Smith Barney Muni Funds
7 World Trade Center
New York, NY 10048
(800) 451-2010

Statement of Additional Information 	July 30, 2001



	This Statement of Additional Information (the "SAI")
expands upon and supplements the information contained in the
current prospectuses of the Smith Barney Muni Funds (the "Trust")
dated July 30, 2001, each as amended or supplemented from time to
time, and should be read in conjunction with the prospectuses.
Shares of Smith Barney Muni Funds are offered currently with a
choice of nine portfolios: the National Portfolio, the Limited
Term Portfolio, the Florida Portfolio, the Georgia Portfolio, the
New York Portfolio, the Pennsylvania Portfolio, the California
Money Market Portfolio, the New York Money Market Portfolio and
the Massachusetts Money Market Portfolio (collectively referred
to as "funds" and individually as a "fund"). Additional
information about a fund's investments is available in the fund's
annual and semi-annual reports to shareholders.  Each fund's
prospectus may be obtained free of charge by contacting a Salomon
Smith Barney Financial Consultant, a PFS Investments Inc.
Registered Representative, a broker/dealer, financial
intermediary or a financial institution (each called a "Service
Agent") or by writing or calling the Trust at the address or
telephone number set forth above.  This SAI, although not in
itself a prospectus, is incorporated by reference into the
prospectus in its entirety.

TABLE OF CONTENTS
Page

Investment Objective and Management Policies	2
Trustees and Officers	15
Distribution	19
Purchase of Shares	22
PFS Accounts	29
Redemption of Shares	30
Valuation of Shares	31
Exchange Privilege	32
Performance Data	34
The Funds	36
Voting Rights	37
Taxes		39
Additional Information	44
Financial Statements	45
Other Information	45

Appendix A - Ratings Definitions	A-1
Appendix B - Special Considerations Relating to California
Municipal Obligations	B-1
Appendix C - Special Considerations Relating to Florida Municipal
Obligations	C-1
Appendix D - Special Considerations Relating to Georgia Municipal
Obligations	D-1
Appendix E - Special Considerations Relating to New York
Municipal Obligations	E-1
Appendix F - Special Considerations Relating to Pennsylvania
Municipal Obligations	F-1
Appendix G - Special Considerations Relating to Massachusetts
Municipal Obligations	G-1
Appendix H - Special Considerations Relating to Municipal
Obligations of the
U.S. Virgin Islands and Guam	H-1
Appendix I - Special Considerations Relating to Municipal
Obligations of Puerto Rico	I-1

INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES

	Each prospectus discusses a specific fund's investment
objective and policies. The following discussion supplements the
description of each fund's investment policies in its prospectus.
Smith Barney Fund Management LLC (formerly known as SSB Citi Fund
Management LLC) ("SBFM" or the "Manager") serves as investment
manager and administrator to each fund.

	National Portfolio.  The National Portfolio seeks as high a
level of income exempt from regular federal income taxes as is
consistent with prudent investing.  The National Portfolio has a
fundamental policy that, under normal market conditions, it will
seek to invest 100% of its total assets - and the fund will
invest not less than 80% of its total assets - in municipal
obligations the interest on which is exempt from federal income
taxes (other than the alternative minimum tax ("AMT").  The fund
may also invest up to 20% of its assets in taxable fixed income
securities issued or guaranteed by the full faith and credit of
the United States.

	Limited Term Portfolio seeks as high a level of income
exempt from regular federal income taxes as is consistent with
prudent investing.  The Limited Term Portfolio has a fundamental
policy that, under normal market conditions, it will seek to
invest 100% of its total assets - and the fund will invest not
less than 80% of its total assets - in municipal obligations the
interest on which is exempt from federal income taxes (other than
the AMT). The fund normally invests in securities that have
remaining maturities of 20 years or less and maintains  an
average effective maturity of between three and 10 years. The
fund may invest up to 20% of its assets in taxable fixed income
securities issued or guaranteed by the full faith and credit of
the United States.

	Florida Portfolio seeks to pay its shareholders as high a
level of income exempt from regular federal income taxes as is
consistent with prudent investing, and generally selects
investments that will enable its shares to be exempt from the
Florida intangibles tax.  The Florida Portfolio has a fundamental
policy that, under normal market conditions, it will seek to
invest 100% of its total assets - and the fund will invest not
less than 80% of its total assets - in municipal obligations the
interest on which is exempt from federal income taxes (other than
the AMT).  It is also a fundamental policy that under normal
market conditions the fund will invest at least 65% of its net
assets in municipal obligations issued by the State of Florida,
its political subdivisions and their agencies and
instrumentalities and in other municipal obligations which are
exempt from the Florida intangibles tax.  The fund may invest up
to 20% of its assets in taxable fixed income securities, but only
in obligations issued or guaranteed by the full faith and credit
of the United States.

	Georgia Portfolio seeks to provide as high a level of
income exempt from regular federal income taxes and from Georgia
personal income taxes as is consistent with prudent investing.
The Georgia Portfolio has a fundamental policy that, under normal
market conditions, it will seek to invest 100% of its total
assets - and the fund will invest not less than 80% of its total
assets - in municipal obligations the interest on which is exempt
from federal income taxes (other than the AMT).  It is also a
fundamental policy that, under normal market conditions, the fund
will invest at least 65% of its total assets in municipal
obligations, the interest on which is also exempt from personal
income taxes of the State of Georgia in the opinion of bond
counsel to issuers.  The fund may invest up to 20% of its assets
in taxable fixed income securities, but only in obligations
issued or guaranteed by the full faith and credit of the United
States.

	New York Portfolio seeks to provide as high a level of
income exempt from regular federal income taxes and from New York
State and New York City personal income taxes as is consistent
with prudent investing.  The New York Portfolio has a fundamental
policy that, under normal market conditions, it will seek to
invest 100% of its total assets - and the fund will invest not
less than 80% of its total assets - in municipal obligations the
interest on which is exempt from federal income taxes (other than
the AMT) and not less than 65% of its total assets in municipal
obligations the interest on which is also exempt from personal
income taxes of New York State and New York City in the opinion
of bond counsel to issuers.  The fund may invest up to 20% of its
total assets in taxable fixed income securities, but only in
obligations issued or guaranteed by the full faith and credit of
the United States.

	Pennsylvania Portfolio seeks to pay its shareholders as
high a level of income exempt from both regular federal income
taxes and Pennsylvania personal income taxes as is consistent
with prudent investing.  The Pennsylvania Portfolio has a
fundamental policy that, under normal market conditions, it will
seek to invest 100% of its total assets - and the fund will
invest not less than 80% of its total assets - in municipal
obligations the interest on which is exempt from federal income
taxes (other than the AMT).  It is also a fundamental policy that
under normal market conditions, the fund will invest at least 65%
of its assets in municipal obligations the interest on which is
also exempt from personal income taxes of the Commonwealth of
Pennsylvania in the opinion of bond counsel to the issuers.  The
fund may invest up to 20% of its assets in taxable fixed income
securities, but only in obligations issued or guaranteed by the
full faith and credit of the United States.

	California Money Market Portfolio seeks to provide income
exempt from regular federal income taxes and from California
personal income taxes from a fund of high quality short-term
municipal obligations selected for liquidity and stability.  The
California Money Market Portfolio has a fundamental policy that,
under normal market conditions, at least 80% of its total assets
will be invested in securities that produce income that is exempt
from federal income taxes (other than the AMT) and from
California personal income taxes in the opinion of bond counsel
for the various issuers.

	New York Money Market Portfolio seeks to provide its
shareholders with income exempt from both regular federal income
taxes and New York State and New York City personal income taxes
from a fund of high quality short-term New York municipal
obligations selected for liquidity and stability.  The New York
Money Market Portfolio has a fundamental policy that, under
normal market conditions, at least 80% of its total assets will
be invested in securities that produce income that is exempt from
federal income taxes (other than the AMT) and from New York State
and City personal income taxes in the opinion of bond counsel for
the various issuers.

Massachusetts Money Market Portfolio seeks to provide
income exempt from regular federal income taxes and from
Massachusetts personal income taxes from a portfolio of high
quality short-term municipal obligations selected for liquidity
and stability.  The Massachusetts Money Market Portfolio has a
fundamental policy that, under normal market conditions, at least
80% of its total assets will be invested in securities that
produce income that is exempt from federal income taxes (other
than the AMT) and from Massachusetts personal income taxes in the
opinion of bond counsel for the various issuers.

	Municipal Obligations.  In general, municipal obligations
are debt obligations (bonds or notes) issued by or on behalf of
states, territories and possessions of the United States and
their political subdivisions, agencies and instrumentalities the
interest on which is exempt from regular federal income taxes in
the opinion of bond counsel to the issuer.  Municipal obligations
are issued to obtain funds for various public purposes, many of
which may enhance the quality of life, including the construction
of a wide range of public facilities, such as airports, bridges,
highways, housing, hospitals, mass transportation, schools,
streets, water and sewer works, gas, and electric utilities.
They may also be issued to refund outstanding obligations, to
obtain funds for general operating expenses, or to obtain funds
to loan to other public institutions and facilities and in
anticipation of the receipt of revenue or the issuance of other
obligations.  In addition, the term "municipal obligations"
includes certain types of industrial development bonds ("IDBs")
issued by public authorities to obtain funds to provide various
privately-operated facilities for business and manufacturing,
housing, sports, convention or trade show facilities, airport,
mass transit, port and parking facilities, air or water pollution
control facilities, and certain facilities for water supply, gas,
electricity or sewerage or solid waste disposal.

	The two principal classifications of municipal obligations
are "general obligation" and "revenue."  General obligations are
secured by a municipal issuer's pledge of its full faith, credit,
and taxing power for the payment of principal and interest.
Revenue obligations are payable only from the revenues derived
from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise  tax or other
specific revenue source.  Although IDBs are issued by municipal
authorities, they are generally secured by the revenues derived
from payments of the industrial user.  The payment of the
principal and interest on IDBs is dependent solely on the ability
of the user of the facilities financed by the bonds to meet its
financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment.
Currently, the majority of each fund's municipal obligations are
revenue bonds.

	For purposes of diversification and concentration under the
Investment Company Act of 1940, as amended (the "1940 Act"), the
identification of the issuer of municipal obligations depends on
the terms and conditions of the obligation.  If the assets and
revenues of an agency, authority, instrumentality or other
political subdivision are separate from those of the government
creating the subdivision and the obligation is backed only by the
assets and revenues of the subdivision, such subdivision is
regarded as the sole issuer.  Similarly, in the case of an IDB or
a pollution control revenue bond, if the bond is backed only by
the assets and revenues of the non-governmental user, the non-
governmental user is regarded as the sole issuer.  If in either
case the creating government or another entity guarantees an
obligation, the guaranty is regarded as a separate security and
treated as an issue of such guarantor.  Similar criteria apply
for purposes of the diversification requirements under Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Code").

	The yields on municipal obligations are dependent on a
variety of factors, including general market conditions, supply
and demand, general conditions of the municipal market, size of a
particular offering, the maturity of the obligation and the
rating of the issue.  The ratings of Nationally Recognized
Statistical Ratings Organizations ("NRSROs") such as Moody's
Investment Service, Inc. ("Moody's") and Standard & Poor's
Ratings Group ("S&P") represent their opinions as to the quality
of the municipal obligations that they undertake to rate.  It
should be emphasized, however, that such ratings are general and
are not absolute standards of quality.  Consequently, municipal
obligations with the same maturity, coupon and rating may have
different yields when purchased in the open market, while
municipal obligations of the same maturity and coupon with
different ratings may have the same yield.

	Each fund may invest in securities the disposition of which
is subject to legal or contractual restrictions.  The sale of
restricted securities often requires more time and results in
higher dealer discounts or other selling expenses than does the
sale of securities that are not subject to restrictions on
resale.  Restricted securities may sell at a price lower than
similar securities that are not subject to restrictions on
resale.

	Securities may be sold in anticipation of a market decline
(a rise in interest rates) or purchased in anticipation of a
market rise (a decline in interest rates).  In addition, a
security may be sold and another purchased at approximately the
same time to take advantage of what the manager believes to be a
temporary disparity in the normal yield relationship between the
two securities.  The fund believes that, in general, the
secondary market for tax-exempt securities in each of the fund's
portfolios may be less liquid than that for taxable fixed-income
securities.  Accordingly, the ability of a fund to make purchases
and sales of securities in the foregoing manner may be limited.
Yield disparities may occur for reasons not directly related to
the investment quality of particular issues or the general
movement of interest rates, but instead due to such factors as
changes in the overall demand for or supply of various types of
tax-exempt securities or changes in the investment objectives of
investors.

	Municipal obligations also are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the federal Bankruptcy Code, and
laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement
of such obligations or upon the ability of municipalities to levy
taxes.  There is also the possibility that, as a result of
litigation or other conditions, the power or ability of any one
or more issuers to pay, when due, the principal of and interest
on its or their Municipal Bonds may be materially affected.

	Ratings.  Municipal bonds purchased for the funds (except
California Money Market, New York Money Market and Massachusetts
Money Market Portfolios) must, at the time of purchase, be
investment-grade municipal bonds, and at least two-thirds of a
fund's municipal bonds must be rated within the three highest
ratings categories by NRSRO.  Investment-grade bonds are rated
within the four highest categories by an NRSRO, such as those
rated Aaa, Aa, A and Baa by Moody's or AAA, AA, A and BBB by S&P
or, if unrated, determined to be of comparable quality by the
manager; pre-refunded bonds escrowed by U.S. Treasury obligations
are considered AAA rated (the highest rating) even though the
issuer does not obtain a new rating.  Up to one-third of assets
of a fund may be invested in municipal bonds rated in the fourth
highest category (this grade, while regarded as having an
adequate capacity to pay interest and repay principal, is
considered to be of medium quality and has speculative
characteristics) or in unrated municipal bonds if, based upon
credit analysis by the manager, it is believed that such
securities are at least of comparable quality to those securities
in which the fund may invest.  In determining the suitability of
an investment in an unrated municipal bond, the manager will take
into consideration debt service coverage, the purpose of the
financing, history of the issuer, existence of other rated
securities of the issuer and other general conditions as may be
relevant, including comparability to other issues.  After a fund
purchases a municipal bond, the issue may cease to be rated or
its rating may be reduced below the minimum required for
purchase.  Such an event would not require the elimination of the
issue from the fund but the manager will consider such an event
in determining whether the fund should continue to hold the
security.

	Each fund's (except California Money Market, New York Money
Market and Massachusetts Money Market Portfolios) short-term
municipal obligations will be limited to high-grade obligations
(obligations that are secured by the full faith and credit of the
United States or are rated MIG 1 or MIG 2, VMIG 1 or VMIG 2 or
Prime-1 or Aa or better by Moody's or SP-1+, SP-1, SP-2, or A-1
or AA or better by S&P or have a rating within comparable
categories by any other NRSRO, or obligations that are unrated
but determined by the manager to be comparable).

	Short-Term Instruments.  Among the types of short-term
instruments in which each fund may invest are floating- or
variable-rate demand instruments, tax-exempt commercial paper
(generally having a maturity of less than nine months), and other
types of notes generally having maturities of less than three
years, such as Tax Anticipation Notes, Revenue Anticipation
Notes, Tax and Revenue Anticipation Notes and Bond Anticipation
Notes.  Demand instruments usually have an indicated maturity of
more than one year, but contain a demand feature that enables the
holder to redeem the investment on no more than 30 days' notice;
variable-rate demand instruments provide for automatic
establishment of a new interest rate on set dates; floating-rate
demand instruments provide for automatic adjustment of their
interest rates whenever some other specified interest rate
changes (e.g., the prime rate).  Each fund may purchase
participation interests in variable-rate tax-exempt securities
(such as Industrial Development Bonds) owned by banks.
Participations are frequently backed by an irrevocable letter of
credit or guarantee of a bank that the manager has determined
meets the prescribed quality standards for the fund.
Participation interests will be purchased only; if management
believes interest income on such interests will be tax-exempt
when distributed as dividends to shareholders.

	Investments in participation interests in variable-rate
tax-exempt securities (such as IDBs) purchased from banks give
the purchaser an undivided interest in the tax-exempt security in
the proportion that the fund participation interest bears to the
total principal amount of the tax-exempt security with a demand
repurchase feature.  Participation interests are frequently
backed by an irrevocable letter of credit or guarantee of a bank
that the manager, under the supervision of the Trustees, has
determined meets the prescribed quality standards for the fund.
A fund has the right to sell the instrument back to the bank and
draw on the letter of credit on demand on seven days' notice or
less, for all or any part of the fund's participation interest in
the tax-exempt security, plus accrued interest.  Each fund
intends to exercise the demand under the letter of credit only
(1) upon a default under the terms of the documents of the tax-
exempt security, (2) as needed to provide liquidity in order to
meet redemptions, or (3) to maintain a high quality investment
fund.  Banks will retain a service and letter of credit fee and a
fee for issuing repurchase commitments in an amount equal to the
excess of the interest paid on the tax-exempt securities over the
negotiated yield at which the instruments were purchased by a
fund.  The manager will monitor the pricing, quality and
liquidity of the variable-rate demand instruments held by each
fund, including the IDBs supported by bank letters of credit or
guarantees, on the basis of published financial information,
reports of rating agencies and other bank analytical services to
which the manager may subscribe.

Limited Term Portfolio.  The Limited Term Portfolio tries
to reduce the volatility of its share prices by seeking to
maintain an average effective portfolio maturity of between 3 and
10 years.  It measures the "average" maturity of all of its
securities on a "dollar-weighted" basis, meaning that larger
securities holdings have a greater effect on overall portfolio
maturity than smaller holdings.

	The "effective" maturity of a security is not always the
same as the stated maturity date.  A number of factors may cause
the "effective" maturity to be shorter than the stated maturity.
For example, a bond's effective maturity might be deemed to be
shorter (for pricing and trading purposes) than its stated
maturity if its coupon interest rate or rate of accretion of
discount on the bond, is higher than current market interest
rates when the bond is callable (that means the issuer can pay
off the bond prior to its stated maturity) in addition to other
factors such as mandatory put provisions and scheduled sinking
fund payments.  When interest rates change, securities that have
an effective maturity that is shorter than their stated maturity
tend to behave like securities having those shorter maturity
dates.

	Money Market Instruments. The California Money Market
Portfolio, New York Money Market Portfolio and Massachusetts
Money Market Portfolio each operate as a money market fund, and
utilize certain investment policies so that, to the extent
reasonably possible, its price per share will not change from
$1.00, although no assurance can be given that this goal will be
achieved on a continuous basis.  For example, none of these funds
will purchase a security which, after giving effect to any demand
features, has a remaining maturity of greater than 397 days, or
maintain a dollar-weighted average fund maturity in excess of 90
days.

	The California Money Market, New York Money Market and
Massachusetts Money Market Portfolios' investments are limited to
United States dollar-denominated instruments that, at the time of
acquisition (including any related credit enhancement features)
have received a rating in one of the two highest categories for
short-term debt obligations from the "Requisite NRSROs,"
securities of issuers that have received such a rating with
respect to other comparable securities, and comparable unrated
securities.  "Requisite NRSROs" means (a) any two nationally
recognized statistical rating organizations NRSROs) that have
issued a rating with respect to a security or class of debt
obligations of an issuer, or (b) one NRSRO, if only one NRSRO has
issued such rating at the time that the fund acquires the
security.  The NRSROs currently designated as such by the
Securities and Exchange Commission ("SEC") are Standard & Poor's
("S&P"), Moody's, Duff and Phelps Inc., Fitch Inc. ("Fitch") and
Thomson BankWatch.

	The California Money Market, New York Money Market and
Massachusetts Money Market Portfolios' may each invest up to 20%
of the value of their assets in one or more of the three
principal types of derivative product structures described below.
Derivative products are typically structured by a bank, broker-
dealer or other financial institution.  A derivative product
generally consists of a trust or partnership through which the
fund holds an interest in one or more underlying bonds coupled
with a conditional right to sell ("put") the fund's interest in
the underlying bonds at par plus accrued interest to a  financial
institution (a "Liquidity Provider").  Typically, a derivative
product is structured as a trust or partnership which provides
for pass-through tax-exempt income.  There are currently three
principal types of derivative structures: (1) "Tender Option
Bonds", which are instruments which grant the holder thereof the
right to put an underlying bond at par plus accrued interest at
specified intervals to a Liquidity Provider; (2) "Swap Products",
in which the trust or partnership swaps the payments due on an
underlying bond with a swap counterpart who agrees to pay a
floating municipal money market interest rate; and (3)
"Partnerships", which allocate to the partners income, expenses,
capital gains and losses in accordance with a governing
partnership agreement.

	Investments in derivative products raise certain tax,
legal, regulatory and accounting issues which may not be
presented by investments in other municipal bonds.  There is some
risk that certain issues could be resolved in a manner that could
adversely impact the performance of a fund.  For example, the
tax-exempt treatment of the interest paid to holders of
derivative products is premised on the legal conclusion that the
holders of such derivative products have an ownership interest in
the underlying bonds. While the fund receives an opinion of legal
counsel to the effect that the income from each derivative
product is tax-exempt to the same extent as the underlying bond,
the Internal Revenue Service (the "IRS") has not issued a ruling
on this subject.  Were the Internal Revenue Service (the "IRS")
to take a contrary position, there is a risk that the interest
paid on such derivative products would be deemed taxable.

	The funds intend to limit the risk of derivative products
by purchasing only those derivative products that are consistent
with the funds' investment objective and policies.  The funds
will not use such instruments to leverage securities.  Hence,
derivative products' contributions to the overall market risk
characteristics of a fund will not materially alter its risk
profile and will be fully representative of the fund's maturity
guidelines.

	Stand-By Commitments.  The California Money Market, New
York Money Market and Massachusetts Money Market Portfolios may
acquire "stand-by commitments" with respect to municipal
obligations held in their respective  funds.  Under a stand-by
commitment a dealer agrees to purchase, at the fund's option,
specified municipal obligations at a specified price.  The funds
intend to enter into stand-by commitments only with dealers,
banks and broker-dealers that, in the opinion of the manager,
present minimal credit risks.  In evaluating the creditworthiness
of the issuer of a stand-by commitment, the manager will review
periodically the issuer's assets, liabilities, contingent claims
and other relevant financial information.  Because a fund invests
in securities backed by banks and other financial institutions,
change in the credit quality of these institutions could cause
losses to the fund and affect its share price.  The funds will
acquire stand-by commitments solely to facilitate fund liquidity
and do not intend to exercise their rights thereunder for trading
purposes.

	Other Factors to be Considered.  The California Money
Market, New York Money Market and Massachusetts Money Market
Portfolios anticipate being as fully invested as practicable in
tax-exempt securities.  The funds may invest in taxable
investments due to market conditions or pending investment of
proceeds from sales of shares or proceeds from the sale of fund
securities or in anticipation of redemptions.  However, the funds
generally expect to invest the proceeds received from the sale of
shares in municipal obligations as soon as reasonably possible,
which is generally within one day.  At no time will more than 20%
of the funds' net assets be invested in taxable investments
except when the manager has determined that market conditions
warrant a fund adopting a temporary defensive investment posture.
To the extent a fund's assets are invested for temporary
defensive purposes, such assets will not be invested in a manner
designed to achieve a fund's investment objective.

	From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the
federal income tax exemption for interest on municipal
obligations, and similar proposals may be introduced in the
future.  If one of these proposals were enacted, the availability
of tax exempt obligations for investment by the funds and the
value of a fund's investments would be affected.  The fund's
Board of Directors would then reevaluate the fund's investment
objective and policies.

	Municipal Bond Index Futures Contracts.  The funds (except
California Money Market, New York Money Market and Massachusetts
Money Market Portfolios) may each invest in municipal bond
futures contracts (currently traded on the Chicago Board of
Trade).  Municipal bond futures contracts are listed contracts
based on U.S. government securities and are used by each fund as
a hedging policy in pursuit of its investment objective; provided
that immediately thereafter not more than 33 1/3% of the fund's
net assets would be hedged or the amount of margin deposits on
the fund's existing futures contracts would not exceed 5% on the
value of its total assets.  A municipal bond index futures
contract is an agreement pursuant to which two parties agree to
take or make delivery of an amount of cash equal to a specific
dollar amount multiplied by the difference between the value of
the index at the close of the last trading day of the contract
and the price at which the index contract was originally written.
No physical delivery of the underlying municipal bonds in the
index is made. Municipal bond index futures contracts based on an
index of 40 tax-exempt, long-term municipal bonds with an
original issue size of at least $50 million and a rating of A- or
higher by S&P or A or higher by Moody's began trading in mid-
1985.  The purpose of the acquisition or sale of a municipal bond
index futures contract by the fund, as the holder of long-term
municipal securities, is to protect a fund from fluctuations in
interest rates on tax-exempt securities without actually buying
or selling long-term municipal securities.

	There are several risks in connection with the use of
futures contracts as a hedging device. Successful use of futures
contracts by a fund is subject to the manager's ability to
predict correctly movements in the direction of interest rates.
Such predictions involve skills and techniques which may be
different from those involved in the management of a long-term
municipal bond fund.  In addition, there can be no assurance that
there will be a correlation between movements in the price of the
municipal bond index and movements in the price of the Municipal
Bonds which are the subject of the hedge.  The degree of
imperfection of correlation depends upon various circumstances,
such as variations in speculative market demand for futures
contracts and municipal securities, technical influences on
futures trading, and differences between the municipal securities
being hedged and the municipal securities underlying the futures
contracts, in such respects as interest rate levels, maturities
and creditworthiness of issuers. A decision of whether, when and
how to hedge involves the exercise of skill and judgment and even
a well-conceived hedge may be unsuccessful to some degree because
of market behavior or unexpected trends in interest rates.

	Although a fund intends to purchase or sell futures
contracts only if there is an active market for such contracts,
there is no assurance that a liquid market will exist for the
contracts at any particular time.  Most domestic futures
exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day.
The daily limit establishes the maximum amount the price of a
futures contract may vary either up or down from the previous
day's settlement price at the end of a trading session.  Once the
daily limit has been reached in a particular contract, no trades
may be made that day at a price beyond that limit. The daily
limit governs only price movement during a particular trading day
and, therefore, does not limit potential losses because the limit
may prevent the liquidation of unfavorable positions. It is
possible that futures contract prices could move to the daily
limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures
positions and subjecting some futures traders to substantial
losses. In such event, it will not be possible to close a futures
position and, in the event of adverse price movements, the fund
would be required to make daily cash payments of variation
margin.  In such circumstances, an increase in the value of the
portion of the fund being hedged, if any, may partially or
completely offset losses on the futures contract. As described
above, however, there is no guarantee that the price of Municipal
Bonds will, in fact, correlate with the price movements in the
municipal bond index futures contract and thus provide an offset
to losses on a futures contract.

	If a fund has hedged against the possibility of an increase
in interest rates adversely affecting the value of the Municipal
Bonds held in its fund and rates decrease instead, the fund will
lose part or all of the benefit of the increased value of the
Municipal Bonds it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations,
if the fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements.  Such sales of
securities may, but will not necessarily, be at increased prices
which reflect the decline in interest rates. The fund may have to
sell securities at a time when it may be disadvantageous to do
so.

	When a fund purchases municipal bond index futures
contracts, an amount of cash and U.S. government securities or
other high grade debt securities equal to the market value of the
futures contracts will be deposited in a segregated account with
the fund's custodian or in the fund's records to collateralize
the positions and thereby insure that the use of such futures
contracts is not leveraged. In addition, the ability of a fund to
trade in municipal bond index futures contracts and options on
interest rate futures contracts may be materially limited by the
requirements of the Code applicable to a regulated investment
company. See "Taxes."

Interest Rate Futures Contracts.  A fund may purchase and
sell interest rate futures contracts as a hedge against changes
in interest rates.  An interest rate futures contract is an
agreement between two parties to buy and sell a security for a
set price on a future date.  Interest rate futures contracts are
traded on designated "contracts markets" which, through their
clearing corporations, guarantee performance of the contracts.
Currently, there are interest rate futures contracts based on
securities such as long-term Treasury bonds, Treasury notes, GNMA
certificates and three-month Treasury bills.

Generally, if market interest rates increase, the value of
outstanding debt securities declines (and vice versa).  Entering
into an interest rate futures contract for the sale of securities
has an effect similar to the actual sale of securities, although
sale of the interest rate futures contract might be accomplished
more easily and quickly.  For example, if a fund holds long-term
U.S. government securities and SBFM anticipates a rise in long-
term interest rates, the fund could, in lieu of disposing of its
portfolio securities, enter into interest rate futures contracts
for the sale of similar long-term securities.  If interest rates
increased and the value of the fund's securities declined, the
value of the fund's interest rate futures contracts would
increase, thereby protecting the fund by preventing the net asset
value from declining as much as it otherwise would have declined.
Similarly, entering into interest rate futures contracts for the
purchase of securities has an effect similar to the actual
purchase of the underlying securities, but permits the continued
holding of securities other than the underlying securities.  For
example, if SBFM expects long-term interest rates to decline, the
fund might enter into interest rate futures contracts for the
purchase of long-term securities, so that it could gain rapid
market exposure that may offset anticipated increases in the cost
of securities that it intends to purchase, while continuing to
hold higher-yielding short-term securities or waiting for the
long-term market to stabilize.

	Municipal Leases.  Each fund (except California Money
Market, New York Money Market and Massachusetts Money Market
Portfolios) may invest without limit in "municipal leases," which
generally are participations in intermediate-and short-term debt
obligations issued by municipalities consisting of leases or
installment purchase contracts for property or equipment.
Although lease obligations do not constitute general obligations
of the municipality for which the municipality's taxing power is
pledged, a lease obligation is ordinarily backed by the
municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation.  However, certain lease
obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis.  In addition to
the "non-appropriation" risk, these securities represent a
relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds.
Although "non-appropriation" lease obligations are often secured
by the underlying property, disposition of the property in the
event of foreclosure might prove difficult.  There is no
limitation on the percentage of the fund's assets that may be
invested in municipal lease obligations.  In evaluating municipal
lease obligations, the manager will consider such factors as it
deems appropriate, which may include:  (a) whether the lease can
be canceled; (b) the ability of the lease obligee to direct the
sale of the underlying assets; (c) the general creditworthiness
of the lease obligor; (d) the likelihood that the municipality
will discontinue appropriating funding for the leased property in
the event such property is no longer considered essential by the
municipality; (e) the legal recourse of the lease obligee in the
event of such a failure to appropriate funding; (f) whether the
security is backed by a credit enhancement such as insurance; and
(g) any limitations which are imposed on the lease obligor's
ability to utilize substitute property or services rather than
those covered by the lease obligation.

	Private Activity Bonds.  Each fund may invest without
limits in private activity bonds.  Interest income on certain
types of private activity bonds issued after August 7, 1986 to
finance non-governmental activities is a specific tax preference
item for purposes of the federal individual and corporate
alternative minimum taxes.  Individual and corporate shareholders
may be subject to a federal alternative minimum tax to the extent
that the fund's dividends are derived from interest on those
bonds.  Dividends derived from interest income on tax-exempt
municipal obligations are a component of the "current earnings"
adjustment item for purposes of the federal corporate alternative
minimum tax.

	Zero Coupon or Deferred Interest Securities.  Each fund
(except California Money Market, New York Money Market and
Massachusetts Money Market Portfolios) may invest in zero coupon
or deferred interest bonds.  Zero coupon or deferred interest
securities are debt obligations which do not entitle the holder
to any periodic payments of interest prior to maturity or a
specified cash payment date when the securities begin paying
current interest (the "cash payment date") and therefore are
issued and traded at a discount from their face amounts or par
values. The discount varies depending on the time remaining until
maturity or cash payment date, prevailing interest rates,
liquidity of the security and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of
the issuer, decreases as the final maturity or cash payment date
of the security approaches.  The market prices of zero coupon or
deferred interest securities generally are more volatile than the
market prices of other debt securities that pay interest
periodically and are likely to respond to changes in interest
rates to a greater degree than do debt securities having similar
maturities and credit quality.  The credit risk factors
pertaining to low-rated securities also apply to low-rated zero
coupon or deferred interest bonds.  Such zero coupon or deferred
interest bonds carry an additional risk in that, unlike bonds
which pay interest throughout the period to maturity, the fund
will realize no cash until the cash payment date unless a portion
of such securities is sold and, if the issuer defaults, the fund
may obtain no return at all on its investment.

	Current federal income tax laws may require the holder of a
zero coupon or deferred interest security to accrue income with
respect to that security prior to the receipt of cash payments.
To maintain its qualification as a regulated investment company
and avoid liability for federal income taxes, a fund may be
required to distribute income accrued with respect to zero coupon
or deferred interest securities and may have to dispose of fund
securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.

	When-Issued Securities.  Each fund may purchase municipal
bonds on a "when-issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield).  The payment
obligation and the interest rate that will be received on the
municipal bonds purchased on a when-issued basis are each fixed
at the time the buyer enters into the commitment. Although a fund
will purchase municipal bonds on a when-issued basis only with
the intention of actually acquiring the securities, the fund may
sell these securities before the settlement date if it is deemed
advisable as a matter of investment strategy.

	Municipal bonds are subject to changes in value based upon
the public's perception of the creditworthiness of the issuers
and changes, real or anticipated, in the level of interest rates.
In general, municipal bonds tend to appreciate when interest
rates decline and depreciate when interest rates rise. Purchasing
municipal bonds on a when-issued basis, therefore, can involve
the risk that the yields available in the market when the
delivery takes place may actually be higher than those obtained
in the transaction itself. To account for this risk, 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 or fair value. If
the market or fair value of such securities declines, additional
cash or securities will be placed in the account on a daily basis
so the value of the account will equal the amount of such
commitments by the fund. Placing securities rather than cash in
the segregated account may have a leveraging effect on the fund's
net assets.  That is, to the extent the fund remains
substantially fully invested in securities at the same time it
has committed to purchase securities on a when-issued basis,
there will be greater fluctuations in its net assets than if it
had set aside cash to satisfy its purchase commitments. Upon the
settlement date of the when-issued securities, the fund will meet
obligations from then-available cash flow, sale of securities
held in the segregated account, sale of other securities or,
although it normally would not expect to do so, from the sale of
the when-issued securities themselves (which may have a value
greater or less than the fund's payment obligations). Sales of
securities to meet such obligations may involve the realization
of capital gains, which are not exempt from federal income taxes
or individual state personal income tax.

	When a fund engages in when-issued transactions, it relies
on the seller to consummate the trade. Failure of the seller to
do so may result in the fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.

	Short-Term Trading.  Fund transactions will be undertaken
principally to accomplish each fund's objective in relation to
anticipated movements in the general level of interest rates, but
each fund may also engage in short-term trading consistent with
its objective.

