PREMIER CALIFORNIA MUNICIPAL INCOME FUND, N-2/A, 1999-09-09

PREMIER CALIFORNIA MUNICIPAL INCOME FUND
N-2/A, 1999-09-09

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<PAGE> 1

AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 9, 1999

SECURITIES ACT FILE NO. 333-84993
INVESTMENT COMPANY ACT FILE NO. 811-09537

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-2

(Check appropriate box or boxes)

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]

Pre-Effective Amendment No. 1 [X]
-----------

Post-Effective Amendment No. [ ]
-----------

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]

Amendment No. 1 [X]
---------------

PREMIER CALIFORNIA MUNICIPAL INCOME FUND
(Exact Name of Registrant as Specified in Charter)

c/o ROPES & GRAY, ONE INTERNATIONAL PLACE, BOSTON, MA 02110
(Address of Principal Executive Offices)

(617) 951-7000
(Registrant's Telephone Number, including Area Code)

Name and Address of
Agent for Service

John M. Loder, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110-2624

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [ ]

It is proposed that this filing will become effective (check appropriate box):
[ ] when declared effective pursuant to Section 8(c)

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED (1) UNIT (1) PRICE (1) REGISTRATION FEE (2)
- ---------------------- -------------------- --------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Common Shares, 66,667 $15.00 $1,000,005 $278
No Par Value
Per Share
</TABLE>

(1) Estimated solely for purposes of calculating the registration fee.

(2) Previously paid.

The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 2
PREMIER CALIFORNIA MUNICIPAL INCOME FUND

CROSS REFERENCE SHEET
ITEMS REQUIRED BY FORM N-2
<TABLE>
<CAPTION>
PART A
ITEM NO. ITEM CAPTION PROSPECTUS CAPTION

<S> <C> <C>
1................. Outside Front Cover Front Cover Page
2................. Inside Front and Outside Back Cover Page Front and Back Cover Page
3................. Fee Table and Synopsis Prospectus Summary; Summary of Fund
Expenses
4................. Financial Highlights Not Applicable
5................. Plan of Distribution Front Cover Page; Prospectus Summary;
Underwriting
6................. Selling Shareholders Not Applicable
7................. Use of Proceeds Use of Proceeds; Investment Objective and
Policies
8................. General Description of the Registrant Prospectus Summary; The Fund; Investment
Objective and Policies; Use of
Leverage and Related Risks; Additional
Risk Considerations; How the Fund Manages
Risk; Management of the Fund; Description
of Shares; Certain Provisions in the
Declaration of Trust
9................. Management Management of the Fund; Custodian,
Transfer Agent, Dividend Disbursing Agent
and Registrar
10 ............... Capital Stock, Long-Term Debt, Net Asset Value; Distributions; Dividend
and Other Securities Reinvestment Plan; Description of
Shares; Repurchase of Common
Shares; Conversion to Open-End Fund;
Tax Matters
11 ............... Defaults and Arrears on Senior Securities Not Applicable
12 ............... Legal Proceedings Not Applicable
13 ............... Table of Contents of the Table of Contents for the
Statement of Additional Information Statement of Additional Information

PART B STATEMENT OF ADDITIONAL
ITEM NO. ITEM CAPTION INFORMATION CAPTION

14 ............... Cover Page Cover Page
15................ Table of Contents Table of Contents
16 ............... General Information and History Not Applicable
17 ............... Investment Objective and Policies Investment Objectives and Policies;
Miscellaneous Investment Practices
18 ............... Management Management of the Fund
19 ............... Control Persons and Principal Management of the Fund
Holders of Securities
20 ............... Investment Advisory and Other Services Fund Charges and Expenses; Management
of the Fund; Custodian; Independent
Accountants
21 ............... Brokerage Allocation and Other Practices Fund Charges and Expenses; Portfolio
Transactions
22 ............... Tax Status Tax Matters
23 ............... Financial Statements Financial Statements

</TABLE>
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED SEPTEMBER 9, 1999

PROSPECTUS _____ SHARES
PREMIER CALIFORNIA MUNICIPAL INCOME FUND
COMMON SHARES
$_____ PER SHARE

___________________________

INVESTMENT OBJECTIVE. The Fund is a newly organized, closed-end,
nondiversified management investment company. The Fund's investment objective is
to provide current income generally exempt from regular federal and California
state income tax.

At least 80% of the Fund's total assets will normally be invested in
municipal bonds rated at least investment grade at the time of investment (which
are those rated Baa or higher by Moody's or BBB or higher by Standard & Poor's
or comparably rated by any other nationally recognized statistical rating
agency), or bonds that are unrated but judged to be of comparable quality by the
Fund's investment advisor. The Fund may invest up to 20% of its net assets in
municipal bonds that, at the time of investment, are rated Ba or B by Moody's or
BB or B by Standard & Poor's or comparably rated by any other nationally
recognized statistical rating agency, or, if not rated, deemed by the Fund's
investment advisor to be of comparable quality. Bonds rated Ba/BB and below are
regarded as having predominantly speculative characteristics with respect to
capacity to pay interest and repay principal, and are commonly referred to as
junk bonds. See "Investment Objective and Policies." The Fund's investments in
medium and lower-quality bonds and notes involve special risks. The Fund's net
asset value and distribution rate will vary and may be affected by several
factors, including changes in interest rates and the credit quality of
California municipal issuers. Fluctuations in net asset value may be magnified
as a result of the Fund's use of leverage, which may be considered a speculative
investment technique. An investment in the Fund may not be appropriate for all
investors, particularly those subject to the federal alternative minimum tax.
The Fund is designed for individual investors who are residents of California
for tax purposes. Closed-end fund shares often trade at a discount to their net
asset value. There is no assurance that the Fund will achieve its investment
objectives. See "Investment Objective and Policies."

NO PRIOR HISTORY. Because the Fund is newly organized, its common shares
have no history of public trading. Shares of closed-end investment companies
frequently trade at a discount from their net asset value. This risk may be
(continued on following page)

THESE SECURITIES INVOLVE CERTAIN RISKS. SEE "ADDITIONAL RISK
CONSIDERATIONS" BEGINNING ON PAGE __.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

___________________________

<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public Offering Price $ 15.000 $__________
Sales Load $ 0.675 $__________
Proceeds to the Fund $ 14.325 $__________
</TABLE>

The underwriters are offering the common shares subject to various
conditions. The underwriters may purchase up to an additional __ Common Shares
at the public offering price, less the sales load, within 30 days from the date
of this prospectus to cover overallotments. The underwriters expect to deliver
the common shares to purchasers on or about ______, 1999 .

___________________________

______, 1999
<PAGE> 4
(continued from previous page)

greater for investors expecting to sell their shares in a relatively short
period after completion of the public offering. We have applied for listing of
the common shares on the New York Stock Exchange, subject to notice of issuance,
under the trading or "ticker" symbol "___."

MUNICIPAL PREFERRED SHARES. The Fund intends to offer preferred shares,
called "Municipal Preferred Shares." The Fund expects that the Municipal
Preferred Shares will represent about 35% of the Fund's capital. The issuance of
Municipal Preferred Shares will leverage your common shares, meaning that the
issuance of the Municipal Preferred Shares may cause you to receive a larger
return or loss on your common shares than you would have received without the
issuance of the Municipal Preferred Shares. Leverage involves special risks, but
also affords an opportunity for greater return. There is no assurance that the
Fund's leveraging strategy will succeed. See "Use of Leverage and Related Risks"
and "Description of Shares."

The underwriters named in this prospectus may purchase up to ____
additional common shares from the Fund under certain circumstances.

________________ has agreed to pay (i) all organizational expenses and
(ii) offering costs (other than sales loads) that exceed $____ per common share.

This Prospectus contains important information about the Fund. You
should read the Prospectus before deciding whether to invest and retain it for
future reference. A Statement of Additional Information, dated ______, 1999,
containing additional information about the Fund, has been filed with the
Securities and Exchange Commission and is hereby incorporated by reference in
its entirety into this Prospectus. You can review the table of contents of the
Statement of Additional Information on page __ of this Prospectus. You may
request a free copy of the Statement of Additional Information by calling
1-800- . You may also obtain the Statement of Additional Information on
the Securities and Exchange Commission web site (http://www.sec.gov).

The Fund's common shares do not represent a deposit or obligation of,
and are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
NEITHER THE FUND NOR THE UNDERWRITERS HAVE AUTHORIZED ANY OTHER PERSON TO
PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. NEITHER THE FUND NOR THE
UNDERWRITERS ARE MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION
WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION
APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER ONLY.

-2-
<PAGE> 5
FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements. We have based
these forward-looking statements largely on our current expectations and
projections about future events and financial trends affecting the financial
condition of our business. These forward-looking statements are subject to a
number of risks, uncertainties and assumptions about Premier California
Municipal Income Fund, including, among other things:

- general economic and business conditions, both generally and
in the markets in which we invest;

- our investment opportunities;

- our expectations and estimates concerning our future financial
performance and financing plans;

- anticipated trends in our business;

- existing and future regulations affecting investment companies
like the Fund; and

- other risk factors set forth under "Additional Risk
Considerations" in this prospectus.

In addition, in this prospectus, the words "believe," "may," "will,"
"estimate," "continue," "anticipate," "intent," "intend," "expect" and similar
expressions, as they relate to the Fund or its management, are intended to
identify forward-looking statements.

We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks and uncertainties, the
forward-looking events and circumstances discussed in this prospectus may not
occur and actual results could differ materially from those anticipated in the
forward-looking statements.

-3-
<PAGE> 6
PROSPECTUS SUMMARY

This is only a summary. You should review the more detailed information
contained in the Prospectus and in the Statement of Additional Information.

THE FUND.............................. Premier California Municipal Income Fund
is a newly organized, closed- end,
nondiversified management investment
company. Throughout the Prospectus, we
refer to Premier Municipal Income Fund
simply as the "Fund" or as "we," "us" or
"our." See "The Fund."

THE OFFERING.......................... The Fund is offering____ common shares
of beneficial interest at $_____ per
share through a group of underwriters
(the "Underwriters") led by _________.
The common shares of beneficial interest
are called "Common Shares" in the rest
of this Prospectus. You must purchase at
least [100] Common Shares. The Fund has
given the Underwriters an option to
purchase up to _________ additional
Common Shares to cover orders in excess
of __________ Common Shares. See
"Underwriting."

INVESTMENT OBJECTIVE.................. The Fund's investment objective is to
provide current income generally exempt
from regular federal and California
state income taxes. The Fund will invest
its net assets in a nondiversified
portfolio of municipal bonds issued by
the State of California or its political
subdivisions, agencies, authorities or
instrumentalities. Under normal
circumstances, the Fund will invest
substantially all (at least 80%) of its
assets in debt obligations, the interest
on which is exempt from regular federal
income and California state income taxes
("California Municipal Obligations"). At
least 80% of the Fund's total assets
will normally be invested in Municipal
Obligations rated at least investment
grade at the time of investment (which
are those rated Baa or higher by Moody's
Investors Service, Inc. ("Moody's") or
BBB or higher by either Standard &
Poor's Ratings Services ("Standard %
Poor's") or comparably rated by any
other nationally recognized statistical
rating organization ("Rating Agency")),
or, if unrated, determined by the
Advisor to be of at least investment
grade quality. An investment in the Fund
is not appropriate for all investors.
The Fund may invest up to 20% of its
total assets in municipal bonds rated Ba
or B by Moody's or BB or B by Standard &
Poor's or comparably rated by another
Rating Agency and unrated municipal
bonds considered to be of comparable
quality by the Advisor. The Fund may not
invest in bonds rated below B by Moody's
or Standard & Poor's or comparably rated
by another Rating Agency. Bonds rated
Ba/BB and below are regarded as having
predominantly speculative
characteristics with respect to capacity
to pay interest and repay principal, and
are commonly referred to as "junk
bonds." These risks include greater
sensitivity to a general economic
downturn and less secondary market
trading. An investment in the Fund is
not appropriate for all investors. The
Fund cannot assure you that it will
attain its investment objective. See
"Investment Objective and Policies."

-4-
<PAGE> 7
SPECIAL CONSIDERATIONS................ The Fund expects that a portion of its
investments will pay interest that is
taxable under the federal alternative
minimum tax. If you are, or as a result
of investment in the Fund would become,
subject to the federal alternative
minimum tax, the Fund may not be a
suitable investment for you. In
addition, capital gains distributions
will be subject to capital gains taxes.
See "Tax Matters."

PROPOSED OFFERING OF
MUNICIPAL PREFERRED
SHARES................................ Subject to market conditions,
approximately one to three months
after completion of this offering, the
Fund intends to offer preferred shares
of beneficial interest ("Municipal
Preferred Shares") representing
approximately 35% of the Fund's capital
after their issuance. The issuance of
Municipal Preferred Shares will leverage
your investment in the Common Shares.
Leverage involves special risks. There
is no assurance that the Fund's
leveraging strategy will be successful.
See "Use of Leverage and Related Risks."
The money the Fund obtains by selling
the Municipal Preferred Shares will be
invested in long-term municipal bonds
which will generally pay fixed rates of
interest over the life of the bond. The
Municipal Preferred Shares will pay
dividends based on shorter-term rates,
which will be reset frequently. So long
as the rate of return, net of applicable
Fund expenses, on the long-term bonds
purchased by the Fund exceeds Municipal
Preferred Share dividend rates as reset
periodically, the investment of the
proceeds of the Municipal Preferred
Shares will generate more income than
will be needed to pay dividends on the
Municipal Preferred Shares. If so, the
excess will be used to pay higher
dividends to holders of Common Shares
("Common Shareholders"). However, the
Fund cannot assure you that the issuance
of Municipal Preferred Shares will
result in a higher yield on your Common
Shares. Once Municipal Preferred Shares
are issued, the net asset value and
market price of the Common Shares and
the yield to Common Shareholders will be
more volatile. See "Use of Leverage and
Related Risks" and "Description of
Shares--Municipal Preferred Shares."

INVESTMENT ADVISOR.................... Colonial Management Associates, Inc.
(the "Advisor") will be the Fund's
investment advisor. The Advisor will
receive an annual fee, payable monthly,
in a maximum amount equal to 0.65% of
the Fund's average weekly total net
assets (including assets attributable to
any Municipal Preferred Shares that may
be outstanding). The Advisor has agreed
to reimburse the Fund for fees and
expenses in the amount of 0.30% of
average weekly total net assets of the
Fund for the first five years of the
Fund's operations (through _______,
2004), and for a declining amount for an
additional five years (through _______,
2009). The Advisor is a wholly-owned
subsidiary of Liberty Funds Group LLC,
which is an indirect majority-owned
subsidiary of Liberty Mutual Insurance
Company. See "Management of the Fund."

DISTRIBUTIONS......................... The Fund's policy will be to make
monthly distributions to Common
Shareholders. Distributions to Common
Shareholders cannot be assured, and the
amount of each monthly distribution will
vary. The initial distribution to Common
Shareholders is expected to be paid
approximately 60 days after the
completion of this offering. See
"Distributions," "Dividend Reinvestment
Plan" and "Use of Proceeds."

-5-
<PAGE> 8
DIVIDEND REINVESTMENT
PLAN.................................. The Fund has established a Dividend
Reinvestment Plan (the "Plan"). Under
the Plan, all dividend and capital gain
distributions will be automatically
reinvested in additional Common Shares,
unless the Common Shareholder elects to
receive cash. Common Shares issued under
the Plan will either be purchased in the
open market or, if the Common Shares are
trading at or above their net asset
value, newly issued by the Fund. Common
Shareholders who intend to hold their
Common Shares through a broker or
nominee should contact their broker or
nominee to determine whether or how they
may participate in the Plan. See
"Dividend Reinvestment Plan."

LISTING............................... We have applied for listing of the
Common Shares on the New York Stock
Exchange under the trading or "ticker"
symbol of "____." See "Description of
Shares--Common Shares."

CUSTODIAN AND TRANSFER
AND DIVIDEND DISBURSING
AGENT................................. The Chase Manhattan Bank will serve as
custodian of the Fund's assets.
EquiServe will serve as the Fund's
transfer and dividend disbursing agent.
See "Custodian, Transfer Agent, Dividend
Disbursing Agent and Registrar."

MARKET PRICE OF SHARES................ Shares of closed-end investment
companies frequently trade at prices
lower than their net asset value. Shares
of closed-end investment companies like
the Fund that invest predominantly in
municipal bonds have sometimes traded at
prices higher than net asset value and
at other times have traded at prices
lower than net asset value. The Fund
cannot assure you that Common Shares
will trade at a price higher than net
asset value in the future. Net asset
value will be reduced immediately
following the offering by the sales load
and the amount of the organization and
offering expenses paid by the Fund. See
"Use of Proceeds." In addition to net
asset value, market price may be
affected by such factors as dividend
levels (which are in turn affected by
expenses), call protection, dividend
stability, portfolio credit quality and
liquidity and market supply and demand.
See "Use of Leverage and Related Risks,"
"Additional Risk Considerations,"
"Description of Shares," "Repurchase of
Fund Shares; Conversion to Open-End
Fund" and the Statement of Additional
Information under "Repurchase of Fund
Shares; Conversion to Open-End Fund."
The Common Shares are designed primarily
for long-term investors, and you should
not view the Fund as a vehicle for
trading purposes.

SPECIAL RISK CONSIDERATIONS........... No Operating History. The Fund is a
newly organized closed-end investment
company with no history of operations.

-6-
<PAGE> 9
Interest Rate and Market Risk. When
market interest rates fall, bond prices
generally rise, and vice versa. Interest
rate risk is the risk that the municipal
bonds in the Fund's portfolio will
decline in value because of increases in
market interest rates. The prices of
longer-term bonds fluctuate more than
prices of shorter-term bonds as interest
rates change. Conversely, the values of
lower-rated securities are less likely
than higher-quality debt securities to
fluctuate inversely with changes in
interest rates. Because the Fund will
invest primarily in long-term bonds, the
Common Share net asset value and market
price per share will fluctuate more in
response to changes in market interest
rates than if the Fund invested
primarily in shorter-term bonds. Market
risk is often greater among certain
types of debt securities, such as
zero-coupon bonds, which do not make
regular interest payments. As interest
rates change, these bonds often
fluctuate in price more than bonds that
make regular interest payments. Because
the Fund may invest in these types of
debt securities, it may be subject to
greater market risk than a fund that
invests only in current interest paying
securities. The Fund's use of leverage,
as described below, will tend to
increase Common Share interest rate
risk.

Lower-Rated Securities. The Fund may
invest in municipal bonds rated Ba or B
by Moody's or BB or B by Standard &
Poor's or comparably rated by another
Rating Agency or unrated but judged by
the Advisor to be of comparable quality.
These bonds generally involve greater
risk of nonpayment of principal and
interest than securities in higher
rating categories. The possibility of
defaults by or bankruptcies of issuers
of securities cause, in part, this
principal and interest risk and may
result in nonpayment of principal or
interest or restructuring of the debt
obligation and, possibly, a reduction in
the Fund's net asset value. The medium
and lower-quality municipal obligations
in which the Fund will invest are
speculative to varying degrees. While
such securities may have some quality
and protective characteristics, large
uncertainties or major risk exposures to
adverse conditions are expected to
outweigh such characteristics. Municipal
bonds rated Ba/BB or below are regarded
as predominantly speculative in
character. With respect to lower rated
or unrated tax-exempt securities, the
Fund will rely more on the judgment,
analysis and experience of the Advisor
than for rated securities.

In evaluating the creditworthiness of an
issue, whether rated or unrated, the
Advisor may consider, among other
things, the following factors:

- the issuer's financial resources;

- the issuer's sensitivity to economic
conditions and trends;

- any operating history of and the
community support for the facility, if
any, financed by the issue;

- the ability of the issuer's
management; and

- regulatory matters.

Income Risk. The income investors
receive from the Fund is based primarily
on the interest it earns from its
investments, which can vary

-7-
<PAGE> 10
widely over the short and long-term. If
interest rates drop, investors' income
from the Fund over time could drop as
well if the Fund purchases securities
paying lower rates of interest. This
risk is magnified when prevailing
short-term interest rates increase and
the Fund holds residual interest
municipal bonds.

Call Risk. If interest rates fall, it is
possible that issuers of callable bonds
with high interest coupons will "call"
(or prepay) their bonds before their
maturity date. If a call were exercised
by the issuer during a period of
declining interest rates, the Fund is
likely to replace the called security
with a lower yielding security. If that
were to happen, it would decrease the
Fund's dividends.

Credit Risk. Credit risk is the risk
that one or more municipal bonds in the
Fund's portfolio will decline in price,
or fail to pay interest or principal
when due, because the issuer of the bond
experiences a decline in its financial
status. The Fund expects to invest in
medium- and lower-rated or unrated
municipal bonds. The prices of these
medium- and lower-rated bonds are more
sensitive to negative developments, such
as a decline in the issuer's revenues or
a general economic downturn, than are
the prices of higher-rated securities.

Liquidity Risk. The Fund may invest in
securities for which there is no readily
available trading market or which are
otherwise illiquid. The Fund may not
be able to readily dispose of such
securities at prices that approximate
those at which the Fund could sell them
if they were more widely traded and, as
a result of such illiquidity, the Fund
may have to sell other investments or
engage in borrowing transactions if
necessary to raise cash to meet its
obligations. In addition, this limited
liquidity could affect the market price
of the securities, thereby adversely
affecting the Fund's net asset value and
ability to make dividend distributions.

Leverage Risk. The use of leverage
through the issuance of preferred shares
by the Fund creates an opportunity for
increased net income, but, at the same
time, creates special risks. There can
be no assurance that a leveraging
strategy will be successful during any
period in which it is employed. The Fund
intends to use leverage to provide the
holders of Common Shares with a
potentially higher return. Leverage
creates risks for holders of Common
Shares, including the likelihood of
greater volatility of the net asset
value and market price of the Common
Shares and the risk that fluctuations in
dividend rates on any preferred shares
may affect the return to Common
Shareholders. It is anticipated that
preferred share dividends will be based
on the yields of short-term municipal
obligations, while the proceeds of any
preferred share offering will be
invested in longer-term municipal
obligations, which typically have higher
yields. To the extent the income derived
from securities purchased with funds
received from leverage exceeds the cost
of leverage, the Fund's return will be
greater than if leverage had not been
used. Conversely, if the income from the
securities purchased with such funds is
not sufficient to cover the cost of
leverage, the return to the Fund will be
less than if leverage had not been used,
and therefore the amounts available for
distribution to Common Shareholders as
dividends and other distributions will
be reduced. In the latter case, the
Advisor in its best judgment may

-8-
<PAGE> 11
nevertheless determine to maintain the
Fund's leveraged position if it deems
such action to be appropriate under the
circumstances. Investment by the Fund
in residual interest municipal bonds may
amplify the effects of leverage and,
during periods of rising short-term
interest rates, may adversely affect the
Fund's income and distributions to
Common Shareholders. In addition, under
current federal income tax law, the Fund
is required to allocate a portion of any
net realized capital gains or other
taxable income to holders of preferred
shares. The terms of any preferred
shares are expected to require the Fund
to pay to any preferred shareholders
additional dividends intended to
compensate the preferred shareholders
for taxes payable on any capital gains
or other taxable income allocated to the
preferred shares. Any such additional
dividends will reduce the amount
available for distribution to the Common
Shareholders. As discussed under
"Management of the Fund," the fee paid
to the Advisor will be calculated on the
basis of the Fund's average daily net
assets, including proceeds from the
issuance of preferred shares, so the
fees will be higher when leverage is
utilized. See "Investment Objective,
Policies and Risks--Use of Leverage and
Related Risks."

The Fund currently intends to seek an
investment grade rating on any preferred
shares from one or more rating agencies.
The Fund may be subject to investment
restrictions of one or more rating
agencies as a result. These restrictions
may impose asset coverage or portfolio
composition requirements that are more
stringent than those imposed on the Fund
by the Investment Company Act of 1940,
as amended (the "Investment Company Act"
or "1940 Act"). It is not anticipated
that these covenants or guidelines will
impede the Advisor in managing the
Fund's portfolio in accordance with its
investment objective and policies. See
"Description of Shares--Municipal
Preferred Shares."

Financial leverage may also be achieved
through the purchase of certain
derivative instruments. The Fund's use
of residual interest municipal bonds and
futures contracts expose the Fund to
special risks. Such transactions may
result in the Fund earning taxable
income or gains. See "Investment
Objectives and Policies."

Municipal Bond Market Risk. The amount
of public information available about
the municipal bonds in the Fund's
portfolio is generally less than that
for corporate equities or bonds, and the
investment performance of the Fund may
therefore be more dependent on the
analytical abilities of the Advisor than
would be a stock fund or taxable bond
fund. The secondary market for municipal
bonds, particularly the below investment
grade bonds in which the Fund may
invest, also tends to be less
well-developed or liquid than many other
securities markets, which may adversely
affect the Fund's ability to sell its
bonds at attractive prices.

Concentration in California Issuers. The
Fund's policy of investing primarily in
municipal obligations of issuers located
in California makes the Fund more
susceptible to adverse economic,
political or regulatory occurrences
affecting such issuers.

-9-
<PAGE> 12
Nondiversification. The Fund has
registered as a "nondiversified"
investment company under the 1940 Act.
For federal income tax purposes, the
Fund, with respect to up to 50% of its
total assets, will be able to invest
more than 5% (but not more than 25%) of
the value of its total assets in the
obligations of any single issuer. To the
extent the Fund invests a relatively
high percentage of its assets in
obligations of a limited number of
issuers, the Fund may be more
susceptible than a more widely
diversified investment company to any
single economic, political or regulatory
occurrence.

Alternative Minimum Tax and Other Tax
Considerations. Interest on certain
"private activity" municipal obligations
is treated as a tax preference item for
purposes of the AMT. In addition, for
corporations, income subject to the AMT
includes interest on all tax-exempt
obligations. There is no specific
limitation on the amount of the Fund's
assets that may be invested in municipal
obligations that pay interest that is
treated as a tax preference item.
Accordingly, an investment in the Fund
may not be appropriate for investors who
are already subject to the AMT or who
would become subject thereto as a result
of owning Common Shares. Moreover,
distributions of any taxable net
investment income and net short-term
capital gain are taxable as ordinary
income. See "Distributions" and "Tax
Matters."

Anti-takeover Provisions. The Agreement
and Declaration of Trust of the Fund
(the "Declaration of Trust") includes
provisions that could limit the ability
of other entities or persons to acquire
control of the Fund or convert the Fund
to open-end status. These provisions of
the Declaration of Trust could have the
effect of depriving the Common
Shareholders of opportunities to sell
their Common Shares at a premium over
their then current market price.

-10-
<PAGE> 13
SUMMARY OF FUND EXPENSES

The following table assumes the issuance of Municipal Preferred Shares
in an amount equal to 35% of the Fund's capital (after their issuance), and
shows Fund expenses both as a percentage of net assets attributable to Common
Shares and as a percentage of total net assets.

<TABLE>
<CAPTION>
Percentage of Total Net Assets
<S> <C>
Shareholder Transaction Expenses
Sales Load Paid by You (as a percentage of
offering price) ............................ 4.50%
Dividend Reinvestment Plan Fees .............. None
</TABLE>

<TABLE>
<CAPTION>
Percentage of Net
Assets Attributable Percentage of
to Common Shares Total Net Assets
------------------- ----------------
<S> <C> <C>
Annual Expenses
Management Fees 1.00% .65%
Fee and Expense Reimbursement (Years 1-5) (0.46%)* (.30%)*
---- ---

Net Management Fees .54%* .35%*
Other Expenses % %
==== ===
Total Net Annual Expenses % %*
==== ===
</TABLE>

- -------

* The Advisor has agreed to reimburse the Fund for fees and expenses in
the following amounts, expressed as a percentage of average weekly net
assets: 0.30% for the first 5 years of the Fund's operations, 0.25% in
year 6, 0.20% in year 7, 0.15% in year 8, 0.10% in year 9 and 0.05% in
year 10. Without the reimbursement, "Total Net Annual Expenses" would
be estimated to be ___% of average weekly total net assets and ____% of
average weekly net assets attributable to Common Shares. The Advisor
has agreed to pay (i) all organizational expenses and (ii) offering
costs (other than sales loads) that exceed $____ per Common Share (___%
of offering price).

The purpose of the table above is to help you understand all fees and
expenses that you, as a Common Shareholder, would bear directly or indirectly.
The expenses shown in the table are based on estimated amounts for the Fund's
first year of operations and assume that the Fund issues____ Common Shares. See
"Management of the Fund" and "Dividend Reinvestment Plan."

The following example illustrates the expenses (including the sales
load of $__) that you would pay on a $1,000 investment in Common Shares,
assuming (1) total net annual expenses of ___% of net assets attributable to
Common Shares and ___% of total net assets in years 1 through 5, increasing to
____% and ___%, respectively, in year 10 and (2) a 5% annual return: (l)

<TABLE>
<CAPTION>
Expenses Based on a Percentage of 1 Year 3 Year 5 Years 10 Years (2)
--------------------------------- ------ ------ ------- ------------
<S> <C> <C> <C> <C>
Net Assets Attributable to Common Shares..... $ $ $ $
---- ---- ---- ----
Total Net Assets............................. $ $ $ $
---- ---- ---- ----
</TABLE>

(1) The example should not be considered a representation of future
expenses. The example assumes that the estimated Other Expenses set
forth in the Annual Expenses table are accurate, that the reimbursement
of fees and expenses decrease as described in note 2 below and that all
dividends and distributions are

-11-
<PAGE> 14
reinvested at net asset value. Actual expenses may be greater or less
than those assumed. Moreover, the Fund's actual rate of return may be
greater or less than the hypothetical 5% return shown in the example.

(2) Assumes reimbursement of fees and expenses of 0.25% of average weekly
net assets in year 6, 0.20% in year 7, 0.15% in year 8, 0.10% in year 9
and 0.05% in year 10. The Advisor has not agreed to reimburse the Fund
for any portion of its fees and expenses beyond _______, 2009.

THE FUND

The Fund is a recently organized, closed-end, nondiversified management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund was organized as a Massachusetts business
trust on August 10, 1999, pursuant to a Declaration of Trust governed by the
laws of the Commonwealth of Massachusetts. As a newly organized entity, the Fund
has no operating history. The Fund's principal office is located at One
Financial Center, Boston, MA 02111, and its telephone number is (617) 426-3750.

USE OF PROCEEDS

The net proceeds of the offering of Common Shares will be approximately
$___________ ($___________ if the Underwriters exercise the overallotment option
in full) after payment of the estimated organization and offering costs. The
Advisor has agreed to pay (i) all organizational expenses and (ii) offering
costs (other than sales loads) that exceed $____ per Common Share. The Fund will
invest the net proceeds of the offering in accordance with the Fund's investment
objective and policies as stated below. It is presently anticipated that the
Fund will be able to invest substantially all of the net proceeds in municipal
bonds that meet its investment objective and policies within [three months]
after the completion of the offering. Pending such investment, it is anticipated
that the proceeds will be invested in short-term, tax-exempt securities.

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to provide current income exempt
from regular federal and California state income taxes. This income will be
earned by investing primarily in investment grade municipal obligations issued
by the State of California or its political subdivisions, agencies, authorities
and instrumentalities. Securities will be purchased and sold in an effort to
maintain a competitive yield and to enhance return based upon the relative value
of the securities available in the marketplace. Investments are based on the
Advisor's research and ongoing credit analysis, the underlying materials for
which are generally not available to individual investors. The Fund is designed
for investors who are residents of California for tax purposes.

