CITIFUNDS TAX FREE INCOME TRUST, 497, 2000-09-29

CITIFUNDS TAX FREE INCOME TRUST
497, 2000-09-29

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<PAGE>

Rule 497(e) File Nos. 33-5819 and 811-5034

[graphic omitted]

Citi(SM) California Tax Free Income Fund
Citi(SM) National Tax Free Income Fund
Citi(SM) New York Tax Free Income Fund

Prospectus
September 30, 2000

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.

CITIFUNDS(R)
-----------------------
FIXED INCOME SERIES

INVESTMENT PRODUCTS: NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE

<PAGE>

TABLE OF CONTENTS
THE FUNDS .................................................................. 3
Citi California Tax Free Income Fund................................... 3
Citi National Tax Free Income Fund.................................... 10
Citi New York Tax Free Income Fund.................................... 17
YOUR ACCOUNT............................................................... 24
How To Buy Shares.......................................................... 24
Cititrade Investing................................................... 24
How The Price Of Your Shares Is Calculated............................ 25
How To Sell Shares.................................................... 25
Exchanges............................................................. 26
Dividends............................................................. 26
Tax Matters........................................................... 26
MANAGEMENT OF THE FUNDS.................................................... 28
Distribution Arrangements............................................. 28
MUNICIPAL OBLIGATIONS...................................................... 29
FINANCIAL HIGHLIGHTS...................................................... A-1
APPENDIX.................................................................. B-1
Taxable Equivalent Yield Tables...................................... B-1

<PAGE>

CITI CALIFORNIA TAX FREE INCOME FUND
The Fund's goal is to generate high levels of current income exempt from federal
and California State personal income taxes and preserve the value of its
shareholders' investment.

PRINCIPAL STRATEGIES
The Fund invests primarily in investment grade California municipal obligations
which are municipal obligations that pay interest that is exempt from federal as
well as California personal income tax. Municipal obligations are debt
securities issued by states, cities, towns and other public entities and
qualifying issuers. Under normal market conditions, the Fund invests at least
65% of its assets in these California municipal obligations. Issuers of these
securities are usually located in California, but the securities can also be
issued by Puerto Rico and other U.S. territories. Interest on these obligations
is also exempt from the federal alternative minimum tax.

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 State personal income taxes. The Fund may also invest to a
limited extent in municipal obligations that are exempt from federal personal
income taxes but that are subject to the federal alternative minimum tax.
However, under normal market conditions, the Fund invests at least 80% of its
assets in municipal obligations that pay interest that is exempt from federal
income taxes including the federal alternative minimum tax.

The Fund may also invest in short-term debt securities that pay interest that is
subject to federal and California State personal income taxes, including those
issued by companies, the U.S. Government or agencies of the U.S. Government.
Except for temporary defensive purposes, no more than 20% of the Fund's net
assets will be invested in debt securities that pay interest subject to federal
income tax including the federal alternative minimum tax.

Certain securities held by the Fund may be covered by municipal bond insurance,
in which case an insurer may make principal and interest payments on the
securities if the issuer fails to do so.

The Fund is permitted to invest in bonds with any maturity. However, the Fund's
dollar-weighted average maturity is normally expected to be in a long-term range
(between 10 and 30 years). For strategic purposes, however, the Fund may invest
so that the average dollar-weighted maturity of the securities held by the Fund
is under 10 years.

The Fund may use futures contracts, a common form of derivative, in order to
protect (or "hedge") against changes in interest rates or to manage the maturity
or duration of fixed income securities.

WHO MAY WANT TO INVEST
Citi California Tax Free Income Fund may be an appropriate investment if you:

o Seek exposure to the bond market.

o Seek tax-exempt income from your investments.

o Have an investment horizon that is at least intermediate term --
typically three years or longer.

o Have income that is subject to California State taxes.

PRINCIPAL RISKS
As with any mutual fund, you may lose money if you invest in the Fund. The
Fund's principal risks are:

NON-DIVERSIFIED FUND. The Fund is a non-diversified mutual fund. This means that
the Fund may invest a relatively high percentage of its assets in the
obligations of a limited number of issuers, including issuers that derive income
from similar projects or that are otherwise related. As a result, many
securities held by the 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.

CALIFORNIA MUNICIPAL OBLIGATIONS. The Fund invests a high percentage of its
assets in municipal obligations of issuers located in California. As a result,
the Fund is more exposed to events that adversely affect issuers in California,
and the Fund has more risk than a broadly diversified fund.

You should be aware that California has experienced difficulties in recent years
and could do so again in the future. This could cause the Fund to lose money. If
the Fund has difficulty finding high quality California municipal obligations to
purchase, the amount of the Fund's income that is subject to California taxes
could increase.

MUNICIPAL MARKET RISK. There are special factors which may affect the value of
municipal securities and, as a result, the Fund's share price. These factors
include political or legislative changes, uncertainties related to the tax
status of the securities or the rights of investors in the securities and supply
and demand for California municipal obligations. The Fund may invest in certain
municipal securities, such as municipal lease obligations and industrial revenue
bonds, that may have greater risks than ordinary municipal bonds.

REVENUE OBLIGATION RISK. The Fund may invest in municipal obligations called
revenue obligations that are payable only from the revenues generated from a
specific project or from another specific revenue source. Projects may suffer
construction delays, increased costs or reduced revenues as a result of
political, regulatory, economic and other factors. As a result, projects may not
generate sufficient revenues to pay principal and interest on the Fund's revenue
obligations.

MUNICIPAL LEASE OBLIGATIONS. When the Fund invests in municipal lease
obligations, it may have limited recourse in the event of default or
termination. 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.

INTEREST RATE RISK. In general, the prices of municipal securities and other
debt securities rise when interest rates fall, and fall when interest rates
rise. Longer term obligations are usually more sensitive to interest rate
changes. A change in interest rates could cause the Fund's share price to go
down.

INCOME RISK. If interest rates decline, the amount of income paid to you by
the Fund as dividends may also decline.

CREDIT RISK. Some issuers may not make payments on debt securities held by the
Fund. Or, an issuer may suffer adverse changes in its financial condition that
could lower the credit quality of a security, leading to greater volatility in
the price of the security and in shares of the Fund. If the credit quality of a
security deteriorates below investment grade, the Fund may continue to hold this
security, commonly known as a junk bond. The prices of lower rated securities,
especially junk bonds, often are more volatile than those of higher rated
securities. Lower quality debt securities, especially junk bonds, may be less
liquid and may be more difficult for the Fund to value and sell.

PORTFOLIO SELECTION. The success of the Fund's investment strategy depends in
large part on the investment process. The portfolio managers may fail to pick
securities that perform well because they are unable to predict accurately the
direction of interest rates or to assess fundamental changes affecting the
credit quality of issuers or other factors. In that case, you may lose money, or
your investment may not do as well as an investment in another tax-free fund.

PREPAYMENT AND EXTENSION RISK. The issuers of debt securities held by the Fund
may be able to call a bond or prepay principal due on securities, particularly
during periods of declining interest rates. The Fund may not be able to reinvest
that principal at attractive rates, reducing income to the Fund, and the Fund
may lose any premium paid. The Fund would also lose the benefit of falling
interest rates on the price of the repaid bond. On the other hand, rising
interest rates may cause prepayments to occur at slower than expected rates.
This effectively lengthens the maturities of the affected securities, making
them more sensitive to interest rate changes and the Fund's share price more
volatile. Securities subject to prepayment risk generally offer less potential
for gains when interest rates decline, and may offer a greater potential for
loss when interest rates rise.

FUTURES CONTRACTS. Futures contracts are a common form of derivatives. The
Fund's use of futures contracts, particularly for non-hedging purposes, may be
risky. This practice could result in losses that are not offset by gains on
other portfolio assets, causing the Fund's share price to go down. In addition,
the Fund's ability to use futures contracts successfully depends on a number of
factors, including futures contracts being available at prices that are not too
costly, tax considerations, the manager's ability to accurately predict interest
rate movements and the availability of liquid markets. If the manager's
predictions are wrong, the Fund could suffer greater losses than if it had not
used futures contracts.

PARTICIPATION INTERESTS. The Fund's investments in participation interests are
subject to the risk that the Fund will not be considered the owner of the
underlying municipal obligation. In that case, interest paid on the
participation interest may not be exempt from federal, state, and local taxes.

ZERO COUPON OBLIGATIONS. Certain debt securities purchased by the Fund may be
zero coupon obligations. Zero coupon obligations pay no current interest. As a
result, their prices tend to be more volatile than those of securities that
offer regular payments of interest. This makes the Fund's share price more
volatile. In order to pay cash distributions representing income on zero coupon
obligations, the Fund may have to sell other securities on unfavorable terms.
These sales may generate taxable gains for Fund investors.

MORE ON THE FUND'S INVESTMENTS AND RISKS
INVESTMENTS. The Fund invests without limit in different types of municipal
obligations, including general obligation securities (which are backed by the
full faith, credit and taxing power of the issuer), revenue securities (which
are payable only from revenues from a specific project or another revenue
source), private activity bonds, industrial revenue bonds and municipal lease
obligations. The Fund also may invest in participation interests in municipal
obligations that are issued by banks and other financial institutions and in
variable rate demand notes. Although the Fund is non-diversified, it seeks to
limit its exposure to the housing, electrical utilities and hospital sectors by
restricting its investment in any one of these sectors to 25% of the Fund's
assets. More information on municipal obligations appears in "Municipal
Obligations" below.

The Fund 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. The Fund can also purchase securities under
arrangements (called when-issued or forward-delivery basis) where the securities
will not be delivered immediately. The Fund will set aside the assets to pay for
these securities at the time of the agreement.

The manager seeks to minimize the Fund's exposure to the risk of default by
investing in debt securities that are:

o Investment grade at the time of purchase (investment grade securities are
those rated Baa or better by Moody's or BBB or better by Standard &
Poor's, or which the manager believes to be of comparable quality), or

o Issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities, or

o Obligations (including certificates of deposit, bankers' acceptances and
repurchase agreements) of banks with at least $1 billion of assets.

In addition, some of the bonds held in the Fund may be covered by municipal bond
insurance.

The Fund may use other strategies and invest in other securities that are
described in the Statement of Additional Information. However, the Fund may not
use all of the strategies and techniques or invest in all of the types of
securities described in this prospectus or in the Statement of Additional
Information. The Fund's goals may be changed without shareholder approval. Of
course, there can be no assurance that the Fund will achieve its goals.

DEFENSIVE STRATEGIES. The Fund may, from time to time, take temporary defensive
positions that are inconsistent with the Fund's principal investment strategies
in attempting to respond to adverse market, political or other conditions. When
doing so, the Fund may invest without limit in high quality taxable money market
and other short-term instruments, and may not be pursuing its investment goals.

MANAGEMENT STYLE. The Fund is managed by employing a combination of qualitative
and quantitative analysis. The portfolio managers decide which securities to
purchase by first developing an interest rate forecast and analysis of general
economic conditions for the United States as a whole, with a particular focus on
California. Given this information, the portfolio managers develop expectations
for the performance of short-, intermediate- and long-term bonds although they
generally make only modest adjustments to reflect their interest rate
expectations. The manager seeks to add value by investing in a range of
municipal bonds, representing different market sectors, structures and
maturities. The portfolio managers use this same approach when deciding which
securities to sell. Securities are sold when the Fund needs cash to meet
redemptions, or when the managers believe that better opportunities exist or
that the security no longer fits within the managers' overall strategies for
achieving the Fund's goals.

PORTFOLIO TURNOVER. The Fund is actively managed. Although the portfolio
managers attempt to minimize portfolio turnover, from time to time the Fund's
annual portfolio turnover rate may exceed 100%. The sale of securities may
produce capital gains, which, when distributed, are taxable to investors. Active
trading may also increase the amount of commissions or mark-ups the Fund pays to
brokers or dealers when it buys and sells securities. The "Financial Highlights"
section of this prospectus shows the Fund's historical portfolio turnover rate.

BROKERAGE. The manager may use brokers or dealers for Fund transactions who also
provide brokerage and research services to the Fund or other accounts over which
the manager exercises investment discretion. The Fund may "pay up" for brokerage
services, meaning that it is authorized to pay a broker or dealer who provides
these brokerage and research services a commission for executing a portfolio
transaction which is higher than the commission another broker or dealer would
have charged. However, the Fund will "pay up" only if the manager determines in
good faith that the higher commission is reasonable in relation to the brokerage
and research services provided, viewed in terms of either the particular
transaction or all of the accounts over which the manager exercises investment
discretion.

<PAGE>

FUND PERFORMANCE
The bar chart indicates the risks of investing in the Fund by showing changes in
the Fund's performance from year to year. Past performance does not necessarily
indicate how the Fund will perform in the future. The bar chart shows the
performance of the Fund's Citi Shares for the past calendar year.

The table indicates the risks of investing in the Fund by comparing the average
annual total return of each class for the periods shown with that of the Lehman
California 4 Years Plus Index, a broad measure of market performance.

Prior to September 30, 2000 the Fund offered two classes of shares. Effective
the same date all outstanding shares of the Fund are called Citi Shares.

The Fund's performance reflects certain fee waivers or reimbursements. If these
are reduced or eliminated, the Fund's performance may go down.

CITI CALIFORNIA TAX FREE INCOME FUND
ANNUAL TOTAL RETURNS

1999 (2.54)%

QUARTERLY RETURNS:
(FOR CALENDAR QUARTERS COVERED BY THE BAR CHART)

Highest: 0.99% in first quarter 1999
Lowest: (2.97)% in second quarter 1999

Year to date performance as of 6/30/00: 5.58%

AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
Life of Fund
Since
1 Year 11/2/98
-----------------------------------------------------------------------------
Citi Shares (2.54)% (1.17)%
Lehman California 4 Years Plus Index (3.65)% *

*Information regarding performance for this period is not available.

For up-to-date yield information, please call 1-800-995-0134, toll-free, or
contact your account representative. If you are a Cititrade(R) customer, please
call 1-888-663-CITI[2484], toll free.

<PAGE>

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

--------------------------------------------------------------------------------
FEE TABLE
--------------------------------------------------------------------------------

SHAREHOLDER FEES - fees paid directly from your investment None
--------------------------------------------------------------------------

ANNUAL OPERATING EXPENSES (% of average net assets)
expenses deducted from Fund assets
--------------------------------------------------------------------------
Management fees 0.50%
Distribution (12b-1) fees 0.25%
Other expenses 0.66%
-----
Total annual operating expenses 1.41%*
--------------------------------------------------------------------------

* Because some of the Fund's expenses were waived or reimbursed,
actual total operating expenses for the prior fiscal year were: 0.80%

Fee waivers and reimbursements may be reduced or terminated at any time.

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

--------------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------------

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:

o you invest $10,000 in the Fund for the time periods indicated;

o you reinvest all dividends;

o you then sell all of your shares at the end of those periods;

o your investment has a 5% return each year -- the assumption of a 5%
return is required by the SEC for the purpose of this example and is not
a prediction of the Fund's future performance; and

o the Fund's operating expenses as shown in the table remain the same --
the example does not include voluntary fee caps.

Although your actual costs may be higher or lower, based on these
assumptions your costs would be:

CITI CALIFORNIA TAX FREE INCOME FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
CITI SHARES $144 $446 $771 $1,691
--------------------------------------------------------------------------------

<PAGE>

CITI NATIONAL TAX FREE INCOME FUND
The Fund's goal is to generate high levels of current income exempt from federal
income taxes and preserve the value of its shareholders' investment.

PRINCIPAL STRATEGIES
The Fund invests primarily in investment grade municipal obligations issued by a
variety of states and localities. Municipal obligations are debt securities
issued by states, cities, towns and other public entities and qualifying
issuers. The interest paid on these debt securities is free from federal income
tax.

Under normal market conditions, the Fund invests at least 80% of its assets in
municipal obligations that pay interest that is exempt from federal personal
income taxes including the federal alternative minimum tax. These may include
obligations of Puerto Rico and other U.S. territories.

The Fund may invest to a limited extent in municipal obligations that are exempt
from federal personal income taxes but that are subject to the federal
alternative minimum tax. When acceptable municipal obligations are not
available, the Fund may also invest in short-term debt securities that pay
interest that is subject to federal income taxes, including those issued by
companies, the U.S. Government or agencies of the U.S. Government. Except for
temporary defensive purposes, no more than 20% of the Fund's net assets will be
invested in debt securities that pay interest subject to federal income tax,
including the federal alternative minimum tax.

Certain securities held by the Fund may be covered by municipal bond insurance,
in which case an insurer may make principal and interest payments on the
securities if the issuer fails to do so. Although the Fund also seeks to
minimize risk by investing in municipal securities from a number of different
states and localities, the Fund may, from time to time, invest over 25% of its
assets in municipal securities from one state or region.

The Fund is permitted to invest in bonds with any maturity. However, the Fund's
dollar-weighted average maturity is normally expected to be in a long-term range
(between 10 and 30 years). For strategic purposes, however, the Fund may invest
so that the dollar-weighted average maturity of the securities held by the Fund
is under 10 years.

The Fund may use futures contracts, a common form of derivative, in order to
protect (or "hedge") against changes in interest rates or to manage the maturity
or duration of fixed income securities.

WHO MAY WANT TO INVEST
Citi National Tax Free Income Fund may be an appropriate investment if you:

o Seek exposure to the bond market.

o Seek tax-exempt income from your investments.

o Have an investment horizon that is at least intermediate term --
typically three years or longer.

PRINCIPAL RISKS
As with any mutual fund, you may lose money if you invest in the Fund. The
Fund's principal risks are:

NON-DIVERSIFIED FUND. The Fund is a non-diversified mutual fund. This means that
the Fund may invest a relatively high percentage of its assets in the
obligations of a limited number of issuers. The Fund also may invest 25% or more
of its assets in securities of issuers who are located in the same state, that
derive income from similar projects or that are otherwise related. As a result,
many securities held by the 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.

MUNICIPAL MARKET RISK. There are special factors which may affect the value of
municipal securities and, as a result, the Fund's share price. These factors
include political or legislative changes, uncertainties related to the tax
status of the securities or the rights of investors in the securities and supply
and demand for municipal obligations. The Fund may invest in certain municipal
securities, such as municipal lease obligations and industrial revenue bonds,
that may have greater risks than ordinary municipal bonds.

INTEREST RATE RISK. In general, the prices of debt securities rise when interest
rates fall, and fall when interest rates rise. Longer term obligations are
usually more sensitive to interest rate changes. A change in interest rates
could cause the Fund's share price to go down.

INCOME RISK. If interest rates decline, the amount of income paid to you by
the Fund as dividends may also decline.

CREDIT RISK. Some issuers may not make payments on debt securities held by the
Fund, causing a loss. Or, an issuer's financial condition may deteriorate,
lowering the credit quality of a security and leading to greater volatility in
the price of the security and in shares of the Fund. If the credit quality of a
security deteriorates below investment grade, the Fund may continue to hold this
security, commonly known as a junk bond. The prices of lower rated securities,
especially junk bonds, often are more volatile than those of higher rated
securities. Lower quality debt securities, especially junk bonds, may be less
liquid and may be more difficult for the Fund to value and sell.

The Fund may invest to a limited extent in municipal obligations that are exempt
from federal personal income taxes but that are subject to the federal
alternative minimum tax. When acceptable municipal obligations are not
available, the Fund may also invest in short-term debt securities that pay
interest that is subject to federal personal income taxes, including those
issued by companies, the U.S. Government or agencies of the U.S. Government.
Except for temporary defensive purposes, no more than 20% of the Fund's net
assets will be invested in debt securities that pay interest subject to federal
income tax including the federal alternative minimum tax.

The manager seeks to minimize the Fund's exposure to the risk of default by
investing in debt securities that are:

o Issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities, or

o Obligations (including certificates of deposit, bankers' acceptances and
repurchase agreements) of banks with at least $1 billion of assets.

In addition, some of the bonds held in the Fund may be covered by municipal bond
insurance. Although the Fund also seeks to minimize risk by investing in
municipal securities from a number of different states and localities, the Fund
may, from time to time, invest over 25% of its assets in municipal securities
from one state or region.

MANAGEMENT STYLE. The Fund is managed using a combination of qualitative and
quantitative analysis. The portfolio managers decide which securities to
purchase by first developing an interest rate forecast and analysis of general
economic conditions throughout the United States. Then the portfolio managers
compare specific regions and sectors to identify broad segments of the municipal
market poised to benefit in this environment. The portfolio managers also
closely study the yields and other characteristics of specific issues to
identify attractive opportunities. The manager uses a geographically diversified
approach, seeking a portfolio of bonds representing a wide range of sectors,
maturities and regions. The portfolio managers use this same approach when
deciding which securities to sell. Securities are sold when the Fund needs cash
to meet redemptions, or when the managers believe that better opportunities
exist or that the security no longer fits within the managers' overall
strategies for achieving the Fund's goals.

<PAGE>

The table indicates the risks of investing in the Fund by comparing the average
annual total return of each class for the periods shown with that of the Lehman
Municipal 4 Years Plus Bond Index, a broad measure of market performance.

Prior to September 30, 2000 the Fund offered two classes of shares. Effective
the same date all outstanding shares of the Fund are called Citi Shares.

The Fund's performance reflects certain fee waivers or reimbursements. If these
are reduced or eliminated, the Fund's performance may go down.

CITI NATIONAL TAX FREE INCOME FUND
ANNUAL TOTAL RETURNS

1996 3.31%
1997 11.45%
1998 10.05%
1999 (3.86)%

QUARTERLY RETURNS:
(FOR CALENDAR QUARTERS COVERED BY THE BAR CHART)

Highest: 4.30% in second quarter 1997
Lowest: (2.59)% in second quarter 1999

Year to date performance as of 6/30/00: 4.25%

AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
Life of Fund
Since
1 Year 8/17/95
-------------------------------------------------------------------------------
Citi Shares (3.86)% (6.34)%
Lehman Municipal 4 Years Plus Bond Index (2.92)% *

*Information regarding performance for this period is not available.

For up-to-date yield information, please call 1-800-995-0134, toll-free, or
contact your account representative. If you are a Cititrade(R) customer, please
call 1-888-663-CITI[2484], toll free.

<PAGE>

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

--------------------------------------------------------------------------------
FEE TABLE
--------------------------------------------------------------------------------

SHAREHOLDER FEES - fees paid directly from your investment None
--------------------------------------------------------------------------------

ANNUAL OPERATING EXPENSES (% of average net assets)
expenses deducted from Fund assets
--------------------------------------------------------------------------------
Management fees 0.75%
Distribution (12b-1) fees 0.25%
Other expenses 0.20%
-----
Total annual operating expenses 1.20%*
--------------------------------------------------------------------------------

* Because some of the Fund's expenses were waived or reimbursed,
actual total operating expenses for the prior fiscal year were: 0.80%

Fee waivers and reimbursements may be reduced or terminated at any time.

--------------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------------

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:

o you invest $10,000 in the Fund for the time periods indicated;

o you reinvest all dividends;

o you then sell all of your shares at the end of those periods;

o your investment has a 5% return each year -- the assumption of a 5%
return is required by the SEC for the purpose of this example and is not
a prediction of the Fund's future performance; and

o the Fund's operating expenses as shown in the table remain the same --
the example does not include voluntary fee caps.

Although your actual costs may be higher or lower, based on these
assumptions your costs would be:

CITI NATIONAL TAX FREE INCOME FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
CITI SHARES $122 $381 $660 $1,455
--------------------------------------------------------------------------------

<PAGE>

CITI NEW YORK TAX FREE INCOME FUND
The Fund's goal is to generate high levels of current income exempt from
federal, New York State and New York City personal income taxes and preserve
the value of its shareholders' investment.

PRINCIPAL STRATEGIES
The Fund invests primarily in investment grade New York municipal obligations
which are municipal obligations that pay interest that is exempt from federal as
well as New York State and New York City personal income tax. Municipal
obligations are debt securities issued by states, cities, towns and other public
entities and qualifying issuers. Under normal market conditions, the Fund
invests at least 80% of its assets in these New York municipal obligations.
Issuers of these securities are usually located in New York, but the securities
can also be issued by Puerto Rico and other U.S. territories. Interest on these
obligations is also exempt from the federal alternative minimum tax. 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 State or City personal income taxes. The Fund may invest to
a limited extent in municipal obligations that are exempt from federal personal
income taxes but that are subject to the federal alternative minimum tax.

The Fund may also invest in short-term debt securities that pay interest that is
subject to federal, New York State and New York City personal income taxes,
including those issued by companies, the U.S. Government or agencies of the U.S.
Government. Except for temporary defensive purposes, no more than 20% of the
Fund's net assets will be invested in debt securities that pay interest subject
to federal income tax, including the federal alternative minimum tax, or New
York State or New York City personal income taxes.

Certain securities held by the Fund may be covered by municipal bond insurance,
in which case an insurer may make principal and interest payments on the
securities if the issuer fails to do so.

The Fund is permitted to invest in bonds with any maturity. However, the Fund's
dollar-weighted average maturity is normally expected to be in a long-term range
(between 10 and 30 years). For strategic purposes, however, the Fund may invest
so that the dollar-weighted average maturity of the securities held by the Fund
is under 10 years.

The Fund may use futures contracts, a common form of derivative, in order to
protect (or "hedge") against changes in interest rates or to manage the maturity
or duration of fixed income securities.

WHO MAY WANT TO INVEST
Citi New York Tax Free Income Fund may be an appropriate investment if you:

o Seek exposure to the bond market.

o Seek tax-exempt income from your investments.

o Have an investment horizon that is at least intermediate term --
typically three years or longer.

o Have income that is subject to New York State or City taxes.

