Edgar Filing: EATON VANCE INSURED CALIFORNIA MUNICIPAL BOND FUND

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-2

/ / REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FILE NO. 333-92202

/ / PRE-EFFECTIVE AMENDMENT NO.
/X/ POST-EFFECTIVE AMENDMENT NO. 1

AND/OR

/ / REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
FILE NO. 811-21147

/X/ AMENDMENT NO. 4

EATON VANCE INSURED
CALIFORNIA
MUNICIPAL BOND FUND
EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER

THE EATON VANCE BUILDING, 255 STATE STREET, BOSTON, MASSACHUSETTS 02109
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES (NUMBER, STREET, CITY, STATE, ZIP CODE)

(617) 482-8260
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE

ALAN R. DYNNER
THE EATON VANCE BUILDING
255 STATE STREET, BOSTON, MASSACHUSETTS 02109
NAME AND ADDRESS (NUMBER, STREET, CITY, STATE, ZIP CODE) OF AGENT FOR SERVICE

COPIES OF COMMUNICATIONS TO:

MARK P. GOSHKO, ESQ. SARAH E. COGAN, ESQ.
KIRKPATRICK & LOCKHART LLP SIMPSON THACHER & BARTLETT
75 STATE STREET 425 LEXINGTON AVENUE
BOSTON, MASSACHUSETTS 02109 NEW YORK, NEW YORK 10017

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered
on a delayed or continuous basis in reliance on Rule 415 under the Securities
Act of 1933, other than securities offered in connection with a dividend
reinvestment plan, check the following box. / /

It is proposed that this filing will become effective (check appropriate
box):
[X] when declared effective pursuant to Section 8(c).

Pre-Effective Amendment No. 3 inadvertently omitted the facing page, this
amendment properly reflects the total number of shares registered in
Pre-Effective Amendment No. 3.

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

==================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF AMOUNT BEING OFFERING AGGREGATE AMOUNT OF
SECURITIES REGISTERED PRICE PER UNIT OFFERING PRICE REGISTRATION FEES
BEING REGISTERED (1)(2) (1) (1)(2) (1)(2)(3)
---------------------------------------------------------------------------------------------------

Common Shares of Beneficial
Interest, $.01 par value 24,000,000 $15.00 $360,000,000 $33,120
===================================================================================================

(1) Estimated solely for purposes of calculating the registration fee, pursuant
to Rule 457(o) under the Securities Act of 1933.

(2) Includes shares that may be offered by the Underwriters pursuant to an
option to cover over-allotments.

(3) The entire registration fee of $33,120 has been previously paid.

____________________________________

PROSPECTUS

[Eaton Vance Logo]
19,100,000 SHARES

EATON VANCE INSURED
CALIFORNIA MUNICIPAL BOND FUND
COMMON SHARES
$15.00 PER SHARE
------------------

Eaton Vance Insured California Municipal Bond Fund (the "Fund") is a newly
organized, non-diversified, closed-end management investment company. The Fund's
investment objective is to provide current income exempt from federal income
tax, including alternative minimum tax, and California personal income tax. This
income will be earned by investing primarily in high grade California municipal
obligations that are insured as to the timely payment of principal and interest
and are not subject to alternative minimum tax. The Fund's net asset value and
distribution rate will vary and may be affected by several factors, including
changes in interest rates and the credit quality of municipal issuers.
Fluctuations in net asset value may be magnified as a result of the Fund's use
of leverage, which may be a speculative investment technique. An investment in
the Fund may not be appropriate for all investors, particularly those that are
not subject to federal and California income taxes. There is no assurance that
the Fund will achieve its investment objective.

The Fund's investment adviser is Eaton Vance Management ("Eaton Vance" or
the "Adviser"). Eaton Vance and certain of its subsidiaries manage 51 different
municipal bond funds with combined assets of about $7 billion, including 3
California municipal bond funds with combined assets of about $428 million.

Because the Fund is newly organized, its common shares have no history of
public trading. The shares of closed-end management investment companies
frequently trade at a discount from their net asset value. This risk may be
greater for investors expecting to sell their shares in a relatively short
period after completion of the public offering. The Fund's common shares have
been listed on the American Stock Exchange under the symbol "EVM".

(continued on following page)
------------------
INVESTING IN SHARES INVOLVES CERTAIN RISKS. SEE "INVESTMENT OBJECTIVE,
POLICIES AND RISKS" BEGINNING AT PAGE 13.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------

PER
SHARE TOTAL(1)
------- ------------

Public Offering Price $15.000 $286,500,000
Sales Load(2) $ 0.675 $ 12,892,500
Estimated Offering Expenses(3) $ 0.030 $ 573,000
Proceeds to the Fund $14.295 $273,034,500

(footnotes on following page)

The underwriters are offering the shares subject to various conditions and
expect to deliver the shares to purchasers on or about August 30,
2002.
------------------

SALOMON SMITH BARNEY UBS WARBURG
A.G. EDWARDS & SONS, INC. PRUDENTIAL SECURITIES
QUICK & REILLY, INC. RAYMOND JAMES
RBC CAPITAL MARKETS TD WATERHOUSE
WACHOVIA SECURITIES WELLS FARGO SECURITIES, LLC

August 27, 2002

(Continued from previous page)

(1) The underwriters named in this Prospectus may purchase up to 2,865,000
additional shares at the public offering price, less sales load, solely to
cover over-allotments, if any. If this option is exercised in full, the
total public offering price, sales load, estimated offering expenses and
proceeds to the Fund will be $329,475,000, $14,826,375, $658,950 and
$313,989,675, respectively.
(2) Certain underwriters that may also participate in any future offering of
preferred shares of the Fund may receive additional compensation in that
offering based on their participation in this offering. See "Underwriting."
(3) Eaton Vance or an affiliate has agreed to pay offering and organizational
costs in excess of $0.03 per share.
------------------

The Fund expects to use financial leverage through the issuance of
preferred shares, initially equal to approximately 38% of its gross assets
(including the amount obtained through leverage). The Fund intends to use
leverage if it is expected to result in higher income to shareholders over time.
Use of financial leverage creates an opportunity for increased income but, at
the same time, creates special risks. There can be no assurance that a
leveraging strategy will be successful. SEE "INVESTMENT OBJECTIVE, POLICIES AND
RISKS -- USE OF LEVERAGE AND RELATED RISKS" AT PAGE 19 AND "DESCRIPTION OF
CAPITAL STRUCTURE" AT PAGE 28.

This Prospectus sets forth concisely information you should know before
investing in the common shares of the Fund. Please read and retain this
Prospectus for future reference. A Statement of Additional Information dated
August 27, 2002, has been filed with the Securities and Exchange Commission
("SEC") and can be obtained without charge by calling 1-800-225-6265 or by
writing to the Fund. A table of contents to the Statement of Additional
Information is located at page 36 of this Prospectus. This Prospectus
incorporates by reference the entire Statement of Additional Information. The
Statement of Additional Information is available along with other Fund-related
materials: at the SEC's public reference room in Washington, DC (call
1-202-942-8090 for information on the operation of the reference room); the
EDGAR database on the SEC's internet site (http://www.sec.gov); upon payment of
copying fees by writing to the SEC's public reference section, Washington, DC
20549-0102; or by electronic mail at publicinfo@sec.gov. The Fund's address is
The Eaton Vance Building, 255 State Street, Boston, Massachusetts 02109 and its
telephone number is 1-800-225-6265.

The underwriters named in the Prospectus may purchase up to 2,865,000
additional shares from the Fund under certain circumstances.

The Fund's shares do not represent a deposit or obligation of, and are not
guaranteed or endorsed by, any bank or other insured depository institution, and
are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE FUND HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH DIFFERENT INFORMATION. THE FUND IS NOT MAKING AN OFFER OF THESE SECURITIES
IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.

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

TABLE OF CONTENTS

PAGE
----

Prospectus Summary.......................................... 4
Fund Expenses............................................... 11
The Fund.................................................... 13
Use of Proceeds............................................. 13
Investment Objective, Policies and Risks.................... 13
Management of the Fund...................................... 23
Distributions and Taxes..................................... 25
Dividend Reinvestment Plan.................................. 26
Description of Capital Structure............................ 28
Underwriting................................................ 32
Custodian and Transfer Agent................................ 35
Legal Opinions.............................................. 35
Reports to Stockholders..................................... 35
Independent Auditors........................................ 35
Additional Information...................................... 35
Table of Contents for the Statement of Additional
Information............................................... 36

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

UNTIL SEPTEMBER 21, 2002 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE THE SHARES, WHETHER OR NOT PARTICIPATING IN THIS
OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and the Statement of
Additional Information.

THE FUND...................... Eaton Vance Insured California Municipal Bond
Fund (the "Fund") is a newly organized,
non-diversified, closed-end management
investment company. The Fund offers investors
the opportunity to receive current income
exempt from federal income tax, including
alternative minimum tax, and California
personal income tax through a professionally
managed portfolio of municipal obligations.
Investments are based on Eaton Vance
Management's ("Eaton Vance" or the "Adviser")
research and ongoing credit analysis, the
underlying materials for which are generally
not available to individual investors. An
investment in the Fund may not be appropriate
for all investors, particularly those that are
not subject to federal and California income
taxes. There is no assurance that the Fund will
achieve its investment objective.

THE OFFERING.................. The Fund is offering 19,100,000 common shares
of beneficial interest, par value $0.01 per
share (the "Shares"), through a group of
underwriters (the "Underwriters") led by
Salomon Smith Barney Inc., UBS Warburg LLC,
A.G. Edwards & Sons, Inc., Prudential
Securities Incorporated, Quick & Reilly, Inc. A
FleetBoston Financial Company, Raymond James &
Associates, Inc., RBC Dain Rauscher, Inc., TD
Waterhouse Investor Services, Inc., Wachovia
Securities, Inc. and Wells Fargo Securities,
LLC. The Underwriters have been granted an
option to purchase up to 2,865,000 additional
Shares solely to cover over-allotments, if any.
The initial public offering price is $15.00 per
share. The minimum purchase in this offering is
100 Shares ($1,500). See "Underwriting." Eaton
Vance, or an affiliate, has agreed to pay (i)
all organizational expenses and (ii) offering
costs (other than sales loads) that exceed
$0.03 per Share.

INVESTMENT OBJECTIVE AND
POLICIES...................... The Fund's investment objective is to provide
current income exempt from federal income tax,
including alternative minimum tax, and
California personal income tax. Securities will
be purchased and sold in an effort to maintain
a competitive yield and to enhance return based
upon the relative value of the securities
available in the marketplace. There is no
assurance that the Fund will achieve its
investment objective.