During normal market conditions, substantially all of the Fund's total
assets (at least 80%) will be invested in debt obligations, the interest on
which is exempt from regular federal income tax and California state personal
income taxes ("California Municipal Obligations"). At least 80% of the Fund's
total assets will normally be invested in California Municipal Obligations rated
at least investment grade at the time of investment (which are those rated Baa
or higher by Moody's Investors Service, Inc. ("Moody's") or BBB or higher by
either Standard & Poor's Ratings Services ("Standard & Poor's")) or comparably
rated by any other nationally recognized statistical rating organization
("Rating Agency")) or, if unrated, determined by the Advisor to be of at least
investment grade quality. From time to time, the Fund may hold a significant
amount of Municipal Obligations not rated by a Rating Agency. When the Fund
invests in lower-rated or unrated California Municipal Obligations, it may be
more dependent on the Advisor's research capabilities than when it invests in
higher-rated California Municipal Obligations.

The Fund may invest up to 20% of its total assets in Municipal
Obligations rated Ba or B by Moody's or BB or B by Standard & Poor's and unrated
Municipal Obligations considered to be of comparable quality by the Advisor. The
Fund may not invest in bonds rated below B or unrated bonds deemed by the
Advisor to be of comparable quality. Investment in Municipal Obligations of
below investment grade quality involves special risks as compared with
investment in higher grade Municipal Obligations. These risks include greater
sensitivity to a general economic downturn and less secondary market trading.
Securities rated below investment grade are commonly known as "junk bonds." Such
securities are regarded, on balance, as predominantly speculative with respect
to the issuer's ability to pay interest and repay principal owed. See
"Additional Risk Considerations." For a description of municipal bond ratings,
see Appendix A to the Statement of Additional Information.

-12-
<PAGE> 15

The foregoing credit quality policies apply only at the time a security
is purchased, and the Fund is not required to dispose of a security in the event
that a Rating Agency downgrades its assessment of the credit characteristics of
a particular issue. In determining whether to retain or sell such a security,
the Advisor may consider such factors as the Advisor's assessment of the credit
quality of the issuer of such security, the price at which such security could
be sold and the rating, if any, assigned to such security by other Rating
Agencies.

Municipal Obligations, including California Municipal Obligations,
include bonds, notes and commercial paper issued by municipalities for a wide
variety of both public and private purposes, the interest on which is, in the
opinion of issuer's counsel (or on the basis of other reliable authority),
exempt from regular federal income tax. Public purpose municipal bonds include
general obligation and revenue bonds. General obligation bonds are backed by the
taxing power of the issuing municipality. Revenue bonds are backed by the
revenues of a project or facility or from the proceeds of a specific revenue
source. Some revenue bonds are payable solely or partly from funds which are
subject to annual appropriations by a state's legislature. Municipal notes
include bond anticipation, tax anticipation and revenue anticipation notes.
Bond, tax and revenue anticipation notes are short-term obligations that will be
retired with the proceeds from an anticipated bond issue, tax revenue or
facility revenue, respectively.

Some of the securities in which the Fund invests may include so-called
"zero-coupon" bonds, whose values are subject to greater fluctuation in response
to changes in market interest rates than bonds that pay interest currently.
Zero-coupon bonds are issued at a significant discount from face value and pay
interest only at maturity, rather than at intervals during the life of the
security. The Fund is required to take into account income from zero-coupon
bonds on a current basis, even though it does not receive that income currently
in cash, and the Fund is required to distribute substantially all of its income
for each taxable year. Thus, the Fund may have to sell other investments to
obtain cash needed to make income distributions.

Until such time as the Fund is fully invested (approximately two to
three months after the completion of this offering), the Fund may invest up to
20% of its net assets in inverse floating rate municipal bonds (which are bonds
whose interest rates bear an inverse relationship to the interest rate on
another security or the value of an index) ("inverse floaters"). An investment
in inverse floaters may involve greater risk than an investment in a fixed rate
bond. Because changes in the interest rate on the other security or index
inversely affect the residual interest paid on the inverse floater, the value of
an inverse floater is generally more volatile than that of a fixed rate bond.
Inverse floaters have interest rate adjustment formulas which generally reduce
or, in the extreme, eliminate the interest paid to the Fund when short-term
interest rates rise, and increase the interest paid to the Fund when short-term
interest rates fall. Inverse floaters have varying degrees of liquidity, and the
market for these securities is volatile. These securities tend to underperform
the market for fixed rate bonds in a rising interest rate environment, but tend
to outperform the market for fixed rate bonds when interest rates decline.
Although volatile, inverse floaters typically offer the potential for yields
exceeding the yields available on fixed rate bonds with comparable credit
quality, coupon, call provisions and maturity. These securities usually permit
the investor to convert the floating rate to a fixed rate (normally adjusted
downward), and this optional conversion feature may provide a partial hedge
against rising rates if exercised at an opportune time. Investment in inverse
floaters may amplify the effects of the Fund's use of leverage. Should
short-term interest rates rise, the combination of the Fund's investment in
inverse floaters and its use of leverage likely will adversely affect the Fund's
income and distributions to Shareholders. The Fund does not intend to invest in
inverse floaters once it becomes fully invested.

The Fund may purchase Municipal Obligations that are additionally
secured by insurance, bank credit agreements or escrow accounts. The credit
quality of companies which provide such credit enhancements will affect the
value of those securities. Although the insurance feature reduces certain
financial risks, the premiums

-13-
<PAGE> 16
for insurance and the higher market price paid for insured obligations may
reduce the Fund's current yield. Insurance generally will be obtained from
insurers with a claims-paying ability rated Aaa by Moody's or AAA by Standard &
Poor's, but may also be obtained from insurers rated Aa or A by Moody's or AA or
A by Standard & Poor's, or comparably rated by another Rating Agency. The
insurance feature does not guarantee the market value of the insured obligations
or the net asset value of the Fund's shares.

Interest income from certain types of Municipal Obligations may be a
tax preference item for purposes of the federal alternative minimum tax (the
"AMT") for individual investors. Distributions to corporate investors of certain
interest income may also be indirectly subject to the AMT. The Fund may not be
suitable for investors currently or who may become subject to the AMT.

The Fund has adopted certain fundamental investment restrictions set
forth in the Statement of Additional Information which may not be changed
without a Shareholder vote. Except for such restrictions and the requirement
that 80% of the Fund's total assets be invested in California Municipal
Obligations set forth above, the investment objectives and policies of the Fund
may be changed by the Board of Trustees without shareholder action.

In addition to investing in Municipal Obligations, the Fund may attempt
to hedge against changes in interest rates by engaging in transactions involving
interest rate futures contracts ("financial futures"), index futures and options
on financial futures, tax-exempt indices and index futures, as a hedge against
changes in interest rates. See "Investment Objective and Policies--Hedging
Activities." The costs of and possible losses incurred from such transactions
may reduce the Fund's current return.

The Fund may also purchase securities on a "when-issued" basis, enter
into repurchase agreements and invest in other taxable instruments, subject to
certain limitations. See "Investment Objective and Policies--Forward
Commitments," "Investment Objective and Policies--Repurchase Agreements" and
"Investment Objective and Policies--Temporary and Defensive Investments."

DESCRIPTION OF MUNICIPAL OBLIGATIONS

As used in this Prospectus, the term "Municipal Obligations" refers to
debt obligations the interest on which was at the time of issuance, in the
opinion of bond counsel to the issuer, exempt from federal income tax (other
than the possible incidence of any alternative minimum tax ("AMT")). (For a
description of the federal AMT, see "Tax Matters--Federal Income Tax Matters.")
The term "California Municipal Obligations" refers to Municipal Obligations that
are also exempt from California state income taxes. California Municipal
Obligations include debt obligations issued by the State of California or any
political subdivision thereof, or any other municipal debt obligations the
interest on which is exempt from federal and California state income taxes, to
obtain funds for various public purposes, including the construction of a wide
range of public facilities such as airports, bridges, highways, housing, mass
transportation, roads, schools and water and sewer works or for other public
purposes. Interest on industrial development bonds used to fund the
construction, equipment, repair or improvement of privately-operated industrial
or commercial facilities may also be exempt from federal and/or California state
income taxes, but the size of such issues is limited under current federal tax
law. The Fund may not be a desirable investment for "substantial users" of
facilities financed by industrial development bonds or private activity bonds or
for "related persons" of substantial users. See "Tax Matters" in this Prospectus
and "Tax Matters" in the Statement of Additional Information. [The Fund has no
present intention of investing in Municipal Obligations the interest on which is
not exempt from federal income tax (other than the possible incidence of any
AMT).] The Advisor will not, in any event, conduct any independent investigation
as to the tax status of any securities in which the Fund invests or of the
issuers of such securities.

The two principal classifications of Municipal Obligations are general
obligation bonds and revenue bonds. General obligation bonds are obligations
involving the credit of an issuer possessing taxing power and are payable from
the issuer's general unrestricted revenues and not from any particular fund or
source. The characteristics and method of enforcement of general obligation
bonds vary according to the law applicable to the particular issuer, and payment
may be dependent upon appropriation by the issuer's legislative body. Revenue

-14-
<PAGE> 17
bonds are payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise or
other specific revenue source. Tax-exempt industrial development bonds and
private activity bonds also generally are revenue bonds and thus not payable
from the unrestricted revenues of the issuer. The credit quality of industrial
development bonds and private activity bonds is usually directly related to the
credit of the corporate user of the facilities. Payment of principal of and
interest on industrial development bonds and private activity bonds is the
responsibility of the corporate user (and any guarantor).

Prices and yields on Municipal Obligations are dependent on a variety
of factors, including general market conditions, the financial condition of the
issuer, general conditions in the tax-exempt bond market, the size of a
particular offering, the maturity of the obligation and the ratings of
particular issues, and are subject to change from time to time. Information
about the financial condition of an issuer of Municipal Obligations may not be
as extensive as that which is made available by corporations whose securities
are publicly traded.

The ratings of Moody's, Standard & Poor's and other Rating Agencies
represent their opinions and are not absolute standards of quality. Municipal
Obligations with the same maturity, interest rate and rating may have different
yields while Municipal Obligations of the same maturity and interest rate with
different ratings may have the same yield.

Obligations of issuers of Municipal Obligations are subject to the
provisions of bankruptcy, insolvency and other laws, such as the Federal
Bankruptcy Reform Act of 1978, affecting the rights and remedies of creditors.
Congress or state legislatures may seek to extend the time for payment of
principal or interest, or both, or to impose other constraints upon enforcement
of such obligations. There is also the possibility that, as a result of
litigation or other conditions, the power or ability of issuers to meet their
obligations to pay interest on and principal of their Municipal Obligations may
be materially impaired or their obligations may be found to be invalid or
unenforceable. Such litigation or conditions may from time to time have the
effect of introducing uncertainties in the market for Municipal Obligations or
certain segments thereof, or materially affecting the credit risk with respect
to particular bonds. Adverse economic, business, legal or political developments
might affect all or a substantial portion of the Fund's Municipal Obligations in
the same manner.

Some of the securities in which the Fund invests may include
"zero-coupon" bonds, whose values are subject to greater fluctuation in response
to changes in market interest rates than bonds that pay interest currently.
Zero-coupon bonds are issued at a significant discount from face value and pay
interest only at maturity rather than at intervals during the life of the
security. The Fund is required to take into account income from zero-coupon
bonds on a current basis, even though it does not receive that income currently
in cash. Because the Fund is required to distribute substantially all of its
income for each taxable year, the Fund may have to sell other investments to
obtain cash needed to make income distributions.

Until such time as the Fund is fully invested (approximately two to
three months after the completion of this offering), it may invest up to 20% of
its net assets in residual interest municipal bonds whose interest rates bear an
inverse relationship to the interest rate on another security or the value of an
index ("inverse floaters"). An investment in inverse floaters may involve
greater risk than an investment in a fixed rate bond. Because changes in the
interest rate on the other security or index inversely affect the residual
interest paid on the inverse floater, the value of an inverse floater is
generally more volatile than that of a fixed rate bond. Inverse floaters have
interest rate adjustment formulas which generally reduce or, in the extreme,
eliminate the interest paid to the Fund when short-term interest rates rise, and
increase the interest paid to the Fund when short-term interest rates fall.
Inverse floaters have varying degrees of liquidity, and the market for these
securities is volatile. These securities tend to underperform the market for
fixed rate bonds in a rising interest rate environment, but tend to outperform
the market for fixed rate bonds when interest rates decline. Although volatile,
inverse floaters typically offer the potential for yields exceeding the yields
available on fixed rate bonds with comparable credit quality, coupon, call
provisions and maturity. These securities usually permit the investor to convert
the floating rate to a fixed rate (normally adjusted downward), and this
optional conversion feature may provide a partial hedge against rising rates if
exercised at an opportune time. Investment in inverse floaters may amplify the
effects of the Fund's use of leverage. Should short-term interest rates rise,
the combination of the Fund's investment in

-15-
<PAGE> 18
inverse floaters and its use of leverage likely will adversely affect the Fund's
income and distributions to Shareholders. The Fund does not intend to invest in
inverse floaters once it becomes fully invested.

[Investments are based on the Advisor's research and ongoing credit
analysis, the underlying materials for which are generally not available to
individual investors. The Advisor seeks to find Municipal Obligations that have
been undervalued in the marketplace. The Advisor's research specialists examine
credit histories, revenue sources, total debt histories, capital structures and
other data. This research capability is important because many obligations in
which the Fund will invest will not be rated or listed on a national securities
exchange, and the amount of public information available about such securities
will be limited. The Fund intends to emphasize the research that is critical to
discovering value while avoiding undue credit risk. The Fund will attempt to
enhance performance opportunities by seeking to remain fully invested.]

The Fund may purchase Municipal Obligations that are additionally
secured by insurance, bank credit agreements, or escrow accounts. The credit
quality of companies which provide such credit enhancements will affect the
value of those securities. Although the insurance feature reduces certain
financial risks, the premiums for insurance and the higher market price paid for
insured obligations may reduce the Fund's current yield. Insurance generally
will be obtained from insurers with a claims-paying ability rated Aaa by Moody's
or AAA by Standard & Poor's, but may also be obtained from insurers rated Aa or
A by Moody's or AA or A by Standard & Poor's, or comparably rated by another
Rating Agency. The insurance feature does not guarantee the market value of the
insured obligations or the net asset value of the Fund's shares.

HEDGING ACTIVITIES

Hedging is a means of transferring risk that an investor does not
desire to assume. The Advisor believes it is possible to reduce or enhance the
effects of interest rate fluctuations through the use of futures contracts and
options on financial instruments.

The Fund may purchase and sell financial futures and tax-exempt bond
index futures contracts ("index futures") to hedge against changes caused by
changing interest rates, in the market value of Municipal Obligations in its
portfolio or that it intends to acquire. In order to hedge, the Fund may also
purchase and write put and call options on financial futures, tax-exempt bond
indices and index futures. The costs of and possible losses incurred from these
transactions may reduce the Fund's current return.

Income earned by the Fund from its hedging activities will be treated
as capital gain in the Fund's hands and, if not offset by net realized capital
losses, will be distributed to shareholders in taxable distributions. See "Tax
Matters--Federal Income Tax Matters."

The Fund will not engage in transactions in futures contracts or
related options for speculative purposes but only as a hedge against changes
resulting from market conditions in the values of securities in its portfolio or
that it intends to acquire. In addition, the Fund will not purchase or sell
futures contracts or purchase or sell related options if immediately thereafter
the sum of the amount of its initial margin deposits on its existing futures and
related options positions and premiums paid for related options would exceed 5%
of its total assets (taken at current value). In instances involving the
purchase or sale of futures contracts or the writing of call or put options
thereon by the Fund, an amount of cash or liquid high-grade debt securities
equal to the underlying commodity value of the futures contracts and options
(less any related margin deposits) will be deposited in a segregated account
with the Fund's custodian to collateralize the position and thereby ensure that
the use of such futures contracts and options is unleveraged.

-16-
<PAGE> 19
The Fund might not employ any of the hedging strategies described
below, and no assurance can be given that any strategy used will succeed. If the
Advisor incorrectly forecasts interest rates, market values or other economic
factors in utilizing a hedging strategy for the Fund, the Fund might have been
in a better position if it had not entered into the position at all. Also,
suitable hedging transactions may not be available in all circumstances or, if
available, effective.

Financial Futures. In connection with its hedging activities, the Fund
may engage in transactions involving financial futures. A financial future is a
contract that obligates the seller to deliver and the purchaser to take delivery
of a specified type of financial instrument at a specified future time and at a
specified price. Although financial futures contracts by their terms require
actual delivery and acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract purchase or sale is effected by
entering into an offsetting transaction. Financial futures trade on boards of
trade that have been designated "contracts markets" by the Commodity Futures
Trading Commission. Financial futures trade on these markets in a manner that is
similar to the way a stock trades on a stock exchange. The boards of trade,
through their clearing corporations, guarantee performance of the contracts.
Currently, there are financial futures based on long-term U.S. Treasury bonds,
U.S. Treasury notes, Government National Mortgage Association ("GNMA")
certificates, three-month U.S. Treasury bills and three-month domestic bank
certificates of deposit. The Fund expects other financial futures to be
developed and traded. The Fund expects to engage in transactions involving
financial futures if, in the opinion of the Advisor, they are appropriate
hedging instruments for the Fund.

The sale of financial futures by the Fund is for the purpose of hedging
the Fund's holdings of long-term debt securities. In the event of a rise in
interest rates, the value of the Fund's short position in financial futures
would increase at approximately the same rate as the value of the long-term
bonds in its portfolio would decline, thereby keeping the net asset value of the
Fund from declining as much as it otherwise would have.

If, on the other hand, interest rates were expected to decline, the
Fund might purchase futures contracts and thus take advantage of the anticipated
rise in the value of long-term securities. In such an event, the futures
contracts could be liquidated and the Fund's cash reserves could be raised to
buy long-term securities in the cash market.

Unlike when the Fund purchases or sells a security, no price is paid or
received by the Fund upon the sale or purchase of a financial future. The Fund
will initially be required to deposit with the Fund's custodian an amount of
"initial margin" of cash or U.S. Treasury bills equal to a small percentage of
the contract amount. The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that initial margin
on financial futures does not involve the borrowing of funds by the customer to
finance the transactions. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Fund upon termination of the financial future, assuming all contractual
obligations have been satisfied. Subsequent payments to and from the broker,
called maintenance margin, will be made on a daily basis as the price of the
underlying debt security fluctuates, making the long and short positions in the
financial future more or less valuable, a process known as "marking to market."
For example, when the Fund has sold a financial future and the price of the
underlying debt security has declined, that position will have increased in
value and the Fund will receive from the broker a maintenance margin payment
equal to that increase. Conversely, where the Fund has sold a financial future
and the price of the underlying debt security has increased, the position would
be less valuable, and the Fund would be required to make a maintenance margin
payment to the broker. At any time prior to expiration of the financial future,
the Fund may elect to close the position by taking an opposite position in the
financial future. A final determination of maintenance margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or a gain. While financial futures based on debt securities do
provide for the delivery and acceptance of securities, such deliveries and
acceptances are very seldom made. Generally, the financial future is terminated
by entering into an offsetting transaction. An offsetting transaction for a
financial future sale is effected by the Fund entering into a financial future
purchase for the same aggregate amount of the specific type of financial
instrument and same delivery date. If the price in the sale exceeds the price in
the offsetting purchase, the Fund immediately is

-17-
<PAGE> 20
paid the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, the Fund pays the difference and realizes a loss.

There are several risks in connection with the use of financial futures
by the Fund as a hedging device. One risk may arise because of the imperfect
correlation between movements in the price of the financial future and movements
in the price of the debt securities that are the subject of the hedge. Financial
futures based on U.S. Government securities and GNMA certificates historically
have reacted to an increase or decrease in interest rates in a similar fashion
to the underlying U.S. Government securities and GNMA certificates. To the
extent, however, that the Fund enters into financial futures on other than
Municipal Obligations, there is a possibility that the value of such financial
futures would not vary in direct proportion to the value of the Fund's holdings
of Municipal Obligations.

Another result of the imperfect correlation between movements in the
prices of the financial future and of the debt securities being hedged is that
the price of the financial future may move more or less than the price of the
debt securities being hedged. If the price of the financial future moves less
than the price of the securities that are the subject of the hedge, the hedge
will not be fully effective, but if the price of the securities being hedged has
moved in an unfavorable direction, the Fund would be in a better position than
if it had not hedged at all. If the price of the securities being hedged has
moved in a favorable direction, the advantage will be partially offset by the
futures contract. If the price of the financial future moves more than the price
of the security, the Fund will experience either a loss or a gain on the future
which will not be completely offset by movements in the prices of the debt
securities which are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of debt securities being hedged and
movements in the price of related financial futures, the Fund may purchase or
sell financial futures in a greater or lesser dollar amount than the dollar
amount of the securities being hedged.

The market prices of financial futures may be affected by several
factors other than interest rates. First, all participants in the futures
markets are subject to margin deposit and maintenance requirements. Rather than
meeting additional margin deposit requirements, investors may close financial
futures through offsetting transactions, which could distort the normal
relationship between the debt securities and futures markets. Second, from the
point of view of speculators, the deposit requirements in the futures market are
less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and the imperfect correlation between movements in the prices of
debt securities and movements in the prices of related financial futures, a
correct forecast of interest rate trends by the Fund's investment advisor may
still not result in a successful hedging transaction.

Positions in futures contracts may be closed out only on an exchange or
board of trade that provides a secondary market for such futures. Although the
Fund intends to engage in futures transactions only on exchanges or boards of
trade where there appear to be an active secondary market, there is no assurance
that a liquid secondary market on an exchange or board of trade will exist for
any particular contract or at any particular time. If there is not a liquid
secondary market at a particular time, it may not be possible to close a futures
position at such time, and in the event of adverse price movements, the Fund
would continue to be required to make daily cash payments of maintenance margin.

Options on Financial Futures. The Fund may also purchase and sell put
and call options on financial futures which are traded on a U.S. exchange or
board of trade or over the counter and enter into closing transactions with
respect to such options to terminate an existing position. The purchase of put
options on financial futures is analogous to the sale of futures so as to hedge
the Fund's portfolio of debt securities against the risk of rising interest
rates. The purchase of call options on financial futures is analogous to the
purchase of futures contracts and represents a means of obtaining exposure to
market appreciation at limited risk.

The Fund may write call options on futures contracts, which constitutes
a partial hedge against any declining price of long-term debt securities. If the
futures price at expiration is below the exercise price, the Fund will retain
the full amount of the option premium, which provides a partial hedge against
any decline that may

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<PAGE> 21
have occurred in the Fund's holdings of debt securities. If the futures price at
expiration exceeds the exercise price, the Fund will ordinarily realize a loss
equal to the amount of such excess.

The Fund may write put options on futures contracts, which constitutes
a partial hedge against an increase in the price of long-term debt securities
when the Fund is not fully invested. If the futures price at expiration is above
the exercise price, the Fund will retain the full amount of the option premium,
which provides a partial hedge against any increase in the market price of
long-term debt securities. If the futures price at expiration is less than the
exercise price, the Fund will ordinarily realize a loss equal to the difference
between the futures price and the exercise price.

An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) 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 in the writer's futures margin account which represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. If an option is exercised on the last
trading day prior to the expiration date of the option, the settlement will be
made entirely in cash in an amount equal to the difference between the exercise
price of the option and the closing price of the futures contract on the
expiration date. Currently options can be purchased or written with respect to
futures contracts on U.S. Treasury bonds and notes on the Chicago Board of
Trade. The holder or writer of an option may terminate his position by selling
or purchasing an option of the same series. There is no guarantee that such
closing transactions can be effected.

Several special risks relate to transactions in options on futures. The
ability to establish and close out positions on such options will be subject to
the maintenance of a liquid secondary market. Compared to the sale of financial
futures, the purchase of put options on financial futures involves less
potential risk to the Fund because the maximum amount at risk is the premium
paid for the options (plus transaction costs). However, there may be
circumstances when the purchase of a put option on a financial future would
result in a loss to the Fund when the sale of a financial future would not, such
as when there is no movement in the price of debt securities.

An option position may be closed out only on an exchange or board of
trade that provides a secondary market for an option of the same series.
Although the Fund generally will purchase only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market on an exchange or board of trade will exist for any particular
option, or at any particular time, and for some options, no secondary market on
an exchange or board of trade may exist. In such event, it might not be possible
to effect closing transactions in particular options, with the result that the
Fund would have to exercise its options in order to realize any profit and would
incur transaction costs upon closing out the futures positions acquired pursuant
to the exercise of such option.

Reasons for the absence of a liquid secondary market on an exchange or
board of trade or over the counter include the following:

- there may be insufficient trading interest in certain options;

- restrictions may be imposed by an exchange or board of trade
on opening transactions or closing transactions or both;

- trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of
options;

- unusual or unforeseen circumstances may interrupt normal
operations on an exchange or board of trade;

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<PAGE> 22
- the facilities of an exchange or board of trade or the Options
Clearing Corporation (the "Clearing Corporation") may not at
all times be adequate to handle current trading volume; or

- one or more exchanges or boards of trade could, for economic
or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market on
that exchange or board of trade (or in that class or series of
options) would cease to exist, although outstanding options on
that exchange or board of trade which had been issued by the
Clearing Corporation as a result of trades on that exchange or
board of trade could continue to be exercisable in accordance
with their terms.

There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Clearing Corporation inadequate, and thereby result in the institution by an
exchange or board of trade of special procedures that may interfere with the
timely execution of customers' orders.

Tax-Exempt Bond Index Transactions. The Fund anticipates utilizing
tax-exempt bond index futures as a hedge against changes in the market value of
the Municipal Obligations in its portfolio or which it intends to acquire. A
tax-exempt bond index assigns relative values to the Municipal Obligations
included in the index. A tax-exempt bond index fluctuates with changes in the
market values of the Municipal Obligations included in the index. An index
future is a bilateral agreement pursuant to which two parties agree to receive
or deliver at settlement an amount of cash equal to a specified dollar amount
multiplied by the difference between the value of the index at the close of a
trading day of the contract and the price at which the future was originally
written. An index future has similar characteristics to financial futures
discussed above except that settlement is made through delivery of cash rather
than the underlying securities.

The Fund's strategies in employing index futures will be similar to the
strategies involved in financial futures transactions. Tax-exempt bond index
futures transactions also will be subject to risks similar to those described
above with respect to financial futures, except that the correlation between
movements in the price of a futures contract and movements in the price of the
Fund's portfolio securities is likely to be higher for tax-exempt index futures
than for financial futures.

The Fund may also purchase and write put and call options on tax-exempt
bond indices and on tax-exempt bond index futures and enter into closing
transactions with respect to such options. An option on an index gives the
holder the right to receive cash upon exercise of the option in an amount equal
to a specified multiple times the amount by which the fixed exercise price of
the option exceeds, in the case of a put, or is less than, in the case of a
call, the closing value of the underlying index on the date of exercise. 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 to sell (in
the case of a put option) or buy (in the case of a call option) a debt
instrument at a specified exercise price at any time during the period of the
option. Upon exercise of the put option, the delivery of the futures position by
the holder of the option to the writer 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 put option on the
index future.

FORWARD COMMITMENTS

New issues of Municipal Obligations are often purchased on a
"when-issued" or delayed delivery basis. The payment obligations and the
interest rate that will be received on the securities are fixed at the time the
buyer enters into the commitment. The Fund will not begin earning interest on
such securities, however, until the securities are scheduled for settlement. The
Fund may enter into such "forward commitments" if it holds and maintains until
the settlement date, in a segregated account, cash or liquid securities which
are "marked to market" daily in an amount sufficient to meet the purchase price.
Forward commitments involve a risk of loss if the value of the Municipal
Obligation to be purchased declines prior to the settlement date. Such a decline
in value could result from, among other things, changes in the level of interest
rates or other market factors. This risk is in addition to the risk of decline
in the value of the Fund's other assets. Although the Fund generally will

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<PAGE> 23
enter into forward commitments with the intention of acquiring Municipal
Obligations for its portfolio, the Fund may dispose of a commitment prior to
settlement if the Advisor deems it appropriate to do so. The Fund may realize
capital gain or loss upon the sale of forward commitments. Any such gains, if
not offset by net realized capital losses, will be distributed to shareholders
in taxable distributions.

REPURCHASE AGREEMENTS

The Fund may purchase U.S. Government securities and concurrently enter
into so-called "repurchase agreements" with the seller, usually a bank or
broker-dealer, whereby the seller agrees to repurchase such securities at the
Fund's cost plus interest within a specified time (normally one day). While
repurchase agreements involve certain risks not associated with direct
investments in U.S. Government securities, the Fund will follow procedures
designed to minimize such risks. These procedures include effecting repurchase
transactions only with the member banks of the Federal Reserve System and
registered broker-dealers having creditworthiness substantially equivalent to
that of the issuers of investment grade debt securities. In addition, the Fund's
repurchase agreements will require that the Fund receive collateral which must
always be at least equal to the repurchase price, including any accrued interest
earned on the repurchase agreement. In the event of a default or bankruptcy by a
seller, the Fund will seek to liquidate such collateral. However, the exercise
of the Fund's right to liquidate such collateral could involve certain costs or
delays and, to the extent that proceeds from any sale upon a default of the
obligation to repurchase were less than the repurchase price, the Fund could
suffer a loss.

INVESTMENT COMPANY SECURITIES

The Fund may purchase common shares of closed-end investment companies
that have a similar investment objectives and policies to the Fund. In addition
to providing tax-exempt income, such securities may provide capital
appreciation. Such investments, which may also be leveraged and subject to the
same risks as the Fund, will not exceed 10% of the Fund's total assets, and no
such company will be affiliated with the Advisor.
These companies bear fees and expenses that the Fund will incur indirectly.

TEMPORARY AND DEFENSIVE INVESTMENTS

A portion of the Fund's assets will be held in cash or invested in
short-term securities for day-to-day operating purposes. It is the intention of
the Fund that short-term investments will also be invested in securities exempt
from U.S. regular federal and California state income taxes. However, if such
securities are not available or if they are available only on a when-issued
basis, the Fund may invest up to 20% of its assets in short-term obligations of
the U.S. Government. In such situations, the Fund may also invest in repurchase
agreements or short-term notes and obligations rated A-1+ of banks that have or
whose parent holding companies have long-term debt ratings of Aaa/AAA or of
corporations with long-term debt ratings of Aaa/AAA, the interest on all of
which is not exempt from federal or California state income taxes.
Notwithstanding the foregoing, the Fund may temporarily invest more than 20% of
its assets in such taxable obligations for defensive purposes. The ability of
the Fund to invest in securities other than tax-exempt securities (as well as
its ability to enter into repurchase agreements) is limited, however, by a
requirement of the Internal Revenue Code of 1986, as amended (the "Code"), that
at least 50% of its total assets be invested in tax-exempt securities at the end
of each quarter in order to pass through to shareholders the Federal income tax
exemption for dividends derived from net investment income on tax-exempt
securities. See "Tax Matters--Federal Taxation of Shareholders."

USE OF LEVERAGE AND RELATED RISKS

The Fund expects to use leverage through the issuance of Municipal
Preferred Shares. The Fund initially intends to use leverage of approximately
35% of its total assets (including the amount obtained through leverage). The
Fund generally will not use leverage if the Advisor anticipates that it would
result in a lower return to Common Shareholders for any significant amount of
time. The Fund also may borrow money as a temporary

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<PAGE> 24
measure for extraordinary or emergency purposes, including the payment of
dividends and the settlement of securities transactions which otherwise might
require untimely dispositions of Fund securities.