	Short-Term Borrowing.  The funds may borrow on a short-term
basis in amounts of up to 5% of its assets in order to facilitate
the settlement of fund securities transactions.

	Diversified Status.  The Florida Portfolio, Georgia
Portfolio, New York Portfolio and Pennsylvania Portfolio and the
Massachusetts Money Market, New York Money Market and California
Money Market Portfolios are each registered as a non-diversified
investment company under the 1940 Act, which means that the funds
are not limited by the 1940 Act in the proportion of its assets
that it may invest in the obligations of a single issuer.
However, the California, New York and Massachusetts Money Market
Portfolios intend to comply with the diversification requirements
under Rule 2a-7 of the 1940 Act.  Each fund intends to conduct
its operations so as to qualify as a "regulated investment
company" for purposes of the Code, which will relieve each fund
of any liability for federal income tax and California and New
York state, respectively, franchise tax to the extent its
earnings are distributed to shareholders.  To so qualify, among
other requirements, the funds will limit their investments so
that, at the close of each quarter of the taxable year, (a) not
more than 25% of the market value of the fund's total assets will
be invested in the securities of a single issuer and (b) with
respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested
in the securities of a single issuer and the fund will not own
more than 10% of the outstanding voting securities of a single
issuer.  The funds' assumption of large positions in the
obligations of a small number of issuers may cause a fund's share
price to fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in
the market's assessment of the issuers.

	Illiquid Securities.  Each fund (except California Money
Market, New York Money Market and Massachusetts Money Market
Portfolios) will not invest more than 15% of the value of its net
assets in illiquid securities, including those for which there is
no established market.  The New York Money Market, California
Money Market and Massachusetts Money Market Portfolios will not
invest more than 10% of the value of their total assets in
illiquid securities, which may include certain derivative
products and will include any repurchase transactions that do not
mature within seven days.

	Portfolio Turnover.  Each fund's portfolio turnover rate
(the lesser of purchases or sales of fund securities during the
year, excluding purchases or sales of short-term securities,
divided by the monthly average value of fund securities)
generally is not expected to exceed 100%, but the fund turnover
rate will not be a limiting factor whenever the fund deems it
desirable to sell or purchase securities. Securities may be sold
in anticipation of a rise in interest rates (market decline) or
purchased in anticipation of a decline in interest rates (market
rise) and later sold. In addition, a security may be sold and
another security of comparable quality may be purchased at
approximately the same time in order to take advantage of what
the fund believes to be a temporary disparity in the normal yield
relationship between the two securities.  These yield disparities
may occur for reasons not directly related to the investment
quality of particular issues or the general movement of interest
rates, such as changes in the overall demand for or supply of
various types of tax-exempt securities.

	Special Considerations Relating to California Municipal
Securities.  See Appendix B for a discussion of the
considerations relating to California Municipal Securities.

	Special Considerations Relating to Florida Municipal
Securities.  See Appendix C for a discussion of the
considerations relating to Florida Municipal Securities.

	Special Considerations Relating to Georgia Municipal
Securities.  See Appendix D for a discussion of the
considerations relating to Georgia Municipal Securities.

	Special Considerations Relating to New York Municipal
Securities.  See Appendix E for a discussion of the
considerations relating to New York Municipal Securities.

	Special Considerations Relating to Pennsylvania Municipal
Securities.  See Appendix F for a discussion of the
considerations relating to Pennsylvania Municipal Securities.

	Special Considerations Relating to Massachusetts Municipal
Securities.   See Appendix G for a discussion of the
considerations relating to Massachusetts Municipal Securities.

Investment Restrictions

	Each of the funds is subject to certain restrictions and
policies that are "fundamental," which means that they may not be
changed without a "vote of a majority of the outstanding voting
securities" of the fund, as defined under the 1940 Act and Rule
18f-2 thereunder (see "Voting").  The funds are subject to other
restrictions and policies that are "non-fundamental" and which
may be changed by the fund's Board of Trustees without
shareholder approval, subject to any applicable disclosure
requirements.

Fundamental Policies - All funds.  Without the approval of a
majority of its outstanding voting securities, no fund may:

1.	Issue "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.

2.	Invest more than 25% of its total assets in securities, the
issuers of which conduct their principal business activities in
the same industry. For purposes of this limitation, securities of
the U.S. government (including its agencies and
instrumentalities) and securities of state or municipal
governments and their political subdivisions are not considered
to be issued by members of any industry.

3.	Borrow money, except that (a) the fund may borrow from
banks for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might
otherwise require the untimely disposition of securities, and (b)
the fund may, to the extent consistent with its investment
policies, enter into reverse repurchase agreements, forward roll
transactions and similar investment strategies and techniques. To
the extent that it engages in transactions described in (a) and
(b), the fund will be limited so that no more than 33 -1/3% of
the value of its total assets (including the amount borrowed),
valued at the lesser of cost or market, less liabilities (not
including the amount borrowed) is derived from such transactions.

4.	Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the fund may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its fund securities, to
the fullest extent permitted under the 1940 Act.

5.	Engage in the business of underwriting securities issued by
other persons, except to the extent that the fund may technically
be deemed to be an underwriter under the Securities Act of 1933,
as amended, ("the 1933 Act") in disposing of fund securities.

6.	Purchase or sell real estate, real estate mortgages, real
estate investment trust securities, commodities or commodity
contracts, but this restriction shall not prevent the fund from
(a) investing in securities of issuers engaged in the real estate
business or the business of investing in real estate (including
interests in limited partnerships owning or otherwise engaging in
the real estate business or the business of investing in real
estate) and securities which are secured by real estate or
interests therein; (b) holding or selling real estate  received
in connection with securities it holds or held; or (c) trading in
futures contracts and options on futures contracts (including
options on currencies to the extent consistent with the fund's
investment objective and policies).

Additional Fundamental Policies.  Without the approval of a
majority of its outstanding voting securities, neither the
National Portfolio nor the Limited Term Portfolio may:

1.	Invest in a manner that would cause the fund to fail to be
a "diversified company" under the 1940 Act and the rules,
regulations and orders thereunder.

Nonfundamental Policies.  As a nonfundamental policy, no fund
may:

1.	Purchase any securities on margin (except for such short-
term credits as are necessary for the clearance of purchases and
sales of fund securities) or sell any securities short (except
"against the box").  For purposes of this restriction, the
deposit or payment by the fund of underlying securities and other
assets in escrow and collateral agreements with respect to
initial or maintenance margin in connection with futures
contracts and related options and options on securities, indexes
or similar items is not considered to be the purchase of a
security on margin.

2.	Purchase or otherwise acquire any security if, as a result,
more than 15% of its net assets would be invested in securities
that are illiquid.

3.	Write or purchase put, call, straddle or spread options.

4.	Invest more than 5% of its assets in unseasoned issuers
with less than three years of continuous operations (including
that of predecessors).

5.	Purchase oil, gas or other mineral leases, rights or
royalty contracts or exploration or development programs, except
that each fund may invest in the securities of issuers which
operate, invest in, or sponsor such programs.

Additional Nonfundamental Policies.  As a nonfundamental policy,

1.	Neither the National Portfolio nor the New York Portfolio
may invest in securities of another investment company except as
permitted by Section 12(d)(1) of the 1940 Act or as part of a
merger, consolidation, or acquisition.

	All of the foregoing restrictions stated in terms of
percentages will apply at the time an investment is made; a
subsequent increase or decrease in the percentage that may result
from changes in values or net assets will not result in a
violation of the restriction.


TRUSTEES AND OFFICERS

	Set forth below is a list of each Trustee and executive
officer of the fund, including a description of principal
occupation during the last 5 years, age and address of each such
person.

LEE ABRAHAM, Trustee (Age 73).
Retired; Director/Trustee of 11 investment companies associated
with Citigroup Inc. ("Citigroup"); Director of R.G. Barry Corp.,
a footwear manufacturer, Signet Group plc, a specialty retailer,
and eNote.com, Inc., a computer hardware company;  Formerly
Chairman and Chief Executive Officer of Associated Merchandising
Corporation, a major retail merchandising and sourcing
organization; His address is 106 Barnes Road, Stamford,
Connecticut 06902.

ALLAN J. BLOOSTEIN, Trustee (Age 71).
President of Allan J. Bloostein Associates, a consulting firm;
Director/Trustee of 18 investment companies associated with
Citigroup; Director of CVS Corporation, a drug store chain, and
Taubman Centers Inc., a real estate development company; Retired
Vice Chairman and Director of The May Department Stores Company;
His address is 27 West 67th Street, New York, New York 10023.

JANE DASHER, Trustee (Age 51).
Investment Officer of Korsant Partners, a family investment
company.  Director/Trustee of 11 investment companies associated
with Citigroup.  Prior to 1997, an Independent Financial
Consultant;  Her address is 283 Greenwich Avenue, Greenwich,
Connecticut 06830.

DONALD R. FOLEY, Trustee (Age 78).
Retired; Director/Trustee of 11 investment companies associated
with Citigroup; Formerly Vice President of Edwin Bird Wilson,
Incorporated (an advertising agency); His address is 3668
Freshwater Drive, Jupiter, Florida  33477.

RICHARD E. HANSON, Jr., Trustee (Age 59).
Retired; Formerly Head of New Atlanta Jewish Community High
School, Atlanta, Georgia; Director/Trustee of 11 investment
companies associated with Citigroup; Formerly Headmaster, The
Peck School, Morristown, New Jersey; His address is 2751 Vermont
Route 140, Poultney, Vermont 05764.


PAUL HARDIN, Trustee (Age 70).
Professor of Law and Chancellor Emeritus at University of North
Carolina at Chapel Hill; Director/Trustee of 13 investment
companies associated with Citigroup; Formerly Director of The
Summit Bancorporation.  Formerly, Chancellor of the University of
North Carolina at Chapel Hill; His address is 12083 Morehead,
Chapel Hill, North Carolina 27514.

*HEATH B. MCLENDON, Chairman of the Board, President and Chief
Executive Officer (Age 68).
Managing Director of Salomon Smith Barney; Chairman, Co-Chairman
or President and/or Trustee/Director of 77 investment companies
affiliated with Citigroup; Director and President of SBFM and
Travelers Investment Advisors ("TIA"); former Chairman of Smith
Barney Strategy Advisors Inc.  His address is 7 World Trade
Center, New York, New York, 10048.

RODERICK C. RASMUSSEN, Trustee (Age 74).
Investment Counselor; Director/Trustee of 11 investment companies
associated with Citigroup. Formerly, Vice President of Dresdner
and Company Inc. (investment counselors); His address is 9
Cadence Court, Morristown, NJ 07960.

JOHN P. TOOLAN, Trustee (Age 70).
Retired; Director/Trustee of 11 investment companies associated
with Smith Barney. Trustee of John Hancock Funds; Formerly,
Director and Chairman of Smith Barney Trust Company, Director of
Smith Barney Holdings Inc. and various subsidiaries and Senior
Executive Vice President, Director and Member of the Executive
Committee of Smith Barney. His address is 13 Chadwell Place,
Morristown, New Jersey, 07960.

LEWIS E. DAIDONE, Senior Vice President and Treasurer (Age 43).
Managing Director of Salomon Smith Barney; Senior Vice President
or Executive Vice President and Treasurer of 83 investment
companies affiliated with Citigroup, and Director and Senior Vice
President of the manager and TIA.  His address is 125 Broad
Street, New York, New York 10004.

PETER M. COFFEY, Vice President and Investment Officer  (Age 57).
Managing Director of Salomon Smith Barney; Vice President of the
Manager and various investment companies associated with Salomon
Smith Barney.  His address is 7 World Trade Center, New York, NY
10048.

JOSEPH DEANE, Vice President and Investment Officer (Age 52).
Managing Director of Salomon Smith Barney and Investment Officer
of SBFM.  His address is 7 World Trade Center, New York, NY
10048.

JOSEPH BENEVENTO, Vice President and Investment Officer (Age 32).
Vice President of Smith Barney and Vice President of the fund and
four investment companies associated with Salomon Smith Barney.
His address is 7 World Trade Center, New York, NY 10048.

ANTHONY PACE, Controller (Age 36).
Director of Salomon Smith Barney; Controller or Assistant
Treasurer of various investment companies affiliated with
Citigroup since 1999.  His address is 125 Broad Street, New York,
New York 10004.

IRVING DAVID, Controller (Age 39).
Director of Salomon Smith Barney.  Controller or Assistant
Treasurer of various investment companies affiliated with
Citigroup.  His address is 125 Broad Street, New York, New York
10004.


PAUL A. BROOK, Controller (Age 47).
Director of Salomon Smith Barney; Controller or Assistant
Treasurer of various investment companies associated with
Citigroup since 1998; Prior to 1998 Managing Director of AMT
Capital Services Inc.; Prior to 1997, Partner with Ernst & Young
LLP; His address is 125 Broad Street, New York, New York 10004.

CHRISTINA T. SYDOR, Secretary (Age 50).
Managing Director of Salomon Smith Barney and Secretary of 60
investment companies affiliated with Salomon Smith Barney;
Secretary and General Counsel of the Manager and TIA.  Her
address is 7 World Trade Center, New York, NY 10048.

*Designates a Trustee that is an "interested person" as defined
in the 1940 Act. Such persons compensated by Smith Barney and are
not separately compensated by the fund for serving as a fund
officer or Trustee.

	The following table shows the compensation paid by the fund
to each person who was a Trustee during the fund's last fiscal
year.  None of the officers of the fund received any compensation
from the fund for such period.  Officers and interested Trustees
of the fund are compensated by Salomon Smith Barney.

COMPENSATION TABLE






Name of Person

Aggregate
Compensation
from Fund
For Fiscal
Year
Ended
03/31/01
Pension or
Retirement
Benefits
Accrued as
part of
Fund
Expenses
Total
Compensation
from Fund
Complex for
Calendar Year
Ended 12/31/00


Number of
Funds for
Which Person
Serves within
Fund Complex
Lee Abraham
$3,779
$ 0
$72,800
11
Allan J. Bloostein
3,688
0
109,500
18
Jane F. Dasher
3,779
0
75,000
11
Donald R. Foley+
3,442
0
74,900
11
Richard E. Hanson
3,779
0
74,800
11
Paul Hardin
3,779
0
93,150
13
Heath B. McLendon*
0
0
0
77
Roderick C.
Rasmussen+
3,169
0
74,900
11
John P. Toolan+
3,140
0
74,900
11
_________________________

*	Designates a person that is an "interested Trustee" of the
Trust.

+	Pursuant to a deferred compensation plan, the indicated
persons elected to defer payment of the following amounts
of their compensation from the Trust: Donald R. Foley -
$994, Roderick C. Rasmussen - $1,054 and John P. Toolan -
$3,140, and the following amounts of their compensation
from the Fund Complex:  Donald R. Foley - $24,000, Roderick
C. Rasmussen - $30,000  and John P. Toolan: $74,900.

	Upon attainment of age 72 the fund's current Trustees may
elect to change to emeritus status.  Any Trustees elected
or appointed to the Board in the future will be required to
change to emeritus status upon attainment of age 80.
Trustees Emeritus are entitled to serve in emeritus status
for a maximum of 10 years during which time they are paid
50% of the annual retainer fee and meeting fees otherwise
applicable to the fund's Trustees, together with reasonable
out-of-pocket expenses for each meeting attended.  For the
last fiscal year, the total paid to Emeritus Trustees by
the Trust was $1,792.

	On July 6, 2001, the Trustees and officers owned in the
aggregate less than 1% of the outstanding shares of each fund of
the Trust.

Investment Manager and Administrator

	SBFM is investment manager to each of the funds pursuant to
a written agreement (the "Advisory Agreement").  The services
provided by the manager under each Advisory Agreement are
described in the prospectuses under "Management."  The manager
pays the salary of any officer and employee who is employed by
both it and the funds. The manager bears all expenses in
connection with the performance of its services.  The Manager is
a wholly owned subsidiary of Citigroup.

	The Advisory Agreements for the National Portfolio, the
Georgia Portfolio and Pennsylvania Portfolio provides for a
management fee at the annual rate of 0.45% of the fund's average
net assets.  The management fee for the Limited Term Portfolio,
the Florida Portfolio and the New York Portfolio is an annual
rate of 0.50% of the fund's average net assets.

	At a Meeting of Shareholders of the Limited Term Portfolio,
the Florida Portfolio and the New York Portfolio held on December
15, 1995, the shareholders of each of these funds approved a new
Advisory Agreement that increases the effective management fee
paid by Smith Barney Muni Funds on behalf of each of these funds
from 0.45% to 0.50% of each of these funds' average daily net
assets.

	The Advisory Agreements for the California Money Market
Portfolio, the New York Money Market Portfolio and the
Massachusetts Money Market Portfolio provide for the payment of a
management fee at an annual rate based on each Money Market
Portfolio's average daily net assets in accordance with the
following schedule:

		0.500% on the first $2.5 billion of net assets;
		0.475% on the next $2.5 billion; and
		0.450% on net assets in excess of $5 billion.
		0.400 on net assets in excess of $7.5 billion

	Based on the current asset levels of each Money Market
Portfolio, except California Money Market, the effective rate of
the management fee for each of the money market funds is 0.50%.
The effective rate of the management fee for California Money
Market Portfolio is 0.497%.

	For the fiscal years or period ended March 31, 2001, 2000
and 1999, the management fee paid by each fund was as follows:

PORTFOLIO

2001
2000
1999

National
$1,957,55
8
$1,990,02
4
$1,976,56
2
Limited Term
1,320,269
1,755,970
1,625,157
New York
3,367,819
3,530,004
3,811,463
Florida
1,103,990
1,132,816
1,109,500
California Money
15,681,06
6
11,636,11
1
9,619,316
New York Money
8,665,074
7,182,349
6,110,859
Georgia (a)
269,510
249,390
200,616
Pennsylvania (b)
288,503
310,437
235,522
Massachusetts Money
(c)
1,404,178
457,792
--

(a)	The manager waived $48,063 of its management fee for the
fund for the fiscal year ended March 31, 1999.
(b) The manager waived $129,973, $81,072 and $128, 223 of its
management fees for the fund for the fiscal years ended
March 31, 1999, 2000 and 2001, respectively.
(c) Massachusetts Money Market Portfolio commenced operations
on September 14, 1999.The manager waived $101,448 for the
fiscal year ended March 31, 2000 and waived $43,424 of its
fees for the fiscal year ended March 31, 2001.

	The Advisory Agreements further provide that all other
expenses not specifically assumed by the manager under the
Advisory Agreement on behalf of each fund are borne by the fund.
Expenses payable by the fund include, but are not limited to, all
charges of custodians (including sums as custodian and sums for
keeping books and for rendering other services to the fund) and
shareholder servicing agents, expenses of preparing, printing and
distributing all prospectuses, proxy material, reports and
notices to shareholders, all expenses of shareholders' and
Trustees' meetings, filing fees and expenses relating to the
registration and qualification of the fund's shares and the fund
under Federal or state securities laws and maintaining such
registrations and qualifications (including the printing of the
fund's  registration statements), fees of auditors and legal
counsel, costs of performing fund valuations, out-of-pocket
expenses of Trustees and fees of Trustees who are not "interested
persons" as defined in the 1940 Act, interest, taxes and
governmental fees, fees and commissions of every kind, expenses
of issue, repurchase or redemption of shares, insurance expense,
association membership dues, all other costs incident to the
fund's existence and extraordinary expenses such as litigation
and indemnification expenses.  Direct expenses of each portfolio
of the fund, including but not limited to the management fee, are
charged to that fund, and general trust expenses are allocated
among the funds on the basis of relative net assets.

	The manager has voluntarily agreed to waive its fees if in
any fiscal year the aggregate expenses of any Class of the
following funds, exclusive of 12b-1 fees, taxes, brokerage,
interest and extraordinary expenses, such as litigation costs,
exceed the indicated percentage of such fund's average net assets
for that fiscal year:

National
0.65%
Limited Term
0.70%
New York
0.70%
Florida
0.70%
California Money Market
0.70%
New York Money Market
0.70%
Georgia
0.65%
Pennsylvania
0.65%
Massachusetts Money Market
0.70%

	The foregoing expense limitations may be terminated at any
time by the manager by notification to existing shareholders and
by supplementing the relevant fund's then-current prospectus
and/or SAI.

DISTRIBUTION

	Distributor. Effective June 5, 2000, Salomon Smith Barney,
Inc., located at 388 Greenwich Street, New York, New York 10013
and PFS Distributors, Inc. ("PFS Distributors") serve as the
fund's co-distributors pursuant to written agreements dated June
5, 2000 (the "Distribution Agreements") which was approved by the
fund's Board of Directors, including a majority of the
independent directors, on March 15, 2000.   Prior to and up to
June 5, 2000, CFBDS, Inc. served as each Fund's Distributor.

The Distributor may be deemed to be an underwriter for
purposes of the 1933 Act. From time to time, the Distributor, or
PFS Distributors or its affiliates may also pay for certain non-
cash sales incentives provided to PFS Registered Representatives.
Such incentives do not have any effect on the net amount
invested. In addition to the reallowances from the applicable
public offering price described above, PFS Distributors may, from
time to time, pay or allow additional reallowances or promotional
incentives, in the form of cash or other compensation to PFS
Registered Representatives that sell shares of each portfolio.

The Distributor has entered into a selling agreement with
PFS Distributors and PFS Distributors has entered into an
agreement with PFS Investments Inc. ("PFSI") giving PFSI the
right to sell shares of each portfolio of the fund on behalf of
the Distributor.  The Distributor's obligation is an agency or
"best efforts" arrangement under which the Distributor is
required to take and pay only for such shares of each portfolio
as may be sold to the public.  The Distributor is not obligated
to sell any stated number of shares.  The Distribution Agreements
are renewable from year to year if approved (a) by the directors
or by a vote of a majority of the fund's outstanding voting
securities, and (b) by the affirmative vote of a majority of
directors who are not parties to the Distribution Agreements or
interested persons of any party by votes cast in person at a
meeting called for such purpose.  The Distribution Agreements
provide that they will terminate if assigned, and that they may
be terminated without penalty by either party on 60 days' written
notice.

	The Trust, on behalf of each fund, has adopted a plan of
distribution pursuant to Rule 12b-1 (the "Plan") under the 1940
Act under which a service fee is paid by each class of shares
(other than Class Y shares) of each fund to Salomon Smith Barney
and PFSI in connection with shareholder service expenses.  The
only Classes of shares being offered for sale through PFSI are
Classes A and B shares.  Under the Plan, Salomon Smith Barney is
paid a fee with respect to shares of each portfolio sold through
Salomon Smith Barney and PFSI is paid a fee with respect to
shares or each portfolio sold through PFS Distributors.  Under
the Plan, the fund pays Salomon Smith Barney, or PFSI (who pays
its Registered Representative), as the case may be, a service fee
equal to 0.15% of the average daily net assets of each class (the
service fee payable by the Class A shares of the California Money
Market, New York Money Market and Massachusetts Money Market
Portfolios is 0.10%).  The service fee, is primarily used to pay
Service Agents for servicing shareholder accounts.  In addition,
each fund pays Salomon Smith Barney a distribution fee with
respect to Class B and Class L shares (except California Money
Market Portfolio, New York Money Market Portfolio and
Massachusetts Money Market Portfolio which do not offer Class B
or L shares and Limited Term Portfolio which does not offer
Class B shares and has a different rate for its Class L shares),
calculated at the annual rates of 0.50% and 0.55%, respectively,
and 0.20% for Limited Term Portfolio Class L shares, of the value
of the fund's average daily net assets attributable to those
classes (and pays PFSI with respect to Class A and B ) to cover
expenses primarily intended to result in the sale of those
shares.  These expenses include: advertising expenses; the cost
of printing and mailing prospectuses to potential investors;
payment to and expenses of Service Agents and other persons who
provide support services in connection with the distribution of
shares; interest and/or carrying charges; and indirect and
overhead costs of Salomon Smith Barney and PFSI associated with
the sale of portfolio shares, including lease, utility,
communications and sales promotion expenses.  Class B shares that
automatically convert to Class A shares eight years after the
date of original purchase will no longer be subject to a
distribution fee.

	For the year ended March 31, 2001, the table below
represents the fees which have been accrued and/or paid to
Salomon Smith Barney pursuant to Rule 12b-1 for each of the
fund's portfolios:


PORTFOLIO

Class A

Class B

Class L

Class Y

Total

California Money Market
$3,136,2
11
N/A
N/A
--
$3,136,2
11
National
$557,626
$280,128
$141,158
--
$978,912
Limited Term
$331,508
N/A
$107,816
--
$439,324
Florida
$229,069
$362,037
$86,711
--
$677,817
Georgia
$63,935
$71,841
$43,506
--
$179,282
New York
$751,568
$971,409
$145,142
--
$1,868,1
19
New York Money Market
$1,733,0
15
N/A
N/A
--
$1,733,0
15
Pennsylvania
$41,072
$178,643
$64,728
--
$284,443
Massachusetts Money
Market*
$280,826
N/A
N/A
--
$280,826
*Massachusetts Money Market Portfolio commenced operations on
September 14, 1999.

Commissions on Class A Shares. For the periods April 1, 1998
through October 7, 1998 and October 8, 1998 through March 31,
1999, and for the 2000 and 2001 fiscal years the aggregate dollar
amounts of commissions on Class A shares, are as follows:


Class A

Name of Fund
04/01/98
through
10/07/98*
10/08/98
through
03/31/99**
Fiscal Year
Ended
03/31/00***
Fiscal
Year Ended
03/31/01+
California Money Market
n/a
n/a
n/a
n/a
National
$336,000
$355,000
$343,000
$419,000
Limited Term
$294,000
$573,000
$259,000
$226,000
Florida
$201,000
$268,000
$235,000
$230,000
Georgia
$77,000
$91,000
$61,000
$55,000
New York
$268,000
$350,000
$358,000
$2,744,0
00
New York Money Market
n/a
n/a
n/a
n/a
Pennsylvania
$75,000
$132,000
$93,000
$65,000
Massachusetts Money
Market
n/a
n/a
n/a
n/a

*The entire amount was paid to Salomon Smith Barney.

** The following amounts were paid to Salomon Smith Barney:
$319,500, $515,700, $241,200, $81,900, $315,000, and $118,800,
for the National, Limited Term, Florida, Georgia, New York, and
Pennsylvania Portfolios.

*** The following amounts were paid to Salomon Smith Barney:
$308,700, $233,100, $211,500, $54,900, $322,200, and $83,700, for
the National, Limited Term, Florida, Georgia, New York, and
Pennsylvania Portfolios.

+ A portion of this amount was paid to Salomon Smith Barney.

Commissions on Class L Shares.  For the periods June 12, 1998
through October 7, 1998 and October 8, 1998 through March 31,
1999, and for the 2000 and 2001 fiscal years the aggregate dollar
amounts of commissions on Class L shares are as follows:



Class L
(On June 12, 1998, Class C
shares were renamed Class L
shares)

Name of Fund
06/12/98
through
10/07/98*
10/08/98
through
03/31/99**
Fiscal Year
Ended
03/31/00***
Fiscal Year
Ended
03/31/01+
California Money
Market
n/a
n/a
n/a
n/a
National
$18,000
$6,000
$19,000
$37,000
Limited Term
$26,000
$91,000
$45,000
$26,000
Florida
$9,000
$14,000
$13,000
$20,000
Georgia
$7,000
$13,000
$9,000
$6,000
New York
$17,000
$48,000
$44,000
$116,00
0
New York Money Market
n/a
n/a
n/a
n/a
Pennsylvania
$6,000
$9,000
$18,000
$5,000
Massachusetts Money
Market
n/a
n/a
n/a
n/a

*	The entire amount was paid to Salomon Smith Barney.

**	The following amounts were paid to Salomon Smith Barney:
$5,400, $81,900, $12,600, $11,700, $43,200 and $8,100 for the
National, Limited Term, Florida, Georgia, New York, and
Pennsylvania Portfolios, respectively.

***The following amounts were paid to Salomon Smith Barney:
$17,100, $40,500, $11,700, $8,100, $39,600 and $16,200 for the
National, Limited Term, Florida, Georgia, New York, and
Pennsylvania Portfolios, respectively.

+ A portion of this amount was paid to Salomon Smith Barney.

	As set forth in the prospectuses, a deferred sales charge
may be imposed on certain redemptions of Class A, Class B and
Class L shares. The amount of the deferred sales charge will
depend on the number of years since the shareholder made the
purchase payment from which the amount is being redeemed. See
"Deferred Sales Charge Provisions" below.

Code of Ethics

	Pursuant to Rule 17j-1 of the 1940 Act, the fund, its
investment adviser and principal underwriter have adopted codes
of ethics that permit personnel to invest in securities for their
own accounts, including securities that may be purchased or held
by the fund.  All personnel must place the interests of clients
first and avoid activities, interests and relationships that
might interfere with the duty to make decisions in the best
interests of the clients.  All personal securities transactions
by employees must adhere to the requirements of the codes and
must be conducted in such a manner as to avoid any actual or
potential conflict of interest, the appearance of such a
conflict, or the abuse of an employee's position of trust and
responsibility.

	A copy of the fund's code of ethics is on file with the
SEC.

 Custodian

	All fund securities and cash owned by the funds will be
held in the custody of PFPC Trust Company, 8800 Tinicum
Boulevard, Philadelphia, Pennsylvania 19153 (successor by
assignment from PNC Bank, National Association).

Counsel

Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New
York 10019, serves as counsel to the funds.

Sullivan & Cromwell, 125 Broad Street, New York, New York
10004, serves as counsel to the directors who are not "interested
persons" of the funds.

Auditors

	KPMG LLP, 757 Third Avenue, New York, New York 10017, has
been selected to serve as independent auditors of the funds and
to render an opinion on the funds' financial statements for the
fiscal year ending March 31, 2002.

PURCHASE OF SHARES

	The National Portfolio, Florida Portfolio, Georgia
Portfolio, New York Portfolio and Pennsylvania Portfolio each
offer four classes ("Classes") of shares:  Class A, Class B,
Class L and Class Y.  The Limited Term Portfolio offers three
classes of shares:  Class A, Class L and Class Y.  Class A shares
are sold to investors with an initial sales charge and Class B
shares are sold without an initial sales charge but with higher
ongoing expenses and a deferred sales charge payable upon certain
redemptions.  Class L shares are sold with a lower initial sales
charge than Class A shares but with higher ongoing expenses and a
deferred sales charge.  Class Y shares are sold without an
initial sales charge and are available only to investors
investing a minimum of $15,000,000.  The California Money Market
Portfolio, the New York Money Market Portfolio, and the
Massachusetts Money Market Portfolio each offer two classes of
shares:  Class A and Class Y.  Class A shares of each of the
California Money Market, New York Money Market and Massachusetts
Money Market Portfolios are sold without an initial sales charge.
These alternatives are designed to provide investors with the
flexibility of selecting an investment best suited to his or her
needs based on the amount of purchase, the length of time the
investor expects to hold the shares and other circumstances.

	The following classes of shares are available for purchase.
See the prospectus for a discussion of factors to consider in
selecting which Class of shares to purchase.

Class A Shares. Class A shares of California Money Market, New
York Money Market and Massachusetts Money Market Portfolios are
sold without sales charges.  Class A shares of Limited Term
Portfolio have an initial sales charge of 2.00% of the
transaction (2.04% of amount invested) of the first $499,999
invested; and no initial sales charge for investments of $500,000
and over.*

Class A shares of each fund except California Money Market, New
York Money Market, Massachusetts Money Market and Limited Term
Portfolios are sold to investors at the public offering price,
which is the net asset value plus an initial sales charge as
follows:







Amount of
Investment

Sales Charge as
a %
Of Transaction

Sales Charge as
a %
of Amount
Invested
Broker/
Dealers
Commission as %
Of Offering Price
Less than $25,000
	4.00%
	4.17%
	3.60%
$ 25,000 - 49,999
	3.50
	3.63
	3.15
50,000 - 99,999
	3.00
	3.09
	2.70
100,000 - 249,999
	2.50
	2.56
	2.25
250,000 - 499,999
	1.50
	1.52
	1.35
500,000 and over
	*
	*
	*

*  Purchases of Class A shares of $500,000 or more will be made
at net asset value without any initial sales charge, but will be
subject to a deferred sales charge of 1.00% on redemptions made
within 12 months of purchase. The deferred sales charge on Class
A shares is payable to Salomon Smith Barney, which compensates
Service Agents whose clients make purchases of $500,000 or more.
The deferred sales charge is waived in the same circumstances in
which the deferred sales charge applicable to Class B and Class
L shares is waived. See "Purchase of Shares-Deferred Sales
Charge Alternatives" and "Purchase of Shares-Waivers of Deferred
Sales Charge."

Members of a selling group may receive up to 90% of the sales
charge and may be deemed to be underwriters of a fund as defined
in the 1933 Act.  The reduced sales charges shown above apply to
the aggregate of purchases of Class A shares of a fund made at
one time by "any person," which includes an individual and his or
her immediate family, or a trustee or other fiduciary of a single
trust estate or single fiduciary account.

Class B Shares.  Class B shares are sold without an initial sales
charge but are subject to a deferred sales charge payable upon
certain redemptions.  See "Deferred Sales Charge Provisions"
below.

Class L Shares.  Class L shares are sold with an initial sales
charge of 1.00% (which is equal to 1.01% of the amount invested)
and are subject to a deferred sales charge payable upon certain
redemptions.  See "Deferred Sales Charge Provisions" below.
Until June 22, 2002 purchases of Class L shares by investors who
were holders of Class C shares of the fund on June 12, 1998 will
not be subject to the 1% initial sales charge.

Class Y Shares.  Class Y shares are sold without an initial sales
charge or deferred sales charge and are available only to
investors investing a minimum of $15,000,000 (except purchases of
Class Y shares by Smith Barney Allocation Series Inc., for which
there is no minimum purchase amount).

General

Investors may purchase shares from a Service Agent.  In addition,
certain investors purchasing through certain Service Agents, may
purchase shares directly from a fund.  When purchasing shares of
a fund, investors must specify which class is being purchased.
Service Agents may charge their customers an annual account
maintenance fee in connection with a brokerage account through
which an investor purchases or holds shares.  Accounts held
directly at PFPC Global Fund Services, Inc. or Primerica
Shareholder Services (each, a "sub-transfer agent" or
collectively, the "sub-transfer agents") are not subject to a
maintenance fee.