During normal market conditions, at least 80%
of the Fund's net assets will be invested in
municipal obligations, the interest on which is
exempt from federal income tax, including
alternative minimum tax, and California
personal income taxes ("municipal
obligations"), and that are insured as to
principal and interest payments. Such insurance
will be from insurers having a claims-paying
ability rated Aaa by Moody's Investors Service,
Inc. ("Moody's") or AAA by Standard & Poor's
Ratings Group ("S&P") or Fitch Ratings
("Fitch"). This insurance does not protect the
market value of such obligations or the net
asset

value of the Fund. The value of an obligation
will be affected by the credit standing of its
insurer. The Fund primarily invests in high
grade municipal obligations. At least 80% of
the Fund's net assets will normally be invested
in municipal obligations rated in the highest
category at the time of investment (which is
Aaa by Moody's or AAA by S&P or Fitch or, if
unrated, determined to be of comparable quality
by the Adviser). Up to 20% of the Fund's net
assets may be invested in obligations rated
below Aaa or AAA (but not lower than BBB or
Baa) and comparable unrated obligations and/or
municipal obligations that are uninsured.
Accordingly, the Fund does not intend to invest
any of its assets in obligations rated below
investment grade or in comparable unrated
obligations. From time to time, the Fund may
hold obligations that are unrated but judged to
be of comparable quality by the Adviser. Under
normal market conditions, the Fund expects to
be fully invested (at least 95% of its net
assets) in accordance with its investment
objective.

The Fund will not invest in an obligation if
the interest on that obligation is subject to
the federal alternative minimum tax.

The Fund may purchase and sell various kinds of
financial futures contracts and related
options, including futures contracts and
related options based on various debt
securities and securities indices, to seek to
hedge against changes in interest rates or for
other risk management purposes.

LISTING....................... The Fund's common shares have been listed on
the American Stock Exchange under the symbol
"EVM".

LEVERAGE...................... The Fund expects to use financial leverage
through the issuance of preferred shares. The
Fund intends initially to use financial
leverage of approximately 38% of its gross
assets (including the amount obtained through
leverage). The Fund generally will not use
leverage if it anticipates that it would result
in a lower return to holders of the Shares
("Shareholders") over time. Use of financial
leverage creates an opportunity for increased
income for Shareholders but, at the same time,
creates special risks (including the likelihood
of greater volatility of net asset value and
market price of the Shares), and there can be
no assurance that a leveraging strategy will be
successful during any period in which it is
employed. The Fund intends to issue preferred
shares approximately one to three months after
completion of this offering, subject to market
conditions, and the Fund's receipt of a AAA/Aaa
credit rating on Preferred Shares from any
nationally recognized statistical rating
organization ("Rating Agency")(typically,
Moody's, S&P or Fitch). See "Investment
Objective, Policies and Risks -- Use of
Leverage and Related Risks."

INVESTMENT ADVISER AND
ADMINISTRATOR................. Eaton Vance, an indirect wholly-owned
subsidiary of Eaton Vance Corp., is the Fund's
investment adviser and administrator. The
Adviser and certain of its subsidiaries manage
4 national municipal funds, 38 single state
municipal funds, 8 limited

maturity municipal funds and 1 money market
municipal fund with combined assets of about $7
billion as of June 30, 2002. Ten of the funds
are closed-end. See "Management of the Fund."

DISTRIBUTIONS................. Commencing with the Fund's first dividend, the
Fund intends to make regular monthly cash
distributions to Shareholders at a level rate
based on the projected performance of the Fund.
The Fund's ability to maintain a level Share
dividend rate will depend on a number of
factors, including dividends payable on the
preferred shares. As portfolio and market
conditions change, the rate of dividends on the
Shares and the Fund's dividend policy could
change. Over time, the Fund will distribute all
of its net investment income (after it pays
accrued dividends on any outstanding preferred
shares). In addition, at least annually, the
Fund intends to distribute net capital gain and
taxable ordinary income, if any, to you so long
as the net capital gain and taxable ordinary
income are not necessary to pay accrued
dividends on, or redeem or liquidate, any
preferred shares. Your initial distribution is
expected to be declared approximately 45 days,
and paid approximately 60 days, from the
completion of this offering, depending on
market conditions. You may elect to
automatically reinvest some or all of your
distributions in additional Shares under the
Fund's Dividend Reinvestment Plan. See
"Distributions and Taxes" and "Dividend
Reinvestment Plan."

DIVIDEND REINVESTMENT PLAN.... The Fund has established a Dividend
Reinvestment Plan (the "Plan"). Under the Plan,
a Shareholder may elect to have all dividend
and capital gain distributions automatically
reinvested in additional Shares either
purchased in the open market, or newly issued
by the Fund if the Shares are trading at or
above their net asset value. Shareholders may
elect to participate in the Plan by completing
the Dividend Reinvestment Plan Application
Form. If Shareholders do not participate, such
Shareholders will receive all distributions in
cash paid by check mailed directly to them by
PFPC Inc., as dividend paying agent.
Shareholders who intend to hold their Shares
through a broker or nominee should contact such
broker or nominee to determine whether or how
they may participate in the Plan. See "Dividend
Reinvestment Plan."

CLOSED-END STRUCTURE.......... Closed-end funds differ from open-end
management investment companies (commonly
referred to as mutual funds) in that closed-end
funds generally list their shares for trading
on a securities exchange and do not redeem
their shares at the option of the shareholder.
By comparison, mutual funds issue securities
redeemable at net asset value at the option of
the shareholder and typically engage in a
continuous offering of their shares. Mutual
funds are subject to continuous asset in-flows
and out-flows that can complicate portfolio
management, whereas closed-end funds generally
can stay more fully invested in securities
consistent with the closed-end fund's
investment objective and policies. In addition,
in comparison to open-end funds, closed-end
funds have greater flexibility in the
employment of financial

leverage and in the ability to make certain
types of investments, including investments in
illiquid securities. However, shares of
closed-end funds frequently trade at a discount
from their net asset value. In recognition of
the possibility that the Shares might trade at
a discount to net asset value and that any such
discount may not be in the interest of
Shareholders, the Fund's Board of Trustees (the
"Board"), in consultation with Eaton Vance,
from time to time may review possible actions
to reduce any such discount. The Board might
consider open market repurchases or tender
offers for Shares at net asset value. There can
be no assurance that the Board will decide to
undertake any of these actions or that, if
undertaken, such actions would result in the
Shares trading at a price equal to or close to
net asset value per Share. The Board might also
consider the conversion of the Fund to an
open-end mutual fund. The Board believes,
however, that the closed-end structure is
desirable, given the Fund's investment
objective and policies. Investors should
assume, therefore, that it is highly unlikely
that the Board would vote to convert the Fund
to an open-end investment company. See
"Description of Capital Structure."

SPECIAL RISK CONSIDERATIONS... No Operating History. The Fund is a closed-end
investment company with no history of
operations and is designed for long-term
investors and not as a trading vehicle.

Interest Rate and Market Risk. The prices of
municipal obligations tend to fall as interest
rates rise. Securities that have longer
maturities or durations tend to fluctuate more
in price in response to changes in market
interest rates. A decline in the prices of the
municipal obligations owned by the Fund would
cause a decline in the net asset value of the
Fund, which could adversely affect the trading
price of the Fund's Shares. This risk is
usually greater among municipal obligations
with longer maturities or durations. Although
the Fund has no policy governing the maturities
or durations of its investments, the Fund
expects that it will invest in a portfolio of
longer-term securities. This means that the
Fund will be subject to greater market risk
(other things being equal) than a fund
investing solely in shorter-term securities.
Market risk is often greater among certain
types of debt securities, such as zero-coupon
bonds, which do not make regular interest
payments. As interest rates change, these bonds
often fluctuate in price more than coupon bonds
that make regular interest payments. Because
the Fund may invest in these types of debt
securities, it may be subject to greater market
risk than a fund that invests only in current
interest paying securities.

Income Risk. The income investors receive from
the Fund is based primarily on the interest it
earns from its investments, which can vary
widely over the short and long-term. If
long-term interest rates drop, investors'
income from the Fund over time could drop as
well if the Fund purchases securities with
lower interest coupons.

Call and Other Reinvestment Risks. If interest
rates fall, it is possible that issuers of
callable bonds with high interest coupons will
"call" (or prepay) their bonds before their
maturity date. If a call were exercised by the
issuer during a period of declining interest
rates, the Fund is likely to replace such
called security with a lower yielding security.
If that were to happen, it could decrease the
Fund's dividends and could affect the market
price of Shares. Similar risks exist when the
Fund invests the proceeds from matured or
traded municipal obligations at market interest
rates that are below the Fund's current
earnings rate.

Liquidity Risk. Although the Fund does not
currently intend to, at times, the Fund may
invest in securities for which there is no
readily available trading market or which are
otherwise illiquid. The Fund may not be able to
readily dispose of such securities at prices
that approximate those at which the Fund could
sell such securities if they were more widely
traded and, as a result of such illiquidity,
the Fund may have to sell other investments or
engage in borrowing transactions if necessary
to raise cash to meet its obligations. In
addition, the limited liquidity could affect
the market price of the securities, thereby
adversely affecting the Fund's net asset value
and ability to make dividend distributions.

Municipal Bond Market. Certain obligations in
which the Fund will invest will not be
registered with the Securities and Exchange
Commission or any state securities commission
and will not be listed on any national
securities exchange. Therefore, the amount of
public information available about portfolio
securities will be limited, and the performance
of the Fund is more dependent on the analytical
abilities of Eaton Vance than would be the case
for an investment company that invests
primarily in registered or exchange-listed
securities.

Municipal Bond Insurance. In the event
Moody's, S&P or Fitch (or all of them) should
downgrade its assessment of the claims-paying
ability of a particular insurer, it (or they)
could also be expected to downgrade the ratings
assigned to municipal bonds insured by such
insurer, and municipal bonds insured under
Portfolio Insurance (as defined below) issued
by such insurer also would be of reduced
quality in the portfolio of the Fund. Any such
downgrade could have an adverse impact on the
net asset value and market price of the Shares.

In addition, to the extent the Fund employs
Portfolio Insurance, the Fund may be subject to
certain restrictions on investments imposed by
guidelines of the insurance companies issuing
such Portfolio Insurance. The Fund does not
expect these guidelines to prevent Eaton Vance
from managing the Fund's portfolio in
accordance with the Fund's investment objective
and policies.

California Concentration. The Fund's policy of
investing primarily in municipal obligations of
issuers located in California makes the Fund
more susceptible to adverse economic, political
or regulatory occurrences affecting such
issuers.

Sector and Territory Concentration. The Fund
may invest 25% or more of its total assets in
municipal obligations of issuers located in the
same U.S. territory or in the same economic
sector, including, without limitation, the
following: lease rental obligations of state
and local authorities; obligations dependent on
annual appropriations by a state's legislature
for payment; obligations of state and local
housing finance authorities, municipal
utilities systems or public housing
authorities; obligations of hospitals as well
as obligations of the education and
transportation sectors. This may make the Fund
more susceptible to adverse economic, political
or regulatory occurrences affecting a
particular territory or economic sector.

