THORNBURG LIMITED TERM MUNICIPAL FUND INC, 497, 1998-02-06

THORNBURG LIMITED TERM MUNICIPAL FUND INC
497, 1998-02-06

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<PAGE>

THORNBURG
MUNICIPAL FUNDS

PROSPECTUS
February 1, 1998

NOT FDIC- MAY LOSE VALUE
INSURED NO BANK GUARANTEE

<PAGE>
THORNBURG MUNICIPAL FUNDS
Prospectus
February 1, 1998

The Thornburg Municipal Funds are separate investment portfolios ("Funds")
offered through this combined prospectus by Thornburg Limited Term Municipal
Fund, Inc. and Thornburg Investment Trust.

All of the Funds are managed by Thornburg Management Company, Inc. (TMC).
Each of the active Funds offers Class A shares through this Prospectus,
which are sold at net asset value plus an initial sales charge imposed at
the time of sale. Limited Term National Fund, Limited California Fund and
Intermediate National Fund also offer Class C shares through this
Prospectus, sold without an initial sales charge but subject to a sales
charge if redeemed within one year of purchase and an annual distribution
fee. One or more Funds may offer other classes of shares. See "Your
Account-Buying Fund Shares," beginning on page 15.

Each Fund has the objective of providing, through investment in a
professionally managed portfolio of Municipal Obligations, as high a level
of current income exempt from federal income tax as is consistent, in the
view of the Funds' investment adviser, with preservation of capital.

Each of the Funds having a state's name will invest primarily in Municipal
Obligations of the state having the same name, with the objective of having
interest dividends paid to its state's shareholders exempt from any
individual income taxes imposed by that state. Additionally, Intermediate
New York Fund will seek to have dividends paid to its individual
shareholders exempt from New York City income taxes. Each of the Limited
Term Funds will maintain a portfolio having a dollar-weighted average
maturity of normally not more than five years, with the objective of
reducing net asset value volatility relative to municipal bond portfolios
with longer average maturities while expecting lower yields than those
received on portfolios with longer average maturities. Each of the
Intermediate Funds will maintain a portfolio having a dollar-weighted
average maturity of normally three to ten years, with the objective of
reducing fluctuations in net asset value relative to long-term municipal
bond portfolios. The Intermediate Funds will expect lower yields than those
received on long term bond portfolios, while seeking higher yields and
expecting higher share price volatility than the Limited Term Funds. During
temporary periods the portfolio maturity of the Intermediate Funds may be
reduced for defensive purposes. There is no limitation on the maturity of
any specific security a Fund may purchase, subject to the limitation on the
average maturity of each Fund. There can be no assurance that the Funds'
respective objectives will be achieved.

This Prospectus sets forth concisely the information a prospective investor
should know about the Funds before investing. It should be read and retained
for further reference. Additional information about the Limited Term Funds
is contained in a Statement of Additional Information - Thornburg Limited
Term Municipal Funds dated November 2, 1997, and additional information
about the Intermediate Funds is contained in a Statement of Additional
Information - Thornburg Intermediate Municipal Funds dated February 1,
1998. Each of these Statements of Additional Information has been
filed with the Securities and Exchange Commission and may be obtained at no
charge by contacting Thornburg Securities Corporation, 119 East Marcy
Street, Suite 202, Santa Fe, New Mexico 87501, 800-847-0200. This
Prospectus incorporates by reference both Statements of Additional
Information.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

FUND SHARES INVOLVE INVESTMENT RISKS (INCLUDING POSSIBLE LOSS OF PRINCIPAL),
AND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, AND
ARE NOT INSURED BY, ANY BANK, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY GOVERNMENT AGENCY.

<PAGE>
LIMITED TERM MUNICIPAL FUNDS

(series of Thornburg Limited Term Municipal Fund, Inc.):
Thornburg Limited Term Municipal Fund National Portfolio
("Limited Term National Fund")
Thornburg Limited Term Municipal Fund California Portfolio
("Limited Term California Fund")

INTERMEDIATE TERM MUNICIPAL FUNDS

(series of Thornburg Investment Trust):
Thornburg Intermediate Municipal Fund ("Intermediate National Fund")
Thornburg Alabama Intermediate Municipal Fund
("Intermediate Alabama Fund")*
Thornburg Arizona Intermediate Municipal Fund
("Intermediate Arizona Fund")*
Thornburg Florida Intermediate Municipal Fund
("Intermediate Florida Fund")
Thornburg New Mexico Intermediate Municipal Fund
("Intermediate New Mexico Fund")
Thornburg New York Intermediate Municipal Fund
("Intermediate New York Fund")
Thornburg Pennsylvania Intermediate Municipal Fund
("Intermediate Pennsylvania Fund")*
Thornburg Tennessee Intermediate Municipal Fund
("Intermediate Tennessee Fund")*
Thornburg Texas Intermediate Municipal Fund
("Intermediate Texas Fund")*
Thornburg Utah Intermediate Municipal Fund
("Intermediate Utah Fund")*

* Funds marked with an asterisk are not currently active, and propose to
commence investment operations in the future.

<PAGE>
TABLE OF CONTENTS

1 Expense Information

4 Financial Highlights

8 Management Discussion of Fund Performance

12 Investment Objectives and Policies

16 Your Account - Buying Fund Shares

20 Selling Fund Shares

22 Investor Services, Transaction Services

23 Shareholder and Account Policies

24 Taxes

25 Service and Distribution Plans

26 Transaction Details

28 Exchange Restrictions

28 Performance

30 Organization of the Funds

30 Thornburg Management Company, Inc.
and Thornburg Securities Corporation

31 Additional Information

<PAGE>

NOTES

<PAGE>
EXPENSE INFORMATION
<TABLE>
SHAREHOLDER TRANSACTION EXPENSES
<CAPTION>
Limited Term Municipal Funds Thornburg Intermediate Municipal Funds
----------------------------- -------------------------------------
Class A Class C Class A Class C
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge on Purchases 2.50% none 3.50% none
(as a percentage of offering price)

Maximum Deferred Sales Charge on Redemptions 0.50 <F1> 0.50% <F2> 0.50 <F1> 0.60% <F2>
(as a percentage of redemption proceeds or
original purchase price, whichever is lower)

<FN>
<F1> Imposed only on redemptions of purchases greater than $1 million
in the event of a redemption within 12 months of purchase.
<F2> Imposed only on redemptions of Class C shares within 12 months of purchase.
</FN>
</TABLE>

<TABLE>
ANNUAL OPERATING EXPENSES
(as a percentage of average net assets) Example: You would pay the following expenses on a $1,000 investment, assuming
the Fund's expense ratio remains the same, a 5% annual return, and redemption
at the end of each time period. The figures do not reflect the contingent
deferred sales charge of 1/2 of 1% imposed on redemption of any portion of a
purchase of Class A shares greater than $1 million within one year of purchase.
Thornburg Limited Term <CAPTION>
Municipal Fund -
National Portfolio Class A Class C One Year 3 Years 5 Years 10 Years
- ------------------ ------- ------- -------- ------- ------- --------
<S> <C> <C> <S> <C> <C> <C> <C>

Management Fees .45% .45% Class A $35 $55 $77 $140
12b-1 Fees (after fee waivers Class C $19 $44 $76 $166
for Class C) * .25% .63%
Other Expenses .26% .30% You would pay the following expenses on the same $1,000 investment, assuming
----- ----- no redemption at the end of each period:
Total Fund Operating Expenses .96% 1.38%
One Year 3 Years 5 Years 10 Years
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Class A $35 $55 $77 $140
Class C $14 $44 $76 $166

* Expenses reflect rounding. Amounts shown have been restated to
reflect current fees. Amounts shown for Class C shares of Limited
Term National Fund reflect a partial waiver of the Class C 12b-1
fee. Absent the waiver, the Class C 12b-1 fees would have been 1.00%
and the total Fund operating expenses would have been 1.86% for the
Class C shares. Long-term Class C shareholders may pay more than
the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.

<PAGE>
Example: You would pay the following expenses on a $1,000 investment, assuming
the Fund's expense ratio remains the same, a 5% annual return, and redemption
at the end of each time period. The figures do not reflect the contingent
deferred sales charge of 1/2 of 1% imposed on redemption of any portion of a
purchase of Class A shares greater than $1 million within one year of purchase.
Thornburg Limited Term <CAPTION>
Municipal Fund -
California Portfolio Class A Class C One Year 3 Years 5 Years 10 Years
- -------------------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <S> <C> <C> <C> <C>
Management Fees .50% .50% Class A $35 $56 $79 $144
12b-1 Fees (after fee waivers Class C $19 $44 $77 $168
for Class C) * .25% .63%
Other Expenses (after You would pay the following expenses on the same $1,000 investment, assuming
assumption of expenses for no redemption at the end of each period:
Class A and Class C) .25% .27%
----- ----- One Year 3 Years 5 Years 10 Years
Total Fund Operating Expenses 1.00% 1.40% -------- ------- ------- --------
<S> <C> <C> <C>
Class A $35 $56 $79 $144
Class C $14 $44 $77 $168

* Expenses reflect rounding. Amounts shown have been restated to
reflect current fees. Amounts shown for Class A of the
Limited Term California Fund reflect an assumption of certain Fund
operating expenses. Absent the assumption of expenses, other
expenses would have been .28% and total Fund operating expenses would
have been 1.03%. Amounts shown for Class C of the Limited Term
California Fund reflect a partial waiver of 12b-1 fees and assumption
of certain Fund operating expenses. Absent the waiver of 12b-1 fees
and assumption of expenses, 12b-1 fees and other expenses would have
been 1.00% and .65%, respectively, and total Fund operating expenses
would have been 2.15%. Long-term Class C shareholders may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.

Example: You would pay the following expenses on a $1,000 investment, assuming
the Fund's expense ratio remains the same, a 5% annual return, and redemption
at the end of each time period. The figures do not reflect the contingent
deferred sales charge of 1/2 of 1% imposed on redemption of any portion of a
purchase of Class A shares greater than $1 million within one year of purchase.
Thornburg Intermediate <CAPTION>
Municipal Fund Class A Class C One Year 3 Years 5 Years 10 Years
- ---------------------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <S> <C> <C> <C> <C>
Management Fees .50% .50% Class A $45 $66 $88 $153
12b-1 Fees (after fee waivers Class C $19 $44 $77 $168
for Class C) * .25% .60%
Other Expenses (after You would pay the following expenses on the same $1,000 investment, assuming
assumption of expenses for no redemption at the end of each period:
Class A and Class C) .25% .30%
----- ----- One Year 3 Years 5 Years 10 Years
Total Fund Operating Expenses 1.00% 1.40% -------- ------- ------- --------
<S> <C> <C> <C>
Class A $45 $66 $88 $153
Class C $14 $44 $77 $168

* Expenses reflect rounding. Amounts shown have been restated to
reflect current fees. Amounts shown for Class A of the Intermediate
National Fund reflect an assumption of certain Fund operating
expenses. Absent the assumption of expenses, other expenses would
have been .30% and total Fund operating expenses would have been
1.05%. Amounts shown for Class C of the Intermediate National Fund
reflect a partial waiver of Rule 12b-1 fees and assumption of certain
Fund operating expenses. Absent the waiver of 12b-1 fees and
assumption of expenses, 12b-1 fees and other expenses would have been
1.00% and .49%, respectively, and the total Fund operating expenses
would have been 1.99%. Long-term Class C shareholders may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.

* Expenses reflect rounding. Amounts shown have been restated to reflect
current fees. Amounts shown for Class A of the Intermediate New Mexico
Fund reflect assumption of certain Fund operating expenses. Absent the
assumption of expenses, other expenses would have been .30%, and
total Fund operating expenses would have been 1.05%.

* Expenses reflect rounding. Amounts shown have been restated to
reflect current fees. Amounts shown for Class A of the Intermediate
Florida Fund reflect assumption of certain Fund operating expenses
Absent the assumption of expenses, other expenses would have been
.41% and total Fund operating expenses would have been 1.13%.

Management Fees .50% Class A $45 $65
12b-1 Fees .25%
Other Expenses (after .24%
assumption of expenses)* -----
Total Fund Operating Expenses .99%

* Expenses reflect rounding. Other expenses are estimated for the
current fiscal year and reflect an estimated assumption of a portion
of these expenses by TMC. Absent the assumption of expenses,
other expenses would have been .34%, and the total Fund operating
expenses would have been 1.09%. TMC's assumption of expenses may be
terminated or reduced at any time.

</TABLE>

EXPLANATION OF TABLES

THE INFORMATION IN THE TABLES ABOVE SHOULD BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN. The expense figures shown in the tables above are presented to
assist the investor in understanding the various costs that an investor in a
Fund will bear, directly or indirectly. The Funds' investment adviser and
distributor may not waive fees or assume Fund expenses in the future.

<PAGE>
FINANCIAL HIGHLIGHTS

The tables on the following pages present, for each Fund shown, per share
income and capital changes for a share outstanding throughout each period
indicated. The information for the years ended June 30, 1989, 1990, 1991,
1992, 1993, 1994, 1995, 1996 and 1997 for the Limited Term National Fund and
the Limited Term California Fund, and the information for all of the years
presented for the Intermediate National Fund, Intermediate New Mexico Fund
and Intermediate Florida Fund, has been audited by McGladrey & Pullen, LLP,
independent auditors, whose reports thereon are incorporated by reference in
the registration statements for the respective Funds. The information
should be read in conjunction with the 1997 Annual Report for each Limited
Term Fund and the 1997 Annual Report for Intermediate National Fund,
Intermediate New Mexico Fund and Intermediate Florida Fund. No figures are
shown for Intermediate New York Fund, which commenced operations on
September 5, 1997.

<TABLE> Ratio of Ratio of Ratio of
Expenses Expenses Net
Net Distri- to to Investment Net
Realized butions Distri- Average Average Income Assets
Net Asset and Total from butions Net Net Net (Loss) at end
Value, Unrealized from Net from Asset Assets Assets to of
Beginning Net Gain Investment Invest- Net Value, Total After Before Average Rate of Period
Fiscal Year of Investment (Loss) on Opera- ment Realized End of Return Exp. Exp. Net Portfolio ('000's
or Period Period Income Investments tions Income Gains Period <F(b)> Reductions Reductions Assets Turnover omitted)
- ------------- ------ --------- -------- ---------- ------- ------- ------- ------ ---------- ---------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Limited Term
National Fund
- -------------
Class A
Year ended:
June 30, 1988 $12.69 $.84 $.06 $.90 $( .84) $12.75 7.37% (1.10)% (1.20)% 6.58% 66.00% $164,489
June 30, 1989 12.75 .85 .05 .90 ( .85) 12.80 7.29 (1.15) (1.15) 6.66 69.96 184,139
June 30, 1990 12.80 .86 (.06) .80 ( .86) 12.74 6.48 (1.11) (1.11) 6.73 67.51 217,325
June 30, 1991 12.74 .85 .09 .94 ( .85) 12.83 7.60 (1.07) (1.07) 6.58 32.36 312,882
June 30, 1992 12.83 .79 .26 1.05 ( .79) 13.09 8.40 (1.04) (1.04) 5.96 27.63 521,683
June 30, 1993 13.09 .68 .50 1.18 ( .68) 13.59 9.24 (1.01) (1.01) 5.03 19.30 895,500
June 30, 1994 13.59 .63 (.32) .31 ( .63) 13.27 2.25 (0.95) (0.95) 4.60 15.63 1,030,293
June 30, 1995 13.27 .64 .10 .74 ( .64) 13.37 5.76 (0.97) (0.97) 4.86 23.02 931,987
June 30, 1996 13.37 .63 (.02) .61 ( .63) 13.35 4.60 (0.97) (0.97) 4.66 20.60 917,831
June 30, 1997 13.35 .62 .09 .71 ( .62) 13.44 5.46 (0.96) (0.90) 4.65 23.39 837,621

Class C
9/1/94 <F(a)> $13.29 $ .46 $ .11 $ .57 $( .46) $13.40 4.25% (1.60)% (1.84)% 4.21% 23.02% $6,469
to 6/30/95 <F(c)> <F(c)> <F(c)>
Year ended
June 30, 1996 13.40 .57 (.03) .54 ( .57) 13.37 4.05 (1.41) (1.63) 4.22 20.60 15,948
June 30, 1997 13.37 .57 .09 .66 ( .57) 13.46 5.02 (1.38) (1.86) 4.24 23.39 19,475

Limited Term
California Fund
- ---------------
Class A
Year ended:
June 30, 1988 $12.01 $.78 $.07 $.85 $( .78) $12.08 7.10% (0.85)% (1.73)% 6.30% 29.00% $11,641
<F(c)> <F(c)> <F(c)>
June 30, 1989 12.08 .77 .07 .84 ( .77) 12.15 7.17 (1.00) (1.38) 6.27 58.80 12,794
June 30, 1990 12.15 .76 (.04) .72 ( .76) 12.11 6.15 (1.00) (1.22) 6.16 49.05 26,517
June 30, 1991 12.11 .75 .13 .88 ( .75) 12.24 7.45 (1.00) (1.20) 6.08 39.66 33,487
June 30, 1992 12.24 .72 .24 .96 ( .72) 12.48 8.10 (1.00) (1.10) 5.80 30.56 53,130
June 30, 1993 12.48 .65 .37 1.02 ( .65) 12.85 8.36 (1.00) (1.06) 5.07 20.81 81,874
June 30, 1994 12.85 .58 (.28) .30 ( .58) 12.57 2.37 (1.00) (1.03) 4.51 15.26 111,723
June 30, 1995 12.57 .58 .04 .62 ( .58) 12.61 5.12 (1.00) (1.04) 4.69 18.54 98,841
June 30, 1996 12.61 .58 .03 .61 ( .58) 12.64 4.94 (1.00) (1.05) 4.59 22.68 94,379
June 30, 1997 12.64 .57 .11 .68 ( .57) 12.75 5.47 (1.00) (1.03) 4.47 20.44 94,253

Class C
9/1/94 <F(a)> $12.55 $ .42 $ .07 $ .49 $( .42) $12.62 3.98% (1.63)% (3.21)% 4.07% 18.54% $790
to 6/30/95 <F(c)> <F(c)> <F(c)>
Year ended
June 30, 1996 12.62 .53 .03 .56 ( .53) 12.65 4.46 (1.43) (2.92) 4.16 22.68 2,444
June 30, 1997 12.65 .52 .11 .63 ( .52) 12.76 5.06 (1.40) (2.15) 4.06 20.44 5,882

<FN>
<F(a)> Commencement of operations.
<F(b)> Sales charges are not reflected in computing total return,
which is not annualized for periods less than one year.
<F(c)> Annualized.
4 5

<PAGE> Ratio of Ratio of Ratio of
Expenses Expenses Net
Net Distri- to to Investment Net
Realized butions Distri- Average Average Income Assets
Net Asset and Total from butions Net Net Net (Loss) at end
Value, Unrealized from Net from Asset Assets Assets to of
Beginning Net Gain Investment Invest- Net Value, Total After Before Average Rate of Period
Fiscal Year of Investment (Loss) on Opera- ment Realized End of Return Expense Expense Net Portfolio ('000's
or Period Period Income Investments tions Income Gains Period <F(b)> Reductions Reductions Assets Turnover omitted)
- ------------- ------ --------- -------- ---------- ------- ------- ------- ------ ---------- ---------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Intermediate
National Fund
- -------------
Class A
7/23/91 <F(a)> $12.06 $ .16 $ .05 $ .21 $( .16) $12.11 1.77% (0.25)% (2.78)% 5.80% 3.40% $9,719
to 9/30/91 <F(c)> <F(c)> <F(c)>
Year ended:
Sept. 30, 1992 12.11 .78 .48 1.26 ( .78) 12.59 10.76 (0.48) (1.19) 6.15 46.15 81,428
Sept. 30, 1993 12.59 .71 .88 1.59 ( .71) 13.47 13.01 (0.70) (1.06) 5.37 14.29 182,319
Sept. 30, 1994 13.47 .67 (.72) (.05) ( .67) $( .02) 12.73 (.38) (0.95) (1.05) 5.23 27.37 207,718
Sept. 30, 1995 12.73 .68 .45 1.13 ( .68) 13.18 9.16 (1.00) (1.08) 5.31 32.20 227,881
Sept. 30, 1996 13.18 .68 .05 .73 ( .68) 13.23 5.64 (1.00) (1.09) 5.12 12.64 246,128
Sept. 30, 1997 13.23 .66 .23 .89 ( .66) 13.46 6.90 (1.00) (1.05) 4.96 15.36 309,293

Class C
9/1/94 <F(a)> $12.91 $ .05 $(.18) $(.13) $( .05) $12.73 (.97)% (1.76)% (1.76)% 4.51% 27.37% $139
to 9/30/94 <F(c)> <F(c)> <F(c)>
Year ended:
Sept. 30, 1995 12.73 .60 .47 1.07 ( .60) 13.20 8.60 (1.66) (2.35) 4.62 32.20 4,001
Sept. 30, 1996 13.20 .63 .04 .67 ( .63) 13.24 5.14 (1.40) (1.97) 4.73 12.64 7,586
Sept. 30, 1997 13.24 .61 .24 .85 ( .61) 13.48 6.55 (1.40) (1.99) 4.55 15.36 11,292

Intermediate
New Mexico Fund
- ---------------
Class A
6/21/91 <F(a)> $12.06 $ .23 $ .15 $ .38 $( .23) $12.21 3.18% (0.25)% (1.32)% 6.57% 49.67% $20,511
to 9/30/91 <F(c)> <F(c)> <F(c)>
Year ended:
Sept. 30, 1992 12.21 .74 .43 1.17 ( .74) 12.64 9.98 (0.42) (1.12) 5.76 32.15 71,034
Sept. 30, 1993 12.64 .65 .72 1.37 ( .65) $( .01) 13.36 10.96 (0.61) (1.01) 4.95 10.33 128,590
Sept. 30, 1994 13.36 .60 (.63) (.03) ( .60) 12.72 (.26) (0.90) (1.04) 4.58 6.87 143,910
Sept. 30, 1995 12.72 .60 .40 1.00 ( .60) 13.12 8.10 (1.00) (1.06) 4.71 17.06 136,742
Sept. 30, 1996 13.12 .63 (.03) .60 ( .63) 13.09 4.68 (1.00) (1.07) 4.81 10.88 131,307
Sept. 30, 1997 13.09 .64 .19 .83 ( .64) 13.28 6.51 (1.00) (1.05) 4.88 10.06 145,850

Intermediate
Florida Fund
- ------------
Class A
2/1/94 <F(a)> $12.06 $ .40 $(.52) $(.12) $( .40) $11.54 (0.95)% (0.25)% (1.95)% 5.09% 19.94% $8,076
to 9/30/94 <F(c)> <F(c)> <F(c)>
Year ended:
Sept. 30, 1995 11.54 .63 .29 .92 ( .63) 11.83 8.22 (0.38) (1.44) 5.41 89.60 14,822
Sept. 30, 1996 11.83 .57 .05 .62 ( .57) 11.88 5.37 (0.61) (1.34) 4.80 77.12 19,501
Sept. 30, 1997 11.88 .56 .26 .82 ( .56) 12.14 7.04 (0.83) (1.13) 4.65 51.48 24,663

<FN>
<F(a)> Commencement of operations.
<F(b)> Sales charges are not reflected in computing total return,
which is not annualized for periods less than one year.
<F(c)> Annualized.
</FN>
</TABLE>
6 7

<PAGE>
MANAGEMENT DISCUSSION OF FUND PERFORMANCE

The graphs on the next page compare how $10,000 would have appreciated if
invested in shares of the named Fund, a broad based securities market index,
and the Consumer Price Index, a general measure of inflation. The table
accompanying each graph shows average annual total return for the Fund for
the designated period. Class A total return figures assume an investment of
$10,000 at the public offering price for purchases up to $10,000; Class C
total return figures assume an investment of $10,000.

Comparison of Fund performance to widely used indices is imperfect, because
the indices do not reflect the ladder ed maturity strategy each Fund uses.
Each index shown attempts to model the total return of a constant maturity
bond portfolio, including bonds from throughout the United States. Each
index also assumes no trading costs for buying and selling bonds, no
custodial or accounting costs, and coupons are immediately reinvested at no
transactional cost. Consequently, the reader should remain aware of the
inherent limitations in comparing a theoretical index to actual results of a
Fund portfolio.

Each Fund "ladders" or arrays the maturities of its bonds. The Limited Term
Municipal Funds maintain a weighted average maturity using this technique
which is normally no more than five years, while the Intermediate Municipal
Funds' weighted average maturity is normally three to ten years.

Interest rates increased during most of 1996, but began decreasing in late
1996. In general, interest rates have continued, with some fluctuations, to
decline slightly over the first ten months of 1997. For example, the
generic 30-year treasury bond started 1996 yielding 5.95%. Its yield went
up by 1.24% to 7.19% by mid-year, before dropping back down to 6.65% at the
end of 1996. After rising again to 7.20% on April 1, 1997, the yield on the
generic 30-year bond again declined, closing at 6.40% on September 30, 1997.

In general, interest rate decreases in 1997 have led to higher bond prices
and falling bond yields. Five, ten and 30-year treasury bond prices have
increased by 0.72%, 2.00% and 4.31%, respectively, between October 1, 1996
and September 30, 1997. Municipal bond prices also increased over calendar
year 1997, with the Bond Buyer 40 Bond Index of long-term bonds rising by
3.75% over the same period of time. The net asset values of the Limited
Term National Fund and the Limited Term California Fund each increased by
1.01% between July 1, 1996 and June 30, 1997, reflecting these influences.
The net asset values of the Intermediate Municipal Funds have similarly
increased between October 1, 1996 and September 30, 1997: Intermediate
National Fund increased 1.81%; Intermediate New Mexico Fund increased 1.45%,
and Intermediate Florida Fund increased 2.19%. While the net asset values
of all of the Funds rose over the periods described, the dividend yields of
all but the Intermediate Florida Fund declined slightly. If interest rates
continue to fall, the net asset values of all of the Funds should continue
to rise, but the dividend yields would be expected to decrease.

<PAGE>
LIMITED TERM NATIONAL FUND

Index Comparison

Compares performance of the Limited Term National Fund, the Lehman 5-Year
General Obligation Bond Index and the Consumer Price Index for the period
October 1, 1984 to June 30, 1997. On June 30, 1997, the weighted average
securities ratings of the Index and the Fund were AA and AA, respectively,
and the weighted average portfolio maturities of the Index and the Fund
were 4.9 years and 3.5 years, respectively. Class C shares became available
on September 1, 1994. Past performance of the Index and the Fund may not be
indicative of future performance.

<TABLE> <This appears as a graph in the prospectus.>
Class A Shares
<CAPTION>
FUND Lehman CPI
A Shares Government
-------- ---------- ---------
<S> <C> <C> <C>
9/84 $ 9,746 $10,000 $10,000
12/84 9,928 10,448 10,151
3/85 10,232 10,852 10,283
6/85 10,677 11,400 10,355
9/85 10,747 11,355 10,417
12/85 11,226 11,741 10,564
3/86 11,739 12,628 10,522
6/86 11,842 12,636 10,553
9/86 12,177 13,103 10,616
12/86 12,471 13,447 10,702
3/87 12,741 13,755 10,852
6/87 12,656 13,629 10,983
9/87 12,683 13,347 11,104
12/87 12,988 13,857 11,204
3/88 13,402 14,289 11,294
6/88 13,589 14,350 11,430
9/88 13,838 14,514 11,545
12/88 14,013 14,601 11,649
3/89 14,168 14,559 11,789
6/89 14,580 15,244 11,955
9/89 14,783 15,421 12,027
12/89 15,105 15,881 12,172
3/90 15,239 15,959 12,404
6/90 15,524 16,316 12,529
9/90 15,715 16,488 12,781
12/90 16,085 17,034 12,948
3/91 16,400 17,402 13,026
6/91 16,704 17,706 13,117
9/91 17,073 18,336 13,222
12/91 17,470 18,952 13,355
3/92 17,628 18,904 13,435
6/92 18,107 19,519 13,543
9/92 18,509 20,010 13,624
12/92 18,822 20,328 13,747
3/93 19,341 20,808 13,858
6/93 19,780 21,298 13,941
9/93 20,264 21,761 14,011
12/93 20,481 22,028 14,123
3/94 20,050 21,332 14,208
6/94 20,225 21,619 14,293
9/94 30,324 21,784 14,408
12/94 20,178 21,713 14,466
3/95 20,896 22,592 14,582
6/95 21,390 23,168 14,713
9/95 21,755 23,801 14,772
12/95 22,190 24,251 14,251
3/96 22,232 24,327 15,010
6/96 22,374 24,433 15,131
9/96 22,703 24,909 15,237
12/96 23,070 25,452 15,374
3/97 23,150 25,411 15,451
6/97 23,595 26,044 15,498
</TABLE>

Average Annual Total Returns (at max. offering price)
A Shares One Year (12 mos. ended 6/30/97): 2.84%
Five Years: 4.90%
Ten Years: 6.15%
From Inception (9/28/84): 6.96%

<TABLE> <This appears as a graph in the prospectus.>
Class C Shares
<CAPTION>
FUND Lehman CPI
C Shares Government
-------- ---------- ---------
<S> <C> <C> <C>
8/94 $10,000 $10,000 $10,000
9/94 9,952 9,925 10,020
10/94 9,894 9,869 10,030
11/94 9,792 9,806 10,040
12/94 9,858 9,893 10,060
1/95 9,969 9,988 10,090
2/95 10,120 10,132 10,110
3/95 10,193 10,293 10,141
4/95 10,245 10,321 10,171
5/95 10,405 10,547 10,201
6/95 10,425 10,556 10,232
7/95 10,483 10,703 10,243
8/95 10,550 10,812 10,263
9/95 10,586 10,844 10,273
10/95 10,663 10,890 10,304
11/95 10,740 10,989 10,314
12/95 10,786 11,049 10,335
1/96 10,848 11,181 10,376
2/96 10,838 11,143 10,397
3/96 10,788 11,084 10,439
4/96 10,786 11,067 10,481
5/96 10,808 11,054 10,512
6/96 10,847 11,132 10,522
7/96 10,910 11,206 10,554
8/96 10,932 11,222 10,565
9/96 11,004 11,307 10,596
10/96 11,067 11,412 10,628
11/96 11,163 11,570 10,660
12/96 11,161 11,553 10,692
1/97 11,192 11,584 10,703
2/97 11,257 11,667 10,735
3/97 11,197 11,535 10,746
4/97 11,228 11,592 10,756
5/97 11,309 11,719 10,778
6/97 11,391 11,822 10,778
</TABLE>

Average Annual Total Returns
C Shares One Year (12 mos. ended 6/30/97): 5.02%
From Inception (9/1/94): 4.71%
9

<PAGE>
LIMITED TERM CALIFORNIA FUND

Index Comparison

Compares performance of the Limited Term California Fund, the Lehman 5-Year
General Obligation Bond Index and the Consumer Price Index for the period
February 28, 1987 to June 30, 1997. On June 30, 1997, the weighted average
securities ratings of the Index and the Fund were AA and AA, respectively,
and the weighted average portfolio maturities of the Index and the Fund were
4.9 years and 3.9 years, respectively. Class C shares became available on
September 1, 1994. Past performance of the Index and the Fund may not be
indicative of future performance.

Class A Shares Class C Shares
<CAPTION>
FUND Lehman CPI FUND Lehman CPI
A Shares Government C Shares Government
-------- ---------- ------- -------- ---------- -------
<S> <C> <C> <C> <S> <C> <C> <C>
1/87 $ 9,750 $10,000 $10,000 8/94 $10,000 $10,000 $10,000
3/87 9,786 10,034 10,080 9/94 9,950 9,925 10,020
6/87 9,857 9,942 10,202 10/94 9,887 9,869 10,030
9/87 9,924 9,737 10,314 11/94 9,792 9,806 10,040
12/87 10,100 10,108 10,407 12/94 9,818 9,893 10,060
3/88 10,375 10,424 10,491 1/95 9,926 9,988 10,090
6/88 10,557 10,469 10,617 2/95 10,099 10,132 10,110
9/88 10,733 10,588 10,724 3/95 10,164 10,293 10,141
12/88 10,885 10,651 10,820 4/95 10,231 10,321 10,171
3/89 10,994 10,620 10,951 5/95 10,380 10,547 10,202
6/89 11,313 11,121 11,105 6/95 10,398 10,556 10,232
9/89 11,469 11,249 11,172 7/95 10,441 10,703 10,243
12/89 11,704 11,585 11,306 8/95 10,509 10,812 10,263
3/90 11,814 11,642 11,522 9/95 10,561 10,844 10,273
6/90 12,009 11,902 11,638 10/95 10,640 10,890 10,304
9/90 12,140 12,028 11,872 11/95 10,719 10,989 10,314
12/90 12,496 12,426 12,027 12/95 10,756 11,049 10,335
3/91 12,707 12,694 12,099 1/96 10,833 11,181 10,376
6/91 12,904 12,916 12,184 2/96 10,828 11,143 10,397
9/91 13,121 13,376 12,282 3/96 10,781 11,084 10,439
12/91 13,436 13,825 13,405 4/96 10,793 11,067 10,481
3/92 13,566 17,790 12,480 5/96 10,805 11,054 10,512
6/92 13,950 14,239 12,580 6/96 10,861 11,132 10,522
9/92 14,261 14,597 12,655 7/96 10,925 11,206 10,554
12/92 14,448 14,829 12,770 8/96 10,953 11,222 10,565
3/93 14,813 15,179 12,872 9/96 11,017 11,307 10,596
6/93 15,116 15,537 12,949 10/96 11,089 11,412 10,628
9/93 15,437 15,874 13,014 11/96 11,189 11,570 10,660
12/93 15,634 16,069 13,119 12/96 11,174 11,553 10,692
3/94 15,308 15,562 13,197 1/97 11,195 11,584 10,703
6/94 15,474 15,771 13,277 2/97 11,260 11,667 10,735
9/94 15,495 15,891 13,383 3/97 11,200 11,535 10,746
12/94 15,300 15,839 13,437 4/97 11,228 11,592 10,756
3/95 15,877 16,481 13,545 5/97 11,328 11,719 10,767
6/95 16,266 16,901 13,667 6/97 11,410 11,822 10,778
9/95 16,549 17,363 13,722
12/95 16,871 17,691 13,804 Average Annual Total Returns
3/96 16,927 17,746 13,943 C Shares One Year (12 mos. ended
6/96 17,670 17,824 14,054 6/30/97): 4.56%
9/96 17,332 18,171 14,153 From Inception (9/1/94): 4.77%
12/96 17,597 18,567 14,281
3/97 17,655 18,537 14,352
6/97 18,004 18,999 14,395

Average Annual Total Returns (at max. offering price)
A Shares One Year (12 mos. ended 6/30/97): 2.87%
Five Years: 4.70%
Ten Years: 5.94%
From Inception (2/19/87): 5.84%
</TABLE>

INTERMEDIATE NATIONAL FUND

Index Comparison

Compares performance of the Intermediate National Fund, the Merrill Lynch
Municipal Bond (7-12 year) Index and the Consumer Price Index, July 23, 1991
to September 30, 1997. On September 30, 1997, the weighted average securities
ratings of the Index and the Fund were AA and A+, respectively, and the
weighted average portfolio maturities of the Index and the Fund were 9.5
years and 7.3 years, respectively. Class C shares became available on
September 1, 1994. Past performance of the Index and the Fund may not be
indicative of future performance.

<TABLE> <appears as two graphs side-by-side in the prospectus>
Class A Shares Class C Shares
<CAPTION>
FUND ML Muni CPI FUND ML Muni CPI
A Shares 7-12 Yrs. C Shares 7-12 Yrs.
-------- --------- ------- -------- --------- --------
<S> <C> <C> <C> <S> <C> <C> <C>
6/91 $ 9,648 $10,000 $10,000 8/94 $10,000 $10,000 $10,000
9/91 9,819 10,428 10,080 9/94 9,903 9,848 10,020
12/91 10,099 10,647 10,181 12/94 9,813 9,785 10,060
3/92 10,207 10,593 10,243 3/95 10,286 10,291 10,141
6/92 10,586 10,982 10,325 6/95 10,530 10,671 10,232
9/92 10,876 11,220 10,387 9/95 10,754 10,862 10,273
12/92 11,090 11,440 10,480 12/95 11,052 11,247 10,335
3/93 11,496 11,834 10,565 3/96 11,000 11,251 10,439
6/93 11,847 12,164 10,628 6/96 11,082 11,290 10,522
9/93 12,291 12,456 10,681 9/96 11,307 11,523 10,596
12/93 12,453 12,682 10,767 12/96 11,499 11,814 10,692
3/94 12,039 12,114 10,832 3/97 11,528 11,787 10,746
6/94 12,160 12,187 10,897 6/97 11,803 12,179 10,778
9/94 12,244 12,306 10,984 9/97 12,048 12,550 10,843
12/94 12,145 12,227 11,028
3/95 12,742 12,860 11,117
6/95 13,066 13,334 11,217
9/95 13,365 13,573 11,262
12/95 13,751 14,054 11,330 Average Annual Total Returns
3/96 13,699 14,059 11,443 C Shares One Year (12 mos. ended
6/96 13,814 14,107 11,535 9/30/97): 5.95%
9/96 14,120 14,398 11,616 From Inception (9/1/94): 6.23%
12/96 14,363 14,762 11,721
3/97 14,413 14,729 11,779
6/97 14,772 15,218 11,815
9/97 15,094 15,682 11,886

Average Annual Total Returns (at max. offering price)
A Shares One Year (12 mos. ended 9/30/97): 3.16%
5 Years: 6.01%
From Inception (7/23/91): 6.87%
</TABLE>

<PAGE>
INTERMEDIATE NEW MEXICO FUND

Index Comparison

Compares performance of the Intermediate New Mexico Fund, the Merrill Lynch
Municipal Bond (7-12 year) Index and the Consumer Price Index, June 18, 1991
to September 30, 1997. On September 30, 1997, the weighted average
securities ratings of the Index and the Fund were AA and AA, respectively,
and the weighted average portfolio maturities of the Index and the Fund were
9.5 years and 6.9 years, respectively. Past performance of the Index and the
Fund may not be indicative of future performance.

<TABLE> <This appears as a graph in the prospectus.>
FUND ML Muni CPI
A Shares 7-12 Yrs.
-------- --------- ---------
<S> <C> <C> <C>
5/91 $ 9,650 $10,000 $10,000
9/91 9,957 10,375 10,100
12/91 10,260 10,593 10,202
3/92 10,329 10,539 10,263
6/92 10,686 10,926 10,345
9/92 10,950 11,162 10,408
12/92 11,145 11,381 10,501
3/93 11,490 11,773 10,586
6/93 11,789 12,102 10,649
9/93 12,150 12,392 10,703
12/93 12,294 12,617 10,788
3/94 11,936 12,052 10,853
6/94 12,012 12,125 10,919
9/94 12,119 12,243 11,006
12/94 12,059 12,164 11,050
3/95 12,593 12,794 11,139
6/95 12,859 13,267 11,239
9/95 13,100 13,504 11,284
12/95 13,404 13,982 11,352
3/96 13,358 13,987 11,466
6/96 13,450 14,035 11,558
9/96 13,713 14,325 11,639
12/96 13,967 14,687 11,744
3/97 14,012 14,653 11,803
6/97 14,305 15,141 11,838
9/97 14,606 15,602 11,910
</TABLE>

Average Annual Total Returns (at max. offering price)
A Shares One Year (12 mos. ended 9/30/97): 2.82%
5 Years: 5.18%
From Inception (6/21/91): 6.21%

INTERMEDIATE FLORIDA FUND

Index Comparison

Compares performance of Intermediate Florida Fund, the Merrill Lynch
Municipal Bond (7-12 year) Index and the Consumer Price Index, February 1,
1994 to September 30, 1997. On September 30, 1997, the weighted average
securities ratings of the Index and the Fund were AA and AA+, respectively,
and the weighted average portfolio maturities of the Index and the Fund were
9.5 years and 6.8 years, respectively. Past performance of the Index and the
Fund may not be indicative of future performance.

<TABLE> <This appears as a graph in the prospectus.>
FUND ML Muni CPI
A Shares 7-12 Yrs.
-------- --------- ---------
<S> <C> <C> <C>
1/94 $ 9,648 $10,000 $10,000
2/94 9,568 9,726 10,030
3/94 9,350 9,466 10,060
6/94 9,481 9,524 10,121
9/94 9,557 9,617 10,202
12/94 9,492 9,555 10,243
3/95 9,936 10,049 10,325
6/95 10,148 10,420 10,418
9/95 10,342 10,607 10,460
12/95 10,595 10,982 10,523
3/96 10,607 10,987 10,628
6/96 10,716 11,024 10,713
9/96 10,897 11,252 10,789
12/96 11,090 11,536 10,886
3/97 11,153 11,510 10,940
6/97 11,387 11,892 10,973
9/97 11,665 12,255 11,039
</TABLE>

Average Annual Total Returns (at max. offering price)
A Shares One Year (12 mos. ended 9/30/97): 3.30%
From Inception (2/01/94): 4.29%

<PAGE>
INVESTMENT OBJECTIVES AND POLICIES

The primary investment objective of each Fund is to obtain as high a level
of current income exempt from federal income tax as is consistent, in the
view of TMC, with preservation of capital. Each single state Fund will
invest primarily in Municipal Obligations originating in its state with the
object of obtaining exemption of interest dividends from any income taxes
imposed by that state on individuals. The Intermediate New York Fund has
the additional objective of obtaining exemption of its income dividends from
the New York City individual income tax. The Intermediate Florida Fund and
the Intermediate Pennsylvania Fund have the additional objective of
obtaining exemption from ad valorem taxes imposed by those states on
securities held by individuals. The secondary objective of the Limited Term
Funds is to minimize expected fluctuations in net asset value relative to
longer intermediate and long-term bond portfolios. The secondary objective
of the Intermediate Funds is to reduce fluctuations in net asset value
relative to long-term municipal bond portfolios, while seeking higher yields
than the Limited Term Municipal Funds expect to receive. There is a risk in
all investments, however, and there is no assurance that the Funds'
objectives will be achieved. Income otherwise exempt from federal income tax
may be subject to the federal alternative minimum tax, and distributions
from gains attributable to market discount are characterized as ordinary
income for federal income tax purposes. The primary and secondary investment
objectives of each Fund are fundamental policies of that Fund, and may not
be changed without a vote of the Fund's shareholders.

Each Fund will pursue its primary objective by investing in a portfolio of
investment grade or equivalent obligations which are issued by states and
state agencies, and local governments and agencies, and by United States
territories and possessions ("Municipal Obligations"). Each single state
Fund will invest primarily in Municipal Obligations originating in the
state of the same name. Municipal Obligations are discussed below under the
caption "Municipal Obligations," and investment grade ratings are discussed
below under the caption "Investment Ratings."

Each of the Limited Term Funds will seek to achieve its secondary objective
of minimizing fluctuations in net asset value by maintaining a portfolio of
investments with a dollar-weighted average maturity normally not exceeding
five years. Each Intermediate Fund will seek to achieve its secondary
objective of obtaining lower share price fluctuation than a long-term
portfolio and obtaining higher yields than a limited term portfolio by
maintaining a dollar-weighted average portfolio maturity normally between
three and ten years. Any Intermediate Fund may maintain a portfolio maturity
shorter than three years as a defensive strategy during abnormal market
conditions. If your sole objective is preservation of capital, then the
Funds may not be suitable for you because their net asset values will vary
as market interest rates fluctuate. Investors whose sole objective is
preservation of capital may wish to consider a high quality money market
fund.

Except to the extent a Fund is invested in temporary investments for
defensive purposes, the objective of each Fund under normal conditions is to
invest 100% of its net assets in Municipal Obligations. As a fundamental
policy which may not be changed without a vote of the Fund's shareholders,
each Fund must normally invest at least 80% of its net assets in Municipal
Obligations. Under normal conditions each single state Fund will invest
100%, and as a matter of fundamental policy, will invest at least 65% of its
total assets in Municipal Obligations which originate in the state having
the same name as the Fund. Any Fund may purchase obligations issued by or on
behalf of territories or possessions of the United States and their agencies
and instrumentalities.

The Funds have reserved the right to invest up to 20% of each Fund's net
assets in "temporary investments" in taxable securities (of comparable
quality to the above tax-exempt investments) that would produce interest not
exempt from federal income tax. Such temporary investments, which may
include repurchase agreements with dealers, banks or recognized financial
institutions that in the opinion of TMC represent minimal credit risk,

<PAGE>
may be made due to market conditions, pending investment of idle funds or to
afford liquidity. Such investments are, like any investment, subject to
market risks and fluctuations in value. In addition, each Fund's temporary
taxable investments may exceed 20% of its net assets when made for defensive
purposes during periods of abnormal market conditions. The Funds do not
expect to find it necessary to make temporary investments in taxable
investments.

MUNICIPAL OBLIGATIONS

Municipal Obligations are obligations bearing interest exempt from federal
income taxes, which are issued by or on behalf of states, territories and
possessions of the United States and the District of Columbia, and their
political subdivisions, agencies and instrumentalities. Municipal
Obligations include notes (including tax-exempt commercial paper), bonds,
municipal leases and participation interests in these obligations. Interest
on Municipal Obligations may be subject to the alternative minimum tax or
state income taxes. See "Federal Taxes."

The yields on Municipal Obligations are dependent on a variety of factors,
including the condition of the general money market and the Municipal
Obligation market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The market value of outstanding
Municipal Obligations will vary with changes in prevailing interest rate
levels and as a result of changing evaluations of the ability of their
issuers to meet interest and principal payments. Variations in market value
of Municipal Obligations held in a Fund's portfolio arising from these or
other factors will cause changes in the net asset value of that Fund's
shares. See "How Fund Shares Are Priced." Municipal Obligations often grant
the issuer the option to pay off the obligation prior to its final maturity.
Prepayment of Municipal Obligations may reduce the expected yield on
invested funds, the net asset value of a Fund, or both if interest rates
have declined below the level prevailing when the obligation was purchased.
If interest rates have declined, reinvestment of the proceeds from the
prepayment of Municipal Obligations may result in a lower yield to a Fund.
In addition, the federal income tax treatment of gains from market discount
as ordinary income may increase the price volatility of Municipal
Obligations.

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

VARIABLE RATE SECURITIES; INVERSE FLOATERS; AND DEMAND INSTRUMENTS

The Funds may purchase variable rate Municipal Obligations. These variable
rate securities bear rates of interest that are adjusted periodically
according to formulas intended to reflect market rates of interest, and
these may include "inverse floaters," whose rates vary inversely with
changes in market rates of interest. The values of inverse floaters will
tend to be more volatile than fixed rate municipal securities having similar
credit quality, redemption provisions, and maturity. No Fund will invest
more than 10% of its total assets in securities whose rates vary inversely
with changes in market rates of interest. Each Fund also may purchase
variable rate demand instruments and also may purchase fixed rate municipal
demand instruments either in the public market or privately from banks,
insurance companies and other financial institutions. These instruments
provide for periodic adjustment of the interest rate paid to the holder. The
"demand" feature permits the holder to demand payment of principal and
interest prior to the final stated maturity, either from the issuer or by
drawing on a bank letter of credit, a guarantee or insurance issued with
respect to the instrument.

<PAGE>
MUNICIPAL LEASES

Each Fund may invest in Municipal Leases. These obligations are used by
state and local governments to acquire a wide variety of equipment and
facilities. Many such obligations include "non-appropriation" clauses
which provide that the governmental issuer has no obligation to make
payments unless money is appropriated for that purpose. If an issuer stopped
making payment on a Municipal Lease held by a Fund, the Lease would lose
some or all of its value. Often, a Fund will not hold the obligation
directly, but will purchase a "participation interest" in the obligation,
which gives the Fund an undivided interest in the underlying Municipal
Lease. Some Municipal Leases may be illiquid under certain circumstances,
and TMC will evaluate the liquidity of each Municipal Lease upon its
acquisition by a Fund and periodically while it is held.

SECURITIES RATINGS AND CREDIT QUALITY

Each Fund's assets will normally consist of (1) Municipal Obligations
(including Municipal Leases) or participation interests therein that are
rated at the time of purchase within the four highest grades by Moody's
Investors Service ("Moody's"), Fitch Investors Service ("Fitch"), or
Standard & Poor's Corporation ("S&P"), (2) Municipal Obligations (including
Municipal Leases) or participation interests therein that are not rated by a
rating agency, but are issued by obligors that either have other comparable
debt obligations that are rated within the four highest grades (Baa or BBB
or better) by Moody's or S&P or Fitch or, in the case of obligors whose
obligations are unrated, are deemed by TMC to be comparable with
issuers having such debt ratings, and (3) cash. Securities rated in the
described categories are described as "investment grade," and are regarded
as having a capacity to pay interest and repay principal that varies from
"extremely strong" to "adequate." According to S&P, for example, BBB bonds
normally exhibit adequate protection parameters, although adverse economic
conditions or other changes are more likely to lead to a weakened capacity
compared to higher rated categories, and AAA bonds exhibit extremely strong
capacity. Securities rated Baa are regarded by Moody's as having some
speculative characteristics. Securities rated BBB by Fitch are considered
to have adequate capacity, although adverse changes in economic conditions
and circumstances are more likely to have an adverse impact than for higher
rated categories. Please see the Statement of Additional Information for
Thornburg Investment Trust - Intermediate Municipal Funds or the Statement
of Additional Information for Thornburg Limited Term Municipal Fund, Inc.
for detailed descriptions of these ratings.

Investments in Municipal Obligations may also include (i) variable rate
demand instruments that are rated within the two highest grades of either
rating agency or, if unrated, are deemed by TMC to be of high quality and
minimal credit risk, (ii) tax-exempt commercial paper that is rated within
the two highest grades of a rating agency, and (iii) municipal notes that
are rated within the two highest grades of a rating agency or, if unrated,
are deemed by TMC to be of comparable quality to such rated municipal notes.
To the extent that unrated Municipal Obligations may be less liquid, there
may be somewhat greater risk in purchasing unrated Municipal Obligations
than in purchasing comparable, rated Municipal Obligations. If a Fund
experienced unexpected net redemptions, it could be forced to sell such
unrated Municipal Obligations at disadvantageous prices without regard to
the Obligations' investment merits, depressing the Fund's net asset value
and possibly reducing the Fund's overall investment performance.

Credit ratings do not reflect the risk that market values of Municipal
Obligations will fluctuate with changes in interest rates, and credit rating
firms may fail to change credit ratings in a timely fashion to reflect
events subsequent to initial ratings. Accordingly, in addition to using
credit rating information, TMC subjects each issue under consideration for
investment to its own credit analysis in an effort to assess the issuer's
financial soundness. This analysis is performed on a continuing basis for
all issues held by the Funds, and TMC may determine to dispose of portfolio
securities upon a change in ratings or adverse events or market conditions
not reflected in ratings. TMC evaluates the credit quality of unrated
Municipal Obligations purchased by each Fund

<PAGE>
under the general supervision of its Directors or Trustees, and determines
the equivalency of unrated obligations to rated obligations.

WHEN-ISSUED TRANSACTIONS

Each Fund may purchase Municipal Obligations on a "when-issued" or delayed
delivery basis, which means that the securities are not delivered until a
future date that may be as many as 45 days after the Fund has agreed to the
purchase. These transactions may involve an element of risk because the
value of the securities is subject to market fluctuation, no interest
accrues to the purchaser before delivery of the securities, and at the time
of delivery the market value may be less than cost. When a Fund agrees to
purchase Municipal Obligations on a "when-issued" basis, it will maintain
high grade liquid debt assets equal in value to the purchase price of the
"when-issued" securities in a segregated account with its custodian bank.