Leverage creates risks for holders of the Common Shares, including the
likelihood of greater volatility of the net asset value and market price of the
Common Shares. There is a risk that fluctuations in the dividend rates on any
Municipal Preferred Shares may adversely affect the return to the holders of the
Common Shares. If the income from the securities purchased with such funds is
not sufficient to cover the cost of leverage, the return on the Fund will be
less than if leverage had not been used, and therefore the amount available for
distribution to Common Shareholders as dividends and other distributions will be
reduced or eliminated. The Advisor in its best judgment nevertheless may
determine to maintain the Fund's leveraged position if it deems such action to
be appropriate in the circumstances. Investment by the Fund in inverse floaters
may amplify the effects of leverage and, during periods of rising short-term
interest rates, may adversely affect the Fund's income and distributions to
Common Shareholders. During periods in which the Fund is using leverage the fees
paid to the Advisor for investment advisory and administrative services will be
higher than if the Fund did not use leverage because the fees paid will be
calculated on the basis of the Fund's total net assets, including proceeds from
the issuance of preferred shares.

Capital raised through leverage will be subject to dividend payments
which may exceed the income and appreciation on the assets purchased. The
issuance of preferred shares involves offering expenses and other costs and may
limit the Fund's freedom to pay dividends on Common Shares or to engage in other
activities. The issuance of a class of preferred shares having priority over the
Fund's Common Shares creates an opportunity for greater return per Common Share,
but at the same time such leveraging is a speculative technique in that it will
increase the Fund's exposure to capital risk. Unless the income and
appreciation, if any, on assets acquired with the offering proceeds exceed the
cost of issuing additional classes of securities (and other Fund expenses), the
use of leverage will diminish the investment performance of the Fund's Common
Shares compared with what it would have been without leverage.

The Fund may be subject to certain restrictions on investments imposed
by guidelines of one or more Rating Agencies which may issue ratings for any
preferred shares issued by the Fund. These guidelines may impose asset coverage
and Fund composition requirements that are more stringent than those imposed on
the Fund by the 1940 Act. It is not anticipated that these covenants or
guidelines will impede the Advisor from managing the Fund's portfolio in
accordance with the Fund's investment objectives and policies.

Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless immediately after such issuance the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding preferred
shares (i.e., such liquidation value may not exceed 50% of the Fund's total
assets). In addition, the Fund is not permitted to declare any cash dividend or
other distribution on its Common Shares unless, at the time of such declaration,
the net asset value of the Fund's portfolio (determined after deducting the
amount of such dividend or other distribution) is at least 200% of such
liquidation value. If preferred shares are issued, the Fund intends, to the
extent possible, to purchase or redeem preferred shares from time to time to
maintain asset coverage of any preferred shares of at least 200%. In addition,
under current federal income tax law, the Fund is required to allocate a portion
of any net realized capital gains or other taxable income to holders of
preferred shares. The terms of any preferred shares are expected to require the
Fund to pay to any preferred shareholders additional dividends intended to
compensate the preferred shareholders for taxes payable on any capital gains or
other taxable income allocated to the preferred shares. Any such additional
dividends will reduce the amount available for distribution to the Common
Shareholders. If the Fund has preferred shares outstanding, two of the Fund's
Trustees will be elected by the holders of preferred shares voting as a separate
class. The remaining Trustees will be elected by holders of Common Shares and
preferred shares voting together as a single class. In the event the Fund failed
to pay dividends on its preferred shares for two years, preferred shareholders
would be entitled to elect a majority of the Trustees until the dividends are
paid.

The Fund is required to meet certain distribution requirements in order
to qualify for federal income taxation as a "regulated investment company" and
in order to avoid corporate level income and

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<PAGE> 25
excise tax. To the extent dividends on any preferred shares do not meet these
requirements, the remainder must be distributed to the holders of the Common
Shares.

The Fund's willingness to issue new securities for investment purposes,
and the amount the Fund will issue, will depend on many factors, the most
important of which are market conditions and interest rates. Successful use of a
leveraging strategy may depend on the Advisor's ability to correctly predict
interest rates and market movements, and there is no assurance that a leveraging
strategy will be successful during any period in which it is employed.

Assuming the utilization of leverage in the amount of 35% of the Fund's
total assets and an annual dividend rate on preferred shares of [___%] payable
on such leverage based on market rates as of the date of this Prospectus, the
additional income that the Fund must earn (net of expenses) in order to cover
such dividend payments would be [___%]. The Fund's actual cost of leverage will
be based on market rates at the time the Fund undertakes a leveraging strategy,
and such actual cost of leverage may be higher or lower than that assumed in the
previous example.

The following table is designed to illustrate the effect on the return
to a holder of the Fund's Common Shares of leverage in the amount of
approximately 35% of the Fund's total assets, assuming hypothetical annual
returns of the Fund's portfolio of minus 10% to plus 10%. As the table shows,
leverage generally increases the return to Common Shareholders when portfolio
return is positive and greater than the cost of leverage and decreases the
return when the portfolio return is negative or less than the cost of leverage.
The figures appearing in the table are hypothetical and actual returns may be
greater or less than those appearing in the table.

<TABLE>
<S> <C> <C> <C> <C> <C>
Assuming Portfolio Return (net of expenses)................ (10%) (5%) 0% 5% 10%
Corresponding Share Return Assuming 35%
Leverage ........................................... (____%) (___%) (__%) ___% __%
</TABLE>

If the Fund issues Municipal Preferred Shares, the ability of the Fund
to take certain actions or enter into certain transactions, such as transactions
in which other entities or persons acquire control of the Fund or convert the
Fund to open-end status, may be limited. See "Description of Shares--Municipal
Preferred Shares."

Unless and until the Fund issues preferred shares, the Common Shares
will not be leveraged, and the risks and special considerations related to
leverage described in this Prospectus will not apply. Such leveraging of the
Shares cannot be achieved until the proceeds resulting from the use of leverage
have been invested in accordance with the Fund's investment objectives and
policies.

ADDITIONAL RISK CONSIDERATIONS

CERTAIN RISKS ASSOCIATED WITH INVESTMENTS IN CALIFORNIA MUNICIPAL
OBLIGATIONS. Since the Fund will invest primarily in California Municipal
Obligations, the performance of the Fund is especially affected by factors
pertaining to the California economy and other factors specifically affecting
the ability of issuers of California Municipal Obligations to meet their
obligations. As a result, the value of the Fund's shares may fluctuate more
widely than the value of shares of a fund investing in a number of different
states. The ability of state, county, or local governments or other issuers of
California Municipal Obligations to meet their obligations will depend primarily
on the availability of tax and other revenues to those entities and on their
fiscal conditions generally. The amounts of tax and other revenues available to
issuers of California Municipal Obligations may be affected from time to time by
economic, political and demographic conditions. In addition, constitutional or
statutory

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<PAGE> 26
restrictions may limit an issuers power to raise revenues or increase taxes. The
availability of federal, state and local aid to issuers of California Municipal
Obligations may also affect their ability to meet their obligations. Payments of
principal and interest on revenue bonds will depend on the economic condition of
the facility or specific revenue source from whose revenues the payments will be
made, which in turn could be affected by economic, political and demographic
conditions in California or elsewhere. Any reduction in the actual or perceived
ability of an issuer of California Municipal Obligations to meet its obligations
(including a reduction in the rating of its outstanding securities) would likely
affect adversely the market value and marketability of its obligations and could
adversely affect the values of other California Municipal Obligations as well.
For a more detailed description of these and other risks affecting investment in
California Municipal Obligations, see Appendix B to the Statement of Additional
Information --"Special Considerations Relating to California."

The State of California and other California public bodies have in the
past experienced financial difficulties and may continue to do so. Such
difficulties could have an adverse effect on the ability (or the perceived
ability) of issuers of certain California Municipal Obligations to meet their
obligations on such securities. If that were the case, the ratings of certain
California Municipal Obligations held by the Fund could be downgraded and the
values of such securities could decline. In recent years, the ratings of a
number of California Municipal Obligations have been downgraded in response to
fiscal and economic factors affecting their issuers.

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<PAGE> 27
INTEREST RATE AND MARKET RISK. The prices of Municipal Obligations tend
to fall as interest rates rise. Securities that have longer maturities tend to
fluctuate more in price in response to changes in market interest rates. A
decline in the prices of the Municipal Obligations owned by the Fund would cause
a decline in the net asset value of the Fund, which could adversely affect the
trading price of the Fund's Common Shares. This risk is usually greater among
Municipal Obligations with longer maturities or durations and when inverse
floaters are held by the Fund. Although the Fund has no policy governing the
maturities or durations of its investments, the Fund expects that it will invest
in a portfolio of longer-term securities. This means that the Fund will be
subject to greater market risk (other things being equal) than a fund investing
solely in shorter-term securities. Market risk is often greater among certain
types of income securities, such as zero-coupon bonds, which do not make regular
interest payments. As interest rates change, these bonds often fluctuate in
price more than bonds that make regular interest payments. Conversely, the
values of lower-quality securities are less likely than higher-quality
securities to fluctuate inversely with changes in interest rates. Because the
Fund may invest in these types of income securities, it may be subject to
greater market risk than a fund that invests only in current interest paying
securities.

Until such time as the Fund is fully invested (approximately two to
three months after the completion of the offering), the Fund may invest to a
significant extent in inverse floaters. Compared to similar fixed rate Municipal
Obligations, the value of inverse floaters will fluctuate to a greater extent in
response to changes in prevailing long-term interest rates. Moreover, the income
earned on inverse floaters will fluctuate in response to changes in prevailing
short-term interest rates. Thus, when inverse floaters are held by the Fund, an
increase in short- or long-term market interest rates will adversely affect the
income received from such bonds or the net asset value of the Fund's shares. To
the extent that the Fund has preferred shares outstanding, an increase in
short-term rates would also result in an increased cost of leverage, which would
adversely affect the Fund's income available for distribution. The Fund does not
intend to invest in inverse floaters once it becomes fully invested.

LOWER-RATED SECURITIES. Municipal Obligations in the medium and lower
rating categories of Rating Agencies or that are unrated generally involve
greater risk of nonpayment of principal and interest than securities in higher
rating categories. The Fund may invest up to 20% of its net assets in Municipal
Obligations that, at the time of investment, are rated Ba or B by Moody's or BB
or B by Standard & Poor's, or considered to be of comparable quality by another
Rating Agency, or unrated Municipal Obligations judged to be of comparable
quality by the Advisor. The possibility of defaults by or bankruptcies of
issuers of securities causes, in part, this principal and interest risk and may
result in nonpayment of principal or interest or restructuring of the debt
obligation and, possibly, a reduction in the Fund's net asset value. The medium
and lower-quality Municipal Obligations in which the Fund may invest are
speculative to varying degrees. While such securities may have some quality and
protective characteristics, large uncertainties or major risk exposures to
adverse conditions are expected to outweigh such characteristics. In addition,
the values of lower-quality securities may be more susceptible to real or
perceived adverse economic conditions than higher-grade securities. Municipal
obligations in the lower rating categories are regarded as predominantly
speculative in character. With respect to lower-rated or unrated Municipal
Obligations, the Fund will rely more on the judgment, analysis and experience of
the Advisor than for rated securities.

In evaluating the creditworthiness of a Municipal Obligation whether
rated or unrated, the Advisor may consider, among other things, the following
factors:

- the issuer's financial resources;

- the issuer's sensitivity to economic conditions and trends;

- any operating history of and the community support for the
facility, if any, financed by the issue;

- the ability of the issuer's management; and

- regulatory matters.

In addition, medium and lower rated or unrated Municipal Obligations
are frequently traded only in markets where the number of potential purchasers
and sellers, if any, is very limited. This may limit the availability of such
securities for the Fund to purchase and the ability of the Fund to sell such
securities at their fair value. The Advisor will attempt to reduce the risks of
investing in medium or lower rated or unrated Municipal Obligations to the
greatest extent practicable through the use of credit analysis.

INCOME RISK. The income investors receive from the Fund is based
primarily on the interest it earns from its investments, which can vary widely
over the short and long-term. If interest rates drop, investors' income from the
Fund over time could drop as well if the Fund purchases securities paying lower
rates of interest. This risk is magnified when prevailing short-term interest
rates increase and the Fund holds inverse floaters.

CALL RISK. If interest rates fall, it is possible that issuers of
callable bonds with high interest coupons will "call" (or prepay) their bonds
before their maturity date. If a call were exercised by the issuer during a
period of declining interest rates, the Fund is likely to replace the called
security with a lower yielding security. If that were to happen, it would
decrease the Fund's dividends.

CREDIT RISK. Municipal Obligations are subject to the risk of
non-payment of scheduled interest and/or principal payments. Such nonpayment
would result in a reduction of income to the Fund, a reduction in the value of
the security experiencing nonpayment and a potential decrease in the net asset
value of the Fund. Securities rated below investment grade or unrated securities
of comparable quality ("lower-quality securities") are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
("credit risk") and may also be subject to price volatility due to such factors
as interest rate sensitivity, market perception of the creditworthiness of the
issuer and general market liquidity ("market risk"). The prices of lower-quality
securities are also more likely to react to real or perceived developments
affecting market and credit risk than are prices of investment grade quality
securities ("higher-quality securities"), which react primarily to movements in
the general level of interest rates.

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<PAGE> 28
As indicated above, the Fund may invest in Municipal Obligations rated
below investment grade and comparable unrated obligations. Such obligations are
commonly called "junk bonds" and will have speculative characteristics in
varying degrees. While such obligations may have some quality and protective
characteristics, these characteristics can be expected to be offset or
outweighed by uncertainties or major risk exposures to adverse conditions. The
Advisor seeks to minimize the risks of investing in below investment grade
securities through professional investment analysis, attention to current
developments in interest rates and economic conditions, and industry and
geographic diversification (if practicable). Because the Fund invests in lower
rated or unrated Municipal Obligations, the achievement of the Fund's goals is
more dependent on the Advisor's ability than would be the case if the Fund were
investing solely in Municipal Obligations in the higher rating categories. In
evaluating the credit quality of a particular issue, whether rated or unrated,
the Advisor will normally take into consideration, among other things, the
financial resources of the issuer (or, as appropriate, of the underlying source
of funds for debt service), its sensitivity to economic conditions and trends,
any operating history of and the community support for the facility financed by
the issue, the ability of the issuer's management and regulatory matters. The
Advisor will attempt to reduce the risks of investing in below investment grade
and comparable unrated obligations through active portfolio management, credit
analysis and attention to current developments and trends in the economy and the
financial markets.

Increases in interest rates and changes in the economy may adversely
affect the ability of issuers of lower rated Municipal Obligations to pay
interest and to repay principal, to meet projected financial goals and to obtain
additional financing. In the event that an issuer of securities held by the Fund
experiences difficulties in the timely payment of principal or interest and such
issuer seeks to restructure the terms of its borrowings, the Fund may incur
additional expenses and may determine to invest additional assets with respect
to such issuer or the project or projects to which the Fund's portfolio
securities relate. Further, the Fund may incur additional expenses to the extent
that it is required to seek recovery upon a default in the payment of interest
or the repayment of principal on its portfolio holdings, and the Fund may be
unable to obtain full recovery thereof.

To the extent that there is no established retail market for some of
the lower rated Municipal Obligations in which the Fund may invest, trading in
such securities may be relatively inactive. The Advisor is responsible for
determining the net asset value of the Fund, subject to the supervision of the
Board of Trustees of the Fund. During periods of reduced market liquidity and in
the absence of readily available market quotations for lower rated Municipal
Obligations held in the Fund's portfolio, the ability of the Advisor to value
the Fund's securities becomes more difficult and the Advisor's use of judgment
may play a greater role in the valuation of the Fund's securities due to the
reduced availability of reliable objective data. The effects of adverse
publicity and investor perceptions may be more pronounced for securities for
which no established retail market exists as compared with the effects on
securities for which such a market does exist. Further, the Fund may have more
difficulty selling such securities in a timely manner and at their stated value
than would be the case for securities for which an established retail market
does exist.

Changes in the credit quality of the issuers of Municipal Obligations
held by the Fund will affect the principal value of (and possibly the income
earned on) such obligations. In addition, the value of such securities are
affected by changes in general economic conditions and business conditions
affecting the relevant economic sectors. Changes by Rating Agencies in their
ratings of a security and in the ability of the issuer to make payments of
principal and interest may also affect the value of the Fund's investments. The
amount of information about the financial condition of an issuer of Municipal
Obligations may not be as extensive as that made available by corporations whose
securities are publicly traded.

The Fund may invest in municipal leases and participations in municipal
leases. The obligation of the issuer to meet its obligations under such leases
is often subject to the appropriation by the appropriate legislative body, on an
annual or other basis, of funds for the payment of the obligations. Investments
in municipal leases are thus subject to the risk that the legislative body will
not make the necessary appropriation and the issuer will not otherwise be
willing or able to meet its obligations.

CONCENTRATION. The Fund normally will invest 80% or more of its total
assets in California Municipal Obligations and may invest 25% or more of its
total assets in a U.S. territory.

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<PAGE> 29
This may make the Fund more susceptible to adverse economic, political or
regulatory occurrences affecting California or a particular territory. As
concentration increases, so does the potential for fluctuation of the net asset
value of Fund Common Shares.

LIQUIDITY RISK. At times, a substantial portion of the Fund's assets
may be invested in securities as to which the Fund, by itself or together with
other accounts managed by the Advisor and its affiliates, holds a major portion
of all of such securities. Under adverse market or economic conditions or in the
event of adverse changes in the financial condition of the issuer, the Fund
could find it more difficult to sell such securities when the Advisor believes
it is advisable to do so or may be able to sell such securities only at prices
lower than if such securities were more widely held. Under such circumstances,
it may also be more difficult to determine the fair value of such securities for
purposes of computing the Fund's net asset value.

The secondary market for some Municipal Obligations is less liquid than
that for taxable debt obligations or other more widely traded Municipal
Obligations. No established resale market exists for certain of the Municipal
Obligations in which the Fund may invest. The market for Municipal Obligations
rated below investment grade is also likely to be less liquid than the market
for higher rated Municipal Obligations. As a result, the Fund may be unable to
dispose of these Municipal Obligations at times when it would otherwise wish to
do so at the prices at which they are valued.

A secondary market may be subject to irregular trading activity, wide
bid/ask spreads and extended trade settlement periods. The Fund has no
limitation on the amount of its assets which may be invested in securities which
are not readily marketable or are subject to restrictions on resale. The risks
associated with illiquidity are particularly acute in situations where the
Fund's operations require cash, such as if the Fund tenders for its Common
Shares, and may result in the Fund borrowing to meet short-term cash
requirements.

OPTIONS AND FUTURES TRANSACTIONS. The Fund may seek to hedge its
portfolio against changes in interest rates using options, index options and
futures and financial futures contracts. The Fund's hedging transactions are
designed to manage the Fund's duration, but come at some cost. For example, the
Fund must pay for the option, and the price of the security may not in fact
drop. In large part, the success of the Fund's hedging activities depends on its
ability to forecast movements in securities prices and interest rates. The Fund
does not, however, intend to enter into options and futures transactions for
speculative purposes. The Fund is not required to hedge its portfolio.

CLOSED-END FUNDS. The Fund is a closed-end investment company with no
history of operations and is designed primarily for long-term investors and not
as a trading vehicle. The shares of closed-end investment companies often trade
at a discount from their net asset value, and the Common Shares may likewise
trade at a discount from net asset value. The trading price of the Fund's Common
Shares may be less than the initial public offering price, creating a risk of
loss for investors purchasing in the initial public offering of the Common
Shares. This market price risk may be greater for investors who sell their
Common Shares within a relatively short period after completion of this
offering.

NONDIVERSIFICATION. The Fund has registered as a "nondiversified"
investment company under the 1940 Act so that, subject to its investment
restrictions and applicable federal income tax diversification requirements,
with respect to 50% of its total assets, it will be able to invest more than 5%
(but not more than 25%) of the value of its total assets in the obligations of
any single issuer. To the extent the Fund invests a relatively high percentage
of its assets in obligations of a limited number of issuers, the Fund will be
more susceptible than a more widely diversified investment company to any single
corporate, economic, political or regulatory occurrence.

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<PAGE> 30
YEAR 2000 COMPLIANCE. Like other investment companies, financial and
business organizations and individuals around the world, the Fund could be
adversely affected if the computer systems used by the Advisor, other service
providers and the issuers in which the Fund invests do not properly process and
calculate date-related information and data from and after January 1, 2000. This
is commonly known as the "Year 2000 Problem." The Advisor is taking steps that
it believes are reasonably designed to address the Year 2000 Problem, including
communicating with vendors who provide services, software and systems to the
Fund in an attempt to ensure that date-related information and data can be
properly processed and calculated on and after January 1, 2000. Many Fund
service providers and vendors, including the Advisor, are in the process of
making Year 2000 modifications to their services, software and systems and
believe that such modifications will be completed on a timely basis prior to
January 1, 2000. In addition, Year 2000 readiness information, if available, is
one of the factors considered by the Advisor in its assessment of the issuers in
which the Fund invests. There can be no assurance that these steps will be
sufficient to avoid any adverse impact on the Fund.

HOW THE FUND MANAGES RISK

INVESTMENT LIMITATIONS

The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed without the approval of the holders of a
majority of the outstanding Common Shares and Municipal Preferred Shares, if
any, voting together as a single class, and the approval of the holders of a
majority of the Municipal Preferred Shares voting as a separate class. The Fund
may not:

- Invest more than 25% of total Fund assets in securities of
issuers in any one industry; except that this limitation does
not apply to municipal bonds backed by the assets and revenues
of governments or political subdivisions of governments; and

- Invest more than 5% of total Fund assets in securities of any
one issuer, except that this limitation does not apply to
bonds issued by the United States Government, its agencies and
instrumentalities or to the investment of 25% of its total
assets.

The Fund may become subject to guidelines which are more limiting than
the investment restrictions set forth above in order to obtain and maintain
ratings from Moody's or Standard & Poor's on the Municipal Preferred Shares that
it intends to issue. The Fund does not anticipate that such guidelines would
have a material adverse effect on the Fund's Common Shareholders or the Fund's
ability to achieve its investment objectives. See "Investment Objectives and
Policies--Investment Restrictions" in the Statement of Additional Information
for information about these guidelines and additional fundamental and
nonfundamental investment policies of the Fund.

LIMITED ISSUANCE OF MUNICIPAL PREFERRED SHARES

Under the 1940 Act, the Fund could issue Municipal Preferred Shares
having a total liquidation value (the liquidation of the original purchase price
of the shares plus any accrued and unpaid dividends) of up to one-half of the
value of the total net assets of the Fund. If the total liquidation value of the
Municipal Preferred Shares was ever more than one-half of the value of the
Fund's total net assets, the Fund would not be able to declare dividends on the
Common Shares until the liquidation value, as a percentage of the Fund's assets,
was reduced. The Fund intends to issue Municipal Preferred Shares representing
about 35% of the Fund's total capital at the time of issuance, if the Fund sells
all the Common Shares and Municipal Preferred Shares discussed in this
Prospectus. This higher than required margin of net asset value provides a
cushion against later fluctuations in the value of the Fund's portfolio and will
subject Common Shareholders to less income and net asset value volatility than
if the Fund were more leveraged. The Fund intends to purchase or redeem
Municipal Preferred Shares, if necessary, to keep the liquidation value of the
Municipal Preferred Shares below one-half of the value of the Fund's total net
assets.

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<PAGE> 31
MANAGEMENT OF INVESTMENT PORTFOLIO AND CAPITAL STRUCTURE TO LIMIT LEVERAGE RISK

The Fund may take certain actions if short-term rates increase or
market conditions otherwise change (or the Fund anticipates such an increase or
change) and the Fund's leverage begins (or is expected) to adversely affect
Common Shareholders. In order to attempt to offset such a negative impact of
leverage on Common Shareholders, the Fund may shorten the average maturity of
its investment portfolio (by investing in short-term, high quality securities)
or may extend the maturity of any outstanding Municipal Preferred Shares. The
Fund may also attempt to reduce the leverage by redeeming or otherwise
purchasing Municipal Preferred Shares. As explained above under "Use of Leverage
and Related Risks," the success of any such attempt to limit leverage risk
depends on the Advisor's ability to accurately predict interest rate or other
market changes. Because of the difficulty of making such predictions, the Fund
may never attempt to manage its capital structure in the manner described above.

If market conditions suggest that additional leverage would be
beneficial, the Fund may sell previously unissued Municipal Preferred Shares or
Municipal Preferred Shares that the Fund previously issued but later
repurchased.

HEDGING STRATEGIES

The Fund may use various investment strategies designed to manage the
duration of the Fund. These hedging strategies include using financial futures
contracts, including index futures, options on financial futures or options
based on either an index of long-term municipal securities or on taxable debt
securities whose prices, in the opinion of the Advisor, correlate with the
prices of the Fund's investments. Successful implementation of most hedging
strategies would generate taxable income.

MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

The Board of Trustees is responsible for the general supervision of the
Fund, including general supervision of the duties performed by the Advisor under
its Management Agreement (as defined below) with the Fund. There are 13 trustees
of the Fund, five of whom are "interested persons" (as defined in the 1940 Act).
The names and addresses of the trustees and officers of the Fund and their
principal occupations and other affiliations during the past five years are set
forth under "Management of the Fund" in the Statement of Additional Information.

THE ADVISOR

Colonial Management Associates, Inc. is a Massachusetts corporation
having its principal offices at One Financial Center, Boston, Massachusetts
02111. The Advisor is a wholly owned subsidiary of Liberty Funds Group LLC
("Liberty Funds Group") and both Liberty Funds Group and the Advisor are
indirect, majority-owned subsidiaries of Liberty Mutual Insurance Company
("Liberty"). The Advisor has been an investment advisor since 1931. As of the
date of this Prospectus, the Advisor serves as investment advisor or sub-advisor
for ___ management investment companies and manages over $__ billion in assets.

The Advisor's investment advisory business is managed together with the
mutual funds and institutional investment advisory businesses of its affiliate,
Stein Roe & Farnham Incorporated ("Stein Roe"), by a combined management team of
employees from both companies. Stein Roe also shares personnel, facilities and
systems with the Advisor that may be used in providing administrative services
to the Fund. Both the Advisor and Stein Roe are subsidiaries of Liberty
Financial Companies, Inc.

____________, a _________ of the Advisor, will manage the Fund.
_________ joined the Advisor in ______ as _____________ and has served in that
capacity since that date. Prior to joining the Advisor, __________ was a
___________ at ________ from ________ until __________.

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<PAGE> 32
MANAGEMENT AGREEMENT

The Management Agreement between the Advisor and the Fund (the
"Management Agreement") provides that, subject to the direction of the Board of
Trustees of the Fund and the applicable provisions of the 1940 Act, the Advisor
is responsible for the actual management of the Fund's portfolio. The
responsibility for making decisions to buy, sell or hold a particular investment
rests with the Advisor, subject to review by the Board of Trustees of the Fund
and compliance with the applicable provisions of the 1940 Act.

The Advisor provides the Fund with accounting, bookkeeping and pricing
services and other services and office facilities (the expenses of which are
borne by the Fund as specified below), except to the extent these services are
provided by an administrator or an accounting firm hired by the Fund.

Under the Management Agreement with the Fund, the Advisor receives a
monthly advisory fee at the annual rate of 0.65% of the average weekly net
assets of the Fund (including net assets, if any, attributable to Municipal
Preferred Shares).

The Advisor places all orders for the purchase and sale of
portfolio securities. In selecting broker-dealers, the Advisor may consider
research and brokerage services furnished by such broker-dealers to the Advisor
and its affiliates. In recognition of the research and brokerage services
provided, the Advisor may cause the Fund to pay the selected broker-dealer a
higher commission than would have been charged by another broker-dealer not
providing such services. Subject to seeking best execution, the Advisor may
consider sales of shares of certain other funds distributed by affiliates of
Liberty in selecting broker-dealers for portfolio security transactions.

In addition to the fee of the Advisor, the Fund pays all other
costs and expenses of its operations, including compensation of its trustees
(other than those affiliated with the Advisor), custodian, transfer and dividend
disbursing expenses, legal fees, expenses of independent auditors, expenses of
repurchasing shares, shareholder reports, expenses of preparing, printing and
distributing notices, proxy statements and reports to governmental agencies, and
taxes, if any.

For the first ten years of the Fund's operation, the Advisor has
agreed to reimburse the Fund for fees and expenses in the amounts, and for the
time periods, set forth below:

<TABLE>
<CAPTION>
Percentage
Reimbursed
(as a
percentage
Year of average
Ending weekly total
_______, net assets)
<S> <C>
1999*............................ 0.30%
2000............................. 0.30%
2001............................. 0.30%
2002............................. 0.30%
2003............................. 0.30%
2004............................. 0.30%
</TABLE>

-30-
<PAGE> 33
<TABLE>
<CAPTION>
Percentage
Reimbursed
(as a
percentage
Year of average
Ending weekly total
_______, net assets)
<S> <C>
2005............................. 0.25%
2006............................. 0.20%
2007............................. 0.15%
2008............................. 0.10%
2009............................. 0.05%
</TABLE>
__________

* From the commencement of operations.

The Advisor has not agreed to reimburse the Fund for any portion of its
fees and expenses beyond _______, 2009.

NET ASSET VALUE

Net asset value of the Fund will be determined no less frequently than
as of the close of regular trading on the New York Stock Exchange (the
"Exchange") (generally 4:00 p.m. Eastern time) on the last Business Day of each
week (generally Friday), and at such other times as the Fund may authorize. The
net asset value of the Fund equals the value of the Fund's assets less the
Fund's liabilities. Portfolio securities for which market quotations are readily
available are valued at current market value. Short-term investments maturing in
60 days or less are valued at amortized cost when the Advisor determines,
pursuant to procedures adopted by the Board of Trustees, that such cost
approximates current market value. All other securities and assets are valued at
their fair value following procedures adopted by the Board of Trustees.

When price quotes are not readily available (which is usually the case
for Municipal Obligations), the pricing service establishes a fair market value
based on prices of comparable Municipal Obligations. All valuations are subject
to review by the Fund's Board of Trustees or its delegate, the Advisor.

DISTRIBUTIONS

The Fund intends to make monthly distributions of its net tax-exempt
interest income, after payment of any dividends on any outstanding preferred
shares. The Fund will distribute annually any taxable income and capital gain.
Distributions to Common Shareholders cannot be assured, and the amount of each
monthly distribution is likely to vary. Initial distributions to Common
Shareholders are expected to be paid approximately 60 days after the completion
of this offering. While there are any preferred shares outstanding, the Fund
might not be permitted to declare any cash dividend or other distributions on
its Common Shares in certain circumstances. See "Description of Shares."

If any of the dividends on the Preferred Shares is determined to be
from taxable capital gains or ordinary income, the terms of the Preferred Shares
may require the Fund to pay an extra amount of dividends on the Preferred Shares
in an amount sufficient to make each holder of the Preferred Shares whole (on an
after-tax basis) with respect to the estimated federal income tax which the
holder would be required to pay on the taxable distributions ("gross-up
payments"), in which case the amount of any dividends payable to Common
Shareholders would be reduced by the amount of any such gross-up payments. For
information regarding important federal income tax consequences of distributions
to Common Shareholders, see "Tax Matters."

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<PAGE> 34

DIVIDEND REINVESTMENT PLAN

Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all
holders of Common Shares whose shares are registered in their own names will
have all distributions reinvested automatically in additional shares of the Fund
by ___________ (the "Plan Agent"), as agent under the Plan, unless a shareholder
elects to receive cash. An election to receive cash may be revoked or reinstated
at the option of the shareholder. Shareholders whose shares are held in the name
of a broker or nominee will have distributions reinvested automatically by the
broker or nominee in additional shares under the Plan, unless the service is not
provided by the broker or nominee, or unless the shareholder elects to receive
distributions in cash. If the service is not available, such distributions will
be paid in cash. Shareholders whose shares are held in the name of a broker or
nominee should contact the broker or nominee for details. All distributions to
investors who elect not to participate (or whose broker or nominee elects not to
participate) in the Plan will be paid by check mailed directly to the record
holder by the Plan Agent, as dividend paying agent.