Investors in Class A, Class B and Class L shares may open an
account in a fund by making an initial investment of at least
$1,000 for each account, in the fund. Investors in Class Y shares
may open an account by making an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made
for all Classes. For shareholders purchasing shares of a fund
through the Systematic Investment Plan on a monthly basis, the
minimum initial investment requirement for Class A, Class B and
Class L shares and subsequent investment requirement for all
Classes is $25. For shareholders purchasing shares of a fund
through the Systematic Investment Plan on a quarterly basis, the
minimum initial investment required for Class A, Class B and
Class L shares and the subsequent investment requirement for all
Classes is $50.  There are no minimum investment requirements for
Class A shares for employees of Citigroup and its subsidiaries,
including Salomon Smith Barney, unitholders who invest
distributions from a Unit Investment Trust ("UIT") sponsored by
Salomon Smith Barney, and Directors/Trustees of any of the Smith
Barney Mutual Funds, and their spouses and children. A fund
reserves the right to waive or change minimums, to decline any
order to purchase its shares and to suspend the offering of
shares from time to time. Shares purchased will be held in the
shareholder's account by the sub-transfer agent. Share
certificates are issued only upon a shareholder's written request
to the sub-transfer agent.

Purchase orders received by a fund or a Service Agent prior to
the close of regular trading on the New York Stock Exchange
("NYSE"), on any day the fund calculates its net asset value, are
priced according to the net asset value determined on that day
(the "trade date").  Orders received by a Dealer Representative
prior to the close of regular trading on the NYSE on any day a
fund calculates its net asset value, are priced according to the
net asset value determined on that day, provided the order is
received by a fund or the fund's agent prior to its close of
business. For shares purchased through Salomon Smith Barney or a
Service Agent purchasing through Salomon Smith Barney, payment
for shares of the fund is due on the third business day after the
trade date. In all other cases, payment must be made with the
purchase order.

Systematic Investment Plan.  Shareholders may make additions to
their accounts at any time by purchasing shares through a service
known as the Systematic Investment Plan.  Under the Systematic
Investment Plan, Salomon Smith Barney or the sub-transfer agent
is authorized through preauthorized transfers of at least $25 on
a monthly basis or at least $50 on a quarterly basis to charge
the shareholder's account held with a bank or other financial
institution on a monthly or quarterly basis as indicated by the
shareholder, to provide for systematic additions to the
shareholder's fund account. A shareholder who has insufficient
funds to complete the transfer will be charged a fee of up to $25
by Salomon Smith Barney or the sub-transfer agent..  The
Systematic Investment Plan also authorizes Salomon Smith Barney
to apply cash held in the shareholder's Salomon Smith Barney
brokerage account or redeem the shareholder's shares of a Smith
Barney money market fund to make additions to the account.
Additional information is available from the fund or a Service
Agent.

Sales Charge Waivers and Reductions

Initial Sales Charge Waivers.  Purchases of Class A shares may be
made at net asset value without a sales charge in the following
circumstances: (a) sales to (i) Board Members and employees of
Citigroup and its subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including retired Board
Members and employees); the immediate families of such persons
(including the surviving spouse of a deceased Board Member or
employee); and to a pension, profit-sharing or other benefit plan
for such persons and (ii) employees of members of the National
Association of Securities Dealers, Inc., provided such sales are
made upon the assurance of the purchaser that the purchase is
made for investment purposes and that the securities will not be
resold except through redemption or repurchase; (b) offers of
Class A shares to any other investment company to effect the
combination of such company with the fund by merger, acquisition
of assets or otherwise; (c) purchases of Class A shares by any
client of a newly employed Service Agent (for a period up to 90
days from the commencement of the Service Agent's employment with
Salomon Smith Barney), on the condition the purchase of Class A
shares is made with the proceeds of the redemption of shares of a
mutual fund which (i) was sponsored by the Service Agent's prior
employer, (ii) was sold to the client by the Service Agent and
(iii) was subject to a sales charge; (d) purchases by
shareholders who have redeemed Class A shares in the fund (or
Class A shares of another Smith Barney Mutual Fund that is
offered with a sales charge) and who wish to reinvest their
redemption proceeds in the fund, provided the reinvestment is
made within 60 calendar days of the redemption; (e) purchases by
accounts managed by registered investment advisory subsidiaries
of Citigroup; (f) direct rollovers by plan participants of
distributions from a 401(k) plan offered to employees of
Citigroup or its subsidiaries or a 401(k) plan enrolled in the
Smith Barney 401(k) Program (Note: subsequent investments will be
subject to the applicable sales charge); (g) purchases by a
separate account used to fund certain unregistered variable
annuity contracts; (h) investments of distributions from or
proceeds from a sale of a UIT sponsored by Salomon Smith Barney;
(i) purchases by investors participating in a Salomon Smith
Barney fee-based arrangement; and (j) accounts associated with
"k" Choice and Collective Choice. In order to obtain such
discounts, the purchaser must provide sufficient information at
the time of purchase to permit verification that the purchase
would qualify for the elimination of the sales charge.

Right of Accumulation.  Class A shares of the fund may be
purchased by "any person" (as defined above) at a reduced sales
charge or at net asset value determined by aggregating the dollar
amount of the new purchase and the total net asset value of all
Class A shares of the fund and of other Smith Barney Mutual Funds
that are offered with a sales charge as currently listed under
"Exchange Privilege" then held by such person and applying the
sales charge applicable to such aggregate.  In order to obtain
such discount, the purchaser must provide sufficient information
at the time of purchase to permit verification that the purchase
qualifies for the reduced sales charge.  The right of
accumulation is subject to modification or discontinuance at any
time with respect to all shares purchased thereafter.

Letter of Intent - Class A Shares.  A Letter of Intent for an
amount of $25,000 or more provides an opportunity for an investor
to obtain a reduced sales charge by aggregating investments over
a 13 month period, provided that the investor refers to such
Letter when placing orders.  For purposes of a Letter of Intent,
the "Amount of Investment" as referred to in the preceding sales
charge table includes (i) all Class A shares of the fund and
other Smith Barney Mutual Funds offered with a sales charge
acquired during the term of the letter plus (ii) the value of all
Class A shares previously purchased and still owned.  Each
investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal.  If
the goal is not achieved within the period, the investor must pay
the difference between the sales charges applicable to the
purchases made and the charges previously paid, or an appropriate
number of escrowed shares will be redeemed.  The term of the
Letter will commence upon the date the Letter is signed, or at
the option of the investor, up to 90 days before such date.
Please contact a Service Agent or the Transfer Agent to obtain a
Letter of Intent application.

Letter of Intent - Class Y Shares.  A Letter of Intent may also
be used as a way for investors to meet the minimum investment
requirement for Class Y shares (except purchases of Class Y
shares by Smith Barney Allocation Series Inc., for which there is
no minimum purchase amount).  Such investors must make an initial
minimum purchase of $5,000,000 in Class Y shares of the fund and
agree to purchase a total of $15,000,000 of Class Y shares of the
fund within 13 months from the date of the Letter.  If a total
investment of $15,000,000 is not made within the 13-month period,
all Class Y shares purchased to date will be transferred to Class
A shares, where they will be subject to all fees (including a
service fee of 0.25%) and expenses applicable to the fund's Class
A shares, which may include a deferred sales charge of 1.00%.
Please contact a Service Agent or the Transfer Agent for further
information.

Deferred Sales Charge Provisions

"Deferred Sales Charge Shares" are: (a) Class B shares; (b) Class
L shares; and (c) Class A shares that were purchased without an
initial sales charge but are subject to a deferred sales charge.
A deferred sales charge may be imposed on certain redemptions of
these shares.

Any applicable deferred sales charge will be assessed on an
amount equal to the lesser of the original cost of the shares
being redeemed or their net asset value at the time of
redemption. Deferred Sales Charge Shares that are redeemed will
not be subject to a deferred sales charge to the extent the value
of such shares represents: (a) capital appreciation of fund
assets; (b) reinvestment of dividends or capital gain
distributions; (c) with respect to Class B shares, shares
redeemed more than five years after their purchase; or (d) with
respect to Class L shares and Class A shares that are Deferred
Sales Charge Shares, shares redeemed more than 12 months after
their purchase.

Class L shares and Class A shares that are Deferred Sales Charge
Shares are subject to a 1.00% deferred sales charge if redeemed
within 12 months of purchase. In circumstances in which the
deferred sales charge is imposed on Class B shares, the amount of
the charge will depend on the number of years since the
shareholder made the purchase payment from which the amount is
being redeemed.  Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during
a month will be aggregated and deemed to have been made on the
last day of the preceding Salomon Smith Barney statement month.
The following table sets forth the rates of the charge for
redemptions of Class B shares by shareholders.


Year Since Purchase Payment Was
Made

Deferred sales charge

First

4.50%

Second

4.00

Third

3.00

Fourth

2.00

Fifth

1.00

Sixth and thereafter

0.00

Class B shares will convert automatically to Class A shares eight
years after the date on which they were purchased and thereafter
will no longer be subject to any distribution fees. There will
also be converted at that time such proportion of Class B
Dividend Shares (Class B shares that were acquired through the
reinvestment of dividends and distributions) owned by the
shareholders as the total number of his or her Class B shares
converting at the time bears to the total number of outstanding
Class B shares (other than Class B Dividend Shares) owned by the
shareholder.

In determining the applicability of any deferred sales charge, it
will be assumed that a redemption is made first of shares
representing capital appreciation, next of shares representing
the reinvestment of dividends and capital gains distributions and
finally of other shares held by the shareholder for the longest
period of time.  The length of time that Deferred Sales Charge
Shares acquired through an exchange have been held will be
calculated from the date the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and fund
shares being redeemed will be considered to represent, as
applicable, capital appreciation or dividend and capital gain
distribution reinvestments in such other funds. For Federal
income tax purposes, the amount of the deferred sales charge will
reduce the gain or increase the loss, as the case may be, on the
amount realized on redemption. The amount of any deferred sales
charge will be paid to Salomon Smith Barney.

To provide an example, assume an investor purchased 100 Class B
shares of the fund at $10 per share for a cost of $1,000.
Subsequently, the investor acquired 5 additional shares of the
fund through dividend reinvestment.  During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or
her investment.  Assuming at the time of the redemption the net
asset value had appreciated to $12 per share, the value of the
investor's shares would be $1,260 (105 shares at $12 per share).
The deferred sales charge would not be applied to the amount
which represents appreciation ($200) and the value of the
reinvested dividend shares ($60).  Therefore, $240 of the $500
redemption proceeds ($500 minus $260) would be charged at a rate
of 4.00% (the applicable rate for Class B shares) for a total
deferred sales charge of $9.60.

Waivers of Deferred Sales Charge

The deferred sales charge will be waived on: (a) exchanges (see
"Exchange Privilege"); (b) automatic cash withdrawals in amounts
equal to or less than 1.00% per month of the value of the
shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (however, automatic cash
withdrawals in amounts equal to or less than 2.00% per month of
the value of the shareholder's shares will be permitted for
withdrawal plans established prior to November 7, 1994); (c)
redemptions of shares within 12 months following the death or
disability of the shareholder; (d) redemptions of shares made in
connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 591/2; (e) involuntary redemptions;
and (f) redemptions of shares to effect a combination of the fund
with any investment company by merger, acquisition of assets or
otherwise. In addition, a shareholder who has redeemed shares
from other Smith Barney Mutual Funds may, under certain
circumstances, reinvest all or part of the redemption proceeds
within 60 days and receive pro rata credit for any deferred sales
charge imposed on the prior redemption.

Deferred sales charge waivers will be granted subject to
confirmation (by Salomon Smith Barney in the case of shareholders
who are also Salomon Smith Barney clients or by the Transfer
Agent in the case of all other shareholders) of the shareholder's
status or holdings, as the case may be.

Volume Discounts

The schedule of sales charges on Class A shares described in the
prospectus applies to purchases made by any "purchaser," which is
defined to include the following: (a) an individual; (b) an
individual's spouse and his or her children purchasing shares for
their own account; (c) a trustee or other fiduciary purchasing
shares for a single trust estate or single fiduciary account; and
(d) a trustee or other professional fiduciary (including a bank,
or an investment adviser registered with the SEC under the
Investment Advisers Act of 1940, as amended) purchasing shares of
the fund for one or more trust estates or fiduciary accounts.
Purchasers who wish to combine purchase orders to take advantage
of volume discounts on Class A shares should contact a Service
Agent.

Determination of Public Offering Price

Each fund offers its shares to the public on a continuous basis.
The public offering price for a Class A, Class L (effective June
12, 1998 the former Class C shares were renamed Class L shares)
and Class Y share of a fund is equal to the net asset value per
share at the time of purchase, plus for Class A and Class L
shares an initial sales charge based on the aggregate amount of
the investment.  The public offering price for a Class B share
(and Class A share purchases, including applicable rights of
accumulation, equaling or exceeding $500,000) is equal to the net
asset value per share at the time of purchase and no sales charge
is imposed at the time of purchase. A deferred sales charge,
however, is imposed on certain redemptions of Class B and Class L
shares, and Class A shares when purchased in amounts equaling or
exceeding $500,000. The method of computation of the public
offering price is shown in the fund's financial statements,
incorporated by reference in their entirety into this SAI.

PFS Accounts

Initial purchase of shares of the fund must be made through a
PFSI Registered Representative by completing the appropriate
application. The completed application should be forwarded to PFS
Shareholder Services, P.O. Box 105033, Atlanta, GA 30348. Checks
drawn on foreign banks must be payable in U.S. dollars and have
the routing number of the U.S. bank encoded on the check.
Subsequent investments may be sent directly to PFS Shareholder
Services.  In processing applications and investments, PFS
Shareholder Services acts as agent for the investor and for PFSI
and also as agent for the distributor, in accordance with the
terms of the prospectus.  If the transfer agent ceases to act as
such, a successor company named by the fund will act in the same
capacity so long as the account remains open.

Shares purchased will be held in the shareholder's account by PFS
Shareholder Services. Share certificates are issued only upon a
shareholder's written request to the sub-transfer agent. A
shareholder that has insufficient funds to complete any purchase
will be charged a fee of up to $30 per returned purchase by PFS
Shareholder Services.

Investors in Class A and Class B shares may open an account by
making an initial investment of at least $1,000 for each account
in each Class (except for Systematic Investment Plan accounts).
Subsequent investments of at least $50 may be made for each
Class. For the fund's Systematic Investment Plan, the minimum
initial investment requirement for Class A and Class B shares and
the subsequent investment requirement for each Class is $25.
There are no minimum investment requirements in Class A shares
for employees of Citigroup and its subsidiaries, including
Salomon Smith Barney, Directors or Trustees of any of the Smith
Barney Mutual Funds, and their spouses and children. The fund
reserves the right to waive or change minimums, to decline any
order to purchase its shares and to suspend the offering of
shares from time to time.  Purchase orders received by the
transfer agent or sub-transfer agent prior to the close of
regular trading on the NYSE, on any day the fund calculates its
net asset value, are priced according to the net asset value
determined on that day.

Initial purchases of fund shares may be made by wire.  The
minimum investment that can be made by wire is $10,000. Before
sending the wire, the PFSI Registered Representative must contact
the PFS Shareholder Services at (800) 665-8677 to obtain proper
wire instructions.  Once an account is open, a shareholder may
make additional investments by wire.  The shareholder should
contact PFS Shareholder Services at (800) 544-5445 to obtain
proper wire instructions.

Shareholders who establish telephone transaction authority on
their account and supply bank account information may make
additions to their accounts at any time.  Shareholders should
contact PFS Shareholder Services at (800) 544-5445 between 8:00
a.m. and 8:00 p.m. eastern time any day that the NYSE is open.
If a shareholder does not wish to allow telephone subsequent
investments by any person in his account, he should decline the
telephone transaction option on the account application.  The
minimum telephone subsequent investment is $250 and can be up to
a maximum of $10,000.  By requesting a subsequent purchase by
telephone, you authorize PFS Shareholder Services to transfer
funds from the bank account provided for the amount of the
purchase.  A shareholder that has insufficient funds to complete
the transfer will be charged a fee of up to $30 by PFS
Shareholder Services.  A shareholder who places a stop payment on
a transfer or the transfer is returned because the account has
been closed, will also be charged a fee of up to $30 by PFS
Shareholder Services.  Subsequent investments by telephone may
not be available if the shareholder cannot reach PFS Shareholder
Services whether because all telephone lines are busy or for any
other reason; in such case, a shareholder would have to use the
fund's regular subsequent investment procedure described above.

Redemption proceeds can be sent by check to the address of
record, or deposited into your bank account designated on the
application via the Automated Clearinghouse (ACH).  A shareholder
will be charged a $25 service fee for wire transfers and a
nominal service fee for transfers made directly to the
shareholder's bank by the ACH.  Wire transfers are not available
on phone redemptions.  PFS Shareholder Services will process and
mail a shareholder's redemption check usually within two to three
business days after receiving the redemption request in good
order.  The shareholder may request the proceeds to be mailed by
two-day air express for an $8 fee that will be deducted from the
shareholder's account or by one-day air express for a $15 fee
that will be deducted from the shareholder's account.

An Account Transcript is available at a shareholder's request,
which identifies every financial transaction in an account since
it has opened.  To defray administrative expenses involved with
providing multiple years worth of information, there is a $15
charge for each Account Transcript requested.  Additional copies
of tax forms are available at the shareholder's request.  A $10
fee for each tax form will be assessed.

Additional information regarding PFS Shareholder Services may be
obtained by contacting the Client Services Department at (800)
544-5445.

REDEMPTION OF SHARES

	The right of redemption may be suspended or the date of
payment postponed (a) for any period during which the NYSE is
closed (other than for customary weekend and holiday closings),
(b) when trading in the markets the fund normally utilizes is
restricted, or an emergency exists, as determined by the SEC, so
that disposal of the fund's investments or determination of net
asset value is not reasonably practicable or (c) for such other
periods as the SEC by order may permit for protection of the
fund's shareholders.

	If the shares to be redeemed were issued in certificate
form, the certificates must be endorsed for transfer (or be
accompanied by an endorsed stock power) and must be submitted to
the sub-transfer agent  together with the redemption request.
Any signature appearing on a share certificate, stock power or
written redemption request in excess of $50,000 must be
guaranteed by an eligible guarantor institution such as a
domestic bank, savings and loan institution, domestic credit
union, member bank of the Federal Reserve System or member firm
of a national securities exchange.  Written redemption requests
of $50,000 or less do not require a signature guarantee unless
more than one such redemption request is made in any 10-day
period or the redemption proceeds are to be sent to an address
other than the address of record.  Unless otherwise directed,
redemption proceeds will be mailed to an investor's address of
record.  The Transfer Agent may require additional supporting
documents for redemptions made by corporations, executors,
administrators, trustees or guardians.  A redemption request will
not be deemed properly received until PFPC receives all required
documents in proper form.  Redemption proceeds will be mailed to
the shareholder's address of record.

	If a shareholder holds shares in more than one Class, any
request for redemption must specify the Class being redeemed.  In
the event of a failure to specify which Class, or if the investor
owns fewer shares of the Class than specified, the redemption
request will be delayed until the Transfer Agent receives further
instructions from Salomon Smith Barney, or if the shareholder's
account is not with Salomon Smith Barney, from the shareholder
directly.  The redemption proceeds will be remitted on or before
the third business day following receipt of proper tender, except
on any days on which the NYSE is closed or as permitted under the
1940 Act, in extraordinary circumstances.  Generally, if the
redemption proceeds are remitted to a Salomon Smith Barney
brokerage account, these funds will not be invested for the
shareholder's benefit without specific instructions and Salomon
Smith Barney will benefit from the use of temporarily uninvested
funds.  Redemption proceeds for shares purchased by check, other
than a certified or official bank check, will be remitted upon
clearance of the check, which may take up to fifteen days or
more.


Distributions in Kind

	If the Board of Trustees of the fund determines that it
would be detrimental to the best interests of the remaining
shareholders to make a redemption payment wholly in cash, each
fund may pay, in accordance with SEC rules, any portion of a
redemption in excess of the lesser of $250,000 or 1.00% of the
fund's net assets by a distribution in kind of fund securities in
lieu of cash. Securities issued as a distribution in kind may
incur brokerage commissions when shareholders subsequently sell
those securities.

Automatic Cash Withdrawal Plan

	An automatic cash withdrawal plan (the "Withdrawal Plan")
is available to shareholders who own shares with a value of at
least $10,000 and who wish to receive specific amounts of cash
monthly or quarterly. Withdrawals of at least $50 may be made
under the Withdrawal Plan by redeeming as many shares of the fund
as may be necessary to cover the stipulated withdrawal payment.
Any applicable deferred sales charge will not be waived on
amounts withdrawn by shareholders that exceed 1.00% per month of
the value of a shareholder's shares at the time the Withdrawal
Plan commences. (With respect to Withdrawal Plans in effect prior
to November 7, 1994, any applicable deferred sales charge will be
waived on amounts withdrawn that do not exceed 2.00% per month of
the value of the shareholder's shares that are subject to a
deferred sales charge). To the extent withdrawals exceed
dividends, distributions and appreciation of a shareholder's
investment in the fund, there will be a reduction in the value of
the shareholder's investment, and continued withdrawal payments
may reduce the shareholder's investment and ultimately exhaust
it. Withdrawal payments should not be considered as income from
investment in the fund. Furthermore, as it generally would not be
advantageous to a shareholder to make additional investments in
the fund at the same time he or she is participating in the
Withdrawal Plan, purchases by such shareholder in amounts of less
than $5,000 ordinarily will not be permitted. All dividends and
distributions on shares in the Withdrawal Plan are reinvested
automatically at net asset value in additional shares of the
fund.

	Shareholders who wish to participate in the Withdrawal Plan
and who hold their shares in certificate form must deposit their
share certificates with the Transfer Agent as agent for
Withdrawal Plan members.  For additional information,
shareholders should contact a Service Agent. A shareholder who
purchases shares directly through the sub-transfer agent may
continue to do so and applications for participation in the
Withdrawal Plan must be received by the sub-transfer agent no
later than the eighth day of the month to be eligible for
participation beginning with that month's withdrawal.

VALUATION OF SHARES

	The prospectus states that the net asset value of each
fund's Classes of shares will be determined on any date that the
NYSE is open.  The NYSE is closed on the following holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day.

	The California Money Market Portfolio, the New York Money
Market Portfolio and the Massachusetts Money Market Portfolio use
the "amortized cost method" for valuing fund securities pursuant
to Rule 2a-7 under the 1940 Act (the "Rule").  The amortized cost
method of valuation of a fund's securities (including any
securities held in the separate account maintained for when-
issued securities) involves valuing a security at its cost at the
time of purchase and thereafter assuming a constant amortization
to maturity of any discount or premium, regardless of the impact
of fluctuating interest rates on the market value of the
instrument.  The market value of each fund's securities will
fluctuate on the basis of the creditworthiness of the issuers of
such securities and with changes in interest rates generally.
While the amortized cost method provides certainty in valuation,
it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the fund would
receive if it sold the instrument.  During such periods the yield
to investors in a fund may differ somewhat from that obtained in
a similar company that uses mark-to-market values for all its
fund securities.  For example, if the use of amortized cost
resulted in a lower (higher) aggregate fund value on a particular
day, a prospective investor in a fund would be able to obtain a
somewhat higher (lower) yield than would result from investment
in such similar company, and existing investors would receive
less (more) investment income.  The purpose of this method of
valuation is to attempt to maintain a constant net asset value
per share, and it is expected that the price of each such fund's
shares will remain at $1.00; however, shareholders should be
aware that despite procedures that will be followed to have a
stable price, including maintaining a maximum dollar-weighted
average fund maturity of 90 days, investing in securities that
have or are deemed to have remaining maturities of only 397 days
or less and investing in only United States dollar-denominated
instruments determined by the fund's Board of Trustees to be of
high quality with minimal credit risks and which are Eligible
Securities (as defined below), there is no assurance that at some
future date there will not be a rapid change in prevailing
interest rates, a default by an issuer or some other event that
could cause one of these fund's price per share to change from
$1.00.

	An Eligible Security is defined in the Rule to mean a
security which:  (a) has a remaining maturity of 397 days or
less; (b)(i) is rated in the two highest short-term rating
categories by any two NRSROs that have issued a short-term rating
with respect to the security or class of debt obligations of the
issuer, or (ii) if only one NRSRO has issued a short-term rating
with respect to the security, then by that NRSRO; (c) was a long-
term security at the time of issuance, is rated in the three
highest long-term rating categories by the requisite NRSROs, and
whose issuer has outstanding a short-term debt obligation which
is comparable in priority and security and has a rating as
specified in clause (b) above; or (d) if no rating is assigned by
any NRSRO as provided in clauses (b) and (c) above, the unrated
security is determined to be of comparable quality to any such
rated security.

EXCHANGE PRIVILEGE

	Except as noted below, shareholders of certain Smith Barney
Mutual Funds may exchange all or part of their shares for shares
of the same class of other Smith Barney Mutual Funds, to the
extent such shares are offered for sale in the shareholder's
state of residence, on the basis of relative net asset value per
share at the time of exchange as follows:

Florida, Georgia, New York, Pennsylvania and National Portfolios.

	A.	Class A and Class Y shareholders of the fund who wish
to exchange all or a portion of their shares for shares of the
respective Class in any of the funds of the Smith Barney Mutual
Fund Complex may do so without imposition of any charge.

	B.	Class B shares of the fund exchanged for Class B
shares of another fund will be subject to the higher applicable
deferred sales charge of the two funds.  Upon an exchange, the
new Class B shares will be deemed to have been purchased on the
same date as the Class B shares of the fund that have been
exchanged.

	C.	Upon exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L shares of
the fund that have been exchanged.


Limited Term Portfolio.

	A.	Class A and Class Y shareholders of the fund who wish
to exchange all or a portion of their shares for shares of the
respective Class in any of the funds of the Smith Barney Mutual
Fund Complex may do so without imposition of any charge.

	B.	Upon exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L shares of
the fund that have been exchanged.

California Money Market, New York Money Market  and Massachusetts
Money Market Portfolios.

	A.	Class A shares of the fund will be subject to the
appropriate sales charge upon the exchange of such shares for
Class A shares of another fund of the Smith Barney Mutual Funds
sold with a sales charge.

	B.	Class Y shareholders of the fund who wish to exchange
all or a portion of their Class Y shares for Class Y shares in
any of the funds identified above may do so without imposition of
any charge.

	Additional Information Regarding the Exchange Privilege.
The funds are not designed to provide investors with a means of
speculation on short-term market movements.  A pattern of
frequent exchanges by investors can be disruptive to efficient
portfolio management and, consequently, can be detrimental to the
fund and its shareholders.  Accordingly, if the funds' management
in its sole discretion determines that an investor is engaged in
excessive trading, the fund, with or without prior notice, may
temporarily or permanently terminate the availability to that
investor of fund exchanges, or reject in whole or part any
purchase or exchange request with respect to such investor's
account.  Such investors also may be barred from purchases and
exchanges involving other funds in the Smith Barney Mutual Fund
family.  Accounts under common ownership or control will be
considered as one account for purposes of determining a pattern
of excessive trading. The funds may notify an investor of
rejection of a purchase or exchange order after the day the order
is placed.  If an exchange request is rejected, the funds will
take no other action with respect to the shares until it receives
further instructions from the investor.  The funds' policy on
excessive trading applies to investors who invest in the funds
directly or through Service Agents, but does not apply to any
systematic investment plans described in the prospectuses.

During times of drastic economic or market conditions, the
funds may suspend the Exchange Privilege temporarily without
notice and treat exchange requests based on their separate
components - redemption orders with a simultaneous request to
purchase the other funds' shares.  In such a case, the redemption
request would be processed at the funds' next determined net
asset value but the purchase order would be effective only at the
net asset value next determined after the fund being purchased
formally accepts the order, which may result in the purchase
being delayed.

	Upon receipt of proper instructions and all necessary
supporting documents, shares submitted for exchange are redeemed
at the then-current net asset value and, subject to any
applicable deferred sales charge, the proceeds immediately
invested, at a price as described above, in shares of the fund
being acquired. Smith Barney reserves the right to reject any
exchange request.  The exchange privilege may be modified or
terminated at any time after written notice to shareholders.
As stated in the prospectus for shares distributed through PFS
Distributors, the exchange privilege is limited.


Additional Information Regarding Telephone Redemption and
Exchange Program.

	Neither the Trust nor its agents will be liable for
following instructions communicated by telephone that are
reasonably believed to be genuine.  The Trust and its agents will
employ procedures designed to verify the identity of the caller
and legitimacy of instructions (for example, a shareholder's name
and account number will be required and phone calls may be
recorded).  Each fund reserves the right to suspend, modify or
discontinue the telephone redemption and exchange program or to
impose a charge for this service at any time following at least
seven (7) days prior notice to shareholders.
The exchange privilege enables shareholders to acquire shares of
the same class in a fund with different investment objectives
when they believe that a shift between funds is an appropriate
investment decision.  This privilege is available to shareholders
residing in any state in which the fund shares being acquired may
legally be sold.  Prior to any exchange, the shareholder should
obtain and review a copy of the current prospectus of each fund
into which an exchange is being considered.  Prospectuses may be
obtained from a Service Agent.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the
then-current net asset value and the proceeds are immediately
invested at a price as described above in shares of the portfolio
being acquired.  Salomon Smith Barney and PFS Distributors
reserve the right to reject any exchange request.  The exchange
privilege may be modified or terminated at any time after written
notice to shareholders.


PERFORMANCE DATA

	From time to time, the fund may quote total return of a
class in advertisements or in reports and other communications to
shareholders.  The fund may include comparative performance
information in advertising or marketing the fund's shares.  Such
performance information may include data from the following
industry and financial publications: Barron's, Business Week, CDA
Investment Technologies, Inc., Changing Times, Forbes, Fortune,
Institutional Investor, Investor's Business Daily, Money,
Morningstar Mutual Fund Values, The New York Times, USA Today and
The Wall Street Journal.



	Each fund, other than the California Money Market
Portfolio, New York Money Market Portfolio and Massachusetts
Money Market Portfolio, computes the average annual total return
during specified periods that would equate the initial amount
invested to the ending redeemable value of such investment by
adding one to the computed average annual total return, raising
the sum to a power equal to the number of years covered by the
computation and multiplying the result by one thousand dollars
which represents the hypothetical initial investment.  The
calculation assumes deduction of the maximum sales charge from
the initial amount invested and reinvestment of all income
dividends and capital gains distributions on the reinvestment
dates at prices calculated as stated in the prospectus.  The
ending redeemable value is determined by assuming a complete
redemption at the end of the period(s) covered by the average
annual total return computation.  Such standard total return
information may also be accompanied with nonstandard total return
information for differing periods computed in the same manner but
without annualizing the total return or taking sales charges into
account.



Average Annual Total Return

	"Average annual total return," as described below, is
computed according to a formula prescribed by the SEC.  The
formula can be expressed as follows:

	P (1+T)n = ERV

Where:		 	P 	= 	a hypothetical initial
payment of $1,000.
T 	= 	average annual total return.
n 	=	number of years.
ERV	=	Ending Redeemable Value of a
hypothetical $1,000 investment made
at the beginning of a 1-, 5-, or
10-year period at the end of a 1-,
5-, or 10-year period (or
fractional portion thereof),
assuming reinvestment of all
dividends and distributions.

The ERV assumes complete redemption of the hypothetical
investment at the end of the measuring period.  A fund's net
investment income changes in response to fluctuations in interest
rates and the expenses of each fund.

	Each fund's average annual total return with respect to its
Class A shares for the one-year period, five- and ten-year
periods, if any, and for the life of the fund ended March 31,
2001 is as follows:

PORTFOLIO

1-Year

5-Years

10-Years

Life of
Fund

Inception
Date







National
6.71%
5.32%
6.97%
7.20%
8/20/86
Limited
Term
5.89%
4.50%
5.61%
6.03%
11/28/88
New York
6.17%
5.38%
7.06%
6.75%
1/16/87
Florida
6.39%
5.17%
N/A
6.65%
4/2/91
Georgia
6.55%
5.67%
N/A
6.33%
4/4/94
Pennsylvani
a
7.35%
5.50%
N/A
6.35%
4/4/94


	Each fund's average annual total return with respect to its
Class B shares for the one-year period, five-year period and for
the life of the fund ended March 31, 2001 is as follows:

PORTFOLIO

1-Year

5-Year
Life of
Fund

Inceptio
n Date






National
6.14%
5.47%
7.29%
11/7/94
New York
5.46%
5.54%
7.29%
11/11/94
Florida
5.64%
5.32%
7.26%
11/16/94
Georgia
5.89%
5.81%
6.15%
6/15/94
Pennsylvani
a
6.65%
5.64%
6.07%
6/20/94


	Each fund's average annual total return with respect to its
Class L shares for a one-year period, five-year period and for
the life of the fund ended March 31, 2001 is as follows:

PORTFOLIO

1-Year

5-Years

Life of
Fund

Inceptio
n
Date






National
8.37%
5.33%
5.70%
1/5/93
Limited
Term
5.83%
4.44%
4.81%
1/5/93
New York
7.81%
5.44%
5.70%
1/8/93
Florida
8.06%
5.22%
5.62%
1/5/93
Georgia
8.13%
5.70%
6.12%
4/14/94
Pennsylvani
a
9.01%
5.52%
6.20%
4/5/94


	Each fund's average annual total return with respect to its
Class Y shares for the one-year period and the life of the fund
ended March 31, 2001 is as follows:

PORTFOLIO

1-Year
Life of
Fund

Inception
Date

Limited
Term
8.26%
3.45%
11/12/98
New York
n/a
1.00%
1/4/01


Yield and Equivalent Taxable Yield

A Class' 30-day yield figure described below is calculated
according to a formula prescribed by the SEC. The formula can be
expressed as follows:

YIELD =2 [(a-b +1)6-1]
						        cd

Where:	 a 	= 	dividends and interest earned during the
period.
		 b	= 	expenses accrued for the period (net of
reimbursement).
 c	= 	the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
	 d 	= 	the maximum offering price per share on
the last day of the period.

For the purpose of determining the interest earned
(variable "a" in the formula) on debt obligations that were
purchased by each fund at a discount or premium, the formula
generally calls for amortization of the discount or premium.  The
amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.

Each fund's equivalent taxable 30-day yield, other than for
the California Money Market Portfolio, the New York Money Market
Portfolio and the Massachusetts Money Market Portfolio, for a
Class of shares is computed by dividing that portion of the
Class' 30-day yield which is tax-exempt by one minus a stated
income tax rate and adding the product to that portion, if any,
of the Class' yield that is not tax-exempt.

The yields on municipal securities are dependent upon a
variety of factors, including general economic and monetary
conditions, conditions of the municipal securities market, size
of a particular offering, maturity of the obligation offered and
rating of the issue.  Investors should recognize that in periods
of declining interest rates each fund's yield for each Class of
shares will tend to be somewhat higher than prevailing market
rates, and in periods of rising interest rates each fund's yield
for each Class of shares will tend to be somewhat lower.  Also,
when interest rates are falling, the inflow of net new money to
each fund from the continuous sale of its shares will likely be
invested in portfolio instruments producing lower yields than the
balance of each fund's portfolio, thereby reducing the current
yield of each fund.  In periods of rising interest rates, the
opposite can be expected to occur.