Effects of Leverage. The use of leverage
through issuance of preferred shares by the
Fund creates an opportunity for increased net
income, but, at the same time, creates special
risks. There can be no assurance that a
leveraging strategy will be successful during
any period in which it is employed. The Fund
intends to use leverage to provide the holders
of Shares with a potentially higher return.
Leverage creates risks for holders of Shares,
including the likelihood of greater volatility
of net asset value and market price of the
Shares and the risk that fluctuations in
dividend rates on any preferred shares may
affect the return to Shareholders. It is
anticipated that preferred share dividends will
be based on the yields of short-term municipal
obligations, while the proceeds of any
preferred share offering will be invested in
longer-term municipal obligations, which
typically have higher yields. To the extent the
income derived from securities purchased with
funds received from leverage exceeds the cost
of leverage, the Fund's return will be greater
than if leverage had not been used. Conversely,
if the income from the securities purchased
with such funds is not sufficient to cover the
cost of leverage, the return to the Fund will
be less than if leverage had not been used, and
therefore the amount available for distribution
to Shareholders as dividends and other
distributions will be reduced. In the latter
case, Eaton Vance in its best judgment may
nevertheless determine to maintain the Fund's
leveraged position if it deems such action to
be appropriate.

In addition, under current federal income tax
law, the Fund is required to allocate a portion
of any net realized capital gains or other
taxable income to holders of preferred shares.
The terms of any preferred shares are expected
to require the Fund to pay to any preferred
shareholders additional dividends intended to
compensate the preferred shareholders for taxes
payable on any capital gains or other taxable
income allocated to the preferred shares. Any
such additional dividends will reduce the
amount available for distribution to the
Shareholders. As discussed under "Management of
the Fund," the fee paid to Eaton Vance will be

calculated on the basis of the Fund's gross
assets, including proceeds from the issuance of
preferred shares, so the fees will be higher
when leverage is utilized. See "Investment
Objective, Policies and Risks -- Use of
Leverage and Related Risks."

The Fund currently intends to seek a Aaa/AAA
grade rating on any preferred shares from any
Rating Agency. The Fund may be subject to
investment restrictions of the Rating Agency as
a result. These restrictions may impose asset
coverage or portfolio composition requirements
that are more stringent than those imposed on
the Fund by the Investment Company Act of 1940,
as amended (the "Investment Company Act" or
"1940 Act"). It is not anticipated that these
covenants or guidelines will impede Eaton Vance
in managing the Fund's portfolio in accordance
with its investment objective and policies. See
"Description of Capital Structure -- Preferred
Shares."

Market Price of Shares. The shares of
closed-end investment companies often trade at
a discount from their net asset value, and the
Fund's Shares may likewise trade at a discount
from net asset value. The trading price of the
Fund's Shares may be less than the public
offering price. This risk may be greater for
investors who sell their Shares in a relatively
short period after completion of the public
offering.

Non-Diversification. The Fund has registered
as a "non-diversified" investment company under
the 1940 Act. For federal income tax purposes,
the Fund, with respect to up to 50% of its
total assets, will be able to invest more than
5% (but not more than 25%) of the value of its
total assets in the obligations of any single
issuer. To the extent the Fund invests a
relatively high percentage of its assets in
obligations of a limited number of issuers, the
Fund may be more susceptible than a more widely
diversified investment company to any single
economic, political or regulatory occurrence.

Certain Tax Considerations. Distributions of
any taxable net investment income and net
short-term capital gain are taxable as ordinary
income. See "Distributions and Taxes."

Anti-Takeover Provisions. The Fund's Agreement
and Declaration of Trust includes provisions
that could have the effect of limiting the
ability of other persons or entities to acquire
control of the Fund or to change the
composition of its Board. See "Description of
Capital Structure -- Anti-Takeover Provisions
in the Declaration of Trust."

FUND EXPENSES
The purpose of the table below is to help you understand all fees and
expenses that you, as a Shareholder, would bear directly or indirectly. The
following table assumes the issuance of preferred shares in an amount equal to
38% of the Fund's total assets (after their issuance), and shows Fund expenses
as a percentage of net assets attributable to common shares.

SHAREHOLDER TRANSACTION EXPENSES

Sales Load Paid by You (as a percentage of offering
price).................................................... 4.50%
Offering Expenses Borne by the Fund......................... 0.20%(1)(2)
Dividend Reinvestment Plan Fees............................. None(3)

ANNUAL EXPENSES

PERCENTAGE OF
NET ASSETS
ATTRIBUTABLE TO
COMMON SHARES(4)
----------------

Investment Advisory Fee..................................... 1.05%
Other Expenses.............................................. 0.33%
-----
Total Annual Expenses....................................... 1.38%
Fee and Expense Reimbursements (Years 1-5).................. (0.52)%(5)
-----
Total Net Annual Expenses (Years 1-5)....................... 0.86%(5)
=====

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

(1) Eaton Vance or an affiliate has agreed to bear all offering and
organizational expenses (other than sales load) that exceed $0.03 per Share.

(2) If the Fund offers preferred shares, costs of that offering, estimated to be
slightly more than 2% of the total amount of the preferred share offering,
will effectively be borne by common shareholders and result in the reduction
of the net asset value of the common shares. Assuming the issuance of
preferred shares in an amount equal to 38% of the Fund's total assets (after
issuance), those offering costs are estimated to be not more than
approximately $1,960,000 or $0.196 per common share. (1.31% of the offering
price).

(3) You will be charged a $5.00 service charge and pay brokerage charges if you
direct the plan agent to sell your Shares held in a dividend reinvestment
account.

(4) Stated as percentages of net assets attributable to common shares assuming
no issuance of preferred shares or borrowings, the Fund's expenses would be
estimated to be as follows:

PERCENTAGE OF
NET ASSETS
ATTRIBUTABLE TO
COMMON SHARES
---------------

ANNUAL EXPENSES
Investment Advisory Fee............................... 0.65%
Other Expenses........................................ 0.20%
-----
Total Annual Expenses................................. 0.85%
Fees and Expense Reimbursements (Years 1-5)........... (0.32)%(5)
-----
Total Net Annual Expenses (Years 1-5)................. 0.53%(5)
=====

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

(5) Eaton Vance has contractually agreed to reimburse the Fund for fees and
other expenses in the amount of 0.32% of average weekly total assets of the
Fund for the first 5 full years of the Fund's operations, 0.24% of average
weekly total assets of the Fund in year 6, 0.16% in year 7 and 0.08% in year
8. For this purpose, total assets (and gross assets in "Management of the
Fund -- The Adviser") shall be calculated by deducting accrued liabilities
of the Fund not including the amount of any preferred shares outstanding or
the principal amount of any indebtedness for money borrowed. Without the
reimbursement, "Total Net Annual Expenses" would be estimated to be 1.38% of
average weekly net assets (or, assuming no issuance of preferred shares or
borrowing, 0.85% of average weekly net assets) attributable to common
shares.

The expenses shown in the table are based on estimated amounts for the
Fund's first year of operations and assume that the Fund issues approximately
10,000,000 common shares. See "Management of the Fund" and "Dividend
Reinvestment Plan."

The following example illustrates the expenses (including the sales load of
$45, estimated offering expenses of this offering of $2 and the estimated
preferred share offering costs assuming preferred shares are issued representing
38% of the Fund's total assets (after issuance) of $13) that you would pay on a
$1,000 investment in common shares, assuming (1) total net annual expenses of
0.86% of net assets attributable to common shares in years 1 through 5,
increasing to 1.38% in years 9 and 10 and (2) a 5% annual return:(1)

1 YEAR 3 YEARS 5 YEARS 10 YEARS(2)
------ ------- ------- -----------

$68 $86 $105 $183

---------------
(1) The example assumes that the estimated Other Expenses set forth in the
Annual Expenses table are accurate, that fees and expenses increase as
described in note 2 below and that all dividends and distributions are
reinvested at net asset value. Actual expenses may be greater or less than
those assumed. Moreover, the Fund's actual rate of return may be greater or
less than the hypothetical 5% return shown in the example.

(2) Assumes reimbursement of fees and expenses of 0.24% of average weekly total
assets of the Fund in year 6, 0.16% in year 7 and 0.08% in year 8. Eaton
Vance has not agreed to reimburse the Fund for any portion of its fees and
expenses beyond this time. See footnote 5 above.

THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE HIGHER OR LOWER.

THE FUND

The Fund is a newly organized, non-diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized as a
Massachusetts business trust on July 8, 2002, pursuant to a Declaration governed
by the laws of the Commonwealth of Massachusetts and has no operating history.
The Fund's principal office is located at The Eaton Vance Building, 255 State
Street, Boston, Massachusetts 02109 and its telephone number is 1-800-225-6265.

This Prospectus relates to the initial public offering of the Fund's common
shares of beneficial interest, $0.01 par value (the "Shares"). See
"Underwriting."

USE OF PROCEEDS

The net proceeds of this offering of Shares will be approximately
$273,034,500 (or $313,989,675 assuming exercise of the Underwriters'
over-allotment option in full), after payment of the estimated offering
expenses, will be invested in accordance with the Fund's investment objective
and policies as soon as practicable, but, in no event, under normal market
conditions, later than three months after the receipt thereof. Pending such
investment, the proceeds may be invested in high-quality, short-term municipal
debt securities. Eaton Vance or an affiliate has agreed to pay all offering and
organizational expenses of the Fund that exceed $0.03 per Share.

INVESTMENT OBJECTIVE, POLICIES AND RISKS

INVESTMENT OBJECTIVE

The Fund's investment objective is to provide current income exempt from
federal income tax, including alternative minimum tax, and California personal
income tax. This income will be earned by investing primarily in high grade
municipal obligations (as defined below) that are insured as to the timely
payment of principal and interest. Securities will be purchased and sold in an
effort to maintain a competitive yield and to enhance return based upon the
relative value of the securities available in the marketplace. Investments are
based on Eaton Vance's research and ongoing credit analysis, the underlying
materials for which are generally not available to individual investors.

Eaton Vance seeks to find municipal obligations of high quality that have
been undervalued in the marketplace. Eaton Vance's team of research analysts,
traders and portfolio managers are devoted exclusively to analyzing municipal
securities. The team's goal is to find municipal bonds of high quality that have
been undervalued in the marketplace due to differing dynamics in individual
sectors of the municipal bond market, municipal bond supply, and the structure
of individual bonds, especially in regard to maturities, coupons, and call
dates. Eaton Vance's team of professionals monitors historical and current yield
spreads to find relative value in the marketplace. This research capability is
key to identifying trends that impact the yield-spread relationship of all
bonds, including those in the insured sector.

