CALIFORNIA DAILY TAX FREE INCOME FUND INC, 485BPOS, 1996-04-26

CALIFORNIA DAILY TAX FREE INCOME FUND INC
485BPOS, 1996-04-26

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As filed with the Securities and Exchange Commission on April 26, 1996

Registration No. 33-10436

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]

Pre-Effective Amendment No. [ ]

Post-Effective Amendment No. 14 [X]

and/or

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

Amendment No. 14 [X]

CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
(Exact Name of Registrant as Specified in Charter)

c/o Reich & Tang Asset Management L.P.
600 Fifth Avenue, New York, New York 10020
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code: (212) 830-5200

Bernadette N. Finn
c/o Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10020
(Name and Address of Agent for Service)

Copy to: MICHAEL R. ROSELLA, Esq.
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
(212) 856-6856

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

[ ] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 1996 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485

The Registrant has registered an indefinite number of securities under the
Securities Act of 1933 pursuant to Section 24(f) under the Investment Company
Act of 1940, as amended, and Rule 24f-2 thereunder, and the Registrant filed a
Rule 24f-2 Notice for its fiscal year ended December 31, 1995 on or about
February 28, 1996.

<PAGE>

CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
Registration Statement on Form N-1A

CROSS-REFERENCE SHEET -
Pursuant to Rule 404(c)

Part A Location in Prospectus
Item No. (Caption)

1. Cover Page . . . . . . . . . . Cover Page

2. Synopsis . . . . . . . . . . . Introduction; Table of Fees and Expenses

3. Condensed Financial
Information. . . . . . . . . . Selected Financial Information

4. General Description General Information; Investment
of Registrant. . . . . . . . . Objectives, Policies and Risks

5. Management of the Fund . . . . Management of the Fund; Custodian and Transfer
Agent; Distribution and Service Plan

5A. Management's Discussion
of Fund Performance . . . . . Not Applicable

6. Capital Stock and Description of Common Stock;
Other Securities . . . . . . . How to Purchase and Redeem Shares; General
Information; Dividends and Distributions;
Federal Income Taxes

7. Purchase of Securities How to Purchase and Redeem
Being Offered. . . . . . . . . Shares; Net Asset Value; Distribution and
Service Plan

8. Redemption or Repurchase . . . How to Purchase and Redeem Shares

9. Legal Proceedings. . . . . . . Not Applicable

<PAGE>

Part B Caption in Statement of
Item No. Additional Information

10. Cover Page . . . . . . . . . . Cover Page

11. Table of Contents. . . . . . . Contents

12. General Information and
History. . . . . . . . . . . . Not Applicable

13. Investment Objectives,
Policies and Risks . . . . . . Investment Objectives, Policies and Risks

14. Management of the Fund . . . . Manager and Management of the Fund

15. Control Persons and Principal Management of the Fund
Holders of Securities. . . . . Description of Common Stock

16. Investment Advisory Manager; Management of the Fund;
and Other Services . . . . . . Distribution and Service Plan; Custodian
and Transfer Agent; Expense Limitation

17. Brokerage Allocation . . . . . Investment Objectives, Policies and Risks

18. Capital Stock and
Other Securities . . . . . . . Description of Common Stock

19. Purchase, Redemption and Pricing How to Purchase and Redeem Shares;
of Securities Being Offered . . Net Asset Value

20. Tax Status . . . . . . . . . . Federal Income Taxes;
California Income Taxes

21. Underwriters . . . . . . . . . Not Applicable

22. Calculations of Yield Quotations
of Money Market Funds. . . . . Yield Quotations

23. Financial Statements . . . . . Independent Auditors' Report (audited);
Statement of Net Assets (audited), dated
December 31, 1995; Statement of
Operations (audited), dated December 31,
1995; Statement of Changes in Net Assets
(audited), for fiscal years ended
December 31, 1994 and 1995; Notes to
Financial Statements (audited).

<PAGE>

- --------------------------------------------------------------------------------
California Daily Tax Free Income Fund, Inc.
Connecticut Daily Tax Free Income Fund, Inc.
Daily Tax Free Income Fund, Inc.
Florida Daily Municipal Income Fund
Institutional Daily Income Fund
Michigan Daily Tax Fee Income Fund, Inc.
New Jersey Daily Municipal Income Fund, Inc.
New York Daily Tax Free Income Fund, Inc.
North Carolina Daily Municipal Income Fund, Inc.
Pennsylvania Daily Municipal Income Fund
Short Term Income Fund, Inc.

(collectively the "Funds" and individually the "Fund")

600 Fifth Avenue, New York, NY 10020
(212) 830-5200
================================================================================

SUPPLEMENT DATED OCTOBER 12, 1995

Reich & Tang Asset Management L.P., the Fund's investment advisor, is a
wholly-owned subsidiary of New England Investment Companies, L.P. ("NEIC"). New
England Mutual Life Insurance Company ("The New England") owns NEIC's sole
general partner and a majority of the limited partnership interest in NEIC. The
New England and Metropolitan Life Insurance Company ("MetLife") have entered
into an agreement to merge, with MetLife to be the survivor of the merger. The
merger is conditioned upon, among other things, approval by the policyholders of
The New England and MetLife and receipt of certain regulatory approvals. The
merger is not expected to occur until after December 31, 1995.

The merger of The New England into MetLife will constitute an "assignment" of
the existing investment advisory agreement relating to the Fund. Under the
Investment Company Act of 1940, such an "assignment" will result in the
automatic termination of the investment advisory agreement, effective at the
time of the merger. Prior to the merger, shareholders of the Fund will be asked
to approve a new investment advisory agreement, intended to take effect at the
time of the merger. The new agreement will be substantially similar to the
existing agreement. A proxy statement describing the new agreement will be sent
to shareholders of the Fund prior to their being asked to vote on the new
agreement.

<PAGE>

- --------------------------------------------------------------------------------
CALIFORNIA 600 FIFTH AVENUE
DAILY TAX FREE NEW YORK, NY 10020
INCOME FUND, INC. (212) 830-5220
================================================================================

PROSPECTUS

May 1, 1996

California Daily Tax Free Income Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company that is a short-term, tax-exempt, money
market fund whose investment objectives are to seek as high a level of current
income exempt from Federal income taxes and to the extent possible from
California income taxes, as is believed to be consistent with preservation of
capital, maintenance of liquidity and stability of principal. No assurance can
be given that those objectives will be achieved.

This Prospectus sets forth concisely the information about the Fund that
prospective investors will find helpful in making their investment decisions. A
Statement of Additional information about the Fund has been filed with the
Securities and Exchange Commission and is available upon request and without
charge by calling or writing the Fund at the above address. The "Statement of
Additional Information" bears the same date as this Prospectus and is
incorporated by reference into this Prospectus in its entirety.

Reich & Tang Asset Management L.P. acts as manager of the Fund and Reich & Tang
Distributors L.P. acts as distributor of the Fund's shares. Reich & Tang Asset
Management L.P. is a registered investment advisor. Reich & Tang Distributors
L.P. is a registered broker-dealer and member of the National Association of
Securities Dealers, Inc.

An investment in the Fund is neither insured nor guaranteed by the U.S.
Government. The Fund intends to maintain a stable net asset value of $1.00 per
share although there can be no assurance that this value will be maintained.

Shares in the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and the shares are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency.

THIS PROSPECTUS SHOULD BE READ AND RETAINED BY INVESTORS FOR FUTURE REFERENCE.
________________________________________________________________________________

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

<PAGE>

<TABLE>
<CAPTION>
TABLE OF FEES AND EXPENSES

Annual Fund Operating Expenses
(as a percentage of average net assets)

<S> <C> <C>
Management Fees 0.30%
12b-1 Fees (After Fee Waiver) 0.00%
Other Expenses 0.37%
Administration Fees (After Fee Waiver) 0.18% ______
Total Fund Operating Expenses 0.67%

<S> <C> <C> <C> <C>
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------

You would pay the following on
a $1,000 investment, assuming 5%
annual return (cumulative
through the end of each year): $7 $21 $37 $

</TABLE>
The purpose of the above fee table is to assist an investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a further discussion of these fees see "Management of the Fund"
and "Distribution and Service Plan" herein. The Manager has voluntarily waived a
portion of the Administration Fee. The Distributor has also voluntarily waived a
portion of the 12b-1 Fees. Absent the fee waivers, the Management Fee would have
been .30%, the Administration Fee would have been .20% and the 12b-1 Fees would
have been .20%. The Total Fund Operating Expenses would have been .89%, absent
the respective fee waivers.

THE FIGURES REFLECTED IN THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE
SHOWN ABOVE.

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

<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION

The following selected financial information of California Daily Tax Free Income
Fund, Inc. has been audited by McGladrey & Pullen, LLP, Independent Certified
Public Accountants, whose report thereon appears in the Statement of Additional
Information.

February 10, 1987
Year Ended December 31, (Inception) to
1995 1994 1993 1992 1991 1990 1989 1988 December 31, 1987
---- ---- ---- ---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
(for a share outstanding throughout the period)

Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
------ ------ ------ ------ ------ ------ ------ ----- -------
Net investment income............... 0.032 0.024 0.021 0.023 0.038 0.051 0.056 0.046 0.037
Dividends from net investment income (0.032) (0.024) (0.021) (0.023) (0.038) (0.051) (0.056) (0.046) (0.037)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period...... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return........................ 3.28% 2.45% 2.16% 2.35% 3.83% 5.18% 5.73% 4.70% 4.23%*
Ratios/Supplemental Data
Net assets, end of period (000)..... $171,808 $105,120 $117,260 $90,795 $83,525 $99,688 $98,923 $79,346 $64,094
Ratios to average net assets:
Expenses........................ 0.67%+ 0.56%+ 0.35%+ 0.68%+ 0.74%+ 0.62%+ 0.62%+ 0.62%+ 0.53%*+
Net investment income........... 3.24%+ 2.40%+ 2.14%+ 2.34%+ 3.77%+ 5.05%+ 5.60%+ 4.59%+ 4.17%*+

* Annualized.
+ Net of management, administration and shareholder servicing fees waived
equivalent to .22%, .28%, .54%, .29%, .23%, .28%, .29%, .28% and .48% of
average net assets.

</TABLE>

2
<PAGE>

INTRODUCTION

California Daily Tax Free Income Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company that is a short-term, tax-exempt money
market fund whose investment objectives are to seek as high a level of current
income exempt under current law, in the opinion of bond counsel to the issuer at
the date of issuance, from Federal income tax, and, to the extent possible, from
California income taxes, and as is believed to be consistent with preservation
of capital, maintenance of liquidity and stability of principal by investing
principally in short-term, high quality debt obligations of the State of
California, Puerto Rico and other U.S. territories, and their political
subdivisions as described under "Investment Objectives, Policies and Risks"
herein. The Fund also may invest in municipal securities of issuers located in
states other than California, the interest income on which will be, in the
opinion of bond counsel to the issuer at the date of issuance, exempt from
Federal income tax, but will be subject to California income taxes for
California residents. The Fund seeks to maintain an investment portfolio with a
dollar-weighted average maturity of 90 days or less, and to value its investment
portfolio at amortized cost and maintain a net asset value of $1.00 per share,
although there can be no assurance that this value will be maintained. The Fund
intends to invest all of its assets in tax-exempt obligations; however, it
reserves the right to invest up to 20% of the value of its total assets in
taxable obligations. This is a summary of the Fund's fundamental investment
policies which are set forth in full under "Investment Objectives, Policies and
Risks" herein and in the Statement of Additional Information and may not be
changed without approval of a majority of the Fund's outstanding shares. Of
course, no assurance can be given that these objectives will be achieved.

The Fund's investment advisor is Reich & Tang Asset Management L.P. (the
"Manager"), which is a registered investment advisor and which currently acts as
manager or administrator to fifteen other open-end management investment
companies. The Fund's shares are distributed through Reich & Tang Distributors
L.P. (the "Distributor"), with whom the Fund has entered into a Distribution
Agreement and a Shareholder Servicing Agreement pursuant to the Fund's
distribution and service plan adopted under Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "1940 Act"). (See "Distribution and Service
Plan" herein.)

On any day on which the New York Stock Exchange, Inc. is open for trading ("Fund
Business Day"), investors may, without charge by the Fund, purchase and redeem
shares of the Fund's common stock at their net asset value next determined after
receipt of the order. An investor's purchase order will be accepted after the
payment is converted into Federal Funds, and shares will be issued as of the
Fund's next net asset value determination which is made as of 12 noon on each
Fund Business Day. (See "How to Purchase and Redeem Shares" and "Net Asset
Value" herein.) Dividends from accumulated net income are declared by the Fund
on each Fund Business Day. The Fund generally pays interest dividends monthly.
Net capital gains, if any, will be distributed at least annually, and in no
event later than within 60 days after the end of the Fund's fiscal year. All
dividends and distributions of capital gains are automatically invested in
additional shares of the Fund unless a shareholder has elected by written notice
to the Fund to receive either of such distributions in cash. (See "Dividends and
Distributions" herein.)

The Fund intends that its investment portfolio may be concentrated in California
Municipal Obligations as defined herein and bank participation certificates
therein. A summary of special risk factors affecting the State of California is
set forth under "California Risk Factors" in the Statement of Additional
Information. Investment in the Portfolio should be made with an understanding of
the risks which an investment in California Municipal Obligations may entail.
Payment of interest and preservation of capital are 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 should consider

3
<PAGE>

the greater risk of the Portfolio's concentration versus the safety that comes
with a less concentrated investment portfolio.

The Fund's Board of Directors is authorized to divide the unissued shares into
separate series of stock, one for each of the Fund's separate investment
portfolios that may be created in the future.

INVESTMENT OBJECTIVES, POLICIES AND RISKS

The Fund is a non-diversified, open-end management investment company that is a
short-term, tax-exempt money market fund whose investment objectives are to seek
as high a level of current income exempt from Federal income tax and, to the
extent possible, from California income taxes, as is believed to be consistent
with the preservation of capital, maintenance of liquidity and stability of
principal. There can be no assurance that the Fund will achieve its investment
objectives.

The Fund's assets will be invested primarily in high quality debt obligations
issued by or on behalf of the State of California, other states, territories and
possessions of the United States, and their authorities, agencies,
instrumentalities and political subdivisions, the interest on which is, in the
opinion of bond counsel at the date of issuance, currently exempt from Federal
income taxation ("Municipal Obligations") and in participation certificates
(which, in the opinion of Battle Fowler LLP, counsel to the Fund, cause the Fund
to be treated as the owner of the underlying Municipal Obligations) in Municipal
Obligations purchased from banks, insurance companies or other financial
institutions. Dividends paid by the Fund which are "exempt-interest dividends"
by virtue of being properly designated by the Fund as derived from Municipal
Obligations and participation certificates in Municipal Obligations will be
exempt from Federal income tax provided the Fund complies with Section 852(b)(5)
of the Internal Revenue Code of 1986, as amended (the "Code").

Although the Supreme Court has determined that Congress has the authority to
subject the interest on bonds such as the Municipal Obligations to regular
Federal income taxation, existing law excludes such interest from regular
Federal income tax. However, "exempt-interest dividends" may be subject to the
Federal alternative minimum tax. Securities, the interest income on which may be
subject to the Federal alternative minimum tax (including participation
certificates in such securities), together with securities, the interest income
on which is subject to regular Federal, state and local income tax, will not
exceed 20% of the value of the Fund's total assets. (See "Federal Income Taxes"
herein.) Exempt-interest dividends paid by the Fund correctly identified by the
Fund as derived from obligations issued by or on behalf of the State of
California or any California local governments, or their instrumentalities,
authorities or districts, and on obligations of the United States which pay
interest excludable from income under the Constitution or laws of the United
States ("California Municipal Obligations") will be exempt from the California
Income Tax. Exempt-interest dividends correctly identified by the Fund as
derived from obligations of Puerto Rico and the Virgin Islands, as well as any
other types of obligations the interest on which is exempt from California
taxation ("Territorial Municipal Obligations") also may be exempt from the
California Income Tax provided the Fund complies with California law. (See
"California Income Taxes" herein.) To the extent suitable California Municipal
Obligations are not available for investment by the Fund, the Fund may purchase
Municipal Obligations issued by other states, their agencies and
instrumentalities, the dividends on which will be designated by the Fund as
derived from interest income which will be, in the opinion of bond counsel to
the issuer at the date of issuance, exempt from Federal income tax but will be
subject to the California Income Tax. However, except as a temporary defensive
measure during periods of adverse market conditions as determined by the
Manager, the Fund will invest at least 65% of its total assets in California
Municipal Obligations, although the exact amount of the Fund's assets invested
in such securities will vary from time to time. The Fund's investments may
include "when-issued" Municipal Obligations, stand-by

4
<PAGE>

commitments and taxable repurchase agreements. Although the Fund will attempt to
invest 100% of its assets in Municipal Obligations (excluding securities, the
interest income on which may be subject to the Federal alternative minimum tax)
and in participation certificates in Municipal Obligations, the Fund reserves
the right to invest up to 20% of the value of its total assets in securities,
the interest income on which is subject to Federal, state and local income tax,
including securities, the interest income on which may be subject to the Federal
alternative minimum tax. The Fund will invest more than 25% of its assets in
participation certificates purchased from banks in industrial revenue bonds and
other California Municipal Obligations. The investment objectives of the Fund
described in this paragraph may not be changed unless approved by the holders of
a majority of the outstanding shares of the Fund that would be affected by such
a change. As used in this Prospectus, the term "majority of the outstanding
shares" of the Fund means, respectively, the vote of the lesser of (i) 67% or
more of the shares of the Fund present at a meeting, if the holders of more than
50% of the outstanding shares of the Fund are present or represented by proxy or
(ii) more than 50% of the outstanding shares of the Fund.

The Fund may only purchase Municipal Obligations that have been determined by
the Fund's Board of Directors to present minimal credit risks and that are
Eligible Securities at the time of acquisition. The term Eligible Securities
means (i) Municipal Obligations with remaining maturities of 397 days or less
and rated in the two highest short-term rating categories by any two nationally
recognized statistical rating organizations ("NRSROs") or in such categories by
the only NRSRO that has rated the Municipal Obligations (collectively, the
"Requisite NRSROs") (acquisition in the latter situation must also be ratified
by the Board of Directors); (ii) Municipal Obligations with remaining maturities
of 397 days or less but that at the time of issuance were long-term securities
(i.e., with maturities greater than 366 days) and whose issuer has received from
the Requisite NRSROs a rating with respect to comparable short-term debt in the
two highest short-term rating categories and (iii) unrated Municipal Obligations
determined by the Fund's Board of Directors to be of comparable quality. Where
the issuer of a long-term security with a remaining maturity which would
otherwise qualify it as an Eligible Security, does not have rated short-term
debt outstanding, the long-term security is treated as unrated but may not be
purchased if it has a long-term rating from any NRSRO that is below the two
highest long-term categories. A determination of comparability by the Board of
Directors is made on the basis of its credit evaluation of the issuer, which may
include an evaluation of a letter of credit, guarantee, insurance or other
credit facility issued in support of the Municipal Obligations or participation
certificates. See "Variable Rate Demand Instruments and Participation
Certificates" in the Statement of Additional Information. While there are
several organizations that currently qualify as NRSROs, two examples of NRSROs
are Standard & Poor's Corporation ("S&P") and Moody's Investors Service, Inc.
("Moody's"). The two highest ratings by S&P and Moody's are "AAA" and "AA" by
S&P in the case of long-term bonds and notes or "Aaa" and "Aa" by Moody's in the
case of bonds; "SP-1" and "SP-2" by S&P or "MIG-1" and "MIG-2" by Moody's in the
case of notes; "A-1" and "A-2" by S&P or "Prime-1" and "Prime-2" by Moody's in
the case of tax-exempt commercial paper. The highest rating in the case of
variable and floating demand notes is "VMIG-1" by Moody's and "SP-1/AA" by S&P.
Such instruments may produce a lower yield than would be available from less
highly rated instruments. The Fund's Board of Directors has determined that
Municipal Obligations which are backed by the credit of the Federal government
(the interest on which is not exempt from Federal income taxation) will be
considered to have a rating equivalent to Moody's "Aaa".

Subsequent to its purchase by the Fund, the quality of an investment may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall reassess
promptly whether the security presents minimal credit risks

5
<PAGE>

and shall cause the Fund to take such action as the Board of Directors
determines is in the best interest of the Fund and its shareholders. However,
reassessment is not required if the security is disposed of or matures within
five business days of the Manager becoming aware of the new rating and provided
further that the Board of Directors is subsequently notified of the Manager's
actions.

In addition, in the event that a security (1) is in default, (2) ceases to be an
eligible investment under Rule 2a-7 or (3) is determined to no longer present
minimal credit risks, the Fund will dispose of the security absent a
determination by the Fund's Board of Directors that disposal of the security
would not be in the best interests of the Fund. In the event that the security
is disposed of, it shall be disposed of as soon as practicable, consistent with
achieving an orderly disposition by sale, exercise of any demand feature or
otherwise. In the event of a default with respect to a security which
immediately before default accounted for 1/2 of 1% or more of the Fund's total
assets, the Fund shall promptly notify the Securities and Exchange Commission of
such fact and of the actions that the Fund intends to take in response to the
situation.

All investments by the Fund will mature or will be deemed to mature in 397 days
or less from the date of acquisition and the average maturity of the Fund
portfolio (on a dollar-weighted basis) will be 90 days or less. The maturities
of variable rate demand instruments held in the Fund's portfolio will be deemed
to be the longer of the period required before the Fund is entitled to receive
payment of the principal amount of the instrument through demand, or the period
remaining until the next interest rate adjustment, although the stated
maturities may be in excess of 397 days.

In view of the "concentration" of the Fund in bank participation certificates in
California Municipal Obligations, which may be secured by bank letters of credit
or guarantees, an investment in the Fund should be made with an understanding of
the characteristics of the banking industry and the risks which such an
investment may entail which include extensive governmental regulation, changes
in the availability and cost of capital funds, and general economic conditions.
See "Variable Rate Demand Instruments and Participation Certificates" in the
Statement of Additional Information. Banks are subject to extensive governmental
regulations which may limit both the amounts and types of loans and other
financial commitments which may be made and interest rates and fees which may be
charged. The profitability of this industry is largely dependent upon the
availability and cost of capital funds for the purpose of financing lending
operations under prevailing money market conditions. Also, general economic
conditions play an important part in the operations of this industry and
exposure to credit losses arising from possible financial difficulties of
borrowers might affect a bank's ability to meet its obligations under a letter
of credit. The Fund may invest 25% or more of the net assets of any portfolio in
securities that are related in such a way that an economic, business or
political development or change affecting one of the securities would also
affect the other securities including, for example, securities the interest upon
which is paid from revenues of similar type projects, or securities the issuers
of which are located in the same state.

The Fund has adopted the following fundamental investment restrictions which
apply to all portfolios and which may not be changed unless approved by a
majority of the outstanding shares of each series of the Fund's shares that
would be affected by such a change. The Fund is subject to further investment
restrictions that are set forth in the Statement of Additional Information. The
Fund may not:

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

6
<PAGE>

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

3. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"), except the Fund may
purchase variable rate demand instruments which contain a demand feature.
The Fund will not invest in a repurchase agreement maturing in more than
seven days if any such investment together with securities that are not
readily marketable held by the Fund exceed 10% of the Fund's net assets.

4. Invest more than 25% of its assets in the securities of "issuers" in any
single industry, provided that the Fund may invest more than 25% of its
assets in bank participation certificates and there shall be no limitation
on the purchase of those Municipal Obligations and other obligations issued
or guaranteed by the United States government, its agencies or
instrumentalities. With respect to 75% of the total amortized cost value of
the Fund's assets, not more than 5% of the Fund's assets may be invested in
securities that are subject to underlying puts from the same institution,
and no single bank shall issue its letter of credit and no single financial
institution shall issue a credit enhancement covering more than 5% of the
total assets of the Fund. However, if the puts are exercisable by the Fund
in the event of default on payment of principal and interest on the
underlying security, then the Fund may invest up to 10% of its assets in
securities underlying puts issued or guaranteed by the same institution;
additionally, a single bank can issue its letter of credit or a single
financial institution can issue a credit enhancement covering up to 10% of
the Fund's assets, where the puts offer the Fund such default protection.

5. Invest in securities of other investment companies, except the Fund may
purchase unit investment trust securities where such unit trusts meet the
investment objectives of the Fund and then only up to 5% of the Fund's net
assets, except as they may be acquired as part of a merger, consolidation
or acquisition of assets.