New York Portfolio's yield for Class A, Class B and Class L
shares for the 30-day period ended March 31, 2001 was 4.16%,
3.80%, and 3.78%, respectively.  The equivalent taxable yield for
Class A, Class B and Class L shares for that same period was
7.33%, 6.70%, and 6.66%, respectively, assuming the payment of
federal income taxes at a rate of 39.1% and New York taxes at a
rate of 6.85%. No yield information is present for Class Y shares
because no Class Y shares were outstanding for the 30-day period
ended March 31, 2001.

Florida Portfolio's yield for Class A, Class B and Class L
shares for the 30-day period ended March 31, 2001 was 4.75%,
7.22%, and 7.00%, respectively.  The equivalent taxable yield for
Class A, Class B and Class L shares for that same period was
7.80%, 7.22% and 7.00%, respectively, assuming the payment of
federal income taxes at a rate of 39.1% and Florida taxes at a
rate of 0.00%.  No yield information is present for Class Y
shares because no Class Y shares were outstanding for the 30-day
period ended March 31, 2001.

Georgia Portfolio's yield for Class A, Class B and Class L
shares for the 30-day period ended March 31, 2001 was 4.67%,
4.29%, and 4.20%, respectively.  The equivalent taxable yield for
Class A, Class B and Class L shares for that same period was
8.16%, 7.49% and 7.34%, respectively, assuming the payment of
federal income taxes at a rate of 39.1% and Georgia taxes at a
rate of 6.00%. No yield information is present for Class Y shares
because no Class Y shares were outstanding for the 30-day period
ended March 31, 2001.

Pennsylvania Portfolio's yield for Class A, Class B and
Class L shares for the 30-day period ended March 31, 2001 was
5.10%, 4.77%, and 4.63%, respectively.  The equivalent taxable
yield for Class A, Class B and Class L shares for that same
period was 8.62%, 8.06% and 7.82%, respectively, assuming the
payment of federal income taxes at a rate of 39.1% and
Pennsylvania taxes at a rate of 2.80%.  No yield information is
present for Class Y shares because no Class Y shares were
outstanding for the 30-day period ended March 31, 2001.

Limited Term Portfolio's yield for Class A, Class L and
Class Y shares for the 30-day period ended March 31, 2001 was
4.77%, 4.52% and 5.09%, respectively.  The equivalent taxable
yield for Class A and Class L shares for that same period was
7.83%, 7.42% and 8.36%, respectively, assuming the payment of
federal income taxes at a rate of 39.1%.

National Portfolio's yield for Class A, Class B and Class L
shares for the 30-day period ended March 31, 2001 was 5.14%,
4.85% and 4.74%, respectively.  The equivalent taxable yield for
Class A, Class B and Class L shares for that same period was
8.44%, 7.96% and 7.78%, respectively, assuming the payment of
federal income taxes at a rate of 39.1%.  No yield information is
present for Class Y shares because no Class Y shares were
outstanding for the 30-day period ended March 31, 2001.

	California Money Market Portfolio's yield with respect to
its Class A shares for the seven-day period ended March 31, 2001
was 2.80% (the effective yield was 2.84%) with an average dollar-
weighted fund maturity of 53 days; the New York Money Market
Portfolio's yield with respect to its Class A shares for the
seven-day period ended March 31, 2001 was 2.88% (the effective
yield was 2.92%) with an average dollar-weighted fund maturity of
42 days and the Massachusetts Money Market Portfolio yield with
respect to its Class A shares for the seven-day period ended
March 31, 2001 was 2.82% (the effective yield was 2.86%) with an
average dollar-weighted fund maturity of 55 days.  From time to
time the California Money Market Portfolio, the New York Money
Market Portfolio and the Massachusetts Money Market Portfolio may
advertise their yields, effective yields and taxable equivalent
yields.  These yield figures are based on historical earnings and
are not intended to indicate future performance.  The yield of
each fund refers to the net investment income generated by an
investment in each fund over a specific seven-day period (which
will be stated in the advertisement).  This net investment income
is then annualized.  The effective yield is calculated similarly
but, when annualized, the income earned by an investment in each
fund is assumed to be reinvested.  The effective yield will be
slightly higher than the yield because of the compounding effect
of the assumed reinvestment.  The tax equivalent yield also is
calculated similarly to the yield, except that a stated income
tax rate is used to demonstrate the taxable yield necessary to
produce an after-tax yield equivalent to the tax-exempt yield of
each fund.

	Performance information may be useful in evaluating a fund
and for providing a basis for comparison with other financial
alternatives.  Since the performance of each fund changes in
response to fluctuations in market conditions, interest rates and
fund expenses, no performance quotation should be considered a
representation as to the fund's performance for any future
period.

THE FUNDS

	The interest of a shareholder is in the assets and earnings
of the fund in which he or she holds shares.  The Board of
Trustees has authorized the issuance of shares in separate
series, each representing shares in one of the separate funds.
Pursuant to such authority, the Board may also authorize the
creation of additional series of shares and additional classes of
shares within any series.  The investment objectives, policies
and restrictions applicable to additional funds would be
established by the Board of Trustees at the time such funds were
established and may differ from those set forth in the
prospectuses and this SAI.  In the event of liquidation or
dissolution of a fund or of the Trust, shares of a fund are
entitled to receive the assets belonging to that fund and a
proportionate distribution, based on the relative net assets of
the respective funds, of any general assets not belonging to any
particular fund that are available for distribution.

	The Declaration of Trust may be amended only by a "majority
shareholder vote" as defined therein, except for certain
amendments that may be made by the Board of Trustees.  The
Declaration of Trust and the By-Laws of the Trust are designed to
make the Trust similar in certain respects to an entity organized
as a corporation.  The principal distinction between the two
forms of business organization relates to shareholder liability
described below.  Under Massachusetts law, shareholders of a
business trust may, under certain circumstances, be held
personally liable as partners for the obligations of the trust,
which is not the case with a corporation.  The Declaration of
Trust of the Trust provides that shareholders shall not be
subject to any personal liability for the acts or obligations of
the Trust and that every written obligation, contract, instrument
or undertaking made by the Trust shall contain a provision to the
effect that the shareholders are not personally liable
thereunder.

	Special counsel for the Trust is of the opinion that no
personal liability will attach to the shareholders under any
undertaking containing such provision when adequate notice of
such provision is given, except possibly in a few jurisdictions.
With respect to (a) all types of claims in the latter
jurisdictions; (b) tort claims; (c) contract claims where the
provision referred to is omitted from the undertaking; (d) claims
for taxes; and (e) certain statutory liabilities in other
jurisdictions, a shareholder may be held personally liable to the
extent that claims are not satisfied by the Trust; however, upon
payment of any such liability the shareholder will be entitled to
reimbursement from the general assets of the Trust.  The Board of
Trustees intends to conduct the operations of the Trust, with the
advice of counsel, in such a way so as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities
of the Trust.

	The Declaration of Trust further provides that no Trustee,
officer or employee of the Trust is liable to the Trust or to a
shareholder, except as such liability may arise from his or her
or its own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his or its duties, nor is any Trustee,
officer or employee personally liable to any third persons in
connection with the affairs of the Trust.  It also provides that
all third persons shall look solely to the Trust property or the
property of the appropriate portfolio of the Trust for
satisfaction of claims arising in connection with the affairs of
the Trust or a particular portfolio, respectively.  With the
exceptions stated, the Declaration of Trust provides that a
Trustee, officer or employee is entitled to be indemnified
against all liability in connection with the affairs of the
Trust.

	The Trust shall continue without limitation of time subject
to the provisions in the Declaration of Trust concerning
termination of the Trust or any of the series of the Trust by
action of the shareholders or by action of the Trustees upon
notice to the shareholders.

VOTING RIGHTS

	The Board of Trustees has the power to alter the number and
the terms of office of the Trustees, and may at any time lengthen
their own terms or make their terms of unlimited duration
(subject to certain removal procedures) and fill vacancies,
provided that in accordance with the 1940 Act, (i) a shareholder
meeting to elect Trustees must promptly be called if at any time
at least a majority of the Trustees have not been elected by the
shareholders of the Trust, and (ii) at least 2/3 of the Trustees
must have been so elected upon the filing of any vacancy by the
board without a shareholder vote. Shares do not have cumulative
voting rights and therefore the holders of more than 50% of the
outstanding shares of the Trust may elect all of the Trustees
irrespective of the votes of other shareholders.  Class A, Class
B, Class L and Class Y shares of a portfolio of the Trust, if
any, represent interests in the assets of that fund and have
identical voting, dividend, liquidation and other rights on the
same terms and conditions, except that each Class of shares has
exclusive voting rights with respect to provisions of the fund's
Rule 12b-1 distribution plan which pertain to a particular class.
For example, a change in investment policy for a fund would be
voted upon only by shareholders of the fund involved.
Additionally, approval of each fund's Advisory Agreement is a
matter to be determined separately by that fund.  Approval of a
proposal by the shareholders of one fund is effective as to that
fund whether or not enough votes are received from the
shareholders of the other funds to approve the proposal as to
those funds. As of July 6, 2001 the following shareholders
beneficially owned 5% or more of a class of shares of a portfolio
of the Trust:

				% of shares

 Georgia Portfolio					  Class A

Gwyn H. Gordon					6.7323%
Helaine, Sugarman TTEES
Rosalie H. Alterman REV Trust
DTD 5/7/1997
1774 W. Sussex Road
Atlanta, GA  30306-3013

MLPF&S for the Sole Benefit of its			6.3753%
Customers
Attn.: Fund Administration'
4800 Deer Lake Drive East 3rd Floor
Jackonsville, FL  32246

Georgia Portfolio					  Class L

E.K. Gandy						5.0573%
164 Country Club Road
Macon, GA  31210-4747


Limited Term Portfolio					Class Y

Robert E. Kelly and					58.6191%
Maria N. Kelly TEN IN COM
6918 75th Street SW
Tacoma, WA  98498-6332

Randolph  McCormick, Sr.				41.3808%
Broussard, Poche, Lewis
and Breaux, CPA's
Attn.: Peter Borello
994 E. Prodhomme Street
Opelousas, LA  70570-8239

Pennsylvania Portfolio 					Class A

Citi Fiduciary Trust Co. 				5.1415%
#138018738151  Donna Wittek
of NJ Trustee of CE Minerals Exec.
Deferral/Retention Plan
153 East 53rd Street, 23rd Floor (Metro)
New York, NY  10043-0001


Massachusetts Money Market Portfolio 		Class A

John T. Goodhue, Jr.  					5.884%
91 Somerset Street
Belmont, MA 02478-2005
Concord, MA  01742-1613


TAXES

	The following is a summary of certain material tax
considerations affecting each fund and its shareholders.  Please
refer to the applicable prospectus for further discussion.  In
addition to the considerations described below and in the
applicable prospectus, there may be other federal, state, local
or foreign tax implications to consider.  Because taxes are a
complex matter, shareholders and prospective shareholders are
urged to consult their tax advisors for more detailed information
with respect to the tax consequences of an investment.

	Capital gain distributions, if any, are taxable to
shareholders, and are declared and paid at least annually.  On
March 31, 2001, the unused capital loss carryovers, by fund, were
approximately as follows:  Limited Term Portfolio, $17,022,000;
New York Money Market Portfolio, $2,900; New York Portfolio,
$14,047,200; Georgia Portfolio, $1,961,900; Pennsylvania
Portfolio, $1,524,900; Florida Portfolio, $3,724,000; National
Portfolio, $7,921,000.  For Federal income tax purposes, these
amounts are available to be applied against future capital gains
of the fund that has the carryovers, if any, that are realized
prior to the expiration of the applicable carryover.  The
carryovers expire as follows:

PORTFOLIO
March 31,
(in thousands)
2003
2004
2005
2006
2007
2008
2009
Limited Term
$273
$1,740
-
-
-
$9,495
$5,514
CA Money
-
-
-
-
-
-
-
NY Money
-
-
-
-
-
$2.9
-
New York
-
-
-
-
-
$9,400.
4
$4,646
 .8
Georgia
-
-
-
-
$31.9
$983.3
$946.7
Pennsylvania
-
-
-
-
-
$667.7
$857.2
Florida
-
-
-
-
-
$2,430
1,294
National
-
-
-
-
-
$4,244
$3,677
Mass Money
-
-
-
-
-
-
-

	As described above and in the Prospectuses, each fund is
designed to provide investors with current income, in the form of
"exempt-interest dividends," which is excluded from gross income
for federal income tax purposes and, except for the Limited Term
Portfolio and the National Portfolio,  exempt from otherwise
applicable state and/or local personal income taxes in a
particular state.  No fund is intended to be a balanced
investment program, and the funds are not designed for investors
seeking capital gains or maximum tax-exempt income irrespective
of fluctuations in principal.  Investment in any fund would not
be suitable for tax-exempt institutions, qualified retirement
plans, H.R. 10 plans and individual retirement accounts because
those investors would not gain any additional tax benefit from
the receipt of tax-exempt income.

	Each fund has qualified and intends to continue to qualify
each year as a "regulated investment company" under the Code.
Provided that a fund (a) is a regulated investment company and
(b) distributes to its shareholders at least 90% of its taxable
net investment income (including, for this purpose, its net
realized short-term capital gains) and 90% of its tax-exempt
interest income (reduced by certain expenses), the fund will not
be liable for federal income taxes to the extent its taxable net
investment income and its net realized long-term and short-term
capital gains, if any, are distributed to its shareholders.  Any
such taxes paid by a fund would reduce the amount of income and
gains available for distribution to shareholders.

	Because each fund will distribute exempt-interest
dividends, interest on indebtedness incurred by a shareholder to
purchase or carry shares of a fund is not deductible for federal
income tax purposes.  If a shareholder receives exempt-interest
dividends with respect to any share of a fund and if the share is
held by the shareholder for six months or less, then any loss on
the sale or exchange of the share may, to the extent of the
exempt-interest dividends, be disallowed.  In addition, the Code
may require a shareholder that receives exempt-interest dividends
to treat as taxable income a portion of certain otherwise non-
taxable social security and railroad retirement benefit payments.
Furthermore, the portion of any exempt-interest dividend paid by
a fund that represents income derived from certain "private
activity bonds" held by the fund may not retain its tax-exempt
status in the hands of a shareholder who is a "substantial user"
of a facility financed by such bonds, or a "related person" of
the substantial user.  Moreover, some or all of a fund's exempt-
interest dividends may be a specific preference item, or a
component of an adjustment item, for purposes of the federal
individual and corporate alternative minimum taxes.  In addition,
the receipt of a fund's dividends and distributions may affect a
foreign corporate shareholder's federal "branch profits" tax
liability and the federal and California "excess net passive
income" tax liability of a Subchapter S corporation.
Shareholders should consult their own tax advisors to determine
whether they are (a) "substantial users" with respect to a
facility or "related" to those users within the meaning of the
Code or (b) subject to a federal alternative minimum tax, the
federal "branch profits" tax, or the federal or California
"excess net passive income" tax.

As a general rule, a fund's gain or loss on a sale or
exchange of an investment will be a long-term capital gain or
loss if the fund has held the investment for more than one year
and will be a short-term capital gain or loss if it has held the
investment for one year or less. Shareholders of each fund will
receive an annual statement as to the income tax status of his or
her dividends and distributions for the prior calendar year.
Each shareholder will also receive, if appropriate, various
written notices after the close of a fund's prior taxable year as
to the federal income tax status of certain dividends or
distributions which were received from the fund during the fund's
prior taxable year.

Dividends paid by any fund from interest income on taxable
investments, net realized short-term capital gains and all or a
portion of any gains realized from the sale or other disposition
of certain market discount bonds are subject to federal income
tax as ordinary income.  Distributions, if any, from net realized
long-term capital gains ("capital gain dividends") are taxable as
long-term capital gains regardless of the length of time a
shareholder has owned fund shares.

If, in any taxable year, a fund fails to qualify as a
regulated investment company under the Code or fails to meet the
distribution requirement, it would be taxed in the same manner as
an ordinary corporation and distributions to its shareholders
would not be deductible by the fund in computing its taxable
income.  In addition, in the event of a failure to qualify, the
fund's distributions, to the extent derived from the fund's
current or accumulated earnings and profits would constitute
dividends (eligible for the corporate dividends-received
deduction) which are taxable to shareholders as ordinary income,
even though those distributions might otherwise (at least in
part) have been treated in the shareholders' hands as tax-exempt
interest.  If a fund fails to qualify as a regulated investment
company in any year, it must pay out its earnings and profits
accumulated in that year in order to qualify again as a regulated
investment company. In addition, if a fund failed to qualify as a
regulated investment company for a period greater than one
taxable year, such fund may be required to recognize any net
built-in gains with respect to certain of its assets (the excess
of the aggregate gains, including items of income, over aggregate
losses that would have been realized if the fund had been
liquidated) in order to qualify as a regulated investment company
in a subsequent year.

		Shareholders are required to pay tax on all taxable
distributions even if those distributions are automatically
reinvested in additional shares.  None of the dividends paid by
any fund will qualify for the corporate dividends-received
deduction.  Certain distributions paid in January may be treated
as if received on December 31 for federal income tax purposes.
Each fund will inform shareholders of the source and tax status of
all distributions promptly after the close of each calendar year.

		Some of the funds may invest in exchange-traded municipal
bond index futures contracts.  As a general rule, these investment
activities will increase or decrease the amount of long-term and
short-term capital gains or losses realized by a fund and,
accordingly, will affect the amount of capital gains distributed
to the fund's shareholders.  For federal income tax purposes, gain
or loss on these futures contracts (referred to herein as "section
1256 contracts") is taxed pursuant to a special "mark-to-market"
system.  Under the mark-to-market system, these instruments are
treated as if sold at a fund's fiscal year end for their fair
market value.  As a result, the fund may be recognizing gains or
losses before they are actually realized.  As a general rule, gain
or loss on section 1256 contracts is treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss.
Marking-to-market and the application of this 60/40 rule to
unrealized gains and losses on section 1256 contracts generally
will affect the amount and timing of capital gains or losses of a
fund and of distributions taxable to a shareholder.  Moreover, if
a fund invests in both section 1256 contracts and offsetting
positions to such contracts, which together constitute a straddle,
then the fund may be required to defer certain realized losses.

		A shareholder's gain or loss, if any, on the disposition of
shares of a fund that are held as capital assets (whether by
redemption, sale or exchange) generally will be a long-term or
short-term capital gain or loss depending on whether the shares
had been held for tax purposes for more than one year, or one year
or less, respectively.  If a shareholder receives a capital gain
dividend with respect to any share and redeems or otherwise sells
the share before it has been held by the shareholder for more than
six months, then any loss (to the extent not disallowed pursuant
to the other six-month rule described above relating to exempt-
interest dividends) on the sale or other disposition of such share
will be treated as long-term capital loss to the extent of the
capital gain dividend.

		If a shareholder incurs a sales charge when acquiring
shares of a fund, disposes of those shares within 90 days and then
acquires shares in a mutual fund for which the otherwise
applicable sales charge is reduced by reason of a reinvestment
right (e.g., an exchange privilege), the original sales charge
will not be taken into account when computing gain or loss on the
original shares to the extent the subsequent sales charge is
reduced.  The portion of the original sales charge that does not
increase the shareholder's tax basis in the original shares will
be treated as incurred with respect to the second acquisition and,
as a general rule, will increase the shareholder's tax basis in
the newly acquired shares.  Furthermore, the same rule also
applies to a disposition of the newly acquired shares made within
90 days of the second acquisition.  This provision prevents a
shareholder from immediately deducting the sales charge by
shifting his or her investment in a family of mutual funds.

		Investors considering buying shares of a fund just prior to
a record date for a capital gain distribution should be aware
that, regardless of whether the price of the fund shares to be
purchased reflects the amount of the forthcoming distribution
payment, any such payment will be a taxable distribution payment.

		Each fund may be required to withhold (as "backup
withholding") all taxable dividends, capital gain distributions,
and (except for California Money Market Portfolio, New York Money
Market Portfolio and Massachusetts Money Market Portfolio) the
proceeds of any redemption, regardless of whether gain or loss is
realized upon the redemption, for shareholders who do not provide
the fund with their correct taxpayer identification number (social
security or employer identification number) and any required
certifications.  Withhholding from taxable dividends and capital
gain distributions also is required for shareholders who otherwise
are subject to backup withholding.  Any tax withheld as a result
of backup withholding does not constitute an additional tax, and
may be claimed as a credit on the shareholders' federal income tax
returns.

	From time to time, proceedings have been introduced before
Congress for the purpose of restricting or eliminating the
federal income tax exemption for interest on municipal
obligations.  It may be expected that similar proposals may be
introduced in the future.  If such proposals were to be enacted,
the ability of a fund to pay "exempt interest" dividends could be
adversely affected and the fund would then need to reevaluate its
investment objectives and policies and consider changes in its
structure.

State Tax Information

California State Taxes California shareholders will not be
subject to California state personal income tax on dividends they
receive from the California Money Market Portfolio to the extent
that such distributions qualify as exempt-interest dividends
under the Code and California law and provided that, at the close
of each quarter of the Portfolio's taxable year, at least 50% of
the Portfolio's total assets are invested in municipal
obligations of California issuers.  To the extent that
distributions are derived from taxable income, including long-
term or short-term capital gains, such distributions will not be
exempt from California state personal income tax.  Dividends on
the California Portfolio are not excluded in determining
California state franchise taxes on corporations and financial
institutions.


Florida Taxes Florida currently does not impose a personal income
tax on individuals.  Thus, individual shareholders of the Florida
Portfolio will not be subject to any Florida state income tax on
distributions received from the Florida Portfolio.  However,
certain distributions will be taxable to corporate shareholders
that are subject to Florida corporate income tax.

Florida currently imposes an "intangibles tax" on certain
securities and other intangible assets owned by Florida
residents.  Certain types of municipal obligations of Florida
issuers, U.S. Treasury securities and municipal obligations
issued by certain U.S. territories and possessions are exempt
from this intangibles tax.  The Florida Portfolio seeks generally
to select investments that will enable its shares to be exempt
from the Florida intangibles tax and attempts to ensure that all
of its assets held on the annual assessment date are exempt from
this tax.  Additionally, the Florida Department of Revenue has
ruled that, if on the annual assessment date of any year the
Florida Portfolio consists solely of such exempt assets, then the
Florida Portfolio's shares will be exempt from the Florida
intangibles tax.  The Florida Portfolio intends to provide
shareholders annually with information relating to its assets
necessary to permit shareholders to determine whether the value
of Florida Portfolio shares held is exempt from the Florida
intangibles tax.

Investors purchasing municipal obligations of their state
of residence, or a fund comprised of such obligations, should
recognize that the benefits of the exemption from local taxes, in
addition to the exemption from federal taxes, necessarily limits
the fund's ability to diversify geographically.  The Florida
Portfolio will make available annually to its shareholders
information concerning the tax status of its distributions,
including the amount of its dividends designated as exempt-
interest dividends and as capital gain dividends.

The foregoing is only a brief summary of the tax
considerations generally affecting the Florida Portfolio and its
shareholders who are Florida residents.  Investors are urged to
consult their tax advisers with specific reference to their own
tax situation.

Georgia Taxes Exempt-interest dividends and distributions by the
Georgia Portfolio to a Georgia resident that are attributable to
interest on Georgia municipal obligations or direct obligations
of the United States and its territories and possessions will not
be subject to the State of Georgia personal income tax.
Dividends or other distributions by the Georgia Portfolio which
are attributable to other sources, including all distributions
that qualify as capital gains dividends for federal income tax
purposes, will be subject to the State of Georgia personal income
tax at the applicable rate.

Investors purchasing municipal obligations of their state
of residence, or a fund comprised of such obligations, should
recognize that the benefits of the exemption from local taxes, in
addition to the exemption from federal taxes, necessarily limits
the fund's ability to diversify geographically.  The Georgia
Portfolio will make available annually to its shareholders
information concerning the tax status of its distributions,
including the amount of its dividends designated as exempt-
interest dividends and as capital gain dividends.

The foregoing is only a brief summary of the tax
considerations generally affecting the Georgia Portfolio and its
shareholders who are Georgia residents.  Investors are urged to
consult their tax advisers with specific reference to their own
tax situation.

Massachusetts Taxes  Individual shareholders of the Massachusetts
Money Market Portfolio who are otherwise subject to Massachusetts
personal income tax will not be subject to Massachusetts personal
income tax on exempt-interest dividends received from the fund to
the extent the dividends are attributable to interest on
obligations of the Commonwealth of Massachusetts and its
political subdivisions, agencies and public authorities (or on
obligations of certain other governmental issuers such as Puerto
Rico, the Virgin Islands and Guam) that pay interest which is
excluded from gross income for federal income tax purposes and
exempt from Massachusetts personal income taxes.  Other
distributions from Massachusetts Money Market Portfolio,
including those related to long-term and short-term capital
gains, other than certain gains from certain Massachusetts
Municipal Securities identified by the Massachusetts Department
of Revenue, generally will not be exempt from Massachusetts
personal income tax.  Businesses should note that Massachusetts
Money Market Portfolio's distributions derived from Massachusetts
Municipal Securities are not exempt from Massachusetts corporate
excise tax.

The foregoing is only a brief summary of the tax
considerations generally affecting the Massachusetts Money Market
Portfolio and its shareholders who are Massachusetts residents.
Shareholders are urged to consult their own tax advisers with
specific reference to their own tax situation.

New York State and City Taxes New York resident shareholders of
the New York Portfolio or the New York Money Market Portfolio
will not be subject to New York State and New York City personal
income taxes on exempt-interest dividends attributable to
interest on tax-exempt obligations of the State of New York and
its political subdivisions, as well as certain other obligations
the interest on which is considered exempt for New York State and
New York City purposes.  The New York Money Market Portfolio is
required to report annually the source, tax status and recipient
information related to its exempt-interest dividends distributed
within the State of New York.  Exempt-interest dividends are not
excluded in determining New York State franchise or New York City
business taxes on corporations and financial institutions.

The foregoing is only a brief summary of some of the tax
considerations generally affecting the New York Portfolio, the
New York Money Market Portfolio and their shareholders who are
New York residents.  Investors are urged to consult their tax
advisors with specific reference to their own tax situation.

Pennsylvania Taxes Exempt-interest dividends distributed by the
Pennsylvania Portfolio will not be subject to the Pennsylvania
personal income tax, the corporate net income tax or to the
Philadelphia school district investment income tax to the extent
that the dividends are attributable to interest received by the
Portfolio from its investments in Pennsylvania municipal
obligations and U.S. Government obligations, including
obligations issued by U.S. possessions.  For Pennsylvania
personal income tax purposes, capital gain distributions are
treated as ordinary dividends and are taxed at ordinary income
tax rates.

Investors purchasing municipal obligations of their state
of residence, or a fund comprised of such obligations, should
recognize that the benefits of the exemption from local taxes, in
addition to the exemption from federal taxes, necessarily limits
the fund's ability to diversify geographically.  The Pennsylvania
Portfolio will make available annually to its shareholders
information concerning the tax status of its distributions,
including the amount of its dividends designated as exempt-
interest dividends and as capital gain dividends.

The foregoing is only a brief summary of some of the tax
considerations generally affecting the Pennsylvania Portfolio and
its shareholders who are Pennsylvania residents.  Investors are
urged to consult their tax advisors with specific reference to
their own tax situation.


ADDITIONAL INFORMATION

	The Trust, an open-end management investment company, is
organized as a "Massachusetts business trust" pursuant to a
Declaration of Trust dated August 14, 1985.  Pursuant to the
Declaration of Trust, the Board of Trustees has authorized the
issuance of different series of shares, each representing shares
in separate funds.  The assets of each fund are segregated and
separately managed.  Each share of a fund represents an equal
proportionate interest in the net assets of that fund with each
other share of the same fund and is entitled to such dividends
and distributions out of the net income of that fund as are
declared in the discretion of the Board of Trustees.
Shareholders are entitled to one vote for each share held and
will vote by individual fund except as otherwise permitted by the
1940 Act.  It is the intention of the Trust not to hold annual
meetings of shareholders.  The Board of Trustees may call
meetings of shareholders for action by shareholder vote as may be
required by the 1940 Act or the Declaration of Trust, and
shareholders are entitled to call a meeting upon a vote of 10% of
the fund's outstanding shares for purposes of voting on removal
of a Trustee or Trustees.  The Trust will assist shareholders in
calling such a meeting as required by the 1940 Act.  Shares do
not have cumulative voting rights or preemptive rights and have
only such conversion or exchange rights as the Board of Trustees
may grant in its discretion.  Shares are redeemable as set forth
under "Redemption of Shares."

	The Trust sends to each of its fund's shareholders a semi-
annual report and an audited annual report, which include
listings of the investment securities held by the funds at the
end of the reporting period.  In an effort to reduce each fund's
printing and mailing costs, each fund plans to consolidate the
mailing of its semi-annual and annual reports by household.  This
consolidation means that a household having multiple accounts
with the identical address of record will receive a single copy
of each report.  Shareholders who do not want this consolidation
to apply to their account should contact their Service Agent or
the Transfer Agent.

	PNC Bank, National Association, located at 17th and
Chestnut Streets, Philadelphia, Pennsylvania 19103, serves as the
custodian of each fund. Under the custody agreement with the
trust, PNC holds each fund's portfolio securities and keeps all
necessary accounts and records.  For its services, PNC receives a
monthly fee based upon the month-end market value of securities
held in custody and also receives certain securities transaction
charges. The assets of each fund are held under bank
custodianship in compliance with the 1940 Act.

	Citi Fiduciary Trust Company, located at 125 Broad Street, New
York, New York 10004, serves as the fund's transfer and dividend-
paying agent.  Under the transfer agency agreement, the transfer
agent maintains the shareholder account records for the fund,
handles certain communications between shareholders and the fund,
distributes dividends and distributions payable by the fund and
produces statements with respect to account activity for the fund
and its shareholders.  For these services, the transfer agent
receives fees from the fund computed on the basis of the number
of shareholder accounts that the transfer agent maintains for the
fund during the month and is reimbursed for out-of-pocket
expenses.

	PFPC Global Fund Services, located at P.O. Box 9699,
Providence, RI 02940-9699, serves as the fund's sub-transfer
agent.  Under the transfer agency agreement, PFPC maintains the
shareholder account records for the fund, handles certain
communications between shareholders and the fund, and distributes
dividends and distributions payable by the fund.  For these
services, PFPC receives a monthly fee computed on the basis of
the number of shareholder accounts it maintains for the fund
during the month, and is reimbursed for out-of-pocket expenses.

FINANCIAL STATEMENTS

The funds' financial information is incorporated by reference to
the funds' Annual Reports to Shareholders for the fiscal year
ended March 31, 2001 which were filed with the SEC on June 8,
2001, accession number 950130-01-502261.

OTHER INFORMATION

Styles of Fund Management: In an industry where the average
portfolio manager has seven years of experience (source: ICI,
1998), the portfolio managers of Smith Barney mutual funds
average 21 years in the industry and 15 years with the firm.

Smith Barney mutual funds offer more than 60 mutual funds.  We
understand that many investors prefer an active role in
allocating the mix of funds in their portfolio, while others want
the asset allocation decisions to be made by experienced
managers.

That's why we offer five "styles" of fund management that can be
tailored to suit each investor's unique financial goals.

Classic Series  - our portfolio manager driven funds
Our Classic Series lets investors participate in mutual
funds whose investment decisions are determined by
experienced portfolio managers, based on each fund's
investment objectives and guidelines.  Classic Series funds
invest across asset classes and sectors, utilizing a range
of strategies in order to achieve their objectives.

Index Series - funds that track the market
Our Index funds are designed to provide investment results
that track, as closely as possible, the performance of a
stock or bond market index.  This strategy distinguishes an
index fund from an "actively managed" mutual fund.  Instead
of trying to outperform a market or segment, a portfolio
manager looks to an index to determine which securities the
fund should own.

Premier Selections Series - our best ideas, concentrated
funds
We offer a series of Premier Selections funds managed by
several of our most experienced and proven managers.  This
series of funds is built on a unique strategy of combining
complementary investment management styles to create
broader, multiclass and multicap products that are
distinguished by a highly concentrated focus.

Research Series - driven by exhaustive fundamental
securities analysis
Built on a foundation of substantial buy-side research
under the direction of our Citibank Global Asset Management
(CGAM) colleagues, our Research funds focus on well-defined
industries, sectors and trends.

Style Pure Series - our solution to funds that stray
Our Style Pure Series funds are the building blocks of
asset allocation.  The funds stay fully invested within
their asset class and investment style, enabling you to
make asset allocation decisions in conjunction with your
financial professional.



APPENDIX A

Ratings of Municipal Bonds, Notes and Commercial Paper

Moody's Investors Service, Inc.  ("Moody's"):

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

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

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

Standard & Poor's Ratings Group ("S&P")

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 higher-rated issues only in
small degree.

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

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


Fitch Inc.:

AAA - Bonds rated AAA by Fitch have the lowest expectation of
credit risk.  The obligor has an exceptionally strong capacity
for timely payment of financial commitments, which is highly
unlikely to be adversely affected by foreseeable events.

AA - Bonds rated AA by Fitch have a very low expectation of
credit risk.  They indicate very strong capacity for timely
payment of financial commitments.  This capacity is not
significantly vulnerable to foreseeable events.

A - Bonds rated A by Fitch are considered to have a low
expectation of credit risk.  The capacity for timely payment of
financial commitments is considered to be strong, but may be more
vulnerable to changes in economic conditions and circumstances
than bonds with higher ratings.

BBB - Bonds rated BBB by Fitch currently have a low expectation
of credit risk.  The capacity for timely payment of financial
commitments is considered to be adequate.  Adverse changes in
economic conditions and circumstances, however, are more likely
to impair this capacity.  This is the lowest investment grade
category assigned by Fitch.

Plus and minus signs are used by Fitch to indicate the relative
position of a credit within a rating category.  Plus and minus
signs, however, are not used in the AAA category.

Description of State and Local Government Note Ratings

Notes are assigned distinct rating symbols in recognition of the
differences between short-term and long-term credit risk.
Factors affecting the liquidity of the borrower and short-term
cyclical elements are critical in short-term ratings, while other
factors of major importance in bond risk-- long-term secular
trends for example-- may be less important over the short run.

Moody's Investors Service, Inc.:

Moody's ratings for state and municipal notes and other short-
term loans are designated Moody's Investment Grade ("MIG").  A
short-term rating may also be assigned on an issue having a
demand feature, a variable-rate demand obligation.  Such ratings
will be designated as "VMIG."  Short-term ratings on issues with
demand features are differentiated by the use of the VMIG symbol
to reflect such characteristics as payment upon periodic demand
rather than fixed maturity dates and payment relying on external
liquidity.  Additionally, investors should be alert to the fact
that the source of payment may be limited to the external
liquidity with no or limited legal recourse to the issuer in the
event the demand is not met.  Symbols used are as follows:

MIG/VMIG 1 - Loans bearing this designation are of the best
quality, enjoying strong protection from established cash flows
of funds, superior liquidity support or demonstrated broad-based
access to the market for refinancing.