The Plan Agent will furnish each person who buys shares in the offering
with written information relating to the Plan. Included in such information will
be procedures for electing to receive distributions in cash (or, in the case of
shares held in the name of a broker or nominee who does not participate in the
Plan, procedures for having such shares registered in the name of the
shareholder so that such shareholder may participate in the Plan).

If the Trustees of the Fund declare a dividend (including a capital
gain dividend) payable either in shares or in cash, as holders of shares may
have elected, then nonparticipants in the Plan will receive cash and
participants in the Plan will receive the equivalent in shares valued as set
forth below. Whenever a market price is equal to or exceeds net asset value at
the time shares are valued for the purpose of determining the number of shares
equivalent to the cash dividend or capital gains distribution, participants will
be issued shares at the net asset value most recently determined as provided
under "Determination of Net Asset Value" in the Prospectus and Statement of
Additional Information, but in no event less than 95% of the market price. If
the net asset value of the shares at such time exceeds the market price of
shares at such time, or if the Fund should declare a dividend (including a
capital gain dividend) payable only in cash, the Plan Agent will, as agent for
the participants, use the cash that the shareholders would have received as a
dividend to buy shares in the open market, the Exchange or elsewhere, for the
participants' accounts. If, before the Plan Agent has completed its purchases,
the market price exceeds the net asset value of the shares, the average per
share purchase price paid by the Plan Agent may exceed the net asset value of
the shares, resulting in the acquisition of fewer shares than if the dividend
(including a capital gain dividend) had been paid in shares issued by the Fund.
The Plan Agent will apply all cash received as

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<PAGE> 35
a dividend (including a capital gain dividend) to purchase shares on the open
market as soon as practicable after the payment date of such dividend, but in no
event later than 30 days after such date, except where necessary to comply with
applicable provisions of the federal securities laws.

The Plan Agent maintains all shareholder accounts in the Plan and
furnishes written confirmations of all transactions in such accounts, including
information needed by shareholders for personal and tax records. Shares in the
account of each Plan participant will be held by the Plan Agent in
noncertificated form in the name of the participant, and each shareholder's
proxy will include those shares purchased pursuant to the Plan.

There is no charge to participants for reinvesting dividends (including
capital gain dividends). The Plan Agent's fees for handling the reinvestment of
dividends (including capital gain dividends) will be paid by the Fund. There
will be no brokerage charges with respect to shares issued directly by the Fund
as a result of dividends or capital gains distributions payable either in stock
or in cash. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open market purchases in
connection with the reinvestment of dividends (including capital gain
dividends).

The automatic reinvestment of dividends (including capital gain
dividends) will not relieve participants of any income tax which may be payable
on such dividends. The amount of the dividend for tax purposes may vary
depending on whether the Fund issues new Common Shares or purchases them on the
open market. For additional information, please see "Tax Matters."

Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend (including a capital gain dividend) paid after written
notice of the change sent to the members of the Plan at least 30 days before the
record date for such dividend. All correspondence concerning the Plan should be
directed to the Plan Agent at __________.

DESCRIPTION OF SHARES

COMMON SHARES

The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of Common Shares, no par value per share. All Common Shares have equal
rights to the payment of dividends and the distribution of assets upon
liquidation. Common Shares will, when issued, be fully paid and, subject to
matters discussed in "Shareholder Liability" in the Statement of Additional
Information, nonassessable, and will have no pre-emptive or conversion rights or
rights to cumulative voting. Whenever Municipal Preferred Shares are
outstanding, Common Shareholders will not be entitled to receive any
distributions from the Fund unless all accrued dividends on Municipal Preferred
Shares have been paid, and unless asset coverage (as defined in the 1940 Act)
with respect to Municipal Preferred Shares would be at least 200% after giving
effect to the distributions. See "Municipal Preferred Shares" below.

We have applied for listing of the Common Shares on the New York Stock
Exchange subject to notice of issuance. The Fund intends to hold annual meetings
of shareholders so long as the Common Shares are listed on a national securities
exchange and such meetings are required as a condition to such listing.

The Fund's net asset value per share generally increases when interest
rates decline, and decreases when interest rates rise, and these changes are
likely to be greater because the Fund intends to have a leveraged capital
structure. Net asset value will be reduced immediately following the offering by
the amount of the sales load and organization and offering expenses paid by the
Fund. The Advisor has agreed to pay (i) all organizational expenses and (ii)
offering costs (other than sales loads) that exceed $___ per Common Share. See
"Use of Proceeds."

Unlike open-end funds, closed-end funds like the Fund do not
continuously offer shares and do not provide daily redemptions. Rather, if a
shareholder determines to buy additional Common Shares or sell shares

-33-
<PAGE> 36
already held, the shareholder may do so by trading on the New York Stock
Exchange, through a broker or otherwise. Shares of closed-end investment
companies may frequently trade at prices lower than net asset value. Shares of
closed-end investment companies like the Fund that invest predominantly in
municipal bonds have during some periods traded at prices higher than net asset
value and during other periods have traded at prices lower than net asset value.
Because the market value of the Common Shares may be influenced by such factors
as dividend levels (which are in turn affected by expenses), call protection,
dividend stability, portfolio credit quality, net asset value, relative demand
for and supply of such shares in the market, general market and economic
conditions, and other factors beyond the control of the Fund, the Fund cannot
assure you that Common Shares will trade at a price equal to or higher than net
asset value in the future. The Common Shares are designed primarily for
long-term investors, and investors in the Common Shares should not view the Fund
as a vehicle for trading purposes. See "Use of Leverage and Related Risks" and
"Additional Risk Considerations" and the Statement of Additional Information
under "Repurchase of Fund Shares; Conversion to Open-End Fund."

MUNICIPAL PREFERRED SHARES

The Declaration of Trust provides that the Fund may authorize separate
classes of shares of beneficial interest. The By-Laws of the Fund will, at the
time they are amended and restated, authorize the issuance of ___ preferred
shares of beneficial interest, no par value per share, which may be issued from
time to time in such series and with such designations, preferences and other
rights, qualifications, limitations and restrictions as are determined in a
resolution of the Board of Trustees ("Preferred Shares"). The By-Laws will, at
the time they are amended and restated, authorize the issuance of up to __
shares of Series __ Municipal Preferred. Shares of Municipal Preferred carry one
vote per share. Shares of Municipal Preferred will, when issued, be fully paid
and, subject to matters discussed in "Shareholder Liability" in the Statement of
Additional Information, nonassessable, and will have no pre-emptive or
conversion rights or rights to cumulative voting.

The Fund's Board of Trustees has indicated its intention to authorize
an offering of Municipal Preferred Shares (representing approximately 35% of the
Fund's capital immediately after the time the Municipal Preferred Shares are
issued) approximately one to three months after completion of the offering of
Common Shares. Any such decision is subject to market conditions and to the
Board's continuing belief that leveraging the Fund's capital structure through
the issuance of Municipal Preferred Shares is likely to achieve the benefits to
the Common Shareholders described in this Prospectus. Although the terms of the
Municipal Preferred Shares will be determined by the Board of Trustees (subject
to applicable law and the Fund's Declaration) if and when it authorizes a
Municipal Preferred Shares offering, the Board has determined that the Municipal
Preferred Shares, at least initially, would likely pay cumulative dividends at
rates determined over relatively shorter-term periods (such as 7 days), by
providing for the periodic redetermination of the dividend rate through an
auction or remarketing procedure. The Board of Trustees has indicated that the
preference on distribution, liquidation preference, voting rights and redemption
provisions of the Municipal Preferred Shares will likely be as stated below.

LIMITED ISSUANCE OF MUNICIPAL PREFERRED SHARES. Under the 1940 Act, the
Fund could issue Municipal Preferred Shares with an aggregate liquidation value
of up to one-half of the value of the Fund's total net assets, measured
immediately after issuance of the Municipal Preferred Shares. "Liquidation
value" means the original purchase price of the shares being liquidated plus any
accrued and unpaid dividends. In addition, the Fund is not permitted to declare
any cash dividend or other distribution on its Common Shares unless the
liquidation value of the Municipal Preferred Shares is less than one-half of the
value of the Fund's total net assets (determined after deducting the amount of
such dividend or distribution) immediately after the distribution. If the Fund
sells all the Common Shares and Municipal Preferred Shares discussed in this
Prospectus, the liquidation value of the Municipal Preferred Shares is expected
to be approximately 35% of the value of the Fund's total net assets. The Fund
intends to purchase or redeem Municipal Preferred Shares, if necessary, to keep
that fraction below one-half.

DISTRIBUTION PREFERENCE. The Municipal Preferred Shares have complete
priority over the Common Shares as to distribution of assets.

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<PAGE> 37
LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
Municipal Preferred Shares will be entitled to receive a preferential
liquidating distribution (expected to equal the original purchase price per
share plus accumulated and unpaid dividends thereon, whether or not earned or
declared) before any distribution of assets is made to holders of Common Shares.

VOTING RIGHTS. Municipal Preferred Shares are required to be voting
shares and to have equal voting rights with Common Shares. Except as otherwise
indicated in this Prospectus or the Statement of Additional Information and
except as otherwise required by applicable law, holders of Municipal Preferred
Shares will vote together with Common Shareholders as a single class.

Holders of Municipal Preferred Shares, voting as a separate class, will
be entitled to elect two of the Fund's trustees. The remaining trustees will be
elected by Common Shareholders and holders of Municipal Preferred Shares, voting
together as a single class. In the unlikely event that two full years of accrued
dividends are unpaid on the Municipal Preferred Shares, the holders of all
outstanding Municipal Preferred Shares, voting as a separate class, will be
entitled to elect a majority of the Fund's trustees until all dividends in
arrears have been paid or declared and set apart for payment. In order for the
Fund to take certain actions or enter into certain transactions, a separate
class vote of holders of Municipal Preferred Shares will be required, in
addition to the single class vote of the holders of Municipal Preferred Shares
and Common Shares. See the Statement of Additional Information under
"Description of Shares -- Municipal Preferred Shares--Voting Rights."

REDEMPTION, PURCHASE AND SALE OF MUNICIPAL PREFERRED SHARES. The terms
of the Municipal Preferred Shares may provide that they are redeemable at
certain times, in whole or in part, at the original purchase price per share
plus accumulated dividends. The terms may also state that the Fund may tender
for or purchase Municipal Preferred Shares and resell any shares so tendered.
Any redemption or purchase of Municipal Preferred Shares by the Fund will reduce
the leverage applicable to Common Shares, while any resale of such Municipal
Preferred Shares by the Fund will increase such leverage. See "Use of Leverage
and Related Risks."

The discussion above describes the Board of Trustees' present intention
with respect to a possible offering of Municipal Preferred Shares. If the Board
of Trustees determines to authorize such an offering, the terms of the Municipal
Preferred Shares may be the same as, or different from, the terms described
above, subject to applicable law and the Fund's Declaration.

CERTAIN PROVISIONS IN THE DECLARATION OF TRUST

The Board of Trustees is divided into three classes, each having a term
of three years. Each year the term of one class expires. This may make it more
difficult to change the Fund's management and could have the effect of depriving
shareholders of an opportunity to sell their Common Shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of the Fund in a tender offer or similar transaction. In addition, the
Declaration of Trust provides that the affirmative vote or consent of two-thirds
of the outstanding Common Shares and any preferred shares of the Fund (including
Municipal Preferred Shares), voting together as a single class, and of the
Preferred Shares (including Municipal Preferred Shares) voting together as a
single class, would be required to authorize the conversion of the Fund from a
closed-end to an open-end investment company. This two-thirds vote requirement
is higher than the vote required under the 1940 Act.

Please refer to the Declaration of Trust, a copy of which is on file
with the Commission, for the full text of these provisions.

-35-
<PAGE> 38
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND

REPURCHASE OF SHARES

Shares of closed-end investment companies frequently trade at a
discount from net asset value. The Board of Trustees regularly monitors the
relationship between the market price and net asset value of the Common Shares.
If the Common Shares were to trade at a substantial discount to net asset value
for an extended period of time, the Board may consider the repurchase of its
Common Shares on the open market or the making of tender offers for such shares.
No assurances can be given that such actions will be taken. Subject to its
investment restrictions, the Fund may borrow money to finance the repurchase of
shares, subject to compliance with the asset coverage requirements of the 1940
Act and the other limitations described under "Use of Leverage and Related
Risks." Shares may not be repurchased, however, (i) if applicable asset coverage
requirements under the 1940 Act (i.e., 200% with respect to any preferred shares
of the Fund, including Municipal Preferred Shares) are not met or would not be
met following such repurchase or (ii) if otherwise prohibited by applicable law.

There can be no assurance that repurchases or tenders, if they were to
occur, would result in the Common Shares trading at a price which is equal to
their net asset value. The Fund anticipates that the market price of the Common
Shares will usually vary from net asset value. The market price of the Common
Shares will be determined, among other things, by the relative demand for and
supply of the Common Shares in the market, the Fund's investment performance,
the Fund's dividends and yield and investor perception of the Fund's overall
attractiveness as an investment as compared with other investment alternatives.
It should be recognized that any such acquisitions of Common Shares would
decrease the total assets of the Fund and therefore have the effect of
increasing the Fund's expense ratio. Furthermore, any interest on borrowings to
finance share repurchase transactions would reduce the Fund's net income.

CONVERSION TO OPEN-END STATUS

The Fund's Board of Trustees may from time to time consider submitting
to the holders of the shares of beneficial interest of the Fund a proposal to
convert the Fund to an open-end investment company. In determining whether to
exercise its discretion to submit this issue to shareholders, the Board of
Trustees would consider all factors then relevant, including the relationship of
the market price of the Common Shares to net asset value, the extent to which
the Fund's capital structure is leveraged and the possibility of re-leveraging,
the spread, if any, between yields on securities in the Fund's portfolio and
interest and dividend charges on preferred shares issued by the Fund and general
market and economic conditions. In addition to any vote required by
Massachusetts law, conversion of the Fund to an open-end investment company
would require the affirmative vote of two thirds of the Common Shares and any
preferred shares of the Fund (including Municipal Preferred Shares), voting
together as a single class, and of the preferred shares (including Municipal
Preferred Shares) voting together as a single class, entitled to be voted on the
matter. This two-thirds vote requirement is higher than the vote required under
the 1940 Act. Shareholders of an open-end investment company may require the
company to redeem their shares at any time (except in certain circumstances as
authorized by or under the 1940 Act) at their net asset value, less such
redemption charges, if any, as might be in effect at the time of redemption. If
the Fund converted to an open-end investment company, it would be required to
redeem all Municipal Preferred Shares then outstanding at the Municipal
Preferred Shares redemption price. In addition, the Fund could be required to
liquidate portfolio securities to meet required and requested redemptions, and
its Common Shares would no longer be listed on the Exchange. No assurance can be
given that the Board will, at any time in the future, decide to submit a
proposal to convert to open-end status to the shareholders of the Fund.

TAX MATTERS

FEDERAL INCOME TAX MATTERS

The following Federal tax discussion reflects provisions of the Code,
existing Treasury Regulations, rulings published by the Internal Revenue
Service, and other applicable authority, as of the date of this Prospectus.
These authorities are subject to change by legislative or administrative
action. The discussions below and in the Statement of Additional Information
are only a summary of some of the important tax considerations generally
applicable to investments in the Common Shares of the Fund. There may be other
important tax considerations applicable to particular investors. Because tax
laws are complex and often change, you should consult your tax advisor about
the tax consequences of an investment in the Fund.

-36-
<PAGE> 39
The Fund primarily invests in municipal bonds issued by the State of
California or its political subdivisions, agencies, authorities and
instrumentalities, by other states (including the District of Columbia), cities
and local authorities and certain possessions and territories of the United
States (such as Puerto Rico or Guam) or in municipal bonds whose income is
otherwise exempt from regular federal income tax. Consequently, the regular
monthly dividends you receive (whether paid in cash or reinvested in additional
Common Shares) will be exempt from regular federal income taxes. A portion of
these dividends, however, will likely be subject to the federal AMT. If you are
subject to the federal AMT, a portion of your regular monthly dividends may be
taxable. Furthermore, if you receive Social Security or Railroad Retirement
benefits, you should be aware that tax-free income is taken into account in
calculating the amount of these benefits that may be subject to federal income
tax.

For corporate shareholders, interest on all tax-exempt Municipal
Obligations is taken into account in the computation of federal AMT, and
dividends from the Fund do not qualify for the dividends received deduction.

Although the Fund does not seek to realize taxable income or capital
gains, the Fund may realize and distribute taxable income or capital gains from
time to time as a result of the Fund's normal investment activities. The Fund
will distribute at least annually any taxable income or realized capital gains.
Distributions of any taxable net investment income and net short-term capital
gain are taxable as ordinary income. Distributions of the Fund's net capital
gain (i.e., the excess of the Fund's net long-term capital gain over net
short-term capital loss) ("capital gain dividends"), if any, are taxable to you
as long-term capital gains, regardless of how long you have held your Common
Shares. Because Fund expenses attributable to earning tax-exempt income do not
reduce the Fund's current earnings and profits, a portion of any distribution in
excess of the Fund's net tax-exempt and taxable income may be considered as paid
out of the Fund's earnings and profits and may therefore be treated as a taxable
dividend (even though that portion represents a return of the Fund's capital).
Distributions, if any, in excess of the Fund's earnings and profits will first
reduce the adjusted tax basis of your Common Shares and, after that basis has
been reduced to zero, will constitute capital gains to you (assuming that you
held your Common Shares as a capital asset).

Distributions of taxable income or capital gains will be taxable to you
whether received in cash or in Common Shares under the Dividend Reinvestment
Plan. In the latter case, you will be treated as receiving an amount equal to
the cash used to purchase such shares (where the Plan Agent purchases shares on
the open market on behalf of Plan participants) or generally the fair market
value of the Common Shares on the date of issuance of such Shares (where the
Fund issues shares to Plan participants).

Distributions of taxable income or capital gains are taxable to you
even if they are paid from income or gains earned by the Fund prior to your
investment (and thus were included in the price that you paid).

Each year, you will receive a year-end statement that describes the tax
status of dividends paid to you during the preceding year, including the source
of net tax-exempt interest income by state and the portion of income that is
subject to the federal AMT. You will receive this statement from the firm where
you purchased your Common Shares if you hold your investment in street name; the
Fund will send you this statement if you hold your shares in registered form.

If you sell your Common Shares, you will generally recognize gain or
loss in an amount equal to the difference between your adjusted tax basis in the
Common Shares and the amount received. If you hold your Common Shares as capital
assets, the gain or loss will be a capital gain or loss. The maximum tax rate
applicable to net capital gains recognized by individuals and other noncorporate
taxpayers is (i) the same as the maximum ordinary income tax rate for gains
recognized on the sale of capital assets held for one year or less or (ii) 20%
for gains recognized on the sale of capital assets held for more than one year
(as well as capital gain dividends).

Any loss recognized on a disposition of Common Shares held for six
months or less will be disallowed to the extent of any exempt interest dividends
received with respect to those Common Shares. In addition, any loss not already
disallowed as provided in the preceding sentence will be treated as a long-term
capital loss to the extent of any capital gain dividends received with respect
to those Common Shares. For purposes of determining whether Common Shares have
been held for six months or less, the holding period is suspended for any
periods

-37-
<PAGE> 40
during which your risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property, or through certain
options or short sales. In addition, any loss realized on a sale or exchange of
Common Shares will be disallowed to the extent that you replace the disposed of
Common Shares with other Common Shares within a period of 61 days beginning 30
days before and ending 30 days after the date of disposition, which could, for
example, occur if you are a participant in the Dividend Reinvestment Plan. In
such an event, your basis in the replacement Common Shares will be adjusted to
reflect the disallowed loss.

If you borrow money to buy Fund shares, you may not deduct the interest
on that loan. Under I.R.S. rules, Fund shares may be treated as having been
bought with borrowed money even if the purchase of the Fund shares cannot be
traced directly to borrowed money.

A Fund's investments in Municipal Obligations issued at a discount and
certain other portfolio positions will require the Fund to accrue and
distribute income and gains not yet received. In such cases, a Fund may be
required to sell assets (including when it is not advantageous to do so) to
generate the cash necessary to distribute as dividends to its shareholders all
of its income and gains and therefore eliminate any tax liability at the Fund
level.

In order to avoid corporate taxation of its earnings and to pay
tax-free dividends, the Fund intends to qualify each year as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended, by meeting certain I.R.S. requirements that govern the Fund's sources
of income and diversification of assets, and distributing substantially all of
its earnings to shareholders. In particular, in order for the Fund to pay
tax-free dividends, at least 50% of the value of the Fund's total assets must
consist of tax-exempt obligations. If the Fund fails to qualify as a regulated
investment company accorded special tax treatment in any taxable year, the Fund
will be subject to tax on its income at corporate rates, and could be required
to recognize unrealized gains, pay substantial taxes and interest and to make
substantial distributions before requalifying as a regulated investment company
that is accorded special tax treatment.

The Fund may be required to withhold 31% of certain of your dividends
if you have not provided the Fund with your correct taxpayer identification
number (normally your Social Security number), or if you are otherwise subject
to back-up withholding.

STATE AND LOCAL TAX MATTERS

The exemption from federal income tax for exempt-interest dividends
does not necessarily result in exemption for such dividends under the income or
other tax laws of any state or local taxing authority. However, the Fund intends
to invest substantially all of its total assets (at least 80%) in debt
obligations, the interest on which is exempt from California state personal
income taxes. See Appendix B to the Statement of Additional Information --
"Special Considerations Relating to California." In addition, some other states
also exempt from state income tax that portion of any exempt-interest dividend
that is derived from interest received by a regulated investment company on its
holdings of securities of that state and its political subdivisions and
instrumentalities.

The Fund will report annually to its shareholders the percentage of
interest income earned by the Fund during the preceding year on tax-exempt
obligations indicating, on a state-by-state basis, the source of such income.
Shareholders of the Fund are advised to consult with their own tax advisors
about state and local tax matters.

-38-
<PAGE> 41
Please refer to the Statement of Additional Information for more
detailed information. You are urged to consult your tax advisor.

UNDERWRITING

Subject to the terms and conditions stated in the underwriting
agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Fund has agreed to sell to such Underwriter, the
number of Common Shares set forth opposite the name of such Underwriter.

<TABLE>
<CAPTION>
Number
Name of Shares
<S> <C>
Total...................................................... __________
</TABLE>

The underwriting agreement provides that the obligations of the several
Underwriters to purchase the Common Shares included in this offering are subject
to approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to purchase all the Common Shares (other than
those covered by the over-allotment option described below) if they purchase any
of the Common Shares. The representatives have advised the Fund that the
Underwriters do not intend to confirm any sales to any accounts over which they
exercise discretionary authority.

The Underwriters, for whom _______________ are acting as
representatives, propose to offer some of the Common Shares directly to the
public at the public offering price set forth on the cover page of this
Prospectus and some of the Common Shares to certain dealers at the public
offering price less a concession not in excess of $___ per Common Share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $____ per Common Share on sales to certain other dealers. If all of the
Common Shares are not sold at the initial offering price, the representatives
may change the public offering price and other selling terms. Investors must pay
for any Common Shares purchased on or before ______, 1999.

The Fund has granted to the Underwriters an option, exercisable for __
days from the date of this Prospectus, to purchase up to ____ additional Common
Shares at the public offering price less the underwriting discount. The
Underwriters may exercise such option solely for the purpose of covering
overallotments, if any, in connection with this offering. To the extent such
option is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase a number of additional Common Shares approximately
proportionate to such Underwriter's initial purchase commitment.

The Fund and the Advisor have agreed that, for a period of ___ days
from the date of this Prospectus, they will not, without the prior written
consent of ________, on behalf of the Underwriters, dispose of or hedge any
Common Shares or any securities convertible into or exchangeable for Common
Shares. ________ in its sole discretion may release any of the securities
subject to these agreements at any time without notice.

Prior to the offering, there has been no public market for the Common
Shares. Consequently, the initial public offering price for the Common Shares
was determined by negotiation among the Fund, the Advisor and the
representatives. There can be no assurance, however, that the price at which the
Common Shares will sell in the public market after this offering will not be
lower than the price at which they are sold by the Underwriters or that an
active trading market in the Common Shares will develop and continue after this
offering. The Fund has applied for listing of the Common Shares on the New York
Stock Exchange.

The Fund and the Advisor have each agreed to indemnify the several
Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.

-39-
<PAGE> 42
The Fund has agreed to pay the Underwriters $______ as partial
reimbursement of expenses incurred in connection with the offering. The Advisor
has agreed to pay (i) all organizational expenses and (ii) offering costs (other
than sales load) that exceed $____ per share.

In connection with the requirements for listing the Fund's Common
Shares on the New York Stock Exchange, the Underwriters have undertaken to sell
lots of 100 or more Common Shares to a minimum of 2,000 beneficial owners in the
United States. The minimum investment requirement is 100 Common Shares.

Certain Underwriters may make a market in the Common Shares after
trading in the Common Shares has commenced on the New York Stock Exchange. No
Underwriter is, however, obligated to conduct market-making activities and any
such activities may be discontinued at any time without notice, at the sole
discretion of the Underwriter. No assurance can be given as to the liquidity of,
or the trading market for, the Common Shares as a result of any market making
activities undertaken by any Underwriter. This Prospectus is to be used by any
Underwriter in connection with the offering and, during the period in which a
prospectus must be delivered, with offers and sales of the Common Shares in
market-making transactions in the over-the-counter market at negotiated prices
related to prevailing market prices at the time of the sale.

The Underwriters have advised the Fund that, pursuant to Regulation M
under the Securities Exchange Act of 1934, as amended, certain persons
participating in the offering may engage in transactions, including stabilizing
bids, covering transactions or the imposition of penalty bids, which may have
the effect of stabilizing or maintaining the market price of the Common Shares
at a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Common Shares on behalf of
an Underwriter for the purpose of fixing or maintaining the price of the Common
Shares. A "covering transaction" is a bid for or purchase of the Common Shares
on behalf of an Underwriter to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is a contractual
arrangement whereby if, during a specified period after the issuance of the
Common Shares, the Underwriters purchase Common Shares in the open market for
the account of the underwriting syndicate and the Common Shares purchased can be
traced to a particular Underwriter or member of the selling group, the
underwriting syndicate may require the Underwriter or selling group member in
question to purchase the Common Shares in question at the cost price to the
syndicate or may recover from (or decline to pay to) the Underwriter or selling
group member in question any or all compensation (including, with respect to a
representative, the applicable syndicate management fee) applicable to the
Common Shares in question. As a result an Underwriter or selling group member
and, in turn, brokers may lose the fees that they otherwise would have earned
from a sale of the Common Shares if their customer resells the Common Shares
while the penalty bid is in effect. The Underwriters are not required to engage
in any of these activities, and any such activities, if commenced, may be
discontinued at any time.

Representatives that sell at least a specified number of Common Shares
will share in the syndicate management fee based on the respective number of
shares sold by them.

The Fund anticipates that from time to time the representatives of the
Underwriters and certain other Underwriters may act as brokers or dealers in
connection with the execution of the Fund's portfolio transactions after they
have ceased to be Underwriters and, subject to certain restrictions, may act as
brokers while they are Underwriters.

CUSTODIAN, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND REGISTRAR

The Fund's securities and cash are held by The Chase Manhattan Bank,
whose principal business address is 270 Park Avenue, New York, New York
10017-2070, as custodian (the "Custodian") under a custodian contract.

EquiServe, whose principal business address is 150 Royall Street,
Canton, Massachusetts 02021, serves as dividend disbursing agent, as agent under
the Plan and as transfer agent and registrar for the shares.

-40-
<PAGE> 43
LEGAL OPINIONS

Certain legal matters in connection with the Common Shares will be
passed upon for the Fund by Ropes & Gray, Boston, Massachusetts, and for the
Underwriters by _______________.

-41-
<PAGE> 44
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION

USE OF PROCEEDS.................................................. B-2
INVESTMENT OBJECTIVES AND POLICIES............................... B-2
FUND CHARGES AND EXPENSES........................................ B-4
MANAGEMENT OF THE FUND........................................... B-5
PORTFOLIO TRANSACTIONS........................................... B-11
NET ASSET VALUE.................................................. B-11
DESCRIPTION OF SHARES............................................ B-12
REPURCHASE OF COMMON SHARES...................................... B-14
MISCELLANEOUS INVESTMENT PRACTICES............................... B-15
TAX MATTERS...................................................... B-24
SHAREHOLDER LIABILITY............................................ B-27
CUSTODIAN........................................................ B-27
INDEPENDENT ACCOUNTANTS.......................................... B-27
APPENDIX A--Ratings of Investments............................... B-28
APPENDIX B--Special Considerations Relating to California........ B-33

-42-
<PAGE> 45
You should rely only on the information contained in this Prospectus. The Fund
has not authorized anyone to provide you with different information. The Fund is
not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information provided by this
Prospectus is accurate as of any date other than the date on the front of this
Prospectus.

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

TABLE OF CONTENTS
Page

Forward-Looking Statements.................................................. 3
Prospectus Summary.......................................................... 4
Summary of Fund Expenses.................................................... 11
The Fund.................................................................... 12
Use of Proceeds............................................................. 12
Investment Objective and Policies........................................... 12
Use of Leverage and Related Risks........................................... 21
Additional Risk Considerations.............................................. 23
How the Fund Manages Risk................................................... 28
Management of the Fund...................................................... 29
Net Asset Value............................................................. 31
Distributions............................................................... 31
Dividend Reinvestment Plan.................................................. 32
Description of Shares....................................................... 33
Certain Provisions in the Declaration of Trust.............................. 35
Repurchase of Common Shares; Conversion to Open-End Fund.................... 36
Tax Matters................................................................. 36
Underwriting................................................................ 39
Custodian, Transfer Agent, Dividend Disbursing Agent and Registrar.......... 40
Legal Opinions.............................................................. 41
Table of Contents for the Statement of Additional Information............... 42

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

Until _______, 1999 (25 days after the date of this Prospectus), all dealers
that buy, sell or trade the Common Shares, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.

-43-
<PAGE> 46

________ Shares

PREMIER CALIFORNIA MUNICIPAL INCOME FUND

COMMON SHARES

$_____ PER SHARE

____________________________

PROSPECTUS

________________, 1999

____________________________

-44-
<PAGE> 47
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED SEPTEMBER 9, 1999

Premier California Municipal Income Fund

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information ("SAI") relating to the common
shares of beneficial interest ("Common Shares") offered by Premier California
Municipal Income Fund (the "Fund") contains information which may be useful to
investors but which is not included in the Prospectus of the Fund. This SAI is
not a prospectus and is authorized for distribution only when accompanied or
preceded by the Prospectus of the Fund dated _________ ___, 1999, describing the
Common Shares (the "Prospectus"). This SAI should be read together with the
Prospectus. Investors may obtain a free copy of the Prospectus by calling
Colonial Management Associates, Inc. at 1-800-426-3750. Capitalized terms used
but not defined in this SAI have the meanings ascribed to them in the
Prospectus.