As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the 1940 Act with respect to investing its assets in
one or relatively few issuers. This non-diversification may present greater
risks than in the case of a diversified company. For a discussion of these
risks, see "Investment Objectives, Policies and Risks" herein and Statement of
Additional Information. However, the Fund intends to qualify as a "regulated
investment company" under Subchapter M of the Code. The Fund will be restricted
in that at the close of each quarter of the taxable year, at least 50% of the
value of its total assets must be represented by cash, government securities,
investment company securities and other securities limited in respect of any one
issuer to not more than 5% in value of the total assets of the Fund and to not
more than 10% of the outstanding voting securities of such issuer. In addition,
at the close of each quarter of its taxable year, not more than 25% in value of
the Fund's total assets may be invested in securities of one issuer other than
government securities. The limitations described in this paragraph regarding
qualification as a "regulated investment company" are not fundamental policies
and may be revised to the extent applicable Federal income tax requirements are
revised. (See "Federal Income Taxes" herein.)

The primary purpose of investing in a portfolio of California Municipal
Obligations is the special tax treatment accorded California resident individual
investors. Certain of the California Municipal Obligations rely in whole or in
part, directly or indirectly, on ad valorum property taxes as a source of
revenue which are and may become subject to constitutional and/or legislative
restrictions. Investment in the Fund should be made with an understanding of the
risks which an investment in California Municipal Obligations may entail.
However, payment of interest and preservation of principal are dependent upon
the continuing ability

7
<PAGE>

of the California issuers and/or obligors of state, municipal and public
authority debt obligations to meet their obligations thereunder. Investors
should consider the greater risk of the Fund's concentration versus the safety
that comes with a less concentrated investment portfolio and should compare
yields available on portfolios of California issues with those of more
diversified portfolios including out-of-state issues before making an investment
decision. The Fund's management believes that by maintaining the Fund's
investment portfolio in liquid, short-term, high quality investments, including
the participation certificates and other variable rate demand instruments that
have high quality credit support from banks, insurance companies or other
financial institutions, the Fund is largely insulated from the credit risks that
may exist on long-term California Municipal Obligations. For additional
information, please refer to the Statement of Additional Information.

MANAGEMENT OF THE FUND

The Fund's Board of Directors, which is responsible for the overall management
and supervision of the Fund, has employed the Manager to serve as investment
manager of the Fund. The Manager provides persons satisfactory to the Fund's
Board of Directors to serve as officers of the Fund. Such officers, as well as
certain other employees and directors of the Fund, may be directors or officers
of Reich & Tang Asset Management, Inc., the sole general partner of the Manager,
or employees of the Manager or its affiliates. Due to the services performed by
the Manager, the Fund currently has no employees and its officers are not
required to devote full-time to the affairs of the Fund. The Statement of
Additional Information contains general background information regarding each
director and principal officer of the Fund.

The Manager is a Delaware limited partnership with its principal office at 600
Fifth Avenue, New York New York 10020. The Manager was at March 31, 1996
investment manager, advisor or supervisor with respect to assets aggregating in
excess of $9.7 billion. The Manager acts as manager or administrator of fifteen
other registered investment companies and also advises pension trusts,
profit-sharing trusts and endowments.

New England Investment Companies, L.P. ("NEICLP") is the limited partner and
owner of a 99.5% interest in the limited partnership, Reich & Tang Asset
Management L.P., the Manager. Reich & Tang Asset Management, Inc. (a
wholly-owned subsidiary of NEICLP) is the general partner and owner of the
remaining .5% interest of the Manager. Reich & Tang Asset Management L.P. has
succeeded NEICLP as the Manager of the Fund.

New England Investment Companies, Inc. ("NEIC"), a Massachusetts corporation,
serves as the sole general partner of NEICLP. The New England Mutual Life
Insurance Company ("The New England") owns approximately 68.1% of the total
partnership units outstanding of NEICLP, and Reich & Tang, Inc., owns
approximately 22.8% of the outstanding partnership units of NEICLP.

In addition, NEIC is a wholly-owned subsidiary of The New England which may be
deemed a "controlling person" of the Manager. NEIC is a holding company offering
a broad array of investment styles across a wide range of asset categories
through ten investment advisory/ management affiliates and two distribution
subsidiaries. In addition to the Manager, these include Loomis, Sayles &
Company, L.P., Copley Real Estate Advisors, Inc., Back Bay Advisors, L.P.,
Marlborough Capital Advisors, L.P., Westpeak Investment Advisors, L.P., Draycott
Partners, Ltd., TNE Investment Services, L.P., New England Investment
Associates, Inc., Harris Associates, and an affiliate, Capital Growth Management
Limited Partnership. These affiliates in the aggregate are investment advisors
or managers to 42 other registered investment companies.

Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Directors of
the Fund.

8
<PAGE>

Pursuant to the Administrative Services Contract for the Fund, the Manager
performs clerical, accounting supervision and office service functions for the
Fund and provides the Fund with personnel to (i) supervise the performance of
bookkeeping and related services by Investors Fiduciary Trust Company, the
Fund's bookkeeping agent, (ii) prepare reports to and filings with regulatory
authorities and (iii) perform such other services as the Fund may from time to
time request of the Manager. The personnel rendering such services may be
employees of the Manager or its affiliates. The Manager, at its discretion, may
voluntarily waive all or a portion of the administrative services fee. For its
services under the Administrative Services Contract, the Manager receives a fee
equal to .21% per annum of the Fund's average daily net assets. Any portion of
the total fees received by the Manager may be used to provide shareholder
services and for distribution of Fund shares. (See "Distribution and Service
Plan" herein.)

DESCRIPTION OF COMMON STOCK

The Fund was incorporated in Maryland on December 5, 1986. The authorized
capital stock of the Fund consists of twenty billion shares of stock having a
par value of one tenth of one cent ($.001) per share. The Fund's Board of
Directors is authorized to divide the unissued shares into separate series of
stock, each series representing a separate, additional investment portfolio.
Shares of all series will have identical voting rights, except where, by law,
certain matters must be approved by a majority of the shares of the affected
series. Each share of any series of shares when issued has equal dividend,
distribution, liquidation and voting rights within the series for which it was
issued, and each fractional share has those rights in proportion to the
percentage that the fractional share represents of a whole share. Shares will be
voted in the aggregate. There are no conversion or preemptive rights in
connection with any shares of the Fund. All shares, when issued in accordance
with the terms of the offering, will be fully paid and nonassessable. Shares are
redeemable at net asset value, at the option of the shareholder. As of March 31,
1996 the amount of shares owned by all officers and directors of the Fund, as a
group, was less than 1% of the outstanding shares of the Fund.

Under its Articles of Incorporation, the Fund has the right to redeem for cash
shares of stock owned by any shareholder to the extent and at such times as the
Fund's Board of Directors determines to be necessary or appropriate to prevent
an undue concentration of stock ownership which would cause the Fund to become a
"personal holding company" for Federal income tax purposes. In this regard, the
Fund may also exercise its right to reject purchase orders.

The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
directors can elect 100% of the directors if the holders choose to do so, and,
in that event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Directors.

DIVIDENDS AND DISTRIBUTIONS

The Fund declares dividends equal to all its net investment income (excluding
capital gains and losses, if any, and amortization of market discount) on each
Fund Business Day and generally pays dividends monthly. There is no fixed
dividend rate. In computing these dividends, interest earned and expenses are
accrued daily.

Net realized capital gains, if any, are distributed at least annually and in no
event later than within 60 days after the end of the Fund's fiscal year.

9
<PAGE>

All dividends and distributions of capital gains are automatically invested in
additional Fund shares immediately upon payment thereof unless a shareholder has
elected by written notice to the Fund to receive either of such distributions in
cash.

HOW TO PURCHASE AND REDEEM SHARES

Investors who have accounts with Participating Organizations may invest in the
Fund through their Participating Organizations in accordance with the procedures
established by the Participating Organizations. (See "Investments Through
Participating Organizations" herein.) All other investors, and investors who
have accounts with Participating Organizations but who do not wish to invest in
the Fund through their Participating Organizations, may invest in the Fund
directly. (See "Direct Purchase and Redemption Procedures" herein.) The minimum
initial investment in the Fund by Participating Organizations is $1,000, which
may be satisfied by initial investments aggregating $1,000 by a Participating
Organization on behalf of customers whose initial investments are less than
$1,000. The minimum initial investment for securities brokers, financial
institutions and other industry professionals that are not Participating
Organizations is $1,000. The minimum initial investment for all other investors
is $5,000. Initial investments may be made in any amount in excess of the
applicable minimums. The minimum amount for subsequent investments is $100
unless the investor is a client of a Participating Organization whose clients
have made aggregate subsequent investments of $100.

The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a charge for either sales or redemptions. All
transactions in Fund shares are effected through the Fund's transfer agent,
which accepts orders for purchases and redemptions from Participating
Organizations and from investors directly.

In order to maximize earnings on its portfolio, the Fund normally has its assets
as fully invested as is practicable. Many securities in which the Fund invests
require immediate settlement in funds of Federal Reserve member banks on deposit
at a Federal Reserve Bank (commonly known as "Federal Funds"). Accordingly, the
Fund does not accept a subscription or invest an investor's payment in portfolio
securities until the payment has been converted into Federal Funds.

Shares will be issued as of the first determination of the Fund's net asset
value per share made after acceptance of the investor's purchase order at the
net asset value per share next determined after receipt of the purchase order.
Shares begin accruing income dividends on the day they are purchased. The Fund
reserves the right to reject any subscription for its shares.

Shares are issued as of 12 noon, New York City time, on any Fund Business Day as
defined herein on which an order for the shares and accompanying Federal Funds
are received by the Fund's transfer agent before 12 noon. Orders accompanied by
Federal Funds and received after 12 noon, New York City time, on a Fund Business
Day will not result in share issuance until the following Fund Business Day.
Fund shares begin accruing income on the day the shares are issued to an
investor.

There is no redemption charge, no minimum period of investment, no minimum
amount for a redemption and no restriction on frequency of withdrawals. Proceeds
of redemptions are paid by check. Unless other instructions are given in proper
form to the Fund's transfer agent, a check for the proceeds of a redemption will
be sent to the shareholder's address of record. If a shareholder elects to
redeem all the shares of the Fund he owns, all dividends accrued to the date of
such redemption will be paid to the shareholder along with the proceeds of the
redemption.

The right of redemption may not be suspended or the date of payment upon
redemption postponed for more than seven days after the shares are tendered for
redemption, except for any period during which the New York Stock Exchange, Inc.
is closed (other than customary weekend and holiday closings) or during which
the Securities and Exchange Commission determines that trading

10
<PAGE>

thereon is restricted, or for any period during which an emergency (as
determined by the Securities and Exchange Commission) exists as a result of
which disposal by the Fund of its portfolio securities is not reasonably
practicable or as a result of which it is not reasonably practicable for the
Fund fairly to determine the value of its net assets, or for such other period
as the Securities and Exchange Commission may by order permit for the protection
of the shareholders of the Fund.

Redemption requests received by the Fund's transfer agent before 12 noon, New
York City time, on any Fund Business Day become effective at 12 noon that day.
Shares are not entitled to participate in dividends declared on the day a
redemption becomes effective. A redemption request received after 12 noon, New
York City time, on any Fund Business Day becomes effective on the next Fund
Business Day.

The Fund has reserved the right to redeem the shares of any shareholder if the
net asset value of all the remaining shares in the shareholder's or his
Participating Organization's account after a withdrawal is less than $500.
Written notice of a proposed mandatory redemption will be given at least 30 days
in advance to any shareholder whose account is to be redeemed or the Fund may
impose a monthly service charge of $10 on such accounts. For Participant
Investor accounts, notice of a proposed mandatory redemption will be given only
to the appropriate Participating Organization, and the Participating
Organization will be responsible for notifying the Participant Investor of the
proposed mandatory redemption. During the notice period a shareholder or
Participating Organization who receives such a notice may avoid mandatory
redemption by purchasing sufficient additional shares to increase the total net
asset value to the minimum amount and thereby avoid such mandatory redemption.

The redemption of shares may result in the investor's receipt of more or less
than he paid for his shares and, thus, is a taxable gain or loss to the
investor.

Investments Through Participating Organizations

Participant Investors may, if they wish, invest in the Fund through the
Participating Organizations with which they have accounts. "Participating
Organizations" are securities brokers, banks and financial institutions or other
industry professionals or organizations which have entered into shareholder
servicing agreements with the Manager with respect to investment of their
customer accounts in the Fund. When instructed by its customer to purchase or
redeem Fund shares, the Participating Organization, on behalf of the customer,
transmits to the Fund's transfer agent a purchase or redemption order, and in
the case of a purchase order, payment for the shares being purchased.

Participating Organizations may confirm to their customers who are shareholders
in the Fund each purchase and redemption of Fund shares for the customers'
accounts. Also, Participating Organizations may send their customers periodic
account statements showing the total number of Fund shares owned by each
customer as of the statement closing date, purchases and redemptions of Fund
shares by each customer during the period covered by the statement and the
income earned by Fund shares of each customer during the statement period
(including dividends paid in cash or reinvested in additional Fund shares).
Participant Investors whose Participating Organizations have not undertaken to
provide such confirmations and statements will receive them from the Fund
directly.

Participating Organizations may charge Participant Investors a fee in connection
with their use of specialized purchase and redemption procedures offered to
Participant Investors by the Participating Organizations. In addition,
Participating Organizations offering purchase and redemption procedures similar
to those offered to shareholders who invest in the Fund directly may impose
charges, limitations, minimums and restrictions in addition to or different from
those applicable to shareholders who invest

11
<PAGE>

in the Fund directly. Accordingly, the net yield to investors who invest through
Participating Organizations may be less than by investing in the Fund directly.
A Participant Investor should read this Prospectus in conjunction with the
materials provided by the Participating Organization describing the procedures
under which Fund shares may be purchased and redeemed through the Participating
Organization.

The Glass-Steagall Act limits the ability of a depository institution to become
an underwriter or distributor of securities. However, it is the Fund
management's position that banks are not prohibited from acting in other
capacities for investment companies, such as providing administrative and
shareholder account maintenance services and receiving compensation from the
Manager for providing such services. However, this is an unsettled area of the
law and if a determination contrary to the Fund management's position is made by
a bank regulatory agency or court concerning shareholder servicing and
administration payments to banks from the Manager, any such payments will be
terminated and any shares registered in the banks' names, for their underlying
customers, will be re-registered in the name of the customers at no cost to the
Fund or its shareholders. In addition, state securities laws on this issue may
differ from the interpretations of Federal law expressed herein and banks and
financial institutions may be required to register as dealers pursuant to state
law.

In the case of qualified Participating Organizations, orders received by the
Fund's transfer agent before 12 noon, New York City time, on a Fund Business
Day, without accompanying Federal Funds will result in the issuance of shares on
that day provided that the Federal Funds required in connection with the orders
are received by the Fund's transfer agent before 4:00 p.m., New York City time,
on that day. Orders for which Federal Funds are received after 4:00 p.m., New
York City time, will not result in share issuance until the following Fund
Business Day. Participating Organizations are responsible for instituting
procedures to insure that purchase orders by their respective clients are
processed expeditiously.

Direct Purchase and Redemption Procedures

The following purchase and redemption procedures apply to investors who wish to
invest in the Fund directly and not through Participating Organizations. These
investors may obtain a current Prospectus and the subscription order form
necessary to open an account by telephoning the Fund at the following numbers:

Within New York State 212-830-5220
Outside New York State (toll free) 800-221-3079

All shareholders, other than certain Participant Investors, will receive from
the Fund individual confirmations of each purchase and redemption of Fund shares
(other than draft check redemptions) and a monthly statement listing the total
number of Fund shares owned as of the statement closing date, purchase and
redemptions of Fund shares during the month covered by the statement and the
dividends paid on Fund shares of each shareholder during the statement period
(including dividends paid in cash or reinvested in additional Fund shares).
Certificates for Fund shares will not be issued to an investor.

Initial Purchases of Shares

Mail

Investors may send a check made payable to "California Daily Tax Free Income
Fund, Inc." along with a completed subscription order form to:

California Daily Tax Free Income Fund, Inc.
Reich & Tang Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020

Checks are accepted subject to collection at full value in United States
currency. Payment by a check drawn on any member of the Federal Reserve System
can normally be converted into Federal Funds within two business days after
receipt of the check. Checks drawn on a non-member bank may take substantially
longer to convert into Federal Funds. An investor's subscription will not be
accepted until the Fund receives Federal Funds.

12
<PAGE>

Bank Wire

To purchase shares of the Fund using the wire system for transmittal of money
among banks, an investor should first obtain a new account number by telephoning
the Fund at 212-830-5220 (within New York State) or at 800-221-3079 (outside New
York State) and then instruct a member commercial bank to wire money immediately
to:

Investors Fiduciary Trust Company
ABA #101003621
DDA #890752-953-8
For California Daily Tax Free Income Fund, Inc.
Account of (Investor's Name)___________________
Fund Account # 0531____________________________
SS #/Tax I.D. #________________________________

The investor should then promptly complete and mail the subscription order form.

Investors planning to wire funds should instruct their bank early in the day so
the wire transfer can be accomplished before 12 noon, New York City time, on the
same day. There may be a charge by the investor's bank for transmitting the
money by bank wire, and there also may be a charge for use of Federal Funds. The
Fund does not charge investors in the Fund for its receipt of wire transfers.
Payment in the form of a "bank wire" received prior to 12 noon, New York City
time, on a Fund Business Day will be treated as a Federal Funds payment received
on that day.

Personal Delivery

Deliver a check made payable to "California Daily Tax Free Income Fund, Inc."
along with a completed subscription order form to:

Reich & Tang Funds
600 Fifth Avenue - 9th Floor
New York, New York 10020

Electronic Funds Transfers (EFT),
Pre-authorized Credit
and Direct Deposit Privilege

You may purchase shares of the Fund (minimum of $100) by having salary, dividend
payments, interest payments or any other payments designated by you, or by
having federal salary, social security, or certain veteran's, military or other
payments from the federal government, automatically deposited into your Fund
account. You can also have money debited from your checking account. To enroll
in any one of these programs, you must file with the Fund a completed EFT
Application, Pre-authorized Credit Application, or a Direct Deposit Sign-Up Form
for each type of payment that you desire to include in the Privilege. The
appropriate form may be obtained from your broker or the Fund. You may elect at
any time to terminate your participation by notifying in writing the appropriate
depositing entity and/or federal agency. Death or legal incapacity will
automatically terminate your participation in the Privilege. Further, the Fund
may terminate your participation upon 30 days' notice to you.

Subsequent Purchases of Shares

Subsequent purchases can be made by personal delivery or by bank wire, as
indicated above or by mailing a check to:

California Daily Tax Free Income Fund, Inc.
Mutual Funds Group
P.O. Box 13232
Newark, New Jersey 07101-3232

There is a $100 minimum for subsequent purchases of shares. All payments should
clearly indicate the shareholder's account number.

Provided that the information on the subscription form on file with the Fund is
still applicable, a shareholder may reopen an account without filing a new
subscription order form at any time during the year the shareholder's account is
closed or during the following calendar year.

Redemption of Shares

A redemption is effected immediately following, and at a price determined in
accordance with, the next determination of net asset value per share following
receipt by the Fund's transfer agent of the redemption order (and any supporting
documentation which it may require). Normally, payment for redeemed shares is
made on the same Fund Business Day after the redemption is effected, provided
the redemption request is

13
<PAGE>

received prior to 12 noon, New York City time and on the next Fund Business Day
if the redemption request is received after 12 noon, New York City time.
However, redemption requests will not be effected, unless the check (including a
certified or cashiers check) used for investment has been cleared for payment by
the investor's bank, currently considered by the Fund to occur within 15 days
after investment.

A shareholder's original subscription order form permits the shareholder to
redeem by written request and to elect one or more of the additional redemption
procedures described below. A shareholder may only change the instructions
indicated on his original subscription order form by transmitting a written
direction to the Fund's transfer agent. Requests to institute or change any of
the additional redemption procedures will require a signature guarantee. When a
signature guarantee is called for, the shareholder should have "Signature
Guaranteed" stamped under his signature and signed and guaranteed by an eligible
guarantor institution which includes a domestic bank, a domestic savings and
loan institution, a domestic credit union, a member bank of the Federal Reserve
System or a member firm of a national securities exchange, pursuant to the
Fund's transfer agent's standards and procedures.

Written Requests

Shareholders may make a redemption in any amount by sending a written request to
the Fund, accompanied by any certificate that may have been previously issued to
the shareholder, addressed to:

California Daily Tax Free Income Fund, Inc.
Reich & Tang Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020

All previously issued certificates submitted for redemption must be endorsed by
the shareholder and all written requests for redemption must be signed by the
shareholder, in each case with signature guaranteed. Normally the redemption
proceeds are paid by check mailed to the shareholder of record.

Checks

By making the appropriate election on their subscription form, shareholders may
request a supply of checks which may be used to effect redemptions. The checks,
which will be issued in the shareholder's name, are drawn on a special account
maintained by the Fund with the agent bank. Checks may be drawn in any amount of
$250 or more. When a check is presented to the Fund's agent bank, it instructs
the Fund's transfer agent to redeem a sufficient number of full and fractional
shares in the shareholder's account to cover the amount of the check. The use of
a check to make a withdrawal enables a shareholder in the Fund to receive
dividends on the shares to be redeemed up to the Fund Business Day on which the
check clears. Checks provided by the Fund may not be certified. Fund shares
purchased by check may not be redeemed by for up to 15 days following the date
of purchase.

There is no charge to the shareholder for checks provided by the Fund. The Fund
reserves the right to impose a charge or impose a different minimum check amount
in the future, if the Board of Directors determines that doing so is in the best
interests of the Fund and its shareholders.

Shareholders electing the checking option are subject to the procedures, rules
and regulations of the Fund's agent bank. Checks drawn on a jointly owned
account may, at the shareholder's election, require only one signature. Checks
in amounts exceeding the value of the shareholder's account at the time the
check is presented for payment will not be honored. Since the dollar value of
the account changes daily, the total value of the account may not be determined
in advance and the account may not be entirely redeemed by check. In addition,
the Fund reserves the right to charge the shareholder's account a fee of up to
$20 for checks not honored as a result of an insufficient account value, a check
deemed not negotiable because it has been held longer than six months, an
unsigned check and a post-dated check. The Fund reserves the right to terminate
or modify the check redemption procedure

14
<PAGE>

at any time or to impose additional fees following notification to the Fund's
shareholders.

Investors wishing to avail themselves of this method of redemption should elect
it on their subscription order form. Individuals and joint tenants are not
required to furnish any supporting documentation. Corporations and other
entities making this election, however, are required to furnish a certified
resolution or other evidence of authorization in accordance with the Fund's
normal practices. Appropriate authorization forms will be sent by the Fund or
its agents to corporations and other shareholders who select this option. As
soon as the authorization forms are filed in good order, the Fund will provide
the shareholder with a supply of checks. This checking service may be terminated
or modified at any time.

Telephone

The Fund accepts telephone requests for redemption from shareholders who elect
this option. The proceeds of a telephone redemption may be sent to the
shareholders at their addresses or, if in excess of $1,000, to their bank
accounts, both as set forth in the subscription order form or in a subsequent
written authorization. The Fund may accept telephone redemption instructions
from any person with respect to accounts of shareholders who elect this service
and thus such shareholders risk possible loss of principal and interest in the
event of a telephone redemption not authorized by them. The Fund will employ
reasonable procedures to confirm that telephone redemption instructions are
genuine, and will require that shareholders electing such option provide a form
of personal identification. The failure by the Fund to employ such procedures
may cause the Fund to be liable for the losses incurred by investors due to
telephone redemptions based upon unauthorized or fraudulent instructions.

A shareholder making a telephone withdrawal should call the Fund at
212-830-5220; outside New York State at 800-221-3079, and state (i) the name of
the shareholder appearing on the Fund's records, (ii) the shareholder's account
number with the Fund, (iii) the amount to be withdrawn, (iv) whether such amount
is to be forwarded to the shareholder's designated bank account or address and
(v) the name of the person requesting the redemption. Usually the proceeds are
sent to the designated bank account or address on the same Fund Business Day the
redemption is effected, provided the redemption request is received before 12
noon, New York City time and on the next Fund Business Day if the redemption
request is received after 12 noon, New York City time. The Fund reserves the
right to terminate or modify the telephone redemption service in whole or in
part at any time and will notify shareholders accordingly.