PRINCIPAL RISKS
As with any mutual fund, you may lose money if you invest in the Fund. The
Fund's principal risks are:

NEW YORK MUNICIPAL OBLIGATIONS. The Fund invests a high percentage of its assets
in municipal obligations of issuers located in New York. As a result, the Fund
is more exposed to events that adversely affect issuers in New York, and the
Fund has more risk than a broadly diversified fund.

You should be aware that New York has experienced difficulties in recent years
and could do so again in the future. This could cause the Fund to lose money. If
the Fund has difficulty finding high quality New York municipal obligations to
purchase, the amount of the Fund's income that is subject to New York taxes
could increase.

MUNICIPAL MARKET RISK. There are special factors which may affect the value of
municipal securities and, as a result, the Fund's share price. These factors
include political or legislative changes, uncertainties related to the tax
status of the securities or the rights of investors in the securities and supply
and demand for New York municipal obligations. The Fund may invest in certain
municipal securities, such as municipal lease obligations and industrial revenue
bonds, that may have greater risks than ordinary municipal bonds.

INCOME RISK. If interest rates decline, the amount of income paid to you by
the Fund as dividends may also decline.

The manager seeks to minimize the Fund's exposure to the risk of default by
investing in debt securities that are:

o Issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities, or

o Obligations (including certificates of deposit, bankers' acceptances and
repurchase agreements) of banks with at least $1 billion of assets.

In addition, some of the bonds held in the Fund may be covered by municipal bond
insurance.

MANAGEMENT STYLE. The Fund is managed with a combination of qualitative and
quantitative analysis. The portfolio managers decide which securities to
purchase by first developing an interest rate forecast and analysis of general
economic conditions for the United States as a whole, with a particular focus on
the New York area. Given this information, the portfolio managers develop
expectations for the performance of short-, intermediate- and long-term bonds
although they generally make only modest adjustments to reflect their interest
rate expectations. The manager seeks to add value by investing in a range of
municipal bonds, representing different market sectors, structures and
maturities. The portfolio managers use this same approach when deciding which
securities to sell. Securities are sold when the Fund needs cash to meet
redemptions, or when the managers believe that better opportunities exist or
that the security no longer fits within the managers' overall strategies for
achieving the Fund's goals.

<PAGE>

The table indicates the risks of investing in the Fund by comparing the average
annual total return of each class for the periods shown with that of the Lehman
Municipal Bond Index, a broad measure of market performance.

Prior to September 30, 2000 the Fund offered two classes of shares. Effective
the same date all outstanding shares of the Fund are called Citi Shares.

The Fund's performance reflects certain fee waivers or reimbursements. If these
are reduced or eliminated, the Fund's performance may go down.

CITI NEW YORK TAX FREE INCOME FUND
ANNUAL TOTAL RETURNS

1990 5.93%
1991 12.34%
1992 7.86%
1993 12.03%
1994 (7.47)%
1995 17.89%
1996 3.01%
1997 9.62%
1998 6.89%
1999 (3.73)%

QUARTERLY RETURNS:
(FOR CALENDAR QUARTERS COVERED BY THE BAR CHART)

Highest: 6.98% in first quarter 1995
Lowest: (5.98)% in first quarter 1994

Year to date performance as of 6/30/00: 4.42%

AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
1 Year 5 Years 10 Years
-------------------------------------------------------------------------
Citi Shares (3.73)% 6.50% 6.19%
Lehman Municipal Bond Index (2.06)% 6.91% 6.89%

For up-to-date yield information, please call 1-800-995-0134, toll-free, or
contact your account representative. If you are a Cititrade(R) customer, please
call 1-888-663-CITI[2484], toll free.

<PAGE>

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

--------------------------------------------------------------------------------
FEE TABLE
--------------------------------------------------------------------------------

SHAREHOLDER FEES - fees paid directly from your investment None
--------------------------------------------------------------------------------

Other expenses 0.13%
-----
Total annual operating expenses 1.13%*
--------------------------------------------------------------------------------

* Because some of the Fund's expenses were waived or reimbursed,
actual total operating expenses for the prior fiscal year were: 0.80%

Fee waivers and reimbursements may be reduced or terminated at any time.
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------------

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:

o you invest $10,000 in the Fund for the time periods indicated;

o you reinvest all dividends;

o you then sell all of your shares at the end of those periods;

o your investment has a 5% return each year -- the assumption of a 5%
return is required by the SEC for the purpose of this example and is not
a prediction of the Fund's future performance; and

o the Fund's operating expenses as shown in the table remain the same --
the example does not include voluntary fee caps.

Although your actual costs may be higher or lower, based on these
assumptions your costs would be:

CITI NEW YORK TAX FREE INCOME FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
CITI SHARES $115 $359 $622 $1,375
--------------------------------------------------------------------------------

<PAGE>

YOUR 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, financial intermediary, financial
institution, or the distributor's financial consultants (each called a Service
Agent). Please call 1-800-995-0134 for information. You may also purchase shares
directly from a Fund by calling the Fund's sub-transfer agent at 1-800-995-0134
between the hours of 8:00 a.m. and 4:00 p.m.

The Funds do not, but your Service Agent may, impose a minimum initial or
subsequent investment requirement.

Shares are purchased at net asset value the next time it is calculated after
your order is received in proper form by a Fund. Each Fund has the right to
reject any purchase order or cease offering Fund shares at any time.

Your Service 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 Service Agent transmits the order when the check
clears.

If you hold your shares through a Service Agent, your Service Agent may
establish and maintain your account and be the shareholder of record. If you
wish to transfer your account, you may transfer it to another financial
institution, or you may set up an account directly with the Funds' sub- transfer
agent.

Each Fund has a Systematic Investment Plan which allows you to automatically
invest a specific dollar amount in your account on a periodic basis. For more
information, please contact the Funds' sub-transfer agent at 1-800-995-0134 or,
if you hold your shares through a Service Agent, your Service Agent. Cititrade
customers should contact a Cititrade account representative at
1-888-663-CITI[2484] for more information.

CITITRADE(R) INVESTING
Shares may be purchased through the Cititrade Program by customers that have
established a Cititrade Account. For more detailed information on how to open a
Cititrade Account, please visit the Cititrade website at www.mycititrade.com, or
call a Cititrade account representative at 1-888-663- CITI[2484].

Once you open your Cititrade Account, you will be subject to the general account
requirements of the Cititrade Program, as described in the Cititrade account
application, and will have access to all the electronic financial services made
available from time to time over the Internet by the Cititrade Program. This
prospectus is readily available for viewing and printing on the Cititrade
website. Please note that www.mycititrade.com is an inactive textual reference
only, meaning that the information contained on the website is not part of this
prospectus and is not incorporated herein by reference.

Investors who have established an account with Cititrade may receive shareholder
information about the Fund they invest in electronically, unless they otherwise
request to receive the information in paper format. Shareholder information
includes prospectuses, financial reports, confirmations, proxy solicitations and
financial statements. Cititrade shareholders may also receive other Fund-related
correspondence through their e-mail account.

You may incur costs imposed by your Internet service provider for on-line access
to shareholder documents and maintaining an e-mail account. The Funds reserve
the right to deliver paper-based documents to investors in certain
circumstances, at no cost to you.

Cititrade is a registered service mark of Citicorp.

HOW THE PRICE OF YOUR SHARES IS CALCULATED
You may buy, exchange or redeem shares at their net asset value next determined
after receipt of your request in good order. A Fund's net asset value is the
value of its assets minus its liabilities. Net asset value is calculated
separately for each class of shares. Each Fund calculates its net asset value
every day the New York Stock Exchange is open. This calculation is done when
regular trading closes on the Exchange (normally 4:00 p.m., Eastern time). The
Exchange is closed on certain holidays listed in the Statement of Additional
Information.

When reliable market prices or quotations are not readily available, each Fund
may price those securities at fair value. Fair value is determined in accordance
with procedures approved by the Funds' Board of Trustees. A fund that uses fair
value to price securities may value those securities higher or lower than
another fund using market quotations to price the same securities.

HOW TO SELL SHARES
You may sell (redeem) your shares Monday through Friday, except on certain
holidays. You may make redemption requests in writing through the Funds' sub-
transfer agent or, if you hold your shares through a Service Agent, through your
Service Agent. If your account application permits, you may also make redemption
requests by telephone. Cititrade customers may redeem shares by contacting a
Cititrade account representative at 1-888-663-CITI[2484]. All redemption
requests must be in proper form, as determined by the sub-transfer agent. Each
Service Agent is responsible for promptly submitting redemption requests to the
Funds' sub-transfer agent. For your protection, a Fund may request documentation
for large redemptions or other unusual activity in your account.

The Funds have Systematic Withdrawal Plans which allow you to automatically
withdraw a specific dollar amount from your account on a regular basis. You must
have at least $10,000 in your account to participate in this program. For more
information, please contact the Funds' sub-transfer agent at 1-800-995-0134 or,
if you hold your shares through a Service Agent, your Service Agent. Cititrade
customers should contact a Cititrade account representative at 1-888-663-CITI
[2484] for more information.

The price of any redemption of Fund shares will be the NAV the next time it is
calculated after your redemption request has been received by the transfer
agent. Fund shares are redeemed without a sales charge.

Your account will be credited with your redemption proceeds in federal funds
normally on the third business day after you sell your shares but, in any event,
within seven days. Your redemption proceeds may be delayed for up to ten days if
your purchase was made by check. Your redemption proceeds may also be delayed,
or your right to receive redemption proceeds suspended, if the New York Stock
Exchange is closed (other than on weekends or holidays) or trading is
restricted, or if an emergency exists. Each Fund has the right to pay your
redemption proceeds by giving you securities instead of cash. In that case, you
may incur costs (such as brokerage commissions) converting the securities into
cash. You should be aware that you may have to pay taxes on your redemption
proceeds.

Your account balance with a Fund may be subject to a $500 minimum. If so, the
Fund reserves the right to close your account if it falls below $500 because of
redemptions. You will have 60 days to make an additional investment. If you do
not increase your balance, a Fund may close your account and send the proceeds
to you. Your shares will be sold at NAV on the day your account was closed.

EXCHANGES
Shares may be exchanged for shares of any other Fund offered in the no-load
family of CitiFunds(R). CitiFunds is a registered service mark of Citicorp. You
may place exchange orders through the sub-transfer agent or, if you hold your
shares through a Service Agent, through your Service Agent. You may place
exchange orders by telephone if your account application permits. The sub-
transfer agent or your Service Agent can provide you with more information.

Cititrade customers may exchange Fund shares by contacting a Cititrade account
representative at 1-888-663-CITI [2484].

There is no sales charge on Fund shares you get through an exchange.

The exchange privilege may be changed or terminated at any time. You should be
aware that you may have to pay taxes on your exchange.

All share classes may not be available upon exchange.

DIVIDENDS
Each Fund declares dividends daily of substantially all of its net income (if
any) from dividends and interest. Each Fund pays these dividends monthly to its
shareholders of record.

Each Fund's net realized short-term and long-term capital gains, if any, will be
distributed to that Fund's shareholders semi-annually. Each Fund may also make
additional distributions to shareholders to the extent necessary to avoid the
application of the 4% non-deductible excise tax on certain undistributed income
and net capital gains of mutual funds.

Unless you choose to receive your dividends in cash, you will receive them as
full and fractional additional Fund shares.

TAX MATTERS
This discussion of taxes is very general. You should consult your own tax
adviser about your particular situation, and the status of your account under
state and local laws.

TAXABILITY OF DISTRIBUTIONS; FEDERAL INCOME TAXES. You will not normally have to
pay federal income taxes on distributions a Fund designates as attributable to
interest on municipal obligations, that is, as "tax-exempt" dividends. Certain
"tax- exempt" dividends may be subject to the federal alternative minimum tax,
however.

A Fund may also invest from time to time in taxable securities, or realize gains
from transactions in securities. You will normally have to pay federal income
taxes on the distributions not attributable to interest on municipal obligations
which you receive from the Fund, whether you take the distributions in cash or
reinvest them in additional shares. Distributions designated by a Fund as
capital gain dividends are taxable as long-term capital gains. Other
distributions, not designated as "tax-exempt" dividends, are generally taxable
as ordinary income. Some distributions paid in January may be taxable to you as
if they had been paid the previous December. Each year the Funds will mail you a
report of your distributions for the prior year and how they are treated for
federal tax purposes.

STATE AND LOCAL TAXES. Generally, you will have to pay state or local taxes on
Fund dividends and other distributions that are taxable to you for federal
income tax purposes, although distributions derived from interest on U.S.
government obligations may be exempt from certain state and local taxes. Except
as noted below, Fund dividends that are not taxable to you for federal income
tax purposes may still be subject to tax under the income or other tax laws of
state or local taxing authorities.

As long as at the end of each quarter of the Citi California Tax Free Income
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 that, if
held by an individual, would pay interest exempt from California taxation,
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 such California municipal obligations.
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
California personal income taxation of dividends received by shareholders.
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.

To the extent that dividends received from the Citi New York Tax Free Income
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
(with certain limited exceptions provided in the New York City Tax on Bank
Corporations).

BACKUP WITHHOLDING. 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 your credit) 31% of certain distributions and proceeds it pays you
if you fail to provide this information or otherwise violate IRS regulations.

TAXATION OF TRANSACTIONS. If you sell your shares of a Fund, or exchange them
for shares of another fund, it is considered a taxable event. Depending on your
purchase price and the sales price of the shares you sell or exchange, you may
have a gain or loss on the transaction. If you redeem your Fund shares after
tax-exempt income has accrued but not yet been declared as a dividend, the
portion of redemption proceeds representing that income may be taxed as a
capital gain even though it would have been tax-exempt if it had been declared
as a dividend prior to redemption. In addition, if you redeem your Fund shares
within six months of their purchase, any short-term capital loss realized on
redemption is disallowed to the extent of any dividends of tax-exempt income
received during that period. You are responsible for any tax liabilities
generated by your transaction.

MANAGEMENT OF THE FUNDS

MANAGER. Each Fund draws on the strength and experience of Citibank N.A.
Citibank is the investment manager of each Fund, and subject to policies set by
the Funds' Trustees, Citibank makes investment decisions. Citibank has been
managing money since 1822. With its affiliates, it currently manages more than
$351 billion in assets worldwide.

Citibank, with headquarters at 153 East 53rd Street, New York, New York, is a
wholly-owned subsidiary of Citigroup Inc. Citi is a service mark of Citicorp.

Citibank and its affiliates, including their directors, officers or employees
may have banking and investment banking relationships with the issuers of
securities that are held in the Funds. They may also own the securities of these
issuers. However, 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.

John C. Mooney, CFA, is a Vice President of Citibank and has managed the Citi
California Tax Free Income Fund since its inception and the Citi National Tax
Free Income Fund and Citi New York Tax Free Income Fund since June 1997. Mr.
Mooney joined Citibank in 1997 as a Senior Portfolio Manager responsible for
managing tax-exempt fixed income funds. He is also part of the team responsible
for fixed-income strategy, research and trading. From 1994 to 1997, Mr. Mooney
served as a Vice President and tax-exempt portfolio manager at SunAmerica. He
has 12 years of investment management experience.

MANAGEMENT FEES. For the Citi California Tax Free Income Fund's fiscal year
ended December 31, 1999, Citibank received management fees totaling 0.05% of
that Fund's average daily net assets, after waivers. For the Citi National Tax
Free Income Fund's fiscal year ended December 31, 1999, Citibank received
management fees totaling 0.36% of that Fund's average daily net assets, after
waivers. For the Citi New York Tax Free Income Fund's fiscal year ended December
31, 1999, Citibank received management fees totaling 0.41% of that Fund's
average daily net assets, after waivers.

DISTRIBUTION ARRANGEMENTS
The Funds have two classes of shares, Citi Shares and D Shares. These classes
have different expense levels. Only Citi Shares are offered in this prospectus.
The Funds do not charge any sales loads or deferred sales loads in connection
with the purchase of Citi Shares.

The 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 is determined by the distributor and may
be substantial. Citibank or an affiliate may make similar payments under similar
arrangements.

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.

MUNICIPAL LEASE OBLIGATIONS are undivided interests issued by a state or
municipality in a lease or installment purchase of equipment or facilities.

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 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
investments.

<PAGE>

FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand each Fund's
performance for the fiscal periods indicated. Certain information reflects
financial results for a single share. The total returns in the table represent
the rate that an investor would have earned or lost on an investment in a Fund
(assuming reinvestment of all dividends and distributions). This information,
except for the six months ended June 30, 2000, has been audited by Deloitte &
Touche LLP, whose report, along with the Funds' financial statements, is
included in the Funds' Annual Reports which are incorporated by reference in the
Statement of Additional Information and which are available upon request.

<TABLE>
<CAPTION>
CITI CALIFORNIA TAX FREE INCOME FUND -- CITI SHARES

November 2, 1998
Six Months Ended (Commencement of
June 30, 2000 Year Ended Operations) to
(unaudited) December 31, 1999 December 31, 1998
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, begining of period $ 9.43 $10.08 $10.00
-------------------------------------------------------------------------------------------------------------------------
Income from operations:
Net investment income 0.218 0.400 0.069
Net realized and unrealized gain
(loss) on investments 0.302 (0.650) 0.080
-------------------------------------------------------------------------------------------------------------------------
Total from operations 0.520 (0.250) 0.149
-------------------------------------------------------------------------------------------------------------------------
Less dividends from:
Net investment income (0.220) (0.400) (0.069)
-------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.73 $ 9.43 $10.08
-------------------------------------------------------------------------------------------------------------------------
Total return 5.58%** (2.54)% 1.49%**
-------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental data:
Net assets, end of period
(000's omitted) $23,233 $34,396 $96,706
Ratio of expenses to average net
assets 0.80%* 0.70% 0%*
Ratio of net investment income to
average net assets 4.63%* 4.06% 4.16%*
-------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 45% 116% 1%
-------------------------------------------------------------------------------------------------------------------------
Note: If agents of the Fund had not voluntarily agreed to waive all of their fees for the period and the Sub-administrator had not
voluntarily assumed expenses, the net investment income per share and the ratios would have been as follows:

Net investment income per share $0.162 $0.195 $0.042
Ratios:
Expenses to average net assets 1.98%* 1.41% 1.60%*
Net investment income to average net
assets 3.45%* 3.35% 2.56%*

* Annualized.
** Not annualized.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
CITI NATIONAL TAX FREE INCOME FUND -- CITI SHARES
August 17, 1995
Year Ended December 31, (Commencement of
Six Months Ended ----------------------------------------------------- Operations) to
June 30, 2000 December 31, 1995
(unaudited) 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $10.54 $11.43 $10.92 $10.34 $10.55 $10.00
-------------------------------------------------------------------------------------------------------------------------
Income from operations:
Net investment income 0.275 0.469 0.524 0.564 0.562 0.187
Net realized and
unrealized gain (loss)
on investments 0.167 (0.900) 0.549 0.586 (0.232) 0.551
-------------------------------------------------------------------------------------------------------------------------
Total from operations 0.442 (0.431) 1.073 1.150 0.330 0.738
-------------------------------------------------------------------------------------------------------------------------
Less dividends from:
Net investment income (0.252) (0.450) (0.540) (0.570) (0.540) (0.188)
Net realized gain on
investments -- (0.009) (0.023) -- -- --
-------------------------------------------------------------------------------------------------------------------------
Total from distributions (0.252) (0.459) (0.563) (0.570) (0.540) (0.188)
-------------------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $10.73 $10.54 $11.43 $10.92 $10.34 $10.55
-------------------------------------------------------------------------------------------------------------------------
Total return 4.25%** (3.86)% 10.05% 11.45% 3.31% 7.43%**
-------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental data:
Net assets, end of
period (000's omitted) $78,718 $106,449 $259,447 $1,917 $2,060 $1,306
Ratio of expenses to
average net assets (A) 0.80%* 0.80% 0% 0.14% 0% 0%
Ratio of expenses to
average net assets
after fees paid
indirectly (A) 0.80%* 0.81% 0% 0% 0% 0%
Ratio of net investment
income to average net
assets 4.76%* 4.14% 4.49% 5.45% 5.42% 5.20%*
-------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 37% 112% 57% 55% 52% 0%
-------------------------------------------------------------------------------------------------------------------------
Note: If agents of the Fund had not voluntarily agreed to waive all of their fees for the period, the expenses were not reduced
for fees paid indirectly, the Sub-administrator had not voluntarily assumed expenses and had expenses been limited to that
required by certain state securities law in 1995, the net investment income per share and the ratios would have been as follows:
Net investment income
(loss) per share $0.245 $0.424 $0.364 $(0.229) $(0.291) $0.098
Ratios:
Expenses to average net
assets 1.30%* 1.20% 1.37% 7.66% 8.23% 2.50%*
Net investment income
(loss) to average net
assets 4.26%* 4.55% 3.12% (2.21)% (2.81)% 2.70%*

* Annualized.
** Not annualized.
(A) The expense ratios for the year ended December 31, 1995 and the periods thereafter have been adjusted to reflect a change
in reporting requirements. The new reporting guidelines require the Fund to increase its expense ratio by the effect of any
expense offset arrangements with its service providers.
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
CITI NEW YORK TAX FREE INCOME FUND -- CITI SHARES

Year Ended December 31,
Six Months Ended -------------------------------------------------------------------------
June 30, 2000
(unaudited) 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $10.79 $11.69 $11.42 $10.98 $11.25 $10.09
-------------------------------------------------------------------------------------------------------------------------------
Income from operations:
Net investment income 0.315 0.514 0.487 0.594 0.585 0.607
Net realized and
unrealized gain (loss)
on investments 0.155 (0.940) 0.282 0.431 (0.267) 1.153
-------------------------------------------------------------------------------------------------------------------------------
Total from operations 0.470 (0.426) 0.769 1.025 0.318 1.760
-------------------------------------------------------------------------------------------------------------------------------
Less dividends from:
Net investment income (0.270) (0.474) (0.499) (0.585) (0.588) (0.600)
-------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $10.99 $10.79 $11.69 $11.42 $10.98 $11.25
-------------------------------------------------------------------------------------------------------------------------------
Total return 4.42%** (3.73)% 6.89% 9.62% 3.01% 17.89%
-------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental data:
Net assets, end of period
(in thousands) $182,281 $224,144 $459,591 $75,978 $82,182 $90,264
Ratio of expenses to
average net assets 0.80%* 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of net investment
income to average net
assets 4.95%* 4.40% 4.24% 5.31% 5.34% 5.62%
-------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 27% 30% 17% 16% 47% 98%
-------------------------------------------------------------------------------------------------------------------------------
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 ended after December 31, 1994, the net investment income per
share and the ratios would have been as follows:

Net investment income per
share $0.294 $0.465 $0.454 $0.540 $0.534 $0.555
Ratios:
Expenses to average net
assets 1.17%* 1.13% 1.09% 1.28% 1.27% 1.27%
Net investment income to
average net assets 4.58%* 4.07% 3.95% 4.83% 4.87% 5.15%
* Annualized.
** Not annualized.
</TABLE>

<PAGE>

APPENDIX

TAXABLE EQUIVALENT YIELD TABLES

RATES FOR 2000 UNDER FEDERAL PERSONAL INCOME TAX LAW, CALIFORNIA STATE INCOME
TAX LAW, AND NEW YORK STATE AND NEW YORK CITY INCOME TAX LAW

If you are subject to income tax, you need to earn a higher taxable yield to
achieve the same after-tax income, than you would if the yield were tax-exempt.
The following tables show the approximate taxable yields which are equivalent to
tax-exempt yields under 2000 federal personal income tax laws, under the
California State personal income tax laws, and under the New York State and New
York City personal income tax laws described in the tables. If tax laws, rates
or brackets are changed, the information in the tables would be out of date.
Each Fund expects that a substantial portion of its dividends will be exempt
from federal personal income taxes. Citi California Tax Free Income Fund also
expects that a substantial portion of its dividends will be exempt from
California personal income taxes. Similarly, Citi New York Tax Free Income Fund
expects a substantial portion of the dividends it pays will be exempt from New
York State and New York City personal income taxes. However, in reviewing the
tables below, you should remember that the Funds may also pay dividends which
are subject to federal, state and local personal income taxes.

<TABLE>
<CAPTION>
FEDERAL TAX RATES

TAXABLE INCOME* INCOME FEDERAL TAX-EXEMPT YIELD
--------------------------------------- TAX ------------------------------------------------------------------------------
SINGLE 2000 JOINT 2000 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>
$0-$ 26,250 $0-$ 43,850 15.0% 2.35% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 26,251-$ 63,550 $ 43,851-$105,950 28.0 2.78 3.47 4.17 4.88 5.56 6.25 6.94 7.64 8.33 9.03
$ 63,551-$132,600 $105,951-$161,450 31.0 2.90 3.62 4.35 5.07 5.80 6.52 7.25 7.97 8.70 9.42
$132,601-$288,350 $161,451-$288,350 36.0 3.13 3.91 4.69 5.47 6.25 7.03 7.81 8.59 9.38 10.16
$288,351 & Over $288,351 & Over 39.6 3.31 4.14 4.97 5.79 6.62 7.45 8.28 9.11 9.93 10.76
*Net amount subject to Federal personal income tax after deductions and exemptions.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
CALIFORNIA TAX RATES

TAXABLE INCOME* INCOME CALIFORNIA TAX-EXEMPT YIELD
--------------------------------------- TAX ------------------------------------------------------------------------------
SINGLE 1999*** JOINT 1999*** 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>
$0-$ 26,250 17.85% 2.43% 3.04% 3.65% 4.26% 4.87% 5.48% 6.09% 6.70% 7.30% 7.91%
$0-$ 43,850 17.40 2.42 3.03 3.63 4.24 4.84 5.45 6.05 6.66 7.26 7.87
$ 26,251-$ 63,550 34.45 3.05 3.81 4.58 5.34 6.10 6.86 7.63 8.39 9.15 9.92
$ 43,851-$105,950 34.06 3.03 3.79 4.55 5.31 6.07 6.82 7.58 8.34 9.10 9.86
$ 63,551-$132,600 $105,951-$161,450 37.42 3.20 3.99 4.79 5.59 6.39 7.19 7.99 8.79 9.59 10.39
$132,601-$288,350 $161,451-$288,350 41.95 3.45 4.31 5.17 6.03 6.89 7.75 8.61 9.47 10.34 11.20
$288,351 & Over $288,351 & Over 45.22 3.65 4.56 5.48 6.39 7.30 8.21 9.13 10.04 10.95 11.87
*Net amount subject to Federal and California 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 1999 information since at this time 2000 information is not available.

