CITIFUNDS NEW YORK FREE INCOME PORTFOLIO, 485APOS, 1998-10-16

CITIFUNDS NEW YORK FREE INCOME PORTFOLIO
485APOS, 1998-10-16

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<PAGE>

As filed with the Securities and Exchange Commission on October 16, 1998

File Nos. 2-99977
811-4596

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549

FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 21*

AND

REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 27

CITIFUNDS MULTI-STATE TAX FREE TRUST**
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

21 MILK STREET, 5TH FLOOR, BOSTON, MASSACHUSETTS 02109
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 617-423-1679

PHILIP W. COOLIDGE, 21 MILK STREET, 5TH FLOOR, BOSTON, MASSACHUSETTS 02109
(NAME AND ADDRESS OF AGENT FOR SERVICE)

COPY TO:
ROGER P. JOSEPH, BINGHAM DANA LLP, 150 FEDERAL STREET,
BOSTON, MASSACHUSETTS 02110

It is proposed that this filing will become effective on January 4, 1999
pursuant to paragraph (a) of Rule 485.

- -------------------------------------------------------------------------------
*Relating to shares of beneficial interest of CitiFunds New York Tax Free
Reserves and CitiFunds Connecticut Tax Free Reserves.
**Formerly known as "Landmark Multi-State Tax Free Funds."
<PAGE>

PROSPECTUS

CITIFUNDS(SM) MONEY MARKET FUNDS

CITIBANK, N.A., INVESTMENT ADVISER

CITIFUNDS(SM) CASH RESERVES
CITIFUNDS(SM) U.S. TREASURY RESERVES
CITIFUNDS(SM) TAX FREE RESERVES
CITIFUNDS(SM) CALIFORNIA TAX FREE RESERVES
CITIFUNDS(SM) CONNECTICUT TAX FREE RESERVES
CITIFUNDS(SM) NEW YORK TAX FREE RESERVES

The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy of this prospectus, and any
representation to the contrary is a criminal offense.

January 4, 1999
<PAGE>

CITIFUNDS MONEY MARKET FUNDS
Each of the Funds described in this prospectus is a money market fund. Money
market funds must follow strict rules about the quality, maturity and other
features of securities they purchase. The Funds also try to maintain a share
price of $1.00 while paying income to shareholders. However, no money market
fund guarantees that you will receive your money back.

Each Fund has different goals and different investment strategies, and each
offers a different mix of investments. See page for a summary of investment
information for each Fund. For more information, see page . Of course, there
is no assurance that any Fund will achieve its investment goals.

The four Tax Free Funds have similar investment goals and strategies. They
invest primarily in high quality municipal securities and most of the
dividends they pay are exempt from federal and, in certain cases, state income
taxes. These Funds are all non-diversified mutual funds, which means that they
may invest relatively high percentages of their assets in a limited number of
issuers. As a result, these Funds have more risk than broadly diversified
money market funds. See page for more information about risks.

TABLE OF CONTENTS

FUNDS AT A GLANCE ....................................................... 3
CitiFunds Cash Reserves ......................................... 3
CitiFunds U.S. Treasury Reserves ................................ 6
CitiFunds Tax Free Reserves ..................................... 9
CitiFunds California Tax Free Reserves .......................... 12
CitiFunds Connecticut Tax Free Reserves ......................... 15
CitiFunds New York Tax Free Reserves ............................ 18
YOUR CITIFUNDS(SM) ACCOUNT .............................................. 21
How to Buy Shares ............................................... 21
How the Price of Your Shares Is Calculated ...................... 21
How to Sell Shares .............................................. 21
Exchanges ....................................................... 21
Dividends ....................................................... 21
Retirement Accounts ............................................. 22
Tax Matters ..................................................... 22
MANAGEMENT OF THE FUNDS ................................................. 23
Investment Adviser .............................................. 23
Distribution Arrangements ....................................... 24
Investment Structure ............................................ 24
MORE ABOUT THE FUNDS .................................................... 24
Principal Investment Strategies ................................. 24
Risks ........................................................... 26
FINANCIAL HIGHLIGHTS .................................................... 28
APPENDIX: Taxable Equivalent Yields ..................................... 34
<PAGE>

Funds at a Glance

CITIFUNDS CASH RESERVES
This summary briefly describes CitiFunds Cash Reserves and the principal risks
of investing in it. For more information, see "More About the Funds" on page
.

FUND GOAL
The Fund's goal is to provide shareholders with liquidity and as high a level
of current income as is consistent with preservation of capital. Of course,
there is no assurance that the Fund will achieve its goal.

MAIN INVESTMENT STRATEGIES
Cash Reserves invests only in high quality, short-term money market
instruments denominated in U.S. dollars. These include:

o short-term obligations of the U.S. government and its agencies and
instrumentalities, and repurchase agreements for these obligations;

o obligations of U.S. and non-U.S. banks;

o obligations issued or guaranteed by the governments of Western Europe,
Australia, Japan and Canada; and

o commercial paper and asset backed securities.

The Fund invests at least 25%, and may invest up to 100%, of its assets in
bank obligations, such as certificates of deposit, fixed time deposits and
bankers' acceptances.

Investing in high quality, short-term instruments may result in a lower yield
(the income on your investment) than investing in lower quality or longer-term
instruments.

MAIN RISKS
The principal risks of investing in Cash Reserves are described below. See
page for more information about risks.

o The amount of income paid to you by the Fund will go up or down depending on
day-to-day variations in short-term interest rates.

o A major change in interest rates, a default on an investment held by the
Fund or a significant decline in the value of a Fund investment could cause
the value of your investment in the Fund, or its yield, to decline.

o Non-U.S. securities are subject to additional risks, such as political,
social and economic developments abroad, different kinds and levels of
market and issuer regulations and the different characteristics of overseas
economies and markets. There may be rapid changes in the value of these
securities.

o The Fund concentrates in bank obligations. This means that your investment
in the Fund is susceptible to adverse events affecting the banking industry.
Banks are sensitive to changes in money market and general economic
conditions, as well as to decisions by regulators that can affect their
profitability.

o An investment in the Fund is not a deposit of Citibank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.

o Although the Fund seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Fund.

WHO MAY WANT TO INVEST
You should keep in mind that an investment in Cash Reserves is not a complete
investment program and should be considered just one part of your total
investment program.

You should consider investing in Cash Reserves if:

o You're seeking current income and a stabilized share price.

o You want to be able to convert your investment to cash quickly with reduced
risk to principal.

o You're seeking higher returns than are usually available from U.S. Treasury
money market funds.

Don't invest in Cash Reserves if:

o You're seeking long term growth of capital or high current income and you
can tolerate daily share price fluctuation.

If you would prefer an investment with dividends taxed at lower rates,
consider the Tax Free Funds.

FUND PERFORMANCE
The following bar chart and table can help you evaluate the risks and
potential rewards of investing in the Fund. The bar chart shows the Fund's
performance over the last ten calendar years. The table compares the average
annual returns for the Fund over the last ten calendar years to the
performance of the IBC Financial 1st Tier Taxable Money Markets Fund Average.
When you consider this information, please remember that the Fund's past
performance is not necessarily an indication of how it will perform in the
future. For current yield information, please call 800-625-4554 toll free, or
contact your account representative.

YEAR-BY-YEAR TOTAL RETURNS
This bar chart shows how the Fund's performance has varied from year to year
and gives an indication of the risk of investing in the Fund.

[bar chart -- for calendar quarters March 31, 1988 through September 30, 1998]

QUARTERLY RETURNS MARCH JUNE SEPTEMBER DECEMBER
- ----------------- ----- ---- --------- --------
1988 ....................... 1.58% 1.55% 1.79% 1.94%
1989 ....................... 2.10 2.26 2.15 2.04
1990 ....................... 1.91 1.90 1.92 1.92
1991 ....................... 1.66 1.46 1.41 1.21
1992 ....................... 0.97 0.87 0.76 0.68
1993 ....................... 0.64 0.67 0.70 0.68
1994 ....................... 0.71 0.87 1.03 1.17
1995 ....................... 1.34 1.40 1.38 1.36
1996 ....................... 1.24 1.19 1.22 1.23
1997 ....................... 1.20 1.26 1.29 1.29
1998 ....................... 1.25 1.25 1.27

Footnote to bar chart: As of September 30, 1998, the Fund had a year-to-date
return of %.

FUND'S HIGHEST AND LOWEST RETURNS QUARTER ENDING
--------------------------------- --------------
(FOR CALENDAR QUARTERS COVERED BY THE BAR CHART)
Highest 2.26% June 30, 1989
Lowest 0.64% March 31, 1993

AS OF 12/31/97
Average Annual Total Return
------------------------------------
1 YEAR 5 YEAR 10 YEAR
------ ------ -------
FUND 5.14% 4.44% 5.50%
IBC 4.94% 4.27% 5.31%*
*Since 5/31/91
<PAGE>

FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF THE FUND.

SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases ..................... None
Maximum Deferred Sales Charge (Load) ................................. None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends .......... None
Redemption Fee ....................................................... None
Exchange Fee ......................................................... None

ANNUAL FUND OPERATING EXPENSES(1) (expenses that are deducted from Fund
assets):

BEFORE WAIVER AFTER WAIVER(2)
------------- ---------------
Management Fees ................................. 0.15% 0.08%
Distribution (12b-1) Fees ....................... 0.20% 0.08%
Other Expenses (administrative, shareholder
servicing and other expenses) ................. 0.69% 0.54%
Total Annual Fund Operating Expenses ............ 1.04%(2) 0.70%

(1)This table reflects the expenses of both the Fund and Cash Reserves
Portfolio, the underlying mutual fund in which the Fund invests.
(2)Certain Fund service providers voluntarily waived fees and reimbursed
expenses of 0.34% through August 31, 1998 in order to prevent total
expenses from exceeding 0.70% of average daily net assets. These waivers
can be reduced or terminated at any time.

EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
to the cost of investing in other mutual funds. The example assumes that you
invest $10,000 in the Fund for the time periods indicated and then sell all of
your shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses as
shown in the table above before giving effect to any fee waivers or
reimbursements remain the same. The assumption of a 5% return is required by
the SEC for purposes of this example. It is not a prediction of the Fund's
future performance. Although your actual costs may be higher or lower, based
on these assumptions your costs would be:

CITIFUNDS CASH RESERVES

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Before waiver ................. $106 $332 $578 $1,287
After waiver .................. $ 72 $224 $390 $ 871
<PAGE>

CITIFUNDS U.S. TREASURY RESERVES
This summary briefly describes CitiFunds U.S. Treasury Reserves and the
principal risks of investing in it. For more information, see "More About the
Funds" on page .

FUND GOAL
The Fund's goal is to provide its shareholders with liquidity and as high a
level of current income from U.S. government obligations as is consistent with
the preservation of capital. Of course, there is no assurance that the Fund
will achieve its goal.

MAIN INVESTMENT STRATEGIES
U.S. Treasury Reserves invests in:

o U.S. Treasury bills, notes and bonds;

o Treasury receipts; and

o securities issued by U.S. government agencies and instrumentalities that are
backed by the full faith and credit of the U.S. government.

Unlike many other U.S. Treasury money market funds, the Fund does not enter
into repurchase agreements.

Investing in high quality, short-term instruments may result in a lower yield
(the return on your investment) than investing in lower quality or longer term
instruments.

MAIN RISKS
The principal risks of investing in U.S. Treasury Reserves are described
below. See page for more information about risks.

o The amount of income paid to you by the Fund will go up or down depending on
day-to-day variations in short-term interest rates.

o A major change in interest rates could cause the value of your investment in
the Fund to decline.

o An investment in the Fund is not a deposit of Citibank and is not insured or
guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation
or any other government agency.

o Although the Fund seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Fund.

WHO MAY WANT TO INVEST
You should keep in mind that an investment in U.S. Treasury Reserves is not a
complete investment program and should be considered just one part of your
total investment program.

You should consider investing in U.S. Treasury Reserves if:

o You're seeking current income and a stabilized share price.

o You want to be able to convert your investment to cash quickly with reduced
risk to principal.

o You want the added safety of a fund that invests only in U.S. government
securities.

Don't invest in U.S. Treasury Reserves if:

o You're seeking long-term growth of capital or high current income and you
can tolerate daily share price fluctuation.

If you would prefer an investment with dividends taxed at lower rates,
consider the Tax Free Funds.

FUND PERFORMANCE
The following bar chart and table can help you evaluate the risks and
potential rewards of investing in the Fund. The bar chart shows the Fund's
performance over the last ten calendar years. The table compares the average
annual returns for the Fund over the last ten calendar years to the
performance of the IBC Financial 100% U.S. Treasury Rated Money Market Funds
Average. When you consider this information, please remember that the Fund's
past performance is not necessarily an indication of how the Fund will perform
in the future. For current yield information, please call 800-625-4554 toll
free, or contact your account representative.

YEAR-BY-YEAR TOTAL RETURNS
This bar chart shows how the Fund's performance has varied from year to year
and gives an indication of the risk of investing in the Fund.

[bar chart -- for calendar quarters September 30, 1991 through September 30,
1998]

QUARTERLY RETURNS MARCH JUNE SEPTEMBER DECEMBER
- ----------------- ----- ---- --------- --------
1991 ..................... 1.36% 1.14%
1992 ..................... 0.88% 0.83% 0.79 0.63
1993 ..................... 0.63 0.61 0.64 0.64
1994 ..................... 0.64 0.76 0.92 1.08
1995 ..................... 1.21 1.31 1.26 1.22
1996 ..................... 1.13 1.09 1.15 1.14
1997 ..................... 1.12 1.15 1.16 1.13
1998 ..................... 1.15 1.14 1.14

Footnote to bar chart: As of September 30, 1998, the Fund had a year-to-date
return of %.

FUND'S HIGHEST AND LOWEST RETURNS QUARTER ENDING
--------------------------------- --------------
(FOR CALENDAR QUARTERS COVERED BY THE BAR CHART)
Highest 1.36% September 30, 1991
Lowest 0.61% June 30, 1993

AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDING DECEMBER 31, 1997)
This table shows how the Fund's average annual total returns for the periods
indicated compare with those of the IBC Financial 100% U.S. Treasury Rated
Money Market Funds Average, a broad measure of money market fund performance,
and gives another indication of the risk of investing in the Fund.

AS OF 12/31/97
Average Annual Total Return 5/3/91
------------------------------------ ---------
1 YEAR 5 YEAR 10 YEAR INCEPTION
------ ------ ------- ---------
FUND 4.64% 4.06% N/A 4.04%
IBC 4.67% 4.11% N/A 4.09%*
*Since 3/31/92
FUND FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF THE FUND.

SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases ....................... None
Maximum Deferred Sales Charge (Load) ................................... None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends ............ None
Redemption Fee ......................................................... None
Exchange Fee ........................................................... None

ANNUAL FUND OPERATING EXPENSES(1) (expenses that are deducted from Fund
assets):

BEFORE WAIVER AFTER WAIVER(2)
------------- ---------------
Management Fees .............................. 0.15% 0.07%
Distribution (12b-1) Fees .................... 0.20% 0.08%
Other Expenses (administrative, shareholder
servicing and other expenses) .............. 0.71% 0.55%
Total Annual Fund Operating Expenses ......... 1.06%(2) 0.70%

(1)This table reflects the expenses of both the Fund and U.S. Treasury
Reserves Portfolio, the underlying mutual fund in which the Fund invests.
(2)Certain Fund service providers voluntarily waived fees and reimbursed
expenses of 0.36% through August 31, 1998 in order to prevent total
expenses from exceeding 0.70% of average daily net assets. These waivers
can be reduced or terminated at any time.

CITIFUNDS U.S. TREASURY RESERVES

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Before waiver ................. $108 $339 $589 $1,312
After waiver .................. $ 72 $224 $390 $ 871
<PAGE>

CITIFUNDS TAX FREE RESERVES
This summary briefly describes CitiFunds Tax Free Reserves and the principal
risks of investing in it. For more information, see "More About the Funds" on
page .

FUND GOAL
The Fund's goals are to provide its shareholders with high levels of current
income exempt from federal income taxes, preservation of capital and
liquidity. Of course, there is no assurance that the Fund will achieve its
goals.

MAIN INVESTMENT STRATEGIES

o Under normal market conditions, Tax Free Reserves invests at least 80% of
its assets in high quality municipal obligations and in participation
interests in these obligations issued by banks, insurance companies and
other financial institutions. Municipal obligations are debt securities
issued by states, cities and towns and other political or public entities or
agencies or qualifying issuers. The interest paid on these debt securities
is free from federal income tax.

o The Fund may invest more than 25% of its assets in participation interests
in municipal obligations that are secured by bank letters of credit or
guarantees.

o The Fund may invest up to 20% of its assets in high quality securities that
pay interest that is subject to federal income tax.

Investing in high quality, short-term instruments may result in a lower yield
(the income on your investment) than investing in lower quality or longer-term
instruments.

MAIN RISKS
The principal risks of investing in Tax Free Reserves are described below. See
page for more information about risks.

o The Fund is a non-diversified fund, which means that it may invest a
relatively high percentage of its assets in the securities of a limited
number of issuers. The Fund also may invest 25% or more of its assets in
issuers located in the same state, that derive income from similar type
projects or that are otherwise related. As a result, many securities held by
the Fund may be adversely affected by a particular economic, business,
regulatory or political event.

o The amount of income paid to you by the Fund will go up or down depending on
day-to-day variations in short-term interest rates.

o The Fund may concentrate in participation interests issued by banks and
secured by bank letters of credit or guarantees. This means that your
investment in the Fund may be susceptible to adverse events affecting the
banking industry. Banks are sensitive to changes in money market and general
economic conditions, as well as to decisions by regulators that can affect
their profitability.

o An investment in the Fund is not a deposit of Citibank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.

o Although the Fund seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Fund.

WHO MAY WANT TO INVEST
You should keep in mind that an investment in Tax Free Reserves is not a
complete investment program and should be considered just one part of your
total investment program.

You should consider investing in this Fund if:

o You're seeking tax-exempt income from your investment.*

o You're seeking current income and a stabilized share price.

o You want to be able to convert your investment to cash quickly with reduced
risk to principal.

Don't invest in Tax Free Reserves if:

o You don't need your income to be tax-exempt, or you're investing through a
tax-deferred vehicle--such as an IRA account.

o You're seeking long term growth of capital or high current income and you
can tolerate daily share price fluctuation.

*Some income may be subject to tax. Consult your personal tax adviser.

FUND PERFORMANCE
The following bar chart and table can help you evaluate the risks and
potential rewards of investing in the Fund. The bar chart shows the Fund's
performance over the last ten calendar years. The table compares the average
annual returns for the Fund over the last ten calendar years to the
performance of the IBC Financial General Purpose Tax Free Money Market Funds
Average. When you consider this information, please remember that the Fund's
past performance is not necessarily an indication of how it will perform in
the future. For current yield information, please call 800-625-4554 toll free,
or contact your account representative.

YEAR-BY-YEAR TOTAL RETURNS
This bar chart shows how the Fund's performance has varied from year to year
and gives an indication of the risk of investing in the Fund.

[bar chart -- for calendar quarters March 31, 1988 through September 30, 1998]

QUARTERLY RETURNS MARCH JUNE SEPTEMBER DECEMBER
- ----------------- ----- ---- --------- --------
1988 ...................... 1.05% 1.05% 1.20% 1.28%
1989 ...................... 1.41 1.54 1.44 1.43
1990 ...................... 1.32 1.38 1.38 1.39
1991 ...................... 1.14 1.03 1.01 0.99
1992 ...................... 0.70 0.72 0.59 0.56
1993 ...................... 0.46 0.47 0.49 0.50
1994 ...................... 0.43 0.52 0.61 0.77
1995 ...................... 0.80 0.88 0.80 0.82
1996 ...................... 0.70 0.72 0.70 0.75
1997 ...................... 0.70 0.81 0.76 0.80
1998 ...................... 0.71 0.79 0.73

Footnote to bar chart: As of September 30, 1998, the Fund had a year-to-date
return of %.

FUND'S HIGHEST AND LOWEST RETURNS QUARTER ENDING
--------------------------------- --------------
(FOR CALENDAR QUARTERS COVERED BY THE BAR CHART)
Highest 1.54% June 30, 1989
Lowest 0.43% March 31, 1994

AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDING DECEMBER 31, 1997)
This table shows how the Fund's average annual total returns for the periods
indicated compare with those of the IBC Financial General Purpose Market Funds
Average, a broad measure of money market fund performance, and gives another
indication of the risk of investing in the Fund. You should remember that
unlike the Fund, the index is unmanaged and doesn't include the costs of
buying, selling and holding securities, or other Fund expenses.

AS OF 12/31/97
Average Annual Total Return
------------------------------------
1 YEAR 5 YEAR 10 YEAR
------ ------ -------
FUND 3.12% 2.73% 3.88%
IBC 3.07% 2.72% 3.61%

FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF THE FUND.

SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases ...................... None
Maximum Deferred Sales Charge (Load) .................................. None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends ........... None
Redemption Fee ........................................................ None
Exchange Fee .......................................................... None

ANNUAL FUND OPERATING EXPENSES(1) (expenses that are deducted from Fund
assets):

BEFORE WAIVER AFTER WAIVER(2)
------------- ---------------
Management Fees ............................... 0.20% 0.11%
Distribution (12b-1) Fees ..................... 0.20% 0.06%
Other Expenses (administrative, shareholder
servicing and other expenses) ............... 0.64% 0.48%
Total Annual Fund Operating Expenses .......... 1.04%(2) 0.65%

(1)This table reflects the expenses of both the Fund and Tax Free Reserves
Portfolio, the underlying mutual fund in which the Fund invests.
(2)Certain Fund service providers voluntarily waived fees and reimbursed
expenses of 0.37% through August 31, 1998 in order to prevent total
expenses from exceeding 0.65% of average daily net assets. These waivers
can be reduced or terminated at any time.

CITIFUNDS TAX FREE RESERVES

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Before waiver ............... $104 $326 $566 $1,263
After waiver ................ $ 66 $208 $362 $ 810
<PAGE>

CITIFUNDS CALIFORNIA TAX FREE RESERVES
This summary briefly describes the CitiFunds California Tax Free Reserves and
the principal risks of investing in it. For more information, see "More About
the Funds" on page .

FUND GOAL
The Fund's goals are to provide shareholders with high levels of current
income exempt from both federal and California personal income taxes,
preservation of capital and liquidity. Of course, there is no assurance that
the Fund will achieve its goals.

MAIN INVESTMENT STRATEGIES

o Under normal market conditions, California Tax Free Reserves invests at
least 80% of its assets in high quality municipal obligations and in
participation interests in these obligations issued by banks, insurance
companies and other financial institutions. Municipal obligations are debt
securities issued by states, cities and towns and other political or public
entities or agencies or qualifying issuers. The interest paid on these debt
securities is free from federal income tax.

o Under normal market conditions, the Fund invests at least 65% of its assets
in municipal obligations that pay interest that is exempt from both federal
and California personal income taxes. These may include obligations of
Puerto Rico and other U. S. territories.

o When acceptable California municipal obligations are not available, the Fund
may purchase other municipal obligations. The interest on these securities
may be subject to California personal income taxes.

o The Fund may invest more than 25% of its assets in participation interests
in municipal obligations that are secured by bank letters of credit or
guarantees.

o The Fund may invest up to 20% of its assets in high quality securities that
pay interest that is subject to federal income tax.

Investing in high quality, short-term instruments may result in a lower yield
(the income on your investment) than investing in lower quality or longer-term
instruments.

MAIN RISKS
The principal risks of investing in California Tax Free Reserves are described
below. See page for more information about risks.

o Because the Fund invests a high percentage of its assets in municipal
obligations of issuers located in California, the Fund is more exposed to
events that adversely affect issuers in California. As a result, this Fund
has more risk than a broadly diversified money market fund.

o Issuers of California municipal obligations experienced severe financial
difficulties in the early 1990's. Although California's economy has been
recovering, there is no assurance that this will continue. Recent global
economic events have begun to adversely affect the earnings of corporate
issuers in California. If California were to experience economic
difficulties again, the value of your investment in the Fund could decline.
The Fund also could have difficulty in finding high quality California
municipal obligations available for investment. This could cause the amount
of the Fund's income that is subject to California tax to increase. Because
many municipal issuers depend on real estate as a source of revenue,
dislocations in the real estate market may cause the Fund similar problems,
as could any legislative initiatives resulting in the reduction of state
revenues or allocations of them to local governments.

o The amount of income paid to you by the Fund will go up or down depending on
day-to-day variations in short-term interest rates.

o A major change in interest rates, a default on an investment held by the
Fund, or a significant decline in the value of a Fund investment could cause
the value of your investment in the Fund, or its yield, to decline.

o An investment in the Fund is not a deposit of Citibank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.

o Although the Fund seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Fund.

WHO MAY WANT TO INVEST
You should keep in mind that an investment in California Tax Free Reserves is
not a complete investment program and should be considered just one part of
your total investment program.

You should consider investing in California Tax Free Reserves if:

o You're seeking tax-exempt income from your investment.*

o You're seeking current income and a stabilized share price.

o You want to be able to convert your investment to cash quickly with reduced
risk to principal.

o Your income is subject to California personal income tax.

Don't invest in California Tax Free Reserves if:

o You don't need your income to be tax-exempt, or you're investing through a
tax-deferred vehicle -- such as an IRA account.

o You're seeking long-term growth of capital or high current income and you
can tolerate daily share price fluctuation.

*Some income may be subject to tax. Consult your personal tax adviser.

FUND PERFORMANCE
The following bar chart and table can help you evaluate the risks and
potential rewards of investing in the Fund. The bar chart shows the Fund's
performance over the last ten calendar years. The table compares the average
annual returns for the Fund over the last ten calendar years to the
performance of the IBC Financial California Tax Free Money Market Funds
Average. When you consider this information, please remember that the Fund's
past performance is not necessarily an indication of how it will perform in
the future. For current yield information, please call 800-625-4554 toll free,
or contact your account representative.

YEAR-BY-YEAR TOTAL RETURNS
This bar chart shows how the Fund's performance has varied from year to year
and gives an indication of the risk of investing in the Fund.

[bar chart -- for calendar quarters June 30, 1992 through September 30, 1998]

QUARTERLY RETURNS MARCH JUNE SEPTEMBER DECEMBER
- ----------------- ----- ---- --------- --------
1992 ...................... 0.76% 0.65% 0.67%
1993 ...................... 0.60% 0.59 0.55 0.55
1994 ...................... 0.53 0.61 0.68 0.82
1995 ...................... 0.68 0.93 0.86 0.87
1996 ...................... 0.75 0.76 0.67 0.72
1997 ...................... 0.67 0.79 0.74 0.78
1998 ...................... 0.68 0.77 0.69

Footnote to bar chart: As of September 30, 1998, the Fund had a year-to-date
return of %.

FUND'S HIGHEST AND LOWEST RETURNS QUARTER ENDING
--------------------------------- --------------
(FOR CALENDAR QUARTERS COVERED BY THE BAR CHART)
Highest 0.92% June 30, 1995
Lowest 0.53% March 31, 1994

AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDING DECEMBER 31, 1997)
This table shows how the Fund's average annual total returns for the periods
indicated compare with those of the IBC Financial California Tax Free Money
Market Funds Average, a broad measure of money market fund performance, and
gives another indication of the risk of investing in the Fund.

AS OF 12/31/97
Average Annual Total Return 3/10/92
------------------------------------ ---------
1 YEAR 5 YEAR 10 YEAR INCEPTION
------ ------ ------- ---------
FUND 3.02% 2.90% N/A 2.88%
IBC 2.99% 2.70% N/A 2.88%

FUND FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF THE FUND.

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets):

BEFORE WAIVER AFTER WAIVER(1)
------------- ---------------
Management Fees ............................... 0.20% 0.12%
Distribution (12b-1) Fees ..................... 0.20% 0.02%
Other Expenses (administrative, shareholder
servicing and other expenses) ............... 0.60% 0.51%
Total Annual Fund Operating Expenses .......... 1.00%(1) 0.65%

(1)Certain Fund service providers voluntarily waived fees and reimbursed
expenses of 0.35% through August 31, 1998 in order to prevent total
expenses from exceeding 0.65% of average daily net assets. These waivers
can be reduced or terminated at any time.

CITIFUNDS CALIFORNIA TAX FREE RESERVES

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Before waiver .................. $102 $319 $555 $1,238
After waiver ................... $ 66 $208 $362 $ 810
<PAGE>

CITIFUNDS CONNECTICUT TAX FREE RESERVES
This summary briefly describes CitiFunds Connecticut Tax Free Reserves and the
principal risks of investing in it. For more information, see "More About the
Funds" on page .

FUND GOAL
The Fund's goals are to provide its shareholders with high levels of current
income exempt from both federal and Connecticut personal income taxes,
preservation of capital and liquidity. Of course, there is no assurance that
the Fund will achieve its goals.

MAIN INVESTMENT STRATEGIES:

o Under normal market conditions, Connecticut Tax Free Reserves invests at
least 80% of its assets in high quality municipal obligations and in
participation interests in these obligations issued by banks, insurance
companies and other financial institutions. Municipal obligations are debt
securities issued by states, cities and towns and other political or public
entities or agencies or qualifying issuers. The interest paid on these debt
securities is free from federal income tax.

o Under normal market conditions, the Fund invests at least 65% of its assets
in municipal obligations that pay interest that is exempt from both federal
and Connecticut personal income taxes. These may include obligations of
Puerto Rico and other U. S. territories.

o When acceptable Connecticut municipal obligations are not available, the
Fund may purchase other municipal obligations. The interest on these
securities may be subject to Connecticut personal income taxes.

o The Fund may invest more than 25% of its assets in participation interests
in municipal obligations that are secured by bank letters of credit or
guarantees.

o The Fund may invest up to 20% of its assets in high quality securities that
pay interest that is subject to federal income tax.

Investing in high quality, short-term instruments may result in a lower yield
(the income on your investment) than investing in lower quality or longer-term
instruments.

MAIN RISKS
The principal risks of investing in Connecticut Tax Free Reserves are
described below. See page for more information about risks.

o Because the Fund invests a high percentage of its assets in municipal
obligations of issuers located in Connecticut, the Fund is more exposed to
events that adversely affect issuers in Connecticut. As a result, this Fund
has more risk than a broadly diversified money market fund.

o In the early 1990's, some rating agencies downgraded Connecticut's general
obligation bonds because of recurring budgetary problems. Other downgrades
have occurred since that time. If similar events were to occur again, the
value of your investment in the Fund could decline. The Fund also could have
difficulty in finding high quality Connecticut municipal obligations
available for investment. This could cause the amount of the Fund's income
that is subject to Connecticut tax to increase. Because many municipal
issuers depend on real estate as a source of revenue, dislocations in the
real estate market may cause the Fund similar problems, as could any
legislative initiatives resulting in the reduction of state revenues or
allocations of them to local governments.

o The amount of income paid to you by the Fund will go up or down depending on
day-to-day variations in short-term interest rates.

o A major change in interest rates, a default on an investment held by the
Fund, or a significant decline in the market value of a Fund investment
could cause the value of your investment in the Fund, or its yield, to
decline.

o The Fund may concentrate in participation interests issued by banks and
secured by bank letters of credit or guarantees. This means that your
investment in the Fund may be particularly susceptible to events affecting
the banking industry. Banks are sensitive to changes in money market and
general economic conditions, as well as to decisions by regulators that can
affect their profitability.

o An investment in the Fund is not a deposit of Citibank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.

o Although the Fund seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Fund.

WHO MAY WANT TO INVEST
You should keep in mind that an investment in Connecticut Tax Free Reserves is
not a complete investment program and should be considered just one part of
your total investment program.

You should consider investing in this Fund if:

o You're seeking tax-exempt income from your investment.*

o You're seeking current income and a stabilized share price.

o You want to be able to convert your investment to cash quickly with reduced
risk to principal.

o Your income is subject to Connecticut personal income tax.

Don't invest in Connecticut Tax Free Reserves if:

o You don't need your income to be tax-exempt, or you're investing through a
tax-deferred vehicle--such as an IRA account.

o You're seeking long-term growth of capital or high current income and you
can tolerate daily share price fluctuation.

*Some income may be subject to tax. Consult your personal tax adviser.

FUND PERFORMANCE
The following bar chart and table can help you evaluate the risks and
potential rewards of investing in the Fund. The bar chart shows the Fund's
performance over the last ten calendar years. The table compares the average
annual returns for the Fund over the last ten calendar years to the
performance of the IBC Financial Connecticut Tax Free Money Market Funds
Average. When you consider this information, please remember that the Fund's
past performance is not necessarily an indication of how it will perform in
the future. For current yield information, please call 800-625-4554 toll free,
or contact your account representative.

YEAR-BY-YEAR TOTAL RETURNS
This bar chart shows how the Fund's performance has varied from year to year
and gives an indication of the risk of investing in the Fund.

[bar chart -- for calendar quarters March 1994 through September 1998]

QUARTERLY RETURNS MARCH JUNE SEPTEMBER DECEMBER
- ----------------- ----- ---- --------- --------
1994 ..................... 0.48% 0.66% 0.72% 0.90%
1995 ..................... 0.90 0.94 0.85 0.89
1996 ..................... 0.74 0.77 0.69 0.73
1997 ..................... 0.67 0.79 0.74 0.76
1998 ..................... 0.68 0.77 0.75

Footnote to bar chart: As of September 30, 1998, the Fund had a year-to-date
return of %.

FUND'S HIGHEST AND LOWEST RETURNS QUARTER ENDING
--------------------------------- --------------
(FOR CALENDAR QUARTERS COVERED BY THE BAR CHART)
Highest 0.94% June 30, 1995
Lowest 0.49% March 31, 1994

AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDING DECEMBER 31, 1997)
This table shows how the Fund's average annual total returns for the periods
indicated compare with those of the IBC Financial Connecticut Tax Free Money
Market Funds Average, a broad measure of money market fund performance, and
gives another indication of the risk of investing in the Fund.

AS OF 12/31/97
Average Annual Total Return
------------------------------------
1 YEAR 5 YEAR 10 YEAR
------ ------ -------
FUND 3.00% N/A N/A
IBC 2.91% N/A N/A

FUND FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF THE FUND.

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets):

BEFORE WAIVER AFTER WAIVER(1)
------------- ---------------
Management Fees ................................ 0.20% 0.11%
Distribution (12b-1) Fees ...................... 0.20% 0.01%
Other Expenses (administrative, shareholder
servicing and other expenses) ................ 0.61% 0.53%
Total Annual Fund Operating Expenses ........... 1.01%(2) 0.65%

(1)Certain Fund service providers voluntarily waived fees and reimbursed
expenses of 0.36% through August 31, 1998 in order to prevent total
expenses from exceeding 0.65% of average daily net assets. These waivers
can be reduced or terminated at any time.

CITI FUNDS CONNECTICUT TAX FREE RESERVES

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Before waiver ................ $103 $323 $561 $1,250
After waiver ................. $ 66 $208 $362 $ 810
<PAGE>

CITIFUNDS NEW YORK TAX FREE RESERVES
This summary briefly describes CitiFunds New York Tax Free Reserves and the
principal risks of investing in it. For more information, see "More About the
Funds" on page .

FUND GOAL
The Fund's goals are to provide its shareholders with high levels of current
income exempt from federal, New York State and New York City personal income
taxes, preservation of capital and liquidity. Of course, there is no assurance
that the Fund will achieve its goals.

MAIN INVESTMENT STRATEGIES

o Under normal market conditions, New York Tax Free Reserves invests at least
80% of its assets in high quality municipal obligations and in participation
interests in these obligations issued by banks, insurance companies and
other financial institutions. Municipal obligations are debt securities
issued by states, cities and towns and other political or public entities or
agencies or qualifying issuers. The interest paid on these debt securities
is free from federal income tax.

o Under normal market conditions, the Fund invests at least 65% of its assets
in municipal obligations that pay interest that is exempt from federal, New
York State and New York City personal income taxes. These may include
obligations of Puerto Rico and other U. S. territories.

o When acceptable New York municipal obligations are not available, the Fund
may purchase other municipal obligations. The interest on these securities
may be subject to New York personal income taxes.

o The Fund may invest more than 25% of its assets in participation interests
in municipal obligations that are secured by bank letters of credit or
guarantees.

o The Fund may invest up to 20% of its assets in high quality securities that
pay interest that is subject to federal income tax.

Investing in high quality, short-term instruments may result in a lower yield
(the income on your investment) than investing in lower quality or longer-term
instruments.

MAIN RISKS
The principal risks of investing in New York Tax Free Reserves are described
below. See page for more information about risks.

o Because the Fund invests a high percentage of its assets in municipal
obligations of issuers located in New York, the Fund is more exposed to
events that adversely affect issuers in New York. As a result, this Fund has
more risk than a broadly diversified money market fund.

o New York State and other issuers of New York municipal obligations have
experienced financial difficulties over the past several years. Although the
New York economy has improved more recently, there is no assurance that this
will continue. Recent global economic events have begun to adversely affect
the earnings of corporate issuers in New York. If New York were to
experience economic difficulties again, the value of your investment in the
Fund could decline. In addition, the Fund also could have difficulty in
finding high quality New York municipal obligations available for
investment. This could cause the amount of the Fund's income that is subject
to New York taxes to increase.

o The amount of income paid to you by the Fund will go up or down depending on
day-to-day variations in short-term interest rates.

o An investment in the Fund is not a deposit of Citibank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.

o Although the Fund seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Fund.

WHO MAY WANT TO INVEST
You should keep in mind that an investment in New York Tax Free Reserves is
not a complete investment program and should be considered just one part of
your total investment program.

You should consider investing in New York Tax Free Reserves if:

o You're seeking tax-exempt income from your investment.*

o You're seeking current income and a stabilized share price.

o You want to be able to convert your investment to cash quickly with reduced
risk to principal.

o Your income is subject to New York State or New York City personal income
taxes.

Don't invest in New York Tax Free Reserves if:

o You don't need your income to be tax-exempt, or you're investing through a
tax-deferred vehicle -- such as an IRA account.

o You're seeking long term growth of capital or high current income and you
can tolerate daily share price fluctuation.

*Some income may be subject to tax. Consult your personal tax adviser.

FUND PERFORMANCE
The following bar chart and table can help you evaluate the risks and
potential rewards of investing in the Fund. The bar chart shows the Fund's
performance over the last ten calendar years. The table compares the average
annual returns for the Fund over the past ten calendar years to the
performance of the IBC Financial New York Tax Free Money Market Funds Average.
When you consider this information, please remember that the Fund's past
performance is not necessarily an indication of how it will perform in the
future. For current yield information, please call 800-625-4554 toll free, or
contact your account representative.

<PAGE>

YEAR-BY-YEAR TOTAL RETURNS
The bar chart shows how the Fund's performance has varied from year to year
and gives an indication of the risk of investing in the Fund.

[bar chart -- for calendar quarters March 1988 through September 1998]

QUARTERLY RETURNS MARCH JUNE SEPTEMBER DECEMBER
- ----------------- ----- ---- --------- --------
1988 ..................... 0.95% 0.97% 1.10% 1.15%
1989 ..................... 1.27 1.41 1.34 1.36
1990 ..................... 1.27 1.28 1.28 1.27
1991 ..................... 1.02 0.90 0.95 0.94
1992 ..................... 0.68 0.62 0.53 0.52
1993 ..................... 0.44 0.42 0.44 0.48
1994 ..................... 0.44 0.51 0.59 0.74
1995 ..................... 0.79 0.86 0.80 0.82
1996 ..................... 0.69 0.71 0.70 0.73
1997 ..................... 0.69 0.79 0.75 0.79
1998 ..................... 0.69 0.78 0.72

Footnote to bar chart: As of September 30, 1998, the Fund had a year-to-date
return of %.

FUND'S HIGHEST AND LOWEST RETURNS QUARTER ENDING
--------------------------------- --------------
(FOR CALENDAR QUARTERS COVERED BY THE BAR CHART)
Highest 1.41% June 30, 1989
Lowest 0.42% June 30, 1992

AS OF 12/31/97
Average Annual Total Return
------------------------------------
1 YEAR 5 YEAR 10 YEAR
------ ------ -------
FUND 3.06% 2.66% 3.44%
IBC 3.01% 2.63% 3.40%

FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets):

BEFORE WAIVER AFTER WAIVER(1)
------------- ---------------
Management Fees ............................... 0.20% 0.12%
Distribution (12b-1) Fees ..................... 0.20% 0.05%
Other Expenses (administrative, shareholder
servicing and other expenses) ............... 0.55% 0.48%
Total Annual Fund Operating Expenses .......... 0.95%(1) 0.65%

(1)Certain Fund service providers voluntarily waived fees and reimbursed
expenses of 0.30% through August 31, 1998 in order to prevent total
expenses from exceeding 0.65% of average daily net assets. These waivers
can be reduced or terminated at any time.

<PAGE>

CITIFUNDS NEW YORK TAX FREE RESERVES

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Before waiver .................. $97 $303 $528 $1,176
After waiver ................... $66 $208 $362 $ 810
<PAGE>

YOUR CITIFUNDS ACCOUNT

HOW TO BUY SHARES
Shares of the Funds are offered continuously and purchases may be made Monday
through Friday, except on certain holidays. Shares may be purchased from the
Funds' distributor or a broker-dealer or financial institution that has an
agreement with the distributor. You must be a customer of a Shareholder
Servicing Agent to purchase shares. Shareholder Servicing Agents are financial
institutions that have entered into shareholder servicing agreements
concerning the Funds. You pay no sales charge (load) to invest in the Funds.
Each Fund and its distributor have the right to reject any purchase order or
cease offering Fund shares at any time.

Shares are purchased at net asset value (normally $1.00 per share) the next
time it is calculated after your order is received and accepted by the
distributor. NAV is the value of a single share of a Fund.

A Shareholder Servicing Agent will establish and maintain your account and is
the shareholder of record. The Agent may establish its own terms, conditions
and charges (such as minimum investments, fixed annual fees or account
maintenance fees) and may offer you a variety of services, such as automatic
purchase and redemption programs, at an additional charge. These charges, if
imposed, would reduce your net return on an investment in a Fund.

Your Agent will not transmit your purchase order for Fund shares until it
receives the purchase price in federal or other immediately available funds.
If you pay by check, the Agent transmits the order when the check clears,
usually within two business days.

The Fund's distributor may make payments for distribution and/or shareholder
servicing activities out of its past profits and other available sources. The
distributor may also make payments for marketing, promotional or related
expenses to dealers. The amount of these payments are determined by the
distributor and may vary. Citibank may make similar payments to dealers under
similar arrangements.

HOW THE PRICE OF YOUR SHARES IS CALCULATED
Every day the New York Stock Exchange is open for trading (at 3:00 p.m.
Eastern time for Cash Reserves and 12:00 noon Eastern time for the other
funds), each Fund calculates its net asset value (NAV). On days when the
financial markets in which the Funds invest close early, NAV will be
calculated as of the close of those markets. The Funds' securities are valued
at amortized cost, which is approximately equal to market value.

HOW TO SELL SHARES
You may sell your shares on any business day without a sales charge at the NAV
(normally $1.00 per share) next determined after your redemption request has
been received by your Agent. You may contact your Agent in writing or, if your
Agent permits, by telephone. All redemption requests must be in proper form,
as determined by your Agent.

You will receive your redemption proceeds in federal funds, if the New York
Stock Exchange is open and operating without restrictions, normally on the day
on which you sell your shares but in any event within seven days. Your
redemption proceeds may also be delayed for up to ten days if the purchase was
made by check. You should be aware that you may have to pay taxes on your
redemption proceeds.

EXCHANGES
You may exchange Fund shares for those of another CitiFund or certain other
funds managed or advised by Citibank which are made available by your
Shareholder Servicing Agent. Your Agent can provide you with more information,
including a prospectus for any fund to be acquired through an exchange. If
your account application allows, you may arrange the exchange by telephone.
The exchange will be based on the relative NAVs of both funds next determined
after the order is accepted by the Funds' distributor. You should be aware
that you may have to pay taxes on your exchange. You cannot exchange shares
until the Fund has received payment in federal funds for your shares.

DIVIDENDS
Each business day when we determine NAV for a Fund, we calculate the Fund's
net income and declare dividends for all shareholders of record. Shares begin
to accrue dividends on the day they are purchased. You will not receive
dividends for the day on which you redeem your shares. Dividends are
distributed once a month, on or before the last business day of the month.
Unless you choose to receive your dividends in cash, we will distribute them
as full and fractional additional Fund shares.

RETIREMENT ACCOUNTS
Your Shareholder Servicing Agent can advise you about how investments in Cash
Reserves and U.S. Treasury Reserves may be incorporated into your retirement
plan.

TAX MATTERS
This discussion of taxes is for general information only. You should consult
your own tax adviser about your particular situation.

