C Shares........ 7.16% 26.97% 93.04% 96.13%
Class R Shares........ 8.04% 33.08% 112.62% 118.74%
Massachusetts Municipal
Bond Fund
Class A Shares........ 2.91% 26.87% 98.24% 93.54%
Class B Shares........ 2.82% 26.69% 95.18% 90.43%
Class C Shares........ 6.85% 27.50% 92.07% 85.74%
Class R Shares........ 7.60% 33.60% 111.56% 107.16%
Massachusetts Insured
Municipal Bond Fund
Class A Shares........ 2.50% 24.49% 92.58% 95.72%
Class B Shares........ 2.25% 24.48% 90.46% 92.99%
Class C Shares........ 6.45% 25.44% 86.99% 88.18%
Class R Shares........ 7.23% 31.54% 106.09% 110.01%
California Municipal
Bond Fund
Class A Shares ....... 4.33% 27.25% 99.20% 119.45%
Class B Shares........ 4.08% 27.76% 97.17% 116.58%
Class C Shares........ 8.36% 28.74% 94.13% 111.10%
Class R Shares........ 8.99% 34.84% 113.68% 136.25%
California Insured
Municipal Bond Fund
Class A Shares ....... 4.09% 26.84% 100.14% 115.79%
Class B Shares........ 3.82% 26.61% 97.31% 112.95%
Class C Shares........ 7.96% 27.26% 93.37% 105.86%
Class R Shares........ 8.86% 33.83% 113.73% 131.33%
Connecticut Municipal
Bond Fund
Class A Shares........ 4.19% 28.08% 99.84% 106.91%
Class B Shares........ 3.76% 28.57% 99.70% 106.74%
Class C Shares........ 8.17% 29.81% 97.15% 103.36%
Class R Shares........ 9.17% 34.18% 109.42% 116.81%
</TABLE>

S-75
<PAGE>

The cumulative total return figures for the New Jersey Municipal Bond Fund,
including the effect of the maximum sales charge for the Class A Shares, and
applicable CDSC for Class B Shares, for the one-year and five-year periods (as
applicable) ended February 28, 1999, and for the period since inception through
February 28, 1999, respectively, using the performance of the oldest class for
periods prior to the inception of the newer classes, as described above, were
as follows:

<TABLE>
<CAPTION>
Cumulative Total Returns
---------------------------------------------------
From
One year Five years Ten years Inception
ended ended ended through
February 28, February 28, February 28, February 28,
1999 1999 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
New Jersey Municipal
Bond Fund
Class A Shares........ 4.47% 29.60% N/A 46.02%
Class B Shares........ 4.25% 29.67% N/A 46.21%
Class C Shares........ 8.40% 30.72% N/A 46.19%
Class R Shares........ 9.29% 37.01% N/A 54.77%
</TABLE>

Calculation of taxable equivalent total return is also not subject to a
prescribed formula. Taxable equivalent total return for a specific period is
calculated by first taking a hypothetical initial investment in Fund shares on
the first day of the period, computing the total return for each calendar year
in the period in the manner described above, and increasing the total return
for each such calendar year by the amount of additional income that a taxable
fund would need to have generated to equal the income on an after-tax basis, at
a specified income tax rate (usually the highest marginal federal tax rate),
calculated as described above under the discussion of "taxable equivalent
yield." The resulting amount for the calendar year is then divided by the
initial investment amount to arrive at a "taxable equivalent total return
factor" for the calendar year. The taxable equivalent total return factors for
all the calendar years are then multiplied together and the result is then
annualized by taking its Nth root (N representing the number of years in the
period) and subtracting 1, which provides a taxable equivalent total return
expressed as a percentage.

Using the 46.8% maximum combined marginal federal and state tax rate for
1999, the annual taxable equivalent total return for the Massachusetts
Municipal Bond Fund's shares for the five-year period ended February 28, 1999
with respect to the Class R shares was 10.90%.

Class A Shares of the Funds are sold at net asset value plus a current
maximum sales charge of 4.20% of the offering price. This current maximum sales
charge will typically be used for purposes of calculating performance figures.
Yield, returns and net asset value of each class of shares of the Funds will
fluctuate. Factors affecting the performance of the Funds include general
market conditions, operating expenses and investment management. Any additional
fees charged by a securities representative or other financial services firm
would reduce returns described in this section. Shares of the Funds are
redeemable at net asset value, which may be more or less than original cost.

In reports or other communications to shareholders or in advertising and
sales literature, the Funds may also compare their performance with that of:
(1) the Consumer Price Index or various unmanaged bond indexes such as the
Lehman Brothers Municipal Bond Index and the Salomon Brothers High Grade
Corporate Bond Index and (2) other fixed income or municipal bond mutual funds
or mutual fund indexes as reported by Lipper Analytical Services, Inc.
("Lipper"), Morningstar, Inc. ("Morningstar"), Wiesenberger Investment
Companies Service ("Wiesenberger") and CDA Investment Technologies, Inc.
("CDA") or similar independent services which monitor the performance of mutual
funds, or other industry or financial publications such as Barron's, Changing
Times, Forbes and Money Magazine. Performance comparisons by these indexes,
services or

S-76
<PAGE>

publications may rank mutual funds over different periods of time by means of
aggregate, average, year-by-year, or other types of total return and
performance figures. Any given performance quotation or performance comparison
should not be considered as representative of the performance of the Funds for
any future period.

Each Fund may from time to time in its advertising and sales materials
compare its current yield or total return with the yield or total return on
taxable investments such as corporate or U.S. Government bonds, bank
certificates of deposit (CDs) or money market funds. These taxable investments
have investment characteristics that differ from those of the Funds. U. S.
Government bonds, for example, are long-term investments backed by the full
faith and credit of the U.S. Government, and bank CDs are generally short-term,
FDIC-insured investments, which pay fixed principal and interest but are
subject to fluctuating rollover rates. Money market funds are short-term
investments with stable net asset values, fluctuating yields and special
features enhancing liquidity.

There are differences and similarities between the investments which the
Funds may purchase and the investments measured by the indexes and reporting
services which are described herein. The Consumer Price Index is generally
considered to be a measure of inflation. The CDA Mutual Fund-Municipal Bond
Index is a weighted performance average of other mutual funds with a federally
tax-exempt income objective. The Salomon Brothers High Grade Corporate Bond
Index is an unmanaged index that generally represents the performance of high
grade long-term taxable bonds during various market conditions. The Lehman
Brothers Municipal Bond Index is an unmanaged index that generally represents
the performance of high grade intermediate and long-term municipal bonds during
various market conditions. Lipper calculates municipal bond fund averages based
on average maturity and credit quality. Morningstar rates mutual funds by
overall risk-adjusted performance, investment objectives, and assets. Lipper,
Morningstar, Wiesenberger and CDA are widely recognized mutual fund reporting
services whose performance calculations are based upon changes in net asset
value with all dividends reinvested and which do not include the effect of any
sales charges. The market prices and yields of taxable and tax-exempt bonds
will fluctuate. The Funds primarily invest in investment grade Municipal
Obligations in pursuing their objective of as high a level of current interest
income which is exempt from federal and state income tax as is consistent, in
the view of the Funds' management, with preservation of capital.

The Funds may also compare their taxable equivalent total return performance
to the total return performance of taxable income funds such as treasury
securities funds, corporate bond funds (either investment grade or high yield),
or Ginnie Mae funds. These types of funds, because of the character of their
underlying securities, differ from municipal bond funds in several respects.
The susceptibility of the price of treasury bonds to credit risk is far less
than that of municipal bonds, but the price of treasury bonds tends to be
slightly more susceptible to change resulting from changes in market interest
rates. The susceptibility of the price of investment grade corporate bonds and
municipal bonds to market interest rate changes and general credit changes is
similar. High yield bonds are subject to a greater degree of price volatility
than municipal bonds resulting from changes in market interest rates and are
particularly susceptible to volatility from credit changes. Ginnie Mae bonds
are generally subject to less price volatility than municipal bonds from credit
concerns, due primarily to the fact that the timely payment of monthly
installments of principal and interest are backed by the full faith and credit
of the U.S. Government, but Ginnie Mae bonds of equivalent coupon and maturity
are generally more susceptible to price volatility resulting from market
interest rate changes. In addition, the volatility of Ginnie Mae bonds due to
changes in market interest rates may differ from municipal bonds of comparable
coupon and maturity because bonds of the sensitivity of Ginnie Mae prepayment
experience to change in interest rates.

S-77
<PAGE>

ADDITIONAL INFORMATION ON THE PURCHASE AND REDEMPTION OF FUND SHARES

As described in the Prospectus, the Funds provide you with alternative ways
of purchasing Fund shares based upon your individual investment needs and
preferences.

Each class of shares of a Fund represents an interest in the same portfolio
of investments. Each class of shares is identical in all respects except that
each class bears its own class expenses, including distribution and
administration expenses, and each class has exclusive voting rights with
respect to any distribution or service plan applicable to its shares. As a
result of the differences in the expenses borne by each class of shares, net
income per share, dividends per share and net asset value per share will vary
among a Fund's classes of shares.