INVESTMENT RESTRICTIONS

Each of the Funds is subject to the restriction that it will not purchase
any investment or enter into any transactions if, as a result, more than 10%
of the Fund's net assets will be illiquid investments. Each of the Funds is
subject to other investment restrictions, which are described in that Fund's
Statement of Additional Information.

SPECIAL CONSIDERATIONS AFFECTING SINGLE-STATE FUNDS

Each of the single-state Intermediate Municipal Funds is a non-diversified
series of Thornburg Investment Trust, and each therefore may invest more
than five percent of its portfolio assets in the securities of a single
issuer, provided that it may not purchase any security (other than
securities issued or guaranteed as to principal or interest by the United
States or its instrumentalities) if, as a result, more than five percent of
the Trust's total assets would be invested in securities of a single issuer.
All other Funds are diversified series. Because each of the single state
Funds will purchase primarily Municipal Obligations originating from within
its state, an investment in a single state Fund may be riskier than an
investment in either the Limited Term National Fund or the Intermediate
National Fund, which purchase Municipal Obligations from throughout the
United States.

Local economic factors could have varying effects on the obligations owned
by each single state Fund. In particular, economic developments in
California, though improving, could impair the ability of certain California
state and municipal issuers to pay their obligations in some situations.
Taxpayer initiatives, weakness in tax collections and reallocation of
certain revenues previously available to county and local governments could
reduce the revenues available to some California issuers. Lower taxes
available in some New Mexico locales, and reductions in staffing at research
and military facilities at Los Alamos, White Sands and Albuquerque could
adversely affect the ability of nearby municipalities to meet their
obligations. Florida has experienced rapid economic growth. While the
economy has broadened, this growth has brought pressure for more
infrastructure, educational facilities, and other improvements. Although
recent state budgets have been balanced, over-dependence on the sensitive
sales tax creates vulnerability to recession and to slower growth in the tax
base in the future. Also, health care, educational and correctional program
cost increases could impose future financial and budgetary pressures on the
state, and recent law changes may restrict future tax increases. New York
State has a diverse economy, growing personal income, and strength in
consumer spending and tourism, but has not participated uniformly with other
regions in the national economic recovery of 1991 through 1997. Although
employment growth is weak, growth in personal income has resulted in some
increase in government revenues. The state, however, has not taken
advantage of revenue increases to reduce the state's substantial accumulated
deficits and establish reserves. Consequently the financial stability and
credit of the state and many of its agencies and political subdivisions
could be vulnerable to consumer spending reductions, national economic
weakness or changes in federally mandated programs. The state's chronic
budget difficulties, while helped recently by some spending reductions, also
may be aggravated by tax cuts unless further spending reductions are
implemented or the state's economy improves.

<PAGE>
YOUR ACCOUNT -
BUYING FUND SHARES IN GENERAL

Each Fund offers Class A shares, and Limited Term National Fund, Limited
California Fund and Intermediate National Fund offer Class C shares. Each
of a Fund's shares represents an equal undivided interest in the Fund's
assets, and each Fund has common investment objectives and a common
investment portfolio. Each class may have varying annual expenses and sales
charge structures, which may affect performance.

Class A shares are sold subject to a sales charge which is deducted at
the time you purchase your shares. TSC deducts the Class A sales charge
shown in the table on page 17 and invests the balance of your investment at
net asset value. This class also pays a service fee. Class C shares are
sold at net asset value, subject to payment of a sales charge if redeemed
within one year of purchase. Class C shares also pay both a service and a
distribution fee. The various service or service and distribution fees are
Fund expenses which are deducted from each class's annual income. If you do
not specify a class of shares in your order, your money will be invested in
Class A shares of the Fund you purchase.

Financial advisors and others who sell shares of the Fund receive different
compensation for selling different classes of the Funds' shares. Shares of
the Funds may be purchased through investment dealers, brokers or agents
"financial advisors") who have agreements with the Funds' distributor,
Thornburg Securities Corporation (TSC), or through TSC in those states where
TSC is registered. Although shares of the National Funds generally are
available in most states, shares of the single state Funds are or will be
available only in their respective states and certain other states where
those Funds are qualified for sale. All orders are subject to acceptance by
the Funds, and the Funds and TSC reserve the right to refuse any order in
whole or in part.

Each Fund also may issue one or more other classes of shares not offered
through this Prospectus. Different classes may have different sales charges
and other expenses which may affect performance. Investors may telephone
the Funds' distributor, TSC, at (800) 847-0200 to obtain more information
concerning the various classes of shares which may be available to them
through their sales representatives. Investors may also obtain information
respecting the different classes of shares through their sales
representative or other person who is offering or making available shares of
the Funds.

NET ASSET VALUE

When you purchase shares, the price is based on the net asset value (NAV)
next determined after receipt of your order. The net asset value is the
value of a share, and is computed for each class of a Fund by adding the
value of investments, cash and other assets for the class, subtracting
liabilities, and then dividing by the number of shares outstanding. Share
price is normally calculated at 4:00 p.m. Eastern time on each day the New
York Stock Exchange is open for business.

BUYING CLASS A SHARES

When you buy Class A shares the sales charge applicable to your investment
is deducted from the price you pay and the balance is invested at NAV. The
sales charge is shown in the table below.

Because the fees for Class A shares of each Fund are lower than the fees for
Class C shares of the same Fund, Class A shares of each Fund pay higher
dividends than Class C shares of the same Fund. The deduction of the initial
sales charge, however, means that you purchase fewer Class A shares than
Class C shares of each Fund for a given amount invested.

If you are in any of the special classes of investors who can buy Class A
shares at net asset value or at a reduced sales charge, you should consider
buying Class A shares. If you are planning a large purchase or purchases
under the Right of Accumulation or Letter of Intent you should consider if
your overall costs will be lower by buying Class A shares, particularly if
you plan to hold your shares for an extended period of time.

<PAGE>
<TABLE>
Class A Shares Dealer Concession
Total Sales Charge or Agency Commission
As Percentage As Percentage As Percentage
of Offering Price of Net Asset Value of Offering Price
<S> <C> <C> <C>
Limited Term Municipal Funds
- ----------------------------
Less than $50,000.00 2.50% 2.56% 2.10%
$50,000 to 99,999.99 2.25% 2.30% 1.85%
$100,000 to 249,999.99 1.75% 1.78% 1.50%
$250,000 to 499,999.99 1.50% 1.52% 1.25%
$500,000 to 999,999.99 1.00% 1.01% .85%
$1,000,000 and up 0.00% 0.00% *

Intermediate Municipal Funds
- ----------------------------
Less than $50,000.00 3.50% 3.63% 3.00%
$50,000 to 99,999.99 3.00% 3.09% 2.75%
$100,000 to 249,999.99 2.50% 2.56% 2.25%
$250,000 to 499,999.99 2.00% 2.04% 1.75%
$500,000 to 999,999.99 1.50% 1.52% 1.25%
$1,000,000 and up 0.00% 0.00% *

* No sales charge will be payable at the time of purchase on investments
of $1 million of more made by a purchaser. A contingent deferred
sales charge will be imposed on these investments in the event of a
share redemption within one year following the share purchase at the
rate of 1/2 of 1%. In determining whether such a sales charge is
payable and the amount of any charge, it is assumed that shares not
subject to the charge are the first redeemed followed by other shares
held for the longest period of time. The applicability of these
charges will be unaffected by transfers of registration. TSC or TMC
intend to pay a commission of up to 1/2 of 1% to dealers who place
orders of $1 million or more for a single purchaser.

At certain times, for specific periods, TSC may reallow up to the full
sales charge to all dealers who sell Fund shares. These "full
reallowances" may be based upon the dealer reaching specified minimum
sales goals. TSC will reallow the full sales charge only after
notifying all dealers who sell Fund shares. During such periods,
dealers may be considered underwriters under securities laws. TMC or
TSC also may pay additional cash or non-cash compensation to dealer
firms which have selling agreements with TSC. Those firms may pay
additional compensation to financial advisors who sell Fund shares.
Non-cash compensation may include travel and lodging in connection
with seminars or other educational programs.
</TABLE>

LETTERS OF INTENT. If you intend to invest, over the course of 13 or fewer
months, an amount of money that would qualify for a reduced sales charge if
it were made in one investment, you can qualify for the reduced sales charge
on the entire amount of your investment by signing a "Letter of Intent"
(LOI). Each investment you make during the 13 months will be charged the
reduced sales commission applicable to the amount stated in your LOI. You do
not have to reach the goal you set. If you don't, you will have to pay the
difference between the sales charge you would have paid and the sales charge
you did pay. You may pay this amount directly to TSC, or TSC will redeem a
sufficient number of your shares in the Fund to obtain the difference.

RIGHTS OF ACCUMULATION. Each time the value of your account plus the amount
of any new investment passes one of the breakpoints illustrated in the table
above, the amount of your new investment in excess of the breakpoint
will be charged the reduced sales charge applicable to that range.

WAIVERS. You may purchase Class A shares of each Fund with no sales charge
if you notify TSC or the Funds' transfer agent, NFDS, at the time you
purchase shares that you belong to one of the categories below. If you do
not provide such notification at the time of purchase, your purchase will
not qualify for the waiver of sales charge.

<PAGE>
A SHAREHOLDER WHO REDEEMED CLASS A SHARES OF A THORNBURG FUND. For two
years after such a redemption you will pay no sales charge on amounts
that you reinvest in Class A shares of one of the Funds covered by this
prospectus, up to the amount you previously redeemed.

AN OFFICER, TRUSTEE, DIRECTOR, OR EMPLOYEE OF TMC (or any investment
company managed by TMC), TSC, any affiliated Thornburg Company, the
Funds' Custodian bank or Transfer Agent and members of their families
including trusts established for the benefit of the foregoing.

EMPLOYEES OF BROKERAGE FIRMS who are members in good standing with the
National Association of Securities Dealers, Inc. (NASD); employees of
financial planning firms who p lace orders for the Fund through a member in
good standing with NASD; the families of both types of employees. Orders
must be placed through an NASD member firm who has signed an agreement with
TSC to sell Fund shares.

CUSTOMERS of bank trust departments, companies with trust powers, investment
dealers and investment advisors who charge fees for service, including
investment dealers who utilize wrap fee or similar arrangements. Accounts
established through these persons are subject to conditions, fees and
restrictions imposed by these persons.

INVESTORS PURCHASING $1 MILLION OR MORE. However, a contingent deferred
sales charge of 1/2 of 1% applies to shares redeemed within one year of
purchase.

THOSE PERSONS WHO ARE DETERMINED BY THE DIRECTORS OR TRUSTEES OF THE FUND to
have acquired their shares under special circumstances not involving any
sales expenses to the Funds or Distributor.

PURCHASES PLACED THROUGH A BROKER THAT MAINTAINS ONE OR MORE OMNIBUS
ACCOUNTS WITH THE FUNDS provided that such purchases are made by: (i)
investment advisors or financial planners who place trades for their own
accounts or the accounts of their clients and who charge a management,
consulting or other fee for their services; (ii) clients of such investment
advisors or financial planners who place trades for their own accounts if
the accounts are linked to the master account of such investment advisor or
financial planner on the books and records of the broker or agent; and (iii)
retirement and deferred compensation plans and trusts used to fund those
plans, including, but not limited to, those defined in Sections 401(a),
403(b) or 457 of the Internal Revenue Code and "rabbi trusts." Investors may
be charged a fee if they effect transactions in Fund shares through a broker
or agent.

PROCEEDS FROM A LOAD FUND REDEMPTION. You may purchase shares of any Fund at
net asset value without a sales charge to the extent that the purchase
represents proceeds from a redemption (within the previous 60 days) of
shares of another mutual fund which has a sales charge. When making a
direct purchase at net asset value under this provision, the Fund must
receive one of the following with your direct purchase order: (i) the
redemption check representing the proceeds of the shares redeemed, endorsed
to the order of the Fund, or (ii) a copy of the confirmation from the other
fund, showing the redemption transaction. Standard back office procedures
should be followed for wire order purchases made through broker dealers.
Purchases with redemptions from money market funds are not eligible for this
privilege. This provision may be terminated anytime by TSC or the Funds
without notice.

<PAGE>
BUYING CLASS C SHARES

You can buy Class C shares of Limited Term National Fund, Limited Term
California Fund or Intermediate National Fund at NAV but you will pay a
contingent deferred sales charge (CDSC) of 1/2 of 1% on shares of Limited
Term Funds and 6/10 of 1% on shares of the Intermediate National Fund if you
redeem your shares within one year of purchase. The CDSC will be imposed
upon the lower of the purchase price or net asset value at redemption of
each share redeemed. The CDSC is not imposed upon shares you buy by
reinvesting dividends or capital gain distributions. Maximum purchase
amount for Class C shares is less than $1 million. Class C shares are
charged higher annual expenses than Class A shares.

If your investment horizon is relatively short and you do not qualify to
purchase Class A shares at a reduced sales charge, you should consider
purchasing Class C shares.

OPENING AN ACCOUNT
___________________________________________________________________________
Buying Shares To Open an Account To Add to an Account
- ---------------------------------------------------------------------------
In Minimum Minimum
- -- ------- -------
Regular Accounts $5,000 $ 100
Automatic Investment
Plans $ 100 $ 100

Through Your Financial Consult with your Consult with your
Advisor financial advisor. financial advisor

By Telephone Exchange from another Exchange from another
1-800-847-0200 Thornburg Fund account Thornburg Fund account
with the same registra- with the same registra-
tion, including name, tion, including name,
address, and taxpayer address, and taxpayer
ID number. ID number.

By Mail Complete and sign the Make your check payable
application. Make your to the applicable
check payable to the Thornburg Fund. Indicate
applicable Thornburg your Fund account number
Fund. Mail to the on your check and mail to
address indicated on the the address printed on
application. your account statement.

Automatic Investment Use one of the above Use Automated Clearing
Plan procedures to open your House funds. Sign up for
account. Obtain an this service when opening
Automatic Investment your account, or call
Plan form to sign up 1-800-847-0200 to add
for this service. to it.

Complete and sign an account application and give it, along with your check,
to your financial advisor. You may also open your account by wire or mail as
described above. If there is no application accompanying this prospectus,
call 1-800-847-0200.

If you buy shares by check and then redeem those shares, the payment may be
delayed for up to 15 business days to ensure that your previous investment
has cleared.
19

<PAGE>
STREET NAME OWNERSHIP OF SHARES

Some securities dealers offer to act as owner of record of Fund shares as a
convenience to investors who are clients of those firms and shareholders of
an individual Fund. Neither the Fund nor the Transfer Agent can be
responsible for failures or delays in crediting shareholders for dividends
or redemption proceeds, or for delays in reports to shareholders if a
shareholder elect s to hold Fund shares in street-name through a brokerage
firm account rather than directly in the shareholder's own name. Further,
neither the Fund nor the Transfer Agent will be responsible to the investor
for any loss to the investor due to the brokerage firm's failure, its loss
of property or funds, or its acts or omissions. Prospective investors are
urged to confer with their financial advisor to learn about the different
options available for owning mutual fund shares. You may receive share
certificates or hold shares in your name with the Transfer Agent upon
request.

SELLING FUND SHARES

You can withdraw money from your Fund account at any time by redeeming some
or all of your shares (by selling them back to the Fund or by selling the
shares through you r financial advisor). Your shares will be purchased by
the Fund at the next share price (NAV) calculated after your order is
received in proper form. The amount of the CDSC, if any, will be deducted
and the remaining proceeds sent to you. No CDSC is imposed on the amount by
which the value of a share may have appreciated. Similarly, no CDSC is
imposed on shares obtained through reinvestment of dividends or capital
gains. Shares not subject to a CDSC will be redeemed first. Share price is
normally calculated at 4 p.m. Eastern time.

To sell shares in an account, you may use any of the methods described on
the following page.

If you are selling some but not all of your shares, leave at least $1,000
worth of shares in the account to keep it open.

CERTAIN REQUESTS MUST INCLUDE A SIGNATURE GUARANTEE. It is designed to
protect you and your Fund from fraud. Your request must be made in writing
and include a signature guarantee if any of the following situations apply:

* You wish to redeem more than $10,000 worth of shares,
* Your account registration has changed within the last 30 days,
* The check is being mailed to a different address than the one on your
account (record address),
* The check is being made payable to someone other than the account owner,
or
* The redemption proceeds are being transferred to a Thornburg account with
a different registration.

You should be able to obtain a signature guarantee from a bank, broker
dealer, credit union (if authorized under state law), securities exchange or
association, clearing agency, savings association or participant in the
Securities Transfer Agent Medallion Program (STAMP). A notary public cannot
provide a signature guarantee.

TELEPHONE REDEMPTION. If you completed the telephone redemption section of
your application when you first purchased your shares, you may easily redeem
any class of shares of any Fund by telephone simply by calling a Fund
Customer Service Representative. Money can be wired directly to the bank
account designated by you on the application or sent to you in a check. The
Funds' Transfer Agent may charge a fee for a bank wire. This fee will be
deducted from the amount wired.

If you did not complete the telephone redemption section of your
application, you may add this feature to your account by calling the Fund
for a telephone redemption application. Once you receive it, please fill it
out, have it signature guaranteed and send it to:

NFDS
c/o Thornburg Funds
P.O. Box 419017
Kansas City, MO 64141-6017

<PAGE>
The Funds, TSC, TMC and the Funds' Transfer Agent are not responsible for,
and will not be liable for, the authenticity of withdrawal instructions
received by telephone or the delivery or transmittal of the redemption
proceeds if they follow instructions communicated by telephone that they
reasonably believe to be genuine. By electing telephone redemption you are
giving up a measure of security you otherwise may have by redeeming shares
only with written instructions, and you may bear the risk of any losses
resulting from telephone redemption. The Funds' Transfer Agent will attempt
to implement reasonable procedures to prevent unauthorized transactions and
the Funds or their Transfer Agent could be liable if these procedures are
not employed. These procedures will include recording of telephone
transactions, providing written confirmation of such transactions within 5
days, and requesting certain information to better confirm the identity of
the caller at the time of the transaction.

____________________________________________________________________________
Redeeming Shares Account Type Special Requirements
- ----------------------------------------------------------------------------
Through Your Financial All account types Consult with your financial
Advisor advisor. Your financial
advisor may charge a fee.

By Mail Individual, Joint The letter of instruction
Tenant, Sole Pro- must be signed by all
prietorship, UGMA, persons required to sign
UTMA for transactions, exactly
as
Send to: NFDS their names appear on the
c/o Thornburg Funds account, and must include:
P.O. Box 419017 * Your name,
Kansas City, MO * The Fund's name,
64141-6017 * Your Fund account
number,

* The dollar amount or
number of shares to be
redeemed,
* Any other applicable
requirements listed
above,
* Signature guarantee, if
required.

Trust In addition to the above
requirements, the trustee
must sign the letter
indicating capacity as
trustee. If the trustee's
name is not in the account
registration, provide a
copy of the trust document
certified within the last
60 days.

Business or In addition to the above
Organization requirements, at least one
person authorized by
corporate resolution to act
on the account must sign
the letter which must be
signature guaranteed.
Include a corporate
resolution with corporate
seal.

Executor, Call 1-800-847-0200 for
Administrator, instructions.
Conservator, Guardian

By Telephone All account types You must sign up for the
1-800-847-0200 except Street-Name telephone redemption
feature
before using it.
* Minimum Wire $1,000
* Minimum Check $50.00

By Systematic Withdrawal All account types You must sign up for this
Plan feature to use it.
* Minimum Account Balance
$10,000
* Minimum Check $50.00

<PAGE>
INVESTOR SERVICES

Thornburg Funds provides a variety of services to help you manage your
account.

Information Services

Thornburg Funds' telephone representatives are available Monday through
Friday from 9:30 am to 6:30 pm Eastern time. Whenever you call, you can
speak with someone equipped to provide the information or service you need.

Thornburg Funds' Audio Response system is available 24 hours a day, 365 days
a year. This computerized system gives you instant access to your account
information and up-to-date figures on all of the Thornburg Funds.

Statements and reports that Thornburg Funds send to you include the
following:
* Account statements after every transaction affecting your account
* Monthly account statements
* Financial reports (every six months)
* Cost basis statement (at the end of any year in which you redeem shares)

TRANSACTION SERVICES

Automatic Investment Plan. One easy way to pursue your financial goals is to
invest money regularly. Thornburg Funds let you transfer as little as $100
from your bank account into your Fund account on a weekly, monthly or
quarterly basis, automatically. Because the Fund's Automatic Investment Plan
has a lower minimum than a regular purchase, it is an ideal way for
beginning investors to invest in a Fund.

While regular investment plans do not guarantee a profit and will not
protect you against loss in a declining market, they can be an excellent way
to invest for retirement, a home, educational expenses, and other long-term
financial goals. Call 1-800-847-0200 and speak to a Fund Customer Service
Representative for more information.

Exchange Privilege. You may exchange Class A shares of any other Thornburg
Fund for Class A shares of one of the Thornburg Municipal Funds.

If you are exchanging from one of the Funds covered by this prospectus into
another Thornburg Fund, you may (i) have to pay the difference between the
front end sales charge you paid on the Fund out of which you are exchanging
and the front end sales charge applicable to the Fund into which you are
exchanging; or (ii) you may qualify for a reduced sales charge or no sales
charge on that Fund. Please consult the exchange an d reinvestment privilege
information in the Prospectus of the other Thornburg Fund.

Note that exchanges out of a Fund may have tax consequences for you. For
details on policies and restrictions governing exchanges, including
circumstances under which a shareholder's exchange privilege may be
suspended or revoked, see page 28.

Systematic withdrawal plans let you set up periodic redemptions from your
account. Because of the sales charge on Class A shares of each Fund, you may
not want to set up a systematic withdrawal plan during a period when you are
buying Class A shares on a regular basis.

<PAGE>
SHAREHOLDER AND ACCOUNT POLICIES

Dividends, Capital Gains, and Taxes
The Funds distribute substantially all of their net income and realized
capital gains, if any, to shareholders each year. Each Fund declares its
net investment income daily and distributes it monthly. Each Fund will
distribute net realized capital gains, if any, at least annually. Capital
gain distributions normally will be declared and payable in December.

Distribution Options
Each Fund earns interest from bond, money market, and other investments.
These are passed along as dividend distributions. Each Fund realizes capital
gains whenever it sells securities for a higher price than it paid for them.
These are passed along as capital gain distributions.

When you open an account, specify on your application how you want to
receive your distributions. Each Fund offers four options, (which you can
change at any time).

Dividends
1. Reinvestment Option. Your dividend distributions will be automatically
invested in additional shares of your Fund. If you do not indicate a
choice on your application, you will be assigned this option. You may
also instruct the Fund to invest your dividends in the shares of any
other Thornburg Fund.

2. Cash Option. You will be sent a check for your dividend distributions.
Cash distribution checks are normally mailed on the third business day
after the month-end.

Capital Gains
1. Reinvestment Option. Your capital gain distributions, if any, will be
automatically reinvested in additional shares of the Fund. If you do not
indicate a choice on your application, you will be assigned this option.
You may also instruct the Fund to re invest your capital gain
distributions in shares of any other Thornburg Fund.

2. Cash Option. You will be sent a check for any capital gain distributions.

Shares of any Thornburg Fund purchased through reinvestment of dividend and
capital gain distributions are not subject to sales charges or contingent
deferred sales charges. No interest is accrued or paid on amounts
represented by uncashed distribution checks.

Turnover and Capital Gains

The Funds do not intend to engage in short-term trading for profits.
Nevertheless, when a Fund believes that a security will no longer contribute
towards its reaching its goal, it will normally sell that security.

When a Fund sells a security at a profit it realizes a capital gain. When it
sells a security at a loss it realizes a capital loss. A fund must, by law,
distribute capital gains, net of any losses, to its shareholders. Whether
you reinvest your capital gain distributions or take them in cash, the
distribution is taxable.

To minimize taxable capital gain distributions, each Fund will realize
capital losses, if available, when, in the judgment of the portfolio
manager, the integrity and income generating aspects of the portfolio would
be unaffected by doing so.

<PAGE>
TAXES

Federal Taxes

The Limited Term National Fund, Limited Term California Fund, Intermediate
National Fund, Intermediate New Mexico Fund and Intermediate Florida Fund
each have qualified under Subchapter M of the Internal Revenue Code (the
"Code ") for tax treatment as a regulated investment company, and each of
these Funds intends to continue its qualification so long as qualification
is in the best interests of the shareholders. The other Funds also intend to
qualify for this treatment under Subchapter M. This tax treatment relieves a
Fund from paying federal income tax on income which is currently distributed
to its shareholders. Each Fund also intends to satisfy conditions that will
enable it to designate distributions from the interest income generated by
its investments in Municipal Obligations, which are exempt from the
individual federal income tax when received by the Fund, as Exempt Interest
Dividends. Shareholders receiving Exempt Interest Dividends will not be
subject to federal income tax on the amount of such dividends, except to the
extent the alternative minimum tax may be imposed.

The Funds' counsel, White, Koch, Kelly & McCarthy, Professional Association,
has not made and normally will not make any review of the proceedings
relating to the issuance of the Municipal Obligations or the basis for any
opinions issued in connection therewith. In the case of certain Municipal
Obligations, federal tax exemption is dependent upon the issuer (and other
users) complying with certain ongoing requirements. There can be no
assurance that the issuer (and other users) will comply with these
requirements, in which event the interest on such Municipal Obligations
could be determined to be taxable, in most cases retroactively from the date
of issuance. Certain matters under the Code, including certain exceptions to
the foregoing, are discussed more specifically below.

Each Fund will receive the opinion of its counsel or other assurances before
commencing investment operations that such distributions will constitute
Exempt Interest Dividends under the Code if certain conditions are
satisfied. Distributions by each Fund of net interest income received from
certain temporary investments (such as certificates of deposit, corporate
commercial paper and obligations of the United States government, its
agencies and instrumentalities) and net short-term capital gains realized by
each Fund, if any, will be taxable to shareholders as ordinary income
whether received in cash or additional shares. Distributions to shareholders
will not qualify for the dividends received deduction for corporations. Any
net long-term capital gains realized by a Fund, whether or not distributed,
will be taxable to shareholders as long-term capital gains regardless of the
length of time investors have held their shares, although gains attributable
to market discount on portfolio securities will be characterized as ordinary
income. Each year each Fund will, where applicable, mail to shareholders
information on the tax status of dividends and distributions, including the
respective percentages of tax-exempt and taxable income and an allocation of
tax-exempt income on a state-by-state basis. The exemption of interest
income for federal income tax purposes does not necessarily result in an
exemption under the income or other tax laws of any state or local taxing
authorities. (See "State Taxes"). Shareholders are advised to consult their
own tax advisers for more detailed information concerning the federal, state
and local taxation of each Fund and the income tax consequences to its
shareholders.

The Code treats interest on certain Municipal Obligations which are private
activity bonds under the Code as a preference item for purposes of the
alternative minimum tax on individuals and corporations. The Funds may
purchase without limitation private activity bonds the interest on which is
subject to treatment under the Code as a preference item for purposes of the
alternative minimum tax on individuals and corporations, although the
frequency and amounts of these purchases are presently uncertain. Some
portion of Exempt Interest Dividends may, as a result of these purchases, be
treated as a preference item for purposes of the alternative minimum tax on
individuals and corporations. Shareholders are advised to consult their own
tax advisers as to the extent and effect of this treatment.

<PAGE>
State Taxes

Distributions of interest income from Municipal Obligations will not
necessarily be exempt from taxes under the income or other tax laws of any
state or local taxing authority. Distributions to individuals attributable
to interest on Municipal Obligations originating in Alabama, California,
Arizona, New Mexico, New York and Tennessee will not be subject to personal
income taxes imposed by the state of the same name as the Fund. For example,
an individual resident in New Mexico, who owns shares in the Intermediate
New Mexico Fund, will not be required by New Mexico to pay income taxes on
interest dividends attributable to obligations originating in that state.
Individual shareholders of the Intermediate New York Fund, who are residents
of New York City, will not be required to pay New York State income taxes on
interest dividends attributable to obligations originating in New York
State. Capital gain distributions are taxable by these states, irrespective
of the origins of the obligations from which the gains arise. Individual
shareholders of the Pennsylvania Intermediate Fund, who are Pennsylvania
residents, will not be subject to Pennsylvania income tax on distributions
attributable to interest on obligations originating in Pennsylvania, or
distributions attributable to gains on dispositions of obligations of
Pennsylvania and its political subdivisions and obligations of the United
States and its territories and possessions. Additionally, individual
shareholders will be exempt from Pennsylvania personal property tax on their
Intermediate Pennsylvania Fund shares to the extent the Fund's assets
consist of obligations described in the preceding sentence. Individual
residents in Pittsburgh will enjoy a similar exemption from personal
property taxes imposed by the City and School District of Pittsburgh.

Florida and Texas do not currently impose an income tax on individuals
or do not impose an income tax on distributions to individuals attributable
to Municipal Obligations. Florida imposes a personal property or
"intangibles" tax which is generally applicable to securities owned by
individual residents in Florida, but the intangibles tax will not apply to
Florida Fund shares if the Funds' assets as of the close of the preceding
taxable year consist only of obligations of Florida and its political
subdivisions and obligations of the United States, Puerto Rico, Guam or the
United States Virgin Islands.

With respect to distributions of interest income from the Limited Term
National Fund and the Intermediate National Fund, the laws of the several
states and local taxing authorities vary with respect to the taxation of
such distributions, and shareholders of these Funds are advised to consult
their own tax advisers in that regard. The Limited Term National Fund and
the Intermediate National Fund will advise shareholders approximately 60
days after the end of each calendar year as to the percentage of income
derived from each state as to which it has any Municipal Obligations in
order to assist shareholders in the preparation of their state and local tax
returns. Prospective investors are urged to confer with their own tax
advisers for more detailed information concerning state tax consequences. In
particular, corporations should note that the preceding outline of state
taxes pertains principally to individuals, and tax treatment of corporations
may be different.

SERVICE AND DISTRIBUTION PLANS

Service Plan - Class A and Class C. Each class of each Fund has adopted a
Service Plan under which TMC makes payments to securities dealers and other
financial institutions and organizations to obtain various shareholder
related services. The Service Plans permit each of these Funds to reimburse
TMC for these payments at annual rates up to .25% of each class's net
assets. No assets of any class of any Fund will be used to reimburse
expenses attributable to any other class of the same, or any other Fund.

Class C Distribution Plan. Each Fund offering Class C shares has adopted a
Class C Distribution Plan applicable to its Class C shares, under which the
Fund will pay to TSC on a monthly basis an annual distribution fee of up to
.75% of the average daily net assets attributable to Class C shares of the
Fund. This distribution fee is an addition to the service fee described
above under "Service Plan - Class A and Class C" and is charged to and

<PAGE>
reduces the income allocated to Class C shares. TSC intends to use these
amounts principally to compensate dealers (including banks) who sell Class C
shares. TSC also will engage in other distribution related activities,
including advertising and other promotional activities. However, the
distribution fee paid to TSC is not computed with respect to TSC's actual
expenses, and the fees received by TSC may be more or less than its actual
distribution expenses. TSC may, but is not obligated to, waive any part or
all of its compensation provided for under the Class C Distribution Plan.

The Glass-Steagall Act prohibits certain banks from underwriting mutual fund
shares. The Funds do not believe that this prohibition will apply to the
commissions described beginning on page 17 or to the plans described above.
However, no assurance can be given that the Glass-Steagall Act will not be
interpreted so as to prohibit these arrangements. In that event, the ability
of the Funds to market their shares could be impaired to a small extent. In
addition, state securities laws on this issue may differ from
interpretations of federal law, and banks and financial institutions may be
required to register as dealers pursuant to state law.

TRANSACTION DETAILS

The Funds are open for business each day the New York Stock Exchange (NYSE)
is open. Each class of shares of the Fund normally calculates its NAV (and
offering price for Class A shares) as of the close of business of the NYSE,
normally 4 p.m. Eastern time. Each Fund's assets are valued on the basis of
valuations obtained from independent pricing services.

When you sign your account application, you will be asked to certify that
your Social Security or taxpayer identification number is correct and that
you are not subject to 31% backup withholding for failing to report income
to the IRS. If you violate IRS regulations, the IRS can require the Fund to
withhold 31% of your taxable distributions and redemptions.

You may initiate many transactions by telephone. Note that a Fund will not
be responsible for any losses resulting from unauthorized transactions if it
follows reasonable procedures designed to verify the identity of the caller.
The Fund will request personalized security codes or other information, and
may also record calls. You should verify the accuracy of your confirmation
statements immediately after you receive them. If you want the ability to
redeem and exchange by telephone, fill in the appropriate section of the
application. If you have an existing account to which you wish to add this
feature, call the Fund for a telephone redemption application. If you are
unable to reach the Fund by phone (for example, during periods of unusual
market activity), consider placing your order by mail or by using your
financial advisor.

The Funds reserve the right to suspend the offering of shares for a period
of time. Each Fund also reserves the right to reject any specific purchase
order, including certain purchases by exchange. See "Exchange Restrictions "
on page 28. Purchase orders may be refused if, in TMC's opinion, they would
disrupt management of a Fund.

When you place an order to buy shares, your order will be processed at the
next share price calculated after your order is received. If you open or
add to your account yourself rather than through your financial advisor
please note the following:

* All of your purchases must be made in U.S. dollars and checks must be
drawn on U.S. banks.
* The Funds do not accept cash.
* If your check does not clear, your purchase will be cancelled and you
could be liable for any losses or fees the Fund or its Transfer Agent has
incurred.

<PAGE>
When you buy shares of a Fund or sell them through your financial advisor,
you may be charged a fee for this service. Please read your financial
advisor's program materials for any additional procedures, service features
or fees that may apply.

Certain financial institutions that have entered sales agreements with TSC
may enter confirmed purchase orders on behalf of customers by phone, with
payment to follow no later than the time when the Fund is priced on the
following business day. If payment is not received by that time, the
financial institution could be held liable for resulting fees or losses.

Each Fund may authorize certain securities brokers to accept on its behalf
purchase and redemption orders received in good form, and some of those
brokers may be authorized to designate other intermediaries to accept
purchase and redemption orders on the Fund's behalf. Provided the order is
promptly transmitted to the Fund, the Fund will be deemed to have received a
purchase or redemption order at the time it is accepted by such an
authorized broker or its designee, and customer orders will be priced based
upon the Fund's net asset value next computed after the order is accepted by
the authorized broker or its designee.

When you place an order to sell shares, your shares will be sold at the next
NAV calculated after your request is received in proper form. (Except that a
CDSC will be deducted from Class C shares within one year of purchase and a
CDSC of 1/2 of 1% will be deducted from redemptions of Class A shares within
one year of purchase where no sales charge was imposed on the purchase
because it exceeded $1,000,000). Note the following:

* Consult your financial advisor for procedures governing redemption
through his or her firm.
* If you redeem by mail the proceeds will normally be mailed to you on the
next business day, but if making immediate payment could adversely affect
your Fund, it may take up to 7 days to pay you.
* Telephone redemptions over the wire generally will be credited to your
bank account on the business day after your phone call.
* Each Fund may hold payment on redemptions until it is reasonably
satisfied that investments previously made by check have been collected,
which can take up to 15 business days.
* Redemptions may be suspended or payment dates postponed when the NYSE is
closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the SEC.
* No interest or earnings will accrue or be paid on amounts represented by
uncashed distribution or redemption checks.
* To the extent consistent with state and federal law, a Fund may make
payments of the redemption price either in cash or in kind. The Funds
have elected to pay in cash all requests for redemption by any
shareholder. They may, however, limit such cash in respect to each
shareholder during any 90 day period to the lesser of $250,000 or 1% of
the net asset value of a Fund at the beginning of such period. This
election has been made pursuant to Rule 18f-1 under the Investment
Company Act of 1940 and is irrevocable while the Rule is in effect unless
the Securities and Exchange Commission, by order, permits its withdrawal.
In the case of a redemption in kind, securities delivered in payment for
shares would be valued at the same value assigned to them in computing
the net asset value per share of the Fund. A shareholder receiving such
securities would incur brokerage costs when selling the securities.
27
<PAGE>
EXCHANGE RESTRICTIONS

As a shareholder you have the privilege of exchanging Class A shares of the
Funds for Class A shares of other Thornburg Funds. However, you should note
the following:

* The Fund you are exchanging into must be registered for sale in your
state.
* You may only exchange between accounts that are registered in the same
name, address, and taxpayer identification number.
* Before exchanging into a Fund, read its prospectus.
* If you exchange Class A shares into a Fund with a higher sales charge,
you may have to pay the percentage-point difference between that Fund's
sales charge and any sales charge you have previously paid in connection
with the shares you are exchanging. For example, if you had already paid
a sales charge of 2.5% on your shares and you exchange them into a Fund
with a 4.5% sales charge, you would pay an additional 2% sales charge.
* Exchanges may have tax consequences for you.
* Because excessive trading can hurt performance and shareholders, each
Fund reserves the right to temporarily or permanently terminate the
exchange privilege of any investor who makes more than four exchanges out
of a Fund in any calendar year. Accounts under common ownership or
control, including accounts with the same taxpayer identification number,
will be counted together for purposes of the four exchange limit.
* Each Fund reserves the right to refuse exchange purchases by any person
or group if, in TMC's judgement, the Fund would be unable to invest the
money effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
* Your exchanges may be restricted or refused if a Fund receives or
anticipates simultaneous orders affecting significant portions of the
Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to a Fund.

Although a Fund will attempt to give prior notice whenever it is reasonably
able to do so, it may impose these restrictions at any time. The Funds
reserve the right to terminate or modify the exchange privilege in the
future.

PERFORMANCE

YIELD COMPUTATION AND TOTAL RETURN

The Funds may quote their yields and returns in reports, sales literature
and advertisements. Yield and return information are computed separately for
Class A and Class C shares. Yield and return for Class C shares of a Fund
ordinarily will be less than t hat of Class A shares of the same Fund
because of the additional distribution fees imposed upon Class C shares.
Additionally, yield and return could differ in minor respects among classes
of the same Fund because of allocation of certain expenses to one or more
specific classes to which the expenses relate. Any return quoted should not
be considered a representation of the return in the future since return
figures are based upon historical earnings. Actual performance will vary.

Current yield quotations will include a standardized calculation which
computes yield for a 30-day or one-month period by dividing a Fund's net
investment income per share during the period by the maximum offering price
on the last day of the period and annualizing the result. Provided that any
such quotation is also accompanied by the standardized calculation referred
to above, any of the Funds also may quote non-standardized yields for a
specified period by dividing the net investment income per share of that
Fund for that period by either the Fund's average public offering price per
share for that same period or the offering price per share on the first or
last day of the period and annualizing the result. The primary differences
between the yield calculations obtain ed using the standardized performance
measure and any non-standardized performance measure will be caused by the
following factors: (1)The non-standardized calculation may cover periods
other than the 30-day or one month period required by the standardize d
calculation; (2)The non-standardized calculations may reflect amortization
of premium based upon historical cost rather than market value; (3) 30-day
or

<PAGE>
one month period required by the standardized calculation; (4) The
non-standardized calculation may reflect the an offering price per share
other than the maximum offering price, provided that any time any Fund's
return is quoted in reports, sales literature or advertisements using a
public offering price which is less than the Fund's maximum public offering
price, the return computed by using the Fund's maximum public offering price
also will be quoted in the same piece; (5) The non-standard return quotation
may include the effective return obtained by compounding the monthly
dividends.

Average annual total return quotations show the average annual percentage
change in value of $1,000 for one, five and ten-year periods unless the
class has been in existence for a shorter period. Average annual total
return includes the effect of paying the maximum sales charge (Class A
shares) or the deduction of the applicable CDSC (Class C shares) and assumes
the reinvestment of all dividends. The Funds also may furnish average annual
total return quotations for other periods, or based upon investments at
various sales charge levels or at net asset value. Total return quotations
show the total of all income and capital gain paid to shareholders, assuming
reinvestment of all distributions, plus (or minus) the change in the value
of the original investment, expressed as a percentage of the purchase price.

Yields and returns described in this section may also be quoted on a
"taxable equivalent yield" basis by computing the taxable yield or return
which a hypothetical investor subject to a specified income tax rate must
realize to receive the same yield or return after taxes. When a taxable
equivalent yield is quoted, the following additional information will be
furnished: (1) a standardized current yield; (2) the length of and the last
day of the base period used in computing the quotation; and (3) a
description of the method by which the quotation is computed. Yield and
return information may be useful in reviewing the performance of the Funds
and for providing a basis for comparison with other investment alternatives.
Comparative information about the yield or distribution rate of the shares
of a Fund and a bout average rates of return on certificates of deposit,
bank money market deposit accounts, money market mutual funds and other
short-term investments may also be included in advertisements and
communications of the Fund. Any such comparison will contain information
about the differences between the Funds and those investments.

From time to time, in advertisements and other types of literature, the
performance of the Funds may be compared to other groups of mutual funds.
This comparative performance ma y be expressed as a ranking or a rating
prepared by Lipper Analytical Services, Inc., Donoghue Organization, Inc.,
Morningstar, Inc., Value Line or other widely recognized independent
services which monitor the performance of mutual funds. Performance
rankings and ratings reported periodically in national financial
publications such as MONEY Magazine, FORBES, BARRON's, VALUE LINE, the WALL
STREET JOURNAL and MORNINGSTAR, and other such publications may also be
used. The Funds may illustrate performance or the characteristics of their
respective investment portfolios through graphs, tabular data, or other
displays which describe (i) the average portfolio maturity of a Fund's
portfolio securities relative to the maturities of other investments, (ii)
the relationship of yield and maturity of the Fund to the yield and maturity
of other investments (either as a comparison or through use of standard
benchmarks or indices such as the Treasury yield curve), (iii) changes in
the Funds' share price or net asset value relative to changes in the value
of other investments, and (iv) the relationship over time of changes in the
Funds' (or other investments) net asset values or prices and the Funds' (or
other investments') investment returns. The Funds also may illustrate or
refer to their respective investment portfolios, investment techniques and
strategies, and general market or economic trends in advertising or

<PAGE>
communications to shareholders or prospective shareholders, including
reprints of interviews or articles written by or about, and including
comments by, Fund managers. These illustrations, references and comments
ordinarily will relate to topics addressed in the Funds' Prospectus and
Statements of Additional Information.

ORGANIZATION OF THE FUNDS

Each of the Limited Term Municipal Funds are diversified series of Thornburg
Limited Term Municipal Fund, Inc., a Maryland corporation organized as a
diversified, open-end management investment company. The Limited Term
Municipal Funds are managed by their investment adviser, Thornburg
Management Company, Inc., under the supervision of the Board of Directors of
Thornburg Limited Term Municipal Fund, Inc. (the "Company" ). The Company
currently offers two series of stock, referred to in this Prospectus as
Limited Term National Fund and Limited Term California Fund, each in
multiple classes, and the Board of Directors is authorized to divide
authorized but unissued shares into additional series and classes.

Each of the Intermediate Municipal Funds are series of Thornburg Investment
Trust, a Massachusetts business trust (the "Trust") organized as a
diversified, open-end management investment company under a Declaration of
Trust (the "Declaration" ). Each of the single-state Intermediate Funds is
a non-diversified series of the Trust, and the Intermediate Municipal Funds
are managed by their investment adviser, Thornburg Management Company, Inc.
under the supervision of the Trust's Trustees. The Trust currently has 13
authorized Funds, ten of which are described in this Prospectus. The
Trustees are authorized to divide the Trust's shares into additional series
and classes.

No Fund is liable for the liabilities of any other Fund. However, because
the Company and the Trust share this Prospectus with respect to the Funds,
there is a possibility that one of these companies could be liable for any
misstatements, inaccuracies or incomplete disclosure in the Prospectus
respecting Funds offered by the other company. The Company and the Trust do
not concede, and specifically disclaim, any such liability.

Each Fund may hold special shareholder meetings and mail proxy materials.
These meetings may be called to elect or remove Directors or Trustees,
change fundamental investment policies, or for other purposes. Shareholders
not attending these meetings are encouraged to vote by proxy. Each Fund will
mail proxy materials in advance, including a voting card and information
about the proposals to be voted on. The number of votes you are entitled to
is based upon the number of shares you own. Shares do not have cumulative
voting rights or preemptive rights.

THORNBURG MANAGEMENT COMPANY, INC. AND THORNBURG SECURITIES CORP.

The Funds are managed by Thornburg Management Company, Inc. (TMC). TMC
performs investment management services for each Fund under the terms of an
Investment Advisory Agreement which specifies that TMC will select
investments for the Fund, monitor those investments and the markets
generally, and perform related services. TMC also performs administrative
services specific to each class of shares of each Fund under an
Administrative Services Agreement which requires that TMC will supervise,
administer and perform certain administrative services necessary for the
maintenance of each class' shareholders. TMC's services to the Limited Term
Municipal Funds are supervised by the Directors of Thornburg Limited Term
Municipal Fund, Inc., and TMC's services to the Intermediate Municipal Funds
are supervised by the Trustees of Thornburg Investment Trust.

For each of the Funds, TMC receives a management fee and an administrative
services fee, computed according to the following scales and paid monthly as
a percentage of each Fund's average daily net assets.

<PAGE>
<TABLE>
Limited Term Intermediate Term All Funds
Municipal Funds Municipal Funds Annual
Net Assets Annual Investment Annual Investment Administrative
Management Fee Management Fee Fee
- ---------- ----------------- ----------------- --------------
<S> <C> <C> <C>
0 to $500 million .50% .50% .125%
$500 million to $1 billion .40% .45% .125%
$1 billion to $1.5 billion .30% .40% .125%
$1.5 billion to $2 billion .25% .35% .125%
Over $2 billion .225% .275% .125%
</TABLE>

TMC was established in 1982. Today, the Thornburg Funds include Thornburg
Value Fund, Thornburg Limited Term U.S. Government Fund and Thornburg
Limited Term Income Fund in addition to the Funds covered by this
Prospectus. The Thornburg Funds total over $1.8 billion in assets.
Thornburg Management Company Inc. is known as a provider of conservative
investment products. For more than a decade the Thornburg Funds have been
committed to preserving and increasing the real wealth of their
shareholders. The key to growing real wealth is increasing buying power
after taxes, inflation, and investment related expenses.

Brian J. McMahon and George Strickland, both of whom are managing directors
of TMC, have primary responsibilities for the day-to-day management of each
of the Fund portfolios. Mr. McMahon has managed municipal bond portfolios
for TMC since 1984 and Mr. Strickland has performed municipal bond credit
analysis and management since joining TMC in 1991. Mr. McMahon and Mr.
Strickland are assisted by other employees of TMC in managing the Funds.

TMC may, from time to time, agree to waive its fees or to reimburse any Fund
for expenses above a specified percentage of average daily net assets. TMC
retains the ability to be repaid by the Fund receiving these reimbursements
if expenses fall below the limit prior to the end of the fiscal year. Fee
waivers and expense reimbursements will increase a Fund's yield, and
repayment of waivers or reimbursements will lower the Fund's yield.

In addition to TMC's fees, each Fund will pay all other costs and expenses
of its operations. Funds will not bear any costs of sales or promotion
incurred in connection with the distribution of their shares, except as
provided for under the service and distribution plans applicable to each
Fund class, as described above under "Service and Distribution Plans."

Thornburg Securities Corporation (TSC) distributes and markets the Thornburg
Funds.

H. Garrett Thornburg, Jr. a Trustee and President of the Trust and a
Director and Chairman of the Company, is the controlling stockholder of both
TMC and TSC.

ADDITIONAL INFORMATION

Reports to Shareholders
Shareholders will receive annual reports of their Fund containing financial
statements audited by the Funds' independent auditors, and also will
receive unaudited semi-annual reports. In addition, each shareholder will
receive an account statement no less often than quarterly.

Custodian and Transfer Agent
The custodian of each Fund's assets is State Street Bank & Trust Co.
National Financial Data Services is the transfer agent for the Funds and
performs bookkeeping, data processing and administrative services incident
to the maintenance of shareholder accounts.

General Counsel
Legal matters in connection with the issuance of shares of the Funds are
passed upon by White, Koch, Kelly & McCarthy, Professional Association, Post
Office Box 787, Santa Fe, New Mexico 87504-0787.

<PAGE>
Investment Adviser
Thornburg Management Company, Inc.
119 East Marcy Street, Suite 202
Santa Fe, New Mexico 87501

Distributor
Thornburg Securities Corporation
119 East Marcy Street, Suite 202
Santa Fe, New Mexico 87501

Auditor
McGladrey & Pullen, LLP
555 Fifth Avenue
New York, New York 10017

Custodian
State Street Bank & Trust Co.
Boston, Massachusetts

Transfer Agent
State Street Bank & Trust Co.
c/o NFDS Servicing Agent
Post Office Box 419017
Kansas City, Missouri 64141-6017

No dealer, sales representative or any other person has been authorized to
give any information or to make any representation not contained in this
Prospectus and, if given or made, the information or representation must not
be relied upon as having been authorized by any Fund or Thornburg Securities
Corporation. This Prospectus constitutes an offer to sell securities of a
Fund only in those states where the Fund's shares have been registered or
otherwise qualified for sale. A Fund will not accept applications from
persons residing in states where the Fund's shares are not registered.

<logo>
Thornburg Funds
Investing With Integrity
Thornburg Securities Corporation, Distributor
119 East Marcy Street, Santa Fe, New Mexico 87501
(800) 847-0200
www.thornburg.com email: [email protected]

<PAGE>
THORNBURG
INSTITUTIONAL
CLASS SHARES

Prospectus
February 1, 1998

NOT FDIC- MAY LOSE VALUE
INSURED NO BANK GUARANTEE

<PAGE>
THORNBURG FUNDS
Institutional Class Shares

Prospectus
February 1, 1998

Limited Term National Fund and Limited Term California Fund are separate
investment portfolios of Thornburg Limited Term Municipal Fund, Inc. and
Intermediate National Fund, Government Fund and Income Fund are separate
investment portfolios of Thornburg Investment Trust. Value Fund is also a
separate investment portfolio of Thornburg Investment Trust. Limited Term
National Fund, Limited Term California Fund and Intermediate National Fund
are municipal bond funds; Government Fund and Income Fund are taxable bond
funds. Value Fund invests in equity and certain other securities to pursue
long-term capital appreciation. Each of the Funds' investment objectives are
described beginning on page 3 of this Prospectus under the caption "General
Information."

All of the Funds are managed by Thornburg Management Company, Inc. (TMC), and
issue multiple classes of shares. Institutional Class shares are offered
through this prospectus. Other classes issued by the Funds are described on
page 3 under the caption "General Information".

This Prospectus sets forth concisely the information a prospective investor
should know about the Funds before investing. It should be read and retained
for further reference. Additional information about the Funds is contained in
a Statement of Additional Information, Thornburg Funds Institutional Class
Shares, dated February 1, 1998. The Statement of Additional Information has
been filed with the Securities and Exchange Commission and may be obtained at no
charge by contacting Thornburg Securities Corporation, 119 East Marcy Street,
Suite 202, Santa Fe, New Mexico 87501, 888-598-0400. This Prospectus
incorporates by reference the entire Statement of Additional Information.