MIG 2/VMIG 2 - Loans bearing this designation are of high
quality, with margins of protection ample although not so large
as in the preceding group.
Standard & Poor's Ratings Group:

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

SP-2 - Satisfactory capacity to pay principal and interest.

Fitch Inc.:

Fitch's short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to
three years, including commercial paper, certificates of deposit,
medium-term notes, and municipal and investment notes.

The short-term rating places greater emphasis than a long-term
rating on the existence of liquidity necessary to meet financial
commitments in a timely manner.

Fitch's short-term ratings are as follows:

F1+ - Issues assigned this rating are regarded as having the
strongest capacity for timely payment of financial commitments.
The "+" denotes an exceptionally strong credit feature.

F1 - Issues assigned this rating are regarded as having the
strongest capacity for timely payment of financial commitments.

F2 - Issues assigned this rating have a satisfactory capacity for
timely payment of financial commitments, but the margin of safety
is not as great as in the case of the higher ratings.

F3 - The capacity for the timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.

DESCRIPTION OF HIGHEST COMMERCIAL PAPER RATINGS

Moody's Investors Service, Inc.:

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

Standard & Poor's Ratings Group:

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 are denoted with a plus (+) sign designation.



Appendices B-I - Special Note:

The following information (set forth in Appendices B-I) is a
summary of special factors available at the time of the
preparation of this SAI affecting municipal obligations for
state-specific portfolios (California, New York and Massachusetts
Money Markets, Florida, Georgia, New York and Pennsylvania
Portfolios).  Also included (set forth in Appendices H-I) is a
summary of specific factors, available at the time of preparation
of this SAI, affecting municipal obligations for certain U.S.
territories including Puerto Rico, the U.S. Virgin Islands and
Guam for both state specific portfolios and the National and
Limited Term Portfolios.  For any such state and territory, the
summary does not purport to be a complete description and is
based on information from official statements and other public
information relating to securities offerings, finances and bond
ratings of issuers within the state and territory.  The manager
has not independently verified any such information. The
respective states and territories typically indicate that
budgetary information is based on estimates and projections of
revenues and expenditures for a fiscal year and must not be
construed as statements of fact; estimates and projections are
based upon various assumptions which may be affected by numerous
factors, including future economic conditions in the state,
territory  and the nation, and that there can be no assurance
that the estimates will be achieved.  Generally, NRSROs base
their ratings on information and materials furnished to the
agencies and on investigations, studies and assumptions by the
rating agencies at a particular point in time.  There is no
assurance that any such rating remains in effect for a given
period of time or that it will not be lowered or withdrawn
entirely if, in the judgment of the NRSRO originally establishing
the rating, circumstances so warrant.  Any such change or
withdrawal of the rating could have an adverse effect on the
market price of the bonds.


APPENDIX B

Special Considerations Relating to California Municipal
Obligations

See Special Note prior to Appendix B

Economic Factors

According to the State's Legislative Analyst Office, with a gross
state product in excess of $1 trillion, California's economy is
the largest state economy in the United States, accounting for
13% of the nation's output, and the sixth largest economy in the
world, trailing only the United States as a whole, Japan,
Germany, England and France. In addition to its size,
California's economy is diverse, with no industry sector
accounting for more than one-quarter of the State's output.

While California's economy is broad, it does have major
concentrations in high technology, aerospace and defense related
manufacturing, entertainment, and real estate and financial
services, and may be sensitive to economic factors affecting
those industries. One example of such potential sensitivity
occurred from mid-1990 to late 1993, when the State suffered a
recession. Construction, manufacturing (especially aerospace),
and financial services, among others, were all severely affected,
particularly in Southern California. More recently, reflective of
the nationwide economic slowdown, the high technology sector of
the State's economy has entered a cyclical downturn. Overall,
following the strongest growth in a decade in 1999 and 2000, the
State's economy is projected to grow more slowly in 2001.

In addition, widely publicized difficulties in California's
energy supplies, highlighted by the Governor of California
declaring a state of emergency in January 2001, pose risks to the
economy, especially if there are prolonged blackouts, shortages
of natural gas or significant rate increases. While these factors
are partially mitigated by the fact that California's economy is
relatively energy-efficient (U.S. Department of Energy statistics
for 1999 revealed that California electricity usage per capita
was the lowest in the nation, forty-two percent (42%) below the
national average) it is not possible to predict at this time what
the long-term impact of these developments will have on the
State's economy, and any significant interruptions in energy
supplies or significant rate increases could adversely affect the
State's revenues.

State Finances

Under the State Constitution, money may be drawn from the
Treasury only through an appropriation made by law. The primary
source of the annual expenditure authorizations is the Budget Act
as approved by the Legislature and signed by the Governor. The
2000-01 Budget Act was signed by the Governor on June 30, 2000.

The State's funds are segregated into the General Fund and over
900 special funds, including bond, trust and pension funds. The
General Fund consists of revenues received by the State Treasury
that are not required by law to be credited to any other fund, as
well as earnings from the investment of state moneys not
allocable to another fund. The General Fund is the principal
operating fund for the majority of governmental activities and is
the depository of most of the major revenue sources of the State.
The General Fund may be expended as a consequence of
appropriation measures enacted by the Legislature and approved by
the Governor, as well as appropriations pursuant to various
constitutional authorizations and initiative statutes.

The principal sources of General Fund revenues in 1999-2000 were
the California personal income tax (55% of total revenues), the
sales tax (29%), bank and corporation taxes (9%), and the gross
premium tax on insurance (2%). An estimated 20% of personal
income tax receipts (10% of the total General Fund) is derived
from capital gains realizations and stock option income. While
these sources have been extraordinarily strong in the past few
years, they are particularly volatile and are expected to
decrease dramatically in 2001. For example, the Governor of
California, in his May 2001 revision to his January 2001 budget
proposal, forecasted that revenues for the 2001-02 budget year
would decrease by $5.3 billion relative to the January
projection. The single largest source of this budget-year decline
is personal income tax, which is being adversely affected by
falling stock options and capital gains. In recognition of the
decreased revenue projections, the May 2001 revision proposed
reducing State expenditures by more than $3 billion for the 2001-
02 budget year. Despite the economic turndown and revised revenue
and expenditure projections for the 2001- 02 budget year, the
State had Cash and Borrowables of approximately $14.9 billion on
April 30, 2001.

The State maintains a Special Fund for Economic Uncertainties
(the "SFEU"), derived from General Fund revenues, as a reserve to
protect the State from unforeseen revenue reductions or
unanticipated expenditure increases, but which is required to be
replenished as soon as sufficient revenues are available. Year-
end balances in the SFEU are included for financial reporting
purposes in the General Fund balance. The proposed 2001-02
budget, as revised, continues to fund the SFEU at greater than $1
billion, or approximately 1.4% of General Fund revenues.

Although the State's strong economy has produced record revenues
to the State government in recent years, the State's budget
continues to be marked by mandated spending of significant funds
on education, a large prison population, and social needs of a
growing population with many immigrants. These factors limit the
growth of State spending in other areas and also put pressure on
local governments. There can be no assurances that, if economic
conditions continue to weaken, or other factors intercede, the
State will not experience budget gaps.

Obligations of the State of California

The California Constitution prohibits the creation of general
obligation indebtedness of the State unless a bond law is
approved by a majority of the electorate voting at a general
election or a direct primary. Several general obligation bond
acts exist, providing that debt service on general obligation
bonds shall be appropriated annually from the State's General
Fund and all debt service on general obligation bonds shall be
paid from the General Fund. Certain general obligation bond
programs receive revenues from sources other than the sale of
bonds or the investment of bond proceeds. Under the California
Constitution, debt service on outstanding general obligation
bonds is the second charge to the General Fund after support of
the public school system and public institutions of higher
education.

According to the State's Treasurer's Office, as of March 1, 2001,
California had outstanding approximately $19.1 billion of general
obligation bonds and approximately $6.5 billion in lease debt
supported by the State General Fund. As of March 1, 2001, the
State had available approximately $7.0 billion of authorized
general obligation bonds which had not yet been issued. In fiscal
year 1999-2000, debt service on general obligation bonds and
lease debt was approximately 3.7% of General Fund revenues. In
addition to those State obligations supported by the General
Fund, certain State agencies and authorities issue revenue
obligations for which the General Fund has no liability. Revenue
bonds represent obligations payable from State revenue- producing
enterprises and projects, which are not payable from the General
Fund, and conduit obligations payable only from revenues paid by
private users of facilities financed by revenue bonds. As of
February 1, 2001, State agencies and authorities had $28.6
billion aggregate principal amount of revenue bonds and notes
which are non-recourse to the General Fund.

Constitutional Limitations on Taxes, Other Charges and
Appropriations

In California, certain constitutional amendments, legislative
measures, executive orders, administrative regulations and voter
initiatives have established tax, spending or appropriation
limitations that could potentially limit the financial
flexibility of State and local governments and ultimately impair
their ability to repay their debt obligations. The following
constitutes a brief summary of some of these limitations.

Limitation on Property Taxes Certain California Municipal Bonds
may be obligations of issuers which rely in whole or in part,
directly or indirectly, on ad valorem property taxes as a source
of revenue. The taxing powers of California local governments and
districts are limited by Article XIIIA of the California
Constitution, enacted by the voters in 1978 and commonly known as
"Proposition 13." Briefly, Article XIIIA limits to 1% of full
cash value of the rate of ad valorem property taxes on real
property and generally restricts the reassessment of property to
2% per year, except under new construction or change of ownership
(subject to a number of exemptions). Taxing entities may,
however, raise ad valorem taxes above the 1% limit to pay debt
service on voter-approved bonded indebtedness.

Under Article XIIIA, the basic 1% ad valorem tax levy is applied
against the assessed value of property as of the owner's date of
acquisition (or as of March 1, 1975, if acquired earlier),
subject to certain adjustments. This system has resulted in
widely varying amounts of tax on similarly situated properties.
Article XIIIA prohibits local governments from raising revenues
through ad valorem taxes above the 1% limit; it also requires
voters of any governmental unit to give two-thirds approval to
levy any "special tax."

Limitations on ad valorem property taxes may particularly affect
"tax allocation" bonds issued by California redevelopment
agencies. Such bonds are secured solely by the increase in
assessed valuation of a redevelopment project area after the
start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (for example, because
of a major natural disaster such as an earthquake), the tax
increment revenue may be insufficient to make principal and
interest payments on these bonds. Both Moody's and S&P suspended
ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB of the California constitution, and only
resumed such ratings on a selective basis.

Proposition 87, approved by California voters in 1988, requires
that all revenues produced by a tax rate increase go directly to
the taxing entity which increased such tax rate to repay that
entity's general obligation indebtedness. As a result,
redevelopment agencies (which, typically, are the issuers of tax
allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are
increased to repay voter-approved bonded indebtedness.

Limitations on Other Taxes, Fees and Charges. Articles XIIIC and
XIIID to the State Constitution, added by Proposition 218 in
1996, contain a number of provisions affecting the ability of
local agencies to levy and collect both existing and future
taxes, assessments, fees and charges. Article XIIIC requires that
all new or increased local taxes be submitted to the electorate
before they become effective. Taxes for general governmental
purposes require a majority vote and taxes for specific purposes
require a two-thirds vote.

Article XIIID contains several provisions making it generally
more difficult for local agencies to levy and maintain
"assessments" for municipal services and programs and also
contains several provisions affecting "fees" and "charges,"
defined for purposes of Article XIIID to mean "any levy other
than an ad valorem tax, a special tax, or an assessment, imposed
by a local government upon a parcel or upon a person as an
incident of property ownership, including a user fee or charge
for a property-related service." All new and existing property-
related fees and charges must conform to requirements
prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property-
related service or are used for unrelated purposes. Furthermore,
no property-related fee or charge may be imposed or increased
without majority approval by the property owners subject to the
fee or charge or, at the option of the local agency, two-thirds
voter approval by the electorate residing in the affected area.

In addition to the provisions described above, Article XIIIC
removes limitations on the initiative power in matters of local
taxes, assessments, fees and charges. Consequently, local voters
could, by future initiative, repeal, reduce or prohibit the
future imposition or increase of any local tax, assessment, fee
or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be
specifically pledged to secure debt issues.

The interpretation and application of Proposition 218 will
ultimately be determined by the courts with respect to a number
of matters, and it is not possible at this time to predict with
certainty the outcome of such determinations. Proposition 218 is
generally viewed as restricting the fiscal flexibility of local
governments, and for this reason, some ratings of California
cities and counties have been affected.

Appropriations Limits

The State and its local governments are each subject to an annual
"appropriations limit" imposed by Article XIIIB of the California
Constitution. "Appropriations subject to limitation" are
authorizations to spend "proceeds of taxes," which consist of tax
revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent
that such proceeds exceed the cost of providing the product or
service, but "proceeds of taxes" exclude most State subventions
to local governments. No limit is imposed on appropriations of
funds which are not "proceeds of taxes," such as reasonable user
charges or fees, and certain other non-tax funds, including bond
proceeds.

Among the expenditures not included in the Article XIIIB
appropriations limit are (1) the debt service cost of bonds
issued or authorized prior to January 1, 1979, or subsequently
authorized by the voters, (2) appropriations to comply with
mandates of courts or the federal government, (3) appropriations
for certain capital outlay projects, (4) appropriations by the
State of post-1989 increases in gasoline taxes and motor vehicle
weight fees, and (5) appropriations made in certain cases of
emergency.

The appropriations limit for each year is adjusted annually to
reflect changes in cost of living and population, and any
transfers of service responsibilities between government units.
The definitions for such adjustments were liberalized in 1990 to
follow more closely growth in the State's economy.

Proposition 111 requires that each agency's actual appropriations
be tested against its limit every two years. If the aggregate
"proceeds of taxes" for the preceding two-year period exceeds the
aggregate limit, the excess must be returned to the agency's
taxpayers through tax rate or fee reductions over the following
two years. If the State's aggregate "proceeds of taxes" for the
preceding two-year period exceeds the aggregate limit, 50% of the
excess is transferred to fund the State's contribution to school
and community college districts and the remainder is refunded to
the taxpayers. With more liberal annual adjustment factors since
1988, and depressed revenues in the early 1990's because of the
recession, few governments have been operating near their
spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits
for up to four years. For the last ten years, appropriations
subject to limitation have been under the State's limit. However,
because of extraordinary revenue receipts in fiscal year 1999-
2000, State appropriations were estimated to be about $700
million above the limit. No refund will occur unless the State
also exceeds its limit in fiscal year 2000-01; the State
Department of Finance has estimated the State will be about $3.6
billion below its appropriation limit in fiscal year 2000-01.

Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and
XIIID of the California Constitution, the ambiguities and
possible inconsistencies in their terms, and the impossibility of
predicting future appropriations or changes in population and
cost of living, and the probability of continuing legal
challenges, it is not currently possible to determine fully the
impact of these Articles on California Municipal Bonds or on the
ability of the State or local governments to pay debt service on
such California Municipal Bonds. It is not possible, at the
present time, to predict the outcome of any pending litigation
with respect to the ultimate scope, impact or constitutionality
of these Articles or the impact of any such determinations upon
State agencies or local governments, or upon their ability to pay
debt service on their obligations. Furthermore, other measures
affecting the taxing or spending authority of California or its
political subdivisions may be approved or enacted in the future.
Ballot initiatives of legislation may be introduced which would
modify existing taxes or other revenue-raising measures or which
either would further limit or, alternatively, would increase the
abilities of state and local governments to impose new taxes or
increase existing taxes. It is not possible, at present, to
predict the extent to which any such initiatives or legislation
will be enacted. Nor is it possible, at present, to determine the
impact of any such initiatives or legislation on California
Municipal Bonds in which the Fund may invest, future allocations
of state revenues to local governments or the abilities of state
or local governments to pay the interest on, or repay the
principal of, such California Municipal Bonds.

Bond Rating

Three major credit rating agencies, Moody's Investors Service,
Inc., S&P and Fitch Inc., assign ratings to California long-term
general obligation bonds. A general description of Moody's, S&P's
and Fitch's ratings of municipal bonds is set forth in Appendix A
to this Statement of Additional Information. The ratings of
Moody's, S&P and Fitch represent their opinions as to the quality
of the municipal bonds they rate. It should be emphasized,
however, that ratings are general and are not absolute standards
of quality. Consequently, municipal bonds with the same maturity,
coupon and rating may have different yields while obligations
with the same maturity and coupon with different ratings may have
the same yield.

As of May 14, 2001, California general obligation bonds were
assigned ratings of "A+" from Standard & Poor's, "Aa2" from
Moody's and "AA" from Fitch. These ratings reflect a downgrade by
Standard & Poor's in April 2001 and a downgrade by Moody's in May
2001. Both downgrades stem largely from each ratings agency's
concerns regarding the State's energy situation and its impact on
the State's finances. These recent reductions on the State's
credit rating, and any potential future reduction, could
adversely affect the market value and marketability of all
outstanding notes and bonds issued by the State, its agencies or
its local governments and there can be no assurance that current
ratings will be maintained in the future.

Legal Proceedings

The State is involved in certain legal proceedings (described in
the State's recent financial statements) that, if decided against
the State, may require the State to make significant future
expenditures or may substantially impair revenues. If the State
eventually loses any of these cases, the final remedies may not
have to be implemented in one year.

Obligations of Other Issuers Other Issuers of California
Municipal Bonds

There are a number of State agencies, instrumentalities and
political subdivisions of the State that issue Municipal
Obligations, some of which may be conduit revenue obligations
payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the
credit quality of the securities issued by them may vary
considerably from the credit quality of obligations backed by the
full faith and credit of the State.

State Assistance

Property tax revenues received by local governments declined more
than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the
redistribution of the State's General Fund surplus to local
agencies, the reallocation of certain State revenues to local
agencies and the assumption of certain governmental functions by
the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at
approximately 75% of General Fund expenditures in recent years,
including the effect of implementing reductions in certain aid
programs.

In 1997, a new program provided for the State to substantially
take over funding for local trial courts (saving cities and
counties some $400 million annually). For the last several years,
the State has also provided $100 million annually to support
local law enforcement costs. In 2000-01, the State provided $200
million in unrestricted grants to cities and counties.

To the extent the State should be constrained by its Article
XIIIB appropriations limit, or its obligation to conform to
Proposition 98, or other fiscal considerations, the absolute
level, or the rate of growth, of State assistance to local
governments may be reduced. Any such reductions in State aid
could compound the serious fiscal constraints already experienced
by many local B-7 governments, particularly counties. Los Angeles
County, the largest in the State, was forced to make significant
cuts in services and personnel, particularly in the health care
system, in order to balance its budget in FY1995-96 and FY1996-
97. Orange County, which emerged from Federal Bankruptcy Court
protection in June 1996, has significantly reduced county
services and personnel, and faces strict financial conditions
following large investment fund losses in 1994 which resulted in
bankruptcy. The ultimate financial impact on the County and the
State cannot be predicted with any certainty.

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

Land-Secured Bonds

California Municipal Bonds which are land-secured bonds may be
adversely affected by a general decline in real estate values or
a slowdown in real estate sales activity. In many cases, such
bonds are secured by land which is undeveloped at the time of
issuance but anticipated to be developed within a few years after
issuance. In the event of such reduction or slowdown, such
development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special
assessments or special taxes securing these bonds are not the
personal liability of the owners of the property assessed, the
lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required
to make payments on the bonds in the event of delinquency in the
payment of assessments or special taxes, except from amounts, if
any, in a reserve fund established for the bonds. Although
secured by real property, the judicial foreclosure process can be
lengthy and is sometimes unsuccessful.

California Long Term Lease Obligations

Based on a series of court decisions, certain long-term lease
obligations, though typically payable from the general fund of
the State or a municipality, are not considered "indebtedness"
requiring voter approval. Such leases, however, are subject to
"abatement" in the event the facility being leased is unavailable
for beneficial use and occupancy by the municipality during the
term of the lease. Abatement is not a default, and there may be
no remedies available to the holders of the certificates
evidencing the lease obligation in the event abatement occurs.
The most common cases of abatement are failure to complete
construction of the facility before the end of the period during
which lease payments have been capitalized and uninsured casualty
losses to the facility (e.g., due to earthquake). In the event
abatement occurs with respect to a lease obligation, lease
payments may be interrupted (if all available insurance proceeds
and reserves are exhausted) and the certificates may not be paid
when due. Although litigation is brought from time to time which
challenges the constitutionality of such lease arrangements, the
California Supreme Court issued a ruling in August, 1998, which
reconfirmed the legality of these financing methods.

Other Considerations - Recent Developments Regarding Energy

California has experienced difficulties with the supply and price
of electricity and natural gas in much of the State since mid-
2000, which are likely to continue for several years. In 1996
California deregulated the State's power markets. While the
transmission and distribution of electricity remained regulated,
the generation of electricity was opened up to competition. Under
the deregulation scheme, utilities were prohibited from passing
through all wholesale power costs to consumers until 2002. Energy
usage in the State has been rising sharply with the strong
economy, but no new power generating plants have been built since
the 1980's. The three major investor-owned utilities in the State
("IOUs") have been purchasing electricity to meet their needs
above their own generating capacity and contracted supplies at
fluctuating short-term and spot market rates, while the retail
prices they can charge their residential and small business
customers have been capped at specified levels. Starting in mid-
2000, power purchase costs exceeded retail charges, and the IOUs
incurred substantial losses and accumulated large debts to
continue to purchase power for their customers. As a result, the
credit ratings of the IOUs have deteriorated, making it difficult
to continue to purchase power. The two largest IOUs have reported
they are in default in paying certain of their obligations. On
April 6, 2001, one of the IOUs filed for voluntary protection
under Chapter 11 of the federal Bankruptcy Code. The bankruptcy
proceedings are pending. While the bankruptcy court decides the
allocation of the IOU's available cash flow and assets among its
creditors, the IOU will continue operations under current
management. No other IOU has sought the protection of or been
forced into bankruptcy, although this may change in the future.

In 2001, there have been rolling electricity blackouts throughout
California affecting millions of customers. The Governor declared
a state of emergency under State law on January 17, 2001, and
ordered the State's Department of Water Resources ("DWR") to
begin purchasing electricity for resale to retail end use
customers, to fill the gap in supplies resulting from the
inability of the IOUs to continue to purchase power. DWR also
started to enter into long-term power supply contracts to reduce
reliance on short-term and spot markets. DWR's purchases are
initially being funded by advances from the State's General Fund;
about $1.8 billion was expended in the first six weeks and as of
May 2001 a total of $6.7 billion in General Fund advances have
been authorized. DWR is entitled to repayment from a portion of
retail end use customer's payments, remitted through the IOUs,
but these amounts will not equal the power purchase costs. In May
2001, state officials announced that the DWR is authorized to
sell up to $13.4 billion of revenue bonds in mid-August to help
finance the State's plan to overcome the current energy
shortages. Proceeds from the offering would be used to buy more
electricity and to pay back the General Fund for purchases
already made. State officials announced that the State expected
to sell about $12.5 billion of bonds, with approximately $8
billion of the bonds sold as tax-exempt securities. The bonds are
to be issued under a trust indenture that will provide that the
bonds are payable solely from payments from retail customers for
electricity. The revenue bonds will not be a liability of or
backed by the General Fund, and neither the faith and credit nor
the taxing power of the State will be pledged to pay the revenue
bonds. The State may make additional loans or other advances from
the General Fund to support the DWR power supply program
subsequent to the issuance of the DWR revenue bonds.

The State is intensifying programs for energy conservation, load
management and improved energy efficiency in government,
businesses and homes. Approval for construction of new power
generating facilities, especially smaller and "peaking" power
facilities, has been accelerated. A number of new larger power
plants are under construction and in permitting phase, and will
come on line in 2001-2003. In addition, the State is seeking
longer term power supply contracts at lower costs. The
combination of these elements is expected to lower wholesale
electricity costs in the future and promote the financial
recovery of the IOUs.

Natural gas prices in California have been increasing
significantly as a result of limited pipeline capacity into the
State, and nationwide price increases. The prices nationally may
remain high for some time until additional supplies are produced,
as natural gas prices are not regulated. One of the State's IOUs
also supplies natural gas, and its credit difficulties and
bankruptcy filing have impaired its ability to obtain supplies.
Significant interruption in natural gas supplies could adversely
affect the economy, including generation of electricity, much of
which is fueled by natural gas.

A number of additional plans are under consideration by the State
Legislature, including the authorization of State agencies to
own, build or purchase power generation or transmission
facilities and assist energy conservation efforts. Plans are also
being considered to assist the IOUs repay their debts incurred in
purchasing power; these may include a State purchase of their
transmission facilities, potentially funded with revenue bonds.

A number of lawsuits are pending dealing with many aspects of the
energy situation in California, including disputes over the rates
which the California Public Utilities Commission ("PUC") may
charge retail customers, financial responsibility for purchases
of power by the IOUs, and various antitrust and fraud claims
against energy suppliers. In May 2001 PUC approved a $5.7 billion
energy rate increase that will impact approximately nine million
residential, industrial and agricultural customers. PUC further
acknowledged that more rate increases may be necessary unless
federal regulators find a way to control the wholesale
electricity market. A number of lawsuits have been filed
concerning various aspects of the current energy situation. These
include disputes over rates set by the PUC, responsibility for
electricity and natural gas purchases made by the utilities and
the California Independent System Operator, continuing
contractual obligations of certain small power generators, and
antitrust and fraud claims against various parties.

Seismic Activity

Substantially all of California is within an active geologic
region subject to major seismic activity. Northern California in
1989 and Southern California in 1994 experienced major
earthquakes causing billions of dollars in damages. The federal
government provided more than $13 billion in aid for both
earthquakes, and neither event has had any long-term negative
economic impact. Any California Municipal Obligation in the Fund
could be affected by an interruption of revenues because of
damaged facilities, or, consequently, income tax deductions for
casualty losses or property tax assessment reductions.
Compensatory financial assistance could be constrained by the
inability of (i) an issuer to have obtained earthquake insurance
coverage rates; (ii) an insurer to perform on its contracts of
insurance in the event of widespread losses; or (iii) the federal
or State government to appropriate sufficient funds within their
respective budget limitations.

Water Supply and Flooding

Due to aspects of its geography, climate and continually growing
population, California is subject to certain risks with regard to
its water resources. Throughout the late 1980's and early 1990's
California experienced a prolonged drought that strained the
State's water supply system. Some urban areas resorted to
mandatory rationing, farmers in several agricultural areas chose
to leave part of their acreage fallow, and ecosystems in certain
regions endured harsh impacts. On the opposite end of the
spectrum, during the winter season of 1997-1998 California
endured double its normal amount of rainfall and about $550
million in flood and storm damage statewide. As with the
potential risks associated with seismic activity, any California
Municipal Obligation in the Fund could be affected by an
interruption of revenues because of damaged facilities or income
tax deductions for casualty losses or property tax assessment
reductions.



APPENDIX C

Special Considerations Relating to Florida Municipal Obligations

See Special Note prior to Appendix B.

General

Population. In 1980, Florida was the seventh most populous state
in the U.S. Florida has grown dramatically since then and as of
April 1, 2000, ranks fourth with an estimated population of 16
million. . The U.S. average population increase since 1990 is
about 1.0% annually, while Florida's average increase is about
1.8% annually. . From 1990 to 1999, 82.4% of Florida's population
growth was due to more people moving into Florida than moved out.
The remaining 17.6% was due to the excess of births over deaths.
 . Approximately one-third of the population increase due to the
net in- migration was due to people moving to Florida from
foreign countries, and the other two-thirds was due to people
moving from other states. . Approximately 60% of Florida's total
population is at the working age (18-64). This share is not
expected to increase significantly in the next decade. . However,
the percentage of Florida residents aged 85 and older was
projected to increase by 29% between 1995 and 2000 and by another
23% between 2000 and 2005.

Income. Personal income in Florida has been growing steadily the
last decade. . Florida's real income per person has tracked
closely with the U.S. average and has tracked above the
southeast. . Since 1992, however, Florida's real income per
person has been consistently slightly below that of the U.S.
Florida has a proportionately greater retirement age population
than most states. As a result, property income (dividends,
interest, and rent), and transfer payments (for example, Social
Security and pension benefits) are relatively more important
sources of income to persons residing in Florida. Transfer
payments are typically less sensitive to the ups and downs of the
economy than wages and salaries and other employment income, and,
therefore, act as a stabilizing force in weak economic periods.

The personal income of residents of the various states in the
U.S. is frequently used to make comparisons among the various
states. However, using personal income to compare Florida to
other states can be misleading. Florida's personal income is
systematically underestimated. Contributions by employers to
employees' pension, profit sharing, and other retirement plans
are included in personal C-1 income of that employee while the
employee is working and earning wages and salary. When those same
employees retire, to avoid double accounting, retirement payments
to them from those retirement plans are excluded in computing
personal income. Florida retirees are more likely to be
collecting retirement benefits that they earned in a state other
than Florida. As a result, Florida personal income is
underestimated. . Florida has no personal income tax. . Florida's
real income per person in 1999 was $28,023. . The U.S. average
real income per person was slightly higher at $28,542. . Real
income per person in the southeast United States was
significantly lower at $25,703. . Total Florida real income
increased 4.6% from 1998 to 1999 and is forecasted to increase
3.6% in the fiscal year ended June 30, 2000/1/, and 4.0% in the
fiscal year ending June 30, 2001. . Florida real income per
person is projected to increase 1.6% in the fiscal year ended
June 30, 2000, and 2.1% in the fiscal year ending June 30, 2001.
 . The national economic forecast indicates slower growth during
the next two fiscal years. While the Florida economy will also
slow, it is expected to continue outperforming the U.S. economy.

Employment

Since 1990, Florida's working age population (age 18-64) has
increased approximately 17%, while the number of employed persons
in Florida increased approximately 20.2%. . Florida is gradually
becoming less dependent on employment related to construction,
agriculture, or manufacturing, and more dependent on employment
related to trade and services. . In 1998, 13 of the 20 public
companies in Florida generating the most revenue were Fortune 500
companies with headquarters in Florida. In 1998, services
constituted 36% and trade constituted 25.5% of Florida's total
non-farm jobs. The U.S., however, continues to have a greater
percentage of manufacturing jobs than Florida. Manufacturing jobs
tend to pay higher wages, but service jobs can also pay well and
tend to be less sensitive to swings in the business cycle.
Florida has a concentration of manufacturing jobs in high-tech
and high value-added sectors, such as electrical and electronic
equipment, as well as printing and publishing. These type of
manufacturing jobs tend to be less cyclical. . From 1990 to 1994,
Florida's unemployment rate was consistently slightly higher than
that of the U.S. . From 1994 to 1997, Florida's unemployment rate
was generally below that of the U.S. . In 1998, Florida's
unemployment rate was again very slightly above that of the U.S.
 . It is estimated that in 1999 and 2000 Florida's unemployment
rate will once again fall below the U.S. unemployment rate. It is
estimated that Florida's unemployment rate will be 3.8% in the
fiscal year ended June 30, 2000, and 4.1% in the fiscal year
ending June 30, 2001.

Florida's economy is expected to grow at a slow rate along with
the U.S., but is expected to out perform the U.S. as a whole. .
Total non-farm employment in Florida is expected to increase 3.5%
for the fiscal year  ended June 30, 2000, and 2.5% for the fiscal
year ending June 30, 2001. . Trade and services, the two largest
employment sectors, currently account for more than half of the
total non-farm employment in Florida.

Employment in the service sectors should experience an increase
of 5.4% for the fiscal year ended June 30, 2000, while growing
4.5% for the fiscal year ending June 30, 2001. Trade is expected
to expand 2.9% for each of the fiscal years ended June 30, 2000,
and ending June 30, 2001. . The service sector is now Florida's
largest non-farm employment category.

Construction

In the past, Florida's economy has been highly dependent on the
construction industry and construction related manufacturing.
This dependency has declined in recent years as a result of
continued diversification of Florida's economy. For example, in
1973, total contract construction employment as a share of total
non-farm employment was about 10%, in the late 1980's, the share
had edged downward to 7.5%, and in 1998, the share was only 5.2%.
This trend is expected to continue as Florida's economy continues
to diversify. While recent federal tax reforms reducing capital
gains realized on the sale of homes may increase the purchases of
second, preretirement homes in Florida, single and multi-family
private housing starts in Florida are projected to slow over the
next two years. .

Single and multi-family private housing starts in Florida for the
fiscal year ended June 30, 2000, are projected to fall to a
combined level of 138,600, decreasing to 134,900 for the fiscal
year ending June 30, 2001. . Total construction expenditures in
Florida are forecasted to increase 3.5% for the fiscal year ended
June 30, 2000, and increase 0.8% for the fiscal year ending June
30, 2001.

Tourism

Tourism is one of Florida's most important industries.
Approximately 48.7 million tourists visited Florida in 1998.
Florida's tourist industry over the years has become more
sophisticated, attracting visitors year-round and, to a degree,
reducing its seasonality. Due in large part to the fact that
Florida does not have a state individual income tax, tourists in
Florida are, in essence, additional residents for purposes of
determining Florida tax revenues.

Tourist arrivals to Florida are forecasted to increase by 4.9%
for the fiscal year ended June 30, 2000, and 2.7% for the fiscal
year ending June 30, 2001. . Tourist arrivals to Florida by air
are expected to increase by 6.3% for the fiscal year ended June
30, 2000, and increase by 4.3% for the fiscal year ending June
30, 2001. . Tourist arrivals by car are expected to increase by
3.1% for the fiscal year ended June 30, 2000, and 0.5% for the
fiscal year ending June 30, 2001. In the fiscal year ended June
30, 2000, 51.2 million domestic and international tourists are
expected to have visited Florida. For the fiscal year ending June
30, 2001, about 52.6 million tourists are expected to visit
Florida.

Revenues and Expenses

Estimated General Revenue plus Working Capital and Budget
Stabilization funds available to Florida for the fiscal year
ending June 30, 2001, total $21,561.2 million. Of the total
General Revenue plus Working Capital and Budget Stabilization
funds available to Florida, $19,361.7 million of that is
Estimated Revenues and represents an increase of 4.8% over the
previous year's Revenues. With effective General Revenues plus
Working Capital and Budget Stabilization Funds appropriations at
$20,143.7 million, including C-3 $47.0 million transferred to the
Budget Stabilization Fund, unencumbered reserves at the fiscal
year ending June 30, 2001, are estimated at $1,464.5 million.
Estimated General Revenue plus Working Capital and Budget
Stabilization funds available to Florida for the fiscal year
ending June 30, 2002, total $21,900.3 million, a 1.6% increase
over the fiscal year ending June 30, 2001. The $20,350.4 million
in Estimated Revenues represents an increase of 5.1% over the
previous year's Estimated Revenues.