PRIMARY INVESTMENT POLICIES

General Composition of the Fund. During normal market conditions, at least
80% of the Fund's net assets will be invested in municipal obligations, the
interest on which is exempt from federal income tax, including alternative
minimum tax, and California personal income tax ("municipal obligations" or
"municipal bonds") and that are insured as to principal and interest payments.
Such insurance will be from insurers having a claims-paying ability rated Aaa by
Moody's Investors Service, Inc. ("Moody's") or AAA by Standard & Poor's Ratings
Group ("S&P") or Fitch Ratings ("Fitch"). This insurance does not protect the
market value of such obligations or the net asset value of the Fund. The value
of an insured municipal obligation will be affected by the credit standing of
its insurer. The Fund primarily invests in high grade municipal obligations. At
least 80% of the Fund's net assets will normally be invested in municipal
obligations rated in the highest category at the time of investment (which is
Aaa by Moody's or AAA by S&P or Fitch or, if unrated, determined to be of
comparable quality by the Adviser). Up to 20%
13

of the Fund's net assets may be invested in obligations rated below Aaa or AAA
(but not lower than BBB or Baa) and comparable unrated obligations and/or
municipal obligations that are uninsured. Accordingly, the Fund does not intend
to invest any of its assets in obligations rated below investment grade or in
comparable unrated obligations. From time to time, the Fund may hold obligations
that are unrated but judged to be of comparable quality by the Adviser. Under
normal market conditions, the Fund expects to be fully invested (at least 95% of
its net assets) in accordance with its investment objective.

The foregoing credit quality policies apply only at the time a security is
purchased, and the Fund is not required to dispose of a security in the event
that a Rating Agency downgrades its assessment of the credit characteristics of
a particular issue or withdraws its assessment. In determining whether to retain
or sell such a security, Eaton Vance may consider such factors as Eaton Vance's
assessment of the credit quality of the issuer of such security, the price at
which such security could be sold and the rating, if any, assigned to such
security by other Rating Agencies.

The Fund has adopted certain fundamental investment restrictions set forth
in the Statement of Additional Information which may not be changed without a
Shareholder vote. Except for such restrictions and the 80% requirement
pertaining to investment in municipal and insured municipal obligations set
forth above, the investment objective and policies of the Fund may be changed by
the Board without Shareholder action.

The Fund will not invest in an obligation if the interest on that
obligation is subject to the federal alternative minimum tax.

Municipal Obligations. Municipal obligations include bonds, notes and
commercial paper issued by a municipality for a wide variety of both public and
private purposes, the interest on which is, in the opinion of issuer's counsel
(or on the basis of other reliable authority), exempt from federal income tax,
including alternative minimum tax. The municipal obligations in which the Fund
will invest are generally issued by California municipal issuers and pay
interest that is, in the opinion of issuer's counsel (or on the basis of other
reliable authority), exempt from California personal income tax, in addition to
federal income tax, including alternative minimum tax. The Fund may also invest
in municipal obligations issued by United States territories (such as Puerto
Rico or Guam) the interest on which is exempt from federal income tax, including
alternative minimum tax and California personal income tax.

Public purpose municipal bonds include general obligation and revenue
bonds. General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenues of a project or facility
or from the proceeds of a specific revenue source. Some revenue bonds are
payable solely or partly from funds that are subject to annual appropriations by
a state's legislature. Municipal notes include bond anticipation, tax
anticipation and revenue anticipation notes. Bond, tax and revenue anticipation
notes are short-term obligations that will be retired with the proceeds of an
anticipated bond issue, tax revenue or facility revenue, respectively.

Some of the obligations in which the Fund invests may include so-called
"zero-coupon" bonds, whose values are subject to greater fluctuation in response
to changes in market interest rates than bonds that pay interest currently.
Zero-coupon bonds are issued at a significant discount from face value and pay
interest only at maturity rather than at intervals during the life of the
security. The Fund is required to take into account income from zero-coupon
bonds on a current basis, even though it does not receive that income currently
in cash, and the Fund is required to distribute substantially all of its income
for each taxable year. Thus, the Fund may have to sell other investments to
obtain cash needed to make income distributions.

Municipal Obligation Insurance Generally. Insured municipal obligations
held by the Fund will be insured as to their scheduled payment of principal and
interest under (i) an insurance policy obtained by the issuer or underwriter of
the Fund municipal obligation at the time of its original issuance ("Original
Issue Insurance"), (ii) an insurance policy obtained by the Fund or a third
party subsequent to the Fund municipal obligation's original issuance
("Secondary Market Insurance") or (iii) another municipal insurance policy
purchased by the Fund ("Portfolio Insurance"). This insurance does not protect
the

market value of such obligations or the net asset value of the Fund. The Fund
expects initially to emphasize investments in municipal bonds insured under
bond-specific insurance policies (i.e., Original Issue or Secondary Market
Insurance). The Fund may obtain Portfolio Insurance from the insurers described
in Appendix D to the Statement of Additional Information. The Fund, as a
non-fundamental policy that can be changed by the Fund's Board of Trustees (the
"Board"), will only obtain policies of Portfolio Insurance issued by insurers
whose claims-paying ability is rated "Aaa" by Moody's or "AAA" by S&P or Fitch.
There is no limit on the percentage of the Fund's assets that may be invested in
municipal bonds insured by any one insurer.

Municipal bonds covered by Original Issue Insurance or Secondary Market
Insurance are themselves typically assigned a rating of "Aaa" or "AAA", as the
case may be, by virtue of the rating of the "Aaa" or "AAA" claims-paying ability
of the insurer and would generally be assigned a lower rating if the ratings
were based primarily upon the credit characteristics of the issuer without
regard to the insurance feature. By way of contrast, the ratings, if any,
assigned to municipal bonds insured under Portfolio Insurance will be based
primarily upon the credit characteristics of the issuer, without regard to the
insurance feature, and generally will carry a rating that is below "Aaa" or
"AAA." While in the portfolio of the Fund, however, a municipal bond backed by
Portfolio Insurance will effectively be of the same credit quality as a
municipal bond issued by an issuer of comparable credit characteristics that is
backed by Original Issue Insurance or Secondary Market Insurance.

The Fund's policy of investing in municipal bonds insured by insurers whose
claims-paying ability is rated "Aaa" or "AAA" applies only at the time of
purchase of a security, and the Fund will not be required to dispose of the
securities in the event Moody's, S&P or Fitch, as the case may be, downgrades
its assessment of the claims-paying ability of a particular insurer or the
credit characteristics of a particular issuer or withdraws its assessment. In
this connection, it should be noted that in the event Moody's, S&P or Fitch (or
all of them) should downgrade its assessment of the claims-paying ability of a
particular insurer, it (or they) could also be expected to downgrade the ratings
assigned to municipal bonds insured by such insurer, and municipal bonds insured
under Portfolio Insurance issued by such insurer also would be of reduced
quality in the portfolio of the Fund. Moody's, S&P and Fitch continually assess
the claims-paying ability of insurers and the credit characteristics of issuers,
and there can be no assurance that they will not downgrade or withdraw their
assessments subsequent to the time the Fund purchases securities.

The value of municipal bonds covered by Portfolio Insurance that are in
default or in significant risk of default will be determined by separately
establishing a value for the municipal bond and a value for the Portfolio
Insurance.

Original Issue Insurance. Original Issue Insurance is purchased with
respect to a particular issue of municipal bonds by the issuer thereof or a
third party in conjunction with the original issuance of such municipal bonds.
Under this insurance, the insurer unconditionally guarantees to the holder of
the municipal bond the timely payment of principal and interest on such
obligations when and as these payments become due but not paid by the issuer,
except that in the event of the acceleration of the due date of the principal by
reason of mandatory or optional redemption (other than acceleration by reason of
a mandatory sinking fund payment), default or otherwise, the payments guaranteed
may be made in the amounts and at the times as payment of principal would have
been due had there not been any acceleration. The insurer is responsible for
these payments less any amounts received by the holder from any trustee for the
municipal bond issuer or from any other source. Original Issue Insurance does
not guarantee payment on an accelerated basis, the payment of any redemption
premium (except with respect to certain premium payments in the case of certain
small issue industrial development and pollution control municipal bonds), the
value of the Fund's shares, the market value of municipal bonds, or payments of
any tender purchase price upon the tender of the municipal bonds. Original Issue
Insurance also does not insure against nonpayment of principal or interest on
municipal bonds resulting from the insolvency, negligence or any other act or
omission of the trustee or other paying agent for these bonds.

Original Issue Insurance remains in effect as long as the municipal bonds
it covers remain outstanding and the insurer remains in business, regardless of
whether the Fund ultimately disposes of these municipal

bonds. Consequently, Original Issue Insurance may be considered to represent an
element of market value with respect to the municipal bonds so insured, but the
exact effect, if any, of this insurance on the market value cannot be estimated.

Secondary Market Insurance. Subsequent to the time of original issuance of
a municipal bond, the Fund or a third party may, upon the payment of a single
premium, purchase insurance on that security. Secondary Market Insurance
generally provides the same type of coverage as Original Issue Insurance and, as
with Original Issue Insurance, Secondary Market Insurance remains in effect as
long as the municipal bonds it covers remain outstanding and the insurer remains
in business, regardless of whether the Fund ultimately disposes of these
municipal bonds.

One of the purposes of acquiring Secondary Market Insurance with respect to
a particular municipal bond would be to enable the Fund to enhance the value of
the security. The Fund, for example, might seek to purchase a particular
municipal bond and obtain Secondary Market Insurance for it if, in the Adviser's
opinion, the market value of the security, as insured, less the cost of the
Secondary Market Insurance, would exceed the current value of the security
without insurance. Similarly, if the Fund owns but wishes to sell a municipal
bond that is then covered by Portfolio Insurance, the Fund might seek to obtain
Secondary Market Insurance for it if, in the Adviser's opinion, the net proceeds
of the Fund's sale of the security, as insured, less the cost of the Secondary
Market Insurance, would exceed the current value of the security. In determining
whether to insure municipal bonds the Fund owns, an insurer will apply its own
standards, which correspond generally to the standards the insurer has
established for determining the insurability of new issues of municipal bonds.
See "Original Issue Insurance" above.

Portfolio Insurance. Portfolio Insurance guarantees the payment of
principal and interest on specified eligible municipal bonds purchased by the
Fund and presently held by the Fund. Except as described below, Portfolio
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance or Secondary Market Insurance. Municipal bonds insured
under a Portfolio Insurance policy would generally not be insured under any
other policy. A municipal bond is eligible for coverage under a policy if it
meets certain requirements of the insurer. Portfolio Insurance is intended to
reduce financial risk, but the cost thereof and compliance with investment
restrictions imposed under the policy will reduce the yield to shareholders of
the Fund.