Shareholders of each class will share expenses proportionately for services
that are received equally by all shareholders. A particular class of shares
will bear only those expenses that are directly attributable to that class,
where the type or amount of services received by a class varies from one class
to another. For example, class-specific expenses generally will include
distribution and service fees.

The minimum initial investment is $3,000 per fund share class, and may be
lower for accounts opened through fee-based programs for which the program
sponsor has established a single master account with the fund's transfer agent
and performs all sub-accounting services related to that account.

Reduction or Elimination of Up-Front Sales Charge on Class A Shares and Class R
Share Purchase Eligibility

Rights of Accumulation. You may qualify for a reduced sales charge on a
purchase of Class A Shares of any Fund if the amount of your purchase, when
added to the value that day of all of your prior purchases of shares of any
Fund or of another Nuveen Mutual Fund, or Nuveen exchange-traded fund, or units
of a Nuveen unit trust, on which an up-front sales charge or ongoing
distribution fee is imposed, or is normally imposed, falls within the amounts
stated in the Class A Sales Charges and Commissions table in "How to Select a
Purchase Option" in the Prospectus. You or your financial adviser must notify
Nuveen or the Fund's transfer agent of any cumulative discount whenever you
plan to purchase Class A Shares of a Fund that you wish to qualify for a
reduced sales charge.

Letter of Intent. You may qualify for a reduced sales charge on a purchase of
Class A Shares of any Fund if you plan to purchase Class A Shares of Nuveen
Mutual Funds over the next 13 months and the total amount of your purchases
would, if purchased at one time, qualify you for one of the reduced sales
charges shown in the Class A Sales Charges and Commissions table in "How to
Select a Purchase Option" in the Prospectus. In order to take advantage of this
option, you must complete the applicable section of the Application Form or
sign and deliver either to an Authorized Dealer or to the Fund's transfer agent
a written Letter of Intent in a form acceptable to Nuveen. A Letter of Intent
states that you intend, but are not obligated, to purchase over the next 13
months a stated total amount of Class A Shares that would qualify you for a
reduced sales charge shown above. You may count shares of a Nuveen Mutual Fund
that you already own on which you paid an up-front sales charge or an ongoing
distribution fee and any Class B or C Shares of a Nuveen Mutual Fund that you
purchase over the next 13 months towards completion of your investment program,
but you will receive a reduced sales charge only on new Class A Shares you
purchase with a sales charge over the 13 months. You cannot count towards
completion of your investment program Class A Shares that you purchase without
a sales charge through investment of distributions from a Nuveen Mutual Fund or
a Nuveen Unit Trust or otherwise.

S-78
<PAGE>

By establishing a Letter of Intent, you agree that your first purchase of
Class A Shares of a Fund following execution of the Letter of Intent will be at
least 5% of the total amount of your intended purchases. You further agree that
shares representing 5% of the total amount of your intended purchases will be
held in escrow pending completion of these purchases. All dividends and capital
gains distributions on Class A Shares held in escrow will be credited to your
account. If total purchases, less redemptions, prior to the expiration of the
13 month period equal or exceed the amount specified in your Letter of Intent,
the Class A Shares held in escrow will be transferred to your account. If the
total purchases, less redemptions, exceed the amount specified in your Letter
of Intent and thereby qualify for a lower sales charge than the sales charge
specified in your Letter of Intent, you will receive this lower sales charge
retroactively, and the difference between it and the higher sales charge paid
will be used to purchase additional Class A Shares on your behalf. If the total
purchases, less redemptions, are less than the amount specified, you must pay
Nuveen an amount equal to the difference between the amounts paid for these
purchases and the amounts which would have been paid if the higher sales charge
had been applied. If you do not pay the additional amount within 20 days after
written request by Nuveen or your financial adviser, Nuveen will redeem an
appropriate number of your escrowed Class A Shares to meet the required
payment. By establishing a Letter of Intent, you irrevocably appoint Nuveen as
attorney to give instructions to redeem any or all of your escrowed shares,
with full power of substitution in the premises.

You or your financial adviser must notify Nuveen or the Fund's transfer agent
whenever you make a purchase of Fund shares that you wish to be covered under
the Letter of Intent option.

Reinvestment of Nuveen Unit Trust Distributions. You may purchase Class A
Shares without an up-front sales charge by reinvestment of distributions from
any of the various unit trusts sponsored by Nuveen. There is no initial or
subsequent minimum investment requirement for such reinvestment purchases.

Group Purchase Programs. If you are a member of a qualified group, you may
purchase Class A Shares of any Fund or of another Nuveen Mutual Fund at the
reduced sales charge applicable to the group's purchases taken as a whole. A
"qualified group" is one which has previously been in existence, has a purpose
other than investment, has ten or more participating members, has agreed to
include Fund sales publications in mailings to members and has agreed to comply
with certain administrative requirements relating to its group purchases.

Under any group purchase program, the minimum initial investment in Class A
Shares of any particular Fund or portfolio for each participant is $3,000 and,
the minimum monthly investment in Class A Shares of any particular Fund or
portfolio by each participant in the program is $50. No certificates will be
issued for any participant's account. All dividends and other distributions by
a Fund will be reinvested in additional Class A Shares of the same Fund. No
participant may utilize a systematic withdrawal program.

To establish a group purchase program, both the group itself and each
participant must fill out special application materials, which the group
administrator may obtain from the group's financial adviser, by calling Nuveen
toll-free (800) 257-8787.

Reinvestment of Redemption Proceeds from Unaffiliated Funds. You may also
purchase Class A Shares at net asset value without a sales charge if the
purchase takes place through a broker-dealer and represents the reinvestment of
the proceeds of the redemption of shares of one or more registered investment
companies not affiliated with Nuveen. You must provide appropriate
documentation that the redemption occurred not more than one year prior to the
reinvestment of the proceeds in Class A Shares, and that you either paid an up-
front sales charge or were subject to a contingent deferred sales charge in
respect of the redemption of such shares of such other investment company.

S-79
<PAGE>

Special Sales Charge Waivers. Class A Shares of a Fund may be purchased at
net asset value without a sales charge, and may be purchased, by the following
categories of investors:

. investors purchasing $1,000,000 or more;

. officers, trustees and former trustees of the Nuveen and Flagship Funds;

. bona fide, full-time and retired employees and directors of Nuveen, any
parent company of Nuveen, and subsidiaries thereof, or their immediate
family members;

. any person who, for at least 90 days, has been an officer, director or
bona fide employee of any Authorized Dealer, or their immediate family
members;

. officers and directors of bank holding companies that make Fund shares
available directly or through subsidiaries or bank affiliates or their
immediate family members;

. bank or broker-affiliated trust departments investing funds over which
they exercise exclusive discretionary investment authority and that are
held in a fiduciary, agency, advisory, custodial or similar capacity;

. investors purchasing on a periodic fee, asset-based fee or no transaction
fee basis through a broker-dealer sponsored mutual fund purchase program;

. clients of investment advisers, financial planners or other financial
intermediaries that charge periodic or asset-based fees for their
services.

. any eligible employer-sponsored qualified defined contribution retirement
plan. Eligible plans are those with at least 25 employees and which
either (a) make an initial purchase of one or more Nuveen mutual funds
aggregating $500,000 or more; or (b) execute a Letter of Intent to
purchase in the aggregate $500,000 or more of fund shares. Nuveen will
pay Authorized Dealers a sales commission on such purchases equal to 1%
of the first $2.5 million, plus 0.50% of the next $2.5 million, plus 2.5%
of any amount purchased over $5.0 million. For this category of investors
a contingent deferred sales charge of 1% will be assessed on redemptions
within 18 months of purchase, unless waived. Municipal bond funds are not
a suitable investment for individuals investing in retirement plans.

Holders of Class C Shares acquired on or before January 31, 1997 can convert
those shares to Class A Shares of the same fund at the shareholder's
affirmative request six years after the date of purchase. Holders of Class C
Shares must submit their request to the transfer agent no later than the last
business day of the 71st month following the month in which they purchased
their shares. Holders of Class C Shares purchased after that date will not have
the option to convert those shares to Class A Shares.

Any Class A Shares purchased pursuant to a special sales charge waiver must
be acquired for investment purposes and on the condition that they will not be
transferred or resold except through redemption by the Funds. You or your
financial adviser must notify Nuveen or the Fund's transfer agent whenever you
make a purchase of Class A Shares of any Fund that you wish to be covered under
these special sales charge waivers.

Class A Shares of any Fund may be issued at net asset value without a sales
charge in connection with the acquisition by a Fund of another investment
company. All purchases under the special sales charge waivers will be subject
to minimum purchase requirements as established by the Funds.