MUNICIPAL FUNDS
Thornburg Limited Term Municipal Fund National Portfolio
("Limited Term National Fund")
Thornburg Limited Term Municipal Fund California Portfolio
("Limited Term California Fund")
Thornburg Intermediate Municipal Fund
("Intermediate National Fund")

TAXABLE INCOME FUNDS
Thornburg Limited Term U. S. Government Fund ("Government Fund")
Thornburg Limited Term Income Fund ("Income Fund")

THORNBURG VALUE FUND
Thornburg Value Fund* ("Value Fund")

* Thornburg Value Fund is not offering Institutional Class shares as of the
date of this Prospectus, and proposes to commence its offering of those
shares in the future.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

FUND SHARES INVOLVE INVESTMENT RISKS (INCLUDING POSSIBLE LOSS OF PRINCIPAL),
AND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, AND ARE
NOT INSURED BY, ANY BANK, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY GOVERNMENT AGENCY.

<PAGE>
TABLE OF CONTENTS

1 Expense Information
3 General Information
4 Financial Highlights
6 Management Discussion of Fund Performance
9 Investment Objectives and Policies - In General
10 Investment Policies and Risks of the Municipal Funds
12 Investment Policies and Risks of the Taxable Income Funds
19 Securities Ratings and Credit Quality
20 Investment Policies and Risks of Value Fund
25 Your Account - Buying Fund Shares
27 Selling Fund Shares
29 Investor Services
31 Shareholder and Account Policies
32 Taxes
34 Service Plan
34 Performance
35 Organization of the Funds
37 Thornburg Management Company, Inc.
and Thornburg Securities Corporation
37 Additional Information

<PAGE>
EXPENSE INFORMATION

Shareholder Transaction Expenses
Maximum Sales Charge on Purchases or Reinvested Dividends none
Maximum Deferred Sales Charge on Redemptions none
Redemption Fees none
Exchange Fees none

<TABLE>
Annual Operating Expenses Examples:
(as a percentage of average net assets) You will pay the following expenses on a $1,000
investment in each Fund, assuming the Fund's
expense ratio remains the same, a 5% annual return,
and redemption at the end of each time period:
<CAPTION>
__________________________
Limited Term National Fund
--------------------------
<S> <C> <C> <C> <C> <C>
Management Fees .45% One 3 5 10
12b-1 Fees (after fee waiver)* .00% Year Years Years Years
Other Expenses .15% ---- ----- ----- -----
----- $6 $19 $33 $75
Total Fund Operating Expenses .60%

____________________________
Limited Term California Fund
----------------------------
<S> <C> <C> <C> <C> <C>
Management Fees .50% One 3 5 10
12b-1 Fees (after fee waiver)* .00% Year Years Years Years
Other Expenses .13% ---- ----- ----- -----
----- $6 $20 $35 $79
Total Fund operating expenses .63%

__________________________
Intermediate National Fund
--------------------------
<S> <C> <C> <C> <C> <C>
Management fees .50% One 3 5 10
12b-1 fees (after fee waiver)* .00% Year Years Years Years
Other expenses (after .19% ---- ----- ----- -----
reimbursement)* ----- $7 $22 $39 $87
Total Fund operating expenses .69%

* Expenses reflect rounding and current fees. TMC has no current intention
to seek reimbursement under the Fund's 12b-1 plan, and the table reflects
a waiver of the fee. Other expenses reflect a partial reimbursement by TMC.
Absent the waiver and reimbursement, the 12b-1 fee would be .25%, other
expenses would be .74%, and total operating expenses would be 1.49%.
1
<PAGE>
Examples:
You will pay the following expenses on a $1,000
investment in each Fund, assuming the Fund's
expense ratio remains the same, a 5% annual return,
and redemption at the end of each time period:

_______________
Government Fund
---------------
<S> <C> <C> <C> <C> <C>
Management fees .38% One 3 5 10
12b-1 fees (after fee waiver)* .00% Year Years Years Years
Other expenses (after .22% ---- ----- ----- -----
reimbursement)* ----- $6 $19 $34 $76
Total Fund operating expenses .60%

___________
Income Fund
-----------
<S> <C> <C> <C> <C> <C>
Management fees .50% One 3 5 10
12b-1 fees (after fee waiver)* .00% Year Years Years Years
Other expenses (after .19% ---- ----- ----- -----
reimbursement)* ----- $7 $22 $38 $86
Total Fund operating expenses .69%

__________
Value Fund
----------
<S> <C> <C> <C> <C> <C>
Management fees .88% One 3 5 10
12b-1 fees (after fee waiver)* .00% Year Years Years Years
Other expenses (after .41% ---- ----- ----- -----
reimbursement)* ----- $13 $41 $71 $156
Total Fund operating expenses 1.29%

* Expenses reflect rounding. TMC has no current intention to seek
reimbursement under the Fund's 12b-1 plan, and the table reflects
a waiver of the fee. Other expenses are estimated. Absent the waiver, the
12b-1 fee would be .25%, and total operating expenses would be 1.54%.</TABLE

Explanation of Tables

THE INFORMATION IN THE TABLES ABOVE SHOULD NOT BE CONSIDERED A
REPRESENTATION
OF PAST OR FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN. The expense figures shown in the tables above are presented to
assist the investor in understanding the various costs that an investor in
any of the Funds will bear, directly or indirectly. The Funds' investment
adviser may not waive fees or assume Fund expenses in the future.

2
<PAGE>
GENERAL INFORMATION

The primary investment objective of Limited Term National Fund, Limited Term
California Fund and Intermediate National Fund is to provide, through
investment in professionally managed portfolios of Municipal Obligations, as
high a level of current income exempt from federal income tax as is
consistent, in TMC's view, with preservation of capital. Limited Term
California Fund will invest primarily in Municipal Obligations originating
in
California, with the objective of having interest dividends paid to
individual shareholders exempt from California personal income taxes.
Limited Term National Fund and Limited Term California Fund will maintain
portfolios having a dollar-weighted average maturity of normally not more
than five years, to attempt to reduce net asset value volatility relative to
municipal bond portfolios with longer average maturities while expecting
lower yields than those received on portfolios with longer average
maturities. Intermediate National Fund will maintain a portfolio having a
dollar-weighted average maturity of normally three to ten years, to attempt
to reduce net asset value volatility relative to long-term municipal bond
portfolios. Intermediate National Fund may receive lower yields than those
received on long-term bond portfolios, while seeking higher yields and
expecting higher share price volatility than Limited Term National Fund.

The primary investment objective of Government Fund and Income Fund is to
provide, through investment in a professionally managed portfolio of fixed
income obligations, as high a level of current income as is consistent, in
TMC's view, with preservation of capital. The Government Fund will try to
achieve its primary investment objective by investing mainly in obligations
issued or guaranteed by the United States Government or by its agencies or
instrumentalities and in participations in, or repurchase agreements secured
by, such obligations. Income Fund will try to achieve its primary
investment
objective by investing in investment grade short and intermediate maturity
bonds and asset backed securities such as mortgage backed securities and
collateralized mortgage obligations. Income Fund also may invest in or
utilize other investment strategies to hedge market risks, manage cash
positions or to enhance potential gain. Additionally, Government Fund and
Income Fund will seek to reduce fluctuations in its net asset value compared
to longer term portfolios by investing in obligations with an expected
dollar-weighted average maturity of normally not more than five years.

Value Fund's investment objective is long-term capital appreciation. The
Fund will seek to achieve this objective by investing mainly in domestic
equity securities selected on a value basis using traditional and additional
fundamental research and valuation methods. To a lesser extent, Value Fund
also may invest in preferred stocks, domestic debt securities and foreign
equity and debt securities.

There can be no assurance that the Funds' objectives can be achieved. If
your sole objective is preservation of capital, then the Funds may not be
suitable for you because their net asset values will change. The share
prices of the Municipal Funds and the Taxable Income Funds will vary as
market interest rates fluctuate. The share price of the Value Fund also
will
vary, sometimes to a greater degree, in response to market conditions,
political and economic news, interest rates, dividends and specific
corporate
developments. When you sell your Fund shares, they may be worth more or
less
than what you paid for them. Investors whose sole objective is preservation
of capital may wish to consider a high quality money market fund. The
primary (and any secondary) investment objective of each Fund is a
fundamental policy and may not be changed without a vote of the Fund's
shareholders. Please see Investment Objectives and Policies below for a
discussion of the Funds' respective investment policies.

Each Fund currently issues multiple classes of shares. Each of a Fund's
shares represents an equal undivided interest in the Fund's assets, and each
Fund has common investment objectives and a common investment portfolio.
Different classes may have different sales charges and other expenses which
may affect performance.
3
<PAGE>
Investors may telephone Thornburg Securities Corporation at (888) 598-0400
to obtain more information concerning other classes of shares available to
them through their sales representative. Investors may also obtain
information respecting other classes of shares through their sales
representative or other person which is offering or making available the
Institutional Class shares described in this Prospectus.

On any day on which the New York Stock Exchange, Inc. is open for trading,
investors may initiate purchases and redemptions of a Fund's shares. See
"Your Account" beginning on page 25 for information about buying Fund
shares,
and "Selling Fund Shares" beginning on page 27 for information about
redeeming Fund shares.

FINANCIAL HIGHLIGHTS

The tables on these pages present, for Institutional Class shares of Limited
Term National Fund, Limited Term California Fund, Intermediate National
Fund, Government Fund and Income Fund, per share income and capital changes
for a share outstanding throughout the periods indicated. This information
has been audited by McGladrey & Pullen, LLP, independent auditors, whose
reports thereon are incorporated by reference in the registration statements
for the Funds. This information should be read in conjunction with the
1997 Annual Reports for the respective Funds.

</TABLE>
<TABLE>
Ratio of Ratio of Ratio of
Expenses Expenses Net
Net Distri- to to Investment Net
Realized butions Distri- Average Average Income Assets
Net Asset and Total from butions Net Net (Loss) at end
Value, Unrealized from Net from Net Asset Assets Assets to of
Beginning Net Gain Investment Invest- Net Value, Total After Before Average Rate of Period
Fiscal Year of Investment (Loss) on Opera- ment Realized End of Return Expense Expense Net Portfolio ('000's
or Period Period Income Investments tions Income Gains Period <F(b)> Reductions Reductions Assets Turnover omitted)
- ------------- ------ --------- -------- ---------- ------- ------- ------- ------ ---------- ---------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Limited Term
National Fund
- -------------
Class I
7/5/96 <F(a)> $13.27 $ .66 $ .17 $ .83 $( .66) $13.44 6.42% (.60%) (.79%) 5.01% 23.39% $35,746
to 6/30/97 <F(c)> <F(c)> <F(c)>

Limited Term
California Fund
- ---------------
Class I
4/1/97 <F(a)> $12.64 $ .15 $ .11 $ .26 $( .15) $12.75 2.07% (.63)% (1.32)% 4.77% 20.44% $3,949
to 6/30/97 <F(c)> <F(c)> <F(c)>

Intermediate
National Fund
- -------------
Class I
7/5/96 <F(a)> $13.00 $ .17 $ .23 $ .40 $( .17) $13.23 3.11% (.70)% (6.10)% 5.49% 12.64% $689
to 9/30/96 <F(c)> <F(c)> <F(c)>
10/1/96 to 13.23 1.70 .21 .91 ( .70) 13.44 7.07 (.69) (1.24) 5.16 15.36 16,615
9/30/97

Limited Term
Government Fund
- ---------------
Class I
7/5/96 <F(a)> $12.14 $ .20 $ .10 $ .30 $( .20) $12.24 2.45% (.58%) (305.74)% 6.64% 23.27% $9
to 9/30/96 <F(c)> <F(c)> <F(c)>
10/1/96 to 12.24 .79 .07 .86 ( .79) 12.31 7.26 (.60) (6.57) 6.35 41.10 5,263
9/30/97

Limited Term
Income Fund
- ------------
Class I
7/5/96 <F(a)> $11.95 $ .19 $ .28 $ .47 $( .19) $12.23 3.97% .69% 4.26% 6.67% 44.35% $797
to 9/30/96 <F(c)> <F(c)> <F(c)>
10/1/96 to 12.23 .80 .13 .93 ( .80) 12.36 7.80 (.69) (1.98) 6.44 13.87 4,495
9/30/97

<FN> Footnotes to Financial Highlights Tables

<F(a)> Commencement of operations.
<F(b)> Total return is not annualized for periods less than one year.
<F(c)> Annualized.
</FN>
</TABLE>
4 5

<PAGE>
MANAGEMENT DISCUSSION OF FUND PERFORMANCE

Intermediate National Fund, Government Fund, Income Fund,
Limited Term National Fund, & Limited Term California Fund

The following graphs compare how $10,000 would have appreciated if invested
in shares of the named Fund, a broad based securities market index, and the
Consumer Price Index, a general measure of inflation. The figures
accompanying each graph shows average annual total return for the Fund for
the designated periods.

Comparison of Fund performance to widely used indices is imperfect, because
the indices do not reflect the laddered maturity strategy each of the fixed
income Funds uses. Each index shown attempts to model the total return of a
constant maturity bond portfolio, including bonds from throughout the United
States. Each index also assumes no trading costs for buying and selling
bonds, no custodial or accounting costs, and coupons are immediately
reinvested at no transactional cost. Consequently, the reader should remain
aware of the inherent limitations in comparing a theoretical index to actual
results of a Fund portfolio.

In general, interest rate decreases in 1997 have led to higher bond prices
and falling bond yields. Five, ten and 30-year treasury bond prices have
increased by 0.72%, 2.00% and 4.31%, respectively, between October 1, 1996
and September 30, 1997. Municipal bond prices also increased over calendar
year 1997, with the Bond Buyer 40 Bond Index of long-term bonds rising by
3.75% over the same period of time. The net asset values of the Limited
Term National Fund and the Limited Term California Fund each increased by
1.01% between July 1, 1996 and June 30, 1997, reflecting these influences.
The net asset value of the Intermediate National Fund similarly increased
between October 1, 1996 and September 30, 1997 by about 1.81% and the net
asset values of the Government Fund and the Income Fund increased slightly
over the same period. While the net asset values of all of the fixed income
Funds rose, the dividend yields of all of those Funds fell slightly. If
interest rates continue to fall, the net asset values of all of the fixed
income Funds should continue to rise, but the dividend yields would be
expected to decrease.

Limited Term National Fund
- --------------------------
Index Comparison

Compares performance of the Limited Term National Fund Class I shares, the
Lehman 5-year General Obligation Bond Index and the Consumer Price Index for
the period July 5, 1996 to June 30, 1997. On June 30, 1997 the weighted
average securities ratings of the Index and the Fund were AA and AA,
respectively, and the weighted average portfolio maturities of the Index and
the Fund were 4.9 years and 3.5 years, respectively. Past performance of
the Index and the Fund may not be indicative of future performance.

<TABLE> <This appears as a graph in the prospectus.>
FUND Lehman CPI
I Shares 5 Yrs.
-------- --------- ---------
<S> <C> <C> <C>
7/5/96 $10,000 $10,000 $10,000
7/31/96 10,119 10,066 10,030
8/31/96 10,147 10,087 10,050
9/30/96 10,220 10,163 10,080
10/31/96 10,285 10,257 10,110
11/30/96 10,382 10,400 10,141
12/31/96 10,386 10,384 10,171
1/31/97 10,422 10,412 10,181
2/28/97 10,489 10,486 10,212
3/31/97 10,439 10,368 10,222
4/30/97 10,475 10,420 10,232
5/31/97 10,558 10,533 10,243
6/30/97 10,642 10,626 10,253
</TABLE>

I Shares Average Annual Total Return
From Inception (7/5/96): 6.42%
6
<PAGE>
Limited Term California Fund
- ----------------------------
Index Comparison

Compares performance of the Limited Term California Fund Class I shares, the
Lehman 5-year General Obligation Bond Index and the Consumer Price Index for
the period April 1, 1997 to June 30, 1997. On June 30, 1997 the weighted
average securities ratings of the Index and the Fund were AA and AA,
respectively, and the weighted average portfolio maturities of the Index and
the Fund were 4.9 years and 3.9 years, respectively. Past performance of
the Index and the Fund may not be indicative of future performance.

<TABLE> <This appears as a graph in the prospectus.>
FUND Lehman CPI
A Shares 5 Yrs.
-------- --------- ---------
<S> <C> <C> <C>
4/01/97 $10,000 $10,000 $10,000
4/30/97 10,032 10,050 10,010
5/31/97 10,127 10,160 10,020
6/30/97 10,208 10,249 10,030
</TABLE>

I Shares Average Annual Total Return
From Inception (4/1/97): 2.07%

Intermediate National Fund
- --------------------------
Index Comparison

Compares performance of the Intermediate National Fund Class I shares, the
Merrill Lynch Municipal Bond (7-12 Year) Index and the Consumer Price Index
for the period July 5, 1996 to September 30, 1997. On September 30, 1997,
the weighted average securities ratings of the Index and the Fund were AA
and A+, respectively, and the weighted average portfolio maturities of the
Index and the Fund were 9.5 years and 7.3 years, respectively. Past
performance of the Index and the Fund may not be indicative of future
performance.

<TABLE> <This appears as a graph in the prospectus.>
FUND ML Muni CPI
I Shares 7-12 Yrs.
-------- --------- -------
<S> <C> <C> <C>
7/5/96 10,000 10,000 10,000
7/31/96 10,164 10,107 10,030
8/31/96 10,195 10,113 10,050
9/30/96 10,311 10,206 10,080
10/31/96 10,404 10,324 10,110
11/30/96 10,521 10,486 10,141
12/31/96 10,497 10,464 10,171
1/31/97 10,511 10,490 10,181
2/28/97 10,590 10,568 10,212
3/31/97 10,526 10,440 10,222
4/30/97 10,589 10,497 10,232
5/31/97 10,692 10,676 10,243
6/30/97 10,804 10,787 10,253
9/30/97 11,040 11,116 10,314
</TABLE>

Average Annual Total Return
I Shares
One year ended 9/30/97: 7.07%
From Inception (7/5/96): 8.32%
7

<PAGE>
Government Fund
- ---------------
Index Comparison

Compares performance of the Government Fund Class I shares, the Lehman
Brothers Intermediate Government Bond Index, and the Consumer Price Index
for the period July 5, 1996 to September 30, 1997. On September 30, 1997,
the weighted average securities ratings of the Index and the Fund were AAA
and AAA, respectively, and the weighted average portfolio maturities of the
Index and the Fund were 3.8 years and 3.7 years, respectively. Past
performance of the Index and the Fund may not be indicative of future
performance.

<TABLE> <This appears as a graph in the prospectus.>
FUND Lehman CPI
I Shares Government
-------- ---------- ---------
<S> <C> <C> <C>
7/5/96 10,000 10,000 10,000
7/31/96 10,116 10,031 10,030
8/31/96 10,131 10,042 10,050
9/30/96 10,245 10,172 10,080
10/31/96 10,385 10,338 10,110
11/30/96 10,501 10,463 10,141
12/31/96 10,464 10,407 10,171
1/31/97 10,504 10,447 10,181
2/28/97 10,525 10,463 10,212
3/31/97 10,488 10,404 10,222
4/30/97 10,588 10,521 10,232
5/31/97 10,654 10,603 10,243
6/30/97 10,755 10,694 10,253
9/30/97 10,989 10,968 10,314
</TABLE>
Average Annual Total Return
I Shares
One year ended 9/30/97: 7.26%
From Inception (07/05/96): 7.91%

Income Fund
- -----------
Index Comparison

Compares performance of the Income Fund Class I shares, the Lehman Brothers
Intermediate Government Corporate Bond Index, and the Consumer Price Index
for the period July 5, 1996 to September 30, 1997. On September 30, 1997,
the weighted average securities ratings of the Index and the Fund were A and
AA, respectively, and the weighted average portfolio maturities of the Index
and the Fund were 4.3 years and 4.8 years, respectively. Past performance
of the Index and the Fund may not be indicative of future performance.

<TABLE> <In the prospectus, this table appears as a graph>
FUND Lehman CPI
I Shares Government
-------- ---------- ---------
<S> <C> <C> <C>
7/5/96 $10,000 $10,000 $10,000
7/31/96 10,123 10,030 10,030
8/31/96 10,230 10,038 10,050
9/30/96 10,397 10,178 10,080
10/31/96 10,624 10,358 10,110
11/30/96 10,801 10,494 10,141
12/31/96 10,730 10,427 10,171
1/31/97 10,720 10,468 10,181
2/28/97 10,742 10,488 10,212
3/31/97 10,670 10,415 10,222
4/30/97 10,737 10,538 10,232
5/31/97 10,857 10,626 10,243
6/30/97 10,969 10,723 10,253
9/30/97 11,208 11,012 10,314
</TABLE>

Average Annual Total Return
I Shares
One year ended 9/30/97: 7.80%
From Inception (07/05/96): 9.64%

8
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES - IN GENERAL

Primary Objectives

The primary investment objective of the Municipal Funds is to obtain,
through
investment in a professionally managed portfolio of Municipal Obligations,
as
high a level of current income exempt from federal income tax as is
consistent, in the view of TMC, with preservation of capital. Limited Term
California Fund will invest primarily in Municipal Obligations originating
in
California with the objective of having interest dividends paid to
individual
shareholders exempt from California personal income taxes. The primary
investment objective of the Taxable Income Funds is to obtain, through
investment in a professionally managed portfolio of fixed income
obligations,
as high a level of current income as is consistent, in the view of TMC, with
safety of capital. The objective of Value Fund is to obtain long-term
capital appreciation by investing mainly in domestic equity securities
selected on a value basis, and by investing to a lesser extent in preferred
stocks, domestic debt securities and foreign equity and debt securities.

Income from the Municipal Funds which is otherwise exempt from federal
income
tax may be subject to the alternative minimum tax, and distributions from
gains attributable to market discount on portfolio securities is treated as
ordinary income for federal income tax purposes. The objective of the
Municipal Funds and the Taxable Income Funds to preserve capital may
preclude
these Funds from obtaining the highest yields available.

Thornburg Management Company, Inc. (TMC) actively manages the portfolios of
the Municipal Funds and the Taxable Income Funds in attempting to meet those
Funds' primary investment objectives. Investment decisions are based upon
general economic and financial trends, such as domestic and international
economic development, outlooks for securities markets, interest rates and
inflation, the supply and demand for debt securities, and other factors.
The
Funds' portfolios are determined by individual security analyses, and TMC's
credit analysts actively monitor the credit quality of the Funds'
portfolios. Each of the Municipal Funds and the Taxable Funds will seek to
enhance its
income by taking advantage of yield disparities, trends or other factors in
the fixed income markets. Although each of these Funds ordinarily will
acquire securities for investment rather than for realization of gains on
market fluctuations, a Fund may dispose of any security prior to its
scheduled maturity to enhance income or reduce loss, to change the
portfolio's average maturity, or to otherwise respond to current market
conditions. In addition, the Funds may utilize other techniques, discussed
below, to enhance a Fund's investment income.

TMC also actively manages Value Fund, investing in securities selected on a
value basis using traditional and additional fundamental research and
valuation methods. TMC also may use additional investment techniques,
discussed below, to increase or decrease its exposure to other factors which
affect securities values. The Fund is designed for those who seek capital
appreciation from a conservative style of investing in equities, and when
appropriate, some fixed income securities. Although values of equity
securities are more volatile, these securities historically have shown
greater growth potential than other types of securities.

Secondary Objectives

The secondary objective of each of the Municipal Funds and the Taxable
Income
Funds is to minimize expected fluctuations in net asset value relative to
longer intermediate and long-term bond portfolios. Because the magnitude of
the changes in market value of interest bearing obligations ordinarily is
greater for obligations of longer terms, each Fund believes that it can
reduce the magnitude of fluctuations in the values of its assets by limiting
its weighted average maturity. Limited Term National Fund, Limited Term
California Fund, Government Fund and Income Fund each will maintain a
portfolio having a dollar-weighted average maturity of normally not more
than
9
<PAGE>
five years, with the objective of reducing fluctuations in its net asset
value relative to bond portfolios with longer average maturities while
expecting lower yields than those received on portfolios with longer average
maturities. Intermediate National Fund will maintain a portfolio having a
dollar-weighted average maturity of normally three to ten years, with the
objective of reducing fluctuations in net asset value relative to long-term
bond portfolios. There is no limitation on the maturity of any specific
security any of these Funds may purchase, subject to the limitation on the
average portfolio maturity of each Fund. Each Fund's dollar-weighted
average
maturity may be lowered for temporary defensive purposes if conditions or
expectations for the behavior of interest rates indicate that a lower
average
maturity will be advantageous. Such conditions could include increasing
inflation or a market in which short-term obligations temporarily have
higher
yields than longer-term obligations. TMC also will attempt to minimize
principal fluctuations in the Funds' portfolios through, among other things,
diversification, careful credit analysis and security selection.

Some policies of each of the Funds are fundamental policies, that is, are
subject to change only with shareholder approval. For example, the primary
objective of each Fund is a fundamental policy of that Fund, and the
secondary objective for each of the Municipal Funds and the Taxable Income
Funds also is a fundamental policy. All policies and restrictions, other
than those identified as fundamental, may be changed without shareholder
approval. Policies and limitations are considered at the time of purchase;
the sale of investments is not required in the event of a subsequent
circumstances.

INVESTMENT POLICIES AND RISKS
OF THE MUNICIPAL FUNDS

The Municipal Funds will pursue their primary objective by investing in a
portfolio of investment grade or equivalent obligations which are issued by
states and state agencies, and local governments and agencies, and by United
States territories and possessions ("Municipal Obligations"). Municipal
Obligations are discussed on page 11 under the caption "Municipal
Obligations," and investment grade ratings are discussed on page 19 under
the caption "Securities Ratings and Investment Quality".

Except to the extent the Municipal Funds are invested in temporary
investments for defensive purposes, each Municipal Fund's policy under
normal
conditions is to invest 100% of its net assets in Municipal Obligations. As
a fundamental policy which may not be changed without a vote of a Municipal
Fund's shareholders, each Municipal Fund must normally invest at least 80%
of its net assets in Municipal Obligations. Under normal conditions,
Limited Term California Fund will invest 100%, and as a matter of
fundamental policy, will invest at least 65% of its total assets in
Municipal Obligations originating in California. The Municipal Funds may
purchase obligations issued by or on behalf of territories or possessions of
the United States and their agencies and instrumentalities.

Each Municipal Fund has reserved the right to invest up to 20% of its net
assets in "temporary investments" in taxable securities (of comparable
quality to the tax-exempt investments) that would produce interest not
exempt
from federal income tax. Such temporary investments, which may include
repurchase agreements with dealers, banks or recognized financial
institutions that in the opinion of TMC represent minimal credit risk, may
be
made due to market conditions, pending investment of idle funds or to afford
liquidity. Such investments are, like any investment, subject to market
risks and fluctuations in value. In addition, each Fund's temporary taxable
investments may exceed 20% of its net assets when made for defensive
purposes
during periods of abnormal market conditions. None of the Municipal Funds
expect to find it necessary to make temporary investments in taxable
investments.

Each Municipal Fund is subject to the restriction that it will not purchase
any investment or enter into any transaction if as a result more than 10% of
the Fund's net assets are illiquid investments. No Municipal Fund will
10
<PAGE>
borrow money, except for emergency or temporary purposes, and then only in
an
amount not exceeding 5% of the Fund's total assets at the time of borrowing.
Investment policies are subject to additional restrictions, which are
described in the Statement of Additional Information.

Municipal Obligations

The yields on Municipal Obligations are dependent on a variety of factors,
including the condition of the general money market and the Municipal
Obligation market, the size of a particular offering, the maturity of the
obligation and the rating of the issues. The market value of outstanding
Municipal Obligations will vary with changes in prevailing interest rates
and as a result of changing evaluations of the ability of their issuers to
meet interest and principal payments. Variations in market value of
Municipal Obligations held in a Fund's portfolio arising from these or other
factors will cause changes in the net asset value of its shares. Municipal
Obligations often grant the issuer the option to pay off the obligation
prior
to its final maturity. Prepayment of Municipal Obligations may reduce the
expected yield on invested funds, the net asset value of the Fund, or both
if
interest rates have declined below the level prevailing when the obligation
was purchased. If interest rates have declined, reinvestment of the
proceeds
from the prepayment of Municipal Obligations may result in a lower yield to
the Fund. In addition, the federal income tax treatment of gains from
market
discount as ordinary income may increase the price volatility of Municipal
Obligations when interest rates rise.

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

Variable Rate Securities; Inverse Floaters; and
Demand Instruments

Any Municipal Fund may purchase variable rate Municipal Obligations.
These variable rate securities bear rates of interest that are adjusted
periodically according to formulas intended to reflect market rates of
interest, and these may include "inverse floaters," whose rates vary
inversely with changes in market rates of interest. The values of inverse
floaters will tend to be more volatile than fixed rate municipal securities
having similar credit quality, redemption provisions, and maturity. None
of the Municipal Funds will invest more than 10% of its total assets in
securities whose rates vary inversely with changes in market rates of
interest. Each Fund also may purchase variable rate demand instruments and
also may purchase fixed rate municipal demand instruments either in the
public market or privately from banks, insurance companies and other
financial institutions. These instruments provide for periodic adjustment
of
11
<PAGE>
the interest rate paid to the holder. The "demand" feature permits the
holder to demand payment of principal and interest prior to the final stated
maturity, either from the issuer or by drawing on a bank letter of credit, a
guarantee or insurance issued with respect to the instrument.

Municipal Leases

Any of the Municipal Funds may invest in Municipal Leases. These
obligations
are used by state and local governments to acquire a wide variety of
equipment and facilities. Many such obligations include "non-appropriation"
clauses which provide that the governmental issuer has no obligation to make
payments unless money is appropriated for that purpose. If an issuer
stopped
making payment on a Municipal Lease held by a Fund, the Lease would lose
some
or all of its value. Often, a Fund will not hold the obligation directly,
but will purchase a "participation interest" in the obligation, which gives
the Fund an undivided interest in the underlying Municipal Lease. Some
Municipal Leases may be illiquid under certain circumstances, and TMC will
evaluate the liquidity of each Municipal Lease upon its acquisition by a
Fund
and periodically while it is held.

When Issued Securities

Any of the Municipal Funds may purchase securities on a when-issued or
forward delivery basis, for payment or delivery at a later date. The price
and yield are generally fixed on the date of the purchase commitment.
During
the period between purchase and settlement, the market value of the security
may be more or less than its purchase price.

Special Considerations Affecting
Limited Term California Fund

Because Limited Term California Fund will purchase Municipal Obligations
originating primarily in California, an investment in Limited Term
California
Fund may be riskier than an investment in either Limited Term National Fund
or Intermediate National Fund, which purchase Municipal Obligations from
throughout the United States. Economic developments in California, although
improving, could impair the ability of certain California state and local
issuers to pay their obligations in some situations. Taxpayer initiatives,
weakness in tax collections and reallocation of certain revenues previously
available to county and local governments could reduce the revenues
available
to some California issuers. The Statement of Additional Information
includes
a more detailed discussion of California state fiscal matters.

INVESTMENT POLICIES AND RISKS
OF THE TAXABLE INCOME FUNDS

Government Fund will pursue its primary objective by investing mainly in
obligations issued or guaranteed by the United States Government or by its
agencies or instrumentalities and in participations in such obligations or
in
repurchase agreements secured by such obligations. Income Fund will seek
to achieve its primary investment objective by investing in investment grade
short and intermediate maturity bonds and asset backed securities such as
mortgage backed securities and collateralized mortgage obligations.
Income Fund also may invest in or utilize other investment strategies to
hedge market risks, manage cash positions or to enhance potential gain. No
assurance can be given that the Funds will achieve their objective. The
types
of securities the Taxable Funds may invest in are discussed on page 13 under
the caption "Taxable Obligations," and investment grade ratings are
discussed
under the caption "Securities Ratings and Credit Quality".

Each Taxable Income Fund's name derives from its policy of maintaining an
overall portfolio of investments with a dollar-weighted average maturity of
normally not more than five years, with the objective of reducing
fluctuations in the Fund's net asset value per share compared to longer
maturity portfolios. Normally, the Funds expect to offer greater price
stability than a higher yielding long-term bond fund and higher yields than
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most short-term investments. Historically, intermediate-term government
bonds enjoyed higher returns, compounded annually over the period 1926-1995,
as compared to long-term government bonds and 90-day U. S. Treasury Bills.
Intermediate-term bonds outperformed longer term issues because
intermediate-term bonds did not suffer the large capital losses which befell
higher yielding long-term bonds when bond yields rose. Intermediate-term
bonds, which have less price stability than short-term obligations,
nonetheless outperformed short-term bills because the yield on
intermediate-term obligations typically is higher than the yield on
short-term obligations. The combination of price stability and relatively
high yield enjoyed by intermediate-term bonds caused these bonds to
outperform normally higher yielding long-term bonds and normally more stable
short-term bills during the periods described. The relationship between
interest rates and the values of obligations, as shown by the foregoing
study, applies to all types of debt securities and has been consistently
demonstrated in the portfolios managed by TMC and the markets it has
observed. However, no assurance can be given that each Taxable Income
Fund's
short and intermediate-term obligations will perform as well in the future
as
intermediate-term government bonds have in the past.

Counsel to the Funds has advised that in their view shares of Government
Fund
are a legal investment for, among other investors, commercial banks and
credit unions chartered under the laws of the United States. This advice is
based upon a review of this Prospectus and the Statement of Additional
Information, and upon counsel's receipt of undertakings by TMC and Thornburg
Investment Trust respecting investment policies. In addition, Thornburg
Investment Trust believes that the Government Fund is currently a legal
investment for savings and loan associations and commercial banks chartered
under the laws of certain states.

Government Fund will not purchase any investment or enter into any
transactions if as a result more than 10% of the Fund's net assets are
illiquid investments; the comparable restriction applicable to Income Fund
is
15%. Government Fund will not borrow money, except for emergency or
temporary purposes, and then only in an amount not exceeding 5% or 10% if
the
borrowing is from banks. Income Fund will not borrow money, except as a
temporary measure, and then only in an amount not exceeding 5% of total
assets unless the borrowing is from banks, in which case the limitation is
10%. The Taxable Income Funds are subject to additional restrictions, which
are described in the Statement of Additional Information.

Taxable Obligations

Both Taxable Income Funds buy the following types of securities. Securities
and techniques specific to Government Fund or to Income Fund are detailed
under the captions "Government Fund Investment Policies" and "Income Fund
Investment Policies".

U. S. Government Securities -
Government Fund and Income Fund

U. S. Government securities include U. S. Treasury obligations such as U. S.
Treasury Bills, U. S. Treasury Notes, and U. S. Treasury Bonds, with various
interest rates, maturities and dates of issuance. These U. S. Treasury
securities are direct obligations of the U. S. Treasury, and are backed by
the full faith and credit of the U. S. Government.

U. S. Government Agency Obligations

U. S. Government agency obligations include, but may not be limited to,
obligations issued by the Banks for Cooperatives; the Export-Import Bank of
the U. S.; the Farmers Home Administration; the Federal Deposit Insurance
Corporation; the Federal Financing Bank; the Federal Home Loan Banks; the
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<PAGE>
Government National Mortgage Association (GNMA); the Federal Home Loan
Mortgage Corporation (FHLMC); the Federal National Mortgage Association
(FNMA); the Federal Housing Administration; the Federal Intermediate Credit
Banks; the Federal Land Banks; the General Services Administration; the
Small
Business Administration; the Student Loan Marketing Association; and the
U.S.
Maritime Administration. Obligations issued by the Farmers Home
Administration, Federal Financing Bank, General Services Administration, and
the Small Business Administration are backed by the full faith and credit of
the United States or the agency has the authority to borrow from the U. S.
Treasury. Other agency obligations are supported by discretionary authority
of the Treasury to purchase obligations of the agency.

GNMA Certificates and Other Asset-Backed Securities

GNMA certificates and other mortgage passthrough securities issued by the
FHLMC and the FNMA evidence interests in specific pools of mortgage loans.
The securities provide shareholders with payments consisting of both
interest
and principal as the mortgages in the underlying mortgage pools are paid
off. Variations in interest rates and other factors may result in prepayment
of
some mortgages underlying these certificates, so that the resulting term of
the certificates will change. During periods of rising interest rates,
mortgage-backed securities may have a greater risk of capital depreciation
because of decreased prepayments and increased effective maturity, and
during
periods of declining interest rates these securities may have less potential
for capital appreciation because of increased prepayments. TMC will
continually evaluate any investment in these certificates in light of market
conditions and each Fund's policy of maintaining a portfolio normally having
a dollar-weighted average maturity or estimated average life of not more
than
five years.

Repurchase Agreements

When one of the Taxable Income Funds purchases securities, it may enter into
a repurchase agreement with the seller in which the seller agrees, at the
time of sale, to repurchase the security at a mutually agreed-upon time and
price. The resale price will be in excess of the purchase price reflecting
an agreed-upon market rate effective for the period of time the Fund's money
will be invested in the securities, and will not be related to the coupon
rate of the purchased securities. At the time the Fund enters into a
repurchase agreement, the value of the underlying securities, including
accrued interest, will be equal to or exceed the value of the repurchase
agreement, and for repurchase agreements which mature in more than one day,
the seller will agree to furnish additional security if the value of the
underlying security falls below the value of the repurchase agreement. If
the seller enters a bankruptcy or other insolvency proceeding, or the seller
fails to repurchase the underlying security as agreed, the Fund could
experience losses, including loss of rights to the security. The Government
Fund will not enter into a repurchase agreement if, as a result, more than
10% of the value of its net assets would then be invested in repurchase
agreements maturing in more than seven days and other securities which are
considered illiquid. The Income Fund will not enter into a repurchase
agreement or purchase any security deemed illiquid if as a result, more than
15% of the value of its net assets would be invested in repurchase
agreements maturing in more than seven days and other securities which are
considered illiquid.

Reverse Repurchase Agreements

Either of the Taxable Income Funds may enter into reverse repurchase
agreements to obtain short-term liquidity. In such a transaction the Fund
would sell a security to a purchaser and agree to repurchase the security in
the future. The Funds will enter into reverse repurchase agreements only
with dealers, banks or recognized financial institutions. These agreements
are subject to the risk that the underlying security will decline in value
during the period when the Fund is obligated to repurchase it. If a Fund
enters into any such transaction, it will deposit high grade liquid debt
14
<PAGE>
assets in a segregated account with its custodian in an amount sufficient to
meet the Fund's obligations to the purchaser. Neither Fund will enter into
any reverse repurchase agreement if, as a result, more than 5% of its total
assets would be subject to such obligations.

Dollar Roll Transactions

The Taxable Income Funds may enter into dollar roll transactions with
selected banks and broker-dealers. Dollar roll transactions are treated as
reverse repurchase agreements for purposes of a Fund's borrowing
restrictions
and consist of the sale by the Fund of mortgage-backed securities, together
with a commitment to purchase similar, but not identical, securities at a
future date, at the same price. If a Fund enters into any such transaction,
it will deposit high grade liquid debt assets in a segregated account with
the custodian in an amount sufficient to meet the Fund's obligations to the
purchaser. A Fund is paid a fee as consideration for entering into the
commitment to purchase. If the broker-dealer to whom the Fund sells the
security underlying a dollar roll transaction becomes insolvent, the Fund's
right to purchase or repurchase the security may be restricted.
Additionally,
the value of the security may change adversely over the term of the dollar
roll and the return earned by the Fund with the proceeds of a dollar roll
may
not exceed transaction costs.

Securities Lending

The Taxable Income Funds may from time to time lend securities on a short-
term basis to banks, brokers, dealers and certain financial institutions and
receive as collateral cash, government securities, or irrevocable bank
letters of credit. The borrowers will be required to deposit and maintain
collateral at least equal to 102% of the current value of the loaned
securities plus accrued interest. Securities loans will not be made by a
Fund if as a result the aggregate of all such outstanding loans exceeds one-
third of the value of the Fund's total assets. The Fund will continue to be
entitled to the interest payable on the loaned securities and will either
receive as income a portion of the interest on the investment of any cash
loan collateral or, in the case of collateral other than cash, a fee
negotiated with the borrower. The terms of these loans will provide that
they are terminable at any time. Loans of securities involve risks of delay
in receiving additional collateral or in recovering the securities loaned or
even loss of rights in the collateral in the event of the insolvency of the
borrower of the securities.

When-Issued Securities

The Taxable Income Funds may purchase securities on a when-issued or forward
delivery basis, for payment and delivery at a later date. The price and
yield are generally fixed on the date of the purchase commitment. During
the
period between purchase and settlement, no interest accrues to the
purchasing
Fund. At the time of settlement, the market value of the security may be
more or less than the purchase price.

Government Fund - Investment Policies

The Government Fund will invest at least 65% of its total assets in
obligations issued or guaranteed by the United States Government or its
agencies or instrumentalities, and will invest at least 80% of its total
assets in such obligations and in readily marketable participations in such
obligations or in repurchase agreements secured by such obligations.
Although the Fund will acquire obligations issued or guaranteed by the U. S.
Government and its agencies and instrumentalities, neither the Fund's net
asset value nor its dividends are so guaranteed.

Participations, CMOs

To facilitate its investment in any of the types of obligations which the
Government Fund may acquire, the Fund may purchase "participations" in any
of
these obligations. Participations are undivided interests in pools of
15
<PAGE>
securities which are assembled by certain banks or other responsible
persons,
such as securities broker/dealers and investment banking houses, where the
underlying government credit support passes through or is otherwise
available
to the participants or the trustee for all participants. Similarly, the
Fund
may acquire collateralized mortgage obligations (CMOs), which are
obligations
issued by a trust or other entity organized to hold a pool of U.S.
Government
insured mortgage-backed securities (such as GNMA certificates) or mortgage
loans. The Fund will acquire a CMO when TMC believes that the CMO is more
attractive than the underlying securities in pursuing the Fund's primary and
secondary investment objectives. Participations and privately issued CMOs
are not considered U.S. Government securities, and are not considered part
of
the 65% of the total assets of the Government Fund which will be invested in
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.

Other Securities

Government Fund may under certain market conditions invest up to 20% of
its assets in (i) time certificates of deposit maturing in one year or less
after the date of acquisition which are issued by United States banks having
assets of one billion dollars or more, or (ii) time certificates of deposit
insured as to principal by the Federal Deposit Insurance Corporation. If
any
certificate of deposit (whether insured in whole or in part) is non-
negotiable, and it matures in more than seven days, it will be considered
illiquid and subject to the Fund's fundamental investment restriction that
no
more than 10% of the Fund's net assets will be placed in illiquid
investments.

Income Fund - Investment Policies

In general, the Income Fund may purchase securities permissible for the
Government Fund. The Income Fund also may invest in other types of debt
securities, so long as at least 65% of its net assets are invested in a
managed portfolio of securities consisting of:

* U.S. Government securities, including bonds, notes, and bills issued
by the U.S. Treasury, and securities issued guaranteed by agencies
and instrumentalities of the U.S. Government;
* Corporate debt securities, such as bonds, notes and debentures;
* Mortgage-backed securities;
* Other asset-backed securities;
* Municipal securities;
* Money market instruments which are comprised of commercial paper,
bank obligations (i.e., certificates of deposit and bankers'
acceptances) and repurchase agreements;
* Privately-placed securities (restricted securities); and
* Foreign securities, including non-U.S. dollar-denominated securities
and U.S. dollar-denominated debt securities issued by foreign
issuers
and foreign branches of U.S. banks.

Municipal Securities

Income Fund may invest in municipal securities, which include obligations
issued by states, territories and possessions of the United States, and
their
political subdivisions, agencies and instrumentalities. Municipal
securities
may be "general obligation" bonds or "revenue bonds." General obligation
bonds are backed by the credit of the issuing political subdivision or
agency, and revenue bonds are repaid from the revenues derived from a
specific project such as a waste treatment plant or stadium. Although
investments in municipal obligations will be made subject to the Fund's
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<PAGE>
emphasis on purchases of investment grade securities (described on page 19
under "Securities Ratings and Credit Quality"), municipal obligations are
subject to the provisions of bankruptcy, insolvency and other laws affecting
the rights and remedies of creditors. In addition, these obligations could
become subject to actions by state legislatures or voter referenda extending
the time for repayment of principal or imposing other constraints upon
enforcement of the obligations or upon political subdivisions to levy taxes
to pay the obligations.

Foreign Securities

While Income Fund generally emphasizes investments in U. S. Government
securities and other issuers domiciled in the United States, it may invest
in
foreign securities of the same types and quality as the domestic securities
in which it may invest. It may do so when TMC anticipates that the
performance of foreign securities offers more potential than domestic
alternatives. Foreign securities may be denominated either in U. S. dollars
or foreign currencies.

Income Fund may also invest in instruments offered by brokers which
combine forward contracts, options and securities in order to reduce foreign
currency exposure. Income Fund may enter into multiple futures, options
and foreign currency transactions or a combination of these transactions,
instead of a single transaction, as part of a hedging strategy.

Investments in foreign securities involve special risks due to more limited
information, higher brokerage costs, different accounting standards, thinner
trading markets and the likely impact of foreign taxes on the yield from
debt
securities. They may also entail other risks, such as the possibility of
one
or more of the following: imposition of dividend or interest withholding or
confiscatory taxes; currency blockages or transfer restrictions;
expropriation, nationalization or other adverse political or economic
developments; less government supervision and regulation of securities
exchanges, brokers and listed companies; and the difficulty of enforcing
obligations in other countries. Purchases of foreign securities are usually
made in foreign currencies and, as a result, the Income Fund may incur
currency conversion costs and may be affected favorably or unfavorably by
changes in the value of foreign currencies against the U. S. dollar.
Further, it may be more difficult for the Income Fund's agents to keep
currently informed about corporate actions which may affect the prices of
portfolio securities. Communications between the United States and foreign
countries may be less reliable than within the United States, thus
increasing the risk of delayed settlements of portfolio transactions or loss
of certificates for portfolio securities. Income Fund's ability and
decisions to purchase and sell portfolio securities may be affected by laws
or regulations relating to the convertibility and repatriation of assets.
These risks may be more acute in the case of developing countries.

Other Investment Strategies

Income Fund may, but is not required to, utilize various other investment
strategies described below to hedge various market risks such as the
effective maturity or duration of fixed-income securities, or to enhance
potential gain. Such strategies are generally accepted by modern portfolio
managers and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as
new instruments and strategies are developed or regulatory changes occur.

In the course of pursuing these investment strategies, Income Fund may
purchase and sell exchange-listed and over-the-counter put and call options
on securities, financial futures, equity and fixed-income indices and other
financial instruments, purchase and sell financial futures contracts, enter
into various interest rate transactions such as swaps, caps, floors or
collars, and enter into various currency transactions such as currency
17
<PAGE>
forward contracts, currency futures contracts, currency swaps or options on
currency or currency futures (collectively, all the above are called
"Strategic Positions"). Strategic Positions may be used to attempt to
protect against possible changes in the market value of securities held in
or
to be purchased for Income Fund's portfolio resulting from securities
markets or currency exchange rate fluctuations, to protect Income Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of Income Fund's portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchasing
or selling particular securities. The Fund may manage its portfolio
maturity
or duration by using options, futures and swaps to acquire and dispose of
specific securities having maturities which are then considered desirable in
managing the Fund's maturity or duration. "Duration" is a measure of an
obligation's life, based upon the present value of the obligor's payments of
principal and interest, and is usually shorter than the obligation's
maturity. Some Strategic Positions may also be used to enhance potential
gain, although no more than 5% of the Fund's assets will be committed to
Strategic Positions entered into for purposes other than bona fide hedging,
risk management or portfolio management. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, because use of any
Strategic Transaction is a function of numerous variables including market
conditions. The ability of the Income Fund to utilize these Strategic
Positions successfully will depend on TMC's ability to predict pertinent
market movements, which cannot be assured. Income Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments.

Strategic Positions involve certain risks including possible default by the
other party to the transaction, illiquidity and, to the extent TMC's view as
to certain market movements is incorrect, the risk that the use of such
Strategic Positions could result in losses greater than if they had not been
used. Selling put and call options may result in losses to Income Fund,
force the purchase or sale of portfolio securities at inopportune times or
for prices higher than (in the case of put options) or lower than (in the
case of call options) current market values, limit the amount of
appreciation
the Fund can realize on its investments or cause the Fund to hold a security
it might otherwise sell. The use of currency transactions can result in
Income Fund incurring losses as a result of a number of factors including
the
imposition of exchange controls, suspension of settlements, or the inability
to deliver or receive a specified currency. The use of options and futures
transactions entails certain other risks. In particular, the variable
degree
of correlation between price movements of a futures contract and price
movements in the related portfolio position of the Fund creates the
possibility that losses on the hedging instrument may be greater than gains
in the value of the Fund's position.

In addition, futures and options markets may not be liquid in all
circumstances, and over-the-counter options and certain other Strategic
Positions (e.g. caps and floors) are considered to be illiquid securities.
As
a result, in certain markets, Income Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options should tend to
minimize the risk of loss due to a decline in the value of the hedged
position, at the same time they tend to limit any potential gain resulting
from an increase in the position's value. Income Fund will not invest in
any
over-the-counter option, cap, rate swap, currency swap, floor or other
illiquid security, if, as a result of that investment, more than 15% of its
net assets would be invested in securities which are not readily marketable
by the Fund. The Fund will segregate cash or high grade liquid debt assets
sufficient to meet its obligation to purchase and deliver securities or
currencies under any futures contract or option or to pay any amount owed
upon the expiration of an index-based futures contract. Finally, the daily
margin requirements for futures contracts may create a greater ongoing
18
<PAGE>
potential financial risk than would purchases of options, where the exposure
is limited to the cost of the initial premium. Losses resulting from the
use
of Strategic Positions would reduce net asset value, and possibly income,
and
such losses could be greater than if the Strategic Positions had not been
utilized. The Strategic Positions that the Fund may use and some of their
risks are described more fully in the Income Fund's Statement of Additional
Information.

Covered Short Sales

Income Fund may make short sales of securities. It will only do so in
circumstances where it owns securities of the type sold, or securities
giving
it the right to obtain securities equivalent in kind and amount to the
securities sold. If the right is conditional, a sale may be made only upon
the same conditions, except in connection with arbitrage transactions. The
Fund may also, however, obtain such short-term credits as may be necessary
for the clearance of purchases and sales of securities.

Segregated Accounts

Income Fund may be required to segregate high grade debt assets in order to
provide coverage consistent with applicable regulatory policies on reverse
repurchase agreements, covered call and put options written by the Fund, to
cover forward foreign currency exchange contracts that require the Fund to
purchase or sell foreign currency for hedging purposes, or in an amount
equal
to the value of the instruments underlying any futures contracts and options
on futures.

SECURITIES RATINGS
AND CREDIT QUALITY

Each of the Municipal Funds' assets will normally consist of (1) securities,
or participation interests therein, that are rated at the time of purchase
within the four highest grades by Moody's Investors Service ("Moody's"),
Fitch Investors Service ("Fitch"), or Standard & Poor's Corporation ("S&P"),
(2) securities, or participation interests therein, that are not rated by a
rating agency, but are issued by obligors that, at the time of purchase,
either have other comparable debt obligations that are rated within the four
highest grades (Baa or BBB or better) by Moody's or S&P or Fitch or, in the
case of obligors whose obligations are unrated, are deemed by TMC to be
comparable to issuers having such debt ratings, and (3) cash. Government
Fund invests at least 65% of its total assets in obligations issued or
guaranteed by the U. S. Government or its agencies or instrumentalities, and
may invest in participations, repurchase agreements and other obligations
described above on page 11. Such obligations are not typically rated. At
least 65% of Income Fund's net assets will be invested in (1) obligations of
the U. S. Government, its agencies and instrumentalities, and in (2) debt
securities rated at the time of purchase in one of the three highest
categories of Standard & Poor's Corporation (AAA, AA or A) or Moody's
Investor's Service, Inc. (Aaa, Aa or A) or, if not rated, judged to be of
comparable quality by TMC. Income Fund will not invest in any debt security
rated at the time of purchase lower than BBB by Standard & Poor's or Baa by
Moody's or of equivalent quality as determined by TMC.