TABLE OF CONTENTS

USE OF PROCEEDS............................................... B-2
INVESTMENT OBJECTIVES AND POLICIES............................ B-2
FUND CHARGES AND EXPENSES..................................... B-4
MANAGEMENT OF THE FUND........................................ B-5
PORTFOLIO TRANSACTIONS........................................ B-11
NET ASSET VALUE............................................... B-11
DESCRIPTION OF SHARES......................................... B-12
REPURCHASE OF COMMON SHARES................................... B-14
MISCELLANEOUS INVESTMENT PRACTICES............................ B-15
TAX MATTERS................................................... B-24
SHAREHOLDER LIABILITY......................................... B-27
CUSTODIAN..................................................... B-27
INDEPENDENT ACCOUNTANTS....................................... B-27
APPENDIX A--Ratings of Investments............................ B-28
APPENDIX B--Special Considerations Relating to California..... B-33
<PAGE> 48
USE OF PROCEEDS

The net proceeds of the offering of Common Shares will be approximately
$_________ ($______ if the underwriters exercise their overallotment option in
full) after payment of the sales load to ______________ (the "Underwriter") and
estimated organization and offering costs. A portion of the offering costs has
been advanced by the Fund's investment advisor, Colonial Management Associates,
Inc. (the "Advisor").

The net proceeds of the offering will be invested in accordance with the
Fund's investment objectives and policies. It is presently anticipated that the
Fund will be able to invest substantially all of the net proceeds in Municipal
Obligations that meet the Fund's investment objectives at or shortly (within
three months) after the completion of the offering. To the extent that all of
the proceeds cannot be so invested, pending such investment, they will be
invested initially in high-quality, short-term, tax-exempt securities, to the
extent such securities are available. If necessary to invest fully the net
proceeds of the offerings immediately, the Fund may also purchase, as temporary
investments, short-term taxable investments of the type described under
"Investment Objectives and Policies--Temporary and Defensive Investments" in the
Prospectus, the income on which may be subject to Federal income taxes.

INVESTMENT OBJECTIVES AND POLICIES

The Fund's Prospectus describes its investment objectives and investment
policies. This SAI includes additional information concerning, among other
things, the investment policies of the Fund and information about certain
securities and investment techniques that are described or referred to in the
Prospectus or in which the Fund expects to engage. Except as indicated under
"Fundamental Investment Policies," the Fund's investment policies are not
fundamental and the Trustees may change the policies without shareholder
approval.

FUNDAMENTAL INVESTMENT POLICIES

The following fundamental restrictions are for the protection of the Fund's
shareholders and cannot be changed without the approval of the holders of a
"majority of the outstanding" Common Shares and Preferred Shares, including
shares of Municipal Preferred, voting together as a single class, and of the
holders of a "majority of the outstanding" Preferred Shares, including shares of
Municipal Preferred, voting as a separate class. A "majority of the outstanding"
shares means the lesser of (i) 67% of the shares represented at a meeting at
which more than 50% of the outstanding shares are represented or (ii) more than
50% of the outstanding shares.

The Fund may:

1. issue senior securities or borrow money to the extent permitted by the
1940 Act;

2. only own real estate acquired as a result of owning securities;

3. purchase and sell futures contracts and related options;

4. underwrite securities issued by others only when disposing of portfolio
securities;

5. make loans only through lending of securities, through the purchase of
debt instruments or similar evidences of indebtedness typically sold to
financial institutions and through repurchase agreements;

6. not concentrate more than 25% of its total assets in any one industry, or
with respect to 50% of total assets purchase any security (other than
obligations of the U.S. Government and cash items including receivables)
if as a result more than 5% of its total assets would then be invested in
securities of a single issuer or purchase the voting securities of an
issuer if, as a result of such purchase, the Fund would own more than 10%
of the outstanding voting shares of such issuer. (The Fund will treat
each state and each separate political subdivision, agency, authority or
instrumentality of such state, each multistate agency or authority, and
each guarantor, if any, as separate issuers. In the utilities category,
gas, electric, water and telephone companies will be considered as
separate industries);

7. purchase or sell commodities or commodities contracts, except for
transactions involving futures contracts and options within the limits
described under "Miscellaneous Investment Practices" below;

B-2
<PAGE> 49
8. and will, under normal circumstances, invest at least 80% of its assets in
debt obligations issued by or on behalf of states (including the District
of Columbia), territories and possessions of the United States, and their
political subdivisions, agencies or instrumentalities, the interest on
which is exempt from regular federal income tax ("Municipal Obligations").

For the purpose of applying the limitation set forth above in subparagraph
(6), 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 issuer, 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 issuer, then such non-governmental issuer would be
deemed to be the sole issuer. Where a security is also backed by the enforceable
obligation of a superior or unrelated governmental 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. When a Municipal Obligation is insured by bond
insurance, it shall not be considered a security that is issued or guaranteed by
the insurer; instead, the issuer of such Municipal Obligation 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 Municipal
Obligations insured by any given insurer.

The restrictions and other limitations set forth above will apply only at
the time of purchase of securities and will not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.

The Fund has no intention to file a voluntary application for relief under
federal bankruptcy law or any similar application under state law for so long as
the Fund is solvent, and does not foresee becoming insolvent.

OTHER INVESTMENT POLICIES

As non-fundamental investment policies which may be changed by the Fund
without a shareholder vote, the Fund may not:

1. Purchase securities on margin, but it may receive short-term credit to
clear securities transactions and may make initial or maintenance margin
deposits in connection with futures transactions;

2. Make short sales of securities, other than short sales "against the box,"
provided that this restriction will not be applied to limit the use of
options, futures contracts and related options, in the manner otherwise
permitted by the investment restrictions, policies and investment program
of the Fund. The Fund has no current intention of making short sales
against the box; and

3. Invest in interests in oil, gas or other mineral exploration or development
programs, including leases.

The Fund intends to apply for ratings for the Municipal Preferred Shares
which it may offer in the future from Moody's Investors Service, Inc. ("Moody's)
and/or Standard & Poor's Rating Services ("S&P"). In order to obtain and
maintain the required ratings, the Fund may be required to comply with
investment quality, diversification and other guidelines established by Moody's
or S&P. Such guidelines will likely be more restrictive than the restrictions
set forth above. The Fund does not anticipate that such guidelines would have a
material adverse effect on the Fund's Common Shareholders or its ability to
achieve its investment objectives. The Fund presently anticipates that any
Municipal Preferred Shares that it intends to issue would be initially given the
highest ratings by Moody's ("Aaa") or by S&P ("AAA"), but no assurance can be
given that such ratings will be obtained. No minimum rating is required for the
issuance of Municipal Preferred Shares by the Fund. Moody's and S&P receive fees
in connection with their ratings issuances.

B-3
<PAGE> 50
FUND CHARGES AND EXPENSES

Under the Fund's management agreement, the Fund pays the Advisor a monthly
fee based on the average weekly net assets of the Fund, including the proceeds
of the offering of the shares of Municipal Preferred, if any, for such month at
the annual rate of .65% of average weekly total net assets.

For the first ten years of the Fund's operation, the Advisor has agreed to
reimburse the Fund for fees and expenses in the amounts, and for the time
periods, set forth below:

<TABLE>
<CAPTION>
Percentage
Reimbursed
(as a
percentage
Year of average
Ending weekly total
_______, net assets)*
<S> <C>
1999*............................ 0.30%
2000............................. 0.30%
2001............................. 0.30%
2002............................. 0.30%
2003............................. 0.30%
2004............................. 0.30%
</TABLE>

<TABLE>
<CAPTION>
Percentage
Reimbursed
(as a
percentage
Year if average
Ending weekly total
_______, net assets)*
<S> <C>
2005............................. 0.25%
2006............................. 0.20%
2007............................. 0.15%
2008............................. 0.10%
2009............................. 0.05%
</TABLE>
__________

* Including net assets attributable to Municipal Preferred Shares.

The Advisor has not agreed to reimburse the Fund for any portion of its
fees and expenses beyond _______, 2009.

The Fund recently commenced operations and has not paid any advisory
fees to the Advisor.

B-4
<PAGE> 51
BROKERAGE COMMISSIONS

The Fund recently commenced operations and has not paid any brokerage
commissions.

MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

The names and business addresses of the Trustees and officers of the
Fund and their principal occupations and other affiliations during the past five
years are set forth below.

<TABLE>
<CAPTION>
NAME (AGE) POSITIONS AND PRINCIPAL OCCUPATIONS
AND ADDRESS OFFICES WITH TRUST DURING PAST FIVE YEARS
- ----------- ------------------ ----------------------
<S> <C> <C>
Robert J. Birnbaum (71).............. Trustee Consultant (formerly Special Counsel,
313 Bedford Road Dechert Price & Rhoads (law firm) from
Ridgewood, NJ 07450 September, 1988 to December, 1993;
President, New York Stock Exchange from
May, 1985 to June, 1988; President,
American Stock Exchange, Inc. from 1977
to May, 1985).
Tom Bleasdale (69)................... Trustee Retired (formerly Chairman of the Board
502 Woodlands Drive and Chief Executive Officer, Shore Bank &
Linville, NC 07450 Trust Company from 1992 to 1993);
Director of The Empire Company since
June, 1995.
John V. Carberry* (52)............... Trustee Senior Vice President of Liberty
56 Woodcliff Road Financial Companies, Inc. (formerly
Wellesley Hills, MA 02481 Managing Director, Salomon Brothers
(investment banking) from January, 1988
to January, 1998).
Lora S. Collins (63)................. Trustee Attorney (formerly Attorney, Kramer,
1175 Hill Road Levin, Naftalis & Frankel (law firm) from
Southold, NY 11971 September, 1986 to November, 1996).
James E. Grinnell (69)............... Trustee Private Investor since November, 1988.
22 Harbor Avenue
Marblehead, MA 01945
Richard W. Lowry* (63)............... Trustee Private Investor since August, 1987.
Seven Winter Street
Nantucket, MA 02554
Salvatore Macera (67)................ Trustee Private Investor (formerly Executive Vice
26 Little Neck Lane President and Director of Itek
New Seabury, MA 02649 Corporation (electronics) from 1975 to
1981).
William E. Mayer* (59)............... Trustee Partner, Development Capital, LLC
500 Park Avenue, 5th Floor (venture capital) (formerly Dean, College
New York, NY 10022 of Business and Management, University of
Maryland from October, 1992 to November,
1996; Dean, Simon Graduate School of
Business, University of Rochester from
October, 1991 to July, 1992).
James L. Moody, Jr.* (67)............ Trustee Retired (formerly Chairman of the Board,
16 Running Tide Road Hannaford Bros. Co. (food retailer) from
Cape Elizabeth, ME 04107 May, 1984 to May, 1997, and Chief
Executive Officer, Hannaford Bros. Co.
from May, 1973 to May, 1992).
John J. Neuhauser (56)............... Trustee Dean, Boston College School of Management
140 Commonwealth Avenue since September, 1977.
Chestnut Hill, MA 02167
</TABLE>
B-5
<PAGE> 52
<TABLE>
<CAPTION>
NAME (AGE) POSITIONS AND PRINCIPAL OCCUPATIONS
AND ADDRESS OFFICES WITH TRUST DURING PAST FIVE YEARS
- ----------- ------------------ ----------------------
<S> <C> <C>
Thomas E. Stitzel* (63).............. Trustee Professor of Finance, College of
2208 Tawny Woods Place Business, Boise State University (higher
Boise, ID 83706 education); Business consultant and
author.
Robert L. Sullivan* (71)............. Trustee Retired (formerly Partner, KPMG Peat
45 Sankaty Avenue Marwick LLP, from July, 1966 to June,
Siasconset, MA 02564 1985).
Anne-Lee Verville (53)............... Trustee Consultant (formerly General Manager,
359 Stickney Hill Road Global Education Industry from 1994 to
Hopkinton, NH 03229 1997, and President, Applications
Solutions Division from 1991 to 1994, IBM
Corporation (global education and global
applications)).
Stephen E. Gibson (45)............... President President of the Trust and the Liberty
Funds since June, 1998, Chairman of the
Board since July, 1998, and Chief
Executive Officer and President since
December, 1996, and Director since 1996
of the Advisor (formerly Executive Vice
President from July, 1996 to December,
1996); Director, Chief Executive Officer
and President of Liberty Funds Group LLC
(formerly known as COGRA, LLC) ("LFG")
since December, 1998 (formerly Director,
Chief Executive Officer and President of
The Colonial Group, Inc. ("TCG") from
December, 1996 to December, 1998);
Assistant Chairman of Stein Roe & Farnham
Incorporated ("SR&F") since August, 1998
(formerly Managing Director of Marketing
of Putnam Investments from June, 1992 to
July, 1996).
J. Kevin Connaughton (34)............ Controller and Chief Controller and Chief Accounting Officer
Accounting Officer of the Trust and the Liberty Funds,
except Liberty Funds Trust IX, since
February, 1998; Controller, Liberty Funds
Trust IX, since December, 1998; Vice
President of the Advisor since February,
1998 (formerly Senior Tax Manager,
Coopers & Lybrand, LLP from April, 1996
to January, 1998; Vice President, 440
Financial Group/First Data Investor
Services Group from March, 1994 to April,
1996).
</TABLE>

B-6
<PAGE> 53
<TABLE>
<CAPTION>
NAME (AGE) POSITIONS AND PRINCIPAL OCCUPATIONS
AND ADDRESS OFFICES WITH TRUST DURING PAST FIVE YEARS
- ----------- ------------------ ----------------------
<S> <C> <C>
Timothy J. Jacoby (45)............... Treasurer and Chief Treasurer and Chief Financial Officer of
Financial Officer the Trust and the Liberty Funds, except
Liberty Funds Trust IX, since October,
1996 (formerly Controller and Chief
Accounting Officer from October, 1997 to
February, 1998); Treasurer of Liberty
Funds Trust IX since December, 1998;
Senior Vice President of the Advisor
since September, 1996; Vice President,
Chief Financial Officer and Treasurer of
LFG since December, 1998 (formerly Vice
President, Chief Financial Officer and
Treasurer of TCG from July, 1997 to
December, 1998); Senior Vice President of
SR&F since August, 1998 (formerly Senior
Vice President, Fidelity Accounting and
Custody Services from September, 1993 to
September, 1996).
Nancy L. Conlin (45)................. Secretary Secretary of the Trust and the Liberty
Funds, except Liberty Funds Trust IX
since April, 1998 (formerly Assistant
Secretary from July, 1994 to April,
1998); Director, Senior Vice President,
General Counsel, Clerk and Secretary of
the Advisor since April, 1998 (formerly
Vice President, Counsel, Assistant
Secretary and Assistant Clerk from July,
1994 to April, 1998); Vice President,
General Counsel and Secretary of LFG
since December, 1998 (formerly Vice
President, General Counsel and Clerk of
TCG from April, 1998 to December, 1998;
formerly Assistant Clerk from July, 1994
to April, 1998).
</TABLE>

B-7
<PAGE> 54
* Denotes those Trustees who are "interested persons" (as defined in the
Investment Company Act of 1940, as amended (the "1940 Act")) of the Fund or the
Advisor.

The business address of the officers of the Fund is One Financial Center,
Boston, MA 02111.

The Trustees of the Fund are also directors or trustees, as the case
may be, of Liberty Funds Trust I, Liberty Funds Trust II, Liberty Funds Trust
III, Liberty Funds Trust IV, Liberty Funds Trust V, Liberty Funds Trust VI,
Liberty Funds Trust VII, Liberty Funds Trust VIII (formerly known as LFC
Utilities Trust), Liberty Variable Investment Trust ("LVIT"), Colonial Municipal
Income Trust, Colonial High Income Municipal Trust, Colonial Investment Grade
Municipal Trust, Colonial Intermediate High Income Fund, and Colonial
Intermarket Income Trust I (collectively, each trust or any series thereof
termed the "Liberty Funds").

At the next annual meeting of the Fund's shareholders following the
issuance of Municipal Preferred Shares, holders of outstanding shares of
Municipal Preferred, voting together as one separate class, will elect two
Trustees, and holders of outstanding Common Shares and shares of Municipal
Preferred, voting together as a single class, will elect the remaining Trustees.
See "Description of Municipal Preferred--Voting Rights."

The Trustees serve as trustees of all Liberty Funds for which each
Trustee (except Mr. Carberry) receives an annual retainer of $45,000 and
attendance fees of $8,000 for each regular joint meeting and $1,000 for each
special joint meeting. Committee chairs and the lead Trustee receive an annual
retainer of $1,000 and Committee chairs receive $1,000 for each special meeting
attended on a day other than a regular joint meeting day. Committee members
receive an annual retainer of $1,000 and $1,000 for each special meeting
attended on a day other than a regular joint meeting day. Two-thirds of the
Trustee fees are allocated among the Liberty Funds based on each Liberty Fund's
relative net assets, and one-third of the fees are divided equally among the
Liberty Funds.

B-8
<PAGE> 55
TRUSTEES AND TRUSTEES' FEES

For the fiscal year ended November 30, ____ the Trustees received the
compensation set forth below for serving as Trustee(a). It is estimated that the
Trustees will receive the amounts set forth below for the fiscal year ending
November 30, ____.

Total Compensation From
Estimated Compensation From The Fund Complex Paid To The
The Fund For The Fiscal Year Trustees For The Calendar Year
Trustee Ended November 30, Ended December 31, (b)
- ------- ---------------------------- ------------------------------

Robert J. Birnbaum
Tom Bleasdale
John V. Carberry
Lora S. Collins
James E. Grinnell
William D. Ireland, Jr.
Richard W. Lowry
Salvatore Macera
William E. Mayer
James L. Moody, Jr.
John J. Neuhauser
George L. Shinn
Thomas E. Stitzel
Robert L. Sullivan
Anne-Lee Verville
Sinclair Weeks, Jr.

(a) The Fund does not currently provide pension or retirement plan benefits
to the Trustees.

(b) At November 30, ____, the complex consisted of __ open-end and __
closed-end management investment portfolios in the ______ Funds and __
open-end management investment portfolios in _____ (together, the "Fund
Complex").

For the fiscal year ended November 30, ____, certain of the Trustees received
the following compensation in their capacities as Trustees or Directors of
Liberty All-Star Equity Fund, Liberty All-Star Growth Fund, Inc. and Liberty
Funds Trust IX (formerly known as LAMCO Trust I)(together, the "Liberty
All-Star Funds")(c):

Total Compensation from
the Liberty All-Star Funds For The Calendar
Trustee Year Ended December 31, 1998 (d)
- ------- -------------------------------------------

Robert J. Birnbaum
John V. Carberry
James E. Grinnell
Richard W. Lowry
William E. Mayer
John J. Neuhauser

(d) The Liberty All-Star Funds are advised by Liberty Asset Management
Company ("LAMCO"). LAMCO is an indirect wholly owned subsidiary of Liberty
Financial (an intermediate parent of the Advisor).

At _____________, 1999, the Fund's officers and Trustees as a group
owned less than 1% of the outstanding Common Shares.

At ____________, 1999, ____________________________, owned of record
__________ shares, representing ____, of the Fund's outstanding shares.

In addition to the provisions discussed in the Prospectus under
"Certain Provisions in the Agreement and Declaration of Trust," the Declaration
provides that the obligations of the Fund are not binding upon the Trustees of
the Fund individually, but only upon the assets and property of the Fund. The
Declaration also provides that the Fund will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with litigation in which
they may be involved because of their offices with the Fund but that such
indemnification will not relieve any officer or Trustee of any liability to the
Fund or its shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of his or her duties. The Fund, at its expense,
provides liability insurance for the benefit of its Trustees and officers.

B-9
<PAGE> 56
INVESTMENT ADVISOR

Colonial Management Associates, Inc. (the "Advisor"), and/or its
affiliate, Colonial Advisory Services, Inc. ("CASI"), has rendered investment
advisory services to investment company, institutional and other clients since
1931. The Advisor currently serves as investment advisor, sub-advisor or
administrator for ___ open-end and ___ closed-end management investment company
portfolios. Trustees and officers of the Fund, who are also officers of the
Advisor or its affiliates, will benefit from the advisory fees, sales
commissions and agency fees paid or allowed by the Fund. More than 30,000
financial advisors have recommended the Liberty Funds to over 800,000 clients
worldwide, representing more than $16.3 billion in assets.

The Advisor is a subsidiary of Liberty Funds Group LLC ("LFG"), One
Financial Center, Boston, MA 02111. LFG is an indirect wholly owned subsidiary
of Liberty Financial Companies, Inc. ("Liberty Financial"), which in turn is a
direct majority-owned subsidiary of LFC Management Corporation, which in turn is
a direct wholly owned subsidiary of Liberty Corporate Holdings, Inc., which in
turn is a direct wholly owned subsidiary of LFC Holdings, Inc., which in turn is
a direct wholly owned subsidiary of Liberty Mutual Equity Corporation, which in
turn is a direct wholly owned subsidiary of Liberty Mutual Insurance Company
("Liberty Mutual"). Liberty Mutual is an underwriter of workers' compensation
insurance and a property and casualty insurer in the United States. Liberty
Financial's address is 600 Atlantic Avenue, Boston, MA 02210. Liberty Mutual's
address is 175 Berkeley Street, Boston, MA 02117.

Under a Management Agreement (the "Agreement"), the Advisor has
contracted to furnish the Fund with investment research and recommendations or
fund management, respectively, and accounting and administrative personnel and
services, and with office space, equipment and other facilities. For these
services and facilities, the Fund pays a monthly fee based on the average weekly
net assets of the Fund for such month. Under the Agreement, any liability of the
Advisor to the Fund and/or its shareholders is limited to situations involving
the Advisor's own willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties.

The Agreement may be terminated with respect to the Fund at any time on
60 days' written notice by the Advisor or by the Trustees of the Fund or by a
vote of a majority of the outstanding voting securities of the Fund. The
Agreement will automatically terminate upon any assignment thereof and shall
continue in effect from year to year only so long as such continuance is
approved at least annually (i) by the Trustees of the Fund or by a vote of a
majority of the outstanding voting securities of the Fund and (ii) by vote of a
majority of the Trustees who are not interested persons (as such term is defined
in the 1940 Act) of the Advisor or the Fund, cast in person at a meeting called
for the purpose of voting on such approval.

The Advisor pays all salaries of officers of the Fund. The Fund pays
all expenses not assumed by the Advisor, including, but not limited to,
auditing, legal, custodial, investor servicing and shareholder reporting
expenses. The Fund pays the cost of printing and mailing any Prospectuses sent
to shareholders.

[The Advisor also provides the Fund with bookkeeping and pricing
services, and for these services, the Fund pays the Advisor a monthly fee of
[$1,500 for the first $50 million of Fund assets, plus a monthly percentage fee
at the following annual rates: 0.0233% on the next $950 million; 0.0167% on the
next $1 billion; 0.0100% on the next $1 billion; and 0.0007% on the excess over
$3 billion of the average net assets of the Fund for such month.]

The Advisor also acts as investment advisor to the other Liberty Funds
(described under "Fund Charges and Expenses--Trustees' Fees"). The Advisor's
affiliate, CASI, advises other institutional, corporate, fiduciary and
individual clients for which CASI performs various services. Various officers
and Trustees of the Fund also serve as officers, directors or trustees of other
Liberty Funds and the other corporate or fiduciary clients of the Advisor. The
other investment companies and clients advised by the Advisor may sometimes
invest in securities and options in which the Fund will also invest. If the
Fund, such other investment companies and such clients desire to buy or sell the
same portfolio securities or options at about the same time, the purchases and
sales will normally be made as nearly as practicable on a pro rata basis in
proportion to the amounts desired to be purchased or sold by each. Although in
some cases these practices may have a detrimental effect on the price or volume
of the securities or options as far as the Fund is concerned, in most cases it
is believed that these practices should produce better executions. It is the
opinion of the Trustees that the desirability of retaining the Advisor as
investment advisor to the Liberty Funds outweighs the disadvantages, if any,
which might result from these practices.

B-10
<PAGE> 57
PORTFOLIO TRANSACTIONS

The Advisor is responsible for decisions to buy and sell securities and
other portfolio holdings for the Fund, the selection of brokers and dealers to
effect the transactions and the negotiation of brokerage commissions, if any.
Fixed-income securities are generally traded on a "net" basis with dealers
acting as principals for their own accounts without a stated commission,
although the price of the security will likely include a profit to the dealer.
In underwritten offerings, securities are usually purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.

In placing orders for portfolio securities of the Fund, the Advisor is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Advisor will seek to execute each
transaction at a price and commission, if any, which provides the most favorable
total cost or proceeds reasonably attainable under the circumstances. In seeking
the most favorable price and execution, the Advisor, having in mind the Fund's
best interests, will consider all factors it deems relevant, including, by way
of illustration, price, the size of the transaction, the nature of the market
for the security, the amount of commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience and financial
stability of the broker-dealer involved and the quality of service rendered by
the broker-dealer in other transactions. Though the Advisor generally seeks
reasonably competitive spreads or commissions, the Fund will not necessarily be
paying the lowest spread or commission available. Within the framework of the
policy of obtaining the most favorable price and efficient execution, the
Advisor will consider research and investment services provided by brokers and
dealers who effect or are parties to portfolio transactions with the Fund, the
Advisor or the Advisor's other clients. Such research and investment services
are those which brokerage houses customarily provide to institutional investors
and include statistical and economic data and research reports on particular
issuers and industries. Such services are used by the Advisor in connection with
all of its investment activities, and some of such services obtained in
connection with the execution of transactions for the Fund may be used in
managing other investment accounts. Conversely, brokers furnishing such services
may be selected for the execution of transactions for such other accounts, and
the services furnished by such brokers may be used by the Advisor in providing
investment management for the Fund. Commission rates are established pursuant to
negotiations based on the quality and quantity of execution services provided by
the broker or dealer in light of generally prevailing rates. The management fee
paid by the Fund will not be reduced because the Advisor and/or other clients
receive such services. The allocation of orders and the commission rates paid by
the Fund will be reviewed periodically by the Board of Trustees.

As permitted by Section 28(e) of the Securities Exchange Act of 1934,
as amended (the "1934 Act"), the Advisor may cause the Fund to pay a
broker-dealer which provides "brokerage and research services" (as defined in
the 1934 Act) to the Advisor, an amount of disclosed commission for effecting a
securities transaction for the Fund in excess of the commission which another
broker-dealer would have charged for effecting that transaction.

The Fund recently commenced operations and has not paid any brokerage
commissions for the execution of portfolio transactions. The rate of portfolio
turnover for the Fund is expected to be approximately ___%.

NET ASSET VALUE

B-11
<PAGE> 58
In determining net asset value for the Fund, the Fund's custodian
utilizes the valuations of portfolio securities furnished by a pricing service
approved by the Board of Trustees. Securities for which quotations are not
readily available (which will constitute a majority of the securities held by
the Fund) 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 or a matrix
system, or both, to determine valuations. The procedures of the pricing service
and its valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Trustees.

DESCRIPTION OF SHARES

The descriptions of the Common Shares and the Municipal Preferred
Shares contained in the Prospectus and this Statement of Additional Information
do not purport to be complete and are subject to and qualified in their
entireties by reference to the Declaration of Trust of the Trust (the
"Declaration") and the By-Laws of the Trust (the "By-Laws"), each as from time
to time amended. Copies of the Declaration and the form of the By-Laws are filed
as exhibits to the Registration Statement of which the Prospectus and this
Statement of Additional Information are a part and may be inspected, and copies
thereof may be obtained, as described under "Further Information" in the
Prospectus.

COMMON SHARES

The Declaration authorizes the issuance of an unlimited number of
Common Shares, no par value. All Common Shares have equal rights as to the
payment of dividends and the distribution of assets upon liquidation. Common
Shares will, when issued, be fully paid and, subject to matters discussed in
"Shareholder Liability," non-assessable, and will have no pre-emptive or
conversion rights or rights to cumulative voting. At any time when the Fund's
Municipal Preferred Shares are outstanding, Common Shareholders will not be
entitled to receive any distributions from the Fund unless all accrued dividends
on Municipal Preferred Shares have been paid, and unless asset coverage (as
defined in the 1940 Act) with respect to Municipal Preferred Shares would be at
least 200% after giving effect to such distributions. See "Municipal Preferred
Shares" below.

The Common Shares have been approved for listing on the New York Stock
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing.

Shares of closed-end investment companies may frequently trade at
prices lower than net asset value. Shares of closed-end investment companies
like the Fund that invest predominantly in investment grade municipal bonds have
during some periods traded at prices higher than net asset value and during
other periods have traded at prices lower than net asset value. There can be no
assurance that Common Shares or shares of other municipal funds will trade at a
price higher than net asset value in the future. Net asset value will be reduced
immediately following the offering after payment of the sales load and
organization and offering expenses. Net asset value generally increases when
interest rates decline, and decreases when interest rates rise, and these
changes are likely to be greater in the case of a fund having a leveraged
capital structure such as the Fund will have once it issues Municipal Preferred
Shares. Whether investors will realize gains or losses upon the sale of Common
Shares will not depend upon the Fund's net asset value but will depend entirely
upon whether the market price of the Common Shares at the time of sale is above
or below the original purchase price for the shares. Since the market price of
the Fund's Common Shares will be determined by factors beyond the control of the
Fund, the Fund cannot predict whether the Common Shares will trade at, below, or
above net asset value or at, below or above the initial public offering price.
Accordingly, the Common Shares are designed primarily for long-term investors,
and investors in the Common Shares should not view the Fund as a vehicle for
trading purposes. See "Repurchase of Fund Shares" in this Statement of
Additional Information and the Prospectus under "Use of Leverage and Related
Risks" and "Additional Risk Considerations."

B-12
<PAGE> 59
MUNICIPAL PREFERRED SHARES

The Declaration authorizes the issuance of an unlimited number of
Municipal Preferred Shares, no par value, in one or more classes or series, with
rights as determined by the Board of Trustees, by action of the Board of
Trustees without the approval of the Common Shareholders.

The Fund's Board of Trustees has indicated its intention to authorize
an offering of Municipal Preferred Shares (representing approximately 35% of the
Fund's capital immediately after the time the Municipal Preferred Shares are
issued) within approximately one to three months after completion of the
offering of Common Shares, subject to market conditions and to the Board's
continuing belief that leveraging the Fund's capital structure through the
issuance of Municipal Preferred Shares is likely to achieve the benefits to the
Common Shareholders described in this Statement of Additional Information.
Although the terms of the Municipal Preferred Shares, including their dividend
rate, voting rights, liquidation preference and redemption provisions, will be
determined by the Board of Trustees (subject to applicable law and the Fund's
Declaration) if and when it authorizes a Municipal Preferred Shares offering,
the Board has stated that the initial series of Municipal Preferred Shares would
likely pay cumulative dividends at relatively shorter-term periods (such as 7
days), by providing for the periodic redetermination of the dividend rate
through an auction or remarketing procedure. The Board of Trustees has indicated
that the preference on distribution, liquidation preference, voting rights and
redemption provisions of the Municipal Preferred Shares will likely be as stated
below.

Preference on Distribution. The Municipal Preferred Shares have
complete priority over the Common Shares as to distribution of assets.

Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
Municipal Preferred Shares will be entitled to receive a preferential
liquidating distribution (expected to equal the original purchase price per
share plus accumulated and unpaid dividends thereon, whether or not earned or
declared) before any distribution of assets is made to holders of Common Shares.
After payment of the full amount of the liquidating distribution to which they
are entitled, holders of Municipal Preferred Shares will not be entitled to any
further participation in any distribution of assets by the Fund. Neither the
sale of all or substantially all the property or business of the Fund, nor the
merger or consolidation of the Fund with or into any Massachusetts business
trust or corporation shall be deemed to be a liquidation, dissolution or winding
up of the Fund.