In determining the amount of your purchases of Class A Shares of any Fund
that may qualify for a reduced sales charge, the following purchases may be
combined: (1) all purchases by a trustee or other fiduciary for a single trust,
estate or fiduciary account; (2) all purchases by individuals and their
immediate family members

S-80
<PAGE>

(i.e., their spouses, parents, children, grandparents, grandchildren, parents-
in-law, sons- and daughters-in-law, siblings, a sibling's spouse, and a
spouse's siblings); or (3) all purchases made through a group purchase program
as described above.

Class R Share Purchase Eligibility. Class R Shares are available for
purchases of $2.5 million or more and for purchases using dividends and capital
gains distributions on Class R Shares. Class R Shares also are available for
the following categories of investors:

. officers, trustees and former trustees of the Nuveen and Flagship Funds
and their immediate family members or trustees/directors of any fund
sponsored by Nuveen, any parent company of Nuveen and subsidiaries
thereof and their immediate family members;

. bona fide, full-time and retired employees and directors of Nuveen, any
parent company of Nuveen, and subsidiaries thereof, or their immediate
family members;

. any person who, for at least 90 days, has been an officer, director or
bona fide employee of any Authorized Dealer, or their immediate family
members;

. officers and directors of bank holding companies that make Fund shares
available directly or through subsidiaries or bank affiliates, or their
immediate family members;

. investors purchasing on a periodic fee, asset-based fee or no transaction
fee basis through a broker-dealer sponsored mutual fund purchase program;

. clients of investment advisers, financial planners or other financial
intermediaries that charge periodic or asset-based fees for their
services.

Any shares purchased by investors falling within any of the first four
categories listed above must be acquired for investment purposes and on the
condition that they will not be transferred or resold except through redemption
by the Fund.

In addition, purchasers of Nuveen unit investment trusts may reinvest their
distributions from such unit investment trusts in Class R Shares, if, before
September 6, 1994, such purchasers had elected to reinvest distributions in
Nuveen Fund shares (before June 13, 1995 for Nuveen Municipal Bond Fund
shares). Shareholders may exchange their Class R Shares of any Nuveen Fund into
Class R Shares of any other Nuveen Fund.

The reduced sales charge programs may be modified or discontinued by the
Funds at any time.

If you are eligible to purchase either Class R Shares or Class A Shares
without a sales charge at net asset value, you should be aware of the
differences between these two classes of shares. Class A Shares are subject to
an annual service fee to compensate Authorized Dealers for providing you with
ongoing account services. Class R Shares are not subject to a distribution or
service fee and, consequently, holders of Class R Shares may not receive the
sale types or levels of services from Authorized Dealers. In choosing between
Class A Shares and Class R Shares, you should weigh the benefits of the
services to be provided by Authorized Dealers against the annual service fee
imposed upon the Class A Shares.

For more information about the purchase of Class A Shares or reduced sales
charge programs, or to obtain the required application forms, call Nuveen toll-
free at (800) 257-8787.

S-81
<PAGE>

Reduction or Elimination of Contingent Deferred Sales Charge

Class A Shares are normally redeemed at net asset value, without any
Contingent Deferred Sales Charge ("CDSC"). However, in the case of Class A
Shares purchased at net asset value on or after July 1, 1996 because the
purchase amount exceeded $1 million, where the Authorized Dealer did not waive
the sales commission, a CDSC of 1% is imposed on any redemption within 18
months of purchase. In the case of Class B Shares redeemed within six years of
purchase, a CDSC is imposed, beginning at 5% for redemptions within the first
year, declining to 4% for redemptions within years two and three, and declining
by 1% each year thereafter until disappearing after the sixth year. Class C
Shares are redeemed at net asset value, without any CDSC, except that a CDSC of
1% is imposed upon redemption of Class C Shares that are redeemed within 12
months of purchase.

In determining whether a CDSC is payable, a Fund will first redeem shares not
subject to any charge, or that represent an increase in the value of a Fund
account due to capital appreciation, and then will redeem shares held for the
longest period, unless the shareholder specifies another order. No CDSC is
charged on shares purchased as a result of automatic reinvestment of dividends
or capital gains paid. In addition, no CDSC will be charged on exchanges of
shares into another Nuveen Mutual Fund or Nuveen money market fund. You may not
exchange Class B Shares for shares of a Nuveen money market fund. The holding
period is calculated on a monthly basis and begins the first day of the month
in which the order for investment is received. The CDSC is calculated based on
the lower of the redeemed shares' cost or net asset value at the time of the
redemption and is deducted from the redemption proceeds. Nuveen receives the
amount of any CDSC shareholders pay. If Class A or Class C Shares subject to a
CDSC are exchanged for shares of a Nuveen money market fund, the CDSC would be
imposed on the subsequent redemption of those money market shares, and the
period during which the shareholder holds the money market fund shares would be
counted in determining the remaining duration of the CDSC. The Fund may elect
not to so count the period during which the shareholder held the money market
fund shares, in which event the amount of any applicable CDSC would be reduced
in accordance with applicable SEC rules by the amount of any 12b-1 plan
payments to which those money market funds shares may be subject.

The CDSC may be waived or reduced under the following six special
circumstances: 1) redemptions within one year following the death or
disability, as defined in Section 72(m)(7) of the Internal Revenue Code of
1986, as amended, of a shareholder; 2) in whole or in part for redemptions of
shares by shareholders with accounts in excess of specified breakpoints that
correspond to the breakpoints under which the up-front sales charge on Class A
Shares is reduced pursuant to Rule 22d-1 under the Act; 3) redemptions of
shares purchased under circumstances or by a category of investors for which
Class A Shares could be purchased at net asset value without a sales charge; 4)
in connection with the exercise of a reinstatement privilege whereby the
proceeds of a redemption of a Fund's shares subject to a sales charge are
reinvested in shares of certain Funds within a specified number of days; 5) in
connection with the exercise of a Fund's right to redeem all shares in an
account that does not maintain a certain minimum balance or that the applicable
board has determined may have material adverse consequences to the shareholders
of such Fund; and 6) redemptions made pursuant to a Fund's systematic
withdrawal plan, up to 12% of the current market value. If a Fund waives or
reduces the CDSC, such waiver or reduction would be uniformly applied to all
Fund shares in the particular category. In waiving or reducing a CDSC, the
Funds will comply with the requirements of Rule 22d-1 of the Investment Company
Act of 1940, as amended.

General Matters

The Funds may encourage registered representatives and their firms to help
apportion their assets among bonds, stocks and cash, and may seek to
participate in programs that recommend a portion of their assets be invested in
tax-free, fixed income securities.

S-82
<PAGE>

In addition to the types of compensation to dealers to promote sales of fund
shares that are described in the Fund's Prospectus, Nuveen may from time to
time make additional reallowances only to certain authorized dealers who sell
or are expected to sell certain minimum amounts of shares of the Nuveen Mutual
Funds and Nuveen Defined Portfolios during specified time periods. Promotional
support may include providing sales literature to and holding informational or
educational programs for the benefit of such Authorized Dealers'
representatives, seminars for the public, and advertising and sales campaigns.
Nuveen may reimburse a participating Authorized Dealer for up to one-half of
specified media costs incurred in the placement of advertisements which jointly
feature the Authorized Dealer and Nuveen Funds and Nuveen Defined Portfolios.

Such reimbursement will be based on the number of its financial advisers who
have sold Nuveen Fund shares and Nuveen Defined Portfolios units during the
prior calendar year according to an established schedule. Any such support or
reimbursement would be provided by Nuveen out of its own assets, and not out of
the assets of the Funds, and will not change the price an investor pays for
shares or the amount that a Fund will receive from such a sale.

To help advisers and investors better understand and most efficiently use the
Funds to reach their investment goals, the Funds may advertise and create
specific investment programs and systems. For example, this may include
information on how to use the Funds to accumulate assets for future education
needs or periodic payments such as insurance premiums. The Funds may produce
software or additional sales literature to promote the advantages of using the
Funds to meet these and other specific investor needs.

The Funds have authorized one or more brokers to accept on their behalf
purchase and redemption orders. Such brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Funds' behalf.
The Funds will be deemed to have received a purchase or redemption order when
an authorized broker or, if applicable, a broker's authorized designee accepts
the order. Customer orders received by such broker (or their designee) will be
priced at the Funds' net asset value next computed after they are accepted by
an authorized broker (or their designee). Orders accepted by an authorized
broker (or their designee) before the close of regular trading on the New York
Stock Exchange will receive that day's share price; orders accepted after the
close of trading will receive the next business day's share price.

Exchanges of shares of a Fund for shares of a Nuveen money market fund may be
made on days when both funds calculate a net asset value and make shares
available for public purchase. Shares of the Nuveen money market funds may be
purchased on days on which the Federal Reserve Bank of Boston is normally open
for business. In addition to the holidays observed by the Fund, the Nuveen
money market funds observe and will not make fund shares available for purchase
on the following holidays: Martin Luther King's Birthday, Columbus Day and
Veterans Day.