Securities rated in the described categories are described as "investment
grade," and are regarded as having a capacity to pay interest and repay
principal that varies from "extremely strong" to "adequate." According to
S&P, for example, BBB bonds normally exhibit adequate protection parameters,
although adverse economic conditions or other changes are more likely to
lead
to a weakened capacity compared to higher rated categories, and AAA bonds
exhibit extremely strong capacity. Securities rated Baa are regarded by
Moody's as having some speculative characteristics. Securities rated BBB by
Fitch are considered to have adequate capacity, although adverse changes in
economic conditions and circumstances are more likely to have an adverse
impact than for higher rated categories. Please see the Statement of
Additional Information for detailed descriptions of these ratings.
19

<PAGE>
If permitted to do so, the Municipal Funds will only buy (i) variable rate
demand instruments that are rated within the two highest grades of either
rating agency or, if unrated, are deemed by TMC to be of high quality and
minimal credit risk, (ii) commercial paper that is rated within the two
highest grades of a rating agency, and (iii) municipal notes that are rated
within the two highest grades of a rating agency or, if unrated, are deemed
by TMC to be of comparable quality to such rated municipal notes. To the
extent that unrated securities may be less liquid, there may be somewhat
greater risk in purchasing unrated securities, especially Municipal
Obligations, than in purchasing comparable, rated securities. If a Fund
experienced unexpected net redemptions, it could be forced to sell such
unrated securities at disadvantageous prices without regard to the
security's
investment merits, depressing the Fund's net asset value and possibly
reducing the Fund's overall investment performance.

Credit ratings do not reflect the risk that market values of fixed income
securities will fluctuate with changes in interest rates, and credit rating
firms may fail to change credit ratings in a timely fashion to reflect
events
subsequent to initial ratings. Accordingly, in addition to using credit
rating information, TMC subjects each issue under consideration for
investment to its own credit analysis in an effort to assess the issuer's
financial soundness. This analysis is performed on a continuing basis for
all issues held by a Fund, and TMC may determine to dispose of portfolio
securities upon a change in ratings or adverse events or market conditions
not reflected in ratings. TMC evaluates the credit quality of unrated
securities purchased by a Fund under the general supervision of the Fund's
Directors or Trustees, and determines the equivalency of unrated obligations
to rated obligations.

INVESTMENT POLICIES AND RISKS
OF VALUE FUND

General Investment Principles

Value Fund seeks long-term capital appreciation by investing in equity and
debt securities of all types. This goal is a fundamental policy of the Fund
and may be changed only with shareholder approval. The Fund expects to
invest its assets primarily in domestic equity securities selected on a
value
basis. However, the Fund may buy foreign equity and debt securities,
domestic debt securities and securities that are not currently paying
dividends, but which, in TMC's opinion, offer prospects for capital
appreciation.

The value of the Fund's investments varies based on many factors. Stock
values fluctuate in response to the activities of individual companies and
general market and economic conditions. The value of bonds fluctuates based
on changes in interest rates and in the credit quality of the issuer. In
general, bond prices rise when interest rates fall, and vice versa. TMC may
use various investment techniques to hedge the Fund's risks, but there is no
guarantee that these strategies will work as TMC intends. When you sell your
shares, they may be worth more or less than what you paid for them.

TMC intends to invest on an opportunistic basis, where in their opinion
there
is intrinsic value. Value Fund's principal focus will be on traditional,
value stocks. However, the portfolio may include stocks and other securities
that in TMC's opinion provide value in a broader or different context. Other
contexts would include growing companies with consistent results, when they
are selling below historic norms, as well as companies whose growth in
products and services reflects social and economic changes. The Fund will
typically buy the latter when they are out of favor. The relative
proportions
of these different types of securities will vary over time. The portfolio
ordinarily will reflect a bias towards certain stocks or industries when
those stocks or industries are depressed, reflecting unfavorable market
perceptions of company or industry fundamentals.
20

<PAGE>
TMC primarily uses individual company and industry analysis when making
investment decisions for Value Fund. The Fund will typically make equity
investments in the following three types of companies:

Companies which, in TMC's opinion, are financially sound companies with
well established businesses whose stock is selling at low valuations
relative to the companies' net assets or potential earning power. The
fortunes of this type of company are often cyclical, and these
companies
generally do well when the economy or their industry is doing well.
TMC's judgment in evaluating these companies, or the industries in
which
they operate, will likely be contrary to the popular perception of the
moment. These companies are often attractive candidates for corporate
takeovers or restructuring when no single person or group owns a
controlling interest.

Consistent growth companies when they are selling at valuations below
historic norms. Stocks in this category generally sell at premium
valuations. The attractive feature of companies of this type is steady
earnings and dividend growth. Typically, these companies have below
average risk because of their financial strength, high profitability
and
dominant industry position.

Rapidly growing companies that, in TMC's opinion, are in the process of
establishing a leading position in a product, service or market and
which TMC expects will grow, or continue to grow, at an above average
rate. The stock price of these smaller, less seasoned companies will
fluctuate more than the stock prices of the first two types of company
listed above. Under normal conditions the proportion of the Fund
invested in companies of this type will be modest when compared to the
proportion invested in cyclical or consistent growth companies.

TMC selects securities, including equity securities, for inclusion in the
Value Fund's investment portfolio based on total return potential. "Total
return" means all elements of return including dividends (or interest ) and
price appreciation. TMC believes that investments in undervalued stocks, in
addition to offering potential capital appreciation, will help limit the
Fund's exposure to loss under adverse market conditions.

Value, for purposes of the Fund's selection criteria, relates both to
current
and to projected measures. Among the specific factors considered by TMC in
identifying undervalued securities for inclusion in the Fund are:

* price/earnings ratio * undervalued assets

* price/sales ratio * relative earnings growth potential

* price to book value * industry growth potential

* price/cash flow ratio * industry leadership

* debt/capital ratio * dividend growth potential

* dividend yield * franchise value

* dividend history * potential for favorable
developments
* security and consistency
of revenue stream

The Value Fund may invest in the stock of issuers of any size, including
stocks of small, unseasoned issuers.

Debt securities will be considered for investment when TMC believes them to
be more attractive than equity alternatives. When analyzing debt security
alternatives, TMC will ordinarily consider the issuer's overall financial
strength as well as prevailing market conditions for debt securities as
opposed to equities.
21

<PAGE>
Securities and Investment Practices and Risks

Described below are certain investment practices Value Fund may use in
pursuing its investment objective, risks associated with those practices,
and
certain restrictions which apply to the Funds's investments. TMC may not
buy
all of these instruments or use all of these techniques to the full extent
permitted unless it believes that doing so will help the Fund achieve its
goal. Current holdings are described in the Fund's financial reports which
are sent to shareholders twice a year. For a free Statement of Additional
Information or financial report, call 800-847-0200.

Diversification. Diversifying a mutual fund's investment portfolio can
reduce
the risks of investing. This may include limiting the amount of money
invested in any one issuer or, on a broader scale, in any one industry.

Restrictions. With respect to 75% of its total assets, the Fund may not
invest more than 5% of its total assets at the time of purchase in any
one issuer. The Fund may not invest more than 25% of its total assets
at
the time of purchase in any one industry. These limitations do not
apply
to U.S. Government securities. These are fundamental limitations.

Equity Securities may include common stocks, preferred stocks, convertible
securities, warrants, ADRs (American Depository Receipts or GDR's),
partnership interests and publicly traded real estate investment trusts.
Common stocks, the most familiar type, represent an equity (ownership)
interest in a corporation. Although equity securities have a history of
long-term growth in value, their prices fluctuate based on changes in a
company's financial condition and on overall market and economic conditions.

Restrictions. With respect to 75% of total assets, the Fund may not own
more than 10% of the outstanding voting securities of a single issuer.

Investments in smaller companies. The Fund may invest in the stock or debt
securities of smaller or unseasoned issuers. Although investments in these
companies may offer greater prospects for appreciation, they involve
additional risks because of limited product lines, limited access to markets
and financial resources, and greater vulnerability to competition and
changes
in markets. Additionally, the value of these securities may fluctuate more,
and they may be more difficult to sell, particularly in declining markets.

Investments in Other Investment Companies. The Fund may invest in
securities
of closed end investment companies. Up to 5% of its total assets at the time
of purchase may be invested in any one investment company, provided that
after its purchase no more than 3% of that investment company's outstanding
stock is owned by the Fund. TMC will charge an advisory fee on the portion
of the Fund's assets that are invested in securities of other investment
companies. Thus shareholders will be paying a "double fee" on those assets
since the advisers of the investment companies also will be charging fees on
the same assets.

Debt Securities. The Fund may buy debt securities of any type. Bonds and
other debt instruments, including convertible debt securities, are used by
issuers to borrow money from investors. The issuer pays the investor a fixed
or variable rate of interest, and must repay the amount borrowed at
maturity.
Some debt securities, such as zero coupon bonds, do not pay current
interest,
but are purchased at a discount from their face values. Debt securities have
varying degrees of quality and varying levels of sensitivity to changing
interest rates. Longer-term debt securities are generally more sensitive to
interest rate changes than short term debt securities.
22

<PAGE>
Lower-quality debt securities (sometimes called "junk bonds" or "high yield
securities") are rated below investment grade by the primary rating
agencies,
and are often considered to be speculative. These securities involve
greater
risk of default or price changes due to changes in the issuer's
creditworthiness, or they may already be in default. The market prices of
these securities may fluctuate more than higher-quality securities and may
decline significantly in periods of general economic difficulty or in
response to adverse publicity or changes in investor perceptions.

Restrictions. The Fund may not invest more than 35% of its assets at
the
time of purchase in lower quality debt securities (those rated below
Baa
by Moody's or BBB by S&P, and unrated securities judged by TMC to be of
equivalent quality). Refer to the Statement of Additional Information
for a discussion of these ratings.

Foreign Securities and foreign currencies may involve additional risks.
Securities of foreign issuers, even if denominated in U.S. dollars, may be
affected significantly by fluctuations in the value of foreign currencies,
and the value of these securities in U.S. dollars may decline even if the
securities increase in value in their home country. Foreign securities also
are subject to greater political risk, including nationalization of assets,
confiscatory taxation, currency exchange controls, excessive or
discriminatory regulations, and restrictions on repatriation of assets and
earnings to the United States. In some countries, there may be political
instability or insufficient governmental supervision of markets, and the
legal protections for the Fund's investments could be subject to unfavorable
judicial or administrative changes. Further, governmental issuers may be
unwilling or unable to repay principal and interest when due, and may
require
that the terms for payment be renegotiated. Markets in some countries may
be
more volatile, and subject to less stringent investor protection and
disclosure requirements and it may be difficult to sell securities in those
markets. Moreover, the economies in many countries may be relatively
unstable because of dependence on a few industries or economic sectors.

These factors could make foreign investments more volatile. The Fund will
only invest in companies domiciled in a country whose currency is freely
convertible into U.S. dollars and in companies (such as oil production
companies) whose business is conducted primarily in U.S. dollars.
Investment
companies whose business is conducted in U.S. dollars could involve
securities of issuers located in developing countries. Risks of investment
in developing countries may be greater than risks otherwise pertaining to
foreign securities due to conditions in those countries, including illiquid
markets, increased difficulty in repatriating assets and earnings, reduced
or
uncertain legal protections for investors, and greater political
instability.

Adjusting Investment Exposure. Value Fund can use various techniques to
increase or decrease its exposure to changing securities prices, interest
rates, currency exchange rates, commodity prices, or other factors that
affect securities values. These techniques may involve derivative
transactions such as buying and selling options and futures contracts,
entering into currency exchange contracts or swap agreements, purchasing
indexed securities, and selling securities short. TMC can use these
practices
to adjust the risk and return characteristics of the Fund's portfolio of
investments. If TMC judges market conditions incorrectly or employs a
strategy that does not correlate well with the Fund's investments, these
techniques could result in a loss, regardless of whether the intent was to
reduce risk or increase return. These techniques may increase the price
volatility of the Fund and may involve a small investment of cash relative
to
the magnitude of the risk assumed. In addition, these techniques could
result
in a loss if the counterparty to the transaction does not perform as
promised.

Other Securities include short-term, highly liquid securities, such as time
certificates of deposit, and investment grade short-term corporate debt
obligations and commercial paper. The Fund may, under normal conditions,
23
<PAGE>
hold a portion of its assets in other securities pending investment of idle
funds or to provide liquidity. During temporary defensive conditions, the
Fund may invest up to 100% of its assets in other securities. If any
certificate of deposit is non-negotiable, and it matures in more than seven
days, it will be considered illiquid.

Repurchase Agreements. In a repurchase agreement, the Fund buys a security
at
one price and simultaneously agrees to sell it back at a higher price.
Delays
or losses could result if the other party to the agreement defaults or
becomes insolvent. In a reverse repurchase agreement, the Fund sells a
security and agrees to repurchase the security at a higher price. See
"Borrowing," below.

Illiquid and Restricted Securities. Some investments may be determined by
TMC, under the supervision of the Trustees, to be illiquid, which means that
they may be difficult to sell promptly at an acceptable price. The sale of
other securities, including illiquid securities, may be subject to legal
restrictions. Difficulty in selling securities may result in a loss or may
be
costly to the Fund.

Restrictions. The Fund may not purchase a security if, as a result, at
the time of purchase more than 10% of its assets would be invested in
illiquid securities.

Borrowing. The Fund may borrow from banks or through reverse repurchase
agreements. If the Fund borrows money, its share price may be subject to
greater fluctuation until the borrowing is paid off. If the Fund makes
additional investments while borrowings are outstanding, this may be
considered a form of leverage.

Restrictions. The Fund may borrow only for temporary or emergency
purposes or in connection with reverse repurchase agreements, but not
in
an amount exceeding 33-1/3% of its total assets. This is a fundamental
limitation.

Securities Lending. Lending securities to broker-dealers and other
institutions is a means of earning income. This practice could result in a
loss or a delay in recovering the Fund's securities.

Restrictions. Loans, in the aggregate, may not exceed 33-1/3% of the
Fund's total assets.

Portfolio Turnover. The Fund does not anticipate that its portfolio turnover
rate ordinarily will exceed 100%. This rate will vary from time to time,
and higher turnover rates may result in higher brokerage commissions, dealer
mark-ups and transaction costs, and also could result in taxable capital
gains.

Portfolio Turnover - All Funds

Each of the Funds had the portfolio turnover rate shown below for its most
recent fiscal year:
<TABLE>
Fund Turnover Rate Fiscal Year Ended
---- ------------- -----------------
<S> <C> <C>
Limited Term National Fund 23.39% June 30, 1997
Limited Term California Fund 20.44% June 30, 1997
Intermediate National Fund 15.36% September 30, 1997
Government Fund 41.10% September 30, 1997
Income Fund 13.87% September 30, 1997
Value Fund 78.83% September 30, 1997
</TABLE>
24

<PAGE>
Each Fund anticipates that its annual turnover rate normally will be less
than 100%. A 100% turnover rate would occur, for example, if all of the
securities held by a Fund were sold and replaced within one year. TMC does
not consider the portfolio turnover rate a limiting factor in making
investment decisions for a Fund which are otherwise consistent with that
Fund's investment objectives and management policies. A higher rate of
turnover, may, however, result in increased transaction costs and taxable
capital gains.

YOUR ACCOUNT

Buying Fund Shares

The Institutional Class shares of the Funds are sold on a continuous basis
with no initial sales charge or contingent deferred sales charge at the net
asset value (NAV) per share next determined after a purchase order is
received by the Funds' transfer agent and accepted. The NAV of each Fund is
computed at least once each day the Funds conduct business, by adding the
value of the Fund's assets, subtracting its liabilities and dividing the
result by the number of shares outstanding. NAV is normally calculated at
four o'clock p. m. Eastern time on each day the New York Stock Exchange is
open. See the table below for instructions on how to place
your order.

Each Fund reserves the right to suspend the offering of shares for a period
of time. Each Fund also reserves the right to reject any specific purchase
order, including certain purchases by exchange. See "Exchange Restrictions"
on page 30.

Qualified individual investors and qualified institutions purchasing shares
for their own account are eligible to purchase Institutional Class shares
provided they invest a minimum of $2,500,000. The minimum amount for
subsequent purchases is $5,000. Qualified institutions include
corporations, banks and insurance companies purchasing for their own account
and other institutions such as trusts, endowments and foundations. TMC or
TSC may make payments from their own resources to assist in the sales or
promotion of the Funds.

Opening An Account
- ----------------------------------------------------------------------------
Buying Shares To Open an Account To Add To An Account
- ----------------------------------------------------------------------------
Qualified Individual Minimum Minimum
or Institutional $2,500,000 $5,000

Qualified Plans Consult your Plan Consult your Plan
Administrator Administrator

Within Wrap or Fee Based Consult your Program Consult your Program
Program Sponsor Sponsor

By Telephone Exchange from another Exchange from another
1-888-598-0400 Thornburg Fund Thornburg Fund
account with the same account with the same
registration, registration
including name, including name,
address, and address, and
taxpayer ID number. taxpayer ID number.

By Mail Complete and sign Make your check
the application. payable to the
Make your check applicable
payable to the Thornburg Fund.
applicable Indicate your
Thornburg Fund. Fund account number
Mail to the address on your check and
indicated on the mail to the address
application. printed on your
account statement.
Automatic Investment Plan Use one of the above Use Automated Clearing
procedures to open House funds. Sign up
your account. Obtain for this service when
an Automatic you open your account,
Investment Plan form or call 1-888-598-0400
to sign up for this to add it.
service.
- ----------------------------------------------------------------------------
25

<PAGE>
Qualified employee benefit or retirement plans other than an individual
retirement account ("IRA") or SEP-IRA are also eligible to purchase
Institutional Class shares, provided they either invest a minimum of
$1,000,000 in the Funds or have 100 or more eligible participants enrolled
in
the plan. There is no minimum amount for subsequent purchases.

Investment dealers, financial advisers or other investment professionals,
including bank trust departments and companies with trust powers, purchasing
for the accounts of others within a clearly defined "wrap" or other fee
based
investment advisory program are eligible to purchase Institutional Class
shares. TSC will establish a minimum amount per program or per account to
qualify for purchase of Institutional Class shares. The minimum amount per
program is currently $250,000. Consult your applicable professional for
their minimum.

Employees, officers, trustees, directors of any Thornburg Fund or Thornburg
company, and their families or trusts established for the benefit of any of
the foregoing, may also purchase Institutional Class shares.

Opening an Account

Complete and sign an account application and give it, along with your check,
to the Fund in which you are investing or to your financial intermediary.
You may also open your account by wire or mail. If there is no application
accompanying this prospectus, please call 1-888-598-0400. If you buy shares
by check and then redeem those shares, the payment may be delayed for up to
15 business days to ensure that your previous investment has cleared.

When you sign your account application, you will be asked to certify that
your Social Security or taxpayer identification number is correct and that
you are not subject to 31% backup withholding for failing to report income
to
the IRS. If you violate IRS regulations, the IRS can require the Fund to
withhold 31% of your taxable distributions and redemptions.

If you open or add to your account yourself rather than through your
financial advisor please note the following:

* All of your purchases must be made in U. S. dollars.
* Checks must be drawn on U. S. banks; the Funds do not accept cash.
* If your check does not clear, your purchase will be canceled and you
could be liable for any losses or fees the Fund or its Transfer Agent
have incurred.

When you buy shares of a Fund or sell them through your financial advisor,
you may be charged a fee for this service. Please read your financial
advisor's program materials for any additional procedures, service features
or fees that may apply.

Certain financial institutions that have entered into sales agreements with
TSC may enter confirmed purchase orders on behalf of customers by phone,
with
payment to follow no later than the time when the Fund is priced on the
following business day. If payment is not received by that time, the
financial institution could be held liable for resulting fees or losses.

Street Name Accounts. Some financial intermediaries offer to act as owner
of
record of Fund shares as a convenience to investors who are clients of those
firms and shareholders of an individual Fund. Neither the Funds nor their
Transfer Agent can be responsible for failures or delays in crediting
shareholders for dividends or redemption proceeds, or for delays in reports
to shareholders if a shareholder elects to hold Fund shares in street-name
through an account with a financial intermediary rather than directly in the
shareholder's own name. Further, neither the Funds nor their Transfer Agent
26
<PAGE>
will be responsible to the investor for any loss to the investor due to the
failure of a financial intermediary, its loss of property or funds, or its
acts or omissions. Prospective investors are urged to confer with their
financial intermediaries to learn about the different options available for
owning mutual fund shares. You may receive share certificates or hold
shares
in your name with the Transfer Agent upon request.

SELLING FUND SHARES

Shareholders of record (the person or entity in whose name the shares are
registered) can withdraw money from their Fund at any time by redeeming some
or all of the shares in the account, either by selling them back to the Fund
or by selling the shares through their financial advisor. The shares will
be purchased by the Fund at the next share price (NAV) calculated after the
redemption order is received in proper form. Share price is normally
calculated at 4 p.m. Eastern time. Please note the following:

* Consult your financial advisor for procedures governing redemption
through the advisor's firm.

* Telephone redemptions over the wire generally will be credited to your
bank account on the business day after your phone call (see Telephone
Redemption, page 29).

- ---------------------------------------------------------------------------
Redeeming Shares Account Type Special Requirements
- ---------------------------------------------------------------------------
Through a Financial All Account Types Consult with your
Intermediary financial advisor.
They may charge a fee.

By Mail Individual, Joint The letter of
Tenant, Sole instruction must be
Proprietorship, signed by all persons
UGMA, UTMA required to sign for
transactions, exactly
as their names appear
on the account and
must include:
Send to: NFDS * Your name,
c/o Thornburg Funds * The Fund's name,
PO Box 419017 * Your Fund account no.
Kansas City, MO * The dollar amount or
64141-6017 number of shares to be
redeemed,
* Any other applicable
requirements listed above
* Signature guarantee,
if required.

Trust In addition to the
above requirements,
the trustee must sign
the letter indicating
capacity as trustee.
If the trustee's name
is not in the account
registration, provide
a copy of the trust
document certified
w/in the last 60 days.

Business or In addition to the
Organization above requirements,
at least one person
authorized by
corporate resolution
to act on the account
must sign the letter
which must be
signature guaranteed.
Include a corporate
resolution with a
corporate seal.

Executor, Call 888-598-0400 for
Administrator, instructions.
Conservator,
Guardian

By Telephone All account types You must sign up for
except Street Name the telephone
Accounts redemption feature
before using it.
Minimum Wire $1,000
Minimum Check $500
- ---------------------------------------------------------------------------
27

<PAGE>
* Your Fund may hold payment on redemptions until it is reasonably
satisfied that investments previously made by check have been
collected, which can take up to 15 business days.

* Payment for shares redeemed normally will be made by mail the next
business day, and in most cases within seven days, after receipt by
the
Transfer Agent of a properly executed request for redemption
accompanied by any outstanding certificates in proper form for
transfer. The Funds may suspend the right of redemption and may
postpone payment when the New York Stock Exchange is closed for other
than weekends or holidays, or if permitted by rules of the Securities
and Exchange Commission during an emergency which makes it impractical
for the Funds to dispose of their securities or fairly to determine
net
asset value, or during any other period specified by the Securities
and
Exchange Commission in a rule or order for the protection of
investors.

* No interest is accrued or paid on amounts represented by uncashed
distribution or redemption checks.

* To the extent consistent with state and federal law, your Fund may
make
payments of the redemption price either in cash or in kind. The Funds
have elected to pay in cash all requests for redemption by any
shareholder. They may, however, limit such cash in respect to each
shareholder during any 90 day period to the lesser of $250,000 or 1%
of
the net asset value of a Fund at the beginning of such period. This
election has been made pursuant to Rule 18f-1 under the Investment
Company Act of 1940 and is irrevocable while the Rule is in effect
unless the Securities and Exchange Commission, by order, permits its
withdrawal. In the case of a redemption in kind, securities delivered
in payment for shares would be valued at the same value assigned to
them in computing the net asset value per share of the Fund. A
shareholder receiving such securities would incur brokerage costs
when
selling the securities.

To sell shares in an account, you may use any of the methods described
below.

If you are a qualified individual or qualified institution selling some but
not all of your shares, leave at least $25,000 worth of shares in the
account
to keep it open. If you own shares through a "wrap" or fee based program,
you must leave at least $1,000 worth of shares in the account to keep it
open. There is no minimum balance requirement for Qualified Plans.

Certain requests must include a signature guarantee. It is designed to
protect you and your Fund from fraud. If you are redeeming directly rather
than through a financial adviser and you have not signed up for
telephone redemption, your request must be made in writing and include a
signature guarantee if any of the following situations apply:

* You wish to redeem more than $10,000 worth of shares,

* Your account registration has changed within the last 30 days,

* The redemption check is being mailed to a different address than the
one on your account,

* The check is being made payable to someone other than the person in
whose name the account is registered, or

* The redemption proceeds are being transferred to a Thornburg account
with a different registration.

<PAGE>
Telephone Redemption

If you completed the telephone redemption section of your application when
you first purchased your shares, you may easily redeem shares of your Fund
by
telephone. Simply call a Fund Customer Service Representative at
888-598-0400. Money can be wired directly to the bank account designated by
you on the application or sent to you in a check. The Fund's Transfer Agent
may charge a fee for a bank wire. This fee will be deducted from the amount
wired.

If you did not complete the telephone redemption section of your
application,
you may add this feature to your account by calling the Fund for a telephone
redemption application. Once you receive it, please fill it out, have it
signature guaranteed and send it to:

NFDS
c/o Thornburg Funds
P.O. Box 419017
Kansas City, MO 64141-6017.

Considerations With Respect to Telephone Redemption

The Funds, TSC, TMC and the Funds' Transfer Agent are not responsible for,
and will not be liable for, the authenticity of withdrawal instruction
received by telephone or the delivery or transmittal of the redemption
proceeds if they follow instructions communicated by telephone that they
reasonably believe to be genuine. By electing telephone redemption you are
giving up a measure of security you otherwise may have by redeeming shares
only with written instructions, and you may bear the risk of any losses
resulting from telephone redemption. The Funds and their Transfer Agent
will
attempt to implement reasonable procedures to prevent unauthorized
transactions and the Funds or their Transfer Agent could be liable if these
procedures are not employed. These procedures will include recording of
telephone transactions, providing written confirmation of such transactions
within 5 days, and requesting certain information to better confirm the
identity of the caller at the time of the transaction. You should verify
the
accuracy of your confirmation statements immediately after you receive them.

INVESTOR SERVICES

Thornburg Funds provides a variety of services to help you manage your
account.

Information Services

Thornburg Funds' telephone representatives are available Monday through
Friday from 8:30 am to 6:30 p.m. Eastern time. Whenever you call, you can
speak with someone equipped to provide the information or service you need.

Statements and reports that Thornburg Funds send to you include the
following:

* Account statements after every transaction affecting your account

* Monthly account statements (except the Value Fund which sends
quarterly account statements)

* Financial reports (every six months)

* Cost basis statement (at the end of any year in which you redeem
shares)
29

<PAGE>
Exchange Privilege

You may exchange Institutional Class shares of any Thornburg Fund for
Institutional Class shares of any other Thornburg Fund that offers
Institutional Class shares, subject to the restrictions described below.
Please consult the exchange and reinvestment privilege information in the
Prospectus of the other Thornburg Fund. Note that exchanges out of a Fund
may have tax consequences for you.

Exchange Restrictions

As a shareholder, you have the privilege of exchanging Institutional Class
shares of the Fund for Institutional Class shares of other Thornburg Funds
which offer Institutional Class shares. However, you should note the
following:

* The Fund you are exchanging into must be registered for sale in your
state.

* You may only exchange between accounts that are registered in the same
name address, and taxpayer identification number.

* Before exchanging into a Fund, read its prospectus.

* Exchanges may have tax consequences for you.

* Because excessive trading can hurt fund performance and shareholders,
each Fund reserves the right to temporarily or permanently terminate
the exchange privilege of any investor who makes more than four
exchanges out of a Fund in any calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer
identification number, will be counted together for purposes of the
four exchange limit.

* Each Fund reserves the right to refuse exchange purchases by any
person
or group if, in TMC's judgment, the Fund would be unable to invest the
money effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.

* Your exchanges may be restricted or refused if a Fund receives or
anticipates simultaneous orders affecting significant portions of the
Fund's assets. In particular, a pattern of exchanges that coincide
with a "market timing" strategy may be disruptive to a Fund. Although
a Fund will attempt to give prior notice whenever it is reasonably
able
to do so, it may impose these restrictions at any time. The Funds
reserve the right to terminate or modify the exchange privilege in the
future.

Systematic Withdrawal Plans

Systematic withdrawal plans let you set up periodic redemptions from your
account. Consult your financial intermediary or call a Fund Customer
Service
Representative at 888-598-0400 for information.

<PAGE>
SHAREHOLDER & ACCOUNT POLICIES

Dividends and Capital Gains

Each Fund distributes substantially all of its net income and realized
capital gains, if any, to shareholders each year. Each of the Municipal
Funds and the Taxable Income Funds declares its net investment income daily
and distributes it monthly. Value Fund distributes net investment income
quarterly. Each Fund will distribute net realized capital gains, if any, at
least annually. Capital gain distributions, if any, normally will be
declared and payable in December. You will be notified annually by your Fund
as to the amount and characterization of distributions paid to or reinvested
by you for the preceding tax year.

Distribution Options

The Funds earn interest from bond, money market, and other investments.
These are passed along as dividend distributions. Each Fund realizes
capital
gains whenever it sells securities for a higher price than it paid for them.
These are passed along as capital gain distributions. When you open an
account, specify on your application how you want to receive your
distributions. Each Fund offers four options, which you can change at
anytime. Shares of any Thornburg Fund purchased through reinvestment of
dividend and capital gain distributions are not subject to sales charges or
contingent deferred sales charges. No interest or earnings are accrued or
paid on amounts represented by uncashed distribution checks.

Dividends

1. Reinvestment Option. Your dividend distributions will be automatically
invested in additional shares of your Fund. If you do not indicate a
choice on your application, you will be assigned this option. You may
also instruct the Fund to invest your dividends in the shares of another
Thornburg Fund.

2. Cash Option. You will be sent a check for your dividend distributions.
Cash distribution checks are normally mailed on the third business day
after the month-end for the Municipal Funds and for the Taxable Income
Funds.

Capital Gain

1. Reinvestment Option. Your capital gain distributions, if any, will be
automatically reinvested in additional shares of your Fund. If you do
not indicate a choice on your application, you will be assigned this
option. You may also instruct the Fund to reinvest your capital gain
distributions in shares of another Thornburg Fund.

2. Cash Option. You will be sent a check for any capital gain distributions.

Turnover and Capital Gains

The Funds do not normally engage in short-term trading for profits.
However, when a Fund believes that a security will no longer contribute
towards its reaching its goal or that another security will better
contribute
to its goal, it will normally sell that security.

When a Fund sells a security at a profit it realizes a capital gain. When
it
sells a security at a loss it realizes a capital loss. A fund must, by law,
distribute capital gains, net of any losses, to its shareholders. Whether
you reinvest your capital gain distributions or take them in cash, the
distribution is taxable.

<PAGE>
TAXES

Federal Taxes - In General

Each Fund has qualified under Subchapter M of the Internal Revenue Code (the
"Code") for tax treatment as a regulated investment company, and intends to
continue its qualification so long as qualification is in the best interests
of its shareholders under Subchapter M. This tax treatment relieves a Fund
from paying federal income tax on income which is currently distributed to
its shareholders. Certain general aspects of federal income taxation of
individual shareholders are discussed below. Aspects of investment by
shareholders who are not individuals are addressed in a limited manner.
Prospective investors, and in particular persons who are not individuals,
should consult their own tax advisers concerning federal, state and local
tax
consequences respecting investments in the Funds.

Federal Taxes - Municipal Funds

The Municipal Funds intend to satisfy conditions that will enable them
to designate distributions from the interest income generated by investments
in Municipal Obligations, which are exempt from federal income tax when
received by a Fund, as Exempt Interest Dividends. Shareholders receiving
Exempt Interest Dividends will not be subject to federal income tax on the
amount of such dividends, except to the extent the alternative minimum tax
may be imposed.

Distributions by the Municipal Funds of net interest income received from
certain temporary investments (such as certificates of deposit, corporate
commercial paper and obligations of the U. S. government, its agencies and
instrumentalities) and net short-term capital gains realized by the Fund, if
any, will be taxable to shareholders as ordinary income whether received in
cash or additional shares. Distributions to shareholders will not qualify
for the dividends received deduction for corporations. Any net long-term
capital gains realized by the Fund, whether or not distributed, will be
taxable to shareholders as long-term capital gains regardless of the length
of time investors have held their shares, although gains attributable to
market discount on portfolio securities will be characterized as ordinary
income. Each year the Fund will, where applicable, mail to shareholders
information on the tax status of dividends and distributions, including the
respective percentages of tax-exempt and taxable, if any, income and an
allocation of tax-exempt income on a state-by-state basis. The exemption of
interest income for federal income tax purposes does not necessarily result
in an exemption under the income or other tax laws of any state or local
taxing authorities. (See "State Taxes"). Shareholders are advised to
consult their own tax advisers for more detailed information concerning the
federal, state and local taxation of the Fund and the income tax
consequences to its shareholders.

The Funds' counsel, White, Koch, Kelly & McCarthy, Professional Association,
has not made and normally will not make any review of the proceedings
relating to the issuance of the Municipal Obligations or the basis for any
opinions issued in connection therewith. In the case of certain Municipal
Obligations, federal tax exemption is dependent upon the issuer (and other
users) complying with certain ongoing requirements. There can be no
assurance that the issuer (and other users) will comply with these
requirements, in which event the interest on such Municipal Obligations
could
be determined to be taxable, in most cases retroactively from the date of
issuance. Certain matters under the Code, including certain exceptions to
the foregoing, are discussed more specifically below.

The Code treats interest on certain Municipal Obligations which are private
activity bonds under the Code as a preference item for purposes of the
alternative minimum tax on individuals and corporations. The Municipal
Funds
may purchase without limitation private activity bonds the interest on which
is subject to treatment under the Code as a preference item for purposes of
the alternative minimum tax on individuals and corporations, although the
frequency and amounts of these purchases are uncertain. Some portion of
32
<PAGE>
Exempt Interest Dividends could, as a result of such purchases, be treated
as
a preference item for purposes of the alternative minimum tax on individuals
and corporations. Shareholders are advised to consult their own tax
advisers
as to the extent and effect of this treatment.

Federal Taxes - Taxable Income Funds

Distributions to shareholders representing net investment income and net
short term capital gains will be taxable to the recipient shareholders as
ordinary income, whether the distributions are actually taken in cash or are
reinvested in additional shares. Fund distributions will not be eligible
for
the dividends received deduction for corporations. Distributions of net
long-term capital gains, if any, will be treated as long-term capital gains
by shareholders regardless of the length of time the shareholder has owned
the shares, and whether received as cash or in additional shares.

Redemption or resale of shares by a shareholder will be a taxable
transaction
for federal income tax purposes, and the shareholder will recognize gain or
loss in an amount equal to the difference between the shareholder's basis in
the shares and the amount received on the redemption or resale. If the
shares sold or redeemed are a capital asset, the gain or loss will be a
capital gain or loss and will be long-term if the shares were held for more
than one year.

Federal Taxes - Value Fund

Your distributions are taxable when paid, whether taken as cash or
reinvested. For federal tax purposes, the Value Fund's income and short-term
capital gains distributions are taxed as dividends; long-term capital gains
distributions are taxed as long-term capital gains. Every January, the Fund
will send each shareholder and the IRS a statement showing the taxable
distributions paid in the previous year. You should consult with your tax
advisor for the correct federal and state treatment of distributions.
Redemptions, including exchanges to other Thornburg Funds, are subject to
capital gains tax. A capital gain or loss is the difference between the cost
of your shares and the price you receive when you sell them. Whenever you
sell shares of a Fund, you will be sent a confirmation statement showing how
many shares you sold and at what price. At the end of the year the Fund
will
also send you a statement showing the average cost basis of the shares you
redeemed. However, it is up to you or your tax preparer to determine whether
this sale resulted in a capital gain and, if so, the amount of federal and
state taxes to be paid. Be sure to keep your regular account statements; the
information they contain will be essential in calculating the amount of your
capital gains. The Fund may pay withholding or other taxes to foreign
governments during the year. These taxes reduce the Fund's distributions,
but
are included in the taxable income reported on your tax statement. You may
be
able to claim an offsetting tax credit or itemized deduction for foreign
taxes paid by the Fund. Your tax statement will generally show the amount of
foreign tax for which a credit or deduction may be available.

State Taxes

With respect to distributions of interest income and capital gains from the
Funds, the laws of the several states and local taxing authorities vary with
respect to the taxation of such distributions, and shareholders of the Funds
are advised to consult their own tax advisers in that regard. The Municipal
Funds will advise shareholders approximately 60 days after the end of each
calendar year as to the percentage of income derived from each state as to
which it has any Municipal Obligations in order to assist shareholders in
the
preparation of their state and local tax returns. Distributions of interest
income by Limited Term California Fund to individuals resident in
California,
to the extent the interest income is attributable to Municipal Obligations
originating in California, will not be subject to California personal income
tax under current law. The Taxable Income Funds will advise shareholders
approximately 60 days after the end of each calendar year as to the
percentage of income derived from Treasury securities in order to assist
shareholders in the preparation of their state and local tax returns.
Prospective investors are urged to confer with their own tax advisers for
more detailed information concerning state tax consequences.
33

<PAGE>
SERVICE PLAN

Each of the Funds has adopted an institutional class Service Plan under
which
TMC may make payments to securities dealers and other financial
institutions,
intermediaries and organizations to obtain various shareholder related
services or to reimburse their marketing expenses. Each Fund's Service Plan
permits the Fund to reimburse TMC for these payments at an annual rate of up
to .25% of the Fund's net assets attributable to Institutional Class shares.
No assets attributable to Institutional Class shares will be used to
reimburse expenses related to any other class of shares of the same Fund.
TMC has no present intention to seek any reimbursement from any of the Funds
under the Service Plans.

The Glass-Steagall Act prohibits certain banks from underwriting mutual fund
shares. The Funds do not believe that this prohibition will apply to the
plans described above. However, no assurance can be given that the Glass-
Steagall Act will not be interpreted so as to prohibit this arrangement. In
that event, the ability of the Funds to market their shares could be
impaired to a small extent. In addition, state securities laws on this
issue
may differ from interpretations of federal law, and banks and financial
institutions may be required to register as dealers pursuant to state law.

PERFORMANCE

Yield Computation and Total Return

Each Fund may quote its yields and returns in reports, sales literature and
advertisements. Yield and return information are computed separately for
each
class of a Fund's shares. Yield and return could differ in minor respects
among classes of the same Fund because of allocation of certain expenses to
one or more specific classes to which the expenses relate. Any return
quoted
should not be considered a representation of the return in the future since
return figures are based upon historical earnings. Actual performance will
vary.

Current yield quotations will include a standardized calculation which
computes yield for a 30-day or one-month period by dividing the Fund's net
investment income per share during the period by its net asset value on the
last day of the period and annualizing the result. Provided that any such
quotation is also accompanied by the standardized calculation referred to
above, the Fund may also quote non-standardized yields. The primary
differences between the yield calculations obtained using the standardized
performance measure and any non-standardized performance measure will be
caused by the following factors: The non-standardized calculation may cover
periods other than the 30-day or one month period required by the
standardized calculation; (2) The non-standardized calculation may reflect
amortization of premium based upon historical cost rather than market value;
(3) The non-standard return quotation may include the effective return
obtained by compounding the monthly dividends; (4) The non-standard return
quotation may use the average price during the period, or its price on the
first day of the period.

Average annual total return quotations show the average annual percentage
change in value of $1,000 for one, five and ten-year periods unless the
class
has been in existence for a shorter period. Average annual total return
assumes the reinvestment of all dividends. The Fund may also furnish average
annual total return quotations for other periods. Total return quotations
show the total of all income and capital gain paid to shareholders, assuming
reinvestment of all distributions, plus (or minus) the change in the value
of
the original investment, expressed as a percentage of the purchase price.
Yields and returns described in this section may also be quoted on a
"taxable
equivalent yield" basis by computing the taxable yield or return which a
hypothetical investor subject to a specified income tax rate must realize to
receive the same yield or return after taxes. When a taxable equivalent
yield
is quoted, the following additional information will be furnished: (1) a
standardized current yield; (2) the length of and the last day of the base
period used in computing the quotation; and (3) a description of the method
by which the quotation is computed.
34

<PAGE>
Yield and return information may be useful in reviewing the performance of a
Fund and for providing a basis for comparison with other investment
alternatives. Comparative information about the yield or distribution rate
of the shares of the Fund and about average rates of return on certificates
of deposit, bank money market deposit accounts, money market mutual funds
and
other short-term investments may also be included in advertisements and
communications of the Fund. Any such comparison will contain information
about the differences between the Fund and those investments.

From time to time, in advertisements and other types of literature, the
performance of a Fund may be compared to other groups of mutual funds. This
comparative performance may be expressed as a ranking or a rating prepared
by
Lipper Analytical Services, Inc., Donoghue Organization, Inc., Morningstar,
Inc., Value Line or other widely recognized independent services which
monitor the performance of mutual funds. Performance rankings and ratings
reported periodically in national financial publications such as MONEY
Magazine, FORBES, BARRON's, VALUE LINE, the WALL STREET JOURNAL and
MORNINGSTAR, and other such publications may also be used. A Fund may
illustrate performance or the characteristics of its respective investment
portfolios through graphs, tabular data, or other displays which describe
(i)
the average portfolio maturity of the Fund's portfolio securities relative
to
the maturities of other investments, (ii) the relationship of yield and
maturity of the Fund to the yield and maturity of other investments (either
as a comparison or through use of standard benchmarks or indices such as the
Treasury yield curve), (iii) changes in the Fund's share price or net asset
value relative to changes in the value of other investments, and (iv) the
relationship over time of changes in the Fund's (or other investments) net
asset values or prices and the Fund's (or other investments') investment
returns. The Fund may also illustrate or refer to its respective investment
portfolio, investment techniques and strategies, and general market or
economic trends in advertising or communications to shareholders or
prospective shareholders, including reprints of interviews or articles
written by or about, and including comments by, Fund managers. These
illustrations, references and comments ordinarily will relate to topics
addressed in the Fund's Prospectus and Statement of Additional Information.

ORGANIZATION OF THE FUNDS

Limited Term National Fund and Limited Term California Fund are diversified
series of Thornburg Limited Term Municipal Fund, Inc., a Maryland
corporation
organized as a diversified, open-end management investment company (the
"Company"). The Company currently offers two series of stock, Limited Term
National Fund and Limited Term California Fund, each in multiple classes,
and
the Board of Directors is authorized to divide authorized but unissued
shares
into additional series and classes.

Intermediate Municipal Fund, Government Fund, Income Fund and Value Fund are
diversified series of Thornburg Investment Trust, a Massachusetts business
trust (the "Trust") organized as a diversified, open-end management
investment company under a Declaration of Trust (the "Declaration"). The
Trust currently has 12 authorized Funds, four of which are described in this
Prospectus. The Trustees are authorized to divide the Trust's shares into
additional series and classes.

Each Fund may hold special shareholder meetings and mail proxy materials,
These meetings may be called to elect or remove Directors or Trustees,
change
fundamental investment policies, or for other purposes.
35
<PAGE>
Shareholders not attending these meetings are encouraged to vote by proxy.
Each Fund will mail proxy materials in advance, including a voting card and
information about the proposals to be voted on. The number of votes you are
entitled to is based upon the number of shares you own. Shares do not have
cumulative voting rights or preemptive rights.

THORNBURG MANAGEMENT COMPANY, INC. AND THORNBURG SECURITIES CORPORATION

The Funds are managed by Thornburg Management Company, Inc., (TMC). TMC
performs investment management services for each Fund under the terms of an
Investment Advisory Agreement which specifies that TMC will select
investments for the Fund, monitor those investments and the markets
generally, and perform related services. TMC also performs administrative
services specific to the Institutional Class under an Administrative
Services
Agreement which requires that TMC will supervise, administer and perform
certain administrative services necessary for the maintenance of
Institutional Class shareholders. TMC's services to Limited Term National
Fund and Limited Term California Fund are supervised by the Directors of
Thornburg Limited Term Municipal Fund, Inc.; its services to the other Funds
are supervised by the Trustees of Thornburg Investment Trust.

TMC was established in 1982. Today, the Thornburg Funds include three other
mutual funds in addition to the Funds covered by this Prospectus. The
Thornburg Funds total over $1.8 billion in assets. Thornburg Management
Company Inc. is known as a provider of conservative investment products.
For more than a decade the Thornburg Funds have been committed to preserving
and increasing the real wealth of their shareholders. The key to growing
real wealth is increasing buying power after taxes, inflation, and
investment related expenses. TMC receives fees for managing each Fund
computed in accordance with the following tables. These annual rates are
calculated on average daily net assets and are paid monthly.

- -------------------------------------------------------
Limited Term National Fund and Limited Term California Fund
- -------------------------------------------------------
Net Assets of Fund Advisory Fee Rate Administrative Services Rate
- ----------------- ----------------- ---------------------------
0 to $500 million .50% .05%
$500 million to $1 billion .40% .05%
$1 billion to $1.5 billion .30% .05%
$1.5 billion to $2 billion .25% .05%
Over $2 billion .225% .05%

- ------------------------------------------
Intermediate National Fund and Income Fund
- ---------------------------------------
Net Assets of Fund Advisory Fee Rate Administrative Services Rate
- ----------------- ----------------- ----------------------------
0 to $500 million .50% .05%
$500 million to $1 billion .45% .05%
$1 billion to $1.5 billion .40% .05%
$1.5 billion to $2 billion .35% .05%
Over $2 billion .275% .05%

- ---------------
Government Fund
- --------------
Net Assets of Fund Advisory Fee Rate Administrative Services Rate
- ----------------- ---------------- ------------------------------
0 to $1 billion .375% .05%
$1 billion to $2 billion .325% .05%
Over $2 billion .275% .05%

<PAGE>

- ----------
Value Fund
- ----------
Net Assets of Fund Advisory Fee Rate Administrative Services Rate
- ----------------- ----------------- --------------------------
0 to $500 million .875% .05%
$500 million to $1 billion .825% .05%
$1 billion to $1.5 billion .775% .05%
$1.5 billion to $2 billion .725% .05%
Over $2 billion .675% .05%
- ---------------------------------------------------------------------------

Brian J. McMahon and George Strickland, both of whom are Managing Directors
of TMC, have primary responsibility for the day-to-day management of the
Municipal Funds. Mr. McMahon has managed municipal bond portfolios for TMC
since 1984 and Mr. Strickland ahs performed municipal bond credit analyses
and management since joining TMC in 1991. Mr. McMahon and Mr. Strickland
are assisted by other employees of TMC in managing the Municipal Funds.

Steven J. Bohlin, a Managing Director of TMC, has primary responsibility for
the day-to-day management of the Taxable Income Funds. He has held this
responsibility for Government Fund since 1988 and for Income
Fund since its inception in 1992. Mr. Bohlin is assisted by other employees
of TMC in managing the Taxable Income Funds.

William Fries, a Managing Director of TMC, is the portfolio manager of Value
Fund, which he has managed since its inception in 1995. Before joining TMC
in May 1995, Mr. Fries managed equity mutual funds for 16 years with another
mutual fund management company. Mr. Fries is assisted by other employees of
TMC.

TMC may, from time to time, agree to waive its fees or to reimburse a Fund
for expenses above a specified percentage of average daily net assets. TMC
retains the ability to be repaid by the Fund for these expense
reimbursements
if expenses fall below the limit prior to the end of the fiscal year. Fee
waivers or expenses by a Fund will boost its performance, and repayment of
waivers or reimbursements will reduce its performance.

In addition to TMC's fees, each Fund will pay all other costs and expenses
of
its operations. No Fund will bear any costs of sales or promotion incurred
in connection with the distribution of Institutional Class shares, except as
described above under "Service Plan".

Thornburg Securities Corporation (TSC) distributes and markets the Thornburg
Funds. TMC or TSC may make payments from their own resources to assist in
the sales or promotion of the Funds.

H. Garrett Thornburg, Jr., a Director and Chairman of the Fund, is the
controlling stockholder of both TMC and TSC.

ADDITIONAL
INFORMATION

Reports to Shareholders
Shareholders will receive annual reports of their Fund containing financial
statements audited by the Funds' independent auditors, and also will receive
unaudited semi-annual reports. In addition, each shareholder will receive
an account statement no less often than quarterly.

<PAGE>

INVESTMENT ADVISER

Thornburg Management Company, Inc.
119 East Marcy Street, Suite 202
Santa Fe, New Mexico 87501

DISTRIBUTOR

Thornburg Securities Corporation
119 East Marcy Street, Suite 202
Santa Fe, New Mexico 87501

AUDITOR

McGladrey & Pullen, LLP
555 Fifth Avenue
New York, New York 10017

CUSTODIAN

State Street Bank & Trust Co.
Boston, Massachusetts

TRANSFER AGENT

State Street Bank & Trust Co.
c/o NFDS Servicing Agent
Post Office Box 419017
Kansas City, Missouri 64141-6017

<Thornburg Funds logo>
Investing With Integrity
Thornburg Securities Corporation, Distributor
119 East Marcy Street, Santa Fe, New Mexico 87501
(800) 847-0200
www.thornburg.com email: [email protected]

Statement of Additional Information
for
Institutional Class Shares
of
Thornburg Limited Term Municipal Fund National Portfolio
("Limited Term National Fund")
Thornburg Limited Term Municipal Fund California Portfolio
("Limited Term California Fund")
Thornburg Intermediate Municipal Fund
("Intermediate National Fund")
Thornburg Limited Term U.S. Government Fund
("Government Fund")
Thornburg Limited Term Income Fund
("Income Fund")
Thornburg Value Fund
("Value Fund")

119 East Marcy Street, Suite 202
Santa Fe, New Mexico 87501

Thornburg Limited Term Municipal Fund National Portfolio ("Limited Term
National Fund") and Thornburg Limited Term Municipal Fund California
Portfolio ("Limited Term California Fund") are investment portfolios
established by Thornburg Limited Term Municipal Fund, Inc. (the "Company"),
and Thornburg Intermediate Municipal Fund ("Intermediate National Fund"),
Thornburg Limited Term U.S. Government Fund ("Government Fund"), Thornburg
Limited Term Income Fund ("Income Fund") and Thornburg Value Fund ("Value
Fund") are investment portfolios established by Thornburg Investment Trust
(the "Trust"). This Statement of Additional Information relates to the
investments made or proposed to be made by the Funds, investment policies
governing the Funds, the Funds' management, and other issues of interest to
a prospective purchaser of Institutional Class shares offered by the Funds.

This Statement of Additional Information is not a prospectus but should
be read in conjunction with the Funds' Institutional Class Prospectus dated
February 1, 1998. A copy of the Institutional Class Prospectus for the
Funds may be obtained at no charge by writing to the distributor of the
Funds' Institutional Class shares, Thornburg Securities Corporation, at 119
East Marcy Street, Suite 202, Santa Fe, New Mexico 87501.

Prior to June 28, 1985 the Company's name was "Tax-Free Municipal Lease
Fund, Inc."; and prior to October 1, 1995, the Trust's name was "Thornburg
Income Trust."