Each Fund intends to meet requirements of the Internal Revenue Code applicable
to regulated investment companies so that it will not be liable for any
federal income or excise taxes.

FEDERAL INCOME TAXES: With respect to Cash Reserves and U.S. Treasury
Reserves, shareholders are required to pay federal income tax on any dividends
and other distributions received. Generally, distributions from a Fund's net
investment income and short-term capital gains will be taxed as ordinary
income. Distributions from long-term net capital gains will be taxed as such
regardless of how long the shares of a Fund have been held. Dividends and
distributions are treated in the same manner for federal tax purposes whether
they are paid in cash or as additional shares. Distributions derived from
interest on U.S. Government obligations may be exempt from certain state and
local taxes.

With respect to the Tax Free Funds, each Fund expects that most of its net
income will be attributable to interest on municipal obligations and as a
result most of each Fund's dividends to shareholders will be excludable from
shareholders' gross income. However, each Fund may invest from time to time in
taxable securities, and certain Fund dividends may be subject to the federal
alternative minimum tax. It is also possible, but not intended, that a Fund
may realize short-term or long-term capital gains or losses. Generally,
distributions from a Fund's short-term capital gains will be taxed as ordinary
income, and distributions from long-term net capital gains will be taxed as
such regardless of how long the shares of the Fund have been held. Dividends
and distributions are treated in the same manner for federal tax purposes
whether they are paid in cash or as additional shares.

If you sell your shares of a Fund, or exchange them for shares of another
Fund, you generally will be subject to tax on any taxable gain. Your taxable
gain is computed by subtracting your tax basis in the shares from the
redemption proceeds (in the case of a sale) or the value of the shares
received (in the case of an exchange).

Fund dividends of tax-exempt income are taken into account in determining the
amount of a shareholder's social security and railroad retirement benefits
that may be subject to federal income tax. No deduction may be claimed for
interest on indebtedness incurred or continued for the purpose of purchasing
or carrying Fund shares. Investors who are, or who are related to,
"substantial users" of facilities financed by private activity bonds should
consult their tax advisers before buying Fund shares.

Early each year, each Fund will notify its shareholders of the amount and tax
status of distributions paid to shareholders for the preceding year.

The account application asks each new investor to certify that the investor's
Social Security or taxpayer identification number is correct and that the
shareholder is not subject to 31% backup withholding for failing to report
income to the IRS. A Fund may be required to withhold (and pay over to the IRS
for the shareholder's credit) 31% of certain distributions paid to investors
who fail to provide this information or otherwise violate IRS regulations.

STATE AND LOCAL TAXES: Except as noted below, Fund dividends that are
excludable from shareholders' gross income for federal income tax purposes may
not necessarily be exempt from the income or other tax laws of any state or
local taxing authority. You should consult your own tax adviser in this
regard.

CALIFORNIA TAX FREE RESERVES: Under existing California law, as long as at the
end of each quarter of the Fund's fiscal year the Fund continues to qualify
for the special federal income tax treatment afforded regulated investment
companies and at least 50% of the value of the Fund's assets consists of
California municipal obligations, shareholders of the Fund will be able to
exclude from income, for California personal income tax purposes, dividends
received from the Fund which are derived from income (less related expenses)
from the California municipal obligations of the Fund. These dividends must be
designated as such by the Fund by written notice to shareholders within 60
days after the close of that fiscal year.

The foregoing description is a general, abbreviated summary that relates
solely to the taxation of shareholders subject to California personal income
tax. Accordingly, potential investors, including, in particular, investors who
may be subject to California corporate franchise tax or California corporate
income tax, should consult with their own tax advisers.

CONNECTICUT TAX FREE RESERVES: Under existing law, the Fund expects that
shareholders will not be subject to the Connecticut personal income tax on
exempt-interest dividends received from the Fund to the extent that such
distributions are derived from interest on Connecticut municipal obligations.
Capital-gain dividends derived from Connecticut municipal obligations other
than obligations of U.S. territories or possessions and their political
subdivisions are also free from this tax. Other distributions from the Fund,
including exempt-interest dividends attributable to obligations of issuers in
other states, other long-term capital gains and all short-term capital gains,
will not be exempt from the Connecticut personal income tax. Moreover,
distributions by the Fund derived from interest income, other than interest on
Connecticut municipal obligations, that are treated as a preference item for
federal income tax purposes may be subject to the net Connecticut minimum tax
in the case of any shareholder subject to the Connecticut personal income tax
and required to pay the federal alternative minimum tax.

NEW YORK TAX FREE RESERVES: To the extent that dividends received from the
Fund are derived from interest on New York Municipal Obligations, the
dividends will also be excluded from the gross income of individual
shareholders who are New York residents for New York State and New York City
personal income tax purposes. Dividends from the Fund are not excluded in
determining New York State or New York City franchise taxes on corporations
and financial institutions.

FOREIGN SHAREHOLDERS: Each Fund will withhold U.S. federal income tax payments
at the rate of 30% (or any lower applicable treaty rate) on taxable dividends
and other payments subject to withholding taxes that are made to persons who
are not citizens or residents of the United States. Distributions received
from a Fund by non-U.S. persons also may be subject to tax under the laws of
their own jurisdictions.

MANAGEMENT OF THE FUNDS

INVESTMENT ADVISER
Each Fund draws on the strength and experience of Citibank. Citibank is the
investment adviser of each Fund, and subject to policies set by the Funds'
Trustees, Citibank makes investment decisions. Citibank, 153 East 53rd Street,
New York, New York, has been managing money since 1822. With its affiliates,
it currently manages more than $290 billion in assets worldwide. Citibank is a
wholly-owned subsidiary of Citicorp, which is, in turn, a wholly-owned
subsidiary of Citigroup Inc. Citigroup Inc. was formed as a result of the
merger of Citicorp and Travelers Group, Inc., which was completed on October
8, 1998. "CitiFunds" is a service mark of Citicorp.

Although Citibank and its affiliates may have banking relationships with the
issuers of securities that are held in the Funds, in making investment
decisions for the Funds, Citibank does not obtain or use material inside
information acquired by any division, department or affiliate of Citibank in
the course of those relationships. Citibank and its affiliates may have loans
outstanding that are repaid with proceeds of securities purchased by the
Funds.

ADVISORY FEES
For the services it provided under the investment advisory agreements for the
Funds, for the Funds' fiscal year ended August 31, 1998 Citibank received the
following fees:

FEE, AS PERCENTAGE OF AVERAGE
FUND DAILY NET ASSETS, AFTER WAIVER
- ---- ------------------------------
CASH RESERVES 0.07%
U.S. TREASURY RESERVES 0.06%
TAX FREE RESERVES 0.20%
CALIFORNIA TAX FREE RESERVES 0.16%
CONNECTICUT TAX FREE RESERVES 0.16%
NEW YORK TAX FREE RESERVES 0.16%

DISTRIBUTION ARRANGEMENTS
The Funds do not charge any sales loads, deferred sales loads or other fees in
connection with the purchase of shares.

The Funds have adopted distribution plans under rule 12b-1 under the
Investment Company Act of 1940. The plans allow each Fund to use up to $0.10%
per year of its average daily net assets to compensate the Funds' distributor
for its distribution activities. The distributor uses the fees to offset Fund
marketing costs, including advertising and other promotional activities, and
to pay its own costs related to distribution activities, including employee
salaries and bonuses. The distributor currently waives a portion of these fees
on a voluntary basis. This fee waiver may be terminated or reduced at any
time. The plans also allow each Fund to pay up to an additional $0.10% per
year of its average daily net assets in anticipation of or as reimbursement
for certain advertising expenses. The Funds did not pay any of these
additional advertising expenses during their last fiscal year, and do not
anticipate doing so during the current fiscal year. Because fees under the
plans are paid out of Fund assets, over time these fees will increase the cost
of your investment and may cost you more than paying other types of sales
charges.

INVESTMENT STRUCTURE
Cash Reserves, U.S. Treasury Reserves and Tax Free Reserves each invest in
securities through an underlying mutual fund having the same goals and
strategies. California Tax Free Reserves, Connecticut Tax Free Reserves and
New York Tax Free Reserves may use this investment structure in the future,
but New York Tax Free Reserves will do so only if Fund shareholders agree.
Each Fund may stop investing in its corresponding underlying fund at any time,
and will do so if the Fund's Trustees believe that to be in the shareholders'
best interests. The Fund could then invest in another mutual fund or pooled
investment vehicle, or could invest directly in securities.

MORE ABOUT THE FUNDS

The Funds' goals, principal investments and risks are summarized in FUNDS AT A
GLANCE. More information on investments, investment strategies and risks
appears below.

PRINCIPAL INVESTMENT STRATEGIES
The Funds' principal investment strategies are the strategies that, in the
opinion of Citibank, are most likely to be important in trying to achieve each
Fund's investment goals. Of course, there can be no assurance that any Fund
will achieve its goals. Please note that each Fund may also use strategies and
invest in securities that are not described below but that are described in
the Statement of Additional Information.

Each Fund has specific investment policies and procedures designed to maintain
a constant net asset value of $1.00 per share. Each Fund also complies with
industry regulations that apply to money market funds. These regulations
require that each Fund's investments mature or be deemed to mature within 397
days from the date purchased and that the average maturity of each Fund's
investments (on a dollar-weighted basis) be 90 days or less. In addition, all
of the Funds' investments must be in U.S. dollar-denominated high quality
securities which have been determined by Citibank to present minimal credit
risks. To be high quality, a security (or its issuer) must be rated in one of
the two highest short-term rating categories by nationally recognized rating
agencies, such as Moody's or Standard & Poor's, or, in Citibank's opinion, be
of comparable quality. Investors should note that within these two rating
categories there may be sub-categories or gradations indicating relative
quality. Investments in high quality, short-term securities may result in a
lower yield than would be available from investments in lower quality or
longer term securities.

WHAT ARE MONEY MARKET INSTRUMENTS?
A MONEY MARKET INSTRUMENT is a short-term IOU issued by banks or other
corporations, or the U.S. or a foreign government and state or local
governments. Money market instruments have maturity dates of 13 months or
less. Money market instruments may include CERTIFICATES OF DEPOSIT, BANKERS'
ACCEPTANCES, VARIABLE RATE DEMAND NOTES (where the interest rate is reset
periodically and the holder may demand payment from the issuer at any time),
FIXED-TERM OBLIGATIONS, COMMERCIAL PAPER (short term unsecured debt of
corporations), ASSET-BACKED SECURITIES (which are backed by pools of accounts
receivable such as car installment loans or credit card receivables) and
REPURCHASE AGREEMENTS. In a repurchase agreement, the seller sells a security
and the buyer agrees to buy it back at a later date (usually within seven
days) and at a higher price, which reflects an agreed upon interest rate.

CASH RESERVES invests in high quality U.S. dollar-denominated money market
instruments of U.S. and non-U.S. issuers. These obligations include U.S.
government obligations, obligations of U.S. and non-U.S. banks, obligations
issued or guaranteed by the governments of Western Europe, Australia, Japan
and Canada, commercial paper, asset backed securities and repurchase
agreements. The Fund's U.S. government obligations may include U.S. Treasury
bills, bonds and notes and obligations of U.S. government agencies and
instrumentalities that may, but need not, be backed by the full faith and
credit of the United States. The Fund concentrates in bank obligations,
including certificates of deposit, fixed time deposits and bankers'
acceptances. This means that the Fund invests at least 25% of its assets in
bank obligations, and the Fund may invest up to all of its assets in bank
obligations. Except for this concentration policy, the Fund's investment goals
and policies may be changed without a shareholder vote.

Cash Reserves invests only in "first tier" securities, which are securities
rated in the highest short-term rating category by nationally recognized
rating agencies or, in Citibank's opinion, of comparable quality.

U.S. TREASURY RESERVES invests in U.S. Treasury bills, bonds, notes and
receipts. Treasury receipts are interest coupons on other U.S. Treasury
obligations. This Fund may also invest in short-term obligations of U.S.
government agencies and instrumentalities, but only if the obligations are
backed by the full faith and credit of the United States. Unlike most other
money market funds and many U.S. Treasury money market funds, the Fund does
not invest in repurchase agreements. The Fund's investment goals and policies
may be changed without a shareholder vote. ALTHOUGH THE FUND INVESTS IN U.S.
GOVERNMENT OBLIGATIONS, AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT.

THE FOUR TAX FREE FUNDS invest primarily in high quality municipal obligations,
including municipal money market instruments, and in participation interests in
municipal obligations.

WHAT ARE MUNICIPAL OBLIGATIONS?
Municipal obligations are fixed and variable rate obligations issued by or on
behalf of states and municipal governments, Puerto Rico and other U.S.
territories, and their authorities, agencies, instrumentalities and political
subdivisions, and by other qualifying issuers. The interest on these
obligations is exempt from federal income tax.

Longer term municipal obligations (municipal bonds) generally are issued to
raise funds for construction or to retire previous debt. Short term
obligations (municipal notes or commercial paper) may be issued to finance
short term cash needs in anticipation of receipt of tax and other revenues.
Under normal market conditions, these Funds invest at least 80% of their
assets in municipal obligations and participation interests. These policies
cannot be changed without a shareholder vote.

Municipal obligations bought by the Funds must be rated in the highest two
rating categories of nationally recognized rating agencies or determined by
Citibank to be of comparable quality. If the credit quality of a municipal
obligation deteriorates after a Fund buys it, Citibank will decide whether the
security should be held or sold.

The Tax Free Funds invest in both "general obligation" securities, which are
backed by the full faith, credit and taxing power of the issuer, and in
"revenue" securities, which are payable only from revenues from a specific
project or another revenue source. The Funds also invest in private activity
bonds, which fund privately operated industrial facilities. Payment on these
bonds generally is made from payments by the operators of the facilities and
is not backed by the taxing authority of the issuing municipality. The Funds
invest in municipal lease obligations, which are undivided interests issued by
a state or municipality in a lease or installment purchase which generally
relates to equipment or facilities. In some cases payments under municipal
leases do not have to be made unless money is specifically approved for that
purpose by an appropriate legislative body.

The Funds may purchase municipal obligations under arrangements (called stand-
by commitments) where they can sell the securities at an agreed-upon price and
date under certain circumstances, and under arrangements (called when-issued
or forward-delivery basis) where the securities will not be delivered
immediately. The Funds will set aside the assets to pay for these securities
at the time of the agreement.

These Funds may concentrate in participation interests issued by banks and
other financial institutions and secured by bank letters of credit or
guarantees. This means that the Funds may invest more than 25% of their assets
in participation interests backed by banks. In a participation interest, the
bank sells undivided interests in a municipal obligation it owns. These
interests may be supported by a bank letter of credit or guarantee. The
interest rate generally is adjusted periodically, and the holder can sell back
to the issuer after a specified notice period. If interest rates rise or fall,
the rates on participation interests and other variable rate instruments
generally will be readjusted. As a result, these instruments do not offer the
same opportunity for capital appreciation or loss as fixed rate instruments.

Under normal market conditions, California Tax Free Reserves, Connecticut Tax
Free Reserves and New York Tax Free Reserves invest at least 65% of their
assets in municipal obligations that pay interest that is exempt from
California, Connecticut and New York taxes, respectively. When acceptable
municipal obligations of this type are not available, the Funds may invest in
municipal obligations that are not free from these state taxes. This would
cause the amount of each Fund's income that is subject to state tax to
increase.

Each Tax Free Fund may also invest in taxable money market instruments,
particularly if the after-tax return on those securities is greater than the
return on municipal money market instruments. The Funds' taxable investments
will be comparable in quality to their municipal investments. Under normal
circumstances, not more than 20% of a Tax Free Fund's assets are invested in
taxable instruments. Except for its policy to invest in municipal obligations,
each Tax Free Fund's investment goals and policies may be changed without a
shareholder vote.

DEFENSIVE STRATEGIES. The Tax Free Funds may, from time to time, take
temporary defensive positions that are inconsistent with the Funds' principal
investment strategies in attempting to respond to adverse market, political or
other conditions. When doing so, the Funds may invest without limit in high
quality taxable money market instruments, and may not be pursuing their
investment objectives.

INVESTMENT STRUCTURE. Cash Reserves, U.S. Treasury Reserves and Tax Free
Reserves each invest in securities through an underlying mutual fund having
the same goals and strategies. The other Funds may use this structure in the
future. New York Tax Free Reserves will do so only if its shareholders agree.

MANAGEMENT STYLE. Managers of mutual funds use different styles when selecting
securities to purchase. Citibank's portfolio managers use a "top-down"
approach when selecting securities for these funds. When using a "top-down"
approach, the portfolio manager looks first at broad economic factors and
market conditions, such as prevailing and anticipated interest rates. On the
basis of those factors and conditions, the manager selects optimal interest
rates and chooses certain sectors or industries within the overall market. The
manager then looks at individual companies within those sectors or industries
to select securities for the investment portfolio.

RISKS
Investing in a mutual fund involves risk, including the risk that you may
receive little or no return on your investment or even that you may lose part
or all of your investment. Before investing, you should consider the risks you
will assume. Certain of these risks are described below.

The risks of investing in each Fund vary depending on the securities it holds
and the investment practices it uses. Please remember that an investment in
the Funds is not a deposit of Citibank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. Although
each Fund seeks to preserve the value of your investment at $1.00 per share,
it is possible to lose money by investing in the Funds.

INTEREST RATE RISK. The Funds invest in short term money market instruments.
As a result, the amount of income paid to you by the Fund will go up or down
depending on day-to-day variations in short term interest rates. A major
change in interest rates could cause the value of your investment in the Fund,
as well as the yield on your investment, to decline.

CREDIT RISK. The Funds invest in high quality debt securities, meaning
securities that are rated, when the Funds buy them, in one of the two highest
short term rating categories by nationally recognized rating agencies or, in
Citibank's opinion, are of comparable quality. However, it is possible that
some issuers will be unable to make the required payments on debt securities
held by the Funds. Debt securities also fluctuate in value based on perceived
creditworthiness of issuers. A default on an investment held by a Fund, or a
significant decline in the value of a Fund investment, could cause the value
of your investment in the Fund to decline.

NON-U.S. SECURITIES. Investors in Cash Reserves should be aware that
investments in non-U.S. securities involve risks relating to political, social
and economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and non-U.S. issuers and
markets are subject. These risks may include expropriation of assets,
confiscatory taxation, withholding taxes on dividends and interest paid on
fund investments, currency exchange controls and other limitations on the use
or transfer of fund assets and political or social instability. In addition,
non-U.S. companies may not be subject to accounting standards or governmental
supervision comparable to U.S. companies, and there may be less public
information about their operations. Non-U.S. markets may be less liquid and
more volatile than U.S. markets. As a result, there may be rapid changes in
the value of non-U.S. securities. Non-U.S. markets also may offer less
protection to investors such as the Fund.

NON-DIVERSIFIED STATUS. Each of the Tax Free Funds is a non-diversified mutual
fund. This means that these Funds may invest a relatively high percentage of
their assets in the obligations of a limited number of issuers. Each Tax Free
Fund also may invest 25% or more of its assets in securities the issuers of
which are located in the same state, that derive interest from similar type
projects or that are otherwise related. As a result, many securities held by a
Fund may be adversely affected by a particular single economic, business,
regulatory or political event. You should consider the greater risk inherent
in these policies when compared with a more diversified mutual fund.

CONCENTRATION. Cash Reserves concentrates in bank obligations. Each of the Tax
Free Funds may concentrate in participation interests issued by banks and
secured by bank letters of credit or guarantees. This means that an investment
in Cash Reserves is, and an investment in the Tax Free Funds may be,
particularly susceptible to events affecting the banking industry. Banks are
highly regulated. Decisions by regulators may limit the loans banks make and
the interest rates and fees they charge, and may reduce bank profitability.
Bank also depend on being able to obtain funds at reasonable costs to finance
their lending operations. This makes them sensitive to changes in money market
and general economic conditions. When a bank's borrowers get in financial
trouble, their failure to repay the bank will also affect the bank's financial
situation.

RISKS AFFECTING INVESTMENTS IN STATE MUNICIPAL OBLIGATIONS. California Tax
Free Reserves, Connecticut Tax Free Reserves and New York Tax Free Reserves
invest a high percentage of their assets in municipal obligations of issuers
in California, Connecticut and New York, respectively. As a result, these
Funds are more exposed to events that adversely affect issuers in those
states, and these Funds have more risk than broadly diversified money market
funds.

You should be aware of special economic factors affecting California,
Connecticut and New York before investing. These factors are summarized in
FUNDS AT A GLANCE for California Tax Free Reserves, Connecticut Tax Free
Reserves and New York Tax Free Reserves. The Funds have obtained this
information from the issuers of California, Connecticut and New York municipal
obligations, and are not responsible for its accuracy or timeliness.

YEAR 2000. The Funds could be adversely affected if the computer systems used
by the Funds or their service providers are not programmed to process
information accurately on or after January 1, 2000. The Funds, and their
service providers, are making efforts to resolve any potential Year 2000
problems. While it is likely these efforts will be successful, the failure to
implement any necessary modifications could have an adverse impact on the
Funds. The Funds also could be adversely affected if the issuers of securities
held by the Funds do not solve their Year 2000 problems.

$1.00 NET ASSET VALUE. In order to maintain a $1.00 per share net asset value,
a Fund could reduce the number of its outstanding shares. The Fund could do
this if there were a default on, or significant decline in value of, an
investment held by the Fund. In these circumstances, each investor would be
treated as having made a pro rata capital contribution to the Fund. By
investing in a Fund, you agree to this capital contribution should it become
necessary.
<PAGE>

CITIFUNDS CASH RESERVES
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ....................... $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
Net investment income .......... 0.05050 0.04940 0.05039 0.05174 0.03137
Less dividends from net
investment income ............ (0.05050) (0.04940) (0.05039) (0.05174) (0.03137)
-------- -------- -------- -------- --------
Net asset value, end of period . $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's omitted) .............. $2,198,443 $1,827,181 $1,468,177 $931,886 $445,600
Ratio of expenses to average net
assets+ ...................... 0.70% 0.70% 0.69% 0.69% 0.69%
Ratio of net investment income
to average net assets+ ....... 5.05% 4.96% 5.02% 5.17% 3.12%
Total return ................... 5.17% 5.05% 5.16% 5.30% 3.18%

Note: If agents of the Fund and agents of Cash Reserves Portfolio had not waived all or a portion of their fees during the
periods indicated, the net investment income per share and the ratios would have been as follows:

Net investment income per share $0.04814 $0.04697 $0.04766 $0.04895 $0.02840
RATIOS:
Expenses to average net assets+ 0.94% 0.95% 0.96% 0.97% 0.99%
Net investment income to average
net assets+ .................. 4.81% 4.71% 4.75% 4.89% 2.82%

- ----------
+Includes the Fund's share of Cash Reserves Portfolio's allocated expenses.
</TABLE>
<PAGE>

CITIFUNDS U.S. TREASURY RESERVES
FINANCIAL HIGHLIGHTS -- CONTINUED

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..... $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
Net investment income .................... 0.04552 0.04547 0.04602 0.04751 0.02837
Less dividends from net investment income (0.04552) (0.04547) (0.04602) (0.04751) (0.02837)
-------- -------- -------- -------- --------
Net asset value, end of period ........... $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) $319,930 $360,717 $317,996 $256,452 $203,400
Ratio of expenses to average net assets+ . 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of net investment income to average
net assets+ ............................ 4.55% 4.57% 4.61% 4.77% 2.81%
Total return ............................. 4.65% 4.64% 4.70% 4.86% 2.87%

Note: If agents of the Fund and agents of U.S. Treasury Reserves Portfolio had not waived all or a portion of their fees during
the periods indicated, the net investment income per share and the ratios would have been as follows:

Net investment income per share .......... $0.04292 $0.04278 $0.04313 $0.04452 $0.02514
RATIOS:
Expenses to average net assets+ .......... 0.96% 0.97% 1.00% 1.00% 1.02%
Net investment income to average
net assets+ ............................ 4.29% 4.30% 4.32% 4.47% 2.49%

- ----------
+Includes the Fund's share of U.S. Treasury Reserves Portfolio's allocated expenses.
</TABLE>
<PAGE>

CITIFUNDS TAX FREE RESERVES
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..... $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
Net investment income .................... 0.03042 0.03004 0.02973 0.03197 0.02002
Less dividends from net investment income (0.03042) (0.03004) (0.02973) (0.03197) (0.02002)
-------- -------- -------- -------- --------
Net asset value, end of period ........... $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) $514,771 $422,483 $371,349 $392,172 $232,333
Ratio of expenses to average net assets+ . 0.65% 0.65% 0.65% 0.65% 0.65%
Ratio of net investment income to average
net assets+ ............................ 3.04% 3.01% 2.97% 3.22% 1.99%
Total return ............................. 3.08% 3.05% 3.01% 3.24% 2.02%

Note: If agents of the Fund and agents of Tax Free Reserves Portfolio had not waived all or a portion of their fees during the
periods indicated, the net investment income per share and the ratios would have been as follows:

Net investment income per share .......... $0.02782 $0.02715 $0.02693 $0.02929 $0.01730
RATIOS:
Expenses to average net assets+ .......... 0.92% 0.94% 0.93% 0.92% 0.92%
Net investment income to average
net assets+ ............................ 2.77% 2.72% 2.69% 2.95% 1.72%

- ----------
+Includes the Fund's share of Tax Free Reserves Portfolio's allocated expenses.
</TABLE>
<PAGE>

CITIFUNDS CALIFORNIA TAX FREE RESERVES
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..... $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
Net investment income .................... 0.02928 0.02899 0.03089 0.03434 0.02288
Less dividends from net investment income (0.02928) (0.02899) (0.03089) (0.03434) (0.02288)
-------- -------- -------- -------- --------
Net asset value, end of period ........... $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) $285,628 $207,345 $150,557 $ 51,832 $ 52,863
Ratio of expenses to average net assets .. 0.65% 0.65% 0.42% 0.30% 0.25%
Ratio of net investment income to average
net assets ............................. 2.92% 2.91% 3.05% 3.43% 2.30%
Total return ............................. 2.97% 2.94% 3.13% 3.49% 2.31%

Note: If agents of the Fund had not waived all or a portion of their fees from the Fund for the period indicated and the
Administrator had not voluntarily assumed expenses for the periods before August 31, 1996, and the expenses were not reduced for
the fees paid indirectly for the years after August 31, 1995, the ratios and net investment income per share would have been as
follows:

Net investment income per share .......... $0.02687 $0.02630 $0.02481 $0.02513 $0.01423
RATIOS:
Expenses to average net assets ........... 0.90% 0.92% 1.01% 1.21% 1.12%
Net investment income to average
net assets ............................. 2.67% 2.64% 2.45% 2.51% 1.43%
</TABLE>
<PAGE>

CITIFUNDS CONNECTICUT TAX FREE RESERVES
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 1, 1993
YEAR ENDED AUGUST 31, (COMMENCEMENT
------------------------------------------------------------------ OF OPERATIONS) TO
1998 1997 1996 1995 AUGUST 31, 1994
---- ---- ---- ---- ----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ........................ $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
Net investment income ........... 0.02971 0.02914 0.03135 0.03564 0.01754
Less dividends from net
investment income ............. (0.02971) (0.02914) (0.03135) (0.03564) (0.01754)
-------- -------- -------- -------- --------
Net asset value, end of period .. $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's
omitted) ...................... $156,552 $169,322 $116,025 $ 46,556 $ 15,949
Ratio of expenses to average net
assets(A) ..................... 0.66% 0.65% 0.42% 0.22% 0.00%*
Ratio of expenses to average net
assets after fees paid
indirectly(A) ................. 0.65% 0.65% 0.42% 0.22% 0.00%*
Ratio of net investment income to
average net assets ............ 2.98% 2.92% 3.08% 3.60% 2.61%*
Total return .................... 3.01% 2.95% 3.18% 3.62% 1.75%**

Note: If agents of the Fund had not voluntarily waived all or a portion of their fees from the Fund for the period indicated and
the Administrator had not voluntarily assumed expenses for the periods before August 31, 1996, and the expenses were not reduced
for the fees paid indirectly for the years after August 31, 1995, the ratios and net investment income per share would have been
as follows:

Net investment income per share . $0.02712 $0.02615 $0.02504 $0.02732 $0.00128
RATIOS:
Expenses to average net assets .. 0.91% 0.95% 1.04% 1.06% 2.42%*
Net investment income to average
net assets .................... 2.71% 2.62% 2.46% 2.76% 0.19%*

- ----------
* Annualized.
** Not annualized.

(A) The expense ratios for the year ended August 31, 1995 and the periods thereafter have been adjusted to reflect a change in
reporting requirements. The new report guidelines require the Fund to increase its expense ratio by the effect of any
expense offset arrangements with its service providers. The expense ratios for the period ended on August 31, 1995 have not
been adjusted to reflect this change.
</TABLE>

<PAGE>

<TABLE>
CITIFUNDS NEW YORK TAX FREE RESERVES
FINANCIAL HIGHLIGHTS -- CONTINUED
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ... $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
Net investment income .................. 0.02991 0.02949 0.02936 0.03136 0.01954
Dividends from net investment income ... (0.02991) (0.02949) (0.02936) (0.03136) (0.01954)
-------- -------- -------- -------- --------
Net asset value, end of period ......... $1.00000 $1.00000 $1.00000 $1.00000 $1.00000
======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's
omitted) ............................. $1,094,732 $976,959 $941,691 $767,129 $684,687
Ratio of expenses to average net assets 0.65% 0.65% 0.65% 0.65% 0.65%
Ratio of net investment income to
average net assets ................... 2.99% 2.95% 2.92% 3.15% 1.96%
Total return ........................... 3.03% 2.99% 2.98% 3.18% 1.97%

Note: If agents of the Fund had not voluntarily agreed to waive all or a portion of their fees for the periods indicated and the
expenses were not reduced for fees paid indirectly for the years after August 31, 1995, the net investment income per share and
ratios would have been as follows:

Net investment income per share ........ $0.02791 $0.02739 $0.02725 $0.02917 $0.01715
RATIOS:
Expenses to average net assets ......... 0.85% 0.86% 0.86% 0.87% 0.88%
Net investment income to average
net assets ........................... 2.79% 2.74% 2.71% 2.93% 1.72%
</TABLE>
<PAGE>

APPENDIX: Taxable Equivalent Yields
<TABLE>
<CAPTION>

TAXABLE INCOME* INCOME FEDERAL TAX-EXEMPT YIELD
- ------------------------------------------ TAX --------------------------------------------------------------------- FEDERAL
SINGLE 1998 JOINT 1998 BRACKET 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% RATE
- --------------------- ------------------- ------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 - $ 25,350 $0 - $ 42,350 0.15 2.35% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 0.15
$ 25,350 - $ 61,400 $ 42,350 - $102,300 0.28 2.78% 3.47% 4.17% 4.88% 5.58% 6.25% 6.94% 7.64% 8.33% 9.03% 0.28
$ 61,400 - $128,100 $102,300 - $155,950 0.31 2.90% 3.62% 4.35% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 0.31
$128,100 - $278,450 $155,950 - $278,450 0.36 3.13% 3.91% 4.69% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16% 0.36
$278,450 & Over $278,450 & Over 0.396 3.31% 4.14% 4.97% 5.79% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76% 0.396

*Net amount subject to Federal personal income tax after deductions and exemptions.

<CAPTION>
TAXABLE INCOME* INCOME CALIFORNIA TAX-EXEMPT YIELD
- ---------------------------------------- TAX -----------------------------------------------------------------------
SINGLE 1997***** JOINT 1997***** BRACKET** 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
- ---------------- ------------------ --------- ----- ----- ----- ----- ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 - $ 25,350 17.88% 2.44% 3.04% 3.65% 4.26% 4.87% 5.48% 6.09% 6.70% 7.31% 7.92%
$0 - $ 42,350 17.44% 2.42% 3.03% 3.63% 4.24% 4.84% 5.45% 6.06% 6.66% 7.27% 7.87%
$ 25,350 - $ 61,400 34.47% 3.05% 3.82% 4.58% 5.34% 6.10% 6.87% 7.63% 8.39% 9.16% 9.92%
$ 42,350 - $102,300 34.10% 3.03% 3.79% 4.55% 5.31% 6.07% 6.83% 7.59% 8.35% 9.10% 9.86%
$ 61,400 - $128,100 $102,300 - $155,950 37.42% 3.20% 3.99% 4.79% 5.59% 6.39% 7.19% 7.99% 8.79% 9.59% 10.39%
$128,100 - $278,450 $155,950 - $278,450 41.95% 3.45% 4.31% 5.17% 6.03% 6.89% 7.75% 8.61% 9.47% 10.34% 11.20%
$278,450 & Over $278,450 & Over 45.22% 3.65% 4.56% 5.48% 6.39% 7.30% 8.21% 9.13% 10.04% 10.95% 11.87%

TAXABLE INCOME* AVERAGE COMBINED
- ---------------------------------------- FEDERAL STATE FED. & ST.
SINGLE 1997***** JOINT 1997***** RATE RATE*** RATE****
- ---------------- ------------------- ------- -------- --------
<S> <C> <C> <C> <C>
$0 - $ 25,350 0.15 0.033840 0.1788
$0 - $ 42,350 0.15 0.028683 0.1744
$ 25,350 - $ 61,400 0.28 0.089886 0.3447
$ 42,350 - $102,300 0.28 0.084659 0.3410
$ 61,400 - $128,100 $102,300 - $155,950 0.31 0.093000 0.3742
$128,100 - $278,450 $155,950 - $278,450 0.36 0.093000 0.4195
$278,450 & Over $278,450 & Over 0.396 0.093000 0.4522

* Net amount subject to Federal and personal income tax after deductions and exemptions.
** Effective combined federal and state tax bracket.
*** State rate based on the average state rate for the federal tax bracket.
**** Combined Federal and California rate assumes itemization of state tax deduction.
***** California tax rates are based on 1997 information, since at this time 1998 information is not available.

TAXABLE INCOME* INCOME CONNECTICUT TAX-EXEMPT YIELD
-------------------------------------- TAX -----------------------------------------------------------------------
SINGLE 1997* JOINT 1997 BRACKET** 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
---------------- ------------------ --------- ----- ----- ----- ----- ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 - $ 25,350 18.45% 2.45% 3.07% 3.68% 4.29% 4.90% 5.52% 6.13% 6.74% 7.36% 7.97%
$0 - $ 42,350 18.37% 2.45% 3.06% 3.68% 4.29% 4.90% 5.51% 6.13% 6.74% 7.35% 7.96%
$ 25,350 - $ 61,400 $42,350 - $102,300 31.24% 2.91% 3.64% 4.36% 5.09% 5.82% 6.54% 7.27% 8.00% 8.73% 9.45%
$ 61,400 - $128,100 $102,300 - $155,950 34.11% 3.04% 3.79% 4.55% 5.31% 6.07% 6.83% 7.59% 8.35% 9.11% 9.86%
$128,100 - $278,450 $155,950 - $278,450 38.88% 3.27% 4.09% 4.91% 5.73% 6.54% 7.36% 8.18% 9.00% 9.82% 10.63%
$278,450 & Over $278,450 & Over 42.32% 3.47% 4.33% 5.20% 6.07% 6.93% 7.80% 8.67% 9.54% 10.40% 11.27%

TAXABLE INCOME* AVERAGE COMBINED
-------------------------------------- FEDERAL STATE FED. & ST.
SINGLE 1997* JOINT 1997 RATE RATE*** RATE****
---------------- ------------------ ------- -------- --------
<S> <C> <C> <C> <C>
$0 - $ 25,350 0.15 0.040561 0.1845
$0 - $ 42,350 0.15 0.039686 0.1837
$ 25,350 - $ 61,400 $42,350 - $102,300 0.28 0.045000 0.3124
$ 61,400 - $128,100 $102,300 - $155,950 0.31 0.045000 0.3411
$128,100 - $278,450 $155,950 - $278,450 0.36 0.045000 0.3888
$278,450 & Over $278,450 & Over 0.396 0.045000 0.4232

*Net amount subject to Federal and Connecticut personal income tax after deductions and exemptions.
**Effective combined federal and state tax bracket.
***State rate based on the average state rate for the federal tax bracket.
****Combined Federal and Connecticut rate assumes itemization of state tax deduction.

TAXABLE INCOME* INCOME NEW YORK TAX-EXEMPT YIELD
-------------------------------------- TAX -----------------------------------------------------------------------
SINGLE 1997* JOINT 1997 BRACKET** 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
---------------- ------------------ --------- ----- ----- ----- ----- ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

$0 - $ 25,350 19.49% 2.48% 3.11% 3.73% 4.35% 4.97% 5.59% 6.21% 6.83% 7.45% 8.07%
$0 - $ 42,350 19.23% 2.48% 3.10% 3.71% 4.33% 4.95% 5.57% 6.19% 6.81% 7.43% 8.05%
$ 25,350 - $ 61,400 $42,350 - $102,300 32.93% 2.98% 3.73% 4.47% 5.22% 5.96% 6.71% 7.45% 8.20% 8.95% 9.69%
$ 61,400 - $128,100 $102,300 - $155,950 35.73% 3.11% 3.89% 4.67% 5.45% 6.22% 7.00% 7.78% 8.56% 9.34% 10.11%
$128,100 - $278,450 $155,950 - $278,450 40.38% 3.35% 4.19% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.06% 10.90%
$278,450 & Over $278,450 & Over 43.74% 3.55% 4.44% 5.33% 6.22% 7.11% 8.00% 8.89% 9.78% 10.66% 11.55%

$0 - $ 25,350 0.15 0.052838 0.1949
$0 - $ 42,350 0.15 0.049751 0.1923
$ 25,350 - $ 61,400 $42,350 - $102,300 0.28 0.068500 0.3293
$ 61,400 - $128,100 $102,300 - $155,950 0.31 0.068500 0.3573
$128,100 - $278,450 $155,950 - $278,450 0.36 0.068500 0.4038
$278,450 & Over $278,450 & Over 0.396 0.068500 0.4374

*Net amount subject to Federal and New York personal income tax after deductions and exemptions.
**Effective combined federal and state tax bracket.
***State rate based on the average state rate for the federal tax bracket.
****Combined Federal and New York rate assumes itemization of state tax deduction.

TAXABLE INCOME* INCOME NEW YORK CITY TAX-EXEMPT YIELD
-------------------------------------- TAX -----------------------------------------------------------------------
SINGLE 1997* JOINT 1997 BRACKET** 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
---------------- ------------------ --------- ----- ----- ----- ----- ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 - $ 25,350 22.76% 2.59% 3.24% 3.88% 4.53% 5.18% 5.83% 6.47% 7.12% 7.77% 8.42%
$0 - $ 42,350 22.47% 2.58% 3.22% 3.87% 4.51% 5.16% 5.80% 6.45% 7.09% 7.74% 8.38%
$ 25,350 - $ 61,400 36.11% 3.13% 3.91% 4.70% 5.48% 6.26% 7.04% 7.83% 8.61% 9.39% 10.17%
$42,350 - $102,300 36.11% 3.13% 3.91% 4.70% 5.48% 6.26% 7.04% 7.83% 8.61% 9.39% 10.17%
$ 61,400 - $128,100 $102,300 - $155,950 38.80% 3.27% 4.08% 4.90% 5.72% 6.54% 7.35% 8.17% 8.99% 9.80% 10.62%
$128,100 - $278,450 $155,950 - $278,450 43.24% 3.52% 4.40% 5.29% 6.17% 7.05% 7.93% 8.81% 9.69% 10.57% 11.45%
$278,450 & Over $278,450 & Over 46.43% 3.73% 4.67% 5.80% 6.53% 7.47% 8.40% 9.33% 10.27% 11.20% 12.13%

COMBINED
TAXABLE INCOME* AVERAGE AVERAGE AVERAGE AVERAGE COMBINED FED., ST.
-------------------------------------- FEDERAL STATE CITY NYC SUR- ADD'L SUR- ST. & CITY & CITY
SINGLE 1997* JOINT 1997 RATE RATE*** RATE**** CHARGE**** CHARGE**** RATE RATE*****
---------------- ------------------ ------- -------- ------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$0 - $ 25,350 0.15 0.052838 0.030167 0.003568 0.004723 0.091295 0.2276
$0 - $ 42,350 0.15 0.049751 0.029939 0.003511 0.004683 0.087884 0.2247
$ 25,350 - $ 61,400 0.28 0.088500 0.033858 0.005100 0.005426 0.112684 0.3611
$42,350 - $102,300 0.28 0.088500 0.033580 0.005118 0.005418 0.112616 0.3611
$ 61,400 - $128,100 $102,300 - $155,950 0.31 0.068500 0.034000 0.005100 0.005474 0.113074 0.3680
$128,100 - $278,450 $155,950 - $278,450 0.36 0.068500 0.034000 0.005100 0.005474 0.113074 0.4324
$278,450 & Over $278,450 & Over 0.396 0.068500 0.034000 0.005100 0.005474 0.113074 0.4643

*Net amount subject to Federal and New York personal income tax after deductions and exemptions.
**Effective combined federal, state and city tax bracket.
***State rate based on the average state rate for the federal tax bracket.
****City rate based on the average city rate for the federal tax bracket.
*****Combined Federal, New York State and New York City rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>

The Statement of Additional Information (SAl) provides more details about the
Funds and their policies. The SAl is incorporated by reference into this
Prospectus and is legally part of it.

The Annual and Semi-Annual Reports for each Fund list portfolio holdings and
describe fund performance.

To obtain free copies of the SAl and the Annual and Semi-Annual Reports or to
make other inquiries, please call 1-800-625-4554 toll-free, or your account
representative.

The SAI is also available from the Securities and Exchange Commission. You can
find it on the SEC Internet site at http://www.sec.gov. Information about the
Fund (including the SAI) can also be reviewed and copied at the SEC's Public
Reference Room in Washington, DC. You can get information on the operation of
the Public Reference Room by calling the SEC at: 1-800-SEC-0330. You can
receive copies of this information by sending your request and a duplicating
fee to the SEC's Public Reference Section, Washington, DC 20549-6009.
<PAGE>

Statement of
Additional Information
January 4, 1999
CITIFUNDS(SM) CASH RESERVES
CITIFUNDS(SM) U.S. TREASURY RESERVES
CITIFUNDS(SM) TAX FREE RESERVES
CITIFUNDS(SM) CALIFORNIA TAX FREE RESERVES
CITIFUNDS(SM) CONNECTICUT TAX FREE RESERVES
CITIFUNDS(SM) NEW YORK TAX FREE RESERVES

This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the
Prospectus, dated January 4, 1999, for CitiFunds(SM) Cash Reserves ("Cash
Reserves"), CitiFunds(SM) U.S. Treasury Reserves ("U.S. Treasury Reserves"),
CitiFunds (SM) Tax Free Reserves ("Tax Free Reserves"), CitiFunds(SM) California
Tax Free Reserves ("California Tax Free Reserves"), CitiFunds(SM) Connecticut
Tax Free Reserves ("Connecticut Tax Free Reserves") and CitiFunds(SM) New York
Tax Free Reserves ("New York Tax Free Reserves") (the foregoing, collectively,
the "Funds"). This Statement of Additional Information should be read in
conjunction with the Prospectus, a copy of which may be obtained by an investor
without charge by contacting the Funds' Distributor (see back cover for address
and phone number).

Cash Reserves and U.S. Treasury Reserves are separate series of CitiFunds
(SM) Trust III. California Tax Free Reserves, Connecticut Tax Free Reserves and
New York Tax Free Reserves are separate series of CitiFunds(SM) Multi-State Tax
Free Trust. The address and telephone number of CitiFunds Trust III, CitiFunds
Multi-State Tax Free Trust and Tax Free Reserves (collectively, the "Trusts")
are 21 Milk Street, Boston, Massachusetts 02109, (617) 423-1679.

CitiFunds Trust III invests all of the investable assets of Cash Reserves
and U.S. Treasury Reserves in Cash Reserves Portfolio and U.S. Treasury Reserves
Portfolio, respectively. Tax Free Reserves invests all of its investable assets
in Tax Free Reserves Portfolio (collectively, with Cash Reserves Portfolio and
U.S. Treasury Reserves Portfolio, the "Portfolios"). The address and telephone
number of Cash Reserves Portfolio are Elizabethan Square, George Town, Grand
Cayman, British West Indies, (345) 945-1824. The address and telephone number of
U.S. Treasury Reserves Portfolio and Tax Free Reserves Portfolio are 21 Milk
Street, Boston, Massachusetts 02109, (617) 423-1679.

FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, CITIBANK, N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.

Table of Contents Page

1. The Funds.................................................... 2
2. Investment Objectives, Policies and Restrictions............. 3
3. Performance Information...................................... 25
4. Determination of Net Asset Value............................. 28
5. Management................................................... 29
6. Portfolio Transactions....................................... 38
7. Description of Shares, Voting Rights and Liabilities......... 39
8. Certain Additional Tax Matters............................... 41
9. Independent Accountants and Financial Statements............. 41
10. Appendix A -Ratings of Municipal Obligations................. A-1
11. Appendix B - Additional Information Concerning California
Municipal Obligations...................................... B-1
12. Appendix C - Additional Information Concerning Connecticut
Municipal Obligations...................................... C-1
13. Appendix D - Additional Information Concerning New York
Municipal Obligations...................................... D-1

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.