Exchange Privilege

Shareholders of the Fund are entitled to exchange some or all of their shares in
the Fund for shares of certain other investment companies which retain Reich &
Tang Asset Management L.P. as investment advisor and which participate in the
exchange privilege program with the Fund. Currently the exchange privilege
program has been established between the Fund and Connecticut Daily Tax Free
Income Fund, Inc., Daily Tax Free Income Fund, Inc., Florida Daily Municipal
Income Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North
Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income
Fund, Reich & Tang Equity Fund, Inc. and Short Term Income Fund, Inc. In the
future, the exchange privilege program may be extended to other investment
companies which retain Reich & Tang Asset Management L.P. as investment advisor,
manager or administrator. An exchange of shares in the Fund pursuant to the
exchange privilege is, in effect, a redemption of Fund shares (at net asset
value) followed by the purchase of shares of the investment company into which
the exchange is made (at net asset value) and may result in a shareholder
realizing a taxable gain or loss for Federal income tax purposes.

There is no charge for the exchange privilege or limitation as to frequency of
exchange. The minimum amount for an exchange is $1,000, except

15
<PAGE>

that shareholders who are establishing a new account with an investment company
through the exchange privilege must ensure that a sufficient number of shares
are exchanged to meet the minimum initial investment required for the investment
company into which the exchange is being made. Shares are exchanged at their
respective net asset value.

The exchange privilege provides shareholders of the Fund with a convenient
method to shift their investment among different investment companies when they
feel such a shift is desirable. The exchange privilege is available to
shareholders resident in any state in which shares of the investment company
being acquired may legally be sold. Shares may be exchanged only between
investment company accounts registered in identical names. Before making an
exchange, the investor should review the current prospectus of the investment
company into which the exchange is to be made. Prospectuses may be obtained by
contacting the Mutual Funds Group at the address or telephone number set forth
on the cover page of this Prospectus.

Instructions for exchanges may be made by sending a signature guaranteed written
request to:

California Daily Tax Free Income Fund, Inc.
Reich & Tang Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020

or, for shareholders who have elected that option, by telephoning the Fund at
212-830-5220; outside New York State at 800-221-3079. The Fund reserves the
right to reject any exchange request and may modify or terminate the exchange
privilege at any time and will notify the shareholders accordingly.

Specified Amount Automatic Withdrawal Plan

Shareholders may elect to withdraw shares and receive payment from the Fund of a
specified amount of $50 or more automatically on a monthly basis in an amount
approved and confirmed by the Manager. A specified amount plan payment is made
by the Fund on the 23rd day of each month. Whenever such 23rd day of a month is
not a Fund Business Day, the payment date is the Fund Business Day preceding the
23rd day of the month. In order to make a payment, a number of shares equal in
aggregate net asset value to the payment amount are redeemed at their net asset
value on the Fund Business Day immediately preceding the date of payment. To the
extent that the redemptions to make plan payments exceed the number of shares
purchased through reinvestment of dividends and distributions, the redemptions
reduce the number of shares purchased on original investment, and may ultimately
liquidate a shareholder's investment.

The election to receive automatic withdrawal payments may be made at the time of
the original subscription by so indicating on the subscription order form. The
election may also be made, changed or terminated at any later time by the
participant. Because the withdrawal plan involves the redemption of Fund shares,
such withdrawals may constitute taxable events to the shareholder, but the Fund
does not expect that there will be any realizable capital gains.

DISTRIBUTION AND SERVICE PLAN

Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission has required that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by the Rule. The Fund's Board of Directors has adopted a
distribution and service plan (the "Plan") and, pursuant to the Plan, the Fund
has entered into a Distribution Agreement with the Distributor and a Shareholder
Servicing Agreement with the Distributor and the Manager.

Reich & Tang Asset Management, Inc. serves as the sole general partner for both
Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P., and Reich
& Tang Asset Management L.P. serves as the sole limited partner of the
Distributor.

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<PAGE>

Under the Distribution Agreement, the Distributor, for nominal consideration and
as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.

Under the Shareholder Servicing Agreement, the Distributor receives from the
Fund a service fee equal to .20% per annum of the Fund's average daily net
assets (the "Shareholder Servicing Fee") for providing personal shareholder
services and for the maintenance of shareholder accounts. The fee is accrued
daily and paid monthly and any portion of the fee may be deemed to be used by
the Distributor for purposes of distribution of Fund shares and for payments to
Participating Organizations with respect to servicing their clients or customers
who are shareholders of Fund.

The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses, including the cost of dedicated lines and CRT terminals, incurred by
the Manager and Distributor in carrying out their obligations under the
Shareholder Servicing Agreement and (ii) preparing, printing and delivering the
Fund's prospectus to existing shareholders of the Fund and preparing and
printing subscription application forms for shareholder accounts.

The Plan provides that the Manager may make payments from time to time from its
own resources, which may include the Management Fee and past profits for the
following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements, for performing shareholder servicing and related
administrative functions on behalf of the Fund; (ii) to compensate certain
Participating Organizations for providing assistance in distributing the Fund's
shares; and (iii) to pay the costs of printing and distributing the Fund's
prospectus to prospective investors and to defray the cost of the preparation
and printing of brochures and other promotional materials, mailings to
prospective shareholders, advertising, and other promotional activities,
including the salaries and/or commissions of sales personnel in connection with
the distribution of the Fund's shares. The Distributor may also make payments
from time to time from its own resources, which may include the Shareholder
Servicing Fee and past profits, for the purposes enumerated in (i) above. The
Manager and Distributor may make payments to Participating Organizations for
providing certain of such services up to a maximum of (on an annualized basis)
.40% of the average daily net asset value of the shares serviced through the
Participating Organization. Moreover, the Distributor, in its sole discretion,
will determine the amount of such payments made pursuant to the Plan, provided
that such payments will not increase the amount which the Fund is required to
pay to the Manager and the Distributor for any fiscal year under either the
Investment Management Contract in effect for that year or the Shareholder
Servicing Agreement in effect for that year.

For the fiscal year ended December 31, 1995, the total amount spent pursuant to
the Plan was .36% of the average daily net assets of the Fund, none of which was
paid by the Fund to the Distributor, pursuant to the Shareholder Servicing
Agreement and all of which was paid by the Manager (which may be deemed an
indirect payment by the Fund).

FEDERAL INCOME TAXES

The Fund has elected to qualify under the Code as a regulated investment company
that distributes "exempt-interest dividends" as defined in the Code. The Fund's
policy is to distribute as dividends each year 100% (and in no event less than
90%) of its tax-exempt interest income, net of certain deductions, and its
investment company taxable income (if any). If distributions are made in this
manner, dividends designated as derived from the interest earned on Municipal
Obligations are "exempt-interest dividends" and are not subject to regular
Federal income tax, although as described below, such "exempt-interest
dividends" may be

17
<PAGE>

subject to Federal alternative minimum tax. Dividends paid from taxable income,
if any, and distributions of any realized short-term capital gains (whether from
tax-exempt or taxable obligations) are taxable to shareholders as ordinary
income for Federal income tax purposes, whether received in cash or reinvested
in additional shares of the Fund. The Fund does not expect to realize long-term
capital gains and thus does not contemplate distributing "capital gain
dividends" or having undistributed capital gain income within the meaning of the
Code. The Fund will inform shareholders of the amount and nature of its income
and gains in a written notice mailed to shareholders not later than 60 days
after the close of the Fund's taxable year. For Social Security recipients,
interest on tax-exempt bonds, including tax-exempt interest dividends paid by
the Fund, is to be added to adjusted gross income for purposes of computing the
amount of Social Security benefits includable in gross income. Further,
corporations will be required to include in alternative minimum taxable income
75% of the amount by which their adjusted current earnings (including generally,
tax-exempt interest) exceeds their alternative minimum taxable income
(determined without this item). In addition, in certain cases Subchapter S
corporations with accumulated earnings and profits from Subchapter C years will
be subject to a tax on "passive investment income," including tax-exempt
interest.

Interest on certain "private activity bonds" (generally, a bond issue in which
more than 10% of the proceeds are used for a non-governmental trade or business
and which meets the private security or payment test, or a bond issue which
meets the private loan financing test) issued after August 7, 1986 will
constitute an item of tax preference subject to the individual alternative
minimum tax.

With respect to variable rate demand instruments, including participation
certificates therein, the Fund is relying on the opinion of Battle Fowler LLP,
counsel to the Fund, that it will be treated for Federal income tax purposes as
the owner thereof and that the interest on the underlying Municipal Obligations
will be tax-exempt from Federal income taxes to the Fund. Counsel has pointed
out that the Internal Revenue Service has announced that it will not ordinarily
issue advance rulings on the question of the ownership of securities or
participation interests therein subject to a put and could reach a conclusion
different from that reached by counsel. See "Federal Income Taxes" in the
Statement of Additional Information.

In South Carolina v. Baker, the U.S. Supreme Court held that the Federal
government may constitutionally require states to register bonds they issue and
may subject the interest on such bonds to Federal tax if not registered, and the
Court further held that there is no constitutional prohibition against the
Federal government's taxing the interest earned on state or other municipal
bonds. The Supreme Court decision affirms the authority of the Federal
government to regulate and control bonds such as the Municipal Obligations and
to tax such bonds in the future. The decision does not, however, affect the
current exemption from taxation of the interest earned on the Municipal
Obligations in accordance with Section 103 of the Code.

CALIFORNIA INCOME TAXES

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<PAGE>

correctly designated as derived from California Municipal Obligations received
by the Fund will not be subject to the California Income Tax. Amounts correctly
designated as derived from Territorial Municipal Obligations will not be subject
to the California Income Tax as long as the interest on such obligations, when
held by an individual, is exempt from California taxation.

California law, however, limits the amount that may be designated as
"exempt-interest dividends." With respect to the Fund's taxable year, if the
aggregate amount designated as an exempt-interest dividend is greater than the
excess of (i) the amount of interest it received which, if held by an
individual, was exempt from taxation by California, over (ii) the amounts that,
if the Fund were treated as an individual, would be disallowed as deductions for
expenses related to exempt income under California or Federal law, the portion
of the distribution designated an "exempt-interest dividend" that will be
allowed shall be only that proportion of the designated amount that the excess
bears to the designated amount.

Exempt-interest dividends which are not derived from California Municipal
Obligations and any other dividends of the Fund which do not qualify as
"exempt-interest dividends" under California law will be includible in a
California resident's tax base for purposes of the California Income Tax.

Shareholders are urged to consult their tax advisors with respect to the
treatment of distributions from the Fund in their own states and localities.

GENERAL INFORMATION

The Fund was incorporated under the laws of the State of Maryland on December 5,
1986 and it is registered with the Securities and Exchange Commission as a
non-diversified, open-end management investment company.

The Fund prepares semi-annual unaudited and annual audited reports which include
a list of investment securities held by the Fund and which are sent to
shareholders.

As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
meetings only (a) for the election of directors, (b) for approval of the revised
investment advisory contracts with respect to a particular class or series of
stock, (c) for approval of revisions to the Fund's distribution agreement with
respect to a particular class or series of stock, and (d) upon the written
request of holders or shares entitled to cast not less than 25% of all the votes
entitled to be cast at such meeting. Annual and other meetings may be required
with respect to such additional matters relating to the Fund as may be required
by the 1940 Act, including the removal of Fund director(s) and communication
among shareholders, any registration of the Fund with the Securities and
Exchange Commission or any state, or as the Directors may consider necessary or
desirable. Each Director serves until the next meeting of the shareholders
called for the purpose of considering the election or reelection of such
Director or of a successor to such Director, and until the election and
qualification of his or her successor, elected at such a meeting, or until such
Director sooner dies, resigns, retires or is removed by the vote of the
shareholders.

For further information with respect to the Fund and the shares offered hereby,
reference is made to the Fund's registration statement filed with the Securities
and Exchange Commission, including the exhibits thereto. The Registration
Statement and the exhibits thereto may be examined at the Commission and copies
thereof may be obtained upon payment of certain duplicating fees.

NET ASSET VALUE

The net asset value of the Fund's shares is determined as of 12 noon, New York
City time, on each Fund Business Day. Fund Business Day means weekdays (Monday
through Friday) except customary business holidays and Good Friday. It is
computed by dividing the value of the Fund's net assets (i.e., the value of its
securities and other assets less its liabilities, including expenses

19
<PAGE>

payable or accrued but excluding capital stock and surplus) by the total number
of shares outstanding. The Fund's portfolio securities are valued at their
amortized cost in compliance with the provisions of Rule 2a-7 under the 1940
Act. Amortized cost valuation involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, except that if fluctuating interest rates cause the market value of the
Fund's portfolio to deviate more than 1/2 of 1% from the value determined on the
basis of amortized cost, the Board of Directors will consider whether any action
should be initiated. Although the amortized cost method provides certainty in
valuation, it may result in periods during which the value of an instrument is
higher or lower than the price an investment company would receive if the
instrument were sold. The Fund intends to maintain a stable net asset value at
$1.00 per share although there can be no assurance that this will be achieved.

CUSTODIAN AND TRANSFER AGENT

Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105 is custodian for the Fund's cash and securities. Reich & Tang Services
L.P., 600 Fifth Avenue, New York, New York 10020, is the transfer agent and
dividend agent for the shares of the Fund. The Fund's transfer agent and
custodian do not assist in, and are not responsible for, investment decisions
involving assets of the Fund.

20
<PAGE>

TABLE OF CONTENTS

Table of Fees and Expenses.............................
Selected Financial Information.........................
Introduction...........................................
Investments Objectives,
Policies and Risks................................
Management of the Fund................................. CALIFORNIA
Description of Common Stock............................ DAILY TAX
Dividends and Distributions............................ FREE INCOME
How to Purchase and Redeem Shares...................... FUND, INC.
Investments Through
Participating Organizations......................
Direct Purchase and
Redemption Procedures............................ PROSPECTUS
Initial Purchases of Shares............................
Subsequent Purchases of Shares......................... May 1, 1996
Redemption of Shares...................................
Exchange Privilege.....................................
Specified Amount Automatic Withdrawal Plan.............
Distribution and Service Plan..........................
Federal Income Taxes...................................
California Income Taxes................................
General Information....................................
Net Asset..............................................
Custodian and Transfer Agent...........................

<PAGE>

- --------------------------------------------------------------------------------
CALIFORNIA
DAILY TAX FREE 600 Fifth Avenue, New York, NY 10020
INCOME FUND, INC.(212) 830-5220
================================================================================

STATEMENT OF ADDITIONAL INFORMATION

May 1, 1996

This Statement of Additional Information, although not in itself a Prospectus,
expands upon and supplements the information contained in the current Prospectus
of California Daily Tax Free Income Fund, Inc. (the "Fund"), dated May 1, 1996
and should be read in conjunction with the Prospectus. The Fund's Prospectus may
be obtained from any Participating Organization or by writing or calling the
Fund. This Statement of Additional Information is incorporated by reference into
the Prospectus in its entirety.

<TABLE>
<CAPTION>
Table of Contents

<S> <C> <C> <C>
Investment Objectives, Policies and Risks............. Manager.............................................
Description of Municipal Obligations.................. Expense Limitation.............................
Variable Rate Demand Instruments Management of the Fund..............................
and Participation Certificates.................... Compensation Table.............................
When-Issued Securities.............................. Counsel and Auditors...........................
Stand-by Commitments................................ Distribution and Service Plan.......................
Taxable Securities.................................... Description of Common Stock.........................
Repurchase Agreements............................... Federal Income Taxes................................
California Risk Factors............................... California Income Taxes.............................
Investment Restrictions............................... Custodian and Transfer Agent .......................
Portfolio Transactions................................ Description of Ratings..............................
How to Purchase and Redeem Shares..................... Tax Equivalent Yield Tables.........................
Net Asset Value....................................... Independent Auditor's Report........................
Yield Quotations...................................... Financial Statements................................
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISKS

As stated in the Prospectus, the Fund is a non-diversified, open-end management
investment company that is a short-term, tax-exempt money market fund. The
Fund's investment objectives are to seek as high a level of current income,
exempt from Federal tax and, to the extent possible, California income taxes
(the "California Income Tax"), as is believed to be consistent with preservation
of capital, maintenance of liquidity and stability of principal. No assurance
can be given that these objectives will be achieved. The following discussion
expands upon the description of the Fund's investment objectives, policies and
risks in the Prospectus.

The Fund's assets will be invested primarily in high quality debt obligations
issued by or on behalf of the State of California, other states, territories and
possessions of the United States and their authorities, agencies,
instrumentalities and political subdivisions, the interest on which is, in the
opinion of bond counsel to the issuer at the date of issuance, currently exempt
from Federal income taxation ("Municipal Obligations") and in participation
certificates (which, in the opinion of Battle Fowler LLP, counsel to the Fund,
cause the Fund to be treated as the owner of the underlying Municipal
Obligations) in Municipal Obligations purchased from banks, insurance companies
or other financial institutions. Dividends paid by the Fund which are
"exempt-interest dividends" by virtue of being properly designated by the Fund
as derived from Municipal Obligations and participation certificates in
Municipal Obligations will be exempt from Federal income tax provided the Fund
complies with Section 852(b)(5) of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). Although the Supreme Court has determined that
Congress has the authority to subject the interest on bonds such as the
Municipal Obligations to regular Federal income taxation, existing law excludes
such interest from regular Federal income tax. However, "exempt-interest
dividends" may be subject to the Federal alternative minimum tax.

Securities, the interest income on which may be subject to the Federal
alternative minimum tax (including participation certificates in such
securities), together with securities, the interest income on which is subject
to regular Federal, state and local income tax, will not exceed 20% of the value
of the Fund's total assets. (See "Federal Income Taxes" herein.) Exempt-interest
dividends paid by the Fund correctly identified by the Fund as derived from
obligations issued by or on behalf of the State of California or any California
local governments, or their instrumentalities, authorities or districts and on
obligations of the United States which pay interest excludable under the
Constitution or laws of the United States ("California Municipal Obligations")
will be exempt from the California Income Tax. Exempt-interest dividends
correctly identified by the Fund as derived from obligations of Puerto Rico and
the Virgin Islands, as well as any other types of obligations that California is
prohibited from taxing under the Constitution, the laws of the United States of
America or the California Constitution ("Territorial Municipal Obligations")
also may be exempt from California Income Tax provided the Fund complies with
California laws. (See "California Income Taxes" herein.) To the extent suitable
California Municipal Obligations are not available for investment by the Fund,
the Fund may purchase Municipal Obligations issued by other states, their
agencies and instrumentalities, the dividends on which will be designated by the
Fund as derived from interest income which will be, in the opinion of bond
counsel to the issuer at the date of issuance, exempt from Federal income tax
but will be subject to the California Income Tax. Except as a temporary
defensive measure during periods of adverse market conditions as determined by
the Manager, the Fund will invest at least 65% of its assets in California
Municipal Obligations, although the exact amount of the Fund's assets invested
in such securities will vary from time to time. The Fund seeks to maintain an
investment portfolio with a dollar-weighted average maturity of 90 days or less
and to value its investment portfolio at amortized cost and maintain a net asset
value at $1.00 per share. There can be no assurance that this value will be
maintained. The Fund may hold uninvested cash reserves pending investment. The
Fund's investments may include "when-issued" Municipal Obligations, stand-by
commitments and taxable repurchase agreements.

Although the Fund will attempt to invest 100% of its assets in Municipal
Obligations (excluding securities, the interest income on which may be subject
to the Federal alternative minimum tax) and in participation certificates in
Municipal Obligations, the Fund reserves the right to invest up to 20% of the
value of its total assets in securities, the interest income on which is subject
to Federal, state and local income tax, including securities, the interest
income on which may be subject to the Federal alternative minimum tax. The Fund
will invest more than 25% of its assets in participation certificates purchased
from banks in industrial revenue bonds and other California Municipal
Obligations. In view of this "concentration" in bank participation certificates
in California Municipal Obligations, an investment in Fund shares should be made
with an understanding of the characteristics of the banking industry and the
risks which such an investment may entail. (See "Variable Rate Demand
Instruments and Participation Certificates" herein.) The investment objectives
of the Fund described in this paragraph may not be changed unless approved by
the holders of a majority of the outstanding shares of the Fund that would be
affected by such a change. As used herein, the term "majority of the outstanding
shares" of the Fund means, respectively, the vote of the lesser of (i) 67% or
more of the shares of the Fund present at a meeting, if the holders of more than
50% of the outstanding shares of the Fund are present or represented by proxy or
(ii) more than 50% of the outstanding shares of the Fund.

2
<PAGE>
The Fund may only purchase Municipal Obligations that have been determined by
the Fund's Board of Directors to present minimal credit risks and that are
Eligible Securities at the time of acquisition. The term Eligible Securities
means (i) Municipal Obligations with remaining maturities of 397 days or less
and rated in the two highest short-term rating categories by any two nationally
recognized statistical rating organizations ("NRSROs") or in such categories by
the only NRSRO that has rated the Municipal Obligations (collectively, the
"Requisite NRSROs") (acquisition in the latter situation must also be ratified
by the Board of Directors); (ii) Municipal Obligations with remaining maturities
of 397 days or less but that at the time of issuance were long-term securities
(i.e., with maturities greater than 366 days) and whose issuer has received from
the Requisite NRSROs a rating with respect to comparable short-term debt in the
two highest short-term rating categories and (iii) unrated Municipal Obligations
determined by the Fund's Board of Directors to be of comparable quality. Where
the issuer of a long-term security with a remaining maturity which would
otherwise qualify it as an Eligible Security, does not have rated short-term
debt outstanding, the long-term security is treated as unrated but may not be
purchased if it has a long-term rating from any NRSRO that is below the two
highest long-term categories. A determination of comparability by the Board of
Directors is made on the basis of its credit evaluation of the issuer, which may
include an evaluation of a letter of credit, guarantee, insurance or other
credit facility issued in support of the Municipal Obligations or participation
certificates. (See "Variable Rate Demand Instruments and Participation
Certificates" herein.) While there are several organizations that currently
qualify as NRSROs, two examples of NRSROs are Standard & Poor's Corporation
("S&P") and Moody's Investors Service, Inc. ("Moody's"). The two highest ratings
by S&P and Moody's are "AAA" and "AA" by S&P in the case of long-term bonds and
notes or "Aaa" and "Aa" by Moody's in the case of bonds; "SP-1" and "SP-2" by
S&P or "MIG-1" and "MIG-2" by Moody's in the case of notes; "A-1" and "A-2" by
S&P or "Prime-1" and "Prime-2" by Moody's in the case of tax-exempt commercial
paper. The highest rating in the case of variable and floating demand notes is
"VMIG-1" by Moody's or "SP-1/AA" by S&P. Such instruments may produce a lower
yield than would be available from less highly rated instruments. The Fund's
Board of Directors has determined that obligations which are backed by the
credit of the Federal government (the interest on which is not exempt from
Federal income taxation) will be considered to have a rating equivalent to
Moody's "Aaa". (See "Description of Ratings" herein.)

As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the Investment Company Act of 1940, as amended, (the
"1940 Act") with respect to investing its assets in one or relatively few
issuers. This non-diversification may present greater risks than in the case of
a diversified company. However, the Fund intends to qualify as a "regulated
investment company" under Subchapter M of the Code. The Fund will be restricted
in that at the close of each quarter of the taxable year, at least 50% of the
value of its total assets must be represented by cash, government securities,
investment company securities and other securities limited in respect of any one
issuer to not more than 5% in value of the total assets of the Fund and to not
more than 10% of the outstanding voting securities of such issuer. In addition,
at the close of each quarter of its taxable year, not more than 25% in value of
the Fund's total assets may be invested in securities of one issuer other than
Government securities. The limitations described in this paragraph regarding
qualification as a "regulated investment company" are not fundamental policies
and may be revised to the extent applicable Federal income tax requirements are
revised. (See "Federal Income Taxes" herein.)

DESCRIPTION OF MUNICIPAL OBLIGATIONS

As used in the Prospectus, "Municipal Obligations" include the following as well
as "Variable Rate Demand Instruments and Participation Certificates" discussed
herein.

1. Municipal Bonds with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition.

Municipal Bonds are debt obligations of states, cities, counties,
municipalities and municipal agencies (all of which are generally referred
to as "municipalities") which generally have a maturity at the time of
issue of one year or more and which are issued to raise funds for various
public purposes such as construction of a wide range of public facilities,
to refund outstanding obligations and to obtain funds for institutions and
facilities.

The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by
the issuer's pledge of its faith, credit and taxing power for the payment
of principal and interest. Issuers of general obligation bonds include
states, counties, cities, towns and other governmental units. The principal
of, and interest on, revenue bonds are payable from the income of specific
projects or
3
<PAGE>
authorities and generally are not supported by the issuer's general power
to levy taxes. In some cases, revenues derived from specific taxes are
pledged to support payments on a revenue bond.