The date of this Statement of Additional Information is February 1,
1998

<PAGE>
TABLE OF CONTENTS

INVESTMENT POLICIES. . . . . . . . . . . . . . . . . . . . . . .1
MUNICIPAL FUNDS. . . . . . . . . . . . . . . . . . . . . . . .1
TAXABLE INCOME FUNDS . . . . . . . . . . . . . . . . . . . . 12
VALUE FUND. . . . . . . . . . . . . . . . . . . . . . . . . 32

INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . 44
Investment Limitations - Limited Term National Fund
and Limited Term California Fund . . . . . . . . . . . . .44
Investment Limitations - Intermediate National Fund. . . . 47
Investment Limitations - Government Fund . . . . . . . . . 49
Investment Limitations - Income Fund . . . . . . . . . . . 51
Investment Limitations - Value Fund. . . . . . . . . . . . 54

YIELD AND RETURN COMPUTATION . . . . . . . . . . . . . . . . . 57
Performance and Portfolio Information - Municipal
Funds and Taxable Income Funds . . . . . . . . . . . . . .57
Performance and Portfolio Information - Value Fund . . . . 58

REPRESENTATIVE PERFORMANCE INFORMATION . . . . . . . . . . . . 62
Representative Performance Information - Limited Term
National Fund (Institutional Class) . . . . . . . . . . . 62
Representative Performance Information - Limited Term
California Fund (Institutional Class) . . . . . . . . . . 63

Representative Performance Information - Intermediate
National Fund (Institutional Class) . . . . . . . . . . . 64
Representative Performance Information - Government Fund
(Institutional Class) . . . . . . . . . . . . . . . . . . 66
Representative Performance Information - Income Fund
(Institutional Class) . . . . . . . . . . . . . . . . . . 67

TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Federal Income Taxes - In General. . . . . . . . . . . . . 67
Federal Income Taxation - Municipal Funds. . . . . . . . . 69
State and Local Tax Aspects of the Municipal Funds . . . . 71
Federal Income Taxes - Taxable Income Funds. . . . . . . . 72
State and Local Income Tax Considerations - Taxable
Income Funds . . . . . . . . . . . . . . . . . . . . . . .73
Federal Income Taxes - Value Fund. . . . . . . . . . . . . 73
State and Local Income Tax Considerations - Value Fund . . 74

DISTRIBUTIONS AND SHAREHOLDERS ACCOUNTS. . . . . . . . . . . . 74

INVESTMENT ADVISER, INVESTMENT ADVISORY AGREEMENT, AND
ADMINISTRATIVE SERVICES AGREEMENT. . . . . . . . . . . . . . . 75
Investment Advisory Agreement. . . . . . . . . . . . . . . 75
Administrative Services Agreement. . . . . . . . . . . . . 77
i
<PAGE>
SERVICE PLANS. . . . . . . . . . . . . . . . . . . . . . . . . 77

PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . 79
In General . . . . . . . . . . . . . . . . . . . . . . . . 79
Municipal Funds and Taxable Income Funds . . . . . . . . . 79
Value Fund . . . . . . . . . . . . . . . . . . . . . . . . 79
Portfolio Turnover Rates . . . . . . . . . . . . . . . . . 81

MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Limited Term National Fund and
Limited Term California Fund. . . . . . . . . . . . . . . 81
Intermediate National Fund; Government Fund;
Income Fund; Value Fund . . . . . . . . . . . . . . . . . 84

PRINCIPAL HOLDERS OF SECURITIES. . . . . . . . . . . . . . . . 87
Limited Term National Fund . . . . . . . . . . . . . . . . 87
Limited Term California Fund . . . . . . . . . . . . . . . 87
Intermediate National Fund . . . . . . . . . . . . . . . . 87
Government Fund. . . . . . . . . . . . . . . . . . . . . . 88
Income Fund. . . . . . . . . . . . . . . . . . . . . . . . 88
Value Fund . . . . . . . . . . . . . . . . . . . . . . . . 88

NET ASSET VALUE. . . . . . . . . . . . . . . . . . . . . . . . 89

DISTRIBUTOR. . . . . . . . . . . . . . . . . . . . . . . . . . 89

INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . 89

FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . 90

<PAGE> INVESTMENT POLICIES

MUNICIPAL FUNDS

The primary investment objective of Limited Term National Fund and
Intermediate National Fund is to provide for their respective shareholders
as high a level of current investment income exempt from federal income tax
as is consistent, in the view of the Funds' investment adviser, Thornburg
Management Company, Inc. ("TMC"), with preservation of capital. The primary
investment objective of Limited Term California Fund is to provide for its
shareholders as high a level of current investment income exempt from
federal income tax and California state personal income tax as is
consistent, in TMC's view, with preservation of capital. Limited Term
National Fund, Limited Term California Fund and Intermediate National Fund
are sometimes referred to in this Statement of Additional Information as the
"Municipal Funds." This objective of preservation of capital may preclude
the Municipal Funds from obtaining the highest possible yields.

Limited Term National Fund and Intermediate National Fund will each
seek to achieve their primary investment objective by investing in a
diversified portfolio of obligations issued by state and local governments
the interest on which is exempt from federal income tax ("Municipal
Obligations"). Limited Term California Fund will seek to achieve its
primary investment objective by investing in a portfolio of Municipal
Obligations originating primarily in California. The Funds may invest in
Municipal Obligations (or participation interests therein) that constitute
leases or installment purchase or conditional sale contracts by state of
local governments or authorities to obtain property or equipment ("Municipal
Leases").

The Limited Term National Fund and Limited Term California Fund each
will maintain a portfolio having a dollar-weighted average maturity of
normally not more than five years, with the objective of reducing
fluctuations in its net asset value relative to municipal bond portfolios
with longer average maturities while expecting lower yields than those
received on portfolios with longer average maturities. The Intermediate
National Fund will maintain a portfolio having a dollar-weighted average
maturity of normally three to ten years, with the objective of reducing
fluctuations in net asset value relative to long-term municipal bond
portfolios. The Intermediate National Fund may receive lower yields than
those received on long-term bond portfolios, while seeking higher yields and
expecting higher share price volatility than the Limited Term National Fund.

Each Municipal Fund's assets will normally consist of (1) Municipal
Obligations or participation interests therein that are rated at the time of
purchase within the four highest grades Aaa, Aa, A, Baa by Moody's Investors
Service ("Moody's"), or AAA, AA, A, BBB by Standard & Poor's Corporation
("S&P"), or Fitch Investors Service ("Fitch"), (2) Municipal Obligations or
participation interests therein that are not rated by a rating agency, but
are issued by obligors that have other comparable debt obligations that are
rated within the four highest grades by Moody's, S&P or Fitch, or in the
case of obligors whose obligations are unrated, are deemed by TMC to be
comparable with issuers having such debt ratings, and (3) a small amount of
cash or equivalents. In normal conditions, the Municipal Funds will hold
cash pending investment in portfolio securities or anticipated redemption
1
<PAGE>
requirements. For an explanation of these ratings, please see "Ratings,"
page 6. To the extent that unrated Municipal Obligations may be less
liquid, there may be somewhat greater risk in purchasing unrated Municipal
Obligations than in purchasing comparable, rated Municipal Obligations. If
a Fund experienced unexpected net redemptions, it could be forced to sell
such unrated Municipal Obligations at disadvantageous prices without regard
to the Obligations' investment merits, depressing the Fund's net asset value
and possibly reducing the Fund's overall investment performance.

Except to the extent that the Municipal Funds are invested in temporary
investments for defensive purposes, each Municipal Fund will, under normal
conditions, invest 100% of its net assets in Municipal Obligations and
normally will not invest less than 80% of its net assets in Municipal
Obligations. This 80% policy is a fundamental investment policy of each of
the Municipal Funds and may be changed only with the approval of a majority
of the outstanding voting securities of a given series of the Fund. Under
normal conditions the Limited Term California Fund will invest 100%, and as
a matter of fundamental policy, will invest at least 65% of its total assets
in Municipal Obligations originating in California.

The ability of the Municipal Funds to achieve their investment
objectives is dependent upon the continuing ability of issuers of Municipal
Obligations in which the Funds invest to meet their obligations for the
payment of interest and principal when due. In addition to using
information provided by the rating agencies, TMC will subject each issue
under consideration for investment to its own credit analysis in an effort
to assess each issuer's financial soundness. This analysis is performed on
a continuing basis for all issues held by either of the Municipal Funds.
TMC subjects each issue under consideration for investment to the same or
similar credit analysis that TMC applies to rated issues.

Credit ratings are helpful in evaluating bonds, but are relevant
primarily to the safety of principal and interest payments under the bonds.
These ratings do not reflect the risk that market values of bonds will
fluctuate with changes in interest rates. Additionally, credit rating
agencies may fail to change credit ratings in a timely fashion to reflect
events subsequent to initial ratings. TMC reviews data respecting the
issuers of the Municipal Funds' portfolio assets on an ongoing basis, and
may dispose of portfolio securities upon a change in ratings or adverse
events not reflected in ratings.

Each of the Municipal Funds has reserved the right to invest up to 20%
of its net assets in "temporary investments" in taxable securities (of
comparable quality to the above tax-exempt investments) that would produce
interest not exempt from Federal income tax. Such temporary investments,
which may include repurchase agreements with dealers, banks or recognized
financial institutions that in the opinion of TMC represent minimal credit
risk, may be made due to market conditions, pending investment of idle funds
or to afford liquidity. See "Temporary Investments," at page 8. Such
investments are, like any investment, subject to market risks and
fluctuations in value. In addition, each Fund's temporary taxable
investments may exceed 20% of its net assets when made for defensive
purposes during periods of abnormal market conditions. The Municipal Funds
do not expect to find it necessary to make temporary investments.
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No Municipal Fund will purchase securities if, as a result, more than
25% of the Fund's total assets would be invested in any one industry.
However, this restriction will not apply to purchase of (i) securities of
the United States Government and its agencies, instrumentalities and
authorities, or (ii) tax exempt securities issued by other governments or
political subdivisions, because these issuers are not considered to be
members of any industry. This restriction may not be changed as to any
Municipal Fund unless approved by a majority of the outstanding shares of
the Fund.

The Municipal Funds' investment objectives and policies, unless
otherwise specified, are not fundamental policies and may be changed without
shareholder approval.

Municipal Obligations

Municipal Obligations include debt and lease obligations issued by
states, cities and local authorities to obtain funds for various public
purposes, including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Obligations may be issued include the refunding
of outstanding obligations, the procurement of funds for general operating
expenses and the procurement of funds to lend to other public institutions
and facilities. In addition, certain types of industrial development bonds
are issued by or on behalf of public authorities to obtain funds to provide
privately-operated housing facilities, sports facilities, convention or
trade show facilities, airport, mass transit, port or parking facilities,
air or water pollution control facilities and certain local facilities for
water supply, gas, electricity or sewage or solid waste disposal. Municipal
Obligations have also been issued to finance single-family mortgage loans
and to finance student loans. Such obligations are included within the term
"Municipal Obligations" if the interest paid thereon is exempt from federal
income tax.

The two principal classifications of Municipal Obligations are
"general obligation" and "revenue" bonds. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. Revenue 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 specific revenue source. Industrial
development bonds are in most cases revenue bonds and are generally not
secured by the pledge of the credit or taxing power of the issuer of such
bonds. There are, of course, variations in the security of Municipal
Obligations, both within a particular classification and between
classifications, depending on numerous factors.

The Municipal Funds may invest in a variety of types of Municipal
Obligations, including but not limited to bonds, notes (such as tax
anticipation and revenue anticipation notes), commercial paper and variable
rate demand instruments. Variable rate demand instruments are Municipal
Obligations or participations therein, either publicly underwritten and
traded or privately purchased, that provide for a periodic adjustment of the
interest rate paid on the instrument and permit the holder to demand payment
of the unpaid principal amount and accrued interest upon not more than seven
days' notice either from the issuer or by drawing on a bank letter of
credit, a guarantee or insurance issued with respect to such instrument.
Such letters of credit, guarantees or insurance will be considered in
determining whether a Municipal Obligation meets a Fund's investment
criteria. See the Prospectus under the caption "Investment Policies of the
Municipal Funds." The issuer of a variable rate demand instrument may have
the corresponding right to prepay the principal amount prior to maturity.
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<PAGE>
The Municipal Funds also may purchase fixed rate municipal demand
instruments either in the public market or privately. Such instruments may
provide for periodic adjustment of the interest rate paid to the holder.
The "demand" feature permits the holder to demand payment of principal and
interest prior to their final stated maturity, either from the issuer or by
drawing on a bank letter of credit, a guarantee or insurance issued with
respect to the instrument. In some cases these demand instruments may be in
the form of units, each of which consists of (i) a Municipal Obligation and
(ii) a separate put option entitling the holder to sell to the issuer of
such option the Municipal Obligation in the unit, or an equal aggregate
principal amount of another Municipal Obligation of the same issuer, issue
and maturity as the Municipal Obligation, at a fixed price on specified
dates during the term of the put option. In those cases, each unit taken as
a whole will be considered a Municipal Obligation, based upon an
accompanying opinion of counsel. A Fund will invest in a fixed rate
municipal demand instrument only if the instrument or the associated letter
of credit, guarantee or insurance is rated within the three highest grades
of a nationally recognized rating agency, or, if unrated, is deemed by TMC
to be of comparable quality with issues having such debt ratings. The
credit quality of such investments will be determined on a continuing basis
by TMC for the Limited Term National Fund under the supervision of the
directors of the Company, and for the Intermediate National Fund under the
supervision of the trustees of the Trust.

A Municipal Fund also may purchase and sell Municipal Obligations on
a when-issued or delayed delivery basis. When-issued and delayed delivery
transactions arise when securities are purchased or sold with payment and
delivery beyond the regular settlement date. (When-issued transactions
normally settle within 30-45 days.) On such transactions the payment
obligation and the interest rate are fixed at the time the buyer enters into
the commitment. The commitment to purchase securities on a when-issued or
delayed delivery basis may involve an element of risk because the value of
the securities is subject to market fluctuation, no interest accrues to the
purchaser prior to settlement of the transaction, and at the time of
delivery the market value may be less than cost. At the time a Fund makes
the commitment to purchase a Municipal Obligation on a when-issued or
delayed delivery basis, it will record the transaction and reflect the value
of the security in determining its net asset value. That Fund also will
maintain liquid assets at least equal in value to commitments for
when-issued or delayed delivery securities, such assets to be segregated by
State Street Bank & Trust Co., the Fund's custodian, specifically for the
settlement of such commitments. The value of the segregated assets will be
marked to the market daily so that the Fund will at all times maintain
assets in the segregated account equal in value to the amount of these
commitments. The Funds will only make commitments to purchase Municipal
Obligations on a when-issued or delayed delivery basis with the intention of
actually acquiring the securities, but the Funds reserve the right to sell
these securities before the settlement date if it is deemed advisable. If a
when-issued security is sold before delivery any gain or loss would not be
tax-exempt.
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<PAGE>
TMC will evaluate the liquidity of each Municipal Lease upon its
acquisition and periodically while it is held based upon factors established
for the Limited Term National Fund by the Company's directors, and for the
Intermediate National Fund by the Trust's trustees, including (i) the
frequency of trades and quotes for the obligation, (ii) the number of
dealers who will buy or sell the obligation and the potential buyers for the
obligation, (iii) the willingness of dealers to make a market for the
obligation, and (iv) the nature and timing of marketplace trades. An
unrated Municipal Lease with non-appropriation risk that is backed by an
irrevocable bank letter of credit or an insurance policy, issued by a bank
or insurer deemed by TMC to be of high quality and minimal credit risk, will
not be deemed to be "illiquid" solely because the underlying Municipal Lease
is unrated, if TMC determines that the Municipal Lease is readily marketable
because it is backed by the letter of credit or insurance policy.

The Municipal Funds will seek to reduce further the special risks
associated with investment in Municipal Leases by investing in Municipal
Leases only where, in TMC's opinion, certain factors established by the
Company's directors for the Limited Term National Fund and Limited Term
California Fund, and by the Trust's trustees for the Intermediate National
Fund, have been satisfied, including (i) the nature of the leased equipment
or property is such that its ownership or use is deemed essential to a
governmental function of the governmental issuer, (ii) the Municipal Lease
has a shorter term to maturity than the estimated useful life of the leased
property and the lease payments will commence amortization of principal at
an early date, (iii) appropriate covenants will be obtained from the
governmental issuer prohibiting the substitution or purchase of similar
equipment for a specified period (usually 60 days or more) in the event
payments are not appropriated, (iv) the underlying equipment has elements of
portability or use that enhance its marketability in the event foreclosure
on the underlying equipment was ever required, and (v) the governmental
issuer's general credit is adequate. The enforceability of the
"non-substitution" provisions referred to in (iii) above has not been tested
by the courts. Investments not meeting certain of these criteria (such as
the absence of a non-substitution clause) may be made if the Municipal Lease
is subject to an agreement with a responsible party (such as the equipment
vendor) providing warranties to the Funds that satisfy such criteria.

Municipal Leases usually grant the lessee the option to purchase the
leased property prior to maturity of the obligation by payment of the unpaid
principal amount of the obligation and, in some cases, a prepayment fee.
Such prepayment may be required in the case of loss or destruction of the
property. The prepayment of the obligation may reduce the expected yield on
the invested funds if interest rates have declined below the level
prevailing when the obligation was purchased.

No Municipal Fund will invest in illiquid securities if, as a result
of the investment, more than 10% of its net assets will be invested in
illiquid securities. For purposes of this limitation, "illiquid securities"
shall be deemed to include (1) Municipal Leases subject to non-appropriation
risk which are not rated at the time of purchase within the four highest
grades by Moody's or S&P and not subject to remarketing agreements (or not
currently subject to remarketing, pursuant to the conditions of any such
agreement then in effect, with a responsible remarketing party, deemed by
TMC to be capable of performing its obligations), (2) repurchase agreements
maturing in more than seven days, (3) securities which the Funds are
restricted from selling to the public without registration under the
Securities Act of 1933, and (4) other securities or participations not
considered readily marketable by the Funds, provided that for purposes of
the foregoing an unrated Municipal Lease which is backed by an irrevocable
bank letter of credit or an insurance policy, issued by a bank or insurer
deemed by TMC to be of high quality and minimal credit risk, will not be
deemed to be illiquid.
5
<PAGE>
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption
for interest on municipal securities. Similar proposals may be introduced
in the future. These proposals, if enacted, may have the effect of reducing
the availability of investments for the Funds. Moreover, the value of the
Funds' portfolios may be affected. The Funds could be compelled to
reevaluate their investment objectives and policies and submit possible
changes in the structure of the Funds for the approval of their respective
shareholders.

The yields on Municipal Obligations are dependent on a variety of
factors, including the condition of the general market and the Municipal
Obligation market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The ratings of Moody's, S&P and
Fitch represent their opinions as to the quality of the Municipal
Obligations which they undertake to rate. See "Ratings." It should be
emphasized, however, that ratings are general and are not absolute standards
of quality. Consequently, Municipal Obligations with the same maturity,
coupon and rating may have different yields, while Municipal Obligations of
the same maturity and coupon with different ratings may have the same yield.
The market value of outstanding Municipal Obligations will vary with changes
in prevailing interest rate levels and as a result of changing evaluations
of the ability of their issuers to meet interest and principal payments.
Such variations in market value of Municipal Obligations held in a Fund's
portfolio arising from these or other factors will cause changes in the net
asset value of the Fund's shares.

Ratings

Tax-Exempt Bonds. The four highest ratings of Moody's for tax-exempt
bonds are Aaa, Aa, A and Baa. Tax-exempt bonds rated Aaa are judged to be
of the "best quality." The rating of Aa is assigned to tax-exempt bonds
which are of "high quality by all standards," but as to which margins of
protection or other elements make long-term risks appear somewhat larger
than Aaa rated tax-exempt bonds. The Aaa and Aa rated tax-exempt bonds
comprise what are generally known as "high grade bonds." Tax-exempt bonds
which are rated A by Moody's possess many favorable investment attributes
and are considered "upper medium grade obligations." Factors giving
security to principal and interest of A rated tax-exempt bonds are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future. Tax-exempt bonds rated
Baa are considered "medium grade" obligations. 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 tax-exempt bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well. The foregoing ratings are
sometimes presented in parentheses preceded with "Con." indicating the bonds
are rated conditionally. Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience,
(c) rentals which begin when facilities are completed, or (d) payments to
which some other limiting condition attaches. The parenthetical rating
denotes the probable credit status upon completion of construction or
elimination of the basis of the condition.
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<PAGE>
The four highest ratings of S&P and Fitch for tax-exempt bonds are
AAA, AA, A, and BBB. Tax-exempt bonds rated AAA bear the highest rating
assigned by S&P and Fitch to a debt obligation and indicates an extremely
strong capacity to pay principal and interest. Tax-exempt bonds rated AA
also qualify as high-quality debt obligations. Capacity to pay principal
and interest is very strong, and in the majority of instances they differ
from AAA issues only in small degree. Bonds rated A have a strong capacity
to pay principal and interest, although they are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions.
The BBB rating, which is the lowest "investment grade" security rating by
S&P or Fitch, indicates an adequate capacity to pay principal and interest.
Whereas BBB rated Municipal Obligations normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for
bonds in this category than for bonds in the A category. The foregoing
ratings are sometimes followed by a "p" indicating that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds 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, the completion.

Municipal Notes. The ratings of Moody's for municipal notes are
MIG 1, MIG 2, MIG 3 and MIG 4. Notes bearing the designation MIG 1 are
judged to be of the best quality, enjoying strong protection from
established cash flows for their servicing or from established and
broad-based access to the market for refinancing, or both. Notes bearing
the designation MIG 2 are judged to be of high quality, with margins of
protection ample although not so large as in the preceding group. Notes
bearing the designation of MIG 3 are judged to be of favorable quality, with
all security elements accounted for but lacking the undeniable strength of
the preceding grades. Market access for refinancing, in particular, is
likely to be less well established. Notes bearing the designation MIG 4
are judged to be of adequate quality, carrying specific risk but having
protection commonly regarded as required of an investment security and not
distinctly or predominantly speculative.

The S&P ratings for municipal notes are SP-1+, SP-1, SP-2 and SP-3.
Notes bearing an SP-1+ rating are judged to possess overwhelming safety
characteristics, with either a strong or very strong capacity to pay
principal and interest. Notes rated SP-1 are judged to have either a strong
or very strong capacity to pay principal and interest but lack the
overwhelming safety characteristics of notes rated SP-1+. Notes bearing an
SP-2 rating are judged to have a satisfactory capacity to pay principal and
interest, and notes rated SP-3 are judged to have a speculative capacity to
pay principal and interest.

Tax-Exempt Demand Bonds. The rating agencies may assign dual ratings
to all long term debt issues that have as part of their provisions a demand
or multiple redemption feature. The first rating addresses the likelihood
of repayment of principal and interest as due and the second rating
addresses only the demand feature. The long term debt rating symbols are
used for bonds to denote the long term maturity and the commercial paper
rating symbols are used to denote the put option (for example, "AAA/A-1+").
For newer "demand notes" maturing in 3 years or less, the respective note
rating symbols, combined with the commercial paper symbols, are used (for
example. "SP-1+/A-1+").
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<PAGE>
Commercial Paper. The ratings of Moody's for issuers of commercial
paper are Prime-1, Prime-2 and Prime-3. Issuers rated Prime-1 are judged to
have superior ability for repayment which is normally evidenced by (i)
leading market positions in well established industries, (ii) high rates of
return on funds employed, (iii) conservative capitalization structures with
moderate reliance on debt and ample asset protection, (if) broad margins in
earnings coverage of fixed financial charges and high internal cash
generation, and (v) well established access to a range of financial markets
and assured sources of alternate liquidity. Issuers rated Prime-2 are
judged to have a strong capacity for repayment which is normally evidenced
by many of the characteristics cited under the discussion of issuers rated
Prime-1 but to a lesser degree. Earnings trends, while sound, will be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Adequate
liquidity is maintained. Issuers rated Prime-3 are judged to have an
acceptable capacity for repayment. The effect of industry characteristics
and market composition may be more pronounced. Variability of 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.

The ratings of S&P for commercial paper are A (which is further
delineated by Categories A-1+, A-1, A-2 and A-3), B, C and D. Commercial
paper rated A is judged to have the greatest capacity for timely payment.
Commercial paper rated A-1+ is judged to possess overwhelming safety
characteristics. Commercial paper rated A-1 is judged to possess an
overwhelming or very strong degree of safety. Commercial paper rated A-2 is
judged to have a strong capacity for payment although the relative degree of
safety is not as high as for paper rated A-1. Commercial paper rated A-3 is
judged to have a satisfactory capacity for timely payment but is deemed to
be somewhat more vulnerable to the adverse changes in circumstances than
paper carrying the higher ratings. Commercial paper rated B is judged to
have an adequate capacity for timely payment but such capacity may be
impaired by changing conditions or short-term adversities.

Temporary Investments

Each Municipal Fund has reserved the right to invest up to 20% of its
net assets in "temporary investments" in taxable securities that would
produce interest not exempt from federal income tax. See "Taxes." Such
temporary investments may be made due to market conditions, pending
investment of idle funds or to afford liquidity. These investments are
limited to the following short-term, fixed-income securities (maturing in
one year or less from the time of purchase): (i) obligations of the United
States government or its agencies, instrumentalities or authorities; (ii)
prime commercial paper within the two highest ratings of Moody's or S&P;
(iii) certificates of deposit of domestic banks with assets of $1 billion or
more; and (iv) repurchase agreements with respect to the foregoing types of
securities. Repurchase agreements will be entered into only with dealers,
domestic banks or recognized financial institutions that in TMC's opinion
represent minimal credit risk. Investments in repurchase agreements are
limited to 5% of a Fund's net assets. See the next paragraph respecting
repurchase agreements. In addition, temporary taxable investments may
exceed 20% of a Fund's net assets when made for defensive purposes during
periods of abnormal market conditions. None of the Municipal Funds expect
to find it necessary to make such temporary investments.
8
<PAGE>
Repurchase Agreements

Each Municipal Fund may enter into repurchase agreements with respect
to taxable securities constituting "temporary investments" in its portfolio.
A repurchase agreement is a contractual agreement whereby the seller of
securities agrees to repurchase the same security at a specified price on a
future date agreed upon by the parties. The agreed upon repurchase price
determines the yield during the Fund's holding period. Repurchase
agreements may be viewed as loans collateralized by the underlying security
that is the subject of the repurchase agreement. No Municipal Fund will
enter into a repurchase agreement if, as a result, more than 5% of the value
of its net assets would then be invested in repurchase agreements. The
Funds will enter into repurchase agreements only with dealers, banks or
recognized financial institutions that in the opinion of TMC represent
minimal credit risk. The risk to a Fund is limited to the ability of the
seller to pay the agreed upon repurchase price on the delivery date;
however, although the value of the underlying collateral at the time the
transaction is entered into always equals or exceeds the agreed upon
repurchase price, if the value of the subject security declines there is a
risk of loss of both principal and interest if the seller defaults. In the
event of a default, the collateral may be sold. A Fund might incur a loss
if the value of the collateral has declined, and the Fund might incur
disposition costs or experience delays in connection with liquidating the
security. In addition, if bankruptcy proceedings are commenced with respect
to the seller of the security, realization upon the subject security by the
Fund may be delayed or limited. The Funds' investment adviser will monitor
the value of the security at the time the transaction is entered into and at
all subsequent times during the term of the repurchase agreement in an
effort to determine that the value always equals or exceeds the agreed upon
repurchase price. In the event the value of the subject security declines
below the repurchase price, TMC will demand additional securities from the
seller to increase the value of the property held to at least that of the
repurchase price.

U.S. Government Obligations

Each Fund's temporary investments in taxable securities may include
obligations of the U.S. government. These include bills, certificates of
indebtedness, notes and bonds issued or guaranteed as to principal or
interest by the United States or by agencies or authorities controlled or
supervised by and acting as instrumentalities of the U.S. government and
established under the authority granted by Congress, including, but not
limited to, the Government National Mortgage Association, the Tennessee
Valley Authority, the Bank for Cooperatives, the Farmers Home
Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Land Banks, Farm Credit Banks and the Federal National Mortgage
Association. Some obligations of U.S. government agencies, authorities and
other instrumentalities are supported by the full faith and credit of the
U.S. Treasury; others by the right of the issuer to borrow from the
Treasury; others only by the credit of the issuing agency, authority or
other instrumentality. In the case of securities not backed by the full
faith and credit of the United States, the investor must look principally to
the agency issuing or guaranteeing the obligation for ultimate repayment,
and may not be able to assert a claim against the United States itself in
the event the agency or instrumentality does not meet its commitments.
9
<PAGE>
Special Risks Affecting Limited Term California Fund

Due to Limited Term California Fund's policy of concentrating its
investments in municipal securities exempt from California personal income
taxes, this Fund will invest primarily in California state, municipal, and
agency obligations. For this reason, an investment in the Limited Term
California Fund may be considered riskier than an investment in the Limited
Term National Fund, which buys Municipal Obligations from throughout the
United States. Prospective investors should consider the risks inherent in
the investment concentration of the Limited Term California Fund before
investing.

California's economy is the largest among the 50 states and one of the
largest in the world. The state's July 1, 1995 population of approximately
32.1 million represents 12.2 percent of the total United States population
and total personal income in the state, at an estimated $810 billion in
1996, accounts for 12.6 percent of all personal income in the nation. Total
employment is about 14.5 million, the majority of which is in the service,
trade and manufacturing sectors.

Changes in California constitutional and other laws raise questions
about the ability of California state and municipal issuers to obtain
sufficient revenue to pay their bond obligations in all situations. In
1978, California voters approved an amendment to the California Constitution
known as Proposition 13, which has had an affect on California issuers that
rely in whole or in part, directly or indirectly, on ad valorem real
property taxes as a source of revenue. Proposition 13 limits ad valorem
taxes on real property and restricts the ability of taxing entities to
increase real property taxes. In 1979, California voters approved another
constitutional amendment, Article XIIIB, which may have an adverse impact on
California state and municipal issuers. Article XIIIB prohibits government
agencies and the state from spending "appropriations subject to limitation"
in excess of the appropriations limit imposed. "Appropriations subject to
limitation" are authorizations to spend "proceeds of taxes", which consist
of tax revenues, certain state subventions and certain other funds,
including proceeds from regulatory licenses, user charges or other fees to
the extent that such proceeds exceed "the cost reasonably borne by such
entity in providing the regulation, product or service". No limit is
imposed on appropriations of funds which are not "proceeds of taxes", such
as debt service on indebtedness existing or authorized before January 1,
1979, or subsequently authorized by the voters, appropriations required to
comply with mandates of the courts or the federal government, reasonable
user charges or fees and certain other non-tax funds. The amendment
restricts the spending authority of state and local government entities. If
revenues exceed such appropriations limits, such revenues must be returned
either as revisions in the tax rate or fee schedules.

California obtains roughly 45% of general fund revenues from personal
income taxes (individual and corporate) compared to an average of only 30%
for other states. Income taxes serve as a bellwether which is frequently a
leading indicator of economic weakness. Much of California's recent deficit
was caused by lower than projected income tax receipts. California's other
principal revenue source is sales taxes.
10
<PAGE>
A recession began in mid-1990 due largely to job losses in the
aerospace and defense-related industries. The 1993 unemployment rate of
9.4% was 135% of the national rate. The recession affected California's
General Fund revenues, and increased expenditures above initial budget
appropriations due to greater health and welfare costs. The state's budget
problems in recent years have also been caused by a structural imbalance in
that the largest General Fund Programs -- K-12 education, health, welfare
and corrections -- were increasing faster than the revenue base, driven by
the state's rapid population growth. These pressures are expected to
continue as population trends maintain strong demand for health and welfare
services, as the school age population continues to grow, and as the state's
corrections program responds to a "Three-Strikes" law enacted in 1994, which
requires mandatory life prison terms for certain third-time felony
offenders.

As a result of these factors and others, from the late 1980's until
1992-'93, the state had a period of budget imbalance. During this period,
expenditures exceeded revenues in four out of six years, and the state
accumulated and sustained a budget deficit approaching $2.8 billion at its
peak at June 30, 1993. Starting in the 1990-'91 fiscal year and for each
fiscal year thereafter, each budget required multibillion dollar actions to
bring projected revenues and expenditures into balance. The Legislature and
Governor agreed on the following principal steps to produce Budget Acts in
the years 1991-'92 to 1994-'95, including:

* significant cuts in health and welfare program expenditures;

* transfers of program responsibilities and funding from the state to
local governments (referred to as "realignment"), coupled with some
reduction in mandates on local government;

* transfer of about $3.6 billion in local property tax revenues from
cities, counties, redevelopment agencies and some other districts to local
school districts, thereby reducing state funding for schools under
Proposition 98;

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

* maintenance of the minimum Proposition 98 funding guarantee for K-12
schools, and the disbursement of additional funds to keep a constant level
of about $4,200 per K-12 pupil;

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

* increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare services
to illegal immigrants, although during this time frame most of the
additional aid requested by the administration was not received; and

* various one-time adjustments and accounting changes.

Despite these budget actions as noted, the effects of the recession led to
large, unanticipated deficits in the budget reserve as compared to projected
positive balances. By the 1993-'94 fiscal year, the accumulated deficit was
so large that it was impractical to budget to retire it in one year, so a
two-year program was implemented, using the issuance of revenue anticipation
11
<PAGE>
warrants to carry a portion of the deficit over the end of the fiscal year.
When the economy failed to recover sufficiently in 1993-'94, a second two-
year plan was implemented in 1994-'95, again using cross-fiscal year revenue
anticipation warrants to partly finance the deficit into the 1995-'96 fiscal
year.

With strengthening revenues and reduced social services caseload growth
based on an improving economy, the state entered the 1995-'96 fiscal year
budget negotiations with the smallest nominal "budget gap" to be closed in
many years. Nonetheless, serious policy differences between the Governor
and Legislature prevented timely enactment of the budget. The 1995-'96
Budget Act was signed by the Governor on August 3, 1995, 34 days after the
start of the fiscal year. Due to an economy which was stronger than
expected, the General Fund received $2.2 billion more tax revenues than
planned for in the 1995-'96 budget. This allowed the state to increase
school, health and welfare spending and still post a positive balance of
$685 million to the Adjusted fund Balance as of June 30, 1996.

The state continues to see healthy growth. Personal income is
estimated to be growing at an annual rate of about 6.8%. Revenues and
transfers for the state in the 1996-'97 fiscal year are estimated to have
been about 48.9 billion while expenditures are estimated to have been about
48.9 billion. This should allow the state to post a positive cash balance
in the Fund for Economic Uncertainty ("SFEU") for only the second time in
the 1990's.

On August 18, 1997, the Governor signed the 1997 Budget Act. The Act
anticipates General Fund revenues and transfers of about $52.5 billion, a
6.8% increase over the previous year, and expenditures of $52.5 billion, an
8% increase. The SFEU is expected to decline about $112 million.

TAXABLE INCOME FUNDS

Government Fund and Income Fund (the "Taxable Income Funds") each has
the primary investment objective of providing, through investment in a
professionally managed portfolio of fixed income obligations as high a level
of current income as is consistent, in TMC's view, with safety of capital.
The Government Fund will seek to achieve its primary investment objective by
investing primarily in obligations issued or guaranteed by the U.S.
government or by its agencies or instrumentalities and in participations in
such obligations or in repurchase agreements secured by such obligations.
The Income Fund will seek to achieve its primary objective by investing in
primarily in investment grade short and intermediate maturity bonds and
asset backed securities such as mortgage backed securities and
collateralized mortgage obligations. The Income Fund also may invest in
other securities, and utilize other investment strategies to hedge market
risks, manage cash positions or to enhance potential gain. Additionally,
each of the Taxable Income Funds has the secondary objective of reducing
fluctuations in its net asset value compared to longer term portfolios, and
will seek to attain this objective by investing in obligations with an
expected dollar-weighted average maturity of normally not more than five
years.
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Determining Portfolio Average Maturity - Government Fund and Income Fund

For purposes of each Taxable Income Fund's investment policy, an
instrument will be treated as having a maturity earlier than its stated
maturity date if the instrument has technical features (such as put or
demand features) or a variable rate of interest which, in the judgment of
TMC, will result in the instrument being valued in the market as though it
has an earlier maturity.

In addition, each Taxable Income Fund may estimate the expected
maturities of certain securities it purchases in connection with achieving
its investment objectives. Certain obligations such as Treasury Bills and
Notes have stated maturities. However, certain obligations a Fund may
acquire, such as GNMA certificates, are interests in pools of mortgages or
other loans having varying maturities.

Due to prepayments of the underlying mortgage instruments or other
loans, such asset-backed securities do not have a known actual maturity (the
stated maturity date of collateralized mortgage obligations is, in effect,
the maximum maturity date). In order to determine whether such a security
is a permissible investment for a Fund (and assuming the security otherwise
qualifies for purchase by the Fund), the security's remaining term will be
deemed equivalent to the estimated average life of the underlying mortgages
at the time of purchase of the security by the Fund. Average life will be
estimated by the Fund based on TMC's evaluation of likely prepayment rates
after taking into account current interest rates, current conditions in the
relevant housing markets and such other factors as it deems appropriate.
There can be no assurance that the average life as estimated will be the
actual average life.

For example, the mortgage instruments in the pools underlying
mortgage-backed securities have original maturities ranging from 8 to 40
years. The maximum original maturity of the mortgage instruments underlying
such a security may, in some cases, be as short as 12 years. The average
life of such a security at the time of purchase by a Fund is likely to be
substantially less than the maximum original maturity of the mortgage
instruments underlying the security because of prepayments of the mortgage
instruments, the passage of time from the issuance of the security until its
purchase by a Fund and, in some cases, the wide dispersion of the original
maturity dates of the underlying mortgage instruments.

Certain securities which have variable or floating interest rates or
demand or put features may nonetheless be deemed to have remaining actual
lives which are less than their stated nominal lives. In addition, certain
asset-backed securities which have variable or floating interest rates may
be deemed to have remaining lives which are less than the stated maturity
dates of the underlying mortgages.

Purchase of Certificates of Deposit - Government Fund and Income Fund

In addition to the other securities each Taxable Income Fund may
purchase, each Taxable Income Fund is authorized to purchase bank
certificates of deposit under certain circumstances. The Government Fund
may under certain market conditions invest up to 20% of its assets in (i)
time certificates of deposit maturing in one year or less after the date of
acquisition which are issued by United States banks having assets of
$1,000,000,000 or more, and (ii) time certificates of deposit insured as to
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principal by the Federal Deposit Insurance Corporation. If any certificate
of deposit (whether or not insured in whole or in part) is nonnegotiable,
and it matures in more than 7 days, it will be considered illiquid, and
subject to the Government Fund's fundamental investment restriction that no
more than 10% of the Fund's net assets will be placed in illiquid
investments.

The Income Fund may invest in certificates of deposit of large domestic
and foreign banks (i.e., banks which at the time of their most recent annual
financial statements show total assets in excess of one billion U.S.
dollars), including foreign branches of domestic banks, and certificates of
deposit of smaller banks as described below. Although the Income Fund
recognizes that the size of a bank is important, this fact alone is not
necessarily indicative of its creditworthiness. Investment in certificates
of deposit issued by foreign banks or foreign branches of domestic banks
involves investment risks that are different in some respects from those
associated with investment in certificates of deposit issued by domestic
banks. (See "Foreign Securities" below). The Income Fund may also invest
in certificates of deposit issued by banks and savings and loan institutions
which had at the time of their most recent annual financial statements total
assets of less than one billion dollars, provided that (i) the principal
amounts of such certificates of deposit are insured by an agency of the U.S.
Government, (ii) at no time will the Fund hold more that $100,000 principal
amount of certificates of deposit of any one such bank, and (iii) at the
time of acquisition, no more than 10% of the Fund's assets (taken at current
value) are invested in certificates of deposit of such banks having total
assets not in excess of one billion dollars.

Asset-Backed Securities - Government Fund and Income Fund

Each of the Funds may invest in asset-backed securities, which are
interests in pools in loans, described in the Prospectus.

Mortgage-Backed Securities and Mortgage Pass-Through Securities

If otherwise consistent with its investment restrictions and the
Prospectus, each Taxable Income Fund may invest in mortgage-backed
securities, which are interests in pools of mortgage loans, including
mortgage loans made by savings and loan institutions, mortgage bankers,
commercial banks and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related
and private organizations as further described below. A Fund also may
invest in debt securities which are secured with collateral consisting of
mortgage -backed securities (see "Collateralized Mortgage Obligations"), and
in other types of mortgage-related securities.

A decline in interest rates may lead to a faster rate of repayment of
the underlying mortgages, and expose the Fund to a lower rate or return upon
reinvestment of the prepayments. Additionally, the potential for
prepayments in a declining interest rate environment will tend to limit to
some degree the increase in net asset value of the Fund because the value of
the mortgage-backed securities held by the Fund may not appreciate as
rapidly as the price of non-callable debt securities. During periods of
increasing interest rates, prepayments likely will be reduced, and the value
of the mortgage-backed securities will decline.
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Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which
consists of both interest and principal payments. In effect, these payments
are a "pass-through" of the monthly payments made by the individual
borrowers on their mortgage loans, net of any fees paid to the issuer or
insurer of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying property, or upon
refinancing or foreclosure, net of fees or costs which may be incurred.
Some mortgage-related securities (such as securities issued by the
Government National Mortgage Association) are described as "modified
pass-through." These securities entitle the holder to receive all interest
and principal payments owed on the mortgage pool, net of certain fees, on
the scheduled payment dates regardless of whether or not the mortgagor
actually makes the payment.

The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a
wholly-owned United States Government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee, with the
full faith and credit of the United States government, the timely payment of
principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools of FHA-insured or VA-guaranteed mortgages.
These guarantees, however, do not apply to the market value or yield of
mortgage-backed securities or to the value of Fund shares. Also, GNMA
securities often are purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.

Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). FNMA is a government-sponsored corporation owned entirely by
private stockholders. It is subject to general regulation by the Secretary
of Housing and Urban Development. FNMA purchases conventional (i.e., not
insured or guaranteed by any government agency) mortgages from a list of
approved seller/servicers which include state and federally-chartered
savings loan associations, mutual savings banks, commercial banks and credit
unions and mortgage bankers. Pass-through securities issued by FNMA are
guaranteed as to timely payment of principal and interest by FNMA but are
not backed by the full faith and credit of the United States Government.
FHLMC is a corporate instrumentality of the United States Government and was
created by Congress in 1970 for the purpose of increasing the availability
of mortgage credit for residential housing. Its stock is owned by the
twelve Federal Home Loan Banks. FHLMC issues Participation Certificates
("PC's") which represent interests in conventional mortgages from FHLMC's
national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PC's are not backed by the full faith
and credit of the United States Government.

Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers
also create pass-through pools of conventional mortgage loans. Such issuers
may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate
of interest than government and government-related pools because there are
no direct or indirect government or agency guarantees of payments. Such
pools
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may be purchased by the Income Fund, but will not be purchased by the
Government Fund. Timely payment of interest and principal of these pools
may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit.
The insurance and guarantees are issued by governmental entities, private
insurers and the mortgage poolers. Such insurance and guarantees and the
creditworthiness of the issuers thereof will be considered in determining
whether a mortgage-related security meets the Income Fund's investment
quality standards. There can be no assurance that the private insurer or
guarantors can meet their obligations under the insurance policies or
guarantee arrangements. The Income Fund may buy mortgage-related securities
without insurance or guarantees, if through an examination of the loan
experience and practices of the originators/servicers and poolers, TMC
determines that the securities meet the Income Fund's quality standards.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable.

Collateralized Mortgage Obligations ("CMO's")

A CMO is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Similar to a bond, interest and prepaid principal
are paid, in most cases, semiannually. CMO's may be collateralized by whole
mortgage loans but are more typically collateralized by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and
their income streams.

CMO's are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMO's provide for a modified form
of call protection through a de facto breakdown of the underlying pool of
mortgages according to how quickly the loans are repaid. Monthly payment of
principal received from the pool of underlying mortgages, including
prepayments, is first returned to investors holding the shortest maturity
class. Investors holding the longer maturity classes receive principal only
after the first class has been retired. An investor is partially guarded
against unanticipated early return of principal because of the sequential
payments.

In a typical CMO transaction, a corporation issues multiple series,
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgage pass-through certificates ("Collateral"). The
Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay
principal on the Bonds in the order A, B, C, Z. The Series A, B, and C
bonds all bear current interest. Interest on the Series Z Bond is accrued
and added to principal and a like amount is paid as principal on the Series
A, B, or C Bond currently being paid off. When the Series A, B, and C
Bonds are paid in full, interest and principal on the Series Z Bond begins
to be paid currently. With some CMO's, the issuer serves as a conduit to
allow loan originators (primarily builders or savings and loan associations)
to borrow against their loan portfolios.
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FHLMC Collateralized Mortgage Obligations

FHLMC CMO's are debt obligations of FHLMC issued in multiple classes
having different maturity dates which are secured by the pledge of a pool of
conventional mortgage loans purchased by FHLMC. Unlike FHLMC PC's, payments
of principal and interest on the CMO's are made semiannually, as opposed to
monthly. The amount of principal payable on each semiannual payment date is
determined in accordance with FHLMC's mandatory sinking fund schedule,
which, in turn, is equal to approximately 100% of FHA prepayment experience
applied to the mortgage collateral pool. All sinking fund payments in the
CMO's are allocated to the retirement of the individual classes of bonds in
the order of their stated maturities. Payment of principal on the mortgage
loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the
CMO's as additional sinking fund payments. Because of the "pass-through"
nature of all principal payments received on the collateral pool in excess
of FHLMC's minimum sinking fund requirement, the rate at which principal of
the CMO's is actually repaid is likely to be such that each class of bonds
will be retired in advance of its scheduled date.

If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.

Criteria for the mortgage loans in the pool backing the CMO's are
identical to those of FHLMC PC's. FHLMC has the right to substitute
collateral in the event of delinquencies or defaults.

Other Mortgage-Backed Securities

TMC expects that governmental, government-related or private entities
may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above. The mortgages underlying these
securities may include alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose terms to
maturity may differ from customary long-term fixed rate mortgages. Neither
the Government Fund nor the Income Fund will purchase mortgage-backed
securities or any other assets which, in the opinion of TMC, are illiquid
and exceed, as a percentage of the Fund's assets, the percentage limitations
on the Fund's investment in securities which are not readily marketable, as
discussed below. TMC will, consistent with the Funds' respective investment
objectives, policies and quality standards, consider making investments in
such new types of mortgage-related securities.

Other Asset-Backed Securities

The securitization techniques used to develop mortgage-backed
securities are now being applied to a broad range of assets. Through the
use of trusts and special purpose corporations, various types of assets,
including automobile loans, computer leases and credit card receivables, are
being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in structures similar to the CMO
pattern. Consistent with the Funds' respective investment objectives and
policies, each Fund may invest in these and other types of asset-backed
securities that may be developed in the future. In general, the collateral
supporting these securities is of shorter maturity than mortgage loans and
is less likely to experience substantial prepayments with interest rate
fluctuations.
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Several types of asset-backed securities have already been offered to
investors, including Certificates of Automobile Receivables ("CARS"). CARS
represent undivided fractional interests in a trust whose assets consist of
a pool of motor vehicle retail installment sales contracts and security
interests in the vehicles securing the contracts. Payments of principal and
interests on CARS are passed through monthly to certificate holders, and are
guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. An investor's return on CARS may be affected by
early prepayment of principal on the underlying vehicle sales contracts. If
the letter of credit is exhausted, the trust may be prevented from realizing
the full amount due on a sales contract because of state law requirements
and restrictions relating to foreclosure sales of vehicles and the obtaining
of deficiency judgments following such sales or because of depreciation,
damage or loss of a vehicle, the application of federal and state bankruptcy
and insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is
exhausted.

Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of bankruptcy laws and of a number of state and federal consumer
credit laws, many of which give such debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the balance due. There
is the possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on these securities.

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

The Income Fund may also invest in residual interests in asset-backed
securities. In the case of asset-backed securities issued in a pass-through
structure, the cash flow generated by the underlying assets is applied to
make required payments on the securities and to pay related administrative
expenses. The residual in an asset-backed security pass-through structure
represents the interest in any excess cash flow remaining after making the
foregoing payments. The amount of the residual will depend on, among other
things, the characteristics of the underlying assets, the coupon rates on
the securities, prevailing interest rates, the amount of administrative
expenses and the actual prepayment experience on the underlying assets.
Asset-backed security residuals not registered under the Securities Act of
1933 may be subject to certain restrictions on transferability. In
addition, there may be no liquid market for such securities.
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The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such
developments may require a Fund holding these securities to dispose of the
securities.

Repurchase Agreements - Government Fund and Income Fund

Either Taxable Income Fund may enter into repurchase agreements with
member banks of the Federal Reserve System or any domestic broker-dealer
which is recognized as a reporting government securities dealer if the
creditworthiness of the bank or broker-dealer has been determined by TMC to
be at least as high as that of other obligations the purchasing Fund may
purchase or at least equal to that of issuers of commercial paper rated
within the two highest grades assigned by Moody's or S&P. These
transactions may not provide the purchasing Fund with collateral
marked-to-market during the term of the commitment.

A repurchase agreement, which provides a means for a Fund to earn
income on funds for periods as short as overnight, is an arrangement under
which the Fund purchases a security ("Obligation") and the seller agrees, at
the time of sale, to repurchase the Obligation at a specified time and
price. The repurchase price may be higher than the purchase price, the
difference being interest at a stated rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the Obligation. Obligations will be held
by the Fund's custodian or in the Federal Reserve Book Entry System.

For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from the purchasing Fund to the seller of the Obligations subject to
the repurchase agreement and is therefore subject to that Fund's investment
restriction applicable to loans. It is not clear whether a court would
consider the Obligation purchased by a Fund subject to a repurchase
agreement as being owned by the Fund or as being collateral for a loan by
the Fund to the seller. In the event of the commencement of bankruptcy or
insolvency proceedings with respect to the seller of the Obligation before
repurchase of the Obligation under a repurchase agreement, the Fund may
encounter delay and incur costs before being able to sell the security.
Delays may involve loss of interest or decline in the price of the
Obligation. If the court characterized the transaction as a loan and the
Fund has not perfected a security interest in the Obligation, the Fund may
be required to return the Obligation to the seller's estate and be treated
as an unsecured creditor of the seller. As an unsecured creditor, the Fund
would be at risk of losing some or all of the principal and income involved
in the transaction. As with any unsecured debt obligation purchased for the
Fund, TMC seeks to minimize the risk of loss through repurchase agreements
by analyzing the creditworthiness of the obligor, in this case the seller of
the Obligation. Apart from the risk of bankruptcy or insolvency
proceedings, there is also the risk that the seller may fail to repurchase
the Obligation, in which case the purchasing Fund may incur a loss if the
proceeds to the Fund of the sale to a third party are less than the
repurchase price. However, if the market value (including interest) of the
Obligation subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Fund will direct the seller of
the Obligation to deliver additional securities so that the market value
(including interest) of all securities subject to the repurchase agreement
will equal or exceed the repurchase price. It is possible that the Fund
will be unsuccessful in seeking to impose on the seller a contractual
obligation to deliver additional securities.
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When Issued Securities - Government Fund and Income Fund

Either Taxable Income Fund may purchase securities offered on a
"when-issued" or "forward delivery" basis. When so offered, the price,
which is generally expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment for the when-issued
or forward delivery securities take place at a later date. During the
period between purchase and settlement, no payment is made by the purchaser
to the issuer and no interest on the when-issued or forward delivery
security accrues to the purchaser. To the extent that assets of a Fund are
not invested prior to the settlement of a purchase of securities, the Fund
will earn no income; however, it is intended that each Fund will be fully
invested to the extent practicable and subject to the Fund's investment
policies. While when-issued or forward delivery securities may be sold
prior to the settlement date, it is intended that each Fund will purchase
such securities with the purpose of actually acquiring them unless sale
appears desirable for investment reasons. At the time a Fund makes the
commitment to purchase a security on a when-issued or forward delivery
basis, it will record the transaction and reflect the value of the security
in determining its net asset value. The market value of when-issued or
forward delivery securities may be more or less than the purchase price.
Neither Fund believes that its net asset value or income will be adversely
affected by its purchase of securities on a when-issued or forward delivery
basis. Each Fund will establish a segregated account for commitments for
when-issued or forward delivery securities as described above.