<CAPTION>
NEW YORK STATE TAX RATES

TAXABLE INCOME* INCOME NEW YORK TAX-EXEMPT YIELD
--------------------------------------- TAX ------------------------------------------------------------------------------
SINGLE 2000** JOINT 2000*** 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>
$0-$ 26,250 19.54% 2.49% 3.11% 3.73% 4.35% 4.97% 5.59% 6.21% 6.84% 7.46% 8.08%
$0-$ 43,850 19.28 2.48 3.10 3.72 4.33 4.96 5.57 6.19 6.81 7.43 8.05
$ 26,251-$ 63,550 $ 43,851-$105,950 32.93 2.98 3.73 4.47 5.22 5.96 6.71 7.45 8.20 8.95 9.69
$ 63,551-$132,600 $105,951-$161,450 35.73 3.11 3.89 4.67 5.45 6.22 7.00 7.78 8.56 9.34 10.11
$132,601-$288,350 $161,451-$288,350 40.38 3.35 4.19 5.03 5.87 6.71 7.55 8.39 9.23 10.06 10.90
$288,351 & Over $288,351 & Over 43.74 3.55 4.44 5.33 6.22 7.11 8.00 8.89 9.78 10.66 11.56
*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.

<CAPTION>
NEW YORK STATE AND CITY TAX RATES

TAXABLE INCOME* INCOME NEW YORK CITY TAX-EXEMPT YIELD
--------------------------------------- TAX ------------------------------------------------------------------------------
SINGLE 2000**** JOINT 2000**** 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>
$0-$ 26,250 22.40% 2.58% 3.22% 3.87% 4.51% 5.15% 5.80% 6.44% 7.09% 7.73% 8.38%
$0-$ 43,850 22.13 2.57 3.21 3.85 4.49 5.14 5.78 6.42 7.06 7.71 8.35
$ 26,251-$ 63,550 35.63 3.11 3.88 4.66 5.44 6.21 6.99 7.77 8.54 9.32 10.10
$ 43,851-$105,950 35.62 3.11 3.88 4.66 5.44 6.21 6.99 7.77 8.54 9.32 10.10
$ 63,551-$132,600 $105,951-$161,450 38.37 3.25 4.06 4.67 5.68 6.49 7.30 8.11 8.92 9.74 10.55
$132,601-$288,350 $161,451-$288,350 42.83 3.50 4.37 5.25 6.12 7.00 7.87 8.75 9.62 10.50 11.37
$288,351 & Over $288,351 & Over 46.05 3.71 4.63 5.56 6.49 7.41 8.34 9.27 10.19 11.12 12.05
*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. 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>

[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

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

Additional information about a Fund's investments is included in the Fund's
Annual and Semi-Annual Reports to Shareholders. In a Fund's Annual Report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance.

The Annual and Semi-Annual Reports for a Fund list its portfolio holdings and
describe its performance.

To obtain free copies of the Funds' SAI and the Funds' Annual and Semi-Annual
Reports, when available, or to make other inquiries, please call 1-800-995-0134
toll-free. Cititrade customers should contact a Cititrade account representative
at 1-888-663-CITI [2484].

The SAI is also available from the Securities and Exchange Commission. You can
find it on the EDGAR Database on the SEC Internet site at http://www.sec.gov.
Information about the Funds (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: (202)
942-8090. Copies may also be obtained upon payment of a duplicating fee by
electronic request to [email protected], or by writing to the SEC's Public
Reference Section, Washington, DC 20549-0102.

SEC File Number 811-5034

CIT0025
<PAGE>

Rule 497(e) File Nos. 33-5819 and 811-5034

Statement of
Additional Information
September 30, 2000

CITI(SM) CALIFORNIA TAX FREE INCOME FUND
CITI(SM) NATIONAL TAX FREE INCOME FUND
CITI(SM) NEW YORK TAX FREE INCOME FUND

CitiFunds(R) Tax Free Income Trust (the "Trust") is an open-end management
investment company which was organized as a business trust under the laws of
the Commonwealth of Massachusetts on May 27, 1986. The Trust offers two
classes of shares of Citi National Tax Free Income Fund, Citi New York Tax
Free Income Fund and Citi California Tax Free Income Fund (collectively, the
"Funds"), to which this Statement of Additional Information relates. The
address and telephone number of the Trust are 388 Greenwich Street, 23rd
Floor, New York, New York 10013, 1-800-451-2010.

-------------------------------------------------------------------------------
INVESTMENT PRODUCTS:
NOT FDIC INSURED -- NO BANK GUARANTEE -- MAY LOSE VALUE
-------------------------------------------------------------------------------

TABLE OF CONTENTS PAGE

1. The Trust ........................................................... 2
2. Investment Objective and Policies ................................... 2
3. Description of Permitted Investments and Investment Practices ....... 3
4. Investment Restrictions ............................................. 13
5. Performance Information and Advertising ............................. 14
6. Determination of Net Asset Value; Valuation of Securities ........... 16
7. Additional Information on the Purchase and Sale of Fund Shares ...... 17
8. Management .......................................................... 19
9. Portfolio Transactions .............................................. 24
10. Description of Shares, Voting Rights and Liabilities ................ 25
11. Tax Matters ......................................................... 26
12. Financial Statements ................................................ 27
Appendix A -- Additional Information Concerning California Municipal
Obligations ........................................................... A-1
Appendix B -- Additional Information Concerning New York Municipal
Obligations ........................................................... B-1
Appendix C -- Description of Securities Ratings ......................... C-1
Appendix D -- Taxable Equivalent Yield Tables ........................... D-1

This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the
Funds' Prospectus dated September 30, 2000, by which shares of the Funds are
offered. This Statement of Additional Information should be read in
conjunction with the Prospectus. This Statement of Additional Information
incorporates by reference the financial statements described on page 27
hereof. These financial statements can be found in the applicable Fund's
Annual Report to Shareholders. Please call 1-800-995-0134 toll free to obtain
a Prospectus for a Fund. A Cititrade customer may obtain copies of a Fund's
Prospectus and annual report without charge on the Cititrade website at
www.mycititrade.com or by calling 1-888-663-CITI[2484].

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 TRUST

CitiFunds Tax Free Income Trust (the "Trust") is an open-end management
investment company which was organized as a business trust under the laws of
the Commonwealth of Massachusetts on May 27, 1986. The Trust was called
Landmark New York Tax Free Income Fund until its name was changed to Landmark
Tax Free Income Funds effective October 21, 1993. Effective March 2, 1998, the
Trust's name was changed to CitiFunds Tax Free Income Trust. This Statement of
Additional Information describes Citi California Tax Free Income Fund (the
"California Fund"), Citi National Tax Free Income Fund, (the "National Fund"),
and Citi New York Tax Free Income Fund, (the "New York Fund"), each of which
is a separate series of the Trust. Prior to March 2, 1998, the National Fund
was called Landmark National Tax Free Income Fund, and the New York Fund was
called Landmark New York Tax Free Income Fund. From March 2, 1998 until
September 4, 2000 the California Fund was called CitiFunds California Tax Free
Income Portfolio, the National Fund was called CitiFunds National Tax Free
Income Portfolio, and the New York Fund was called CitiFunds New York Tax Free
Income Portfolio. References in this Statement of Additional Information to
the "Prospectus" are to the Fund's Prospectus dated September 30, 2000.

Each Fund is a non-diversified mutual fund, which means that it is not
limited by the Investment Company Act of 1940 (the "1940 Act") in the
proportion of its assets that may be invested in the obligations of a single
issuer. Each Fund intends, however, to comply with diversification
requirements imposed on mutual funds by the Internal Revenue Code.

Citibank, N.A. ("Citibank" or the "Manager") is the manager of each of the
Funds. Citibank manages the investments of the Funds from day to day in
accordance with each Fund's investment objective and policies. The selection
of investments for the Funds and the way they are managed depend on the
conditions and trends in the economy and the financial marketplaces.

The Board of Trustees of the Trust provides broad supervision over the
affairs of the Funds. Shares of the Funds are continuously sold by Salomon
Smith Barney, Inc., the Funds' distributor ("Salomon Smith Barney" or the
"Distributor").

2. INVESTMENT OBJECTIVE AND POLICIES
CALIFORNIA FUND

The investment objective of the California Fund is to generate high levels
of current income exempt from federal and California State personal income
taxes and preserve the value of its shareholders' investment.

The California Fund seeks its objective by investing in debt securities
consisting primarily of obligations issued by state and municipal governments
and by other qualifying issuers ("Municipal Obligations") that pay interest
that is exempt from federal income taxes including the federal alternative
minimum tax. As a fundamental policy, at least 80% of the California Fund's
net assets will be invested in Municipal Obligations under normal
circumstances. At least 65% of the California Fund's total assets will be
invested in Municipal Obligations the interest on which is exempt from both
federal and California personal income taxes ("California Municipal
Obligations") under normal circumstances. California Municipal Obligations
include Municipal Obligations of the State of California and its political
subdivisions, Puerto Rico, other U.S. territories and their political
subdivisions and other qualifying issuers.

NATIONAL FUND

The investment objective of the National Fund is to generate high levels
of current income exempt from federal income taxes and preserve the value of
its shareholders' investment.

The National Fund seeks its objective by investing in Municipal
Obligations that pay interest that is exempt from federal income taxes
including the federal alternative minimum tax. As a fundamental policy, at
least 80% of the National Fund's assets will be invested in tax-exempt
Municipal Obligations under normal circumstances.

NEW YORK FUND

The investment objective of the New York Fund is to generate high levels
of current income exempt from federal, New York State and New York City
personal income taxes and preserve the value of its shareholders' investment.

The New York Fund seeks its objective by investing in Municipal
Obligations that pay interest that is exempt from federal, New York State and
New York City personal income taxes including the federal alternative minimum
tax ("New York Municipal Obligations"). As a fundamental policy, at least 80%
of the New York Fund's assets will be invested in New York Municipal
Obligations under normal circumstances. New York Municipal Obligations include
Municipal Obligations of New York State and its political subdivisions, Puerto
Rico, other U.S. territories and their political subdivisions and other
qualifying issuers.

GENERAL

The investment objective of each Fund may be changed without approval by
that Fund's shareholders, but shareholders will be given written notice at
least 30 days before any change is implemented. Of course, there can be no
assurance that a Fund will achieve its investment objective.

The Fund's Prospectus contains a discussion of the principal investment
strategies of each Fund and the principal risks of investing in each Fund. The
following supplements the information contained in the Prospectus concerning
the investment, policies and techniques of each Fund. Unless specifically
designated, the policies described in this section and those described below
under "Description of Permitted Investments and Investment Practices" are not
fundamental and may be changed without shareholder approval.

The Funds currently invest directly in securities. However, in the future,
the Funds may invest in securities indirectly through one or more investment
companies, to the extent permitted by applicable law. Shareholder approval is
not needed to change the Funds' investment structure.

3. DESCRIPTION OF PERMITTED INVESTMENTS
AND INVESTMENT PRACTICES

The Funds may, but need not, invest in all of the investments and utilize
all of the investment techniques described below and in the Prospectus. The
selection of investments and the utilization of investment techniques depend
on, among other things, the Manager's investment strategies for each Fund,
conditions and trends in the economy and financial markets and investments
being available on terms that, in the Manager's opinion, make economic sense.

MUNICIPAL OBLIGATIONS

Municipal Obligations include municipal bonds, notes and commercial paper
issued by or on behalf of states, territories and possessions of the United
States (including, for example, the District of Columbia, Puerto Rico, Guam
and certain Indian tribes) and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income taxes
(without regard to whether the interest thereon is also exempt from the
personal income taxes of any state). Municipal Obligation bonds generally have
a maturity at the time of issue of one year or more and are issued to obtain
funds for various public purposes, including the construction of a wide range
of public facilities such as bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Obligation bonds may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses, and
obtaining funds to loan to other public institutions and facilities. In
addition, certain types of industrial development bonds are issued by or on
behalf of public authorities to obtain funds to provide privately-operated
housing facilities, industrial facilities, sports facilities, convention or
trade show facilities, airport, mass transit, port or parking facilities, air
or water pollution control facilities, hazardous waste treatment or disposal
facilities, and certain local facilities for water supply, gas, electricity or
sewage or solid waste disposal. Such obligations are included within the term
Municipal Obligations if the interest paid thereon qualifies as exempt from
federal income tax. Other types of industrial development bonds, the proceeds
of which are used for the construction, equipment, repair or improvement of
privately operated industrial or commercial facilities, may constitute
Municipal Obligations, although the current federal tax laws place substantial
limitations on the size of such issues.

The two principal classifications of Municipal Obligation bonds are
"general obligation" and "revenue" bonds. There are, of course, variations in
the security of Municipal Obligations, both within a particular classification
and between classifications, depending on numerous factors. General obligation
bonds are secured by the issuer's pledge of its good faith, credit and taxing
power for the payment of principal and interest. The payment of the principal
of and interest on such bonds may be dependent upon an appropriation by the
issuer's legislative body. The characteristics and enforcement of general
obligation bonds vary according to the law applicable to the particular
issuer. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Industrial
development bonds which are Municipal Obligations are in most cases revenue
bonds and do not generally constitute the pledge of the credit of the issuer
of such bonds. Each Fund may invest more than 25% of its assets in (i)
industrial revenue bonds issued to finance industrial projects, and (ii)
Municipal Obligations issued to finance housing, electrical utilities and
hospitals (although a Fund may not invest more than 25% of its assets at any
time in debt securities financing any one of housing, electrical utilities, or
hospitals, considered as three separate categories). Projects may suffer
construction delays, increased costs or reduced revenues as a result of
political, regulatory, economic and other factors. As a result projects may
not generate sufficient revenues to pay principal and interest on Municipal
Obligations held by the Funds.

Municipal Obligation notes are issued by states, municipalities and other
tax-exempt issuers to finance short-term cash needs or, occasionally, to
finance construction. Most Municipal Obligation notes are general obligations
of the issuing entity payable from taxes or designated revenues expected to be
received within the related fiscal period. Municipal Obligation notes
generally have maturities of one year or less. Municipal Obligation notes
include:

1. Tax Anticipation Notes. Tax Anticipation Notes are issued to
finance operational needs of municipalities. Generally, they are issued in
anticipation of the receipt of various tax revenues, such as property,
income, sales, use and business taxes.

2. Revenue Anticipation Notes. Revenue Anticipation Notes are issued
in expectation of receipt of dedicated revenues, such as state aid or
federal revenues available under federal revenue sharing programs.

3. Tax and Revenue Anticipation Notes. Tax and Revenue Anticipation
Notes are issued by a state or municipality to fund its day-to-day
operations and certain local assistance payments to its municipalities and
school districts. Such Notes are issued in anticipation of the receipt of
various taxes and revenues, such as personal income taxes, business taxes
and user taxes and fees.

4. Bond Anticipation Notes. Bond Anticipation Notes are issued to
provide interim financing until long-term bond financing can be arranged.
Long-term bonds or renewal Bond Anticipation Notes provide the money for
the repayment of the Notes. Bond Anticipation Notes 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.

Municipal Obligation commercial paper typically represents short-term,
unsecured, negotiable promissory notes. These obligations are issued by
agencies of state and local governments to finance 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 Obligation commercial paper is backed by
letters of credit, lending agreements, note repurchase agreements or other
credit facility agreements offered by banks or other institutions.

The yields on Municipal Obligations are dependent on a variety of factors,
including general market conditions, supply and demand and general conditions
of the Municipal Obligation market, size of a particular offering, the
maturity of the obligation and rating (if any) of the issue. The ratings of
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group
("Standard & Poor's) and FITCH IBCA, Inc. ("Fitch") represent their opinions
as to the quality of various Municipal 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.

In determining the tax status of interest on Municipal Obligations, the
Manager relies without independent review on opinions rendered at the time of
issuance of bond counsel who may be counsel to the issuer.

RISK FACTORS AFFECTING CALIFORNIA

The Trust intends to invest a high proportion of the California Fund's
assets in Municipal Obligations of the State of California and its political
subdivisions, municipalities, agencies, instrumentalities and public
authorities. 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.

Investors in the California Fund should consider carefully the special
risks inherent in investing in California Municipal Obligations. The State of
California and other issuers of California Municipal Obligations have
experienced severe financial difficulties. From 1990-1993, the State suffered
through a severe recession, the worst since the 1930's, heavily influenced by
large cutbacks in the defense/aerospace industries and military base closures
and a major drop in real estate construction. In December 1994, Orange County,
California and its pooled investment funds filed for protection under the
federal Bankruptcy Code. Orange County's financial difficulties could continue
to adversely affect other issuers of California Municipal Obligations. Since
the start of 1994, California's economy has been recovering and growing
steadily stronger, to the point where the State's economic growth is outpacing
the rest of the nation. A significant portion of the State's economic growth
has been in industries, such as high technology and entertainment, that may be
particularly sensitive to economic trends. In addition, such industries can be
adversely affected by economic turmoil in foreign markets. After having been
downgraded in 1994 as the result of the financial difficulties of the State of
California, the credit ratings of certain of the State's obligations have been
upgraded by certain rating agencies. There can be no assurance that the
State's economic growth will continue or that credit ratings on obligations of
the State of California and other California Municipal Obligations will not be
downgraded again.

Many of the California Fund's Municipal Obligations are likely to be
obligations of California governmental issuers which rely in whole or in part,
directly or indirectly, on real property taxes as a source of revenue.
"Proposition Thirteen" and similar California constitutional and statutory
amendments and initiatives in recent years have restricted the ability of
California taxing entities to increase real property tax revenues. Other
initiative measures approved by California voters in recent years, through
limiting various other taxes, have resulted in a substantial reduction in
state revenues. Decreased state revenues may result in reductions in
allocations of state revenues to local governments. Investors in the
California Fund should consider the greater risks inherent in the California
Fund's concentration in these securities when compared with the safety that
comes with a less geographically concentrated investment portfolio.

For further information concerning California Municipal Obligations, see
Appendix A to this Statement of Additional Information. The summary set forth
above and in Appendix A is included for purposes of providing a general
description of California credit and financial conditions. This summary is
based on information from statements, including preliminary 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 NEW YORK

The Trust intends to invest a high proportion of the New York Fund's
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.

Many complex political, social and economic forces influence New York
State's economy and finances, which may in turn affect New York's financial
plan. These forces may affect New York unpredictably from fiscal year to
fiscal year and are influenced by governments, institutions and events that
are not subject to the State's control.

Over the long-term, uncertainties with regard to the economy present the
largest potential risk to future budget balance in New York State. For
example, a downturn in the financial markets or the wider economy is possible,
a risk that is heightened by the lengthy expansion currently underway. The
securities industry is more important to the New York economy than the
national economy as a whole, potentially amplifying the impact of an economic
downturn. A large change in stock market performance could result in wage,
bonus and unemployment levels that are significantly different from those
embodied in the State's financial plan forecast. Merging and downsizing by
firms, as a consequence of deregulation or continued foreign competition, may
also have more significant adverse effects on employment than expected.

The fiscal health of the State may also be affected by the fiscal health
of New York City, which continues to receive significant financial assistance
from the State. 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. 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.

Investors in the New York Fund should consider carefully the special risks
inherent in investing in New York Municipal Obligations. There can be no
assurance that credit ratings on obligations of New York State, New York City
and other New York governmental authorities will not be downgraded due to
changes in New York's financial condition. Investors in the New York Fund
should consider the greater risks inherent in the New York Fund's
concentration in these securities when compared with the safety that comes
with a less geographically concentrated investment portfolio.

For further information concerning New York Municipal Obligations, see
Appendix B to this Statement of Additional Information. The summary set forth
above and in Appendix B is included for purposes 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.

PARTICIPATIONS IN MUNICIPAL LEASES

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. Participations in municipal lease obligations are
deemed to be illiquid unless otherwise determined by the Board of Trustees.

PARTICIPATION INTERESTS

The Trust may purchase from banks on behalf of each Fund participation
interests in all or part of specific holdings of Municipal Obligations. The
Trust has the right to sell the participation interest back to the bank and
draw on the letter of credit or guarantee for all or any part of the full
principal amount of the participation interest in the security, plus accrued
interest. In some cases, these rights 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 Funds" credit standards at the
time of purchase of the participation interests. Each participation interest
is backed by an irrevocable letter of credit or guarantee of the selling bank.
Participation interests will only be purchased if in the opinion of counsel to
the issuer interest income on such interests will be tax-exempt when
distributed as dividends to shareholders of the Funds. The Trust will not
invest more than 5% of either the National Fund or the New York Fund's total
assets (taken at the greater of cost or market value) in participation
interests.

OTHER DEBT SECURITIES

Subject to the limitations set forth in each Fund's Prospectus, the Funds
may also invest in short-term debt securities that pay interest that is
subject to federal income taxes and State and city personal income taxes.
These debt securities may be issued by companies, the U.S. Government, or
agencies of the U.S. Government. These investments may include commercial
paper, which is unsecured debt of corporations usually maturing in 270 days or
less from its date of issuance.

SECURITIES RATED BAA OR BBB

Each Fund may purchase securities rated Baa by Moody's or BBB by Standard
& Poor's and securities of comparable quality, which may have poor protection
of payment of principal and interest. These securities are often considered to
be speculative and involve greater risk of default or price changes than
securities assigned a higher quality rating due to changes in the issuer's
creditworthiness. The market prices of these securities may fluctuate more
than higher-rated securities and may decline significantly in periods of
general economic difficulty which may follow periods of rising interest rates.
Appendix C contains a description of these ratings.

FLOATING AND VARIABLE RATE OBLIGATIONS

Each Fund may invest in floating and variable rate obligations. Floating
or variable rate obligations bear interest at rates that are not fixed, but
vary with changes in specified market rates or indices, such as the prime
rate, and at specified intervals. Certain of the floating or variable rate
obligations that may be purchased by a Fund may carry a demand feature that
would permit the holder to tender them back to the issuer at par value prior
to maturity. Such obligations include variable rate master demand notes, which
are unsecured instruments issued pursuant to an agreement between the issuer
and the holder that permit the indebtedness thereunder to vary and provide for
periodic adjustments in the interest rate. If interest rates rise or fall, the
rates payable on variable rate instruments will generally be readjusted. As a
result, variable rate instruments do not offer the same opportunity for
capital appreciation or loss as fixed rate investments.

Each Fund will limit its purchases of floating and variable rate
obligations to those of the same quality as it otherwise is allowed to
purchase. The Funds will monitor on an ongoing basis the ability of an issuer
of a demand instrument to pay principal and interest on demand. Some of the
demand instruments purchased by a Fund are not traded in a secondary market
and derive their liquidity solely from the ability of the holder to demand
repayment from the issuer or third party providing credit support. If a demand
instrument is not traded in a secondary market, a Fund will nonetheless treat
the instrument as "readily marketable" for the purposes of its operating
policy limiting investments in illiquid securities unless the demand feature
has a notice period of more than seven days in which case the instrument will
be characterized as "not readily marketable" and therefore illiquid. A Fund's
right to obtain payment at par on a demand instrument could be affected by
events occurring between the date the Fund elects to demand payment and the
date payment is due that may affect the ability of the issuer of the
instrument or third party providing credit support to make payment when due,
except when such demand instruments permit same day settlement. To facilitate
settlement, these same day demand instruments may be held in book entry form
at a bank other than a Fund's custodian subject to a sub-custodian agreement
approved by the Fund between that bank and the Fund's custodian.

The Funds' investments in floating or variable rate securities normally
involve industrial development or revenue bonds which provide that the rate of
interest is set as a specific percentage of a designated base rate, such as
rates on Treasury Bonds or Bills or the prime rate at a major commercial bank,
and that a bondholder can demand payment of the obligations on short notice at
par plus accrued interest. While there is usually no established secondary
market for issues of this type of security, the dealer that sells an issue of
such securities frequently also offers to repurchase such securities at any
time, at a repurchase price which varies and may be more or less than the
amount the bondholder paid for them.

The maturity of floating or variable rate obligations (including
participation interests therein) is deemed to be the longer of (i) the notice
period required before a Fund is entitled to receive payment of the obligation
upon demand or (ii) the period remaining until the obligation's next interest
rate adjustment. If not redeemed by a Fund through the demand feature, the
obligations mature on a specified date which may range up to 30 years from the
date of issuance.

FUTURES CONTRACTS

Each Fund may use financial futures in order to protect itself from
fluctuations in interest rates (sometimes called "hedging") without actually
buying or selling debt securities, or to manage the effective maturity or
duration of fixed-income securities in the Fund's portfolio in an effort to
reduce potential losses or enhance potential gain. Because the value of a
futures contract changes based on the price of the underlying security,
futures contracts are a common form of derivatives. Futures contracts are a
generally accepted part of modern portfolio management and are regularly
utilized by many mutual funds and other institutional investors.

A futures contract is an agreement between two parties for the purchase or
sale for future delivery of securities or for the payment or acceptance of a
cash settlement based upon changes in the value of the securities or of an
index of securities. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at
a specified price, or to make or accept the cash settlement called for by the
contract, on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to acquire the securities called for
by the contract at a specified price, or to make or accept the cash settlement
called for by the contract, on a specified date. Futures contracts in the
United States have been designed by exchanges which have been designated
"contract markets" by the Commodity Futures Trading Commission ("CFTC") and
must be executed through a futures commission merchant, or brokerage firm,
which is a member of the relevant contract market. Futures contracts trade on
these markets, and the exchanges, through their clearing organizations,
guarantee that the contracts will be performed as between the clearing members
of the exchange. Futures contracts may also be traded on markets outside the
U.S.