In addition, certain kinds of "private activity bonds" are issued by public
authorities to provide funding for various privately operated industrial
facilities (hereinafter referred to as "industrial revenue bonds" or
"IRBs"). Interest on the IRBs is generally exempt, with certain exceptions,
from Federal income tax pursuant to Section 103(a) of the Code, provided
the issuer and corporate obligor thereof continue to meet certain
conditions. (See "Federal Income Taxes" herein.) IRBs are, in most cases,
revenue bonds and do not generally constitute the pledge of the credit of
the issuer of such bonds. The payment of the principal and interest on IRBs
usually depends solely on the ability of the user of the facilities
financed by the bonds or other guarantor to meet its financial obligations
and, in certain instances, the pledge of real and personal property as
security for payment. If there is no established secondary market for the
IRBs, the IRBs or the participation certificates in IRBs purchased by the
Fund will be supported by letters of credit, guarantees or insurance that
meet the definition of Eligible Securities at the time of acquisition as
stated herein and provide the demand feature which may be exercised by the
Fund at any time to provide liquidity. Shareholders should note that the
Fund may invest in IRBs acquired in transactions involving a Participating
Organization. In accordance with investment restriction 6 herein, the Fund
is permitted to invest up to 10% of the portfolio in high quality,
short-term Municipal Obligations (including IRBs) meeting the definition of
Eligible Securities at the time of acquisition that may not be readily
marketable or have a liquidity feature.

2. Municipal Notes with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. The principal kinds of
Municipal Notes include tax anticipation notes, bond anticipation notes,
revenue anticipation notes and project notes. Notes sold in anticipation of
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuing municipality or agency. Project notes
are issued by local agencies and are guaranteed by the United States
Department of Housing and Urban Development. Project notes are also secured
by the full faith and credit of the United States. The Fund's investments
may be concentrated in Municipal Notes of California issuers.

3. Municipal Commercial Paper that is an Eligible Security at the time of
acquisition. Issues of Municipal Commercial Paper typically represent very
short-term, unsecured, negotiable promissory notes. These obligations are
often issued to meet seasonal working capital needs of municipalities or to
provide interim construction financing and are paid from general revenues
of municipalities or are refinanced with long-term debt. In most cases
Municipal Commercial Paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions which may be called upon in the
event of default by the issuer of the commercial paper.

4. Municipal Leases, which may take the form of a lease or an installment
purchase or conditional sale contract, are issued by state and local
governments and authorities to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, telecommunications
equipment and other capital assets. Municipal Leases frequently have
special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance
limitations of many state constitutions and statutes are deemed to be
inapplicable because of the inclusion in many leases or contracts of
"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. To reduce this risk, the Fund will
only purchase Municipal Leases subject to a non-appropriation clause where
the payment of principal and accrued interest is backed by an
unconditional, irrevocable letter of credit, a guarantee, insurance or
other comparable undertaking of an approved financial institution. These
types of municipal leases may be considered illiquid and subject to the 10%
limitation of investments in illiquid securities set forth under
"Investment Restrictions" contained herein. The Board of Directors may
adopt guidelines and delegate to the Manager the daily function of
determining and monitoring the liquidity of municipal leases. In making
such determination, the Board and the Manager may consider such factors as
the frequency of trades for the obligation, the number of dealers willing
to purchase or sell the obligations and the number of other potential
buyers and the nature of the marketplace for the obligations, including the
time needed to dispose of the obligations and the method of soliciting
offers. If the Board determines that any municipal leases are illiquid,
such lease will be subject to the 10% limitation on investments in illiquid
securities.

5. Any other Federal tax exempt, and to the extent possible, California Income
Tax exempt obligations issued by or on behalf of states and municipal
governments and their authorities, agencies, instrumentalities and
political
4
<PAGE>
subdivisions, whose inclusion in the Fund would be consistent with the
Fund's "Investment Objectives, Policies and Risks" and permissible under
Rule 2a-7 under the 1940 Act.

Subsequent to its purchase by the Fund, a rated Municipal Obligation may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall reassess
promptly whether the Municipal Obligation presents minimal credit risks and
shall cause the Fund to take such action as the Board of Directors determines is
in the best interest of the Fund and its shareholders. However, reassessment is
not required if the Municipal Obligation is disposed of or matures within five
business days of the Manager becoming aware of the new rating and provided
further that the Board of Directors is subsequently notified of the Manager's
actions.

In addition, in the event that a Municipal Obligation (1) is in default, (2)
ceases to be an Eligible Security or (3) there is a determination that it no
longer presents minimal credit risks, the Fund will dispose of the Municipal
Obligation absent a determination by the Fund's Board of Directors that disposal
of the Municipal Obligation would not be in the best interests of the Fund. In
the event that the Municipal Obligation is disposed of it shall be disposed of
as soon as practicable consistent with achieving an orderly disposition by sale,
exercise of any demand feature or otherwise. In the event of a default with
respect to a Municipal Obligation which immediately before default accounted for
1/2 of 1% or more of the Fund's total assets, the Fund shall promptly notify the
Securities and Exchange Commission of such fact and of the actions that the Fund
intends to take in response to the situation. Certain Municipal Obligations
issued by instrumentalities of the United States Government are not backed by
the full faith and credit of the United States Treasury but only by the
creditworthiness of the instrumentality. The Fund's Board of Directors has
determined that any obligation that depends directly, or indirectly through a
government insurance program or other guarantee, on the full faith and credit of
the United States Government will be considered to have a rating in the highest
category. Where necessary to ensure that the Municipal Obligations are Eligible
Securities, or where the obligations are not freely transferable, the Fund will
require that the obligation to pay the principal and accrued interest be backed
by an unconditional, irrevocable bank letter of credit, a guarantee, insurance
or other comparable undertaking of an approved financial institution that would
qualify the investment as an Eligible Security.

Variable Rate Demand Instruments and Participation Certificates

Variable rate demand instruments that the Fund will purchase are tax-exempt
Municipal Obligations that provide for a periodic adjustment in the interest
rate paid on the instrument and permit the holder to demand payment of the
unpaid principal balance plus accrued interest at specified intervals upon a
specified number of days' notice either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to such
instrument.

The variable rate demand instruments in which the Fund may invest are payable on
demand on not more than thirty calendar days' notice and may be exercised at any
time or at specified intervals not exceeding 397 days depending upon the terms
of the instrument. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily to up to 397 days and the adjustments
are based upon the "prime rate"* of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. The Fund will decide
which variable rate demand instruments it will purchase in accordance with
procedures prescribed by its Board of Directors to minimize credit risks. A fund
utilizing the amortized cost method of valuation under Rule 2a-7 of the 1940 Act
may only purchase variable rate demand instruments only if (i) the instrument is
subject to an unconditional demand feature, exercisable by the Fund in the event
of default in the payment of principal or interest on the underlying securities,
that is an Eligible Security or (ii) the instrument is not subject to an
unconditional demand feature but does qualify as an Eligible Security and has a
long-term rating by the Requisite NRSROs in one of the two highest rating
categories, or, if unrated, is determined to be of comparable quality by the
Fund's Board of Directors. The Fund's Board of Directors may determine that an
unrated variable rate demand instrument meets the Fund's quality criteria if it
is backed by a letter of credit or guarantee or is insured by an insurer that
meets the quality criteria for the Fund stated herein or on the basis of a
credit evaluation of the underlying obligor. If an instrument is ever not deemed
to be an Eligible Security, the Fund either will sell it in the market or
exercise the demand feature.

The variable rate demand instruments that the Fund may invest in include
participation certificates purchased by the Fund from banks, insurance companies
or other financial institutions in fixed or variable rate, tax-exempt Municipal
Obligations (expected to be concentrated in IRBs) owned by such institutions or
affiliated organizations. The Fund will not purchase participation certificates
in fixed rate tax-exempt Municipal Obligations without obtaining an opinion of
- --------------------------------
* The "prime rate" is generally the rate charged by a bank to its most
creditworthy customers for short-term loans. The prime rate is a particular
bank may differ from other banks and will be the rate announced by each bank
on a particular day. Changes in the prime rate may occur with great frequency
and generally become effective on the date announced.

5
<PAGE>
counsel that the Fund will be treated as the owner thereof for Federal income
tax purposes. A participation certificate gives the Fund an undivided interest
in the Municipal Obligation in the proportion that the Fund's participation
interest bears to the total principal amount of the Municipal Obligation and
provides the demand repurchase feature described below. Where the institution
issuing the participation does not meet the Fund's eligibility criteria, the
participation is backed by an irrevocable letter of credit or guaranty of a bank
(which may be the bank issuing the participation certificate, a bank issuing a
confirming letter of credit to that of the issuing bank, or a bank serving as
agent of the issuing bank with respect to the possible repurchase of the
certificate of participation) or insurance policy of an insurance company that
the Board of Directors of the Fund has determined meets the prescribed quality
standards for the Fund. The Fund has the right to sell the participation
certificate back to the institution and, where applicable, draw on the letter of
credit or insurance after no more than 30 days' notice either at any time or at
specified intervals not exceeding 397 days (depending on the terms of the
participation), for all or any part of the full principal amount of the Fund's
participation interest in the security, plus accrued interest. The Fund intends
to exercise the demand only (1) upon a default under the terms of the bond
documents, (2) as needed to provide liquidity to the Fund in order to make
redemptions of Fund shares or (3) to maintain a high quality investment
portfolio. The institutions issuing the participation certificates will retain a
service and letter of credit fee (where applicable) and a fee for providing the
demand repurchase feature, in an amount equal to the excess of the interest paid
on the instruments over the negotiated yield at which the participations were
purchased by the Fund. The total fees generally range from 5% to 15% of the
applicable prime rate or other interest rate index. With respect to insurance,
the Fund will attempt to have the issuer of the participation certificate bear
the cost of the insurance, although the Fund retains the option to purchase
insurance if necessary, in which case the cost of insurance will be an expense
of the Fund subject to the expense limitation. (See "Expense Limitation"
herein.) The Manager has been instructed by the Fund's Board of Directors to
continually monitor the pricing, quality and liquidity of the variable rate
demand instruments held by the Fund, including the participation certificates,
on the basis of published financial information and reports of the rating
agencies and other bank analytical services to which the Fund may subscribe.
Although these instruments may be sold by the Fund, the Fund intends to hold
them until maturity, except under the circumstances stated above. (See "Federal
Income Taxes" herein.)

In view of the potential "concentration" of the Fund in bank participation
certificates in California Municipal Obligations, which may be secured by bank
letters of credit or guarantees, an investment in the Fund should be made with
an understanding of the characteristics of the banking industry and the risks
which such an investment may entail. Banks are subject to extensive governmental
regulations which may limit both the amounts and types of loans and other
financial commitments which may be made and interest rates and fees which may be
charged. The profitability of this industry is largely dependent upon the
availability and cost of capital funds for the purpose of financing lending
operations under prevailing money market conditions. Also, general economic
conditions play an important part in the operations of this industry and
exposure to credit losses arising from possible financial difficulties of
borrowers might affect a bank's ability to meet its obligations under a letter
of credit. The Fund may invest 25% or more of the net assets of any portfolio in
securities that are related in such a way that an economic, business or
political development or change affecting one of the securities would also
affect the other securities including, for example, securities the interest upon
which is paid from revenues of similar type projects, or securities the issuers
of which are located in the same state. The recent period has seen wide
fluctuations in interest rates, particularly "prime rates" charged by banks.

While the value of the underlying variable rate demand instruments may change
with changes in interest rates generally, the variable rate nature of the
underlying variable rate demand instruments should minimize changes in value of
the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed income
securities. The portfolio may contain variable rate demand instruments on which
stated minimum or maximum rates, or maximum rates set by state law, limit the
degree to which interest on such variable rate demand instruments may fluctuate;
to the extent it does, increases or decreases in value may be somewhat greater
than would be the case without such limits. Additionally, the portfolio may
contain variable rate demand participation certificates in fixed rate Municipal
Obligations. The fixed rate of interest on these Municipal Obligations will be a
ceiling on the variable rate of the participation certificate. In the event that
interest rates increased so that the variable rate exceeded the fixed rate on
the Municipal Obligations, the Municipal Obligations could no longer be valued
at par and may cause the Fund to take corrective action, including the
elimination of the instruments from the portfolio. Because the adjustment of
interest rates on the variable rate demand instruments is made in relation to
movements of the applicable banks' "prime rates", or other interest rate
adjustment index, the variable rate demand instruments are not comparable to
long-term fixed rate securities. Accordingly, interest rates on the variable
rate demand instruments may be higher or lower than current market rates for
fixed rate obligations of comparable quality with similar maturities.

Because of the variable rate nature of the instruments, the Fund's yield will
decline and its shareholders will forego the opportunity for capital
appreciation during periods when prevailing interest rates have declined. On the
other hand,
6
<PAGE>

during periods where prevailing interest rates have increased, the Fund's yield
will increase and its shareholders will have reduced risk of capital
depreciation.

For purposes of determining whether a variable rate demand instrument held by
the Fund matures within 397 days from the date of its acquisition, the maturity
of the instrument will be deemed to be the longer of (1) the period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment. The maturity of a variable rate demand instrument will be determined
in the same manner for purposes of computing the Fund's dollar-weighted average
portfolio maturity. If a variable rate demand instrument ceases to be an
Eligible Security, it will be sold in the market or through exercise of the
repurchase demand feature to the issuer.

When-Issued Securities

New issues of certain Municipal Obligations frequently are offered on a
when-issued basis. The payment obligation and the interest rate that will be
received on the Municipal Obligations are each fixed at the time the buyer
enters into the commitment although delivery and payment of the Municipal
Obligations normally take place within 45 days after the date of the Fund's
commitment to purchase. Although the Fund will only make commitments to purchase
when-issued Municipal Obligations with the intention of actually acquiring them,
the Fund may sell these securities before the settlement date if deemed
advisable by the Manager.

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

Stand-by Commitments

When the Fund purchases Municipal Obligations it may also acquire stand-by
commitments from banks and other financial institutions with respect to such
Municipal Obligations. Under a stand-by commitment, a bank or broker-dealer
agrees to purchase at the Fund's option a specified Municipal Obligation at a
specified price with same day settlement. A stand-by commitment is the
equivalent of a "put" option acquired by the Fund with respect to a particular
Municipal Obligation held in its portfolio.

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

The Fund's right to exercise a stand-by commitment would be unconditional and
unqualified. A stand-by commitment would not be transferable by the Fund,
although it could sell the underlying Municipal Obligation to a third party at
any time.

The Fund expects that stand-by commitments generally will be available without
the payment of any direct or indirect consideration. However, if necessary and
advisable, the Fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for outstanding
stand-by commitments held in the Fund's portfolio would not exceed 1/2 of 1% of
the value of the Fund's total assets calculated immediately after each stand-by
commitment was acquired.
7
<PAGE>

The Fund would enter into stand-by commitments only with banks and other
financial institutions that, in the Manager's opinion, present minimal credit
risks and, where the issuer of the Municipal Obligation does not meet the
eligibility criteria, only where the issuer of the stand-by commitment has
received a rating which meets the eligibility criteria or, if not rated,
presents a minimal risk of default as determined by the Board of Directors. The
Fund's reliance upon the credit of these banks and broker-dealers would be
supported by the value of the underlying Municipal Obligations held by the Fund
that were subject to the commitment.

The Fund intends to acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The purpose of this practice is to permit the Fund to be fully
invested in securities the interest on which is exempt from Federal income taxes
while preserving the necessary liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions and to purchase at a later date
securities other than those subject to the stand-by commitment.

The acquisition of a stand-by commitment would not affect the valuation or
assumed maturity of the underlying Municipal Obligations which will continue to
be valued in accordance with the amortized cost method. Stand-by commitments
acquired by the Fund would be valued at zero in determining net asset value. In
those cases in which the Fund paid directly or indirectly for a stand-by
commitment, its cost would be reflected as unrealized depreciation for the
period during which the commitment is held by the Fund. Stand-by commitments
would not affect the dollar-weighted average maturity of the Fund's portfolio.
The maturity of a security subject to a stand-by commitment is longer than the
stand-by repurchase date.

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

In addition, the Fund may apply to the Internal Revenue Service for a ruling, or
seek from its counsel an opinion, that interest on Municipal Obligations subject
to stand-by commitments will be exempt from Federal income taxation. (See
"Federal Income Taxes" herein.) In the absence of a favorable tax ruling or
opinion of counsel, the Fund will not engage in the purchase of securities
subject to stand-by commitments.

TAXABLE SECURITIES

Although the Fund will attempt to invest 100% of its net assets in tax-exempt
Municipal Obligations, the Fund may invest up to 20% of the value of its total
assets in securities of the kind described below, the interest income on which
is subject to Federal income tax, under any one or more of the following
circumstances: (a) pending investment of proceeds of sales of Fund shares or of
portfolio securities, (b) pending settlement of purchases of portfolio
securities, (c) to maintain liquidity for the purpose of meeting anticipated
redemptions and (d) with regard to (5) below, if the Manager believes that such
investments are in the best interests of the investors in the Fund. In addition,
the Fund may temporarily invest more than 20% in such taxable securities when,
in the opinion of the Manager, it is advisable to do so because of adverse
market conditions affecting the market for Municipal Obligations. The kinds of
taxable securities in which the Fund may invest are limited to the following
short-term, fixed-income securities (maturing in 397 days or less from the time
of purchase): (1) obligations of the United States Government or its agencies,
instrumentalities or authorities; (2) commercial paper meeting the definition of
Eligible Securities at the time of acquisition; (3) certificates of deposit of
domestic banks with assets of $1 billion or more; (4) repurchase agreements with
respect to any Municipal Obligations or other securities which the Fund is
permitted to own; and (5) Municipal Obligations, the interest income on which
may be subject to the Federal alternative minimum tax. (See "Federal Income
Taxes" herein.)

Repurchase Agreements

The Fund may invest in instruments subject to repurchase agreements with
securities dealers or member banks of the Federal Reserve System. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt instrument for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase and the Fund to resell the
instrument at a fixed price and time, thereby determining the yield during the
Fund's holding period. This results in a fixed rate of return insulated from
market fluctuations during such period. A repurchase agreement is subject to the
risk that the seller may fail to repurchase the security. Repurchase agreements
may be deemed to be loans under the 1940 Act. All repurchase agreements entered
into by the Fund shall be fully collateralized at all times during the period of
the agreement in that the value of the underlying security shall be at least
equal to the amount of the loan, including the accrued interest thereon, and the
Fund or its custodian shall have possession of the collateral, which the Fund's
Board believes will give it a valid, perfected security interest in the
collateral. In the event of default by the seller under a repurchase agreement
construed to be a collateralized

8
<PAGE>

loan, the underlying securities are not owned by the Fund but only constitute
collateral for the seller's obligation to pay the repurchase price. Therefore,
the Fund may suffer time delays and incur costs in connection with the
disposition of the collateral. The Fund's Board believes that the collateral
underlying repurchase agreements may be more susceptible to claims of the
seller's creditors than would be the case with securities owned by the Fund. It
is expected that repurchase agreements will give rise to income which will not
qualify as tax-exempt income when distributed by the Fund. The Fund will not
invest in a repurchase agreement maturing in more than seven days if any such
investment together with illiquid securities held by the Fund exceed 10% of the
Fund's net assets. (See Investment Restriction Number 6 herein.) Repurchase
agreements are subject to the same risks described herein for stand-by
commitments.

CALIFORNIA RISK FACTORS

Certain of the California Municipal Obligations in the Fund may be bonds or
other types of obligations which rely in whole or in part, directly or
indirectly, on ad valorem real property taxes as a source of revenue. Over the
past several years, California voters have approved amendments to the California
Constitution which establish certain limitations on the powers of municipalities
to impose and collect ad valorem taxes on real property which, in turn, restrict
the ability of municipalities to service their debt or lease obligations from
such taxes.

Article XIIIA of the California Constitution, as amended, now limits ad valorem
real property taxes to 1% of the full cash value of the property; defines "full
cash value" as the county tax assessor's valuation as of March 1, 1975, plus
adjustments not to exceed 2% per year, as per changes in the Consumer Price
Index or comparable data for the area under the taxing jurisdiction; allows
adjustments from the March 1, 1975 full cash value upon purchase, change of
ownership or new construction after that date; allows reassessment of property
which was not current on the 1975-76 assessment roll up to the March 1, 1975
value; allows reassessments downward if property values decrease; exempts from
the 1% ad valorem property tax limitation taxes or special assessments levied to
pay (1) interest or redemption charges on any indebtedness approved by the
voters prior to July 1, 1978 or (2) any bonded indebtedness for the acquisition
or improvement of real property approved on or after July 1, 1978, by two-thirds
of the votes cast by the voters voting on the proposition; requires counties to
collect the 1% ad valorem property tax and to apportion it according to law to
the local districts within the counties; prohibits new ad valorem taxes on real
property, or sales or transaction taxes on the sale of real property after July
1, 1978; allows special taxes to be levied by local cities, counties and special
districts only upon approval of not less than two-thirds vote of each of the
"qualified electors" of such district; and requires not less than two-thirds
vote of each of the two houses of the California Legislature to change any state
taxes resulting in increased revenues.

Article XIIIB to the California Constitution, which became effective on July 1,
1980, provides that state and local government appropriations from certain
revenue sources each year may not exceed the "appropriations limit" related to
such revenue sources set forth for the fiscal year 1978-79, with certain
adjustments made for changes in the cost of living and population. Article XIIIB
was modified substantially by Propositions 98 and 111. Certain appropriations
such as appropriations for debt service, costs of certain bonds, and, pursuant
to Proposition 111, appropriations for qualified capital taxes and motor vehicle
weight fees above January 1, 1990 levels are not included in the appropriations
limit. The appropriation limit provision also contains provisions relating to
emergency situations, revision of the appropriations limit by a majority vote of
the people, reorganizations of governments, savings by government,
non-impairment of bonds, allocation of funding of state-mandated programs and
various other exemptions.

The State's appropriation limit is based on the limit for the prior year,
adjusted annually for changes in the per capita personal income of the State and
changes in population, and adjusted, when applicable, for any transfer of
financial responsibility of providing services to or from another unit of
government. As amended by Proposition 111, the limit is tested over consecutive
two-year periods. Any excess for those two years is divided equally between
transfers to K-14 school districts and refunds to taxpayers.

As originally enacted, the appropriations limit was based on the 1978-79 fiscal
year with annual adjustments. Starting in the 1990-91 fiscal year, the
appropriations limit will be recalculated by taking the actual 1986-1987 limit,
and applying the annual adjustments as if Proposition 111 had been in effect.
This recalculation has resulted in an increase of $1 billion to the State's
appropriations limit for the 1990-1991 fiscal year.

Proposition 98, approved by the voters in 1988, changed State funding of public
education below the university level, and the operation of the State's
appropriations limit, primarily by guaranteeing K-14 schools a minimum share of
the State's general fund revenues.

Proposition 98 permits the California Legislature, by a two-thirds vote of both
houses, with the Governor's concurrence, to suspend the minimum funding period
for a one-year period.

9
<PAGE>
It is not presently possible to predict the outcome of any such litigation with
respect to the ultimate scope, impact or constitutionality of either Article
XIIIA or Article XIIIB, or their respective implementing or related legislation,
or the impact of any such determinations upon state agencies, local governments
and districts, or upon the abilities of such entities to pay the interest on, or
repay the principal of, the California Municipal Obligations in the Fund. Due to
the complex nature of Articles XIIIA and XIIIB, the ambiguities and possible
inconsistencies in their respective terms, and the applicability of their
respective exemptions and exceptions and the impossibility of predicting future
appropriations and changes in population and cost of living, it is not currently
possible to determine the impact of Article XIIIA or Article XIIIB or any
implementing or related legislation on the Municipal Obligations in the Fund or
the ability of state or local governments to pay the interest on, or repay the
principal of, such Municipal Obligations.

On September 2, 1992, the Governor signed California's Budget Act for the
1992-93 fiscal year, providing for expenditures of $57.4 billion, and a reserve
as of June 1993 of approximately $28 million. Because the 1992-93 Budget Act was
not adopted until September 2, 1992, the State was delayed in carrying out its
usual cash flow borrowing for the 1992-93 fiscal year. The resulting short fall
of cash forced the State Controller to issue approximately $3.8 billion of
interest bearing "registered warrants" between July 1 and September 4, 1992.
Registered Warrants are registered by the State Treasurer on the reverse side as
not paid because of the shortage of funds in the General Fund. Registered
Warrants had not been issued by the State since the 1930's.