Reverse Repurchase Agreements - Government Fund and Income Fund

Either Taxable Income Fund may enter into reverse repurchase agreements
by transferring securities to another person in return for proceeds equal to
a percentage of the value of the securities, subject to its agreement to
repurchase the securities from the other person for an amount equal to the
proceeds plus an interest amount. Neither Fund will enter into any such
transaction if, as a result, more than 5% of the Fund's total assets would
then be subject to reverse repurchase agreements. See the "Investment
Restrictions" applicable to each Fund, below.

Dollar Roll Transactions - Government Fund and Income Fund

Either Taxable Income Fund may enter into "dollar roll" transactions,
which consist of the sale by the Fund to a bank or broker-dealer (the
"counterparty") of GNMA certificates or other mortgage-backed securities
together with a commitment to purchase from the counterparty similar, but
not identical, securities at a future date at the same price. The
counterparty receives all principal and interest payments, including
prepayments, made on the security while it is the holder. The selling Fund
receives a fee from the counterparty as consideration for entering into the
commitment to purchase. Dollar rolls may be renewed over a period of
several months with a new purchase and repurchase price fixed and a cash
settlement made at each renewal without physical delivery of securities.
Moreover, the transaction may be preceded by a firm commitment agreement
pursuant to which the Fund agrees to buy a security on a future date.
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Dollar rolls are treated for purposes of the Investment Company Act of
1940 (the "1940 Act") as borrowings of the Fund entering into the
transaction because they involve the sale of a security coupled with an
agreement to repurchase, and are subject to the investment restrictions
applicable to any borrowings made by the Fund. Like all borrowings, a
dollar roll involves costs to the borrowing Fund. For example, while the
Fund receives a fee as consideration for agreeing to repurchase the
security, the Fund forgoes the right to receive all principal and interest
payments while the counterparty holds the security. These payments to the
counterparty may exceed the fee received by the Fund, thereby effectively
charging the Fund interest on its borrowing. Further, although the Fund can
estimate the amount of expected principal prepayment over the term of the
dollar roll, a variation in the actual amount of prepayment could increase
or decrease the cost of the Fund's borrowing.

Dollar rolls involve potential risks of loss to the selling Fund which
are different from those related to the securities underlying the
transactions. For example, if the counterparty becomes insolvent, the
Fund's right to purchase from the counterparty may be restricted.
Additionally, the value of such securities may change adversely before the
Fund is able to purchase them. Similarly, the Fund may be required to
purchase securities in connection with a dollar roll at a higher price than
may otherwise be available on the open market. Since, as noted above, the
counterparty is required to deliver a similar, but not identical security to
the Fund, the security which the Fund is required to buy under the dollar
roll may be worth less than an identical security. Finally, there can be no
assurance that the Fund's use of the cash that it receives from a dollar
roll will provide a return that exceeds borrowing costs.

Lending of Portfolio Securities - Government Fund and Income Fund

Each Taxable Income Fund may seek to increase its income by lending
portfolio securities. Under present regulatory policies, including those of
the Board of Governors of the Federal Reserve System and the Securities and
Exchange Commission, such loans may be made to member firms of the New York
Stock Exchange, and would be required to be secured continuously by
collateral in cash, cash equivalents or U.S. Treasury bills maintained on a
current basis at an amount at least equal to the market value and accrued
interest of the securities loaned. The lending Fund would have the right to
call a loan and obtain the securities loaned on no more than five days'
notice. During the existence of a loan, the Fund would continue to receive
the equivalent of the interest paid by the issuer on the securities loaned
and would also receive compensation based on investment of the collateral.
As with other extensions of credit there are risks of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. However, the loans would be made only to firms deemed by
TMC to be of good standing, and when, in the judgment of TMC, the
consideration which can be earned currently from securities loans of this
type justifies the attendant risk.

Other Investment Strategies - Income Fund

The Income Fund may, but is not required to, utilize various other
investment strategies as described below to hedge various market risks (such
as interest rates, currency exchange rates, and broad or specific equity
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market movements), to manage the effective maturity or duration of
fixed-income securities or portfolios, or to enhance potential gain. Such
strategies are used by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new investments and
strategies are developed or regulatory changes occur.

In the course of pursuing these investment strategies, the Income Fund
may purchase and sell exchange-listed and over-the-counter put and call
options on securities, financial futures, equity and fixed-income indices
and other financial instruments, purchase and sell financial futures
contracts, enter into various interest rate transactions such as swaps,
caps, floors or collars, and enter into various currency transactions such
as currency forward contracts, currency futures contracts, currency swaps or
options on currency or currency futures (collectively, all the above are
called "Strategic Transactions"). Strategic Transactions may be used to
attempt to protect against possible changes in the market value of
securities held in or to be purchased for the Income Fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect the Fund's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's
portfolio, or to establish a position in the derivatives markets as a
temporary substitute for purchasing or selling particular securities. Some
Strategic Transactions may also be used to enhance potential gain although
no more than 5% of the Fund's assets will be committed to Strategic
Transactions entered into for purposes not related to bona fide hedging or
risk management. Any or all of these investment techniques may be used at
any time and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The ability of
the Income Fund to utilize these Strategic Transactions successfully will
depend on TMC's ability to predict pertinent market movements, which cannot
be assured. The Fund will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments.

Strategic Transactions have risks associated with them including
possible default by the other party to the transaction, illiquidity and, to
the extent TMC's view as to certain market movements is incorrect, the risk
that the use of such Strategic Transactions could result in losses greater
than if they had not been used. Use of put and call options may result in
losses to the Income Fund, force the sales of portfolio securities at
inopportune times or for prices higher than (in the case of put options) or
lower than (in the case of call options) current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the
Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund incurring losses as a result of a number
of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency.
The use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of
the Fund creates the possibility that losses on the hedging instrument may
be greater than gains in the value of the Fund's position. In addition,
futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in
certain markets, the Fund might not be able to close out a transaction
without incurring substantial losses, if at all. Although the contemplated
use of these futures contracts and options thereon should tend to minimize
the risk
22
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of loss due to a decline in the value of the hedged position, at the same
time they tend to limit any potential gain which might result from an
increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is
limited to the cost of the initial premium. Losses resulting from the use
of Strategic Transactions would reduce net asset value, and possibly income,
and such losses can be greater than if the Strategic Transactions had not
been utilized.

General Characteristics of Options - Income Fund

Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument as to which the options relate. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving
options require segregation of Income Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."

A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the
underlying security, commodity, index, currency or other instrument at the
exercise price. For instance, the Income Fund's purchase of a put option on
a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the Fund the right to sell the
instrument at the option exercise price. A call option, upon payment of a
premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell, the underlying instrument at the exercise price.
The Fund's purchase of a call option on a security, financial future, index,
currency or other instrument might be intended to protect the Fund against
an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase the
instrument. An American-style put or call option may be exercised at any
time during the option period while a European-style put or call options may
be exercised only upon expiration or during a fixed period prior thereto.
The Income Fund is authorized to purchase and sell exchange listed options
and over-the-counter options ("OTC options"). Exchange listed options are
issued by a regulated intermediary such as the Options Clearing Corporation
("OCC"), which guarantees the performance of the obligations of the parties
to such options. The discussion below uses the OCC as a paradigm, but is
also applicable to other financial intermediaries.

With certain exceptions, OCC and exchange listed options generally
settle by physical delivery of the underlying security or currency, although
in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, to the
extent the option is "in-the-money" (i.e., where the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the
case of a put option, the exercise price of the option) at the time the
option is exercised. Frequently, rather than taking or making delivery of
the underlying instrument through the process of exercising the option,
listed options are closed by entering into offsetting purchase or sale
transactions that do not result in ownership of the new option.
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The Income Fund's ability to close out its position as a purchaser or
seller of an OCC or exchange listed put or call option is dependent, in
part, upon the liquidity of the option market. Among the possible reasons
for the absence of a liquid option market on an exchange are: (i)
insufficient trading interest in certain options; (ii) restrictions on
transactions imposed by an exchange; (iii) trading halts, suspensions or
other restrictions imposed with respect to particular classes or series of
options or underlying securities including reaching daily price limits; (iv)
interruption of the normal operations of the OCC or an exchange; (v)
inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the
trading of options (or a particular class or series of options), in which
event the relevant market for that option on that exchange would cease to
exist, although outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.

The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying
financial instruments, significant price and rate movements can take place
in the underlying markets that cannot be reflected in the option markets.

OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options,
which generally have standardized terms and performance mechanics, all the
terms of an OTC option, including such terms as method of settlement, term,
exercise price, premium, guaranties and security, are set by negotiation of
the parties. The Income Fund will only enter into OTC options that have a
buy-back provision permitting the Fund to require the Counterparty to buy
back the option at a formula price within seven days. The Fund expects
generally to enter into OTC options that have cash settlement provisions,
although it is not required to do so.

Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails
to make or take delivery of the security, currency or other instrument
underlying an OTC option it has entered into with the Income Fund or fails
to make a cash settlement payment due in accordance with the terms of that
option, the Fund will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Accordingly, TMC must assess the
creditworthiness of each Counterparty or any guarantor or credit enhancement
of the Counterparty's credit to determine the likelihood that the terms of
the OTC option will be satisfied. The Income Fund will engage in OTC option
transactions only with United States government securities dealers
recognized by the Federal Reserve Bank in New York as "primary dealers,"
broker dealers, domestic or foreign banks or other financial institutions
which have received a short-term credit rating of "A-1" from Standard &
Poor's Corporation or "P-1" from Moody's Investor Services or have been
determined by TMC to have an equivalent credit rating. The staff of the SEC
currently takes the position that the amount of the Income Fund's
obligation pursuant to an OTC option is illiquid, and is subject to the
Income Fund's limitation on investing no more than 15% its assets in
illiquid instruments.

If the Income Fund sells a call option, the premium that it receives
may serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale of put options can
also provide income.
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The Income Fund may purchase and sell call options on U.S. Treasury and
agency securities, foreign sovereign debt, mortgage-backed securities,
corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets and related futures
on such securities other than futures on individual corporate debt and
individual equity securities. All calls sold by the Fund must be "covered"
or must meet the asset segregation requirements described below as long as
the call is outstanding (i.e., the Fund must own the securities or futures
contract subject to the call). Even though the Fund will receive the option
premium to help protect it against loss, a call sold by the Fund exposes the
Fund during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security and may
require the Fund to hold a security which it might otherwise have sold.

The Income Fund may purchase and sell put options that relate to U.S.
Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds
the above securities in its portfolio) or futures on such securities other
than futures on individual corporate debt and individual equity securities.
The Fund will not sell put options if, as a result, more than 50% of the
Fund's assets would be required to be segregated to cover its potential
obligations under its hedging, duration management, risk management, and
other Strategic Transactions other than those with respect to futures and
options thereon. In selling put options, there is a risk that the Fund may
be required to buy the underlying security at a disadvantageous price above
the market price.

General Characteristics of Futures - Income Fund

The Income Fund may purchase and sell financial futures contracts or
purchase put and call options on such futures as a hedge against anticipated
interest rate, currency or equity market changes, for duration management
and for risk management purposes. Futures are generally bought and sold on
the commodities exchanges where they are listed with payment of initial and
variation margin as described below. The sale of a futures contract creates
a firm obligation by the Fund, as seller, to deliver the specific type of
financial instrument called for in the contract at a specific future time
for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). Options on futures contracts are similar
to options on securities except that 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.

The Income Fund's use of financial futures and options thereon will in
all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the Commodity Futures Trading
Commission and will be entered into only for bona fide hedging, risk
management (including duration management) or other portfolio management
purposes. Typically, maintaining a futures contract or selling an option
thereon requires the Fund to deposit with a financial intermediary as
security for its obligations an amount of cash or other specified assets
(initial margin) which initially is typically 1% to 5% of the face amount of
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the contract, but may be higher in some circumstances. Additional cash or
assets (variation margin) may be required to be deposited thereafter on a
daily basis as the mark to market value of the contract fluctuates. The
purchase of options on financial futures involves payment of a premium for
the option without any further obligation on the part of the Fund. If the
Fund exercises an option on a futures contract it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just as it would for any position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position will be offset
prior to settlement and that delivery will not occur.

The Income Fund will not enter into a futures contract or related
option (except for closing transactions) if, immediately thereafter, the sum
of the amount of its initial margin and premiums on open futures contracts
and options thereon would exceed 5% of the Fund's total assets (taken at
current value); however, in the case of an option that is in-the-money at
the time of the purchase, the segregation requirements with respect to
futures and options thereon are described below.

Options on Securities Indices and Other Financial Indices - Income Fund

The Income Fund also may purchase and sell call and put options on
securities indices and other financial indices and, in so doing can achieve
many of the same objectives it would achieve through the sale or purchase of
options on individual securities or other instruments. Options on
securities indices and other financial indices are similar to options on a
security or other instrument except that, rather than settling by physical
delivery of the underlying instrument, they settle by cash settlement (i.e.,
an option on an index gives the holder the right to receive, upon exercise
of the option, an amount of cash if the closing level of the index upon
which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option except if, in the
case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise
price of the option, which also may be multiplied by a formula value. The
seller of the option is obligated, in return for the premium received, to
make delivery of this amount. The gain or loss on an option on an index
depends on price movements in the instruments making up the market, market
segment, industry or other composite on which the underlying index is based
rather than price movements in individual securities, as is the case with
respect to options on securities.

Currency Transactions - Income Fund

The Income Fund may engage in currency transactions with Counterparties
in order to hedge the value of currencies against fluctuations in relative
value. Currency transactions include forward currency contracts, exchange
listed currency futures, exchange listed and OTC options on currencies, and
currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell ( with delivery generally required) a
specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. A currency swap is an agreement to exchange cash
flows based on the notional difference among two or more currencies and
operates similarly to an interest rate swap, which is described below.
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The Income Fund's dealings in forward currency contracts and other
currency transactions such as futures, options, options on futures and swaps
will be limited to hedging involving either specific transactions or
portfolio positions. Transactions hedging is entering into a currency
transaction with respect to specific assets or liabilities of the Fund,
which will generally arise in connection with the purchase or sale of its
portfolio securities. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.

The Income Fund will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended to
wholly or partially offset other transactions, than the aggregate market
value (at the time of entering into the transaction) of the securities held
in its portfolio that are denominated or generally quoted in or currently
convertible into such currency other than with respect to proxy hedging as
described below.

The Income Fund may also cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which the Fund has or in
which the Fund expects to have portfolio exposure.

To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Income Fund may also
engage in proxy hedging. Proxy hedging is often used when the currency to
which the Fund's portfolio is exposed is difficult to hedge or to hedge
against the dollar. Proxy hedging entails entering into a forward contract
to sell a currency whose changes in value are generally considered to be
linked to a currency or currencies in which some or all of the Fund's
portfolio securities are or are expected to be denominated, and to buy U.S.
dollars. The amount of the contract would not exceed the value of the
Fund's securities denominated in linked currencies. For example, if TMC
considers the Austrian schilling is linked to the German Deutschemark (the
"D-mark"), the Fund holds securities denominated in Austrian schillings and
TMC believes that the value of schillings will decline against the U.S.
dollar, TMC may enter into a contract to sell D-marks and buy dollars.
Hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to the Fund if the currency being hedged fluctuates in value to a
degree or in a direction that is not anticipated. Further, there is the
risk that the perceived linkage between various currencies may not be
present or may not be present during the particular time that the Fund is
engaging in proxy hedging. If the Fund enters into a currency hedging
transaction, the Fund will comply with the asset segregation requirements
described below.

Risks of Currency Transactions - Income Fund

Currency transactions are subject to risks different from other
transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases
and sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the
Income Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to
be rendered ineffective, resulting in full currency exposure as well as
incurring transaction costs. Buyers and sellers of currency futures are
subject to the 27
<PAGE>
same risks that apply to the use of futures generally. Further, settlement
of a currency futures contract for the purchase of most currencies must
occur at a bank based in the issuing nation. Trading options on currency
futures is relatively new, and the ability to establish and close out
positions on such options is subject to the maintenance of a liquid market
which may not always be available. Currency exchange rates may fluctuate
based on factors extrinsic to the issuing country's economy.

Combined Transactions - Income Fund

The Income Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts) and any
combination of futures, options and currency transactions ("combined"
transactions), instead of a single Strategic Transaction, as part of a
single or combined strategy when, in the opinion of TMC, it is in the best
interests of the Fund to do so. A combined transaction will usually contain
elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on TMC's
judgment that the combined strategies will reduce risk or otherwise more
effectively achieve the desired portfolio management goal, it is possible
that the combination will instead increase such risks or hinder achievement
of the portfolio management objective.

Swaps, Caps, Floors and Collars - Income Fund

Among the Strategic Transactions into which the Income Fund may enter
are interest rate, currency and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a
later date. The Income Fund intends to use these transactions as hedges and
not as speculative investments and will not sell interest rate caps or
floors where it does not own securities or other instruments providing the
income stream the Fund may be obligated to pay. An interest rate swap is an
agreement between two parties to exchange payments that are based on
specified interest rates and a notional amount. The exchange takes place
over a specified period of time. A currency swap is an agreement to
exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement
to swap cash flows on a notional amount based on changes in the values of
the reference indices. Although swaps can take a variety of forms,
typically one party pays fixed and receives floating rate payments and the
other party receives fixed and pays floating rate payments. An interest
rate cap is an agreement between two parties over a specified period of time
where one party makes payments to the other party equal to the difference
between the current level of an interest rate index and the level of the
cap, if the specified interest rate index increases above the level of the
cap. An interest rate floor is similar except the payments are the
difference between the current level of an interest rate index and the level
of the floor if the specified interest rate index decreases below the level
of the floor. An interest rate collar is the simultaneous execution of a
cap and floor agreement on a particular interest rate index. The purchase
of a cap entitles the purchaser to receive payments on a notional principal
amount from the party selling the cap to the extent that a specified index
exceeds a predetermined interest rate or amount. Purchase of a floor
entitles the purchaser to receive
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payments on a notional principal amount from the party selling the floor to
the extent that a specified index falls below a predetermined interest rate
or amount. A collar is a combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates or values.

The Income Fund may enter into swaps, caps, floors or collars on either
an asset-based or liability-based basis, depending on whether it is hedging
its assets or its liabilities, and will usually enter into swaps on a net
basis, i.e., the two payment streams are netted out in a cash settlement on
the payment date or dates specified in the instrument, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these swaps, caps, floors and collars are entered
into for good faith hedging purposes, TMC and the Fund believe such
obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to its borrowing
restrictions. The Fund will not enter into any swap, cap, floor or collar
transaction unless, at the time of entering into the transaction, the
unsecured long term debt rating of the Counterparty combined with any credit
enhancements, satisfies credit criteria established by the Trust's trustees.
If there is a default by the Counterparty, the Fund will have contractual
remedies pursuant to the agreements related to the transaction. The swap
market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.

Eurodollar Instruments - Income Fund

The Income Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or
options thereon which are linked to the London Interbank Offered Rate
("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain
a fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Fund might use Eurodollar futures contracts and options
thereon to hedge against changes in the LIBOR, to which many interest rate
swaps and fixed income instruments are linked.

Risks of Strategic Transactions Outside the United States - Income Fund

When constructed outside the United States, Strategic Transactions may
not be regulated as rigorously as in the United States, may not involve a
clearing mechanism and related guarantees, and are subject to the risk of
governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions
also could be adversely affected by: (i) other complex foreign political,
legal and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the
Income Fund's ability to act upon economic events occurring in foreign
markets during non-business hours in the United States, (iv) the imposition
of different exercise and settlement terms and procedures and margin
requirements than in the United States, and (v) lower trading volume and
liquidity.
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Use of Segregated and Other Special Accounts - Income Fund

Some transactions which the Income Fund may enter into, including many
Strategic Transactions, require that the Income Fund segregate liquid high
grade debt assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. Transactions which require segregation include
reverse repurchase agreements, dollar rolls, undertakings by the Fund to
purchase when-issued securities, the Fund's sales of put or call options,
the Fund's sales of futures contracts, currency hedging transactions
(including forward currency contracts, currency futures and currency swaps)
and swaps, floors and collars to the extent of the Fund's uncovered
obligation under the transaction. In general, the full amount of any
obligation by the Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to
be delivered, or an amount of cash or liquid high grade debt securities at
least equal to the current amount of the obligation must be segregated with
the custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer
necessary to segregate them. For example, a call option written by the Fund
will require the Fund to hold the securities without additional
consideration or to segregate liquid high-grade assets sufficient to
purchase and deliver the securities if the call is exercised. A call option
sold by the Fund on an index will require the Fund to own portfolio
securities which correlate with the index or to segregate liquid high grade
debt assets equal to the excess of the index value over the exercise price
on a current basis. A put option written by the Fund requires the Fund to
segregate liquid, high grade assets equal to the exercise price.

Except when the Income Fund enters into a forward contract for the
purchase or sale of a security denominated in a particular currency, which
requires no segregation, a currency contract which obligates the Fund to buy
or sell currency will generally require the Fund to hold an amount of that
currency or liquid securities denominated in that currency equal to the
Fund's obligations, or to segregate liquid high grade debt assets equal to
the amount of the Fund's obligation.

OTC options entered into by the Income Fund, including those on
securities, currency, financial instruments or indices, OCC issued and
exchange listed index options, swaps, caps, floors and collars will
generally provide for cash settlement. As a result, with respect to these
instruments the Fund will only segregate an amount of assets equal to its
accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of
the exercise price in the case of a put, or the in-the-money amount in the
case of a call. In addition, when the Fund sells a call option on an index
at a time when the in-the-money amount exceeds the exercise price, the Fund
will segregate, until the option expires or is closed out, cash or cash
equivalents equal in value to such excess. Other OCC issued and exchange
listed options sold by the Fund, other than those above, generally settle
with physical delivery, and the Fund will segregate an amount of assets
equal to the full value of the option. OTC options settling with physical
delivery, if any, will be treated the same as other options settling with
physical delivery.

In the case of a futures contract or an option thereon, the Income Fund
must deposit initial margin and possible daily variation margin in addition
to segregating assets sufficient to meet its obligation to purchase or
provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. Such assets may consist of
cash, cash equivalents, or high grade liquid debt instruments.
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With respect to swaps, the Income Fund will accrue the net amount of
the excess, if any, of its obligations over its entitlements with respect to
each swap on a daily basis and will segregate an amount of cash or liquid
high grade securities having a value equal to the accrued excess. Caps,
floors and collars require segregation of assets with a value equal to the
Fund's net obligation, if any.

Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Income Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options
and Strategic Transactions. For example, the Fund could purchase a put
option if the strike price of that option is the same or higher than the
strike price of a put option sold by the Fund. Moreover, instead of
segregating assets if the Fund held a futures or forward contract, it could
purchase a put option on the same futures or forward contract with a strike
price as high or higher than the price of the contract held. Other
Strategic Transactions may also be offset in combinations. If the
offsetting transaction terminates at the time of or after the primary
transaction, no segregation is required. If it terminates prior to that
time, assets equal to any remaining obligation would need to be segregated.

The Income Fund's activities involving Strategic Transactions may be
limited by the requirements of Subchapter M of the Internal Revenue Code for
qualification as a regulated investment company. See "Taxes."

Foreign Securities - Income Fund

The Income Fund may invest in securities of foreign issuers. Investing
in foreign issuers involves certain special considerations, including those
set forth below, which are not typically associated with investing in United
States issuers. As foreign companies are not generally subject to uniform
accounting and auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic companies, there may
be less publicly available information about a foreign company than a
domestic company. Volume and liquidity in most foreign bond markets is less
than in the United States and, at times, volatility of price can be greater
than in the United States. There is generally less government supervision
and regulation of brokers and listed companies than in the United States.
Mail service between the United States and foreign countries may be slower
or less reliable than within the United States, thus increasing the risk of
delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. Securities issued or guaranteed by foreign national
governments, their agencies, instrumentalities, or political subdivisions,
may or may not be supported by the full faith and credit and taxing power of
the foreign government. The Income Fund's ability and decisions to purchase
and sell portfolio securities may be affected by laws or regulations
relating to the convertability and repatriation of assets. Further, it may
be more difficult for the Fund's agents to keep currently informed about
corporate actions which may affect the prices of portfolio securities. In
addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect United States
investments in those countries, and it may be more difficult to obtain and
enforce a judgment against a foreign issuer. Foreign securities may be
subject to foreign government taxes which will reduce the yield on such
securities.
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VALUE FUND

The following discussion supplements the disclosures in the Prospectus
respecting Value Fund's investment policies, techniques and investment
limitations.

Illiquid Investments - Value Fund

Illiquid investments are investments that cannot be sold or disposed of
in the ordinary course of business at approximately the prices at which they
are valued. Under the supervision of the Trustees, TMC determines the
liquidity of the Fund's investments and, through reports from TMC, the
Trustees monitor investments in illiquid instruments. In determining the
liquidity of the Fund's investments, TMC may consider various factors,
including (1) the frequency of trades and quotations, (2) the number of
dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or lender features), and (5) the nature of the market place for
trades (including the ability to assign or offset the Fund's rights and
obligations relating to the investment).

Investments currently considered by the Fund to be illiquid include
repurchase agreements not entitling the holder to payment of principal and
interest within seven days, over-the-counter options, and non-government
stripped fixed-rate mortgage-backed securities. Also TMC may determine some
restricted securities, government-stripped fixed-rate mortgage-backed
securities, emerging market securities, and swap agreements to be illiquid.
However, with respect to over-the-counter options the Fund writes, all or a
portion of the value of the underlying instrument may be illiquid depending
on the assets held to cover the option and the nature and terms of any
agreement the Fund any have to close out the option before expiration.

In the absence of market quotations, illiquid investments are priced at
fair value as determined utilizing procedures and methods reviewed by the
Trustees. If through a change in values, net assets, or other
circumstances, the Fund were in a position where more than 10% of its net
assets was invested in illiquid securities, it would seek to take
appropriate steps to protect liquidity.

Restricted Securities - Value Fund

Restricted securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the
Securities Act of 1933, or in a registered public offering. Where
registration is required, the Fund could be obligated to pay all or part of
the registration expense and a considerable period may elapse between the
time it decides to seek registration and the time it is permitted to sell a
security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a
less favorable price than prevailed when it decided to seek registration of
the security.
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Swap Agreements - Value Fund

Swap agreements can be individually negotiated and structured to
include exposure to a variety of different types of investments or market
factors. Depending on their structure, swap agreements may increase or
decrease the Fund's exposure to long or short-term interest rates (in the
U.S. or abroad), foreign currency values, mortgage securities, corporate
borrowing rates, or other factors such as security prices or inflation
rates. The Fund is not limited to any particular form of swap agreement if
TMC determines it is consistent with the Fund's investment objective and
policies.

Although swaps can take a variety of forms, typically one party pays
fixed and receives floating rate payments and the other party receives fixed
and pays floating payments. An interest rate cap is an agreement between
two parties over a specified period of time where one party makes payments
to the other party equal to the difference between the current level of an
interest rate index and the level of the cap, if the specified interest rate
index increases above the level of the cap. An interest rate floor is
similar except the payments are the difference between the current level of
an interest rate index and the level of the floor, if the specified interest
rate index decreases below the level of the floor. An interest rate collar
is the simultaneous execution of a cap and floor agreement on a particular
interest rate index. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such
cap to the extent that a specified index exceeds a predetermined interest
rate or amount. Purchase of a floor entitles the purchaser to receive
payments on a notional principal amount from the party selling such floor to
the extent that a specified index falls below a predetermined interest rate
or amount. A collar is a combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates or values.

Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. For example, if the Fund agreed to
exchange payments in dollars for payments in foreign currency, the swap
agreement would tend to decrease the Fund's exposure to U.S. interest rates
and increase its exposure to foreign currency and interest rates. Caps and
floors have an effect similar to buying or writing options. Depending on
how they are used, swap agreements may increase or decrease the overall
volatility of the Fund's investments and its share price and yield. The
most significant factor in the performance of swap agreements is the change
in the specific interest rate, currency, or other factors that determine the
amounts of payments due to and from the Fund. If a swap agreement calls for
payments by the Fund, the Fund must be prepared to make such payments when
due. In addition, if the counterparty's credit worthiness declined, the
value of the swap agreement would be likely to decline, potentially
resulting in losses. The Fund expects to be able to eliminate its exposure
under swap agreements either by assignment or other disposition, or by
entering into an offsetting swap agreement with the same party or a
similarly creditworthy party.

The Fund will maintain appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap agreements.
If the Fund enters into a swap agreement on other than a net basis, it will
segregate assets with a value equal to the full amount of the Fund's accrued
obligations under the agreement.
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Indexed Securities - Value Fund

The Fund may purchase securities whose prices are indexed to the prices
of other securities, securities indices, currencies, precious metals or
other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument
or statistic. Gold-indexed securities, for example, typically provide for a
maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency
indexed securities typically are short-term to intermediate-term debt
securities whose maturity values or interest rates are determined by
reference to the values of one or more specified foreign currencies, and may
offer higher yields than U.S. dollar-denominated securities of equivalent
issuers. Currency-indexed securities may be positively or negatively
indexed; that is, their maturity value may increase when the specified
currency value increases, resulting in a security that performs similarly to
a foreign-denominated instrument, or their maturity value may decline when
foreign currencies increases, resulting in a security whose price
characteristics are similar to a put on the underlying currency. Currency-
indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.

The performance of indexed securities depends to a great extent on the
performance of the security, currency or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit
risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates. Recent
issuers of indexed securities have included banks, corporations, and certain
U.S. government agencies. Indexed securities may be more volatile than
their underlying instruments.

Repurchase Agreements - Value Fund

In a repurchase agreement, the Fund purchases a security and
simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days from the date of
purchase. The resale price reflects the purchase price plus an agreed upon
incremental amount which is unrelated to the coupon rate or maturity of the
purchased security. A repurchase agreement involves the obligation of the
seller to pay the agreed upon price, which obligation is in effect secured
by the value (at least equal to the amount of the agreed upon resale price
and marked to market daily) of the underlying security. The Fund may engage
in a repurchase agreements with respect to any security in which it is
authorized to invest.

The Fund may enter into these arrangements with member banks of the
Federal Reserve System or any domestic broker-dealer if the creditworthiness
of the bank or broker-dealer has been determined by TMC to be satisfactory.
These transactions may not provide the Fund with collateral marked-to-market
during the term of the commitment.

A repurchase agreement, which provides a means for the Fund to earn
income on funds for periods as short as overnight, is an arrangement under
which the Fund purchases a security and the seller agrees, at the time of
the sale, to repurchase the security at a specified time and price. The
repurchase price may be higher than the purchase price, the difference being
interest at a stated rate due to the Fund together with the repurchase price
on repurchase.
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For purposes of the Investment Company Act of 1940, a repurchase
agreement is deemed to be a loan from the Fund to the seller of the security
subject to the repurchase agreement and is therefore subject to the Fund's
investment restriction applicable to loans. It is not clear whether a court
would consider the security purchased by the Fund subject to a repurchase
agreement as being owned by the Fund or as being collateral for a loan by
the Fund to the seller. In the event of the commencement of bankruptcy or
insolvency proceedings with respect to the seller of the security before
repurchase of the security under a repurchase agreement, the Fund may
encounter delay and incur costs before being able to sell the security.
Delays may involve loss of interest or decline in the price of the
underlying security. If the court characterized the transaction as a loan
and the Fund has not perfected a security interest in the underlying
security, the Fund may be required to return the security to the seller's
estate and be treated as an unsecured creditor of principal and income
involved in the transaction. As with any unsecured debt obligation
purchased for the Fund, TMC seeks to minimize the risk of loss through
repurchase agreements by analyzing the creditworthiness of the obligor, in
this case the seller of the security. Apart from the risk of bankruptcy or
insolvency proceedings, there is also the risk that the seller may fail to
repurchase the security, in which case the Fund may incur a loss if the
proceeds to the Fund of the sale to a third party are less than the
repurchase price. However, if the market value (including interest) of the
security subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Fund will direct the seller of
the security to deliver additional securities so that the market value
(including interest) of all securities subject to the repurchase agreement
will equal or exceed the repurchase price. It is possible that the Fund
will be unsuccessful in seeking to impose on the seller a contractual
obligation to deliver additional securities.

Reverse Repurchase Agreements - Value Fund

In a reverse repurchase agreement , the Fund sells a portfolio
instrument to another party, such as a bank or broker-dealer, in return for
cash and agrees to repurchase the instrument at a particular price and time.
While a reverse repurchase agreement is outstanding, the Fund will maintain
appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement. The Fund will enter into reverse repurchase
agreements only with parties whose creditworthiness has been found
satisfactory by TMC. Such transactions may increase fluctuations in the
market value of the Fund's assets and may be viewed as a form of leverage.

Securities Lending - Value Fund

The Fund may lend securities to parties such as broker-dealers or
institutional investors. Securities lending allows the Fund to retain
ownership of the securities loaned and, at the same time, to earn additional
income. Since there may be delays in the recovery of loaned securities, or
even a loss of rights in collateral supplied should the borrower fail
financially, loans will be made only to parties deemed by TMC to be of good
standing. Furthermore, they will only be made if, in TMC's judgment, the
consideration to be earned from such loans would justify the risk.

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TMC understands that it is the current view of the SEC Staff that the
Fund may engage in loan transactions only under the following conditions:
(1) the Fund must receive 100% collateral in the form of cash or cash
equivalents (e.g., U.S. Treasury bills or notes) from the borrower; (2) the
borrower must increase the collateral whenever the market value of the
securities loaned (determined on a daily basis) rises above the value of the
collateral; (3) after giving notice, the Fund must be able to terminate
the loan at any time; (4) the Fund must receive reasonable interest on the
loan or a flat fee from the borrower, as well as amounts equivalent to any
dividends, interest, or other distributions on the securities loaned and to
any increase in market value; (5) the Fund may pay only reasonable
custodian fees in connection with the loan; and (6) the Trustees must be
able to vote proxies on the securities loaned, either by terminating the
loan or by entering into an alternative arrangement with the borrower.

Cash received through loan transactions may be invested in any security
in which the Fund is authorized to invest. Investing this cash subjects
that investment, as well as the security loaned, to market forces (i.e.,
capital appreciation or depreciation).

Lower-Quality Debt Securities - Value Fund

The Fund may purchase lower-quality debt securities (those rated below
Baa by Moody's Investors Service, Inc. or BBB by Standard and Poor's
Corporation, and unrated securities judged by TMC to be of equivalent
quality) that have poor protection with respect to the payment of interest
and repayment of principal, or may be in default. These securities are
often considered to be speculative and involve greater risk of loss or price
changes due to changes in the issuer's capacity to pay. The market prices
of lower-quality debt securities may fluctuate more than those of higher-
quality debt securities and may decline significantly in periods of general
economic difficulty, which may follow periods of rising interest rates.

While the market for high-yield corporate debt securities has been in
existence for may years and has weathered previous economic downturns, the
1980's brought a dramatic increase in the use of such securities to fund
highly leveraged corporate acquisitions and restructuring. Past experience
may not provide an accurate indication of the future performance of the
high-yield bond market, especially during periods of economic recession. In
fact, from 1989 to 1991, the percentage of lower-quality securities that
defaulted rose significantly above prior levels, although the default rate
decreased in 1992 and 1993.

The market for lower-quality debt securities may be thinner and less
active than that for higher-quality debt securities, which can adversely
affect the prices at which the former are sold. If market quotations are
not available, lower-quality debt securities will be valued in accordance
with procedures established by the Trustees, including the use of outside
pricing services. Judgment plays a greater role in valuing high-yield
corporate debt securities than is the case for securities for which more
external sources for quotations and last-sale information are available.
Adverse publicity and changing investor perceptions may affect the ability
of outside pricing services to value lower-quality debt securities and the
Fund's ability to sell these securities. Since the risk of default is
higher for lower-quality debt securities, TMC's research and credit analysis
are an especially important part of managing securities of this type held
by the Fund. In considering investments for the Fund, TMC will attempt to
identify those issuers of high-yielding securities whose financial condition
is adequate to meet future obligations, has improved, or is expected to
improve in the future. TMC's analysis focuses on relative values based on
such factors as interest or dividend coverage, asset coverage, earnings
prospects, and the experience and managerial strength of the issuer.
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The Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise to exercise its rights as a security holder
to seek to protect the interests of security holders if it determines this
to be in the best interest of the Fund's shareholders.

Foreign Investments - Value Fund

Foreign investments can involve significant risks in addition to the
risks inherent in U.S. investments. The value of securities denominated in
or indexed to foreign currencies, and of dividends and interest from such
securities, can change significantly when foreign currencies strengthen or
weaken relative to the U.S. dollar. Foreign securities markets generally
have less trading volume and less liquidity than U.S. markets, and prices on
some foreign markets can be highly volatile. Many foreign countries lack
uniform accounting and disclosure standards comparable to those applicable
to U.S. companies, and it may be more difficult to obtain reliable
information regarding an issuer's financial condition and operations. In
addition, the costs of foreign investing, including withholding taxes,
brokerage commissions, and custodial costs, are generally higher than for
U.S. investments.

Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers, brokers, and securities markets may be subject to
less government supervision. Foreign security trading practices, including
those involving the release of assets in advance of payment, may involve
increased risks in the event of a failed trade or the insolvency of a
broker-dealer, and may involve substantial delays. It may also be difficult
to enforce legal rights in foreign countries.

Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments
adverse to the interests of U.S. investors, including the possibility of
expropriation or nationalization of assets, confiscatory taxation,
restrictions on U.S. investment or on the ability to repatriate assets or
convert currency into U.S. dollars, or other government intervention. There
may be a greater possibility of default by foreign governments or foreign
government-sponsored enterprises. Investments in foreign countries also
involve a risk of local political, economic, or social instability, military
action or unrest, or adverse diplomatic developments. There is no assurance
that TMC will be able to anticipate these potential events or counter their
effects.

The considerations noted above generally are intensified for
investments in developing countries. Developing countries may have
relatively unstable governments, economies based on only a few industries,
and securities markets that trade a small number of securities.

The Fund may invest in foreign securities that impose restrictions on
transfer within the U.S. or to U.S. persons. Although securities subject to
transfer restrictions may be marketable abroad, they may be less liquid than
foreign securities of the same class that are not subject to such
restrictions.
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American Depository Receipts and European Depository Receipts (ADR's
and EDR's) are certificates evidencing ownership of shares of a foreign-
based issuer held in trust by a bank or similar financial institution.
Designed for use in U.S. and European securities markets, respectively,
ADR's and EDR's are alternatives to the purchase of the underlying
securities in their national markets and currencies.

Foreign Currency Transactions - Value Fund

The Fund may conduct foreign currency transactions on a spot (i.e.,
cash) basis or by entering into forward contracts to purchase or sell
foreign currencies at a future date and price. The Fund will convert
currency on a spot basis from time to time, and investors should be aware of
the costs of currency conversion. Although foreign exchange dealers
generally do not charge a fee for conversion, they do realize a profit based
on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to
the Fund at one rate, while offering a lesser rate of exchange should the
Fund desire to resell that currency to the dealer. Forward contracts are
generally traded in an interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. The parties
to a forward contract may agree to offset or terminate the contract before
its maturity, or may hold the contract to maturity and complete the
contemplated currency exchange. The Fund may use currency forward contracts
for any purpose consistent with its investment objective. The following
discussion summarizes the principal currency management strategies involving
forward contracts that could be used by the Fund. The Fund may also use
swap agreements, indexed securities, and options and futures contracts
relating to foreign currencies for the same purposes. When the Fund agrees
to buy or sell a security denominated in a foreign currency, it may desire
to "lock in" the U.S. dollar price of the security. By entering into a
forward contract for the purchase or sale, for a fixed amount of U.S.
dollars, of the amount of foreign currency involved in the underlying
security transaction, the Fund will be able to protect itself against an
adverse change in foreign currency values between the date the security is
purchased or sold and the date on which payment is made or received. This
technique is sometimes referred to as a "settlement hedge" or "transaction
hedge." The Fund may also enter into forward contracts to purchase or sell
a foreign currency in anticipation of future purchases or sales of
securities denominated in foreign currency, even if the specific investments
have not yet been selected by TMC.

The Fund may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For
example, if the Fund owned securities denominated in pounds sterling, it
could enter into a forward contract to sell pounds sterling in return for
U.S. dollars to hedge against possible declines in the pound's value. Such
a hedge, sometimes referred to as a "position hedge, " would tend to offset
both positive and negative currency fluctuations, but would not offset
changes in security values caused by other factors. The Fund could also
hedge the position by selling another currency expected to perform similarly
to the pound sterling for example, by entering into a forward contract to
sell Deutschemarks or European Currency Units in return for U.S. dollars.
This type of hedge, sometimes referred to as a "proxy hedge," could offer
advantages in terms of cost, yield, or efficiency, but generally would not
hedge currency exposure as effectively as a simple hedge into U.S. dollars.
Proxy hedges may result in losses if the currency used to hedge does not
perform similarly to the currency in which the hedged securities are
denominated.
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The Fund may enter into forward contracts to shift its investment
exposure from one currency into another. This may include shifting exposure
from U.S. dollars to a foreign currency, or from one foreign currency to
another foreign currency. For example, if the Fund held investments
denominated in deutschemarks, the Fund could enter into forward contracts to
sell deutschemarks and purchase Swiss francs. This type of strategy,
sometimes known as a "cross hedge," will tend to reduce or eliminate
exposure to the currency that is sold, and increase exposure to the currency
that is purchased, much as if the Fund had sold a security denominated in
one currency and purchased an equivalent security denominated in another.
Cross-hedges protect against losses resulting from a decline in the hedged
currency, but will cause the Fund to assume the risk of fluctuations in the
value of the currency it purchases. Under certain conditions, SEC
guidelines require mutual funds to set aside appropriate liquid assets in a
segregated custodial account to cover currency forward contracts. As
required by SEC guidelines, the Fund will segregate assets to cover currency
forward contracts, if any, whose purpose is essentially speculative. The
Fund will not segregate assets to cover forward contracts entered into for
hedging purposes, including settlement hedges, position hedges, and proxy
hedges.

Successful use of currency management strategies will depend on TMC's
skill in analyzing and predicting currency values. Currency management
strategies may substantially change the Fund's investment exposure to
changes in currency exchange rates, and could result in losses to the Fund
if currencies do not perform as TMC anticipates. For example, if a
currency's value rose at a time when TMC had hedged the Fund by selling that
currency in exchange for dollars, the Fund would be unable to participate in
the currency's appreciation. If TMC hedges currency exposure through proxy
hedges, the Fund could realize currency losses from the hedge and the
security position at the same time if the two currencies do not move in
tandem. Similarly, if TMC increases the Fund's exposure to a foreign
currency, and that currency's value declines, the Fund will realize a loss.
There is no assurance that TMC's use of currency management strategies will
be advantageous to the Fund or that it will hedge at an appropriate time.

Limitations on Futures and Options Transactions - Value Fund

The Fund will not: (a) sell futures contracts, purchase put options,
or write call options if, as a result, more than 25% of the Fund's total
assets would be hedged with futures and options under normal conditions; (b)
purchase futures contracts or write put options if, as a result, the Fund's
total obligations upon settlement or exercise of purchased futures contracts
and written put options would exceed 25% of its total assets; or (c)
purchase call options if, as a result, the current value of option premiums
for call options purchased by the Fund would exceed 5% of the Fund's total
assets. These limitations do not apply to options attached to or acquired
or traded together with their underlying securities, and do not apply to
securities that incorporate features similar to options.

The above limitations on the Fund's investments in futures contracts
and options, and the Fund's policies regarding futures contracts and options
discussed elsewhere in this statement of Additional Information, are not
fundamental policies and may be changed as regulatory agencies permit.
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Real Estate-Related Instruments - Value Fund

Real Estate-Related Instruments include real estate investment trusts,
commercial and residential mortgage-backed securities, and real estate
financings. Real estate-related instruments are sensitive to factors such
as changes in real estate values and property taxes, interest rates, cash
flow of underlying real estate assets, over building, and the management
skill and creditworthiness of the issuer. Real estate-related instruments
may also be affected by tax and regulatory requirements, such as those
relating to the environment.

Futures Contracts - Value Fund

When the Fund purchases a futures contract, it agrees to purchase a
specified underlying instrument at a specified future date. When the Fund
sells a futures contract, it agrees to sell the underlying instrument at a
specified future date. The price at which the purchase and sale will take
place is fixed when the Fund enters into the contract. Some currently
available futures contracts are based on specific securities, such as U.S.
Treasury bonds or notes, and some are based on indices of securities prices,
such as the Standard & Poor's 500 Composite Stock Price Index (S&P 500).
Futures can be held until their delivery dates, or can be closed out before
then if a liquid secondary market is available. The value of a futures
contract tends to increase and decrease in tandem with the value of its
underlying instrument. Therefore, purchasing futures contracts will tend to
increase the Fund's exposure to positive and negative price fluctuations in
the underlying instrument, much as if it had purchased the underlying
instrument directly. When the Fund sells a futures contract, by contrast,
the value of its futures position will tend to move in a direction contrary
to the market. Selling futures contracts, therefore will tend to offset
both positive and negative market price changes, much as if the underlying
instrument had been sold.

Futures Margin Payments - Value Fund

The purchaser or seller of a futures contract is not required to
deliver or pay for the underlying instrument unless the contract is held
until the delivery date. However both the purchaser and seller are required
to deposit "initial margin" with a futures broker, known as a futures
commission merchant (FCM), when the contract is entered into. Initial
margin deposits are typically equal to a percentage of the contract's value.
If either party's position declines, that party will be required to make
additional "variation margin" payments to settle the change in value on a
daily basis. The party that has a gain may be entitled to receive all or a
portion of this amount. Initial and variation margin payments do not
constitute purchasing securities on margin for purposes of the Fund's
investment limitations. In the event of the bankruptcy of an FCM that holds
margin on behalf of the Fund, the Fund may be entitled to return of margin
owed to it only in proportion to the amount received by the FCM's other
customers, potentially resulting in losses to the Fund.

Purchasing Put and Call Options - Value Fund

By purchasing a put option, the Fund obtains the right (but not the
obligation) to sell the option's underlying instrument at a fixed strike
price. In return for this right, the Fund pays the current market price for
the option (known as the option premium). Options have various types of
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underlying instruments, including specific securities, indices of securities
prices, and futures contracts. The Fund may terminate its position in a put
option it has purchased by allowing it to expire or by exercising the
option. If the option is allowed to expire, the Fund will lose the entire
premium it paid. If the Fund exercises the option, it completes the sale of
the underlying instrument at the strike price. The Fund may also terminate
a put option position by closing it out in the secondary market at its
current price, if a liquid secondary market exists.

The buyer of a typical put option can expect to realize a gain if
security prices fall substantially. However, if the underlying instrument's
price does not fall enough to offset the cost of purchasing the option, a
put buyer can expect to suffer a loss (limited to the amount of the premium
paid, plus related transaction costs).

The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost
of the option.

Writing Put and Call Options - Value Fund

When the Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the
premium, the Fund assumes the obligation to pay the strike price for the
option's underlying instrument if the other party to the option chooses to
exercise it. When writing an option on a futures contract the Fund will be
required to make margin payments to an FCM as described above for futures
contracts. The Fund may seek to terminate its position in a put option it
writes before exercise by closing out the option in the secondary market at
its current price. If the secondary market is not liquid for a put option
the Fund has written, however, the Fund must continue to be prepared to pay
the strike price while the option is outstanding, regardless of price
changes, and must continue to set aside assets to cover its position.

If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it received.
If security prices remain the same over time, it is likely that the writer
will also profit, because it should be able to close out the option at a
lower price. If security prices fall, the put writer would expect to suffer
a loss. This loss should be less than the loss from purchasing the
underlying instrument directly, however, because the premium received for
writing the option should mitigate the effects of the decline. Writing a
call option obligates the Fund to sell or deliver the option's underlying
instrument, in return for the strike price, upon exercise of the option.
The characteristics of writing call options are similar to those of writing
put options, except that writing calls generally is a profitable strategy if
prices remain the same or fall. Through receipt of the option premium, a
call writer mitigates the effects of a price decline.

At the same time, because a call writer must be prepared to deliver the
underlying instrument in return for the strike price, even if its current
value is greater, a call writer gives up some ability to participate in
security price increases.
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Combined Positions - Value Fund

The Fund may purchase and write options in combination with each other,
or in combination with futures or forward contracts, to adjust the risk and
return characteristics of the overall position. For example, the Fund may
purchase a put option and write a call option on the same underlying
instrument, in order to construct a combined position whose risk and return
characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price
and buying a call option at a lower price, in order to reduce the risk of
the written call option in the event of a substantial price increase.
Because combined options positions involve multiple trades, they result in
higher transaction costs and may be more difficult to open and close out.

Correlation of Price Changes - Value Fund

Because there are a limited number of types of exchange-traded options
and futures contracts, it is likely that the standardized contracts
available will not match the Fund's current or anticipated investments
exactly. The Fund may invest in options and futures contracts based on
securities with different issuers, maturities, or other characteristics from
the securities in which it typically invests, which involves a risk that the
options or futures position will not track the performance of the Fund's
other investments. Options and futures prices can also diverge from the
prices of their underlying instruments, even if the underlying instruments
match the Fund's investments well. Options and futures prices are affected
by such factors as current and anticipated short-term interest rates,
changes in volatility of the underlying instrument, and the time remaining
until expiration of the contract, which may not affect security prices the
same way. Imperfect correlation may also result from differing levels of
demand in the options and futures markets and the securities markets, from
structural differences in how options and futures and securities are traded,
or from imposition of daily price fluctuation limits or trading halts. The
Fund may purchase or sell options and futures contracts with a greater or
lesser value than the securities it wishes to hedge or intends to purchase
in order to attempt to compensate for differences in volatility between the
contract and the securities, although this may not be successful in all
cases. If price changes in the Fund's options or futures positions are
poorly correlated with its other investments, the positions may fail to
produce anticipated gains or result in losses that are not offset by gains
in other investments.

Liquidity of Options and Futures Contracts - Value Fund

There is no assurance a liquid secondary market will exist for any
particular options or futures contract at any particular time. Options may
have relatively low trading volume and liquidity if their strike prices are
not close to the underlying instrument's current price. In addition,
exchanges may establish daily price fluctuation limits for options and
futures contracts, and may halt trading if a contract's price moves upward
or downward more than the limit in a given day. On volatile trading days
when the price fluctuation limit is reached or a trading halt is imposed, it
may be impossible for the Fund to enter into new positions or close out
existing positions. If the secondary market for a contract is not liquid
because of price fluctuation limits or otherwise, it could prevent prompt
liquidation of unfavorable positions, and potentially could require the Fund
to continue to hold a position until delivery or expiration regardless of
changes in its value. As a result, the Fund's access to other assets held
to cover its options or futures positions could also be impaired.
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OTC Options - Value Fund

Unlike exchange-traded options, which are standardized with respect to
the underlying instrument, expiration date, contract size, and strike price,
the terms of over-the-counter options (options not traded on exchanges)
generally are established through negotiation with the other party to the
option contract. While this type of arrangement allows the Fund greater
flexibility to tailor an option to its needs, OTC options generally involve
greater credit risk than exchange-traded options, which are guaranteed by
the clearing organization of the exchanges where they are traded. The staff
of the SEC currently takes the position that OTC options are illiquid, and
investments by the Fund in those instruments are subject to the Fund's
limitation on investing no more than 10% of its assets in illiquid
instruments.