If a municipal obligation is already covered by Original Issue Insurance or
Secondary Market Insurance, then the security is not required to be additionally
insured under any Portfolio Insurance that the Fund may purchase. All premiums
respecting municipal bonds covered by Original Issue Insurance or Secondary
Market Insurance are paid in advance by the issuer or other party obtaining the
insurance.

Portfolio Insurance policies are effective only as to municipal bonds owned
by and held by the Fund, and do not cover municipal bonds for which the contract
for purchase fails. A "when-issued" municipal obligation will be covered under a
Portfolio Insurance policy upon the settlement date of the issue of such
"when-issued" municipal bond.

In determining whether to insure municipal bonds held by the Fund, an
insurer will apply its own standards, which correspond generally to the
standards it has established for determining the insurability of new issues of
municipal bonds. See "Original Issue Insurance" above.

Each Portfolio Insurance policy will be noncancellable and will remain in
effect so long as the Fund is in existence, the municipal bonds covered by the
policy continue to be held by the Fund, and the Fund pays the premiums for the
policy. Each insurer will generally reserve the right at any time upon 90 days'
written notice to the Fund to refuse to insure any additional bonds purchased by
the Fund after the effective date of such notice. The Fund's Board generally
will reserve the right to terminate each policy upon seven days' written notice
to an insurer if it determines that the cost of such policy is not reasonable in
relation to the value of the insurance to the Fund.

Each Portfolio Insurance policy will terminate as to any municipal bond
that has been redeemed from or sold by the Fund on the date of redemption or the
settlement date of sale, and an insurer will not have any liability thereafter
under a policy for any municipal bond, except that if the redemption date or
16

settlement date occurs after a record date and before the related payment date
for any municipal bond, the policy will terminate for that municipal bond on the
business day immediately following the payment date. Each policy will terminate
as to all municipal bonds covered thereby on the date on which the last of the
covered municipal bonds mature, are redeemed or are sold by the Fund.

One or more Portfolio Insurance policies may provide the Fund, pursuant to
an irrevocable commitment of the insurer, with the option to exercise the right
to obtain permanent insurance ("Permanent Insurance") for a municipal bond that
is sold by the Fund. The Fund would exercise the right to obtain Permanent
Insurance upon payment of a single, predetermined insurance premium payable from
the sale proceeds of the municipal bond. The Fund expects to exercise the right
to obtain Permanent Insurance for a municipal bond only if, in the Adviser's
opinion, upon the exercise the net proceeds from the sale of the municipal bond,
as insured, would exceed the proceeds from the sale of the security without
insurance.

The Portfolio Insurance premium for each municipal bond is determined based
upon the insurability of each security as of the date of purchase and will not
be increased or decreased for any change in the security's creditworthiness
unless the security is in default as to payment of principal or interest, or
both. If such event occurs, the Permanent Insurance premium will be subject to
an increase predetermined at the date of the Fund's purchase.

Because each Portfolio Insurance policy will terminate for municipal bonds
sold by the Fund on the date of sale, in which event the insurer will be liable
only for those payments of principal and interest that are then due and owing
(unless Permanent Insurance is obtained by the Fund), the provision for this
insurance will not enhance the marketability of the Fund's obligations, whether
or not the obligations are in default or in significant risk of default. On the
other hand, because Original Issue Insurance and Secondary Market Insurance
generally will remain in effect as long as the municipal bonds they cover are
outstanding, these insurance policies may enhance the marketability of these
bonds even when they are in default or in significant risk of default, but the
exact effect, if any, on marketability, cannot be estimated. Accordingly, the
Fund may determine to retain or, alternatively, to sell municipal bonds covered
by Original Issue Insurance or Secondary Market Insurance that are in default or
in significant risk of default.

Premiums for a Portfolio Insurance policy are paid monthly, and are
adjusted for purchases and sales of municipal bonds covered by the policy during
the month. The yield on the Fund is reduced to the extent of the insurance
premiums it pays. Depending upon the characteristics of the municipal bonds held
by the Fund, the annual premium rate for policies of Portfolio Insurance is
estimated to range from 12 to 18 basis points of the value of the municipal
bonds covered under the policy.

Although the insurance feature reduces certain financial risks, the
premiums for insurance and the higher market price paid for insured obligations
may reduce the Fund's current yield. Insurance generally will be obtained from
insurers with a claims-paying ability rated Aaa by Moody's or AAA by S&P or
Fitch. The insurance does not guarantee the market value of the insured
obligation or the net asset value of the Fund's Shares.

Other Types of Credit Support. The Fund may also invest in uninsured
municipal obligations that are secured by an escrow or trust account that
contains securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, that are backed by the full faith and credit of the United
States, and sufficient, in combination with available trustee-held funds, in
amount to ensure the payment of interest on and principal of the secured
obligation ("collateralized obligations"). These collateralized obligations
generally will not be insured and will include, but are not limited to,
municipal bonds that have been advance refunded where the proceeds of the
refunding have been used to buy U.S. Government or U.S. Government agency
securities that are placed in escrow and whose interest or maturing principal
payments, or both, are sufficient to cover the remaining scheduled debt service
on that municipal bond. Collateralized obligations generally are regarded as
having the credit characteristics of the underlying U.S. Government, U.S.
Government agency or instrumentality securities. These obligations will not be
subject to Issue Insurance, Secondary Market Insurance or Portfolio Insurance.
Accordingly, despite the existence of the foregoing credit support
characteristics, these obligations will not be considered
17

to be insured obligations for purposes of the Fund's policy of investing at
least 80% of its net assets in insured obligations. The credit quality of
companies that provide such credit enhancements will affect the value of those
securities.

ADDITIONAL INVESTMENT PRACTICES

When-Issued Securities. The Fund may purchase securities on a
"when-issued" basis, which means that payment and delivery occur on a future
settlement date. The price and yield of such securities are generally fixed on
the date of commitment to purchase. However, the market value of the securities
may fluctuate prior to delivery and upon delivery the securities may be worth
more or less than what the Fund agreed to pay for them. The Fund may be required
to maintain a segregated account of liquid assets equal to outstanding purchase
commitments. The Fund may also purchase instruments that give the Fund the
option to purchase a municipal obligation when and if issued.

Futures Transactions. The Fund may purchase and sell various kinds of
financial futures contracts and options thereon to seek to hedge against changes
in interest rates or for other risk management purposes. Futures contracts may
be based on various debt securities and securities indices (such as the
Municipal Bond Index traded on the Chicago Board of Trade). Such transactions
involve a risk of loss or depreciation due to unanticipated adverse changes in
securities prices, which may exceed the Fund's initial investment in these
contracts. The Fund will only purchase or sell futures contracts or related
options in compliance with the rules of the Commodity Futures Trading
Commission. These transactions involve transaction costs. There can be no
assurance that Eaton Vance's use of futures will be advantageous to the Fund.
Distributions by the Fund of any gains realized on the Fund's transactions in
futures and options on futures will be taxable. Rating Agency guidelines on any
preferred shares issued by the Fund may limit use of these transactions.

Interest Rate Swaps and Forward Rate Contracts. Interest rate swaps
involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest, e.g., an exchange of fixed rate payments
for floating rate payments. The Fund will only enter into interest rate swaps on
a net basis, i.e., the two payment streams are netted out with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. The Fund may also enter forward rate contracts. Under these contracts,
the buyer locks in an interest rate at a future settlement date. If the interest
rate on the settlement date exceeds the lock rate, the buyer pays the seller the
difference between the two rates. If the lock rate exceeds the interest rate on
the settlement date, the seller pays the buyer the difference between the two
rates. Any such gain received by the Fund would be taxable.

If the other party to an interest rate swap or forward rate contract
defaults, the Fund's risk of loss consists of the net amount of payments that
the Fund is contractually entitled to receive. The net amount of the excess, if
any, of the Fund's obligations over its entitlements will be maintained in a
segregated account by the Fund's custodian. The Fund will not enter into any
interest rate swap or forward rate contract unless the claims-paying ability of
the other party thereto is considered to be investment grade by the Adviser. If
there is a default by the other party to such a transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction.
These instruments are traded in the over-the-counter market.

Investment Company Securities. The Fund may purchase common shares of
closed-end investment companies that have a similar investment objective and
policies to the Fund. In addition to providing tax-exempt income, such
securities may provide capital appreciation. Such investments, which may also be
leveraged and subject to the same risks as the Fund, will not exceed 10% of
total assets, and no such company will be affiliated with Eaton Vance. These
companies bear fees and expenses that the Fund will incur indirectly.

Municipal Leases. The Fund may invest in municipal leases and
participations therein. Municipal leases are obligations in the form of a lease
or installment purchase arrangement which is issued by the state or local
government to acquire equipment and facilities.

USE OF LEVERAGE AND RELATED RISKS

The Fund expects to use leverage through the issuance of preferred shares.
The Fund initially intends to use leverage of approximately 38% of its gross
assets (including the amount obtained from leverage). The Fund generally will
not use leverage if the Adviser anticipates that it would result in a lower
return to Shareholders for any significant amount of time. The Fund also may
borrow money as a temporary measure for extraordinary or emergency purposes,
including the payment of dividends and the settlement of securities transactions
which otherwise might require untimely dispositions of Fund securities.

Leverage creates risks for holders of the Shares, including the likelihood
of greater volatility of net asset value and market price of the Shares. There
is a risk that fluctuations in the dividend rates on any preferred shares may
adversely affect the return to the holders of the Shares. If the income from the
securities purchased with such funds is not sufficient to cover the cost of
leverage, the return on the Fund will be less than if leverage had not been
used, and therefore the amount available for distribution to Shareholders as
dividends and other distributions will be reduced. The Adviser in its best
judgment nevertheless may determine to maintain the Fund's leveraged position if
it deems such action to be appropriate in the circumstances. During periods in
which the Fund is using leverage the fees paid to Eaton Vance for investment
advisory services will be higher than if the Fund did not use leverage because
the fees paid will be calculated on the basis of the Fund's gross assets,
including proceeds from the issuance of preferred shares. As discussed under
"Description of Capital Structure," the Fund's issuance of preferred shares may
alter the voting power of common shareholders.

Capital raised through leverage will be subject to dividend payments, which
may exceed the income and appreciation on the assets purchased. The issuance of
preferred shares involves offering expenses and other costs and may limit the
Fund's freedom to pay dividends on Shares or to engage in other activities. The
issuance of a class of preferred shares having priority over the Fund's Shares
creates an opportunity for greater return per Share, but at the same time such
leveraging is a speculative technique in that it will increase the Fund's
exposure to capital risk. Unless the income and appreciation, if any, on assets
acquired with offering proceeds exceed the cost of issuing additional classes of
securities (and other Fund expenses), the use of leverage will diminish the
investment performance of the Fund's Shares compared with what it would have
been without leverage.