<PAGE>

1. THE FUNDS

CitiFunds Trust III is a no-load, diversified, open-end management
investment company which was organized as a business trust under the laws of the
Commonwealth of Massachusetts on June 28, 1985 and is the successor to the
business of The Landmark Funds Cash Reserves, Inc., which was incorporated under
the laws of the State of Maryland in 1984. Shares of CitiFunds Trust III are
divided into two separate series, Cash Reserves and U.S. Treasury Reserves.
Prior to January 2, 1998, CitiFunds Trust III was called Landmark Funds III, and
Cash Reserves and U.S. Treasury Reserves were called Landmark Cash Reserves and
Landmark U.S. Treasury Reserves, respectively.

Tax Free Reserves is a no-load, non-diversified, open-end management
investment company which was organized as a business trust under the laws of the
Commonwealth of Massachusetts on June 21, 1985 and is the successor to the
business of The Landmark Funds Tax Free Reserves, Inc., which was incorporated
under the laws of the State of Maryland in 1983. Prior to January 2, 1998, Tax
Free Reserves was called Landmark Tax Free Reserves.

CitiFunds Multi-State Tax Free Trust is a no-load, non-diversified,
open-end management investment company which was organized as a business trust
under the laws of the Commonwealth of Massachusetts on August 30, 1985. Shares
of CitiFunds Multi-State Tax Free Trust are divided into three separate series,
California Tax Free Reserves, Connecticut Tax Free Reserves and New York Tax
Free Reserves. Prior to January 2, 1998 CitiFunds Multi-State Tax Free Trust was
called Landmark Multi-State Tax Free Funds, and California Tax Free Reserves,
Connecticut Tax Free Reserves and New York Tax Free Reserves were called
Landmark California Tax Free Reserves, Landmark Connecticut Tax Free Reserves
and Landmark New York Tax Free Reserves, respectively.

All references in this Statement of Additional Information to the
activities of the Trusts are intended to include those of the Trusts and their
respective predecessors, if any, unless the context indicates otherwise.
References in this Statement of Additional Information to the Prospectus are to
the Prospectus, dated January 4, 1999, of the Funds by which shares of the Funds
are offered.

Each of the Funds is a type of mutual fund called a "money market fund."
Tax Free Reserves is referred to as a "tax-exempt money market fund." Each of
California Tax Free Reserves and Connecticut Tax Free Reserves is a type of fund
commonly referred to as a "double tax-exempt money market fund," and New York
Tax Free Reserves is a type of fund commonly referred to as a "triple tax-exempt
money market fund." The net asset value of each Fund's shares is expected to
remain constant at $1.00, although there can be no assurance that this will be
so on a continuing basis. (See "Determination of Net Asset Value.")

Each of Tax Free Reserves, California Tax Free Reserves, Connecticut
Tax Free Reserves and New York Tax Free Reserves is referred to as a "Tax
Free Fund." Each Tax Free Fund is non-diversified.

CitiFunds Trust III seeks the investment objectives of Cash Reserves and
U.S. Treasury Reserves by investing all of their investable assets in Cash
Reserves Portfolio and U.S. Treasury Reserves Portfolio, respectively. Tax Free
Reserves seeks its investment objectives by investing all of its investable
assets in Tax Free Reserves Portfolio. Each of Cash Reserves Portfolio and U.S.
Treasury Reserves Portfolio is a diversified, open-end management investment
company. Tax Free Reserves Portfolio is a non-diversified, open-end management
investment company. Each Portfolio has the same investment objectives and
policies as its corresponding Fund.

The Trustees of CitiFunds Trust III and Tax Free Reserves believe that the
aggregate per share expenses of Cash Reserves, U.S. Treasury Reserves and Tax
Free Reserves and their corresponding Portfolios will be less than or
approximately equal to the expenses that the Fund would incur if the assets of
the Fund were invested directly in the types of securities held by its
Portfolio. Each Fund many withdraw its investment in its Portfolio at any time,
and will do so if the Fund's Trustees believe it to be in the best interest of
the Fund's shareholders. If a Fund were to withdraw its investment in its
Portfolio, the Fund could either invest directly in securities in accordance
with the investment policies described below or invest in another mutual fund or
pooled investment vehicle having the same investment objectives and policies. If
a Fund were to withdraw, the Fund could receive securities from the Portfolio
instead of cash, causing the Fund to incur brokerage, tax and other charges or
leaving it with securities which may or may not be readily marketable or widely
diversified.

Each Portfolio may change its investment objective and certain of its
investment policies and restrictions without approval by its investors, but a
Portfolio will notify its corresponding Fund (which in turn will notify its
shareholders) and its other investors at least 30 days before implementing any
change in its investment objective. A change in investment objective, policies
or restrictions may cause a Fund to withdraw its investment in its Portfolio.

The Portfolios, as New York trusts, are not required to hold and have no
intention of holding annual meetings of investors. However, when a Portfolio is
required to do so by law, or in the judgment of Trustees it is necessary or
desirable to do so, the Portfolio will submit matters to its investors for a
vote. When a Fund is asked to vote on matters concerning its corresponding
Portfolio (other than a vote to continue the Portfolio following the withdrawal
of an investor), the Fund will hold a shareholder meeting and vote in accordance
with shareholder instructions, or otherwise act in accordance with applicable
law. Of course, the Fund could be outvoted, or otherwise adversely affected, by
other investors in the Portfolio.

The Portfolios may sell interests to investors in addition to the Funds.
These investors may be mutual funds which offer shares to their shareholders
with different costs and expenses than the Funds. Therefore, the investment
returns for all investors in funds investing in a Portfolio may not be the same.
These differences in returns are also present in other mutual fund structures.

Information about other holders of interests in the Portfolios is
available from the Funds' distributor, CFBDS, Inc. ("CFBDS") (21 Milk Street,
Boston, Massachusetts 02109, (617) 423-1679).

Citibank, N.A. ("Citibank" or the "Adviser") is the investment adviser to
each of the Portfolios and to CitiFunds Multi-State Tax Free Trust. The Adviser
manages the investments of each Portfolio, California Tax Free Reserves,
Connecticut Tax Free Reserves and New York Tax Free Reserves from day to day in
accordance with the investment objectives and policies of that Portfolio or
Fund. The selection of investments for each Portfolio and Fund, and the way they
are managed, depend on the conditions and trends in the economy and the
financial marketplaces.

CFBDS, the Funds' administrator (the "Administrator"), supervises the
overall administration of the Trusts, U.S. Treasury Reserves Portfolio and
Tax Free Reserves Portfolio. Signature Financial Group (Cayman) Ltd. ("SFG")
supervises the overall administration of Cash Reserves Portfolio. The Boards
of Trustees of the Trusts and the Portfolios provide broad supervision over
the affairs of the Trusts and of the Portfolios, respectively.

Shares of each Fund are continuously sold by CFBDS, the Funds' distributor
(the "Distributor"), only to investors who are customers of a financial
institution, such as a federal or state-chartered bank, trust company, savings
and loan association or savings bank, or a securities broker, that has entered
into a shareholder servicing agreement with the appropriate Trust with respect
to that Fund (collectively, "Shareholder Servicing Agents"). Although shares of
the Funds are sold without a sales load, CFBDS may receive fees from the Funds
pursuant to Distribution Plans adopted in accordance with Rule 12b-1 under the
Investment Company Act of 1940, as amended (the "1940 Act").

2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS

INVESTMENT OBJECTIVES

The investment objective of CASH RESERVES is to provide shareholders with
liquidity and as high a level of current income as is consistent with
preservation of capital.

The investment objective of U.S. TREASURY RESERVES is to provide its
shareholders with liquidity and as high a level of current income from U.S.
government obligations as is consistent with the preservation of capital.

The investment objectives of TAX FREE RESERVES are to provide its
shareholders with high levels of current income exempt from federal income
taxes, preservation of capital and liquidity.

The investment objectives of CALIFORNIA TAX FREE RESERVES are to provide
shareholders with high levels of current income exempt from both federal and
California personal income taxes, preservation of capital and liquidity.

The investment objectives of CONNECTICUT TAX FREE RESERVES are to provide
its shareholders with high levels of current income exempt from both federal and
Connecticut personal income taxes, preservation of capital and liquidity.

The investment objectives of NEW YORK TAX FREE RESERVES are to provide its
shareholders with high levels of current income exempt from federal, New York
State and New York City personal income taxes, preservation of capital and
liquidity.

The investment objectives of each Fund may be changed without approval by
that Fund's shareholders. Of course, there can be no assurance that any Fund
will achieve its investment objectives.

INVESTMENT POLICIES

CitiFunds Trust III seeks the investment objectives of its series by
investing all of the investable assets of Cash Reserves and U.S. Treasury
Reserves in Cash Reserves Portfolio and U.S. Treasury Reserves Portfolio,
respectively. Tax Free Reserves seeks its investment objectives by investing all
of its investable assets in Tax Free Reserves Portfolio. Each Portfolio has the
same investment objectives and policies as its corresponding Fund. The
Prospectus contains a discussion of the principal investment strategies of each
Fund and certain risks of investing in each Fund. The following supplements the
information contained in the Prospectus concerning the investment objectives,
policies and techniques of each Fund and Portfolio, and contains more
information about the various types of securities in which each Fund and each
Portfolio may invest and the risks involved in such investments. Since the
investment characteristics of Cash Reserves, U.S. Treasury Reserves and Tax Free
Reserves will correspond directly to those of the Portfolio in which it invests,
the following is a supplementary discussion with respect to each Portfolio.

Each of Cash Reserves, U.S. Treasury Reserves and Tax Free Reserves may
withdraw its investment from its corresponding Portfolio at any time, if the
Board of Trustees of the applicable Trust determines that it is in the best
interests of the Fund to do so. Upon any such withdrawal, a Fund's assets would
be invested in accordance with the investment policies described below with
respect to its corresponding Portfolio. Except for the concentration policy of
Cash Reserves with respect to bank obligations described in paragraph (1) below
and for the policy of each of the Tax Free Funds with respect to investing in
municipal obligations described below, which may not be changed without the
approval of Cash Reserves' or the applicable Tax Free Fund's shareholders, the
approval of a Fund's shareholders would not be required to change that Fund's
investment objectives or any of its investment policies. Likewise, except for
the concentration policy of Cash Reserves Portfolio with respect to bank
obligations described in paragraph (1) below and for the policy of Tax Free
Reserves Portfolio with respect to investing in municipal obligations described
below, which may not be changed without the approval of Cash Reserves
Portfolio's or Tax Free Reserves Portfolio's investors, as applicable, the
approval of the investors in a Portfolio would not be required to change that
Portfolio's investment objectives or any of its investment policies discussed
below, including those concerning securities transactions. Each Portfolio would,
however, give written notice to its investors at least 30 days prior to
implementing any change in its investment objectives.

CASH RESERVES PORTFOLIO

Cash Reserves Portfolio seeks its investment objective through investments
limited to the following types of high quality U.S. dollar-denominated money
market instruments. All investments by Cash Reserves Portfolio mature or are
deemed to mature within 397 days from the date of acquisition, and the average
maturity of the investments held by the Portfolio (on a dollar-weighted basis)
is 90 days or less. All investments by the Portfolio are in "first tier"
securities (i.e., securities rated in the highest rating category for short-term
obligations by at least two nationally recognized statistical rating
organizations (each, an "NRSRO") assigning a rating to the security or issuer
or, if only one NRSRO assigns a rating, that NRSRO or, in the case of an
investment which is not rated, of comparable quality as determined by the
Adviser) and are determined by the Adviser to present minimal credit risks.
Investments in high quality, short term instruments may, in many circumstances,
result in a lower yield than would be available from investments in instruments
with a lower quality or a longer term. Cash Reserves Portfolio may hold
uninvested cash reserves pending investment. Under the 1940 Act, Cash Reserves
and Cash Reserves Portfolio are each classified as "diversified," although in
the case of Cash Reserves, all of its investable assets are invested in the
Portfolio. A "diversified investment company" must invest at least 75% of its
assets in cash and cash items, U.S. government securities, investment company
securities (e.g., interests in the Portfolio) and other securities limited as to
any one issuer to not more than 5% of the total assets of the investment company
and not more than 10% of the voting securities of the issuer.

(1) Bank obligations -- Cash Reserves Portfolio invests at least
25% of its investable assets, and may invest up to 100% of its assets, in
bank obligations. This concentration policy is fundamental and may not be
changed without the approval of the investors in Cash Reserves Portfolio.
Bank obligations include, but are not limited to, negotiable certificates
of deposit, bankers' acceptances and fixed time deposits. Cash Reserves
Portfolio limits its investments in U.S. bank obligations (including
their non-U.S. branches) to banks having total assets in excess of $1
billion and which are subject to regulation by an agency of the U.S.
government. The Portfolio may also invest in certificates of deposit
issued by banks the deposits in which are insured by the Federal Deposit
Insurance Corporation ("FDIC"), through either the Bank Insurance Fund or
the Savings Association Insurance Fund, having total assets of less than
$1 billion, provided that the Portfolio at no time owns more than
$100,000 principal amount of certificates of deposit (or any higher
principal amount which in the future may be fully insured by FDIC
insurance) of any one of those issuers. Fixed time deposits are
obligations which are payable at a stated maturity date and bear a fixed
rate of interest. Generally, fixed time deposits may be withdrawn on
demand by the Portfolio, but they may be subject to early withdrawal
penalties which vary depending upon market conditions and the remaining
maturity of the obligation. Although fixed time deposits do not have a
market, there are no contractual restrictions on the Portfolio's right to
transfer a beneficial interest in the deposit to a third party.

U.S. banks organized under federal law are supervised and
examined by the Comptroller of the Currency and are required to be
members of the Federal Reserve System and to be insured by the FDIC.
U.S. banks organized under state law are supervised and examined by
state banking authorities and are members of the Federal Reserve
System only if they elect to join. However, state banks which are
insured by the FDIC are subject to federal examination and to a
substantial body of federal law and regulation. As a result of
federal and state laws and regulations, U.S. branches of U.S. banks,
among other things, are generally required to maintain specified
levels of reserves, and are subject to other supervision and
regulation designed to promote financial soundness.

Cash Reserves Portfolio limits its investments in non-U.S. bank
obligations (i.e., obligations of non-U.S. branches and subsidiaries
of U.S. banks, and U.S. and non-U.S. branches of non-U.S. banks) to
U.S. dollar-denominated obligations of banks which at the time of
investment are branches or subsidiaries of U.S. banks which meet the
criteria in the preceding paragraphs or are branches of non-U.S. banks
which (i) have more than $10 billion, or the equivalent in other
currencies, in total assets; (ii) in terms of assets are among the 75
largest non-U.S. banks in the world; (iii) have branches or agencies
in the United States; and (iv) in the opinion of the Adviser, are of
an investment quality comparable with obligations of U.S. banks which
may be purchased by the Portfolio. These obligations may be general
obligations of the parent bank, in addition to the issuing branch or
subsidiary, but the parent bank's obligations may be limited by the
terms of the specific obligation or by governmental regulation. The
Portfolio also limits its investments in non-U.S. bank obligations to
banks, branches and subsidiaries located in Western Europe (United
Kingdom, France, Germany, Belgium, the Netherlands, Italy,
Switzerland, Denmark, Norway, Sweden), Australia, Japan, the Cayman
Islands, the Bahamas and Canada. Cash Reserves Portfolio does not
purchase any bank obligation of the Adviser or an affiliate of the
Adviser.

Since Cash Reserves Portfolio may hold obligations of non-U.S.
branches and subsidiaries of U.S. banks, and U.S. and non-U.S.
branches of non-U.S. banks, an investment in Cash Reserves involves
certain additional risks. Such investment risks include future
political and economic developments, the possible imposition of
non-U.S. withholding taxes on interest income payable on such
obligations held by the Portfolio, the possible seizure or
nationalization of non-U.S. deposits and the possible establishment of
exchange controls or other non-U.S. governmental laws or restrictions
applicable to the payment of the principal of and interest on
certificates of deposit or time deposits that might affect adversely
such payment on such obligations held by the Portfolio. In addition,
there may be less publicly-available information about a non-U.S.
branch or subsidiary of a U.S. bank or a U.S. or non-U.S. branch of a
non-U.S. bank than about a U.S. bank and such branches and
subsidiaries may not be subject to the same or similar regulatory
requirements that apply to U.S. banks, such as mandatory reserve
requirements, loan limitations and accounting, auditing and financial
record-keeping standards and requirements.

The provisions of federal law governing the establishment and
operation of U.S. branches do not apply to non-U.S. branches of U.S.
banks. However, Cash Reserves Portfolio may purchase obligations only
of those non-U.S. branches of U.S. banks which were established with
the approval of the Board of Governors of the Federal Reserve System
(the "Board of Governors"). As a result of such approval, these
branches are subject to examination by the Board of Governors and the
Comptroller of the Currency. In addition, such non-U.S. branches of
U.S. banks are subject to the supervision of the U.S. bank and
creditors of the non-U.S. branch are considered general creditors of
the U.S. bank subject to whatever defenses may be available under the
governing non-U.S. law and to the terms of the specific obligation.
Nonetheless, Cash Reserves Portfolio generally will be subject to
whatever risk may exist that the non-U.S. country may impose
restrictions on payment of certificates of deposit or time deposits.

U.S. branches of non-U.S. banks are subject to the laws of the
state in which the branch is located or to the laws of the United
States. Such branches are therefore subject to many of the
regulations, including reserve requirements, to which U.S. banks are
subject. In addition, Cash Reserves Portfolio may purchase
obligations only of those U.S. branches of non-U.S. banks which are
located in states which impose the additional requirement that the
branch pledge to a designated bank within the state an amount of its
assets equal to 5% of its total liabilities.

Non-U.S. banks in whose obligations Cash Reserves Portfolio may
invest may not be subject to the laws and regulations referred to in
the preceding two paragraphs.

(2) Obligations of, or guaranteed by, non-U.S. governments. Cash
Reserves Portfolio limits its investments in non-U.S. government
obligations to obligations issued or guaranteed by the governments of
Western Europe (United Kingdom, France, Germany, Belgium, the
Netherlands, Italy, Switzerland, Denmark, Norway, Sweden), Australia,
Japan and Canada. Generally, such obligations may be subject to the
additional risks described in paragraph (1) above in connection with the
purchase of non-U.S. bank obligations.

(3) Commercial paper rated Prime-1 by Moody's Investors Service,
Inc. ("Moody's") or A-1 by Standard & Poor's Ratings Group ("Standard &
Poor's") or, if not rated, determined to be of comparable quality by the
Adviser, such as unrated commercial paper issued by corporations having
an outstanding unsecured debt issue currently rated Aaa by Moody's or AAA
by Standard & Poor's. Commercial paper is unsecured debt of corporations
usually maturing in 270 days or less from its date of issuance.

(4) Obligations of, or guaranteed by, the U.S. government, its
agencies or instrumentalities. These include issues of the U.S. Treasury,
such as bills, certificates of indebtedness, notes, bonds and Treasury
Receipts, which are unmatured interest coupons of U.S. Treasury bonds and
notes which have been separated and resold in a custodial receipt program
administered by the U.S. Treasury, and issues of agencies and
instrumentalities established under the authority of an Act of Congress.
Some of the latter category of obligations are supported by the full
faith and credit of the United States, others are supported by the right
of the issuer to borrow from the U.S. Treasury, and still others are
supported only by the credit of the agency or instrumentality. Examples
of each of the three types of obligations described in the preceding
sentence are (i) obligations guaranteed by the Export-Import Bank of the
United States, (ii) obligations of the Federal Home Loan Mortgage
Corporation, and (iii) obligations of the Student Loan Marketing
Association, respectively.

(5) Repurchase agreements, providing for resale within 397 days or
less, covering obligations of, or guaranteed by, the U.S. government, its
agencies or instrumentalities which may have maturities in excess of 397
days. A repurchase agreement arises when a buyer purchases an obligation
and simultaneously agrees with the vendor to resell the obligation to the
vendor at an agreed-upon price and time, which is usually not more than
seven days from the date of purchase. The resale price of a repurchase
agreement is greater than the purchase price, reflecting an agreed-upon
market rate which is effective for the period of time the buyer's funds
are invested in the obligation and which is not related to the coupon
rate on the purchased obligation. Obligations serving as collateral for
each repurchase agreement are delivered to the Portfolio's custodian
either physically or in book entry form and the collateral is marked to
the market daily to ensure that each repurchase agreement is fully
collateralized at all times. A buyer of a repurchase agreement runs a
risk of loss if, at the time of default by the issuer, the value of the
collateral securing the agreement is less than the price paid for the
repurchase agreement. If the vendor of a repurchase agreement becomes
bankrupt, Cash Reserves Portfolio might be delayed, or may incur costs or
possible losses of principal and income, in selling the collateral. The
Portfolio may enter into repurchase agreements only with a vendor which
is a member bank of the Federal Reserve System or which is a "primary
dealer" (as designated by the Federal Reserve Bank of New York) in U.S.
government obligations. The Portfolio will not enter into any repurchase
agreements with the Adviser or an affiliate of the Adviser. The
restrictions and procedures described above which govern the Portfolio's
investment in repurchase agreements are designed to minimize the
Portfolio's risk of losses in making those investments. (See "Repurchase
Agreements.")

(6) Asset-backed securities, which may include securities such as
Certificates for Automobile Receivables ("CARS") and Credit Card
Receivable Securities ("CARDS"), as well as other asset-backed securities
that may be developed in the future. CARS represent fractional interests
in pools of car installment loans, and CARDS represent fractional
interests in pools of revolving credit card receivables. The rate of
return on asset-backed securities may be affected by early prepayment of
principal on the underlying loans or receivables. Prepayment rates vary
widely and may be affected by changes in market interest rates. It is not
possible to accurately predict the average life of a particular pool of
loans or receivables. Reinvestment of principal may occur at higher or
lower rates than the original yield. Therefore, the actual maturity and
realized yield on asset-backed securities will vary based upon the
prepayment experience of the underlying pool of loans or receivables.
(See "Asset-Backed Securities.")

Cash Reserves Portfolio does not purchase securities which the Portfolio
believes, at the time of purchase, will be subject to exchange controls or
non-U.S. withholding taxes; however, there can be no assurance that such laws
may not become applicable to certain of the Portfolio's investments. In the
event exchange controls or non-U.S. withholding taxes are imposed with respect
to any of the Portfolio's investments, the effect may be to reduce the income
received by the Portfolio on such investments or to prevent the Portfolio from
receiving any value in U.S. dollars from its investment in non-U.S. securities.

ASSET-BACKED SECURITIES
As set forth above, Cash Reserves Portfolio may purchase asset-backed
securities that represent fractional interests in pools of retail installment
loans, both secured (such as CARS) and unsecured, or leases or revolving credit
receivables, both secured and unsecured (such as CARDS). These assets are
generally held by a trust and payments of principal and interest or interest
only are passed through monthly or quarterly to certificate holders and may be
guaranteed up to certain amounts by letters of credit issued by a financial
institution affiliated or unaffiliated with the trustee or originator of the
trust.

Underlying automobile sales contracts, leases or credit card receivables
are subject to prepayment, which may reduce the overall return to certificate
holders. Nevertheless, principal repayment rates tend not to vary much with
interest rates and the short-term nature of the underlying loans, leases or
receivables tends to dampen the impact of any change in the prepayment level.
Reinvestment of principal may occur at higher or lower rates than the original
yield. Certificate holders may also experience delays in payment on the
certificates if the full amounts due on underlying loans, leases or receivables
are not realized by the Portfolio because of unanticipated legal or
administrative costs of enforcing the contracts or because of depreciation or
damage to the collateral (usually automobiles) securing certain contracts, or
other factors. If consistent with its investment objectives and policies, Cash
Reserves Portfolio may invest in other asset-backed securities that may be
developed in the future.

U.S. TREASURY RESERVES PORTFOLIO

U.S. Treasury Reserves Portfolio seeks its investment objective by
investing in obligations of, or guaranteed by, the U.S. government, its agencies
or instrumentalities including issues of the U.S. Treasury, such as bills,
certificates of indebtedness, notes, bonds and Treasury Receipts, which are
unmatured interest coupons of U.S. Treasury bonds and notes which have been
separated and resold in a custodial receipt program administered by the U.S.
Treasury, and in issues of agencies and instrumentalities established under the
authority of an Act of Congress which are supported by the full faith and credit
of the United States. U.S. Treasury Reserves Portfolio will not enter into
repurchase agreements. All investments by the Portfolio are in "first tier"
securities (i.e., securities rated in the highest rating category for short-term
obligations by at least two NRSRO's assigning a rating to the security or issuer
or, if only one NRSRO assigns a rating, that NRSRO or, in the case of an
investment which is not rated, of comparable quality as determined by the
Adviser) and are determined by the Adviser to present minimal credit risks.
Investments in high quality, short term instruments may, in many circumstances,
result in a lower yield than would be available from investments in instruments
with a lower quality or a longer term. U.S. Treasury Reserves Portfolio may hold
uninvested cash reserves pending investment.

THE TAX FREE FUNDS

TAX FREE RESERVES PORTFOLIO
Tax Free Reserves Portfolio seeks its investment objectives by investing
primarily in short-term, high quality fixed rate and variable rate obligations
issued by or on behalf of states and municipal governments, and their
authorities, agencies, instrumentalities and political subdivisions and other
qualifying issuers, the interest on which is exempt from federal income taxes,
including participation interests in such obligations issued by banks, insurance
companies or other financial institutions. (These securities, whether or not the
interest thereon is subject to the federal alternative minimum tax, are referred
to herein as "Municipal Obligations.") In determining the tax status of interest
on Municipal Obligations, the Adviser relies on opinions of bond counsel who may
be counsel to the issuer. Although the Portfolio will attempt to invest 100% of
its assets in Municipal Obligations, the Portfolio reserves the right to invest
up to 20% of its total assets in securities the interest income on which is
subject to federal, state and local income tax or the federal alternative
minimum tax. The Portfolio invests more than 25% of its assets in participation
certificates issued by banks in industrial development bonds and other Municipal
Obligations. In view of this "concentration" in bank participation certificates,
an investment in Tax Free Reserves shares should be made with an understanding
of the characteristics of the banking industry and the risks which such an
investment may entail. (See "Variable Rate Instruments and Participation
Interests" below.) Tax Free Reserves Portfolio may hold uninvested cash reserves
pending investment. Tax Free Reserves Portfolio's investments may include "when-
issued" or "forward delivery" Municipal Obligations, stand-by commitments and
taxable repurchase agreements.

Tax Free Reserves Portfolio may invest 25% or more of its assets in
securities that are related in such a way that an economic, business or
political development or change affecting one of the securities would also
affect the other securities including, for example, securities the interest upon
which is paid from revenues of similar type projects, or securities the issuers
of which are located in the same state.

All investments by Tax Free Reserves Portfolio mature or are deemed to
mature within 397 days from the date of acquisition and the average maturity of
the Portfolio's securities (on a dollar-weighted basis) is 90 days or less. The
maturities of variable rate instruments held by Tax Free Reserves Portfolio are
deemed to be the longer of the notice period, or the period remaining until the
next interest rate adjustment, although the stated maturities may be in excess
of 397 days. (See "Variable Rate Instruments and Participation Interests"
below.) All investments by Tax Free Reserves Portfolio are "eligible
securities," that is, rated in one of the two highest rating categories for
short-term obligations by at least two NRSRO's assigning a rating to the
security or issuer or, if only one NRSRO assigns a rating, that NRSRO, or, in
the case of an investment which is not rated, of comparable quality as
determined by or on behalf of Tax Free Reserves Portfolio's Board of Trustees on
the basis of its credit evaluation of the obligor or of the bank issuing a
participation interest, letter of credit or guarantee, or insurance issued in
support of the Municipal Obligations or participation interests. (See "Variable
Rate Instruments and Participation Interests" below.) Such instruments may
produce a lower yield than would be available from less highly rated
instruments. Tax Free Reserves Portfolio's Board of Trustees has determined that
Municipal Obligations which are backed by the full faith and credit of the U.S.
government are considered to have a rating equivalent to Moody's Aaa. (See
"Ratings of Municipal Obligations" in Appendix A to this Statement of Additional
Information.)

The Portfolio's fundamental policy to invest at least 80% of its assets,
under normal circumstances, in certain Municipal Obligations is described below
in "Municipal Obligations."

CALIFORNIA TAX FREE RESERVES, CONNECTICUT TAX FREE RESERVES AND NEW YORK TAX
FREE RESERVES
Each of California Tax Free Reserves, Connecticut Tax Free Reserves and
New York Tax Free Reserves seeks its investment objectives by investing
primarily in short- term, high quality Municipal Obligations (as defined above).
Each Fund's fundamental policy to invest at least 80% of its assets, under
normal circumstances, in certain Municipal Obligations is described below in
"Municipal Obligations."

CitiFunds Multi-State Tax Free Trust's Board of Trustees has determined
that the term "high quality" means Municipal Obligations which at the time of
purchase are rated within the AAA or AA categories by Standard & Poor's or Fitch
IBCA, Inc. ("Fitch") or within the Aaa or Aa categories by Moody's in the case
of bonds; MIG 1/VMIG 1 or MIG 2/VMIG 2 by Moody's, SP-1+, SP-1 or SP-2 by
Standard & Poor's or F-1 or F-2 by Fitch in the case of notes; A-1+, A-1 or A-2
by Standard & Poor's or Prime-1, Prime-2 by Moody's or F-1 or F-2 by Fitch, in
the case of tax-exempt commercial paper; or which are unrated but are determined
to be of comparable quality by or on behalf of the Trust's Board of Trustees on
the basis of a credit evaluation of the obligor or of the bank issuing a
participation interest, letter of credit or guarantee, or insurance policy
issued in support of the Municipal Obligations or participation interests. (See
"Variable Rate Instruments and Participation Interests" below.) Such instruments
may produce a lower yield than would be available from less highly rated
instruments. The Trust's Board of Trustees has determined that Municipal
Obligations which are backed by the full faith and credit of the U.S. government
will be considered to have a rating equivalent to Moody's Aaa. (See Appendix A
to this Statement of Additional Information for an explanation of these rating
systems.)

In the case of California Tax Free Reserves, in general, dividends paid by
the Fund which are attributable to interest income on tax-exempt obligations of
the State of California and its political subdivisions, of Puerto Rico, other
U.S. territories and their political subdivisions and of other qualifying
issuers ("California Municipal Obligations"), will be exempt from federal and
California personal income taxes. For Connecticut Tax Free Reserves, dividends
paid by the Fund which are treated as exempt-interest dividends for federal
income tax purposes, to the extent derived from interest income on tax-exempt
obligations issued by or on behalf of the State of Connecticut, its political
subdivisions, or public instrumentalities, state or local authorities, districts
or similar public entities created under Connecticut law, obligations of Puerto
Rico, other U.S. territories and their political subdivisions and obligations of
other qualifying issuers ("Connecticut Municipal Obligations"), will be exempt
from federal and Connecticut personal income taxes. In the case of New York Tax
Free Reserves, dividends paid by the Fund which are attributable to interest
income on tax-exempt obligations of the State of New York and its political
subdivisions, of Puerto Rico, other U.S. territories and their political
subdivisions and of other qualifying issuers ("New York Municipal Obligations"),
will be exempt from federal, New York State and New York City personal income
taxes. These Funds may purchase Municipal Obligations issued by other states,
their agencies and instrumentalities the interest income on which will be exempt
from federal income tax but will be subject to California, Connecticut or New
York State and New York City personal income taxes, as the case may be.

In order for California Tax Free Reserves to pay dividends that are exempt
from federal tax and California personal income tax, the Fund must continue to
qualify as a "regulated investment company" for federal income tax purposes. In
addition, in order for California Tax Free Reserves to be eligible to pay
dividends that are exempt from California personal income tax, at the end of
each quarter of its taxable year at least 50% of the Fund's total assets must be
invested in obligations, the interest on which is exempt from California
taxation when received by an individual ("California Exempt-Interest
Securities").

In determining the tax status of interest on Municipal Obligations, the
Adviser relies on opinions of bond counsel who may be counsel to the issuer.

Under normal circumstances, California Tax Free Reserves, Connecticut Tax
Free Reserves and New York Tax Free Reserves invest at least 65% of their assets
in California Municipal Obligations, Connecticut Municipal Obligations and New
York Municipal Obligations, respectively, although the exact amount of a Fund's
assets invested in such securities varies from time to time. Although these
Funds attempt to invest 100% of their assets in Municipal Obligations, each Fund
may invest up to 20% of its total assets in securities the interest income on
which is subject to federal, state and local income tax or the federal
alternative minimum tax. Each Fund may invest more than 25% of its assets in
participation interests issued by banks in industrial development bonds and
other Municipal Obligations. In view of this possible "concentration" in bank
participation interests, an investment in these Funds should be made with an
understanding of the characteristics of the banking industry and the risks which
such an investment may entail. (See "Variable Rate Instruments and Participation
Interests" below.) Uninvested cash reserves may be held temporarily for the
Funds pending investment. The Funds' investments may include "when-issued" and
"forward delivery" Municipal Obligations, stand-by commitments and taxable
repurchase agreements.

All of California Tax Free Reserves', Connecticut Tax Free Reserves' and
New York Tax Free Reserves' investments mature or are deemed to mature within
397 days from the date of acquisition and the average maturity of the
investments in the Funds' respective portfolios (on a dollar-weighted basis) is
90 days or less. The maturities of variable rate instruments held in such Funds'
portfolios are deemed to be the longer of the period remaining until the next
interest rate adjustment or the period until a Fund would be entitled to payment
pursuant to demand rights, a letter of credit, guarantee or insurance policy or
a right to tender or put the instrument, although the stated maturities may be
in excess of 397 days. (See "Variable Rate Instruments and Participation
Interests" below.)

As non-diversified investment companies, California Tax Free Reserves,
Connecticut Tax Free Reserves and New York Tax Free Reserves are not subject to
any statutory restrictions under the 1940 Act with respect to limiting the
investment of their assets in one or relatively few issuers. This concentration
may present greater risks than in the case of a diversified company. However,
each Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). In
order so to qualify under current law, at the close of each quarter of a Fund's
taxable year, at least 50% of the value of the Fund's total assets must be
represented by cash, U.S. government securities, investment company securities
and other securities limited in respect of any one issuer (or related) to not
more than 5% in value of the total assets of the Fund and not more than 10% of
the outstanding voting securities of such issuer. In addition, and again under
current law, at the close of each quarter of its taxable year, not more than 25%
in value of the Fund's total assets may be invested in securities, other than
U.S. government securities, of one issuer (or related issuers).

Each Fund may invest 25% or more of its assets in securities that are
related in such a way that an economic, business or political development or
change affecting one of the securities would also affect the other securities
including, for example, securities the interest upon which is paid from revenues
of similar type projects, or securities the issuers of which are located in the
same state.

MUNICIPAL OBLIGATIONS
As a fundamental policy, each of the Tax Free Funds (including Tax Free
Reserves Portfolio for purposes of this discussion) invests at least 80% of its
assets, under normal circumstances, in:

(1) Municipal bonds with remaining maturities of one year (397 days for
California Tax Free Reserves and Connecticut Tax Free Reserves) or less that are
rated within the Aaa or Aa categories at the date of purchase by Moody's or
within the AAA or AA categories by Standard & Poor's or Fitch (and, for
Connecticut Tax Free Reserves, present a minimal credit risk as determined by
its Board of Trustees or the Adviser on its behalf) or, if not rated by these
rating agencies, are of comparable quality as determined by the Adviser on the
basis of the credit evaluation of the obligor on the bonds or of the bank
issuing a participation interest or guarantee or of any insurance issued in
support of the bonds or the participation interests.

(2) Municipal notes with remaining maturities of one year (397 days for
California Tax Free Reserves and Connecticut Tax Free Reserves) or less that at
the date of purchase are rated MIG 1/VMIG 1 or MIG 2/VMIG 2 by Moody's, SP-1+,
SP-1 or SP-2 by Standard & Poor's or F-1 or F-2 by Fitch (and, for Connecticut
Tax Free Reserves, present a minimal credit risk as determined by its Board of
Trustees or the Adviser on its behalf) or, if not rated by these rating
agencies, are of comparable quality as determined by the Adviser. The principal
kinds of municipal notes are tax and revenue anticipation notes, tax
anticipation notes, bond anticipation notes and revenue anticipation notes.
Notes sold in anticipation of collection of taxes, a bond sale or receipt of
other revenues are usually general obligations of the issuing municipality or
agency. The investments of California Tax Free Reserves, Connecticut Tax Free
Reserves and New York Tax Free Reserves may be concentrated in municipal
obligations of California, Connecticut and New York issuers, respectively.

(3) Municipal commercial paper that is rated Prime-1 or Prime-2 by
Moody's, A-1+, A-1 or A-2 by Standard & Poor's or F-1 or F-2 by Fitch (and, for
Connecticut Tax Free Reserves, present a minimal credit risk as determined by
its Board of Trustees or the Adviser on its behalf) or, if not rated by these
rating agencies, is of comparable quality as determined by the Adviser. Issues
of municipal commercial paper typically represent very short-term, unsecured,
negotiable promissory notes. These obligations are often issued to meet seasonal
working capital needs of municipalities or to provide interim construction
financing and are paid from general revenues of municipalities or are refinanced
with long-term debt. In most cases municipal commercial paper is backed by
letters of credit, lending agreements, note repurchase agreements or other
credit facility agreements offered by banks or other institutions which may be
called upon in the event of default by the issuer of the commercial paper.

Subsequent to its purchase by a Tax Free Fund, a rated Municipal
Obligation may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. Neither event requires sale of such Municipal
Obligation by the Fund (other than variable rate instruments which must be sold
if they are not "high quality"), but the Adviser considers such event in
determining whether the Fund should continue to hold the Municipal Obligation.
To the extent that the ratings given to the Municipal Obligations or other
securities held by a Tax Free Fund are altered due to changes in any of the
Moody's, Standard & Poor's or Fitch ratings systems (see Appendix A to this
Statement of Additional Information for an explanation of these rating systems),
the Adviser adopts such changed ratings as standards for its future investments
in accordance with the investment policies contained above and in the
Prospectus. Certain Municipal Obligations issued by instrumentalities of the
U.S. government are not backed by the full faith and credit of the U.S. Treasury
but only by the creditworthiness of the instrumentality. CitiFunds Multi-State
Tax Free Trust's and Tax Free Reserves Portfolio's Boards of Trustees have
determined that any Municipal Obligation that depends directly, or indirectly
through a government insurance program or other guarantee, on the full faith and
credit of the U.S. government is considered to have a rating in the highest
category. Where necessary to ensure that the Municipal Obligations are "eligible
securities" (i.e., within the two highest ratings assigned by Moody's, Standard
& Poor's or Fitch), or where the obligations are not freely transferable, a Tax
Free Fund will require that the obligation to pay the principal and accrued
interest be backed by an unconditional irrevocable bank letter of credit, a
guarantee, insurance policy or other comparable undertaking of an approved
financial institution.

MUNICIPAL BONDS. Municipal bonds are debt obligations of states, cities,
municipalities and municipal agencies and authorities which generally have a
maturity at the time of issuance of one year or more and which are issued to
raise funds for various public purposes, such as construction of a wide range of
public facilities, refunding outstanding obligations or obtaining funds for
institutions and facilities. The two principal classifications of municipal
bonds are "general obligation" and "revenue" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. The principal of and interest on revenue
bonds are payable from the income of specific projects or authorities and
generally are not supported by the issuer's general power to levy taxes. In some
cases, revenues derived from specific taxes are pledged to support payments on a
revenue bond.

In addition, certain kinds of private activity bonds ("IDBs") are issued
by or on behalf of public authorities to provide funding for various privately
operated industrial facilities, such as warehouse, office, plant and store
facilities and environmental and pollution control facilities. IDBs are, in most
cases, revenue bonds. The payment of the principal and interest on IDBs usually
depends solely on the ability of the user of the facilities financed by the
bonds or other guarantor to meet its financial obligations and, in certain
instances, the pledge of real and personal property as security for payment.
Many IDBs may not be readily marketable; however, the IDBs or the participation
certificates in IDBs purchased by a Fund will have liquidity because they
generally will be supported by demand features to "high quality" banks,
insurance companies or other financial institutions.

Municipal bonds may be issued as "zero coupon" obligations. Zero-coupon
bonds are issued at a significant discount from their principal amount in lieu
of paying interest periodically. Because zero-coupon bonds do not pay current
interest in cash, their value is subject to greater fluctuation in response to
changes in market interest rates than bonds that pay interest currently.
Zero-coupon bonds allow an issuer to avoid the need to generate cash to meet
current interest payments. Accordingly, such bonds may involve greater credit
risks than bonds paying interest currently in cash. Each Tax Free Fund is
required to accrue interest income on such investments and to distribute such
amounts at least annually to shareholders even though zero-coupon bonds do not
pay current interest in cash. Thus, it may be necessary at times for a Fund to
liquidate investments in order to satisfy its dividend requirements.

MUNICIPAL NOTES. There are four major varieties of state and municipal
notes: Tax and Revenue Anticipation Notes ("TRANs"); Tax Anticipation Notes
("TANs"); Revenue Anticipation Notes ("RANs"); and Bond Anticipation Notes
("BANs"). TRANs, TANs and RANs are issued by states, municipalities and other
tax-exempt issuers to finance short-term cash needs or, occasionally, to finance
construction. Many TRANs, TANs and RANs are general obligations of the issuing
entity payable from taxes or designated revenues, respectively, expected to be
received within the related fiscal period. BANSs are issued with the expectation
that their principal and interest will be paid out of proceeds from renewal
notes or bonds to be issued prior to the maturity of the BANs. BANs are issued
most frequently by both general obligation and revenue bond issuers usually to
finance such items as land acquisition, facility acquisition and/or construction
and capital improvement projects.

For an explanation of the ratings of Municipal Obligations by Moody's,
Standard & Poor's and Fitch, see Appendix A to this Statement of Additional
Information. For a comparison of yields on such Municipal Obligations and
taxable securities, see the Appendix to the Prospectus.

MUNICIPAL LEASE OBLIGATIONS. Participations in municipal leases are
undivided interests in a portion of a lease or installment purchase issued by a
state or local government to acquire equipment or facilities. Municipal leases
frequently have special risks not normally associated with general obligation
bonds or revenue bonds. Many leases include "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Although the
obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or foreclosure
might, in some cases, prove difficult. Municipal lease obligations are deemed to
be illiquid unless otherwise determined by the Board of Trustees.

VARIABLE RATE INSTRUMENTS AND PARTICIPATION INTERESTS
Each of the Tax Free Funds (including Tax Free Reserves Portfolio for
purposes of this discussion) may purchase variable rate instruments and
participation interests. Variable rate instruments that the Tax Free Funds may
purchase are tax-exempt Municipal Obligations (including municipal notes and
municipal commercial paper) that provide for a periodic adjustment in the
interest rate paid on the instrument and permit the holder to receive payment
upon a specified number of days' notice of the unpaid principal balance plus
accrued interest either from the issuer or by drawing on a bank letter of
credit, a guarantee or an insurance policy issued with respect to such
instrument or by tendering or "putting" such instrument to a third party.

The variable rate instruments in which Tax Free Funds' assets may be
invested are payable upon a specified period of notice which may range from one
day up to one year. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily to up to one year and the adjustments
are based upon the prime rate of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. Each Tax Free Fund
will decide which variable rate instruments it will purchase in accordance with
procedures prescribed by its Board of Trustees to minimize credit risks. An
unrated variable rate instrument may be determined to meet a Fund's high quality
criteria if it is backed by a letter of credit or guarantee or a right to tender
or put the instrument to a third party or is insured by an insurer that meets
the high quality criteria for the Fund discussed above or on the basis of a
credit evaluation of the underlying obligor. If the credit of the obligor is of
"high quality," no credit support from a bank or other financial institution
will be necessary. Each unrated variable rate instrument will be evaluated on a
quarterly basis to determine that it continues to meet a Tax Free Fund's high
quality criteria. If an instrument is ever deemed to be of less than high
quality, the Funds either will sell it in the market or exercise the liquidity
feature described below.