In addition, you may exchange Class R Shares of any Fund for Class A Shares
of the same Fund without a sales charge if the current net asset value of those
Class R Shares is at least $3,000 or you already own Class A Shares of that
Fund.

Each Fund may suspend the right of redemption, or delay payment to redeeming
shareholders for more than seven days, when the New York Stock Exchange is
closed (not including customary weekend and holiday closings); when trading in
the markets a Fund normally uses is restricted, or the SEC determines that an
emergency exists so that trading of a Fund's portfolio securities or
determination of a Fund's net asset value is not reasonably practical; or the
SEC by order permits the suspension of the right of redemption or the delay in
payment to redeeming shareholders for more than seven days.

Shares will be registered in the name of the investor or the investor's
financial adviser. A change in registration or transfer of shares held in the
name of a financial adviser may only be made by an order in good

S-83
<PAGE>

form from the financial adviser acting on the investor's behalf. Share
certificates will only be issued upon written request to the Funds' transfer
agent. No share certificates will be issued for fractional shares.

For more information on the procedure for purchasing shares of a Fund and on
the special purchase programs available thereunder, see "How to Buy Fund
Shares" in the Prospectus.

Nuveen serves as the principal underwriter of the shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution
agreement with the Nuveen Flagship Multistate Trust II, dated February 1, 1997
and last renewed on , 1998 ("Distribution Agreement"). Pursuant to the
Distribution Agreement, the Trust appointed Nuveen to be its agent for the
distribution of the Funds' shares on a continuous offering basis. Nuveen sells
shares to or through brokers, dealers, banks or other qualified financial
intermediaries (collectively referred to as "Dealers"), or others, in a manner
consistent with the then effective registration statement of the Trust.
Pursuant to the Distribution Agreement, Nuveen, at its own expense, finances
certain activities incident to the sale and distribution of the Funds' shares,
including printing and distributing of prospectuses and statements of
additional information to other than existing shareholders, the printing and
distributing of sales literature, advertising and payment of compensation and
giving of concessions to Dealers. Nuveen receives for its services the excess,
if any, of the sales price of the Funds' shares less the net asset value of
those shares, and reallows a majority or all of such amounts to the Dealers who
sold the shares; Nuveen may act as such a Dealer. Nuveen also receives
compensation pursuant to a distribution plan adopted by the Trust pursuant to
Rule 12b-1 and described herein under "Distribution and Service Plan." Nuveen
receives any CDSCs imposed on redemptions of Shares.

The following table sets forth the aggregate amount of underwriting
commissions with respect to the sale of Fund shares and the amount thereof
retained by Nuveen, (or Flagship Financial, Inc. which Nuveen acquired on
January 1, 1998) for each of the Funds for the last three fiscal years. All
figures are to the nearest thousand.

<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
February 28, 1999 February 28, 1998 February 28, 1997*
------------------------ ------------------------ ------------------------
Amount of Amount Amount of Amount of Amount of Amount
Underwriting Retained By Underwriting Retained By Underwriting Retained By
Commissions Nuveen Commssions Nuveen Commissions Nuveen
Fund ------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
New Jersey Fund......... 242 33 206 19
<CAPTION>
Year Ended Year Ended Year Ended
February 28, 1999 February 28, 1998 February 28, 1997
------------------------ ------------------------ ------------------------
Amount of Amount Amount of Amount of Amount of Amount
Underwriting Retained By Underwriting Retained By Underwriting Retained By
Commissions Nuveen Commssions Nuveen Commissions Nuveen
Fund ------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
New York Fund........... 367 60 244 24
New York Insured Fund... 308 48 394 49
California Fund......... 272 38 209 31
California Insured Fund. 310 45 338 52
Massachusetts Fund...... 103 13 99 9
Massachusetts Insured
Fund................... 56 7 79 11
<CAPTION>
Year Ended Year Ended Year Ended
February 28, 1999 February 28, 1998 February 28, 1997**
------------------------ ------------------------ ------------------------
Amount of Amount Amount of Amount of Amount of Amount
Underwriting Retained By Underwriting Retained By Underwriting Retained By
Commissions Nuveen Commssions Nuveen Commissions Nuveen
Fund ------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Connecticut Fund........ 504 61 127 18
</TABLE>
- --------
*For the thirteen month period ended February 28, 1997.
**For the nine month period ended February 28, 1997.

S-84
<PAGE>

DISTRIBUTION AND SERVICE PLAN

The Funds have adopted a plan (the "Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940, which provides that Class B Shares and Class C
Shares will be subject to an annual distribution fee, and that Class A Shares,
Class B Shares and Class C Shares will be subject to an annual service fee.
Class R Shares will not be subject to either distribution or service fees.

The distribution fee applicable to Class B and Class C Shares under each
Fund's Plan will be payable to reimburse Nuveen for services and expenses
incurred in connection with the distribution of Class B and Class C Shares,
respectively. These expenses include payments to Authorized Dealers, including
Nuveen, who are brokers of record with respect to the Class B and Class C
Shares, as well as, without limitation, expenses of printing and distributing
prospectuses to persons other than shareholders of the Fund, expenses of
preparing, printing and distributing advertising and sales literature and
reports to shareholders used in connection with the sale of Class B and Class C
Shares, certain other expenses associated with the distribution of Class B and
Class C Shares, and any distribution-related expenses that may be authorized
from time to time by the Board of Trustees.

The service fee applicable to Class A Shares, Class B Shares and Class C
Shares under each Fund's Plan will be payable to Authorized Dealers in
connection with the provision of ongoing account services to shareholders.
These services may include establishing and maintaining shareholder accounts,
answering shareholder inquiries and providing other personal services to
shareholders.

Each Fund may spend up to .20 of 1% per year of the average daily net assets
of Class A Shares as a service fee under the Plan applicable to Class A Shares.
Each Fund may spend up to .75 of 1% per year of the average daily net assets of
Class B Shares as a distribution fee and up to .20 of 1% per year of the
average daily net assets of Class B Shares as a service fee under the Plan
applicable to Class B Shares. Each Fund may spend up to .55 of 1% per year of
the average daily net assets of Class C Shares as a distribution fee and up to
..20 of 1% per year of the average daily net assets of Class C Shares as a
service fee under the Plan applicable to Class C Shares.

For the fiscal year ended February 28, 1999, 100% of service fees and
distribution fees were paid out as compensation to Authorized Dealers. Prior to
February 1, 1997, the service fee for the New York Municipal Bond Fund, the New
York Insured Municipal Bond Fund, the New Jersey Municipal Bond Fund, the
California Municipal Bond Fund, the California Insured Municipal Bond Fund, the
Massachusetts Municipal Bond Fund, and the Massachusetts Insured Municipal Bond
Fund was .25% for both Class A and Class C Shares and the distribution fee was
..75% for Class C Shares. Thereafter, the service fee for the Class A and Class
C Shares was .20% and the distribution fee for the Class C Shares was .55%. For
the period from June 1, 1996 to January 31, 1997, the service fee for the New
Jersey Intermediate Fund and the Connecticut Municipal Bond Fund Class C Shares
was .20% and the distribution fee was .20% for the Class A Shares and .75% for
the Class C Shares; thereafter, the fees were the same as the aforementioned
Funds.

S-85
<PAGE>

<TABLE>
<CAPTION>
Compensation Paid to
Authorized Dealers for
end of Fiscal 1999
----------------------
<S> <C>
New York Municipal Bond Fund
Class A................................................ $146,006
Class B................................................ $ 18,117
Class C................................................ $ 37,940
New York Insured Municipal Bond Fund
Class A................................................ $ 79,903
Class B................................................ $ 27,910
Class C................................................ $ 16,700
New Jersey Municipal Bond Fund
Class A................................................ $ 62,042
Class B................................................ $ 13,006
Class C................................................ $ 32,738
California Municipal Bond Fund
Class A................................................ $ 48,663
Class B................................................ $ 9,832
Class C................................................ $ 12,835
California Insured Municipal Bond Fund
Class A................................................ $ 64,074
Class B................................................ $ 10,854
Class C................................................ $ 17,984
Connecticut Municipal Bond Fund
Class A................................................ $420,815
Class B................................................ $ 13,123
Class C................................................ $ 67,747
Massachusetts Municipal Bond Fund
Class A................................................ $ 16,106
Class B................................................ $ 2,710
Class C................................................ $ 10,459
Massachusetts Insured Municipal Bond Fund
Class A................................................ $ 15,789
Class B................................................ $ 1,965
Class C................................................ $ 7,520
</TABLE>

Under each Fund's Plan, the Fund will report quarterly to the Board of
Trustees for its review all amounts expended per class of shares under the
Plan. The Plan may be terminated at any time with respect to any class of
shares, without the payment of any penalty, by a vote of a majority of the
trustees who are not "interested persons" and who have no direct or indirect
financial interest in the Plan or by vote of a majority of the outstanding
voting securities of such class. The Plan may be renewed from year to year if
approved by a vote of the Board of Trustees and a vote of the non-interested
trustees who have no direct or indirect financial interest in the Plan cast in
person at a meeting called for the purpose of voting on the Plan. The Plan may
be continued only if the trustees who vote to approve such continuance
conclude, in the exercise of reasonable business judgment and in light of their
fiduciary duties under applicable law, that there is a reasonable likelihood
that the Plan will benefit the Fund and its shareholders. The Plan may not be
amended to increase materially the cost

S-86
<PAGE>

which a class of shares may bear under the Plan without the approval of the
shareholders of the affected class, and any other material amendments of the
Plan must be approved by the non-interested trustees by a vote cast in person
at a meeting called for the purpose of considering such amendments. During the
continuance of the Plan, the selection and nomination of the non-interested
trustees of the Trust will be committed to the discretion of the non-interested
trustees then in office.