While futures contracts based on debt securities do provide for the
delivery and acceptance of securities, such deliveries and acceptances are
very seldom made. Generally, a futures contract is terminated by entering into
an offsetting transaction. Brokerage fees will be incurred when a Fund
purchases or sells a futures contract. At the same time such a purchase or
sale is made, the Fund must provide cash or securities as a deposit ("initial
deposit") known as "margin." The initial deposit required will vary, but may
be as low as 1% or less of a contract's face value. Daily thereafter, the
futures contract is valued through a process known as "marking to market," and
the Fund may receive or be required to pay additional "variation margin" as
the futures contract becomes more or less valuable. At the time of delivery of
securities pursuant to such a contract, adjustments are made to recognize
differences in value arising from the delivery of securities with a different
interest rate than the specific security that provides the standard for the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was entered into.

A Fund may purchase or sell futures contracts to attempt to protect the
Fund from fluctuations in interest rates, or to manage the effective maturity
or duration of the Fund's portfolio in an effort to reduce potential losses or
enhance potential gain, without actually buying or selling debt securities.
For example, if interest rates were expected to increase, the Fund might enter
into futures contracts for the sale of debt securities. Such a sale would have
much the same effect as if the Fund sold bonds that it owned, or as if the
Fund sold longer-term bonds and purchased shorter-term bonds. If interest
rates did increase, the value of the Fund's debt securities would decline, but
the value of the futures contracts would increase, thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have.
Similar results could be accomplished by selling bonds, or by selling bonds
with longer maturities and investing in bonds with shorter maturities.
However, by using futures contracts, the Fund avoids having to sell its
securities.

Similarly, when it is expected that interest rates may decline, a Fund
might enter into futures contracts for the purchase of debt securities. Such a
transaction would be intended to have much the same effect as if the Fund
purchased bonds, or as if the Fund sold shorter-term bonds and purchased
longer-term bonds. If interest rates did decline, the value of the futures
contracts would increase.

Although the use of futures for hedging, if correctly used, should tend to
minimize the risk of loss due to a decline in the value of the hedged position
(e.g., if a Fund sells a futures contract to protect against losses in the
debt securities held by the Fund), they do not eliminate the risk of loss and
at the same time the futures contracts may limit any potential gain which
might result from an increase in value of a hedged position.

In addition, the ability effectively to hedge all or a portion of a Fund's
investments through transactions in futures contracts depends on the degree to
which movements in the value of the debt securities underlying such contracts
correlate with movements in the value of the Fund's securities. If the
security underlying a futures contract is different than the security being
hedged, they may not move to the same extent or in the same direction. In that
event, the Fund's hedging strategy might not be successful and the Fund could
sustain losses on these hedging transactions which would not be offset by
gains on the Fund's other investments or, alternatively, the gains on the
hedging transaction might not be sufficient to offset losses on the Fund's
other investments. It is also possible that there may be a negative
correlation between the security underlying a futures contract and the
securities being hedged, which could result in losses both on the hedging
transaction and the securities. In these and other instances, the Fund's
overall return could be less than if the hedging transactions had not been
undertaken. Similarly, where a Fund enters into futures transactions other
than for hedging purposes, the effectiveness of its strategy may be affected
by lack of correlation between changes in the value of the futures contracts
and changes in value of the securities which the Fund would otherwise buy or
sell.

The ordinary spreads between prices in the cash and futures markets, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close out futures contracts through
offsetting transactions which could distort the normal relationship between
the cash and futures markets. Second, there is the potential that the
liquidity of the futures market may be lacking. Prior to expiration, a futures
contract may be terminated only by entering into a closing purchase or sale
transaction, which requires a secondary market on the contract market on which
the futures contracts was originally entered into. While a Fund will establish
a futures position only if there appears to be a liquid secondary market
therefor, there can be no assurance that such a market will exist for any
particular futures contract at any specific time. In that event, it may not be
possible to close out a position held by the Fund, which could require the
Fund to purchase or sell the instrument underlying the futures contract or to
meet ongoing variation margin requirements. The inability to close out futures
positions also could have an adverse impact on the ability effectively to use
futures transactions for hedging or other purposes.

The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by the exchanges,
which limit the amount of fluctuation in the price of a futures contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. The trading of futures contracts also is subject to the
risk of trading halts, suspensions, exchange or clearing house equipment
failures, government intervention, insolvency of a brokerage firm or clearing
house or other disruptions of normal trading activity, which could at times
make it difficult or impossible to liquidate existing positions or to recover
excess variation margin payments.

Investments in futures contracts also entail the risk that if the
Manager's investment judgment about the general direction of interest rates or
other economic factors is incorrect, the Fund's overall performance may be
poorer than if any such contract had not been entered into. For example, if a
Fund hedged against the possibility of an increase in interest rates which
would adversely affect the price of the Fund's bonds and interest rates
decrease instead, part or all of the benefit of the increased value of the
Fund's bonds which were hedged will be lost because the Fund will have
offsetting losses in its futures positions. Similarly, if a Fund purchases
futures contracts expecting a decrease in interest rates and interest rates
instead increased, the Fund will have losses in its futures positions which
will increase the amount of the losses on the securities in its portfolio
which will also decline in value because of the increase in interest rates. In
addition, in such situations, if the Fund has insufficient cash, the Fund may
have to sell bonds from its investments to meet daily variation margin
requirements, possibly at a time when it may be disadvantageous to do so.

Each contract market on which futures contracts are traded has established
a number of limitations governing the maximum number of positions which may be
held by a trader, whether acting alone or in concert with others. The Manager
does not believe that these trading and position limits would have an adverse
impact on a Fund's strategies involving futures.

CFTC regulations require compliance with certain limitations in order to
assure that a Fund is not deemed to be a "commodity pool" under such
regulations. In particular, CFTC regulations prohibit each Fund from
purchasing or selling futures contracts (other than for bona fide hedging
transactions) if, immediately thereafter, the sum of the amount of initial
margin required to establish the Fund's non-hedging futures positions would
exceed 5% of the Fund's net assets.

The Funds will comply with this CFTC requirement, and each Fund currently
intends to adhere to the additional policies described below. First, an amount
of cash or liquid securities will be maintained by each Fund in a segregated
account so that the amount so segregated, plus the applicable margin held on
deposit, will be approximately equal to the amount necessary to satisfy the
Fund's obligations under the futures contract. The second is that a Fund will
not enter into a futures contract if immediately thereafter the amount of
initial margin deposits on all the futures contracts held by the Fund would
exceed approximately 5% of the net assets of the Fund. The third is that the
aggregate market value of the futures contracts held by a Fund not generally
exceed 50% of the market value of the Fund's total assets other than its
futures contracts. For purposes of this third policy, "market value" of a
futures contract is deemed to be the amount obtained by multiplying the number
of units covered by the futures contract times the per unit price of the
securities covered by that contract. Finally, a Fund will not invest in
futures contracts to the extent that such investment would be inconsistent
with the Fund's investment policies which provide that, under normal
circumstances, the National Fund and the California Fund will invest at least
80% of their assets in Municipal Obligations exempt from federal income taxes
including the federal alternative minimum tax and the New York Fund will
invest at least 80% of its assets in triple tax-exempt Municipal Obligations
(that is, obligations that pay interest that is exempt from federal, New York
State and New York City personal income taxes including the federal
alternative minimum tax).

The use of futures contracts potentially exposes a Fund to the effects of
"leveraging," which occurs when futures are used so that the Fund's exposure
to the market is greater than it would have been if the Fund had invested
directly in the underlying securities. "Leveraging" increases a Fund's
potential for both gain and loss. As noted above, the Funds intend to adhere
to certain policies relating to the use of futures contracts, which should
have the effect of limiting the amount of leverage by the Funds.

The use of futures contracts may increase the amount of taxable income of
a Fund and may affect the amount, timing and character of a Fund's income for
tax purposes, as more fully discussed herein in the section entitled "Certain
Additional Tax Matters."

STAND-BY COMMITMENTS

When a Fund purchases Municipal Obligations it may also acquire stand-by
commitments from banks or broker-dealers with respect to the Municipal
Obligations. Under a stand-by commitment, a bank or broker-dealer agrees to
purchase at a Fund's option a specified Municipal Obligation at a specified
price. A stand-by commitment is the equivalent of a "put" option with respect
to a particular Municipal Obligation. Each Fund intends to acquire stand-by
commitments solely to facilitate liquidity. Stand-by commitments are subject
to certain risks, which include the ability of the issuer of the commitment to
pay for the Municipal Obligations at the time the commitment is exercised, the
fact that the commitment is not marketable, and the fact that the maturity of
the underlying security will generally be different from that of the
commitment. In some cases it may not be possible to exercise rights under a
stand-by commitment when the underlying Municipal Obligation is in default.

WHEN-ISSUED SECURITIES

Each of the Funds may purchase securities on a "when-issued" or on a
"forward delivery" basis, meaning that delivery of the securities occurs
beyond normal settlement times. In general, a Fund does not pay for the
securities until received and does not start earning interest until the
contractual settlement date. It is expected that, under normal circumstances,
the Funds would take delivery of such securities, but the Fund may sell them
before the settlement date. When a Fund commits to purchase a security on a
"when-issued" or on a "forward delivery" basis, it sets up procedures
consistent with Securities and Exchange Commission ("SEC") policies. Since
those policies currently require that an amount of a Fund's assets equal to
the amount of the purchase be held aside or segregated to be used to pay for
the commitment, each Fund expects always to have cash or liquid securities
sufficient to cover any commitments or to limit any potential risk. However,
even though the Funds do not intend to make such purchases for speculative
purposes and intend to adhere to the provisions of SEC policies, purchases of
securities on such bases may involve more risk than other types of purchases.
The when-issued securities are subject to market fluctuation, and no interest
accrues on the security to the purchaser during this period. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the purchaser enters into the commitment. Purchasing
obligations on a when-issued basis is a form of leveraging and can involve a
risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. In that
case, there could be an unrealized loss at the time of delivery. 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.

LENDING OF SECURITIES

Consistent with applicable regulatory requirements and in order to
generate income, each of the Funds 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 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). When the borrower
provides a Fund with collateral consisting of U.S. Treasury obligations, the
borrower is also obligated to pay the Fund a fee for use of the borrowed
securities. A Fund 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 Manager to be of good standing. In addition, a Fund could suffer
a loss if the borrower terminates the loan and the Fund is forced to liquidate
the investments in order to return the cash collateral to the buyer. The
Manager will make loans only when, in the judgment of the Manager, the
consideration which can be earned currently from loans of this type justifies
the attendant risk. If the Manager determines to make loans, it is not
intended that the value of the securities loaned by a Fund would exceed 30% of
the market value of its total assets.

RULE 144A SECURITIES

Each of the Funds may purchase securities that are not registered under
the Securities Act of 1933 (the "Securities Act"), but can be offered and sold
to "qualified institutional buyers" under Rule 144A under the Securities Act
("Rule 144A securities"). However, the National Fund will not invest more than
15%, and the California and New York Funds will not invest more than 10%, of
their respective net assets (taken at market value) in illiquid investments,
which include securities for which there is no readily available market,
securities subject to contractual restrictions on resale and Rule 144A
securities, unless, in the case of Rule 144A securities, the Board of Trustees
of the Trust determines, based on the trading markets for a specific Rule 144A
security, that it is liquid. The Trustees have adopted guidelines and, subject
to oversight by the Trustees, have delegated to the Manager the daily function
of determining and monitoring liquidity of Rule 144A securities.

PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS

The National Fund may invest up to 15%, and the California and New York
Funds may invest up to 10%, of their respective 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 to sell them promptly at an
acceptable price.

SHORT SALES "AGAINST THE BOX"

In a short sale, a Fund sells a borrowed security and has a corresponding
obligation to the lender to return the identical security. A Fund, in
accordance with applicable investment restrictions, may engage in short sales
only if at the time of the short sale it owns or has the right to obtain, at
no additional cost, an equal amount of the security being sold short. This
investment technique is known as a short sale "against the box."

In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. If a Fund engages in a short sale, the collateral for the short
position is maintained for the Fund by the custodian or qualified sub-
custodian. While the short sale is open, an amount of securities equal in kind
and amount to the securities sold short or securities convertible into or
exchangeable for such equivalent securities are maintained in a segregated
account for the Fund. These securities constitute the Fund's long position.

A Fund may make a short sale against the box as a hedge, when it believes
that the price of a security may decline, causing a decline in the value of a
security owned by the Fund (or a security convertible or exchangeable for such
security). In such case, any future losses in the Fund's long position should
be reduced by a gain in the short position. Conversely, any gain in the long
position should be reduced by a loss in the short position. The extent to
which such gains or losses are reduced depends upon the amount of the security
sold short relative to the amount the Fund owns. There are certain additional
transaction costs associated with short sales against the box, but each Fund
endeavors to offset these costs with the income from the investment of the
cash proceeds of short sales.

Not more than 40% of a Fund's total assets would be involved in short
sales "against the box."

OTHER INVESTMENT COMPANIES

Subject to applicable statutory and regulatory limitations, assets of the
Funds may be invested in shares of other investment companies.

REPURCHASE AGREEMENTS

Each of the Funds may invest in repurchase agreements collateralized by
securities in which the Fund may otherwise invest. Repurchase agreements are
agreements by which a Fund purchases a security and simultaneously commits to
resell that security to the seller (which is usually a member bank of the U.S.
Federal Reserve System or a member firm of the New York Stock Exchange (or a
subsidiary thereof)) at an agreed-upon date within a number of days
(frequently overnight and usually not more than seven days) from the date of
purchase. The resale price reflects the purchase price plus an agreed-upon
market rate of interest which is unrelated to the coupon rate or maturity of
the purchased security. A repurchase agreement involves the obligation of the
seller to pay the agreed upon price, which obligation is in effect secured by
the value of the underlying security, usually U.S. Government or government
agency issues. Under the 1940 Act, repurchase agreements may be considered to
be loans by the buyer. A Fund's risk is limited to the ability of the seller
to pay the agreed-upon amount on the delivery date. If the seller defaults,
the underlying security constitutes collateral for the seller's obligation to
pay although a Fund may incur certain costs in liquidating this collateral and
in certain cases may not be permitted to liquidate this collateral. All
repurchase agreements entered into by a Fund are fully collateralized, with
such collateral being marked to market daily. In the event of the bankruptcy
of the other party to a repurchase agreement, a Fund could experience delays
in recovering the resale price. To the extent that, in the meantime, the value
of the securities purchased has decreased, a Fund could experience a loss.
Repurchase agreements may involve Municipal Obligations and other securities.

REVERSE REPURCHASE AGREEMENTS

Each Fund may enter into reverse repurchase agreements subject to the
Funds' investment restriction on borrowing. Reverse repurchase agreements
involve the sale of securities held by a Fund and the agreement by the Fund to
repurchase the securities at an agreed-upon price, date and interest payment.
When a Fund enters into reverse repurchase transactions, securities of a
dollar amount equal in value to the securities subject to the agreement will
be segregated. The segregation of assets could impair a Fund's ability to meet
its current obligations or impede investment management if a large portion of
the Fund's assets are involved. Reverse repurchase agreements are considered
to be a form of borrowing by the Fund. In the event of the bankruptcy of the
other party to a reverse repurchase agreement, a Fund could experience delays
in recovering the securities sold. To the extent that, in the meantime, the
value of the securities sold has changed, a Fund could experience a loss.

DEFENSIVE STRATEGIES

During periods of unusual economic or market conditions or for temporary
defensive purposes or liquidity, the Funds may invest without limit in cash
and in taxable U.S. dollar-denominated high quality money market and short-
term instruments. These investments may result in a lower yield than would be
available from investments in a lower quality or longer term.

4. INVESTMENT RESTRICTIONS

The Trust, on behalf of each Fund, has adopted the following policies
which cannot be changed without the approval of the holders of a majority of
the applicable Fund's outstanding voting securities (which, as used in this
Statement of Additional Information, means the lesser of (i) more than 50% of
the outstanding voting securities of the Fund, or (ii) 67% or more of the
outstanding voting securities of the Fund present at a meeting at which
holders of more than 50% of the Fund's outstanding voting securities are
represented in person or by proxy). The term "voting securities" as used in
this paragraph has the same meaning as in the 1940 Act.

None of the Funds may:

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

(2) Underwrite securities issued by other persons except that all or
any portion of the assets of the Fund may be invested in one or more
investment companies, to the extent not prohibited by the 1940 Act, the
rules and regulations thereunder, and exemptive orders granted under such
Act, and except insofar as the Fund may technically be deemed an
underwriter under the Securities Act in selling a security.

(3) Make loans to other persons except (a) through the lending of its
portfolio securities and provided that any such loans not exceed 30% of
the Fund's total assets (taken at market value), (b) through the use of
repurchase agreements or fixed time deposits 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. The purchase of short-term commercial paper or 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.

(4) 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 foregoing
shall not be deemed to preclude the Fund from purchasing or selling
futures contracts or options thereon, and the Fund reserves the freedom of
action to hold and to sell real estate acquired as a result of the
ownership of securities by the Fund).

(5) Concentrate its investments in any particular industry, but if it
is deemed appropriate for the achievement of the Fund's investment
objective, up to 25% of its assets, at market value at the time of each
investment, may be invested in any one industry, except that positions in
futures contracts shall not be subject to this restriction.

(6) 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.

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 the principal of and interest on the
security. The California Fund treats industries such as telecommunications,
electric utilities and gas utilities as separate industries for purposes of
restriction (5) above. For purposes of restriction (1) above, arrangements
with respect to securities lending are not treated as borrowing.

For purposes of investment restriction (4) above, the Funds also may
purchase and sell securities issued by companies that invest or deal in real
estate or real estate investment trusts.

As an operating policy, the National Fund will not invest more than 15% of
its net assets (taken at market value), and the California and New York Funds
will not invest more than 10% of their respective net assets (taken at market
value) in securities for which there is no readily available market. Each
Fund's policy is not fundamental and may be changed without shareholder
approval.

If a percentage restriction 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 for the Fund is not
considered a violation of policy. If the value of a Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable
at the time of acquisition due to subsequent fluctuations in value or other
reasons, the Board of Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.

5. PERFORMANCE INFORMATION AND ADVERTISING

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, and the value of a Fund's shares when redeemed may be more
or less than their original cost.

Each Fund may provide its period, annualized, cumulative, and average
annual "total rates of return" and "tax equivalent 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, reflects any change in net asset value per share
and is compounded to include the value of any shares purchased with any
dividends or capital gains declared during such period. Period total rates 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. Average
annual total return figures represent the average annual percentage change
over the specified period. Cumulative total return figures are not annualized
and represent the aggregate percentage or dollar value change over a stated
period of time. The "tax equivalent total rate of return" refers to the total
rate of return that a fully taxable mutual 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 are
expected to be mostly exempt from federal income taxes with the total rates of
return of funds the dividends from which are not so tax-exempt.

A total rate of return quotation for each 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
per share on the first day of such period, and (b) subtracting 1 from the
result. 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.

Average annual total return is a measure of a Fund's performance over
time. It is determined by taking a Fund's performance over a given period and
expressing it as an average annual rate. The average annual total return
quotation is computed in accordance with a standardized method prescribed by
SEC rules. The average annual total return for a specific period is found by
taking a hypothetical $1,000 initial investment in Fund shares on the first
day of the period, reducing the amount to reflect the maximum sales charge,
and computing the redeemable value of that investment at the end of the
period. The redeemable value is then divided by the initial investment, and
this quotient is taken to the Nth root (N representing the number of years in
the period) and 1 is subtracted from the result, which is then expressed as a
percentage. The calculation assumes that all income and capital gains
distributions have been reinvested in Fund shares at net asset value on the
reinvestment dates during the period.

Cumulative total return for a specific period is calculated by first
taking a hypothetical initial investment in Fund shares on the first day of a
period, deducting (as applicable) the maximum sales charge, and computing the
"redeemable value" of that investment at the end of the period. The cumulative
total return percentage is then determined by subtracting the initial
investment from the redeemable value and dividing the remainder by the initial
investment and expressing the result as a percentage. The calculation assumes
that all income and capital gains distributions by each Fund have been
reinvested at net asset value on the reinvestment dates during the period.
Cumulative total return may also be shown as the increased dollar value of the
hypothetical investment over the period.

Each Fund may provide annualized "yield," "effective yield" and "tax
equivalent yield" quotations. The "yield" of a Fund refers to the income
generated by an investment in the Fund over a 30-day or one month 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 month over a one-
year period and is shown as a percentage of the public offering price on the
last day of that period. The "effective yield" is calculated similarly, but
when annualized the income earned by the investment during that 30-day or one
month period is assumed to be reinvested. The effective yield is slightly
higher than the yield because of the compounding effect of this assumed
reinvestment. The "tax equivalent yield" refers to the yield that a fully
taxable 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 a Fund, the dividends from which are
expected to be mostly exempt from federal income taxes with yields of funds
the dividends from which are not so tax exempt. A "yield" quotation, unlike a
total rate of return quotation, does not reflect changes in net asset value.

Any current yield quotation of a Fund consists of an annualized historical
yield, carried at least to the nearest hundredth of one percent, based on a 30
calendar day or one month period and is calculated by (a) raising to the sixth
power the sum of 1 plus the quotient obtained by dividing the Fund's net
investment income earned during the period by the product of the average daily
number of shares outstanding during the period that were entitled to receive
dividends and the public offering price per share on the last day of the
period, (b) subtracting 1 from the result, and (c) multiplying the
result by 2.

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 would 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 would 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.

In computing total rates of return and yield quotations, all Fund expenses
are included. However, fees that may be charged directly to a shareholder by
that shareholder's broker dealer, Service Agent or other financial
intermediaries are not included. Of course, any such fees will reduce the
shareholder's net return on investment.

Set forth below is average annual total rate of return information for the
Citi Shares (previously called "Class A shares") of the Funds for the periods
indicated, assuming that dividends and capital gains distributions, if any,
were reinvested. Commencing July 14, 2000, each Fund converted to a no-load
fund, which means that there are no sales charges on the purchase or sale of
Citi or D Shares. Also on that date, all outstanding Class B shares of the
Funds were redesignated Citi Shares. The Citi Share performance includes
periods when sales charges applied to the purchase of Citi Shares. D Shares
are not yet offered as of the date of this Statement of Additional Information
and performance information for D Shares is currently not available.

Performance results include any applicable fee waivers or expense
subsidies in place during the time period, which may cause the results to be
more favorable than they otherwise would have been.

REDEEMABLE VALUE
AVERAGE OF A HYPOTHETICAL
ANNUAL $1,000 INVESTMENT
TOTAL RATE AT THE END OF
OF RETURN THE PERIOD
--------- ----------

CITI CALIFORNIA TAX FREE INCOME FUND
CITI SHARES
November 2, 1998 (Commencement of Operations) to
December 31, 1999 ............................ -1.17% $ 986.45
One Year Ended December 31, 1999 ............... -2.54% $ 974.57

CITI NATIONAL TAX FREE INCOME FUND
CITI SHARES
August 17, 1995 (Commencement of Operations) to
December 31, 1999 ............................ 6.34% $1,308.77
One Year Ended December 31, 1999 ............... -3.86% $ 961.37

CITI NEW YORK TAX FREE INCOME FUND
CITI SHARES
Ten Years Ended December 31, 1999 .............. 6.19% $1,822.53
Five Years Ended December 31, 1999 ............. 6.50% $1,369.78
One year Ended December 31, 1999 ............... -3.73% $ 962.65

The yields of Citi Shares for the 30-day period ended December 31, 1999
were 4.49% for the California Fund, 4.67% for the National Fund, and 4.74%
for the New York Fund. The tax equivalent yields of Citi Shares for the 30-day
period ended December 31, 1999 were 8.20% for the California Fund, 7.73% for
the National Fund, and 8.43% for the New York Fund.

Comparative performance information may be used from time to time in
advertising shares of the Funds, including data from Lipper Analytical
Services, Inc. and other industry sources and publications. From time to time
a Fund may compare its performance against inflation with the performance of
other instruments against inflation, such as FDIC-insured bank money market
accounts. In addition, advertising for the Funds may indicate that investors
should consider diversifying their investment portfolios in order to seek
protection of the value of their assets against inflation. From time to time,
advertising materials for the Funds may refer to or discuss current or past
economic or financial conditions, developments and events.

From time to time, each Fund may use hypothetical tax equivalent yields or
charts in its advertising. These hypothetical yields or charts will be used
for illustrative purposes only and are not indicative of a Fund's past or
future performance.

For advertising and sales purposes, the Funds will generally use the
performance of Citi Shares. If the performance of D Shares is used for
advertising and sales purposes, performance after class inception will be
actual performance, while performance prior to that date will be Citi Shares
performance, although this Citi Shares performance may not reflect the
differences in fees and expenses between the classes. D Shares performance
generally would have been higher than Citi Shares performance, had the D
Shares been offered for the entire period, because the expenses attributable
to D Shares are lower than the expenses attributable to the Citi Shares.

6. DETERMINATION OF NET ASSET VALUE;
VALUATION OF SECURITIES

The net asset value per share of each Fund is determined for each class on
each day during which the New York Stock Exchange (the "Exchange") is open for
trading ("Business Day"). 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. This
determination is made once each day as of the close of regular trading on the
Exchange (normally 4:00 p.m. Eastern time) by adding the market value of all
securities and other assets attributable to the class, then subtracting the
liabilities attributable to that class, and then dividing the result by the
number of outstanding shares of the class. The net asset value per share is
effective for orders received and accepted by the Transfer Agent prior to its
calculation.