The Fund may be subject to certain restrictions on investments imposed by
guidelines of one or more Rating Agencies that may issue ratings for any
preferred shares issued by the Fund. These guidelines may impose asset coverage
or Fund composition requirements that are more stringent than those imposed on
the Fund by the 1940 Act. It is not anticipated that these covenants or
guidelines will impede the Adviser from managing the Fund's portfolio in
accordance with the Fund's investment objective and policies.

Under the Investment Company Act, the Fund is not permitted to issue
preferred shares unless immediately after such issuance the net asset value of
the Fund's portfolio is at least 200% of the liquidation value of the
outstanding preferred shares (i.e., such liquidation value may not exceed 50% of
the Fund's total assets). In addition, the Fund is not permitted to declare any
cash dividend or other distribution on its Shares unless, at the time of such
declaration, the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or other distribution) is at least 200% of
such liquidation value. If preferred shares are issued, the Fund intends, to the
extent possible, to purchase or redeem preferred shares, from time to time, to
maintain coverage of any preferred shares of at least 200%. In addition, under
current federal income tax law, the Fund is required to allocate a portion of
any net realized capital gains or other taxable income to holders of preferred
shares. The terms of any preferred shares are expected to require the Fund to
pay to any preferred shareholders additional dividends intended to compensate
the preferred shareholders for taxes payable on any capital gains or other
taxable income allocated to the preferred shares. Any such additional dividends
will reduce the amount available for distribution to the Shareholders. Normally,
holders of the Shares will elect five of the Trustees of the Fund and holders of
any preferred shares will elect two. In the event the Fund failed to pay
dividends on its preferred shares for two years, preferred shareholders would be
entitled to elect a majority of the Trustees until the dividends are paid.

To qualify for federal income taxation as a "regulated investment company,"
the Fund must distribute in each taxable year at least 90% of its net investment
income (including tax-exempt interest and net short-term gain). The Fund also
will be required to distribute annually substantially all of its taxable income
and capital gain net income, if any, to avoid imposition of a nondeductible 4%
federal excise tax. If the Fund is precluded from making distributions on the
Shares because of any applicable asset coverage requirements, the terms of the
preferred shares may provide that any amounts so precluded from being
distributed, but required to be distributed for the Fund to meet the
distribution requirements for qualification as a regulated investment company,
will be paid to the holders of the preferred shares as a special dividend. This
dividend can be expected to decrease the amount that holders of preferred shares
would be entitled to receive upon redemption or liquidation of the shares.

The Fund's willingness to issue new securities for investment purposes, and
the amount the Fund will issue, will depend on many factors, the most important
of which are market conditions and interest rates. Successful use of a
leveraging strategy may depend on the Adviser's ability to predict correctly
interest rates and market movements, and there is no assurance that a leveraging
strategy will be successful during any period in which it is employed.

Assuming the utilization of leverage in the amount of 38% of the Fund's
gross assets and an annual dividend rate on preferred shares of 1.85% payable on
such leverage based on market rates as of the date of this Prospectus, the
additional income that the Fund must earn (net of expenses) in order to cover
such dividend payments would be 0.70%. The Fund's actual cost of leverage will
be based on market rates at the time the Fund undertakes a leveraging strategy,
and such actual cost of leverage may be higher or lower than that assumed in the
previous example.

The following table is designed to illustrate the effect on the return to a
holder of the Fund's Shares of leverage in the amount of approximately 38% of
the Fund's gross assets, assuming hypothetical annual returns of the Fund's
portfolio of minus 10% to plus 10%. As the table shows, leverage generally
increases the return to Shareholders when portfolio return is positive and
greater than the cost of leverage and decreases the return when the portfolio
return is negative or less than the cost of leverage. The figures appearing in
the table are hypothetical and actual returns may be greater or less than those
appearing in the table.

Assuming Portfolio Return (net of expenses)............ (10)% (5)% 0% 5% 10%
Corresponding Share Return Assuming 38% Leverage....... (17.26)% (9.20)% (1.13)% 6.93% 15.00%

Until the Fund issues preferred shares, the Shares will not be leveraged,
and the risks and special considerations related to leverage described in this
Prospectus will not apply. Such leveraging of the Shares cannot be achieved
until the proceeds resulting from the use of leverage have been invested in
accordance with the Fund's investment objective and policies.

ADDITIONAL RISK CONSIDERATIONS

No Operating History. The Fund is a closed-end investment company with no
history of operations and is designed for long-term investors and not as a
trading vehicle.

Interest Rate and Market Risk. The prices of municipal obligations tend to
fall as interest rates rise. Securities that have longer maturities tend to
fluctuate more in price in response to changes in market interest rates. A
decline in the prices of the municipal obligations owned by the Fund would cause
a decline in the net asset value of the Fund, which could adversely affect the
trading price of the Fund's Shares. This risk is usually greater among municipal
obligations with longer maturities or durations. Although the Fund has no policy
governing the maturities or durations of its investments, the Fund expects that
it will invest in a portfolio of longer-term securities. This means that the
Fund will be subject to greater market risk (other things being equal) than a
fund investing solely in shorter-term securities. Market risk is often greater
among certain types of income securities, such as zero-coupon bonds, which do
not make regular interest payments. As interest rates change, these bonds often
fluctuate in price more than coupon bonds that make regular interest payments.
Because the Fund may invest in these types of

income securities, it may be subject to greater market risk than a fund that
invests only in current interest paying securities.

Income Risk. The income investors receive from the Fund is based primarily
on the interest it earns from its investments, which can vary widely over the
short- and long-term. If long-term interest rates drop, investors' income from
the Fund over time could drop as well if the Fund purchases securities with
lower interest coupons.

Call and Other Reinvestment Risks. If interest rates fall, it is possible
that issuers of callable bonds with high interest coupons will "call" (or
prepay) their bonds before their maturity date. If a call were exercised by the
issuer during a period of declining interest rates, the Fund is likely to
replace such called security with a lower yielding security. If that were to
happen, it could decrease the Fund's dividends and possibly could affect the
market price of Shares. Similar risks exist when the Fund invests the proceeds
from matured or traded municipal obligations at market interest rates that are
below the Fund's current earnings rate.

Credit Risk. Credit risk is the risk that one or more municipal bonds in
the Fund's portfolio will decline in price, or fail to pay interest or principal
when due, because the issuer of the bond experiences a decline in its financial
status. In general, lower rated municipal bonds carry a greater degree of risk
that the issuer will lose its ability to make interest and principal payments,
which could have a negative impact on the Fund's net asset value or dividends.
Securities rated in the fourth highest category are considered investment grade
but they also may have some speculative characteristics.

Changes in the credit quality of the issuers of municipal obligations held
by the Fund will affect the principal value of (and possibly the income earned
on) such obligations. In addition, the value of such securities are affected by
changes in general economic conditions and business conditions affecting the
relevant economic sectors. Changes by Rating Agencies in their ratings of a
security and in the ability of the issuer to make payments of principal and
interest may also affect the value of the Fund's investments. The amount of
information about the financial condition of an issuer of municipal obligations
may not be as extensive as that made available by corporations whose securities
are publicly traded.

The Fund may invest in municipal leases and participations in municipal
leases. The obligation of the issuer to meet its obligations under such leases
is often subject to the appropriation by the appropriate legislative body, on an
annual or other basis, of funds for the payment of the obligations. Investments
in municipal leases are thus subject to the risk that the legislative body will
not make the necessary appropriation and the issuer will not otherwise be
willing or able to meet its obligation.

California Concentration. As described above, the Fund will invest
substantially all of its net assets in municipal obligations that are exempt
from California personal income tax. The Fund is therefore susceptible to
political, economic or regulatory factors affecting issuers of California
municipal obligations. The information set forth below and the related
information in the Statement of Additional Information is derived from sources
that are generally available to investors. The information is intended to give a
recent historical description and is not intended to indicate future or
continuing trends in the financial or other positions of California. It should
be noted that the creditworthiness of obligations issued by local California
issuers may be unrelated to the creditworthiness of obligations issued by the
State, and that there is no obligation on the part of the State to make payment
on such local obligations in the event of default.

California's economy is the largest among the 50 states and one of the
largest in the world. The State has a diversified economy with major sectors in
manufacturing, agriculture, services, tourism, international trade and
construction. The State has a population of about 35 million, which has been
growing at a 1-2% annual rate for several decades. Gross domestic product of
goods and services in the State exceeds $1 trillion. Personal income was
estimated at $1,095 billion in 2000. Total employment is over 16 million.

Since 1994, the California economy had been growing steadily, outpacing the
rest of the nation, with particular strength in high technology manufacturing,
software, exports, services, entertainment and construction. By late 2000,
unemployment had fallen to its lowest level in three decades. After a strong
fourth quarter of 2000, the economy entered a mild recession in 2001, in concert
with the slowdown of the
21

national economy and a cyclical downturn in the high technology section. The
aftermath of the September 11, 2001 terrorist attacks has hurt tourism-based
areas.

The State received significant tax revenues in recent years, derived from
the strong economy and stock market through 2000. Capital gains and stock
options income represented almost a quarter of General Fund revenue in the
2000-2001 fiscal year. The slowing economy and depressed stock market in 2001
will result in significantly reduced revenues in fiscal year 2001-2002, compared
both to the prior year and to earlier forecasts. Since January 2002, the revenue
situation has deteriorated further. The May Revision to the 2002 Governor's
Budget projects a combined budget gap for 2001-2002 and 2002-2003 of $23.6
billion. A large part of the State's annual budget is mandated by constitutional
guarantees (such as for education funding and debt service) and caseload
requirements for health and welfare programs. State General Obligation bonds
are, as of March 1, 2002, rated "A1" by Moody's, "A+" by S&P, and "AA" by Fitch
with some agencies maintaining a negative outlook.

Many local government agencies, particularly counties, continue to face
budget constraints due to limited taxing powers and mandated expenditures for
health, welfare and public safety, among other factors. The State and local
governments are limited in their ability to levy and raise property taxes and
other forms of taxes, fees or assessments, and in their ability to appropriate
their tax revenues, by a series of constitutional amendments, enacted by voter
initiative since 1978. Individual local governments may also have local
initiatives which affect their fiscal flexibility.

The foregoing information constitutes only a brief summary of some of the
general factors that may impact certain issuers of municipal obligations and
does not purport to be a complete or exhaustive description of all adverse
conditions to which issuers of municipal obligations held by the Fund are
subject. Additionally, many factors including national economic, social and
environment policies and conditions, which are not within the control of the
issuers of municipal obligations, could affect or could have an adverse impact
on the financial condition of the issuers. The Fund is unable to predict whether
or to what extent such factors or other factors may affect the issuers of the
municipal obligations, the market value or marketability of municipal
obligations or the ability of the respective issuers of the municipal
obligations acquired by the Fund to pay interest on or principal of the
municipal obligations. This information has not been independently verified. See
the Statement of Additional Information for a further discussion of factors
affecting municipal bonds in California.