Voting Rights. In connection with any issuance of Municipal Preferred
Shares, the Fund must comply with Section 18(i) of the Investment Company Act of
1940 (the "1940 Act") which requires, among other things, that Municipal
Preferred Shares be voting shares and have equal voting rights with Common
Shares. Except as otherwise indicated in this Statement of Additional
Information and except as otherwise required by applicable law, holders of
Municipal Preferred Shares will vote together with Common Shareholders as a
single class.

In connection with the election of the Fund's trustees, holders of
Municipal Preferred Shares, voting as a separate class, will be entitled to
elect two of the Fund's trustees, and the remaining trustees shall be elected by
Common Shareholders and holders of Municipal Preferred Shares, voting together
as a single class. In addition, if at any time dividends (whether or not earned
or declared) on the Fund's outstanding Municipal Preferred Shares shall be
unpaid in an amount equal to two full years' dividends thereon, the holders of
all outstanding Municipal Preferred Shares, voting as a separate class, will be
entitled to elect a majority of the Fund's trustees until all such dividends in
arrears have been paid or declared and set apart for payment.

The affirmative vote of the holders of a majority of the outstanding
Municipal Preferred Shares of any class or series, as the case may be, voting as
a separate class, will be required to, among other things (1) take certain
actions which would affect the preferences, rights, or powers of such class or
series or (2) authorize or issue any class or series ranking prior to the
Municipal Preferred Shares. Except as may otherwise be required by law, (1) the
affirmative vote of the holders of at least two-thirds of the Municipal
Preferred Shares outstanding at the time, voting as a separate class, will be
required to approve any conversion of the Fund from a closed-end to an open-end
investment company and (2) the affirmative vote of the holders of at least
two-thirds of the outstanding Municipal Preferred Shares, voting as a separate
class, shall be required to approve any plan

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of reorganization (as such term is used in the 1940 Act) adversely affecting
such shares, provided however, that such separate class vote shall be a majority
vote if the action in question has previously been approved, adopted or
authorized by the affirmative vote of two-thirds of the total number of Trustees
fixed in accordance with the Declaration or the By-laws. The affirmative vote of
the holders of a majority of the outstanding Municipal Preferred Shares, voting
as a separate class, shall be required to approve any action not described in
the preceding sentence requiring a vote of security holders under Section 13(a)
of the 1940 Act including, among other things, changes in the Fund's investment
objectives or changes in the investment restrictions described as fundamental
policies under "Investment Objectives and Policies--Investment Restrictions."
The class or series vote of holders of Municipal Preferred Shares described
above shall in each case be in addition to any separate vote of the requisite
percentage of Common Shares and Municipal Preferred Shares necessary to
authorize the action in question.

The foregoing voting provisions will not apply with respect to the
Fund's Municipal Preferred Shares if, at or prior to the time when a vote is
required, such shares shall have been (1) redeemed or (2) called for redemption
and sufficient funds shall have been deposited in trust to effect such
redemption.

Redemption, Purchase and Sale of Municipal Preferred Shares by the
Fund. The terms of the Municipal Preferred Shares may provide that they are
redeemable at certain times, in whole or in part, at the original purchase price
per share plus accumulated dividends, that the Fund may tender for or purchase
Municipal Preferred Shares and that the Fund may subsequently resell any shares
so tendered for or purchased. Any redemption or purchase of Municipal Preferred
Shares by the Fund will reduce the leverage applicable to Common Shares, while
any resale of shares by the Fund will increase such leverage. See "Use of
Leverage and Related Risks" in the Prospectus.

REPURCHASE OF COMMON SHARES

The Fund is a closed-end investment company and as such its
shareholders will not have the right to cause the Fund to redeem their shares.
Common Shares trade in the open market at a price that is a function of several
factors, including net asset value and yield. Although the common shares of a
closed-end investment company such as the Fund that invests substantially all of
its assets in investment grade municipal obligations have generally traded at a
premium to net asset value, such shares have occasionally traded at a discount
to net asset value. The Board of Trustees has currently determined that, at
least annually, it will consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect of Common
Shares, which may include the repurchase of such shares in the open market or in
private transactions, the making of a tender offer for such shares at net asset
value, or the conversion of the Fund to an open-end investment company. There
can be no assurance, however, that the Board of Trustees will decide to take any
of these actions, or that share repurchases or tender offers, if undertaken,
will reduce market discount. In addition, see "Description of Shares--Municipal
Preferred Shares" for a discussion of the limitations on the Fund's ability to
engage in certain transactions. The staff of the SEC currently requires that any
tender offer made by a closed-end investment company for its shares must be at a
price equal to the net asset value of such shares on the close of business on
the last day of the tender offer. Any service fees incurred in connection with
any tender offer made by the Fund will be borne by the Fund and will not reduce
the stated consideration to be paid to tendering shareholders.

Subject to its investment limitations, the Fund may borrow to finance
the repurchase of shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by the Fund
in anticipation of share repurchases or tenders will reduce the Fund's net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Board of Trustees would have to comply with the Securities Exchange Act
of 1934, as amended, and the 1940 Act and the rules and regulations thereunder.

Although the decision to take action in response to a discount from net
asset value will be made by the Board of Trustees at the time it considers such
issue, it is the Board's present policy, which may be changed by the Board, not
to

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authorize repurchases of the Fund's Common Shares or a tender offer for such
shares if (1) such transactions, if consummated, would (a) result in the
delisting of the Common Shares from the New York Stock Exchange (the
"Exchange"), or (b) impair the Fund's status as a regulated investment company
under the Code (which would make the Fund a taxable entity, causing the Fund's
income to be taxed at the corporate level in addition to the taxation of
shareholders who receive dividends from the Fund) or as a registered closed-end
investment company under the 1940 Act; (2) the Fund would not be able to
liquidate portfolio securities in an orderly manner and consistent with the
Fund's investment objectives and policies in order to repurchase shares; or (3)
there is, in the Board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Fund, (b) general suspension of or limitation on prices
for trading securities on the Exchange, (c) declaration of a banking moratorium
by Federal or state authorities or any suspension of payment by United States or
New York State banks in which the Fund invests, (d) material limitation
affecting the Fund or the issuers of its portfolio securities by Federal or
state authorities on the extension of credit by lending institutions or on the
exchange of foreign currency, (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States, or (f) other event or condition which would have a material
adverse effect (including any adverse tax effect) on the Fund or its
shareholders if shares were repurchased. The Board of Trustees may in the future
modify these conditions in light of experience. Before deciding whether to take
any action in response to a discount from net asset value, the Board of Trustees
would consider all relevant factors, including the extent and duration of the
discount, the liquidity of the Fund's portfolio, the impact of any action that
might be taken on the Fund or its shareholders, and market considerations. Based
on these considerations, even if the Fund's Common Shares should trade at a
discount, the Board may determine that, in the interest of the Fund and its
shareholders, no action should be taken.

MISCELLANEOUS INVESTMENT PRACTICES

SHORT-TERM TRADING

In seeking the Fund's objective, the Advisor will buy or sell portfolio
securities whenever the Advisor believes it appropriate to do so. In deciding
whether to sell a portfolio security, the Advisor does not consider how long the
Fund has owned the security. From time to time the Fund will buy securities
intending to seek short-term trading profits. A change in the securities held by
the Fund is known as "portfolio turnover" and generally involves some expense to
the Fund. This expense may include brokerage commissions or dealer markups and
other transaction costs on both the sale of securities and the reinvestment of
the proceeds in other securities. If sales of portfolio securities cause the
Fund to realize net short-term capital gain, such gain generally will be taxable
as ordinary income. As a result of the Fund's investment policies, under certain
market conditions the Fund's portfolio turnover rate may be higher than that of
other investment companies. Portfolio turnover rate for a fiscal year is the
ratio of the lesser of purchases or sales of portfolio securities to the monthly
average of the value of portfolio securities -- excluding securities whose
maturities at acquisition were one year or less. The Fund's portfolio turnover
rate is not a limiting factor when the Advisor considers a change in the Fund's
portfolio.

LOWER-RATED SECURITIES

The Fund may invest up to 20% of its net assets in municipal bonds
that, at the time of investment, are rated Ba or B by Moody's or BB or B by
Standard & Poor's or comparably rated by another Rating Agency and unrated
municipal bonds considered to be of comparable quality by the Advisor. The Fund
may not invest in bonds rated below B by Moody's or Standard & Poor's or
comparably rated by another Rating Agency. Bonds rated Ba/BB and below are
regarded as having predominantly speculative characteristics with respect to
capacity to pay interest and repay principal, and are commonly referred to as
"junk bonds." These risks include greater sensitivity to a general economic
downturn and less secondary market trading. The lower ratings of certain
securities held by the Fund reflect a greater possibility that adverse changes
in the financial condition of the issuer or in general economic conditions, or
both, or an unanticipated rise in interest rates, may impair the ability of the
issuer to make payments of interest and principal. The inability (or perceived
inability) of issuers to make timely payments of interest and principal would
likely make the values of securities held by the Fund more volatile and could
limit the Fund's ability to sell its securities at prices approximating the
values the Fund had placed on such securities. In the absence of a liquid
trading market for securities held by it, the Fund at times may be unable to
establish the fair value for such securities.

Securities ratings are based largely on the issuer's historical
financial condition and the rating agencies' analysis at the time of rating.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better or
worse than the rating would indicate. In addition, the rating assigned to a
security

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<PAGE> 62
by Moody's or Standard & Poor's (or by any other nationally recognized
securities rating organization) does not reflect an assessment of the volatility
of the security's market value or the liquidity of an investment in the
security. See Appendix A for a description of security ratings.

Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. A decrease in
interest rates will generally result in an increase in the value of the Fund's
assets. Conversely, during periods of rising interest rates, the value of the
Fund's assets will generally decline. The values of lower-rated securities may
often be affected to a greater extent by changes in general economic conditions
and business conditions affecting the issuers of such securities and their
industries. Negative publicity or investor perceptions may also adversely affect
the values of lower-rated securities. Changes by recognized rating services in
their ratings of any fixed-income security and changes in the ability of an
issuer to make payments of interest and principal may also affect the value of
these investments. Changes in the value of portfolio securities generally will
not affect income derived from these securities, but will affect the Fund's net
asset value. The Fund will not necessarily dispose of a security when its rating
is reduced below its rating at the time of purchase. However, the Advisor will
monitor the investment to determine whether its retention will assist in meeting
the Fund's investment objective.

Issuers of lower-rated securities are often highly leveraged, so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. Such issuers
may not have more traditional methods of financing available to them and may be
unable to repay outstanding obligations at maturity by refinancing. The risk of
loss due to default in payment of interest or repayment of principal by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.

At times, a substantial portion of the Fund's assets may be invested in
securities as to which the Fund, by itself or together with other Funds and
accounts managed by the Advisor and its affiliates, holds all or a major portion
of the securities outstanding. Although the Advisor generally considers such
securities to be liquid because of the availability of an institutional market
for such securities, it is possible that, under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, the Fund could find it more difficult to sell these securities when the
Advisor believes it advisable to do so or may be able to sell the securities
only at prices lower than if they were more widely held. Under these
circumstances, it may also be more difficult to determine the fair value of such
securities for purposes of computing the Fund's net asset value. In order to
enforce its rights in the event of a default under such securities, the Fund may
be required to participate in various legal proceedings or take possession of
and manage assets securing the issuer's obligations on such securities. This
could increase the Fund's operating expenses and adversely affect the Fund's net
asset value.

Certain securities held by the Fund may permit the issuer at its option
to "call," or redeem, its securities. If an issuer were to redeem securities
held by the Fund during a time of declining interest rates, the Fund might not
be able to reinvest the proceeds in securities providing the same investment
return as the securities redeemed. The Fund may invest without limit in such
bonds.

To the extent the Fund invests in securities in the lower rating
categories, the achievement of the Fund's goals is more dependent on the
Advisor's investment analysis than would be the case if the Fund were investing
in securities in the higher rating categories.

PRIVATE PLACEMENTS

The Fund may invest in securities that are purchased in private
placements and, accordingly, may be subject to restrictions on resale as a
matter of contract or under federal securities laws. Because there may be
relatively few potential purchasers for such investments, especially under
adverse market or economic conditions or in the event of adverse changes in the
financial condition of the issuer, the Fund could find it more difficult to sell
such securities when the Advisor believes it advisable to do so or may be able
to sell such securities only at prices lower than if such securities were more
widely held. At times, it may also be more difficult to determine the fair value
of such securities for purposes of computing the Fund's net asset value.

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STEP COUPON BONDS (STEPS)

The Fund may invest in debt securities which do not pay interest for a
stated period of time and then pay interest at a series of different rates for a
series of periods. In addition to the risks associated with the credit rating of
the issuers, these securities are subject to the volatility risk of zero coupon
bonds for the period when no interest is paid.

TENDER OPTION BONDS

A tender option bond is a municipal security (generally held pursuant
to a custodial arrangement) having a relatively long maturity and bearing
interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates that has been coupled with the agreement of a third party, such
as a bank, broker-dealer or other financial institution, pursuant to which such
institution grants the security holders the option, at periodic intervals, to
tender their securities to the institution and receive the face value thereof.
As consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the municipal security's fixed
coupon rate and the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the securities, coupled
with the tender option, to trade at par on the date of such determination. Thus,
after payment of this fee, the security holder effectively holds a demand
obligation that bears interest at the prevailing short-term tax-exempt rate. The
Advisor will consider on an ongoing basis the creditworthiness of the issuer of
the underlying municipal securities, of any custodian, and of the third-party
provider of the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in the event of a default in payment
of principal or interest on the underlying municipal securities and for other
reasons.

PAY-IN-KIND (PIK) SECURITIES

The Fund may invest in securities which pay interest either in cash or
additional securities at the issuer's option. These securities are generally
high yield securities and in addition to the other risks associated with
investing in high yield securities are subject to the risks that the interest
payments, which consist of additional securities, will also be subject to the
risks of high yield securities.

MONEY MARKET INSTRUMENTS

The Fund may invest in short-term money market instruments as follows:
Government obligations are issued by the U.S. or foreign governments, their
subdivisions, agencies and instrumentalities. Supranational obligations are
issued by supranational entities and are generally designed to promote economic
improvements. Certificates of deposit are issued against deposits in a
commercial bank with a defined return and maturity. Banker's acceptances are
used to finance the import, export or storage of goods and are "accepted" when
guaranteed at maturity by a bank. Commercial paper is promissory notes issued by
businesses to finance short-term needs (including those with floating or
variable interest rates, or including a frequent interval put feature).
Short-term corporate obligations are bonds and notes (with one year or less to
maturity at the time of purchase) issued by businesses to finance long-term
needs.

FORWARD COMMITMENTS

The Fund may enter into contracts to purchase securities for a fixed
price at a future date beyond customary settlement time ("forward commitments")
if the Fund sets aside, on the books and records of its custodian, liquid assets
in an amount sufficient to meet the purchase price, or if the Fund enters into
offsetting contracts for the forward sale of other securities it owns. In the
case of to-be-announced ("TBA") purchase commitments, the unit price and the
estimated principal amount are established when the Fund enters into a contract,
with the actual principal amount being within a specified range of the estimate.
Forward commitments may be considered securities in themselves, and involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in the value
of the Fund's other assets. Where such purchases are made through dealers, the
Fund relies on the dealer to consummate the sale. The dealer's failure to do so
may result in the loss to the Fund of an advantageous yield or price. Although
the Fund will generally enter into forward commitments with the intention of
acquiring securities for its portfolio or for delivery pursuant to

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<PAGE> 64
options contracts it has entered into, the Fund may dispose of a commitment
prior to settlement if the Advisor deems it appropriate to do so. The Fund may
realize short-term profits or losses on the sale of forward commitments.

The Fund may enter into TBA sale commitments to hedge its portfolio
positions or to sell securities it owns under delayed delivery arrangements.
Proceeds of TBA sale commitments are not received until the contractual
settlement date. During the time a TBA sale commitment is outstanding,
equivalent deliverable securities, or an offsetting TBA purchase commitment
deliverable on or before the sale commitment date, are held as "cover" for the
transaction. Unsettled TBA sale commitments are valued at current market value
of the underlying securities. If the TBA sale commitment is closed through the
acquisition of an offsetting purchase commitment, the Fund realizes a gain or
loss on the commitment without regard to any unrealized gain or loss on the
underlying security. If the Fund delivers securities under the commitment, the
Fund realizes a gain or loss from the sale of the securities based upon the unit
price established at the date the commitment was entered into.

REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements. A repurchase agreement
is a contract under which the Fund acquires a security for a relatively short
period (usually not more than one week), subject to the obligation of the seller
to repurchase and the Fund to resell such security at a fixed time and price
(representing the Fund's cost plus interest). It is the Fund's present intention
to enter into repurchase agreements only with commercial banks and registered
broker-dealers and only with respect to obligations of the U.S. government or
its agencies or instrumentalities. Repurchase agreements may also be viewed as
loans made by the Fund which are collateralized by the securities subject to
repurchase. The Advisor will monitor such transactions to ensure that the value
of the underlying securities will be at least equal at all times to the total
amount of the repurchase obligation, including the interest factor. If the
seller defaults, the Fund could realize a loss on the sale of the underlying
security to the extent that the proceeds of sale, including accrued interest,
are less than the resale price provided in the agreement, including interest. In
addition, if the seller should be involved in bankruptcy or insolvency
proceedings, the Fund may incur delay and costs in selling the underlying
security or may suffer a loss of principal and interest if the Fund is treated
as an unsecured creditor and required to return the underlying collateral to the
seller's estate.

Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund may transfer uninvested cash balances into a joint account,
along with cash of other Liberty Funds and certain other accounts. These
balances may be invested in one or more repurchase agreements and/or short-term
money market instruments.

OPTIONS ON SECURITIES

WRITING COVERED OPTIONS. The Fund may write covered call options and
covered put options on optionable securities held in its portfolio, when in the
opinion of the Advisor such transactions are consistent with the Fund's
investment objective and policies. Call options written by the Fund give the
purchaser the right to buy the underlying securities from the Fund at a stated
exercise price; put options give the purchaser the right to sell the underlying
securities to the Fund at a stated price.

The Fund may write only covered options, which means that, so long as
the Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the Fund will
hold cash and/or high-grade short-term debt obligations equal to the price to be
paid if the option is exercised. In addition, the Fund will be considered to
have covered a put or call option if and to the extent that it holds an option
that offsets some or all of the risk of the option it has written. The Fund may
write combinations of covered puts and calls on the same underlying security.

The Fund will receive a premium from writing a put or call option,
which increases the Fund's return on the underlying security in the event the
option expires unexercised or is closed out at a profit. The amount of the
premium reflects, among other things, the relationship between the exercise
price and the current market value of the underlying security, the volatility of
the underlying security, the amount of time remaining until expiration, current
interest rates and the effect of supply and demand in the options market and in
the market for the underlying security. By writing a call option, the Fund
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option but continues to bear
the risk of a decline in the value of the underlying security. By writing a put
option, the Fund

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assumes the risk that it may be required to purchase the underlying security for
an exercise price higher than its then-current market value, resulting in a
potential capital loss unless the security subsequently appreciates in value.

The Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an offsetting option. The Fund realizes a profit or loss from a closing
transaction if the cost of the transaction (option premium plus transaction
costs) is less or more than the premium received from writing the option. If the
Fund writes a call option but does not own the underlying security, and when it
writes a put option, the Fund may be required to deposit cash or securities with
its broker as "margin," or collateral, for its obligation to buy or sell the
underlying security. As the value of the underlying security varies, the Fund
may have to deposit additional margin with the broker. Margin requirements are
complex and are fixed by individual brokers, subject to minimum requirements
currently imposed by the Federal Reserve Board and by stock exchanges and other
self-regulatory organizations.

PURCHASING PUT OPTIONS. The Fund may purchase put options to protect
its portfolio holdings in an underlying security against a decline in market
value. Such protection is provided during the life of the put option since the
Fund, as holder of the option, is able to sell the underlying security at the
put exercise price regardless of any decline in the underlying security's market
price. In order for a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to cover
the premium and transaction costs. By using put options in this manner, the Fund
will reduce any profit it might otherwise have realized from appreciation of the
underlying security by the premium paid for the put option and by transaction
costs.

PURCHASING CALL OPTIONS. The Fund may purchase call options to hedge
against an increase in the price of securities that the Fund wants ultimately to
buy. Such hedge protection is provided during the life of the call option since
the Fund, as holder of the call option, is able to buy the underlying security
at the exercise price regardless of any increase in the underlying security's
market price. In order for a call option to be profitable, the market price of
the underlying security must rise sufficiently above the exercise price to cover
the premium and transaction costs.

RISK FACTORS IN OPTIONS TRANSACTIONS

The successful use of the Fund's options strategies depends on the
ability of the Advisor to forecast interest rate and market movements correctly.
For example, if the Fund were to write a call option based on the Advisor's
expectation that the price of the underlying security would fall, but the price
were to rise instead, the Fund could be required to sell the security upon
exercise at a price below the current market price. Similarly, if the Fund were
to write a put option based on the Advisor's expectation that the price of the
underlying security would rise, but the price were to fall instead, the Fund
could be required to purchase the security upon exercise at a price higher than
the current market price.

When the Fund purchases an option, it runs the risk that it will lose
its entire investment in the option in a relatively short period of time, unless
the Fund exercises the option or enters into a closing sale transaction before
the option's expiration. If the price of the underlying security does not rise
(in the case of a call) or fall (in the case of a put) to an extent sufficient
to cover the option premium and transaction costs, the Fund will lose part or
all of its investment in the option. This contrasts with an investment by the
Fund in the underlying security, since the Fund will not realize a loss if the
security's price does not change.

The effective use of options also depends on the Fund's ability to
terminate option positions at times when the Advisor deems it desirable to do
so. There is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price.

If a secondary market in options were to become unavailable, the Fund
could no longer engage in closing transactions. Lack of investor interest might
adversely affect the liquidity of the market for particular options or series of
options. A market may discontinue trading of a particular option or options
generally. In addition, a market could become temporarily unavailable if unusual
events -- such as volume in excess of trading or clearing capability -- were to
interrupt its normal operations.

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A market may at times find it necessary to impose restrictions on
particular types of options transactions, such as opening transactions. For
example, if an underlying security ceases to meet qualifications imposed by the
market or the Options Clearing Corporation, new series of options on that
security will no longer be opened to replace expiring series, and opening
transactions in existing series may be prohibited. If an options market were to
become unavailable, the Fund as a holder of an option would be able to realize
profits or limit losses only by exercising the option, and the Fund, as option
writer, would remain obligated under the option until expiration or exercise.

Disruptions in the markets for the securities underlying options
purchased or sold by the Fund could result in losses on the options. If trading
is interrupted in an underlying security, the trading of options on that
security is normally halted as well. As a result, the Fund as purchaser or
writer of an option will be unable to close out its positions until options
trading resumes, and it may be faced with considerable losses if trading in the
security reopens at a substantially different price. In addition, the Options
Clearing Corporation or other options markets may impose exercise restrictions.
If a prohibition on exercise is imposed at the time when trading in the option
has also been halted, the Fund as purchaser or writer of an option will be
locked into its position until one of the two restrictions has been lifted. If
the Options Clearing Corporation were to determine that the available supply of
an underlying security appears insufficient to permit delivery by the writers of
all outstanding calls in the event of exercise, it may prohibit indefinitely the
exercise of put options. The Fund, as holder of such a put option, could lose
its entire investment if the prohibition remained in effect until the put
option's expiration.

FUTURES CONTRACTS AND RELATED OPTIONS

Subject to applicable law, the Fund may invest without limit in the
types of futures contracts and related options identified in the Prospectus for
hedging and non-hedging purposes, such as to manage the effective duration of
the Fund's portfolio or as a substitute for direct investment. A financial
futures contract sale creates an obligation by the seller to deliver the type of
financial instrument called for in the contract in a specified delivery month
for a stated price. A financial futures contract purchase creates an obligation
by the purchaser to take delivery of the type of financial instrument called for
in the contract in a specified delivery month at a stated price. The
determination is made in accordance with the rules of the exchange on which the
futures contract sale or purchase was made. Futures contracts are traded in the
United States only on commodity exchanges or boards of trade -- known as
"contract markets" -- approved for such trading by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant or brokerage firm which is a member of the relevant contract market.

Although futures contracts (other than index futures) by their terms
call for actual delivery or acceptance of commodities or securities, in most
cases the contracts are closed out before the settlement date without the making
or taking of delivery. Closing out a futures contract sale is effected by
purchasing a futures contract for the same aggregate amount of the specific type
of financial instrument or commodity with the same delivery date. If the price
of the initial sale of the futures contract exceeds the price of the offsetting
purchase, the seller is paid the difference and realizes a gain. Conversely, if
the price of the offsetting purchase exceeds the price of the initial sale, the
seller realizes a loss. If the Fund is unable to enter into a closing
transaction, the amount of the Fund's potential loss is unlimited. The closing
out of a futures contract purchase is effected by the purchaser's entering into
a futures contract sale. If the offsetting sale price exceeds the purchase
price, the purchaser realizes a gain, and if the purchase price exceeds the
offsetting sale price, the purchaser realizes a loss. In general, 40% of the
gain or loss arising from the closing out of a futures contract traded on an
exchange approved by the CFTC is treated as short-term gain or loss, and 60% is
treated as long-term gain or loss.

Unlike when the Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Upon
entering into a contract, the Fund is required to deposit with its custodian in
a segregated account in the name of the futures broker an amount of liquid
assets. This amount is known as "initial margin." The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds to finance the transactions. Rather, initial margin is similar to a
performance bond or good faith deposit which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations have
been satisfied. Futures contracts also involve brokerage costs.

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Subsequent payments, called "variation margin" or "maintenance margin,"
to and from the broker (or the custodian) are made on a daily basis as the price
of the underlying security or commodity fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"marking to the market." For example, when the Fund has purchased a futures
contract on a security and the price of the underlying security has risen, that
position will have increased in value and the Fund will receive from the broker
a variation margin payment based on that increase in value. Conversely, when the
Fund has purchased a security futures contract and the price of the underlying
security has declined, the position would be less valuable and the Fund would be
required to make a variation margin payment to the broker.

The Fund may elect to close some or all of its futures positions at any
time prior to their expiration in order to reduce or eliminate a position then
currently held by the Fund. The Fund may close its positions by taking opposite
positions which will operate to terminate the Fund's position in the futures
contracts. Final determinations of variation margin are then made, additional
cash is required to be paid by or released to the Fund, and the Fund realizes a
loss or a gain. Such closing transactions involve additional commission costs.

The Fund does not intend to purchase or sell futures or related options
for other than hedging purposes if, as a result, the sum of the initial margin
deposits on the Fund's existing futures and related options positions and
premiums paid for outstanding options on futures contracts would exceed 5% of
the Fund's net assets.

OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write call and
put options on futures contracts and it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions.
Options on futures contracts give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract at the specified option
exercise price at any time during the period of the option. The Fund may use
options on futures contracts in lieu of writing or buying options directly on
the underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against a possible decrease in the value of its
portfolio securities, the Fund may purchase put options or write call options on
futures contracts rather than selling futures contracts. Similarly, the Fund may
purchase call options or write put options on futures contracts as a substitute
for the purchase of futures contracts to hedge against a possible increase in
the price of securities which the Fund expects to purchase. Such options
generally operate in the same manner as options purchased or written directly on
the underlying investments.

As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected.

The Fund will be required to deposit initial margin and maintenance
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements, similar to those described above in
connection with the discussion of futures contracts.

RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS.
Successful use of futures contracts by the Fund is subject to the Advisor's
ability to predict movements in various factors affecting securities markets,
including interest rates. Compared to the purchase or sale of futures contracts,
the purchase of call or put options on futures contracts involves less potential
risk to the Fund because the maximum amount at risk is the premium paid for the
options (plus transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in a loss to
the Fund when the purchase or sale of a futures contract would not, such as when
there is no movement in the prices of the hedged investments. The writing of an
option on a futures contract involves risks similar to those risks relating to
the sale of futures contracts.

The use of options and futures strategies also involves the risk of
imperfect correlation among movements in the prices of the securities underlying
the futures and options purchased and sold by the Fund, of the options and
futures contracts themselves, and, in the case of hedging transactions, of the
securities which are the subject of a hedge.

There is no assurance that higher than normal trading activity or other
unforeseen events might not, at times, render certain market clearing facilities
inadequate, and thereby result in the institution by exchanges of special
procedures which may interfere with the timely execution of customer orders.

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To reduce or eliminate a position held by the Fund, the Fund may seek
to close out such position. The ability to establish and close out positions
will be subject to the development and maintenance of a liquid secondary market.
It is not certain that this market will develop or continue to exist for a
particular futures contract or option. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain contracts or options, (ii) restrictions
may be imposed by an exchange on opening transactions or closing transactions or
both, (iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of contracts or options, or underlying
securities, (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange, (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume,
or (vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of contracts or options
(or a particular class or series of contracts or options), in which event the
secondary market on that exchange for such contracts or options (or in the class
or series of contracts or options) would cease to exist, although outstanding
contracts or options on the exchange that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.

U.S. TREASURY SECURITY FUTURES CONTRACTS AND OPTIONS. U.S. Treasury
security futures contracts require the seller to deliver, or the purchaser to
take delivery of, the type of U.S. Treasury security called for in the contract
at a specified date and price. Options on U.S. Treasury security futures
contracts give the purchaser the right, in return for the premium paid, to
assume a position in a U.S. Treasury security futures contract at the specified
option exercise price at any time during the period of the option.

Successful use of U.S. Treasury security futures contracts by the Fund
is subject to the Advisor's ability to predict movements in the direction of
interest rates and other factors affecting markets for debt securities. For
example, if the Fund has sold U.S. Treasury security futures contracts in order
to hedge against the possibility of an increase in interest rates which would
adversely affect securities held in its portfolio, and the prices of the Fund's
securities increase instead as a result of a decline in interest rates, the Fund
would be likely to lose part or all of the benefit of the increased value of its
securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell securities to meet daily maintenance margin
requirements at a time when it may be disadvantageous to do so.

There is also a risk that price movements in U.S. Treasury security
futures contracts and related options will not correlate closely with price
movements in markets for particular securities. For example, if the Fund has
hedged against a decline in the values of high yield corporate securities held
by it by selling Treasury security futures and the values of Treasury securities
subsequently increase while the values of its high yield corporate securities
decrease, the Fund would incur losses on both the Treasury security futures
contracts written by it and the high yield corporate securities held in its
portfolio.

INDEX FUTURES CONTRACTS. An index futures contract is a contract to buy
or sell units of an index at a specified future date at a price agreed upon when
the contract is made. Entering into a contract to buy units of an index is
commonly referred to as buying or purchasing a contract or holding a long
position in the index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short position. A unit
is the current value of the index. The Fund may enter into stock index futures
contracts, debt index futures contracts, or other index futures contracts
appropriate to its objective. The Fund may also purchase and sell options on
index futures contracts.

There are several risks in connection with the use by the Fund of index
futures. One risk arises because of the imperfect correlation between movements
in the prices of the index futures and movements in the prices of securities
which are the subject of the hedge. The Advisor will, however, attempt to reduce
this risk by buying or selling, to the extent possible, futures on indices the
movements of which will, in its judgment, have a significant correlation with
movements in the prices of the securities sought to be hedged.

Successful use of index futures by the Fund is also subject to the
Advisor's ability to predict movements in the direction of the market. For
example, it is possible that, where the Fund has sold futures to hedge its
portfolio against a decline in the market, the index on which the futures are
written may advance and the value of securities held in the Fund's portfolio may
decline. If this occurred, the Fund would lose money on the futures and also
experience a decline in value in its portfolio

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securities. It is also possible that, if the Fund has hedged against the
possibility of a decline in the market adversely affecting securities held in
its portfolio and securities prices increase instead, the Fund will lose part or
all of the benefit of the increased value of those securities it has hedged
because it will have offsetting losses in its futures positions. In addition, in
such situations, if the Fund has insufficient cash, it may have to sell
securities to meet daily variation margin requirements at a time when it is
disadvantageous to do so.