INDEPENDENT PUBLIC ACCOUNTANTS AND CUSTODIAN

Arthur Andersen LLP, independent public accountants, 33 West Monroe Street,
Chicago Illinois 60603 has been selected as auditors for all of the Funds. In
addition to audit services, the auditors will provide consultation and
assistance on accounting, internal control, tax and related matters. The
financial statements incorporated by reference elsewhere in this Statement of
Additional Information and the information for prior periods set forth under
"Financial Highlights" in the Prospectus have been audited by the auditors as
indicated in their reports with respect thereto, and are included in reliance
upon the authority of that firm in giving that report.

The custodian of the Funds' assets is The Chase Manhattan Bank, 4 New York
Plaza, New York 10004. The custodian performs custodial, fund accounting,
portfolio accounting, shareholder, and transfer agency services.

FINANCIAL STATEMENTS

The audited financial statements for each Fund's most recent fiscal year
appear in the Fund's Annual Reports; each is included herein by reference. The
Annual Reports accompany this Statement of Additional Information.

S-87
<PAGE>

APPENDIX A

Ratings of Investments

The four highest ratings of Moody's for Municipal Obligations are Aaa, Aa, A
and Baa. Municipal Obligations rated Aaa are judged to be of the "best
quality." The rating of Aa is assigned to Municipal Obligations which are of
"high quality by all standards," but as to which margins of protection or other
elements make long-term risks appear somewhat greater than in Aaa rated
Municipal Obligations. The Aaa and Aa rated Municipal Obligations comprise what
are generally known as "high grade bonds." Municipal Obligations that are rated
A by Moody's possess many favorable investment attributes and are considered
upper medium grade obligations. Factors giving security to principal and
interest of A rated Municipal Obligations are considered adequate, but elements
may be present, which suggest a susceptibility to impairment sometime in the
future. Municipal Obligations rated Baa by Moody's are considered medium grade
obligations (i.e., they are neither highly protected nor poorly secured). Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Moody's bond rating symbols may contain numerical
modifiers of a generic rating classification. The modifier 1 indicates that the
bond ranks at the high end of its category; the modifier 2 indicates a mid-
range ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its general rating category.

The four highest ratings of S&P for Municipal Obligations are AAA, AA, A and
BBB. Municipal Obligations rated AAA have a strong capacity to pay principal
and interest. The rating of AA indicates that capacity to pay principal and
interest is very strong and such bonds differ from AAA issues only in small
degree. The category of A describes bonds which have a strong capacity to pay
principal and interest, although such bonds are somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions. The
BBB rating is the lowest "investment grade" security rating by S&P. Municipal
Obligations rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas such bonds normally exhibit adequate protection
parameters, adverse economic conditions are more likely to lead to a weakened
capacity to pay principal and interest for bonds in this category than for
bonds in the A category.

The four highest ratings of Fitch for Municipal Obligations are AAA, AA, A
and BBB. Municipal Obligations rated AAA are 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. Municipal Obligations rated AA are considered
to be investment grade and of very high quality. The obligor's ability to pay
interest and repay principal is very strong, although not quite as strong as
bonds rated "AAA." Because Municipal Obligations 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+." Municipal
Obligations rated A are 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. Municipal
Obligations rated BBB are 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 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.

The "Other Corporate Obligations" category of temporary investments are
corporate (as opposed to municipal) debt obligations rated AAA by S&P or Aaa by
Moody's. Corporate debt obligations rated AAA by S&P have an extremely strong
capacity to pay principal and interest. The Moody's corporate debt rating of
Aaa is comparable to that set forth above for Municipal Obligations.

A-1
<PAGE>

Subsequent to its purchase by a Fund, an issue may cease to be rated or its
rating may be reduced below the minimum required for purchase by such Fund.
Neither event requires the elimination of such obligation from a Fund's
portfolio, but Nuveen Advisory will consider such an event in its determination
of whether the Fund should continue to hold such obligation.

A-2
<PAGE>

APPENDIX B

DESCRIPTION OF HEDGING TECHNIQUES

Set forth below is additional information regarding the various Fund's
defensive hedging techniques and use of repurchase agreements.

Futures and Index Transactions

Financial Futures. A financial future is an agreement between two parties to
buy and sell a security for a set price on a future date. They have been
designed by boards of trade which have been designated "contracts markets" by
the Commodity Futures Trading Commission ("CFTC").

The purchase of financial futures is for the purpose of hedging a Fund's
existing or anticipated holdings of long-term debt securities. When a Fund
purchases a financial future, it deposits in cash or securities an "initial
margin" of between 1% and 5% of the contract amount. Thereafter, the Fund's
account is either credited or debited on a daily basis in correlation with the
fluctuation in price of the underlying future or other requirements imposed by
the exchange in order to maintain an orderly market. The Fund must make
additional payments to cover debits to its account and has the right to
withdraw credits in excess of the liquidity, the Fund may close out its
position at any time prior to expiration of the financial future by taking an
opposite position. At closing a final determination of debits and credits is
made, additional cash is paid by or to the Fund to settle the final
determination and the Fund realizes a loss or gain depending on whether on a
net basis it made or received such payments.

The sale of financial futures is for the purpose of hedging a Fund's existing
or anticipated holdings of long-term debt securities. For example, if a Fund
owns long-term bonds and interest rates were expected to increase, it might
sell financial futures. If interest rates did increase, the value of long-term
bonds in the Fund's portfolio would decline, but the value of the Fund's
financial futures would be expected to increase at approximately the same rate
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have.

Among the risks associated with the use of financial futures by the Funds as
a hedging device, perhaps the most significant is the imperfect correlation
between movements in the price of the financial futures and movements in the
price of the debt securities which are the subject of the hedge.

Thus, if the price of the financial future moves less or more than the price
of the securities which are the subject of the hedge, the hedge will not be
fully effective. To compensate for this imperfect correlation, the Fund may
enter into financial futures in a greater dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the prices of
such securities has been greater than the historical volatility of the
financial futures. Conversely, the Fund may enter into fewer financial futures
if the historical volatility of the price of the securities being hedged is
less than the historical volatility of the financial futures.

The market prices of financial futures may also be affected by factors other
than interest rates. One of these factors is the possibility that rapid changes
in the volume of closing transactions, whether due to volatile markets or
movements by speculators, would temporarily distort the normal relationship
between the markets in the financial future and the chosen debt securities. In
these circumstances as well as in periods of rapid and large price movements.
The Fund might find it difficult or impossible to close out a particular
transaction.

B-1
<PAGE>

Options on Financial Futures. The Funds may also purchase put or call options
on financial futures which are traded on a U.S. Exchange or board of trade and
enter into closing transactions with respect to such options to terminate an
existing position. Currently, options can be purchased with respect to
financial futures on U.S. Treasury Bonds on The Chicago Board of Trade. The
purchase of put options on financial futures is analogous to the purchase of
put options by a Fund on its portfolio securities to hedge against the risk of
rising interest rates. As with options on debt securities, the holder of an
option may terminate his position by selling an option of the same Fund. There
is no guarantee that such closing transactions can be effected.

Index Contracts

Index Futures. A tax-exempt bond index which assigns relative values to the
tax-exempt bonds included in the index is traded on the Chicago Board of Trade.
The index fluctuates with changes in the market values of all tax-exempt bonds
included rather than a single bond. An index future is a bilateral agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash--rather than any security--equal to specified dollar amount times the
difference between the index value at the close of the last trading day of the
contract and the price at which the index future was originally written. Thus,
an index future is similar to traditional financial futures except that
settlement is made in cash.

Index Options. The Funds may also purchase put or call options on U.S.
Government or tax-exempt bond index futures and enter into closing transactions
with respect to such options to terminate an existing position. Options on
index futures are similar to options on debt instruments except that an option
on an index future gives the purchaser the right, in return for the premium
paid, to assume a position in an index contract rather than an underlying
security at a specified exercise price at any time during the period of the
option. Upon exercise of the option, the delivery of the futures position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance of the writer's futures margin account
which represents the amount by which the market price of the index futures
contract, at exercise, is less than the exercise price of the option on the
index future.