Sector and Territory Concentration. The Fund may invest 25% or more of its
total assets in municipal obligations of issuers located in the same U.S.
territory or in municipal obligations in the same economic sector, including,
without limitation, the following: lease rental obligations of state and local
authorities; obligations dependent on annual appropriations by a territory's
legislature for payment; obligations of state and local housing finance
authorities, municipal utilities systems or public housing authorities;
obligations of hospitals as well as obligations of the education and
transportation sectors. This may make the Fund more susceptible to adverse
economic, political, or regulatory occurrences affecting a particular state or
economic sector. For example, health care related issuers are susceptible to
Medicaid reimbursement policies, and national and state health care legislation.
As concentration increases, so does the potential for fluctuation in the net
asset value of Fund Shares.

Liquidity Risk. At times, a portion of the Fund's assets may be invested
in securities as to which the Fund, by itself or together with other accounts
managed by Eaton Vance and its affiliates, holds a major portion of all of such
securities. The secondary market for some municipal obligations is less liquid
than that for taxable debt obligations or other more widely traded municipal
obligations. No established resale market exists for certain of the municipal
obligations in which the Fund may invest. The Fund has no limitation on the
amount of its assets, which may be invested in securities which are not readily
marketable or are subject to restrictions on resale. In certain situations, the
Fund could find it more difficult to sell such securities at desirable times
and/or prices.

Municipal Bond Market Risk. Investing in the municipal bond market
involves certain risks. The amount of public information available about the
municipal obligations in the Fund's portfolio is generally less than for
corporate equities or bonds, and the investment performance of the Fund may
therefore be
22

more dependent on the analytical abilities of Eaton Vance than if the Fund were
a stock fund or taxable bond fund.

The ability of municipal issuers to make timely payments of interest and
principal may be diminished during general economic downturns and as
governmental cost burdens are reallocated among federal, state and local
governments. In addition, laws enacted in the future by Congress or state
legislatures or referenda could extend the time for payment of principal and/or
interest, or impose other constraints on enforcement of such obligations, or on
the ability of municipalities to levy taxes. Issuers of municipal securities
might seek protection under the bankruptcy laws. In the event of bankruptcy of
such an issuer, the Fund could experience delays in collecting principal and
interest to which it is entitled. To enforce its rights in the event of default
in the payment of interest or repayment of principal, or both, the Fund may take
possession of and manage the assets securing the issuer's obligations on such
securities, which may increase the Fund's operating expenses. Any income derived
from the Fund's ownership or operation of such assets may not be tax-exempt.

Municipal Bond Insurance. In the event Moody's, S&P or Fitch (or all of
them) should downgrade its assessment of the claims-paying ability of a
particular insurer, it (or they) could also be expected to downgrade the ratings
assigned to municipal obligations insured by such insurer, and municipal
obligations insured under Portfolio Insurance issued by such insurer also would
be of reduced quality in the portfolio of the Fund. Any such downgrade could
have an adverse impact on the net asset value and market price of the Shares.
See "Primary Investment Policies -- Municipal Obligation Insurance Generally"
above.

In addition, to the extent the Fund employs Portfolio Insurance, the Fund
may be subject to certain restrictions on investments imposed by guidelines of
the insurance companies issuing such Portfolio Insurance. The Fund does not
expect these guidelines to prevent Eaton Vance from managing the Fund's
portfolio in accordance with the Fund's investment objective and policies.

Market Price of Shares. The Fund is a closed-end investment company with
no history of operations and is designed primarily for long-term investors and
not as a trading vehicle. The shares of closed-end investment companies often
trade at a discount from their net asset value, and the Shares may likewise
trade at a discount from net asset value. The trading price of the Fund's Shares
may be less than the initial public offering price, creating a risk of loss for
investors purchasing in the initial public offering of the Shares. This market
price risk may be greater for investors who sell their Shares within a
relatively short period after completion of this offering.

Inflation Risk. Inflation risk is the risk that the value of assets or
income from investment will be worth less in the future as inflation decreases
the value of money. As inflation increases, the real value of the Shares and
distributions thereon can decline. In addition, during any periods of rising
inflation, preferred shares dividend rates would likely increase, which would
tend to further reduce returns to Shareholders.

Non-Diversification. The Fund has registered as a "non-diversified"
investment company under the 1940 Act so that, subject to its investment
restrictions and applicable federal income tax diversification requirements,
with respect to 50% of its total assets, it will be able to invest more than 5%
(but not more than 25%) of the value of its total assets in the obligations of
any single issuer. To the extent the Fund invests a relatively high percentage
of its assets in obligations of a limited number of issuers, the Fund will be
more susceptible than a more widely diversified investment company to any single
corporate, economic, political or regulatory occurrence.

MANAGEMENT OF THE FUND

BOARD OF TRUSTEES

The management of the Fund, including general supervision of the duties
performed by the Adviser under the Advisory Agreement (as defined below), is the
responsibility of the Fund's Board under the laws of The Commonwealth of
Massachusetts and the Investment Company Act.
23

THE ADVISER

Eaton Vance acts as the Fund's investment adviser under an Investment
Advisory Agreement (the "Advisory Agreement"). The Adviser's principal office is
located at The Eaton Vance Building, 255 State Street, Boston, Massachusetts
02109. Eaton Vance, its affiliates and predecessor companies have been managing
assets of individuals and institutions since 1924 and of investment companies
since 1931. Eaton Vance (or its affiliates) currently serves as the investment
adviser to investment companies and various individual and institutional clients
with combined assets under management of approximately $55 billion. Eaton Vance
an indirect, wholly-owned subsidiary of Eaton Vance Corp., a publicly-held
holding company, which through its subsidiaries and affiliates engages primarily
in investment management, administration and marketing activities.

Eaton Vance employs 25 personnel in its municipal bond department,
including five portfolio managers, three traders and nine credit analysts. Eaton
Vance was one of the first advisory firms to manage a registered municipal bond
investment company, and has done so continuously since 1978. Eaton Vance and
certain of its subsidiaries currently manage 4 national municipal investment
companies, 38 single state municipal investment companies, 8 limited maturity
municipal investment companies and 1 money market municipal investment company,
with assets of about $7 billion. Ten of those funds are closed-end and 3 are
California funds with about $428 million in assets.

Under the general supervision of the Fund's Board of Trustees, the Adviser
will carry out the investment and reinvestment of the assets of the Fund, will
furnish continuously an investment program with respect to the Fund, will
determine which securities should be purchased, sold or exchanged, and will
implement such determinations. The Adviser will furnish to the Fund investment
advice and office facilities, equipment and personnel for servicing the
investments of the Fund. The Adviser will compensate all Trustees and officers
of the Fund who are members of the Adviser's organization and who render
investment services to the Fund, and will also compensate all other Adviser
personnel who provide research and investment services to the Fund. In return
for these services, facilities and payments, the Fund has agreed to pay the
Adviser as compensation under the Advisory Agreement a fee in the amount of
0.65% of the average weekly gross assets of the Fund. Gross assets of the Fund
shall be calculated by deducting accrued liabilities of the Fund not including
the amount of any preferred shares outstanding or the principal amount of any
indebtedness for money borrowed. During periods in which the Fund is using
leverage the fees paid to Eaton Vance for investment advisory services will be
higher than if the Fund did not use leverage because the fees paid will be
calculated on the basis of the Fund's gross assets, including proceeds from the
issuance of preferred shares.

Cynthia J. Clemson is the portfolio manager of the Fund and is responsible
for day-to-day management of the Fund's investments. Ms. Clemson also manages
other Eaton Vance portfolios, has been an Eaton Vance portfolio manager for more
than 5 years, and is a Vice President of Eaton Vance.

The Fund and the Adviser have adopted a Code of Ethics relating to personal
securities transactions. The Code permits Adviser personnel to invest in
securities (including securities that may be purchased or held by the Fund) for
their own accounts, subject to certain pre-clearance, reporting and other
restrictions and procedures contained in such Code.

Eaton Vance serves as administrator of the Fund, but currently receives no
compensation for providing administrative services to the Fund. Under the
Administration Agreement with the Fund ("Administration Agreement"), Eaton Vance
is responsible for managing the business affairs of the Fund, subject to the
supervision of the Fund's Board. Eaton Vance will furnish to the Fund all office
facilities, equipment and personnel for administering the affairs of the Fund.
Eaton Vance's administrative services include recordkeeping, preparation and
filing of documents required to comply with federal and state securities laws,
supervising the activities of the Fund's custodian and transfer agent, providing
assistance in connection with the Trustees' and shareholders' meetings,
providing service in connection with any repurchase offers and other
administrative services necessary to conduct the Fund's business.

DISTRIBUTIONS AND TAXES

The Fund intends to make monthly distributions of net investment income,
after payment of any dividends on any outstanding preferred shares. The Fund
will distribute annually any net short-term capital gain and any net capital
gain (which is the excess of net long-term capital gain over net short-term
capital loss). Distributions to Shareholders cannot be assured, and the amount
of each monthly distribution is likely to vary. Initial distributions to
Shareholders are expected to be declared approximately 45 days and are expected
to be paid approximately 60 days after the completion of this offering. While
there are any preferred shares outstanding, the Fund might not be permitted to
declare any cash dividend or other distribution on its Shares in certain
circumstances. See "Description of Capital Structure."

FEDERAL INCOME TAX

The following discussion of federal income tax matters is based on the
advice of Kirkpatrick & Lockhart LLP, counsel to the Fund.

The Fund intends to invest a sufficient portion of its assets in tax-exempt
municipal securities so that it will be permitted to pay "exempt-interest
dividends" (as defined under applicable federal income tax law). Each
distribution of exempt-interest dividends, whether paid in cash or reinvested in
additional Shares, ordinarily will constitute income exempt from regular federal
income tax. Furthermore, exempt-interest dividends are included in determining
what portion, if any, of a person's social security and railroad retirement
benefits will be includible in gross income subject to regular federal income
tax. Distributions of any taxable net investment income and net short-term
capital gain are taxable as ordinary income. Distributions of the Fund's net
capital gain ("capital gain dividends"), if any, are taxable to Shareholders as
long-term capital gains, regardless of the length of time Shares have been held
by Shareholders. Distributions, if any, in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's Shares and, after
that basis has been reduced to zero, will constitute capital gains to the
Shareholder (assuming the Shares are held as a capital asset). See below for a
summary of the maximum tax rates applicable to capital gains (including capital
gain dividends). Interest on indebtedness incurred or continued by a Shareholder
to purchase or carry Shares is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the Shareholder's taxable
year.

The Fund will inform Shareholders of the source and tax status of all
distributions promptly after the close of each calendar year.