Variable rate instruments in which the Tax Free Funds may invest include
participation interests in variable rate, tax-exempt Municipal Obligations owned
by a bank, insurance company or other financial institution or affiliated
organizations. Although the rate of the underlying Municipal Obligations may be
fixed, the terms of the participation interest may result in the Fund receiving
a variable rate on its investment. A participation interest gives a Tax Free
Fund an undivided interest in the Municipal Obligation in the proportion that
the Fund's participation bears to the total principal amount of the Municipal
Obligation and provides the liquidity feature. Each participation may be backed
by an irrevocable letter of credit or guarantee of, or a right to put to, a bank
(which may be the bank issuing the participation interest, a bank issuing a
confirming letter of credit to that of the issuing bank, or a bank serving as
agent of the issuing bank with respect to the possible repurchase of the
participation interest) or insurance policy of an insurance company that has
been determined by or on behalf of the Board of Trustees of the applicable Trust
to meet the prescribed quality standards of a Tax Free Fund. Each Tax Free Fund
has the right to sell the participation interest back to the institution or draw
on the letter of credit or insurance after a specified period of notice, for all
or any part of the full principal amount of the Fund's participation in the
security, plus accrued interest. Each Tax Free Fund intends to exercise the
liquidity feature only (1) upon a default under the terms of the bond documents,
(2) as needed to provide liquidity to the Fund in order to facilitate
withdrawals from the Fund, or (3) to maintain a high quality investment
portfolio. In some cases, this liquidity feature may not be exercisable in the
event of a default on the underlying Municipal Obligations; in these cases, the
underlying Municipal Obligations must meet the Fund's high credit standards at
the time of purchase of the participation interest. Issuers of participation
interests will retain a service and letter of credit fee and a fee for providing
the liquidity feature, in an amount equal to the excess of the interest paid on
the instruments over the negotiated yield at which the participations were
purchased on behalf of a Tax Free Fund. The total fees generally range from 5%
to 15% of the applicable prime rate or other interest rate index. With respect
to insurance, each of the Tax Free Funds will attempt to have the issuer of the
participation interest bear the cost of the insurance, although the applicable
Fund retains the option to purchase insurance if necessary, in which case the
cost of insurance will be an expense of the Fund subject to the expense
limitation of 2 1/2% of the first $30 million of the Fund's average net assets,
2% of the next $70 million and 1 1/2% of the Fund's average net assets in excess
of $100 million. The Adviser has been instructed by the Trusts' Boards of
Trustees to monitor continually the pricing, quality and liquidity of the
variable rate instruments held by the Tax Free Funds, including the
participation interests, on the basis of published financial information and
reports of the rating agencies and other bank analytical services to which a
Fund may subscribe. Although participation interests may be sold, each Tax Free
Fund intends to hold them until maturity, except under the circumstances stated
above. Participation interests include municipal lease obligations which are
deemed to be illiquid unless otherwise determined by or at the direction of the
Board of Trustees. Purchase of a participation interest may involve the risk
that a Fund will not be deemed to be the owner of the underlying Municipal
Obligation for purposes of the ability of to claim tax exemption of interest
paid on that Municipal Obligation.

Periods of high inflation and periods of economic slowdown, together with
the fiscal measures adopted to attempt to deal with them, have brought wide
fluctuations in interest rates. When interest rates rise, the value of fixed
income securities generally falls; and vice versa. While this is true for
variable rate instruments generally, the variable rate nature of the underlying
instruments should minimize these changes in value. Accordingly, as interest
rates decrease or increase, the potential for capital appreciation and the risk
of potential capital depreciation is less than would be the case with a
portfolio of fixed income securities. Because the adjustment of interest rates
on the variable rate instruments is made in relation to movements of various
interest rate adjustment indices, the variable rate instruments are not
comparable to long-term fixed rate securities. Accordingly, interest rates on
the variable rate instruments may be higher or lower than current market rates
for fixed rate obligations of comparable quality with similar maturities.

Because of the variable rate nature of the instruments, when prevailing
interest rates decline each Tax Free Fund's yield will decline and its
shareholders will forgo the opportunity for capital appreciation. On the other
hand, during periods when prevailing interest rates increase, each Tax Free
Fund's yield will increase and its shareholders will have reduced risk of
capital depreciation.

For purposes of determining whether a variable rate instrument held by a
Tax Free Fund matures within 397 days from the date of its acquisition, the
maturity of the instrument will be deemed to be the longer of (1) the period
required before the Fund is entitled to receive payment of the principal amount
of the instrument after notice or (2) the period remaining until the
instrument's next interest rate adjustment, except that an instrument issued or
guaranteed by the U.S. government or any agency thereof shall be deemed to have
a maturity equal to the period remaining until the next adjustment of the
interest rate. The maturity of a variable rate instrument will be determined in
the same manner for purposes of computing a Fund's dollar-weighted average
portfolio maturity.

In view of the possible "concentration" of the Tax Free Funds in bank
participation interests in Municipal Obligations secured by bank letters of
credit or guarantees, an investment in these Funds should be made with an
understanding of the characteristics of the banking industry and the risks which
such an investment may entail. Banks are subject to extensive governmental
regulation which may limit both the amounts and types of loans and other
financial commitments which may be made and interest rates and fees which may be
charged. The profitability of this industry is largely dependent upon the
availability and cost of capital funds for the purpose of financing lending
operations under prevailing money market conditions. Also, general economic
conditions play an important part in the operation of this industry and exposure
to credit losses arising from possible financial difficulties of borrowers might
affect a bank's ability to meet its obligations under a letter of credit.

"WHEN-ISSUED" SECURITIES
Each of the Tax Free Funds (including Tax Free Reserves Portfolio for
purposes of this discussion) may purchase securities on a "when-issued" or
"forward delivery" basis. New issues of certain Municipal Obligations frequently
are offered on a "when-issued" or "forward delivery" basis. The payment
obligation and the interest rate that will be received on the Municipal
Obligations are each fixed at the time the buyer enters into the commitment
although settlement, i.e., delivery of and payment for the Municipal
Obligations, takes place beyond customary settlement time (but normally within
45 days after the date of the Fund's commitment to purchase). Although the Tax
Free Funds will only make commitments to purchase "when-issued" or "forward
delivery" Municipal Obligations with the intention of actually acquiring them,
the Funds may sell these securities before the settlement date if deemed
advisable by the Adviser.

Municipal Obligations purchased on a "when-issued" or "forward delivery"
basis and the securities held in a Tax Free Fund's portfolio are subject to
changes in value based upon the public's perception of the credit-worthiness of
the issuer and changes, real or anticipated, in the level of interest rates. The
value of these Municipal Obligations and securities generally change in the same
way, that is, both experience appreciation when interest rates decline and
depreciation when interest rates rise. Purchasing Municipal Obligations on a
"when-issued" or "forward delivery" basis can involve a risk that the yields
available in the market on the settlement date may actually be higher or lower
than those obtained in the transaction itself. A separate account of a Tax Free
Fund consisting of cash or liquid debt securities equal to the amount of the
"when-issued" or "forward delivery" commitments will be established at the
Fund's custodian bank. For the purpose of determining the adequacy of the
securities in the account, the deposited securities will be valued at market
value. If the market value of such securities declines, additional cash or
highly liquid securities will be placed in the account daily so that the value
of the account will equal the amount of the Fund's commitments. On the
settlement date of the "when-issued" or "forward delivery" securities, the Tax
Free Fund's obligations will be met from then-available cash flow, sale of
securities held in the separate account, sale of other securities or, although
not normally expected, from sale of the "when-issued" or "forward delivery"
securities themselves (which may have a value greater or lesser than the Fund's
payment obligations). Sale of securities to meet such obligations may result in
the realization of capital gains or losses, which are not exempt from federal
income tax. An increase in the percentage of a Fund's assets committed to the
purchase of securities on a "when-issued" basis may increase the volatility of
its net asset value.

STAND-BY COMMITMENTS
When a Tax Free Fund (including Tax Free Reserves Portfolio for purposes
of this discussion) purchases Municipal Obligations it may also acquire stand-by
commitments from banks with respect to such Municipal Obligations. A Tax Free
Fund also may acquire stand-by commitments from broker-dealers. Under the
stand-by commitment, a bank or broker-dealer agrees to purchase at the Fund's
option a specified Municipal Obligation at a specified price. A stand-by
commitment is the equivalent of a "put" option acquired by a Tax Free Fund with
respect to a particular Municipal Obligation held in the Fund's portfolio.

The amount payable to a Tax Free Fund upon the exercise of a stand-by
commitment normally would be (1) the acquisition cost of the Municipal
Obligation (excluding any accrued interest paid on the acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the security, plus (2) all interest accrued on
the security since the last interest payment date during the period the security
was owned by the Fund. Absent unusual circumstances relating to a change in
market value, the Fund would value the underlying Municipal Obligation at
amortized cost. Accordingly, the amount payable by a bank or dealer during the
time a stand-by commitment is exercisable would be substantially the same as the
market value of the underlying Municipal Obligation. Each Tax Free Fund values
stand-by commitments at zero for purposes of computing the value of its net
assets.

The stand-by commitments that each Tax Free Fund may enter into are
subject to certain risks, which include the ability of the issuer of the
commitment to pay for the securities at the time the commitment is exercised and
the fact that the commitment is not marketable by the Fund and the maturity of
the underlying security will generally be different from that of the commitment.

TAXABLE SECURITIES
Although each Tax Free Fund (including Tax Free Reserves Portfolio for
purposes of this discussion) attempts to invest 100% of its net assets in
tax-exempt Municipal Obligations, each Fund may invest up to 20% of the value of
its net assets in securities of the kind described below, the interest income on
which is subject to federal income tax. Circumstances in which a Tax Free Fund
may invest in taxable securities include the following: (a) pending investment
in the type of securities described above; (b) to maintain liquidity for the
purpose of meeting anticipated withdrawals; and (c) when, in the opinion of the
Fund's investment adviser, it is advisable to do so because of adverse market
conditions affecting the market for Municipal Obligations. The kinds of taxable
securities in which the Tax Free Funds' assets may be invested are limited to
the following short-term, fixed-income securities (maturing in 397 days or less
from the time of purchase): (1) obligations of the U.S. government or its
agencies, instrumentalities or authorities; (2) commercial paper rated Prime-1
or Prime-2 by Moody's, A-1+, A-1 or A-2 by Standard & Poor's or F-1+, F-1 or F-2
by Fitch; (3) certificates of deposit of U.S. banks with assets of $1 billion or
more; and (4) repurchase agreements with respect to any Municipal Obligations or
other securities which the Fund is permitted to own. Each Tax Free Fund's assets
may also be invested in Municipal Obligations which are subject to an
alternative minimum tax.

REPURCHASE AGREEMENTS
Each of the Tax Free Funds (including Tax Free Reserves Portfolio for
purposes of this discussion) may invest its assets in instruments subject to
repurchase agreements. Repurchase agreements are described in more detail below.
(See "Repurchase Agreements.")

RISK FACTORS AFFECTING INVESTMENT IN CALIFORNIA MUNICIPAL OBLIGATIONS
California Tax Free Reserves intends to invest a high proportion of its
assets in California Municipal Obligations. Payment of interest and preservation
of principal is dependent upon the continuing ability of California issuers
and/or obligors of state, municipal and public authority debt obligations to
meet their obligations thereunder. For information concerning California
Municipal Obligations, see Appendix B to this Statement of Additional
Information.

The summary set forth above and in Appendix B is included for the purpose
of providing a general description of the State of California credit and
financial conditions. This summary is based on information from statements of
issuers of California Municipal Obligations and does not purport to be complete.
The Trust is not responsible for the accuracy or timeliness of this information.

RISK FACTORS AFFECTING INVESTMENT IN CONNECTICUT MUNICIPAL OBLIGATIONS
Connecticut Tax Free Reserves intends to invest a high proportion of
its assets in Connecticut Municipal Obligations. Payment of interest and
preservation of principal is dependent upon the continuing ability of
Connecticut issuers and/or obligors of state, municipal and public authority
debt obligations to meet their obligations thereunder. For information
concerning Connecticut Municipal Obligations, see Appendix C to this Statement
of Additional Information.

The summary set forth above and in Appendix C is included for the purpose
of providing a general description of the State of Connecticut credit and
financial conditions. This summary is based on information from statements of
issuers of Connecticut Municipal Obligations and does not purport to be
complete. The Trust is not responsible for the accuracy or timeliness of this
information.

RISK FACTORS AFFECTING INVESTMENT IN NEW YORK MUNICIPAL OBLIGATIONS
New York Tax Free Reserves intends to invest a high proportion of the
its assets in Municipal Obligations of the State of New York and its political
subdivisions, municipalities, agencies, instrumentalities and public
authorities. Payment of interest and preservation of principal is dependent upon
the continuing ability of New York issuers and/or obligors of state, municipal
and public authority debt obligations to meet their obligations thereunder.

The fiscal stability of New York State is related, at least in part, to
the fiscal stability of its localities and authorities. Various State agencies,
authorities and localities have issued large amounts of bonds and notes either
guaranteed or supported by the State through lease-purchase arrangements, other
contractual arrangements or moral obligation provisions. While debt service is
normally paid out of revenues generated by projects of such State agencies,
authorities and localities, the State has had to provide special assistance in
recent years, in some cases of a recurring nature, to enable such agencies,
authorities and localities to meet their financial obligations and, in some
cases, to prevent or cure defaults. To the extent State agencies and local
governments require State assistance to meet their financial obligations, the
ability of the State to meet its own obligations as they become due or to obtain
additional financing could be adversely affected.

For further information concerning New York Municipal Obligations, see
Appendix D to this Statement of Additional Information. The summary set forth
above and in Appendix D is included for the purpose of providing a general
description of New York State and New York City credit and financial conditions.
This summary is based on information from statements of issuers of New York
Municipal Obligations and does not purport to be complete. The Trust is not
responsible for the accuracy or timeliness of this information.

REPURCHASE AGREEMENTS

Each of the Funds and Portfolios (other than U.S. Treasury Reserves and
U.S. Treasury Reserves Portfolio, which may not invest in repurchase agreements)
may invest its assets in instruments subject to repurchase agreements only with
member banks of the Federal Reserve System or "primary dealers" (as designated
by the Federal Reserve Bank of New York) in U.S. government securities. Under
the terms of a typical repurchase agreement, the Fund would acquire an
underlying debt instrument for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase and the Fund to
resell the instrument at a fixed price and time, thereby determining the yield
during the Fund's holding period. This results in a fixed rate of return
insulated from market fluctuations during such period. A repurchase agreement is
subject to the risk that the seller may fail to repurchase the security.
Repurchase agreements may be deemed to be loans under the 1940 Act. All
repurchase agreements entered into by the Funds shall be fully collateralized at
all times during the period of the agreement in that the value of the underlying
security shall be at least equal to the amount of the loan, including the
accrued interest thereon, and the Fund or its custodian or sub-custodian shall
have possession of the collateral, which the applicable Trust's Board of
Trustees believes will give it a valid, perfected security interest in the
collateral. Whether a repurchase agreement is the purchase and sale of a
security or a collateralized loan has not been definitively established. This
might become an issue in the event of the bankruptcy of the other party to the
transaction. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Fund but only constitute collateral for the seller's obligation to pay
the repurchase price. Therefore, a Fund may suffer time delays and incur costs
in connection with the disposition of the collateral. The Trusts' Boards of
Trustees believe that the collateral underlying repurchase agreements may be
more susceptible to claims of the seller's creditors than would be the case with
securities owned by the Funds. Repurchase agreements will give rise to income
which will not qualify as tax-exempt income when distributed by the Funds. A
Fund will not invest in a repurchase agreement maturing in more than seven days
if any such investment together with illiquid securities held by the Fund exceed
10% of the Fund's total net assets. Repurchase agreements are also subject to
the same risks described herein with respect to stand-by commitments.

LENDING OF SECURITIES

Consistent with applicable regulatory requirements and in order to
generate income, each of the Funds and Portfolios may lend its securities to
broker-dealers and other institutional borrowers. Such loans will usually be
made only to member banks of the U.S. Federal Reserve System and to member firms
of the New York Stock Exchange (and subsidiaries thereof). Loans of securities
would be secured continuously by collateral in cash, cash equivalents, or U.S.
Treasury obligations maintained on a current basis at an amount at least equal
to the market value of the securities loaned. The cash collateral would be
invested in high quality short-term instruments. Either party has the right to
terminate a loan at any time on customary industry settlement notice (which will
not usually exceed three business days). During the existence of a loan, a Fund
or Portfolio would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned and with respect to cash
collateral would also receive compensation based on investment of the collateral
(subject to a rebate payable to the borrower). Where the borrower provides a
Fund or Portfolio with collateral consisting of U.S. Treasury obligations, the
borrower is also obligated to pay the Fund or Portfolio a fee for use of the
borrowed securities. The Fund or Portfolio would not, however, have the right to
vote any securities having voting rights during the existence of the loan, but
would call the loan in anticipation of an important vote to be taken among
holders of the securities or of the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in the collateral
should the borrower fail financially. However, the loans would be made only to
entities deemed by the Adviser to be of good standing, and when, in the judgment
of the Adviser, the consideration which can be earned currently from loans of
this type justifies the attendant risk. In addition, a Fund or Portfolio could
suffer loss if the borrower terminates the loan and the Fund or Portfolio is
forced to liquidate investments in order to return the cash collateral to the
buyer. If the Adviser determines to make loans, it is not intended that the
value of the securities loaned by a Fund or Portfolio would exceed 33 1/3% of
the value of its net assets.

PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS

Each Fund and Portfolio may invest up to 10% of its net assets in
securities for which there is no readily available market. These illiquid
securities may include privately placed restricted securities for which no
institutional market exists. The absence of a trading market can make it
difficult to ascertain a market value for illiquid investments. Disposing of
illiquid investments may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for a Fund or Portfolio to sell them
promptly at an acceptable price.

INVESTMENT RESTRICTIONS

The Trusts, on behalf of the Funds, and the Portfolios have each adopted
the following policies which may not be changed without approval by holders of a
"majority of the outstanding shares" of the applicable Fund or Portfolio, which
as used in this Statement of Additional Information means the vote of the lesser
of (i) 67% or more of the outstanding voting securities of the Fund or Portfolio
present at a meeting, if the holders of more than 50% of the outstanding "voting
securities" of the Fund or Portfolio are present or represented by proxy, or
(ii) more than 50% of the outstanding "voting securities" of the Fund or the
Portfolio. The term "voting securities" as used in this paragraph has the same
meaning as in the 1940 Act. Whenever the Trust is requested to vote on a change
in the investment restrictions of a Portfolio (or, in the case of Cash Reserves
Portfolio and the Tax Free Funds, with respect to the fundamental restrictions
discussed under "Investment Policies"), the Trust will hold a meeting of the
corresponding Fund's shareholders and will cast its vote as instructed by the
shareholders, or will otherwise vote Fund interests in a Portfolio in accordance
with applicable law. Each Fund will vote the shares held by its shareholders who
do not give voting instructions in the same proportion as the shares of that
Fund's shareholders who do give voting instructions. Shareholders of the Funds
who do not vote will have no effect on the outcome of these matters.

CASH RESERVES

CitiFunds Trust III, on behalf of Cash Reserves, may not:

(1) Invest in equity securities (e.g., common stock, preferred
stock, options, warrants, puts, calls), voting securities, restricted
securities, corporate debt securities (e.g., bonds, debentures) other than
those bank securities and commercial paper referred to under "Investment
Policies," local or state government securities (e.g., municipal bonds,
state bonds), commodities or commodity contracts, real estate, or
securities of other investment companies, except that the Trust may invest
all or a portion of the Fund's assets in a diversified, open-end
management investment company with substantially the same investment
objective, policies and restrictions as the Fund. The Trust, on behalf of
the Fund, will not sell securities short, write put or call options,
engage in underwriting, or invest in companies for the purpose of
exercising control. The Trust, on behalf of the Fund, will not make loans
to other persons except that it may acquire debt securities as discussed
under "Investment Policies;"

(2) Purchase securities or obligations of any one issuer (other than
securities issued by the U.S. government, its agencies and
instrumentalities and repurchase agreements covering such securities) if
immediately after such purchase more than 5% of the value of its assets
would be invested in that issuer except that the Trust may invest all or a
portion of the Fund's assets in a diversified, open-end management
investment company with substantially the same investment objective,
policies and restrictions as the Fund;

(3) Borrow money except from banks as a temporary measure for
extraordinary or emergency purposes (not for leveraging) or in order to
meet unexpectedly heavy redemption requests in an amount not exceeding 15%
of the value of the Fund's assets and will not purchase any securities at
any time when the Fund's total outstanding borrowings from banks exceed 5%
of the Fund's gross assets. The Trust, on behalf of the Fund, will not
pledge its assets except to secure borrowings. While the Trust, on behalf
of the Fund, may borrow from its Custodian for the foregoing purposes, any
borrowing from the Custodian will be on terms no less favorable to the
Fund than those offered by the Custodian to comparable borrowers and on
terms which the Trust believes are not less favorable than those readily
obtainable elsewhere;

(4) Concentrate the Fund's investments in any particular industry,
but if it is deemed appropriate to the achievement of the Fund's
investment objective, up to 25% of the assets of the Fund (taken at market
value at the time of each investment) may be invested in any one industry,
provided that, if the Trust withdraws the Fund's investment from an
open-end management investment company with substantially the same
investment objective, policies and restrictions as the Fund, it will
invest at least 25%, and may invest up to 100%, of the assets of the Fund
in bank obligations; and provided, further, that nothing in this
Investment Restriction is intended to affect the Trust's ability to invest
100% of the Fund's assets in a diversified, open-end management investment
company with substantially the same investment objective, policies and
restrictions as the Fund;

(5) There is no limitation on investing in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, or
repurchase agreements covering those securities, except that the Trust, on
behalf of the Fund, will not acquire securities that are not readily
marketable or repurchase agreements calling for resale within more than 7
days if, as a result thereof, more than 10% of the value of its net assets
would be invested in such securities. The Trust, on behalf of the Fund,
may not invest in fixed time deposits maturing in more than seven calendar
days, and fixed time deposits maturing from two business days through
seven calendar days may not exceed 10% of the Fund's net assets.

Cash Reserves Portfolio may not:

(1) Borrow money, except that as a temporary measure for
extraordinary or emergency purposes the Portfolio may borrow from banks in
an amount not to exceed 1/3 of the value of the net assets of the
Portfolio, including the amount borrowed (moreover, the Portfolio may not
purchase any securities at any time at which borrowings exceed 5% of its
total assets (taken at market value))(it is intended that the Portfolio
would borrow money only from banks and only to accommodate requests for
the withdrawal of all or a portion of a beneficial interest in the
Portfolio while effecting an orderly liquidation of securities);

(2) Purchase any security or evidence of interest therein on margin,
except that the Portfolio may obtain such short term credit as may be
necessary for the clearance of purchases and sales of securities;

(3) Underwrite securities issued by other persons, except insofar as
the Portfolio may technically be deemed an underwriter under the
Securities Act of 1933 in selling a security;

(4) Make loans to other persons except (a) through the lending of
securities held by the Portfolio, but not in excess of 33 1/3% of the
Portfolio's net assets, (b) through the use of fixed time deposits or
repurchase agreements or the purchase of short term obligations, or (c) by
purchasing all or a portion of an issue of debt securities of types
commonly distributed privately to financial institutions; for purposes of
this paragraph 4 the purchase of short term commercial paper or a portion
of an issue of debt securities which are part of an issue to the public
shall not be considered the making of a loan;

(5) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts in the ordinary course of business (the Portfolio
reserves the freedom of action to hold and to sell real estate acquired as
a result of the ownership of securities by the Portfolio);

(6) Concentrate its investments in any particular industry, but if
it is deemed appropriate for the achievement of its investment objective,
up to 25% of the assets of the Portfolio (taken at market value at the
time of each investment) may be invested in any one industry, except that
the Portfolio will invest at least 25% of its assets and may invest up to
100% of its assets in bank obligations; or

(7) Issue any senior security (as that term is defined in the 1940
Act) if such issuance is specifically prohibited by the 1940 Act or the
rules and regulations promulgated thereunder, except as appropriate to
evidence a debt incurred without violating Investment Restriction (1)
above.

U.S. TREASURY RESERVES

Neither CitiFunds Trust III, on behalf of U.S. Treasury Reserves, nor
U.S. Treasury Portfolio may:

(1) Borrow money, except that as a temporary measure for
extraordinary or emergency purposes either the Trust or the Portfolio may
borrow from banks in an amount not to exceed 1/3 of the value of the net
assets of the Fund or the Portfolio, respectively, including the amount
borrowed (moreover, neither the Trust (on behalf of the Fund) nor the
Portfolio may purchase any securities at any time at which borrowings
exceed 5% of the total assets of the Fund or the Portfolio, respectively
(taken in each case at market value)) (it is intended that the Fund and
the Portfolio would borrow money only from banks and only to accommodate
requests for the repurchase of shares of the Fund or the withdrawal of all
or a portion of a beneficial interest in the Portfolio while effecting an
orderly liquidation of securities);

(2) Purchase any security or evidence of interest therein on margin,
except that either the Trust, on behalf of the Fund, or the Portfolio may
obtain such short term credit as may be necessary for the clearance of
purchases and sales of securities;

(3) Underwrite securities issued by other persons, except that all
the assets of the Fund may be invested in the Portfolio and except insofar
as either the Trust or the Portfolio may technically be deemed an
underwriter under the Securities Act of 1933 in selling a security;

(4) Make loans to other persons except (a) through the lending of
securities held by either the Fund or the Portfolio, but not in excess of
33 1/3% of the Fund's or the Portfolio's net assets, as the case may be,
(b) through the use of repurchase agreements or the purchase of short term
obligations, or (c) by purchasing all or a portion of an issue of debt
securities of types commonly distributed privately to financial
institutions; for purposes of this paragraph 4 the purchase of a portion
of an issue of debt securities which is part of an issue to the public
shall not be considered the making of a loan;

(5) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts in the ordinary course of business (the Fund and the
Portfolio reserve the freedom of action to hold and to sell real estate
acquired as a result of the ownership of securities by the Fund or the
Portfolio);

(6) Concentrate its investments in any particular industry;
provided, that nothing in this Investment Restriction is intended to
affect the ability to invest 100% of the Fund's assets in the Portfolio;
or

TAX FREE RESERVES

Tax Free Reserves may not:

(1) Make investments other than as described under "Investment
Policies" above or any other form of federal tax-exempt investment which
meets the Fund's high quality criteria, as determined by the Board of
Trustees and which is consistent with the Fund's investment objectives and
policies (provided, however, that the Fund may invest all of its assets in
a diversified, open-end management investment company with substantially
the same investment objectives, policies and restrictions as the Fund);

(2) Borrow money. This restriction shall not apply to borrowings
from banks for temporary or emergency (not leveraging) purposes, including
the meeting of redemption requests that might otherwise require the
untimely disposition of securities, in an amount up to 15% of the value of
the Fund's total assets (including the amount borrowed) valued at market
less liabilities (not including the amount borrowed) at the time the
borrowing was made. While borrowings exceed 5% of the value of the Fund's
total assets, the Fund will not make any investments. Interest paid on
borrowings will reduce net income;

(3) Pledge, hypothecate, mortgage or otherwise encumber its assets,
except in an amount up to 15% of the value of its total assets and only to
secure borrowings for temporary or emergency purposes;

(4) Sell securities short or purchase securities on margin, or
engage in the purchase and sale of put, call, straddle or spread options
or in writing such options, except to the extent that securities subject
to a demand obligation and stand-by commitments may be purchased as set
forth under "Investment Policies" above;

(5) Underwrite the securities of other issuers, except insofar as
the Fund may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security (provided, however, that the Fund may
invest all of its assets in a diversified, open-end management investment
company with substantially the same investment objectives, policies and
restrictions as the Fund);

(6) Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or oil and gas interests,
but this shall not prevent the Fund from investing in Municipal
Obligations secured by real estate or interests in real estate;

(7) Make loans to others, except through the purchase of Fund
investments, including repurchase agreements, as described under
"Investment Policies" above;

(8) Invest more than 5% of the value of its total assets in the
securities of issuers where the entity providing the revenues from which
the issue is to be paid has a record, including predecessors, of fewer
than three years of continuous operation, except obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities
(provided, however, that the Fund may invest all of its assets in a
diversified, open-end management investment company with substantially the
same investment objectives, policies and restrictions as the Fund);

(9) Invest more than 25% of its assets in the securities of
"issuers" in any single industry, provided that there shall be no
limitation on the purchase of Municipal Obligations or on obligations
issued or guaranteed by the U.S. government, its agencies or
instrumentalities. In addition, the Fund reserves the freedom of action to
invest more than 25% of its assets in instruments (including without
limitation participation interests) issued by U.S. branches of domestic
banks; or

(10) Invest in securities of other investment companies, except the
Fund may purchase unit investment trust securities where such unit trusts
meet the investment objectives and policies of the Fund and then only up
to 5% of the Fund's net assets, except as they may be acquired as part of
a merger, consolidation or acquisition of assets (provided, however, that
the Fund may invest all of its assets in a diversified, open-end
management investment company with substantially the same investment
objectives, policies and restrictions as the Fund).

Tax Free Reserves has adopted the following non-fundamental policy, which
may be changed without approval by a majority of the outstanding shares of the
Fund. Tax Free Reserves will not invest in a repurchase agreement maturing in
more than seven days or other illiquid securities if as a result thereof the
Fund's total illiquid assets (including repurchase agreements maturing in more
than seven days) would exceed 10% of the Fund's net assets.

Tax Free Reserves Portfolio may not:

(1) Borrow money, except that as a temporary measure for
extraordinary or emergency purposes borrow from banks in an amount not to
exceed 1/3 of the value of the net assets of the Portfolio, including the
amount borrowed (moreover, the Portfolio may not purchase any securities
at any time at which borrowings exceed 5% of its total assets (taken at
market value)); (it is intended that the Portfolio would borrow money only
from banks and only to accommodate requests for the withdrawal of all or a
portion of a beneficial interest in the Portfolio while effecting an
orderly liquidation of securities);

(3) Underwrite securities issued by other persons, except insofar as
the Portfolio may technically be deemed an underwriter under the
Securities Act of 1933 in selling a security;

(4) Make loans to other persons except (a) through the lending of
securities held by the Portfolio, but not in excess of 33 1/3% of the
Portfolio's net assets, (b) through the use of fixed time deposits or
repurchase agreements or the purchase of short term obligations, or (c) by
purchasing all or a portion of an issue of debt securities of types
commonly distributed privately to financial institutions; for purposes of
this paragraph (4) the purchase of short term commercial paper or a
portion of an issue of debt securities which are part of an issue to the
public shall not be considered the making of a loan;

For purposes of the investment restriction in paragraph (6) above, "bank
obligations" shall include bank participation interests in Municipal
Obligations.

CALIFORNIA TAX FREE RESERVES

CitiFunds Multi-State Tax Free Trust may not with respect to California
Tax Free Reserves:

(1) Make investments other than as described under "Investment
Policies" above or any other form of federal tax-exempt investment which
meets the Fund's high quality criteria, as determined by the Board of
Trustees and which is consistent with the Fund's investment objectives and
policies (provided, however, that the Trust may invest all or
substantially all of the Fund's assets in another registered investment
company having the same investment objective and policies and
substantially the same investment restrictions as the Fund).

(2) Borrow money. This restriction shall not apply to borrowings
from banks for temporary or emergency (not leveraging) purposes, including
the meeting of redemption requests that might otherwise require the
untimely disposition of securities, in an amount up to 15% of the value of
the Fund's total assets (including the amount borrowed) valued at market
less liabilities (not including the amount borrowed) at the time the
borrowing was made. While borrowings exceed 5% of the value of the Fund's
total assets, the Trust will not make any investments on behalf of the
Fund. Interest paid on borrowings will reduce net income.

(3) Pledge, hypothecate, mortgage or otherwise encumber the Fund's
assets, except in an amount up to 15% of the value of the Fund's total
assets and only to secure borrowings for temporary or emergency purposes.

(5) Underwrite the securities of other issuers, except insofar as
the Trust may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security of the Fund (provided, however, that the
Trust may invest all or substantially all of the Fund's assets in another
registered investment company having the same investment objective and
policies and substantially the same investment restrictions as the Fund).

(6) The Trust will not invest on behalf of the Fund in a repurchase
agreement maturing in more than seven days if any such investment together
with other illiquid securities held by the Fund exceed 10% of the Fund's
total net assets.

(7) Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or oil and gas interests,
but this shall not prevent the Trust from investing in Municipal
Obligations secured by real estate or interests in real estate.

(8) Make loans to others, except through the purchase of portfolio
investments, including repurchase agreements, as described under
"Investment Policies" above.

(9) Purchase more than 10% of all outstanding voting securities of
any one issuer or invest in companies for the purpose of exercising
control, except that the Trust may invest all or substantially all of the
Fund's assets in another registered investment company having the same
investment objective and policies and substantially the same investment
restrictions as the Fund.

(10) Invest more than 25% of the Fund's assets in the securities of
"issuers" in any single industry, provided that the Trust may invest more
than 25% of the Fund's assets in bank participation interests and there
shall be no limitation on the purchase of those Municipal Obligations and
other obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities, except that the Trust may invest all or
substantially all of the Fund's assets in another registered investment
company having the same investment objectives and policies and
substantially the same investment restrictions as the Fund. When the
assets and revenues of an agency, authority, instrumentality or other
political subdivision are separate from those of the government creating
the issuing entity and a security is backed only by the assets and
revenues of the entity, the entity would be deemed to be the sole issuer
of the security. Similarly, in the case of a private activity bond, if
that bond is backed only by the assets and revenues of the
non-governmental user, then such non-governmental user would be deemed to
be the sole issuer. If, however, in either case, the creating government
or some other entity, such as an insurance company or other corporate
obligor, guarantees a security or a bank issues a letter of credit, such a
guarantee or letter of credit would be considered a separate security and
would be treated as an issue of such government, other entity or bank.

(11) Invest in securities of other investment companies, except the
Trust may purchase on behalf of the Fund unit investment trust securities
(i.e., securities issued by an investment company which (i) is organized
under a trust indenture or contract of custodianship or similar
instrument, (ii) does not have a board of directors, and (iii) issues only
redeemable securities, each of which represents an undivided interest in a
unit of specified securities) where such unit trusts meet the investment
objectives and policies of the Fund and then only up to 5% of the Fund's
net assets, except as they may be acquired as part of a merger,
consolidation or acquisition of assets, except that the Trust may invest
all or substantially all of the Fund's assets in another registered
investment company having the same investment objectives and policies and
substantially the same investment restrictions as the Fund. As of the date
of this Statement of Additional Information, the Trust has no intention of
investing in unit investment trust securities on behalf of the Fund.

For purposes of the investment restrictions described in (9) and (10)
above, the issuer of a tax-exempt security is deemed to be the entity (public or
private) ultimately responsible for the payment of principal of and interest on
the security. If, however, the acting government or some other entity, such as
an insurance company or other corporate obligor, guarantees a security or a bank
issues a Letter of Credit, such a guarantee or Letter of Credit may, in
accordance with applicable Securities and Exchange Commission ("SEC") rules, be
considered a separate security and treated as an issue of such government, other
entity or bank.

CONNECTICUT TAX FREE RESERVES

CitiFunds Multi-State Tax Free Trust may not with respect to Connecticut
Tax Free Reserves:

(1) Make investments other than as described under "Investment
Policies" above or any other form of federal tax-exempt investment which
meets the Fund's high quality criteria, as determined by the Board of
Trustees and which is consistent with the Fund's investment objectives and
policies (provided, however, that the Trust may invest all or
substantially all of the Fund's assets in another registered investment
company having the same investment objective and policies and
substantially the same investment restrictions as the Fund).

(2) Borrow money. This restriction shall not apply to borrowings
from banks for temporary or emergency (not leveraging) purposes, including
the meeting of redemption requests that might otherwise require the
untimely disposition of securities, in an amount up to 15% of the value of
the Fund's total assets (including the amount borrowed) valued at market
less liabilities (not including the amount borrowed) at the time the
borrowing was made. While borrowings exceed 5% of the value of the Fund's
total assets, the Trust will not make any investments on behalf of the
Fund. Interest paid on borrowings will reduce net income.

(6) Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or oil and gas interests,
but this shall not prevent the Trust from investing in Municipal
Obligations secured by real estate or interests in real estate.

(7) Make loans to others, except through the purchase of portfolio
investments, including repurchase agreements, as described under
"Investment Policies" above.

(8) Purchase more than 10% of all outstanding voting securities of
any one issuer or invest in companies for the purpose of exercising
control, except that the Trust may invest all or substantially all of the
Fund's assets in another registered investment company having the same
investment objective and policies and substantially the same investment
restrictions as the Fund.

(9) Invest more than 25% of the Fund's assets in the securities of
"issuers" in any single industry, provided that the Trust reserves the
right to invest more than 25% of the Fund's assets in bank participation
interests and there shall be no limitation on the purchase of those
Municipal Obligations and other obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, except that the Trust
may invest all or substantially all of the Fund's assets in another
registered investment company having the same investment objective and
policies and substantially the same investment restrictions as the Fund.
When the assets and revenues of an agency, authority, instrumentality or
other political subdivision are separate from those of the government
creating the issuing entity and a security is backed only by the assets
and revenues of the entity, the entity would be deemed to be the sole
issuer of the security. Similarly, in the case of a private activity bond,
if that bond is backed only by the assets and revenues of the non-
governmental user, then such non-governmental user would be deemed to be
the sole issuer. If, however, in either case, the creating government or
some other entity, such as an insurance company or other corporate
obligor, guarantees a security or a bank issues a letter of credit, such a
guarantee or letter of credit may, in accordance with applicable SEC
rules, be considered a separate security and could be treated as an issue
of such government, other entity or bank.

(10) Invest in securities of other investment companies, except the
Trust may purchase on behalf of the Fund unit investment trust securities
(i.e., securities issued by an investment company which (i) is organized
under a trust indenture or contract of custodianship or similar
instrument, (ii) does not have a board of directors, and (iii) issues only
redeemable securities, each of which represents an undivided interest in a
unit of specified securities) where such unit trusts meet the investment
objectives and policies of the Fund and then only up to 5% of the Fund's
net assets, except as they may be acquired as part of a merger,
consolidation or acquisition of assets, except that the Trust may invest
all or substantially all of the Fund's assets in another registered
investment company having the same investment objectives and policies and
substantially the same investment restrictions as the Fund. As of the date
of this Statement of Additional Information, the Trust has no intention of
investing in unit investment trust securities on behalf of the Fund.

(11) Issue any senior security (as that term is defined in the 1940
Act) if such issuance is specifically prohibited by the 1940 Act or the
rules and regulations promulgated thereunder, except as appropriate to
evidence a debt incurred without violating Investment Restriction (2)
above.

For purposes of the investment restrictions described in (8) and (9)
above, the issuer of a tax-exempt security is deemed to be the entity (public or
private) ultimately responsible for the payment of principal of and interest on
the security. If, however, the acting government or some other entity, such as
an insurance company or other corporate obligor, guarantees a security or a bank
issues a Letter of Credit, such a guarantee or Letter of Credit may, in
accordance with applicable SEC rules, be considered a separate security and
treated as an issue of such government, other entity or bank.

In addition, as a matter of non-fundamental policy, the Trust will not
invest on behalf of the Fund in securities that are not readily marketable, such
as fixed time deposits and repurchase agreements maturing in more than seven
days, if such investments together with other illiquid securities held by the
Fund exceed 10% of the Fund's total net assets.

NEW YORK TAX FREE RESERVES

CitiFunds Multi-State Tax Free Trust may not with respect to New York Tax
Free Reserves:

(2) Borrow money. This restriction shall not apply to borrowings
from banks for temporary or emergency (not leveraging) purposes, including
the meeting of redemption requests that might otherwise require the
untimely disposition of securities, in an amount up to 15% of the value of
the Fund's total assets (including the amount borrowed) valued at market
less liabilities (not including the amount borrowed) at the time the
borrowing was made. While borrowings exceed 5% of the value of the Fund's
total assets, the Trust will not make any investments on behalf of the
Fund. Interest paid on borrowings will reduce net income.

(5) Underwrite the securities of other issuers, except insofar as
the Trust may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security of the Fund.

(6) Purchase securities subject to restrictions on disposition under
the Securities Act of 1933 ("restricted securities"). The Trust will not
invest on behalf of the Fund in a repurchase agreement maturing in more
than seven days if any such investment together with securities that are
not readily marketable held by the Fund exceed 10% of the Fund's total net
assets.

(8) Make loans to others, except through the purchase of portfolio
investments, including repurchase agreements, as described under
"Investment Policies" above.

(9) Purchase more than 10% of all outstanding voting securities of
any one issuer or invest in companies for the purpose of exercising
control.

(10) Invest more than 25% of the Fund's assets in the securities of
"issuers" in any single industry, provided that the Trust may invest more
than 25% of the Fund's assets in bank participation interests and there
shall be no limitation on the purchase of those Municipal Obligations and
other obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities. When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate
from those of the government creating the issuing entity and a security is
backed only by the assets and revenues of the entity, the entity would be
deemed to be the sole issuer of the security. Similarly, in the case of a
private activity bond, if that bond is backed only by the assets and
revenues of the non-governmental user, then such non-governmental user
would be deemed to be the sole issuer. If, however, in either case, the
creating government or some other entity, such as an insurance company or
other corporate obligor, guarantees a security or a bank issues a letter
of credit, such a guarantee or letter of credit would be considered a
separate security and would be treated as an issue of such government,
other entity or bank.

(11) Invest in securities of other investment companies, except the
Trust may purchase on behalf of the Fund unit investment trust securities
(i.e., securities issued by an investment company which (i) is organized
under a trust indenture or contract of custodianship or similar
instrument, (ii) does not have a board of directors, and (iii) issues only
redeemable securities, each of which represents an undivided interest in a
unit of specified securities) where such unit trusts meet the investment
objectives and policies of the Fund and then only up to 5% of the Fund's
net assets, except as they may be acquired as part of a merger,
consolidation or acquisition of assets. As of the date of this Statement
of Additional Information, the Trust has no intention of investing in unit
investment trust securities on behalf of the Fund.

For purposes of the investment restrictions described above, the issuer of
a tax-exempt security is deemed to be the entity (public or private) ultimately
responsible for the payment of principal of and interest on the security. If,
however, the acting government or some other entity, such as an insurance
company or other corporate obligor, guarantees a security or a bank issues a
Letter of Credit, such a guarantee or Letter of Credit may, in accordance with
applicable SEC rules, be considered a separate security and treated as an issue
of such government, other entity or bank.

If a percentage restriction or a rating restriction (other than a
restriction as to borrowing) on investment or utilization of assets set forth
above or referred to in the Prospectus is adhered to at the time an investment
is made or assets are so utilized, a later change in percentage resulting from
changes in the value of the securities held by a Fund or a Portfolio or a later
change in the rating of a security held by a Fund or a Portfolio is not
considered a violation of policy.

3. PERFORMANCE INFORMATION

Fund performance may be quoted in advertising, shareholder reports and
other communications in terms of yield, effective yield, tax equivalent yield,
total rate of return or tax equivalent total rate of return. All performance
information is historical and is not intended to indicate future performance.
Yields and total rates of return fluctuate in response to market conditions and
other factors.

Each Fund may provide annualized yield and effective yield quotations. The
yield of a Fund refers to the income generated by an investment in the Fund over
a seven-day period (which period is stated in any such advertisement or
communication). This income is then annualized; that is, the amount of income
generated by the investment over that period is assumed to be generated each
week over a 365-day period and is shown as a percentage of the investment. Any
current yield quotation of a Fund which is used in such a manner as to be
subject to the provisions of Rule 482(d) under the Securities Act of 1933, as
amended, consists of an annualized historical yield, carried at least to the
nearest hundredth of one percent, based on a specific seven calendar day period
and is calculated by dividing the net change in the value of an account having a
balance of one share at the beginning of the period by the value of the account
at the beginning of the period and multiplying the quotient by 365/7. For this
purpose the net change in account value would reflect the value of additional
shares purchased with dividends declared on the original share and dividends
declared on both the original share and any such additional shares, but would
not reflect any realized gains or losses as a result of a Fund's investment in a
Portfolio or from the sale of securities or any unrealized appreciation or
depreciation on portfolio securities. The effective yield is calculated
similarly, but when annualized the income earned by the investment during that
seven-day period is assumed to be reinvested. The effective yield is slightly
higher than the yield because of the compounding effect of this assumed
reinvestment. Any effective yield quotation of a Fund so used shall be
calculated by compounding the current yield quotation for such period by
multiplying such quotation by 7/365, adding 1 to the product, raising the sum to
a power equal to 365/7, and subtracting 1 from the result.

U.S. Treasury Reserves and each Tax Free Fund may provide tax equivalent
yield quotations. The tax equivalent yield refers to the yield that a fully
taxable money market fund would have to generate in order to produce an
after-tax yield equivalent to that of a Fund. The use of a tax equivalent yield
allows investors to compare the yield of the Fund, the dividends from which may
be exempt from federal or state personal income tax, with yields of funds the
dividends from which are not tax exempt. Any tax equivalent yield quotation of a
Fund is calculated as follows: If the entire current yield quotation for such
period is tax-exempt, the tax equivalent yield will be the current yield
quotation divided by 1 minus a stated income tax rate or rates. If a portion of
the current yield quotation is not tax-exempt, the tax equivalent yield will be
the sum of (a) that portion of the yield which is tax-exempt divided by 1 minus
a stated income tax rate or rates and (b) the portion of the yield which is not
tax-exempt. A Fund also may provide yield, effective yield and tax equivalent
yield quotations for longer periods.