Bond index futures and options transactions would be subject to risks similar
to transactions in financial futures and options thereon as described above. No
series will enter into transactions in index or financial futures or related
options unless and until, in the Adviser's opinion, the market for such
instruments has developed sufficiently.

Repurchase Agreements

A Fund may invest temporarily up to 5% of its assets in repurchase
agreements, which are agreements pursuant to which securities are acquired by
the Fund from a third party with the understanding that they will be
repurchased by the seller at a fixed price on an agreed date. These agreements
may be made with respect to any of the portfolio securities in which the Fund
is authorized to invest. Repurchase agreements may be characterized as loans
secured by the underlying securities. The Fund may enter into repurchase
agreements with (i) member banks of the Federal Reserve System having total
assets in excess of $500 million and (ii) securities dealers, provided that
such banks or dealers meet the creditworthiness standards established by the
Fund's board of trustees ("Qualified Institutions"). The Adviser will monitor
the continued creditworthiness of Qualified Institutions, subject to the
oversight of the Fund's board of trustees.

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

B-2
<PAGE>

bankruptcy or otherwise, the Fund 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, the Fund's ability to dispose of the underlying securities may be
restricted. Finally, it is possible that the Fund 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,
the Fund may suffer a loss to the extent proceeds from the sale of the
underlying securities are less than the repurchase price.

The resale price reflects the purchase price plus an agreed upon market rate
of interest which is unrelated to the coupon rate or date of maturity of the
purchased security. The collateral is marked to market daily. Such agreements
permit the Fund to keep all its assets earning interest while retaining
"overnight" flexibility in pursuit of investments of a longer-term nature.
VAI-MS2
B-3
<PAGE>

PART C--OTHER INFORMATION

Item 24: Financial Statements and Exhibits.
(a) Financial statements:

Included in the Prospectus:

Financial Highlights

Included in the Statement of Additional Information through incorporation
by reference to each Fund's most recent Annual and Semi-Annual Reports:

Portfolio of Investments

Statement of Net Assets

Statement of Operations

Statement of Changes in Net Assets

Report of Independent Public Accountants

(b) Exhibits:

<TABLE>
<C> <S>
1(a). Declaration of Trust of Registrant. Filed as Exhibit 1(a) to Regis-
trant's Registration Statement on Form N-1A (File No. 333-14729) and
incorporated herein by reference thereto.
1(b). Amended and Restated Establishment and Designation of Series of
Shares of Beneficial Interest dated October 11, 1996. Filed as Ex-
hibit 1(b) to Registrant's Registration Statement on Form N-1A (File
No. 333-14729) and incorporated herein by reference thereto.
1(c). Certificate for the Establishment and Designation of Classes dated
July 10, 1996. Filed as Exhibit 1(c) to Registrant's Registration
Statement on Form N-1A (File No. 333-14729) and incorporated herein
by reference thereto.
1(d). Incumbency Certificate.
2. By-Laws of Registrant. Filed as Exhibit 2 to Registrant's Registra-
tion Statement on Form N-1A (File No. 333-14729) and incorporated
herein by reference thereto.
3. Not applicable.
4. Specimen certificates of Shares of each Fund. Filed as Exhibit 4 to
Registrant's Registration Statement on Form N-1A (File No. 333-14729)
and incorporated herein by reference thereto.
5. Investment Management Agreement between Registrant and Nuveen Advi-
sory Corp. Filed as Exhibit 5 to Registrant's Registration Statement
on Form N-1A (File No. 333-14729) and incorporated herein by refer-
ence thereto.
5(a). Renewal of Investment Management Agreement dated May 5, 1998.
6. Distribution Agreement between Registrant and John Nuveen & Co. In-
corporated. Filed as Exhibit 6 to Registrant's Registration Statement
on Form N-1A (File No. 333-14729) and incorporated herein by refer-
ence thereto.
6(a). Renewal of Distribution Agreement dated July 31, 1997.
7. Not applicable.
8. Custodian Agreement between Registrant and Chase Manhattan Bank.
Filed as Exhibit 8 to Post-Effective Amendment No.1 to Registrant's
Registration Statement on Form N-1A (file No.333-14729) and incorpo-
rated herein by reference thereto.
9(a). Transfer Agency Agreement between Registrant and Shareholder Servic-
es, Inc.
9(b). Transfer Agency Agreement between Registrant and Boston Financial
Data Services.
10. Opinion of Morgan, Lewis & Bockius LLP.
11. Consent of Arthur Andersen LLP, Independent Public Accountants.
12. Not applicable.
13. Not applicable.
14. Not applicable.
15. Plan of Distribution and Service Pursuant to Rule 12b-1 for the Class
A Shares, Class B Shares and Class C Shares of each Fund. Filed as
Exhibit 15 to Registrant's Registration Statement on Form N-1A (File
No. 333-14729) and incorporated herein by reference thereto.
16. Schedule of Computation of Performance Figures.
17. Financial Data Schedule.
18. Multi-Class Plan Adopted Pursuant to Rule 18f-3. Filed as Exhibit 18
to Registrant's Registration Statement on Form N-1A (File No. 333-
14729) and incorporated herein by reference thereto.
99(a). Original Power of Attorney for Judith M. Stockdale authorizing, among
others, Gifford R. Zimmerman and Larry W. Martin to execute the Reg-
istration Statement on her behalf as one of the Registrant's Direc-
tors. Original Powers of Attorney for all of Registrant's other Di-
rectors authorizing, among others, Gifford R. Zimmerman and Larry W.
Martin to execute the Registration Statement were filed as Exhibit
99(a) to Registrant's Registration Statement on Form N-1A (File No.
333-14729) and is incorporated herein by reference thereto.
99(b). Certified copy of Resolution of Board of Trustees authorizing the
signing of the names of trustees and officers on the Registrant's
Registration Statement pursuant to power of attorney.
99(c). Code of Ethics and Reporting Requirements. Filed as Exhibit 99(c) to
Post-Effective Amendment No.1 to Registrant's Registration Statement
on Form N-1A (File No. 333-14729) and incorporated herein by refer-
ence thereto.
</TABLE>

C-1
<PAGE>

Item 25: Persons Controlled by or under Common Control with Registrant
Not applicable.

Item 26: Number of Holders of Securities
As of May 26, 1998:

<TABLE>
<CAPTION>
Number of
Title of Series Record Holders
--------------- --------------
Nuveen Flagship New York Municipal Bond Fund
<S> <C>
Class A Shares......................................... 1,756
Class B Shares......................................... 85
Class C Shares......................................... 105
Class R Shares......................................... 4,442
Nuveen New York Insured Municipal Bond Fund
Class A Shares......................................... 1,675
Class B Shares......................................... 92
Class C Shares......................................... 69
Class R Shares......................................... 7,995
Nuveen Flagship New Jersey Municipal Bond Fund
Class A Shares......................................... 1,338
Class B Shares......................................... 74
Class C Shares......................................... 169
Class R Shares......................................... 1,751
Nuveen Flagship New Jersey Intermediate Municipal Bond
Fund
Class A Shares......................................... 181
Class C Shares......................................... 18
Class R Shares......................................... 11
Nuveen California Municipal Bond Fund
Class A Shares......................................... 957
Class B Shares......................................... 54
Class C Shares......................................... 82
Class R Shares......................................... 4,507
Nuveen California Insured Municipal Bond Fund
Class A Shares......................................... 1,074
Class B Shares......................................... 58
Class C Shares......................................... 116
Class R Shares......................................... 3,950
Nuveen Flagship Connecticut Municipal Bond Fund
Class A Shares......................................... 4,483
Class B Shares......................................... 99
Class C Shares......................................... 260
Class R Shares......................................... 24
Nuveen Massachusetts Municipal Bond Fund
Class A Shares......................................... 584
Class B Shares......................................... 31
Class C Shares......................................... 50
Class R Shares......................................... 2,264
Nuveen Massachusetts Insured Municipal Bond Fund
Class A Shares......................................... 439
Class B Shares......................................... 12
Class C Shares......................................... 33
Class R Shares......................................... 1,708
</TABLE>

C-2
<PAGE>

Item 27: Indemnification
Section 4 of Article XII of Registrant's Amended and Restated Declaration of
Trust provides as follows:

Subject to the exceptions and limitations contained in this Section 4, every
person who is, or has been, a Trustee, officer, employee or agent of the Trust,
including persons who serve at the request of the Trust as directors, trustees,
officers, employees or agents of another organization in which the Trust has an
interest as a shareholder, creditor or otherwise (hereinafter referred to as a
"Covered Person"), shall be indemnified by the Trust to the fullest extent
permitted by law against liability and against all expenses reasonably incurred
or paid by him in connection with any claim, action, suit or proceeding in
which he becomes involved as a party or otherwise by virtue of his being or
having been such a Trustee, director, officer, employee or agent and against
amounts paid or incurred by him in settlement thereof.