In early 1993, budget forecasts estimated a State budget deficit for fiscal year
1993-94 of over $8 billion. Following several budget proposals from the Governor
and debate among various government representatives and interest groups, a $52.1
billion final State budget, which closed the projected gap, was adopted by the
State legislature and signed by Governor Wilson on a timely basis in late June
1993. Under the final budget, $1.1 billion of the fiscal 1992-93 budget deficit
was to be funded in fiscal year 1993-94.

The 1994-95 Fiscal Year was the fourth consecutive year the Governor and
Legislature were faced with a very difficult budget environment to produce a
balanced budget. Many program cuts and budgetary adjustments had already been
made in the last three years. The budget proposal set forth revenue and
expenditure forecasts and proposals which would result in operating surpluses
and an elimination of the budget deficit (estimated at approximately $2 billion
at June 30, 1994) by June 30, 1996. The 1994-95 Budget Act, signed by the
Governor on July 8, 1994, assumes that the State will use a cash flow borrowing
program in 1994-95 which combines one-year notes and the State's 1994 Revenue
Anticipation Warrants. The 1994 Revenue Anticipation Warrants allow the State to
defer repayment of approximately $1 billion of its accumulated budget deficit
into the 1995-96 Fiscal Year.

On November 15, 1994, the State Controller issued a report on the State's cash
position indicating that the cash position of the General Fund on June 30, 1995
would be $581 million better than was estimated in the July, 1994 cash flow
projections and therefore, no budget adjustment procedures would be involved for
the 1994-95 Fiscal Year.

The Department of Finance Bulletin for November, 1994, reported that revenues
for the first four months of the fiscal year were, in the aggregate, about $372
million, or 3.2%, above forecast.

The Budget Act was signed by the Governor on August 3, 1995, 34 days after the
start of the fiscal year. The Budget Act projected General Fund revenues and
transfers of $44.1 billion, a 3.5% increase from the prior year. Expenditures
were budgeted at $43.4 billion, a 4% increase. The Department of Finance
projected that, after repaying the last of the carryover budget deficit, there
would be a positive balance of $28 million in the budget reserves, the Special
Fund for Economic Uncertainties, at June 30, 1997. The Budget Act also projected
Special Fund revenues of $12.7 billion and appropriated Special Fund
expenditures of $13.0 billion.

The Governors' Budget for the 1996-97 Fiscal Year, released on January 10, 1996,
updated the current year projections, so that revenues and transfers are
estimated to be $45.0 billion, and expenditures to be $44.2 billion. The Special
Fund for Economic Uncertainties is projected to have a positive balance of about
$50 million at June 30, 1996, and on that date available internal borrowable
resources (available cash, after payment of all obligations due) will be
approximately $2.2 billion. The Administration projects it will issue up to $2.0
billion of revenue anticipation notes in April 1996, to mature June 30, 1996, to
assist in cash flow management for the final two months of the year, after
repayments of the $4.0 billion RAW issue on April 25, 1996.

The following are the principal features of the 1995-96 Budget Act:

1. Proposition 98 funding for schools and community colleges was originally
budgeted to increase by about $1.0 billion (General Fund) and $1.2 billion
total above revised 1994-95 levels. Because of higher than projected
revenues in 1994-95, an additional $543 million ($91 per K-12 ADA) was
appropriated to the 1994-95 Proposition 98 entitlement. A large part of
this is a block grant of about $54 per pupil for any one time purpose. For
the first time in several years, a full 2.7% cost of living allowance was
funded. The budget compromise anticipates a settlement date of the CTA v.
Gould litigation which challenged the validity of certain off-
10
<PAGE>
budget loans. As part of the negotiations leading to the 1995-96 Budget
Act, an oral agreement was reached to settle this case. It is expected that
a formal settlement reflecting these conditions will be entered in the near
future. The oral agreement provides that both the State and K-14 schools
share in the repayment of prior years' emergency loans to schools. Of the
total $1.76 billion in loans, the State will repay $935 million by
forgiveness of the amount owed, while schools will repay $825 million. The
State share of the repayment will be reflected as expenditures 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. Once a court settlement is reached, and the
Director of Finance certifies that such a settlement has occurred,
approximately $377 million in appropriations from the 1995-96 Fiscal Year
to schools will be disbursed in August 1996.

In anticipation of the settlement of such litigation, the 1995-96
Governors' Budget indicates that, with revenues even higher that projected,
Proposition 98 apportionments will exceed the amounts originally budgeted,
reaching a level of $4,500 per ADA.

2. Cuts in health and welfare costs totaling about $0.9 billion. Some of these
cuts (totaling about $500 million) require federal legislative or
administrative approval, which were still pending as of February, 1996.

3. A 3.5% increase in funding for the University of California ($90 million
General Fund) and the California State University systems ($24 million
General Fund), with no increases in student fees.

4. The 1995-96 Governor's Budget, as updated by the 1996-97 Governor's Budget
dated January 10, 1996, assumed receipt of $494 million in new federal aid
for incarceration and health costs of illegal immigrants, above commitments
already made by the federal government.

5. General Fund support for the Department of Corrections is increased by
about 8% over the prior year, reflecting estimates of increased prison
population, but funding is less than proposed in the 1995 Governor's
Budget.

On January 10, 1996, the Governor released his proposed budget for the 1996-97
fiscal year. The Governor requested total General Fund appropriations of about
$45.2 billion, based on projected revenues and transfers of about $45.6 billion,
which would leave a budget reserve in the Special Fund for Economic
Uncertainties at June 30, 1997 of about $400 million. The Governor renewed a
proposal, which had been rejected by the Legislature in 1995, for a 15% phased
cut in individual and corporate tax rates over three years (the budget proposal
assumes this will be enacted, reducing revenues in 1996-97 by about $600
million). There was also a proposal to restructure trial court funding in a way
which would result in a $300 million decrease in General Fund revenues. The
Governor requested legislation to make permanent a moratorium on cost of living
increases for welfare payments, and suspension of renters tax credit, which
otherwise would go back into effect in the 1996-97 Fiscal Year. He further
proposed additional cuts in certain health and welfare programs, and assumed
that cuts previously approved by the Legislature will receive federal approval.
The Governor's Budget proposes increases in funding K-12 schools under Proposal
98, for State higher education systems (with a second year of no student fee
increases), and for corrections. The 1996-97 Governor's Budget projects external
cash flow borrowing of up to $3.2 Billion, to mature by June 30, 1997.

California's General Obligation Bonds are currently rated "A" by S&P, "A-1" by
Moody's and "A" by Fitch.

There can be no assurance that general economic difficulties or the financial
circumstances of California or its towns, cities and special districts will not
adversely affect the market volume or rating of the California Municipal
Obligations or the ability of the obligors to pay debt service on the California
Municipal Obligations.

INVESTMENT RESTRICTIONS

1. Make portfolio investments other than as described under "Investment
Objectives, Policies and Risks" or any other form of Federal tax-exempt
investment which meets the Fund's high quality criteria, as determined by
the Board of Directors and which is consistent with the Fund's objectives
and policies.

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

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

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

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

6. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"), except the Fund may
purchase variable rate demand instruments which contain a demand feature.
The Fund will not invest in a repurchase agreement maturing in more than
seven days if any such investment together with securities that are not
readily marketable held by the Fund exceed 10% of the Fund's net assets.

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

8. Make loans to others, except through the purchase of portfolio investments,
including repurchase agreements, as described under "Investment Objectives,
Policies and Risks" herein.

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

10. Invest more than 25% of its assets in the securities of "issuers" in any
single industry, provided that the Fund may invest more than 25% of its
assets in bank participation certificates and there shall be no limitation
on the purchase of those Municipal Obligations and other obligations issued
or guaranteed by the United States Government, its agencies or
instrumentalities. When the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from those of
the government creating the issuing entity and a security is backed only by
the assets and revenues of the entity, the entity would be deemed to be the
sole issuer of the security. Similarly, in the case of an industrial
revenue bond, if that bond is backed only by the assets and revenues of the
non-governmental user, then such non-governmental user would be deemed to
be the sole issuer. If, however, in either case, the creating government or
some other entity, such as an insurance company or other corporate obligor,
guarantees a security or a bank issues a letter of credit, such a guarantee
or letter of credit would be considered a separate security and would be
treated as an issue of such government, other entity or bank. With respect
to 75% of the total amortized cost value of the Fund's assets, not more
than 5% of the Fund's assets may be invested in securities that are subject
to underlying puts from the same institution, and no single bank shall
issue its letter of credit and no single financial institution shall issue
a credit enhancement covering more than 5% of the total assets of the Fund.
However, if the puts are exercisable by the Fund in the event of default on
payment of principal and interest on the underlying security, then the Fund
may invest up to 10% of its assets in securities underlying puts issued or
guaranteed by the same institution; additionally, a single bank can issue
its letter of credit or a single financial institution can issue a credit
enhancement covering up to 10% of the Fund's assets, where the puts offer
the Fund such default protection.

11. Invest in securities of other investment companies, except the Fund may
purchase unit investment trust securities where such unit trusts meet the
investment objectives of the Fund and then only up to 5% of the Fund's net
assets, except as they may be acquired as part of a merger, consolidation
or acquisition of assets.

12. Issue senior securities, except insofar as the Fund may be deemed to have
issued a senior security in connection with any permitted borrowing.

If a percentage restriction is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or in the amount of the Fund's assets will not constitute a
violation of such restriction.

PORTFOLIO TRANSACTIONS

The Fund's purchases and sales of portfolio securities usually are principal
transactions. Portfolio securities are normally purchased directly from the
issuer, from banks and financial institutions or from an underwriter or market
maker for the securities. There usually are no brokerage commissions paid for
such purchases. The Fund has paid no brokerage commissions since its formation.
Any transaction for which the Fund pays a brokerage commission will

12
<PAGE>
be effected at the best price and execution available. Purchases from
underwriters of portfolio securities include a commission or concession paid by
the issuer to the underwriter, and purchases from dealers serving as market
makers include the spread between the bid and asked price. The Fund purchases
participation certificates in variable rate Municipal Obligations with a demand
feature from banks or other financial institutions at a negotiated yield to the
Fund based on the applicable interest rate adjustment index for the security.
The interest received by the Fund is net of a fee charged by the issuing
institution for servicing the underlying obligation and issuing the
participation certificate, letter of credit, guarantee or insurance and
providing the demand repurchase feature.

Allocation of transactions, including their frequency, to various dealers is
determined by the Manager in its best judgment and in a manner deemed in the
best interest of shareholders of the Fund rather than by any formula. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price. No preference in purchasing portfolio securities will
be given to banks or dealers that are Participating Organizations.

Investment decisions for the Fund will be made independently from those for any
other investment companies or accounts that may be or become managed by the
Manager or its affiliates. If, however, the Fund and other investment companies
or accounts managed by the Manager are simultaneously engaged in the purchase or
sale of the same security, the transactions may be averaged as to price and
allocated equitably to each account. In some cases, this policy might adversely
affect the price paid or received by the Fund or the size of the position
obtainable for the Fund. In addition, when purchases or sales of the same
security for the Fund and for other investment companies managed by the Manager
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantage available to large denomination purchasers or
sellers.

No portfolio transactions are executed with the Manager or its affiliates acting
as principal. In addition, the Fund will not buy bankers' acceptances,
certificates of deposit or commercial paper from the Manager or its affiliates.

HOW TO PURCHASE AND REDEEM SHARES

The material relating to the purchase and redemption of shares in the Prospectus
is herein incorporated by reference.

NET ASSET VALUE

The Fund does not determine net asset value per share on the following holidays:
New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas.

The net asset value of the Fund's shares is determined as of 12 noon, New York
City time, on each Fund Business Day. It is computed by dividing the value of
the Fund's net assets (i.e., the value of its securities and other assets less
its liabilities, including expenses payable or accrued but excluding capital
stock and surplus) by the total number of shares outstanding.

The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, except that if fluctuating
interest rates cause the market value of the Fund's portfolio to deviate more
than 1/2 of 1% from the value determined on the basis of amortized cost, the
Board of Directors will consider whether any action should be initiated, as
described in the following paragraph. Although the amortized cost method
provides certainty in valuation, it may result in periods during which the value
of an instrument is higher or lower than the price an investment company would
receive if the instrument were sold.

The Fund's Board of Directors has established procedures to stabilize the Fund's
net asset value at $1.00 per share. These procedures include a review of the
extent of any deviation of net asset value per share, based on available market
rates, from the Fund's $1.00 amortized cost per share. Should that deviation
exceed 1/2 of 1%, the Board will consider whether any action should be initiated
to eliminate or reduce material dilution or other unfair results to
shareholders. Such action may include redemption of shares in kind, selling
portfolio securities prior to maturity, reducing or withholding dividends and
utilizing a net asset value per share as determined by using available market
quotations. The Fund will maintain a dollar-weighted average portfolio maturity
of 90 days or less, will not purchase any instrument with a remaining maturity
greater than 397 days, will limit portfolio investments, including repurchase
agreements, to those United States dollar-denominated instruments that the
Fund's Board of Directors determines present minimal credit risks, and will
comply with certain reporting and record keeping procedures. The Fund has also
established procedures to ensure compliance with the requirement that portfolio
securities are Eligible Securities. (See "Investment Objectives, Policies and
Risks" herein.)

YIELD QUOTATIONS

The Fund calculates a seven-day yield quotation using a standard method
prescribed by the rules of the Securities and Exchange Commission. Under that
method, the Fund's yield figure, which is based on a chosen seven-day
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<PAGE>
period, is computed as follows: the Fund's return for the seven-day period
(which is obtained by dividing the net change in the value of a hypothetical
account having a balance of one share at the beginning of the period by the
value of such account at the beginning of the period (expected to always be
$1.00) is multiplied by (365/7) with the resulting annualized figure carried to
the nearest hundredth of one percent). For purposes of the foregoing
computation, the determination of the net change in account value during the
seven-day period reflects (i) dividends declared on the original share and on
any additional shares, including the value of any additional shares purchased
with dividends paid on the original share and (ii) fees charged to all
shareholder accounts. Realized capital gains or losses and unrealized
appreciation or depreciation of the Fund's portfolio securities are not included
in the computation. Therefore annualized yields may be different from effective
yields quoted for the same period.

The Fund's "effective yield" is obtained by adjusting its "current yield" to
give effect to the compounding nature of the Fund's portfolio, as follows: the
unannualized base period return is compounded and brought out to the nearest one
hundredth of one percent by adding one to the base period return, raising the
sum to a power equal to 365 divided by 7, and subtracting one from the result,
i.e., effective yield = (base period return + 1)365/7 - 1.

Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day. The Fund's yield for any given period is not an indication, or
representation by the Fund, of future yields or rates of return on the Fund's
shares, and may not provide a basis for comparison with bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors who
purchase the Fund's shares directly may realize a higher yield than Participant
Investors because they will not be subject to any fees or charges that may be
imposed by Participating Organizations.

The Fund may from time to time advertise its tax equivalent yield. The tax
equivalent yield is computed based upon a 30-day (or one month) period ended on
the date of the most recent balance sheet included in this Statement of
Additional Information, computed by dividing that portion of the yield of the
Fund (as computed pursuant to the formulae previously discussed) which is
tax-exempt by one minus a stated income tax rate and Fund may also fluctuate
daily and does not provide a basis for determining future yields. adding the
product to that portion, if any, of the yield of the Fund that is not
tax-exempt. The tax equivalent yield for the

The Fund may from time to time advertise a taxable equivalent yield table which
shows the yield that an investor would need to receive from a taxable investment
in order to equal a tax-free yield from the Fund. (See "Taxable Equivalent Yield
Table" herein.)

The Fund's yield for the seven-day period ended March 31, 1996 was 2.67% which
is equivalent to an effective yield of 2.71%.

MANAGER

The investment manager for the Fund is Reich & Tang Asset Management L.P., a
Delaware limited partnership with principal offices at 600 Fifth Avenue, New
York, New York 10020 (the "Manager"). The Manager was at March 31, 1996,
investment manager, advisor or supervisor with respect to assets aggregating in
excess of $9.7 billion. In addition to the Fund, the Manager acts as investment
manager and administrator of fifteen other investment companies and also advises
pension trusts, profit-sharing trusts and endowments.

New England Investment Companies, L.P. ("NEICLP") is the limited partner and
owner of a 99.5% interest in the newly created limited partnership, Reich & Tang
Asset Management L.P., the Manager. Reich & Tang Asset Management, Inc. (a
wholly-owned subsidiary of NEICLP) is the general partner and owner of the
remaining .5% interest of the Manager. Reich & Tang Asset Management L.P. has
succeeded NEICLP as the Manager of the Fund.

NEIC is a wholly-owned subsidiary of The New England which may be deemed a
"controlling person" of the Manager. NEIC is a holding company offering a broad
array of investment styles across a wide range of asset categories through ten
investment advisory/management affiliates and two distribution subsidiaries. In
addition to the Manager, these include Loomis, Sayles & Company, L.P., Copley
Real Estate Advisors, Inc., Back Bay Advisors, L.P., Westpeak Investment
Advisors, L.P., Draycott Partners, Ltd., TNE Investment Services, L.P., New
England Investment Associates, Inc., Harris Associates, and an affiliate,
Capital Growth Management Limited Partnership. These affiliates in the aggregate
are investment advisors or managers of 42 other registered investment companies.

of the Fund. The Manager provides persons satisfactory to the Board of Directors
of the Fund to serve as officers of the Fund. Such officers, as well as certain
other employees and directors of the Fund, may be directors or officers of Reich
& Tang Asset Management, Inc., the sole general partner of the Manager or
employees of the Manager or its affiliates.

The Investment Management Contract was most recently approved on April 8, 1996
by the Board of Directors, including a majority of the directors who are not
interested persons (as defined in the 1940 Act) of the Fund or the Manager. The
new Investment Management Contract has a term which extends to June 30, 1997,
and may be continued in force thereafter for successive twelve-month periods
beginning each July 1, provided that such continuance is specifically approved
annually by majority vote of the Fund's outstanding voting securities or by its
Board of Directors, and in either case by a majority of the directors who are
not parties to the Investment Management Contract or interested persons of any
such party, by votes cast in person at a meeting called for the purpose of
voting on such matter. The Investment Management Contract was approved by a
majority of the Fund's shareholders at the meeting held on August 12, 1993.

The Investment Management Contract is terminable without penalty by the Fund on
sixty days' written notice when authorized either by majority vote of its
outstanding voting shares or by a vote of a majority of its Board of Directors,
or by the Manager on sixty days' written notice, and will automatically
terminate in the event of its assignment. The Investment Management Contract
provides that in the absence of willful misfeasance, bad faith or gross
negligence on the part of the Manager, or of reckless disregard of its
obligations thereunder, the Manager shall not be liable for any action or
failure to act in accordance with its duties thereunder.

For its services under the Investment Management Contract, the Manager receives
from the Fund a fee equal to .30% per annum of the Fund's average daily net
assets (the "Management Fee") for managing the Fund's investment portfolio and
performing related administrative and clerical services. The fees are accrued
daily and paid monthly. Any portion of the total fees received by the Manager
may be used by the Manager to provide shareholder and administrative services.
(See "Distribution and Service Plan" herein.) For the Fund's fiscal years ended
December 31, 1993, 1994 and 1995 the fees payable to the Manager under the
Investment Management Contract were $453,069, $373,973 and $321,501,
respectively, of which $288,069, $5,495 and $0, respectively, was voluntarily
waived, therefore, the Manager actually received $165,000, $368,477 and
$321,501, respectively for such years. The Manager may waive its rights to any
portion of the management fee and may use any portion of the management fee for
purposes of shareholder and administrative services and distribution of the
Fund's shares.

Pursuant to the Administrative Services Contract with the Fund, the Manager
performs clerical, accounting, office service and related functions for the Fund
and provides the Fund with personnel to (i) supervise the performance of
accounting and related services by Investors Fiduciary Trust Company, the Fund's
bookkeeping or recordkeeping agent, (ii) prepare reports to and filings with
regulatory authorities and (iii) perform such other services as the Fund may
from time to time request of the Manager. The personnel rendering such services
may be employees of the Manager, of its affiliates or of other organizations.
The Manager, at its discretion, may voluntarily waive all or a portion of the
administrative services fee. For its services under the Administrative Services
Contract, the Manager receives a fee equal to .21% per annum of the Fund's
average daily net assets. For the Fund's fiscal year ended December 31, 1994,
the fee payable to the Manager under the Administrative Services Contract was
$249,315, $110,615 of which was waived. For the Fund's fiscal year ended
December 31, 1995, the amount payable to the Manager under the Administrative
Services Contract was $215,873, of which $22,133 was voluntarily waived. Any
portion of the total fees received by the Manager may be used to provide
shareholder services and for distribution of Fund shares. (See "Distribution and
Service Plan" herein.)

Expense Limitation

The Manager has agreed to reimburse the Fund for its expenses (exclusive of
interest, taxes, brokerage, and extraordinary expenses) which in any year exceed
the limits on investment company expenses prescribed by any state in which the
Fund's shares are qualified for sale. For the purpose of this obligation to
reimburse expenses, the Fund's annual expenses are estimated and accrued daily,
and any appropriate estimated payments are made to it on a monthly basis.
Subject to the obligations of the Manager to reimburse the Fund for its excess
expenses as described above, the Fund has, under the Management Contract,
confirmed its obligation for payment of all its other expenses, including taxes,
brokerage fees and commissions, commitment fees, certain insurance premiums,
interest charges and expenses of the custodian, transfer agent and dividend
disbursing agent's fees, telecommunications expenses, auditing and legal
expenses, costs of forming the corporation and maintaining corporate existence,
compensation of directors, officers and employees of the Fund and costs of other
personnel performing services for the Fund who are not officers of the general
partner of the Manager or its affiliates, costs of investor services,

15
<PAGE>

shareholders' reports and corporate meetings, Securities and Exchange Commission
registration fees and expenses, state securities laws registration fees and
expenses, expenses of preparing and printing the Fund's prospectus for delivery
to existing shareholders and of printing application forms for shareholder
accounts, and the fees payable to the Manager under the Investment Management
Contract.

The Fund may from time to time hire its own employees or contract to have
management services performed by third parties (including Participating
Organizations) as discussed herein, and the management of the Fund intends to do
so whenever it appears advantageous to the Fund. The Fund's expenses for
employees and for such services are among the expenses subject to the expense
limitation described above.

MANAGEMENT OF THE FUND

The directors and officers of the Fund and their principal occupations during
the past five years are set forth below. The address of each such person, unless
otherwise indicated, is 600 Fifth Avenue, New York, New York 10020. Mr. Duff may
be deemed an "interested person" of the Fund, as defined in the 1940 Act, on the
basis of his affiliation with the Manager.

Steven W. Duff, 42 - President and Director of the Fund, is President of Mutual
Funds division of the Manager since September 1994. Mr. Duff was formerly
Director of Mutual Fund Administration at NationsBank which he was associated
with from June 1981 to August 1994. Mr. Duff is President and a Director of
Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc.,
New Jersey Daily Municipal Income Fund, Inc., North Carolina Daily Municipal
Income Fund, Inc. and Short Term Income Fund, Inc., President and a Trustee of
Florida Daily Municipal Income Fund, Institutional Daily Income Fund and
Pennsylvania Daily Municipal Income Fund, President of Cortland Funds, Inc.,
Michigan Daily Tax Free Income Fund, Inc., and New York Daily Tax Free Income
Fund, Inc., Executive Vice President and a Director of Reich & Tang Equity Fund,
Inc., and President and Chief Executive Officer of Tax Exempt Proceeds Fund,
Inc.

Dr. W. Giles Mellon, 65 - Director of the Fund, is Professor of Business
Administration and Area Chairman of Economics in the Graduate School of
Management, Rutgers University with which he has been associated since 1966. His
address is Rutgers University Graduate School of Management, 92 New Street,
Newark, New Jersey 07102. Dr. Mellon is also a Director of Connecticut Daily Tax
Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc.,
Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal Income
Fund, Inc., North Carolina Daily Municipal Income Fund, Inc., Reich & Tang
Equity Fund, Inc. and Short Term Income Fund, Inc. and a Trustee of Florida
Daily Municipal Income Fund, Institutional Daily Income Fund and Pennsylvania
Daily Municipal Income Fund.