General Revenues and Expenses

For the fiscal year ended June 30, 1999, approximately 68% of
Florida's total direct revenue to its four operating funds were
derived from Florida taxes and fees, with federal grants and
other special revenue accounting for the balance. The large
majority of Florida General Revenue Funds available to Florida
for the fiscal year ended June 30, 1999, were made up of the
following taxes: .

Sales and use tax--71%

Corporate income tax--8%

Intangible personal property tax--4%

Estate tax--4%

Documentary stamp tax--3%

During the same fiscal year ended June 30, 1999, the large
majority of expenditures from Florida's General Revenue Fund were
as follows: .

Health and social concerns--36%

Education--27%

Government--12%

Florida Sales and Use Tax

Florida's sales and use tax (6%) currently accounts for Florida's
single largest source of tax receipts. Slightly less than 10% of
Florida's sales and use tax is designated for local governments
and is distributed to the respective counties in which the tax is
collected for use by the counties, and the municipalities in such
counties. In addition to this money from the State of Florida,
local governments may (by a vote of the residents) assess a 0.5%
or a 1.0% discretionary sales surtax within their county.
Proceeds from this local option sales tax are used for funding
local infrastructure programs and acquiring land for public
recreation or conservation or protection of natural resources as
provided under applicable Florida law. Certain charter counties
have other taxing powers in addition, and non-consolidated
counties with a population in excess of 800,000 may levy a local
option sales tax to fund indigent health care. The indigent
health care tax alone cannot exceed 0.5% and when combined with
the infrastructure surtax cannot exceed 1.0%. . With the
exception of the tax on gasoline and special fuels, the receipts
from the sales and use tax are credited to either the General
Revenue Fund, the Solid Waste Management Trust Fund, or to local
governments. .

For the fiscal year ended June 30, 2000, Florida sales and use
tax receipts (exclusive of the tax on gasoline and special fuels)
credited to the General Revenue Fund totaled $13,766.7 million,
an increase of 8.3% over the fiscal year ended June 30, 1999,
collections. .

For the fiscal year ended June 30, 2000, Florida sales and use
tax receipts (exclusive of the tax on gasoline and special fuels)
credited to the Solid Waste Management Trust Fund totaled $46.0
million, an increase of 3.1% over the fiscal year ended June 30,
1999, collections. . For the fiscal year ended June 30, 2000,
Florida sales and use tax receipts (exclusive of the tax on
gasoline and special fuels) credited to local governments totaled
$1,264.1 million, an increase of 8.4% over the fiscal year ended
June 30, 1999, collections.

Alcoholic Beverage Tax

Florida imposes an alcoholic beverage, wholesale tax (excise tax)
on beer, wine, and liquor. This tax is one of Florida's major tax
sources. The surcharge on alcoholic beverages sold for
consumption on premises was reduced by the 1999 Legislature. This
reduction is expected to reduce collections by $30.3 million in
the fiscal year ended June 30, 2000, and $37.4 million in the
fiscal year ending June 30, 2001. Approximately 88% of the
revenues collected from this tax are deposited into Florida's
General Revenue Fund. .

Receipts from the alcoholic beverage tax and liquor license fees
that were credited to the General Revenue Fund totaled $556.6
million for the fiscal year ended June 30, 2000, a decrease of
1.0% from the fiscal year ended June 30, 1999.

Corporate Income Tax

Florida imposes an income tax on corporations. All receipts of
the corporate income tax are credited to the General Revenue
Fund. . For the fiscal year ended June 30, 2000, corporate income
tax totaled $1,406.5 million, a decrease of 4.5% from the fiscal
year ended June 30, 1999.

Documentary Stamp Tax

Florida imposes a documentary stamp tax on deeds and other
documents relating to realty, corporate shares, bonds,
certificates of indebtedness, promissory notes, wage assignments,
and retail charge accounts. The receipts from the documentary
stamp tax are credited mainly to various trust funds. For the
fiscal year ended June 30, 2000, only 7.56% of these taxes were
deposited to the General Revenue Fund. . Documentary stamp tax
collections totaled $1,223.4 million for the fiscal year ended
June 30, 2000, a 3.2% increase from the fiscal year ended June
30, 1999.

Intangible Personal Property Tax

Florida imposes an annual intangible personal property tax on
stocks, bonds, including bonds secured by liens on Florida real
property, notes, governmental leaseholds, interests in limited
partnerships registered with the Securities and Exchange
Commission, and certain other intangibles not secured by a lien
on Florida real property. The annual rate of tax is currently 1
mill (a mill is $1.00 of tax per $1,000.00 of property value).
Florida also imposes a non- recurring tax on mortgages and other
obligations secured by liens on Florida real property. The rate
of the non-recurring tax was reduced as of January 2000, from 2
mills to 1.5 mills, and a further reduction to 1 mill was
effective January 2001. The rate reduction is expected to reduce
general revenues by $202.3 million for the fiscal year ending
June 30, 2001, and by $252.7 million for the fiscal year ending
June 30, 2002. After reduction for administrative costs incurred
by the Florida Department of Revenue, 66.5% of the receipts from
the intangible personal property tax are distributed to the
General Revenue Fund and the remaining 33.5% are distributed to
the County Revenue Sharing Trust Fund. . For the fiscal year
ended June 30, 2000, total intangible personal property tax
collections were $994.7 million, a 17.8% decrease from the fiscal
year ended June 30, 1999.

Estate Tax

Florida imposes an estate tax on the estate of a decedent for the
privilege of transferring property at death. The estate tax is
limited by the Florida Constitution to an amount equal to the
aggregate credit or deduction allowable against an estate's
federal or other state tax liability. Therefore, an elimination
or reduction of the federal estate tax could significantly reduce
the revenue from the C-5 Florida estate tax. All receipts of the
estate tax are credited to the General Revenue Fund. . For the
fiscal year that ended June 30, 2000, receipts from this tax were
$778.7 million, an increase of 15.5% over the fiscal year ended
June 30, 1999.

Lottery

Florida began its own lottery in 1988. Florida law requires that
lottery revenues be distributed 50% to the public in prizes, at
least 38.0% for use in enhancing education, and no more than
12.0% for costs of administering the lottery.

Lottery ticket sales for the fiscal year ended June 30, 2000,
totaled an estimated $2,266.5 million, providing education with
approximately $861.2 million.

Tobacco Litigation Award to Florida

Florida's 1997 tobacco litigation settlement, as amended in 1998,
is expected to exceed $11 billion over a 25 year period. The
settlement anticipates that Florida will use the proceeds for
children's healthcare coverage and other health-related services,
to reimburse Florida for medical expenses it has incurred, and
for mandated improvements in enforcement efforts against the sale
of tobacco products to minors. A portion of the settlement funds
have been deposited in the Lawton Chiles Endowment Fund as a
continuing source of funding for services to children and elders,
and for biomedical research. As of June 30, 2000, the value of
the Lawton Chiles Endowment Fund was approximately $1,182
million.

Debt-Balanced Budget Requirement

At the end of the fiscal year ended June 30, 1999, Florida had
outstanding about $9,260 million in principal amount of debt
secured by its full faith and credit. Since then, the State has
issued about $691.3 million in principal amount of full faith and
credit bonds. Florida's Constitution and statutes require that
Florida not run a deficit in its budget, as a whole, or in any
separate fund within its budget. Rather its budget and funds must
be kept in balance from currently available revenues each fiscal
year. If the Governor or Comptroller believes a deficit will
occur in any fund, by statute, he must certify his opinion to the
Administrative Commission, which then is authorized to reduce all
Florida agency budgets and releases by a sufficient amount to
prevent a deficit in any fund. Additionally, the Florida
Constitution prohibits Florida from borrowing by issuing bonds to
fund its operations.

Litigation

Currently under litigation are several issues relating to Florida
actions or Florida taxes that put at risk a portion of General
Revenue Fund monies. There is no assurance that any of such
matters, individually or in the aggregate, will not have a
material adverse affect on Florida's financial position. A brief
summary of these matters follows. Nathan M. Hameroff, M.D., et
al. v. Agency for Healthcare Administration, et al. The plaintiff
challenged the constitutionality of Florida's Public Medical
Assistance Trust Fund annual assessment on net operating revenue
of free standing out-patient facilities offering sophisticated
radiology services. The case is set to be heard in Leon County
Circuit Court, 2nd Judicial Circuit, and is currently in the
discovery phase. If Florida is unsuccessful in its action, the
potential cost to Florida could be $116.8 million. Barnett Banks,
Inc. v. Florida Department of Revenue The taxpayer in this case
challenged the imposition of interest on additional amounts of
corporate income tax due as a result of adjustments under a
federal income tax audit that were reported to Florida. DOR's
historical position is that interest is due from the due date of
the return until payment C-6 of the additional amount of tax is
made. The taxpayer contends that interest should begin to accrue
only from the date the federal audit adjustments were due to be
reported to Florida. A Final Order was issued adopting DOR's
position, but the taxpayer won on appeal. The potential lost
revenue and refund exposure are estimated in the range of $12 to
$20 million annually. Savona, et al. v. Agency for Health Care
Administration The plaintiffs seek reimbursement of differential
between Medicare and Medicaid rates for dual-enrolled eligibles.
The case is set to be heard in Leon County Circuit Court, 2nd
Judicial Circuit. If the plaintiffs prevail, Florida's share
(45%) of the potential liability could be up to $270 million.

Deficit Fund Equity

The Special Disability Trust Fund has a deficit fund balance of
approximately $1.7 billion. This deficit is the result of claims
expense over net assessment revenue.

Bond Ratings

Florida maintains a bond rating of Aa2, AA+, and AA from Moody's
Investors Service, Standard & Poors Corporation, and Fitch Inc.,
respectively, on all of its general obligation bonds.  While
these ratings and some of the information presented above
indicate that Florida is in satisfactory economic health, there
can be no assurance that there will not be a decline in economic
conditions or that particular Florida Municipal Obligations
purchased by the Fund will not be adversely affected by any such
changes.

Information

The sources for the information presented above include official
statements and financial statements of the State of Florida.
While the funds have not independently verified this information,
the funds have no reason to believe that the information is not
correct in all material respects.


APPENDIX D

Special Considerations Relating to Georgia Municipal Obligations

See Special Note prior to Appendix B

General

The fund's concentration in the debt obligations of one state
carries a higher risk than a portfolio that is geographically
diversified. In addition to State of Georgia general obligations
and state agency issues, the fund will invest in local bond
issues, lease obligations, and revenue bonds, the credit quality
and risk of which will vary according to each security's own
structure and underlying economics.

Debt

The State of Georgia and its local governments issued $5.3
billion in municipal bonds in calendar 2000, a 7% decrease from
the previous year. As of May 1, 2001, the state was rated Aaa by
Moody's and AAA by S&P's and Fitch. The State of Georgia
currently has net direct obligations of approximately $5.5
billion. In 1973, a constitutional amendment authorizing the
issuance of state general obligation (GO) bonds was implemented.
Since the implementation of the amendment, the state has funded
most of its capital needs through the issuance of GO bonds.
Previously, capital requirements were funded through the issuance
of bonds by 10 separate authorities and secured by lease rental
agreements and annual state appropriations. Georgia's
constitution permits the state to issue bonds for two types of
public purposes: (1) general obligation debt and (2) guaranteed
revenue debt. The Georgia constitution imposes certain debt
limits and controls. The state's GO debt service cannot exceed
10% of total revenue receipts less refunds of the state treasury.
GO bonds have a maximum maturity of 25 years and 67% of the
state's debt is scheduled to be retired in 10 years or less.
Maximum GO debt service requirements are well below the legal
limit at 5.1% of fiscal year 1999 treasury receipts. The state
established "debt affordability" limits that provide that
outstanding debt will not exceed 2.7% of personal income or that
maximum annual debt service will not exceed 5% of the prior
year's revenues. The state's near-term debt offerings will be
limited to allow for a decrease to these levels.

In addition to the GO and appropriation-backed debt described
above, about $72.2 million of bonds issued by the Georgia
Environmental Facilities Authority are outstanding. Also, the
Georgia Tollway Authority has about $226.2 million of revenue
bonds outstanding. Although these bonds are issued by the above
authorities, the state's full faith and credit is pledged towards
the repayment of the bonds.

Economy

The State of Georgia is the tenth most populous state with a
population of approximately 7.8 million residents, increasing
over 20% from 1990 to 1999. In this same period, the state
experienced strong economic expansion and job growth. The state's
very strong economy attracted new businesses and labor force
personnel throughout the 1990s. The services sector has played a
key role in the state becoming a regional center for the entire
Southeast region. From 1989 to 1998, the services sector
strengthened as the leading employment sector in the state
increasing to over 28% of employment from about 22.5% of
employment. Another leading employment sector continues to be the
trade sector that held steady at around 23% of employment
throughout the state from 1989 to 1998. The Atlanta metropolitan
statistical area continues to serve as the central focus on the
strong economic growth occurring throughout the state with
approximately 45% of the state's population. This area includes
Atlanta, the state's capital and 18 surrounding counties. The
next largest metropolitan area is the Columbus-Muscogee area.

The state's economy continues to outperform the nation. The
state's very strong economy is highlighted by a very strong labor
market. From 1992 to 2000, the state's unemployment rate steadily
decreased and is currently at its 30-year low of just 3.6%. The
state's per capita income continues to improve against the
national average and currently is 96.3% of the U.S. level. This
is a significant trend with the realization that the state
continues to be very attractive from a quality of life and cost
of living perspective.

Financial

The creditworthiness of the portfolio is largely dependent on the
financial strength of the State of Georgia and its localities.
The state's strong economic performance continues to translate
into its strong financial performance and accumulation of
substantial reserves. In the early 1990s, the state depleted its
reserve fund balances and invoked tightened budgeting practices
while experiencing revenue shortfalls brought on by a lagging
recession. Economic began to improve in 1992 and have continued
on a positive trend. From fiscals 1994 to 1999, the state has
annually strengthened its unreserved general fund balances. At
the close of fiscal 1999, the state had almost $1.26 billion of
unreserved general fund reserves or about 7.1% of expenditures.
In addition to this healthy unreserved general fund balance, the
state had a revenue shortfall reserve of about $381 million and a
reserve for midyear adjustments of around $127 million. Such
strong reserve levels allow financing flexibility and provide
very strong safeguards against short-term economic swings.

A significant portion of the portfolio's assets is expected to be
invested in the debt obligations of local governments and public
authorities with investment-grade ratings of BBB or higher. While
local governments in Georgia are primarily reliant on independent
revenue sources such as property taxes, they are not immune to
budget shortfalls caused by cutbacks in state aid. The fund may
purchase obligations issued by public authorities in Georgia
which are not backed by the full faith and credit of the state
and may or may not be subject to annual appropriations from the
state's general fund. Likewise, certain enterprises such as water
and sewer systems or hospitals may be affected by changes in
economic activity.

Sectors

Certain areas of potential investment concentration present
unique risks. A significant portion of the fund's assets may be
invested in health care issues. For over a decade, the hospital
industry has been under significant pressure to reduce expenses
and shorten the length of hospital stays, a phenomenon that has
negatively affected the financial health of many hospitals. All
hospitals are dependent on third-party reimbursement sources such
as the federal Medicare and state Medicaid programs or private
insurers. To the extent these payors reduce reimbursement levels,
the individual hospitals may be affected. In the face of these
pressures, the trend of hospital mergers and acquisitions has
accelerated in recent years. These organizational changes present
both risks and opportunities for the institutions involved.

The fund may from time to time invest in electric revenue issues
that have exposure to or participate in nuclear power plants that
could affect issuers' financial performance. Such risks include
unexpected outages or plant shutdowns, increased Nuclear
Regulatory Commission surveillance or inadequate rate relief. In
addition, the financial performance of electric utilities may be
impacted by increased competition and deregulation of the
electric utility industry.

The fund may invest in private activity bond issues for corporate
and nonprofit borrowers. Sold through various governmental
conduits, these issues are backed solely by the revenues pledged
by the respective borrowing corporations. No governmental support
is implied.


APPENDIX E

Special Considerations Relating to New York Municipal Obligations

See Special Note prior to Appendix B

Risk Factors

The information set forth below is derived from the Official
Statements and/or preliminary drafts of Official Statements
prepared in connection with the issuance of New York State and
New York City municipal bonds. The Sponsors have not
independently verified this information.

Economic Trends

Over the long term, the State of New York (the "State") and the
City of New York (the "City") face serious potential economic
problems. The City accounts for approximately 41% of the State's
population and personal income, and the City's financial health
affects the State in numerous ways. The State historically has
been one of the wealthiest states in the nation. For decades,
however, the State has grown more slowly than the nation as a
whole, gradually eroding its relative economic affluence.
Statewide, urban centers have experienced significant changes
involving migration of the more affluent to the suburbs and an
influx of generally less affluent residents. Regionally, the
older Northeast cities have suffered because of the relative
success that the South and the West have had in attracting people
and business. The City has also had to face greater competition
as other major cities have developed financial and business
capabilities which make them less dependent on the specialized
services traditionally available almost exclusively in the City.

The State has for many years had a very high State and local tax
burden relative to other states. The State and its localities
have used these taxes to develop and maintain their
transportation networks, public schools and colleges, public
health systems, other social services and recreational
facilities. Despite these benefits, the burden of State and local
taxation, in combination with the many other causes of regional
economic dislocation, has contributed to the decisions of some
businesses and individuals to relocate outside, or not locate
within, the State.

Notwithstanding the numerous initiatives that the State and its
localities may take to encourage economic growth and achieve
balanced budgets, reductions in federal spending could materially
and adversely affect the financial condition and budget
projections of the State and its localities.

New York City

The City, with a population of approximately 8 million, is an
international center of business and culture. Its non-
manufacturing economy is broadly based, with the banking and
securities, life insurance, communications, publishing, fashion
design, retailing and construction industries accounting for a
significant portion of the City's total employment earnings.
Additionally, the City is the nation's leading tourist
destination. Manufacturing activity in the City is conducted
primarily in apparel and printing.

For each of the 1981 through 2000 fiscal years, the City had an
operating surplus, before discretionary transfers, and achieved
balanced C-13 operating results as reported in accordance with
then applicable generally accepted accounting principles
("GAAP"), after discretionary transfers. The City has been
required to close substantial gaps between forecast revenues and
forecast expenditures in order to maintain balanced operating
results. There can be no assurance that the City will continue to
maintain balanced operating results as required by State law
without tax or other revenue increases or reductions in City
services or entitlement programs, which could adversely affect
the City's economic base.

As required by law, the City prepares a four-year annual
financial plan, which is reviewed and revised on a quarterly
basis and which includes the City's capital, revenue and expense
projections and outlines proposed gap- closing programs for years
with projected budget gaps. The City's current financial plan
projects a surplus in the 2001 and 2002 fiscal years, before
discretionary transfers, and budget gaps for each of the 2003,
2004 and 2005 fiscal years. This pattern of current year surplus
operating results and projected subsequent year budget gaps has
been consistent through the entire period since 1982, during
which the City has achieved surplus operating results, before
discretionary transfers, for each fiscal year.

The City depends on aid from the State both to enable the City to
balance its budget and to meet its cash requirements. There can
be no assurance that there will not be reductions in State aid to
the City from amounts currently projected; that State budgets
will be adopted by the April 1 statutory deadline, or interim
appropriations will be enacted; or that any such reductions or
delays will not have adverse effects on the City's cash flow or
expenditures. In addition, the federal budget negotiation process
could result in a reduction in or a delay in the receipt of
federal grants which could have additional adverse effects on the
City's cash flow or revenues.

The Mayor is responsible for preparing the City's financial plan,
including the City's current financial plan for the 2001 through
2005 fiscal years (the "2001-2005 Financial Plan" or "Financial
Plan"). The City's projections set forth in the Financial Plan
are based on various assumptions and contingencies which are
uncertain and which may not materialize. Such assumptions and
contingencies include the condition of the regional and local
economies, the provision of State and federal aid and the impact
on City revenues and expenditures of any future federal or State
policies affecting the City.

Implementation of the Financial Plan is dependent upon the City's
ability to market its securities successfully. The City's program
for financing capital projects for fiscal years 2001 through 2005
contemplates the issuance of $11.4 billion of general obligation
bonds and approximately $5.54 billion of bonds (excluding bond
anticipation notes) to be issued by the New York City
Transitional Finance Authority (the "Finance Authority"). In
addition, the Financial Plan anticipates access to approximately
$2.4 billion (including the $604 million of bond proceeds
received to date) in financing capacity of TSASC, Inc. ("TSASC"),
which issues debt secured by revenues derived from the settlement
of litigation with tobacco companies selling cigarettes in the
United States. The Finance Authority and TSASC were created to
assist the City in financing its capital program while keeping
City indebtedness within the forecast level of the constitutional
restrictions on the amount of debt the City is authorized to
incur. In addition, the City issues revenue and tax anticipation
notes to finance its seasonal working capital requirements. The
success of projected public sales of City, New York City
Municipal Water Finance Authority ("Water Authority"), Finance
Authority, TSASC and other bonds and notes will be subject to
prevailing market conditions. The City's planned capital and
operating expenditures are dependent upon the sale of its general
obligation debt, as well as debt of the Water Authority, Finance
Authority and TSASC. Future developments concerning the C-14 City
and public discussion of such developments, as well as prevailing
market conditions, may affect the market for outstanding City
general obligation bonds and notes.

The City Comptroller and other agencies and public officials,
from time to time, issue reports and make public statements
which, among other things, state that projected revenues and
expenditures may be different from those forecast in the City's
financial plans. For the 2000 fiscal year, the City had an
operating surplus of $3.187 billion, before discretionary and
other transfers, and achieved balanced operating results, after
discretionary and other transfers, in accordance with GAAP. The
2000 fiscal year is the twentieth consecutive year that the City
has achieved an operating surplus, before discretionary and other
transfers, and balanced operating results, after discretionary
and other transfers.

On January 25, 2001, the City released the Financial Plan for the
2001 through 2005 fiscal years, which relates to the City and
certain entities which receive funds from the City. The Financial
Plan is a modification to the financial plan submitted to the
Control Board on June 15, 2000 (the "June Financial Plan"), as
modified in November 2000. The Financial Plan projects revenues
and expenditures for the 2001 and 2002 fiscal years balanced in
accordance with GAAP, and projects gaps of $2.4 billion, $2.5
billion and $2.3 billion for fiscal years 2003 through 2005,
respectively.

Changes since the June Financial Plan include: (i) an increase in
projected revenues of $950 million, $589 million, $604 million
and $696 million in fiscal years 2001 through 2004, respectively,
reflecting primarily increases in projected personal income,
business and sales tax revenues; (ii) an increase in projected
revenues of $323 million and $139 million in fiscal years 2001
and 2002, respectively, due to reductions in proposed tax cuts;
(iii) increased pension costs resulting primarily from a cost of
living adjustment in pension payments totaling $132 million, $265
million, $380 million and $480 million in fiscal years 2001
through 2004, respectively; (iv) an increase in labor costs
totaling $130 million, $220 million, $180 million and $200
million in fiscal years 2001 through 2004, respectively, to
reflect the elimination of previously planned savings, partially
offset by recently negotiated fringe benefit cost savings; and
(v) other net spending increases of $134 million, $340 million,
$401 million and $379 million in fiscal years 2001 through 2004,
respectively, including increased spending for Medicaid, police,
energy, debt service and other agency spending.

In addition, the Financial Plan sets forth gap-closing actions to
eliminate a previously projected gap for the 2002 fiscal year and
to reduce projected gaps for fiscal years 2003 through 2005. The
gap-closing actions for the 2001 through 2005 fiscal years
include: (i) additional agency savings and revenue actions
totaling $346 million, $692 million, $330 million, $312 million
and $312 million for fiscal years 2001 through 2005,
respectively; (ii) State reimbursement for landfill closure costs
in fiscal year 2002 totaling $75 million; (iii) additional
federal and State actions of $350 million in each of fiscal years
2002 through 2005; and (iv) the proposed sale of OTB in fiscal
year 2002 for $250 million. The Financial Plan includes a
proposed discretionary transfer in the 2001 fiscal year of $2.3
billion to pay debt service due in fiscal year 2002 and a
proposed discretionary transfer in fiscal year 2002 of $345
million to pay debt service due in fiscal year 2003.

The Financial Plan assumes: (i) collection of projected rent
payments for the City's airports, totaling $350 million, $205
million, $140 million and $70 million in the 2002 through 2005
fiscal years, respectively, which depends on the successful
completion of negotiations with The Port Authority of New York
and New Jersey (the "Port Authority") or the enforcement of the
City's rights under the C-15 existing leases through pending
legal actions; (ii) State and federal approval of the State and
federal gap-closing actions proposed by the City in the Financial
Plan; (iii) the annual receipt of $114 million of State payments
to a stock transfer tax incentive fund reflected in the Financial
Plan as a revenue to the City which was not included in the
Governor's Executive Budget; (iv) the successful completion of
the sale of OTB, which will require State legislative approval;
and (v) the sale of approximately $150 million of assets. The

Financial Plan contains a labor reserve for merit pay wage
increases for City employees for two years after their collective
bargaining agreements expire, at a cost of $355 million, $750
million, $800 million and $800 million in fiscal years 2001
through 2004, respectively. The Financial Plan does not make any
provision for wage increases other than the labor reserve for
merit pay increases discussed above. The Financial Plan also
reflects a proposed tax reduction program which totals $405
million, $721 million, $1.0 billion and $1.2 billion in fiscal
years 2002 through 2005, respectively. This tax reduction program
includes elimination of the commercial rent tax over four years;
the extension of current tax reductions for owners of cooperative
and condominium apartments; an earned income tax credit; a credit
against the personal income tax for resident owners of Subchapter
S corporations; repeal of the $2 hotel tax; elimination of the
sales tax on clothing and footwear; and a 10% reduction in
business taxes, each of which requires approval by the State
legislature and/or the City Council. It can be expected that the
Financial Plan will engender public debate, which will continue
through the time the budget is scheduled to be adopted in June
2001, and that there will be proposals to increase spending.
Accordingly, the Financial Plan may be changed by the time the
budget for fiscal year 2002 is adopted. In addition, the economic
and financial condition of the City may be affected by various
financial, social, economic and other factors which could have a
material effect on the City.

The Financial Plan is based on numerous assumptions, including
the condition of the City's and the region's economies and modest
employment growth and the concomitant receipt of economically
sensitive tax revenues in the amounts projected. The Financial
Plan is subject to various other uncertainties and contingencies
relating to, among other factors, the extent, if any, to which
wage increases for City employees exceed the annual wage costs
assumed for the 2001 through 2005 fiscal years; continuation of
projected interest earnings assumptions for pension fund assets
and current assumptions with respect to wages for City employees
affecting the City's required pension fund contributions; the
willingness and ability of the State to provide the aid
contemplated by the Financial Plan and to take various other
actions to assist the City; the ability of City agencies to
maintain balanced budgets; the willingness of the federal
government to provide the amount of federal aid contemplated in
the Financial Plan; the impact on City revenues and expenditures
of federal and State welfare reform and any future legislation
affecting Medicare or other entitlement programs; adoption of the
City's budgets by the City Council in substantially the forms
submitted by the Mayor; the ability of the City to implement cost
reduction initiatives, and the success with which the City
controls expenditures; the impact of conditions in the real
estate market on real estate tax revenues; the City's ability to
market its securities successfully in the public credit markets;
and unanticipated expenditures that may be incurred as a result
of the need to maintain the City's infrastructure. Although the
City has maintained balanced budgets in each of its last twenty
fiscal years and is projected to achieve balanced operating
results for the 2001 fiscal year, there can be no assurance that
the gap-closing actions proposed in the Financial Plan can be
successfully implemented or that the City will maintain a
balanced budget in future years without additional State aid,
revenue increases or expenditure reductions. Additional tax
increases and C-16 reductions in essential City services could
adversely affect the City's economic base. On September 13, 2000,
Standard & Poor's revised its rating of City bonds upward to A.
Moody's rating of City bonds was revised in August 2000 to A2
from A3. On March 8, 1999, Fitch revised its rating of City bonds
upward to A from A- and on September 15, 2000, Fitch revised its
rating to A+. Moody's, Standard & Poor's and Fitch currently rate
the City's outstanding general obligation bonds A2, A and A+,
respectively.

New York State and its Authorities

The State Financial Plan projects balance on a cash-basis for the
2000-2001 fiscal year, with a closing balance in the General Fund
of $1.4 billion. The Governor's Executive Budget projects balance
on a cash basis for the 2001-2002 fiscal year, with a closing
balance in the General Fund of $2.3 billion, including a
projected reserve of $1.3 billion to mitigate the impact in
future years of a potential national economic slowdown. The
Legislature and the State Comptroller will review the Governor's
Executive Budget and are expected to comment on it. There can be
no assurance that the Legislature will enact the Executive Budget
into law, or that the State's adopted budget projections will not
differ materially and adversely from the projections set forth in
the Executive Budget. Depending on the amount of State aid
provided to localities, the City might be required to make
changes in its Financial Plan. The State Financial Plan contains
projections of a potential imbalance in the 2002-2003 fiscal year
of $2.5 billion and in the 2003-2004 fiscal year of $2.9 billion,
assuming implementation of the 2001-2002 Executive Budget
recommendations. The current gap projections do not count on the
use of any of the proposed $1.3 billion reserve fund in either
2002-2003 or 2003-2004, and include no new collective bargaining
costs after the current labor contracts expire in 2003. In
addition, the third quarterly update to the State's Annual
Information Statement (the "Update") describes risks relating to
a slowing economy and litigation against the State. According to
the Update, the State revised the cash-basis 2000-01 State
Financial Plan on January 16, 2001, with the release of the 2001-
02 Executive Budget. The State Division of the Budget ("DOB") now
expects the State to close the 2000-01 fiscal year with an
available cash surplus of $1.36 billion in the General Fund. The
projected surplus as reported by DOB results from $1.71 billion
in higher projected receipts, reduced in part by $346 million in
higher estimated disbursements compared to the Mid-Year update.
DOB revised its projected receipts and disbursements based on a
review of actual operating results through December 2000, as well
as an analysis of underlying economic and programmatic trends it
believes may affect the Financial Plan for the balance of the
fiscal year. DOB projects a closing balance in the General Fund
of $1.14 billion in 2000- 01. The balance is comprised of $627
million in the Tax Stabilization Reserve after an $80 million
deposit in 2000-01; $338 million in the Community Projects Fund,
which pays for Legislative initiatives; $150 million in the
Contingency Reserve Fund; and $29 million in the Universal Pre-
Kindergarten Fund. In addition to the General Fund closing
balance of $1.14 billion, the State will have a projected $1.85
billion in the tax refund reserve account at the end of 2000-01.
The refund reserve account is used to adjust personal income tax
collections across fiscal years to pay for tax refunds, as well
as to accomplish other Financial Plan objectives. The projected
balance of $1.85 billion is comprised of $1.28 billion from the
2000-01 surplus, $521 million from LGAC that may be used to pay
tax refunds during 2000-01 but must be on deposit at the close of
the fiscal year, and $49 million in other funds designated to pay
other tax refunds. The closing balance also excludes $1.2 billion
in the School Tax Relief (STAR) Special Revenue Fund (for future
C-17 STAR payments) and $250 million in the Debt Reduction
Reserve Fund (for 2001-02 Debt Reduction). Many complex
political, social and economic forces influence the State's
economy and finances, which may in turn affect the State
Financial Plan. For example, a downturn in the financial markets
or the wider economy is possible, a risk that is heightened by
recent events. The securities industry is more important to the
New York economy than the national economy as a whole,
potentially amplifying the impact of an economic downturn. A
large change in stock market performance during the forecast
horizon could result in wage and unemployment levels that are
significantly different from those embodied in the Financial Plan
forecast. Merging and downsizing by firms, as a consequence of
deregulation, continued foreign competition or a sustained
economic downturn, may have more significant adverse effects on
employment than expected. The 2000-01 Financial Plan is also
necessarily based upon forecasts of national and State economic
activity. The DOB believes that its projections of receipts and
disbursements relating to the 2000-01 Financial Plan, and the
assumptions on which they are based, are reasonable, however,
actual results could differ materially and adversely from these
projections. Standard & Poor's rates the State's general
obligation bonds AA, and Moody's rates the State's general
obligation bonds A2. On December 19, 2000, Standard & Poor's
revised its rating on the State's general obligation bonds from
A+ to AA.

Litigation

A number of court actions have been brought involving State
finances. The court actions in which the State is a defendant
generally involve State programs and miscellaneous tort, real
property, and contract claims. While the ultimate outcome and
fiscal impact, if any, on the State of those proceedings and
claims are not currently predictable, adverse determinations in
certain of them might have a material adverse effect upon the
State's ability to carry out the State Financial Plan. The City
has estimated that its potential future liability on account of
outstanding claims against it as of June 30, 2000, amounted to
approximately $3.5 billion.


APPENDIX F

Special Considerations Relating to Pennsylvania Municipal
Obligations

See Special Note prior to Appendix B

The following highlights only some of the more significant
financial trends and problems affecting Pennsylvania, and is
based on information drawn from official statements and
prospectuses relating to securities offerings of the Commonwealth
of Pennsylvania, its agencies and instrumentalities, as available
on the date of this Statement of Additional Information. The fund
has not independently verified any of the information contained
in such official statements and other publicly available
documents, but is not aware of any fact which would render such
information inaccurate.

Overview

Because the funds concentrate their investments in Pennsylvania,
there are risks associated with the funds that would not exist if
the funds' investments were more widely diversified. These risks
include the possible enactment of new legislation in Pennsylvania
that could affect obligations of the state or its political
subdivisions, municipalities or agencies, economic factors that
could affect such obligations, and varying levels of supply and
demand for obligations of the Commonwealth and its political
subdivisions, municipalities, and agencies.

Constitutional and Statutory Revenue Limitations

The Constitution of Pennsylvania requires that all taxes shall be
uniform, upon the same class of subjects, within the territorial
limits of the authority levying the tax, and shall be levied and
collected under the general laws of the Commonwealth of
Pennsylvania. The Constitution of Pennsylvania provides that the
General Assembly may exempt from taxation certain persons and
property. For instance, the General Assembly may establish
exemption or special tax treatment for classes based on age,
disability, infirmity, or poverty.