In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the index futures
and the portion of the portfolio being hedged, the prices of index futures may
not correlate perfectly with movements in the underlying index due to certain
market distortions. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
index and futures markets. Second, margin requirements in the futures market are
less onerous than margin requirements in the securities market, and as a result
the futures market may attract more speculators than the securities market does.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Advisor may still not result in a
profitable position over a short time period.

OPTIONS ON INDEX FUTURES. Options on index futures are similar to
options on securities except that options on index futures give the purchaser
the right, in return for the premium paid, to assume a position in an index
futures contract (a long position if the option is a call and a short position
if the option is a put) 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 in the writer's futures
margin account which represents the amount by which the market price of the
index futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the index
future. If an option is exercised on the last trading day prior to its
expiration date, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing level of the
index on which the future is based on the expiration date. Purchasers of options
who fail to exercise their options prior to the exercise date suffer a loss of
the premium paid.

OPTIONS ON INDICES

As an alternative to purchasing call and put options on index futures,
the Fund may purchase and sell call and put options on the underlying indices
themselves. Such options would be used in a manner identical to the use of
options on index futures.

INDEX WARRANTS

The Fund may purchase put warrants and call warrants whose values vary
depending on the change in the value of one or more specified securities indices
("index warrants"). Index warrants are generally issued by banks or other
financial institutions and give the holder the right, at any time during the
term of the warrant, to receive upon exercise of the warrant a cash payment from
the issuer based on the value of the underlying index at the time of exercise.
In general, if the value of the underlying index rises above the exercise price
of the index warrant, the holder of a call warrant will be entitled to receive a
cash payment from the issuer upon exercise based on the difference between the
value of the index and the exercise price of the warrant. If the value of the
underlying index falls, the holder of a put warrant will be entitled to receive
a cash payment from the issuer upon exercise based on the difference between the
exercise price of the warrant and the value of the index. The holder of a
warrant would not be entitled to any payments from the issuer at any time when,
in the case of a call warrant, the exercise price is greater than the value of
the underlying index, or, in the case of a put warrant, the exercise price is
less than the value of the underlying index. If the Fund were not to exercise an
index warrant prior to its expiration, then the Fund would lose the amount of
the purchase price paid by it for the warrant.

The Fund will normally use index warrants in a manner similar to its
use of options on securities indices. The risks of the Fund's use of index
warrants are generally similar to those relating to its use of index options.
Unlike most index options,

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however, index warrants are issued in limited amounts and are not obligations of
a regulated clearing agency, but are backed only by the credit of the bank or
other institution which issues the warrant. Also, index warrants generally have
longer terms than index options. Although the Fund will normally invest only in
exchange-listed warrants, index warrants are not likely to be as liquid as
certain index options backed by a recognized clearing agency. In addition, the
terms of index warrants may limit the Fund's ability to exercise the warrants at
such time, or in such quantities, as the Fund would otherwise wish to do.

ZERO COUPON SECURITIES (ZEROS)

The Fund may invest in zero coupon securities, which are securities
issued at a significant discount from face value and pay interest only at
maturity rather than at intervals during the life of the security and in
certificates representing undivided interests in the interest or principal of
mortgage-backed securities (interest only/principal only), which tend to be more
volatile than other types of securities. The Fund will accrue and distribute
income from zero coupon and stripped securities and certificates on a current
basis and may have to sell securities to generate cash for distributions.

INVERSE FLOATERS

Inverse floaters are derivative securities whose interest rates vary
inversely to changes in short-term interest rates and whose values fluctuate
inversely to changes in long-term interest rates. The value of certain inverse
floaters will fluctuate substantially more in response to a given change in
long-term rates than would a traditional debt security. These securities have
investment characteristics similar to leverage, in that interest rate changes
have a magnified effect on the value of inverse floaters.

SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL OBLIGATIONS

Factors pertaining to the Fund's investment in California Municipal
Obligations are set forth in Appendix B--"Special Considerations Relating to
California."

TAX MATTERS

FEDERAL INCOME TAX MATTERS

Federal Taxation of the Fund

The ability of the Fund to qualify for taxation as a regulated
investment company under Subchapter M of the Code requires, among other things,
that the Fund satisfy income and asset diversification tests, and distribute
substantially all its income to its shareholders, as described below.
Specifically, in order to qualify as a regulated investment company, the Fund
must derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent such
currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities, or options and futures
with respect to stock or securities) and other income (including but not limited
to gains from options, futures or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies (the "Income
Requirement"). The Fund must also satisfy an asset diversification test. Under
this test, at the close of each quarter of the Fund's taxable year, at least 50%
of the value of the Fund's assets must consist of cash and cash items (including
receivables), U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in securities
of such issuer and as to which the Fund does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated interment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses or related trades or
businesses. Finally, the Fund must distribute to its shareholders with respect
to each year at least 90% of the sum of (1) its net tax-exempt interest income
and (2) its taxable net investment income (including,

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generally, taxable interest, dividends and certain other income, less certain
expenses, and the excess, if any, of net short-term capital gain over net
long-term capital loss) (the "Distribution Requirement").

A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount at least equal
to the sum of 98% of ordinary taxable income for the calendar year and 98% of
capital gain net income for the one-year period ended on October 31 of such
calendar year (or, at the election of a regulated investment company having a
taxable year ending November 30 or December 31, for its taxable year), plus 100%
of any undistributed income from the preceding year. For the foregoing purposes,
a regulated investment company is treated as having distributed any amount on
which it is subject to income tax for any taxable year ending in such calendar
year.

The Fund generally intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the Fund may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability. In addition, the Fund may elect to pay the excise tax liability
if it determines that the costs of making an excise tax distribution are greater
than the excise tax liability that would be due upon the failure to make such
excise tax distribution.

If the Fund does not qualify for taxation as a regulated investment
company for any taxable year, the Fund's income will be subject to corporate
income taxes imposed at the Fund level, and all distributions from earnings and
profits, including distributions of net exempt-interest income and net capital
gain (i.e., the excess, if any, of net long-term capital gain over net
short-term capital loss), will be taxable to shareholders as ordinary income. In
addition, in order to requalify for taxation as a regulated investment company,
the Fund may be required to recognize unrealized gains, pay substantial taxes
and interest, and make certain distributions.

If at any time when shares of Municipal Preferred are outstanding the
Fund does not meet applicable asset coverage requirements, the Fund will be
required to suspend distributions to holders of Common Shares until the
requisite asset coverage is restored. Any such suspension may cause the Fund to
pay the 4% Federal excise tax described above and may prevent the Fund from
satisfying the Distribution Requirement. The Fund may redeem shares of Municipal
Preferred in an effort to comply with the Distribution Requirement and to avoid
the excise tax. See "Description of Municipal Preferred--Dividends."

Federal Taxation of Shareholders

Dividends and Other Distributions. Prior proposed legislation that was
ultimately not enacted would have reinstated a deductible tax (the
"Environmental Tax"), imposed through tax years beginning before January 1,
1996, at a rate of 0.12% on a corporation's alternative minimum taxable income
(computed without regard to the alternative minimum tax net operating loss
deduction) in excess of $2 million. If the Environmental Tax is reinstated,
exempt-interest dividends paid by the Fund that are included in a corporate
shareholder's alternative minimum taxable income may subject such shareholder to
the Environmental Tax. It is not possible for the Fund to predict whether
similar legislation might be proposed and enacted in the future. Corporate
shareholders should consult with their own tax advisors regarding the likelihood
of such legislation and its effect on them.

As discussed in the Prospectus, exempt-interest dividends attributable
to interest received on certain private activity bonds and certain industrial
development bonds will not be tax-exempt to any shareholders who are, within the
meaning of Section 147(a) of the Code, "substantial users" of the facilities
financed by such obligations or bonds or who are "related persons" of such
substantial users. In general, a "substantial user" of a facility includes a
"non-exempt person who regularly uses a part of such facility in his trade or
business." "Related persons" are in general defined to include persons among
whom there exists a relationship, either by family or business, which would
result in a disallowance of losses in transactions among them under various
provisions of the Code (or if they are members of the same controlled group of
corporations under the Code), including a partnership and each of its partners
(and their spouses and minor children), an S corporation and each of its
shareholders (and their spouses and minor children) and various combinations of
these relationships. The foregoing is not a complete statement of all of the
provisions of the Code covering the definitions of "substantial user" and
"related person." For additional information, investors should consult their tax
advisors before investing in Common Shares.

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Any dividend paid by the Fund during January of a given year generally
is deemed to have been received by shareholders on December 31 of the preceding
year, provided that the dividend actually was declared by the Fund in October,
November or December of such preceding year and was payable to shareholders of
record on a date in such month.

All or a portion of interest on indebtedness incurred or continued by a
shareholder to purchase or carry Fund shares may not be deductible by the
shareholder. The portion of interest that is not deductible is equal to the
total interest paid or accrued on the indebtedness multiplied by the percentage
of the Fund's total distributions (not including distributions of net capital
gain) paid to the shareholder that are exempt-interest dividends. Under rules
used by the Internal Revenue Service for determining when borrowed funds are
considered to have been used for the purpose of purchasing or carrying
particular assets, the purchase of Common Shares may be considered to have been
made with borrowed funds even though such funds are not directly traceable to
the purchase of shares.

Under Federal tax law in effect at the date of this Prospectus, a
shareholder's interest deduction generally will not be disallowed if the average
adjusted basis of the shareholder's tax-exempt obligations (including Common
Shares) does not exceed two percent of the average adjusted basis of the
shareholder's trade or business assets (in the case of most corporations and
some individuals) and portfolio investments (in the case of individuals). Prior
proposed legislation that was ultimately not enacted would have further limited
or repealed this two-percent de minimis exception, which could reduce the total
after-tax yield of the Municipal Preferred to investors to whom the de minimis
exception would otherwise apply. It is not possible for the Fund to predict
whether similar legislation might be proposed and enacted in the future.
Shareholders should consult with their own tax advisors regarding the likelihood
of such legislation and its effect on them.

If the Fund engages in hedging transactions, including hedging
transactions in options, futures contracts, and straddles, or other similar
transactions, it will be subject to special tax rules (including constructive
sale, mark-to-market, straddle, wash sale, and short sale rules), the effect of
which may be to accelerate income to the Fund, defer losses to the Fund, cause
adjustments in the holding periods of the Fund's securities, or convert
short-term capital losses into long-term capital losses. These rules could
therefore affect the amount, timing and character of distributions to
shareholders. The Fund will endeavor to make any available elections pertaining
to such transactions in a manner believed to be in the best interests of the
Fund.

Sales or Redemptions of Shares. From time to time the Fund may make a
tender or repurchase offer for its Common Shares. It is expected that the terms
of any such offer will require a tendering shareholder to tender all Common
Shares, and dispose of all shares of Municipal Preferred, held or considered
under Code rules to be held by such shareholder. Shareholders who tender all
Common Shares and dispose of all shares of Municipal Preferred held, or
considered held, by them will be treated as having sold such shares and
generally will realize a capital gain or loss. If, however, a shareholder
tenders fewer than all of its Common Shares, or retains a substantial portion of
its Municipal Preferred, such shareholder may be treated as having received a
taxable dividend upon the tender of its Common Shares. In such a case, there is
a remote risk that non-tendering shareholders (including holders of Municipal
Preferred) will be treated as having received taxable distributions from the
Fund. Likewise, if the Fund redeems some but not all of the Municipal Preferred
held by a holder of Municipal Preferred and such holder of Municipal Preferred
is treated as having received a taxable dividend upon such redemption, there is
a remote risk that holders of Common Shares and non-redeeming holders of
Municipal Preferred will be treated as having received taxable distributions
from the Fund.

Foreign Investors. Non-resident alien individuals, foreign corporations
and certain other foreign entities generally will be subject to a U.S.
withholding tax at a rate of 30% on the Fund's distributions from its ordinary
income and the excess of its net short-term capital gain over its net long-term
capital loss, unless the tax is reduced or eliminated by an applicable tax
treaty. Distributions from the excess of the Fund's net capital gain received by
such shareholders and any gain from the sale or other disposition of shares of
the Fund generally will not be subject to U.S. Federal income taxation, provided
that non-resident alien status has been certified by the shareholder. Different
U.S. tax consequences may result if the shareholder is engaged in a trade or
business in the United States, is present in the United States for a sufficient
period of time during a taxable year to be treated as a U.S. resident, or fails
to provide any required certifications regarding status as a non-resident alien
investor. Foreign shareholders should consult their tax advisors regarding the
U.S. and foreign tax consequences of an investment in the Fund.

The Internal Revenue Service recently revised its regulations affecting
the application to foreign investors of the back-up withholding and withholding
tax rules described above. The new regulations will generally be effective for
payments made after December 31, 2000. In some circumstances, the new rules will
increase the certification and filing requirements imposed on foreign investors
in order to qualify for exemption from the 31% back-up withholding tax and for
reduced withholding tax rates under income tax treaties. Foreign investors in
the Fund should consult their tax advisors with respect to the potential
application of these new regulations.

The foregoing is a general, abbreviated summary of the provisions of
the Code and regulations thereunder presently in effect as they directly govern
the taxation of the Fund and owners of Common Shares. These provisions are
subject to change by legislative or administrative action, and any such change
may be retroactive with respect to Fund transactions. Owners of

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Common Shares are advised to consult with their own tax advisors for more
detailed information concerning Federal income tax matters.

FOREIGN, STATE AND LOCAL TAX MATTERS

The exemption from Federal income tax for exempt-interest dividends
does not necessarily result in exemption for such dividends under the income or
other tax laws of any foreign, state or local taxing authority. Some states
exempt from state income tax that portion of any exempt-interest dividend that
is derived from interest received by a regulated investment company on its
holdings of securities of that state and its political subdivisions and
instrumentalities. Therefore, the Fund will report annually to its shareholders
the percentage of interest income earned by the Fund during the preceding year
on tax-exempt obligations indicating, on a state-by-state basis, the source of
such income. Holders of shares of Municipal Preferred are advised to consult
with their own tax advisors about foreign, state and local tax matters.

SPECIAL TAX CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL OBLIGATIONS

Information regarding the California tax consequences of investing in
the Fund are set forth in Appendix B--"Special Considerations Relating to
California."

SHAREHOLDER LIABILITY

Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration disclaims shareholder liability for acts or obligations
of the Fund and requires that a notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Fund or the
Trustees. The Declaration provides for indemnification out of Fund property for
all loss and expense of any shareholder held personally liable for the
obligations of the Fund. Thus, the risk of a shareholder's incurring financial
loss on account of shareholder liability is limited to circumstances (which are
considered remote) in which the Fund would be unable to meet its obligations and
the disclaimer was inoperative.

CUSTODIAN

The Chase Manhattan Bank is the Fund's custodian. The custodian is
responsible for safeguarding the Fund's cash and securities, receiving and
delivering securities and collecting the Fund's interest and dividends.

INDEPENDENT ACCOUNTANTS

________________ are the Fund's independent accountants, providing
audit and tax return preparation services and assistance and consultation in
connection with the review of various Securities and Exchange Commission
filings. The address of ___________________ is ________________________.

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APPENDIX A

RATINGS OF INVESTMENTS

STANDARD & POOR'S CORPORATION -- A brief description of the applicable Standard
& Poor's Corporation ("S&P") rating symbols and their meanings (as published by
S&P) follows:

LONG TERM DEBT

An S&P corporate or municipal debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such
as guarantors, insurers, or lessees.

The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or
suitability for a particular investor.

The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.

The ratings are based, in varying degrees, on the following
considerations:

1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation;

2. Nature of and provisions of the obligation;

3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.

INVESTMENT GRADE

AAA Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

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

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

BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.

SPECULATIVE GRADE RATING

Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation and
'C' the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by major uncertainties or major exposures
to adverse conditions.

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BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The 'BB' rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied 'BBB-' rating.

B Debt rated 'B' has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal.

The 'B' rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied 'BB' or 'BB-' rating.

CCC Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal.

The 'CCC' rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied 'B' or 'B-' rating.

CC The rating 'CC' typically is applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' debt rating.

C The rating 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C'
rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued.

CI The rating 'CI' is reserved for income bonds on which no interest is
being paid.

D Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The
'D' rating also will be used upon the filing of a bankruptcy petition
if debt service payments are jeopardized.

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

PROVISIONAL RATINGS: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise judgment
with respect to such likelihood and risk.

L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is federally insured and interest is adequately
collateralized.* In the case of certificates of deposit the letter 'L'
indicates that the deposit, combined with other deposits being held in
the same right and capacity, will be honored for principal and accrued
pre-default interest up to the federal insurance limits within 30 days
after closing of the insured institution or, in the event that the
deposit is assumed by a successor insured institution, upon maturity.

* Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement or closing documentation
confirming investments and cash flow.

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NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.

MUNICIPAL NOTES

An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment:

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

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

NOTE RATING SYMBOLS ARE AS FOLLOWS:

SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.

SP-2 Satisfactory capacity to pay principal and interest.

SP-3 Speculative capacity to pay principal and interest.

A note rating is not a recommendation to purchase, sell, or hold a security
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.

COMMERCIAL PAPER

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

Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:

A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with a
plus sign (+) designation.

A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-l."

A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.

B Issues rated "B" are regarded as having only speculative capacity for
timely payment.

C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.

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D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.

A commercial paper rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.

MOODY'S INVESTORS SERVICE, INC.-- A brief description of the applicable Moody's
Investors Service, Inc. ("Moody's") rating symbols and their meanings (as
published by Moody's) follows:

MUNICIPAL BONDS

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

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

A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.

BAA Bonds which are rated Baa are considered as medium grade obligations,
i.e. they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.

BA Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.

B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.

CAA Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.

CA Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

Bonds for which the security depends upon the completion of some act or
the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned

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in operation experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.

NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the
symbols Aal, Al, Baal, Bal and Bl.

SHORT-TERM LOANS

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

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

MIG 3/VMIG 3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable
strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is
likely to be less well established.

MIG 4/VMIG 4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is
present and although not distinctly or predominantly
speculative, there is specific risk.

S.G. This designation denotes speculative quality. Debt instruments
in this category lack margins of protection.

COMMERCIAL PAPER

Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:

--Leading market positions in well established industries.

--High rates of return on funds employed.

--Conservative capitalization structures with moderate reliance on debt and
ample asset protection.

--Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.

--Well established access to a range of financial markets and assured
sources of alternate liquidity.

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

Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.

Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.

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APPENDIX B

SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA

The Fund's concentration on municipal bonds issued by the State of
California (the "State"), its agencies, or its political subdivisions means that
investors are subject to risks of default or change in value of the securities
making up the Fund deriving from certain unique factors affecting California
issuers. The information presented below has been derived from official
statements and other public reports of the State, but does not purport to be
comprehensive. In addition, the financial strength of local governments in
California is not directly related to the State's financial strength, and
factors not listed below may affect an individual local government.

During the early 1990's, the State experienced significant financial
difficulties, which reduced its credit standing. The State's finances have
improved significantly since 1994, with credit ratings increases since 1996. The
ratings of certain related debt of other issuers for which the State has an
outstanding lease purchase, guarantee or other contractual obligation (such as
for state-insured hospital bonds) are generally linked directly to the State's
credit rating. Should the State's financial condition deteriorate again, its
credit ratings could be reduced, and the market value and marketability of all
outstanding notes and bonds issued by the State, its agencies or its local
governments could be adversely affected.

ECONOMIC FACTORS

California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of almost 34 million represents
over 12% of the total United States population. Total personal income in
California, at an estimated $902 billion in 1998, accounts for almost 13% of all
personal income in the nation. Total employment is over 15 million, the majority
of which is in the service, trade and manufacturing sectors.

From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. Employment levels
stabilized by late 1993 and pre-recession job levels were reached in 1996.
Unemployment has come down to under six percent in June 1999. Economic
indicators show a steady and strong recovery underway in California since the
start of 1994. The Asian economic crisis starting in 1997 has dampened the
State's economic growth, particularly in high technology manufacturing. Several
key export industries, such as electronics and aerospace manufacturing,
agriculture, and motion picture production, are struggling, due in part to
weakness in foreign demand. Conversely, the demand for high technology services,
including software, internet applications, and biotechnology, is strong and
construction activity continues to surge. Current forecasts predict continued
strong growth of the State's economy in 1999, with a slowdown predicted in 2000
and beyond. Any delay or reversal of the recovery may create new shortfalls in
State revenues.

CONSTITUTIONAL LIMITATIONS ON TAXES, OTHER CHARGES AND APPROPRIATIONS

Limitation on Property Taxes. Certain California municipal bonds 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 taxing powers of
California local governments and districts are limited by Article XIII A of the
California Constitution, enacted by the voters in 1978 and commonly known as
"Proposition 13." Briefly, Article XIII A limits to one percent of "full cash
value" the rate of ad valorem property taxes on real property and generally
restricts the increase in the assessed value of real property to two percent per
year, except when new construction or a change in ownership occurs (subject to a
number of exemptions). Taxing entities may, however, increase the permissible ad
valorem tax rate above one percent to pay debt service on voter-approved bonded
indebtedness.

Under Article XIII A, the basic one percent tax rate applies to the
assessed value of property, determined 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. Although several lawsuits have been filed challenging Proposition
13's acquisition value-based system, it was upheld by the U.S. Supreme Court in
1992.

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Article XIII A also requires the voters of any city, county or special
district to approve any "special tax" by a two-thirds vote. Court decisions,
however, allowed a non-voter approved levy of "general taxes" which were not
dedicated to a specific use.

Limitations on Other Taxes, Fees and Charges. In November 1996, California
voters approved Proposition 218, which added Articles XIII C and XIII D to the
State Constitution. These provisions affect significantly the ability of local
governments (including special districts) to levy and collect existing and
future taxes, assessments, fees and charges.

Article XIII C requires that all new, extended 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 1994 and before Proposition
218's approval, must be approved by a majority vote within two years of the date
Proposition 218 was approved.

Article XIII D contains several provisions making it generally more
difficult for local governments (including special districts) to levy and
maintain "assessments" for municipal services and programs. Article XIII D also
contains several provisions affecting "fees" and "charges," defined 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 user fees or charges for a property related service." All
new, extended or increased property-related fees and charges must conform to
requirements prohibiting, among other things, the generation of revenues
exceeding the funds required to provide the property-related service, and the
use of the revenues for unrelated purposes. Notice, hearing and protest
procedures are provided for levying or increasing 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 XIII D), 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 XIII C removes
limitations on the initiative power in matters of reducing or repealing 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.

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 credit ratings of
California cities and counties have been, and others may be, reduced.

Appropriations Limits. The State and its local governments are also subject
to an annual "appropriations limit" imposed by Article XIII B of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIII B prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed on that entity.
"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 many State subventions to local governments. Each
entity's appropriations limit is adjusted annually to reflect changes in cost of
living and population, and transfers of service responsibilities between
governmental units.

Article XIII B does not limit 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 XIII B 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, and (3) appropriations for certain capital outlay projects.

A governmental entity that receives "excess" revenues, measured over a
two-year cycle, must dispose of the excess amount. Local governments must return
any excess to taxpayers by rate reductions. The State must refund to taxpayers
half of any excess, with the other half 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

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over time. State appropriations were $5 billion under the limit for fiscal year
1998-99. Local governments may, by voter approval, exceed their spending limits
for up to four years.

Because of the complex nature of Articles XIII A through XIII D of the
California Constitution, the ambiguities and possible inconsistencies in their
terms, 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 bonds or on the ability of the State or local
governments to pay debt service on such California municipal bonds. 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 upon the State's or any local government's ability to pay debt service
on, or repay, their obligations. Future voter action may also affect the ability
of the State or local governments to repay their obligations.

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 (the State's principal
operating fund) after support of the public school system and public
institutions of higher education. As of May 1, 1999, the State had outstanding
approximately $19.7 billion of long-term general obligation bonds, $246 million
of general obligation commercial paper, and $6.6 billion of lease-purchase debt
supported by the General Fund. The State also had about $15.2 billion of
authorized and unissued long-term general obligation bonds and lease-purchase
debt. In the 1997-98 fiscal year, debt service on general obligation bonds and
lease purchase debt was approximately 4.4% of General Fund revenues.

RECENT FINANCIAL RESULTS

The principal sources of General Fund revenues are the California personal
income tax, the sales and use tax, bank and corporation taxes, and the gross
premium tax on insurance. The State also 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. Year-end balances in the SFEU are
included for financial reporting purposes in the General Fund balance. Because
of the recession and an accumulated budget deficit, no reserve was budgeted in
the SFEU from 1992-93 to 1995-96. The California Department of Finance estimates
year-end balances in the SFEU of $1.881 billion for 1998-99 and $985 million for
1999-00.

General. Throughout the 1980's, State spending increased rapidly as the
State's 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 and community college school districts. In 1988, Proposition 98 was
enacted, which generally guarantees local school districts and community college
districts a minimum share of State General Fund revenues (currently about 35%).

Recent Budgets. As a result of the severe economic recession from 1990-94
and other factors, the State experienced substantial revenue shortfalls and
greater than anticipated social service costs in the early and mid- 1990's. The
State accumulated and sustained a budget deficit in the budget reserve, the
SFEU, approaching $2.8 billion at its peak on June 30, 1993. The Legislature and
Governor agreed on a number of different steps to respond to the adverse
financial conditions and produce Budget Acts in the fiscal years 1991- 92 to
1994-95 (although not all of these actions were taken in each year) including:

- significant cuts in health and welfare program expenditures;

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

- revenue increases (particularly in the 1991-92 fiscal year budget),
most of which were for a short duration.

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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. The State's cash condition became so serious that from
late spring 1992 until 1994, 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. For a two-month period in the Summer of 1992,
pending adoption of the annual Budget Act, the State was forced to issue
registered warrants (IOUs) to some of its suppliers, employees and other
creditors. The last of these deficit notes was repaid in April 1996.

The State's financial condition improved markedly during the 1995-96,
1996-97 and 1997-98 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued spending
restraint based on the actions taken in earlier years. The State's cash position
also improved, and no external deficit borrowing has occurred over the end of
these three fiscal years.

The State economy grew strongly during the 1995-96 through 1997-98 fiscal
years, and the General Fund took in substantially greater tax revenues (around
$2.2 billion in 1995-96, $1.6 billion in 1996-97 and $2.4 billion in 1997-98)
than were initially planned when the budgets were enacted. These additional
funds were largely directed to school spending as mandated by Proposition 98,
and to make up shortfalls from reduced federal health and welfare aid in 1995-96
and 1996-97. The accumulated budget deficit from the recession years was finally
eliminated.

FY 1997-98 Budget. In May 1997, the California Supreme Court ruled that the
State acted illegally in 1993 and 1994 by using a deferral of payments to the
Public Employees Retirement Fund to help balance earlier budgets. In response to
this court decision, the Governor ordered an immediate repayment to the
Retirement Fund of about $1.228 billion, which substantially "used up" the
then-expected additional General Fund revenues for the fiscal year. The 1997-98
Budget Act provided another year of rapidly increasing funding for K-14 public
education. Support for higher education units in the State also increased by
about six percent. Because of the pension repayment, most other State programs
were funded at levels consistent with prior years, and several initiatives had
to be dropped. The final results for 1997-98 showed General Fund revenues and
transfers of $54.9 billion and expenditures of $52.9 billion.

Part of the 1997-98 Budget Act was completion of State welfare reform
legislation to implement the federal welfare reform law passed in 1996. The new
State program became effective January 1, 1998, and emphasizes programs to bring
aid recipients into the workforce. As required by federal law, new time limits
are placed on receipt of welfare aid.

FY 1998-99 Budget. The 1998-99 Budget Act was signed on August 21, 1998.
The Budget Act assumed General Fund revenues and transfers in 1998-99 of $57.0
billion. After giving effect to line-item vetoes made by the Governor, the
Budget Act authorized spending of about $57.3 billion from the General Fund and
$14.7 billion from Special Funds. After enactment of the Budget Act, a number of
additional fiscal bills were enacted, but the Administration also raised its
estimate of revenues from the 1997-98 fiscal year.

As has been the case in the last several years, spending on K-12 education
increased significantly, by a total of $2.2 billion, with projected per-pupil
spending of $5,752. Funding to support higher education was also increased
significantly (more than 15% for the University of California and more than 14%
for the California State University system). The Budget included some increases
in health and welfare programs, including the first increase in the monthly
welfare grant in nine years.

One of the most important elements of the 1998-99 Budget Act was agreement
on $1.4 billion of tax cuts. The largest of these is a cut in the Vehicle
License Fee (an annual tax on the value of cars registered in the State, the
"VLF"). Starting in 1999, the VLF is reduced by 25%, and then increasing to
67.5%. Because VLF funds are automatically transferred to cities and counties,
the new legislation provides for the General Fund to make up the reductions in
VLF funds. If State General Fund revenues continue to grow above certain
targeted levels in future years, the cut could reach as much as 67.5% by the
year 2003. The initial 25% VLF cut will be offset by about $500 million in
General Fund money in 1998-99, and $1 billion annually for future years. Other
tax cuts in 1998-99 include an increase in the dependent exemption credit for
personal income tax filers, restoration of a renter's tax credit for individual
taxpayers, and a variety of business tax relief measures. The total cost of
these tax cuts (including the VLF cut) is estimated at $1.4 billion in 1998-99.

B-36
<PAGE> 83
The Administration released new projections for the balance of 1998-99 on
January 8, 1999 as part of the Governor's Proposed Budget for 1999-00 (the
"Governor's Budget"). As a result of somewhat slower economic growth largely due
to the Asian economic slowdown, resulting in reduced revenues, and higher health
and welfare caseloads than projected, the Administration projected that the SFEU
would be reduced to about $600 million as of June 30, 1999. New projections for
the balance of 1998-99 were also released on May 14, 1999 as part of the May
Revision to the Governor's Proposed Budget for 1999-00 (the "May Revision"). The
May Revision revealed that the State's economy was much stronger in late 1998
and into 1999 than the Administration had thought when it made its first 1999-00
Budget Proposal in January 1999. As a result, the May Revision updates 1998-99
General Fund revenues to be about $57.9 billion, almost $1 billion above the
1998-99 Budget Act, and over $1.6 billion above the Administration's January
1999 estimate. This increase is from personal income taxes, reflecting stronger
wage employment than previously estimated, and extraordinary growth in capital
gain realizations resulting from the stock market's rise. The May Revision
projects the SFEU will have a balance of almost $1.9 billion at June 30, 1999.

Although the Administration projects a budget reserve in the SFEU of about
$1.9 billion on June 30, 1999, the General Fund balance on that date also
reflects $1.76 billion of "loans" which the General Fund made to local schools
in the recession years, representing cash outlays above the mandatory minimum
funding level. A July 1996 settlement of litigation over these transactions
calls for repayment of these loans over a period ending in 2001-02, about
equally split between outlays from the General Fund and from schools'
entitlements. The 1998-99 Budget Act contained a $250 million appropriation from
the General Fund toward this settlement.