Bonds and other fixed income securities (other than short-term
obligations) held for each Fund are valued on the basis of valuations
furnished by a pricing service, use of which has been approved by the Board of
Trustees. In making such valuations, the pricing service utilizes both dealer-
supplied valuations and electronic data processing techniques which take into
account appropriate factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
quoted prices or exchange or over-the-counter prices, since such valuations
are believed to reflect more accurately the fair value of such securities.
Short-term obligations (maturing in 60 days or less) are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Futures contracts are normally valued at the settlement price on the exchange
on which they are traded. Securities for which there are no such valuations
are valued at fair value as determined in good faith by or at the direction of
the Board of Trustees.

Interest income on long-term obligations held for a Fund is determined on
the basis of interest accrued plus amortization of "original issue discount"
(generally, the difference between issue price and stated redemption price at
maturity) and premiums (generally, the excess of purchase price over stated
redemption price at maturity). Interest income on short-term obligations is
determined on the basis of interest accrued less amortization of any premiums.

7. ADDITIONAL INFORMATION ON THE PURCHASE
AND SALE OF FUND SHARES

The Funds offer two classes of shares, Citi Shares and D Shares. Both Citi
and D Shares of the Funds are sold at net asset value without an initial sales
charge. There are no deferred sales charges when you sell your shares.

Citi Shares may be purchased from the Distributor or a broker-dealer,
financial intermediary, financial institution, or the Distributor's financial
consultants (each called a "Service Agent"). Shares may be purchased through
the Cititrade Program by customers that have established a Cititrade Account.
For more detailed information on how to open a Cititrade Account, please visit
the Cititrade website at www.mycititrade.com or call a Cititrade account
representative at 1-888-663-CITI [2484].

D Shares may be purchased from a Service Agent or from a Fund, but only if
the investor is investing through certain qualified plans or certain dealer
representatives. Service Agents may charge their customers an annual account
maintenance fee in connection with a brokerage account through which an
investor purchases or holds D Shares. D Shares held directly at the sub-
transfer agent are not subject to a maintenance fee.

Citi Shares of each Fund may pay a distribution and service fees of up to
0.25% of the average daily net assets represented by these shares. D Shares
are not subject to a distribution or service fee.

During periods of drastic economic or market changes or severe weather or
other emergencies, shareholders may experience difficulties implementing a
telephone or Internet exchange or redemption. In such an event, another method
of instruction, if available, should be considered. The Funds 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 shareholder's identity by asking for the
shareholder's name, address, telephone number, Social Security number, account
number, or password identification number. If these or other reasonable
procedures are not followed, the Funds or their transfer 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.

SYSTEMATIC WITHDRAWAL PLAN. The Citi Shares' Systematic Withdrawal Plan
permits you to have a specified dollar amount (minimum of $100 per withdrawal)
automatically withdrawn from your account without a redemption fee on a
regular basis if you have at least $10,000 in your Fund account at the time of
enrollment. You are limited to one withdrawal per month under the Plan. You
may receive your withdrawals by check, or have the monies transferred directly
into your bank account. Or you may direct that payments be made directly to a
third party. To participate in the Plan, you must complete the appropriate
forms provided by the sub-transfer agent or, if you hold your shares through a
Service Agent, by your Service Agent. Cititrade customers should contact a
Cititrade account representative at 1-888-663-CITI[2484] for more information.

The D Shares' Withdrawal Plan is available to shareholders of a Fund who
own D Shares of the Fund with a value of at least $10,000 and who wish to
receive specific amounts of cash monthly or quarterly. Withdrawals of at least
$50 may be made without a redemption fee under the Withdrawal Plan by
redeeming as many D Shares of the Fund as may be necessary to cover the
stipulated withdrawal payment. As it generally would not be advantageous to a
shareholder to make additional investments in D Shares at the same time he or
she is participating in the Withdrawal Plan, purchases by such shareholders in
amounts of less than $5,000 ordinarily will not be permitted.

D Shares shareholders who wish to participate in the Withdrawal Plan and
who hold their shares in certificate form must deposit their share
certificates with the sub-transfer agent as agent for Withdrawal Plan members.
All dividends and distributions on shares in the Withdrawal Plan are
reinvested automatically at net asset value in additional D Shares of the Fund
involved. A shareholder who purchases shares directly through the sub-transfer
agent may continue to do so and applications for participation in the
Withdrawal Plan must be received by the sub-transfer agent no later than the
eighth day of the month to be eligible for participation beginning with that
month's withdrawal. For additional information, shareholders should contact
their Service Agent.

To the extent withdrawals exceed dividends, distributions and appreciation
of a shareholder's investment in a Fund, continued withdrawal payments will
reduce the shareholder's investment, and may ultimately exhaust it. Withdrawal
payments should not be considered as income from investment in a Fund.

SYSTEMATIC INVESTMENT PLAN. Citi and D Shares shareholders may make additions
to their accounts at any time by purchasing shares through a service known as
the Systematic Investment Plan. Under the Systematic Investment Plan, a
Service Agent or the sub-transfer agent is authorized through preauthorized
transfers of at least $25 on a monthly basis or at least $50 on a quarterly
basis to charge the shareholder's account held with a bank or other financial
institution on a monthly or quarterly basis as indicated by the shareholder,
to provide for systematic additions to the shareholder's Fund account. A
shareholder who has insufficient funds to complete the transfer will be
charged a fee of up to $25 by a Service Agent or the sub-transfer agent. The
Systematic Investment Plan also authorizes the Funds to apply cash held in a D
Shares shareholder's brokerage account or redeem the shareholder's shares of a
Smith Barney money market fund to make additions to the account. For Cititrade
customers, the Systematic Investment Plan authorizes the Funds to apply cash
held in a Citi Shares shareholder's Cititrade Account to make additions to the
account. For additional information, please contact the Funds' sub-transfer
agent, or if you hold your shares through a Service Agent, your Service Agent.

You may be able to invest in the Funds under one of several tax-sheltered
plans. Such plans include IRAs, Keogh or Corporate Profit-Sharing and Money-
Purchase Plans, 403(b) Custodian Accounts, and certain other qualified pension
and profit-sharing plans. You should consult with the transfer agent and your
tax and retirement advisers.

Subject to compliance with applicable regulations, the Trust has reserved
the right to pay the redemption price of shares of the Funds either totally or
partially, by a distribution in kind of 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 being sold. If a
holder of shares received a distribution in kind, such holder could incur
brokerage or other charges in converting the securities to cash.

The Trust may suspend the right of redemption or postpone the date of
payment for shares of a Fund more than seven days during any period when (a)
trading in the markets the Fund normally utilizes is restricted, or an
emergency, as defined by the rules and regulations of the SEC, exists making
disposal of the Fund'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.

There are no conversion, preemptive or other subscription rights.

ADDITIONAL DEALER CONCESSIONS

From time to time, the Funds' Distributor or Citibank, at its expense, may
provide additional commissions, compensation or promotional incentives
("concessions") to dealers that sell or arrange for the sale of shares of the
Funds. Such concessions provided by the Funds' Distributor or Citibank may
include financial assistance to dealers in connection with pre-approved
conferences or seminars, sales or training programs for invited registered
representatives and other employees, payment for travel expenses, including
lodging, incurred by registered representatives and other employees for such
seminars or training programs, seminars for the public, advertising and sales
campaigns regarding the Funds, and/or other dealer-sponsored events. From time
to time, the Funds' Distributor or Citibank may make expense reimbursements
for special training of a dealer's registered representatives and other
employees in group meetings or to help pay the expenses of sales contests.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.

8. MANAGEMENT

The Trustees and officers of the Trust, their ages and their principal
occupations during at least 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
the Trust. Unless otherwise indicated below, the address of each Trustee and
officer is 388 Greenwich Street, New York, New York 10013.

TRUSTEES

ELLIOTT J. BERV; 57 -- Chief Executive Officer, Rocket City Enterprises
(Consulting, Publishing, Internet Services) (Since January 2000); President
and Chief Executive Officer, Catalyst, Inc. (Management Consultants) (since
June 1992); President and Director, Elliott J. Berv & Associates (Management
Consultants) (since May 1984).

PHILIP W. COOLIDGE*; 48 -- Chief Executive Officer and President, Signature
Financial Group, Inc. and CFBDS, Inc.

MARK T. FINN; 57 -- President and Director, Delta Financial, Inc. (since June
1983); Chairman of the Board and Part Owner, FX 500 Ltd. (Commodity Trading
Advisory Firm) (April 1990 to February 1996); General Partner and Shareholder,
Greenwich Ventures LLC (Investment Partnership) (since January 1996);
President, Secretary, and Owner, Phoenix Trading Co. (Commodity Trading
Advisory Firm) (since March 1997); Director, Chairman and Owner, Vantage
Consulting Group, Inc. (since October 1988).

RILEY C. GILLEY; 74 -- Vice President and General Counsel, Corporate Property
Investors (November 1988 to December 1991); Partner, Breed, Abbott & Morgan
(Attorneys) (retired, December 1987).

DIANA R. HARRINGTON; 60 -- Professor, Babson College (since September 1993);
Trustee, The Highland Family of Funds (March 1997 to March 1998).

SUSAN B. KERLEY; 49 -- President, Global Research Associates, Inc. (Investment
Research) (since September 1990); Trustee, Mainstay Institutional Funds (since
December 1990).

HEATH B. MCLENDON*; 66 -- President of the Trust; Chairman, President, and
Chief Executive Officer of SSB Citi Fund Management LLC (formerly known as
SSBC Fund Management, Inc.) (since March 1996); Managing Director of Salomon
Smith Barney (since August 1993); and Chairman, President and Chief Executive
Officer of fifty-eight investment companies sponsored by Salomon Smith Barney.
His address is 388 Greenwich Street, New York, New York.

C. OSCAR MORONG, JR.; 65 -- Chairman of the Board of Trustees of the Trust;
Managing Director, Morong Capital Management (since February 1993); Director,
Indonesia Fund (1990 to 1999); Director, MAS Funds (since 1993).

WALTER E. ROBB, III; 74 -- President, Benchmark Consulting Group, Inc. (since
1991); Principal, Robb Associates (Corporate Financial Advisors) (since 1978);
President and Treasurer, Benchmark Advisors, Inc. (Corporate Financial
Advisors)(since 1989); Trustee of certain registered investment companies in
the MFS Family of Funds (since 1985).

E. KIRBY WARREN; 66 -- Professor of Management, Graduate School of Business,
Columbia University (1987 to December 1999).

OFFICERS OF THE TRUST

HEATH B. McLENDON* (age 66) -- President of the Trust; Chairman, President,
and Chief Executive Officer of SSB Citi Fund Management LLC ("SSB Citi")
(since March 1996); Managing Director of Salomon Smith Barney (since August
1993); President of Travelers Investment Adviser, Inc. ("TIA"); Chairman or
Co-Chairman of the Board of seventy-one investment companies associated with
Salomon Smith Barney. His address is 7 World Trade Center, New York, New York
10048.

LEWIS E. DAIDONE* (age 42) -- Senior Vice President and Treasurer of the
Trust; Managing Director of Salomon Smith Barney; Chief Financial Officer of
the Smith Barney mutual funds; Treasurer and Senior Vice President or
Executive Vice President of sixty-one investment companies associated with
Citigroup; Director and Senior Vice President of SSB Citi and TIA. His address
is 125 Broad Street, New York,
New York 10004.

IRVING DAVID* (age 39) -- Controller of the Trust; Director of Salomon Smith
Barney; formerly Assistant Treasurer of First Investment Management Company.
Controller or Assistant Treasurer of fifty-three investment companies
associated with Citigroup. His address is 125 Broad Street, New York, New York
10004.

FRANCES GUGGINO* (age 42) - Assistant Controller of the Trust; Vice President
of Citibank since February, 1991.

PAUL BROOK* (age 46) - Assistant Controller of the Trust; Director of Salomon
Smith Barney; Controller or Assistant Treasurer of forty-three investment
companies associated with Citigroup; from 1997-1998 Managing Director of AMT
Capital Services Inc.; prior to 1997 Partner with Ernst & Young LLP. His
address is 125 Broad Street, New York, New York 10004.

ANTHONY PACE* (age 35) - Assistant Treasurer of the Trust. Mr. Pace is Vice
President - Mutual Fund Administration for Salomon Smith Barney Inc. Since
1986, when he joined the company as a Fund Accountant, Mr. Pace has been
responsible for accounts payable, financial reporting and performance of
mutual funds and other investment products.

MARIANNE MOTLEY* (age 41) - Assistant Treasurer of the Trust. Ms. Motley is
Director - Mutual Fund Administration for Salomon Smith Barney Inc. Since
1994, when she joined the company as a Vice President, Ms. Motley has been
responsible for accounts payable, financial reporting and performance of
mutual funds and other investment products.

ROBERT I. FRENKEL, ESQ.* (age 45) - Secretary of the Trust. Mr. Frenkel is a
Managing Director and General Counsel - Global Mutual Funds for SSB Citi Asset
Management Group. Since 1994, when he joined Citibank as a Vice President and
Division Counsel, he has been responsible for legal affairs relating to mutual
funds and other investment products.

THOMAS C. MANDIA, ESQ.* (age 38) - Assistant Secretary of the Trust. Mr.
Mandia is a Vice President and Associate General Counsel for SSB Citi Asset
Management Group. Since 1992, he has been responsible for legal affairs
relating to mutual funds and other investment products.

ROSEMARY D. EMMENS, ESQ.* (age 30) - Assistant Secretary of the Trust. Ms.
Emmens has been a Vice President and Associate General Counsel of SSB Citi
Asset Management Group since 1998, where she has been responsible for legal
affairs relating to mutual funds and other investment products. Before joining
Citibank, Ms. Emmens was Counsel at The Dreyfus Corporation since 1995.

HARRIS GOLDBLAT, ESQ.* (age 30) - Assistant Secretary of the Trust. Associate
General Counsel at SSB Citi Asset Management Group since April 2000. From June
1997 to March 2000, he was an associate at the law firm of Stroock & Stroock &
Lavan LLP, New York City, and from September 1996 to May 1997, he was an
associate at the law firm of Sills Cummis Radin Tischman Epstein & Gross,
Newark, NJ. From August 1995 to September 1996. Mr. Goldblat served as a law
clerk to the Honorable James M. Havey, P.J.A.D., in New Jersey.

The officers of the Trust also hold comparable positions with certain
other funds for which Salomon Smith Barney or its affiliates serve as the
distributor or administrator.

The following table shows Trustee compensation for the period indicated:

<TABLE>
<CAPTION>
AGGREGATE AGGREGATE AGGREGATE
COMPENSATION COMPENSATION COMPENSATION
FROM THE FROM THE FROM THE TOTAL COMPENSATION
CALIFORNIA NATIONAL NEW YORK FROM THE TRUST
TRUSTEE FUND(1) FUND(1) FUND(1) AND COMPLEX(1)
------- ------- ------- ------- --------------
<S> <C> <C> <C> <C>
Elliott J. Berv $1,447 $1,045 $2,581 $69,500
Philip W. Coolidge -0- -0- -0- -0-
Mark T. Finn 1,790 1,863 4,061 63,250
Riley C. Gilley 1,378 895 2,326 65,250
Diana R. Harrington 1,536 1,381 3,324 71,250
Susan B. Kerley 1,536 1,361 3,265 69,750
Heath B. McLendon -0- -0- -0- -0-
C. Oscar Morong, Jr. 1,622 1,704 4,043 92,000
Walter E. Robb, III 1,411 953 2,408 67,500
E. Kirby Warren 1,453 1,124 2,797 62,750
William Woods, Jr.(2) 1,694 1,751 3,987 66,000

(1) Messrs. Berv, Coolidge, Finn, Gilley, McLendon, Morong, Robb, and Warren and Mses. Harrington and Kerley are
Trustees of 24, 47, 23, 34, 22, 38, 27, 38, 29 and 29 funds and portfolios, respectively, in the family of open-end
registered investment companies advised or managed by Citibank.

(2) Effective December 31, 1999, Mr. Woods became a Trustee Emeritus of the Trust. Per the terms of the Trust's Trustee
Emeritus Plan, Mr. Woods serves the Board of Trustees in an advisory capacity. As a Trustee Emeritus, Mr. Woods is
paid 50% of the annual retainer fee and meeting fees otherwise applicable to Trustees, together with reasonable
out-of-pocket expenses for each meeting attended.
</TABLE>

As of September 25, 2000, all Trustees and officers as a group owned less
than 1% of the outstanding shares of the Funds. As of the same date, more than
95% of the outstanding shares of the Funds were held of record by Citibank,
N.A. or its affiliates, as Service Agents of the Funds for the accounts of
their respective clients.

The Trust's Declaration of Trust provides that the Trust will indemnify
its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Trust unless, as to liability to the Trust or its 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 the Trust. 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 the Trust, 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.

MANAGER

Citibank manages the assets of each Fund and provides certain
administrative services to the Trust pursuant to separate management
agreements (the "Management Agreements"). Subject to such policies as the
Board of Trustees of the Trust may determine, Citibank manages the securities
of each Fund and makes investment decisions for each Fund. Citibank furnishes
at its own expense all services, facilities and personnel necessary in
connection with managing each Fund's investments and effecting securities
transactions for each Fund. The Management Agreements with the Trust provide
that Citibank may delegate the daily management of the securities of each Fund
to one or more subadvisers. Unless otherwise terminated, each Management
Agreement with the Trust will continue in effect indefinitely as long as such
continuance is specifically approved at least annually by the Board of
Trustees of the Trust or by a vote of a majority of the outstanding voting
securities of the applicable Fund, and, in either case, by a majority of the
Trustees of the Trust who are not parties to the Management Agreement or
interested persons of any such party, at a meeting called for the purpose of
voting on the Management Agreement.

Citibank provides the Trust with general office facilities and supervises
the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the Trust's independent contractors
and agents; the preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations; and arranging
for the maintenance of books and records of the Trust. Trustees, officers, and
investors in the Trust are or may be or may become interested in Citibank, as
directors, officers, employees, or otherwise and directors, officers and
employees of Citibank are or may become similarly interested in the Trust.

Each Management Agreement provides that Citibank may render services to
others. Each Management Agreement is terminable without penalty on not more
than 60 days' nor less than 30 days' written notice by the Trust when
authorized either by a vote of a majority of the outstanding voting securities
of the applicable Fund or by a vote of a majority of the Board of Trustees of
the Trust, or by Citibank on not more than 60 days' nor less than 30 days'
written notice, and will automatically terminate in the event of its
assignment. The Management Agreements with the Trust provide that neither
Citibank 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 Fund,
except for willful misfeasance, bad faith or gross negligence or reckless
disregard of its or their obligations and duties under the Management
Agreements with the Trust.

For its services under the Management Agreements, Citibank receives fees,
which are accrued daily and paid monthly of 0.75% of the New York and National
Fund's average daily net assets and of 0.50% of the California Fund's average
daily net assets, in each case on an annualized basis. Citibank may
voluntarily agree to waive a portion of its management fees.

For the period from November 2, 1998 (commencement of operations) to
December 31, 1998, Citibank waived all management fees for the California
Fund. For the fiscal year ended December 31, 1999, the fees paid to Citibank
by the California Fund under its Management Agreement, after waivers, were
$56,949.

For the fiscal year ended December 31, 1997, Citibank waived all
investment advisory fees for the National Fund. For the fiscal year ended
December 31, 1998, all fees payable to Citibank by the National Fund under its
Management Agreement were waived. For the fiscal year ended December 31, 1999,
the fees paid to Citibank by the National Fund under its Management Agreement,
after waivers, were $684,897.

For the fiscal year ended December 31, 1997, the fees paid to Citibank by
the New York Fund under a prior investment advisory agreement, after waivers,
were $181,270. For the fiscal years ended December 31, 1998 and 1999, the fees
paid to Citibank by the New York Fund under its Management Agreement were
$1,026,221 and $1,456,147, respectively, after waivers.

The Funds currently do not employ investment subadvisers, but in the
future a Fund may do so. Citibank would be responsible for recommending the
hiring, termination or replacement of any subadviser and for supervising and
monitoring the subadviser's performance.

For the fiscal year ended December 31, 1997, the fees payable from each of
the National Fund and the New York Fund to CFBDS, Inc. under prior
administrative services agreements were $7,777 (all of which was voluntarily
waived) and $194,607 (of which $124,928 was voluntarily waived), respectively.

DISTRIBUTOR

Salomon Smith Barney, 388 Greenwich Street, New York, New York 10013,
serves as the Distributor of each Fund's shares pursuant to Distribution
Agreements with the Trust with respect to each class of shares of the Funds
(the "Distribution Agreements"). Under the Distribution Agreements, Salomon
Smith Barney is obligated to use its best efforts to sell shares of the Funds.

Each Distribution Agreement is terminable with respect to a Fund with or
without cause, without penalty, on 60 days' notice by the Board of Trustees of
the Trust or by vote of holders of a majority relevant class of the Fund's
outstanding voting securities, or on 90 days' notice by Salomon Smith Barney.
Unless otherwise terminated, each Distribution Agreement shall continue for
successive annual periods with respect to a Fund so long as such continuance
is specifically approved at least annually by (a) the Trust's Board of
Trustees, or (b) by a vote of a majority (as defined in the 1940 Act) of the
relevant class of the Fund's outstanding voting securities, provided that in
either event the continuance is also approved by a majority of the Board
members of the Trust who are not interested persons (as defined in the 1940
Act) of any party to the Distribution Agreement, by vote cast in person at a
meeting called for the purpose of voting on such approval. Each Distribution
Agreement will terminate automatically in the event of its assignment, as
defined in the 1940 Act and the rules and regulations thereunder.

The Citi Shares of the Funds have adopted a Service Plan (the "Service
Plan") in accordance with Rule 12b-1 under the 1940 Act. Under the Plan, the
Citi Shares of a Fund may pay the Distributor, a broker-dealer or financial
institution that has entered into a service agreement with the Distributor
concerning the Citi Shares of the Funds or others a monthly distribution and
service fee at an annual rate not to exceed 0.25% of the average daily net
assets represented by the Citi Shares of a Fund.

The Service Plan permits the Funds to pay fees to the Distributor, Service
Agents and others as compensation for their services, not as reimbursement for
specific expenses incurred. Thus, even if their expenses exceed the fees
provided for by the Plan, the Fund will not be obligated to pay more than
those fees and, if their expenses are less than the fees paid to them, they
will realize a profit. Citi Shares of each Fund will pay the fees to the
Distributor, and others until the Service Plan or Distribution Agreement is
terminated or not renewed. In that event, the Distributor's or other
recipient's expenses in excess of fees received or accrued through the
termination date will be the Distributor's or other recipient's sole
responsibility and not obligations of the Fund. In their annual consideration
of the continuation of the Service Plan for the Citi Shares of each Fund, the
Trustees will review the Service Plan and the expenses for each Fund
separately.

The Service Plan continues in effect if such continuance is specifically
approved at least annually by a vote of both a majority of the Trust's
Trustees and a majority of the Trustees who are not "interested persons" of
the Trust and who have no direct or indirect financial interest in the
operation of the Service Plan or in any agreement related to the Plan (for
purposes of this paragraph "Qualified Trustees"). The Service Plan requires
that the Trust and the Distributor provide to the 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 Service Plan. The Service Plan
further provides that the selection and nomination of the Qualified Trustees
is committed to the discretion of such Qualified Trustees then in office. The
Service Plan may be terminated with respect to the Citi Shares of any Fund at
any time by a vote of a majority of the Trust's Qualified Trustees or by a
vote of a majority of the outstanding voting securities representing the Citi
Shares of that Fund. The Service 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 securities representing the Citi
Shares of that Fund and may not be materially amended in any case without a
vote of a majority of both the Trustees and Qualified Trustees. The
Distributor will preserve copies of any plan, agreement or report made
pursuant to the Service Plan for a period of not less than six years, and for
the first two years the Distributor will preserve such copies in an easily
accessible place.

As contemplated by the Service Plan, Salomon Smith Barney acts as the
agent of the Trust in connection with the offering of Citi Shares of the Fund
pursuant to the Distribution Agreement. For the period from November 2, 1998
(commencement of operations) to December 31, 1998, CFBDS, Inc., the former
distributor for the Funds, waived all fees payable from the California Fund
under a prior distribution agreement. For the fiscal years ended December 31,
1996, 1997 and 1998, CFBDS, Inc. waived all fees payable from the National
Fund under a prior distribution agreement. For the fiscal years ended December
31, 1997 and 1998, the fees paid to CFBDS, Inc. under the distribution
agreement with the New York Fund, after waivers, were $1,860 and $555,422,
respectively. For the fiscal year ended December 31, 1999, the fees paid to
CFBDS, Inc. under prior distribution agreements with respect to Citi Shares
after waivers were $153,959 for the California Fund, $455,060 for the National
Fund, and $862,089 for the New York Fund.

CODE OF ETHICS

The Trust, the Manager and the Distributor each have adopted a code of
ethics pursuant to Rule 17j-1 under the 1940 Act. Each code of ethics permits
personnel subject to such code to invest in securities, including securities
that may be purchased or held by a Fund. However, the codes of ethics contain
provisions and requirements designed to identify and address certain conflicts
of interest between personal investment activities and the interests of the
Funds. Of course, there can be no assurance that the codes of ethics will be
effective in identifying and addressing all conflicts of interest relating to
personal securities transactions.

EXPENSES

In addition to amounts payable under the Management Agreements and Service
Plan, each Fund is responsible for its own expenses, including, among other
things, the costs of securities transactions, the compensation of Trustees
that are not affiliated with Citibank or the Funds' Distributor, government
fees, taxes, accounting and legal fees, expenses of communication with
shareholders, interest expense, and insurance premiums.

TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT

The Trust has entered into a Transfer Agency and Service Agreement with
Citi Fiduciary Trust Company ("Citi Fiduciary") pursuant to which Citi
Fiduciary acts as transfer agent for each Fund. Under the Transfer Agency and
Service Agreement, Citi Fiduciary maintains the shareholder account records
for the Funds, handles certain communications between shareholders and the
Funds and distributes dividends and distributions payable by the Funds. For
these services, Citi Fiduciary receives a monthly fee computed on the basis of
the number of shareholder accounts it maintains for a Fund during the month
and is reimbursed for out-of-pocket expenses. The principal business address
of Citi Fiduciary is 25 Broad Street, New York, New York 10004.

Boston Financial Data Services ("BFDS" or "sub-transfer agent"), P.O. Box
9083, Boston, Massachusetts 02205-9083, serves as the Funds' sub-transfer
agent. Under the sub-transfer agency agreement, the sub-transfer agent
maintains the shareholder account records for the Funds, handles certain
communications between shareholders and the Funds, and distributes dividends
and distributions payable by the Funds. For these services, the sub-transfer
agent receives a monthly fee computed on the basis of the number of
shareholder accounts it maintains for the Funds during the month, and is
reimbursed for out-of-pocket expenses.

The Trust has entered into a Custodian Agreement and a Fund Accounting
Agreement with State Street Bank and Trust Company ("State Street"), pursuant
to which custodial and fund accounting services, respectively, are provided
for each Fund. Among other things, State Street calculates the daily net asset
value for the Funds. Securities may be held by a sub-custodian bank approved
by the Trustees. The principal business address of State Street is 225
Franklin Street, Boston, Massachusetts 02110.

AUDITORS

Deloitte & Touche LLP are the independent accountants for the Trust,
providing audit services and assistance and consultation with respect to the
preparation of filings with the SEC. The address of Deloitte & Touche LLP is
200 Berkeley Street, Boston, Massachusetts 02116.

COUNSEL

Bingham Dana LLP, 150 Federal Street, Boston, Massachusetts 02110, acts as
counsel for the Trust.

9. PORTFOLIO TRANSACTIONS

The Trust trades securities for a Fund if it believes that a transaction
net of costs (including custodian charges) will help achieve the Fund's
investment objective. Changes in a Fund's investments are made without regard
to the length of time a security has been held, or whether a sale would result
in the recognition of a profit or loss. Therefore, the rate of turnover is not
a limiting factor when changes are appropriate. Specific decisions to purchase
or sell securities for each Fund are made by a portfolio manager who is an
employee of Citibank and who is appointed and supervised by its senior
officers. The portfolio manager may serve other clients of Citibank in a
similar capacity.

The primary consideration in placing portfolio securities transactions
with broker-dealers for execution is to obtain and maintain the availability
of execution at the most favorable prices and in the most effective manner
possible. Citibank attempts to achieve this result by selecting broker-dealers
to execute transactions on behalf of each Fund and other clients of Citibank
on the basis of their professional capability, the value and quality of their
brokerage services, and the level of their brokerage commissions. In the case
of securities traded in the over-the-counter market (where no stated
commissions are paid but the prices include a dealer's markup or markdown),
Citibank normally seeks to deal directly with the primary market makers,
unless in its opinion, best execution is available elsewhere. In the case of
securities purchased from underwriters, the cost of such securities generally
includes a fixed underwriting commission or concession. From time to time,
soliciting dealer fees are available to Citibank on the tender of a Fund's
securities in so-called tender or exchange offers. Such soliciting dealer fees
are in effect recaptured for the Fund by Citibank. At present no other
recapture arrangements are in effect.

In connection with the selection of brokers or dealers and the placing of
portfolio securities transactions, brokers or dealers may be selected who also
provide brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to a Fund and/or the other
accounts over which Citibank or its affiliates exercise investment discretion.
Citibank is authorized to pay a broker or dealer who provides such brokerage
and research services a commission for executing a portfolio transaction for a
Fund which is in excess of the amount of commission another broker or dealer
would have charged for effecting that transaction if Citibank determines in
good faith that such amount of commission is reasonable in relation to the
value of the brokerage and research services provided by such broker or
dealer. This determination may be viewed in terms of either that particular
transaction or the overall responsibilities which Citibank and its affiliates
have with respect to accounts over which they exercise investment discretion.
The Trustees of the Trust periodically review the commissions paid by a Fund
to determine if the commissions paid over representative periods of time were
reasonable in relation to the benefits to the Fund.

The management fee that each Fund pays to Citibank will not be reduced as
a consequence of Citibank's receipt of brokerage and research services. While
such services are not expected to reduce the expenses of Citibank, Citibank
would, through the use of the services, avoid the additional expenses which
would be incurred if it should attempt to develop comparable information
through its own staff or obtain such services independently.

In certain instances there may be securities that are suitable as an
investment for a Fund as well as for one or more of Citibank's other clients.
Investment decisions for each Fund and for Citibank's other clients are made
with a view to achieving their respective investment objectives. It may
develop that a particular security is bought or sold for only one client even
though it might be held by, or bought or sold for, other clients. Likewise, a
particular security may be bought for one or more clients when one or more
clients are selling the same security. Some simultaneous transactions are
inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for the
investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could adversely affect
the price of or the size of the position obtainable in a security for a Fund.
When purchases or sales of the same security for a Fund and for other
portfolios managed by Citibank occur contemporaneously, the purchase or sale
orders may be aggregated in order to obtain any price advantages available to
large volume purchases or sales.

For the fiscal years ended December 31, 1997, 1998 and 1999, none of the
Funds paid any brokerage commissions.

10. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES

The Trust's Declaration of Trust permits the 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 and to divide
such series into classes. The Trust has reserved the right to create and issue
additional series and classes of shares. Each share of each class represents
an equal proportionate interest in that Fund with each other share of that
class. Shares of each series of the Trust participate equally in the earnings,
dividends and distribution of net assets of the particular series upon
liquidation or dissolution (except for any differences between classes of
shares of a series). Shares of each series are entitled to vote separately to
approve advisory agreements or changes in investment policy, and shares of a
class are entitled to vote separately to approve any distribution or service
arrangements relating to that class, 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 the Trust may elect all of the Trustees of the 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 Trust is not required to hold, and
has no present intention of holding, annual meetings of shareholders but the
Trust will hold special meetings of shareholders when in the judgment of the
Trustees it is necessary or desirable to submit matters for a shareholder
vote. Shareholders have, under certain circumstances (e.g., upon the
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 under certain
circumstances 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 the Trust's Declaration of Trust without the
affirmative vote of the holders of a majority of the outstanding shares of
each series affected by the amendment. (See "Investment Restrictions.")

At any meeting of shareholders of a Fund, a Service 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 that Service Agent is the holder of
record.

The 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 a 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. The 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, the Trust will continue
indefinitely.

The Funds' Transfer Agent maintains a share register for shareholders of
record. Share certificates are not issued.

The 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, the Declaration of Trust of the
Trust contains an express disclaimer of shareholder liability for acts or
obligations of the 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. The Declaration of Trust of the Trust also
provides that the Trust may 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 Trust itself was unable to
meet its obligations.

The 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 of the 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.

11. TAX MATTERS

TAXATION OF THE FUNDS

FEDERAL TAXES. Each Fund has elected to be treated, and intends to qualify
each year, as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended (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 both the Fund's 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.

TAXATION OF SHAREHOLDERS

TAXATION OF DISTRIBUTIONS. The portion of each 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. In addition, if a shareholder is receiving Social Security or railroad
retirement benefits any "tax-exempt" dividends may affect the amount of those
benefits which are subject to federal income tax. Unless a 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 Fund on their federal income tax returns.

Shareholders of a Fund will generally have to pay federal income taxes on
the balance of the Fund's distributions of net investment income and on any
distributions from net short-term capital gains, whether the distributions are
made in cash or in additional shares. Distributions of net capital gains
(i.e., the excess of net long-term capital gains over net short-term capital
losses), whether made in cash or in additional shares, are taxable to
shareholders as long-term capital gains without regard to the length of time
the shareholders have held their shares. Because each Fund expects to earn
primarily interest income, it is expected that no Fund dividends will qualify
for the dividends received deduction for corporations.

Any Fund dividend that is declared in October, November or December of any
calendar year, that is payable to shareholders of record in such a month, and
that is paid the following January will be treated as if received by the
shareholders on December 31 of the year in which the dividend is declared. Any
Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution other
than an exempt-interest dividend may thus pay the full price for the shares
and then effectively receive a portion of the purchase price back as a taxable
distribution.

BACKUP WITHHOLDING. The account application asks each new shareholder to
certify that the shareholder'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. If a shareholder fails to
provide this information, or is otherwise subject to backup withholding, a
Fund may be required to withhold tax at the rate of 31% on certain
distributions and redemption proceeds paid to that shareholder.

DISPOSITION OF SHARES. In general, any gain or loss realized upon a
taxable disposition of shares of a Fund by a shareholder that holds such
shares as a capital asset will be treated as long-term capital gain or loss if
the shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss. However, any loss realized upon a redemption
of shares in a Fund held for six months or less will be disallowed to the
extent of any exempt-interest dividends received with respect to those shares.
If not disallowed, any such loss will be treated as a long-term capital loss
to the extent of any distributions of net capital gain made with respect to
those shares. Any loss realized upon a disposition of shares may also be
disallowed under rules relating to wash sales.

EFFECTS OF CERTAIN INVESTMENTS AND TRANSACTIONS

CERTAIN DEBT INVESTMENTS. Any investment in certain securities purchased
at a market discount will cause a Fund to recognize income prior to the
receipt of cash payments with respect to those securities. In order to
distribute this income and avoid a tax, the Trust may be required to liquidate
securities of a Fund that it might otherwise have continued to hold and
thereby potentially cause the Fund to realize additional taxable gain or loss.

FUTURE CONTRACTS, ETC. The Funds' transactions in short sales "against the
box" and futures contracts, if any, will be subject to special tax rules that
may affect the amount, timing, and character of Fund income and distributions
to shareholders. For example, certain positions held by the Trust on behalf of
a Fund on the last business day of each taxable year will be marked to market
(i.e., treated as if closed out) on that day, and any gain or loss associated
with the positions will be treated as 60% long-term and 40% short-term capital
gain or loss. Certain positions held by the Trust on behalf of a Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute straddles, and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods
of securities held by the Trust on behalf of the Fund and conversion of short-
term into long-term capital losses. Certain tax elections exist for straddles
which may alter the effects of these rules. The Trust will limit its
investment activities in futures contracts on behalf of the Funds to the
extent necessary to meet the requirements of Subchapter M of the Code.

12. FINANCIAL STATEMENTS

The audited financial statements of the California Fund (Portfolio of
Investments at December 31, 1999, Statement of Assets and Liabilities at
December 31, 1999, Statement of Operations for the year ended December 31,
1999, Statement of Changes in Net Assets for the year ended December 31, 1999
and the period November 2, 1998 (commencement of operations) to December 31,
1998, Financial Highlights for the year ended December 31, 1999 and for the
period November 2, 1998 (commencement of operations) to December 31, 1999,
Notes to Financial Statements and Independent Auditors' Report), each of which
is included in the Annual Report to Shareholders of the California Fund, are
incorporated by reference into this Statement of Additional Information and
have been so incorporated in reliance upon the report of Deloitte & Touche
LLP, independent accountants, on behalf of the California Fund.

The audited financial statements of the National Fund (Portfolio of
Investments at December 31, 1999, Statement of Assets and Liabilities at
December 31, 1999, Statement of Operations for the year ended December 31,
1999, Statement of Changes in Net Assets for the years ended December 31, 1998
and 1999, Financial Highlights for each of the years in the four-year period
ended December 31, 1999 and for the period August 17, 1995 (commencement of
operations) to December 31, 1995, Notes to Financial Statements and
Independent Auditors' Report), each of which is included in the Annual Report
to Shareholders of the National Fund, are incorporated by reference into this
Statement of Additional Information and have been so incorporated in reliance
upon the report of Deloitte & Touche LLP, independent accountants, on behalf
of the National Fund.

The audited financial statements of the New York Fund (Portfolio of
Investments at December 31, 1999, Statement of Assets and Liabilities at
December 31, 1999, Statement of Operations for the year ended December 31,
1999, Statement of Changes in Net Assets for the years ended December 31, 1998
and 1999, Financial Highlights for each of the years in the five-year period
ended December 31, 1999, Notes to Financial Statements and Independent
Auditors' Report), each of which is included in the Annual Report to
Shareholders of the New York Fund, are incorporated by reference into this
Statement of Additional Information and have been so incorporated in reliance
upon the report of Deloitte & Touche LLP, independent accountants, on behalf
of the New York Fund.

A copy of the Annual Report to Shareholders of the applicable Fund
accompanies this Statement of Additional Information.
<PAGE>

APPENDIX A

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. Citi California Tax
Free Income Fund is not responsible for the accuracy or timeliness of this
information.

RECENT DEVELOPMENTS

In the 2000 May Revision of the 2000-01 Governor's Budget released on May
15, 2000, the Department of Finance projected that the California economy will
continue to show strong growth in 2000, followed by more moderate gains in
2001. The projection assumes a relatively flat stock market, and a 25%
reduction in stock option income in 2000-01. The economic expansion has been
marked by strong growth in high technology manufacturing and business services
(including software, computer programming and the Internet), nonresidential
construction, entertainment and tourism-related industries. Growth in 1999 was
greater than earlier years in the economic expansion, with 3.7% year-over-year
increase in nonfarm payroll employment. Unemployment, now less than 5%, is at
the lowest rate in over 30 years. Taxable sales in the first quarter of 2000
are 10% above year-earlier levels. Significant economic improvement in Asia
(Japan excluded), ongoing strength in NAFTA partners Mexico and Canada, and
stronger growth in Europe are expected to further increase California-made
exports in 2000 and 2001. Nonresidential construction has been strong for the
past four years. New residential construction has increased since lows of the
early 1990's recession, but remains lower than during the previous economic
expansion in the 1980's.

Moody's, Standard and Poor's and Fitch IBCA assigned their municipal bond
ratings of Aa3, AA- 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.

There are various types of appropriations excluded from the Appropriations
Limit. For example, 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, most State subventions
to local governments, appropriations for tax refunds, 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 are all excluded).
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 or any transfer of the financial source for the provisions
of services from tax proceeds to non-tax proceeds. 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 in the early 1990s, 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 is repaying
$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 through 1999-00 have resulted 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 more than 50 percent from the level in place in
1991-92, and is estimated at about $6,672 per ADA in 2000-01. A significant
amount of the "extra" Proposition 98 monies in the last few years have been
allocated to special programs, including an initiative to increase the number of
computers in schools throughout the State. Furthermore, since General Fund
revenue growth is expected to continue in 2000-01, the Governor has also
proposed new initiatives to improve student achievement, provide better teacher
recruitment and training, and provide schools with advanced technology and the
opportunity to form academic partnerships to help them meet increased
expectations. Additional initiatives include teacher performance bonuses, tax
relief for teachers and an expansion of English Language Learners Program.

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 1998-99 contributed about 53
percent of General Fund revenues and transfers, 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 1.0
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.

Taxes on capital gains realizations, which have in part been linked to
stock market performance, have become a larger component of personal income
taxes in the last few years. For the 1999 tax year, capital gains are
projected to be 18 percent of the total personal income tax liability compared
to an average of 8.5 percent for the period 1985-95.

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 32
percent of General Fund revenue and transfers in 1998-99. 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. Pursuant
to federal law, out-of-state sales to Californians over the internet are not
taxed by the State at this time.

BANK AND CORPORATION TAX

Bank and corporation tax revenues, which comprised about 10 percent of
General Fund revenue in 1998-99, are derived from the following taxes:

1. The franchise tax and the corporate income tax are levied at an
8.84 percent rate on profits. The former is imposed on corporations for
the privilege of doing business in California, while the latter is imposed
on corporations that derive income from California sources but are not
sufficiently present to be classified as doing business in the State.

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.

4. A minimum franchise tax of $800 is imposed on corporations subject
to the franchise tax but not on those subject to the corporate income tax.
Beginning in 2000, all new corporations are exempted from the minimum
franchise tax for the first two years of incorporation.

5. 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 2.1
percent of General Fund revenues and transfers in 1998-99.

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 2.3 percent of General Fund revenues and transfers in the
1998-99 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 (e.g., oil and gas royalties).

Motor vehicle related taxes and fees accounted for about 55 percent of all
Special Fund revenues and transfers in 1998-99. Principal sources of this
income are motor vehicle fuel taxes, registration and weight fees and vehicle
license fees. During the 1998-99 Fiscal Year, $8.6 billion was derived from
the ownership or operation of motor vehicles. This was only 1.4 percent above
the 1997-98 level, due to tax reductions enacted for vehicle license fees.
About $4.7 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.

Chapter 322, Statutes of 1998 established a vehicle license fee offset
program. Pursuant to this chapter, vehicle license fees were reduced by 25
percent beginning January 1, 1999. In addition, Chapter 74, Statutes of 1999,
provided a one-time expansion of the offset program by an additional 10
percent for the 2000 calendar year only, and Chapter 76, Statutes of 1999,
allowed a one-year reduction in vehicle license fees for certain commercial
motor vehicles. For 1999-00 and 2000-01, the offset program is expected to
reduce revenues by $1.350 billion and $1.712 billion, respectively. This loss
of local revenue is replaced by the State's General Fund.

Vehicle license fees, over and above the costs of collection and refunds
authorized by law, are constitutionally defined local revenues. A continuous
appropriation from the General Fund replaces the vehicle license fee revenue
that local governments would otherwise lose due to the fee reductions. If in
any year the Legislature fails to appropriate enough funds to fully offset the
then-applicable vehicle license fee reduction, the percentage offset will be
reduced to assure that local governments are not disadvantaged.

In addition to the initial 25 percent reduction, Chapter 322 also sets out
a series of "trigger" levels, so that the percentage fee reduction could be
increased in annual stages up to a maximum of 67.5 percent in 2003 depending
on whether future General Fund revenues reach the target levels. Based on the
current revenue forecast, the 35 percent offset will go into effect in the
2001 calendar year, and the 46.5 percent offset will go into effect in 2002.
Unless revenues make a dramatic reversal, it appears the maximum 67.5 percent
offset will go into effect in 2003. The estimated cost to the General Fund to
replace the vehicle license fee reductions after the full 67.5 percent offset
becomes effective is $3.9 billion per full fiscal year.

Taxes on Tobacco Products. 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.

Proposition 10, approved in 1998, increased the excise tax imposed on
distributors selling cigarettes in California to 87 cents per pack effective
January 1, 1999. At the same time, this proposition imposed a new excise tax
on cigars, chewing tobacco, pipe tobacco, and snuff at a rate equivalent to
the tax increase on cigarettes of 50 cents per pack. In addition, the higher
excise tax on cigarettes automatically triggered an additional increase in the
tax on other tobacco products effective July 1, 1999, with the proceeds going
to the Cigarette and Tobacco Products Surtax Fund. Thus, this proposition
increased the total excise tax on other tobacco products by an amount
equivalent to an increase in the cigarette tax of one dollar per pack. There
is litigation pending challenging the enactment of these new taxes. See
"Litigation."

The State excise tax on cigarettes of 87 cents per pack and other tobacco
product taxes are earmarked as follows:

o Fifty cents of the per-pack tax on cigarettes, and the equivalent rate levied
on non-cigarette tobacco products, go to the California Children and Families
First Trust Fund and are allocated primarily for early childhood development
programs.

o Twenty-five cents of the per-pack tax on cigarettes, and the equivalent rates
levied on non-cigarette tobacco products are allocated to the Cigarette and
Tobacco Products Surtax Fund. These funds are appropriated for anti-tobacco
education and research, indigent health services, and environmental and
recreation programs. This portion of the excise tax was imposed on January 1,
1989, as voters approved Proposition 99 in 1988.

o Ten cents of the per-pack tax is allocated to the State's General Fund.

o The remaining two cents of the per-pack tax is deposited into the Breast
Cancer Fund.

Legislation enacted in 1993 added the additional per pack excise tax for
the purpose of funding breast cancer research.

TOBACCO LITIGATION

In 1998, the State signed a settlement agreement with the four major
cigarette manufacturers. The State agreed to drop its lawsuit and not to sue
in the future. Tobacco manufacturers agreed to billions of dollars in payments
and restrictions in marketing activities. Under the settlement, the companies
agreed to pay California governments a total of approximately $25 billion over
a period of 25 years. Beyond 2025, payments of approximately $1 billion per
year will continue in perpetuity. Under the settlement, half of these moneys
will be paid to the State, and half to local governments (all counties and the
cities of San Diego, Los Angeles, San Francisco and San Jose). The May
Revision to the Governor's Budget includes the receipt of $515 million of
settlement money to the General Fund in fiscal year 1999-00. In 2000-01,
General Fund tobacco settlement receipts are forecast to be $388 million.

PRIOR FISCAL YEARS' FINANCIAL RESULTS

Following a severe recession beginning in 1990, the State's financial
condition improved markedly during the fiscal years starting in 1995-96, with
a combination of better than expected revenues, slowdown in growth of social
welfare programs, and continued spending restraint based on actions taken in
earlier years. The State's cash position also improved, and no external
deficit borrowing occurred over the end of the last four fiscal years.

The economy grew strongly during the fiscal years beginning in 1995-96,
and as a result, the General Fund took in substantially greater tax revenues
(around $2.2 billion in 1995-96, $1.6 billion in 1996-97, $2.4 billion in
1997-98 and $1.7 billion in 1998-99) than were initially planned when the
budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, to make up shortfalls from reduced
federal health and welfare aid in 1995-96 and 1996-97 and particularly in
1998-99 to fund new program incentives.

The following were major features of the 1998 Budget Act and certain
additional fiscal bills enacted before the end of the legislative session:

1. The most significant feature of the 1998-99 budget was agreement
on a total of $1.4 billion of tax cuts. The central element was a bill
which provided for a phased-in reduction of the Vehicle License Fee
("VLF"). Since the VLF is transferred to cities and counties under
existing law, the bill provided for the General Fund to replace the lost
revenues. Starting on January 1, 1999, the VLF has been reduced by 25
percent, at a cost to the General Fund of approximately $500 million in
the 1998-99 Fiscal Year and about $1 billion annually thereafter.

In addition to the cut in VLF, the 1998-99 budget included both
temporary and permanent increases in the personal income tax dependent
credit ($612 million General Fund cost in 1998-99, but less in future
years), a nonrefundable renters tax credit ($133 million), and various
targeted business tax credits ($106 million).

2. Proposition 98 funding for K-14 schools was increased by $1.7
billion in General Fund moneys over revised 1997-98 levels, over $300
million higher than the minimum Proposition 98 guarantee. Of the 1998-99
funds, major new programs included money for instructional and library
materials, deferred maintenance, support for increasing the school year to
180 days and reduction of class sizes in Grade 9. The Budget also included
$250 million as repayment of prior years' loans to schools, as part of the
settlement of the CTA v. Gould lawsuit.

3. Funding for higher education increased substantially above the
actual 1997-98 level. General Fund support was increased by $340 million
(15.6 percent) for the University of California and $267 million (14.1
percent) for the California State University system. In addition,
Community Colleges funding increased by $300 million (6.6 percent).

4. The Budget included increased funding for health, welfare and
social services programs. A 4.9 percent grant increase was included in the
basic welfare grants, the first increase in those grants in 9 years.

5. Funding for the judiciary and criminal justice programs increased
by about 11 percent over 1997-98, primarily to reflect increased State
support for local trial courts and rising prison population.

6. Major legislation enacted after the 1998 Budget Act included new
funding for resources projects, a share of the purchase of the Headwaters
Forest, funding for the Infrastructure and Economic Development Bank ($50
million) and funding for the construction of local jails. The State
realized savings of $433 million from a reduction in the State's
contribution to the State Teacher's Retirement System in 1998-99.

Final tabulation of revenues and expenditures contained in the 2000-01
Governor's Budget, released on January 10, 2000, reveals that stronger than
expected economic conditions in the State produced total 1998-99 General Fund
revenues of about $58.6 billion, almost $1.6 billion above the 1998 Budget Act
estimates. Actual General Fund expenditures were $57.8 billion, the amount
estimated at the 1998 Budget Act. Some of this additional revenue will be
directed to K-14 schools pursuant to Proposition 98. The Governor's Budget
reports a balance in the Special Fund for Economic Uncertainties ("SFEU") at
June 30, 1999, of approximately $3.1 billion on a budgetary basis.

CURRENT STATE BUDGET

The discussion below of the 1999-00 Fiscal Year budget and the Proposed
2000-01 Fiscal Year budget are based on estimates and projections of revenues
and expenditures for the current and upcoming fiscal years and must not be
construed as statements of fact. These estimates and projections are based
upon various assumptions as updated in the 2000-01 Governor's Budget 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.

1999-2000 FISCAL YEAR BUDGET

On January 8, 1999, Governor Davis released his proposed budget for Fiscal
Year 1999-00 (the "January Governor's Budget"). The January Governor's Budget
generally reported that General Fund revenues for FY 1998-99 and FY 1999-00
would be lower than earlier projections (primarily due to weaker overseas
economic conditions perceived in late 1998), while some caseloads would be
higher than earlier projections. The January Governor's Budget proposed $60.5
billion of General Fund expenditures in FY 1999-00, with a $415 million SFEU
reserve at June 30, 2000.

The 1999 May Revision showed an additional $4.3 billion of revenues for
combined fiscal years 1998-99 and 1999-00. The completion of the 1999 Budget
Act occurred in a timely fashion. The final Budget Bill was adopted by the
Legislature on June 16, 1999, and was signed by the Governor on June 29, 1999
(the "1999 Budget Act"), meeting the Constitutional deadline for budget
enactment for only the second time in the 1990's.