No indemnification shall be provided hereunder to a Covered Person:

(a) against any liability to the Trust or its Shareholders by reason of a
final adjudication by the court or other body before which the proceeding
was brought that he engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of
his office;

(b) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that
his action was in the best interests of the Trust; or

(c) in the event of a settlement or other disposition not involving a final
adjudication (as provided in paragraph (a) or (b)) and resulting in a
payment by a Covered Person, unless there has been either a determination
that such Covered Person did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office by the court or other body approving the settlement
or other disposition or a reasonable determination, based on a review of
readily available facts (as opposed to a full trial-type inquiry), that he
did not engage in such conduct:

(i) by a vote of a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees then in
office act on the matter); or

(ii) by written opinion of independent legal counsel.

The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any
other rights to which any Covered Person may now or hereafter be entitled,
shall continue as to a person who has ceased to be such a Covered Person and
shall inure to the benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to indemnification to
which Trust personnel other than Covered Persons may be entitled by contract or
otherwise under law.

Expenses of preparation and presentation of a defense to any claim, action,
suit or proceeding subject to a claim for indemnification under this Section 4
shall be advanced by the Trust prior to final disposition thereof upon receipt
of an undertaking by or on behalf of the recipient to repay such amount if it
is ultimately determined that he is not entitled to indemnification under this
Section 4, provided that either:

(a) such undertaking is secured by a surety bond or some other appropriate
security or the Trust shall be insured against losses arising out of any
such advances; or

(b) a majority of the Disinterested Trustees acting on the matter (provided
that a majority of the Disinterested Trustees then in office act on the
matter) or independent legal counsel in a written opinion shall determine,
based upon a review of the readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.

As used in this Section 4, a "Disinterested Trustee" is one (x) who is not an
Interested Person of the Trust (including, as such Disinterested Trustee,
anyone who has been exempted from being an Interested Person by any rule,
regulation or order of the Commission), and (y) against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending.

As used in this Section 4, the words "claim," "action," "suit" or "proceeding"
shall apply to all claims, actions, suits, proceedings (civil, criminal,
administrative or other, including appeals), actual or threatened; and the word
"liability" and "expenses" shall include without limitation, attorneys' fees,
costs, judgments, amounts paid in settlement, fines, penalties and other
liabilities.

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

The trustees and officers of the Registrant are covered by an Investment Trust
Errors and Omission policy in the aggregate amount of $20,000,000 (with a
maximum deductible of $500,000) against liability and expenses of claims of
wrongful acts arising out of their position with the Registrant, except for
matters which involved willful acts, bad faith,

C-3
<PAGE>

gross negligence and willful disregard of duty (i.e., where the insured did not
act in good faith for a purpose he or she reasonably believed to be in the best
interest of Registrant or where he or she shall have had reasonable cause to
believe this conduct was unlawful).

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

Item 28: Business and Other Connections of Investment Adviser
Nuveen Advisory Corp. serves as investment adviser to the following open-end
management type investment companies: Nuveen Flagship Multistate Trust I,
Nuveen Flagship Multistate Trust II, Nuveen Flagship Multistate Trust III,
Nuveen Flagship Multistate Trust IV, Nuveen Flagship Municipal Trust, Flagship
Admiral Funds Inc., Nuveen California Tax-Free Fund, Inc., Nuveen Tax-Free
Money Market Fund, Inc., Nuveen Tax-Exempt Money Market Fund, Inc., and Nuveen
Tax-Free Reserves, Inc. It also serves as investment adviser to the following
closed-end management type investment companies: Nuveen Municipal Value Fund,
Inc., Nuveen California Municipal Value Fund, Inc., Nuveen New York Municipal
Value Fund, Inc., Nuveen Municipal Income Fund, Inc., Nuveen Premium Income
Municipal Fund, Inc., Nuveen Performance Plus Municipal Fund, Inc., Nuveen
California Performance Plus Municipal Fund, Inc., Nuveen New York Performance
Plus Municipal Fund, Inc., Nuveen Municipal Advantage Fund, Inc., Nuveen
Municipal Market Opportunity Fund, Inc., Nuveen California Municipal Market
Opportunity Fund, Inc., Nuveen Investment Quality Municipal Fund, Inc., Nuveen
California Investment Quality Municipal Fund, Inc., Nuveen New York Investment
Quality Municipal Fund, Inc., Nuveen Insured Quality Municipal Fund, Inc.,
Nuveen Florida Investment Quality Municipal Fund, Nuveen New Jersey Investment
Quality Municipal Fund, Inc., Nuveen Pennsylvania Investment Quality Municipal
Fund, Nuveen Select Quality Municipal Fund, Inc., Nuveen California Select
Quality Municipal Fund, Inc., Nuveen New York Select Quality Municipal Fund,
Inc., Nuveen Quality Income Municipal Fund, Inc., Nuveen Insured Municipal
Opportunity Fund, Inc., Nuveen Florida Quality Income Municipal Fund, Nuveen
Michigan Quality Income Municipal Fund, Inc., Nuveen Ohio Quality Income
Municipal Fund, Inc., Nuveen Texas Quality Income Municipal Fund, Nuveen
California Quality Income Municipal Fund, Inc., Nuveen New York Quality Income
Municipal Fund, Inc., Nuveen Premier Municipal Income Fund, Inc., Nuveen
Premier Insured Municipal Income Fund, Inc. Nuveen Premium Income Municipal
Fund 2, Inc., Nuveen Insured California Premium Income Municipal Fund, Inc.,
Nuveen Insured New York Premium Income Municipal Fund, Inc., Nuveen Select
Maturities Municipal Fund, Nuveen Arizona Premium Income Municipal Fund, Inc.,
Nuveen Insured Florida Premium Income Municipal Fund, Nuveen Michigan Premium
Income Municipal Fund, Inc., Nuveen New Jersey Premium Income Municipal Fund,
Inc., Nuveen Premium Income Municipal Fund 4, Inc., Nuveen Insured California
Premium Income Municipal Fund 2, Inc., Nuveen Pennsylvania Premium Income
Municipal Fund 2, Nuveen Maryland Premium Income Municipal Fund, Nuveen
Massachusetts Premium Income Municipal Fund, Nuveen Virginia Premium Income
Municipal Fund, Nuveen Washington Premium Income Municipal Fund, Nuveen
Connecticut Premium Income Municipal Fund, Nuveen Georgia Premium Income
Municipal Fund, Nuveen Missouri Premium Income Municipal Fund, Nuveen North
Carolina Premium Income Municipal Fund, Nuveen California Premium Income
Municipal Fund, and Nuveen Insured Premium Income Municipal Fund 2. Nuveen
Advisory Corp. has no other clients or business at the present time. The
principal business address for all of these investment companies is 333 West
Wacker Drive, Chicago, Illinois 60606.

For a description of other business, profession, vocation or employment of a
substantial nature in which any director or officer, other than Timothy R.
Schwertfeger and Anthony T. Dean, of the investment adviser has engaged during
the last two years for his account or in the capacity of director, officer,
employee, partner or trustee, see the descriptions under "Management" in the
Statement of Additional Information.

Timothy R. Schwertfeger is Chairman and Director of Nuveen Advisory Corp., the
investment adviser. Mr. Schwertfeger has, during the last two years, been
Chairman and formerly Executive Vice President and Director of the John Nuveen
Company, John Nuveen & Co. Incorporated, and Nuveen Institutional Advisory
Corp.; Chairman and Director (since January 1997) of Nuveen Asset Management,
Inc.; Director (since 1996) of Institutional Capital Corporation. Anthony T.
Dean is President and Director of Nuveen Advisory Corp., the investment
adviser. Mr. Dean has, during the last two years, been Executive Vice President
and Director of The John Nuveen Company and John Nuveen & Co. Incorporated; and
Director of Nuveen Institutional Advisory Corp.; President and Director (since
January 1997) of Nuveen Asset Management, Inc.; Chairman and Director of
Rittenhouse Financial Services, Inc.