Each Fund may provide its period and average annualized total rates of
return. The total rate of return refers to the change in the value of an
investment in a Fund over a stated period and is compounded to include the value
of any shares purchased with any dividends or capital gains declared during such
period. A total rate of return quotation for a Fund is calculated for any period
by (a) dividing (i) the sum of the net asset value per share on the last day of
the period and the net asset value per share on the last day of the period of
shares purchasable with dividends and capital gains distributions declared
during such period with respect to a share held at the beginning of such period
and with respect to shares purchased with such dividends and capital gains
distributions, by (ii) the public offering price on the first day of such
period, and (b) subtracting 1 from the result. Period total rate of return may
be annualized. An annualized total rate of return assumes that the period total
rate of return is generated over a one-year period. Any annualized total rate of
return quotation is calculated by (x) adding 1 to the period total rate of
return quotation calculated above, (y) raising such sum to a power which is
equal to 365 divided by the number of days in such period, and (z) subtracting 1
from the result.

U.S. Treasury Reserves and each Tax Free Fund may provide tax equivalent
total rates of return. The tax equivalent total rate of return refers to the
total rate of return that a fully taxable money market fund would have to
generate in order to produce an after-tax total rate of return equivalent to
that of a Fund. The use of a tax equivalent total rate of return allows
investors to compare the total rates of return of a Fund, the dividends from
which may be exempt from federal or state personal income taxes, with the total
rates of return of funds the dividends from which are not tax exempt. Any tax
equivalent total rate of return quotation of a Fund is calculated as follows: If
the entire current total rate of return quotation for such period is tax-exempt,
the tax equivalent total rate of return will be the current total rate of return
quotation divided by 1 minus a stated income tax rate or rates. If a portion of
the current total rate of return quotation is not tax-exempt, the tax equivalent
total rate of return will be the sum of (a) that portion of the total rate of
return which is tax-exempt divided by 1 minus a stated income tax rate or rates
and (b) the portion of the total rate of return which is not tax-exempt.

<PAGE>

Set forth below is total rate of return information, assuming that
dividends and capital gains distributions, if any, were reinvested, for each
Fund for the periods indicated, at the beginning of which periods no sales
charges were applicable to purchases of shares of the Funds.

REDEEMABLE
VALUE OF A
HYPOTHETICAL
ANNUALIZED $1,000 INVESTMENT
TOTAL AT THE END
RATE OF RETURN OF THE PERIOD
-------------- -----------------
PERIOD
------
Cash Reserves
Ten years ended August 31, 1998......... 5.40% $1,692.35
Five years ended August 31, 1998........ 4.77% $1,262.30
One year ended August 31, 1998.......... 5.17% $1,051.68

U.S. Treasury Reserves
May 3, 1991 (commencement of operations)
to August 31, 1998..................... 4.09% $1,342.17
Five years ended August 31, 1998........ 4.34% $1,236.78
One year ended August 31, 1998.......... 4.65% $1,046.48

Tax Free Reserves
Ten years ended August 31, 1998......... 3.57% $1,419.67
Five years ended August 31, 1998........ 2.88% $1,152.58
One year ended August 31, 1998.......... 3.08% $1,030.84

California Tax Free Reserves
March 10, 1992 (commencement of operations)
to August 31, 1998..................... 2.88% $1,201.86
Five years ended August 31, 1998........ 2.97% $1,157.42
One year ended August 31, 1998.......... 2.97% $1,029.67

Connecticut Tax Free Reserves
December 31, 1993 (commencement of operations)
to August 31, 1998..................... 3.06% $1,153.94
One year ended August 31, 1998.......... 3.01% $1,030.12

New York Tax Free Reserves
Ten years ended August 31, 1998......... 3.37% $1,393.00
Five years ended August 31, 1998........ 2.83% $1,149.69
One year ended August 31, 1998.......... 3.03% $1,030.32

The following table shows the Funds' annualized yield and effective
compound annualized yield for the seven-day period ended August 31, 1998:

Compound Annualized
Annualized Yield Yield
---------------- -------------------
Cash Reserves 5.01% 5.13%
U.S. Treasury Reserves 4.41% 4.50%
Tax Free Reserves 2.83% 2.87%
California Tax Free 2.63% 2.67%
Reserves
Connecticut Tax Free 2.95% 3.00%
Reserves
New York Tax Free 2.79% 2.82%
Reserves

The annualized tax equivalent yields for the seven-day period ended August
31, 1998 were as follows: U.S. Treasury Reserves 4.97% (assuming a combined
state and local tax rate of 11.307% for New York City residents); Tax Free
Reserves 4.69% (assuming a federal tax bracket of 39.60%); California Tax Free
Reserves 3.72% (assuming (i) a combined California State and federal tax
bracket of 45.22% and (ii) that 77.55% of the Fund's assets were invested in
California Municipal Obligations); Connecticut Tax Free Reserves 3.78%
(assuming (i) a combined Connecticut State and federal tax bracket of 42.32% and
(ii) that 74.00% of the Fund's assets were invested in Connecticut Municipal
Obligations); and New York Tax Free Reserves 4.00% (assuming (i) a combined New
York State, New York City and federal tax bracket of 46.43% and (ii) that 76.89%
of the Fund's assets were invested in New York Municipal Obligations).

4. DETERMINATION OF NET ASSET VALUE

The net asset value of each share of the Funds is determined on each day
on which the New York Stock Exchange is open for trading. This determination is
normally made once during each such day as of 3:00 p.m., Eastern time, for Cash
Reserves and 12:00 noon, Eastern time, for the other Funds, by dividing the
value of each Fund's net assets (i.e., the value of its assets, including its
investment in a Portfolio, if applicable, less its liabilities, including
expenses payable or accrued) by the number of the Fund's shares outstanding at
the time the determination is made. On days when the financial markets in which
the Funds invest close early, each Fund's net asset value is determined as of
the close of these markets if such time is earlier than the time at which the
net asset value is normally calculated. As of the date of this Statement of
Additional Information, the Exchange is open for trading every weekday except
for the following holidays (or the days on which they are observed): New Year's
Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. It is
anticipated that the net asset value of each share of each Fund will remain
constant at $1.00 and, although no assurance can be given that they will be able
to do so on a continuing basis, as described below, the Funds and Portfolios
employ specific investment policies and procedures to accomplish this result.

The value of a Portfolio's net assets (i.e., the value of its securities
and other assets less its liabilities, including expenses payable or accrued) is
determined at the same time and on the same days as the net asset value per
share of the corresponding Fund is determined. The net asset value of a Fund's
investment in the corresponding Portfolio is equal to the Fund's pro rata share
of the total investment of the Fund and of other investors in the Portfolio less
the Fund's pro rata share of the Portfolio's liabilities.

The securities held by a Fund or Portfolio are valued at their amortized
cost. Amortized cost valuation involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium. If fluctuating interest rates cause the market value of the securities
held by the Fund or Portfolio to deviate more than 1/2 of 1% from their value
determined on the basis of amortized cost, the applicable Trust's or Portfolio's
Board of Trustees will consider whether any action should be initiated, as
described in the following paragraph. Although the amortized cost method
provides certainty in valuation, it may result in periods during which the
stated value of an instrument is higher or lower than the price the Fund or
Portfolio would receive if the instrument were sold.

Pursuant to the rules of the SEC, the Trusts' and the Portfolios' Boards
of Trustees have established procedures to stabilize the value of the Funds' and
Portfolios' net assets within 1/2 of 1% of the value determined on the basis of
amortized cost. These procedures include a review of the extent of any such
deviation of net asset value, based on available market rates. Should that
deviation exceed 1/2 of 1% for a Fund or Portfolio, the applicable Trust's or
Portfolio's Board of Trustees will consider whether any action should be
initiated to eliminate or reduce material dilution or other unfair results to
investors in the Fund or Portfolio. Such action may include withdrawal in kind,
selling securities prior to maturity and utilizing a net asset value as
determined by using available market quotations. The Funds and Portfolios
maintain a dollar-weighted average maturity of 90 days or less, do not purchase
any instrument with a remaining maturity greater than 397 days or (in the case
of all Funds and Portfolios other than U.S. Treasury Reserves and U.S. Treasury
Reserves Portfolio which may not invest in repurchase agreements) subject to a
repurchase agreement having a duration of greater than 397 days, limit their
investments, including repurchase agreements, to those U.S. dollar-denominated
instruments that are determined by the Adviser to present minimal credit risks
and comply with certain reporting and recordkeeping procedures. The Trusts and
Portfolios also have established procedures to ensure that securities purchased
by the Funds and Portfolios meet high quality criteria. (See "Investment
Objectives, Policies and Restrictions -- Investment Policies.")

Because of the short-term maturities of the portfolio investments of each
Fund, the Funds do not expect to realize long-term capital gains or losses. Any
net realized short-term capital gains will be declared and distributed to the
Funds' shareholders annually after the close of each Fund's fiscal year.
Distributions of short-term capital gains are taxable to shareholders as
described in "Certain Additional Tax Matters." Any realized short-term capital
losses will be offset against short-term capital gains or, to the extent
possible, utilized as capital loss carryover. Each Fund may distribute
short-term capital gains more frequently then annually, reduce shares to reflect
capital losses or make distributions of capital if necessary in order to
maintain the Fund's net asset value of $1.00 per share.

It is expected that each Fund will have a positive net income at the time
of each determination thereof. If for any reason a Fund's net income is a
negative amount, which could occur, for instance, upon default by an issuer of a
portfolio security, the Fund would first offset the negative amount with respect
to each shareholder account from the dividends declared during the month with
respect to those accounts. If and to the extent that negative net income exceeds
declared dividends at the end of the month, the Fund would reduce the number of
outstanding Fund shares by treating each shareholder as having contributed to
the capital of the Fund that number of full and fractional shares in the
shareholder's account which represents the shareholder's share of the amount of
such excess. Each shareholder would be deemed to have agreed to such
contribution in these circumstances by investment in the Fund.

Subject to compliance with applicable regulations, the Trust and the
Portfolios have each reserved the right to pay the redemption price of shares of
the Funds or beneficial interests in the Portfolios, either totally or
partially, by a distribution in kind of readily marketable securities (instead
of cash). The securities so distributed would be valued at the same amount as
that assigned to them in calculating the net asset value for the shares or
beneficial interests being sold. If a holder of shares or beneficial interests
received a distribution in kind, such holder could incur brokerage or other
charges in converting the securities to cash.

Shareholders may redeem Fund shares by sending written instructions in
proper form (as determined by a shareholder's Shareholder Servicing Agent) to
their Shareholder Servicing Agents. Shareholders are responsible for ensuring
that a request for redemption is in proper form.

Shareholders may redeem or exchange Fund shares by telephone, if their
account applications so permit, by calling their Shareholder Servicing Agents.
During periods of drastic economic or market changes or severe weather or other
emergencies, shareholders may experience difficulties implementing a telephone
exchange or redemption. In such an event, another method of instruction, such as
a written request sent via an overnight delivery service, should be considered.
The Funds and each Shareholder Servicing Agent will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine. These
procedures may include recording of the telephone instructions and verification
of a caller's identity by asking for the shareholder's name, address, telephone
number, Social Security number, and account number. If these or other reasonable
procedures are not followed, the Fund or the Shareholder Servicing Agent may be
liable for any losses to a shareholder due to unauthorized or fraudulent
instructions. Otherwise, the shareholders will bear all risk of loss relating to
a redemption or exchange by telephone.

The Trusts and the Portfolios may suspend the right of redemption or
postpone the date of payment for shares of a Fund or beneficial interests in a
Portfolio more than seven days during any period when (a) trading in the markets
the Fund or Portfolio normally utilizes is restricted, or an emergency, as
defined by the rules and regulations of the SEC, exists making disposal of the
Fund's or Portfolio's investments or determination of its net asset value not
reasonably practicable; (b) the New York Stock Exchange is closed (other than
customary weekend and holiday closings); or (c) the SEC has by order permitted
such suspension.

5. MANAGEMENT

Each Fund and Portfolio is supervised by a Board of Trustees. In each
case, a majority of the Trustees are not affiliated with the Adviser. In
addition, a majority of the disinterested Trustees of Cash Reserves, U.S.
Treasury Reserves and Tax Free Reserves are different from a majority of the
disinterested Trustees of their corresponding Portfolios.

The Trustees and officers of the Trusts and the Portfolios, their ages and
their principal occupations during the past five years are set forth below.
Their titles may have varied during that period. Asterisks indicate that those
Trustees and officers are "interested persons" (as defined in the 1940 Act) of a
Trust or a Portfolio. Unless otherwise indicated below, the address of each
Trustee and officer is 21 Milk Street, Boston, Massachusetts. The address of
Cash Reserves Portfolio is Elizabethan Square, George Town, Grand Cayman,
British West Indies. The address of U.S. Treasury Reserves Portfolio and Tax
Free Reserves Portfolio is 21 Milk Street, Boston, Massachusetts.

TRUSTEES OF CITIFUNDS TRUST III AND TAX FREE RESERVES

PHILIP W. COOLIDGE; 47* -- President of the Trusts and the Portfolios; Chief
Executive Officer and President, Signature Financial Group, Inc. and CFBDS.

C. OSCAR MORONG, JR.; 63 -- Chairman of the Boards of Trustees of the Trusts;
Managing Director, Morong Capital Management (since February, 1993); Senior Vice
President and Investment Manager, CREF Investments, Teachers Insurance & Annuity
Association (retired January, 1993). His address is 1385 Outlook
Drive West, Mountainside, New Jersey.

WALTER E. ROBB, III; 72 -- President, Benchmark Consulting Group (since
1991); Principal, Robb Associates (Corporate Financial Advisors ) (since
1978); President, Benchmark Advisors, Inc. (Corporate Financial Advisors)
(since 1989); Trustee of certain registered investment companies in the MFS
Family of Funds. His address is 35 Farm Road, Sherborn, Massachusetts.

E. KIRBY WARREN; 64 -- Professor of Management, Graduate School of Business,
Columbia University (since 1987). Samuel Bronfman Professor of Democratic
Business Enterprise (1978 to 1987). His address is Columbia University, Graduate
School of Business, 725 Uris Hall, New York, New York.

TRUSTEES OF CITIFUNDS MULTI-STATE TAX FREE TRUST

ELLIOTT J. BERV; 55 -- Chairman and Director, Catalyst, Inc. (Management
Consultants) (since June, 1992); President, Chief Operating Officer and
Director, Deven International, Inc. (International Consultants) (June, 1991
to June, 1992); President and Director, Elliott J. Berv & Associates
(Management Consultants) (since May, 1984). His address is 15 Stornoway
Drive, Cumberland Foreside, Maine.

PHILIP W. COOLIDGE; 47* -- President of the Trusts and the Portfolios; Chief
Executive Officer and President, Signature Financial Group, Inc. and CFBDS.

MARK T. FINN; 55 -- President and Director, Delta Financial, Inc. (since
June, 1983); Chairman of the Board and Chief Executive Officer, FX 500 Ltd.
(Commodity Trading Advisory Firm) (since April, 1990); Director, Vantage
Consulting Group, Inc. (since October, 1988). His address is 3500 Pacific
Avenue, P.O. Box 539, Virginia Beach, Virginia.

RILEY C. GILLEY; 72 -- Vice President and General Counsel, Corporate Property
Investors (November, 1988 to December, 1991); Partner, Breed, Abbott & Morgan
(Attorneys) (Retired, December, 1987). His address is 4041 Gulf Shore
Boulevard North, Naples, Florida.

DIANA R. HARRINGTON; 58 -- Professor, Babson College (since September, 1993);
Visiting Professor, Kellogg Graduate School of Management, Northwestern
University (September, 1992 to September, 1993); Professor, Darden Graduate
School of Business, University of Virginia (September, 1978 to September, 1993);
Trustee, The Highland Family of Funds (March, 1997 to March, 1998). Her address
is 120 Goulding Street, Holliston, Massachusetts.

SUSAN B. KERLEY; 47 -- President, Global Research Associates, Inc.
(Investment Research) (since August, 1990); Manager, Rockefeller & Co.
(March, 1988 to July, 1990); Trustee, Mainstay Institutional Funds (since
December, 1990). Her address is P.O. Box 9572, New Haven, Connecticut.

WALTER E. ROBB, III; 72 -- President, Benchmark Consulting Group (since 1991);
Principal, Robb Associates (Corporate Financial Advisors) (since 1978);
President, Benchmark Advisors, Inc. (Corporate Financial Advisors) (since 1989);
Trustee of certain registered investment companies in the MFS Family of Funds.
His address is 35 Farm Road, Sherborn, Massachusetts.

E. KIRBY WARREN; 64 -- Professor of Management, Graduate School of Business,
Columbia University (since 1987); Samuel Bronfman Professor of Democratic
Business Enterprise (1978 to 1987). His address is Columbia University, Graduate
School of Business, 725 Uris Hall, New York, New York.

WILLIAM S. WOODS, JR.; 78 -- Vice President - Investments, Sun Company
(retired, April, 1984). His address is 35 Colwick Road, Cherry Hill, New
Jersey.

TRUSTEES OF THE PORTFOLIOS

PHILIP W. COOLIDGE; 47* -- President of the Trusts and the Portfolios; Chief
Executive Officer and President, Signature Financial Group, Inc. and CFBDS.

OFFICERS OF THE TRUSTS AND PORTFOLIOS

PHILIP W. COOLIDGE; 47* -- President of the Trusts and the Portfolios; Chief
Executive Officer and President, Signature Financial Group, Inc., and CFBDS.

CHRISTINE A. DRAPEAU; 28* -- Assistant Secretary and Assistant Treasurer of
Trusts and the Portfolios; Assistant Vice President, Signature Financial Group,
Inc. (since January, 1996); Paralegal and Compliance Officer, various financial
companies (July, 1992 to January, 1996); Graduate Student, Bentley College
(prior to December, 1994).

TAMIE EBANKS-CUNNINGHAM, 26* -- Assistant Secretary of the Trusts and the
Portfolios; Office Manager, Signature Financial Group (Cayman) Ltd. (Since April
1995); Administrator, Cayman Islands Primary School (prior to April 1995). Her
address is P.O. Box 2494, Elizabethan Square, George Town, Grand Cayman, Cayman
Islands, B.W.I.

JOHN R. ELDER; 50* -- Treasurer of the Trusts and the Portfolios; Vice
President, Signature Financial Group, Inc. (since April, 1995); Treasurer,
CFBDS (since April 1995); Treasurer, Phoenix Family of Mutual Funds (Phoenix
Home Life Mutual Insurance Company) (1983 to March, 1995).

LINDA T. GIBSON; 33* -- Secretary of the Trusts and the Portfolios; Vice
President, Signature Financial Group, Inc. (since May, 1992); Assistant
Secretary, CFBDS (since October, 1992).

JOAN R. GULINELLO; 43* -- Assistant Secretary and Assistant Treasurer of the
Trusts and the Portfolios; Vice President, Signature Financial Group, Inc.
(since October, 1993); Secretary, CFBDS (since October, 1995); Vice President
and Assistant General Counsel, Massachusetts Financial Services Company
(prior to October, 1993).

JAMES E. HOOLAHAN; 51* -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trusts and the Portfolios; Senior Vice President, Signature
Financial Group, Inc.

SUSAN JAKUBOSKI; 34* -- Vice President, Assistant Treasurer and Assistant
Secretary of the Trusts and the Portfolios; Vice President, Signature Financial
Group (Cayman) Ltd. (since August, 1994); Fund Compliance Administrator, Concord
Financial Group (November, 1990 to August, 1994). Her address is Suite 193, 12
Church St., Hamilton HM11, Bermuda.

MOLLY S. MUGLER; 47* -- Assistant Secretary and Assistant Treasurer of the
Trusts and the Portfolios; Vice President, Signature Financial Group, Inc.;
Assistant Secretary, CFBDS.

CLAIR TOMALIN, 30* -- Assistant Secretary of the Trusts and the Portfolios;
Office Manager, Signature Financial Group (Europe) Limited (since 1993). Her
address is 117 Charterhouse Street, London ECIM 6AA.

SHARON M. WHITSON; 50* -- Assistant Secretary and Assistant Treasurer of the
Trusts and the Portfolios; Assistant Vice President, Signature Financial
Group, Inc.

JULIE J. WYETZNER; 39* -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trusts and the Portfolios; Vice President, Signature
Financial Group, Inc.

The Trustees and officers of the Trusts and the Portfolios also hold comparable
positions with certain other funds for which CFBDS or an affiliate serves as the
distributor or administrator.

<TABLE>
TRUSTEES COMPENSATION TABLE

<CAPTION>
Total
Compen-
sation
Aggregate Aggregate Aggregate Aggregate Pension or from the
Compen- Compen- Compen- Compen- Retirement Trusts and
Aggregate sation Aggregate sation sation sation Benefits Estimated Fund
Compensation from Compensation from from from Accrued as Annual Complex
from U.S. from California Connecticut New York Part of Benefits Paid to
Cash Treasury Tax Free Tax Free Tax Free Tax Free Fund Upon Trustees
Trustee Reserves(1) Reserves(1) Reserves(1) Reserves(1) Reserves(1) Reserves(1) Expenses Retirement (1)(2)
- ------- ----------- ----------- ----------- ---------- ------------ -------------------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Elliott J. Berv N/A N/A N/A $1,402 $1,315 $4,419 None None $57,000
Philip W. Coolidge $0 $0 $0 $0 $0 $0 None None $0
Mark T. Finn N/A N/A N/A $1,276 $1,210 $3,733 None None $54,000
Riley C. Gilley N/A N/A N/A $1,582 $1,468 $5,411 None None $50,000
Diana R. Harrington N/A N/A N/A $2,030 $1,835 $7,742 None None $57,000
Susan B. Kerley N/A N/A N/A $2,104 $1,894 $8,089 None None $59,000
C. Oscar Morong, Jr $14,468 $3,960 $5,898 $2,385 $2,128 $9,649 None None $70,000
Walter E. Robb, III (3) $0 $0 $0 $1,430 $1,336 $4,527 None None $56,000
E. Kirby Warren $ 8,080 $2,620 $4,310 $1,665 $1,537 $5,847 None None $50,000
William S. Woods, Jr. (4) $ 6,482 $3,329 $5,170 $2,071 $1,866 $7,821 None None $58,000
</TABLE>

(1) Information is for the fiscal year ended August 31, 1998.
(2) Messrs. Berv, Coolidge, Finn, Gilley, Morong, Robb, Warren and
Woods and Mses. Harrington and Kerley are trustees of 30, 53, 29, 33, 47, 33,
27, 26, 28 and 28 funds and portfolios, respectively, in the family of open-end
registered investment companies advised or managed by Citibank.
(3) Mr. Robb was appointed as a trustee of CitiFunds Trust III and Tax
Free Reserves as of September 1, 1998.
(4) Mr. Woods resigned as a trustee of CitiFunds Trust III and Tax Free
Reserves as of September 1, 1998.

As of December __, 1998, all Trustees and officers as a group owned less
than 1% of each Fund's outstanding shares. As of the same date, more than 95% of
the outstanding shares of each Fund were held of record by Citibank or an
affiliate, as a Shareholder Servicing Agent of the Funds, for the accounts of
their respective clients.

The Declaration of Trust of each of the Trusts and the Portfolios provides
that such Trust or Portfolio, as the case may be, will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with such
Trust or Portfolio, as the case may be, unless, as to liability to such Trust or
Portfolio or its respective investors, it is finally adjudicated that they
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices, or unless with respect to any
other matter it is finally adjudicated that they did not act in good faith in
the reasonable belief that their actions were in the best interests of such
Trust or Portfolio, as the case may be. In the case of settlement, such
indemnification will not be provided unless it has been determined by a court or
other body approving the settlement or other disposition, or by a reasonable
determination, based upon a review of readily available facts, by vote of a
majority of disinterested Trustees of such Trust or Portfolio, or in a written
opinion of independent counsel, that such officers or Trustees have not engaged
in willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.

ADVISER

Citibank manages the assets of each Portfolio and CitiFunds Multi-State
Tax Free Trust pursuant to separate investment advisory agreements (the
"Advisory Agreements"). Subject to such policies as the Board of Trustees of the
Portfolios or Trust, as applicable, may determine, the Adviser manages the
securities of each Portfolio and California Tax Free Reserves, Connecticut Tax
Free Reserves and New York Tax Free Reserves and makes investment decisions for
each Portfolio and such Funds. The Adviser furnishes at its own expense all
services, facilities and personnel necessary in connection with managing each
Portfolio's and California Tax Free Reserves', Connecticut Tax Free Reserves'
and New York Tax Free Reserves' investments and effecting securities
transactions for each Portfolio and such Funds. Each of the Advisory Agreements
will continue in effect as long as such continuance is specifically approved at
least annually by the Board of Trustees of the applicable Portfolio or Trust or
by a vote of a majority of the outstanding voting securities of the applicable
Portfolio or Fund, and, in either case, by a majority of the Trustees of the
applicable Portfolio or Trust who are not parties to such Advisory Agreement or
interested persons of any such party, at a meeting called for the purpose of
voting on the Advisory Agreement.

Each Advisory Agreement provides that the Adviser may render services to
others. Each Advisory Agreement is terminable without penalty on not more than
60 days' nor less than 30 days' written notice by the applicable Portfolio or
Trust when authorized either by a vote of a majority of the outstanding voting
securities of the applicable Portfolio or Fund or by a vote of a majority of the
Board of Trustees of the applicable Portfolio or Trust, or by the Adviser on not
more than 60 days' nor less than 30 days' written notice, and will automatically
terminate in the event of its assignment. Each Advisory Agreement provides that
neither the Adviser nor its personnel shall be liable for any error of judgment
or mistake of law or for any loss arising out of any investment or for any act
or omission in the execution of security transactions for the applicable
Portfolio or Fund, except for willful misfeasance, bad faith or gross negligence
or reckless disregard of its or their obligations and duties under the Advisory
Agreement.

For its services under the Advisory Agreements, the Adviser receives
investment advisory fees, which are accrued daily and paid monthly, of 0.15% of
Cash Reserves Portfolio's and U.S. Treasury Reserves Portfolio's average daily
net assets and 0.20% of Tax Free Reserves Portfolio's, California Tax Free
Reserves', Connecticut Tax Free Reserves' and New York Tax Free Reserves'
average daily net assets, in each case on an annualized basis for the Fund's or
Portfolio's then-current fiscal year. The Adviser has voluntarily agreed to
waive a portion of its investment advisory fee.

CASH RESERVES PORTFOLIO: For the fiscal years ended August 31, 1996, 1997
and 1998, the fees paid to Citibank under the Advisory Agreement, after waivers,
were $2,713,691, $4,395,286 and $6,739,206, respectively.

U.S. TREASURY RESERVES PORTFOLIO: For the fiscal years ended August 31,
1996, 1997 and 1998, the fees paid to Citibank under the Advisory Agreement,
after waivers, were $373,944, $494,339 and $578,350, respectively.

TAX FREE RESERVES PORTFOLIO: For the fiscal years ended August 31, 1996,
1997 and 1998, the fees paid to Citibank under the Advisory Agreement, after
waivers, were $737,021, $506,142 and $659,288, respectively.

CALIFORNIA TAX FREE RESERVES: For the fiscal years ended August 31, 1996,
1997 and 1998, the fees paid to Citibank under the Advisory Agreement, after
waivers, were $4,795, $187,339 and $292,561, respectively.

CONNECTICUT TAX FREE RESERVES: For the fiscal years ended August 31, 1996,
1997 and 1998, the fees paid to Citibank under the Advisory Agreement, after
waivers, were $4,398, $141,986 and $173,117, respectively.

NEW YORK TAX FREE RESERVES: For the fiscal years ended August 31, 1996,
1997 and 1998, the fees paid to Citibank under the Advisory Agreement, after
waivers, were $1,041,646, $1,144,036 and $1,316,731, respectively.

Citibank and its affiliates may have deposit, loan and other relationships
with the issuers of securities purchase on behalf of the Funds, including
outstanding loans to such issuers which may be repaid in whole or in part with
the proceeds of securities so purchased. Citibank has informed the Funds that,
in making its investment decisions, it does not obtain or use material inside
information in the possession of any division or department of Citibank or in
the possession of any affiliate of Citibank.

The Glass-Steagall Act prohibits certain financial institutions, such as
Citibank, from underwriting securities of open-end investment companies, such as
the Funds. Citibank believes that its services under the Investment Advisory
Agreements and the activities performed by it or its affiliates as Shareholder
Servicing Agents and sub-administrator are not underwriting and are consistent
with the Glass-Steagall Act and other relevant federal and state laws. However,
there is no controlling precedent regarding the performance of the combination
of investment advisory, shareholder servicing and sub-administrative activities
by banks. State laws on this issue may differ from applicable federal law and
banks and financial institutions may be required to register as dealers pursuant
to state securities laws. Changes in either federal or state statutes or
regulations, or in their interpretations, could prevent Citibank or its
affiliates from continuing to perform these services. If Citibank or its
affiliates were to be prevented from acting as the Adviser, sub-administrator or
a Shareholder Servicing Agent, the Funds or Portfolios would seek alternative
means for obtaining these services. The Funds do not expect that shareholders
would suffer any adverse financial consequences as a result of any such
occurrence.

ADMINISTRATORS

Pursuant to Administrative Services Agreements (the "Administrative
Services Agreements"), CFBDS provides the Trusts, U.S. Treasury Reserves
Portfolio and Tax Free Reserves Portfolio, and SFG provides Cash Reserves
Portfolio, with general office facilities, and CFBDS supervises the overall
administration of the Trusts, U.S. Treasury Reserves Portfolio and Tax Free
Reserves Portfolio and SFG supervises the overall administration of Cash
Reserves Portfolio, including, among other responsibilities, the negotiation of
contracts and fees with, and the monitoring of performance and billings of, the
independent contractors and agents of the Trusts and the Portfolios; the
preparation and filing of all documents required for compliance by the Trusts
and the Portfolios with applicable laws and regulations; and arranging for the
maintenance of books and records of the Trusts and the Portfolios. CFBDS and SFG
provide persons satisfactory to the Board of Trustees of the Trusts and the
Portfolios to serve as Trustees and officers of the Trusts and the Portfolios.
Such Trustees and officers may be directors, officers or employees of CFBDS, SFG
or their affiliates.

For these services, the Administrators receive fees accrued daily and paid
monthly of 0.35% of the average daily net assets of Cash Reserves and U.S.
Treasury Reserves, 0.25% of the average daily net assets of each Tax Free Fund
and 0.05% of the assets of each Portfolio, in each case on an annualized basis
for the Fund's or the Portfolio's then-current fiscal year. However, each of the
Administrators may voluntarily agree to waive a portion of the fees payable to
it.

CASH RESERVES: For the fiscal years ended August 31, 1996, 1997 and 1998,
the fees paid to CFBDS from the Fund under the Administrative Services
Agreement, after waivers, were $3,176,058, $4,429,870 and $5,538,777,
respectively. For the fiscal years ended August 31, 1996, 1997 and 1998, the
fees payable to SFG under the Administrative Services Agreement were voluntarily
waived.

U.S. TREASURY RESERVES: For the fiscal years ended August 31, 1996, 1997
and 1998, the fees paid to CFBDS from the Fund under the Administrative Services
Agreement with the Trust, after waivers, were $747,957, $897,971 and $846,110,
respectively. For the fiscal years ended August 31, 1996, 1997 and 1998, the
fees payable to CFBDS under the Administrative Services Agreement with the
Portfolio were voluntarily waived.

TAX FREE RESERVES: For the fiscal years ended August 31, 1996, 1997 and
1998, the fees paid to CFBDS from the Fund under the Administrative Services
Agreement with the Trust, after waivers, were $261,250, $522,829 and $784,522,
respectively. For the fiscal years ended August 31, 1996 and 1997, the fees
payable to CFBDS under the Administrative Services Agreement with the Portfolio,
after waivers, were $180,025 and $79,252, respectively. For the fiscal year
ended August 31, 1998, all fees payable to CFBDS under the Administrative
Services Agreement with the Portfolio were voluntarily waived.

CALIFORNIA TAX FREE RESERVES: For the fiscal years ended August 31, 1996,
1997 and 1998, the fees paid to CFBDS from the Fund under the Administrative
Services Agreement with the Trust, after waivers, were $166,107, $301,183 and
$422,331, respectively.

CONNECTICUT TAX FREE RESERVES: For the fiscal years ended August 31, 1996,
1997 and 1998, the fees paid to CFBDS from the Fund under the Administrative
Services Agreement with the Trust, after waivers, were $117,484, $234,859 and
$253,409, respectively.

NEW YORK TAX FREE RESERVES: For the fiscal years ended August 31, 1996,
1997 and 1998, the fees paid to CFBDS from the Fund under the Administrative
Services Agreement with the Trust, after waivers, were $1,539,536, $1,711,547
and $1,872,505, respectively.

By Agreement, the Trusts acknowledge that the name CitiFunds is the
property of Citigroup Inc. and provide that if Citibank ceases to serve as the
Adviser of the Trusts, the Trusts and the Funds will change their respective
names so as to delete the word CitiFunds. The Agreements with the Trusts also
provide that Citibank may permit other investment companies in addition to the
Trusts to use the word "CitiFunds" in their names.

The Administrative Services Agreements with the Trusts continue in effect
as to a Fund if such continuance is specifically approved at least annually by
the respective Trust's Board of Trustees or by a vote of a majority of the
outstanding voting securities of applicable Fund and, in either case, by a
majority of the Trustees of the Trust who are not interested parties of the
Trust or CFBDS. The Administrative Services Agreements with the Trusts terminate
automatically if they are assigned and may be terminated as to a Fund by the
applicable Trust without penalty by vote of a majority of the outstanding voting
securities of the Fund or by either party on not more than 60 days' nor less
than 30 days' written notice. The Administrative Services Agreements with the
Trusts also provide that neither CFBDS nor its personnel shall be liable for any
error of judgment or mistake of law or for any act or omission in the
administration or management of the Trusts, except for willful misfeasance, bad
faith or gross negligence in the performance of its or their duties or by reason
of reckless disregard of its or their obligations and duties under the
Administrative Services Agreements.

CFBDS has agreed to reimburse the Funds for their operating expenses
(exclusive of interest, taxes, brokerage, and extraordinary expenses) which in
any year exceed the limits prescribed by any state in which the Funds' shares
are qualified for sale. The expenses incurred by the Funds for distribution
purposes pursuant to the Trusts' Distribution Plans are included within such
operating expenses only to the extent required by any state in which the Funds'
shares are qualified for sale. The Trusts may elect not to qualify each Fund's
shares for sale in every state. The Trusts believe that currently the most
restrictive expense ratio limitation imposed by any state is 2 1/2% of the
first $30 million of a Fund's average net assets for its then-current fiscal
year, 2% of the next $70 million of such assets, and 1 1/2% of such assets in
excess of $100 million. For the purpose of this obligation to reimburse
expenses, the Funds' annual expenses are estimated and accrued daily, and any
appropriate estimated payments will be made by CFBDS. Subject to the obligation
of CFBDS to reimburse the Funds for their excess expenses as described above,
the Trusts have, under their respective Administrative Services Agreements,
confirmed their obligation for payment of all other expenses of the Funds.

The Administrative Services Agreements with the Portfolios provide that
CFBDS or SFG, as the case may be, may render administrative services to others.
The Administrative Services Agreement with each Portfolio terminates
automatically if it is assigned and may be terminated without penalty by a vote
of a majority of the outstanding voting securities of the Portfolio or by either
party on not more than 60 days' nor less than 30 days' written notice. The
Administrative Services Agreement with each Portfolio also provides that neither
CFBDS or SFG, as the case may be, nor its personnel shall be liable for any
error of judgment or mistake of law or for any act or omission in the
administration or management of the Portfolio, except for willful misfeasance,
bad faith or gross negligence in the performance of its or their duties or by
reason of reckless disregard of its or their obligations and duties under the
Administrative Services Agreement.

CFBDS and SFG are wholly-owned subsidiaries of Signature Financial Group,
Inc.

Pursuant to Sub-Administrative Services Agreements (the
"Sub-Administrative Agreements"), Citibank performs such sub-administrative
duties for the Trusts and the Portfolios as are from time to time agreed upon by
Citibank and, as the case may be, CFBDS or SFG. Citibank's sub-administrative
duties may include providing equipment and clerical personnel necessary for
maintaining the organization of the Trusts and the Portfolios, participation in
preparation of documents required for compliance by the Trusts and the
Portfolios with applicable laws and regulations, preparation of certain
documents in connection with meetings of Trustees and shareholders of the Trusts
and Portfolios, and other functions which would otherwise be performed by CFBDS
as set forth above. For performing such sub-administrative services, Citibank
receives such compensation as is from time to time agreed upon by Citibank and,
as the case may be, CFBDS or SFG not in excess of the amount paid to CFBDS or
SFG for its services under the applicable Administrative Services Agreement. All
such compensation is paid by CFBDS or SFG, as the case may be.

DISTRIBUTOR

Each of the Trusts has adopted a Distribution Plan ("Distribution Plan")
in accordance with Rule 12b-1 under the 1940 Act after having concluded that
there is a reasonable likelihood such Distribution Plan will benefit the
applicable Funds and their shareholders. Each Distribution Plan provides that
the applicable Trust shall pay a distribution fee to the Distributor at an
annual rate not to exceed 0.10% of the average daily net assets of each Fund
(exclusive of any advertising expenses incurred by the Distributor in connection
with the sale of shares of each Fund). The Distributor may use all or any
portion of such fee to pay for Fund expenses of printing prospectuses and
reports used for sales purposes, expenses of the preparation and printing of
sales literature and other distribution-related expenses, including, but not
limited to, employee salaries, bonuses and other overhead expenses.

The Distribution Plans also permit each Fund to pay the Distributor an
additional fee (not to exceed 0.10% per annum of the average daily net assets)
in anticipation of, or as reimbursement for, print or electronic media
advertising expenses incurred in connection with the sale of Fund shares. No
payments under a Distribution Plan are made to Shareholder Servicing Agents,
although Shareholder Servicing Agents receive payments under the Administrative
Services Plans referred to below.

Each Distribution Plan continues in effect if such continuance is
specifically approved at least annually by a vote of both a majority of the
applicable Trust's Trustees and a majority of the Trust's Trustees who are not
"interested persons" of the Trust and who have no direct or indirect financial
interest in the operation of the Distribution Plan or in any agreement related
to the Plan ("Qualified Trustees"). Each Distribution Plan requires that the
applicable Trust and the Distributor shall provide to the Board of Trustees, and
the Board of Trustees shall review, at least quarterly, a written report of the
amounts expended (and the purposes therefor) under the Distribution Plan. Each
Distribution Plan further provides that the selection and nomination of the
Qualified Trustees is committed to the discretion of the disinterested Trustees
(as defined in the 1940 Act) then in office. Each Distribution Plan may be
terminated with respect to any Fund at any time by a vote of a majority of the
applicable Trust's Qualified Trustees or by a vote of a majority of the
outstanding voting securities of the Fund. A Distribution Plan may not be
amended to increase materially the amount of a Fund's permitted expenses
thereunder without the approval of a majority of the outstanding voting
securities of that Fund and may not be materially amended in any case without a
vote of the majority of both the Trustees and the Qualified Trustees. The
Distributor will preserve copies of any plan, agreement or report made pursuant
to a Distribution Plan for a period of not less than six years from the date of
the Plan, and for the first two years the Distributor will preserve such copies
in an easily accessible place.

As contemplated by each Distribution Plan, CFBDS acts as the agent of the
Funds in connection with the offering of shares of the Funds pursuant to a
Distribution Agreement (the "Distribution Agreement"). After the prospectus and
periodic reports have been prepared, set in type and mailed to existing
shareholders, the Distributor pays for the printing and distribution of copies
of the prospectuses and periodic reports which are used in connection with the
offering of shares of the each of the Funds to prospective investors. The
Prospectus contains a description of fees payable to the Distributor under the
Distribution Agreements. During the period they are in effect, each Distribution
Plan and Distribution Agreement obligates the applicable Funds to pay
distribution fees to CFBDS as compensation for its distribution activities, not
as reimbursement for specific expenses incurred. Thus, even if CFBDS's expenses
exceed its distribution fees for any Fund, the Fund will not be obligated to pay
more than those fees and, if CFBDS's expenses are less than such fees, it will
retain its full fees and realize a profit. Each Fund will pay the distribution
fees to CFBDS until either its Distribution Plan or Distribution Agreement is
terminated or not renewed. In that event, CFBDS's expenses in excess of
distribution fees received or accrued through the termination date will be
CFBDS's sole responsibility and not obligations of the Fund. The Distributor has
voluntarily agreed to waive a portion of the fees payable to it by Connecticut
Tax Free Reserves and New York Tax Free Reserves on a month-to-month basis.

CASH RESERVES: For the fiscal years ended August 31, 1996, 1997 and 1998,
the fees paid from the Fund to the Distributor under the Distribution Agreement,
after waivers, were $663,261, $996,306 and $1,262,825, respectively, none of
which was applicable to print or electronic media advertising.

U.S. TREASURY RESERVES: For the fiscal years ended August 31, 1996, 1997
and 1998, the fees paid from the Fund to the Distributor under the Distribution
Agreement, after waivers, were $152,890, $194,657 and $184,159, respectively,
none of which was applicable to print or electronic media advertising.

TAX FREE RESERVES: For the fiscal year ended August 31, 1996, all fees
payable to the Distributor under the Distribution Agreement were voluntarily
waived. For the fiscal years ended August 31, 1997 and 1998, the fees paid from
the Fund to the Distributor under the Distribution Agreement, after waivers,
were $162,993 and $273,142, respectively, none of which was applicable to print
or electronic media advertising.

CALIFORNIA TAX FREE RESERVES: For the fiscal year ended August 31, 1996,
all fees payable to the Distributor under the Distribution Agreement were
voluntarily waived. For the fiscal years ended August 31, 1997 and 1998, the
fees paid from the Fund to the Distributor under the Distribution Agreement,
after waivers, were $23,302 and $38,266, respectively, none of which was
applicable to print or electronic media advertising.

CONNECTICUT TAX FREE RESERVES: For the fiscal year ended August 31, 1996,
all fees payable to the Distributor under the Distribution Agreement were
voluntarily waived. For the fiscal years ended August 31, 1997 and 1998, the
fees paid from the Fund to the Distributor under the Distribution Agreement,
after waivers, were $1,483 and $15,904, respectively, none of which was
applicable to print or electronic media advertising.

NEW YORK TAX FREE RESERVES: For the fiscal years ended August 31, 1996,
1997 and 1998, the fees paid from the Fund to the Distributor under the
Distribution Agreement, after waivers, were $382,233, $470,746 and $536,134,
respectively, none of which was applicable to print or electronic media
advertising.

SHAREHOLDER SERVICING AGENTS, TRANSFER AGENT AND CUSTODIAN

The Trusts have each adopted an Administrative Services Plan
("Administrative Plan") which provides that the applicable Trust may obtain the
services of an administrator, a transfer agent, a custodian, a fund accountant
and one or more Shareholder Servicing Agents, and may enter into agreements
providing for the payment of fees for such services. Under the Administrative
Services Plans, the total of the fees paid to each Administrator and Shareholder
Servicing Agent and the distribution fee paid to the Distributor (other than any
fee concerning electronic or other media advertising) may not exceed 0.70% of
Cash Reserves' or U.S. Treasury Reserves' average daily net assets or 0.60% of
each Tax Free Fund's average daily net assets on an annualized basis for the
Fund's then-current fiscal year. Within this overall limitation, individual fees
may vary. Each Administrative Plan continues in effect if such continuance is
specifically approved at least annually by a vote of both a majority of the
applicable Trust's Trustees and a majority of the Trust's Trustees who are not
"interested persons" of the Trust and who have no direct or indirect financial
interest in the operation of the Administrative Plan or in any agreement related
to such Plan ("Qualified Trustees"). Each Administrative Plan requires that at
least quarterly the applicable Trust provide to its Board of Trustees and the
Board of Trustees review a written report of the amounts expended (and the
purposes therefor) under the Administrative Plan. Each Administrative Plan may
be terminated with respect to a Fund at any time by a vote of a majority of the
applicable Trust's Qualified Trustees or by a vote of a majority of the
outstanding voting securities of the Fund. An Administrative Plan may not be
amended to increase materially the amount of a Fund's permitted expenses
thereunder without the approval of a majority of the outstanding voting
securities of the Fund and may not be materially amended in any case without a
vote of the majority of both the applicable Trust's Trustees and Qualified
Trustees.