Local taxes (other than Philadelphia) are generally authorized
under the Local Tax Enabling Act. This statute generally
authorizes, and imposes limits on, the ability of political
subdivisions to impose taxes. Pennsylvania's political
subdivisions consist of counties, municipalities, and school
districts. The Local Tax Enabling Act does not apply to counties
whose taxing authority is limited for the most part to real
estate and personal property taxes. Most Philadelphia taxes
(other than real estate and personal property taxes) are imposed
pursuant to the general authority of two enabling acts (referred
to as the Sterling Act and the Little Sterling Act), applicable
to the City and School District, respectively. Each of these
statutes grants broad taxing powers. The Philadelphia business
privilege tax is imposed under the authority of the First Class
City Business Tax Reform Act.

The Pennsylvania Intergovernmental Cooperation Authority Act for
cities of the first class authorizes Philadelphia to enact a
combination of a sales tax, a realty transfer tax or a wage and
net profits tax for the benefit of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"). The PICA tax on
wages and net profits reduces the amount of wage and net profits
taxes imposed under the Sterling Act (prior to the imposition of
the PICA tax), so that the combined rate of tax remains the same.
Other local taxes are specially enacted or authorized for certain
classes of localities, including Philadelphia and Pittsburgh. The
Pennsylvania General Assembly has enacted legislation which gives
local governments the option of reducing property taxes and
simplifying their local tax system by collecting an earned income
or other type of tax. The General Assembly may, in the future,
consider other local tax reform measures.

Pennsylvania Taxes

The Commonwealth General Fund budgets for fiscal 1996 through
2000 included various tax reduction measures. Tax reductions
included in the enacted fiscal 2000 budget totaled an estimated
$390.2 million. Enacted permanent tax cuts for fiscal 2001 total
an estimated $444.6 million and include a phase-out of the
capital stock and franchise tax.

In the fall of 1998, Pennsylvania enacted the Keystone
Opportunity Zone Act, which provides for the creation of
"keystone opportunity zones" designed to spur economic
development by foregoing state and local taxes under certain
circumstances. The legislation provides for relief from, among
other things, corporate net income taxes, capital stock/foreign
franchise taxes, personal income taxes and sales and use taxes
(on purchases used and consumed by businesses in the zone).
Legislation enacted in 2000 expands the program.

General Economic Conditions In Pennsylvania

Historically, the key industries in Pennsylvania were in the
areas of manufacturing and mining, with steel and coal industries
of national importance. These industries have made Pennsylvania
vulnerable not only to cyclical economic fluctuations, but also
to pronounced long-term changes in the nation's economic
structure. In recent years, the state has experienced growth in
the services sector, including trade, medical and health
services, education, and financial institutions. Manufacturing
has fallen behind both the services sector and the trade sector
as the largest single source of employment within the
Commonwealth.

The five-year period ending with fiscal 2000 was a time of
economic growth with modest rates of growth at the beginning of
the period and larger increases during the most recent years.
Throughout the period, inflation has remained relatively low,
helping to restrain expenditure growth. Favorable economic
conditions have helped total revenues and other sources rise at
an annual average of 5.5% (5.9% on a "GAAP" basis) during the
five-year period. The annual growth rate for taxes, the largest
revenue source, increased at an average annual rate of 5.0% (5.0%
on a "GAAP" basis). License and fee revenues rose at a 9.5%
annual rate, largely because of various motor vehicle fee
increases effective for fiscal 1998. Other revenues, mostly
charges for sales and services and investment income, increased
at an average annual rate of 20.3%. Expenditure and other uses
during the fiscal 1996 through fiscal 2000 period rose at a 4.5%
(4.6% on a "GAAP" basis) average annual rate, led by a 17.3%
average annual increase for economic development and assistance
costs, protection of person and property costs.

The 1999 fiscal year ended with an unappropriated surplus (prior
to the transfer to the Tax Stabilization Reserve Fund) of $702.9
million, an increase of $214.2 million from June 30, 1998.
Transfers to the Tax Stabilization Reserve Fund totaled $225.4
million for fiscal year 1999 consisting of $105.4 million
representing the statutory 15% of the fiscal year-end
unappropriated surplus and an additional $150 million from the
unappropriated surplus authorized by the General Assembly. The
$447.5 million balance of the unappropriated surplus was carried
over to fiscal year 2000. The higher unappropriated surplus was
generated by tax revenues that were $712.0 million (3.9%) above
estimate and $61.0 million of non-tax revenue (18.4%) above
estimate. Higher than anticipated appropriation lapses also
contributed to the higher surplus. A portion of the higher
revenues and appropriation lapses were used for supplemental
fiscal 1999 appropriations totaling $357.8 million. Including the
supplemental appropriations and net of appropriation lapses,
expenditures for fiscal 1999 totaled $18,144.9 million, a 5.9%
increase over expenditures during fiscal 1998.

For GAAP purposes, assets increased $1,024 million in fiscal 1999
and liabilities rose $119.5 million. The increase in assets over
liabilities for fiscal 1999 caused the fund balance as of June
30, 1999 to increase by $904.5 million over the fund balance as
of June 30, 1998. The total fund balance as of June 30, 1999 was
$2,863.4 million. At the end of the 2000 fiscal year the
unappropriated surplus balance (prior to the transfer to the Tax
Stabilization Reserve Fund) totaled $718.3 million, a $280.6
million increase from fiscal 1999 year-end. The gain was due to
higher than anticipated revenues and appropriation lapses that
were partially offset by additional supplemental appropriations
and reserves for tax refunds. $107.7 million was transferred from
the surplus to the Tax Stabilization Reserve Fund representing
the required 15% annual transfer. The remaining $610.5 million
fiscal year-end unappropriated surplus balance was carried over
to the 2001 fiscal year. Commonwealth revenues for the 2000
fiscal year totaled $20,256.7 million, an increase of 5.4%
($1,030 million) over the prior fiscal year. Expenditures for the
fiscal year (excluding pooled financing expenditures and net of
appropriation lapses) were $19,171 million representing a 5.7%
($1,026 million), increase over the prior fiscal year.

For GAAP purposes, assets increased $1,731.4 million in fiscal
2000, chiefly due to higher temporary investments. Liabilities
also rose during the period by $331.1 million. Together, these
changes produced a $1,400.3 million increase to the fund balance
at June 30, 2000. The fund balance at the end of fiscal 2000 was
$4,263.6 million, the largest fund balance achieved since audited
GAAP reporting was instituted in 1984 for the Commonwealth. The
$1,105 million June 30, 2000 balance in the Tax Stabilization
Reserve Fund is included in the GAAP basis fund balance for the
General Fund. Revenues from taxes and other sources during fiscal
2000 increased 5.9 percent over the fiscal 1999 level.
Expenditures and other uses rose during the fiscal year by 6.8
percent.

The General Fund budget for the 2001 fiscal year was approved by
the General Assembly in May 2000. The enacted budget authorized
$19,910.8 million of spending from estimated Commonwealth
revenues of $19,314.8 million (net of estimated tax refunds and
enacted tax changes and property tax rebate). A draw down of most
of the $610.5 million fiscal 2000 year-end unappropriated balance
is intended to fund the $596.0 million difference between
estimated revenues and authorized spending. The amount of
spending authorized in the enacted budget is 2.5 percent over the
total amount of spending authorized for fiscal 2000 of $19,426.3
million. Tax changes enacted for the fiscal 2001 budget and
effective during the fiscal year are estimated to reduce
Commonwealth revenues to the General Fund by $444.6 million. In
addition, a non-recurring state-paid tax rebate to qualifying
property owners equal to a portion of their fiscal year 1998-99
school district property taxes was included in the budget.

Tax rebate payments to be made during the 2000-01 fiscal year are
budgeted in the amount of $330 million. The estimate in the
enacted budget for the Commonwealth revenues to be received
during fiscal year 2001 is based upon an economic forecast for
real gross domestic product to grow at a 3.7% rate from the
second quarter of 2000 to the second quarter of 2001. This rate
of growth for real gross domestic product represents an expected
slow-down in national economic growth compared to the rate of
growth in fiscal 2000. The most modest economic growth rate is
anticipated to be a response to a slower rate of consumer
spending to a level consistent with personal income gains and by
smaller increases in business investment as interest rates rise
and profit gains are weak. The expected slower economic growth is
not expected to cause an appreciable increase in the unemployment
rate during the fiscal year. Inflation is expected to remain
moderate during the period. Trends for the Pennsylvania economy
are expected to maintain their current close association with
national economic trends. Personal income growth is anticipated
to remain slightly below that of the U.S., while the Pennsylvania
unemployment rate is anticipated to be very close to the national
rate.

Commonwealth revenues (prior to adjustment for the estimated cost
of enacted tax reductions) are projected to increase by 3.2% over
fiscal 2000 receipts. Appropriations from Commonwealth funds in
the enacted budget for fiscal 2001 are 2.5 percent over fiscal
2000 appropriations. On February 6, 2001, Pennsylvania Governor
Ridge delivered his budget address for fiscal 2002. The proposed
fiscal 2002 budget for the General Fund is $20.8 billion, an
increase of $793 million or 4%. The proposed budget includes
$216.9 million in tax reductions (including the continued phase-
out of the capital stock and franchise tax). Estimated General
Fund revenue in the proposed budget is $20.5 billion.

The following table shows the average annual unemployment rate
for Pennsylvania and the nation for the periods indicated. This
information is drawn from official statements and prospectuses
relating to securities offerings of the state of Pennsylvania,
its agencies, and instrumentalities. No independent verification
of the information contained in such official statements and
other publicly available documents has been made.

Period
Pennsylvania
United States
1990
5.4%
5.6%
1991
7.0%
6.8%
1992
7.6%
7.5%
1993
7.1%
6.9%
1994
6.2%
6.1%
1995
5.9%
5.6%
1996
5.3%
5.4%
1997
5.2%
4.9%
1998
4.6%
4.5%
1999
4.4%
4.2%

As of November 2000, the seasonally adjusted unemployment rate
for the Commonwealth was 4.2%, compared to 4.0% for the United
States.

From time to time, certain Pennsylvania municipalities and
political subdivisions have experienced economic downturns. For
example, the financial condition of the City of Philadelphia in
the early 1990s had impaired its ability to borrow and resulted
in its obligations being downgraded by the major rating services
to below investment grade. However, these obligations have since
been upgraded.

The Pennsylvania Intergovernmental Cooperation Authority ("PICA")
was created by Commonwealth legislation in 1991 to assist
Philadelphia in remedying its fiscal emergencies. PICA is
designed to provide assistance through the issuance of funding
debt and to make factual findings and recommendations to
Philadelphia concerning its budgetary and fiscal affairs. At this
time Philadelphia is operating under a five-year fiscal plan
approved by PICA on May 16, 2000.

No further bonds are to be issued by PICA for the purpose of
financing a capital project or deficit as the authority for such
bond sales expired December 31, 1994. PICA's authority to issue
debt for the purpose of financing a cash flow deficit expired on
December 31, 1996. Its ability to refund existing outstanding
debt is unrestricted. PICA had $959.4 million in special revenue
bonds outstanding as of June 30, 2000. Neither the taxing power
nor the credit of the Commonwealth is pledged to pay debt service
on PICA's bonds.

There is various litigation pending against the Commonwealth, its
officers, and employees. In 1978, the Pennsylvania General
assembly approved a limited waiver of sovereign immunity. Damages
for any loss are limited to $250,000 for each person and $1
million for each accident. The Supreme Court held that this
limitation is constitutional. Approximately 3,500 suits against
the Commonwealth are pending, some of which, if decided adversely
to the Commonwealth, could have a material adverse impact on
governmental operations.

All of the foregoing factors could affect the outstanding
obligations of the Commonwealth and its municipalities and
political subdivisions, including obligations held by the funds.
Further, there can be no assurance that the same factors that
adversely affect the economy of the Commonwealth generally will
not also adversely affect the market value or marketability of
obligations issued by local units of government or local
authorities in the Commonwealth, or the ability of the obligators
to pay the principal of or interest on such obligations. As of
January 2001, Pennsylvania General Obligation Bonds were rated
Aa2 by Moody's, AA by Fitch and AA by S&P.


APPENDIX G

Special Considerations Relating to Massachusetts Municipal
Obligations

Summary

The Commonwealth of Massachusetts and certain of its cities and
towns and public bodies have experienced financial difficulties
in the past that have adversely affected their credit standing.
The recurrence of such financial difficulties could adversely
affect the market value of the instruments held in the funds. The
information summarized below describes some of the more
significant factors that could affect the funds or the ability of
the obligors to pay debt service. The sources of such information
are the official statements of issuers located in the
Commonwealth of Massachusetts, as well as other publicly
available documents, and statements of public information
contained in such statements and documents, but the fund is not
aware of facts which would render such information inaccurate.

Fiscal Matters

The Commonwealth's operating fund structure satisfies the
requirements of state finance law and is in accordance with
generally accepted accounting principles ("GAAP"), as defined by
the Governmental Accounting Standards Board. The General Fund and
those special revenue funds which are appropriated in the annual
state budget receive most of the non-bond and non-federal grant
revenues of the Commonwealth. These funds are referred to herein
as the "budgeted operating funds" of the Commonwealth. They do
not include the capital projects funds of the Commonwealth, into
which the proceeds of Commonwealth bonds are deposited. The three
principal budgeted operating funds are the General Fund, the
Highway Fund and the Local Aid Fund. Expenditures from these
three funds generally account for approximately 93% of total
expenditures of the budgeted operating funds.

The Commonwealth's budgeted operating funds for fiscal 1997,
1998, 1999 and 2000 showed an excess (deficiency) of revenues and
other sources over expenditures and other uses of $221 million,
$798 million, ($80) million and $173 million and positive fund
balances of $1.394 billion, $2.192 billion, $2.112 billion and
$2.285 billion, respectively. Over the same period, budgeted
expenditures and other uses were approximately $17.949 billion
for fiscal 1997, $19.002 billion for fiscal 1998, $20.245 billion
for fiscal 1999 and $22.414 billion for fiscal 2000.

The Commonwealth's fiscal 2001 budget is based on numerous
spending and revenue estimates, the achievement of which cannot
be assured. The Executive Office of Administration and Finance
estimates fiscal 2000 budgeted expenditures and other uses will
total approximately $22.1 billion, and budgeted revenues and
other sources will total approximately $22.1 billion.

Limitations on Tax Revenues

Chapter 62F, which was enacted by the voters in November, 1986,
establishes a state tax revenue growth limit for each fiscal year
equal to the average positive rate of growth in total wages and
salaries in the Commonwealth, as reported by the federal
government, during the three calendar years immediately preceding
the end of such fiscal year. Chapter 62F also requires that
allowable state tax revenues be reduced by the aggregate amount
received by local governmental units from any newly authorized or
increased local option taxes or excises. Any excess in state tax
revenue collections for a given fiscal year over the prescribed
limit, as determined by the State Auditor, is to be applied as a
credit against the then current personal income tax liability of
all taxpayers in the Commonwealth in proportion to the personal
income tax liability of all taxpayers in the commonwealth for the
immediately preceding tax year. The law does not exclude
principal and interest payments on Commonwealth debt obligations
from the scope of its tax limit. However, the preamble contained
in Chapter 62F provides that "although not specifically required
by anything contained in this chapter, it is assumed that from
allowable state tax revenues as defined herein the Commonwealth
will give priority attention to the funding of state financial
assistance to local governmental units, obligations under the
state governmental pension systems, and payment of principal and
interest on debt and other obligations of the Commonwealth."

Tax revenues in fiscal 1997 through fiscal 2000 were lower than
the limit set by Chapter 62F, and the Executive Office for
Administration and Finance currently estimates that state tax
revenues in fiscal 2000 will not reach the limit imposed by
either of these statutes. For fiscal 2000, as calculated by the
State Auditor pursuant to Chapter 62F, net state tax revenues
were approximately $15.702 billion and allowable state tax
revenues were approximately $16.694 billion.

Reductions in Income Tax Rates

On November 7, 2000, Massachusetts voters approved two initiative
petitions that will reduce personal income taxes. One of the
approved petitions sets the Part B income tax rate at 5.6% on
January 1, 2001, 5.3% on January 1, 2002 and 5% on January 1,
2003 and thereafter. The Department of Revenue estimates that
this change will reduce fiscal 2001 revenues by $135 million,
fiscal 2002 revenues by $457 million and fiscal 2003 revenues by
$883 million. The annualized value of the reduction, once fully
effective in fiscal 2004, is estimated to be approximately $1.154
billion. The other approved petition provides for a personal
income tax deduction for charitable contributions, effective
January 1, 2001. The petition essentially re-enacts a provision
for such a deduction included in the fiscal 2001 budget. The
Department of Revenue estimates the cost of the deduction to be
$70 million to $90 million in fiscal 2001 and $157 million to
$192 million annually thereafter. An initiative petition that
would have established tax credits for amounts paid as tolls and
motor vehicle excise taxes was disapproved by the voters.

Local Aid - Proposition 2 1/2

In November 1980, voters in the Commonwealth approved a statewide
tax limitation initiative petition, commonly known as Proposition
2 1/2, to constrain levels of property taxation and to limit the
charges and fees imposed on cities and towns by certain
governmental entities, including county governments. Proposition
2 1/2 is not a provision of the state constitution and
accordingly is subject to amendment or repeal by the Legislature.
Proposition 2 1/2, as amended to date, limits the property taxes
that may be levied by any city or town in any fiscal year to the
lesser of (i) 2.5% of the full and fair cash valuation of the
real estate and personal property therein, and (ii) 2.5% over the
previous year's levy limit plus any growth in the tax base from
certain new construction and parcel subdivisions. Proposition 2
1/2 also limits any increase in the charges and fees assessed by
certain governmental entities, including county governments, on
cities and towns to the sum of (i) 2.5% of the total charges and
fees imposed in the preceding fiscal year, and (ii) any increase
in charges for services customarily provided locally or services
obtained by the city or town at its option. The law contains
certain override provisions and, in addition, permits debt
service on specific bonds and notices and expenditures for
identified capital projects to be excluded from the limits by a
majority vote at a general or special election. At the time
Proposition 2 1/2 was enacted, many cities and towns had property
tax levels in excess of the limit and were therefore required to
roll back property taxes with a concurrent loss of revenues.
Between fiscal 1981 and fiscal 1999, the aggregate property tax
levy grew from $3.346 billion to $6.753 billion, representing an
increase of approximately 101.8%. By contrast, according to the
federal Bureau of Labor Statistics, the consumer price index for
all urban consumers in Boston grew during the same period by
approximately 107.9%.

Many communities have responded to the limitation imposed by
Proposition 2 1/2 through statutorily permitted overrides and
exclusions. There are three types of referenda questions
(override of levy limit, exclusion of debt service, or exclusion
of capital expenditures) which permit communities to exceed the
limits of Proposition 2 1/2. Override activity steadily increased
throughout the 1980's before peaking in fiscal 1991 and
decreasing thereafter. In fiscal 1999, 24 communities had
successful override referenda which added $8.7 million to their
levy limits. In fiscal 1999, the impact of successful override
referenda going back as far as fiscal 1993, was to raise the levy
limits of 125 communities by $67 million. Although Proposition 2
1/2 will continue to constrain local property tax revenues,
significant capacity exists for overrides in nearly all cities
and towns.

In addition to overrides, Proposition 2 1/2 allows a community,
through voter approval, to assess taxes in excess of its levy
limit for the payment of certain capital projects (capital outlay
expenditure exclusions) and for the payment of specified debt
service costs (debt exclusions). Capital exclusions were passed
by 20 communities in fiscal 1999 and totaled $4.6 million. In
fiscal 1999, the impact of successful debt exclusion votes going
back as far as fiscal 1993, was to raise the levy limits of 250
communities by $945.8 million.

Commonwealth Financial Support for Local Governments

During the 1980s, the Commonwealth increased payments to its
cities, towns and regional school districts ("Local Aid") to
mitigate the impact of Proposition 2 1/2 on local programs and
services. In fiscal 2000, approximately 21.7% of the
Commonwealth's budget is estimated to be allocated to direct
Local Aid. Local Aid payments to cities, towns and regional
school districts take the form of both direct and indirect
assistance. Direct Local Aid consists of general revenue sharing
funds and specific program funds sent directly to local
governments and regional school districts as reported on the so-
called "cherry sheet" prepared by the Department of Revenue,
excluding certain pension funds and nonappropriated funds.

As a result of comprehensive education reform legislation enacted
in June 1993, a large portion of general revenue sharing funds
are earmarked for public education and are distributed through a
formula designed to provide more aid to the Commonwealth's poorer
communities. The legislation established a fiscal 1993 state
spending base of approximately $1.288 billion for local education
purposes and required annual increases in state expenditures for
such purposes above that base, subject to appropriation,
estimated to be approximately $2.803 billion in fiscal 2000. All
of the budgets in fiscal years 1994 through 2000 have fully
funded the requirements imposed by this legislation.

Another component of general revenue sharing, the Lottery and
Additional Assistance programs, provides unrestricted funds for
municipal use. There are also several specific programs funded
through direct Local Aid, such as highway construction, school
building construction, and police education incentives.

In addition to direct Local Aid, the Commonwealth has provided
substantial indirect aid to local governments, including, for
example, payments for Massachusetts Bay Transportation Authority
assistance and debt service, pensions for teachers, housing
subsidies and the costs of courts and district attorneys that
formerly had been paid by the counties. Beginning July 1, 2000,
Commonwealth support for the Massachusetts Bay Transportation
Authority will take the form of dedicated tax revenues.

Initiative Law

A statute adopted by voter initiative petition at the November
1990 statewide election regulates the distribution of Local Aid
to cities and towns. This statute requires that, subject to
annual appropriation, no less than 40% of collections from
personal income taxes, sales and use taxes, corporate excise
taxes, and lottery fund proceeds be distributed to cities and
towns. Under the law, the Local Aid distribution to each city or
town would equal no less than 100% of the total Local Aid
received for fiscal 1989. Distributions in excess of fiscal 1989
levels would be based on new formulas that would replace the
current Local Aid distribution formulas. By its terms, the new
formula would have called for a substantial increase in direct
Local Aid in fiscal 1992 and subsequent years. Nonetheless, Local
Aid payments remain subject to annual appropriation by the
legislature, and appropriations for Local Aid since the enactment
of the initiative law have not met the levels set forth in the
initiative law.
Commonwealth Expenditures

Fiscal 1997 budgeted expenditures were $17.949 billion, an
increase of 6.3% over fiscal 1996 levels. Fiscal 1998 budgeted
expenditures were $19.002 billion, an increase of 5.9% over
fiscal 1997. Fiscal 1999 budgeted expenditures were $20.245
billion, an increase of 6.5% over fiscal 1998. Fiscal 2000
budgeted expenditures were $22.414, an increase of 10.7% over
fiscal year 1999. It is estimated that fiscal 2001 budgeted
expenditures will be $22.110 billion.

Commonwealth expenditures since 1997 largely reflect significant
growth in several programs and services provided by the
Commonwealth, principally direct Local Aid, Medicaid, higher
education, and other program expenditures.

The Commonwealth is responsible for the payment of pension
benefits for state employees and for school teachers throughout
the state and for certain cost-of-living increases payable to
local government retirees. The Commonwealth has adopted a funding
schedule under which it is required to fund future pension
liabilities currently and to amortize the accumulated unfunded
liabilities by June 30, 2018. Since the adoption of this
schedule, the amount of the unfunded liability has been reduced
significantly. In fiscal 1999, the pension expenditure was $990
million. In fiscal 1996, a number of reform measures affecting
pensions were enacted into law. Among the most notable were a
measure consolidating the assets of the state employees' and
teachers' retirement systems into a single investment fund and
another that will reform the disability pension system.

Commonwealth Bond and Note Liabilities

The Commonwealth is authorized to issue three types of debt:
general obligation debt, special obligation debt, and federal
grant anticipation notes. General obligation debt is secured by a
pledge of the full faith and credit of the Commonwealth. Special
obligation debt may be secured either with a pledge of receipts
credited to the Highway Fund or with a pledge of receipts
credited to the Boston Convention and Exhibition Center Fund.
Federal grant anticipation notes are secured by a pledge of
federal highway construction reimbursements. In addition, certain
independent authorities and agencies within the Commonwealth are
statutorily authorized to issue bonds and notes for which the
Commonwealth is either directly, in whole or in part, or
indirectly liable. As of January 1, 2001, the Commonwealth's
total bond and note liabilities was $18.288 billion, consisting
of approximately $12.057 billion of general obligation debt, $564
million of special obligation debt, $1.499 billion of federal
grant anticipation notes, $3.958 billion of Commonwealth
supported debt and $210 million of Commonwealth guaranteed debt.
Based on the United States census resident population estimate
for Massachusetts for 1999, the per capita debt as of June 30,
1999 was $2,470.

Commonwealth Capital Spending

Since fiscal 1992, the Executive Office for Administration and
Finance has maintained a five-year capital spending plan,
including an annual administrative limit on the amount of bond-
financed state capital spending. Actual bond-financed capital
expenditures during fiscal years 1996, 1997, 1998 and 1999 were
approximately $908 million, $955 million, $1.0 billion and $1.0
billion, respectively. Total capital spending for the current
five year plan is estimated to be $3.197 billion for fiscal 2001,
$2.747 billion for fiscal 2002, $2.284 billion for fiscal 2003,
$1.776 billion for fiscal 2004 and $1.668 billion for fiscal
2005. Capital spending for fiscal years 2000 through 2004 to be
financed from debt issued by the Commonwealth is forecast at $5.6
billion, which includes both general obligation bonds and special
obligation debt, and which is significantly below legislatively
authorized capital spending levels. The five-year capital plan
contemplates that the projected level of capital spending will
leverage approximately $2.301 billion of federal highway funding.
Due to the size and complexity of the Commonwealth's capital
program, and other factors, the timing and the amount of actual
expenditures and debt issuances over the period will likely vary
somewhat from the annual spending amounts contained in the five-
year capital plan. Central Artery/Ted Williams Tunnel Project.

The largest single component of the Commonwealth's capital
program currently is the Central Artery/Ted Williams Tunnel
project, a major construction project that is part of the
completion of the federal interstate highway system. The project
involves the depression of a portion of Interstate 93 in downtown
Boston (the Central Artery), which is now an elevated highway,
and the construction of a new tunnel under Boston harbor (the Ted
Williams Tunnel) to link the Boston terminus of the Massachusetts
turnpike (Interstate 90) to Logan International Airport and
points north. The magnitude of the Central Artery/Ted Williams
Tunnel project has resulted in the realignment of certain
transportation assets in the Commonwealth and the development of
additional financing mechanisms to support its completion,
including payments from the Massachusetts Turnpike Authority and
the Massachusetts Port Authority and state borrowings in
anticipation of future federal highway reimbursements. The
completed project will be owned and operated by the Massachusetts
Turnpike Authority as part of the Metropolitan Highway System
which was established in conjunction with the project.

On March 15, 2000 the Massachusetts Turnpike Authority filed with
the Federal Highway Administration a finance plan update for the
Central Artery/Ted Williams Tunnel project describing the
components of the additional project cash needs of $1.398
billion, expected total cash outlays of $13.064 billion and the
Governor's proposed funding plan. The plan included as an
appendix an interim cost validation report by the consultants
that had been retained by the Turnpike Authority to undertake an
independent assessment of its findings. The consultants analyzed
only the estimates related to design and construction costs,
which amounted to $975 million of the $1.398 billion total. The
consultants reported that the $975 million assessment was
realistic but also indicated that they had identified risk areas
of potential additional costs totaling approximately $300
million.

On April 11, 2000 the U. S. Secretary of Transportation released
a report dated March 31, 2000 that had been prepared by a task
force of federal officials pursuant to the action plan that the
Secretary had announced on February 17, 2000. The task force
report stated that senior management of the Central Artery/Ted
Williams Tunnel project had deliberately withheld information
about cost overruns from the Federal Highway Administration and
recommended a change in project leadership, as well as an
evaluation of whether the Turnpike Authority should continue to
be responsible for the management of the project. The report
validated the methodology used by the Turnpike Authority to
identify the potential $1.4 billion cost overrun as realistic and
consistent with normal industry practice, but stated that there
were risks that could lead to cost exposures in addition to those
identified in the March 15, 2000 finance plan update in the range
of $300 million to $480 million. The task force estimated that a
realistic total cost estimate for the project was $13.4 billion
to $13.6 billion. The report stated that the Commonwealth
appeared to have adequate resources to finance the additional
costs but had not yet identified precisely how it would do so,
noting that several of the elements in the Governor's proposed
funding plan did not appear to have state legislative support.

Upon receiving the report, the Governor requested and received
the resignation of the chairman of the Turnpike Authority and
appointed a new chairman. On May 8, 2000 the Turnpike Authority
received a letter from the Federal Highway Administration stating
that it could not accept the March 15, 2000 finance plan update
as filed. The letter indicated that the most critical issue to
resolve was the identification of new funding resources and said
that if sufficient new funding sources were not made available by
the approval of appropriate legislation by May 19, 2000, the
federal government would withhold additional "obligation
authority" for the project. The letter further stated that prior
to May 19, 2000 any use of obligation authority would be
available only for work that could not be deferred without cost
increases. (Obligation authority has since been reinstated.) In
addition, the letter stated that a completely revised finance
plan update had to be submitted by June 16, 2000. Finally, the
letter provided that total obligation authority for the project
would be limited to the amount described in the March 15, 2000
finance plan update ($7.049 billion plus grant anticipation notes
of $1.5 billion), and "advance construction" authorizations for
the project would be limited to the amount specified in
previously accepted finance plan updates (the existing balance,
which was approximately $2.864 billion at the end of fiscal 1999,
plus $222 million). Under federal highway funding statutes, the
"advance construction" approach allows states, with Federal
Highway Administration approval, to begin a project before
amassing all of the obligation authority needed to cover the
federal share of that project, and the Commonwealth has used this
approach extensively for the Central Artery/Ted Williams Tunnel
project. The limits on obligation authority and advance
construction authorizations contained in the letter are
consistent with the amount of federal funding contemplated in
connection with a total project cost of $11.667 billion, meaning
that all additional costs will have to be met with non-federal
funds. According to the May 8, 2000 letter, the revised finance
plan update must provide for funding resources consistent with
total project costs in excess of $13.1 billion, as indicated by
the higher estimates described in the March 31, 2000 federal task
force report and the independent cost validation report appended
to the March 15, 2000 finance plan, and must provide for full
funding of a balanced statewide road and bridge program.

On May 17, 2000 the Governor approved legislation to provide
financing for the additional costs of the Central Artery/Ted
Williams Tunnel project and for the statewide road and bridge
program. The legislation authorized approximately $1.520 billion
of Commonwealth bonds, to be issued as general obligations or as
special obligations payable from the gasoline tax. The
legislation reinstated certain fees collected by the Registry of
Motor Vehicles to be credited to the Highway Fund, which are
expected to generate approximately $100 million per year to
offset debt service costs associated with the foregoing bonds and
to provide direct funding for the project. (Legislation
clarifying that such fees may be pledged to secure special
obligation bonds was approved by the Governor on June 30, 2000.)
The legislation also provided for the sale of a highway exit ramp
by the Commonwealth to the Massachusetts Port Authority in
exchange for $65 million and for the additional payment to the
Commonwealth by the Massachusetts Turnpike Authority of $200
million (which was received on September 1, 2000). Such moneys
have been or will be deposited in a new Central Artery and
Statewide Road and Bridge Infrastructure Fund and used to pay
additional costs of the Central Artery/Ted Williams Tunnel
project and to fund the statewide road and bridge program to the
extent of at least $100 million per year for each of fiscal years
2001 through 2005. In addition the legislation authorized up to
$650 million to be deposited in the Debt Defeasance Trust Fund
(up to $500 million from surplus fiscal 2000 revenues and up to
$150 million from accumulated surpluses from fiscal years 1997,
1998 and 1999 which were originally credited to the Capital
Projects Fund). Such moneys have been used to establish sinking
funds to retire certain Commonwealth bonds payable during fiscal
2001 or on July 1, 2001. During fiscal 2001 and fiscal 2002, an
amount equal to the amount that would otherwise have been
appropriated for debt service on the defeased Commonwealth bonds
will be transferred by the Comptroller from the applicable
budgetary operating funds to the Central Artery and Statewide
Road and Bridge Infrastructure Fund.

On June 16, 2000 the Massachusetts Turnpike Authority filed with
the Federal Highway Administration a finance plan update
identifying total project costs, expressed as cash needs through
completion in fiscal 2005, of $13.513 billion. This cost figure
was based upon the previously identified project cash requirement
of $11.667 billion, plus $1.846 billion in additional costs
(including $53 million for a garage and surface restoration work
to be funded out of Turnpike Authority resources that had
previously been excluded from the project budget). The estimate
of additional costs was $448 million higher than the revised
estimates released on February 1, 2000 but was consistent with
the range of estimated additional costs contained in the March
31, 2000 federal task force report. The June 16, 2000 finance
plan update included a $130 million contingency for Central
Artery/Ted William Tunnel project needs. By letter dated June 15,
2000, the Federal Highway Administration informed the
Massachusetts Turnpike Authority that it had been designated a
"high-risk grantee" with respect to activities related to the
Central Artery/Ted Williams Tunnel project. The letter indicated
that such designation will remain in effect until the completion
of the project. According to the letter, the designation means
that more detailed financial reports and additional project
monitoring will be required on the project. On June 22, 2000, the
Federal Highway Administration, the Executive Office of
Transportation and Construction, the Massachusetts Turnpike
Authority and the Massachusetts Highway Department signed a
project partnership agreement setting out the federal reporting
and monitoring requirements for the project and stipulating that
federal funding for the project will not exceed $8.549 billion,
as contemplated by the May 8, 2000 Federal Highway Administration
letter. In March, 2000, the Executive Office for Administration
and Finance engaged the services of an independent consulting and
accounting firm to review costs associated with the Central
Artery/Ted Williams Tunnel project. On August 7, 2000 the
Executive Office received the firm's report. The report
recommended that project officials should budget for $2.140
billion in additional costs, an increase of $294 million over the
amount provided for in the June 16, 2000 finance plan update. The
consultant's report also detailed other scenarios and suggested a
range of further potential budget exposures of up to an
additional $280 million. On August 8, 2000 the Turnpike Authority
received a letter from the Federal Highway Administration stating
that it would defer action on the June 16, 2000 finance plan
update in view of the consultant's report released on August 7,
2000 and would instead await the filing of the next scheduled
finance plan on October 1, 2000.