C-4
<PAGE>

Item 29: Principal Underwriters
(a) John Nuveen & Co., Incorporated ("Nuveen") acts as principal underwriter to
the following open-end management type investment companies:Nuveen Flagship
Multistate Trust I, Nuveen Flagship Multistate Trust II, Nuveen Flagship
Multistate Trust III, Nuveen Flagship Multistate Trust IV, Nuveen Flagship
Municipal Trust, Nuveen California Tax-Free Fund, Inc., Nuveen Tax-Free Money
Market Fund, Inc., Nuveen Tax-Exempt Money Market Fund Inc., Nuveen Tax-Free
Reserves, Inc., Flagship Admiral Funds Inc., Nuveen Investment Trust and Nuveen
Investment Trust II. Nuveen also acts as depositor and principal underwriter of
the Nuveen Tax-Exempt Unit Trust, and Nuveen Unit Trusts, registered unit
investment trusts. Nuveen has also served or is serving as co-managing
underwriter to the following closed-end management type investment companies:
Nuveen Municipal Value Fund, Inc., Nuveen California Municipal Value Fund,
Inc., Nuveen New York Municipal Value Fund, Inc., Nuveen Municipal Income Fund,
Inc., Nuveen Premium Income Municipal Fund, Inc., Nuveen Performance Plus
Municipal Fund, Inc., Nuveen California Performance Plus Municipal Fund, Inc.,
Nuveen New York Performance Plus Municipal Fund, Inc., Nuveen Municipal
Advantage Fund, Inc., Nuveen Municipal Market Opportunity Fund, Inc., Nuveen
California Municipal Market Opportunity Fund, Inc., Nuveen Investment Quality
Municipal Fund, Inc., Nuveen California Investment Quality Municipal Fund,
Inc., Nuveen New York Investment Quality Municipal Fund, Inc., Nuveen Insured
Quality Municipal Fund, Inc., Nuveen Florida Investment Quality Municipal Fund,
Nuveen New Jersey Investment Quality Municipal Fund, Inc., Nuveen Pennsylvania
Investment Quality Municipal Fund, Nuveen Select Quality Municipal Fund, Inc.,
Nuveen California Select Quality Municipal Fund, Inc., Nuveen New York Select
Quality Municipal Fund, Inc., Nuveen Quality Income Municipal Fund, Inc.,
Nuveen Insured Municipal Opportunity Fund, Inc., Nuveen Florida Quality Income
Municipal Fund, Nuveen Michigan Quality Income Municipal Fund, Inc., Nuveen
Ohio Quality Income Municipal Fund, Inc., Nuveen Texas Quality Income Municipal
Fund, Nuveen California Quality Income Municipal Fund, Inc., Nuveen New York
Quality Income Municipal Fund, Inc., Nuveen Premier Municipal Income Fund,
Inc., Nuveen Premier Insured Municipal Income Fund, Inc., Nuveen Premium Income
Municipal Fund 2, Inc., Nuveen Insured California Premium Income Municipal
Fund, Inc., Nuveen Insured New York Premium Income Municipal Fund, Inc., Nuveen
Select Maturities Municipal Fund, Nuveen Arizona Premium Income Municipal Fund,
Inc., Nuveen Insured Florida Premium Income Municipal Fund, Nuveen Michigan
Premium Income Municipal Fund, Inc., Nuveen New Jersey Premium Income Municipal
Fund, Inc., Nuveen Premium Income Municipal Fund 4, Inc., Nuveen Insured
California Premium Income Municipal Fund 2, Inc., Nuveen Pennsylvania Premium
Income Municipal Fund 2, Nuveen Maryland Premium Income Municipal Fund, Nuveen
Massachusetts Premium Income Municipal Fund, Nuveen Virginia Premium Income
Municipal Fund, Nuveen Washington Premium Income Municipal Fund, Nuveen
Connecticut Premium Income Municipal Fund, Nuveen Georgia Premium Income
Municipal Fund, Nuveen Missouri Premium Income Municipal Fund, Nuveen North
Carolina Premium Income Municipal Fund, Nuveen California Premium Income
Municipal Fund, Nuveen Insured Premium Income Municipal Fund 2, Nuveen Select
Tax-Free Income Portfolio, Nuveen Select Tax-Free Income Portfolio 2, Nuveen
Insured California Select Tax-Free Income Portfolio, Nuveen Insured New York
Select Tax-Free Income Portfolio and Nuveen Select Tax-Free Income Portfolio 3.

(b)

<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
- -----------------------------------------------------------------------------
<S> <C> <C>
Timothy R. Schwertfeger Chairman of the Board, Chairman of the Board
333 West Wacker Drive Chief Executive Officer and Director
Chicago, Illinois 60606 and Director
Anthony T. Dean President and Director President and Director
333 West Wacker Drive
Chicago, Illinois 60606
John P. Amboian Executive Vice President None
333 West Wacker Drive and Chief Financial Officer
Chicago, IL 60606
Bruce P. Bedford Executive Vice President Executive Vice President
333 West Wacker Drive
Chicago, IL 60606
William Adams IV Vice President None
333 West Wacker Drive
Chicago, Illinois 60606
Alan G. Berkshire Vice President Vice President and
333 West Wacker Drive and Secretary Assistant Secretary
Chicago, IL 60606
</TABLE>

C-5
<PAGE>

<TABLE>
<CAPTION>
Positions and
Name and Principal Positions and Offices Offices
Business Address with Underwriter with Registrant
- -------------------------------------------------------------------------------
<S> <C> <C>
Clifton L. Fenton Vice President None
333 West Wacker Drive
Chicago, IL 60606
Kathleen M. Flanagan Vice President Vice President
333 West Wacker Drive
Chicago, Illinois 60606
Stephen D. Foy Vice President Vice President and
333 West Wacker Drive Controller
Chicago, Illinois 60606
Michael G. Gaffney Vice President None
333 West Wacker Drive
Chicago, Illinois 60606
Anna R. Kucinskis Vice President Vice President
333 West Wacker Drive
Chicago, Illinois 60606
Robert B. Kuppenheimer Vice President None
333 West Wacker Drive
Chicago, Illinois 60606
Larry W. Martin Vice President and Vice President and
333 West Wacker Drive Assistant Secretary Assistant Secretary
Chicago, Illinois 60606
Thomas C. Muntz Vice President None
333 West Wacker Drive
Chicago, Illinois 60606
Stuart W. Rogers Vice President None
333 West Wacker Drive
Chicago, Illinois 60606
Bradford W. Shaw, Jr. Vice President None
333 West Wacker Drive Chicago, Illi-
nois 60606
H. William Stabenow Vice President Vice President and
333 West Wacker Drive and Treasurer Treasurer
Chicago, Illinois 60606
Paul C. Williams Vice President None
333 West Wacker Drive
Chicago, Illinois 60606
Gifford R. Zimmerman Vice President and Vice President and
333 West Wacker Drive Assistant Secretary Secretary
Chicago, Illinois 60606
</TABLE>

Item 30: Location of Accounts and Records
Nuveen Advisory Corp., 333 West Wacker Drive, Chicago, Illinois 60606,
maintains the Declaration of Trust, By-Laws, minutes of trustees and
shareholder meetings and contracts of the Registrant and all advisory material
of the investment adviser.

The Chase Manhattan Bank, 4 New York Plaza, New York, New York 10004 maintains
all general and subsidiary ledgers, journals, trial balances, records of all
portfolio purchases and sales, and all other required records not maintained by
Nuveen Advisory Corp., Shareholder Services, Inc., Boston Financial, or Chase
Global Funds Services Company.

C-6
<PAGE>

Until August 10, 1998, Shareholder Services, Inc., P.O. Box 5330, Denver,
Colorado 80217-5330 and Boston Financial Data Services, 225 Franklin Street,
Boston, Massachusetts 02106 will maintain all the required records in their
capacity as transfer, dividend paying, and shareholder service agents for the
Funds. After August 10, 1998, Chase Global Funds Services Company,
P.O. Box 5186, New York, New York 10274-5186, will maintain the same records in
the same capacity for the Funds.

Item 31: Management Services
Not applicable.

Item 32: Undertakings
(a) Not applicable.

(b) Not applicable.

(c) The Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest Annual Report to Sharehold-
ers upon request and without charge.

(d) The Registrant agrees to call a meeting of shareholders for the purpose of
voting upon the question of the removal of any trustee or trustees when re-
quested to do so in writing by the record holders of at least 10% of the Reg-
istrant's outstanding shares and to assist the shareholders in communications
with other shareholders as required by section 16(c) of the Act.

C-7
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that this Registration Statement
meets all the requirements for effectiveness under paragraph (a) of Rule 485
under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago, and State of Illinois, on the 29th day of
April, 1999.

NUVEEN FLAGSHIP MULTISTATE TRUST II

/s/ Gifford R. Zimmerman
-----------------------------------------
Gifford R. Zimmerman, Vice President

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <C> <S>
/s/ Stephen D. Foy
-------------------------------
Stephen D. Foy Vice President and April 29, 1999
Controller (Principal
Financial and
Accounting Officer)

Timothy R. Schwertfeger Chairman of the Board
and Trustee (Principal
Executive Officer)
Anthony T. Dean President and Trustee
Robert P. Bremner Trustee
Lawrence H. Brown Trustee
Anne E. Impellizzeri Trustee
Peter R. Sawers Trustee
William J. Schneider Trustee
</TABLE>
/s/ Gifford R. Zimmerman
By____________________________
Gifford R. Zimmerman
Attorney-in-Fact

April 29, 1999

An original power of attorney authorizing, among others, Gifford R. Zimmerman
and Larry W. Martin to execute this Registration Statement, and Amendments
thereto, for Judith M. Stockdale has been executed and is filed as an Exhibit
to this Registration Statement. An original power of attorney for each of the
other officers and directors of the Registrant has been executed and is
incorporated by reference in this Registration Statement.