Robert Straniere, 54 - Director of the Fund, has been a member of the New York
State Assembly and a partner with the Straniere Law Firm since 1981. His address
is 182 Rose Avenue, Staten Island, New York 10306. Mr. Straniere is also a
Director of Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income
Fund, Inc., Delafield Fund, Inc., LifeCycle Funds, Inc., Michigan Daily Tax Free
Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York Daily
Tax Free Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Reich & Tang Equity Fund, Inc. and Short Term Income Fund, Inc. and a Trustee of
Florida Daily Municipal Income Fund, Institutional Daily Income Fund and
Pennsylvania Daily Municipal Income Fund.

Dr. Yung Wong, 57 - Director of the Fund, was Director of Shaw Investment
Management (UK) Limited from 1994 to October 1995 and formerly General Partner
of Abacus Partners Limited Partnership (a general partner of a venture capital
investment firm) since 1984. His address is 29 Alden Road, Greenwich,
Connecticut 06831. Dr. Wong is a Director of Republic Telecom Systems
Corporation (provider of telecommunications equipment) since January 1989 and of
TelWatch, Inc. (provider of network management software) since August 1989. Dr.
Wong is also a Director of Connecticut Daily Tax Free Income Fund, Inc., Daily
Tax Free Income Fund, Inc., Delafield Fund, Inc., Michigan Daily Tax Free Income
Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York Daily Tax
Free Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc., Reich
& Tang Equity Fund, Inc. and Short Term Income Fund, Inc. and a Trustee of
Florida Daily Municipal Income Fund, Institutional Daily Income Fund and
Pennsylvania Daily Municipal Income Fund.

Molly Flewharty, 45 - Vice President of the Fund, is Vice President of the
Mutual Funds division of the Manager since September 1993. Ms. Flewharty was
formerly Vice President of Reich & Tang, Inc. which she was associated with from
December 1977 to September 1993. Ms. Flewharty is also Vice President of
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax
Free Income Fund, Inc., Delafield Fund, Inc., Florida Daily Municipal Income
Fund, Institutional Daily Income Fund, Lebenthal Funds, Inc., Michigan Daily Tax
Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York
Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income Fund,
Inc., Pennsylvania Daily Municipal Income Fund and Short Term Income Fund, Inc.

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<PAGE>

Lesley M. Jones, 47 - Vice President of the Fund, is Senior Vice President of
the Mutual Funds division of the Manager since September 1993. Ms. Jones was
formerly Senior Vice President of Reich & Tang, Inc. which she was associated
with from April 1973 to September 1993. Ms. Jones is also Vice President of
Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc.,
Delafield Fund, Inc., Florida Daily Municipal Income Fund, Institutional Daily
Income Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Municipal
Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North Carolina
Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income Fund,
Reich & Tang Equity Fund, Inc. and Short Term Income Fund, Inc.

Dana E. Messina, 39 - Vice President of the Fund, is Executive Vice President of
the Mutual Funds division of the Manager since January 1995 and was Vice
President from September 1993 to January 1995. Ms. Messina was formerly Vice
President of Reich & Tang, Inc. which she was associated with from December 1980
to September 1993. Ms. Messina is also Vice President of Connecticut Daily Tax
Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income Fund, Inc.,
Delafield Fund, Inc., Florida Daily Municipal Income Fund, Institutional Daily
Income Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North
Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income
Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund, Inc. and Tax
Exempt Proceeds Fund, Inc.

Bernadette N. Finn, 48 - Secretary of the Fund, is Vice President of the Mutual
Funds division of the Manager since September 1993. Ms. Finn was formerly Vice
President and Assistant Secretary of Reich & Tang, Inc. which she was associated
with from September 1970 to September 1993. Ms. Finn is also Secretary of
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax
Free Income Fund, Inc., Florida Daily Municipal Income Fund, Michigan Daily Tax
Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York
Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income Fund,
Inc., Pennsylvania Daily Municipal Income Fund and Tax Exempt Proceeds Fund,
Inc., Vice President and Secretary of Delafield Fund, Inc., Institutional Daily
Income Fund, Reich & Tang Equity Fund, Inc. and Short Term Income Fund, Inc.

Richard De Sanctis, 39 - Treasurer of the Fund, is Vice President and Treasurer
of the Manager since September 1993. Mr. De Sanctis was formerly Controller of
Reich & Tang, Inc. from January 1991 to September 1993, Vice President and
Treasurer of Cortland Financial Group, Inc. and Vice President of Cortland
Distributors, Inc. from 1989 to December 1990. He is also Treasurer of
Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc.,
Delafield Fund, Inc., Florida Daily Municipal Income Fund, Institutional Daily
Income Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North
Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income
Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund, Inc. and Tax
Exempt Proceeds Fund, Inc. and is Vice President and Treasurer of Cortland
Trust, Inc.

The Fund paid an aggregate remuneration of $9,750 to its directors with respect
to the period ended December 31, 1995, all of which consisted of aggregate
directors' fees paid to the three disinterested directors, pursuant to the terms
of the Investment Management Contract. (See "Manager" herein.) See Compensation
Table below.

<TABLE>
<CAPTION>
Compensation Table

<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)

Name of Person, Aggregate Compensation Pension or Retirement Estimated Annual Total Compensation from
Position from Registrant for Benefits Accrued as Part Benefits upon Retirement Fund and Fund Complex
Fiscal Year of Fund Expenses Paid to Directors

W. Giles Mellon, $3,250.00 0 0 $56,750 (14 Funds)
Director

Robert Straniere, $3,250.00 0 0 $56,750 (14 Funds)
Director

Yung Wong, $3,250.00 0 0 $56,750 (14 Funds)
Director

* The total compensation paid to such persons by the Fund and Fund Complex for
the fiscal year ending December 31,

17
<PAGE>

1995 (and, with respect to certain of the funds in the Fund Complex,
estimated to be paid during the fiscal year ending December 31, 1995). The
parenthetical number represents the number of investment companies (including
the Fund) from which such person receives compensation that are considered
part of the same Fund complex as the Fund, because, among other things, they
have a common investment advisor.
</TABLE>

Counsel and Auditors

Legal matters in connection with the issuance of shares of stock of the Fund are
passed upon by Battle Fowler LLP, 75 East 55th Street, New York, New York 10022.

Matters in connection with California law are passed upon by LeBoeuf, Lamb,
Greene & MacRae LLP, 725 South Figueroa Street, Los Angeles, California 90017.

McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York 10017, independent
certified public accountants, have been selected as auditors for the Fund.

DISTRIBUTION AND SERVICE PLAN

Pursuant to Rule 12b-1 (the "Rule") under the 1940 Act, the Securities and
Exchange Commission has required that an investment company which bears any
direct or indirect expense of distributing its shares must do so only in
accordance with a plan permitted by the Rule. The Fund's Board of Directors has
adopted a distribution and service plan (the "Plan") and, pursuant to the Plan,
the Fund and the Manager have entered into a Distribution Agreement and a
Shareholder Servicing Agreement with Reich & Tang Distributors L.P. (the
"Distributor") as distributor of the Fund's shares.

The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses including the cost of dedicated lines and CRT terminals, incurred by
the Manager and Distributor in carrying out their obligations under the
Shareholder Servicing Agreement and (ii) preparing, printing and delivering the
Fund's prospectus to existing shareholders of the Fund and preparing and
printing subscription application forms for shareholder accounts, brochures and
other promotional materials and of delivering the prospectuses and materials to
prospective shareholders of the Fund. The Plan provides that the Manager may
make payments from time to time from their own resources, which may include the
Management Fee and past profits for the following purposes: (i) to defray the
costs of, and to compensate others, including Participating Organizations with
whom the Distributor has entered into written agreements, for, performing
shareholder servicing and related administrative functions on behalf of the
Fund; (ii) to compensate certain Participating Organizations for providing
assistance in distributing the Fund's shares; and (iii) to pay the costs of
printing and distributing the Fund's prospectus to prospective investors and to
defray the cost of the preparation and printing of brochures and other
promotional materials, mailings to prospective shareholders, advertising, and
other promotional activities, including the salaries and/or commissions of sales
personnel in connection with the distribution of the Fund's shares. The
Distributor may also make payments from time to time from its own resources,
which include the Shareholder Servicing Fee and past profits, for the purposes
enumerated in (i) above. The Distributor, in its sole discretion, will determine
the amount of such payments made pursuant to the Plan, provided that such
payments will not increase the amount which the Fund is required to pay to the
Manager and Distributor for any fiscal year under either the Investment
Management Contract or the Shareholder Servicing Agreement in effect for that
year.

In accordance with the Rule, the Plan provides that all written agreements
relating to the Plan entered into between either the Fund or the Distributor and
Participating Organizations or other organizations must be in a form
satisfactory to the Fund's Board of Directors. In addition, the Plan requires
the Fund and the Distributor to prepare, at least quarterly, written reports
setting forth all amounts expended for distribution purposes by the Fund and the
Distributor pursuant to the Plan and identifying the distribution activities for
which those expenditures were made.

18
<PAGE>

For the Fund's fiscal year ended December 31, 1995 the amount payable to the
Distributor under the Distribution Plan and Shareholder Servicing Agreement
adopted thereunder pursuant to the Rule under the 1940 Act, totaled $214,334,
all of which was voluntarily waived by the Distributor. During the same period,
the Manager and Distributor made payments under the Plan totaling $389,175, of
which $358,227 was to or on behalf of Participating Organizations. For the
Fund's fiscal year ended December 31, 1994, the amount payable to the
Distributor under the Distribution Plan and Shareholder Servicing Agreement
totalled $249,316, $226,617 of which was voluntarily waived by the Distributor.
During the same period, the Manager and Distributor made payments under the Plan
totalling $383,820, of which $354,501was to or on behalf of Participating
Organizations. For the Fund's fiscal year ended December 31, 1993, the amount
payable to the Distributor under the Distribution Plan and Shareholder Servicing
Agreement totalled $210,110, all of which was voluntarily waived by the
Distributor. During the same period, the Manager and Distributor made payments
under the Plan totalling $268,105, of which $249,836 was to or on behalf of
Participating Organizations. The excess of such payments over the total payments
the Manager and Distributor received from the Fund under the Plan represent
distribution expenses funded by the Manager from its own resources including the
Management Fee.

The Plan was most recently approved on October 6, 1995 by the Board of Directors
and shall continue until December 31, 1997, including a majority of the
directors who are not interested persons (as defined in the 1940 Act) of the
Fund or the Manager. The Plan provides that it may continue in effect for
successive annual periods provided it is approved by the shareholders or by the
Board of Directors, including a majority of directors who are not interested
persons of the Fund and who have no direct or indirect interest in the operation
of the Plan or in the agreements related to the Plan. The Plan was approved by a
majority of the shareholders of the Fund at their annual meeting held on August
31, 1988. The Plan further provides that it may not be amended to increase
materially the costs which may be spent by the Fund for distribution pursuant to
the Plan without shareholder approval, and the other material amendments must be
approved by the directors in the manner described in the preceding sentence. The
Plan may be terminated at any time by a vote of a majority of the disinterested
directors of the Fund or the Fund's shareholders.

DESCRIPTION OF COMMON STOCK

The authorized capital stock of the Fund, which was incorporated on December 5,
1986 in Maryland, consists of twenty billion shares of stock having a par value
of one tenth of one cent ($.001) per share. Each share has equal dividend,
distribution, liquidation and voting rights and a fractional share has those
rights in proportion to the percentage that the fractional share represents of a
whole share. Shares will be voted in the aggregate. There are no conversion or
preemptive rights in connection with any shares of the Fund. All shares, when
issued in accordance with the terms of the offering, will be fully paid and
nonassessable. Shares are redeemable at net asset value, at the option of the
shareholder. On March 31, 1996, there were 189,323,307 shares of the Fund
outstanding. As of March 31, 1996, the amount of shares owned by all officers
and directors of the Fund as a group was less than 1% of the outstanding shares
of the Fund. Set forth below is certain information as to persons who owned 5%
or more of the Fund's outstanding common stock as of March 31, 1996.

Nature of
Name and Address % of Shares Ownership
- ---------------- ----------- ---------

Fundtech Services L.P.
As Agent For Various 89.80 Record
Beneficial Owners
600 Fifth Avenue
New York, NY 10020

Investors Fiduciary Trust Company 05.13 Record
ATTN: Aggie Robinson
210 West 10th Street
Kansas City, MO 64105

Under its Articles of Incorporation the Fund has the right to redeem for cash
shares of stock owned by any shareholder to the extent and at such times as the
Fund's Board of Directors determines to be necessary or appropriate to prevent
an undue concentration of stock ownership which would cause the Fund to become a
"personal holding company" for Federal income tax purposes. In this regard, the
Fund may also exercise its right to reject purchase orders.

19
<PAGE>
and, in that event, the holders of the remaining shares will not be able to
elect any person or persons to the Board of Directors.

As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
meetings only (a) for the election of directors, (b) for approval of the Fund's
revised investment advisory contracts with respect to a particular class or
series of stock, (c) for approval of revisions to the Fund's distribution
agreement with respect to a particular class or series of stock and (d) upon the
written request of holders of shares entitled to cast not less than 25% of all
the votes entitled to be cast at such meeting. Annual and other meetings may be
required with respect to such additional matters relating to the Fund as may be
required by the 1940 Act, including the removal of Fund director(s) and
communication among shareholders, any registration of the Fund with the
Securities and Exchange Commission or any state, or as the Directors may
consider necessary or desirable. Each Director serves until the next meeting of
shareholders called for the purpose of considering the election or reelection of
such Director or of a successor to such Director, and until the election and
qualification of his or her successor, elected at such meeting, or until such
Director sooner dies, resigns, retires or is removed by the vote of the
shareholders.

FEDERAL INCOME TAXES

The Fund has elected to qualify under the Code and under California law as a
"regulated investment company" that distributes "exempt-interest dividends". The
Fund intends to continue to qualify for regulated investment company status, so
long as such qualification is in the best interests of its shareholders. Such
qualification relieves the Fund of liability for Federal income taxes to the
extent its earnings are distributed in accordance with the applicable provisions
of the Code.

The Fund's policy is to distribute as dividends each year 100% and in no event
less than 90% of its tax-exempt interest income, net of certain deductions.
Exempt-interest dividends, as defined in the Code, are dividends or any part
thereof (other than capital gain dividends) paid by the Fund that are
attributable to interest on obligations, the interest on which is exempt from
regular Federal income tax, and designated by the Fund as exempt-interest
dividends in a written notice mailed to the Fund's shareholders not later than
60 days after the close of its taxable year. The percentage of the total
dividends paid by the Fund during any taxable year that qualifies as
exempt-interest dividends will be the same for all shareholders receiving
dividends during the year.

Exempt-interest dividends are to be treated by the Fund's shareholders as items
of interest excludable from their gross income under Section 103(a) of the Code.
If a shareholder receives an exempt-interest dividend with respect to any share
and such share has been held for six months or less, then any loss on the sale
or exchange of such share will be disallowed to the extent of the amount of such
exempt-interest dividend. The Code provides that interest on indebtedness
incurred, or continued, to purchase or carry certain tax-exempt securities such
as shares of the Fund is not deductible. Therefore, among other consequences, a
certain proportion of interest on indebtedness incurred, or continued, to
purchase or carry securities on margin may not be deductible during the period
an investor holds shares of the Fund. For Social Security recipients, interest
on tax-exempt bonds, including exempt-interest dividends paid by the Fund, is to
be added to adjusted gross income for purposes of computing the amount of Social
Security benefits includable in gross income. The amount of such interest
received will have to be disclosed on the shareholders' Federal income tax
returns. Taxpayers other than corporations are required to include as an item of
tax preference for purposes of the Federal alternative minimum tax all
tax-exempt interest on "private activity" bonds (generally, a bond issue in
which more than 10% of the proceeds are used in a non-governmental trade or
business) (other than Section 501(c)(3) bonds) issued after August 7, 1986.
Thus, this provision will apply to the portion of the exempt-interest dividends
from the Fund's assets, if any, that are attributable to such post-August 7,
1986 private activity bonds, if any of such bonds are acquired by the Fund.
Corporations are required to increase their alternative minimum taxable income
by 75% of the amount by which the adjusted current earnings (which will include
tax-exempt interest) of the corporation exceeds the alternative minimum taxable
income (determined without this provision). In addition, in certain cases,
Subchapter S corporations with accumulated earnings and profits from Subchapter
C years are subject to a minimum tax on excess "passive investment income" which
includes tax-exempt interest. A shareholder is advised to consult his tax
advisor with respect to whether exempt-interest dividends retain the exclusion
under Section 103(a) of the Code if such shareholder would be treated as a
"substantial user" or "related person" under Section 147(a) of the Code with
respect to some or all of the "private activity bonds", if any, held by the
Fund.

Although it is not intended, it is possible that the Fund may realize short-term
or long-term capital gains or losses from its portfolio transactions. The Fund
may also realize short-term or long-term capital gains upon the maturity or
disposition of securities acquired at discounts resulting from market
fluctuations. Short-term capital gains will be taxable to shareholders as
ordinary income when they are distributed. Any net capital gains (the excess of
its net realized long-term capital gain over its net realized short-term capital
loss) will be distributed annually to the Fund's
20
<PAGE>

shareholders. The Fund will have no tax liability with respect to distributed
net capital gains and the distributions will be taxable to shareholders as
long-term capital gains regardless of how long the shareholders have held Fund
shares. However, Fund shareholders who at the time of such a net capital gain
distribution have not held their Fund shares for more than six months, and who
subsequently dispose of those shares at a loss, will be required to treat such
loss as a long-term capital loss to the extent of such net capital gain
distribution. Distributions of net capital gain will be designated as a capital
gain dividend in a written notice mailed to the Fund's shareholders not later
than 60 days after the close of the Fund's taxable year.

The Fund intends to distribute at least 90% of its investment company taxable
income (taxable income subject to certain adjustments exclusive of the excess of
its net long-term capital gain over its net short-term capital loss) for each
taxable year. The Fund will be subject to Federal income tax on any
undistributed investment company taxable income. To the extent such income is
distributed it will be taxable to shareholders as ordinary income. Expenses paid
or incurred by the Fund will be allocated between tax-exempt and taxable income
in the same proportion as the amount of the Fund's tax-exempt income bears to
the total of such exempt income and its gross income (excluding from gross
income the excess of capital gains over capital losses). If the Fund does not
distribute at least 98% of its ordinary income and 98% of its capital gain net
income for a taxable year, the Fund will be subject to a 4% excise tax on the
excess of such amounts over the amounts actually distributed.

The Fund generally is required to withhold 31% of taxable interest or dividend
payments or proceeds from the redemption of shares of the Fund if a shareholder
fails to provide the Fund with a current taxpayer identification number.

Dividends and distributions to shareholders will be treated in the same manner
for Federal income tax purposes whether received in cash or reinvested in
additional shares of the Fund.

With respect to the variable rate demand instruments, including participation
certificates therein, the Fund has obtained and is relying on the opinion of
Battle Fowler LLP, counsel to the Fund, that it will be treated for Federal
income tax purposes as the owner thereof and the interest on the underlying
Municipal Obligations will be tax-exempt to the Fund. Counsel has pointed out
that the Internal Revenue Service has announced that it will not ordinarily
issue advance rulings on the question of ownership of securities or
participation interests therein subject to a put, and as a result could reach a
conclusion different from that reached by counsel.

From time to time, proposals have been introduced before Congress to restrict or
eliminate the Federal income tax exemption for interest on Municipal
Obligations. If such a proposal were introduced and enacted in the future, the
ability of the Fund to pay exempt-interest dividends would be adversely affected
and the Fund would re-evaluate its investment objective and policies and
consider changes in the structure.

In South Carolina v. Baker, the U.S. Supreme Court held that the Federal
government may constitutionally require states to register bonds they issue and
may subject the interest on such bonds to Federal tax if not registered, and
that there is no constitutional prohibition against the Federal government's
taxing the interest earned on state or other municipal bonds. The Supreme Court
decision affirms the authority of the Federal government to regulate and control
bonds such as the Municipal Obligations and to tax such bonds in the future. The
decision does not, however, affect the current exemption from taxation of the
interest earned on the Municipal Obligations in accordance with Section 103 of
the Code.

CALIFORNIA INCOME TAXES

The designation of all or a portion of a dividend paid by the Fund as an
"exempt-interest dividend" under the Code does not necessarily result in the
exemption of such amount from tax under the laws of any state or local taxing
authority. Under California law, at the end of each quarter of its tax year, at
least 50% of the "value" of the Fund's assets must consist of obligations which,
when held by an individual, the interest therefrom is exempt from taxation by
the State of California under the Constitution or laws of the State of
California or the United States. Assuming compliance with this requirement, with
respect to dividends treated for Federal income tax purposes as exempt-interest
dividends that are paid by the Fund to a California resident individual
shareholder, in the opinion of LeBoeuf, Lamb, Greene & MacRae LLP, special
California tax counsel to the Fund, amounts correctly designated as derived from
California Municipal Obligations received by the Fund will not be subject to the
California Income Tax. Amounts correctly designated as derived from Territorial
Municipal Obligations and which bear interest exempt from taxation by the State
of California, as described above, also will not be subject to the California
Income Tax. In the past, the California Franchise Tax Board has taken the
position that dividends derived from Federal obligations are includable in a
California resident's tax base for purposes of the California Income Tax.
Legislation was enacted, however, to clarify treatment as "exempt-interest
dividends".

21
<PAGE>

California also taxes capital gain dividends distributed to shareholders at
ordinary income rates. No tax is imposed on undistributed amounts unless the
shareholder has the option of receiving cash or additional shares.
Exempt-interest dividends which are not derived from California Municipal
Obligations and any other dividends of the Fund which do not qualify as
"exempt-interest dividends" under California law will be includable in a
California resident's tax base for purposes of the California Income Tax.

Shareholders are urged to consult their tax advisors with respect to the
treatment of distributions from the Fund in their own states and localities.

CUSTODIAN AND TRANSFER AGENT

Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105 is custodian for its cash and securities. Reich & Tang Services L.P., 600
Fifth Avenue, New York, New York 10020 is transfer agent and dividend disbursing
agent for the shares of the Fund. The transfer agent and custodian do not assist
in, and are not responsible for, investment decisions involving assets of the
Fund.

22
<PAGE>
DESCRIPTION OF RATINGS*

Description of Moody's Investors Service, Inc.'s two highest municipal 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 are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.

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

Con. (_____) - Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.

Description of Moody's Investors Service, Inc.'s two highest ratings of state
and municipal notes and other short-term loans:

Moody's ratings for state and municipal notes and other short-term loans will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of the first importance in bond risk
are of lesser importance in the short run. Symbols used will be as follows:

MIG-1 - Loans bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.

MIG-2 - Loans bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.

Description of Standard & Poor's Corporation's two highest debt ratings:

AAA - Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

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

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

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

S&P does not provide ratings for state and municipal notes.

Description of Standard & Poor's Corporation's two highest commercial paper
ratings:

Issues assigned this highest rating are regarded as having the greatest capacity
for timely payment. Issues in this category are delineated with the numbers 1, 2
and 3 to indicate the relative degree of safety.

A-1 - This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.