On September 29, 2000 the Turnpike Authority filed with the
Federal Highway Administration a new finance plan dated October
1, 2000. The October 1, 2000 finance plan is based on information
as of June 30, 2000 and the results of a comprehensive cost and
schedule evaluation. The finance plan estimates total project
costs to be $14.075 billion, an increase of $562 million over the
estimates contained in the June 16, 2000 finance plan update.
Most of the increase is contained in a $203 million increase in
estimated construction costs and the addition of a project
contingency budget of $258 million. The project cost estimates
contained in the October 1, 2000 finance plan are $2.408 billion
higher than the $11.667 billion project budget in place prior to
the announcement of additional costs on February 1, 2000.
Excluding the $53 million for a garage and surface restoration
work that had been added to the project budget in the June 16,
2000 update (and which is being financed from Turnpike Authority
resources), the difference between the October 1, 2000 estimate
and the pre-February 1, 2000 estimate is $2.355 billion. The
finance plan contemplates that $2.168 billion of this amount will
be defrayed by amounts in the Central Artery and Statewide Road
and Bridge Infrastructure Fund established by the legislation
approved on May 17, 2000. The balance of the increase, $185
million, is budgeted to come from the proceeds of the sale of
certain real estate assets by the Turnpike Authority
(approximately $152 million was received on July 14, 2000) and
investment earnings thereon ($40 million anticipated, $33 million
budgeted). The $2.168 billion figure to be provided by the
Central Artery and Statewide Road and Bridge Infrastructure Fund
consists of $1.35 billion of Commonwealth bond proceeds, $231
million of license and registration fees not used for debt
service, $664 million from avoided debt service related to debt
defeasance transactions, $200 million from the Turnpike
Authority, $65 million from the Port Authority and $159 million
in interest earnings through fiscal year 2005 on the balances in
the Central Artery and Statewide Road and Bridge Infrastructure
Fund itself, less $500 million that is budgeted to be spent on
highway and bridge projects not related to the Central Artery/Ted
Williams Tunnel project. The October 1, 2000 finance plan also
identifies additional funding sources that could be utilized as a
contingency if there were to be growth in the project cost
estimate. One potential source of funds is additional sales of
Turnpike Authority real estate assets, including assets made
available after completion of the project (estimated range of
values - $142 million to $309 million). Other sources include up
to $150 million of proceeds of additional revenue bonds that
could be supported by the currently projected Metropolitan
Highway System tolls and $50 million expected to be withdrawn
from the owner-controlled insurance program trust fund for the
project. Internal project cost estimates prepared by the
Massachusetts Division of the Federal Highway Administration as
of September 27, 2000 totaled $13.8 billion. The Division
indicated at that time that the estimates used by the Turnpike
Authority in preparing the October 1, 2000 finance plan
constituted a reasonable representation of expected costs to be
used as a basis for budgetary planning.

On October 23, 2000 the President of the United States approved
legislation providing for appropriations for the U. S. Department
of Transportation and related agencies for the federal fiscal
year ending September 30, 2001. The legislation provides that the
U. S. Secretary of Transportation is to withhold obligation of
federal funds and all project approvals for the Central
Artery/Ted Williams Tunnel project in federal fiscal year 2001
and thereafter unless the Secretary has approved the annual
update of the project finance plan (approval of the October 1,
2000 finance plan need not occur until December 1, 2000) and has
determined that the Commonwealth is in full compliance with the
June 22, 2000 project partnership agreement described above and
is maintaining a balanced statewide transportation program,
including spending at least $400 million each year for
construction activities and transportation projects other than
the Central Artery/Ted Williams Tunnel project. In addition, the
legislation limits total federal funding to $8.549 billion, as
previously contemplated by the Federal Highway Administration's
May 8, 2000 letter described above. This limit is consistent with
the October 1, 2000 finance plan. Finally, the legislation ties
future federal funding for the project to an annual finding by
the Inspector General of the U. S. Department of Transportation
that the annual update of the project finance plan is consistent
with Federal Highway Administration financial plan guidance.
Should any federal assistance be withheld from the project
pursuant to such legislation, such funding would nonetheless be
available to the Commonwealth for projects other than the Central
Artery/Ted Williams Tunnel project. Moreover, the legislation
provides that federal funds will not be withheld if the Secretary
of Administration and Finance certifies that such funds are
required to pay all or any portion of the principal of federal
grant anticipation notes issued for the project. On November 29,
2000 the Office of Inspector General of the U. S. Department of
Transportation found the October 1, 2000 finance plan to be
consistent with Federal Highway Administration guidance and to
contain reasonable estimates of the projected cost, funding and
schedule for the project, and on the same day the plan was
accepted by the Federal Highway Administration.

Other Factors

Many factors affect the financial condition of the Commonwealth,
including many social environmental, and economic conditions,
which are beyond the control of the Commonwealth. As with most
urban states, the continuation of many of the Commonwealth's
programs, particularly its human service programs, is in
significant part dependent upon continuing federal reimbursements
which have been declining.


APPENDIX H

Special Considerations Relating to Municipal Obligations of the
U.S. Virgin Islands and of Guam

U.S. Virgin Islands

The United States Virgin Islands ("USVI") is heavily reliant on
the tourism industry, with roughly 43% of non-agricultural
employment in tourist-related trade and services. The tourism
industry is economically sensitive and would likely be affected
adversely by a recession in either the United States or Europe.

An important component of the USVI revenue base is the federal
excise tax on rum exports. Tax revenues rebated by the federal
government to the USVI provide the primary security of many
outstanding USVI bonds. Since more than 90% of the rum distilled
in the USVI is distilled at one plant, any interruption in its
operations (as occurred after Hurricane Hugo in 1989) would
adversely affect these revenues. The last major hurricane to
impact the USVI was Hurricane Marilyn on September 15, 1995.
Consequently, there can be no assurance that rum exports to the
United States and the rebate of tax revenues to the USVI will
continue at their present levels. The preferential tariff
treatment the USVI rum industry currently enjoys could be reduced
under NAFTA. Increased competition from Mexican rum producers
could reduce USVI rum imported to the U.S., decreasing excise tax
revenues generated. The USVI is periodically hit by hurricanes.
Several hurricanes have caused extensive damage, which has had a
negative impact on revenue collections. There is currently no
rated, unenhanced Virgin Islands debt outstanding (although there
is unrated debt outstanding).

Guam

The U.S. territory of Guam derives a substantial portion of its
economic base from Japanese tourism. With a reduced U.S. military
presence on the island, Guam has relied more heavily on tourism
in the past few years. During its 1997 fiscal year, the
government was able to make noticeable progress on its
traditional budgetary problems operating with a balanced budget
for that fiscal year. However, during 1998, the Japanese
recession combined with the impact of typhoon Paka resulted in a
budget deficit of $21 million. With hotels alone accounting for
8.5% of Guam's employment and Japanese tourists comprising 86% of
total visitor arrivals, the Japanese recession and depreciation
of the yen versus the dollar in 1999 have had a negative impact
on the island's economy. Based on these factors, S&P downgraded
Guam's rating to BBB- from BBB with a negative outlook on May 26,
1999. There does seem to be some recent improvement in the
Japanese economy. However, Guam has not realized any economic
benefit as visitor arrivals are 0.8% below 1998 levels for the
second quarter ended June 30, 1999, driving General Fund revenues
down 3.1%.



APPENDIX I

Special Considerations Relating to Puerto Rico Municipal
Obligations

See Special Note Prior to Appendix B

The fiscal year of the Government of Puerto Rico begins each July
1. The Governor is constitutionally required to submit to the
Legislature an annual balanced budget of capital improvements and
operating expenses of the central government for the ensuing
fiscal year. The annual budget is prepared by the Office of
Management and Budget ("OMB"), working with the Planning Board,
the Department of the Treasury, and the other government offices
and agencies. Section 7 of Article VI of the Constitution
provides that "The appropriations made for any fiscal year shall
not exceed the total revenues, including available surplus,
estimated for said fiscal year unless the imposition of taxes
sufficient to cover said appropriations is provided by law."

The annual budget, which is developed utilizing elements of
program budgeting and zero-base budgeting, includes an estimate
of revenues and other resources for the ensuing fiscal year
under: (i) laws existing at the time the budget is submitted; and
(ii) legislative measures proposed by the Governor and submitted
with the proposed budget, as well as the Governor's
recommendations as to appropriations that in his judgment are
necessary, convenient, and in conformity with the four-year
investment plan prepared by the Planning Board.

Act No. 147 of June 18, 1980 created a Budgetary Fund, as amended
(the "Budgetary Fund Act"), to cover the appropriations approved
in any fiscal year in which the revenues available for such
fiscal year are insufficient, honor the public debt, and provide
for unforeseen circumstances in the provision of public services.
The Budgetary Fund Act was amended in 1994 to require that an
annual legislative appropriation equal to one third of one
percent (.33%) of the total budgeted appropriations for each
fiscal year be deposited in the Budgetary Fund. In 1997, the
Budgetary Fund Act was further amended to increase the annual
legislative appropriation required to be deposited in the
Budgetary Fund to one percent (1%) of the total revenues of the
preceding fiscal year, beginning in fiscal year 2000. In
addition, other income (not classified as revenues) that is not
assigned by law to a specific purpose is also required to be
deposited in the Budgetary Fund. The maximum balance of the
Budgetary Fund may not exceed six percent (6%) of the total
appropriations included in the budget for the preceding fiscal
year. The balance of the Budgetary Fund as of June 30, 2000 is
expected to be approximately $62 million.

*In Puerto Rico, the central government has many functions which
in the fifty states are the responsibility of local government,
such as providing public education and police and fire
protection. The central government also makes large annual grants
to the University of Puerto Rico and to the municipalities. The
grants to the University of Puerto Rico are included in current
expenses for education and the debt service on general obligation
bonds is included in current expenses for debt service. Debt
service on Sugar Corporation notes paid by the Government of
Puerto Rico is included in current expenses for economic
development, and debt service on Urban Renewal and Housing
Corporation bonds and notes and on Housing Bank and Finance
Agency mortgage subsidy bonds paid by the Government of Puerto
Rico is included in current expenses for housing.

Approximately 25.2% of the General Fund is committed, including
debt service on direct debt of the Commonwealth and on the debt
of the Sugar Corporation, municipal subsidies, grants to the
University of Puerto Rico, contributions to Aqueduct and Sewer
Authority, and rental payments to Public Building Authority,
among others.

In the fiscal 2000 budget, revenues and other resources of all
budgetary funds total $10,637,811,000 excluding balances from the
previous fiscal year and general obligation bonds authorized. The
estimated net increase in General Fund revenues in fiscal 2000
are accounted for by increases in corporation income taxes (up
$207,841,000), personal income taxes (up $196,113,000), income
tax withheld from non-residents (up $180,996,000), federal excise
tax on off-shore shipments (up $28,849,000), lottery revenues (up
$23,438,000), general excise tax of 5% (up $8,646,000),
registration and document certification fees (up $5,644,000),
excise tax on alcoholic beverages (up $5,535,000), and decreases
in the special excise tax on certain petroleum products (down
$20,056,000) and customs revenue (down $6,335,000).

Current expenses and capital improvements of all budgetary funds
total $11,225,813,000, an increase of $474,591,000 from fiscal
1999. The major changes in General Fund expenditures by program
in fiscal 2000 are: increases in general government (up
$155,519,000), health (up $119,028,000), debt service (up
$89,804,000), contributions to municipalities (up $66,794,000),
welfare (up $45,326,000), education (up $28,614,000),
transportation and communications (up $15,673,000), special
pension contributions (up $3,792,000), and housing (up
$1,355,000), and decreases in other debt service (down
$58,691,000), public safety and protection (down $44,133,000),
and economic development (down $20,800,000)

The general obligation bond authorization for the fiscal 2000
budget was $475,000,000.

In the fiscal 2001 budget proposal, revenues and other resources
of all budgetary funds total $11,251,387,000 excluding balances
from the previous fiscal year and general obligation bonds
authorized. The estimated net increase in General Fund revenues
in fiscal 2001 are accounted for by increases in personal income
taxes (up $153,000,000), corporation income taxes (up
$94,000,000), income tax withheld from non-residents (up
$72,000,000), federal excise taxes on off-shore shipments (up
$67,000,000), general excise tax of 5% (up $46,000,000), excise
tax on motor vehicles and accessories (up $30,000,000), special
excise tax on certain petroleum products (up $20,000,000),
registration and document certification fees (up $10,000,000),
excise tax on alcoholic beverages (up $9,000,000), and decreases
in tollgate taxes (down $21,000,000).

Current expenses and capital improvements of all budgetary funds
total $11,713,398,000, an increase of $457,585,000 from fiscal
2000. The major changes in General Fund expenditures by program
in fiscal 2001 are: increases in general government (up
$232,798,000), education (up $94,320,000), health (up
$62,875,000), public safety and protection (up $45,460,000), debt
service (up $36,874,000), other debt service (up $17,460,000),
welfare tax (up $7,061,000), special pension contributions (up
$6,908,000), and contributions to municipalities (up $6,730,000),
and decreases in economic development (down $41,330,000) and
transportation and communications (down $5,394,000).

The general obligation bond authorization for the fiscal 2001
budget is $400,000,000.

Public employees of the Government of Puerto Rico and its
instrumentalities are covered by five retirement systems: The
Employees Retirement System of the Government of Puerto Rico and
its Instrumentalities (the "Employees Retirement System"), the
Annuity and Pension System for the Teachers of Puerto Rico (the
"Teachers Retirement System"), the Commonwealth of Puerto Rico
Judiciary Retirement System (the "Judiciary Retirement System"),
the Retirement System of the University of Puerto Rico (the
"University Retirement System"), and the Employees Retirement
System of Puerto Rico Electric Power Authority (the "Electric
Power Authority Retirement System"). The University Retirement
System and the Electric Power Authority Retirement System apply
to employees of the University of Puerto Rico and Electric Power
Authority, respectively. The Government of Puerto Rico is not
required to contribute directly to those two systems, although a
large portion of University revenues are derived from legislative
appropriations. The Teachers Retirement System primarily covers
public school teachers, the Judiciary Retirement System covers
judges, and the Employees Retirement System covers all other
employees of the Government of Puerto Rico, its municipalities,
and instrumentalities. As of June 30, 1999, the total number of
active members of the three systems was as follows: Employees
Retirement System, 158,000; Teachers Retirement System, 48,122;
and Judiciary Retirement System, 355. The three systems are
financed by contributions made by employers (the Government of
Puerto Rico, public corporations, or municipalities), employees,
and investment income. The government is responsible for
approximately 66% of total employer contributions to the
Employees Retirement System and 100% and 99% of total employer
contributions to the Judiciary and Teachers Retirement Systems,
respectively. Retirement and related benefits provided by the
systems and required contributions to the systems by employees
are determined by statute. Required contributions to the systems
by employers are determined by statute with respect to the
Teachers Retirement System and, with respect to the Employees and
Judiciary Retirement Systems, by the Administrators of the
Systems. As of July 30, 1999, the total pension benefit
obligation for the Employees Retirement System and the Judiciary
Retirement System was $8,308,000,000 and $118,200,000,
respectively, and the unfounded pension benefit obligation for
the same period was $6,450,000,000 and $44,300,000, respectively
representing a funding ratio of 22% and 62%, respectively. As of
June 30, 1999, the accrued pension liability of the Teachers
Retirement System was $2,904,195,938, the value of assets
amounted to $2,313,730,000 representing a funding ratio of 79.67%
and the resulting unfounded accrued liability was $590,465,938, a
decrease of $194,037,629 from the prior valuation made as of June
30, 1998.

On February 1, 1990, the Legislature of Puerto Rico enacted Act
No. 1 amending the organic act of the Employees Retirement System
to reduce the future pension liabilities of the Employees
Retirement System. Among other provisions, the legislation
increased the level of contribution to the System and limited the
retirement benefits for new employees by increasing the length of
time for the vesting of certain benefits and reducing the level
of benefits in the case of early retirement. The legislation also
reduced the level of occupational disability benefits and death
benefits received by new employees. Also, Act No. 305 of
September 24, 1999, further amends the organic act of the
Employees Retirement System to change it, prospectively, from a
defined benefit system to a defined contribution system. The
individual account of each current employee is credited initially
with an amount equal to his aggregate contributions to the
Employees Retirement System, plus interest. Current employees who
do not elect to transfer to the new defined contribution system
will continue accruing benefits under the current defined
benefits system. The individual account of each participant of
the new defined contribution system is credited monthly with the
participant's contribution and is credited semiannually with a
rate of return based on either of two notional investment
returns. The Government does not credit such accounts with any
contribution. Instead, Government contributions will now be used
completely to reduce the unfunded accumulated pension liability
of the Employees Retirement System. Based on actuarial studies
conducted by the actuary of the Employees Retirement System, it
is expected that the implementation of the defined contribution
system will allow the Government to reduce the current actuarial
deficit of the Employees Retirement System. Also, the law
approving the sale of a controlling interest in PRTC to a
consortium led by GTE International Telecommunications
Incorporated provides that any future proceeds received by the
Government from the sale of its remaining 43% stock ownership in
PRTC will be transferred to the Employees Retirement System to
reduce its accumulated unfunded pension benefit obligation. It is
recognized that it will be necessary to further strengthen the
finances of the Teachers Retirement System in order to assure
that combined contributions and investment income continue to
exceed benefit payments, avoiding the possible future draw down
of assets.

General Economic Conditions in Puerto Rico

The economy of Puerto Rico is fully integrated with that of the
United States. In fiscal 1999, trade with the United States
accounted for approximately 87% of Puerto Rico's exports and
approximately 60% of its imports. In this regard, in fiscal 1999
Puerto Rico experienced a $9.6 billion positive adjusted
merchandise trade balance. Gross product in fiscal 1995 was $28.5
billion ($26 billion in 1992 prices) and gross product in fiscal
1999 was $38.2 billion ($29.8 billion in 1992 prices). This
represents an increase in gross product of 34.4% from fiscal 1995
to 1999 (14.8% in 1992 prices).

Since fiscal 1985, personal income, both aggregate and per
capita, has increased consistently each fiscal year. In fiscal
1999, aggregate personal income was $37.2 billion ($33 billion in
1992 prices) and personal per capita income was $9,674 ($8,571 in
1992 prices). Personal income includes transfer payments to
individuals in Puerto Rico under various social programs. Total
federal payments to Puerto Rico, which include transfers to local
government entities and expenditures of federal agencies in
Puerto Rico, in addition to federal transfer payments to
individuals, are lower on a per capita basis in Puerto Rico than
in any state. Transfer payments to individuals in fiscal 1999
were $8.1 billion, of which $5.3 billion, or 65.4%, represented
entitlements to individuals who had previously performed services
or made contributions under programs such as Social Security,
Veteran's Benefits, Medicare, and U.S. Civil Service retirement
pensions.

Puerto Rico's economic expansion, which has lasted over ten
years, continued throughout the five-year period from fiscal 1995
through fiscal 1999. Almost every sector of the economy
participated, and record levels of employment were achieved.
Factors behind the continued expansion included Government-
sponsored economic development programs, periodic declines in the
exchange value of the U.S. dollar, increases in the level of
federal transfers, low oil prices, and the relatively low cost of
borrowing funds during the period. The performance of the economy
during fiscal 2000 and 2001 will be affected principally by the
performance of the United States economy and by the increase in
oil prices and, to a lesser extent, by the level of interest
rates. Since Puerto Rico is heavily dependent on oil imports for
its energy needs, if oil prices remain at their current high
level for a long period of time, that could have an adverse
effect on the level of economic activity in Puerto Rico.

Average employment increased from 1,051,000 in fiscal 1995, to
1,158,000 in fiscal 2000. Average unemployment decreased from
13.8% in fiscal 1995, to 12.5% in fiscal 1999. According to the
Labor Department's Household Employment Survey, during fiscal
2000, total employment increased 1.1% over the same period in
fiscal 1999. Total monthly employment averaged 1,158,500 during
fiscal 2000, compared to 1,145,900 in fiscal 1999. Unemployment,
although at relatively low historical levels, remains above the
U.S. average. Puerto Rico has a diversified economy. During the
period between fiscal 1995 and 1999, the manufacturing and
services sectors generated the largest portion of gross domestic
product. Three sectors of the economy provide the most
employment: manufacturing, services, and government.

Manufacturing is the largest sector in the economy accounting in
terms of gross domestic product for $26.3 billion or 43.8% of
gross domestic product in fiscal 1999. The manufacturing sector
employed 139,663 workers as of March 2000. Manufacturing in
Puerto Rico is now more diversified than during earlier phases of
industrial development. In the last two decades, industrial
development has tended to be more capital intensive and dependent
on skilled labor. This gradual shift is best exemplified by heavy
investment in pharmaceuticals, scientific instruments, computers,
microprocessors, medical products, and electrical products
industries in Puerto Rico over the last decade.  The services
sector, which includes wholesale and retail trade and finance,
insurance, real estate, hotels and related services, and other
services, ranks second in its contribution to gross domestic
product and it is the sector that employs the greatest number of
people.  The government's (including the public corporations)
share of employment, measured according to the payroll survey,
has diminished from 34.9% in calendar 1980, to 32.9% in calendar
1992, to 27.6% in calendar 1999. On February 25, 1998, the
Governor signed into law Act No. 45, which permits the
unionization of government employees (excluding municipal
employees). Under this law, government employees are given
collective bargaining rights subject to a number of limitations.
Among those limitations are: employees are prohibited from
striking; annual salary increases are limited; employees cannot
be required to become union members and pay union dues; and
collective bargaining negotiations cannot occur in an election
year. Negotiations of non-economic conditions with government
employees pursuant to this bill commenced in fiscal 2000 and
negotiations of economic conditions will commence in fiscal 2001.
Tourism also contributes significantly to the island economy,
accounting for 5.6% of the island's gross domestic product in
fiscal 1999.

New Economic Model

The present administration has developed and is implementing a
new economic development program, which is based on the premise
that the private sector should provide the primary impetus for
economic development and growth. This new program, which is
referred to as the New Economic Model, promotes changing the role
of the Government from one of being a provider of most basic
services to that of a facilitator for private sector initiatives
and encourages private sector investment by reducing Government-
imposed regulatory restraints.

The New Economic Model contemplates the development of
initiatives that will foster private investment in, and private
management of, sectors that are served more efficiently and
effectively by the private enterprise. One of these initiatives
has been the adoption of a new tax code intended to expand the
tax base, reduce top personal and corporate tax rates, and
simplify the tax system. Another initiative is the improvement
and expansion of Puerto Rico's infrastructure to facilitate
private sector development and growth, such as the construction
of the water pipeline, cogeneration facilities, and the
construction of a light rail system for the San Juan metropolitan
area.

The New Economic Model also seeks to identify and promote areas
in which Puerto Rico can compete more effectively in the global
markets. Tourism has been identified as one such area because of
its potential for job creation and contribution to the gross
product. In 1993, a new Tourism Incentives Act was enacted
providing special tax incentives for the development of new hotel
projects. In November 1993, the Tourism Development Fund was
created for the purpose of promoting capital investments in and
providing financing to entities that contribute to the
development of the tourism industry. As a result of these
initiatives, new hotels have been constructed or are under
construction, which have increased the number of hotel rooms on
the island from 8,415 in fiscal 1992 to 11,928 at the end of
fiscal 2000 and to a projected 12,650 by the end of fiscal 2000.

The New Economic Model also seeks to reduce the size of the
Government's direct contribution to gross domestic product. As
part of this goal, the Government has transferred certain
governmental operations and sold a number of its assets to
private parties. Among these are: (i) the Government sold the
assets of the Puerto Rico Maritime Shipping Authority; (ii) the
Aqueduct and Sewer Authority executed a construction and
operating agreement with a private consortium for the design,
construction, and operation of an approximately 75 million gallon
per day pipeline to deliver water to the San Juan metropolitan
area and other municipalities along the north coast from the Dos
Bocas reservoir in Utuado; (iii) the Electric Power Authority
executed power purchase contracts with private power producers
under which two cogeneration plants (with a total capacity of
approximately 961 megawatts), using fuels other than oil, will be
constructed, operated and owned by these producers; (iv) the
Corrections Administration entered into operating agreements with
two private companies for the operation of three new correctional
facilities; (v) the Government entered into a definitive
agreement to sell certain assets of a pineapple juice processing
business and sold certain mango growing operations; (vi) the
Government has also transferred to local sugar cane growers
certain sugar processing facilities; (vii) the Government sold
three hotel properties and is currently negotiating the sale of a
complex consisting of two hotels and a convention center; and
(viii) the Government sold a controlling interest in the Puerto
Rico Telephone Company ("PRTC"), a subsidiary of the Telephone
Authority, to a consortium led by GTE International
Telecommunications Incorporated.

One of the goals of the Rossello administration is to change
Puerto Rico's public health care system from one in which the
Government provides free health services to low income
individuals through public health facilities owned and
administered by the Government to one in which all medical
services are provided by the private sector and the Government
provides comprehensive health insurance coverage for qualifying
(generally low income) Puerto Rico residents. Under this new
system, the Government selects, through a bidding system, one
private health insurance company in each of several designated
regions of the island and pays such insurance company the
insurance premium for each eligible beneficiary within such
region. This new health insurance system is now covering all
municipalities on the island. The total cost of this program will
depend on the number of municipalities included in the program,
the number of participants receiving coverage, and the date
coverage commences. As of July 28, 2000, approximately 1.75
million persons were participating in the program at an estimated
annual cost to Puerto Rico for fiscal 2000 of approximately $1.07
billion, of which approximately $833 million will be covered by
appropriations from the General Fund. It is expected that the
number of participants will increase to approximately 2.16
million persons by the end of fiscal 2001. The required insurance
premiums will increase to approximately $1.38 billion and the
required appropriations from the General Fund will increase to
approximately $1.1 billion. In conjunction with this program, the
operation of certain public health facilities has been
transferred to private entities. The Government's current
privatization plan for health facilities provides for the
transfer of ownership of all health facilities to private
entities. The Government has sold forty-eight health facilities
to private companies and to municipal Governments and is
currently in the process of closing the sale of twenty additional
health facilities to such companies. In addition, the Government
recently published a final notice stating its intention to
privatize the remaining eleven health facilities.

Tax Incentives

Since 1948, Puerto Rico has promulgated various industrial
incentive laws designed to stimulate industrial investment. Under
these laws, companies engaged in manufacturing and certain other
designated activities are eligible to receive full or partial
exemption from income, property, and other taxes. The most recent
of these laws is Act No. 135 of December 2, 1997 (the "1998 Tax
Incentives Law"), a new industrial incentives law aimed at
attracting and retaining foreign investment in Puerto Rico.

The benefits provided by the 1998 Tax Incentives Law are
available to new companies as well as companies currently
conducting tax-exempt operations in Puerto Rico that choose to
renegotiate their existing tax exemption grant. Activities
eligible for tax exemption include manufacturing, certain
designated services performed for markets outside Puerto Rico,
the production of energy from local renewable sources for
consumption in Puerto Rico, and laboratories for scientific and
industrial research. For companies qualifying thereunder, the
1998 Tax Incentives Law imposes income tax rates ranging from 2%
to 7% for periods ranging from 10 to 25 years. In addition, it
grants 90% exemption from property taxes, 100% exemption from
municipal license taxes during the first eighteen months of
operation and between 80% and 60% thereafter, and 100% exemption
from municipal excise taxes. The 1998 Tax Incentives Law also
provides various special deductions designated to stimulate
employment and productivity, research and development, and
capital investment in Puerto Rico.

Under the 1998 Tax Incentives Law, companies are able to
repatriate or distribute their profits free of dividend taxes. In
addition, passive income derived from the investment of eligible
funds in Puerto Rico financial institutions, obligations of the
government of Puerto Rico, and other designated investments are
fully exempt from income and municipal license taxes. Individual
shareholders of an exempted business are allowed a credit against
their Puerto Rico income taxes equal to 30% of their
proportionate share in the exempted business' income tax
liability. Gain from the sale or exchange of shares of an
exempted business by its shareholders during the exemption period
will be subject to a 4% income tax rate.

For many years, U.S. companies operating in Puerto Rico enjoyed a
special tax credit that was available under Section 936 of the
Code. Originally, the credit provided an effective 100% federal
tax exemption for operating and qualifying investment income from
Puerto Rico sources. Amendments to Section 936 made in 1993 (the
"1993 Amendments") instituted two alternative methods for
calculating the tax credit and limited the amount of the credit
that a qualifying company could claim. These limitations are
based on a percentage of qualifying income (the "percentage of
income limitation") and on qualifying expenditures on wages and
other wage related benefits and other qualifying expenditures
(the "economic activity limitation," also known as the "wage
credit limitation"). As a result of amendments incorporated in
the Small Business Job Protection Act of 1996 enacted by the U.S.
Congress and signed into law by President Clinton on August 20,
1996 (the "1996 Amendments"), the tax credit, as described below,
is now being phased out over a ten-year period for existing
claimants and is no longer available for corporations that
establish operations in Puerto Rico after October 13, 1995
(including existing Section 936 Corporations (as defined below)
to the extent substantially new operations are established in
Puerto Rico). The 1996 Amendments also moved the credit based on
the economic activity limitation to Section 30A of the Code and
phased it out over 10 years. In addition, the 1996 Amendments
eliminated the credit previously available for income derived
from certain qualified investments in Puerto Rico. The Section
30A Credit and the remaining Section 936 credit are discussed
below.

Section 30A

The 1996 Amendments added a new Section 30A to the Code. Section
30A permits a "qualifying domestic corporation" ("QDC") that
meets certain gross income tests (which are similar to the 80%
and 75% gross income tests of Section 936 of the Code discussed
below) to claim a credit (the "Section 30A Credit") against the
federal income tax imposed on taxable income derived from sources
outside the United States from the active conduct of a trade or
business in Puerto Rico or from the sale of substantially all the
assets used in such business ("possession income").

A QDC is a U.S. corporation which (i) was actively conducting a
trade or business in Puerto Rico on October 13, 1995, (ii) had a
Section 936 election in effect for its taxable year that included
October 13, 1995, (iii) does not have in effect an election to
use the percentage limitation of Section 936(a)(4)(B) of the
Code, and (iv) does not add a "substantial new line of business."

The Section 30A Credit is limited to the sum of (i) 60% of
qualified possession wages as defined in the Code, which includes
wages up to 85% of the maximum earnings subject to the OASDI
portion of Social Security taxes plus an allowance for fringe
benefits of 15% of qualified possession wages, (ii) a specified
percentage of depreciation deductions ranging between 15% and
65%, based on the class life of tangible property, and (iii) a
portion of Puerto Rico income taxes paid by the QDC, up to a 9%
effective tax rate (but only if the QDC does not elect the
profit-split method for allocating income from intangible
property).

A QDC electing Section 30A of the Code may compute the amount of
its active business income eligible for the Section 30A Credit,
by using either the cost-sharing formula, the profit-split
formula, or the cost-plus formula, under the same rules and
guidelines prescribed for such formulas as provided under Section
936 (see discussion below). To be eligible for the first two
formulas, the QDC must have a significant presence in Puerto
Rico. In the case of taxable years beginning after December 31,
2001, the amount of possession income that would qualify for the
Section 30A Credit would be subject to a cap based on the QDC's
possession income for an average adjusted base period ending
before October 14, 1995 (the "income cap"). Section 30A applies
only to taxable years beginning after December 31, 1995 and
before January 1, 2006.

Section 936

Under Section 936 of the Code, as amended by the 1996 Amendments,
and as an alternative to the Section 30A Credit, U.S.
corporations that meet certain requirements and elect its
application ("Section 936 Corporations") are entitled to credit
against their U.S. corporate income tax, the portion of such tax
attributable to income derived from the active conduct of a trade
or business within Puerto Rico ("active business income") and
from the sale or exchange of substantially all assets used in the
active conduct of such trade or business. To qualify under
Section 936 in any given taxable year, a corporation must derive
for the three-year period immediately preceding the end of such
taxable year (i) 80% or more of its gross income from sources
within Puerto Rico and (ii) 75% or more of its gross income from
the active conduct of a trade or business in Puerto Rico.

Under Section 936, a Section 936 Corporation may elect to compute
its active business income, eligible for the Section 936 credit,
under one of three formulas: (A) a cost-sharing formula, whereby
it is allowed to claim all profits attributable to manufacturing
intangibles and other functions carried out in Puerto Rico
provided it makes a cost sharing payment in the amount required
under section 936; (B) a profit-split formula, whereby it is
allowed to claim 50% of the combined net income of its affiliated
group from the sale of products manufactured in Puerto Rico; or
(C) a cost-plus formula, whereby it is allowed to claim a
reasonable profit on the manufacturing costs incurred in Puerto
Rico. To be eligible for the first two formulas, the Section 936
Corporation must have a significant business presence in Puerto
Rico for purposes of the Section 936 rules.

As a result of the 1993 Amendments and the 1996 Amendments, the
Section 936 credit is only available to companies that were
operating in Puerto Rico on October 13, 1995, and had elected the
percentage of income limitation and is limited in amount to 40%
of the credit allowable prior to the 1993 Amendments, subject to
a five-year phase-in period from 1994 to 1998 during which period
the percentage of the allowable credit is reduced from 60% to
40%.

In the case of taxable years beginning on or after 1998, the
possession income subject to the Section 936 credit will be
subject to a cap based on the Section 936 Corporation's
possession income for an average adjusted base period ending on
October 14, 1995. The Section 936 credit is eliminated for
taxable years beginning in 2006.

Proposal to Extend the Phaseout of Section 30A

During 1997, the Government of Puerto Rico proposed to Congress
the enactment of a new permanent federal incentive program
similar to that provided under Section 30A. Such a program would
provide U.S. companies a tax credit based on qualifying wages
paid and other wage-related expenses, such as fringe benefits, as
well as depreciation expenses for certain tangible assets and
research and development expenses. Under the Governor's proposal,
the credit granted to qualifying companies would continue in
effect until Puerto Rico shows, among other things, substantial
economic improvements in terms of certain economic parameters.
The fiscal 1998, fiscal 1999, and fiscal 2000 budgets submitted
by President Clinton to Congress included a proposal to modify
Section 30A to (i) extend the availability of the Section 30A
Credit indefinitely; (ii) make it available to companies
establishing operations in Puerto Rico after October 13, 1995;
and (iii) eliminate the income cap. This proposal was not
included in the 1998, 1999, or 2000 budgets approved by Congress.
The fiscal 2001 budget submitted by President Clinton included a
proposal to extend the Section 30A Credit for three years and
make it available to companies establishing new operations, but
would make the credit subject to the existing income cap. Two
bills were recently introduced in Congress in one case to extend
the Section 30A Credit until 2009 and in the other extend it
until the Puerto Rico economy reaches a level closer to that of
the U.S. economy. Both bills would make the Section 30A Credit
applicable to newly established companies and new lines of
businesses and would remove the income cap. While the Government
of Puerto Rico plans to continue lobbying for these proposals, it
is not possible at this time to predict whether the Section 30A
Credit will be so modified.

Outlook

The Government of Puerto Rico believes that the phase out of
Section 936 and 30A will not have a significant adverse effect on
the economy of Puerto Rico. It believes that, notwithstanding the
loss of the federal income tax benefits provided by Sections 936
and 30A, the tax and other benefits offered by Puerto Rico to
U.S. and foreign investors will enable it to continue attracting
and retaining investments in manufacturing and service
operations.



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