Each Trust has entered into a shareholder servicing agreement (a
"Servicing Agreement") with each Shareholder Servicing Agent pursuant to which
that Shareholder Servicing Agent provides shareholder services, including
answering customer inquiries, assisting in processing purchase, exchange and
redemption transactions and furnishing Fund communications to shareholders. For
services provided under each Servicing Agreement, each Shareholder Servicing
Agent receives fees from each Fund at an annual rate of 0.25% of the average
daily net assets of the Fund represented by shares owned by investors for whom
such Shareholder Servicing Agent maintains a servicing relationship. Some
Shareholder Servicing Agents may impose certain conditions on their customers in
addition to or different from those imposed by the Funds, such as requiring a
minimum initial investment or charging their customers a direct fee for their
services. Each Shareholder Servicing Agent has agreed to transmit to its
customers who are shareholders of a Fund appropriate prior written disclosure of
any fees that it may charge them directly and to provide written notice at least
30 days prior to imposition of any transaction fees. For the fiscal years ended
August 31, 1996, 1997 and 1998, aggregate fees paid to Shareholder Servicing
Agents under the Servicing Agreements, after waivers, were as follows: Cash
Reserves $3,083,893, $4,065,240 and $5,026,036, respectively; U.S. Treasury
Reserves $737,500, $848,485 and $797,572, respectively; Tax Free Reserves
$976,208, $1,008,233 and $1,194,360, respectively; California Tax Free Reserves
$61,703, $459,224 and $619,577, respectively; Connecticut Tax Free Reserves
$50,991, $77,265 and $377,316, respectively; and New York Tax Free Reserves
$2,181,408, $2,405,573 and $2,634,965, respectively.

Each Trust and Portfolio has entered into a Transfer Agency and Service
Agreement and a Custodian Agreement with State Street Bank and Trust Company
("State Street") pursuant to which State Street (or its affiliate State Street
Canada, Inc.) acts as transfer agent and custodian and performs fund accounting
services. State Street (or its affiliate State Street Canada, Inc.) calculates
the daily net asset value for the Funds and the Portfolios. Securities held for
a Fund or Portfolio may be held by a sub-custodian bank approved by the
applicable Trust's or Portfolio's Trustees.

The Portfolios also have adopted Administrative Services Plans (the
"Portfolio Administrative Plans") which provide that the Portfolios may obtain
the services of an administrator, a transfer agent, a custodian and a fund
accountant, and may enter into agreements providing for the payment of fees for
such services. Under the Portfolio Administrative Plans, the administrative
services fee payable to either CFBDS or SFG, as the case may be, may not exceed
0.05% of a Portfolio's average daily net assets on an annualized basis for its
then-current fiscal year. Each Portfolio Administrative Plan continues in effect
if such continuance is specifically approved at least annually by a vote of both
a majority of the applicable Portfolio's Trustees and a majority of the
Portfolio's Trustees who are not "interested persons" of the Portfolio and who
have no direct or indirect financial interest in the operation of the Portfolio
Administrative Plan or in any agreement related to such Plan ("Qualified
Trustees"). Each Portfolio Administrative Plan requires that the applicable
Portfolio provide to its Board of Trustees and the Board of Trustees review, at
least quarterly, a written report of the amounts expended (and the purposes
therefor) under the Portfolio Administrative Plan. Each Portfolio Administrative
Plan may be terminated at any time by a vote of a majority of the Portfolio's
Qualified Trustees or by a vote of a majority of the outstanding voting
securities of the applicable Portfolio. Neither Portfolio Administrative Plan
may be amended to increase materially the amount of permitted expenses
thereunder without the approval of a majority of the outstanding voting
securities of the applicable Portfolio and may not be materially amended in any
case without a vote of the majority of both the Portfolio's Trustees and the
Portfolio's Qualified Trustees.

6. PORTFOLIO TRANSACTIONS

The Portfolios' and CitiFunds Multi-State Tax Free Trust's purchases and
sales of portfolio securities usually are principal transactions. Portfolio
securities normally are purchased directly from the issuer or from an
underwriter or market maker for the securities. There usually are no brokerage
commissions paid for such purchases. The Portfolios and CitiFunds Multi-State
Tax Free Trust do not anticipate paying brokerage commissions. Any transaction
for which a Portfolio or a Fund pays a brokerage commission will be effected at
the best price and execution available. Purchases from underwriters of portfolio
securities include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asked price.

Allocation of transactions, including their frequency, to various dealers
is determined by the Adviser in its best judgment and in a manner deemed to be
in the best interest of investors in the applicable Portfolio or Fund rather
than by any formula. The primary consideration is prompt execution of orders in
an effective manner at the most favorable price.

Investment decisions for each Portfolio and for CitiFunds Multi-State Tax
Free Trust will be made independently from those for any other account, series
or investment company that is or may in the future become managed by the Adviser
or its affiliates. If, however, a Portfolio or Fund and other investment
companies, series or accounts managed by the Adviser are contemporaneously
engaged in the purchase or sale of the same security, the transactions may be
averaged as to price and allocated equitably to each account. In some cases,
this policy might adversely affect the price paid or received by the Portfolio
or Fund or the size of the position obtainable for the Portfolio or Fund. In
addition, when purchases or sales of the same security for a Portfolio or Fund
and for other investment companies or series managed by the Adviser occur
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large denomination purchases or sales.

Portfolio transactions may be executed with the Adviser, or with any
affiliate of the Adviser, acting either as principal or as broker, subject to
applicable law. No commissions on portfolio transactions were paid by any
Portfolio or by CitiFunds Multi-State Tax Free Trust during the fiscal year
ended August 31, 1998 to the Adviser or any affiliate of the Adviser.

7. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES

Each Trust's Declaration of Trust permits the Trust's Board of Trustees to
issue an unlimited number of full and fractional shares of beneficial interest
(without par value) of each series and to divide or combine the shares of any
series into a greater or lesser number of shares of that series without thereby
changing the proportionate beneficial interests in that series. Currently, the
Funds are the only series of shares of each of the Trusts. Each share of each
Fund represents an equal proportionate interest in that Fund with each other
share of the Fund. Upon liquidation or dissolution of a Fund, the Fund's
shareholders are entitled to share pro rata in the Fund's net assets available
for distribution to its shareholders. The Trust reserves the right to create and
issue additional series and classes of shares. Shares of each series participate
equally in the earnings, dividends and distribution of net assets of the
particular series upon the liquidation or dissolution. Shares of each series are
entitled to vote separately to approve advisory agreements or changes in
investment policy, but shares of all series may vote together in the election or
selection of Trustees and accountants for the Trust. In matters affecting only a
particular series or class, only shares of that particular series or class are
entitled to vote.

Shareholders are entitled to one vote for each share held on matters on
which they are entitled to vote. Shareholders in the Trust do not have
cumulative voting rights, and shareholders owning more than 50% of the
outstanding shares of a Trust may elect all of the Trustees of that Trust if
they choose to do so and in such event the other shareholders in the Trust would
not be able to elect any Trustee. The Trusts are not required and have no
current intention to hold annual meetings of shareholders, but the Trusts will
hold special meetings of a Fund's shareholders when in the judgment of the
Trust's Trustees it is necessary or desirable to submit matters for a
shareholder vote. Shareholders have under certain circumstances (e.g., upon
application and submission of certain specified documents to the Trustees by a
specified number of shareholders) the right to communicate with other
shareholders in connection with requesting a meeting of shareholders for the
purpose of removing one or more Trustees. Shareholders also have the right to
remove one or more Trustees without a meeting by a declaration in writing by a
specified number of shareholders. No material amendment may be made to a Trust's
Declaration of Trust without the affirmative vote of the holders of a majority
of its outstanding shares.

Each Trust's Declaration of Trust provides that, at any meeting of
shareholders of the Trust or of any series of the Trust, a Shareholder Servicing
Agent may vote any shares of which it is the holder of record and for which it
does not receive voting instructions proportionately in accordance with the
instructions it receives for all other shares of which it is the holder of
record. Shares have no preference, pre-emptive, conversion or similar rights.
Shares, when issued, are fully paid and non-assessable, except as set forth
below.

Each Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders of
two-thirds of the Trust's outstanding shares voting as a single class, or of the
affected series of the Trust, as the case may be, except that if the Trustees of
the Trust recommend such sale of assets, merger or consolidation, the approval
by vote of the holders of a majority of the Trust's or the affected series'
outstanding shares would be sufficient. A Trust or any series of the Trust, as
the case may be, may be terminated (i) by a vote of a majority of the
outstanding voting securities of the Trust or the affected series or (ii) by the
Trustees by written notice to the shareholders of the Trust or the affected
series. If not so terminated, each Trust will continue indefinitely.

Share certificates will not be issued.

Each Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations and liabilities. However, each Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of the
applicable Trust and provides for indemnification and reimbursement of expenses
out of Trust property for any shareholder held personally liable for the
obligations of the Trust. Each Declaration of Trust also provides that the
applicable Trust shall maintain appropriate insurance (e.g., fidelity bonding
and errors and omissions insurance) for the protection of the Trust, its
shareholders, Trustees, officers, employees and agents covering possible tort
and other liabilities. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the applicable Trust itself was unable to meet
its obligations.

Each Trust's Declaration of Trust further provides that obligations of the
Trust are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or failure
to act, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he or she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office.

Each Portfolio is organized as a trust under the laws of the State of New
York. Each Portfolio's Declaration of Trust provides that investors in the
Portfolio (e.g., other investment companies (including the corresponding Fund),
insurance company separate accounts and common and commingled trust funds) are
each liable for all obligations of the Portfolio. However, the risk of a Fund
incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance existed and the applicable
Portfolio itself was unable to meet its obligations. It is not expected that the
liabilities of any Portfolio would ever exceed its assets.

Each investor in a Portfolio, including the corresponding Fund, may add to
or reduce its investment in the Portfolio on each business day. At 3:00 p.m.,
Eastern time, for Cash Reserves Portfolio, and 12:00 noon, Eastern time, for
U.S. Treasury Reserves Portfolio and Tax Free Reserves Portfolio, on each such
business day, the value of each investor's interest in the Portfolio is
determined by multiplying the net asset value of the Portfolio by the percentage
representing that investor's share of the aggregate beneficial interests in the
Portfolio effective for that day. Any additions or withdrawals, which are to be
effected on that day, are then effected. The investor's percentage of the
aggregate beneficial interests in the Portfolio is then re-computed as the
percentage equal to the fraction (i) the numerator of which is the value of such
investor's investment in the Portfolio as of 3:00 p.m. Eastern time, for Cash
Reserves Portfolio, and 12:00 noon, Eastern time, for U.S. Treasury Reserves
Portfolio and Tax Free Reserves Portfolio, on such day plus or minus, as the
case may be, the amount of any additions to or withdrawals from the investor's
investment in the Portfolio effected on such day, and (ii) the denominator of
which is the aggregate net asset value of the Portfolio as of 3:00 p.m., Eastern
time, for Cash Reserves Portfolio, and 12:00 noon, Eastern time, for U.S.
Treasury Reserves Portfolio and Tax Free Reserves Portfolio, on such day plus or
minus, as the case may be, the amount of the net additions to or withdrawals
from the aggregate investments in the Portfolio by all investors in the
Portfolio. The percentage so determined is then applied to determine the value
of the investor's interest in the Portfolio as of 3:00 p.m., Eastern time, for
Cash Reserves Portfolio, and 12:00 noon, Eastern time, for U.S. Treasury
Reserves Portfolio and Tax Free Reserves Portfolio, on the following business
day of the Portfolio.

8. CERTAIN ADDITIONAL TAX MATTERS

Each of the Funds has elected to be treated and intends to qualify each
year as a "regulated investment company" under Subchapter M of the Code, by
meeting all applicable requirements of Subchapter M, including requirements as
to the nature of the Fund's gross income, the amount of Fund distributions (as a
percentage of a Tax Free Fund's overall income and its tax-exempt income) and
the composition of the Fund's portfolio assets. Provided all such requirements
are met and all of a Fund's net investment income and realized capital gains are
distributed to shareholders in accordance with the timing requirements imposed
by the Code, no federal income or excise taxes generally will be required to be
paid by the Fund. If a Fund should fail to qualify as a regulated investment
company for any year, the Fund would incur a regular corporate federal income
tax upon its taxable income and Fund distributions would generally be taxable as
ordinary dividend income to shareholders. Each of the Portfolios believes that
it will not be required to pay any federal income or excise taxes.

Investment income received by Cash Reserves from non-U.S. investments may
be subject to foreign income taxes withheld at the source; Cash Reserves does
not expect to be able to pass through to shareholders any foreign tax credits or
deductions with respect to those foreign taxes. The United States has entered
into tax treaties with many foreign countries that may entitle Cash Reserves to
a reduced rate of tax or an exemption from tax on these investments. It is not
possible to determine Cash Reserves' effective rate of foreign tax in advance
since that rate depends upon the proportion of the Cash Reserves Portfolio's
assets ultimately invested within various countries.

The portion of a Tax Free Fund's distributions of net investment income
that is attributable to interest from tax-exempt securities will be designated
by the Fund as an "exempt-interest dividend" under the Code and will generally
be exempt from federal income tax in the hands of shareholders so long as at
least 50% of the total value of the Fund's assets consists of tax-exempt
securities at the close of each quarter of the Fund's taxable year.
Distributions of tax-exempt interest earned from certain securities may,
however, be treated as an item of tax preference for shareholders under the
federal alternative minimum tax, and all exempt-interest dividends may increase
a corporate shareholder's alternative minimum tax. Unless the Tax Free Fund
provides shareholders with actual monthly percentage breakdowns, the percentage
of income designated as tax-exempt will be applied uniformly to all
distributions by the Fund of net investment income made during each fiscal year
of the Fund and may differ from the percentage of distributions consisting of
tax-exempt interest in any particular month. Shareholders are required to report
exempt-interest dividends received from a Tax Free Fund on their federal income
tax returns.

Because each Fund expects to earn primarily interest income, it is
expected that no Fund distributions will qualify for the dividends received
deduction for corporations.

With respect to California Tax Free Reserves, under existing California
law, if, at the close of each quarter of its taxable year, the Fund continues to
qualify for the special federal income tax treatment afforded regulated
investment companies and at least 50% of the value of the Fund's total assets
consist of California Exempt-Interest Securities, then "California
exempt-interest dividends" attributable to such securities will be exempt from
California personal income tax. A "California exempt-interest dividend" is any
dividend distributed by California Tax Free Reserves to the extent that it is
derived from the interest received by the Fund from California Exempt-Interest
Securities (less related expenses) and designated as such by written notice to
shareholders. Distributions other than "California exempt-interest dividends" by
California Tax Free Reserves to California residents will be subject to
California personal income tax. The foregoing is only a brief summary of some of
the important tax considerations generally affecting shareholders that are
subject to California personal income tax. Potential investors, including, in
particular, investors who may be subject to other taxes, such as California
corporate franchise tax. California corporate income tax or taxes of other
jurisdictions, should consult with their own tax advisers.

9. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS

PricewaterhouseCoopers LLP and PricewaterhouseCoopers are the independent
and chartered accountants for Cash Reserves and Cash Reserves Portfolio,
respectively, providing audit services and assistance and consultation with
respect to the preparation of filings with the SEC. Deloitte & Touche LLP are
the independent accountants for U.S. Treasury Reserves, U.S. Treasury Reserves
Portfolio, Tax Free Reserves Portfolio and each of the Tax Free Funds, providing
audit services and assistance and consultation with respect to the preparation
of filings with the SEC.

Financial statements to be added by amendment.

<PAGE>

APPENDIX A

RATINGS OF MUNICIPAL OBLIGATIONS*

The ratings of Moody's Investors Service, Inc., Standard & Poor's Ratings Group
and Fitch IBCA, Inc. represent their opinions as to the quality of various debt
obligations. It should be emphasized, however, that ratings 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.

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC'S TWO HIGHEST LONG-TERM DEBT
RATINGS:

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

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

Note: Moody's applies numerical modifiers 1, 2, and 3 in the generic rating
classification Aa. The modifier 1 indicates that the obligation ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates a ranking in the lower end of that generic
rating category.

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST RATINGS OF STATE
AND MUNICIPAL NOTES:

Moody's ratings for state and municipal short-term obligations are designated
Moody's Investment Grade ("MIG"). Issues or the features associated with MIG or
VMIG ratings are identified by date of issue, date of maturity or maturities or
rating expiration date and description to distinguish each rating from other
ratings. Each rating designation is unique with no implication as to any other
similar issue of the same obligor. MIG ratings terminate at the retirement of
the obligation while VMIG rating expiration will be a function of each issue's
specific structural or credit features.

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

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

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST SHORT-TERM DEBT
RATINGS:

Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.

Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics: (1) leading market
positions in well established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structure with moderate reliance on
debt and ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (5) well established
access to a range of financial markets and assured sources of alternate
liquidity.

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

DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S TWO HIGHEST LONG-TERM DEBT
RATINGS:

AAA -- An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitments on the
obligation is extremely strong.

AA -- An obligation rated AA differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial obligations is very
strong.

Plus (+) or Minus (-): The AA rating may be modified by the addition of a plus
or minus sign to show relative standing within the AA rating category.

DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S TWO HIGHEST RATINGS OF STATE
AND MUNICIPAL NOTES:

A Standard & Poor's note rating reflects the liquidity factors and market access
risks unique to notes. Notes maturing in three years or less will likely receive
a note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assessment:

- -- Amortization schedule -- the larger the final maturity relative to other
maturities, the more likely the issue is to be treated as a note.

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

Note rating symbols and definitions are as follows:

SP-1 -- Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.

SP-2 -- Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.

DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S TWO HIGHEST COMMERCIAL PAPER
RATINGS:

A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days.

A-1 -- A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.

A-2 -- A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.

DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S RATINGS OF TAX-EXEMPT DEMAND
BONDS:

Standard & Poor's assigns "dual" ratings to all debt issues that have a put
option or demand feature as part of their structure.

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 for the put option (for example, "AAA/A-1+").
With short-term demand debt, Standard & Poor's rating symbols are used with the
commercial paper rating symbols (for example, "SP-1+/A-1+").

DESCRIPTION OF FITCH IBCA, INC.'S TWO HIGHEST INTERNATIONAL LONG-TERM CREDIT
RATINGS:

When assigning ratings, Fitch IBCA considers the historical and prospective
financial condition, quality of management, and the operating performance of the
issuer and of any guarantor, any special features of a specific issue or
guarantee, the issue's relationship to other obligations of the issuer, as well
as developments in the economic and political environment that might affect the
issuer's financial strength and credit quality.

Variable rate demand obligations and other securities which contain a demand
feature will have a dual rating, such as "AAA/F1+". The first rating denotes
long-term ability to make principal and interest payments. The second rating
denotes ability to meet a demand feature in full and on time.

AAA -- Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in the case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely to
be adversely affected by foreseeable events.

AA -- Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.

Plus (+) or Minus (-): "+" or "-" may be appended to a rating of "AA" to denote
relative status within the rating category.

DESCRIPTION OF FITCH IBCA, INC.'S TWO HIGHEST INTERNATIONAL SHORT-TERM CREDIT
RATINGS:

A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.

F1 -- Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" denote any exceptionally
strong credit feature.

F2 -- Good Credit Quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.

*As described by the rating agencies. Ratings are generally given to securities
at the time of issuance. While the rating agencies may from time to time revise
such ratings, they undertake no obligation to do so.

<PAGE>

APPENDIX B

ADDITIONAL INFORMATION CONCERNING
CALIFORNIA MUNICIPAL OBLIGATIONS
The following information is a summary of special factors affecting
investments in California Municipal Obligations. The sources of payment for such
obligations and the marketability thereof may be affected by financial or other
difficulties experienced by the State of California (the "State") and certain of
its municipalities and public authorities. This information does not purport to
be a complete description and is based on information from statements relating
to offerings of California issuers. CitiFunds California Tax Free Reserves is
not responsible for the accuracy or timeliness of this information.

RECENT DEVELOPMENTS
From 1990-1993, the State suffered through a severe recession, the worst
since the 1930's, heavily influenced by large cutbacks in defense/aerospace
industries and military base closures and a major drop in real estate
construction. California's economy has been recovering and growing steadily
stronger since the start of 1994, to the point where the State's economic growth
is outpacing the rest of the nation. More than 300,000 nonfarm jobs were added
in the State in 1996, while personal income grew by more than $55 billion.
Another 380,000 jobs are expected to be created in 1997. The unemployment rate,
while still higher than the national average, fell to the low 6% range in
mid-1997, compared to over 10% at the worst of the recession.

California's economic expansion is being fueled by strong growth in high-
technology industries, including computer software, electronics manufacturing
and motion picture/television production; growth is also strong in business
services, export trade, and manufacturing, with even the aerospace sector now
showing increased employment. The State's economy is now much more balanced and
diversified than it was during the 1980's. Nonresidential real estate
construction has grown rapidly in response to the growth in the economy.
Residential construction has been growing slowly since the depths of the
recession, but remains much lower (as measured by annual new unit permits) than
the late 1980's.

Moody's, Standard and Poor's and Fitch assigned their municipal bond
ratings of A1, A+ and AA-, respectively, to the State's general obligation
bonds. Each such rating reflects only the views of the respective rating agency,
and an explanation of the significance of such rating may be obtained from such
rating agency. There is no assurance that such ratings will continue for any
given period of time or that they will not be revised or withdrawn entirely by
such rating agency if, in the judgment of such rating agency, circumstances so
warrant. A downward revision or withdrawal of any such rating may have an
adverse effect on the market price of the State's general obligation bonds.

CONSTITUTIONAL LIMITS ON SPENDING AND TAXES

STATE APPROPRIATIONS LIMIT
The State is subject to an annual appropriations limit imposed by Article
XIII B of the State Constitution (the "Appropriations Limit"). The
Appropriations Limit does not restrict appropriations to pay debt service on
voter-authorized bonds.

Article XIII B prohibits the State from spending "appropriations subject
to limitation" in excess of the Appropriations Limit. "Appropriations subject to
limitation," with respect to the State, are authorizations to spend "proceeds of
taxes," which consist of tax revenues, and certain other funds, including
proceeds from regulatory licenses, user charges or other fees to the extent that
such proceeds exceed "the cost reasonably borne by that entity in providing the
regulation, product or service," but "proceeds of taxes" exclude most State
subventions to local governments, tax refunds and some benefit payments such as
unemployment insurance. No limit is imposed on appropriations of funds which are
not "proceeds of taxes," such as reasonable user charges or fees and certain
other non-tax funds.

Not included in the Appropriations Limit are appropriations for the debt
service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase in
gasoline taxes and motor vehicle weight fees above January 1, 1990 levels, and
appropriations of certain special taxes imposed by initiative (e.g., cigarette
and tobacco taxes). The Appropriations Limit may also be exceeded in cases of
emergency.

The State's Appropriations Limit in each year is based on the limit for
the prior year, adjusted annually for changes in State per capita personal
income and changes in population, and adjusted, when applicable, for any
transfer of financial responsibility of providing services to or from another
unit of government. The measurement of change in population is a blended average
of statewide overall population growth, and change in attendance at local school
and community college ("K-14") districts. The Appropriations Limit is tested
over consecutive two-year periods. Any excess of the aggregate "proceeds of
taxes" received over such two-year period above the combined Appropriations
Limits for those two years is divided equally between transfers to K-14
districts and refunds to taxpayers.

PROPOSITION 98
On November 8, 1988, voters of the State approved Proposition 98, a
combined initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act." Proposition 98 changed State
funding of public education below the university level and the operation of the
State Appropriations Limit, primarily by guaranteeing K-14 schools a minimum
share of General Fund revenues. Under Proposition 98 (as modified by Proposition
111, which was enacted on June 5, 1990), K-14 schools are guaranteed the greater
of (a) in general, a fixed percent of General Fund revenues ("Test 1"), (b) the
amount appropriated to K-14 schools in the prior year, adjusted for changes in
the cost of living (measured as in Article XIII B by reference to State per
capita personal income) and enrollment ("Test 2"), or (c) a third test, which
would replace Test 2 in any year when the percentage growth in per capita
General Fund revenues from the prior year plus one half of one percent is less
than the percentage growth in State per capita personal income ("Test 3"). Under
Test 3, schools would receive the amount appropriated in the prior year adjusted
for changes in enrollment and per capita General Fund revenues, plus an
additional small adjustment factor. If Test 3 is used in any year, the
difference between Test 3 and Test 2 would become a "credit" to schools which
would be the basis of payments in future years when per capita General Fund
revenue growth exceeds per capita personal income growth. Legislation adopted
prior to the end of the 1988-89 Fiscal Year, implementing Proposition 98,
determined the K-14 schools' funding guarantee under Test 1 to be 40.3 percent
of the General Fund tax revenues, based on 1986-87 appropriations. However, that
percentage has been adjusted to approximately 35 percent to account for a
subsequent redirection of local property taxes, since such redirection directly
affects the share of General Fund revenues to schools.

Proposition 98 permits the Legislature by two-thirds vote of both houses,
with the Governor's concurrence, to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.

During the recent recession, General Fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,200 from Fiscal Year
1991-92 to Fiscal Year 1993-94.

In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. The settlement
of this case, finalized in July, 1996, provides, among other things, that both
the State and K-14 schools share in the repayment of prior years' emergency
loans to schools. Of the total $1.76 billion in loans, the State will repay $935
million by forgiveness of the amount owed, while schools will repay $825
million. The State share of the repayment will be reflected as an appropriation
above the current Proposition 98 base calculation. The schools' share of the
repayment will count as appropriations that count toward satisfying the
Proposition 98 guarantee, or from "below" the current base. Repayments are
spread over the eight-year period of 1994-95 through 2001-02 to mitigate any
adverse fiscal impact.

Substantially increased General Fund revenues, above initial budget
projections, in the fiscal years 1994-95 and thereafter have resulted or will
result in retroactive increases in Proposition 98 appropriations from subsequent
fiscal years' budgets. Because of the State's increasing revenues, per-pupil
funding at the K-12 level has increased by about 22% from the level in place
from 1991-92 through 1993-94, and is estimated at about $5,150 per ADA in
1997-98. A significant amount of the "extra" Proposition 98 monies in the last
few years have been allocated to special programs, most particularly an
initiative to allow each classroom from grades K-3 to have no more than 20
pupils by the end of the 1997-98 school year. There are also new initiatives for
reading skills and to upgrade technology in high schools.

SOURCES OF TAX REVENUE
The following is a summary of the State's major revenue sources.

PERSONAL INCOME TAX
The California personal income tax, which in 1995-96 contributed about 44
percent of General Fund revenues, is closely modeled after the federal income
tax law. It is imposed on net taxable income (gross income less exclusions and
deductions). The tax is progressive with rates ranging from 1 to 9.3 percent.
Personal, dependent, and other credits are allowed against the gross tax
liability. In addition, taxpayers may be subject to an alternative minimum tax
("AMT") which is much like the federal AMT. Legislation enacted in July 1991
added two new marginal tax rates, at 10 percent and 11 percent, effective for
tax years 1991 through 1995. After 1995, the maximum personal income tax rate
returned to 9.3 percent, and the AMT rate dropped from 8.5 percent to 7 percent.

The personal income tax is adjusted annually by the change in the consumer
price index to prevent taxpayers from being pushed into higher tax brackets
without a real increase in income.

SALES TAX
The sales tax is imposed upon retailers for the privilege of selling
tangible personal property in California. Sales tax accounted for about 34
percent of General Fund revenue in 1995-96. Most retail sales and leases are
subject to the tax. However, exemptions have been provided for certain
essentials such as food for home consumption, prescription drugs, gas delivered
through mains and electricity. Other exemptions provide relief for a variety of
sales ranging from custom computer software to aircraft.

BANK AND CORPORATION TAX
Bank and corporation tax revenues, which comprised about 13 percent of
General Fund revenue in 1995-96, are derived from the following taxes:

1. The franchise tax and the corporate income tax are levied at a 8.84
percent rate on profits for income years beginning on or after January 1, 1997.
The former is imposed on corporations for the privilege of doing business in
California, while the latter is imposed on corporations which do not do business
in the State but which derive income from California sources.

2. Banks and other financial corporations are subject to the franchise tax
plus an additional tax at the rate of 2.0 percent on their net income. This
additional tax is in lieu of personal property taxes and business license taxes.

3. The alternative minimum tax ("AMT") is similar to that in federal law.
In general, the AMT is based on a higher level of net income computed by adding
back certain tax preferences. This tax is imposed at a rate of 6.65 percent
effective for income years beginning on or after January 1, 1997.

4. Sub-Chapter S corporations are taxed at 1.5 percent of profits.

INSURANCE TAX
The majority of insurance written in California is subject to a 2.35
percent gross premium tax. For insurers, this premium tax takes the place of all
other State and local taxes except those on real property and motor vehicles.
Exceptions to the 2.35 percent rate are certain pension and profit-sharing plans
which are taxed at the lesser rate of 0.50 percent, surplus lines and
nonadmitted insurance at 3 percent and ocean marine insurers at 5 percent of
underwriting profits. Insurance taxes comprised approximately 2.4 percent of
General Fund revenues in 1995-96.

In November, 1988, voters approved Proposition 103, which mandated
reductions and rebates for certain property and casualty insurance premiums. The
measure also directed the State Board of Equalization to adjust the gross
premiums tax rate to compensate for any resultant decrease in insurance tax
revenue through the 1990 tax year. As a result, the State Board of Equalization
increased the gross premiums tax rate from 2.35 percent to 2.37 percent for the
1989 tax year and to 2.46 percent for the 1990 tax year. For 1991 and beyond,
the rate returned to 2.35 percent. Implementation of the offset rates used for
Proposition 103 resulted in a lawsuit which has now been settled. The Board of
Equalization anticipates claims of $33 million from this case will be paid by
the State.

OTHER TAXES
Other General Fund major taxes and license revenues include: Estate,
Inheritance and Gift Taxes, Cigarette Taxes, Alcoholic Beverage Taxes, Horse
Racing Revenues and trailer coach license fees. These other sources totaled
approximately 2.6 percent of General Fund revenues in the 1995-96 Fiscal Year.

SPECIAL FUND REVENUES
The California Constitution, codes and statutes specify the uses of
certain revenue. Such receipts are accounted for in various Special Funds. In
general, Special Fund revenues comprise three categories of income:

1. Receipts from tax levies which are allocated to specified functions,
such as motor vehicle taxes and fees and certain taxes on tobacco products.

2. Charges for special services to specific functions, including such
items as business and professional license fees.

3. Rental royalties and other receipts designated for particular purposes
(for example, oil and gas royalties).

Motor vehicle related taxes and fees accounted for about 60 percent of all
Special Fund revenue in 1995-96. Principal sources of this income are motor
vehicle fuel taxes, registration and weight fees and vehicle license fees.
During the 1995-96 Fiscal Year, $7.7 billion was derived from the ownership or
operation of motor vehicles. About $3.3 billion of this revenue was returned to
local governments. The remainder was available for various State programs
related to transportation and services to vehicle owners. These amounts include
the additional fees and taxes derived from the passage of Proposition 111 in
June 1990.

On November 8, 1988, voters approved Proposition 99, which imposed, as of
January 1, 1989, an additional 25 cents per pack excise tax on cigarettes, and a
new, equivalent excise tax on other tobacco products. The initiative requires
that funds from this tax be allocated to anti-tobacco education and research and
indigent health services, and environmental and recreation programs. The
Legislature, as part of the 1994-95 and 1995-96 Budget Acts, redirected part of
the Proposition 99 funds to indigent health care. These actions have been
blocked by court orders, and are currently before the appellate court, after the
State lost in trial court.

PRIOR FISCAL YEARS' FINANCIAL RESULTS

FISCAL YEARS PRIOR TO 1995-96
Pressures on the State's budget in the late 1980's and early 1990's were
caused by a combination of external economic conditions and growth of the
largest General Fund Programs -- K-14 education, health, welfare and corrections
- -- at rates faster than the revenue base. These pressures could continue as the
State's overall population and school age population continue 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. In addition, the State's health and welfare programs are in a
transition period as a result of recent federal and State welfare reform
initiatives.

As a result of these factors and others, and especially because a severe
recession between 1990-94 reduced revenues and increased expenditures for social
welfare programs, 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 in its
budget reserve, the Special Fund for Economic Uncertainties ("SFEU") approaching
$2.8 billion at its peak at June 30, 1993. Between the 1991-92 and 1994-95
Fiscal Years, each budget required multibillion dollar actions to bring
projected revenues and expenditures into balance, including significant cuts in
health and welfare program expenditures; transfers of program responsibilities
and funding from the State to local governments; transfer of about $3.6 billion
in annual local property tax revenues from other local governments to local
school districts, thereby reducing State funding for schools under Proposition
98; and revenue increases (particularly in the 1991-92 Fiscal Year budget), most
of which were for a short duration.

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

Another consequence of the accumulated budget deficits, together with
other factors such as disbursement of funds to local school districts "borrowed"
from future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish its cash reserves,
the State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.

For several fiscal years during the recession, the State was forced to
rely on external debt markets to meet its cash needs, as a succession of notes
and revenue anticipation warrants were issued in the period from June 1992 to
July 1994, often needed to pay previously maturing notes or warrants. These
borrowings were used also in part to spread out the repayment of the accumulated
budget deficit over the end of a fiscal year, as noted earlier. The last and
largest of these borrowings was $4.0 billion of revenue anticipation warrants
which were issued in July, 1994 and matured on April 25, 1996.

1995-96 AND 1996-97 FISCAL YEARS
With the end of the recession, and a growing economy starting in 1994, the
State's financial condition improved markedly in the last two fiscal years, with
a combination of better than expected revenues, slowdown in growth of social
welfare programs, and continued spending restraint based on the actions taken in
earlier years. The last of the recession-induced budget deficits was repaid,
allowing the State's budget reserve (the "SFEU") to post a positive cash balance
for only the second time in the 1990's, totaling $281 million as of June 30,
1997. The State's cash position also returned to health, as cash flow borrowing
was limited to $3 billion in 1996-97, and no deficit borrowing has occurred over
the end of these last two fiscal years.

In each of these two fiscal years, the State budget contained the
following major features:

1. Expenditures for K-14 schools grew significantly, as the new revenues
were directed to school spending under Proposition 98. This new money allowed
several new education initiatives to be funded, and raised K-12 per-pupil
spending to around $4,900 by Fiscal Year 1996-97.

2. The budgets restrained health and welfare spending levels, holding to
the reduced benefit levels enacted in earlier years, and attempted to reduce
General Fund spending by calling for greater support from the federal
government. The State also attempted to shift to the federal government a larger
share of the cost of incarceration and social services for illegal aliens. Some
of these efforts were successful, and federal welfare reform also helped, but as
a whole the federal support never reached the levels anticipated when the
budgets were enacted. These funding shortfalls were, however, filled by the
strong revenue collections, which exceeded expectations.

3. General Fund support for the University of California and California
State Universities grew by an average of 5.2 percent and 3.3 percent per year,
respectively, and there were no increases in student fees.

4. General Fund support for the Department of Corrections grew as needed
to meet increased prison population. No new prisons were approved for
construction, however.

5. There were no tax increases, and starting January 1, 1997, there was a
5 percent cut in corporate taxes. The suspension of the Renter's Tax Credit,
first taken as a cost-saving measure during the recession, was continued.

As noted, the economy grew strongly during these fiscal years, and as a
result, the General Fund took in substantially greater tax revenues (around $2.2
billion in 1995-96 and $1.6 billion in 1996-97) than were initially planned when
the budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, and to make up shortfalls from reduced
federal health and welfare aid. As a result, there was not any dramatic increase
in budget reserves, although the accumulated budget deficit from the recession
years was finally eliminated in the past fiscal year.

CURRENT STATE BUDGET

The discussion below of the 1997-98 Fiscal Year budget is based on
estimates and projections of revenues and expenditures for the current fiscal
year and must not be construed as statements of fact. These estimates and
projections are based upon various assumptions which may be affected by numerous
factors, including future economic conditions in the State and the nation, and
there can be no assurance that the estimates will be achieved.
See "Economic Considerations" below.

1997-98 FISCAL YEAR
Background
On January 9, 1997, the Governor released his proposed budget for the
1997-98 Fiscal Year (the "Proposed Budget"). The Proposed Budget estimated
General Fund revenues and transfers of about $50.7 billion, and proposed
expenditures of $50.3 billion, which would leave a budget reserve in the SFEU of
about $550 million. The Proposed Budget included provisions for a further 10%
cut in Bank and Corporation Taxes, which ultimately was not enacted by the
Legislature.

At the time of the May Revision, released on May 14, 1997, the Department
of Finance increased its revenue estimate for the upcoming fiscal year by $1.3
billion, in response to the continued strong growth in the State's economy.
Budget negotiations continued into the summer, with major issues to be resolved
including final agreement on State welfare reform, increase in State employee
salaries and consideration of a tax cut proposed by the Governor. In May, 1997,
action was taken by the California Supreme Court in an ongoing lawsuit, PERS v.
Wilson, which made final a judgment against the State requiring an immediate
payment from the General Fund to the Public Employees Retirement Fund ("PERF")
to make up certain deferrals in annual retirement fund contributions which had
been legislated in earlier years for budget savings, and which the courts found
to be unconstitutional. On July 30, 1997, following a direction from the
Governor, the Controller transferred $1.235 billion from the General Fund to the
PERF in satisfaction of the judgment, representing the principal amount of the
improperly deferred payments from 1995-96 and 1996-97.

Fiscal Year 1997-98 Budget Act
Once the pension payment eliminated essentially all the "increased"
revenue in the budget, final agreement was reached within a few weeks on the
welfare package and the remainder of the budget. The Legislature passed the
Budget Bill on August 11, 1997, along with numerous related bills to implement
its provisions. On August 18, 1997, the Governor signed the Budget Act, but
vetoed about $314 million of specific spending items, primarily in health and
welfare and education areas from both the General Fund and Special Funds.

The Budget Act anticipates General Fund revenues and transfers of $52.5
billion (a 6.8 percent increase over the final 1996-97 amount), and expenditures
of $52.8 billion (an 8.0 percent increase from the 1996-97 levels). On a
budgetary basis, the budget reserve (SFEU) is projected to decrease from $408
million at June 30, 1997 to $112 million at June 30, 1998. The Budget Act also
includes Special Fund expenditures of $14.4 billion (as against estimated
Special Fund revenues of $14.0 billion), and $2.1 billion of expenditures from
various Bond Funds. Following enactment of the Budget Act, the State implemented
its normal annual cash flow borrowing program, issuing $3 billion of notes which
mature on June 30, 1998.

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

1. For the second year in a row, the Budget contains a large increase in
funding for K-14 education under Proposition 98, reflecting strong revenues
which have exceeded initial budgeted amounts. Part of the nearly $1.75 billion
in increased spending is allocated to prior fiscal years. Funds are provided to
fully pay for the cost-of-living-increase component of Proposition 98, and to
extend the class size reduction and reading initiatives.

2. The Budget Act reflects the $1.235 billion pension case judgment
payment, and brings funding of the State's pension contribution back to the
quarterly basis which existed prior to the deferral actions which were
invalidated by the courts. There is no provision for any additional payments
relating to this court case.

3. Continuing the third year of a four-year "compact" which the
Administration has made with higher education units, funding from the General
Fund for the University of California and California State University has
increased by about 6 percent ($121 million and $107 million, respectively), and
there was no increase in student fees.

4. Because of the effect of the pension payment, most other State programs
were continued at 1996-97 levels, adjusted for caseload changes.

5. Health and welfare costs are contained, continuing generally the grant
levels from prior years, as part of the initial implementation of the new
CalWORKs program.

6. Unlike prior years, this Budget Act does not depend on uncertain
federal budget actions. About $300 million in federal funds, already included in
the federal Fiscal Year 1997 and 1998 budgets, are included in the Budget Act,
to offset incarceration costs for illegal aliens.

7. The Budget Act contains no tax increases, and no tax reductions. The
Renters Tax Credit was suspended for another year, saving approximately $500
million.

Prior to the end of the Legislative Session on September 13, 1997, the
Legislature passed a bill restoring $203 million of education-related
expenditures which the Governor had vetoed in the original Budget Act, based on
agreement with the Governor on an education testing program. The Governor signed
several bills implementing a new education testing program, and is expected to
sign the bill to restore the funding. The Legislature also passed a bill to
restore $48 million of welfare cost savings which had been part of earlier
legislation vetoed by the Governor. This bill was signed by the Governor in
early October.

Also prior to the end of the Legislative Session, the Legislature passed
several bills encompassing a coordinated package of fiscal reforms, mostly to
take effect after the 1997-98 Fiscal Year. Included in the package are a variety
of phased-in tax cuts, conformity with certain provisions of the federal tax
reform law passed earlier in the year, and reform of funding for county trial
courts, with the State to assume greater financial responsibility. The Governor
signed most of these bills in early October. The Department of Finance estimates
that the major impact of these fiscal reforms will occur in Fiscal Year 1998-99
and subsequent years. The Department further estimates that a small projected
revenue loss in Fiscal Year 1997-98 will be more than offset by increased
Personal Income Tax receipts which will be generated by the new, more favorable
federal and state capital gains tax rates.

ECONOMIC CONSIDERATIONS
The State's economy is continuing to experience strong, sustained growth.
Nonfarm wage and salary employment increased at an annual rate of 400,000 jobs
in this year's first quarter. The March 1997 unemployment rate of 6.5 percent
was a full percentage point lower than a year ago.

The more vigorous national economy and strong first-quarter California job
growth has resulted in an upward revision to the California forecast. This year,
the state is on course to add 380,000 new jobs, 50,000 more than in the January
budget. In 1998, the State is expected to create an additional 300,000 jobs, up
from 250,000 in the January forecast. Thus, employment growth for the next two
years has been increased by 100,000 over the January budget, to a gain of
680,000 new jobs.

The revised 1997 unemployment rate of 6.3 percent is a half-percent lower
than the January forecast, and the revised 1998 rate of 5.8 percent is nearly a
full percentage point lower than was forecast in January. Personal income growth
is revised up by 0.2 percentage point in both 1997 and 1998, a rate that
continues to outpace the nation's growth rate.

The State is benefiting from a unique industry mix that includes a wide
array of high-technology manufacturing and service sectors, including electronic
components, computers, instruments, software, motion pictures, multimedia and
biotechnology. Growth in these industries has more than offset losses resulting
from severe cuts in the nation's defense budget, which contributed to a
67-percent drop in aerospace employment between 1988 and 1995.

From the recession's low point in late 1993, California's economy has
created more than one million new jobs through March 1997, and has eclipsed the
previous May 1990 employment peak by nearly 300,000. The State's economy is
marking another milestone this year: gross state product is now exceeding the
one trillion dollar level -- the first time any state has achieved this
magnitude of economic output.

Many of the new high-growth industries are also high-wage industries.
Wages in computer manufacturing average more than $64,000 per year; in software
and multimedia industries, more than $68,000; in biotechnology, more than
$60,000; and in motion picture production, more than $65,000. Growth in these
high-wage jobs resulted in total wages increasing by more than double the rise
in total employment in 1996.

Employment in manufacturing increased by 3.3 percent in 1996 -- a gain of
almost 60,000 jobs. This represents the best job gain since 1984 and is in sharp
contrast to a loss of nearly 250,000 factory jobs in the other 49 states. The
long decline in aerospace appears to have bottomed out -- the industry added
1,400 jobs over the past year reflecting a pickup in the commercial segment of
the business.

International trade also contributes to the State's economic growth. In
spite of a stronger dollar and sluggish economic performance by many industrial
trading partners, foreign trade through California ports continued to expand in
1996 -- with total trade volume of just under $300 billion. Exports shipped via
California ports grew by 6.3 percent and imports rose by 2.9 percent over 1995.
Importantly, exports of California-made goods -- shipped from California and
elsewhere -- rose more than 8 percent in 1997, nearly double the growth of
exports nationwide.

California inflation has been revised down 0.4 percentage point compared
to the January forecast. This is less than the revision to national inflation
and is due to housing cost pressures in the Bay Area.

Highlights of the California forecast include:

o Employment is projected to grow faster than the nation for the next two
years, with an increase of 3 percent in 1997 and 2.3 percent in 1998 --
680,000 new jobs over the next two years. Unemployment is expected to drop to
6 percent by the end of 1997.

o Personal income growth is expected to remain strong -- increasing by 6.8
percent in 1997 and 6.1 percent in 1998.

o Inflation will remain below the national average. Consumer prices in
California are expected to increase by 2.3 percent in 1997 and 1998. Real
purchasing power, therefore, will rise by an average of more than 4 percent
per year over the next two years.

o Homebuilding is forecast to increase moderately to 110,000 units this year
and 122,000 in 1998. Stronger job-generated demand is being offset by a
forecast of higher interest rates. In response to low office and industrial
vacancy rates, nonresidential construction is expected to show strong growth
-- with last year's double-digit growth continuing in 1997 and 1998.