The final 1999 Budget Act estimated General Fund revenues and transfers of
$63.0 billion, and contained expenditures totaling $63.7 billion after the
Governor used his line-item veto to reduce the legislative Budget Bill
expenditures by $581 million (both General Fund and Special Fund). The 1999
Budget Act also contained expenditures of $16.1 billion from special funds and
$1.5 billion from bond funds. The Administration estimated that the SFEU would
have a balance at June 30, 2000, of about $880 million. Not included in this
amount was an additional $300 million which (after the Governor's vetoes) was
"set aside" to provide funds for employee salary increases (to be negotiated
in bargaining with employee unions), and for litigation reserves. The 1999
Budget Act anticipated normal cash flow borrowing during the fiscal year.

The principal features of the 1999 Budget Act include the following:

1. Proposition 98 funding for K-12 schools was increased by $1.6
billion in General Fund moneys over revised 1998-99 levels, $108.6 million
higher than the minimum Proposition 98 guarantee. Of the 1999-00 funds,
major new programs included money for reading improvement, new textbooks,
school safety, improving teacher quality, funding teacher bonuses,
providing greater accountability for school performance, increasing
preschool and after school care programs and funding deferred maintenance
of school facilities. The Budget also includes $310 million as repayment
of prior years' loans to schools, as part of the settlement of the CTA v.
Gould lawsuit.

2. Funding for higher education increased substantially above the
actual 1998-99 level. General Fund support was increased by $184 million
(7.3 percent) for the University of California and $126 million (5.9
percent) for the California State University system. In addition,
Community Colleges funding increased by $324.3 million (6.6 percent). As a
result, undergraduate fees at UC and CSU will be reduced for the second
consecutive year, and the per-unit charge at Community Colleges will be
reduced by $1.

3. The Budget included increased funding of nearly $600 million for
health and human services.

4. About $800 million from the General Fund will be directed toward
infrastructure costs, including $425 million in additional funding for the
Infrastructure Bank, initial planning costs for a new prison in the
Central Valley, additional equipment for train and ferry service, and
payment of deferred maintenance for state parks.

5. The Legislature enacted a one-year additional reduction of 10
percent of the VLF for calendar year 2000, at a General Fund cost of about
$250 million in each of FY 1999-00 and 2000-01 to make up lost funding to
local governments. Conversion of this one-time reduction to a permanent
cut will remain subject to the revenue tests in the legislation adopted
last year. Several other targeted tax cuts, primarily for businesses, were
also approved, at a cost of $54 million in 1999-00.

6. A one-time appropriation of $150 million, to be split between
cities and counties, was made to offset property tax shifts during the
early 1990's. Additionally, an ongoing $50 million was appropriated as a
subvention to cities for jail booking or processing fees charged by
counties when an individual arrested by city personnel is taken to a
county detention facility.

The revised 1999-2000 budget included in the May 2000 Revision of the
2000-01 Governor's Budget (the "2000 May Revision"), released on May 15, 2000,
reflects the latest estimated costs or savings as provided in various pieces
of legislation passed and signed after the 1999 Budget Act. As a result of the
very strong economy in the State and associated extraordinary revenue
receipts, revised 1999-2000 General Fund revenues are $70.9 billion, an
increase of $7.9 billion above the projections made when the 1999 Budget Act
was enacted, and $5.7 billion above the previous estimate made in the 2000-01
Governor's Budget in January, 2000. Revised 1999-2000 expenditures are $67.3
billion or $3.6 billion higher than projections at the 1999 Budget Act. These
additional expenditures include a supplemental appropriation of $665 million
for Smog Impact Fee refunds (see discussion of Jordan v. D.M.V. case in
"Litigation" below). The Department of Finance projects that the balance in
the SFEU will be about $6.9 billion at June 30, 2000, much of which will be
appropriated for Fiscal Year 2000-01.

PROPOSED 2000-01 FISCAL YEAR BUDGET

On January 10, 2000, Governor Davis released his proposed budget for
Fiscal Year 2000-01. The 2000-01 Governor's Budget generally reflected an
estimate that General Fund revenues for Fiscal Year 1999-2000 would be higher
than projections made at the time of the 1999 Budget Act. Even these positive
estimates proved to be greatly understated as continuing economic growth and
stock market gains (at least through the first quarter of 2000) resulted in a
surge of revenues. The Administration estimated in the 2000 May Revision that
General Fund revenues would total $70.9 billion in 1999-2000, and $73.8
billion in 2000-01, a two-year increase of $12.3 billion above the January
Governor's Budget revenue estimates. The 2000-01 revenue estimate assumes a
$545 million reduction in personal income tax revenue from the Governor's
proposal to provide an income tax exemption for all teachers in the State.

The 2000 May Revision proposes General Fund expenditures of $78.2 billion,
as compared to an original spending proposal of $68.8 billion in the January
Governor's Budget. Included in the revised Budget are set-asides of $500
million for legal contingencies and $200 million for various one-time
legislative initiatives. Based on the proposed revenues and expenditures, the
2000 May Revision projects the June 30, 2001 balance in the SFEU to be $1.769
billion, up from $1.238 billion proposed in the January Governor's Budget.

The 2000 May Revision contains a number of proposals for spending the
additional revenues, mostly in 2000-01. According to a report by the
Legislative Analyst's Office, about $7.2 billion is proposed for one-time
expenditures, including a general tax rebate and senior citizen's tax relief
($1.9 billion), aid to public schools ($1.5 billion), transportation ($1.5
billion), housing ($500 million), set-asides and increased reserves ($600
million) and other uses ($1.2 billion). About $5.1 billion is proposed for
program enhancements which would be permanent including increased Proposition
98 funds for schools ($2.4 billion), tax relief ($600 million, including the
exemption for teachers mentioned above), transportation ($440 million per year
for five years), health and social services ($1.1 billion) and other ($600
million). All of these proposals are subject to review and action by the
Legislature.

LITIGATION

The State is a party to numerous legal proceedings. The following are the
most significant pending proceedings as reported by the Office of Attorney
General.

On December 24, 1997, lead claimant Sonoma County and a consortium of
California counties filed a test claim with the Commission on State Mandates
(the "Commission") asking the Commission to determine whether the property tax
shift from counties to school districts beginning in 1993-94, is a
reimbursable state mandated cost. The Commission denied the test claim on
October 29, 1998, and the claimants sought review in the Sonoma County
Superior Court. On November 10, 1999, the superior court granted the counties'
petition for writ of mandate and reversed the Commission's decision. The State
then appealed to the court of appeal and briefing in that court will be
completed by the end of June 2000. Meanwhile, on April 19, 2000, the
California Supreme Court denied the counties' petition to transfer the State's
appeal directly to the Supreme Court. Should the final decision on this matter
be in favor of the counties, the impact to the State General Fund could be
more than $10.0 billion. In addition, there would be an annual Proposition 98
General Fund cost of at least $3.75 billion. This cost would grow in
accordance with the annual assessed value growth rate.

On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers Association et al.
v. Kathleen Connell filed a complaint for certain declaratory and injunctive
relief challenging the authority of the State Controller to make payments from
the State Treasury in the absence of a state budget. On July 21, 1998, the
trial court issued a preliminary injunction prohibiting the State Controller
from paying moneys from the State Treasury for fiscal year 1998-99, with
certain limited exceptions, in the absence of a state budget. The preliminary
injunction, among other things, prohibited the State Controller from making
any payments pursuant to any continuing appropriation.

On July 22 and 27, 1998, various employee unions which had intervened in
the case appealed the trial court's preliminary injunction and asked the Court
of Appeal to stay the preliminary injunction. On July 28, 1998, the Court of
Appeal granted the unions' requests and stayed the preliminary injunction
pending the Court of Appeal's decision on the merits of the appeal. On August
5, 1998, the Court of Appeal denied the plaintiffs' request to reconsider the
stay. Also on July 22, 1998, the State Controller asked the California Supreme
Court to immediately stay the trial court's preliminary injunction and to
overrule the order granting the preliminary injunction on the merits. On July
29, 1998, the Supreme Court transferred the State Controller's request to the
Court of Appeal. The matters are now pending before the Court of Appeal.
Briefs are being submitted; no date has yet been set for oral argument.

The State is a defendant in Ceridian Corporation v. Franchise Tax Board, a
suit which challenges the constitutionality of a Revenue & Taxation Code
section which limits deductions for insurance dividends to those dividends
paid from earnings previously subject to California taxation. On August 13,
1998, the trial court issued a judgment against the Franchise Tax Board. The
Franchise Tax Board has appealed the judgment. Briefing has been completed.
The State has taken the position that, if the challenged section of the
Revenue & Taxation Code is struck down, all deductions relating to dividends
would be eliminated and the result would be additional income to the State.
Plaintiffs, however, contend that if they prevail, the deduction should be
extended to all dividends which would result in a one-time liability for open
years of approximately $60 million, including interest, and an annual revenue
loss of approximately $10 million. No date has yet been set for oral argument.

The State is also a defendant in First Credit Bank etc. v. Franchise Tax
Board which challenges a Revenue & Taxation Code section similar to the one
challenged in the Ceridian case, but applicable to a different group of
corporate taxpayers. The State's motion for summary judgment is currently
pending and a trial date has been set in September 2000. A decision in the
Ceridian case could impact the outcome of this case. The State has taken the
position that, if the challenged section of the Revenue & Taxation Code is
struck down, all deductions relating to dividends would be eliminated and the
result would be additional income to the State. Plaintiffs, however, contend
that if they prevail, the deduction should be extended to all dividends which
would result in a one-time liability for open years of approximately $385
million, including interest, and an annual revenue loss of approximately $60
million.

The State is involved in ongoing litigation related to state-mandated
claims, initially filed in 1980 and 1981, concerning the costs of providing
special education programs and services to disabled children. The case, Thomas
Hayes v. Commission on State Mandates, related to State-mandated costs. The
action involved 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)
in favor of the local school districts' claims for reimbursement. In the trial
and appellate courts, the State successfully established that federal special
education requirements impose a "federal mandate" upon the State. Accordingly,
the courts reversed the Board of Control's decision and remanded the case to
the Commission to determine what remained of the claim. On remand, the
claimant identified several specific aspects of the State's special education
program that allegedly exceeded federal requirements. The Commission has since
expanded the claim to include supplemental claims filed by seven other
educational institutions. To date, the Legislature has not appropriated funds.
The Commission issued a decision in December 1998 determining that a small
number of components of the State's special education program are state
mandated local costs. The administrative proceeding is in the "parameters and
guidelines" stage where the Commission is considering whether and to what
extent the costs associated with the state mandated components of the special
education program are offset by funds that the State already allocates to that
program. The State's position is that all costs are offset by existing
funding. The State has the option to seek judicial review of the mandate
finding. Potential liability of the State, if all potentially eligible school
districts pursue timely claims, has been estimated by the Department of
Finance to be in excess of $1.5 billion, if the State is not credited for its
existing funding of the program. The Commission was unable to resolve two
other identified aspects of the State's program due to tie votes. As such, the
Commission referred these matters to an administrative law judge for
preparation of recommended decisions. One of these matters encompasses all
special education services for students between the ages of 3 to 5 and 18 to
21, and thus represents significant additional potential liability if the
claim is ultimately upheld and the State is denied credit for its existing
funding.

In January of 1997, California experienced major flooding with preliminary
estimates of property damage of approximately $1.6 to $2.0 billion. In McMahon
v. State, a substantial number of plaintiffs have joined suit against the
State, local agencies, and private companies and contractors seeking
compensation for the damages they suffered as a result of the 1997 flooding.
After various pre-trial proceedings, the State filed its answer to the
plaintiffs' complaint in January of 2000. No trial date has been set. The
State is vigorously defending the action.

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, resulting in significant
findings of liability against the State as owner, operator, and generator of
wastes taken to the site. The State has appealed the rulings. Present
estimates of the cleanup range from $400 to $600 million. Potential State
liability falls within this same range. However, all or a portion of any
judgment against the State could be satisfied by recoveries from the State's
insurance carriers. The State has filed a suit against certain of these
carriers. The trial is expected to begin in 2001.

The State is a defendant in Paterno v. State of California, a coordinated
action involving 3,000 plaintiffs seeking recovery of damages caused by the
Yuba River flood of February 1986. The trial court found liability in inverse
condemnation and awarded damages of $500,000 to a sample of the plaintiffs.
The State's potential liability to the remaining plaintiffs ranges from $800
million to $1.5 billion. In 1992, the State and plaintiffs filed appeals. In
August 1999, the Court of Appeal issued a decision reversing the trial court's
judgment against the State and remanding the case for retrial on the inverse
condemnation cause of action. The California Supreme Court denied plaintiffs'
petition for review. No trial date has been set although trial management
issues, including whether plaintiffs have the right to a jury trial on their
inverse condemnation claim and whether trial should be held in Yuba County,
are presently being considered by the trial court.

Plaintiffs in County of San Bernardino v. Barlow Respiratory Hospital and
related actions seek mandamus relief requiring the State to retroactively
increase out-patient Medi-Cal reimbursement rates. Plaintiffs have estimated
the damages to be several hundred million dollars. The State is vigorously
defending these cases, as well as related federal cases addressing the
calculation of Medi-Cal reimbursement rates in the future. Trial is scheduled
for September 2000.

The State is involved in two refund actions, Cigarettes Cheaper!, et al.
v. Board of Equalization, et al. and California Assn. Of Retail Tobacconists
(CART), et al. v. Board of Equalization, et al., that challenge the
constitutionality of Proposition 10, approved by the voters in 1998.
Plaintiffs allege that Proposition 10, which increases the excise tax on
tobacco products, violates 11 sections of the California Constitution and
related provisions of law. Plaintiffs Cigarettes Cheaper! seek declaratory
and injunctive relief and a refund of over $4 million. The CART case filed by
retail tobacconists in San Diego seeks a refund of $5 million. Plaintiffs
McLane/Suneast seek a refund between $500,000 and $1 million. The State is
vigorously contesting these cases. The State's motion for judgment on the
pleadings was granted but the court gave the three sets of plaintiffs
permission to amend their complaints. As a result, the defendants' motion for
summary judgment was taken off the calendar. A hearing on the State's demurrer
to the third amended complaint by CART, the second amended complaint by
Cigarettes Cheaper! and the first amended complaint by McLane/Suneast is
pending. The State has obtained several protective orders and extensive
discovery continues. If the statute is declared unconstitutional, exposure may
include the entire $750 million collected annually with interest.

The State is involved in two cases challenging the constitutionality of
the interest offset provisions of the Revenue and Taxation Code: Hunt-Wesson,
Inc., v. Franchise Tax Board and F.W. Woolworth Co. and Kinney Shoe
Corporation v. Franchise Tax Board. In both cases, the Franchise Tax Board
prevailed in the California Court of Appeal and the California Supreme Court
denied taxpayers' petitions for review. In both cases, the United States
Supreme Court granted certiorari. On February 22, 2000, the United States
Supreme Court reversed and remanded the Hunt-Wesson case to the California
Court of Appeal for further proceedings. Although the Court did not take
similar action in the Woolworth Co. case, it is anticipated that it will do
so. The Franchise Tax Board recently estimated that the adverse decisions in
these cases will result in a reduction in state revenues of approximately $15
million annually, with past year collection and interest exposure of
approximately $95 million.

Guy F. Atkinson Company of California v. Franchise Tax Board is a
corporation tax refund action involving the solar energy system tax credit
provided for under the Revenue & Taxation Code. The case went to trial in May
1998 and the trial court entered judgment in favor of the Franchise Tax Board.
The taxpayer has filed an appeal to the California Court of Appeal and
briefing is completed. The Franchise Tax Board estimates that the cost would
be $150 million annually if the plaintiff prevails. Allowing refunds for all
open years would entail a refund of at least $500 million.

Jordan, et al. v. Department of Motor Vehicles, et al., challenges the
validity of the Vehicle Smog Impact Fee, a $300 fee which is collected by the
Department of Motor Vehicles from vehicle registrants when a vehicle without a
California new-vehicle certification is first registered in California. The
plaintiffs contend that the fee violates the interstate commerce and equal
protection clauses of the United States Constitution as well as Article XIX of
the State Constitution. In October, 1999 the Court of Appeal upheld a trial
court judgment for the plaintiffs and the State has declined to appeal
further. Although refunds through the court actions could be limited by a
three-year statute of limitations, with a potential liability of about $750
million, the Governor has proposed refunding fees collected back to the
initiation of these fees in 1990. Legislation has been enacted, which the
Governor is prepared to sign, providing a $665 million supplemental
appropriation in 1999-2000 to pay these claims.

PTI, Inc., et al. v. Philip Morris, et al. was filed by five distributors
in the cigarette import/re-entry business, seeking to overturn the tobacco
Master Settlement Agreement (MSA) entered between 46 states and the tobacco
industry in November, 1998. The primary focus of the complaint is the
provision of the MSA encouraging participating states to adopt a statute
requiring nonparticipating manufacturers to either become participating
manufacturers and share the financial obligations under the MSA or pay money
into an escrow account. Plaintiffs seek compensatory and punitive damages
against the state and state officials and an order placing tobacco settlement
funds into a trust to be administered by the court for the treatment of
medical expenses of persons injured by tobacco products. Plaintiffs have filed
an amended complaint and the State has filed a motion to dismiss the amended
complaint. A hearing on the State's motion to dismiss was heard on May 8,
2000. The potential fiscal impact of an adverse ruling is largely unknown, but
could exceed the full amount of the settlement (estimated to be $1 billion
annually, of which 50 percent will go directly to the State's General Fund and
the other 50 percent directly to the State's 58 counties and 4 largest
cities).

In FORCES Action Project et al. v. State of California et al., various
smokers rights groups challenge the tobacco settlement as it pertains to
California, Utah and the City and County of San Francisco. Plaintiffs assert a
variety of constitutional challenges, including that the settlement represents
an unlawful tax on smokers. Motions to dismiss by all defendants, including
the tobacco companies, were eventually converted to summary judgment motions
by the court and heard on September 17, 1999. On January 5, 2000, the court
dismissed the complaint for lack of subject matter jurisdiction because the
plaintiffs lacked standing to sue. The court also concluded that the
plaintiffs' claims against the State and its officials are barred by the 11th
Amendment. Plaintiffs have appealed. Briefing is expected to be complete by
July, 2000.

Louis Bolduc et al. v. State of California et al. is a class action filed
on July 13, 1999 by six Medi-Cal beneficiaries who have received medical
treatment for smoking-related diseases. Plaintiffs allege the State owes them
an unspecified portion of the tobacco settlement monies under a federal
regulation that requires a state to turn over to an injured Medicaid
beneficiary any monies the state recovers from a third party tortfeasor in
excess of the costs of the care provided. The State moved to dismiss the
complaint on September 8, 1999. On February 29, 2000, the court denied the
State's motion to dismiss, but struck the Plaintiffs' class action
allegations. The State is seeking appellate review of that portion of the
court's order denying its motion to dismiss, and plaintiffs have appealed the
court's striking of their class action allegations. All written briefs should
be filed by August 2000.

Arnett v. California Public Employees Retirement System, et al. was filed
by seven former employees of the State of California and local agencies,
seeking back wages, damages and injunctive relief. Plaintiffs are former
public safety members who began employment after the age of 40 and are
recipients of Industrial Disability Retirement ("IDR") benefits. Plaintiffs
contend that the formula which determines the amount of IDR benefits violates
the federal Age Discrimination in Employment Act of 1967 ("ADEA"). Plaintiffs
contend that, but for their ages at hire, they would receive increased monthly
IDR benefits similar to their younger counterparts who began employment before
the age of 40. CalPERS has estimated the liability to the State as
approximately $315.5 million were the plaintiffs to prevail. The District
Court dismissed the complaint for failure to state a claim. On August 17,
1999, the Ninth Circuit Court of Appeals reversed the District Court's
dismissal of the complaint. The State sought further review in the United
States Supreme Court. On January 11, 2000, the United States Supreme Court in
Kimel v. Florida Board of Regents, held that Congress did not abrogate the
sovereign immunity of the states when it enacted the ADEA. Thereafter, on
January 18, 2000, the Supreme Court granted the petition for writ of
certiorari in Arnett, vacated the judgment of the Ninth Circuit, and remanded
the case to the Ninth Circuit for further proceedings consistent with Kimel.
In turn, the Ninth Circuit has remanded the case to the District Court and the
State has filed a motion to dismiss the complaint based upon a lack of subject
matter jurisdiction.

On March 30, 2000, a group of students, parents, and community based
organizations representing school children in the Los Angeles Unified School
District brought a lawsuit against the State Allocation Board ("SAB"), the
State Office of Public School Construction ("OPSC") and a number of State
officials (Godinez, et al. v. Davis, et al.) in the Superior Court in the
County of Los Angeles. The lawsuit principally alleges SAB and OPSC have
unconstitutionally and improperly allocated funds to local school districts
for new public school construction as authorized by the Class Size Reduction
Kindergarten-University Public Education Facilities Bond Act (hereafter
referred to as "Proposition 1A"). Plaintiffs allege that funds are not being
allocated reasonably and fairly according to need on the basis of a uniform,
state wide assessment of highest priority needs. Plaintiffs seek a declaration
of the illegality of the current allocation system, and a preliminary and
permanent injunction and/or a writ of mandate against further allocation of
Proposition 1A funds unless the allocation system is modified. On May 12,
2000, Judge David P. Yaffe of the Superior Court denied Plaintiffs' request
for a temporary restraining order, and a hearing on Plaintiffs' request for a
preliminary injunction is scheduled on June 20, 2000. The State will
vigorously defend this lawsuit. The Plaintiffs have not questioned the
legality of, or sought any relief concerning, any commercial paper notes or
bonds issued by the State under Proposition 1A, all of which funded projects
based on allocations made prior to the filing of the lawsuit. The Attorney
General is of the opinion that the lawsuit does not affect the validity of any
State bonds.
<PAGE>

APPENDIX B

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 Income Portfolio is not responsible for the accuracy or
timeliness of this information.

CURRENT ECONOMIC OUTLOOK

The information in this section summarizes the State economic situation
and outlook upon which projects of receipts and certain disbursements were
made for the State's 2000-01 Financial Plan.

New York is the third most populous state in the nation and has a
relatively high level of personal wealth. The State's economy is diverse, with
a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment and a very small share
of the nation's farming and mining activity. The State's location and its air
transport facilities and natural harbors have made it an important link in
international commerce. Travel and tourism constitute an important part of the
economy. Like the rest of the nation, New York has a declining proportion of
its workforce engaged in manufacturing and an increasing proportion engaged in
service industries.

The forecast of the State's economy shows continued expansion throughout
2000. Most major sectors recorded significant employment gains for the first
quarter of 2000, with the services sector accounting for most of the increase.
Much of this increase occurred in business services. The employment growth
rate in 2000 is expected to be 2.1 percent, which, although lower than 1999's
2.6 percent, represents another strong year relative to recent historical
performance. The unemployment rate is expected to be 4.9 percent in 2000, down
from 5.1 percent in 1999.

Personal income is expected to rise 6.1 percent in 2000, with a 7.5
percent increase in wages. Two major factors are working to produce this
impressive growth in wages. One is the overall tightness in the labor market,
and the other is strong growth in financial sector bonus payments.

Given the importance of the securities industry in the New York State
economy, a significant change in stock market performance during the forecast
horizon could result in financial sector profits and bonuses that are
significantly different from those embodied in the forecast. Any actions by
the Federal Reserve Board to moderate inflation by increasing interest rates
more than anticipated may have an adverse impact in New York given the
sensitivity of financial markets to interest rate shifts and the prominence of
these markets in the New York economy. In additional, there is a possibility
that greater-than-anticipated mergers, downsizing, and relocation of firms
caused by deregulation and global competition may have a significant adverse
effect on employment growth.

1999-2000 FISCAL YEAR

The State ended its 1999-2000 fiscal year in balance on a cash basis, with
a General Fund cash-basis surplus of $1.51 billion as reported by the Division
of the Budget ("DOB"). As in recent years, strong growth in receipts above
forecasted amounts produced most of the year-end surplus. Spending was also
modestly below projections, further adding to the surplus.

The State reported closing balance of $1.17 billion in the General Fund,
an increase of $275 million over the closing balance form the prior year. The
balance was held in four accounts within the General Fund: the Tax
Stabilization Reserve Fund (TSRF), the Contingency Reserve Fund (CRF), the
Debt Reduction Reserve Fund (DRRF) and the Community Projects Funds (CPF)
which is used to finance legislative initiatives. The balance is comprised of
$547 million in the TSRF after a deposit of $74 million in 1999-2000; $107
million in the CRF; $250 million in the DRRF; and $263 million in the CPF.

The closing fund balance excludes $3.97 billion that the State deposited
into the tax refund reserve account at the close of 1999-2000 to pay for tax
refunds in 2000-01 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 as of March 31, 2000. The tax refund reserve account
transaction has the effect of decreasing reported personal income tax receipts
in 1999-2000, while increasing reported receipts in 2000-01.

General Fund receipts and transfers from other funds (net of tax refund
reserve account activity) for the 1999-2000 fiscal year totaled $37.40
billion, an increase of 1.6 percent over 1998-99. General Fund disbursements
and transfers to other funds totaled $37.17 billion, an increase of 1.6
percent from the prior fiscal year.

1998-99 FISCAL YEAR

The State ended its 1998-99 fiscal year on March 31, 1999 in balance on a
cash basis, with a General Fund cash surplus as reported by the DOB of $1.82
billion. The cash surplus was derived primarily from higher-than-projected tax
collections as a result of continued economic growth, particularly in the
financial markets and the securities industries.

The State reported a General Fund closing cash balance of $892 million, an
increase of $254 million from the prior fiscal year. The TSRF closing balance
was $473 million, following an additional deposit of $73 million in 1998-99.
The CRF closing balance was $107 million, following a deposit of $39 million
in 1998-99. The CPF, which finances legislative initiatives, closed the fiscal
year with a balance of $312 million.