FY 1999-00 Budget. The newly elected Governor, Gray Davis, released his
proposed 1999-00 Budget in January 1999. The proposed budget projected somewhat
lower General Fund revenues for 1999-00 than earlier projections. The May
Revision sharply increased the revenue estimates, by over $2.7 billion, to a
total of almost $63.0 billion, which would represent a nine percent increase
above 1998-99. The January Governor's Budget proposed $60.5 billion of
expenditures in 1999-00, with a $400 million SFEU reserve at June 30, 2000. The
budget proposal also contained some education funding initiatives and certain
limited initiatives in other areas, but was overall relatively limited by the
expectation of smaller revenue gains. In the May Revision, the Governor proposed
several additional initiatives to respond to the over $4.3 billion of new
revenues over the two years 1997-98 and 1998-99. These include over $1.2 billion
more for K-12 education (much of which is mandated by Proposition 98), over $1
billion of infrastructure spending, increases for higher education, public
safety, health and welfare and many other programs, but only a small increase in
funding to local governments. Total proposed General Fund spending for 1999-00
in the Man Revision is $63.2 billion.

The Governor also proposed to increase the SFEU to about $1 billion by June
30, 2000, and also proposed to "set aside" about $700 million to pay for future
employee pay increases, possible litigation costs, and a possible future VLF tax
cut based on the current law. If these moneys are not spent for these purposes,
they would increase the SFEU reserve.

The 1999-00 Budget Act was the first State budget since 1993 to be signed
into law by the June 30 deadline. The 1999-00 budget projects General Fund
reserves and transfers of almost $63 billion and General Fund expenditures of
$63.7 billion. The 1999-00 budget projects a June 30, 2000 balance in the SFEU
of $881 million.

The 1999-00 budget includes Proposition 98 spending of $37.9 billion, a 6.5
percent increase over 1998-99, a $634 million increase in spending for the
University of California and California State University systems and for
California community colleges, a ten percent reduction in the VLF (resulting in
a cumulative 35 percent reduction from 1998 VLF levels), a $1.3 billion increase
in capital expenditures for streets and highways, and a 5.5 percent salary
increase (effective April 1, 1999) for many state employees.

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 RATINGS

B-37
<PAGE> 84
The ratings on the State's long-term general obligation bonds were reduced
in the early 1990's from the "AAA" levels which existed prior to the recession.
Beginning in 1996, the three major rating agencies raised their ratings of the
State's general obligation bonds, which as of February 1999 were assigned
ratings of "A+" from Standard & Poor's, "Aa3" from Moody's and "AA-" from Fitch.

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, 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 also include reductions in
welfare payments, the use of certain cigarette tax funds for health costs, and
the State's liability for property damage incurred in 1997 floods in Northern
California. All of these cases are subject to further proceedings and appeals,
and if the State eventually loses, the final remedies may not have to be
implemented in one year.

YEAR 2000 PREPARATIONS

The State and California local governments, along with all other public and
private institutions in the nation, face a major challenge to ensure that their
computer systems, including microchips embedded into existing machinery, will
not fail prior to or at January 1, 2000, which date may not be recognized
properly by software utilizing only two digits to identify a year. The State
Department of Information Technology ("DOIT"), created in 1995, coordinates
activities, provides technical assistance to State agencies and local
governments, and reports on the status of remediation efforts by over 100 State
departments and agencies.

In January 1999 DOIT reported that 372 of 564 "mission critical"
information technology systems in State government had been remediated (although
final testing was continuing in some cases). Of the remaining 192 "mission
critical" systems, 54 systems were being retired and 138 were in the remediation
process. DOIT also reported that, with respect to embedded systems, State
agencies had not yet reported on all facilities, nor had they completed the
survey of all facilities. Of the 606 facilities that were reported, remediation
was completed in 52 facilities.

In addition to hardware and software changes, State agencies are preparing
business contingency plans in case of computer problems at January 1, 2000, and
are actively coordinated with outside agencies, vendors, contractors and others
with whom computer data is shared. The State Treasurer (responsible for bond
payments) and State Controller (responsible for State fiscal controls) have
reported that the systems for bond payments and the State fiscal and accounting
system, respectively, were fully remediated by December 31, 1998, and that they
are spending 1999 testing and confirming their respective systems.

The State has expended, and plans to spend, many hundreds of millions of
dollars on year 2000 projects, and has set aside tens of millions of dollars in
contingency funds to support late-coming needs. There is no survey of local
government costs or the overall status of their activities, however. It is
likely that larger government agencies are better prepared at this time than
smaller ones. Both the State and local governments are preparing emergency plans
for year 2000 computer difficulties similar to their normal planning for nature
emergencies, such as floods or earthquakes.

OBLIGATIONS OF OTHER ISSUERS

Other Issuers of California Municipal Obligations. There are a number of
State agencies, instrumentalities and political subdivisions that issue
municipal obligations, some of which may be conduit revenue obligations that
derive 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 considerable from the credit quality of obligations
backed by the full faith and credit of the State.

B-38
<PAGE> 85
State Assistance. Property tax revenues received by local governments
declined substantially following passage of Proposition 13. Subsequently, to
assist municipal issuers 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. Total local assistance from the
State's General Fund was budgeted at approximately 75% of General Fund
expenditures in recent years. To reduce State General Fund support for school
districts, in 1993-94, the State caused local governments to transfer some of
their property tax revenues to school districts, representing the loss of the
post-Proposition 13 "bailout" aid. (Litigation has been brought against the
State challenging the legality of these property tax revenues shifts.) Local
governments have in return received greater revenues and greater flexibility to
operate health and welfare programs. However, except for agreement in 1997 on a
new program for the State to substantially take over funding for local trial
courts (saving cities and counties some $400 million annually), there has been
no large-scale reversal of the property tax shift to help local governments.

To the extent the State is constrained by its Article XIII B appropriations
limit (described above), 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. 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.

Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which were enacted in August
1997 in order to comply with the federal welfare reform law. Generally, counties
play a large role in the new system, and are given substantial flexibility to
develop and administer programs to bring aid recipients into the workforce.
Counties are also given financial incentives if either at the county or
statewide level, the "Welfare-to-Work" programs exceed minimum targets; counties
are also subject to financial penalties for failure to meet such targets.
Counties remain responsible to provide "general assistance" for able-bodied
indigents who are ineligible for other welfare programs. The long-term financial
impact of the new welfare system on local governments is still unknown.

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 which is 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). If 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. Although
litigation is brought from time to time challenging the constitutionality of
such lease arrangements, the California Supreme Court issued a ruling in August
1998 which reconfirmed the legality of these financing methods.

OTHER CONSIDERATIONS

The repayment of industrial development bonds and other securities secured
by real property may be affected by California laws limiting foreclosure rights
of creditors. Securities backed by health care 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 the
risks related to the policy of awarding exclusive contracts to certain
hospitals.

B-39
<PAGE> 86
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
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 XIII A and XIII
B, and only resumed such ratings on a selective basis.

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
the 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 the State or local governments to pay the interest on, or repay
the principal of, such California municipal obligations.

Most 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 million in aid after these
earthquakes, and neither earthquake is expected to have any long-term negative
economic impact. The value of any California municipal obligation held by 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 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.

CALIFORNIA TAX MATTERS

The following is based upon the advice of Heller Ehrman White & McAuliffe,
special California counsel to the Fund.

The following is a general, abbreviated summary of certain provisions of
the applicable California State tax law as presently in effect as it directly
governs the taxation of Common Shareholders of the Fund who are either
California resident individuals or corporations subject to the California
franchise tax. 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 Fund.

The following is based on the assumptions that the Fund will qualify under
Subchapter M of the Code as a regulated investment company, that it will satisfy
the conditions which will cause distributions of the Fund (to the extent derived
by the Fund from interest on California municipal obligations) to qualify as
exempt-interest dividends to shareholders for federal and California purposes,
and that it will distribute all interest and dividends it receives to the
shareholders.

The Fund will be subject to the California corporate franchise and
corporation income tax only if it has a sufficient nexus with California. If it
is subject to the California franchise or corporation income tax, the Fund does
not expect to pay a material amount of such tax.

If at the close of each quarter of the Fund's taxable year at least 50% of
the value of its total assets consists of obligations that, when held by an
individual, pay interest that is exempt from tax by California under California
or federal law, then distributions by the Fund that are attributable to interest
on any such obligation will not be subject to the California personal income
tax. All other distributions, including distributions attributable to dividends
and capital gains, will be includable in gross income for purposes of the
California personal income tax.

Interest on "private activity bonds" is not included in an individual's
income for purposes of the California alternative minimum tax. In addition,
California does not impose personal income tax on Social Security benefits.

B-40
<PAGE> 87
Interest on indebtedness incurred or continued for the purpose of acquiring
or maintaining an investment in the Common Shares will not be deductible for
purposes of the California personal income tax.

All distributions of the Fund, regardless of source, to corporate Common
Shareholders that are subject to the California corporate franchise tax will be
included in gross income for purposes of such tax.

Gain on the sale, exchange, or other disposition of Common Shares will be
subject to the California personal income and corporate franchise tax. Any loss
realized by a holder of Common Shares upon the sale of shares held for six
months or less may be disallowed to the extent of any exempt interest dividends
received with respect to such shares. Moreover, any loss realized upon the sale
of Common Shares within 30 days before or after the acquisition of other Common
Shares (including through a distribution from the Fund) may be disallowed under
the "wash sale" rules.

Common Shareholders are advised to consult with their own tax advisers for
more detailed information concerning California tax matters.

TAX RATE COMPARISONS

The table below gives the approximate yield a taxable security must earn at
various income brackets to produce after-tax yields equivalent to those of
tax-exempt bonds yielding from 4.75% to 5.50% under the Code and the California
state personal income tax law, applying tax rates applicable to individuals for
1998.

<TABLE>
<CAPTION>
COMBINED TAX EXEMPT
(TAXABLE INCOME*) FEDERAL AND
CA STATE 4.75% 5.00% 5.25% 5.50%
SINGLE RETURN JOINT RETURN TAX BRACKET IS EQUIVALENT TO A FULLY TAXABLE YIELD OF:
------------- ------------ ----------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Up to $5,131 Up to $10,262 15.85% 5.64% 5.94% 6.24% 6.54%
$5,132 - $12,161 $10,263 - $24,322 16.70% 5.70% 6.00% 6.30% 6.60%
$12,162 - $19,193 $24,323 - $38,386 18.40% 5.82% 6.13% 6.43% 6.74%
$19,194 - $25,350 $38,387 - $42,350 20.10% 5.94% 6.26% 6.57% 6.88%
$25,351 - $26,644 $42,351 - $53,288 32.32% 7.02% 7.39% 7.76% 8.13%
$26,645 - $33,673 $53,289 - $67,346 33.76% 7.17% 7.55% 7.93% 8.30%
$33,674 - $61,400 $67,347 - $102,300 34.70% 7.27% 7.66% 8.04% 8.42%
$61,401 - $128,100 $102,301 - $155,950 37.42% 7.59% 7.99% 8.39% 8.79%
$128,101 - $278,450 $155,951 - $278,450 41.95% 8.18% 8.61% 9.04% 9.47%
over $278,450 over $278,450 45.22% 8.67% 9.13% 9.58% 10.04%
</TABLE>

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

* Net amount subject to federal and California personal income tax after
deductions and exemptions. Although the federal income tax brackets for
1999 have been released, the California personal income tax brackets
for 1999 have not been released. Consequently, the table above uses the
combined brackets for 1998.

The above-indicated federal income tax brackets do not take into
account the effect of a reduction in the deductibility of itemized deductions
for individual taxpayers with adjusted gross income in excess of $124,500. The
tax brackets also do not show the effects of phaseout of personal exemptions for
single filers with adjusted gross income in excess of $124,500 and joint filers
with adjusted gross income in excess of $186,800. The effective tax brackets and
equivalent taxable yields of those taxpayers will be higher than those indicated
above.

The combined federal and California tax brackets are calculated using
the highest California tax rate applicable within each bracket. Taxpayers with
taxable income within such brackets may have lower combined tax brackets and
taxable equivalent yields than indicated above. The combined tax brackets assume
that California taxes are itemized deductions for federal income tax purposes.
Investors who do not itemize deductions on their federal income tax return will
have a higher combined bracket and higher

B-41
<PAGE> 88
taxable equivalent yield than those indicated above. The applicable federal tax
rates within the brackets are 15%, 28%, 31%, 36% and 39.6%, over the same ranges
of income.

Yields shown are for illustration purposes only and are not meant to
represent the Trust's actual yield. No assurance can be given that the Trust
will achieve any specific tax-exempt yield. While it is expected that the Trust
will invest principally in obligations the interest from which is exempt from
the regular federal income tax and California state personal income taxes, other
income received by the Trust may be taxable. It should also be noted that the
interest earned on certain "private activity bonds," while exempt from the
regular federal income tax, is treated as a tax preference item which could
subject the recipient to the federal alternative minimum tax ("AMT"). The
illustrations assume that the AMT is not applicable and do not take into account
any tax credits that may be available.

The information set forth above is as of the date of this Statement of
Additional Information. Subsequent tax law changes could result in prospective
or retroactive changes in the tax brackets, tax rates, and tax equivalent yields
set forth above. Investors should consult their tax adviser for additional
information.

B-42
<PAGE> 89
PART C

OTHER INFORMATION

Item 24. Financial Statements and Exhibits

(1) Financial Statements:

Included in Part A

None

Included in Part B

Report of Independent Accountants(2)

Statement of Assets and Liabilities(2)

(2) Exhibits

(a)(1) Agreement and Declaration of Trust(1)
(b) By-Laws(2)
(c) Not applicable
(d)(1) To be filed under amendment
(d)(2) Form of specimen for the municipal auction rate cumulative
preferred shares(2)
(e) Dividend Reinvestment Plan(2)
(f) Not applicable
(g) Management Agreement with ___________________ (2)
(h) Form of Underwriting Agreement(2)
(i) Not applicable
(j) To be filed under amendment

C-1
<PAGE> 90

(k) To be filed under amendment
(l) Opinion and Consent of Ropes & Gray, counsel to Registrant(2)
(m) Not applicable
(n) Consent of independent accountants(2)
(o) Not applicable
(p) Not applicable
(q) Not applicable

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

(1) Incorporated by reference to the Registration Statement filed with the
Commission via EDGAR on or about August 11, 1999.

(2) To be filed under amendment

Item 25. Marketing Arrangements.

See Sections _______ of Exhibit (h) of Item 24(2) of this
Registration Statement.

Item 26. Other Expenses of Issuance and Distribution.

The following table sets forth the expenses to be incurred in
connection with the Offer described in this Registration Statement:

Registration fees(2)
New York Stock Exchange listing fee(2)
Printing(2)
Accounting fees and expenses(2)
Legal fees and expenses(2)
Underwriters expense reimbursement(2)
NASD fee(2)
Miscellaneous(2)
--------
Total (2) $
========
(2) To be filed under amendment

Item 27. Persons Controlled by or under Common Control with Registrant.

None.

Item 28. Number of Holders of Securities

<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Common Shares of Beneficial Interest -0-
</TABLE>

Item 29. Indemnification.

The Agreement and Declaration of Trust, as amended, filed as
Exhibit (a)(1) to this Registration Statement provides for
indemnification to each of the Registrant's Trustees and
officers against all liabilities and expenses incurred in acting

C-2
<PAGE> 91
as Trustee or officer, except in the case of wilful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Trustees and officers.

Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of the Registrant pursuant to the
foregoing provisions, 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 a trustee, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer 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 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.

The Registrant, Colonial Management Associates, Inc. and their
respective trustees, directors and officers are insured by a
directors and officers/errors and omissions liability policy.

C-3
<PAGE> 92
Item 30. Business and Other Connections of Investment Adviser

The description of the business of Colonial Management Associates,
Inc., the Registrant's Investment Adviser, is set forth under the
caption "The Advisor" in the Prospectus forming part of this
Registration Statement. The following sets forth business and other
connections of each director and officer of Colonial Management
Associates, Inc.

Registrant's investment adviser, Colonial Management Associates, Inc.
("Colonial"), is registered as an investment adviser under the Investment
Advisers Act of 1940 (1940 Act). Colonial Advisory Services, Inc. (CASI), an
affiliate of Colonial, is also registered as an investment adviser under the
1940 Act. As of the end of the fiscal year, December 31, 1998, CASI had four
institutional, corporate or other accounts under management

C-4
<PAGE> 93

or supervision, the market value of which was approximately $227 million. As of
the end of the fiscal year, December 31, 1998, Colonial was the investment
adviser, sub-adviser and/or administrator to 57 mutual funds, including funds
sub-advised by Colonial, the market value of which investment companies was
approximately $18,950.90 million.

The following sets forth the business and other connections of each director and
officer of Colonial Management Associates, Inc.:

(1) (2) (3) (4)
Name and principal
business
addresses* Affiliation
of officers and with Period is through 05/31/99. Other
directors of investment business, profession, vocation or
investment adviser adviser employment connection Affiliation
- ------------------ ---------- -------------------------------- -----------
<S> <C> <C> <C>
Allard, Laurie V.P.

Archer, Joseph A. V.P.

Ballou, William J. V.P., Liberty Trusts I through IX Asst. Sec.
Asst. Colonial High Income
Sec., Municipal Trust Asst. Sec.
Counsel Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
</TABLE>

C-5
<PAGE> 94
<TABLE>
<CAPTION>
<S> <C> <C> <C>

Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
AlphaTrade Inc. Asst. Clerk
Liberty Funds Distributor,
Inc. Asst. Clerk
Liberty Financial Advisers,
Inc. Asst. Sec.
Liberty Funds Group LLC Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.

Barron, Suzan M. V.P., Liberty Trusts I through IX Asst. Sec.
Asst. Colonial High Income
Sec., Municipal Trust Asst. Sec.
Counsel Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
AlphaTrade Inc. Asst. Clerk
Liberty Funds Distributor,
Inc. Asst. Clerk
Liberty Financial Advisers,
Inc. Asst. Sec.
Liberty Funds Group LLC Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
</TABLE>

C-6
<PAGE> 95

<TABLE>
<CAPTION>
<S> <C> <C> <C>
Barsketis, Ophelia Sr.V.P. Stein Roe & Farnham Incorporated Snr. V.P.

Berliant, Allan V.P.

Boatman, Bonny E. Sr.V.P.; Colonial Advisory Services,
IPC Mbr. Inc. Exec. V.P.

Bunten, Walter V.P.

Campbell, Kimberly V.P.

Carnabucci,
Dominick V.P.

Carome, Kevin Sr.V.P.; Liberty Funds Distributor,
IPC Mbr. Inc. Assistant Clerk
Liberty Funds Group LLC Sr. V.P.
Stein Roe & Farnham
Incorporated General Counsel

Carroll, Sheila A. Sr.V.P.

Citrone, Frank Sr.V.P.

Conlin, Nancy L. Sr. V.P.; Liberty Trusts I through IX Secretary
Sec.; Clerk Colonial High Income
IPC Mbr.; Municipal Trust Secretary
Dir; Gen. Colonial InterMarket Income
Counsel Trust I Secretary
Colonial Intermediate High
Income Fund Secretary
Colonial Investment Grade
Municipal Trust Secretary
Colonial Municipal Income
Trust Secretary
Liberty Funds Distributor,
Inc. Dir.; Clerk
Liberty Funds Services, Inc. Clerk; Dir.
Liberty Funds Group LLC V.P.; Gen.
Counsel and
Secretary
Liberty Variable Investment
Trust Secretary
</TABLE>

C-7
<PAGE> 96
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Colonial Advisory Services,
Inc. Dir.; Clerk
AlphaTrade Inc. Dir.; Clerk
Liberty Financial Advisors,
Inc. Dir.; Sec.
Liberty All-Star Equity Fund Secretary
Liberty All-Star Growth Fund,
Inc. Secretary

Connaughton, V.P. Liberty Trust I through VIII CAO; Controller
J. Kevin Liberty Variable Investment
Trust CAO; Controller
Colonial High Income
Municipal Trust CAO; Controller
Colonial Intermarket Income
Trust I CAO; Controller
Colonial Intermediate High
Income Fund CAO; Controller
Colonial Investment Grade
Municipal Trust CAO; Controller
Colonial Municipal Income
Trust CAO; Controller
Liberty All-Star Equity Fund Controller
Liberty All-Star Growth Fund,
Inc. Controller
Liberty Trust IX Controller

Daniszewski, V.P.
Joseph J.

Dearborn, James V.P.

Desilets, Marian H. V.P. Liberty Funds Distributor,
Inc. V.P.
Liberty Trust I through IX Asst. Sec.
Colonial High Income
Municipal Trust Asst. Sec.
Colonial Intermarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
</TABLE>

C-8
<PAGE> 97
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.

DiSilva-Begley, V.P. Colonial Advisory Services, Compliance
Linda IPC Mbr. Inc. Officer

Eckelman, Marilyn Sr.V.P.

Ericson, Carl C. Sr.V.P. Colonial Intermediate High
IPC Mbr. Income Fund V.P.
Colonial Advisory Services, Pres.; CEO
Inc. and CIO

Evans, C. Frazier Sr.V.P. Liberty Funds Distributor,
Inc. Mng. Director

Feloney, Joseph L. V.P. Colonial Advisory Services,
Asst. Treas. Inc. Asst. Treas.
Liberty Funds Group LLC Asst. Treas.

Finnemore, Sr.V.P. Colonial Advisory Services,
Leslie W. Inc. Sr. V.P.

Franklin, Sr. V.P. AlphaTrade Inc. President
Fred J. IPC Mbr. Liberty Financial Companies, Chief
Inc. Compliance Ofcr

Garrison, William V.P. Stein Roe & Farnham
Incorporated V.P.

Gibson, Stephen E. Dir.; Pres.; Liberty Funds Group LLC Dir.;
CEO; Pres.; CEO;
Chairman of Exec. Cmte.
the Board; Mbr.; Chm.
IPC Mbr. Liberty Funds Distributor,
Inc. Dir.; Chm.
Colonial Advisory Services,
Inc. Dir.; Chm.
</TABLE>

C-9

<PAGE> 98
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Liberty Funds Services, Inc. Dir.; Chm.
AlphaTrade Inc. Dir.
Liberty Trusts I through VIII President
Colonial High Income
Municipal Trust President
Colonial InterMarket Income
Trust I President
Colonial Intermediate High
Income Fund President
Colonial Investment Grade
Municipal Trust President
Colonial Municipal Income
Trust President
Liberty Financial Advisors,
Inc. Director
Stein Roe & Farnham
Incorporated Asst. Chairman
Liberty Variable Investment
Trust President

Grabowski, Neil V.P.

Hanson, Loren Sr. V.P.;
IPC Mbr.

Harasimowicz, V.P.
Stephen

Harris, David V.P. Stein Roe Global Capital Mngmt. Principal

Hartford, Brian Sr.V.P.

Haynie, James P. Sr.V.P. Colonial Advisory Services,
Inc. Sr. V.P.

Held, Dorothy V.P.

Hernon, Mary V.P.

Hill, William V.P. Colonial Advisory Services,
Inc. V.P.

Hounsell, Clare V.P. Stein Roe & Farnham
Incorporated V.P.

Iudice, Jr. V.P.; Liberty Funds Group LLC Controller,
Philip J. Controller CAO, Asst.

</TABLE>

C-10
<PAGE> 99
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Asst. Treas.
Treasurer Liberty Funds Distributor, CFO,
Inc. Treasurer
Colonial Advisory Services, Controller;
Inc. Asst. Treas.
AlphaTrade Inc. CFO, Treas.
Liberty Financial Advisors,
Inc. Asst. Treas.

Jacoby, Timothy J. Sr. V.P.; Liberty Funds Group LLC V.P., Treasr.,
CFO; CFO
Treasurer Liberty Trusts I through VIII Treasr.,CFO
Colonial High Income
Municipal Trust Treasr.,CFO
Colonial InterMarket Income
Trust I Treasr.,CFO
Colonial Intermediate High
Income Fund Treasr.,CFO
Colonial Investment Grade
Municipal Trust Treasr.,CFO
Colonial Municipal Income
Trust Treasr.,CFO
Colonial Advisory Services,
Inc. CFO, Treasr.
Liberty Financial Advisors,
Inc. Treasurer
Stein Roe & Farnham
Incorporated Snr. V.P.
Liberty Variable Investment
Trust Treasurer, CFO
Liberty All-Star Equity Fund Treasurer
Liberty All-Star Growth Fund,
Inc. Treasurer
Liberty Trust IX Treasurer

Jansen, Deborah Sr.V.P. Stein Roe & Farnham
Incorporated Sr. V.P.

Jersild, North V.P. Stein Roe & Farnham
Incorporated V.P.
</TABLE>

C-11
<PAGE> 100
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Johnson, Gordon V.P.

Knudsen, Gail E. V.P. Liberty Trusts I through IX Asst. Treas.
Colonial High Income
Municipal Trust Asst. Treas.
Colonial InterMarket Income
Trust I Asst. Treas.
Colonial Intermediate High
Income Fund Asst. Treas.
Colonial Investment Grade
Municipal Trust Asst. Treas.
Colonial Municipal Income
Trust Asst. Treas.
Liberty Variable Investment
Trust Asst. Treas.
Liberty All-Star Equity Fund Asst. Treas.
Liberty All-Star Growth Fund,
Inc. Asst. Treas.
Lapointe, Thomas V.P.

Lasher, Bennett V.P.

Lasman, Gary V.P.

Lennon, John E. Sr.V.P. Colonial Advisory Services,
Inc. V.P.
Lenzi, Sharon V.P.

Lessard, Kristen V.P.

Loring, William
C., Jr. Sr.V.P.

MacKinnon,
Donald S. Sr.V.P.

Marcus, Harold V.P.

Muldoon, Robert V.P.

Newman, Maureen Sr.V.P.

O'Brien, David Sr.V.P.

Ostrander, Laura Sr.V.P. Colonial Advisory Services,
Inc. V.P.
Palombo, Joseph R. Dir.; Colonial Advisory Services,
Exe.V.P.; Inc. Dir.
IPC Mbr.; Colonial High Income
</TABLE>

C-12
<PAGE> 101
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Municipal Trust V.P.
Colonial InterMarket
Income Trust I V.P.
Colonial Intermediate High
Income Fund V.P.
Colonial Investment Grade
Municipal Trust V.P.
Colonial Municipal Income
Trust V.P.
Liberty Trusts I through IX V.P.
Liberty Funds Services, Inc. Director
Liberty Funds Group LLC CAO; Ex. V.P.
Liberty Funds Distributor,
Inc. Director
AlphaTrade Inc. Director
Liberty Financial Advisors,
Inc. Director
Stein Roe & Farnham
Incorporated Exec. V.P.
Liberty Variable Investment
Trust V.P.
Liberty All-Star Equity Fund V.P.
Liberty All-Star Growth Fund,
Inc. V.P.

Peishoff, William V.P.

Peterson, Ann T. V.P. Colonial Advisory Services,
Inc. V.P.
Pielech, Mitchell V.P.

Pope, David V.P.

Rao, Gita Sr.V.P.

Reading, John V.P.; Liberty Funds Services, Inc. Asst. Clerk
Asst. Liberty Funds Group LLC Asst. Sec.
Sec.; Colonial Advisory Services,
Asst. Inc. Asst. Clerk
Clerk and Liberty Funds Distributor,
Counsel Inc. Asst. Clerk
AlphaTrade Inc. Asst. Clerk
Liberty Trusts I through IX Asst. Sec.
Colonial High Income
Municipal Trust Asst. Sec.
Colonial InterMarket Income
Trust I Asst. Sec.

</TABLE>

C-13
<PAGE> 102
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
Liberty Financial Advisors,
Inc. Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.

Rega, Michael V.P. Colonial Advisory Services,
Inc. V.P.
Salopek, Steven V.P. Stein Roe & Farnham
Incorporated V.P.

Schermerhorn, Scott Sr. V.P.

Seibel, Sandra L. V.P. Colonial Advisory Services,
Inc. V.P.

Shields, Yvonne V.P. Stein Roe & Farnham
Incorporated V.P.

Smalley, Greg V.P.

Spanos, Gregory J. Sr. V.P. Colonial Advisory Services,
Inc. Exec. V.P.

Stevens, Richard V.P. Colonial Advisory Services,
Inc. V.P.

Stoeckle, Mark Sr.V.P. Colonial Advisory Services,
Inc. V.P.

Swayze, Gary Sr.V.P.

Thomas, Ronald V.P.

Wallace, John V.P. Colonial Advisory Services,
Asst.Treas. Inc. Asst. Treas.
Liberty Funds Group LLC Asst. Treas.
Ware, Elizabeth M. V.P.

Wiley, Christine V.P.
</TABLE>

C-14
<PAGE> 103

<TABLE>
<CAPTION>
<S> <C> <C> <C>
Wiley, Peter V.P.
</TABLE>

- -----------------------------------------------
*The Principal address of all of the officers and directors of the investment
adviser is One Financial Center, Boston, MA 02111.

Item 31. Location of Accounts and Records

To be filed under amendment

Item 32. Management Services

Not Applicable

Item 33. Undertakings

(1) The Registrant hereby undertakes to suspend the offering of its
common shares of beneficial interest until it amends its
prospectus if (a) subsequent to the effective date of its
registration statement, the net asset value declines more than ten
percent from its net asset value as of the effective date of the
registration statement or (b) the net asset value increases to an
amount greater than its net proceeds as stated in the prospectus.

(2) Not Applicable

(3) Not Applicable

(4) Not Applicable

(5) (a) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant under Rule 497(h) under the Securities Act
of 1933 shall be deemed to be part of this registration statement
as of the time it was declared effective.

(b) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein,
and the offering of the securities at that time shall be deemed to
be the initial bona fide offering thereof.

(c) The Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two
business days of receipt of a written or oral request, any
Statement of Additional Information.

C-15
<PAGE> 104

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Amendment to its Registration Statement on Form N-2 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts on the 9th day of September, 1999.

PREMIER CALIFORNIA MUNICIPAL INCOME FUND

By: /s/ STEPHEN E. GIBSON
---------------------
Stephen E. Gibson
President

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in their capacities and
on the date indicated.

SIGNATURES TITLE DATE
- ---------- ----- ----

/s/ STEPHEN E. GIBSON President (chief September 9, 1999
- ---------------------- executive officer)
Stephen E. Gibson

/s/ J. KEVIN CONNAUGHTON Controller and Chief September 9, 1999
- ------------------------ Accounting Officer
J. Kevin Connaughton

/s/ TIMOTHY J. JACOBY Treasurer and Chief September 9, 1999
- ------------------------ Financial Officer
Timothy J. Jacoby

C-16
<PAGE> 105
<TABLE>
<S> <C> <C>
ROBERT J. BIRNBAUM* Trustee
- -------------------
Robert J. Birnbaum

TOM BLEASDALE* Trustee
- --------------
Tom Bleasdale

JOHN CARBERRY* Trustee
- --------------
John Carberry

LORA S. COLLINS* Trustee
- ----------------
Lora S. Collins

JAMES E. GRINNELL* Trustee
- ------------------
James E. Grinnell

RICHARD W. LOWRY* Trustee By:*/s/ WILLIAM J. BALLOU
- ----------------- --------------------------
Richard W. Lowry William J. Ballou
Attorney-in-fact
For each Trustee
SALVATORE MACERA* Trustee September 9, 1999
- -----------------
Salvatore Macera

WILLIAM E. MAYER* Trustee
- -----------------
William E. Mayer

JAMES L. MOODY, JR. * Trustee
- ---------------------
James L. Moody, Jr.

JOHN J. NEUHAUSER* Trustee
- ------------------
John J. Neuhauser

THOMAS E. STITZEL* Trustee
- ------------------
Thomas E. Stitzel

ROBERT L. SULLIVAN* Trustee
- -------------------
Robert L. Sullivan

ANNE-LEE VERVILLE* Trustee
- ------------------
Anne-Lee Verville
</TABLE>

C-17

<PAGE> 106

EXHIBIT INDEX

None