LITIGATION
The State is a party to numerous legal proceedings, many of which normally
occur in governmental operations. Following are some of the more significant
lawsuits against the State:

The State is involved in a lawsuit, Thomas Hayes v. Commission on State
Mandates, related to State-mandated costs. The action involves an appeal by the
Director of Finance from a 1984 decision by the State Board of Control (now
succeeded by the Commission on State Mandates ("Commission")). The Board of
Control decided in favor of local school districts' claims for reimbursement for
special education programs for handicapped students. The case was then brought
to the trial court by the State and later remanded to the Commission for
redetermination. The Commission has since expanded the claim to include
supplemental claims filed by seven other educational institutions; the issuance
of a final consolidated decision is anticipated sometime in early 1997. To date,
the Legislature has not appropriated funds. The liability to the State, if all
potentially eligible school districts pursue timely claims, has been estimated
by the Department of Finance at over $1 billion.

The State is involved in a lawsuit related to contamination at the
Stringfellow toxic waste site. In United States, People of the State of
California v. J.B. Stringfellow, Jr. et al., the State is seeking recovery for
the past costs of cleanup of the site, a declaration that the defendants are
jointly and severally liable for future costs, and an injunction ordering
completion of the cleanup. However, the defendants have filed a counterclaim
against the State for alleged negligent acts. Because the State is the present
owner of the site, the State may be found liable. Present estimates of the
cleanup range from $200 million to $800 million.

The State is a defendant in a coordinated action involving 3,000
plaintiffs seeking recovery for damages caused by the Yuba River flood of
February 1986. The trial court has found liability in inverse condemnation and
awarded damages of $500,000 to a sample of plaintiffs. The State's potential
liability to the remaining 3,000 plaintiffs from claims filed ranges from $800
million to $1.5 billion. An appeal has been filed.

The State is a defendant in California State Employees Association v.
Wilson, where the petitioners are challenging several budget appropriations in
the 1994 and 1995 Budget Acts. The appropriations mandate the transfer of funds
from the State Highway Account to the General Fund to reimburse the General Fund
for debt service costs on two rail bond measures. The petitioners contend that
the transfers violate the bond acts themselves and are requesting the monies be
returned. The loss to the State's General Fund could be up to $227 million.

In a similar case, Professional Engineers in California Government v.
Wilson, the petitioners are challenging several appropriations in the 1993,
1994, and 1995 Budget Acts. The appropriations mandate the transfer of
approximately $262 million from the State Highway Account and $113 million from
the Motor Vehicle Account to the General Fund and appropriate approximately $6
million from the State Highway Account to fund a highway- grade crossing program
administered by the Public Utilities Commission. Petitioners contend that the
transfers violate several constitutional provisions and request that the monies
be returned to the State Highway Account and Motor Vehicle Account.

The State is a defendant in Just Say No To Tobacco Dough Campaign v. State
of California, where the petitioners challenge the appropriation of
approximately $166 million of Proposition 99 funds in the Cigarette and Tobacco
Products Surtax Fund for years ended June 30, 1990, through June 30, 1995 for
programs which were allegedly not health education or tobacco-related disease
research. If the State loses, the General Fund and funds from other sources
would be used to reimburse the Cigarette and Tobacco Products Surtax for
approximately $166 million.

The State is a defendant in the case of Kurt Hathaway, et al. v. Wilson,
et al, where the plaintiffs are challenging the legality of various budget
action transfers and appropriations from particular special funds for years
ended June 30, 1995, and June 30, 1996. The plaintiffs allege that the transfers
and appropriations are contrary to the substantive law establishing the funds
and providing for interest accruals to the fund, violate the single subject
requirement of the State Constitution, and is an invalid "special law."
Plaintiffs seek to have monies totaling approximately $335 million returned to
the special funds.

The State is a defendant in two related cases, Beno vs. Sullivan ("Beno")
and Welch vs. Anderson ("Welch"), concerning reductions in Aid to Families with
Dependent Children ("AFDC") grant payments. In the Beno case, plaintiffs seek to
invalidate AFDC grant reductions and in the Welch case, plaintiffs contend that
AFDC grant reductions are not authorized by state law. The Beno case concerns
the total grant reductions while the Welch case concerns the period of time the
State did not have a waiver for those reductions. The State's potential
liability for retroactive AFDC grant reductions is estimated at $831 million if
the plaintiffs are awarded the full amount in both cases.

The State was a defendant in California Teachers Association v. Russell S.
Gould, et al., where the petitioners challenged a recharacterization of $1.1
billion of appropriations for the 1991-92 fiscal year and $190 million in the
1992-93 fiscal year as emergency loans rather than Proposition 98 funds. The
Petitioners were seeking a declaration that all appropriated funds are
Proposition 98 funds and, therefore, must be included in the minimum funding
guarantee for schools. The trial court ruled that the appropriations are not
Proposition 98 funds and should not be included in the minimum funding
calculation in future years.

The petitioners also challenged the Legislature's appropriation of $973
million to schools in the 1992-93 fiscal year and $787 million to schools in the
1993-94 fiscal year. The appropriations, which the Legislature called "emergency
loans," were in excess of the Proposition 98 guarantee of minimum funding; the
Legislature explicitly excluded those excess funds from being included in the
future Proposition 98 minimum funding guarantee. The trial court found that
amounts which the State appropriated to schools as loans in excess of the
Proposition 98 guarantee were considered to be Proposition 98 funding and were
required to be used to calculate the Proposition 98 requirement in future years.
Moreover, the trial court found that the State cannot require schools to repay
the appropriations which were characterized as loans. The parties have reached a
settlement which provides that both the State and K-14 schools share in the
repayment of prior years' emergency loans to schools. Of the total $1.8 billion
in loans, the State will repay $935 million by forgiveness of the amount owed,
while schools will repay $825 million, the $935 million forgiveness of the
amount owed is included as 1995-96 fiscal year expenditures of the General Fund.
The State's share of the repayment will be reflected as an appropriation above
the current Proposition 98 base calculation. The schools share of the repayment
will count as appropriations that count toward satisfying the Proposition 98
guarantee, or from "below" the current base.

In the case of Board of Administration, California Public Employees'
Retirement System, et al. v. Pete Wilson, Governor, et al., plaintiffs
challenged the constitutionality of legislation which deferred payment of the
State's employer contribution to the Public Employees' Retirement System
beginning in Fiscal Year 1992-93. On January 11, 1995, the Sacramento County
Superior Court entered a judgment finding that the legislation
unconstitutionally impaired the vested contract rights of PERS members. The
judgment provides for issuance of a writ of mandate directing State defendants
to disregard the provisions of the legislation, to implement the statute
governing employer contributions that existed before the changes in the
legislation found to be unconstitutional, and to transfer to PERS the
contributions that were unpaid to date. On February 19, 1997, the State Court of
Appeal affirmed the decision of the Superior Court, and the Supreme Court
subsequently refused to hear the case, making the Court of Appeals' ruling
final. On July 30, 1997, the Controller transferred $1.235 billion from the
General Fund to PERS in repayment of the principal amount determined to have
been improperly deferred. Subsequent State payments to PERS will be made on a
quarterly basis. No prejudgment interest has been paid in accordance with the
trial court ruling that there was insufficient evidence that money for that
purpose had been appropriated and was available. No post-judgment interest was
ordered.

<PAGE>

APPENDIX C

ADDITIONAL INFORMATION CONCERNING
CONNECTICUT MUNICIPAL OBLIGATIONS

The following information is a summary of special factors affecting
investments in Connecticut Municipal Obligations. The sources of payment for
such obligations and the marketability thereof may be affected by financial or
other difficulties experienced by Connecticut (the "State") and certain of its
municipalities and public authorities. This summary does not purport to be a
complete description and is based on information from statements relating to
offerings of Connecticut bond issues. Landmark Connecticut Tax Free Reserves is
not responsible for the accuracy or timeliness of this information.

CERTAIN ECONOMIC CONSIDERATIONS

Connecticut's economy is diverse. Manufacturing employment in the State has
been on a downward trend since the mid-1980s, while non-manufacturing employment
has recovered most of its losses from its peak in the late 1980s. Manufacturing
is diversified, with transportation equipment the dominant industry. Connecticut
is a leading producer of aircraft engines and parts, submarines and helicopters.
The largest employers in these industries are United Technologies Corporation,
including its Pratt and Whitney Aircraft Division, with headquarters in East
Hartford, and Sikorsky Aircraft Division in Stratford as well as General
Dynamics Corporation's Electric Boat Division in Groton.

During the past ten years, Connecticut's manufacturing employment was at
its highest in 1987 at over 384,000 workers. Since that year, employment in
manufacturing has been on a downward trend, declining 28.3%, or a loss of
108,760 jobs by 1996 from 1987 levels. A number of factors, such as the
overvalued dollar of the mid-1980s, heightened foreign competition, a sharp
decrease in defense spending, and improved productivity played a significant
role in affecting the overall level of manufacturing employment. In Connecticut,
the rate of job loss in the manufacturing sector produced a decline of 1.3% or
3,660 jobs from 1995 to 1996.

Over the past several decades the non-manufacturing sector of the State's
economy has risen in economic importance, from just over 50% of total State
employment in 1950 to approximately 83% by 1996. This trend has decreased the
State's dependence on manufacturing. The State's non-manufacturing sector
expanded by 2.0% in 1996 as compared to 1.9% in 1995, 1.7% in 1994, and 1.4% in
1993, following three years of decline starting in 1990. During the 1990s,
Connecticut's growth in non-manufacturing employment has lagged that of the New
England region and the nation as a whole.

The non-manufacturing sector is comprised of industries that typically
provide a service. The four major industries in terms of employment are: trade;
finance, insurance, and real estate; business and personal services; and
government, which collectively comprise about 90% of employment in the
non-manufacturing sector.

After enjoying an extraordinary boom during the mid-1980s, Connecticut, as
well as the rest of the Northeast, experienced an economic slowdown before the
onset of the national recession in the latter half of 1990. Reflecting the
downturn, the unemployment rate in the State rose from a low of 3% in 1988 to
just above the national average of 7.5% during 1992.

FISCAL CONDITION IN RECENT YEARS

The State finances most of its operations through its General Fund. The
major components of General Fund revenues are State taxes, including the
personal income tax, the sales and use tax and the corporation business tax.
Miscellaneous fees, receipts, transfers and unrestricted federal grants account
for most of the other General Fund revenue.

The adopted budget for 1998-99 anticipates General Fund revenues of
$9,496.0 million and General Fund expenditures of $9,495.9 million.

Beginning with the income year commencing on or after January 1, 1991, the
State imposed a personal income tax on the income of residents of the State
(including resident trusts and estates), part-year residents and certain non-
residents who have taxable income derived from or connected with sources within
Connecticut. For tax years commencing or after January 1, 1992, the tax imposed
is at the rate of 4.5% on Connecticut taxable income. Depending on federal
income tax filing status and Connecticut adjusted gross income, personal
exemptions ranging from $12,000 to $24,000 are available to taxpayers. In
addition, tax credits ranging from 1% to 75% of a taxpayer's Connecticut tax
liability are also available depending upon federal income tax filing status and
Connecticut adjusted gross income. Such exemptions and tax credits are phased
out at certain higher income levels. Neither the personal exemption nor the tax
credit described above is available to a trust or an estate. Legislation enacted
in 1995 effected a graduated rate structure beginning in tax year 1996. Under
this revised structure, the top rate remains at 4.5% with a rate of 3% on the
first $4,500 of taxable income for joint filers and the first $2,250 for single
filers. For tax year 1997, the 3% rate is expanded to the first $9,000 of
taxable income for joint filers and the first $4,500 for single filers.
Legislation enacted during the 1997 session expands the amount of taxable income
subject to the lower 3% rate. By tax year 1999, the first $20,000 of taxable
income for a joint filer and the first $10,000 of taxable income for a single
filer will be taxed at the 3% rate. In addition, the maximum $100 income tax
credit for property taxes will be expanded to a maximum of $285 per filer.
Taxpayers are also subject to a Connecticut minimum tax based on their
liability, if any, for payment of the federal alternative minimum tax.

The Sales Tax is imposed, subject to certain limitations, on the gross
receipts from certain transactions within the State of persons engaged in
business in the State, including (a) sales at retail of tangible personal
property, (b) the rendering of certain services, (c) the leasing or rental of
tangible personal property, (d) the producing, fabricating, processing,
printing, or imprinting of tangible personal property to special order or with
materials furnished by the consumer, (e) the furnishing, preparing or serving of
food, meals, or drinks, and (f) the transfer of occupancy of hotel or lodging
house rooms for a period not exceeding thirty consecutive calendar days. The Use
Tax is imposed on the consideration paid for certain services or purchases or
rentals of tangible personal property used within the State pursuant to a
transaction not subject to the Sales Tax. A separate rate of 12% is charged on
the occupancy of hotel rooms. Effective October 1, 1991, the tax rate for the
Sales and Use Taxes was reduced from eight percent to six percent. Various
exemptions from the Sales and Use Taxes are provided, based on the nature, use
or price of the property or services involved or the identity of the purchaser.
Tax returns and accompanying payments with respect to revenues from these taxes
are generally due monthly on or before the last day of the month next succeeding
the taxable month.

The Corporation Business Tax provides for three methods of computation. The
taxpayer's liability is the greatest amount computed under any of the three
methods.

The first method of computation is a tax measured by the net income of a
taxpayer (the "Income-Base Tax"). Net income, except as applied to insurance
companies, means federal gross income with limited variations less certain
deductions, most of which correspond to the deductions allowed under the
Internal Revenue Code of 1986, as amended from time to time. In the case of life
insurance companies subject to the Corporation Business Tax, net income means
life insurance company taxable income, as determined for federal income tax
purposes, with certain adjustments. The Income-Base Tax is levied at the rate of
10.75% until January 1, 1998 when it will decrease to 9.5%. Legislation enacted
in 1993 and subsequent years instituted a phase down in the corporation tax rate
so that by the income year commencing on or after January 1, 2000 the corporate
rate will be 7.5%. The second method of computing the Corporation Business Tax,
from which domestic insurance companies are exempted, is an alternative tax on
capital. This alternative tax is determined either as a specific maximum dollar
amount or at a flat rate on a defined base, usually related in whole or part to
its capital stock and balance sheet surplus, profit and deficit. The third
method of computing the Corporation Business Tax is the minimum tax which is
$250. Corporations must compute their tax under all three methods and pay the
tax under the highest computation.

Other tax revenues are derived from inheritance taxes, taxes on gross
receipts of hospital and public service corporations, taxes on net direct
premiums of insurance companies, taxes on oil companies, cigarette and alcoholic
beverage excise taxes, real estate conveyance taxes and other miscellaneous tax
sources.

Federal grants in aid are normally conditioned to some degree, depending
upon the particular program being funded, on resources provided by the State.
More than 99% of unrestricted federal grant revenue is expenditure driven. The
largest federal grants in fiscal 1997 were made for the purposes of providing
medical assistance payments to the indigent and Aid to Families with Dependent
Children. The State also receives certain restricted federal grants which are
not reflected in annual appropriations but which nonetheless are accounted for
in the General Fund

Other non-tax revenues are derived from special revenue transfers; Indian
gaming payments; licenses, permits and fees; sales of commodities and services;
rents, fines and escheats; investment income; and other miscellaneous revenue
sources.

In November 1992, electors approved an amendment to the State Constitution
providing that the amount of general budget expenditures authorized for any
fiscal year shall not exceed the estimated amount of revenue for such fiscal
year. This amendment also provides for a cap on budget expenditures. The General
Assembly is precluded from authorizing an increase in general budget
expenditures for any fiscal year above the amount of general budget expenditures
authorized for the previous fiscal year by a certain percentage which exceeds
the greater of the percentage increase in personal income or the percentage
increase in inflation, unless the Governor declares an emergency or the
existence of extraordinary circumstances and at least three-fifths of the
members of each house of the General Assembly vote to exceed such limit for the
purposes of such emergency or extraordinary circumstances. The limitation on
general budget expenditures does not include expenditures for the payment of
bonds, notes or other evidences of indebtedness. There is no statutory or
constitutional prohibition against bonding for general budget expenditures.

By statute, no bonds, notes or other evidences of indebtedness for borrowed
money payable from General Fund tax receipts of the State shall be authorized by
the General Assembly except as shall not cause the aggregate amount of (1) the
total amount of bonds, notes or other evidences of indebtedness payable from
General Fund tax receipts authorized by the General Assembly but which have not
been issued and (2) the total amount of such indebtedness (excluding short-term
and certain other indebtedness) which has been issued and remains outstanding,
to exceed 1.6 times the total estimated General Fund tax receipts of the State
for the fiscal year in which any such authorization will become effective. As a
result, the State had a debt incurring margin as of December 1, 1997 of
2,029,278,606.

ADDITIONAL CONSIDERATIONS

The classification of Landmark Connecticut Tax Free Reserves under the
Investment Company Act of 1940 as a "non-diversified" investment company allows
it to invest more than 5% of its assets in the securities of any issuer, subject
to satisfaction of certain tax requirements. Because of the relatively small
number of issuers of Connecticut obligations, the Fund is likely to invest a
greater percentage of its assets in the securities of a single issuer than is an
investment company which invests in a broad range of Municipal Obligations.
Therefore, the Fund would be more susceptible than a diversified fund to any
single adverse economic or political occurrence or development affecting
Connecticut issuers. The Fund will also be subject to an increased risk of loss
if the issuer is unable to make interest or principal payments or if the market
value of such securities declines. It is also possible that there will not be
sufficient availability of suitable Connecticut tax-exempt obligations for the
Fund to achieve its objective of providing income exempt from Connecticut taxes.

Landmark Connecticut Tax Free Reserves may invest 25% or more of its assets
in Connecticut Municipal Obligations of the same type, including, without
limitation, the following: general obligations of the State of Connecticut and
its political subdivisions; lease rental obligations of state and local
authorities; obligations of state and local housing finance authorities,
municipal utilities systems or public housing authorities; or industrial
development or pollution control bonds issued for hospitals, electric utility
systems, steel companies, life care facilities or other purposes. This may make
the Fund more susceptible to adverse economic, political, or regulatory
occurrences affecting a particular category of issuers.

Connecticut Municipal Obligations also include obligations of the
governments of Puerto Rico and other U.S. territories and their political
subdivisions to the extent that these obligations are exempt from Connecticut
State personal income taxes. Accordingly, the Fund may be adversely affected by
local political and economic conditions and developments within Puerto Rico and
certain other U.S. territories affecting the issuers of such obligations. The
economy of Puerto Rico is dominated by the manufacturing and service sectors
(including finance and tourism). Investments in fixed capital, including public
infrastructure, private development and construction, and purchases of equipment
and machinery, increased significantly during 1996 and accounted for
approximately 24.9% of Puerto Rico's gross domestic product. The economy of
Puerto Rico expanded significantly from 1986 through 1990, with yearly increases
in gross domestic product ranging from 4.4% for 1988 to 2.5% for 1990. Gross
domestic product increased moderately for the following two years, at yearly
rates of 0.9% for 1991 and 0.8% for 1992. Between 1993 and 1995, Puerto Rico
experienced more significant yearly increases in gross domestic product, ranging
from 2.5% in 1994 to 3.4% in 1995. Annual increases in gross domestic product
for the years 1996 and 1997 were 3.3% and 3.2% respectively. The increase in
gross domestic product for the past fiscal year is due, in large part, to a high
growth in the internal investment of fixed capital accompanied by increases in
the expenditures of personal consumption and of the government. These increases
were somewhat offset by an increase in the negative balance of net sales of
merchandise and services to the rest of the world. Although the Puerto Rico
unemployment rate has declined substantially since 1983, the unemployment rate
for 1997 was approximately 13.1%. The economic projections for fiscal years 1998
and 1999 show that the sustained growth seen in the economy of Puerto Rico since
1993 will continue throughout the next two years. Indeed, the economic
indicators concerning the movements of the economy during the months gone by of
the current fiscal year confirm this general trajectory. The growth projections
are based on a variety of factors, including: the stability of interest rates; a
certain level of confidence by the consumer; the policy of the Government of
Puerto Rico as a facilitator in the processes for development of new projects;
and the priority given to the commencement and continuation of infrastructure
projects.

RECENT RATINGS OF CERTAIN GENERAL OBLIGATION BONDS

Moody's, Standard & Poor's and Fitch assigned their municipal bond ratings
of Aa3, AA- and AA, respectively, to the outstanding general obligation bonds of
the State. Each such rating reflects only the views of the respective rating
agency, and an explanation of the significance of such rating may be obtained
from such rating agency. There is no assurance that such ratings will continue
for any given period of time or that they will not be revised or withdrawn
entirely by the rating agency if, in the judgment of such rating agency,
circumstances so warrant. A downward revision or withdrawal of any such rating
may have an adverse effect on the market price of the State's general obligation
bonds.

LITIGATION

The State, its officers and employees are defendants in numerous lawsuits.
The ultimate disposition and fiscal consequences of these lawsuits are not
presently determinable. The Attorney General's Office has reviewed the status of
pending lawsuits and reports that it is the opinion of the Attorney General that
such pending litigation will not be finally determined so as to result
individually or in the aggregate in a final judgment against the State which
would materially adversely affect its financial position, except that in the
cases described below the fiscal impact of an adverse decision might be
significant but is not determinable at this time. The cases described in this
section generally do not include any individual case where the fiscal impact of
an adverse judgment is expected to be less than $15 million, but adverse
judgments in a number of such cases could, in the aggregate and in certain
circumstances, have a significant impact.

Connecticut Criminal Defense Lawyers Association v. Forst is an action
brought in 1989 in Federal District Court alleging a pervasive campaign by the
State and various State Police officials of illegal electronic surveillance,
wiretapping and bugging for a number of years at Connecticut State Police
facilities. The plaintiffs seek compensatory damages, punitive damages, as well
as other damages and costs and attorneys fees, as well as temporary and
permanent injunctive relief. In November 1991, the court issued an order which
will allow the plaintiffs to represent a class of all persons who participated
in wire or oral communications to, from, or within State Police facilities
between January 1, 1974 and November 9, 1989 and whose communications were
intercepted, recorded and/or used by the defendants in violation of the law.
This class includes a sub-class of the Connecticut State Police Union, current
and former Connecticut State Police officers who are not defendants in this or
any consolidated case, and other persons acting on behalf of the State Police
who participated in oral or wire communications to, from or within State Police
facilities between such dates.

Sheff v. O'Neill is a Superior Court action brought in 1989 on behalf of
black and Hispanic school children in the Hartford school district. The
plaintiffs sought a declaratory judgment that the public schools in the greater
Hartford metropolitan area are segregated de facto by race and ethnicity and are
inherently unequal to their detriment. They also sought injunctive relief
against state officials to provide them with an "integrated education." On April
12, 1995, the Superior Court entered judgment for the State. On July 9, 1996,
the State Supreme Court reversed the Superior Court judgment and remanded the
case with direction to render a declaratory judgment in favor of the plaintiffs.
The Court directed the legislature to develop appropriate measures to remedy the
racial and ethnic segregation in the Hartford public schools. The Supreme Court
also directed the Superior Court to retain jurisdiction of this matter. The 1997
General Assembly enacted P.A. 97-290, An Act Enhancing Educational
Opportunities, in response to the Supreme Court decision. In response to a
motion filed by the plaintiffs, the Superior Court recently ordered the State to
show cause as to whether there has been compliance with the Supreme Court's
ruling.

The Connecticut Traumatic Brain Injury Association, Inc. v. Hogan is a
Federal District Court civil rights action brought in 1990 on behalf of all
persons with retardation or traumatic brain injury who have been, or may be,
placed in Norwich, Fairfield Hills or Connecticut Valley Hospitals. The
plaintiffs claim that the treatment and training they need is unavailable in
state hospitals for the mentally ill and that placement in those hospitals
violates their constitutional rights. The plaintiffs seek relief which would
require that the plaintiff classmembers be transferred to community residential
settings with appropriate support services. This case has been settled as to all
persons with mental retardation by their eventual discharge from Norwich and
Fairfield Hills Hospital. The case is still proceeding as to those persons with
traumatic brain injury. The Court recently expanded the class of plaintiffs to
include persons who are in the custody of the Department of Mental Health and
Addiction Services at any time during the pendency of the case for treatment or
benefits in any program which is provided by or is the responsibility of the
State, by reason of being diagnosed with acquired brain injury (which includes
traumatic and other brain injuries).

Several suits have been filed since 1977 in the Federal District Court and
the Connecticut Superior Court on behalf of alleged Indian Tribes in various
parts of the State, claiming monetary recovery as well as ownership of land in
issue. Some of these suits have been settled or dismissed. The plaintiff group
in the remaining suits is the alleged Golden Hill Paugussett Tribe and the lands
involved are generally located in Bridgeport, Trumball, Orange, Shelton and
Seymour.

Johnson v. Rowland is a Superior Court action brought in 1998 in the name
of several public school students and the Connecticut municipalities in which
the students reside, seeking a declaratory judgment that the State's current
system of financing public education through local property taxes and State
payments to municipalities determined under a statutory Education Cost Sharing
("ECS") formula violates the Connecticut Constitution. Additionally, the suit
seeks various injunctive orders requiring the State to, among other things,
cease implementation of the present system. modify the ECS formula, and fund the
ECS formula at the level contemplated in the original 1988 public act which
established the ECS.

<PAGE>

APPENDIX D

ADDITIONAL INFORMATION CONCERNING
NEW YORK MUNICIPAL OBLIGATIONS

The following information is a summary of special factors affecting
investments in New York Municipal Obligations. The sources of payment for such
obligations and the marketability thereof may be affected by financial or other
difficulties experienced by New York State (the "State") and certain of its
municipalities and public authorities. This information does not purport to be a
complete description and is based on information from official statements
relating to securities offerings of New York issuers. CitiFunds New York Tax
Free Reserves is not responsible for the accuracy or timeliness of this
information.

NEW YORK STATE

The factors affecting the State's financial condition are complex and the
following description constitutes only a summary.

CURRENT ECONOMIC OUTLOOK

The national economy has maintained a robust rate of growth during the
past six quarters as the expansion, which is well into its seventh year,
continues. Since early 1992, approximately 16 1/2 million jobs have been added
nationally. The State economy has also continued to expand, but growth remains
somewhat slower than in the nation. Although the State has added over 400,000
jobs since late 1992, employment growth in the State has been hindered during
recent years by significant cutbacks in the computer and instrument
manufacturing, utility, defense, and banking industries. Government downsizing
has also moderated these job gains.

The State Division of the Budget ("DOB") forecasts that national economic
growth will be quite strong in the first half of calendar 1998, but will
moderate considerably as the year progresses. The projected overall growth rate
of the national economy for calendar year 1998 is modestly below the consensus
forecast of a widely followed survey of national economic forecasters. Growth in
real Gross Domestic Product for 1998 is projected to be 2.8 percent, with a
decline in net exports and continued restraint in federal spending more than
offset by increases in consumption and investment. Inflation, as measured by the
Consumer Price Index, is projected to reach its lowest annual rate since the
1960's at about 1.6 percent due to improved productivity, foreign competition
and low energy and commodity costs. Personal income and wages are projected to
increase by 5.3 percent and 6.3 percent respectively.

The forecast of the State's economy shows continued expansion during the
1998 calendar year, with employment growth gradually slowing as the year
progresses. The financial and business service sectors are expected to continue
to do well, while employment in the manufacturing and government sectors will
post only small, if any, declines. On an average annual basis, the employment
growth rate in the State is expected to be higher than in 1997 and the
unemployment rate is expected to drop further to 6.1 percent. Personal income is
expected to record moderate gains in 1998. Wage growth in 1998 is expected to be
slower than in the previous year as the recent robust growth in bonus payments
moderates.

1997-98 FISCAL YEAR

The State ended its 1997-98 fiscal year in balance on a cash basis, with a
General Fund cash surplus as reported by DOB of approximately $2.04 billion. The
cash surplus was derived primarily from higher-than-anticipated receipts and
lower spending on welfare, Medicaid, and other entitlement programs.

The General Fund had a closing balance of $638 million, an increase of
$205 million from the prior fiscal year. The balance is held in three accounts
within the General Fund: the Tax Stabilization Reserve Fund ("TSRF"), the
Contingency Reserve Fund ("CRF") and the Community Projects Fund ("CPF"). The
TSRF closing balance was $400 million, following a required deposit of $15
million (repaying a transfer made in 1991-92) and an extraordinary deposit of
$68 million made from the 1997-98 surplus. The CRF closing balance was $68
million, following a $27 million deposit from the surplus. The CPF, which
finances legislative initiatives, closed the fiscal year with a balance of $170
million, an increase of $95 million. The General Fund closing balance did not
include $2.39 billion in the tax refund reserve account, of which $521 million
was made available as a result of the Local Government Assistance Corporation
("LGAC") financing program and was required to be on deposit on March 31, 1998.

General Fund receipt and transfers from other funds for the 1997-98 fiscal
year (including net tax refund reserve account activity) totaled $34.55 billion,
an annual increase of $1.51 billion, or 4.57 percent over 1996-97. General Fund
disbursements and transfers to other funds were $34.35 billion, an annual
increase of $1.45 billion or 4.41 percent.

1996-97 FISCAL YEAR

The State ended its 1996-97 fiscal year on March 31, 1997 in balance on a
cash basis, with a General Fund cash surplus as reported by DOB of approximately
$1.2 billion. The cash surplus was derived primarily from higher-than-expected
receipts and lower-than-expected spending for social services programs.

The General Fund closing fund balance was $433 million, an increase of $146
million from the 1995-96 fiscal year. The balance included $317 million in the
TSRF, after a required deposit of $15 million and an additional deposit of $65
million in 1996-97. In addition, $41 million remained on deposit in the CRF. The
remaining $75 million reflected amounts then on deposit in the Community
Projects Fund. The General Fund closing fund balance did not include $1.86
billion in the tax refund reserve account, of which $521 million was made
available as a result of the LGAC financing program and was required to be on
deposit as of March 31, 1997.

General Fund receipts and transfers from other funds for the 1996-97 fiscal
year totaled $33.04 billion, an increase of 0.7 percent from the previous fiscal
year (including net tax refund reserve account activity). General Fund
disbursements and transfers to other funds totaled $32.90 billion for the
1996-97 fiscal year, an increase of 0.7 percent from the 1995-96 fiscal year.

1995-96 FISCAL YEAR

The State ended its 1995-96 fiscal year on March 31, 1996 with a General
Fund cash surplus as reported by DOB, of $445 million. The cash surplus was
derived from higher-than-expected receipts, savings generated through agency
cost controls and lower-than-expected welfare spending.

The General Fund closing fund balance was $287 million, an increase of $129
million from 1994-95 levels. The $129 million change in fund balance is
attributable to the $65 million voluntary deposit to the TSRF, a $15 million
required deposit to the TSRF, a $40 million deposit to the CRF, and a $9 million
deposit to the Revenue Accumulation Fund. The closing fund balance included $237
million on deposit in the TSRF. In addition, $41 million was on deposit in the
CRF. The remaining $9 million reflected amounts then on deposit in the Revenue
Accumulation Fund. The General Fund closing balance does not include $678
million in the tax refund reserve account of which $521 million was made
available as a result of the LGAC financing program and was required to be on
deposit as of March 31, 1996.

General Fund receipts and transfers from other funds (including net refund
reserve account activity) totaled $32.81 billion, a decrease of 1.1 percent from
1994-95 levels. General Fund disbursements and transfers to other funds totaled
$32.68 billion for the 1995-96 fiscal year, a decrease of 2.2 percent from
1994-95 levels.

Rating Agencies Actions: On February 8, 1993, Fitch assigned its municipal
bond rating of A+ to the State's general obligation bonds. Moody's assigned its
municipal bond rating of A2 on February 10, 1997, and as of August 28, 1997,
Standard & Poor's assigned its rating of A to the State's general obligation
bonds. Each such rating reflects only the views of the respective rating agency,
and an explanation of the significance of such rating may be obtained from such
rating agency. There is no assurance that such ratings will continue for any
given period of time or that they will not be revised or withdrawn entirely by
such rating agency if, in the judgment of such rating agency, circumstances so
warrant. A downward revision or withdrawal of any such rating may have an
adverse effect on the market price of the State's general obligation bonds.

PUBLIC AUTHORITIES

The fiscal stability of the State is related, in part, to the fiscal
stability of its public authorities, meaning public benefit corporations created
pursuant to State law, other than local authorities. Public authorities are not
subject to the constitutional restrictions on the incurrence of debt which apply
to the State itself and may issue bonds and notes within the amounts, and
restrictions set forth in legislative authorization. The State's access to the
public credit markets could be impaired, and the market price of its outstanding
debt may be materially and adversely affected, if any of its public authorities
were to default on their respective obligations, particularly those using the
financing techniques referred to as State-supported or State-related debt. As of
December 31, 1997, there were 17 public authorities that had outstanding debt of
$100 million or more, and the aggregate outstanding debt, including refunding
bonds, of all State public authorities was $84 billion, only a portion of which
constitutes State-supported or State related debt.

The State has numerous public authorities with various responsibilities,
including those which finance, construct and/or operate revenue producing public
facilities. Public authorities generally pay their operating expenses and debt
service costs from revenues generated by the projects they finance or operate,
such as tolls charged for the use of highways, bridges or tunnels, charges for
public power, electrical gas utility services, rentals charged for housing
units, and charges for occupancy at medical care facilities.

In addition, State legislation authorizes several financing techniques for
public authorities. Also, there are statutory arrangements providing for State
local assistance payments, otherwise payable to localities, to be made under
certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local assistance
payments have been paid to public authorities under these arrangements, the
affected localities could seek additional State assistance if local assistance
payments are so diverted.

Some authorities also receive moneys from State appropriations to pay for
the operating costs of certain of their programs. As described below, the
Metropolitan Transportation Authority ("MTA") receives the bulk of this money in
order to provide transit and commuter services.

Beginning in 1998, the Long Island Power Authority ("LIPA") assumed
responsibility for the provision of electric utility services previously
provided by Long Island Lighting Company for Nassau, Suffolk and a portion of
Queen Counties, as part of an estimated $7 billion financing plan. As of June
26, 1998, LIPA has issued over $5 billion in bonds secured solely by ratepayer
charges. LIPA's debt is not considered either State-supported or State-related
debt.

METROPOLITAN TRANSPORTATION AUTHORITY

The MTA oversees the operation of subway and bus lines in New York City by
its affiliates, the New York City Transit Authority and the Manhattan and Bronx
Surface Transit Operating Authority (collectively, the "TA"). The MTA operates
certain commuter rail and bus services in the New York Metropolitan area through
MTA's subsidiaries, the Long Island Rail Road Company, the Metro- North Commuter
Railroad Company, and the Metropolitan Suburban Bus Authority. In addition, the
Staten Island Rapid Transit Operating Authority, an MTA subsidiary, operates a
rapid transit line on Staten Island. Through its affiliated agency, the
Triborough Bridge and Tunnel Authority (the "TBTA"), the MTA operates certain
intrastate toll bridges and tunnels. Because fare revenues are not sufficient to
finance the mass transit portion of these operations, the MTA has depended on,
and will continue to depend on, operating support from the State, local
governments and TBTA, including loans, grants and subsidies. If current revenue
projections are not realized and/or operating expenses exceed current
projections, the TA or commuter railroads may be required to seek additional
State assistance, raise fares or take other actions.

Since 1980, the State has enacted several taxes--including a surcharge on
the profits of banks, insurance corporations and general business corporations
doing business in the 12-county Metropolitan Transportation Region served by the
MTA and a special one-quarter of 1 percent regional sales and use tax-- that
provide revenues for mass transit purposes, including assistance to the MTA.
Since 1987 State law has required that the proceeds of a one-quarter of 1
percent mortgage recording tax paid on certain mortgages in the Metropolitan
Transportation Region be deposited in a special MTA fund for operating or
capital expenses. In 1993, the State dedicated a portion of certain additional
State petroleum business tax receipts to fund operating or capital assistance to
the MTA. For the 1998-99 State fiscal year, total State assistance to the MTA is
projected to total approximately $1.3 billion, an increase of $133 million over
the 1997-98 fiscal year.

State legislation accompanying the 1996-97 adopted State budget authorized
the MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance a
portion of the $12.17 billion MTA capital plan for the 1995 through 1999
calendar years (the "1995-99 Capital Program"). In July 1997, the Capital
Program Review Board ("CPRB") approved the 1995-99 Capital Program (subsequently
amended in August 1997), which supercedes the overlapping portion of the MTA's
1992-96 Capital Program. The 1995-99 Capital Program is the fourth capital plan
since the Legislature authorized procedures for the adoption, approval and
amendment of MTA capital programs and is designed to upgrade the performance of
the MTA's transportation systems by investing in new rolling stock, maintaining
replacement schedules for existing assets and bringing the MTA system into a
state of good repair. The 1995-99 Capital Program assumes the issuance of an
estimated $5.2 billion in bonds under this $6.5 billion aggregate bonding
authority. The remainder of the plan is projected to be financed through
assistance from the federal government, the State, the City of New York, and
from various other revenues generated from actions taken by the MTA.

There can be no assurance that all the necessary governmental actions for
future capital programs will be taken, that funding sources currently identified
will not be decreased or eliminated, or that the 1995-99 Capital Program, or
parts thereof, will not be delayed or reduced. Should funding levels fall below
current projections, the MTA would have to revise its 1995-99 Capital Program
accordingly. If the 1995-99 Capital Program is delayed or reduced, ridership and
fare revenues may decline, which could, among other things, impair the MTA's
ability to meet its operating expenses without additional assistance.

LOCALITIES
THE CITY OF NEW YORK

The fiscal health of the State may also be affected by the fiscal health of
New York City (the "City"), which continues to require significant financial
assistance from the State. State aid contributes to the City's ability to
balance its budget and to meet its cash requirements. The State may also be
affected by the ability of the City and certain entities issuing debt for the
benefit of the City to market their securities successfully in the public credit
markets. The City has achieved balanced operating results for each of its fiscal
years since 1981 as reported in accordance with the then-applicable GAAP
standards.

FISCAL OVERSIGHT

In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among those actions, the State
established the Municipal Assistance Corporation for the City of New York ("NYC
MAC") to provide financing assistance to the City; the New York State Financial
Control Board (the "Control Board") to oversee the City's financial affairs; and
the Office of the State Deputy Comptroller for the City of New York ("OSDC") to
assist the Control Board in exercising its powers and responsibilities. A
"Control Period" existed from 1975 to 1986 during which the City was subject to
certain statutorily-prescribed fiscal controls. Although the Control Board
terminated the Control Period in 1986 when certain statutory conditions were
met. State law requires the Control Board to reimpose a Control Period upon the
occurrence or "substantial likelihood and imminence" of the occurrence of
certain events, including (but not limited to) a City operating budget deficit
of more than $100 million or impaired access to the public credit markets.

Currently, the City and its Covered Organizations (i.e., those which
receive or may receive moneys from the City directly, indirectly or
contingently) operate under a four-year financial plan (the "Financial Plan")
which the City prepares annually and periodically updates. The City's Financial
Plan summarizes its capital, revenue and expense projections and outlines
proposed gap-closing programs for years with projected budget gaps. The City's
projections set forth in the Financial Plan are based on various assumptions and
contingencies, some of which are uncertain and may not materialize. Unforeseen
developments and changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements.

To successfully implement its Financial Plan, the City and certain entities
issuing debt for the benefit of the City to market their securities
successfully. The City issues securities to finance, refinance and rehabilitate
infrastructure and other capital needs, as well as for seasonal financing needs.
In 1997 the State created the New York City Transitional Finance Authority to
finance a portion of the City's capital program because the City was approaching
its State Constitutional general debt limit. Without the additional financing
capacity of the Transitional Finance Authority, projected contracts for City
capital projects would have exceeded the City's debt limit during City fiscal
year 1997-98. Despite this additional financing mechanism, the City currently
projects that if no further action is taken, it will reach its debt limit in
City fiscal year 1999-2000. On June 2, 1997, an action was commenced seeking a
declaratory judgment declaring the legislation establishing the Transitional
Finance Authority to be unconstitutional. On November 25, 1997 the State Supreme
Court found the legislation establishing the TFA to be constitutional and
granted the defendants' motion for summary judgment. The plaintiffs have
appealed the decision. Future developments concerning the City or entities
issuing debt for the benefit of the City, and public discussion of such
developments, as well as prevailing market conditions and securities credit
ratings, may affect the ability or cost to sell securities issued by the City or
such entities and may also affect the market for their outstanding securities.

MONITORING AGENCIES

The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's Financial Plans. The reports analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service
requirements, as well as evaluate compliance by the City and its Covered
Organizations with the Financial Plan. According to recent staff reports, while
economic growth in New York City has been slower than in other regions of the
country, a surge in Wall Street profitability resulted in increased tax revenues
and generated a substantial surplus for the City in City fiscal year 1996-97.
Recent staff reports also indicate that the City projects a substantial surplus
for City fiscal year 1997-98. Although several sectors of the City's economy
have expanded recently, especially tourism and business and professional
services, City tax revenues remain heavily dependent on the continued
profitability of the securities industries and the course of the national
economy. Staff reports have indicated that recent City budgets have been
balanced in part through the use of non-recurring resources and that the City's
Financial Plan tends to rely in part on actions outside its direct control.
These reports have also indicated that the City has not yet brought its
long-term expenditure growth in line with recurring revenue growth and that the
City is therefore likely to continue to face substantial gaps between forecast
revenues and expenditures in future years that must be closed with reduced
expenditures and/or increased revenues. In addition to these monitoring
agencies, the Independent Budget Office ("IBO") has been established pursuant to
the City Charter to provide analysis to elected officials and the public on
relevant fiscal and budgetary issues affecting the City. Copies of the most
recent Control Board, OSDC and City Comptroller, and IBO staff reports are
available by contacting the Control Board at 270 Broadway, 21st Floor, New York,
NY, 10007, Attention: Executive Director; OSDC at 270 Broadway, 23rd Floor, New
York, NY 10007, Attention: Deputy Comptroller; the City Comptroller at Municipal
Building, Room 517, One Centre Street, New York, NY 10007, Attention: Deputy
Comptroller, Finance; and the IBO at 110 William Street, 14th Floor, New York,
NY 10038, Attention:
Director.

OTHER LOCALITIES

Certain localities outside New York City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The cities of Yonkers and Troy continue to
operate under State-ordered control agencies. The potential impact on the State
of any future requests by localities for additional assistance is not included
in the projections of the State's receipts and disbursements for the State's
1998-99 fiscal year.

Eighteen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities and twenty-eight municipalities received more than $32 million
in targeted unrestricted aid in the 1997-98 budget. Both of these emergency aid
packages were largely continued through the 1998-99 budget. The State also
dispersed an additional $21 million among all cities, towns and villages, a 3.9
percent increase in General Purpose State Aid in 1997-98 and continued this
increase in 1998-99.

The 1998-99 budget includes an additional $29.4 million in unrestricted aid
targeted to 57 municipalities across the State. Other assistance for
municipalities with special needs totals more than $25.6 million. Twelve upstate
cities will receive $24.2 million in one-time assistance from cash flow
acceleration of State aid.

The appropriation and allocation of general purpose local government aid
among localities, including New York City, is currently the subject of
investigation by a State commission. While the distribution of general purpose
local government aid was originally based on a statutory formula, in recent
years both the total amount appropriated and the amounts appropriated to
localities have been determined by the Legislature. A State commission was
established to study the distribution and amounts appropriated and the amounts
appropriated to localities have been determined by the Legislature. A State
commission was established to study the distribution and amounts of general
purpose local government aid and recommend a new formula by June 30, 1999, which
may change the way aid is allocated.

Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1996, the total indebtedness of all localities in
the State other than New York City was approximately $20.0 billion. A small
portion (approximately $77.2 million) of that indebtedness represented borrowing
to finance budgetary deficits and was issued pursuant to State enabling
legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City that are authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
Twenty-one localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1996.

Like the State, local governments must respond to changing political,
economic and financial influences over which they have little or no control.
Such changes may adversely affect the financial condition of certain local
governments. For example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs, which in turn, may require
local governments to fund these expenditures from their own resources. It is
also possible that the State, New York City, or any of their respective public
authorities may suffer serious financial difficulties that could jeopardize
local access to the public credit markets, which may adversely affect the
marketability of notes and bonds issued by localities within the State.
Localities may also face unanticipated problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Other large-scale
potential problems, such as declining urban populations, increasing
expenditures, and the loss of skilled manufacturing jobs, may also adversely
affect localities and necessitate State assistance.

LITIGATION

GENERAL

The legal proceedings noted below involve State finances, and programs and
miscellaneous civil rights, real property, contract and other tort claims in
which the State is a defendant and the potential monetary claims against the
State are substantial, generally in excess of $100 million. These proceedings
could adversely affect the financial condition of the State in the 1998-99
fiscal year or thereafter.