The closing fund balance excluded $2.31 billion that the State deposited
into the tax refund reserve account at the close of 1998-99 to pay for tax
refunds in 1999-2000. The remaining balance of $521 million was made available
as a result of the Local Government Assistance Corporation (LGAC) financing
program and was required to be on deposit as of March 31, 1999.

General Fund receipts and transfers from other funds (net of tax refund
reserve account activity) for the 1998-99 fiscal year totaled $36.82 billion,
an increase of 6.2 percent from 1997-98 levels. General Fund disbursements and
transfers to other funds totaled $36.57 billion for the 1998-99 fiscal year,
an increase of 6.1 percent from 1997-98 levels.

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 TSRF closing balance was $400
million, following a required deposit of $15 million (repaying a transfer made
in 1991-92) and an additional 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 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 LGAC financing program and was
required to be on deposit on March 31, 1998.

General Fund receipts and transfers from other funds (net of tax refund
reserve account activity) for the 1997-98 fiscal year totaled $34.67 billion,
an annual increase of 4.9 percent over 1996-97. General Fund disbursements and
transfers to other funds were $34.47 billion, an annual increase of 4.8
percent.

RATING AGENCIES' ACTIONS

Moody's assigned its municipal bond rating of Aaa, and Standard & Poor's
assigned its rating of AAA to the State's general obligation variable interest
rate bonds as of March 15, 2000. 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 these
State public authorities was $95 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, electric and 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 may seek additional State assistance if
local assistance payments are 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 May
31, 2000, LIPA has issued over $7 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. The 2000-01 Enacted Budget provides State
assistance to the MTA totaling approximately $1.35 billion and initiates a
five-year State transportation plan that includes nearly $2.2 billion in
dedicated revenue support for the MTA's 2000-2004 Capital Program. This
capital commitment includes an additional $800 million of newly dedicated
State petroleum business tax revenues, motor vehicle fees, and motor fuel
taxes not previously fuel taxes not previously dedicated to the MTA.

State legislation accompanying the 2000-01 Enacted State budget increased
the aggregate bond cap for the MTA, TBTA and TA to $16.5 billion in order to
finance a portion of the $17.1 billion MTA capital plan for the 2000 through
2004 calendar years (the "2000-04 Capital Program"). On May 4, 2000, the
Capital Program Review Board approved the MTA's $17.1 billion capital program
for transit purposes for 2000 through 2004. The 2000-04 Capital Program is the
fifth 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,
bringing the MTA system into a state of good repair, and making major
investments in system expansion projects such as the Second Avenue Subway
project and the East Side Access project.

The currently approved 2000-04 Capital Program assumes the issuance of an
estimated $8.9 billion in new money bonds. The remainder of the plan is
projected to be financed with assistance from the Federal Government, the
State, the City of New York, and from various other revenues generated from
actions taken by the MTA. In addition, $1.6 billion in State support is
projected to be financed using proceeds from State general obligation bonds
under the proposed $3.8 billion Transportation Infrastructure Bond Act of
2000, if approved by the voters in the November 2000 general election.
Further, the enacted State budget authorized the MTA to undertake a major debt
restructuring initiative which will enable the MTA to refund approximately
$13.7 billion in bonds, consolidate its credit sources, and obviate the need
for debt service reserves. The authorization for debt restructuring includes
outstanding bonds secured by service contracts with the State.

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, that the Transportation
Infrastructure Bond Act will be approved by voters or that the 2000-04 Capital
Program (or parts thereof) will not be delayed or reduced. Should the
Transportation Infrastructure Bond Act be defeated, the State could come under
pressure to provide additional funding to the MTA. Should funding levels fall
below current projections, the MTA would have to revise its 2000-04 Capital
Program accordingly. If the 2000-04 Capital Program is delayed or reduced,
ridership and fare revenues may decline, which could impair the MTA's ability
to meet its operating expenses without additional State 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 must market their securities
successfully. This debt is issued to finance the rehabilitation of the City's
infrastructure and other capital needs and to refinance existing debt, as well
as to finance seasonal needs. In City fiscal years 1997-98, 1998-99 and
1999-2000, the State Constitutional debt limit would have prevented the City
from entering into new capital contracts. To prevent disruptions in the
capital program, two actions were taken to increase the City's capital
financing capacity: (i) the State Legislature created the New York City
Transitional Finance Authority (TFA) in 1997, and (ii) in 1999, the City
created TSASC, Inc., a not-for-profit corporation empowered to issue tax-
exempt debt backed by tobacco settlement revenues. Despite these actions, the
City, in order to continue its capital program, will need additional financing
capacity beginning in City fiscal year 2000-01, which could be provided
through increasing the borrowing authority of the TFA or amending the State
constitutional debt limit for City fiscal year 2001-02 and thereafter.

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,
economic growth in the City has been very strong in recent years, lead by a
surge in Wall Street profitability which resulted in increased tax revenues
and helped produce substantial surpluses for the City in City fiscal years
1996-97, 1997-98 and 1998-99. These staff reports also indicate that the City
projects a substantial surplus for City fiscal year 1999-2000. Although
several sectors of the City's economy have expanded over the last several
years, especially tourism, media, business and professional services, City tax
revenues remain heavily dependent on the continued profitability of the
securities industries and the performance of the national economy. In
addition, the cost of recent tax reductions has increased to over $2.3 billion
in City fiscal year 1999-2000 through the expirations of a personal income tax
surcharge, the repeal of the non-resident earnings tax and the elimination of
the sales tax on clothing items costing less than $110. The Mayor has proposed
additional tax reductions that would raise the total of recent tax cuts to
$3.5 billion by City fiscal year 2003-04.

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 relies 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 for Public 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 potential impact on the State of any
future requests by localities for additional oversight or financial assistance
is not included in the projections of the State's receipts and disbursements
for the State's 2000-01 fiscal year.

The State is considering various measures to help resolve persistent
fiscal difficulties in Nassau County. The Governor has proposed actions which
would, if legislation is enacted, establish a Nassau County Interim Finance
Authority. The Authority would be empowered to issue bonds, backed solely by
diverted Nassau County sales tax revenues, to achieve short-term budget relief
and ensure credit market access for the County. Such Authority would also
impose financial plan requirements on Nassau County. The Governor has also
proposed that transitional State assistance be appropriated in State fiscal
year 2000-01, and in four subsequent State fiscal years. Allocation of such
assistance would be subject to the Authority's approval of Nassau County's
financial plan. There is no assurance that such proposals will be enacted, or
that future actions will not be required by the State to assist Nassau County,
resulting in increased State expenditures for extraordinary local assistance.

The State has provided extraordinary financial assistance to select
municipalities, primarily cities, since the 1996-97 fiscal year. Funding has
essentially been continued or increased in each subsequent fiscal year. Such
funding in 2000-01 totals $200.4 million. The 2000-01 enacted budget also
increased General Purpose State Aid for local governments by $11 million to
$562 million.

While the distribution of General Purpose State Aid for local governments
was originally based on a statutory formula, in recent years both the total
amount appropriated and the shares appropriated to specific localities have
been determined by the Legislature. A State commission established to study
the distribution and amounts of general purpose local government aid failed to
agree on any recommendations for a new formula.

Counties, cities, towns, villages and school districts have engaged in
substantial short-term and long-term borrowings. In 1998, the total
indebtedness of all localities in the State, other than New York City, was
approximately $20.3 billion. A small portion (approximately $80 million) of
that indebtedness represented borrowing to finance budgetary deficits and was
issued pursuant to enabling State legislation. State law requires the
Comptroller to review and make recommendations concerning the budgets of those
local government units (other than New York City) authorized by State law to
issue debt to finance deficits during the period that such deficit financing
is outstanding. Twenty-three localities had outstanding indebtedness for
deficit financing at the close of their fiscal year ending in 1998.

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, Nassau County, 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 2000-01
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 2000-01 Financial Plan. The State believes that the proposed 2000-01
Financial Plan includes sufficient reserves to offset the costs associated
with the payment of judgments that may be required during the 2000-01 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 2000-01 Financial Plan
resources available for the payment of judgments and, could therefore, affect
the ability of the State to maintain a balanced 2000-01 Financial Plan. In its
General Purpose Financial Statements, the State reports its estimated
liability for awarded and anticipated unfavorable judgments.

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. Petitioners' 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. On July 9, 1998, the New York Court of
Appeals reversed the order of the Appellate Division, Third Department, and
remanded the matter to the Supreme Court, Albany County, for further
proceedings. The Court held that the petitioners had standing to assert an
equal protection claim, but that their claim did not implicate racial
discrimination. The Court remanded the case to Supreme Court, Albany County,
for resolution of the question of whether there was a rational basis for the
Tax Department's policy of non-enforcement of the sales and excise taxes on
reservation sales of cigarettes and motor fuel to non-Indians. In a footnote,
the Court stated that, in view of its disposition of the case, petitioners'
cross-appeal regarding the statewide suspension of the taxes is "academic." By
decision and judgment dated July 9, 1999, the Supreme Court, Albany County,
granted judgment dismissing the petition. On September 2, 1999, petitioners
appealed to the Appellate Division, Third Department, from the July 9, 1999
decision and order. The appeal is scheduled to be argued June 8, 2000.

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. On July 10, 1998, the State filed a motion to
dismiss this action. By order entered January 7, 1999, the Court denied the
State's motion to dismiss. On January 27, 1999 the State appealed that order.
On September 9, 1999, the Appellate Division, Third Department, heard the
appeal.

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 a related case, Rodriguez v. DeBuono, on April 19,
1999, the United States District Court for the Southern District of New York
enjoined the State's use of task based assessment, which is similar to the
HARRI, unless the State assesses safety monitoring as a separate task based
assessment, on the grounds that its use without such additional assessment
violated federal Medicaid law and the Americans with Disabilities Act. The
State appealed from the April 19, 1999 order and on July 12, 1999 argued the
appeal before the Second Circuit. By order dated October 6, 1999, the Second
Circuit reversed the April 19, 1999 order and vacated the injunction. On
October 20, 1999, petitioners filed a request for rehearing en banc.

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 gross receipts
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 (S)(S) 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 appealed that order.
By decision and order dated August 31, 1998, the Appellate Division, Second
Department, affirmed that order. On September 30, 1998, the State moved for
re-argument or, in the alternative, for a certified question for the Court of
Appeals to review. By order dated January 7, 1999 the motion was denied. A
final order was entered in Supreme Court on January 26, 1999. On February 23,
1999, the State appealed that order to the Court of Appeals. In a decision
entered December 16, 1999, the Court of Appeal reversed the decision below and
upheld the constitutionality of the assessments. On May 15, 2000, plaintiffs
filed a petition for certiorari with the United States Supreme Court seeking
to appeal the December 16, 1999 decision. The State's response is due June 15,
2000.

In Dental Society, et al. v. Pataki, et al., (United States District,
Northern District of New York, commenced February 2, 1999), plaintiffs
challenge the State's reimbursement rates for dental care provided under the
State's dental Medicaid program. Plaintiff's claim that the State's Medicaid
fee schedule violates Title XIX of the Social Security Act (42 U.S.C. (S)
1396a et seq.) and the federal and State Constitutions. On June 25, 1999, the
State filed its answer. The parties have entered into a settlement agreement
dated May 8, 2000 that will increase Medicaid dental reimbursement rates
prospectively over a four-year period, beginning June 1, 2000.

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 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. By decision and order dated May 6, 1999, the Appellate Division, First
Department, affirmed the July 25, 1997 judgment. By order dated July 8, 1999,
the Appellate Division denied the State's motion for leave to appeal to the
Court of Appeals from the May 6, 1999 decision and order. By order dated
October 14, 1999, the Court of Appeals dismissed the State's leave to appeal.

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 (S)1983 and the Equal Educational Opportunity Act, 20 USC
(S)(S)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 1998-99 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.
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. By decision
dated June 22, 1999, as discussed below, the Second Circuit affirmed the
District Court's order requiring the State to pay one-half of the cost of EIP
I for the 1996-97 school year and remanded the case to the District Court for
further proceedings consistent with its decision.

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. That opinion was
reduced to an order on July 27, 1998. The order directed the State to pay
$37.5 million by August 1, 1998 for estimated EIP costs for the 1997-98 school
year. The State made this payment, as directed. On August 24, 1998, the State
appealed that order to the Second Circuit. The City of Yonkers and the Yonkers
Board of Education cross-appealed to the Second Circuit from that order. By
stipulation of the parties approved by the Second Circuit on November 19,
1998, the appeals from the July 27, 1998 order were withdrawn without
prejudice to reinstatement upon determination of the State's appeal of the
October 14, 1997 judgment discussed above.

On April 15, 1999, the District Court issued two additional orders. The
first order directed the State to pay to Yonkers an additional $11.3 million
by May 1, 1999, as the State's remaining share of EIP costs for the 1997-98
school year. The second order directed the State to pay to Yonkers $69.1
million as its share of the estimated EIP costs for the 1998-99 school year.
The State made both payments on April 30, 1999.

In a decision dated June 22, 1999, the Second Circuit found no basis for
the District Court's findings that vestiges of a dual system continued to
exist in Yonkers and reversed the order directing the implementation of EIP-
II. The Second Circuit also affirmed the District Court's order requiring the
State to pay one-half of the cost of EIP I for the 1996-97 school year and
remanded the case to the District Court for further proceedings consistent
with its decision. On July 2, 1999 the NAACP filed a petition for rehearing of
the June 22, 1999 decision before the Second Circuit, en banc. The State has
joined in the City of Yonker's motion to stay further implementation of EIP II
pending the decision on the petition for rehearing. By order dated August 5,
1999, the Second Circuit granted the motion staying further implementation of
EIP II pending appeal.

On July 27, 1999, the City of Yonkers moved in the District Court to
modify the July 27, 1998 order to require the State to make payments for EIP
expenses each month from July 1999 through April 2000 of $9.22 million per
month instead of paying $92.2 million by May 1, 2000. By memorandum and order
dated July 29, 1999, the District Court denied this motion.

In a decision dated November 16, 1999, the Second Circuit vacated its June
22, 1999 decision. In this decision, the Second Circuit again affirmed the
District Court's order requiring the State to pay one-half of the cost of EIP
I for the 1996-97 school year. The Second Circuit also found no basis for the
District Court's findings that vestiges of a dual system continued to exist in
Yonkers, and therefore vacated the District Court's EIP II order. The Second
Circuit, however, remanded to the District Court for the limited purpose of
making further findings on the existing record as to whether any other
vestiges of the dual system remain in the Yonkers public schools. On May 22,
2000, the United States Supreme Court denied the State's petition for
certiorari, seeking leave to appeal the November 16, 1999 decision and the
underlying September 3, 1996 decision.

In Campaign for Fiscal Equity, Inc., et al. v. State, et al. (Supreme
Court, New York County), plaintiffs challenge the funding for New York City
public schools. Plaintiffs seek a declaratory judgment that the State's public
school financing system violates article 11, section 1 of the State
Constitution and Title VI of the federal Civil Rights Act of 1964 and
injunctive relief that would require the State to satisfy State Constitutional
standards. This action was commenced in 1993. The trial of this action
commenced October 12, 1999.

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.

In 1998, the United States filed a complaint in intervention in Oneida
Indian Nation of New York. In December 1998, both the United States and the
tribal plaintiffs moved for leave to amend their complaints to assert claims
for 250,000 acres, to add the State as a defendant, and to certify a class
made up of all individuals who currently purport to hold title within said
250,000 acre area. These motions were argued March 29, 1999 and are still
awaiting determination. The District Court has not yet rendered a decision. By
order dated February 24, 1999, the District Court appointed a federal
settlement master. A conference scheduled by the District Court for May 26,
1999 to address the administration of this case has been adjourned
indefinitely.

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 and Seneca Nation of Indians, et al. v. State, et al., in
the United States District Court for the Western 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. In the Cayuga Indian Nation of New York case, by order dated March 29,
1999, the United States District Court for the Northern District of New York
appointed a federal settlement master. In October 1999, the District Court
granted the Federal Government's motion to have the State held jointly and
severally liable for any damages owed to the plaintiffs. At the conclusion of
the damages phase of the trial of this case, a jury verdict of $35 million in
damages plus $1.9 million representing that fair rental value of the
properties at issue was rendered against the defendants. On July 5, 2000, a
bench hearing is scheduled to determine whether prejudgment interest is
appropriate and, if so, the amount thereof. In the Canadian St. Regis Band of
Mohawk Indians case, the United States District Court for the Northern
District of New York has directed the parties to rebrief outstanding motions
to dismiss brought by the defendants. The State filed its brief on July 1,
1999. The motions were argued in September 1999. No decision has been rendered
on these motions. In Seneca Nation of Indians, by order dated November 22,
1999, the District Court confirmed the July 12, 1999 magistrate's report,
which recommended granting the State's motion to dismiss that portion of the
action relating to the right of way where the New York State Thruway crosses
the Cattaraugus Reservation in Erie and Chatauqua Counties and denying the
State's motion to dismiss the Federal Government's damage claims. The District
court has set a trial date of October 17, 2000 for that portion of the case
related to plaintiff's claim of ownership of the islands in the Niagara River.

PROPRIETARY SCHOOLS

In an action unsealed in February, 1996, the relator claims, inter alia,
that the State violated the Federal False Claims Act, 31 USC (S) 3729, et seq.
(United States ex rel. Long v. SCS Business and Technical Institute, Inc., et
al., United States District Court, District of Columbia). On March 29, 1999,
the District of Columbia Circuit Court reversed a decision by the District
Court and granted the State's motion to dismiss the action. The United States
has petitioned for certiorari to the United States Supreme Court, which is
holding the petition pending its decision in a similar case, U.S. ex rel.
Stevens v. State of Vermont. The State filed its response in September 1999.

FOOD STAMP PROGRAM

In an action commenced April 5, 1999 by New York and several other states
against the Federal Government (State of Arizona, et al. v. Shalala, et al.,
United States District Court, District of Columbia), plaintiffs challenge a
federal directive which requires states to change their method of allocating
costs associated with the Food Stamp program. On July 29, 1999, plaintiffs
moved for summary judgment. On September 23, 1999, defendant cross-moved for
summary judgment. No date for argument of these motions has been set.
<PAGE>

APPENDIX C

DESCRIPTION OF SECURITIES RATINGS

The ratings of Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Ratings Group ("S&P") and FITCH IBCA, Inc. ("Fitch") represent their
opinions as to the quality of various debt securities. It should be
emphasized, however, that ratings are not absolute standards of quality.
Consequently, debt securities with the same maturity, coupon and rating may
have different yields while debt securities of the same maturity and coupon
with different ratings may have the same yield. The ratings below are 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.

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
FOUR HIGHEST BOND 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 risk appear somewhat larger than in Aaa
securities.

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

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

NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Baa. 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 STANDARD & POOR'S RATINGS GROUP'S
FOUR HIGHEST BOND RATINGS

AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment 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 commitment on the
obligation is very strong.

A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

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

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

When assigning ratings, Fitch 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.

A: High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.

BBB: Good credit quality. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.

"+" OR "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA" long-term
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 STANDARD & POOR'S RATINGS GROUP'S
TWO HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES

An S&P note rating reflects the liquidity factors and market-access risks
unique to notes. Notes due 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 it will be treated as a note.

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

Note rating symbols are as follows:

SP-1: Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is 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
RATINGS OF TAX-EXEMPT DEMAND BONDS

S&P 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, note 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 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 "+" to 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.

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 COMMERCIAL PAPER RATINGS

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

A-1: A short-term obligation rated A-1 is rated in the highest category by
S&P. The obligor's capacity to meet its financial commitment on the obligation
is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.

A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
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<TABLE>

APPENDIX D

TAXABLE EQUIVALENT YIELD TABLES

RATES FOR 2000 UNDER FEDERAL PERSONAL AND CALIFORNIA STATE, NEW YORK STATE AND NEW YORK CITY INCOME TAX LAW

If you are subject to income tax, you need to earn a higher taxable yield to achieve the same after-tax income, than you would if
the yield were tax-exempt. The following tables show the approximate taxable yields which are equivalent to tax-exempt yields
under 2000 federal personal income tax laws, and under the California State, New York State and New York City personal income tax
laws described in the tables. If tax laws, rates or brackets are changed, the information in the table would be out of date. Each
Fund expects that a substantial portion of its dividends will be exempt from federal personal income taxes. Citi California Tax
Free Income Fund expects that a substantial portion of its dividends will be exempt from California personal income taxes, and
Citi New York Tax Free Income Fund expects that a substantial portion of its dividends will be exempt from New York State and New
York City personal income taxes. However, in reviewing the tables below, you should remember that each Fund may also pay dividends
which are subject to federal, state and local personal income taxes.

FEDERAL TAX RATES
<CAPTION>

Taxable Income* Income Federal Tax-Exempt Yield
------------------------------------------- Tax --------------------------------------------------------------------------
Single 2000 Joint 2000 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 - $ 26,250 $0 - $ 43,850 15.0% 2.35% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 26,251 - $ 63,550 $ 43,851 - $105,950 28.0% 2.78% 3.47% 4.17% 4.88% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 63,551 - $132,600 $105,951 - $161,450 31.0% 2.90% 3.62% 4.35% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$132,601 - $288,350 $161,451 - $288,350 36.0% 3.13% 3.91% 4.69% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
$288,351 & Over $288,351 & Over 39.6% 3.31% 4.14% 4.97% 5.79% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%

* Net amount subject to Federal personal income tax after deductions and exemptions.
</TABLE>
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<TABLE>

CALIFORNIA TAX RATES
<CAPTION>

Taxable Income* Income California Tax-Exempt Yield
------------------------------------------- Tax --------------------------------------------------------------------------
Single 1999*** Joint 1999*** 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 - $ 26,250 17.85% 2.43% 3.04% 3.65% 4.26% 4.87% 5.48% 6.09% 6.70% 7.30% 7.91%
$0 - $ 43,850 17.40% 2.42% 3.03% 3.63% 4.24% 4.84% 5.45% 6.05% 6.66% 7.26% 7.87%
$ 26,251 - $ 63,550 34.45% 3.05% 3.81% 4.58% 5.34% 6.10% 6.86% 7.63% 8.39% 9.15% 9.92%
$ 43,851 - $105,950 34.06% 3.03% 3.79% 4.55% 5.31% 6.07% 6.82% 7.58% 8.34% 9.10% 9.86%
$ 63,551 - $132,600 $105,951 - $161,450 37.42% 3.20% 3.99% 4.79% 5.59% 6.39% 7.19% 7.99% 8.79% 9.59% 10.39%
$132,601 - $288,350 $161,451 - $288,350 41.95% 3.45% 4.31% 5.17% 6.03% 6.89% 7.75% 8.61% 9.47% 10.34% 11.20%
$288,351 & Over $288,351 & Over 45.22% 3.65% 4.56% 5.48% 6.39% 7.30% 8.21% 9.13% 10.04% 10.95% 11.87%

* Net amount subject to Federal and California 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 1999 information since at this time 2000 information is
not available.
</TABLE>
<PAGE>
<TABLE>

NEW YORK STATE TAX RATES

<CAPTION>
Taxable Income* Income New York Tax-Exempt Yield
------------------------------------------- Tax --------------------------------------------------------------------------
Single 2000** Joint 2000*** 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 - $ 26,250 19.54% 2.48% 3.11% 3.73% 4.35% 4.97% 5.59% 6.21% 6.83% 7.45% 8.08%
$0 - $ 43,850 19.28% 2.48% 3.10% 3.72% 4.33% 4.95% 5.57% 6.19% 6.81% 7.43% 8.05%
$ 26,251 - $ 63,550 $ 43,851 - $105,950 32.93% 2.98% 3.73% 4.47% 5.22% 5.96% 6.71% 7.45% 8.20% 8.95% 9.69%
$ 63,551 - $132,600 $105,951 - $161,450 35.73% 3.11% 3.89% 4.67% 5.45% 6.22% 7.00% 7.78% 8.56% 9.34% 10.11%
$132,601 - $288,350 $161,451 - $288,350 40.38% 3.35% 4.19% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.06% 10.90%
$288,351 & Over $288,351 & Over 43.74% 3.55% 4.44% 5.33% 6.22% 7.11% 8.00% 8.89% 9.78% 10.66% 11.55%

* 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.

NEW YORK STATE AND CITY TAX RATES
<CAPTION>

Taxable Income* Income New York City Tax-Exempt Yield
------------------------------------------- Tax --------------------------------------------------------------------------
Single 2000**** Joint 2000**** 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 - $ 26,250 22.40% 2.58% 3.22% 3.87% 4.51% 5.16% 5.80% 6.44% 7.09% 7.73% 8.38%
$0 - $ 43,850 22.13% 2.57% 3.21% 3.85% 4.49% 5.14% 5.78% 6.42% 7.06% 7.71% 8.35%
$ 26,251 - $ 63,550 35.63% 3.11% 3.89% 4.66% 5.44% 6.22% 6.99% 7.77% 8.55% 9.33% 10.10%
$ 43,851 - $105,950 35.62% 3.11% 3.89% 4.66% 5.44% 6.22% 6.99% 7.77% 8.55% 9.32% 10.10%
$ 63,551 - $132,600 $105,951 - $161,450 38.37% 3.25% 4.06% 4.67% 5.68% 6.49% 7.30% 8.11% 6.92% 9.74% 10.55%
$132,601 - $288,350 $161,451 - $288,350 42.83% 3.50% 4.37% 5.25% 6.12% 7.00% 7.87% 8.75% 9.62% 10.50% 11.37%
$288,351 & Over $288,351 & Over 46.05% 3.71% 4.63% 5.56% 6.49% 7.41% 8.34% 9.27% 10.19% 11.12% 12.05%

* 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>