Option and Futures Relating to Foreign Currencies - Value Fund

Currency futures contracts are similar to forward currency exchange
contracts, except that they are traded on exchanges (and have margin
requirements) and are standardized as to contract size and delivery date.
Most currency futures contracts call for payment or delivery in U.S.
dollars. The underlying instrument of a currency option may be a foreign
currency, which generally is purchased or delivered in exchange for U.S.
dollars, or may be a futures contract. The purchaser of a currency call
obtains the right to purchase the underlying currency, and the purchaser of
a currency put obtains the right to sell the underlying currency.

The uses and risks of currency options and futures are similar to
options and futures relating to securities or indices, as discussed above.
The Fund may purchase and sell currency futures and may purchase and write
currency options to increase or decrease its exposure to different foreign
currencies. The Fund may also purchase and write currency options in
conjunction with each other or with currency futures or forward contracts.
Currency futures and options values can be expected to correlate with
exchange rates, but may not reflect other factors that affect the value of
the Fund's investments. A currency hedge, for example, should protect a
Yen-denominated security from a decline in the Yen, but will not protect the
Fund against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of the Fund's foreign-denominated
investments changes in response to many factors other than exchange rates,
it may not be possible to match the amount of currency options and futures
to the value of the Fund's investments exactly over time.

Asset Coverage for Futures and Options Positions - Value Fund

The Fund will comply with guidelines established by the SEC with
respect to coverage of options and futures strategies by mutual funds, and
if the guidelines so require will set aside appropriate liquid assets in a
segregated custodial account in the amount prescribed. Securities held in a
segregated account cannot be sold while the futures or option strategy is
outstanding, unless they are replaced with other suitable assets. As a
result, there is a possibility that segregation of large percentage of the
Fund's assets could impede Fund management or the Fund's ability to meet
redemption requests or other current obligations.
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Short Sales - Value Fund

The Fund may enter into short sales with respect to stocks underlying
its convertible security holdings. For example, if TMC anticipates a
decline in the price of the stock underlying a convertible security the Fund
holds, it may sell the stock short. If the stock price subsequently
declines, the proceeds of the short sale could be expected to offset all or
a portion of the effect of the stock's decline on the value of the
convertible security. The Fund currently intends to hedge no more than 15%
of its total assets with short sales on equity securities underlying its
convertible security holdings under normal circumstances. When the Fund
enters into a short sale, it will be required to set aside securities
equivalent in kind and amount to those sold short (or securities convertible
or exchangeable into such securities) and will be required to continue to
hold them while the short sale is outstanding. The Fund will incur
transaction costs, including interest expense, in connection with opening,
maintaining , and closing short sales.

INVESTMENT LIMITATIONS

Investment Limitations - Limited Term National Fund and
Limited Term California Fund

Thornburg Limited Term Municipal Fund, Inc. has adopted the following
fundamental investment policies applicable to each of Limited Term National
Fund and Limited Term California Fund which may not be changed unless
approved by a majority of the outstanding shares of each Fund. No Fund may:

(1) Invest in securities other than Municipal Obligations (including
participations therein) and temporary investments within the percentage
limitations specified in the Prospectus under the caption "Investment
Objective and Policies";

(2) Purchase any security if, as a result, more than 5% of its total
assets would be invested in securities of any one issuer, excluding
obligations of, or guaranteed by, the United States government, its
agencies, instrumentalities and authorities;

(3) Borrow money, except for temporary or emergency purposes and not
for investment purposes, and then only in an amount not exceeding 5% of the
value of the Fund's total assets at the time of borrowing;

(4) Pledge, mortgage or hypothecate its assets, except to secure
borrowings permitted by subparagraph (3) above;

(5) Issue senior securities as defined in the Investment Company Act
of 1940, except insofar as the Fund may be deemed to have issued a senior
security by reason of (a) entering into any repurchase agreement; (b)
purchasing any securities on a when-issued or delayed delivery basis; or (c)
borrowing money in accordance with the restrictions described above;
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<PAGE>
(6) Underwrite any issue of securities, except to the extent that, in
connection with the disposition of portfolio securities, it may be deemed to
be an underwriter under the federal securities laws;

(7) Purchase or sell real estate and real estate mortgage loans, but
this shall not prevent the Fund from investing in Municipal Obligations
secured by real estate or interests therein;

(8) Purchase or sell commodities or commodity futures contracts or
oil, gas or other mineral exploration or development programs;

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

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

(11) Write or purchase puts, calls, straddles, spreads or other
combinations thereof, except to the extent that securities subject to a
demand obligation or to a remarketing agreement may be purchased as set
forth in the Prospectus or this Statement of Additional Information;

(12) Invest more than 5% of its total assets in securities of
unseasoned issuers which, together with their predecessors, have been in
operation for less than three years excluding (i) obligations of, or
guaranteed by, the United States government, its agencies,
instrumentalities and authorities and (ii) obligations secured by the pledge
of the faith, credit and taxing power of any entity authorized to issue
Municipal Obligations;

(13) Invest more than 5% of its total assets in securities which the
Fund is restricted from selling to the public without registration under the
Securities Act of 1933;

(14) Purchase securities of any issuer if such purchase at the time
thereof would cause more than 10% of the voting securities of any such
issuer to be held by the Fund;

(15) Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets;

(16) Purchase securities (other than securities of the United States
government, its agencies, instrumentalities and authorities) if, as a
result, more than 25% of the Fund's total assets would be invested in any
one industry; or

(17) Purchase or retain the securities of any issuer other than the
securities of the Fund if, to the Fund's knowledge, those officers and
directors of the Fund, or those officers and directors of TMC, who
individually own beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
outstanding securities.
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For the purpose of applying the limitations set forth in paragraphs (2)
and (12) above, an issuer shall be deemed a separate issuer 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 nongovernmental user, such as an industrial corporation or a
privately owned or operated hospital, if the security is backed only by the
assets and revenues of the nongovernmental user, then such nongovernmental
user would be deemed to be the sole issuer. Where a security is also
guaranteed by the enforceable obligation of another entity it shall also be
included in the computation of securities owned that are issued by such
other entity. In addition, for purposes of paragraph (2) above, a
remarketing party entering into a remarketing agreement with a Fund as
described in the Prospectus or this Statement of Additional Information
shall not be deemed an "issuer" of a security or a "guarantor" of a
Municipal Lease subject to that agreement.

Neither of these Funds will purchase securities if, as a result, more
than 25% of the Fund's total assets would be invested in any one industry.
However, this restriction will not apply to purchases of (i) securities of
the United States government and its agencies, instrumentalities and
authorities, or (ii) tax exempt securities issued by different governments,
agencies, or political subdivisions, because these issuers are not
considered to be members of any one industry.

With respect to temporary investments, in addition to the foregoing
limitations, a Fund will not enter into a repurchase agreement if, as a
result thereof, more than 5% of its net assets would be subject to
repurchase agreements.

Although each of these Funds has the right to pledge, mortgage or
hypothecate its assets in order to comply with certain state statutes on
investment restrictions, a Fund will not, as a matter of operating policy
(which policy may be changed by the Board of Directors without shareholder
approval), pledge, mortgage or hypothecate its portfolio securities to the
extent that at any time the percentage of pledged securities will exceed
10%of its total assets.

In the event the Limited Term National Fund or the Limited Term
California Fund acquires disposable assets as a result of the exercise of a
security interest relating to Municipal Obligations, the Fund will dispose
of such assets as promptly as possible.

Investment Limitations - Intermediate National Fund

Thornburg Investment Trust has adopted the following fundamental
investment policies respecting the Intermediate National Fund which may not
be changed unless approved by a majority of the outstanding shares of the
Fund.

The Intermediate National Fund may not:

(2) The Intermediate National Fund may not purchase any security if,
as a result, more than 5% of its total assets would be invested in
securities of any one issuer, excluding obligations of, or guaranteed by,
the United States government, its agencies, instrumentalities and
authorities;
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(3) Borrow money, except for temporary or emergency purposes and not
for investment purposes, and then only in an amount not exceeding 5% of the
value of the Fund's total assets at the time of borrowing;

(4) Pledge, mortgage or hypothecate its assets, except to secure
borrowings permitted by subparagraph (3) above;

(6) Underwrite any issue of securities, except to the extent that, in
connection with the disposition of portfolio securities, it may be deemed to
be an underwriter under the federal securities laws;

(7) Purchase or sell real estate and real estate mortgage loans, but
this shall not prevent the Fund from investing in Municipal Obligations
secured by real estate or interests therein;

(8) Purchase or sell commodities or commodity futures contracts or
oil, gas or other mineral exploration or development programs;

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

(12) Invest more than 5% of its total assets in securities of
unseasoned issuers which, together with their predecessors, have been in
operation for less than three years excluding (i) obligations of, or
guaranteed by, the United States government, its agencies, instrumentalities
and authorities and (ii) obligations secured by the pledge of the faith,
credit and taxing power of any entity authorized to issue Municipal
Obligations;

(13) Invest more than 5% of its total assets in securities which the
Fund is restricted from selling to the public without registration under the
Securities Act of 1933;

(14) Purchase securities of any issuer if such purchase at the time
thereof would cause more than 10% of the voting securities of any such
issuer to be held by the Fund;
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<PAGE>
(15) Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets;

(17) Purchase or retain the securities of any issuer other than the
securities issued by the Fund itself if, to the Fund's knowledge, those
officers and trustees of the Fund, or those officers and directors of TMC,
who individually own beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
outstanding securities; or

(18) Purchase the securities of any issuer if as a result more than 10%
of the value of the Fund's net assets would be invested in restricted
securities, unmarketable securities and other illiquid securities (including
repurchase agreements of more than seven days maturity and other securities
which are not readily marketable).

For the purpose of applying the limitations set forth in paragraphs (2)
and (12) above, an issuer shall be deemed a separate issuer 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 nongovernmental user, such as an industrial corporation or a
privately owned or operated hospital, if the security is backed only by the
assets and revenues of the nongovernmental user, then the nongovernmental
user would be deemed to be the sole issuer. Where a security is also
guaranteed by the enforceable obligation of another entity it shall also be
included in the computation of securities owned that are issued by such
other entity. In addition, for purposes of paragraph (2) above, a
remarketing party entering into a remarketing agreement with the Fund as
described in the Prospectus or in this Statement of Additional Information
shall not be deemed an "issuer" of a security or a "guarantor" pursuant to
the agreement.

With respect to temporary investments, in addition to the foregoing
limitations the Intermediate National Fund will not enter into a repurchase
agreement if, as a result thereof, more than 5% of its net assets would be
subject to repurchase agreements.

Although the Fund has the right to pledge, mortgage or hypothecate its
assets, in order to comply with certain state statutes on investment
restrictions, the Fund will not, as a matter of operating policy (which
policy may be changed by its Trustees without shareholder approval), pledge,
mortgage or hypothecate its portfolio securities to the extent that at any
time the percentage of pledged securities will exceed 10% of its total
assets.

In the event the Fund acquires disposable assets as a result of the
exercise of a security interest relating to Municipal Obligations, it will
dispose of such assets as promptly as possible.
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Investment Limitations - Government Fund

As a matter of fundamental investment policy, the Government Fund will
not:

(1) Invest more than 20% of the Fund's total assets in securities
other than obligations issued or guaranteed by the United States Government
or its agencies, instrumentalities and authorities, or in participations in
such obligations or repurchase agreements secured by such obligations,
generally described (but not limited) under the heading "Types of
Obligations the Fund May Acquire", and then only in the nongovernmental
obligations described in the Prospectus;

(3) Borrow money, except (a) as a temporary measure, and then only in
amounts not exceeding 5% of the value of the Fund's total assets or (b) from
banks, provided that immediately after any such borrowing all borrowings of
the Fund do not exceed 10% of the Fund's total assets. The exceptions to
this restriction are not for investment leverage purposes but are solely for
extraordinary or emergency purchases or to facilitate management of the
Fund's portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio instruments is deemed to be disadvantageous. The
Fund will not purchase securities while borrowings are outstanding. For
purposes of this restriction (i) the security arrangements described in
restriction (4) below will not be considered as borrowing money, and (ii)
reverse repurchase agreements will be considered as borrowing money;

(4) Mortgage, pledge or hypothecate any assets except to secure
permitted borrowings. Arrangements to segregate assets with the Fund's
custodian with respect to when-issued and delayed delivery transactions, and
reverse repurchase agreements, and deposits made in connection with futures
contracts, will not be considered a mortgage, pledge or hypothecation of
assets;

(5) Underwrite any issue of securities, except to the extent that, in
connection with the disposition of portfolio securities, it may be deemed to
be an underwriter under federal securities laws;

(6) Purchase or sell real estate and real estate mortgage loans, but
this shall not prevent the Fund from investing in obligations of the U.S.
Government or its agencies, relating to real estate mortgages as described
generally in the Prospectus;

(7) Purchase or sell commodities or commodity futures contracts or
oil, gas or other mineral exploration or development programs. Investment
in futures contracts respecting securities and in options on these futures
contracts will not be considered investment in commodity futures contracts;
49
<PAGE>
(8) Make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objectives and policies; (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions; and (c) loans of securities;

(9) Purchase any security on margin, except for such short-term
credits as are necessary for the clearance of transactions. For purposes of
this restriction, the Fund's entry into futures contracts will not be
considered the purchase of securities on margin;

(10) Make short sales of securities;

(11) Invest more than 5% of its total assets in securities of
unseasoned issuers which, together with their predecessors, have been in
operation for less than three years excluding obligations of, or guaranteed
by, the United States government, its agencies, instrumentalities and
authorities;

(12) Invest more than 5% of its total assets in securities which the
Fund is restricted from selling to the public without registration under the
Securities Act of 1933. The Fund has no present intention to purchase any
such restricted securities;

(13) Purchase securities of any issuer if the purchase at the time
thereof would cause more than 10% of the voting securities or more than 10%
of any class of securities of any such issuer to be held by the Fund;

(14) Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets;

(15) Purchase securities (other than securities of the United States
government, its agencies, instrumentalities and authorities) if, as a
result, more than 25% of the Fund's total assets would be invested in any
one industry;

(16) Purchase or retain the securities of any issuer other than the
securities of the Fund if, to the Fund's knowledge, those officers and
Trustees of the Fund, or those officers and directors of TMC, who
individually own beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
outstanding securities;

(17) Enter into any reverse repurchase agreement if, as a result
thereof, more than 5% of its total assets would be subject to its
obligations under reverse purchase agreements at any time;

(18) Purchase or sell any futures contract if, as a result thereof, the
sum of the amount of margin deposits on the Fund's existing futures
positions and the amount of premiums paid for related options would exceed
5% of the Fund's total assets;

(19) Purchase any put or call option not related to a futures contract;
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<PAGE>
(20) Purchase the securities of any issuer if as a result more than 10%
of the value of the Fund's net assets would be invested in securities which
are considered illiquid because they are subject to legal or contractual
restrictions on resale ("restricted securities") or because no market
quotations are readily available; or enter into a repurchase agreement
maturing in more than seven days, if as a result such repurchase agreements
together with restricted securities and securities for which there are no
readily available market quotations would constitute more than 10% of the
Fund's net assets; or

(21) Issue senior securities, as defined under the Investment Company
Act of 1940, except that the Fund may enter into repurchase agreements and
reverse repurchase agreements, lend its portfolio securities, borrow, and
enter into when-issued and delayed delivery transactions as described in the
Prospectus or this Statement of Additional Information and as limited by the
foregoing investment limitations.

Whenever an investment policy or restriction states a minimum or
maximum percentage of the Government Fund's assets which may be invested in
any security or other assets, it is intended that the minimum or maximum
percentage limitations will be determined immediately after and as a result
of the Fund's acquisition of the security or asset. Accordingly, any later
increase or decrease in the relative percentage of value represented by the
asset or security resulting from changes in asset values will not be
considered a violation of these restrictions.

Although the Government Fund has the right to pledge, mortgage or
hypothecate its assets subject to the restrictions described above, in order
to comply with certain state statutes on investment restrictions, the Fund
will not, as a matter of operating policy (which policy may be changed by
the Trustees without shareholder approval), mortgage, pledge or hypothecate
its portfolio securities to the extent that at any time the percentage of
pledged securities will exceed 10% of its total assets.

Investment Limitations - Income Fund

As a matter of fundamental policy, the Income Fund may not:

(1) with respect to 75% of its total assets taken at market value,
purchase more than 10% of the voting securities of any one issuer or invest
more than 5% of the value of its total assets in the securities of any one
issuer, except obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and except securities of other investment
companies;

(2) borrow money, except as a temporary measure for extraordinary or
emergency purposes or except in connection with reverse repurchase
agreements; provided that the Fund maintains asset coverage of 300% for all
borrowings;

(3) purchase or sell real estate (except that the Fund may invest in
(i) securities of companies which deal in real estate or mortgages, and (ii)
securities secured by real estate or interests therein and that the Fund
reserves freedom of action to hold and sell real estate acquired as a result
of the Fund's ownership of securities) or purchase or sell physical
commodities or contracts relating to physical commodities;
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<PAGE>
(4) act as underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Fund;

(5) make loans to any other person, except (a) loans of portfolio
securities, and (b) to the extent that the entry into repurchase agreements
and the purchase of debt securities in accordance with its investment
objectives and investment policies may be deemed to be loans;

(6) issue senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur, and except for shares of the
separate classes of a fund or series of the Trust provided that collateral
arrangements with respect to currency-related contracts, futures contracts,
options, or other permitted investments, including deposits of initial and
variation margin, are not considered to be the issuance of senior securities
for purposes of this restriction;

(7) purchase any securities which would cause more than 25% of the
market value of its total assets at the time of such purchase to be invested
in the securities of one or more issuers having their principal business
activities in the same industry, provided that there is no limitation with
respect to investments in obligations issued or guaranteed by the U.S.
government or its agencies or instrumentalities (for the purposes of this
restriction, telephone companies are considered to be in a separate industry
from gas and electric public utilities, and wholly-owned finance companies
are considered to be in the industry of their parents if their activities
are primarily related to financing the activities of the parents).

As a matter of non-fundamental policy the Income Fund may not:

(a) purchase or retain securities of any open-end investment company,
or securities of any closed-end investment company except by purchase in the
open market where no commission or profit to a sponsor or dealer results
from such purchases, or except when such purchase, though not made in the
open market, is part of a plan of merger, consolidation, reorganization or
acquisition of assets. The Fund will not acquire any security issued by
another investment company ( the "acquired company") if the Fund thereby
would own (i) more than 3% of the total outstanding voting securities of the
acquired company, or (ii) securities issued by the acquired company having
an aggregate value exceeding 5% of the Fund's total assets, or (iii)
securities issued by investment companies having an aggregate value
exceeding 10% of the Fund's total assets;

(b) pledge, mortgage or hypothecate its assets in excess, together
with permitted borrowings, of 1/3 of its total assets;

(c) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the Fund
or a member, officer, director or trustee of the investment adviser of the
Fund if one or more of such individuals owns beneficially more than one-half
of one percent (1/2%) of the outstanding shares or securities or both (taken
at market value) of such issuer and such shares or securities together own
beneficially more than 5% of such shares or securities or both;

(d) purchase securities on margin or make short sales, unless, by
virtue of its ownership of other securities, it has the right to obtain
securities equivalent in kind and amount to the securities sold and, if the
right is conditional, the sale is made upon the same conditions, except in
connection with arbitrage transactions, and except that the Fund may obtain
such short-term credits as may be necessary for the clearance of purchases
and sales of securities;
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(e) invest more than 15% of its net assets in the aggregate in
securities which are not readily marketable, the disposition of which is
restricted under Federal securities laws, and in repurchase agreements not
terminable within 7 days provided the Fund will not invest more than 5% of
its total assets in restricted securities;

(f) purchase securities of any issuers with a record of less than
three years of continuous operations, including predecessors, except U.S.
government securities, securities of such issuers which are rated by at
least one nationally recognized statistical rating organization, municipal
obligations and obligations issued or guaranteed by any foreign government
or its agencies or instrumentalities, if such purchase would cause the
investments of the Fund in all such issuers to exceed 5% of the total assets
of the Fund taken at market value;

(g) purchase more than 10% of the voting securities of any one issuer,
except securities issued by the U.S. Government, its agencies or
instrumentalities;

(h) buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the Fund at any time do
not exceed 20% of its net assets; or sell put options in securities if, as a
result, the aggregate value of the obligations underlying such put options
(together with other assets then segregated to cover the Fund's potential
obligations under its hedging, duration management, risk management and
other Strategic Transactions other than those with respect to futures and
options thereon) would exceed 50% of the Fund's net assets;

(i) enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate initial margin
with respect to all futures contracts entered into on behalf of the Fund and
the premiums paid for options on futures contracts does not exceed 5% of the
fair market value of the Fund's total assets; provided that in the case of
an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in computing the 5% limit;

(j) invest in oil, gas or other mineral leases, or exploration or
development programs (although it may invest in issuers which own or invest
in such interests);

(k) borrow money except as a temporary measure, and then not in excess
of 5% of its total assets (taken at market value) unless the borrowing is
from banks, in which case the percentage limitation is 10%; reverse
repurchase agreements and dollar rolls will be considered borrowings for
this purpose, and will be further subject to total asset coverage of 300%
for such agreements;

(l) purchase warrants if as a result warrants taken at the lower of
cost or market value would represent more than 5% of the value of the Fund's
total net assets or more than 2% of its net assets in warrants that are not
listed on the New York or American Stock Exchanges or on an exchange with
comparable listing requirements (for this purpose, warrants attached to
securities will be deemed to have no value); or
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(m) make securities loans if the value of such securities loaned
exceeds 30% of the value of the Fund's total assets at the time any loan is
made; all loans of portfolio securities will be fully collateralized and
marked to market daily. The Fund has no current intention of making loans
of portfolio securities that would amount to greater than 5% of the Fund's
total assets;

(n) purchase or sell real estate limited partnership interests.

Restrictions with respect to repurchase agreements shall be construed to be
for repurchase agreements entered into for the investment of available cash
consistent with the Income Fund's repurchase agreement procedures, not
repurchase commitments entered into for general investment purposes.

Investment Limitations - Value Fund

The following policies and limitations supplement those set forth in
the Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be
invested in any security or other asset, that percentage limitation will be
determined immediately after and as a result of the Fund's acquisition of
such security or other asset. Accordingly, any subsequent change in values,
net assets, or other circumstances will not be considered when determining
whether the investment complies with the Fund's investment policies and
limitations.

The Fund's fundamental investment policies and limitations cannot be
changed without approval by a "majority of the outstanding voting
securities" (as defined in the Investment Company Act of 1940) of the Fund.
THE FOLLOWING ARE THE FUND'S FUNDAMENTAL INVESTMENT LIMITATIONS SET FORTH IN
THEIR ENTIRETY. THE FUND MAY NOT:

(1) with respect to 75% of the Fund's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by the
U.S. government or any of its agencies or instrumentalities) if, as a
result, (a) more than 5% of the Fund's total assets would be invested in the
securities of that issuer, or (b) the Fund would hold more than 10% of the
outstanding voting securities of that issuer;

(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;

(3) borrow money, except for temporary or emergency purposes or except
in connection with reverse repurchase agreements; in an amount not exceeding
33 1/3% of its total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that come to exceed this amount
will be reduced within three days (not including Sundays and holidays) to
the extent necessary to comply with the 33 1/3% limitation;
54
<PAGE>
(4) underwrite any issue of securities (except to the extent that the
Fund may be deemed to be an underwriter within the meaning of the Securities
Act of 1933 in the disposition of restricted securities);

(5) purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, more than 25% of the Fund's total assets
would be invested in the securities of companies whose principal business
activities are in the same industry;

(6) purchase or sell real estate unless acquired as a result or
ownership of securities or other instruments (but this shall not prevent the
Fund from investing in securities or other instruments backed by real estate
or securities of companies engaged in the real estate business);

(7) purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent
the Fund from purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical
commodities); or

(8) lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of debt securities or to repurchase
agreements.

THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL:

(i) The Fund does not currently intend to sell securities short,
unless it owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short, and provided that transactions in
futures contracts and options are not deemed to constitute selling
securities short.

(ii) The Fund does not currently intend to purchase securities on
margin, except that the Fund may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin
payments in connection with futures contracts and options on futures
contracts shall not constitute purchasing securities on margin.

(iii) The Fund may borrow money only (a) from a bank or (b) by
engaging in reverse repurchase agreements with any party. The Fund will not
purchase any security while borrowings representing more than 5% of its
total assets are outstanding.

(iv) The Fund does not currently intend to purchase any security if,
as a result, more than 10% of its net assets would be invested in securities
that are deemed to be illiquid because they are subject to legal or
contractual restrictions on resale or because they cannot be sold or
disposed of in the ordinary course of business at approximately the prices
at which they are valued.

(v) The Fund does not currently intend to purchase interests in real
estate investment trusts that are not readily marketable or interests in
real estate limited partnerships that are not listed on an exchange or
traded on the NASDAQ National Market System if, as a result, the sum of such
interests and other investments considered illiquid under the limitation in
the preceding paragraph would exceed the Fund's limitations on investments
in illiquid securities.
55
<PAGE>
(vi) The Fund does not currently intend to (a) purchase securities of
other investment companies, except in the open market where no commission
except the ordinary broker's commission is paid, or (b) purchase or retain
securities issued by other open-end investment companies. Limitations (a)
and (b) do not apply to securities received as dividends, through offers of
exchange, or as a result of a reorganization, consolidation, or merger.

(vii) The Fund does not currently intend to purchase the securities of
any issuer (other than securities issue or guaranteed by domestic or foreign
governments or political subdivisions thereof) if, as a result, more than 5%
of its total assets would be invested in the securities of business
enterprises that, including predecessors, have a record of less than three
years of continuous operation.

(viii) The Fund does not currently intend to purchase warrants, valued
at the lower of cost or market, in excess of 5% of the Fund's net assets.
Included in that amount, but not to exceed 2% of the Fund's net assets, may
be warrants that are not listed on the New York Stock Exchange or the
American Stock exchange. Warrants acquired by the Fund in units or attached
to securities are not subject to these restrictions.

(ix) The Fund does not currently intend to invest in oil, gas or other
mineral exploration or development programs or leases.

(x) The Fund does not currently intend to purchase the securities of
any issuer if those officers and Trustees of the trust and those officers
and directors of TMC who individually own more than 1/2 of 1% of the
securities of such issuer together own more than 5% of such issuer's
securities.

For the Fund's limitations on futures and options transactions, see the
section entitled "Limitations on Futures and Options Transactions"
beginning on page 39.

YIELD AND RETURN COMPUTATION

Performance and Portfolio Information - Municipal Funds and Taxable Income
Funds

The yield and return of a Fund or any Fund class may, from time to
time, be quoted in reports, sales literature and advertisements published by
the Fund, the Distributor, or investment dealers offering the Fund. Any
such quotation must include a standardized calculation which computes yield
for a 30-day or one month period by dividing net investment income per
share during the period by the maximum offering price on the last day of the
period. The standardized calculation will include the effect of semiannual
compounding and will reflect amortization of premiums for those bonds which
have a market value in excess of par. New schedules based on market value
will be computed each month for amortizing premiums. With respect to
mortgage-backed securities or other receivables-backed obligations, the Fund
56
<PAGE>
will amortize the discount or premium on the outstanding principal balance,
based upon the cost of the security, over the remaining term of the
security. Gains or losses attributable to actual monthly paydowns on
mortgage-backed obligations will be reflected as increases or decreases to
interest income during the period when such gains or losses are realized.
Provided that any such quotation is also accompanied by the standardized
calculation referred to above, a Fund may also quote non-standardized
performance data for a specified period by dividing the net investment
income per share for that period by either the Fund's average public
offering price per share for that same period or the offering price per
share on the first or last day of the period, and multiplying the result by
365 divided by the number of days in the specified period. For purposes of
this non-standardized calculation, net investment income will include
accrued interest income plus or minus any amortized purchase discount or
premium less all accrued expenses. The primary differences between the
results obtained using the standardized performance measure and any
non-standardized performance measure will be caused by the following
factors: (1) The non-standardized calculation may cover periods other than
the 30-day or one month period required by the standardized calculation; (2)
The non-standardized calculation may reflect amortization of premium based
upon historical cost rather than market value; (3) The non-standardized
calculation may reflect the average offering price per share for the period
or the beginning offering price per share for the period, whereas the
standardized calculation always will reflect the maximum offering price per
share on the last day of the period; (4) The non-standardized calculation
may reflect an offering price per share other than the maximum offering
price, provided that any time the Fund's return is quoted in reports, sales
literature or advertisements using a public offering price which is less
than the Fund's maximum public offering price, the return computed by using
the Fund's maximum public offering price also will be quoted in the same
piece; (5) The non-standardized return quotation may include the effective
return obtained by compounding the monthly dividends.

Any performance quotation also must include average annual total return
quotation for the one, 5 and 10 year period ended on the date of the most
recent balance sheet included in the registration statement, computed by
finding the average annual compounded rates of return over such periods that
would equate the initial amount invested at the maximum public offering
price to the ending redeemable value. To the extent that a Fund has been in
operation less than one, 5 or 10 years, the time period during which the
Fund has been in operation will be substituted for any one, 5 or 10 year
period for which a total return quotation is not obtainable.

Any quoted performance should not be considered a representation of the
performance in the future since the performance is not fixed. Actual
performance will depend not only the type, quality and maturities of the
investments held by the Fund and changes in interest rates on such
investments, but also on changes in the Fund's expenses during the period.
In addition, a change in the Fund's net asset value will affect its
performance.

From time to time, in advertisements and other types of literature, the
performance of the Municipal Funds or the Taxable Income Funds may be
compared to other groups of mutual funds. This comparative performance may
be expressed as a ranking prepared by Lipper Analytical Services, Inc. or
other widely recognized independent services which monitor the performance
of mutual funds. These performance analyses ordinarily will include the
reinvestment of dividends and capital gains distributions, but do not take
sales charges into consideration and are prepared without regard to tax
consequences. Performance rankings and ratings reported periodically in
national financial publications such as MONEY magazine, FORBES and BARRON's
also may be used.
57
<PAGE>
A Municipal Fund or a Taxable Income Fund also may illustrate
performance or the characteristics of its investment portfolio through
graphs, tabular data or other displays which describe (i) the average
portfolio maturity of the Fund's portfolio securities relative to the
maturities of other investments, (ii) the relationship of yield and maturity
of the Fund to the yield and maturity of other investments (either as a
comparison or through use of standard bench marks or indices such as the
Treasury yield curve), (iii) changes in the Fund's share price or net asset
value in some cases relative to changes in the value of other investments,
and (iv) the relationship over time of changes in the Fund's (or other
investments') net asset value or price and the Fund's (or other
investments') investment return.

Yield and return information may be used in reviewing the performance
of a Fund's investments and for providing a basis for comparison with other
investment alternatives. However, each Fund's return fluctuates, unlike
certain bank deposits or other investments which pay a fixed return for a
stated period of time.

Performance and Portfolio Information - Value Fund

The Fund may quote performance in various ways. All performance
information supplied by the Fund in advertising is historical and is not
intended to indicate future returns. The Fund's share price, yield, and
total return fluctuate in response to market conditions and other factors,
and the value of the Fund shares when redeemed may be more or less than
their original cost.

Yields for the Fund are computed by dividing the Fund's interest and
dividend income for a given 30-day or one-month period, net of expenses, by
the average number of shares entitled to receive distributions during the
period, dividing this figure by the Fund's offering price at the end of the
period, and annualizing the result (assuming compounding of income) in order
to arrive at an annual percentage rate. In addition, the Fund may use the
same method to obtain yields for 90-day or quarterly periods. Income is
calculated for purposes of yield quotations in accordance with standardized
methods applicable to all stock and bond funds. Dividends from equity
investments are treated as if they were accrued on a daily basis, solely for
the purposes of yield calculations. In general, interest income is reduced
with respect to bonds trading at a premium over their par value by
subtracting a portion of the premium from income on a daily basis, and is
increased with respect to bonds trading at a discount by adding a portion of
the discount to daily income. For the Fund's investments denominated in
foreign currencies, income and expenses are calculated first in their
respective currencies, and are then converted to U.S. dollars, either when
they are actually converted or at the end of the 30-day or one month period,
whichever is earlier. Capital gains and losses generally are excluded from
the calculation as are gains and losses from currency exchange rate
fluctuations.

Income calculated for the purposes of calculating the Fund's yield
differs from income as determined for other accounting purposes. Because of
the different accounting methods used, and because of the compounding of
income assumed in yield calculations, the Fund's yield may not equal its
distribution rate, the income paid to a shareholder's account, or the income
reported in the Fund's financial statements.
58
<PAGE>
Yield information may be useful in reviewing the Fund's performance and
in providing a basis for comparison with other investment alternatives.
However, the Fund's yield fluctuates, unlike investments that pay a fixed
interest rate over a stated period of time. When comparing investment
alternatives, investors should also note the quality and maturity of the
portfolio securities of respective investment companies they have chosen to
consider.

Investors should recognize that in periods of declining interest rates
the Fund's yield will tend to be somewhat higher than prevailing market
rates, and in periods of rising interest rates the Fund's yield will tend to
be somewhat lower. Also, when interest rates are falling, the inflow of net
new money to the Fund from the continuous sale of its shares will likely be
invested in instruments producing lower yields than the balance of the
Fund's holdings, thereby reducing the Fund's current yield. In periods of
rising interest rates, the opposite can be expected to occur.

Total returns quoted in advertising reflect all aspects of the Fund's
return, including the effect of reinvesting dividends and capital gain
distributions, and any change in the Fund's net asset value (NAV) over a
stated period. Average annual total returns are calculated by determining
the growth or decline in value of a hypothetical historical investment in
the Fund over a stated period, and then calculating the annually compounded
percentage rate that would have produced the same result if the rate of
growth or decline in value had been constant over the period. For example,
a cumulative total return of 100% over ten years would produce an average
annual return of 7.18%, which is the steady annual rate of return that would
equal 100% growth on a compounded basis in ten years. While average annual
returns are a convenient means of comparing investment alternatives,
investors should realize that the Fund's performance is not constant over
time, but changes from year to year, and the average annual returns
represent averaged figures as opposed to the actual year-to-year performance
of the Fund. In addition to average annual total returns, the Fund may
quote unaveraged or cumulative total returns reflecting the simple change in
value an investment over a stated period. Average annual and cumulative
total returns may be quoted as a percentage or as a dollar amount, and may
be calculated for a single investment, a series of investments, or a series
of redemptions, over any time period. Total returns may be broken down into
their components of income and capital (including capital gains and changes
in share price) in order to illustrate the relationship of these factors and
their contributions to total return. Total returns may be quoted on a
before-tax or after-tax basis and may be quoted with or without taking the
Fund's maximum sales charge into account. Excluding the Fund's sales charge
from a total return calculation produces a higher total return figure.
Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration.

Charts and graphs using the Fund's net asset values, adjusted net asset
values, and benchmark indices may be used to exhibit performance. An
adjusted NAV includes any distributions paid by the Fund and reflects all
elements of its return. Unless otherwise indicated, the Fund's adjusted
NAV's are not adjusted for sales charges, if any.
59
<PAGE>
The Fund may illustrate performance using moving averages. A long-term
moving average is the average of each week's adjusted closing NAV or total
return for a specified period. A short-term moving average NAV is the
average of each day's adjusted closing NAV for a specified period. Moving
average activity indicators combine adjusted closing NAV's from the last
business day of each week with moving averages for a specified period the
produce indicators showing when an NAV has crossed, stayed above, or stayed
below its moving average.

The Fund commenced operations October 1, 1995. The Fund's performance
may be compared to the performance of other mutual funds in general, or to
the performance of particular types of mutual funds. These comparisons may
be expressed as mutual fund ranking prepared by Lipper Analytical Services,
Inc. (Lipper), an independent service located in Summit, New Jersey that
monitors the performance of mutual funds. Lipper generally ranks funds on
the basis of total return, assuming reinvestment of distributions, but does
not take sales charges or redemption fees into consideration, and is
prepared without regard to tax consequences. In addition to the mutual fund
rankings the Fund's performance may be compared to stock, bond, and money
market mutual fund performance indices prepared by Lipper or other
organizations. When comparing these indices, it is important to remember
the risk and return characteristics of each type of investment. For
example, while stock mutual funds may offer higher potential returns, they
also carry the highest degree of share price volatility. Likewise, money
market funds may offer greater stability of principal, but generally do not
offer the higher potential returns from stock mutual funds. From time to
time, the Fund's performance may also be compared to other mutual funds
tracked by financial or business publications and periodicals. For example,
the Fund may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on
the basis of risk-adjusted performance. Rankings that compare the
performance of Thornburg funds to one another in appropriate categories over
specific periods of time may also be quoted in advertising.

The Fund may be compared in advertising to Certificates of Deposit
(CD's) or other investments issued by banks or other depository
institutions. Mutual funds differ from bank investments in several
respects. For example, while the Fund may offer greater liquidity or higher
potential returns than CD's, the Fund does not guarantee a shareholder's
principal or return, and Fund shares are not FDIC insured.

TMC may provide information designed to help individuals understand
their investment goals and explore various financial strategies. Such
information may include information about current economic market, and
political conditions; materials that describe general principles of
investing, such as asset allocation, diversification, risk tolerance, and
goal setting; questionnaires designed to help create a personal financial
profile; worksheets used to project savings needs bases on assumed rates of
inflation and hypothetical rates of return; and action plans offering
investment alternatives. Materials may also include discussions of other
Thornburg mutual funds.

Ibbotson Associates of Chicago, Illinois (Ibbotson) provides historical
returns of the capital markets in the United States, including common
stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury
bills, the U.S. rate of inflation (based on the CPI), and combinations of
various capital markets. The performance of these capital markets is based
on the returns of differed indices.
60
<PAGE>
The Value Fund may use the performance of these capital markets in
order to demonstrate general risk-versus-reward investment scenarios.
Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in the capital market may or may not correspond directly to
those of the Fund. The Fund may also compare performance to that of other
compilations or indices that may be developed and made available in the
future, and advertising, sales literature and shareholder reports also may
discuss aspects of periodic investment plans, dollar cost averaging and
other techniques for investing to pay for education, retirement and other
goals. In addition, the Fund may quote or reprint financial or business
publications and periodicals, including model portfolios or allocations, as
they relate to current economic and political conditions, fund management,
portfolio composition, investment philosophy, investment techniques and the
desirability of owning a particular mutual fund. The Fund may present its
fund number, Quotron (trademark) number, and CUSIP number, and discuss or
quote its current portfolio manager.

The Fund may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Fund may compare these
measures to those of other funds. Measures of volatility seek to compare
the Fund's historical share price fluctuations or total returns to those of
a benchmark. Measures of benchmark correlation indicate how valid a
comparative benchmark may be. All measures of volatility and correlation
are calculated using averages of historical data. In advertising, the Fund
may also discuss or illustrate examples of interest rate sensitivity.

Momentum Indicators show the Fund's price movements over specific
periods of time. Each point on the momentum indicator represents the Fund's
percentage change in price movements over that period. The Fund may
advertise examples of the effects of periodic investment plans, including
the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss
in a declining market, the investor's average cost per share can be lower
than if fixed numbers of shares are purchased at the same intervals. In
evaluating such a plan, investors should consider their ability to continue
purchasing shares during periods of low price levels. The Fund may be
available for purchase through retirement plans or other programs offering
deferral of, or exemption from, income taxes, which may produce superior
after-tax returns over time. For example, a $1,000 investment earning a
taxable return of 10% annually would have an after-tax value of $1,949 after
ten years, assuming tax was deducted from the return each year at a 31%
rate. An equivalent tax-deferred investment would have an after-tax value
of $2,100 after ten years, assuming tax was deducted at a 31% rate from the
tax-deferred earnings at the end of the ten-year period.
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REPRESENTATIVE PERFORMANCE INFORMATION

Representative Performance Information - Limited Term National Fund
(Institutional Class)

THE FOLLOWING DATA FOR THE LIMITED TERM NATIONAL FUND REPRESENT PAST
PERFORMANCE, AND THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
IN THE FUND WILL FLUCTUATE. AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST.

Yield Computations

Standardized Method of Computing Yield. The yield of the Limited Term
National Fund Institutional Class shares for the one month period ended June
30, 1997, computed in accordance with the standardized calculation described
above, was 4.37%. This method of computing yield does not take into account
changes in net asset value.

Non-standardized Method of Computing Yield. The Limited Term National
Fund's nonstandardized yield, for Institutional Class shares computed in
accordance with its non-standardized method for the 7-day period ended June
30, 1997, was 5.03%. This nonstandardized method differs from the
standardized method of computing yield in that the nonstandardized yield is
computed for the 7-day period rather than a 30-day or one month period, the
nonstandardized yield reflects amortization of premium based upon historical
cost rather than market value, and the nonstandardized yield is computed by
compounding dividends monthly rather than semiannually. This method of
computing performance does not take into account changes in net asset value.

Taxable Equivalent Yield. The Intermediate National Fund's taxable
equivalent yield for Institutional Class shares, computed in accordance with
the methods described above using a maximum federal tax rate of 39.6%, were
as shown below for the indicated periods ending June 30, 1997:

Taxable
Equivalent
Yield Yield
----- ----------
Standardized Method
30 days ended 06/30/97 4.37% 7.23%

Non-standardized Method
7 days ended 06/30/97 5.03% 8.33%

Non-standardized Method
30 days ended 06/30/97 5.03% 8.33%

The nonstandardized method of computation differs from the standardized
method in that the nonstandardized yield for the 7-day period is computed on
a basis of seven days rather than the standard 30-day or one month period,
the nonstandardized yield reflects amortization of premium based upon
historical cost rather than market value, and the nonstandardized yield is
computed by compounding dividends monthly rather than semiannually. The
standardized and nonstandardized methods of computing yield and taxable
equivalent yield do not take into account changes in net asset value.
62
<PAGE>
Average Annual Total Return. The Limited Term National Fund's
Institutional Class total return figures are set forth below for the period
shown ending June 30, 1997. Institutional Class shares were first offered
on July 5, 1996. These total return figures assume reinvestment of all
dividends at net asset value.

1 Year 5 Years 10 Years Since Inception
------ ------- -------- ---------------
N/A N/A N/A 6.42%

Representative Performance Information - Limited Term California Fund
(Institutional Class)

THE FOLLOWING DATA FOR THE LIMITED TERM CALIFORNIA FUND REPRESENT PAST
PERFORMANCE, AND THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
IN THE FUND WILL FLUCTUATE. AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST.

Yield Computations

Standardized Method of Computing Yield. The yield of the Limited Term
California Fund Institutional Class shares for the one month period ended
June 30, 1997, computed in accordance with the standardized calculation
described above, was 4.38%. This method of computing yield does not take
into account changes in net asset value.

Non-standardized Method of Computing Yield. The Limited Term
California Fund's nonstandardized yield, for Institutional Class shares
computed in accordance with its non-standardized method for the 7-day period
ended June 30, 1997, was 4.81%. This nonstandardized method differs from
the standardized method of computing yield in that the nonstandardized yield
is computed for the 7-day period rather than a 30-day or one month period,
the nonstandardized yield reflects amortization of premium based upon
historical cost rather than market value, and the nonstandardized yield is
computed by compounding dividends monthly rather than semiannually. This
method of computing performance does not take into account changes in net
asset value.
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<PAGE>
Taxable Equivalent Yield. The Limited Term California Fund's taxable
equivalent yield for Institutional Class shares, computed in accordance with
the methods described above using a maximum federal tax rate of 39.6% and a
maximum California tax rate of 9.3%, were as shown below for the indicated
periods ending June 30, 1997:

Taxable
Equivalent
Yield Yield
----- ----------
Standardized Method
30 days ended 06/30/97 4.38% 8.57%

Non-standardized Method
7 days ended 06/30/97 4.81% 9.41%

Non-standardized Method
30 days ended 06/30/97 4.82% 9.43%

Average Annual Total Return. The Limited Term California Fund's
Institutional Class total return figures are set forth below for the period
shown ending June 30, 1997. Institutional Class shares were first offered
on April 1, 1997. These total return figures assume reinvestment of all
dividends at net asset value.

1 Year 5 Years 10 Years Since Inception
------ ------- -------- ---------------
N/A N/A N/A 2.07%

Representative Performance Information - Intermediate National Fund
(Institutional Class)

THE FOLLOWING DATA FOR INTERMEDIATE NATIONAL FUND REPRESENT PAST
PERFORMANCE, AND THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
IN THE FUND WILL FLUCTUATE. AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST.

Yield Computations

Standardized Method of Computing Yield. The yield of the Intermediate
National Fund Institutional Class shares for the one month period ended
September 30, 1997, computed in accordance with the standardized calculation
described above, was 4.55%. This method of computing yield does not take
into account changes in net asset value.
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<PAGE>
Non-standardized Method of Computing Yield. The Intermediate National
Fund's nonstandardized yield, for Institutional Class shares computed in
accordance with its non-standardized method for the 7-day period ended
September 30, 1997, was 5.14%. This nonstandardized method differs from the
standardized method of computing yield in that the nonstandardized yield is
computed for the 7-day period rather than a 30-day or one month period, the
nonstandardized yield reflects amortization of premium based upon historical
cost rather than market value, and the nonstandardized yield is computed by
compounding dividends monthly rather than semiannually. This method of
computing performance does not take into account changes in net asset value.

Taxable
Equivalent
Yield Yield
----- ----------
Standardized Method
30 days ended 09/30/97 4.55% 7.53%

Non-standardized Method
7 days ended 09/30/97 5.14% 8.51%

Non-standardized Method
30 days ended 09/30/97 5.33% 8.82%

Average Annual Total Return. The Intermediate National Fund's
Institutional Class total return figures are set forth below for the period
shown ending September 30, 1997. Institutional Class shares were first
offered on July 5, 1996. These total return figures assume reinvestment of
all dividends at net asset value.

1 Year 5 Years 10 Years Since Inception
------ ------- -------- ---------------
7.07% N/A N/A 8.32%

Representative Performance Information - Government Fund
(Institutional Class)

THE FOLLOWING DATA FOR THE GOVERNMENT FUND REPRESENT PAST PERFORMANCE,
AND THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT IN THE FUND
WILL FLUCTUATE. AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST.
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<PAGE>
Yield Computations

Standardized Method of Computing Yield. The Government Fund's yield
for Institutional Class shares, computed for the one-month period ended
September 30, 1997 in accordance with the standardized calculation described
above, was 6.34%. This method of computing yield does not take into account
changes in net asset value.

Non-standardized Method of Computing Yield. The Government Fund's
yield for Institutional Class shares, computed for the 7-day period ended
September 30, 1997 in accordance with a non-standardized method, was 6.31%.
This non-standardized method of computation differs from the standardized
method of computing yield in that the non-standardized yield is computed for
a 7-day period rather than a 30-day or one-month period, the non-
standardized yield reflects amortization of premium based upon historical
cost rather than market value, and the non-standardized yield is computed by
compounding dividends monthly rather than semiannually. This method of
computing performance does not take into account changes in net asset value.

Average Annual Total Return. The Government Fund's total returns for
Institutional Class shares, computed in accordance with the total return
calculation described above, are displayed in the table below for the
periods shown ending September 30, 1997. The Government Fund commenced
sales of Institutional Class shares on July 5, 1996. "Total return," unlike
the standardized yield and non-standardized yield figures shown above, takes
into account changes in net asset value over the described periods. These
data assume reinvestment of all dividends at net asset value.

1 Year 5 Years 10 Years Since Inception
------ ------- -------- ---------------
7.26% N/A N/A 7.91% (7/5/96)

Total return figures are average annual total returns for the periods shown.

Representative Performance Information - Income Fund
(Institutional Class)

THE FOLLOWING DATA FOR THE INCOME FUND REPRESENT PAST PERFORMANCE, AND
THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT IN THE FUND WILL
FLUCTUATE. AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST.

Yield Computations

Standardized Method of Computing Yield. The Income Fund's yield for
Institutional Class shares, computed for the one-month period ended
September 30, 1997 in accordance with the standardized calculation described
above, was 6.42%. This method of computing yield does not take into account
changes in net asset value.

Non-standardized Method of Computing Yield. The Income Fund's yield
for Institutional Class shares, computed for the 7-day period ended
September 30, 1997 in accordance with a non-standardized method, was 6.41%.
This non-standardized method of computation differs from the standardized
method of computing yield in that the non-standardized yield is computed for
a 7-day period rather than a 30-day or one month period, the non-
standardized yield reflects amortization of premium based upon historical
cost rather than market value, and the non-standardized yield is computed by
compounding dividends monthly rather than semiannually. This method of
computing performance does not take into account changes in net asset value.
66
<PAGE>
Average Annual Total Return. The Income Fund's total returns for
Institutional Class shares, computed in accordance with the total return
calculation described above,are displayed in the table below for the periods
shown ending September 30, 1997. The Income Fund commenced sales of
Institutional Class shares on July 5, 1996. "Total return," unlike the
standardized yield and non-standardized yield figures shown above, takes
into account changes in net asset value over the described periods. These
data assume reinvestment of all dividends at net asset value.

1 Year 5 Years 10 Years Since Inception
------ ------- -------- ---------------
7.80% N/A N/A 9.64% (7/5/96)

Total return figures are average annual total returns for the periods shown.

TAXES

Federal Income Taxes - In General

Each Fund has elected and intends to qualify for treatment as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code").

If in any year a Fund fails to qualify for the treatment conferred by
Subchapter M of the Code, the Fund would be taxed as a corporation on its
income. Distributions to the shareholders would be treated as ordinary
income to the extent of the Fund's earnings and profits, and would be
treated as nontaxable returns of capital to the extent of the shareholders'
respective bases in their shares. Further distributions would be treated as
amounts received on a sale or exchange or property. Additionally, if in any
year the Fund qualified as a regulated investment company but failed to
distribute all of its net income, the Fund would be taxable on the
undistributed portion of its net income. Although each Fund intends to
distribute all of its net income currently, it could have undistributed net
income if, for example, expenses of the Fund were reduced or disallowed on
audit.

The Code imposes a nondeductible 4% excise tax on regulated investment
companies which do not distribute to shareholders by the end of each
calendar year the sum of (i) 98% of the company's net ordinary income
realized in the year, (ii) 98% of the company's net capital gain income for
the 12-month period ending on October 31 of that year, and (iii) the excess
of (A) the sum of the amounts in (i) and (ii) for the prior calendar year
plus all amounts from earlier years which are not treated as having been
distributed under this provision, over (B) actual distributions for the
preceding calendar years. The effect of this excise tax will be to cause
each Fund to distribute substantially all of its income during the calendar
year in which the income is earned. Shareholders will be taxed on the full
amount of the distribution declared by their Fund for each such year,
including declared distributions not actually paid until January 31 of the
next calendar year.
67
<PAGE>
Each shareholder will be notified annually by their Fund as to the
amount and characterization of distributions paid to or reinvested by the
shareholder for the preceding taxable year. The Fund may be required to
withhold federal income tax at a rate of 31% from distributions otherwise
payable to a shareholder if (i) the shareholder has failed to furnish the
Fund with his taxpayer identification number, (ii) the Fund is notified that
the shareholder's number is incorrect, (iii) the Internal Revenue Service
notifies the Fund that the shareholder has failed properly to report certain
income, or (iv) when required to do so, the shareholder fails to certify
under penalty of perjury that he is not subject to this withholding.