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

Description of Moody's Investors Service, Inc.'s two highest commercial paper
ratings:

Moody's employs the following designations, both judged to be investment grade,
to indicate the relative repayment capacity of rated issues: Prime-1, highest
quality; Prime-2, higher quality.
- -------------------------------------
* As described by the rating agencies
23
<PAGE>

<TABLE>
<CAPTION>
INDIVIDUAL TAX EQUIVALENT YIELD TABLE

- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

1. If Your Taxable Income Bracket Is . . .
- ----------------------------------------------------------------------------------------------------------------------------
Single $0- $24,001- $25,084- $31,701- $58,151- -- $109,937- $121,301- -- $263,751
Return 24,000 25,083 31,700 58,150 109,936 -- 121,300 263,750 -- and over
- ----------------------------------------------------------------------------------------------------------------------------
Joint $0 $40,101- $50,167- $63,401- $96,901- $147,701- -- -- $219,873- $439,745
Return 40,100 50,166 63,400 96,900 147,700 219,872 -- -- 439,744 and over
- -----------------------------------------------------------------------------------------------------------------------------
2. Then Your COmbined Income Tax Bracket Is . . .
- ----------------------------------------------------------------------------------------------------------------------------
Federal
Tax Rate 15.00% 28.00% 28.00% 28.00% 31.00% 31.00% 31.00% 36.00% 39.60% 39.60%
- ----------------------------------------------------------------------------------------------------------------------------
State
Tax Rate 6.00% 6.00% 8.00% 9.30% 9.30% 9.30% 10.00% 10.00% 10.00% 11.00%
- ----------------------------------------------------------------------------------------------------------------------------
Combined
Marginal
Tax Rate 20.10% 32.32% 33.76% 34.70% 37.42% 37.42% 37.90% 42.40% 45.64% 46.24%
- ----------------------------------------------------------------------------------------------------------------------------

3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
- ----------------------------------------------------------------------------------------------------------------------------
Tax Exempt Equivalent Taxable Investment Yield
Yield Requires to Match Tax Exempt Yield
- -----------------------------------------------------------------------------------------------------------------------------
2.00% 2.50% 2.96% 3.02% 3.06% 3.20% 3.20% 3.22% 3.47% 3.68% 3.72%
- -----------------------------------------------------------------------------------------------------------------------------
2.50% 3.13% 3.69% 3.77% 3.83% 3.99% 3.99% 4.03% 4.34% 4.60% 4.65%
- -----------------------------------------------------------------------------------------------------------------------------
3.00% 3.75% 4.43% 4.53% 4.59% 4.79% 4.79% 4.83% 5.21% 5.52% 5.58%
- -----------------------------------------------------------------------------------------------------------------------------
3.50% 4.38% 5.17% 5.28% 5.36% 5.59% 5.59% 5.64% 6.08% 6.44% 6.51%
- -----------------------------------------------------------------------------------------------------------------------------
4.00% 5.01% 5.91% 6.04% 6.13% 6.39% 6.39% 6.44% 6.94% 7.36% 7.44%
- -----------------------------------------------------------------------------------------------------------------------------
4.50% 5.63% 6.65% 6.79% 6.89% 7.19% 7.19% 7.25% 7.81% 8.28% 8.37%
- -----------------------------------------------------------------------------------------------------------------------------
5.00% 6.26% 7.39% 7.55% 7.66% 7.99% 7.99% 8.05% 8.68% 9.20% 9.30%
- -----------------------------------------------------------------------------------------------------------------------------
5.50% 6.88% 8.13% 8.30% 8.42% 8.79% 8.79% 8.86% 9.55% 10.12% 10.23%
- -----------------------------------------------------------------------------------------------------------------------------
6.00% 7.51% 8.87% 9.06% 9.19% 9.59% 9.59% 9.66% 10.42% 11.04% 11.16%
- -----------------------------------------------------------------------------------------------------------------------------
6.50% 8.14% 9.60% 9.81% 9.95% 10.39% 10.39% 10.47% 11.28% 11.96% 12.09%
- -----------------------------------------------------------------------------------------------------------------------------
7.00% 8.76% 10.34% 10.57% 10.72% 11.19% 11.19% 11.27% 12.15% 12.88% 13.02%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>

To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, in section three, to see the equivalent taxable yields
for each of the tax free income yields given.
- --------------------------------------------------------------------------------

24
<PAGE>

<TABLE>
<CAPTION>
CORPORATE TAXABLE EQUIVALENT YIELD TABLE

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

1. If Your Corporate Taxable Income Bracket Is . . .
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>

Corporate $0- $50,001- $75,001- $100,001- $10,000,001- $15,000,001- $18,333,334
Return 50,000 75,000 100,000 335,000 $335,001- 15,000,000 18,333,333 and over
10,000,000
- --------------------------------------------------------------------------------------------------------------------------

2. Then Your Combined Income Tax Bracket Is . . .
- --------------------------------------------------------------------------------------------------------------------------
Federal
Tax 15.00% 25.00% 34.00% 39.00% 34.00% 35.00% 38.00% 35.00%
Rate
- --------------------------------------------------------------------------------------------------------------------------
State
Tax 9.30% 9.30% 9.30% 9.30% 9.30% 9.30% 9.30% 9.30%
Rate
- --------------------------------------------------------------------------------------------------------------------------
Combined
Marginal
Tax 22.91% 31.98% 40.14% 44.67% 40.14% 41.05% 43.77% 41.05%
Rate
- --------------------------------------------------------------------------------------------------------------------------

3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
- --------------------------------------------------------------------------------------------------------------------------
Tax Equivalent Taxable Investment Yield
Exempt Requires to Match Tax Exempt Yield
Yield
- --------------------------------------------------------------------------------------------------------------------------
2.00% 2.59% 2.94% 3.34% 3.61% 3.34% 3.39% 3.56% 3.39%
- --------------------------------------------------------------------------------------------------------------------------
2.50% 3.24% 3.68% 4.18% 4.52% 4.18% 4.24% 4.45% 4.24%
- --------------------------------------------------------------------------------------------------------------------------
3.00% 3.89% 4.41% 5.01% 5.42% 5.01% 5.09% 5.33% 5.09%
- --------------------------------------------------------------------------------------------------------------------------
3.50% 4.54% 5.15% 5.85% 6.33% 5.85% 5.94% 6.22% 5.94%
- --------------------------------------------------------------------------------------------------------------------------
4.00% 5.19% 5.88% 6.68% 7.23% 6.68% 6.78% 7.11% 6.78%
- --------------------------------------------------------------------------------------------------------------------------
4.50% 5.84% 6.62% 7.52% 8.13% 7.52% 7.63% 8.00% 7.63%
- --------------------------------------------------------------------------------------------------------------------------
5.00% 6.49% 7.35% 8.35% 9.04% 8.35% 8.48% 8.89% 8.48%
- --------------------------------------------------------------------------------------------------------------------------
5.50% 7.13% 8.09% 9.19% 9.94% 9.19% 9.33% 9.78% 9.33%
- --------------------------------------------------------------------------------------------------------------------------
6.00% 7.78% 8.82% 10.02% 10.84% 10.02% 10.18% 10.67% 10.18%
- --------------------------------------------------------------------------------------------------------------------------
6.50% 8.43% 9.56% 10.86% 11.75% 10.86% 11.03% 11.56% 11.03%
- --------------------------------------------------------------------------------------------------------------------------
7.00% 9.08% 10.29% 11.69% 12.65% 11.69% 11.87% 12.45% 11.87%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>

25
<PAGE>

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

CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
INDEPENDENT AUDITOR'S REPORT

===============================================================================

The Board of Directors and Shareholders
California Daily Tax Free Income Fund, Inc.

We have audited the accompanying statement of net assets of California Daily Tax
Free Income Fund, Inc. as of December 31, 1995, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the selected financial
information for each of the five years in the period then ended. These financial
statements and selected financial information are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and selected financial information based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and selected
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1995, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and selected financial information
referred to above present fairly, in all material respects, the financial
position of California Daily Tax Free Income Fund, Inc. as of December 31, 1995,
the results of its operations, the changes in its net assets and the selected
financial information for the periods indicated, in conformity with generally
accepted accounting principles.

\s\McGladrey & Pullen, LLP

New York, New York
January 26, 1996

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

26
<PAGE>

- -------------------------------------------------------------------------------
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
-------------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poors
------ ---- ----- ------- ------- -------
Other Tax Exempt Investments (23.57%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5,000,000 California State RAW - Series C
LOC (14)* 04/25/96 3.65 % $ 5,030,524 MIG-1 SP-1
4,310,000 California State RAW - Series C
LOC (14)* 04/25/96 3.65 4,336,301 MIG-1 SP-1
5,000,000 County of Fresno, CA Sanger USDF TRAN 11/07/96 3.74 5,028,544 SP-1+
3,000,000 Los Angeles County, CA TRAN
LOC Credit Suisse/Morgan Guaranty/Swiss Bank Corporation
Union Bank of Switzerland/West Land Girozentrale/Bank of America 07/01/96 3.64 3,010,792 MIG-1 SP-1+
5,000,000 Los Angeles County, CA TRAN
LOC Credit Suisse/Morgan Guaranty/Swiss Bank Corporation
Union Bank of Switzerland/West Land Girozentrale/Bank of America 07/01/96 3.24 5,027,626 MIG-1 SP-1+
10,000,000 Los Angeles County, CA TRAN
LOC Credit Suisse/Morgan Guaranty/Swiss Bank Corporation
Union Bank of Switzerland/West Land Girozentrale/Bank of America 07/01/96 3.74 10,033,316 MIG-1 SP-1+
1,000,000 San Diego County, CA TRAN
LOC Nations West/Banque Nationale de Paris 09/30/96 3.69 1,004,984 MIG-1 SP-1
1,000,000 San Diego, CA USDF TRAN - Series A
LOC Westdeutsche Landesbank Girozentrale 10/10/96 3.74 1,006,678 VMIG-1
1,000,000 San Jose, CA Airport Revenue
FGIC Insured 03/01/96 3.64 1,001,073 Aaa AAA
5,000,000 Ventura County, CA TRAN 07/02/96 3.74 5,016,754 MIG-1 SP-1+
- ---------- ----------
40,310,000 Total Other Tax Exempt Investments 40,496,592
- ---------- ----------
<CAPTION>
Other Variable Rate Demand Instruments (c) (47.90%)
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$2,800,000 Alameda County, CA IDRB Refunding Bonds
(Hoover Universal) - Series 1994 06/01/04 5.90 % $ 2,800,000 VMIG-1 A1
400,000 California HFA (Sutter Health) - Series 1990A
LOC Morgan Guaranty 03/01/20 5.85 400,000 VMIG-1 A1+
3,800,000 California PCFA Refunding RB
(Atlantic Richfield Company Project) - Series 1994A 12/01/24 6.05 3,800,000 VMIG-1 A1
1,100,000 California PCFA Refunding RB
(Southern California Edison) - Series D 02/28/08 5.40 1,100,000 VMIG-1 A1+
700,000 California PCFA Refunding RB
(Southern California Edison) - Series A 02/28/08 5.40 700,000 VMIG-1 A1
2,500,000 California PCFA Solid Waste Disposal
(Western Waste Industrial Project)
LOC Citibank 12/01/00 5.38 2,500,000 VMIG-1

</TABLE>

- -------------------------------------------------------------------------------
See Notes to Financial Statements.

27
<PAGE>

Other Variable Rate Demand Instruments (c) (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 2,400,000 California PCRB Financial Authority
(Southern California Edison) - Series B 02/28/08 5.40 % $ 2,400,000 VMIG-1 A1+
7,500,000 City of Anaheim, CA COP (1993 Refunding Projects)
AMBAC Insured 08/01/19 5.30 7,500,000 VMIG-1 A1
1,500,000 City of Los Angeles IDRB (Cereal Food Processors, Inc. Project)
LOC Commerzbank A.G. 12/01/05 5.05 1,500,000 A1
2,560,000 County of Contra Costa
(GNMA Collateralized Del Norte Place Apartments)
LOC Sumitomo Bank, Ltd. 10/20/28 5.85 2,560,000 A1
1,175,000 Fullerton, CA IDA RB (PCL Packaging)
LOC Bank of Nova Scotia 12/01/04 5.00 1,175,000 A1+
1,000,000 Irwindale, CA IDRB
(Toys R' Us, Incorporated Project) - Series 1984
LOC Bankers Trust Company 12/01/19 5.13 1,000,000 Aa2
3,000,000 Los Angeles County, CA HFA MHRB
(Sand Canyon Ranch Project) - Series F
LOC Citibank 11/01/06 5.30 3,000,000 A1+
5,700,000 Los Angeles County, CA TRAN
Common Sales Tax Revenue - Series A
FGIC Insured 07/01/12 5.10 5,700,000 VMIG-1 A1
1,000,000 Los Angeles, CA (Harbor Cove Project)
LOC Citibank 10/01/06 5.15 1,000,000 A1+
7,700,000 Ontario, CA IDA (LD Brinkman & Company)
LOC Barclays Bank 04/01/15 5.90 7,700,000 P1
1,000,000 Orange County, CA (Radnor Aragon Corporation)
LOC Bank of Nova Scotia 08/01/19 5.13 1,000,000 Aa2
305,000 Oxnard, CA (Channel Island Business Center Project)
LOC Wells Fargo Bank, N.A. 07/01/05 5.23 305,000 VMIG-1
4,500,000 Rohnert Park, CA MHRB
(Crossbrook Apartments Project) - Series A 06/15/25 5.00 4,500,000 A1+
5,000,000 Sacramento County, CA MHRB (Shadowood Apartments Project)
LOC General Electric Capital Corporation 12/01/22 5.20 5,000,000 A1+
3,000,000 San JoaQuin County Transportation Authority Sales Tax RB
- Series 1993
LOC Sumitomo Bank, Ltd. 04/01/11 5.15 3,000,000 VMIG-1 A1

</TABLE>

- -------------------------------------------------------------------------------
See Notes to Financial Statements.

28
<PAGE>

- -------------------------------------------------------------------------------
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
DECEMBER 31, 1995
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poors
------ ---- ----- -------- ------- -----
Other Variable Rate Demand Instruments (c) (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------

<C> <C> <C> <C> <C> <C>
$ 2,200,000 Santa Clara County, CA Transit District
Refunding Equipment Trust
LOC Sumitomo Bank, Ltd. 06/01/15 5.85 % $ 2,200,000 VMIG-1
7,000,000 Southeast Resource Recovery Facilities
California Lease Revenue - Series A
LOC Industrial Bank of Japan, Ltd. 12/01/18 5.15 7,000,000 VMIG-1 A1
4,000,000 Southern California (Public Power Authority Transmission Project) RB
(1991 Subordinate)
LOC Swiss Bank Corporation 07/01/19 4.75 4,000,000 VMIG-1 A1+
2,100,000 The City of Los Angeles MHRB
(Coral Wood County Project) - Series 1995D
LOC Union Bank of California 11/01/25 5.15 2,100,000 VMIG-1
3,700,000 The City of Los Angeles MHRB
(Orangewood County Project) - Series 1995C
LOC Union Bank of California 11/01/25 5.15 3,700,000 VMIG-1
2,155,000 Town of Windsor Variable Rate Demand MHRB
(Oakmount at Windsor Project)
LOC Banque Paribas 08/01/25 5.25 2,155,000 A1
2,500,000 Visalia, CA IDRB (Savannah Foods)
LOC Trust Co. Bank of Atlanta 06/01/05 5.25 2,500,000 Aa3
- ----------- ----------
82,295,000 Total Other Variable Rate Demand Instruments 82,295,000
---------- ----------
<CAPTION>

Put Bonds (d) (1.60%)
- -----------------------------------------------------------------------------------------------------------------------------------

<C> <C> <C> <C> <C> <C>
$ 2,745,000 California PCFA PCRB (Chevron USA Incorporated Project) 11/15/96 3.66 % $ 2,751,914 Aa2 AA
---------- ----------
2,745,000 Total Put Bonds 2,751,914
---------- ----------

<CAPTION>
Revenue Bonds (0.87%)
- -----------------------------------------------------------------------------------------------------------------------------------

<C> <C> <C> <C> <C> <C> <C>
$ 1,500,000 California HFA Housing Mortgage RB - Series 1995E
FGIC Insured 02/01/96 4.60 % $ 1,500,000 VMIG-1 A1+
--------- ---------
1,500,000 Total Revenue Bonds 1,500,000
--------- ---------

<CAPTION>
Tax Exempt Commercial Paper (22.88%)
- -----------------------------------------------------------------------------------------------------------------------------------

<C> <C> <C> <C>
$ 3,010,000 California PCFA PCRB (Pacific Gas & Electric) - Series 1988C (d)
LOC Credit Suisse 02/14/96 3.50 % $ 3,010,000 A1+
4,000,000 California PCFA PCRB (Pacific Gas & Electric) - Series F (d)
LOC Banque Nationale de Paris 01/10/96 3.75 4,000,000 A1+

</TABLE>

- -------------------------------------------------------------------------------
See Notes to Financial Statements.

29
<PAGE>

Tax Exempt Commercial Paper (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------

<C> <C> <C> <C> <C> <C> <C>
$ 4,000,000 California PCFA PCRB (Pacific Gas & Electric) - Series F (d)
LOC Banque Nationale de Paris 02/07/96 3.40 % $ 4,000,000 A1+
3,000,000 California PCFA PCRB
(Southern California Edison) - Series 1985A (d) 02/20/96 3.65 3,000,000 P1 A1
3,100,000 California PCFA PCRB
(Southern California Edison) - Series 1985A (d) 03/06/96 3.20 3,100,000 P1 A1
10,800,000 Puerto Rico Government Development Bank 01/11/96 3.40 10,800,000 A1+
1,500,000 Riverside County, CA Transportation Commission Sales Tax RB (b)
LOC Industrial Bank of Japan, Ltd. 01/10/96 3.50 1,500,000
2,900,000 San Diego County, CA Water Authority 01/23/96 3.55 2,900,000 P1 A1
3,000,000 The City of Long Beach Harbor Department, CA - Series A 01/16/96 3.80 3,000,000 P1 A1+
4,000,000 West & Central Water Basin Municipal Water District 04/03/96 3.45 4,000,000 P1 A1+
---------- ----------
39,310,000 Total Tax Exempt Commercial Paper 39,310,000
---------- ----------
<CAPTION>
Variable Rate Demand Instruments - Private Placements (c) (3.64%)
- -----------------------------------------------------------------------------------------------------------------------------------

<C> <C> <C> <C> <C> <C>
$ 4,065,000 Gene E. Lynn Nursing Home
LOC Bank of America (b) 12/01/15 5.48 % $ 4,065,000
2,180,000 IDA County Riverside, CA IDRB (National RV Incorporated Project)
LOC Union Bank 12/01/03 5.10 2,180,000 P1 A1+
--------- ------------
6,245,000 Total Variable Rate Demand Instruments - Private Placements 6,245,000
--------- ------------
Total Investments (100.46%)(Cost $172,598,506+) 172,598,506
Liabilities In Excess of Cash and Other Assets (-0.46%) ( 790,251)
------------
Net Assets (100.00%), 171,823,867 Shares Outstanding (Note 3) $171,808,255
============
Net Asset Value, Offering and Redemption Price Per Share $ 1.00
============

+ Aggregate cost for federal income tax purposes is identical.

* Bank of America/Morgan Guaranty/Sumitomo Bank/Banque Nationale de
Paris/ Bank of Nova Scotia/Canadian Imperial Bank of
Commerce/Society Generale/ Citibank/Credit Suisse/Nations
West/Toronto Dominion/Chemical/ Swiss Bank/ West Deutche Landesbank

</TABLE>

- -------------------------------------------------------------------------------
See Notes to Financial Statements.

30
<PAGE>

FOOTNOTES:

(a) The ratings noted for variable rate demand instruments are those of the bank
whose letter of credit secures such instruments or the guarantor of the
bond. P1 and A1+ are the highest ratings assigned for tax exempt commercial
paper.

(b) Securities that are not rated which the Fund's Board of Directors
has determined to be of comparable quality to those rated securities in
which the Fund invests.

(c) Securities payable on demand at par including accrued interest (usually
with seven days notice) and, if indicated, unconditionally secured as to
principal and interest by a bank letter of credit. The interest rates are
adjustable and are based on bank prime rates or other interest rate
adjustment indices. The rate shown is the rate in effect at the date of
this statement.

(d) The maturity date indicated is the next put date.

KEY:
<S> <C><C> <C> <C><C>
COP = Certificate of Participation PCFA = Pollution Control Finance Authority
HFA = Housing Finance Agency PCRB = Pollution Control Revenue Bond
IDA = Industrial Development Authority RAW = Revenue Anticipation Warrant
IDRB = Industrial Development Revenue Bond RB = Revenue Bond
MHRB = Multi-Family Housing Revenue Bond TRAN = Tax and Revenue Anticipation Note
USDF = Unified School District Fund
</TABLE>

- -------------------------------------------------------------------------------
See Notes to Financial Statements.

31
<PAGE>

- -------------------------------------------------------------------------------
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
===============================================================================
<TABLE>
<CAPTION>

<S> <C>

INVESTMENT INCOME

Income:
Interest...................................................................... $ 4,174,084
------------------
Expenses: (Note 2)
Investment management fee.................................................... 321,501
Administration fee........................................................... 215,873
Shareholder servicing fee.................................................... 214,334
Custodian expenses........................................................... 20,872
Shareholder servicing and related shareholder expenses....................... 89,891
Legal, compliance and filing fees............................................ 27,337
Audit and accounting......................................................... 49,705
Directors' fees.............................................................. 10,061
Other........................................................................ 5,975
------------------
Total expenses........................................................... 955,549
Less: Fees waived (Note 2) .............................................. ( 236,467)
Expenses paid indirectly.......................................... ( 16,408)
------------------
Net expenses............................................................. 702,674
------------------
Net investment income........................................................... 3,471,410
------------------
<CAPTION>
<S> <C>

REALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investments......................................... -0-
------------------
Increase in net assets from operations.......................................... $ 3,471,410
==================
</TABLE>

- -------------------------------------------------------------------------------
See Notes to Financial Statements.

32
<PAGE>

- -------------------------------------------------------------------------------
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1995 AND 1994
===============================================================================
<TABLE>
<CAPTION>
1995 1994
----------------- -----------------
<S> <C> <C>

INCREASE (DECREASE) IN NET ASSETS

Operations:
Net investment income...................................... $ 3,471,410 $ 2,986,671
Net realized gain (loss) on investments.................... -0- ( 12,387)
--------------- ----------------

Increase in net assets from operations.......................... 3,471,410 2,974,284

Dividends to shareholders from net investment income............ ( 3,471,410)* ( 2,986,671)*
Capital share transactions (Note 3)............................. 66,687,982 ( 12,126,851)
--------------- ----------------
Total increase (decrease).................................. 66,687,982 ( 12,139,238)
Net assets:
Beginning of year.......................................... 105,120,273 117,259,511
--------------- ----------------
End of year................................................ $ 171,808,255 $ 105,120,273
=============== ================

* Designated as exempt-interest dividends for federal income tax purposes.
</TABLE>

- -------------------------------------------------------------------------------
See Notes to Financial Statements.

33
<PAGE>

- -------------------------------------------------------------------------------
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
===============================================================================

1. Summary of Accounting Policies.

California Daily Tax Free Income Fund, Inc. is a no-load, non-diversified,
open-end management investment company registered under the Investment Company
Act of 1940. The Fund is a short-term, tax exempt money market fund. Its
financial statements are prepared in accordance with generally accepted
accounting principles for investment companies as follows:

a) Valuation of Securities -

Investments are valued at amortized cost. Under this valuation method, a
portfolio instrument is valued at cost and any discount or premium is
amortized on a constant basis to the maturity of the instrument. The
maturity of variable rate demand instruments is deemed to be the longer of
the period required before the Fund is entitled to receive payment of the
principal amount or the period remaining until the next interest rate
adjustment.

b) Federal Income Taxes -

It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute all of its tax exempt and taxable income to its shareholders.
Therefore, no provision for federal income tax is required.

c) Dividends and Distributions -

Dividends from investment income (excluding capital gains and losses, if
any, and amortization of market discount) are declared daily and paid
monthly. Distributions of net capital gains, if any, realized on sales of
investments are made after the close of the Fund's fiscal year, as declared
by the Fund's Board of Directors.

d) Use of Estimates -

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations during the reporting period. Actual results could differ
from those estimates.

e) General -

Securities transactions are recorded on a trade date basis. Interest income
is accrued as earned. Realized gains and losses from securities transactions
are recorded on the identified cost basis.

2. Investment Management Fees and Other Transactions with Affiliates.

Under the Investment Management Contract, the Fund pays an investment management
fee to Reich & Tang Asset Management L.P. (Manager) at the annual rate of .30%
of the Fund's average daily net assets. The Manager is required to reimburse the
Fund for its expenses (exclusive of interest, taxes, brokerage, and
extraordinary expenses) to the extent that such expenses, including the
investment management and the shareholder servicing and administration fees, for
any fiscal year exceed 2.5% of the first $30 million of the Fund's average net
assets, 2% of the next $70 million of its average net assets, and 1.5% of its
average net assets in excess of $100 million. No such reimbursement was required
for the year ended December 31, 1995.

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

34
<PAGE>

- -------------------------------------------------------------------------------
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
===============================================================================

2. Investment Management Fees and Other Transactions with Affiliates
(Continued).

Pursuant to an Administrative Services Contract the Fund pays to the Manager an
annual fee of .21% of the Fund's average daily net assets. Prior to December 1,
1995, the administration fee was .20%.

The Manager is a wholly-owned subsidiary of New England Investment Companies,
L.P. ("NEIC"). On August 16, 1995, New England Mutual Life Insurance Company
("The New England"), the owner of NEIC's general partner and a majority
owner of the limited partnership interest in NEIC, entered into an
agreement to merge with Metropolitan Life Insurance Company ("MetLife"),
with MetLife to be the survivor of the merger. The merger is subject to
several conditions, including the required approval, by shareholders
of the Fund of a proposed new investment advisory agreement, intended to
take effect at the time of the merger. The new agreement will be
substantially similar to the existing agreement.