Adverse developments in these proceedings, other proceedings for which
there are unanticipated, unfavorable and material judgments, or the initiation
of new proceedings could affect the ability of the State to maintain a balanced
1998-99 Financial Plan. The State believes that the 1998-99 Financial Plan
includes sufficient reserves to offset the costs associated with the payment of
judgments that may be required during the 1998-99 fiscal year. These reserves
include (but are not limited to) amounts, appropriated for court of claims
payments and projected fund balances in the General Fund. In addition, any
amounts ultimately required to be paid by the State may be subject to settlement
or may be paid over a multi-year period. There can be no assurance, however,
that adverse decisions in legal proceedings against the State would not exceed
the amount of all potential 1998-99 Financial Plan resources available for the
payment of judgments and, could therefore, affect the ability of the State to
maintain a balanced 1998-99 Financial Plan. In its General Purpose Financial
Statements, the State reports its estimated liability for awarded and
anticipated unfavorable judgments.

STATE FINANCE POLICIES

INSURANCE LAW

Proceedings have been brought by two groups of petitioners each challenging
regulations promulgated by the Superintendent of Insurance establishing excess
medical malpractice premium rates for the 1986-87 through 1996-97 fiscal years,
(New York State Health Maintenance Organization Conference, Inc., et al. v. Muhl
et al. ["HMO"], and New York State Conference of Blue Cross and Blue Shield
Plans, et al. v. Muhl, et al. ["Blue Cross "I" and "II" "] Supreme Court, Albany
County). By order filed January 22, 1997, the Court in Blue Cross I permitted
the plaintiffs in HMO to intervene, and dismissed the challenges to the rates
for the period prior to 1995-96. By decision dated July 24, 1997, the Court in
Blue Cross I held that the determination made by the Superintendent in
establishing the 1995-96 rate was arbitrary and capricious and directed that
premiums paid pursuant to that determination should be returned to the payors.
The State has appealed this decision. The petitioners did not cross appeal. In
Blue Cross II, by amended judgment dated April 2, 1998, the Supreme Court
annulled the regulation setting the 1996-97 premium rate and directed that all
1996-97 excess malpractice premiums be returned to the payors. The State will
not be obligated in either case to pay moneys to any petitioner. Adverse
determinations would result in refunds from the affected insurers.

TAX LAW

In New York Association of Convenience Stores et al. v. Urbach, et al.,
petitioners New York Association of Convenience Stores, National Association of
Convenience Stores, M.W.S. Enterprises, Inc. and Sugarcreek Stores, Inc. seek to
compel respondents, the Commissioner of Taxation and Finance and the Department
of Taxation and Finance, to enforce sales and excise taxes pursuant to Tax Law
Articles 12-A, 20 and 28 on tobacco products and motor fuel sold to non-Indian
consumers on Indian reservations. In orders dated August 13, 1996 and August 24,
1996, the Supreme Court, Albany County, ordered, inter alia, that there be equal
implementation and enforcement of said taxes for sales to non-Indian consumers
on and off Indian reservations, and further ordered that, if respondents failed
to comply within 120 days, no tobacco products or motor fuel could be introduced
onto Indian reservations other than for Indian consumption or, alternatively,
the collection and enforcement of such taxes would be suspended statewide.
Respondents appealed to the Appellate Division, Third Department and invoked
CPLR 5519(a)(1), which provides that the taking of the appeal stayed all
proceedings to enforce the orders pending the appeal. Petitioner's motion to
vacate the stay was denied. In a decision entered May 8, 1997, the Third
Department modified the orders by deleting the portion thereof that provided for
the statewide suspension of the enforcement and collection of the sales and
excise taxes on motor fuel and tobacco products. The Third Department held,
inter alia, that petitioners had not sought such relief in their petition and
that it was an error for the Supreme Court to have awarded such undemanded
relief without adequate notice of its intent to do so. On May 22, 1997,
respondents appealed to the Court of Appeals on other grounds, and again invoked
the statutory stay. On October 23, 1997, the Court of Appeals granted
petitioners' motion for leave to cross-appeal from the portion of the Third
Department's decision that deleted the statewide suspension of the enforcement
and collection of the sales and excise taxes on motor fuel and tobacco. The case
was argued before the Court of Appeals on March 24, 1998.

CLEAN WATER/CLEAN AIR BOND ACT OF 1996

In Robert L. Schulz et al. v. The New York State Executive, et al. (Supreme
Court, Albany County, commenced October 16, 1996), plaintiffs challenge the
enactment of the Clean Water/Clean Air Bond Act of 1996 and its implementing
legislation (1996 Laws of New York, Chapters 412 and 413). Plaintiffs claim,
inter alia, that the Bond Act and its implementing legislation violate
provisions of the State Constitution requiring that such debt be authorized by
law for some single work or purpose distinctly specified therein and forbidding
incorporation of other statutes by reference.

STATE PROGRAMS
LINE ITEM VETO

In an action commenced in June 1998 by the Speaker of the Assembly of the
State of New York against the Governor of the State of New York (Silver v.
Pataki, Supreme Court, New York County), the Speaker challenges the Governor's
application of his constitutional line item veto authority to certain portions
of budget bills adopted by the State Legislature contained in Chapters 56, 57
and 58 of the Laws of 1998.

MEDICAID

Several cases challenge provisions of Chapter 81 of the Laws of 1995 which
alter the nursing home Medicaid reimbursement methodology on and after April 1,
1995. Included are New York State Health Facilities Association, et al. v.
DeBuono, et al., St. Luke's Nursing Center, et al. v. DeBuono, et al., New York
Association of Homes and Services for the Aging v. DeBuono et al. (three cases),
Healthcare Association of New York State v. DeBuono and Bayberry Nursing Home et
al. v. Pataki, et al. Plaintiffs allege that the changes in methodology have
been adopted in violation of procedural and substantive requirements of State
and federal law.

In a consolidated action commenced in 1992, Medicaid recipients and home
health care providers and organizations challenge promulgation by the State
Department of Social Services ("DSS") in June 1992 of a home assessment resource
review instrument ("HARRI"), which is to be used by DSS to determine eligibility
for and the nature of home care services for Medicaid recipients, and challenge
the policy of DSS of limiting reimbursable hours of service until a patient is
assessed using the HARRI (Dowd, et al. v. Bane, Supreme Court, New York County).

In several cases, plaintiffs seek retroactive claims for reimbursement for
services provided to Medicaid recipients who were also eligible for Medicare
during the period January 1, 1987 to June 2, 1992. Included are Matter of New
York State Radiological Society v. Wing, Appel v. Wing, E.F.S. Medical Supplies
v. Dowling, Kellogg v. Wing, Lifshitz v. Wing, New York State Podiatric Medical
Association v. Wing and New York State Psychiatric Association v. Wing. These
cases were commenced after the State's reimbursement methodology was held
invalid in New York City Health and Hospital Corp. v. Perales. The State
contends that these claims are time- barred.

In a judgment dated September 5, 1996, the Supreme Court, Albany County,
dismissed Matter of New York State Radiological Society v. Wing as time-barred.
By order dated November 26, 1997, the Appellate Division, Third Department,
affirmed that judgment. By decision dated June 9, 1998, the Court of Appeals
denied leave to appeal.

Several cases, including Port Jefferson Health Care Facility, et al. v.
Wing (Supreme Court, Suffolk County), challenge the constitutionality of Public
Health Law (S)2807-d, which imposes a tax on the hospitals and residential
health care facilities receive from all patient care services. Plaintiffs allege
that the tax assessments were not uniformly applied, in violation of federal
regulations.

In a decision dated June 30, 1997, the Court held that the 1.2 percent and
3.8 percent assessments on gross receipts imposed pursuant to Public Health Law
ss.ss. 2807-d(2)(b)(ii) and 2807-d(2)(b)(iii), respectively, are
unconstitutional. An order entered August 27, 1997 enforced the terms of the
decision. The State has appealed that order.

SHELTER ALLOWANCE

In an action commenced in March 1987 against State and New York City
officials (Jiggetts, et al. v. Bane, et al., Supreme Court, New York County),
plaintiffs allege that the shelter allowance granted to recipients of public
assistance is not adequate for proper housing.

In a decision dated April 16, 1997, the Court held that the shelter
allowance promulgated by the Legislature and enforced through DSS regulations is
not reasonably related to the cost of rental housing in New York City and
results in homelessness to families in New York City. A judgment was entered on
July 25, 1997, directing, inter alia, that the State (i) submit a proposed
schedule of shelter allowances (for the Aid to Dependent Children program and
any successor program) that bears a reasonable relation to the cost of housing
in New York City; and (ii) compel the New York City Department of Social
Services to pay plaintiffs a monthly shelter allowance in the full amount of
their contract rents, provided they continue to meet the eligibility
requirements for public assistance, until such time as a lawful shelter
allowance is implemented, and provide interim relief to other eligible
recipients of Aid to Dependent Children under the interim relief system
established in this case. The State has appealed to the Appellate Division,
First Department, from each and every provision of this judgment except that
portion directing the continued provision of interim relief.

In an opinion dated June 9, 1998, the Court of Appeals affirmed the July
17, 1997 order of the Appellate Division, Third Department, affirming the lower
court dismissal of this case.

CIVIL RIGHTS CLAIMS

In an action commenced in 1980 (United States, et al. v. Yonkers Board of
Education, et al.), the United States District Court for the Southern District
of New York found, in 1985, that Yonkers and its public schools were
intentionally segregated. In 1986, the District Court ordered Yonkers to develop
and comply with a remedial educational improvement plan ("EIP I"). On January
19, 1989, the District Court granted motions by Yonkers and the NAACP to add the
State Education Department, the Yonkers Board of Education, and the State Urban
Development Corporation as defendants, based on allegations that they had
participated in the perpetuation of the segregated school system. On August 30,
1993, the District Court found that vestiges of a dual school system continued
to exist in Yonkers. On March 27, 1995, the District Court made factual findings
regarding the role of the State and the other State defendants (the "State") in
connection with the creation and maintenance of the dual school system, but
found no legal basis for imposing liability. On September 3, 1996, the United
States Court of Appeals for the Second Circuit, based on the District Court's
factual findings, held the State defendants liable under 42 USC ss.1983 and the
Equal Educational Opportunity Act, 20 USC ss.ss.1701, et seq., for the unlawful
dual school system, because the State, inter alia, had taken no action to force
the school district to desegregate despite its actual or constructive knowledge
of de jure segregation. By order dated October 8, 1997, the District Court held
that vestiges of the prior segregated school system continued to exist and that,
based on the State's conduct in creating and maintaining that system, the State
is liable for eliminating segregation and its vestiges in Yonkers and must fund
a remedy to accomplish that goal. Yonkers presented a proposed educational
improvement plan ("EIP II") to eradicate these vestiges of segregation. The
October 8, 1997 order of the District Court ordered that EIP II be implemented
and directed that, within 10 days of the entry of the Order, the State make
available to Yonkers $450,000 to support planning activities to prepare the EIP
II budget for 1997-98 and the accompanying capital facilities plan. A final
judgment to implement EIP II was entered on October 14, 1997. On November 7,
1997, the State appealed that judgment to the Second Circuit. The appeal is
pending. Additionally, the Court adopted a requirement that the State pay to
Yonkers approximately $9.85 million as its pro rata share of the funding of EIP
I for the 1996-97 school year. The requirement for State funding of EIP I was
reduced to an order on December 2, 1997 and reduced to a judgment on February
10, 1998. The State appealed that order to the Second Circuit on December 31,
1997 and amended the notice of appeal after entry of the judgment. That appeal
has been consolidated with the appeal of the EIP II appeal, and is also pending.

On June 15, 1998, the District Court issued an opinion setting forth the
formula for the allocation of the costs of EIP I and EIP II between the State
and the City for the school years 1997-98 through 2005-06.

REAL PROPERTY CLAIMS

On March 4, 1985 in Oneida Indian Nation of New York, et al. v. County of
Oneida, the United States Supreme Court affirmed a judgment of the United States
Court of Appeals for the Second Circuit holding that the Oneida Indians have a
common-law right of action against Madison and Oneida Counties for wrongful
possession of 872 acres of land illegally sold to the State in 1795. At the same
time, however, the Court reversed the Second Circuit by holding that a
third-party claim by the counties against the State for indemnification was not
properly before the federal courts. The case was remanded to the District Court
for an assessment of damages, which action is still pending. The counties may
still seek indemnification in the State courts.

Several other actions involving Indian claims to land in upstate New York
are also pending. Included are Cayuga Indian Nation of New York v. Cuomo, et
al., and Canadian St. Regis Band of Mohawk Indians, et al. v. State of New York,
et al., both in the United States District Court for the Northern District of
New York. The Supreme Court's holding in Oneida Indian Nation of New York may
impair or eliminate certain of the State's defenses to these actions but may
enhance others.

<PAGE>

Shareholder Servicing Agents

FOR CITIBANK NEW YORK RETAIL BANKING AND
BUSINESS AND PROFESSIONAL CUSTOMERS:
Citibank, N.A.
450 West 33rd Street, New York, NY 10001
(212) 564-3456 or (800) 846-5300

FOR CITIGOLD CLIENTS:
Citigold
P.O. Box 5130, New York, NY 10126-5130
Call Your Citigold Executive or in NY or CT (800) 285-1701,
or for all other states, (800) 285-1707

FOR PRIVATE BANKING CLIENTS:
Citibank, N.A.
The Citibank Private Bank
153 East 53rd Street, New York, NY 10043
Call Your Citibank Private Banking Account Officer,
Registered Representative or (212) 559-5959

FOR CITIBANK GLOBAL ASSET MANAGEMENT CLIENTS:
Citibank, N.A.
Citibank Global Asset Management
153 East 53rd Street, New York, NY l0043 (212) 559-7117

FOR NORTH AMERICAN INVESTOR SERVICES CLIENTS:
Citibank, N.A.
111 Wall Street, New York, NY 10043
Call Your Account Manager or (212) 657-9100

FOR CITICORP INVESTMENT SERVICES CUSTOMERS:
Citicorp Investment Services
One Court Square, Long Island City, NY 11120
Call Your Investment Consultant or (800) 846-5200
(212) 736-8170 in New York City

<PAGE>

INVESTMENT ADVISER
Citibank, N.A.
153 East 53rd Street, New York, NY 10043

ADMINISTRATOR AND DISTRIBUTOR
CFBDS, Inc.
21 Milk Street, Boston, MA 02109
(617) 423-1679

TRANSFER AGENT AND CUSTODIAN State Street Bank and Trust Company 225 Franklin
Street, Boston, MA 02110

AUDITORS
(FOR CITIFUNDS(SM) CASH RESERVES) PricewaterhouseCoopers LLP 160 Federal Street,
Boston, MA 02110

(FOR CITIFUNDS(SM) U.S. TREASURY, TAX FREE, NEW YORK TAX FREE,
CALIFORNIA TAX FREE AND CONNECTICUT TAX FREE RESERVES)
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110

LEGAL COUNSEL
Bingham Dana LLP
150 Federal Street, Boston, MA 02110
- --------------------------------------------------------------------------------

SHAREHOLDER SERVICING AGENTS
(See Inside of Cover)
<PAGE>

PART C

Item 23. Exhibits.

* 1(a) Declaration of Trust of the Registrant
* and 1(b) Amendments to Declaration of Trust of the Registrant
filed
herewith
* 2(a) Amended and Restated By-Laws of the Registrant
*, ** 2(b) Amendments to Amended and Restated By-Laws of the
Registrant
* 4 Advisory Agreements between the Registrant and
Citibank, N.A., as adviser
* 5 Distribution Agreement between the Registrant and
CFBDS, Inc. ("CFBDS"), as distributor
* 7 Custodian Contract between the Registrant and State
Street Bank and Trust Company ("State Street"), as
custodian, and amendment thereto
* 8(a) Amended and Restated Administrative Services Plan of
the Registrant
* 8(b) Administrative Services Agreement between the
Registrant and CFBDS, as administrator
* 8(c) Sub-Administrative Services Agreement between
Citibank, N.A. and CFBDS
* 8(d)(i) Form of Shareholder Servicing Agreement between the
Registrant and Citibank, N.A., as shareholder
servicing agent
* 8(d)(ii) Form of Shareholder Servicing Agreement between
the Registrant and a federal savings bank, as
shareholder servicing agent
* 8(d)(iii) Form of Shareholder Servicing Agreement between the
Registrant and CFBDS, as shareholder servicing agent
* 8(e) Transfer Agency and Service Agreement between the
Registrant and State Street, as transfer agent
* 8(f) Amended and Restated Exchange Privilege Agreement
between the Registrant, certain other investment
companies and CFBDS, as distributor
* 13 Amended and Restated Distribution Plan of the
Registrant
25 Powers of Attorney for the Registrant

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

* Incorporated herein by reference to Post-Effective Amendment No. 18
to the Registrant's Registration Statement on Form N-1A (File No.
2-99977) as filed with the Securities and Exchange Commission on
August 29, 1996.
** Incorporated herein by reference to Post-Effective Amendment No. 20
to the Registrant's Registration Statement on Form N-1A (File No.
2-99977) as filed with the Securities and Exchange Commission on
December 23, 1997.

Item 24. Persons Controlled by or under Common Control with Registrant.

Not applicable.

Item 25. Indemnification.

Reference is hereby made to (a) Article V of the Registrant's Declaration
of Trust, incorporated by reference herein as an Exhibit to the Registrant's
Registration Statement on Form N-1A; (b) Section 4 of the Distribution Agreement
between the Registrant and CFBDS, incorporated by reference herein as an Exhibit
to the Registrant's Registration Statement on Form N-1A; and (c) the undertaking
of the Registrant regarding indemnification set forth in its Registration
Statement on Form N-1A.

The Trustees and officers of the Registrant and the personnel of the
Registrant's administrator are insured under an errors and omissions liability
insurance policy. The Registrant and its officers are also insured under the
fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940.

Item 26. Business and Other Connections of Investment Adviser.

Citibank, N.A. ("Citibank") is a commercial bank offering a wide range of
banking and investment services to customers across the United States and around
the world. Citibank is a wholly-owned subsidiary of Citigroup Inc., a registered
bank holding company. Citibank also serves as investment adviser to the
following registered investment companies (or series thereof): Asset Allocation
Portfolios (Large Cap Value Portfolio, Small Cap Value Portfolio, International
Portfolio, Foreign Bond Portfolio, Intermediate Income Portfolio and Short-Term
Portfolio), The Premium Portfolios (Growth & Income Portfolio, Balanced
Portfolio, Large Cap Growth Portfolio, International Equity Portfolio,
Government Income Portfolio and Small Cap Growth Portfolio), Tax Free Reserves
Portfolio, U.S. Treasury Reserves Portfolio, Cash Reserves Portfolio,
CitiFunds(SM) Multi-State Tax Free Trust (CitiFunds(SM) California Tax Free
Reserves), CitiFunds(SM) Tax Free Income Trust (CitiFunds(SM) National Tax Free
Income Portfolio, CitiFunds(SM) New York Tax Free Income Portfolio and
CitiFunds(SM) California Tax Free Income Portfolio), CitiFunds(SM) Institutional
Trust (CitiFunds(SM) Institutional Cash Reserves) and Variable Annuity
Portfolios (CitiSelect(R) VIP Folio 200, CitiSelect(R) VIP Folio 300,
CitiSelect(R) VIP Folio 400, CitiSelect(R) VIP Folio 500 and CitiFunds(SM) Small
Cap Growth VIP Portfolio). Citibank and its affiliates manage assets in excess
of $88 billion worldwide. The principal place of business of Citibank is located
at 399 Park Avenue, New York, New York 10043.

John S. Reed is the Chairman and a Director of Citibank. Victor J.
Menezes is the President and a Director of Citibank. William R. Rhodes and
H. Onno Ruding are Vice Chairmen and Directors of Citibank. The other
Directors of Citibank are Paul J. Collins, Vice Chairman of Citigroup Inc.
and Robert I. Lipp, Chairman and Chief Executive Officer of The Travelers
Insurance Group Inc. and of Travelers Property Casualty Corp.

Each of the individuals named above is also a Director of Citigroup Inc.
In addition, the following persons have the affiliations indicated:

Paul J. Collins Director, Kimberly-Clark Corporation

Robert I. Lipp Chairman, Chief Executive Officer and President, TAP

John S. Reed Director, Monsanto Company
Director, Philip Morris Companies Incorporated
Stockholder, Tampa Tank & Welding, Inc.

William R. Rhodes Director, Private Export Funding Corporation

H. Onno Ruding Supervisory Director, Amsterdamsch Trustees Cantoor B.V.
Director, Pechiney S.A.
Advisory Director, Unilever NV and Unilever PLC
Director, Corning Incorporated

Item 27. Principal Underwriters.

(a) CFBDS, the Registrant's Distributor, is also the distributor for
CitiFunds(SM) International Growth & Income Portfolio, CitiFunds(SM)
International Growth Portfolio, CitiFunds(SM) Intermediate Income Portfolio,
CitiFundsSM Short-Term U.S. Government Income Portfolio, CitiFunds(SM) Large Cap
Growth Portfolio, CitiFunds(SM) Cash Reserves, CitiFunds(SM) U.S. Treasury
Reserves, CitiFunds(SM) Premium U.S. Treasury Reserves, CitiFunds(SM) Premium
Liquid Reserves, CitiFunds(SM) Institutional U.S. Treasury Reserves,
CitiFunds(SM) Institutional Liquid Reserves, CitiFunds(SM) Institutional Cash
Reserves, CitiFunds(SM) Tax Free Reserves, CitiFunds(SM) Institutional Tax Free
Reserves, CitiFunds(SM) California Tax Free Reserves, CitiFunds(SM) Balanced
Portfolio, CitiFunds(SM) Small Cap Value Portfolio, CitiFunds(SM) Growth &
Income Portfolio, CitiFunds(SM) Small Cap Growth Portfolio, CitiFunds(SM)
National Tax Free Income Portfolio, CitiFunds(SM) New York Tax Free Income
Portfolio, CitiFunds(SM) California Tax Free Income Portfolio, CitiSelect(R) VIP
Folio 200, CitiSelect(R) VIP Folio 300, CitiSelect(R) VIP Folio 400,
CitiSelect(R) VIP Folio 500, CitiFunds(SM) Small Cap Growth VIP Portfolio,
CitiSelect(R) Folio 200, CitiSelect(R) Folio 300, CitiSelect(R) Folio 400, and
CitiSelect(R) Folio 500. CFBDS is also the placement agent for Large Cap Value
Portfolio, Small Cap Value Portfolio, International Portfolio, Foreign Bond
Portfolio, Intermediate Income Portfolio, Short-Term Portfolio, Growth & Income
Portfolio, Large Cap Growth Portfolio, Small Cap Growth Portfolio, International
Equity Portfolio, Balanced Portfolio, Government Income Portfolio, Tax Free
Reserves Portfolio, Cash Reserves Portfolio and U.S. Treasury Reserves
Portfolio.

(b) The information required by this Item 29 with respect to each director
and officer of CFBDS is incorporated by reference to Schedule A of Form BD filed
by CFBDS pursuant to the Securities and Exchange Act of 1934 (File No. 8-32417).

Item 28. Location of Accounts and Records.

The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:

NAME ADDRESS

CFBDS, Inc. 21 Milk Street, 5th Floor
(administrator and distributor) Boston, MA 02109

State Street Bank and Trust Company 1776 Heritage Drive
(transfer agent and custodian) North Quincy, MA 02171

Citibank, N.A. 153 East 53rd Street
(investment adviser) New York, NY 10043

SHAREHOLDER SERVICING AGENTS
Citibank, N.A. 450 West 33rd Street
New York, NY 10001

Citibank, N.A. - Citigold Citicorp Mortgage Inc. -
Citigold
15851 Clayton Road
Ballwin, MO 63011

Citibank, N.A. - The Citibank 153 East 53rd Street
Private Bank New York, NY 10043

Citibank, N.A. - Citibank Global 153 East 53rd Street
Asset Management New York, NY 10043

Citibank, N.A. - North American 111 Wall Street
Investor Services New York, NY 10094

Citicorp Investment Services One Court Square
Long Island City, NY 11120

CFBDS, Inc. 21 Milk Street, 5th Floor
Boston, MA 02109

Item 29. Management Services.

Not applicable.

Item 30. Undertakings.

Not applicable.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Registrant has duly caused this Post-Effective Amendment to the
Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and Commonwealth
of Massachusetts on the 14th day of October, 1998.

CITIFUNDS MULTI-STATE TAX FREE
TRUST

By: Philip W. Coolidge
-----------------------
Philip W. Coolidge
President

Pursuant to the requirements of the Securities Act, this Post-Effective
Amendment to the Registration Statement on Form N-1A has been signed below by
the following persons in the capacities indicated below on October 14, 1998.

Signature Title

Philip W. Coolidge President, Principal Executive
----------------------- Officer and Trustee
Philip W. Coolidge

John R. Elder Principal Financial Officer and
----------------------- Principal Accounting Officer
John R. Elder

Elliott J. Berv* Trustee
-----------------------
Elliott J. Berv

Mark T. Finn* Trustee
-----------------------
Mark T. Finn

Riley C. Gilley* Trustee
-----------------------
Riley C. Gilley

Diana R. Harrington* Trustee
-----------------------
Diana R. Harrington

Susan B. Kerley* Trustee
-----------------------
Susan B. Kerley

C. Oscar Morong, Jr.* Trustee
-----------------------
C. Oscar Morong, Jr.

Walter E. Robb, III* Trustee
-----------------------
Walter E. Robb, III

E. Kirby Warren* Trustee
-----------------------
E. Kirby Warren

William S. Woods, Jr.* Trustee
-----------------------
William S. Woods, Jr.

*By: Philip W. Coolidge
-----------------------
Philip W. Coolidge
Executed by Philip W.
Coolidge on behalf of those
indicated pursuant to Powers
of Attorney.

<PAGE>

EXHIBIT INDEX

Exhibit
No.: Description:
-------- ------------
1(b) Amendments to Declaration of Trust of the Registrant
25 Powers of Attorney for the Registrant

<PAGE>
Exhibit 1(b)

LANDMARK MULTI-STATE TAX FREE FUNDS

AMENDMENT TO
DECLARATION OF TRUST

The undersigned, constituting a majority of the Trustees of Landmark
Multi-State Tax Free Funds (the "Trust"), a business trust organized under the
laws of the Commonwealth of Massachusetts, pursuant to a Declaration of Trust
dated August 30, 1985, as amended (the "Declaration"), do hereby amend Section
1.1 of the Declaration by deleting Section 1.1 in its entirety and replacing it
with the following, effective on such date as any officer of the Trust may
select by written notice to the Trust:

Section 1.1. Name. The name of the trust created hereby is
"CitiFunds Multi-State Tax Free Trust."

IN WITNESS WHEREOF, the undersigned have executed this Amendment this
14th day of November, 1997.

Elliott J. Berv Philip W. Coolidge
- ------------------------------- -------------------------------
ELLIOTT J. BERV PHILIP W. COOLIDGE
As Trustee and Not Individually As Trustee and Not Individually

Mark T. Finn Riley C. Gilley
- ------------------------------- -------------------------------
MARK T. FINN RILEY C. GILLEY
As Trustee and Not Individually As Trustee and Not Individually

Diana R. Harrington Susan B. Kerley
- ------------------------------- -------------------------------
DIANA R. HARRINGTON SUSAN B. KERLEY
As Trustee and Not Individually As Trustee and Not Individually

C. Oscar Morong, Jr. Walter E. Robb, III
- ------------------------------- -------------------------------
C. OSCAR MORONG, JR. WALTER E. ROBB, III
As Trustee and Not Individually As Trustee and Not Individually

E. Kirby Warren William S. Woods, Jr.
- ------------------------------- -------------------------------
E. KIRBY WARREN WILLIAM S. WOODS, JR.
As Trustee and Not Individually As Trustee and Not Individually

<PAGE>

Philip W. Coolidge
President
Landmark Multi-State Tax Free Funds
c/o Signature Financial Group Inc.
6 St. James Avenue, 9th Floor
Boston, MA 02116

I, Philip W. Coolidge, hereby certify that I am the duly elected,
qualified and acting President of Landmark Multi-State Tax Free Funds, a
Massachusetts business trust (the "Trust"), and, pursuant to authority granted
by the Board of Trustees of the Trust at a meeting held on November 14, 1997, do
hereby give notice that the Amendment to Declaration of Trust of the Trust, as
executed by the Trustees of the Trust on November 14, 1997, shall become
effective as of January 2, 1998.

IN WITNESS WHEREOF, I have hereunto signed my name at Boston,
Massachusetts this 15th day of December, 1997.

Philip Coolidge
-----------------------------
Philip W. Coolidge, President

<PAGE>

CITIFUNDS MULTI-STATE TAX FREE TRUST

AMENDED AND RESTATED
ESTABLISHMENT AND DESIGNATION OF SERIES OF
SHARES OF BENEFICIAL INTEREST (WITHOUT PAR VALUE)

Pursuant to Section 6.9 of the Declaration of Trust, dated August 30,
1985, as amended (the "Declaration of Trust"), of CitiFunds Multi-State Tax Free
Trust (formerly, Landmark Multi-State Tax Free Funds) (the "Trust"), the
undersigned, being a majority of the Trustees of the Trust, do hereby amend and
restate the Trust's existing Establishment and Designation of Series of Shares
of Beneficial Interest (without par value) in order to change the names of three
series of Shares (as defined in the Declaration of Trust) which were previously
established and designated. No other changes to the special and relative rights
of the existing series are intended by this amendment and restatement. This
amendment and restatement shall become effective on such date as any officer of
the Trust may select by written notice to the Trust.

1. The series shall be as follows:

The series previously designated as Landmark New York Tax Free
Reserves shall be redesignated as "CitiFunds New York Tax
Free Reserves."

The series previously designated as Landmark California Tax Free
Reserves shall be redesignated as "CitiFunds California Tax
Free Reserves."

The series previously designated as Landmark Connecticut Tax Free
Reserves shall be redesignated as "CitiFunds Connecticut Tax
Free Reserves."

2. Each series shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in the Trust's
then currently effective registration statement under the Securities Act of 1933
to the extent pertaining to the offering of Shares of each series. Each Share of
each series shall be redeemable, shall be entitled to one vote or fraction
thereof in respect of a fractional share on matters on which shares of that
series shall be entitled to vote, shall represent a pro rata beneficial interest
in the assets allocated or belonging to such series, and shall be entitled to
receive its pro rata share of the net assets of such series upon liquidation of
the series, all as provided in Section 6.9 of the Declaration of Trust.

3. Shareholders of each series shall vote separately as a class on any
matter to the extent required by, and any matter shall be deemed to have been
effectively acted upon with respect to each series as provided in, Rule 18f-2,
as from time to time in effect, under the Investment Company Act of 1940, as
amended, or any successor rule, and by the Declaration of Trust.

4. The assets and liabilities of the Trust shall be allocated to each
series as set forth in Section 6.9 of the Declaration of Trust.

5. Subject to the provisions of Section 6.9 and Article IX of the
Declaration of Trust, the Trustees (including any successor Trustees) shall have
the right at any time and from time to time to reallocate assets and expenses or
to change the designation of any series now or hereafter created or otherwise to
change the special and relative rights of any such series.

IN WITNESS WHEREOF, the undersigned have executed this Establishment
and Designation of Series on separate counterparts this 14th day of November,
1997.

Elliott J. Berv Philip W. Coolidge
- ------------------------------- -------------------------------
ELLIOTT J. BERV PHILIP W. COOLIDGE
As Trustee and Not Individually As Trustee and Not Individually

Mark T. Finn Riley C. Gilley
- ------------------------------- -------------------------------
MARK T. FINN RILEY C. GILLEY
As Trustee and Not Individually As Trustee and Not Individually

<PAGE>

Philip W. Coolidge
President
CitiFunds Multi-State Tax Free Trust
c/o Signature Financial Group Inc.
6 St. James Avenue, 9th Floor
Boston, MA 02116

I, Philip W. Coolidge, hereby certify that I am the duly elected,
qualified and acting President of CitiFunds Multi-State Tax Free Trust, a
Massachusetts business trust (the "Trust"), and, pursuant to authority granted
by the Board of Trustees of the Trust at a meeting held on November 14, 1997, do
hereby give notice that the Amended and Restated Establishment and Designation
of Series of Shares of Beneficial Interest (without par value) of the Trust, as
executed by the Trustees of the Trust on November 14, 1997, shall become
effective as of January 2, 1998.

IN WITNESS WHEREOF, I have hereunto signed my name at Boston,
Massachusetts this 15th day of December, 1997.

Philip Coolidge
-----------------------------
Philip W. Coolidge, President

<PAGE>
Exhibit 25

CITIFUNDS MULTI-STATE TAX FREE TRUST

The undersigned hereby constitutes and appoints Philip W. Coolidge, John R.
Elder, Susan Jakuboski, Molly S. Mugler and Linda T. Gibson, and each of them,
with full powers of substitution as her true and lawful attorneys and agents to
execute in her name and on her behalf in any and all capacities the Registration
Statements on Form N-1A, and any and all amendments thereto, filed by CitiFunds
Multi-State Tax Free Trust (on behalf of each of its series now or hereinafter
created) (the "Registrant") with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, and under the Investment Company Act of
1940, as amended, and any and all other instruments which such attorneys and
agents, or any of them, deem necessary or advisable to enable the Registrant to
comply with the Securities Act of 1933, as amended, and the Investment Company
Act of 1940, as amended, the rules, regulations and requirements of the
Securities and Exchange Commission, and the securities or Blue Sky laws of any
state or other jurisdiction; and the undersigned hereby ratifies and confirms as
her own act and deed any and all that such attorneys and agents, or any of them,
shall do or cause to be done by virtue hereof. Any one of such attorneys and
agents shall have, and may exercise, all of the powers hereby conferred.

IN WITNESS WHEREOF, the undersigned has hereunto set her hand this 6th day of
February, 1998.

Susan B. Kerley
- --------------------------
Susan B. Kerley

<PAGE>

CITIFUNDS MULTI-STATE TAX FREE TRUST

IN WITNESS WHEREOF, the undersigned has hereunto set her hand this 6th day of
February, 1998.

Diana R. Harrington
- --------------------------
Diana R. Harrington

<PAGE>

CITIFUNDS MULTI-STATE TAX FREE TRUST

The undersigned hereby constitutes and appoints John R. Elder, Susan
Jakuboski, Molly S. Mugler and Linda T. Gibson, and each of them, with full
powers of substitution as his true and lawful attorneys and agents to execute in
his name and on his behalf in any and all capacities the Registration Statements
on Form N-1A, and any and all amendments thereto, filed by CitiFunds Multi-State
Tax Free Trust (on behalf of each of its series now or hereinafter created) (the
"Registrant") with the Securities and Exchange Commission under the Securities
Act of 1933, as amended, and under the Investment Company Act of 1940, as
amended, and any and all other instruments which such attorneys and agents, or
any of them, deem necessary or advisable to enable the Registrant to comply with
the Securities Act of 1933, as amended, and the Investment Company Act of 1940,
as amended, the rules, regulations and requirements of the Securities and
Exchange Commission, and the securities or Blue Sky laws of any state or other
jurisdiction; and the undersigned hereby ratifies and confirms as his own act
and deed any and all that such attorneys and agents, or any of them, shall do or
cause to be done by virtue hereof. Any one of such attorneys and agents shall
have, and may exercise, all of the powers hereby conferred.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 6th day of
February, 1998.

Philip W. Coolidge
- --------------------------
Philip W. Coolidge

<PAGE>

CITIFUNDS MULTI-STATE TAX FREE TRUST

The undersigned hereby constitutes and appoints Philip W. Coolidge, John R.
Elder, Susan Jakuboski, Molly S. Mugler and Linda T. Gibson, and each of them,
with full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statements on Form N-1A, and any and all amendments thereto, filed by CitiFunds
Multi-State Tax Free Trust (on behalf of each of its series now or hereinafter
created) (the "Registrant") with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, and under the Investment Company Act of
1940, as amended, and any and all other instruments which such attorneys and
agents, or any of them, deem necessary or advisable to enable the Registrant to
comply with the Securities Act of 1933, as amended, and the Investment Company
Act of 1940, as amended, the rules, regulations and requirements of the
Securities and Exchange Commission, and the securities or Blue Sky laws of any
state or other jurisdiction; and the undersigned hereby ratifies and confirms as
his own act and deed any and all that such attorneys and agents, or any of them,
shall do or cause to be done by virtue hereof. Any one of such attorneys and
agents shall have, and may exercise, all of the powers hereby conferred.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 6th day of
February, 1998.

Riley C. Gilley
- --------------------------
Riley C. Gilley

<PAGE>

CITIFUNDS MULTI-STATE TAX FREE TRUST

The undersigned hereby constitutes and appoints Philip W. Coolidge, Susan
Jakuboski, Molly S. Mugler and Linda T. Gibson, and each of them, with full
powers of substitution as his true and lawful attorneys and agents to execute in
his name and on his behalf in any and all capacities the Registration Statements
on Form N-1A, and any and all amendments thereto, filed by CitiFunds Multi-State
Tax Free Trust (on behalf of each of its series now or hereinafter created) (the
"Registrant") with the Securities and Exchange Commission under the Securities
Act of 1933, as amended, and under the Investment Company Act of 1940, as
amended, and any and all other instruments which such attorneys and agents, or
any of them, deem necessary or advisable to enable the Registrant to comply with
the Securities Act of 1933, as amended, and the Investment Company Act of 1940,
as amended, the rules, regulations and requirements of the Securities and
Exchange Commission, and the securities or Blue Sky laws of any state or other
jurisdiction; and the undersigned hereby ratifies and confirms as his own act
and deed any and all that such attorneys and agents, or any of them, shall do or
cause to be done by virtue hereof. Any one of such attorneys and agents shall
have, and may exercise, all of the powers hereby conferred.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 6th day of
February, 1998.

John R. Elder
- --------------------------
John R. Elder

<PAGE>

CITIFUNDS MULTI-STATE TAX FREE TRUST

The undersigned hereby constitutes and appoints Philip W. Coolidge, John R.
Elder, Susan Jakuboski, Molly S. Mugler and Linda T. Gibson, and each of them,
with full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statements on Form N-1A, and any and all amendments thereto, filed by CitiFunds
Multi-State Tax Free Trust (on behalf of each of its series now or hereinafter
created) (the "Registrant") with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, and under the Investment Company Act of
1940, as amended, and any and all other instruments which such attorneys and
agents, or any of them, deem necessary or advisable to enable the Registrant to
comply with the Securities Act of 1933, as amended, and the Investment Company
Act of 1940, as amended, the rules, regulations and requirements of the
Securities and Exchange Commission, and the securities or Blue Sky laws of any
state or other jurisdiction; and the undersigned hereby ratifies and confirms as
his own act and deed any and all that such attorneys and agents, or any of them,
shall do or cause to be done by virtue hereof. Any one of such attorneys and
agents shall have, and may exercise, all of the powers hereby conferred.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 6th day of
February, 1998.

C. Oscar Morong, Jr.
- --------------------------
C. Oscar Morong, Jr.

<PAGE>

CITIFUNDS MULTI-STATE TAX FREE TRUST

The undersigned hereby constitutes and appoints Philip W. Coolidge, John R.
Elder, Susan Jakuboski, Molly S. Mugler and Linda T. Gibson, and each of them,
with full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statements on Form N-1A, and any and all amendments thereto, filed by CitiFunds
Multi-State Tax Free Trust (on behalf of each of its series now or hereinafter
created) (the "Registrant") with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, and under the Investment Company Act of
1940, as amended, and any and all other instruments which such attorneys and
agents, or any of them, deem necessary or advisable to enable the Registrant to
comply with the Securities Act of 1933, as amended, and the Investment Company
Act of 1940, as amended, the rules, regulations and requirements of the
Securities and Exchange Commission, and the securities or Blue Sky laws of any
state or other jurisdiction; and the undersigned hereby ratifies and confirms as
his own act and deed any and all that such attorneys and agents, or any of them,
shall do or cause to be done by virtue hereof. Any one of such attorneys and
agents shall have, and may exercise, all of the powers hereby conferred.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 6th day of
February, 1998.

E. Kirby Warren
- --------------------------
E. Kirby Warren

<PAGE>

CITIFUNDS MULTI-STATE TAX FREE TRUST

The undersigned hereby constitutes and appoints Philip W. Coolidge, John R.
Elder, Susan Jakuboski, Molly S. Mugler and Linda T. Gibson, and each of them,
with full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statements on Form N-1A, and any and all amendments thereto, filed by CitiFunds
Multi-State Tax Free Trust (on behalf of each of its series now or hereinafter
created) (the "Registrant") with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, and under the Investment Company Act of
1940, as amended, and any and all other instruments which such attorneys and
agents, or any of them, deem necessary or advisable to enable the Registrant to
comply with the Securities Act of 1933, as amended, and the Investment Company
Act of 1940, as amended, the rules, regulations and requirements of the
Securities and Exchange Commission, and the securities or Blue Sky laws of any
state or other jurisdiction; and the undersigned hereby ratifies and confirms as
his own act and deed any and all that such attorneys and agents, or any of them,
shall do or cause to be done by virtue hereof. Any one of such attorneys and
agents shall have, and may exercise, all of the powers hereby conferred.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 6th day of
February, 1998.

William S. Woods, Jr.
- --------------------------
William S. Woods, Jr.

<PAGE>

CITIFUNDS MULTI-STATE TAX FREE TRUST

The undersigned hereby constitutes and appoints Philip W. Coolidge, John R.
Elder, Susan Jakuboski, Molly S. Mugler and Linda T. Gibson, and each of them,
with full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statements on Form N-1A, and any and all amendments thereto, filed by CitiFunds
Multi-State Tax Free Trust (on behalf of each of its series now or hereinafter
created) (the "Registrant") with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, and under the Investment Company Act of
1940, as amended, and any and all other instruments which such attorneys and
agents, or any of them, deem necessary or advisable to enable the Registrant to
comply with the Securities Act of 1933, as amended, and the Investment Company
Act of 1940, as amended, the rules, regulations and requirements of the
Securities and Exchange Commission, and the securities or Blue Sky laws of any
state or other jurisdiction; and the undersigned hereby ratifies and confirms as
his own act and deed any and all that such attorneys and agents, or any of them,
shall do or cause to be done by virtue hereof. Any one of such attorneys and
agents shall have, and may exercise, all of the powers hereby conferred.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 6th day of
February, 1998.

Elliott J. Berv
- --------------------------
Elliott J. Berv

<PAGE>

CITIFUNDS MULTI-STATE TAX FREE TRUST

The undersigned hereby constitutes and appoints Philip W. Coolidge, John R.
Elder, Susan Jakuboski, Molly S. Mugler and Linda T. Gibson, and each of them,
with full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statements on Form N-1A, and any and all amendments thereto, filed by CitiFunds
Multi-State Tax Free Trust (on behalf of each of its series now or hereinafter
created) (the "Registrant") with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, and under the Investment Company Act of
1940, as amended, and any and all other instruments which such attorneys and
agents, or any of them, deem necessary or advisable to enable the Registrant to
comply with the Securities Act of 1933, as amended, and the Investment Company
Act of 1940, as amended, the rules, regulations and requirements of the
Securities and Exchange Commission, and the securities or Blue Sky laws of any
state or other jurisdiction; and the undersigned hereby ratifies and confirms as
his own act and deed any and all that such attorneys and agents, or any of them,
shall do or cause to be done by virtue hereof. Any one of such attorneys and
agents shall have, and may exercise, all of the powers hereby conferred.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 6th day of
February, 1998.

Mark T. Finn
- --------------------------
Mark T. Finn

<PAGE>

CITIFUNDS MULTI-STATE TAX FREE TRUST

The undersigned hereby constitutes and appoints Philip W. Coolidge, John R.
Elder, Susan Jakuboski, Molly S. Mugler and Linda T. Gibson, and each of them,
with full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statements on Form N-1A, and any and all amendments thereto, filed by CitiFunds
Multi-State Tax Free Trust (on behalf of each of its series now or hereinafter
created) (the "Registrant") with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, and under the Investment Company Act of
1940, as amended, and any and all other instruments which such attorneys and
agents, or any of them, deem necessary or advisable to enable the Registrant to
comply with the Securities Act of 1933, as amended, and the Investment Company
Act of 1940, as amended, the rules, regulations and requirements of the
Securities and Exchange Commission, and the securities or Blue Sky laws of any
state or other jurisdiction; and the undersigned hereby ratifies and confirms as
his own act and deed any and all that such attorneys and agents, or any of them,
shall do or cause to be done by virtue hereof. Any one of such attorneys and
agents shall have, and may exercise, all of the powers hereby conferred.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 6th day of
February, 1998.

Walter E. Robb, III
- --------------------------
Walter E. Robb, III