Effective for sales charges incurred after October 3, 1989 if the
shareholder disposes of shares within 90 days after purchasing them, and
later acquires shares for which the sales charge is eliminated or reduced
pursuant to a reinvestment right, then the original sales charge to the
extent of the reduction is not included in the basis of the shares sold for
determining gain or loss. Instead, the reduction is included in determining
the basis of the reinvested shares.

Distributions by a Fund result in a reduction in the net asset value of
the Fund's shares. Should distributions reduce the net asset value below a
shareholder's cost basis, the distribution would nevertheless be taxable to
the shareholder as ordinary income or capital gain as described above, even
though, from an investment standpoint, it may constitute a partial return of
capital. In particular, investors should consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased
at that time includes the amount of the forthcoming distribution. Those
purchasing just prior to a distribution will then receive a partial return
of capital upon the distribution, which will nevertheless be taxable to
them.

If a Fund holds zero coupon securities or other securities which are
issued at discount, a portion of the difference between the issue price and
the face amount of zero coupon securities ("original issue discount") will
be treated as ordinary income if the Fund holds securities with original
issue discount each year, although no current payments will be received by
the Fund with respect to that income. This original issue discount will
comprise a part of that investment company taxable income of the Fund which
must be distributed to shareholders in order to maintain its qualification
as a regulated investment company and to avoid federal income tax on the
Fund. Taxable shareholders of the Fund will be subject to income tax on
original issue discount, whether or not they elect to receive their
distributions in cash.

Federal Income Taxation - Municipal Funds

The Municipal Funds each intend to satisfy conditions (including
requirements as to the proportion of its assets invested in Municipal
Obligations) which will enable each Fund to designate distributions from the
interest income generated by its investments in Municipal Obligations, which
are exempt from federal income tax when received by the Fund, as Exempt
Interest Dividends. Shareholders receiving Exempt Interest Dividends will
not be subject to federal income tax on the amount of those dividends,
except to the extent the alternative minimum tax may apply. A Municipal
Fund would be unable to make Exempt Interest Dividends if, at the close of
any quarter of its taxable year, more than 50% of the value of the Fund's
total assets
68
<PAGE>
consisted of assets other than Municipal Obligations. Additionally, if in
any year the Fund qualified as a regulated investment company but failed to
distribute all of its net income, the Fund would be taxable on the
undistributed portion of its net income. Although each Fund intends to
distribute all of its net income currently, it could have undistributed net
income if, for example, expenses of the Fund were reduced or disallowed on
audit.

Under the Code, interest on indebtedness incurred or continued to
purchase or carry shares is not deductible. Under rules issued by the
Department of the Treasury for determining when borrowed funds are
considered used for the purpose of purchasing or carrying particular assets,
the purchase of shares may be considered to have been made with borrowed
funds even though the borrowed funds are not directly traceable to the
purchase of shares. Investors with questions regarding this issue should
consult with their own tax advisers.

Shares of a Municipal Fund may not be an appropriate investment for
persons who are "substantial users" of facilities financed by industrial
development bonds (including any Municipal Lease that may be deemed to
constitute an industrial development bond) or persons related to such
"substantial users". Such persons should consult their own tax advisers
before investing in shares.

Distributions by each Municipal Fund of net interest income received
from certain temporary investments (such as certificates of deposit,
commercial paper and obligations of the United States government, its
agencies, instrumentalities and authorities), short-term capital gains
realized by the Fund, if any, and realized amounts attributable to market
discount on bonds, will be taxable to shareholders as ordinary income
whether received in cash or additional shares. Distributions to
shareholders will not qualify for the dividends received deduction for
corporations.

Any net long-term capital gains realized by a Municipal Fund, whether
or not distributed in cash or reinvested in additional shares, must be
treated as long-term capital gains by shareholders regardless of the length
of time investors have held their shares. If a Fund should have net
undistributed capital gain in any year, the Fund would pay the tax on such
gains and each shareholder would be deemed, for federal tax purposes, to
have paid his or her pro rata share of such tax.

If a Fund has both tax-exempt and taxable interest, it will use the
"actual earned method" for determining the designated percentage that is
taxable income and designate the use of such method within 45 days after the
end of the Fund's taxable year. Under this method the ratio of taxable
income earned during the period for which a distribution was made to total
income earned during the period determines the percentage of the
distribution designated taxable. The percentages of income, if any,
designated as taxable income will under this method vary from distribution
to distribution.

As is the case with other types of income, including other tax-exempt
interest income, Exempt Interest Dividends received by an individual
shareholder will be added to his or her "modified adjusted gross income" in
determining what portion, if any, of the individual's Social Security
benefits will be subject to federal income taxation. Shareholders are
advised to consult their own tax advisers as to the effect of this
treatment. 69
<PAGE>
The Code treats interest on certain Municipal Obligations which are
private activity bonds under the code issued after August 7, 1986 (in
certain cases, after September 1, 1986) as a preference item for purposes of
the alternative minimum tax on individuals and corporations. Each Fund may
purchase private activity bonds which are subject to treatment under the
Code as a preference item for purposes of the alternative minimum tax on
individuals and corporations, although the frequency and amounts of those
purchases are uncertain. Some portion of Exempt Interest Dividends may, as
a result of such purchases, be treated as a preference item for purposes of
the alternative minimum tax on individuals and corporations. Shareholders
are advised to consult their own tax advisers as to the extent and effect of
such treatment.

In addition, the Code provides that a portion of the adjusted current
earnings of a corporation reported on its financial statement and not
otherwise included in the minimum tax base will be included for purposes of
calculating the alternative minimum tax for such years. The adjusted
current earnings of a corporation will include Exempt Interest Dividends in
calculating the alternative minimum tax on corporations to the extent that
such dividends are not otherwise treated as a preference item for the
reasons discussed above. An environmental tax is imposed on the excess of a
corporation's modified alternative minimum taxable income (minimum taxable
base, discussed above, with certain modifications) over $2 million.
Modified alternative minimum taxable income includes Exempt Interest
Dividends. The environmental tax applies with respect to taxable years
beginning after December 31, 1986 and before January 1, 1996. Exempt
Interest Dividends are included in effectively connected earnings and
profits for purposes of computing the branch profits tax on certain foreign
corporations doing business in the United States.

With respect to property and casualty companies, the amount of certain
cost deductions otherwise allowed is reduced (in certain cases below zero)
by a specified percentage of, among other things, Exempt Interest Dividends
received on shares acquired after August 7, 1986, for taxable years
beginning after 1986. Commercial banks, thrift institutions and other
financial institutions may not deduct their cost of carrying shares acquired
after August 7, 1986, for taxable years ending after December 31, 1986.

Redemption or resale of shares will be a taxable transaction for
federal income tax purposes and the shareholder will recognize gain or loss
in an amount equal to the difference between the shareholder's basis in the
shares and the amount realized by the shareholder on the redemption or
resale. If the redemption or resale occurs before May 7, 1997, and the
shareholder held the shares as capital assets, the gain or loss will be
long-term if the shares were held for more than 12 months, and any such
long-term gain will be subject to a maximum federal income tax rate of 28%
to the extent that gain exceeds any net short-term capital losses realized
by the taxpayer. If the redemption or resale occurs after May 6, 1997, and
the shares were held as capital assets, the gain or loss will be long-term
if the shares were held for more than 12 months, and the maximum 28% rate
will continue to apply to gains realized on shares held more than 12 months
and less than 18 months. However, for shares held as capital assets for
more than 18 months, the maximum federal income tax rate is 20%; and is
reduced to 10% for gains which otherwise would be taxable at 15% rate. For
taxable years beginning after December 31, 2000, the maximum tax rates for
gains on capital assets which are held more than five years are 8% and 18%,
instead of the 10% and 20% rates applicable to assets held more than 18
months.
70
<PAGE>
The foregoing is a general and abbreviated summary of the provisions of
the Code and Treasury Regulations presently in effect as they directly
govern the taxation of the Municipal Funds and their individual
shareholders, and this summary primarily addresses tax consequences to
individual shareholders. For complete provisions, reference should be made
to the pertinent Code sections and Treasury Regulations. The Code and
Treasury Regulations are subject to change by legislative or administrative
action, and any such change may be retroactive with respect to Fund
transactions. Shareholders are advised to consult their own tax advisers
for more detailed information concerning the federal taxation of the Funds
and the income tax consequences to their shareholders.

State and Local Tax Aspects of the Municipal Funds

The exemption from federal income tax for distributions of interest
income from Municipal Obligations which are designated Exempt Interest
Dividends will not necessarily result in exemption under the income or other
tax laws of any state or local taxing authority.

The exemption from the State of California personal income taxes for
distributions of interest income in the Limited Term California Fund applies
only to shareholders who are residents of the State of California, and only
to the extent such income qualifies as "exempt-interest dividends" under
Section 17145 of the California Revenue and Taxation Code and is not derived
from interest on obligations from any state other than from California or
its political subdivisions.

The laws of the several states and local taxing authorities vary with
respect to the taxation of such distributions, and shareholders of each Fund
are advised to consult their own tax advisers in that regard. In
particular, prospective investors who are not individuals are advised that
the preceding discussion relates primarily to tax consequences affecting
individuals, and the tax consequences of an investment by a person which is
not an individual may be very different. Each Fund will advise shareholders
within 60 days of the end of each calendar year as to the percentage of
income derived from each state in which the Fund has any Municipal
Obligations in order to assist shareholders in the preparation of their
state and local tax returns.

Federal Income Taxes - Taxable Income Funds

Each of the Taxable Income Funds has elected and intends to qualify for
treatment as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986 (the "Code"). Distributions representing net
interest and net short-term capital gains will be taxable as ordinary income
to the recipient shareholders, whether the distributions are actually taken
in cash or are reinvested by the recipient shareholders in additional
shares. Fund distributions will not be eligible for the dividends received
deduction for corporations. Distributions of net long-term capital gains,
if any, will be treated as long-term capital gains to the distributee
shareholders, whether the distributions are actually taken as cash or are
reinvested by the recipient shareholders in additional shares.
71
<PAGE>
Redemption or resale of shares will be a taxable transaction for
federal income tax purposes and the shareholder will recognize gain or loss
in an amount equal to the difference between the shareholder's basis in the
shares and the amount realized by the shareholder on the redemption or
resale. If the redemption or resale occurs before May 7, 1997, and the
shareholder held the shares as capital assets, the gain or loss will be
long-term if the shares were held for more than 12 months, and any such
long-term gain will be subject to a maximum federal income tax rate of 28%
to the extent that gain exceeds any net short-term capital losses realized
by the taxpayer. If the redemption or resale occurs after May 6, 1997, and
the shares were held as capital assets, the gain or loss will be long-term
if the shares were held for more than 12 months, and the maximum 28% rate
will continue to apply to gains realized on shares held more than 12 months
and less than 18 months. However, for shares held as capital assets for
more than 18 months, the maximum federal income tax rate is 20%; and is
reduced to 10% for gains which otherwise would be taxable at 15% rate. For
taxable years beginning after December 31, 2000, the maximum tax rates for
gains on capital assets which are held more than five years are 8% and 18%,
instead of the 10% and 20% rates applicable to assets held more than 18
months.

Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a mutual fund accrues interest
or other receivables or accrues expenses or other liabilities denominated in
a foreign currency and the time the Fund actually collects such receivables
or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on a disposition of debt securities denominated
in a foreign currency and on disposition of certain futures contracts,
forward contracts and options, gains or losses attributable to fluctuations
in the value of foreign currency between the date of acquisition of the
security or contract and the date of disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of the
Income Fund's investment company taxable income to be distributed to its
shareholders as ordinary income.

The foregoing is a general and abbreviated summary of the provisions of
the Code and Treasury Regulations presently in effect as they directly
govern the taxation of the Taxable Income Funds and their individual
shareholders, and this summary primarily addresses tax consequences to
individual shareholders. For complete provisions, reference should be made
to the pertinent Code sections and Treasury Regulations. The Code and
Treasury Regulations are subject to change by legislative or administrative
action, and any such change may be retroactive with respect to Fund
transactions. Shareholders are advised to consult their own tax advisers
for more detailed information concerning the federal and state taxation of
the Fund and the income tax consequences to its shareholders.

State and Local Income Tax Considerations - Taxable Income Funds

A portion of each Fund's dividends derived from certain U.S. Government
obligations may be exempt from state and local taxation. The income tax
treatment of the shareholders in the respective states will depend upon the
specific laws applicable in those states, and prospective investors are
urged to confer with their own tax advisers concerning their particular
situations.
72
<PAGE>
Federal Income Taxes - Value Fund

Gains (losses) attributable to foreign currency fluctuations are
generally taxable as ordinary income and therefore will increase (decrease)
dividend distributions. Net short-term capital gains are distributed as
dividend income. The Value Fund will send each shareholder a notice in
January describing the tax status of dividends and capital gain
distributions for the prior year.

Long-term capital gains earned by the Value Fund on the sale of
securities and distributed to shareholders are federally taxable as long-
term capital gains, regardless of the length of time shareholders have held
their shares. If a shareholder receives a long-term capital gain
distribution on shares of the Value Fund and such shares are held 12 months
or less and are sold at a loss, the portion of the loss equal to the amount
of the long-term capital gain distribution will be considered a long-term
loss for tax purposes. Net short-term capital gains distributed by the Fund
are taxable to shareholders as dividends, not as capital gains.

Foreign governments may withhold taxes on dividends and interest paid
with respect to foreign securities typically at a rate between 10% and 35%.
Foreign governments may also impose taxes on other payments or gains with
respect to foreign securities. Because the Fund does not currently
anticipate that securities of foreign issuers will constitute more than 50%
of its total assets at the end of its fiscal year, shareholders should not
expect to claim a foreign tax credit or deduction on their federal income
tax returns with respect to foreign taxes withheld.
73
<PAGE>
The foregoing is a general and abbreviated summary of the provisions of
the Code and Treasury Regulations currently in effect as they directly
govern the income taxation of Value Fund shareholders. This summary
primarily addresses income tax consequences to shareholders who are
individuals. The Code and Regulations are subject to change at any time, in
some cases retroactively. Shareholders are advised to consult their own tax
advisers for more detailed information concerning the federal tax
consequences of an investment in the Value Fund.

State and Local Income Tax Considerations - Value Fund

Shareholders may be subject to state and local taxes on Value Fund
distributions, and capital gains taxation on disposition of shares. Shares
also may be subject, in some jurisdictions, to state and local property
taxes. A portion of the Value Fund's dividends derived from certain U.S.
Government obligations may be exempt from state and local taxation.
Shareholders should consult their own tax advisers for information
concerning the state and local taxation of an investment in the Value Fund.

DISTRIBUTIONS AND SHAREHOLDERS ACCOUNTS

When an investor or the investor's financial advisor makes an initial
investment in shares of a Fund, the Transfer Agent will open an account on
the books of the Fund, and the investor or financial advisor will receive a
confirmation of the opening of the account. Thereafter, whenever a
transaction, other than the reinvestment of interest income, takes place in
the account -- such as a purchase of additional shares or redemption of
shares or a withdrawal of shares represented by certificates -- the investor
or the financial advisor will receive a confirmation statement giving
complete details of the transaction. Shareholders also will receive at
least quarterly statements setting forth all distributions of interest
income and other transactions in the account during the period and the
balance of full and fractional shares. The final statement for the year
will provide information for income tax purposes.

The monthly or quarterly distributions of interest income, net of
expenses, and the annual distributions of net realized capital gains, if
any, will be credited to the accounts of shareholders in full and fractional
shares of the Fund at net asset value on the payment or distribution date,
as the case may be. Upon written notice to the Transfer Agent, a
shareholder may elect to receive periodic distributions of net interest
income in cash. Such an election will remain in effect until changed by
written notice to the Transfer Agent, which change may be made at any time
in the sole discretion of the shareholder.

The issuance and delivery of certificates for shares is not required,
and shareholders may be relieved of the responsibility of safekeeping. Upon
written request to the Transfer Agent, a certificate will be issued for any
or all of the full shares credited to a shareholder's account, unless the
shareholder has elected the Fund's telephone redemption or systematic
withdrawal features, which are described in the Prospectus. Certificates
which have been issued to a shareholder may be returned at any time for
credit to his or her account.
74
<PAGE>
INVESTMENT ADVISER, INVESTMENT ADVISORY AGREEMENT,
AND ADMINISTRATIVE SERVICES AGREEMENT

Investment Advisory Agreement

Pursuant to an Investment Advisory Agreement in respect of each Fund,
Thornburg Management Company, Inc. ("TMC"), 119 East Marcy Street, Suite
202, Santa Fe, New Mexico 87501, acts as investment adviser for, and will
manage the investment and reinvestment of the assets of, each of the Funds
in accordance with the Funds' respective investment objectives and policies,
subject to the general supervision and control of the directors of Thornburg
Limited Term Municipal Fund, Inc. with respect to Limited Term National Fund
and Limited Term California Fund, and subject to the general supervision and
control of the trustees of Thornburg Investment Trust with respect to
Intermediate National Fund, Government Fund, Income Fund and Value Fund.

TMC is also investment adviser to Thornburg New Mexico Intermediate
Municipal Fund, Thornburg New York Intermediate Municipal Fund and Thornburg
Florida Intermediate Municipal Fund, separate series of Thornburg Investment
Trust having assets of $147,418,000, $27,127,000 and $25,487,000,
respectively as of September 30, 1997. TMC is a subadviser to Daily
Tax-Free Income Fund, Inc., a registered investment company.

TMC is paid a fee by each Fund, in the percentage amounts described in
the Prospectus. All fees and expenses are accrued daily and deducted before
payment of dividends. In addition to the fees of TMC, each Fund will pay
all other costs and expenses of its operations. Each Fund also will bear
the expenses of registering and qualifying the Fund and its shares for
distribution under federal and state securities laws, including legal fees.

The Company's directors (including a majority of the directors who are
not "interested persons" within the meaning of the Investment Company Act of
1940) have approved the Investment Advisory Agreement applicable to each of
Limited Term National Fund and Limited Term California Fund, and the Trust's
trustees (including a majority of the trustees who are not "interested
persons") have similarly approved the Investment Advisory Agreement
applicable to each of Intermediate National Fund, Government Fund, Income
Fund and Value Fund. The shareholders of each of the Funds approved a
restatement of the Investment Advisory Agreement applicable to each Fund at
special meetings of shareholders on April 16, 1996, to reduce the advisory
fees under those agreements and to remove from those agreements the
requirement that TMC would provide certain administrative services.
Instead, those services are provided under the terms of an Administrative
Services Agreement applicable to each class of shares issued by each Fund.
The Administrative Services Agreements are described below.

The Investment Advisory Agreement applicable to each Fund may be
terminated by either party, at any time without penalty, upon 60 days'
written notice, and will terminate automatically in the event of its
assignment. Termination will not affect the right of TMC to receive
payments on any unpaid balance of the compensation earned prior to
termination. The Agreement further provides that in the absence of willful
misfeasance, bad faith or gross negligence on the part of TMC, or of
reckless disregard of its obligations and duties under the Agreement, TMC
will not be liable for any action or failure to act in accordance with its
duties thereunder.
75
<PAGE>
For the three most recent fiscal periods with respect to each Fund, the
amounts paid to TMC by each Fund under the Investment Advisory Agreement
applicable to each Fund were as follows:

<TABLE>
June 30, 1995 June 30, 1996 June 30, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Limited Term National Fund $6,805,432 $6,584,835 $4,159,938
Limited Term California Fund $740,936 $748,077 $496,821

Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Intermediate National Fund $1,062,263 $1,446,809 $1,248,058
Government Fund $735,085 $678,979 $529,056
Income Fund 0 $150,436 $170,199
Value Fund N/A $105,914 $376,424

TMC has waived its rights to fees in the foregoing periods as follows:
<CAPTION>
June 30, 1995 June 30, 1996 June 30, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Limited Term National Fund $16,669 0 0
Limited Term California Fund $45,876 $75,198 $27,360

Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Intermediate National Fund $191,779 0 $144,709
Government Fund $24,278 0 0
Income Fund $163,741 0 0
Value Fund N/A 0 0
</TABLE>

The foregoing figures for the time periods before July 1, 1996 reflect, in
whole or in part, fee rates applicable before restatement of the Investment
Advisory Agreement for each Fund. TMC may (but is not obligated to) waive
its rights to any portion of its fees in the future, and may use any portion
of its fee for purposes of shareholder and administrative services and
distribution of fund shares. During the fiscal year ended June 30, 1997,
Limited Term National Fund and Limited Term California Fund each reimbursed
TMC $96,589 and $10,477, respectively, for accounting expenses incurred on
behalf of each Fund, and during the fiscal year ended September 30, 1997,
Intermediate National Fund, Government Fund and Income Fund reimbursed TMC
$27,337, $14,839 and $3,685, respectively, for accounting services.

H. Garrett Thornburg, Jr., Treasurer, Director and Chairman of the
Board of Thornburg Limited Term Municipal Fund, Inc., and President and
Trustee of Thornburg Investment Trust, is also Director and controlling
shareholder of TMC.
76
<PAGE>
Administrative Services Agreement

Administrative services are provided to each class of shares issued by
each of the Funds under an Administrative Services Agreement which requires
the delivery of administrative functions necessary for the maintenance of
the shareholders of the class, supervision and direction of shareholder
communications, assistance and review in preparation of reports and other
communications to shareholders, administration of shareholder assistance,
supervision and review of bookkeeping, clerical, shareholder and account
administration and accounting functions, supervision or conduct of
regulatory compliance and legal affairs, review and administration of
functions delivered by outside service providers to or for shareholders, and
other related or similar functions as may from time to time be agreed. The
Administrative Services Agreement specific to each Fund's Institutional
Class shares provides that the class will pay a fee calculated at an annual
percentage of .05% of the class's average daily net assets, paid monthly,
together with any applicable sales or similar tax. Services are currently
provided under these agreements by TMC. For the year ended June 30, 1997,
Limited Term National Fund and Limited Term California Fund paid to TMC
$8,588 and $265, respectively, under each Fund's Administrative Services
Plan specific to Institutional Class shares. For the year ended September
30, 1996, Intermediate National Fund, Government Fund and Income Fund paid
to TMC $57, $1 and $89, respectively, under each Fund's Administrative
Services Agreement specific to Institutional Class shares, and for the year
ended September 30, 1997, Intermediate National Fund, Government Fund and
Income Fund paid to TMC $2,673, $229 and $1,212, respectively, under the
same Agreement. The agreements applicable to each class may be terminated
by either party, at any time without penalty, upon 60 days' written notice,
and will terminate automatically upon assignment. Termination will not
affect the service provider's right to receive fees earned before
termination. The agreements further provide that in the absence of willful
misfeasance, bad faith or gross negligence on the part of the service
provider, or reckless disregard of its duties thereunder, the provider will
not be liable for any action or failure to act in accordance with its duties
thereunder.

SERVICE PLANS

Each of the Funds has adopted a plan and agreement of distribution
pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("Service
Plan") which is applicable to Institutional Class shares of each Fund. The
Plan permits each Fund to pay to TMC (in addition to the management and
administration fees and reimbursements described above) an annual amount not
exceeding .25 of 1% of the Fund's Institutional Class assets to reimburse
TMC for specific expenses incurred by it in connection with certain
shareholder services and the distribution of that Fund's shares to
investors. TMC may, but is not required to, expend additional amounts from
its own resources in excess of the currently reimbursable amount of
expenses. Reimbursable expenses include the payment of amounts, including
incentive compensation, to securities dealers and other financial
institutions, including banks (to the extent permissible under the
Glass-Steagall Act and other federal banking laws), for administration and
shareholder services, and in connection with the distribution of
Institutional Class shares. The nature and scope of services provided by
dealers and other entities likely will vary from entity to entity, but may
include, among other things, processing new account applications, preparing
and transmitting to the Transfer Agent information respecting shareholder
account transactions, and serving as a source of information to customers
concerning the Funds and transactions with the Funds. TMC has no current
intention to request or receive any reimbursement under the Service Plans
applicable to the Institutional Classes of any of the Funds. The Service
Plan does not provide for accrued but unpaid reimbursements to be carried
over and paid to TMC in later years.
77
<PAGE>
PORTFOLIO TRANSACTIONS

In General

Municipal Funds and Taxable Income Funds

TMC reserves the right to manage other investment companies and
investment accounts for other clients which may have investment objectives
similar to those of the Funds. Subject to applicable laws and regulations,
TMC will attempt to allocate equitably portfolio transactions among the
Funds and the portfolios of its other clients purchasing securities whenever
decisions are made to purchase or sell securities by a Fund and one or more
of such other clients simultaneously. In making such allocations the main
factors to be considered will be the respective investment objectives of the
Fund and the other clients, the size of investment commitments generally
held by the Fund and the other clients and opinions of the persons
responsible for recommending investments to the Fund and such other clients.
While this procedure could have a detrimental effect on the price or amount
of the securities available to a Fund from time to time, it is the opinion
of the Funds' Directors or Trustees that the benefits available from TMC's
organization will outweigh any disadvantage that may arise from exposure to
simultaneous transactions. Each Fund's Directors or Trustees will review
simultaneous transactions.

TMC, in effecting purchases and sales of portfolio securities for the
account of each of the Municipal Funds and Taxable Income Funds, will place
orders in such manner as, in the opinion of TMC, will offer the best price
and market for the execution of each transaction. Portfolio securities
normally will be purchased directly from an underwriter or in the
over-the-counter market from the principal dealers in such securities,
unless it appears that a better price of execution may be obtained
elsewhere. Purchases from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include the spread between the bid and asked price. Given the best
price and execution obtainable, it will be the practice of each of the Funds
to select dealers which, in addition, furnish research information including
credit analyses of issuers and statistical and other services to TMC. It is
not possible to place a dollar value on information and statistical and
other services received from dealers. Since it is only supplementary to
TMC's own research efforts, the receipt of research information is not
expected significantly to reduce TMC's expenses. In selecting among the
firms believed to meet the criteria for handling a particular transaction,
TMC also may give consideration to those firms which have sold or are
selling shares of the Funds. While TMC will be primarily responsible for
the placement of the Funds' business, the policies and practices of TMC in
this regard must be consistent with the foregoing and will at all times be
subject to review by the Directors or Trustees of each Fund.

Value Fund

All orders for the purchase or sale of portfolio securities are placed
on behalf of Value Fund by TMC pursuant to authority contained in the
Investment Advisory Agreement. TMC is also responsible for the placement of
78
<PAGE>
transaction orders for other investment companies for which it acts as
investment adviser. In selecting broker-dealers, subject to applicable
limitations of the federal securities laws, TMC considers various relevant
factors, including, but not limited to: the size and type of the
transaction; the nature and character of the markets for the security to be
purchased or sold; the execution efficiency, settlement capability, and
financial condition of the broker-dealer firm; the broker-dealer's execution
services rendered on a continuing basis; and the reasonableness of any
commissions; and arrangements for payment of Fund expenses. Generally
commissions for foreign investments traded will be higher than for U.S.
investments and may not be subject to negotiation. Value Fund may execute
portfolio transactions with broker-dealers who provide research and
execution services to the Fund. Such services may include advice concerning
the value of securities; the availability of securities or the purchasers or
sellers of securities; furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy, and
performance of accounts; and effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement).
The selection of such broker-dealers is generally made by TMC (to the
extent possible consistent with execution considerations) in accordance with
a ranking of broker-dealers determined periodically by TMC's investment
staff based upon the quality of such research and execution services
provided. The receipt of research from broker-dealers that execute
transactions on behalf of the Fund may be useful to TMC in rendering
investment management services to the Fund. The receipt of such research
has not reduced TMC's normal independent research activities; however, it
enables TMC to avoid the additional expenses that could be incurred if TMC
tried to develop comparable information through its own efforts.

Subject to applicable limitations of the federal securities laws,
broker-dealers may receive commissions for agency transactions that are in
excess of the amount of commissions charged by other broker-dealers in
recognition of their research and execution services. In order to cause the
Value Fund to pay such higher commissions, TMC must determine in good faith
that such commissions are reasonable in relation to the value of the
brokerage and research services provided by such executing broker-dealers,
viewed in terms of a particular transaction or TMC's overall
responsibilities to the Fund. In reaching this determination, TMC will not
attempt to place a specific dollar value on the brokerage and research
services provided, or to determine what portion of the compensation would be
related to those services.

TMC is authorized to use research services provided by and to place
portfolio transactions with brokerage firms that have provided assistance in
the distribution of shares of the Fund or shares of other Thornburg funds to
the extent permitted by law. TMC may use research services provided by and
place agency transactions with Thornburg Securities Corporation (TSC) if the
commissions are fair, reasonable, and comparable to commissions charged by
non-affiliated, qualified brokerage firms for similar services. TMC may
allocate brokerage transactions to broker-dealers who have entered into
arrangements with TMC under which the broker-dealer allocates a portion of
the commissions paid by the Fund toward payment of the Fund's expenses, such
as transfer agent fees or custodian fees. The transaction quality must,
however, be comparable to those of other qualified broker-dealers.

The Trustees of Thornburg Investment Trust periodically review TMC's
performance of its responsibilities in connection with the placement of
portfolio transactions on behalf of Value Fund and review the commissions
paid by the Fund over representative periods of time to determine if they
are reasonable in relation to the benefits to the Fund.
79
<PAGE>
From time to time the Trustees will review whether the recapture for
the benefit of the Fund of some portion of the brokerage commissions or
similar fees paid by the Fund on portfolio transactions is legally
permissible and advisable. The Fund may seek to recapture soliciting
broker-dealer fees on the tender of portfolio securities.

Portfolio Turnover Rates

The Funds' respective portfolio turnover rates for the two most recent
fiscal years are as follows:

Year ended Year ended
June 30, 1996 June 30, 1997
------------- -------------
Limited Term National Fund 20.59% 23.39%
Limited Term California Fund 22.68% 20.44%

Year ended Year ended
Sept. 30, 1996 Sept. 30, 1997
-------------- --------------
Intermediate National Fund 12.64% 15.36%
Government Fund 23.27% 41.10%
Income Fund 44.35% 13.87%
Value Fund 59.62% 78.83%

MANAGEMENT

Limited Term National Fund and Limited Term California Fund

Limited Term National Fund and Limited Term California Fund are
separate "series" or investment portfolios of Thornburg Limited Term
Municipal Fund, Inc., a Maryland corporation (the "Company"). The
management of Limited Term National Fund and Limited Term California Fund,
including general supervision of TMC's performance of duties under the
Investment Advisory Agreement and Administrative Services Agreements
applicable to the Funds, is the responsibility of the Board of Directors of
the Company. There are five Directors of the Company, one of whom is an
"interested person" (as the term "interested" is defined in the Investment
Company Act of 1940) and four of whom are "disinterested" persons. The
names of the Directors and officers and their principal occupations and
other affiliations during the past five years are set forth below, with
those Directors who are "interested persons" of the Company indicated by an
asterisk:

H. Garrett Thornburg, Jr.,* 51, Director, Chairman and Treasurer of the
Company; President and Trustee of Thornburg Investment Trust; Chairman and
Director of Thornburg Mortgage Advisory Corporation since its formation in
1989; Chairman and Director of Thornburg Mortgage Asset Corporation (real
80
<PAGE>
estate investment trust) since its formation in 1993; Executive Vice
President of Daily Tax Free Income Fund, Inc. (mutual fund) since its
formation in 1982 and a Director from 1982 to June 1993; Director and
Treasurer of TMC since its formation in 1982 and President from 1982 to
August 1997.

J. Burchenal Ault, 70, Director of the Company; Consultant to and fund
raiser for charities, 1990 to present; Trustee of Thornburg Investment Trust
since June 1987; Director of Farrar, Strauss & Giroux (publishers).

Eliot R. Cutler , 50, Director of the Company; Partner, Cutler &
Stanfield, Attorneys, Washington, D.C.

James E. Monaghan, Jr., 49, Director of the Company; President,
Monaghan & Associates, Inc. and Strategies West, Inc. Denver, Colorado,
(business consultants).

A. G. Newmyer III, 47, Director of the Company; President, from 1983 to
December 1992, and Senior Officer from January 1993, Newmyer Associates,
Inc., Washington, D.C., (business consultants).

Richard M. Curry , 57, Advisory Director of the Company; Senior Vice
President McDonald & Co., Indianapolis, Indiana (securities dealers).

Brian J. McMahon, 41, President of the Company; Vice President of
Thornburg Investment Trust since June 1987 and a Trustee from June 1996 to
August 1997; Managing Director of TMC, Vice President of TMC from December
1995 through July 1997 and President since August 1997.

Steven J. Bohlin, 38, Vice President of the Company; Vice President and
Treasurer of Thornburg Investment Trust; a Managing Director and a Vice
President of TMC.

William Fries, 57, Vice President of the Company; Vice President of
Thornburg Investment Trust; Managing Director of TMC since May 1995 and Vice
President since December 1995; Vice President of USAA Investment Management
Company from 1982 to 1995.

Ken Ziesenheim, 43, Vice President of the Company; Vice President of
Thornburg Investment Trust; Managing Director and Vice President of TMC
since 1995; President of Thornburg Securities Corporation since 1995; Senior
Vice President of Financial Services, Raymond James & Associates, Inc. from
1991 to 1995.

Dawn B. Fischer, 50, Secretary of the Company; Secretary and Assistant
Treasurer of Thornburg Investment Trust; Managing Director and Secretary of
TMC.

Susan Rossi, 36, Assistant Vice President of the Company since July
1992; Assistant Vice President of Thornburg Investment Trust since June
1992; Associate of TMC, and Vice President since December 1995.
81
<PAGE>
George Strickland, 34, Assistant Vice President of the Company since
July 1992; Vice President of Thornburg Investment Trust; Associate of TMC
since July 1991 and Managing Director since 1996; Vice President of TMC
since December 1995.

Jonathan Ullrich, 28, Assistant Vice President of the Company since
July 1992; Assistant Vice President of Thornburg Investment Trust since
1992; Associate of TMC since September 1991 and Assistant Vice President
since December 1995.

Jack Lallement, 58, Assistant Vice President of the Company since
September 1997; Fund Accountant for TMC since March 1997; Chief Financial
Officer/Controller for Zuni Rental, Inc. (equipment leasing and sales),
Albuquerque, New Mexico from February 1995 to March 1997; Chief Financial
Officer/Controller, Montgomery & Andrews, P.A. (law firm), Santa Fe, New
Mexico from March 1987 to August 1994.

Thomas Garcia, 26, Assistant Vice President of the Company since
September 1997; Assistant Vice President of Thornburg Investment Trust; Fund
Accountant for TMC since 1993; BBA, University of New Mexico, 1993.

Van Billops, 31, Assistant Vice President of the Company since
September 1997; Assistant Vice President of Thornburg Investment Trust; Fund
Accountant for TMC since 1992.

Dale Van Scoyk, 50, Assistant Vice President of the Company since
September 1997; Assistant Vice President of Thornburg Investment Trust;
Account Manager for TMC since 1997; National Account Manager for the
Heartland Funds 1993 - 1997.

The business address of each person listed is 119 East Marcy Street,
Suite 202, Santa Fe, New Mexico 87501. Mr. Thornburg is a Director of TSC,
and Executive Vice President of Daily Tax-Free Income Fund, Inc. Mr.
Ziesenheim is president of TSC, and Ms. Fischer is secretary of TSC.

The officers and Directors affiliated with TMC will serve without any
compensation from the Company. The Company pays each Director who is not an
employee of TMC or an affiliated company a quarterly fee of $1,000 plus a
$500 fee for each meeting of the Board of Directors attended by the
Director. In addition, the Company pays a $1,000 annual stipend to each
member of the audit committee, and reimburses all Directors for travel and
out-of-pocket expenses incurred in connection with attending such meetings.
82
<PAGE>

The Company paid fees to the Directors during the year ended June 30,
1997 as follows:

<TABLE>
Pension or
Retirement Estimated Total
Aggregate Benefits Annual Compensation
Name of Compensation Accrued as Benefits from Company and
Person, from Part of Upon Fund Complex
Position Company Fund Expenses Retirement Paid to Directors
- -------- ------------ ------------- ------------- -----------------
<C> <C> <C> <C> <C>
H. Garrett 0 0 0 0
Thornburg,
Jr.

J. Burchenal $7,000 0 0 $14,000
Ault

Eliot R. $6,000 0 0 $6,000
Cutler

James E. $7,000 0 0 $7,000
Monaghan, Jr.

A. G. $7,000 0 0 $7,000
Newmyer, III

Richard M. $6,000 0 0 $6,000
Curry
</TABLE>

Intermediate National Fund; Government Fund; Income Fund; Value Fund

Intermediate National Fund, Government Fund, Income Fund and Value Fund
are separate "series" or investment portfolios of Thornburg Investment
Trust, a Massachusetts business trust (the "Trust"). The management of
Intermediate National Fund, Government Fund, Income Fund and Value Fund,
including the general supervision of TMC's performance of its duties under
the Investment Advisory Agreements and Administrative Services Agreements
applicable to the Funds, is the responsibility of the Trust's Trustees.
There are five Trustees, one of whom is an "interested person" (as the term
"interested" is defined in the Investment Company Act of 1940) and four of
whom are "disinterested" persons. The names of Trustees and officers and
their principal occupations and affiliations during the past five years are
set forth below, with the Trustee who is an "interested person" of the Trust
indicated by an asterisk.

Name / Position / Principal Occupation During Past 5 Years
- ----------------------------------------------------------

H. Garrett Thornburg, Jr.,* 51 / Trustee, President / Director, Chairman
(since January of 1987) and Treasurer of Thornburg Limited Term Municipal
Fund, Inc. (a mutual fund investing in certain municipal securities) since
its inception in 1984; Chairman and Director of Thornburg Mortgage Advisory
Corporation since its formation in 1989; Chairman and Director of Thornburg
Mortgage Asset Corporation (real estate investment trust) since its
formation in 1993; Executive Vice President of Daily Tax Free Income Fund,
Inc. (mutual fund) since its formation in 1982 and a Director from 1982 to
June 1993; Director and Treasurer of TMC since its formation in 1982 and
President from 1982 to August 1997.

David A. Ater, 51 / Trustee / Principal in Ater & Ater Associates, Santa Fe,
New Mexico (developer, planner and broker of residential and commercial real
estate) since 1990; owner, developer and broker for various real estate
projects; Director of Thornburg Mortgage Asset Corporation (real estate
investment trust) since 1994.

J. Burchenal Ault, 70 / Trustee / Independent Fund Raising Counsel, May 1986
to present; Trustee, Woodrow Wilson International Center for Scholars;
Director of Thornburg Limited Term Municipal Fund, Inc. since its formation
in 1984; Director of Farrar, Strauss & Giroux (publishers) since 1968.

Forrest S. Smith, 66 / Trustee / Attorney in private practice and
shareholder Catron, Catron & Sawtell (law firm), Santa Fe, New Mexico, 1988
to present.

James W. Weyhrauch, 38 / Trustee / Executive Vice President and Director,
Nambe' Mills, Inc. (manufacturer), Santa Fe, New Mexico, 1986 to present.

Brian J. McMahon, 41 / Vice President and Assistant Secretary / President of
Thornburg Limited Term Municipal Fund, Inc. since January, 1987; Managing
Director of TMC since December 1985, President of TMC since August 1997 and
a Vice President from April 1984 to August 1997.

Steven J. Bohlin, 38 / Vice President and Treasurer / Vice President of
Thornburg Limited Term Municipal Fund, Inc. since November 1988; a Managing
Director and a Vice President of TMC.

Dawn B. Fischer, 50 / Secretary and Assistant Treasurer / Secretary,
Thornburg Limited Term Municipal Fund, Inc. since its formation in 1984;
Vice President, Daily Tax Free Income Fund, Inc. since 1989; Managing
Director of TMC since 1985 and a Vice President since January 1984.

William Fries, 57 / Vice President / Vice President of Thornburg Limited
Term Municipal Fund, Inc. since June 1995; Managing Director of TMC since
May 1995 and Vice President of TMC since December 1995; Vice President of
USAA Investment Management Company from 1982 to 1995.

Ken Ziesenheim, 43 / Vice President / Managing Director of TMC since 1995
and Vice President of Thornburg Limited Term Municipal Fund, Inc. since
1995; President of Thornburg Securities Corporation since 1995; Senior Vice
President of Financial Services, Raymond James & Associates, Inc. from 1991
to 1995.

George Strickland, 34 / Vice President / Assistant Vice President of
Thornburg Limited Term Municipal Fund, Inc. since July 1992; Associate of
TMC since July 1991 and a Managing Director commencing in 1996.

Susan Rossi, 36 / Assistant Vice President / Assistant Vice President of
Thornburg Limited Term Municipal Fund, Inc. since July 1992; Associate of
TMC since June 1990 and a Vice President since 1995.

Jonathan Ullrich, 28 / Assistant Vice President / Assistant Vice President
of Thornburg Limited Municipal Fund, Inc. since July 1992 and a Vice
President since 1995.

Jack Lallement, 58 / Assistant Vice President / Assistant Vice President of
Thornburg Limited Term Municipal Fund, Inc. since September 1997; Fund
Accountant for TMC since March 1997; Chief Financial Officer/Controller for
Zuni Rental, Inc. (equipment leasing and sales), Albuquerque, New Mexico
from February 1995 to March 1997; Chief Financial Officer/Controller,
Montgomery & Andrews, P.A. (law firm), Santa Fe, New Mexico from March 1987
to August 1994.

Thomas Garcia, 26 / Assistant Vice President / Assistant Vice President of
Thornburg Limited Term Municipal Fund, Inc. since September 1997; Fund
Accountant for TMC since 1993; BBA, University of New Mexico, 1993.

Van Billops, 31 / Assistant Vice President / Assistant Vice President of
Thornburg Limited Term Municipal Fund, Inc. since September 1997; Fund
Accountant for TMC since 1992.

Dale Van Scoyk, 50 / Assistant Vice President / Assistant Vice President of
Thornburg Limited Term Municipal Fund, Inc. since September 1997; Account
Manager for TMC since 1997; National Account Manager for the Heartland Funds
1993 - 1997.

The business address of each person listed is 119 East Marcy Street,
Suite 202, Santa Fe, New Mexico 87501. Mr. Thornburg is a Director of TSC,
Executive Vice President of Daily Tax-Free Income Fund, Inc., and a Chairman
and Treasurer of Thornburg Limited Term Municipal Fund, Inc. Mr. Ziesenheim
and Ms. Fischer are president and secretary, respectively, of TSC.

The officers and Trustees affiliated with TMC serve without any
compensation from the Trust. The Trust pays each Trustee who is not an
employee of TMC or an affiliated person a quarterly fee of $1,000 plus $500
for each meeting of the Trustees attended by the Trustee. In addition, the
Trust pays a $1,000 annual stipend to each member of each committee
established by the Trustees, and reimburses all Trustees for travel and
out-of-pocket expenses incurred in connection with attending those meetings.
The Trustees have established one committee, the audit committee, on which
Messrs. Ater, Ault and Smith currently serve.
85
<PAGE>
The Trust paid fees to the Trustees during the year ended September 30,
1997 as follows:

<TABLE>
Pension or
Retirement Estimated Total
Aggregate Benefits Annual Compensation
Compensation Accrued as Benefits from Trust and
from Part of Upon Fund Complex
Trustee Trust Fund Expenses Retirement Paid to Trustee
- -------- ------------ ------------- ------------- ---------------
<C> <C> <C> <C> <C>
David A. $7,000 0 0 $7,000
Ater

J. Burchenal $7,000 0 0 $13,000
Ault

Forrest S. $7,000 0 0 $7,000
Smith

James W. $5,500 0 0 $5,500
Weyhrauch
</TABLE>

The Trust does not pay retirement or pension benefits.

PRINCIPAL HOLDERS OF SECURITIES

Limited Term National Fund

As of August 15, 1997, Limited Term National Fund had an aggregate of
65,935,670.115 shares outstanding, of which 2,948,646.691 were Institutional
Class shares. No persons are known to have held of record or beneficially
5% or more of Limited Term National Fund's outstanding shares on August 15,
1997. On the same date, the officers, Directors and related persons of
Thornburg Limited Term Municipal Fund, Inc., as a group, held less than one
percent of the outstanding shares of the Fund.

Limited Term California Fund

As of August 15, 1997, Limited Term California Fund had an aggregate of
8,352,620.3 shares outstanding, of which 435,163.622 were Institutional
Class shares. No persons are known to have held of record or beneficially
5% or more of Limited Term California Fund's outstanding shares on August
15, 1997. On the same date, the officers, Directors and related persons of
Thornburg Limited Term Municipal Fund, Inc., as a group, held less than one
percent of the outstanding shares of the Fund.

Intermediate National Fund

As of November 14, 1997, Intermediate National Fund had an aggregate of
25,274,985 shares outstanding, of which 1,327,420 were Institutional Class
shares. No persons are known to have held of record or beneficially 5% or
more of Intermediate National Fund's outstanding shares on November 14,
1997. On the same date, the officers, Trustees and related persons of
Thornburg Investment Trust, as a group, held less than one percent of the
outstanding shares of the Fund.
86
<PAGE>
Government Fund

As of November 14, 1997, Government Fund had an aggregate of 11,327,887
shares outstanding, of which 428,889 were Institutional Class shares. No
persons are known to have held of record or beneficially 5% or more of
Government Fund's outstanding shares on November 14, 1997. On the same
date, the officers, Trustees and related persons of Thornburg Investment
Trust, as a group, held less than one percent of the outstanding shares of
the Fund.

Income Fund

As of November 14, 1997, Income Fund had an aggregate of 3,409,459
shares outstanding, of which 375,074 were Institutional Class shares. No
persons are known to have held of record or beneficially 5% or more of
Income Fund's outstanding shares on November 14, 1997. On the same date,
the Thornburg Management Company, Inc. Profit Sharing Plan held 74,281
shares of the Fund, representing approximately 2.18% of the issued and
outstanding shares of that Fund on that date.

Value Fund

As of November 14, 1997, Value Fund had an aggregate of 3,972,379
shares outstanding, none of which were Institutional Class shares. On the
same date, the officers, Trustees and related persons owned 485,454 shares
of Value Fund, representing approximately 12.22% of the Fund's issued and
outstanding shares. On November 14, 1997 the following persons owned 5% or
more of Value Fund's outstanding shares:

<TABLE>
No. of % of
Shareholder Shares Total Shares
----------- ------ ------------
<C> <C> <C>
H. Garrett Thornburg, Jr. 382,609 <F1> 9.63%
119 East Marcy Street
Santa Fe, New Mexico 87501

Brian J. McMahon 251,770 <F2> 6.34%
119 East Marcy Street
Santa Fe, New Mexico 87501

Dawn B. Fischer 198,953 <F3> 5.01%
119 East Marcy Street
Santa Fe, New Mexico 87501

<FN>
<F1> Total includes 130,088 shares owned by the Thornburg Management
Company,
Inc. Profit Sharing Plan (as to which Mr. Thornburg is a trustee and
holds shared voting and investment powers) and 88,686 shares owned by
Thornburg Management Company, Inc.

<F2> Total includes 88,686 shares owned by Thornburg Management Company,
Inc.
(as to which Mr. McMahon is president), and 130,088 shares owned by the
Thornburg Management Company, Inc. Profit Sharing Plan (as to which
Mr. McMahon is a trustee and holds shared voting and investment powers)
and 29,453 shares owned by Thornburg Descendants Trust (as to which
Mr. McMahon is a trustee and holds shared voting and investment
powers).

<F3> Total includes 130,088 shares owned by the Thornburg Management
Company,
Inc. Profit Sharing Plan (as to which Ms. Fischer is a trustee and
holds shared voting and investment powers) and 29,453 shares owned by
Thornburg Descendants Trust (as to which Ms. Fischer is a trustee and
holds shared voting and investment powers), and 37,577 shares owned by
the Lloyd Thornburg Irrevocable Trust (as to which Ms. Fischer is a
trustee and holds voting and investment powers).
</TABLE>

87
<PAGE>

NET ASSET VALUE

Each Fund will calculate the net asset value at least once daily on
days when the New York Stock Exchange is open for trading, and more
frequently if deemed desirable by the Fund. Net asset value will not be
calculated on New Year's Day, Washington's Birthday (on the third Monday in
February), Good Friday, Memorial Day (on the last Monday in May),
Independence Day, Labor Day, Thanksgiving Day, Christmas Day, on the
preceding Friday if any of the foregoing holidays falls on a Saturday, and
on the following Monday if any of the foregoing holidays falls on a Sunday.
Under the Investment Company Act of 1940, net asset value must be computed
at least once daily on each day (i) in which there is a sufficient degree of
trading in a fund's portfolio securities that the current net asset value of
its shares might be materially affected by changes in the value of such
securities and (ii) on which an order for purchase or redemption of its
shares is received.

DISTRIBUTOR

Pursuant to a Distribution Agreement with Thornburg Limited Term
Municipal Fund, Inc., Thornburg Securities Corporation ("TSC") acts as
principal underwriter of Limited Term National Fund and Limited Term
California Fund Institutional Class shares, and pursuant to a separate
Distribution Agreement with Thornburg Investment Trust, TSC also acts as
principal underwriter of Institutional Class shares of Intermediate National
Fund, Government Fund, Income Fund and Value Fund. The Funds do not bear
selling expenses except (i) those involved in registering its shares with
the Securities and Exchange Commission and qualifying them or the Fund with
state regulatory authorities, and (ii) expenses paid under the Service Plans
and which might be considered selling expenses. Terms of continuation,
termination and assignment under the Distribution Agreement are identical to
those described above with regard to the Investment Advisory Agreements,
except that termination other than upon assignment requires six months'
notice.

H. Garrett Thornburg, Jr., Treasurer, a Director and Chairman of the
Board of Thornburg Limited Term Municipal Fund, Inc. and President and a
Trustee of Thornburg Investment Trust, is also Director and controlling
stockholder of TSC.

INDEPENDENT AUDITORS

McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York 10017, is
the independent auditor of the Limited Term National Fund and Limited Term
California Fund for their fiscal year ending June 30, 1998, and is the
independent auditor of Intermediate National Fund, Government Fund, Income
Fund and Value Fund for their fiscal year ending September 30, 1998.
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<PAGE>
FINANCIAL STATEMENTS

Statements of Assets and Liabilities, including Schedules of
Investments, as of June 30, 1997, Statements of Operations for the year
ended June 30, 1997 and Statements of Changes in Net Assets for the two
years in the period ended June 30, 1997, Notes to Financial Statements and
Financial Highlights, and Independent Auditor's Reports dated July 25, 1997,
for Limited Term National Fund and Limited Term California Fund are
incorporated herein by reference from the Funds' Annual Reports to
Shareholders, June 30, 1997.

Statements of Assets and Liabilities, including Schedules of
Investments, as of September 30, 1997, Statements of Operations for the year
ended September 30, 1997 and Statements of Changes in Net Assets for the two
years in the period ended September 30, 1997 (one year for Value Fund),
Notes to Financial Statements and Financial Highlights, and Independent
Auditor's Reports dated October 24, 1997, for Intermediate National Fund,
Government Fund, Income Fund and Value Fund, are incorporated herein by
reference from the Funds' Annual Reports to Shareholders, September 30,
1997.