Pursuant to a Distribution Plan adopted under Securities and Exchange
Commission Rule 12b-1, the Fund and Reich & Tang Distributors L.P.
(the Distributor) have entered into a Distribution Agreement and a
Shareholder Servicing Agreement. For its services under the Shareholder
Servicing Agreement, the Distributor receives from the Fund a fee
equal to .20% of the Fund's average daily net assets. There were no additional
expenses borne by the Fund pursuant to the Distribution Plan.

During the year ended December 31, 1995, the Manager and the Distributor
voluntarily waived administration fees and shareholder servicing fees of
$22,133, and $214,334, respectively.

Fees are paid to Directors who are unaffiliated with the Manager
on the basis of $2,000 per annum plus $250 per meeting attended.

Included in the Statement of Operations under the caption "Shareholder
servicing and related shareholder expenses" are fees of $32,917 paid to Reich &
Tang Services L.P., an affiliate of the Manager, as servicing agent for
the Fund. Included in the Statement of Operations under the caption
"Custodian expenses" are expense offsets of $16,408.

3. Capital Stock.

At December 31, 1995, 20,000,000,000 shares of $.001 par value stock were
authorized and capital paid in amounted to $171,823,867. Transactions
in capital stock, all at $1.00 per share, were as follows:
<TABLE>
<CAPTION>

Year Year
Ended Ended
December 31, 1995 December 31, 1994
----------------- -----------------

<S> <C> <C>
Sold........................................... 378,553,200 461,860,925
Issued on reinvestment of dividends............ 2,706,820 2,013,039
Redeemed....................................... ( 314,572,038) ( 476,000,815)
------------------ -------------------
Net increase (decrease)........................ 66,687,982 ( 12,126,851)
================== ===================
</TABLE>

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

35
<PAGE>

4. Sales of Securities.

Accumulated undistributed realized losses at December 31, 1995 amounted to
$15,612. This amount represents tax basis capital losses which may be carried
forward to offset future capital gains. Such losses expire December 31, 1999
through December 31, 2002.

5. Concentration of Credit Risk.

The Fund invests primarily in obligations of political subdivisions of the State
of California and, accordingly, is subject to the credit risk associated with
the non-performance of such issuers. Approximately 59% of these investments are
further secured, as to principal and interest, by letters of credit issued by
financial institutions. The Fund maintains a policy of monitoring its exposure
by reviewing the creditworthiness of the issuers, as well as that of the
financial institutions issuing the letters of credit, and by limiting the amount
of holdings with letters of credit from one financial institution.

6. Selected Financial Information.

Reference is made to page 2 of the Prospectus for Selected Financial
Information.

36
<PAGE>

PART C
OTHER INFORMATION

Item 24. Financial Statements and Exhibits.

(A) Financial Statements:

Included in Prospectus (Part A):

(1) Table of Fees and Expenses

(2) Selected Financial Information

Included in Statement of Additional Information (Part B):

(1) Independent Auditor's Report dated January 26, 1996;

(2) Statement of Net Assets (audited);

(3) Statement of Operations (audited);

(4) Statements of Changes in Net Assets (audited); and

(5) Notes to Financial Statements;

(B) Exhibits:

*(1) Articles of Incorporation of the Registrant.

*(2) By-Laws of the Registrant.

(3) Not applicable.

**(4) Form of certificate for shares of Common Stock, par value $.001
per share, of the Registrant.

****(5) Investment Management Contract between the Registrant and Reich &
Tang Asset Management L.P.

****(6) See Distribution Agreement between the Registrant and Reich & Tang
Distributors L.P. filed as Exhibit 15.2.

(7) Not applicable.

*****(8) Custody Agreement between the Registrant and Investors Fiduciary
Trust Company filed as Exhibit 8.

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

* Filed with the initial Registration Statement No. 33-10436, filed on
November 26, 1986, and incorporated herein by reference.
** Filed with Pre-Effective Amendment No. 1 to said Registration Statement on
January 28, 1987, and incorporated by reference herein.
*** Filed with Post-Effective Amendment No. 2 to said Registration Statement
on May 20, 1988, and incorporated by reference herein.
**** Filed with Post-Effective Amendment No. 11 to said Registration Statement
on February 28, 1994 and incorporated by reference herein.
***** Filed with Post-Effective Amendment No. 13 to said Registration Statement
on April 28, 1995 and incorporated by reference herein.

C-1
<PAGE>

(9) Not applicable.

**(10.1) Opinion of Messrs. Battle Fowler LLP as to the legality of the
Securities being registered, including their consent to the filing
thereof and to the use of their name under the headings "Federal
Income Taxes" and "Counsel and Auditors" in the Prospectus.

****(10.2) Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. as to California
law, including their consent to the filing thereof and to the use
of their name under the heading "California Income Taxes" in the
Prospectus.

(11) Consent of Certified Public Accountants filed as Exhibit 11
herein.

*****(11.1) An executed Power of Attorney of Principal Officers filed as
Exhibit 11.1.

(12) Not applicable.

**(13) Written assurance of Reich & Tang, Inc. that its purchase of
shares of the registrant was for investment purposes without any
present intention of redeeming or reselling.

(14) Not applicable.

****(15.1) Distribution and Service Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940.

****(15.2) Amended Distribution Agreement between the Registrant and Reich &
Tang Distributors L.P.

****(15.3) Amended Shareholder Servicing Agreement between the Registrant and
Reich & Tang Distributors L.P.

(15.4) Administrative Services Contract between the Registrant and Reich
& Tang Asset Management L.P. filed as Exhibit 15.4 herein.

Item 25. Persons Controlled by or Under Common Control with Registrant.

None.

Item 26. Number of Holders of Securities.

Number of Record Holders
Title of Class as of March 31, 1996
-------------- ------------------------

Common Stock 655
(par value $.001)

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

** Filed with Pre-Effective Amendment No. 1 to said Registration Statement on
January 28, 1987, and incorporated by reference herein.
**** Filed with Post-Effective Amendment No. 11 to said Registration Statement
on February 28, 1995, and incorporated by reference herein.
***** Filed with Post-Effective Amendment No. 13 to said Registration Statement
on April 28, 1995 and incorporated by reference herein.

C-2
<PAGE>

Item 27 Indemnification.

Registrant incorporates herein by reference the response to Item 27 of
Pre-Effective Amendment No. 1 of this Registration Statement filed with the
Commission on January 28, 1987.

Item 28. Business and Other Connections of Investment Adviser.

The description of Reich & Tang Asset Management L.P. under the caption
"Management of the Fund" in the Prospectus and "Manager" in the Statement of
Additional Information constituting parts A and B, respectively, of the
Registration Statement are incorporated herein by reference.

New England Mutual Life Insurance Company, ("The New England") of which New
England Investment Companies, Inc. ("NEIC") is an indirect wholly-owned
subsidiary, owns approximately 68.1% of the outstanding partnership units of New
England Investment Companies, L.P.,("NEICLP") and Reich & Tang, Inc. owns
approximately 21.8% of the outstanding partnership units of NEICLP. NEICLP is
the limited partner and owner of a 99.5% interest in Reich & Tang Asset
Management L.P. Reich & Tang Asset Management, Inc. serves as the sole general
partner and owner of the remaining .5% interest of Reich & Tang Asset Management
L.P. and serves as the sole general partner of Reich & Tang Distributors L.P.
Reich & Tang Asset Management L.P. serves as the sole limited partner of the
Distributor.

Registrant's investment advisor, Reich & Tang Asset Management L.P., is a
registered investment advisor. Reich & Tang Asset Management L.P.'s investment
advisory clients include Connecticut Daily Tax Free Income Fund, Inc., Cortland
Trust, Inc., Daily Tax Free Income Fund, Inc., Florida Daily Municipal Income
Fund, Institutional Daily Income Fund, Michigan Daily Tax Free Income Fund,
Inc., New Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free
Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Pennsylvania Daily Municipal Income Fund, Short Term Income Fund, Inc. and Tax
Exempt Proceeds Fund, Inc., registered investment companies whose addresses are
600 Fifth Avenue, New York, New York 10020, which invest principally in money
market instruments, Delafield Fund, Inc., and Reich & Tang Equity Fund, Inc.,
registered investment companies whose address is 600 Fifth Avenue, New York, New
York 10020, which invest principally in equity securities. In addition, Reich &
Tang Asset Management L.P. is the sole general partner of Alpha Associates,
August Associates, Reich & Tang Small Cap L.P. and Tucek Partners, L.P., private
investment partnerships organized as limited partnerships.

Peter S. Voss, President, Chief Executive Officer and a Director of NEIC
since October 1992, Chairman of the Board of NEIC since December 1992, Group
Executive Vice President, Bank of America, responsible for the global asset
management private banking businesses, from April 1992 to October 1992,
Executive Vice President of Security Pacific Bank, and Chief Executive Officer
of Security Pacific Hoare Govett Companies a wholly-owned subsidiary of Security
Pacific Corporation, from April 1988 to April 1992, Director of The New England
since March 1993, Chairman of the Board of Directors of NEIC's subsidiaries
other than Loomis, Sayles & Company, L.P. ("Loomis") and Back Bay Advisors, L.P.
("Back Bay"), where he serves as a Director, and Chairman of the Board of
Trustees of all of the mutual funds in the TNE Fund Group and the Zenith Funds.
G. Neil Ryland, Executive Vice President, Treasurer and Chief Financial Officer
NEIC since July 1993, Executive Vice President and Chief Financial Officer of
The Boston Company, a diversified financial services company, from March 1989
until July 1993, from September 1985 to December 1988, Mr. Ryland was employed
by Kenner Parker Toys, Inc. as

C-3
<PAGE>

Senior Vice President and Chief Financial Officer. Edward N. Wadsworth,
Executive Vice President, General Counsel, Clerk and Secretary of NEIC since
December 1989, Senior Vice President and Associate General Counsel of The New
England from 1984 until December 1992, and Secretary of Westpeak and Draycott
and the Treasurer of Lorraine C. Hysler has been Secretary of RTAM since July
1994, Assistant Secretary of NEIC since September 1993, Vice President of the
Mutual Funds Group of NEICLP from September 1993 until July 1994, and Vice
President of Reich & Tang Mutual Funds since July 1994. Ms. Hysler joined Reich
& Tang, Inc. in May 1977 and served as Secretary from April 1987 until September
1993. Richard E. Smith, III has been a Director of RTAM since July 1994,
President and Chief Operating Officer of the Capital Management Group of NEICLP
from May 1994 until July 1994, President and Chief Operating Officer of the
Reich & Tang Capital Management Group since July 1994, Executive Vice President
and Director of Rhode Island Hospital Trust from March 1993 to May 1994,
President, Chief Executive Officer and Director of USF&G Review Management Corp.
from January 1988 until September 1992. Steven W. Duff has been a Director of
RTAM since October 1994, President and Chief Executive Officer of Reich & Tang
Mutual Funds since August 1994, Senior Vice President of NationsBank from June
1981 until August 1994, Mr. Duff is President and a Director of California Daily
Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily
Tax Free Income Fund, Inc., Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund,
Inc., North Carolina Daily Municipal Income Fund, Inc. and Short Term Income
Fund, Inc., President and Trustee of Institutional Daily Municipal Income Fund,
Pennsylvania Daily Municipal Income Fund, President and Chief Executive Officer
of Tax Exempt Proceeds Fund, Inc., and Executive Vice President of Reich & Tang
Equity Fund, Inc. Bernadette N. Finn has been Vice President/Compliance of RTAM
since July 1994, Vice President of Mutual Funds Division of NEICLP from
September 1993 until July 1994, Vice President of Reich & Tang Mutual Funds
since July 1994. Ms. Finn joined Reich & Tang, Inc. in September 1970 and served
as Vice President from September 1982 until May 1987 and as Vice President and
Assistant Secretary from May 1987 until September 1993. Ms. Finn is also
Secretary of California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax
Free Income Fund, Inc., Cortland Trust, Inc., Delafield Fund, Inc., Daily Tax
Free Income Fund, Inc., Institutional Daily Municipal Income Fund, Michigan
Daily Tax Free Income Funds, Inc., New Jersey Daily Municipal Income Fund, Inc.,
New York Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income
Fund, Inc., Pennsylvania Daily Municipal Income Fund and Tax Exempt Proceeds
Fund, Inc., a Vice President and Secretary of Reich & Tang Equity Fund, Inc. and
Short Term Income Fund, Inc. Richard De Sanctis has been Treasurer of RTAM since
July 1994, Assistant Treasurer of NEIC since September 1993 and Treasurer of the
Mutual Funds Group of NEICLP from September 1993 until July 1994, Treasurer of
the Reich & Tang Mutual Funds since July 1994. Mr. De Sanctis joined Reich &
Tang, Inc. in December 1990 and served as Controller of Reich & Tang, Inc., from
January 1991 to September 1993. Mr. De Sanctis was Vice President and Treasurer
of Cortland Financial Group, Inc. and Vice President of Cortland Distributors,
Inc. from 1989 to December 1990. Mr. De Sanctis is also Treasurer of California
Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc.,
Daily Tax Free Income Fund, Inc., Delafield Fund, Inc., Institutional Daily
Municipal Income Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey
Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc.,
North Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal
Income Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund, Inc. and
Tax Exempt Proceeds Fund, Inc. and is Vice President and Treasurer of Cortland
Trust, Inc.

C-4
<PAGE>

ITEM 29. Principal Underwriters.

(a) Reich & Tang Distributors L.P. is also distributor for Connecticut
Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income
Fund, Inc., Delafield Fund, Inc., Florida Daily Municipal Income Fund,
Institutional Daily Income Fund, Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund,
Inc., North Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily
Municipal Income Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund,
Inc. and Tax Exempt Proceeds Fund, Inc.

(b) The following are the directors and officers of, Reich & Tang Asset
Management Inc., the general partner of Reich & Tang Distributors L.P. Reich &
Tang Distributors L.P. does not have any officers. The principal business
address of Messrs. Voss, Ryland, and Wadsworth is 399 Boylston Street, Boston,
Massachusetts 02116. For all other persons, the principal business address is
600 Fifth Avenue, New York, New York 10020.

Positions and Offices
With the General Partner Positions and Offices
Name of the Distributor With Registrant

Peter S. Voss President and Director None
G. Neal Ryland Director None
Edward N. Wadsworth Clerk None
Richard E. Smith III Director None
Steven W. Duff Director President
Bernadette N. Finn Vice President - Compliance Secretary
Lorraine C. Hysler Secretary None
Richard De Sanctis Vice President and Treasurer Treasurer

Item 30. Location of Accounts and Records.

Accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder
are maintained in the physical possession of the Registrant; at Reich & Tang
Asset Management L.P., 600 Fifth Avenue, New York, New York 10020, the
Registrant's manager, at Investors Fiduciary Trust Company, 127 West 10th
Street, Kansas City, Missouri 64105, the Registrant's custodian and at Reich &
Tang Services L.P., 600 Fifth Avenue, New York, New York 10020, the Registrant's
transfer agent and dividend disbursing agent.

Item 31. Management Services.

No such management-related service contracts.

Item 32. Undertakings.

(a) Not applicable.

(b) Not applicable.

C-5
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant certifies that it has
met all of the requirements for effectiveness of this Post-Effective Amendment
to its Registration Statement pursuant to Rule 485(b) under the Securities Act
of 1933 and has duly caused this Post-Effective Amendment to its Registration
Statement to be signed on its behalf by the under-signed, thereunto duly
authorized, in the City of New York, and State of New York, on the 19th day of
April, 1996.

CALIFORNIA DAILY TAX FREE INCOME FUND, INC.

By: /S/Steven W. Duff
Steven W. Duff
President

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

Signature Capacity Date

(1) Principal Executive President and 04/19/96
Officer Director

/s/Steven W. Duff
Steven W. Duff

(2) Principal Financial Treasurer 04/19/96
and Accounting Officer

/s/Richard De Sanctis
Richard De Sanctis

(3) Majority of Directors

Yung Wong
W. Giles Mellon
Robert Straniere

By: /s/Bernadette N. Finn 04/19/96
Bernadette N. Finn
Attorney-in-Fact*

* Powers of Attorney for Messers. Wong, Mellon and Straniere filed as Exhibit
11.2 with Post-Effective Amendment No. 6 to said Registration Statement
filed on May 1, 1991, and incorporated by reference herein.

EXHIBIT 11

McGLADREY & PULLEN L.L.P.
Certified Public Accountants & Consultants

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the use of our report dated January 26, 1996, on the
financial statements referred to therein in Post-Effective Amendment No. 14 to
the Registration Statement on Form N-1A, File No. 33-10436 of California Daily
Tax Free Income Fund, Inc., as filed with the Securities and Exchange
Commission.

We also consent to the reference to our Firm in the Prospectus under the
caption "Selected Financial Information" and in the Statement of Additional
Information under the caption "Counsel and Auditors."

/s/McGLADREY & PULLEN, LLP
McGladrey & Pullen, LLP

New York, New York
April 15, 1996

EXHIBIT 15.4
ADMINISTRATIVE SERVICES CONTRACT

CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
the "Fund"

New York, New York

December 1, 1995

Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10022

Gentlemen:

We herewith confirm our agreement with you as follows:

1. We propose to engage in the business of investing and reinvesting our
assets in securities of the type, and in accordance with the limitations,
specified in our Articles of Incorporation, By-Laws and Registration Statement
filed with the Securities and Exchange Commission under the Investment Company
Act of 1940 (the "1940 Act") and the Securities Act of 1933, including the
Prospectus forming a part thereof (the "Registration Statement"), all as from
time to time in effect, and in such manner and to such extent as may from time
to time be authorized by our Board of Directors. We enclose copies of the
documents listed above and will furnish you such amendments thereto as may be
made from time to time.

2. a. We hereby employ you as our administrator (the "Administrator")
to provide all management and administrative services reasonably necessary for
our operation, other than those services you provide to us pursuant to the
Investment Management Contract. The services to be provided by you shall include
but not be limited to those enumerated on Exhibit A hereto. The personnel
providing these services may be your employees or employees of your affiliates
or of other organizations. You shall make periodic reports to the Fund's Board
of Directors in the performance of your obligations under this Agreement and the
execution of your duties hereunder is subject to the general control of the
Board of Directors.

b. It is understood that you will from time to time employ,
subcontract with or otherwise associate with yourself, entirely at your expense,
such persons as you believe to be particularly fitted to assist you in the
execution of your duties hereunder. While this agreement is in effect, you or
persons affiliated with you, other than us ("your affiliates"),

<PAGE>

will provide persons satisfactory to our Board of Directors to be elected or
appointed officers or employees of our corporation. These shall be a president,
a secretary, a treasurer, and such additional officers and employees as may
reasonably be necessary for the conduct of our business.

c. You or your affiliates will also provide persons, who may be
our officers, to (i) supervise the performance of bookkeeping and related
services and calculation of net asset value and yield by our bookkeeping agent,
(ii) prepare reports to and the filings with regulatory authorities, and (iii)
perform such clerical, other office and shareholder services for us as we may
from time to time request of you. Such personnel may be your employees or
employees of your affiliates or of other organizations. Notwithstanding the
preceding, you shall not be required to perform any accounting services not
expressly provided for herein.

d. You or your affiliates will also furnish us such administrative
and management supervision and assistance and such office facilities as you may
believe appropriate or as we may reasonably request subject to the requirements
of any regulatory authority to which you may be subject. You or your affiliates
will also pay the expenses of promoting the sale of our shares (other than the
costs of preparing, printing and filing our Registration Statement, printing
copies of the prospectus contained therein and complying with other applicable
regulatory requirements), except to the extent that we are permitted to bear
such expenses under a plan adopted pursuant to Rule 12b-1 under the 1940 Act or
a similar rule.

3. We will expect of you, and you will give us the benefit of, your best
judgment and efforts in rendering these services to us, and we agree as an
inducement to your undertaking these services that you will not be liable
hereunder for any mistake of judgment or for any other cause, provided that
nothing herein shall protect you against any liability to us or to our security
holders by reason of willful misfeasance, bad faith or gross negligence in the
performance of your duties hereunder, or by reason of your reckless disregard of
your obligations and duties hereunder.

4. In consideration of the foregoing we will pay you an annual fee of .21%
of the Fund's average daily net assets. Your fee will be accrued by us daily,
and will be payable on the last day of each calendar month for services
performed hereunder during that month or on such other schedule as we may agree
in writing. You may use any portion of this fee for distribution of our shares,
or for making payments to organizations whose customers or clients are our
stockholders. You may waive yourright to any fee to which you are entitled
hereunder, provided such waiver is delivered to us in writing.

2
<PAGE>

5. This Agreement will become effective on the date hereof and shall
continue in effect until November 30, 1996 and thereafter for successive
twelve-month periods (computed from each December 1st), provided that such
continuation is specifically approved at least annually by our Board of
Directors and by a majority of those of our directors who are neither party to
this Agreement nor, other than by their service as directors of the corporation,
interested persons, as defined in the 1940 Act, of any such person who is party
to this Agreement. This Agreement may be terminated at any time, without the
payment of any penalty, (i) by vote of a majority of our outstanding voting
securities, as defined in the 1940 Act, or (ii) by a vote of a majority of our
entire Board of Directors, on sixty days' written notice to you, or (iii) by you
on sixty days' written notice to us.

6. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by you and this Agreement shall terminate automatically
in the event of any such transfer, assignment, sale, hypothecation or pledge by
you. The terms "transfer", "assignment" and "sale" as used in this paragraph
shall have the meanings ascribed thereto by governing law and in applicable
rules or regulations of the Securities and Exchange Commission.

7. Except to the extent necessary to perform your obligations hereunder,
nothing herein shall be deemed to limit or restrict your right, or the right of
any of your officers, directors or employees who may also be a director, officer
or employee of ours, or of a person affiliated with us, as defined in the Act,
to engage in any other business or to devote time and attention to the
management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to any other corporation,
firm, individual or association.

8. This Agreement shall be construed in accordance with the laws of the
State of New York and the applicable provisions of the 1940 Act.

3
<PAGE>

If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.

Very truly yours,

PENNYSLVANIA DAILY TAX FREE INCOME FUND

By: /s/ Bernadette N. Finn

ACCEPTED: December 1, 1995

REICH & TANG ASSET MANAGEMENT L.P.

By: REICH & TANG ASSET MANAGEMENT, INC., General Partner

By: /s/ Lorraine C. Hysler

<PAGE>

Exhibit A

Administration Services To Be Performed
by Reich & Tang Asset Management L.P.

Administration Services

1. In conjunction with Fund counsel, prepare and file all Post-Effective
Amendments to the Registration Statement, all state and federal tax
returns and all other regulatory filings.

2. In conjunction with Fund counsel, prepare and file all Blue Sky
filings, reports and renewals.

3. Coordinate, but not pay for, required Fidelity Bond and Trustees and
Officers Insurance (if any) and monitor their compliance with
Investment Company Act.

4. Coordinate the preparation and distribution of all materials for
Trustees, including the agenda for meetings and all exhibits thereto,
and actual and projected quarterly summaries.

5. Coordinate the activities of the Fund's Manager, Custodian, Legal
Counsel and Independent Accountants.

6. Prepare and file all periodic reports to shareholders and proxies and
provide support for shareholders meetings.

7. Monitor daily and periodic compliance with respect to all requirements
and restrictions of the Investment Company Act, the Internal Revenue
Code and the Prospectus.

8. Monitor daily the Fund's bookkeeping services agent's calculation of
all income and expense accruals, sales and redemptions of capital
shares outstanding.

9. Evaluate expenses, project future expenses, and process payments of
expenses.

10. Monitor and evaluate performance of accounting and accounting related
services by Fund's bookkeeping services agent. Nothing herein shall be
construed to require you to perform any accounting services not
expressly provided for in this Agreement.

<ARTICLE> 6
<LEGEND> The schedule contains summary financial information
extracted from the financial statements and supporting
schedules as of the end of the most current period and is
qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000806620
<NAME> California Daily Tax Free Income Fund, Inc.

<S> <C>
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<PERIOD-TYPE> YEAR
<INVESTMENTS-AT-COST> 172598506
<INVESTMENTS-AT-VALUE> 172598506
<RECEIVABLES> 1649765
<ASSETS-OTHER> 0
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<SHARES-COMMON-PRIOR> 105135885
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<DISTRIBUTIONS-OF-INCOME> 3471410
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<NUMBER-OF-SHARES-SOLD> 378553200
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<SHARES-REINVESTED> 2706820
<NET-CHANGE-IN-ASSETS> 66687982
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
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<PER-SHARE-NAV-BEGIN> 1.00
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>