Selling Shareholders will generally recognize gain or loss in an amount
equal to the difference between the Shareholder's adjusted tax basis in the
Shares and the amount received. If the Shares are held as a capital asset, the
gain or loss will be a capital gain or loss. The maximum tax rate applicable to
net capital gains recognized by individuals and other non-corporate taxpayers is
(i) the same as the maximum ordinary income tax rate for gains recognized on the
sale of capital assets held for one year or less, (ii) 20% for gains recognized
on the sale of capital assets held for more than one year (as well as capital
gain dividends) (10% for individuals in the 10% or 15% tax bracket) or (iii) 18%
for gains on the sale of certain capital assets held more than five (5) years.
Any loss on a disposition of Shares held for six months or less will be treated
as a long-term capital loss to the extent of any capital gain dividends received
with respect to those Shares, and will be disallowed to the extent of any
exempt-interest dividends received with respect to those Shares. For purposes of
determining whether Shares have been held for six months or less, the holding
period is suspended for any periods during which the Shareholder's risk of loss
is diminished as a result of holding one or more other positions in
substantially similar or related property, or through certain options or short
sales. Any loss realized on a sale or exchange of Shares will be disallowed to
the extent those Shares are replaced by other Shares within a period of 61 days
beginning 30 days before and ending 30 days after the date of disposition of the
Shares (which could occur, for example, if the Shareholder is a participant in
the Plan (as defined below)). In that event, the basis of the replacement Shares
will be adjusted to reflect the disallowed loss.

Distributions by the Fund of net tax-exempt interest income that are
properly designated as "exempt-interest dividends" may be treated by
shareholders as interest excludable from gross income under Section 103(a) of
the Code. In order for the Fund to be entitled to pay the tax-exempt interest
income as exempt-interest dividends to its shareholders, the Fund must and
intends to satisfy certain requirements, including the requirement that, at the
close of each quarter of its taxable year, at least 50% of the value of its
total assets consists of obligations the interest on which is exempt from
regular federal income tax under Code Section 103(a). Interest on certain
municipal obligations is treated as a tax preference item for purposes of the
alternative minimum tax. Shareholders of the Fund are required to report
tax-exempt interest on their federal income tax returns.

An investor should be aware that if Shares are purchased shortly before the
record date for any taxable dividend (including a capital gain dividend), the
purchase price likely will reflect the value of the dividend and the investor
then would receive a taxable distribution likely to reduce the trading value of
such Shares, in effect resulting in a taxable return of some of the purchase
price. Taxable distributions to individuals and certain other non-corporate
Shareholders, including those who have not provided their correct taxpayer
identification number and other required certifications, may be subject to
"backup" federal income tax withholding at the rate of 30%.

CALIFORNIA TAXES

In the opinion of special California tax counsel, Sidley Austin Brown &
Wood LLP, under California law, dividends paid by the Fund are exempt from
California personal income tax applicable to individuals who reside in
California to the extent such dividends are derived from interest payment on
California municipal obligations and municipal obligations issued by certain
U.S. Territories and provided that at least 50% of the assets of the Fund at the
close of each quarter of its taxable year are invested in obligations the
interest on which is exempt under either federal or California law from taxation
by the state of California. This opinion assumes and relies upon the Fund's
qualification as a regulated investment company under federal income tax law.

Under the California personal income tax, distributions of short-term
capital gains are treated as ordinary income, and distributions of long-term
capital gains are treated as long-term capital gains taxable at ordinary income
rates. Exempt-interest dividends paid to a corporate shareholder subject to
California state corporate franchise tax will be taxable as ordinary income.

The foregoing briefly summarizes some of the important federal income tax
and California personal income tax consequences to Shareholders of investing in
Shares, reflects the federal and California income tax laws as of the date of
this Prospectus, and does not address special tax rules applicable to certain
types of investors, such as corporate and foreign investors. Investors should
consult their tax advisors regarding other federal, state or local tax
considerations that may be applicable in their particular circumstances,
including state alternative minimum tax as well as any proposed tax law changes.

DIVIDEND REINVESTMENT PLAN

Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), a
Shareholder may elect to have all distributions of dividends (including all
capital gain dividends) automatically reinvested in Shares. Shareholders may
elect to participate in the Plan by completing the Dividend Reinvestment Plan
Application Form. If Shareholders do not participate, such Shareholders will
receive all distributions in cash paid by check mailed directly to them by PFPC
Inc., as dividend paying agent.

PFPC Inc. (the "Plan Agent") serves as agent for the Shareholders in
administering the Plan. Shareholders who elect not to participate in the Plan
will receive all distributions of dividends in cash paid by check mailed
directly to the Shareholder of record (or if the Shares are held in Street or
other nominee name, then to the nominee) by PFPC Inc., as disbursing agent.
Participation in the Plan is completely voluntary and may be terminated or
resumed at any time without penalty by written notice if received by the Plan
Agent not less than ten days prior to any dividend record date.

Shares will be acquired by the Plan Agent or an independent broker-dealer
for the participants' accounts, depending upon the circumstances described
below, either (i) through receipt of additional previously authorized but
unissued Shares from the Fund ("newly issued Shares") or (ii) by purchase of
outstanding Shares on the open market ("open-market purchases") on the American
Stock Exchange or elsewhere. If on the payment date for the dividend, the net
asset value per Share is equal to or less than the market price per Share plus
estimated brokerage commissions (such condition being referred to herein as
"market premium"), the Plan Agent will invest the dividend amount in newly
issued Shares on behalf of the participants. The number of newly issued Shares
to be credited to each participant's account will be determined by dividing the
dollar amount of the dividend by the net asset value per Share on the date the
Shares are issued, provided that the maximum discount from the then current
market price per Share on the date of issuance may not exceed 5%. If on the
dividend payment date the net asset value per Share is greater than the market
value plus estimated brokerage commissions (such condition being referred to
herein as "market discount"), the Plan Agent will invest the dividend amount in
Shares acquired on behalf of the participants in open-market purchases.

In the event of a market discount on the dividend payment date, the Plan
Agent will have up to 30 days after the dividend payment date to invest the
dividend amount in Shares acquired in open-market purchases. If, before the Plan
Agent has completed its open-market purchases, the market price of a Share
exceeds the net asset value per Share, the average per Share purchase price paid
by the Plan Agent may exceed the net asset value of the Fund's Shares, resulting
in the acquisition of fewer Shares than if the dividend had been paid in newly
issued Shares on the dividend payment date. Therefore, the Plan provides that if
the Plan Agent is unable to invest the full dividend amount in open-market
purchases during the purchase period or if the market discount shifts to a
market premium during the purchase period, the Plan Agent will cease making
open-market purchases and will invest the uninvested portion of the dividend
amount in newly issued Shares.

The Plan Agent maintains all Shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the accounts, including
information needed by Shareholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent on behalf of the Plan
participant, and each Shareholder proxy will include those Shares purchased or
received pursuant to the Plan. The Plan Agent will forward all proxy
solicitation materials to participants and vote proxies for Shares held pursuant
to the Plan in accordance with the instructions of the participants.

In the case of Shareholders such as banks, brokers or nominees that hold
Shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of Shares certified from time to time by the
record Shareholder's name and held for the account of beneficial owners who
participate in the Plan.

There will be no brokerage charges with respect to Shares issued directly
by the Fund as a result of dividends payable either in Shares or in cash.
However, each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open-market purchases in connection
with the reinvestment of dividends.

Shareholders participating in the Plan may receive benefits not available
to Shareholders not participating in the Plan. If the market price (plus
commissions) of the Fund's Shares is above their net asset value, participants
in the Plan will receive Shares of the Fund at less than they could otherwise
purchase them and will have Shares with a cash value greater than the value of
any cash distribution they would have received on their Shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions in Shares with a net asset value greater than the per Share value
of any cash distribution they would have received on their Shares. However,
there may be insufficient Shares available in the market to make distributions
in Shares at prices below the net asset value. Also, since the Fund does not
redeem its Shares, the price on resale may be more or less than the net asset
value.

Experience under the Plan may indicate that changes are desirable.
Accordingly, upon thirty (30) days notice to Plan participants, the Fund
reserves the right to amend or terminate the Plan.

Shareholders will be charged a $5.00 service charge and pay brokerage charges if
such Shareholder directs the Plan Agent to sell Shares held in a dividend
reinvestment account.

All correspondence concerning the Plan should be directed to the Plan Agent
at PFPC Inc., P.O. Box 43027, Providence, RI 02940-3027. Please call
1-800-331-1710 between the hours of 9:00 a.m. and 5:00 p.m. Eastern Standard
Time if you have questions regarding the Plan.

DESCRIPTION OF CAPITAL STRUCTURE

The Fund is an unincorporated business trust established under the laws of
The Commonwealth of Massachusetts by an Agreement and Declaration of Trust dated
July 8, 2002 (the "Declaration of Trust"). The Declaration of Trust provides
that the Trustees of the Fund may authorize separate classes of shares of
beneficial interest. The Trustees have authorized an unlimited number of Shares.
The Fund intends to hold annual meetings of Shareholders in compliance with the
requirements of the American Stock Exchange.

Shares. The Declaration of Trust permits the Fund to issue an unlimited
number of full and fractional Shares of beneficial interest, $0.01 par value per
Share. Each Share represents an equal proportionate interest in the assets of
the Fund with each other Share in the Fund. Holders of Shares will be entitled
to the payment of dividends when, as and if declared by the Board. The 1940 Act
or the terms of any borrowings or preferred shares may limit the payment of
dividends to the holders of Shares. Each whole Share shall be entitled to one
vote as to matters on which it is entitled to vote pursuant to the terms of the
Declaration of Trust on file with the SEC. Upon liquidation of the Fund, after
paying or adequately providing for the payment of all liabilities of the Fund
and the liquidation preference with respect to any outstanding preferred shares,
and upon receipt of such releases, indemnities and refunding agreements as they
deem necessary for their protection, the Trustees may distribute the remaining
assets of the Fund among the holders of the Shares. The Declaration of Trust
provides that Shareholders are not liable for any liabilities of the Fund,
requires inclusion of a clause to that effect in every agreement entered into by
the Fund and indemnifies shareholders against any such liability. Although
shareholders of an unincorporated business trust established under Massachusetts
law, in certain limited circumstances, may be held personally liable for the
obligations of the Fund as though they were general partners, the provisions of
the Declaration of Trust described in the foregoing sentence make the likelihood
of such personal liability remote.

While there are any borrowings or preferred shares outstanding, the Fund
may not be permitted to declare any cash dividend or other distribution on its
Shares, unless at the time of such declaration, (i) all accrued dividends on
preferred shares or accrued interest on borrowings have been paid and (ii) the
value of the Fund's total assets (determined after deducting the amount of such
dividend or other distribution), less all liabilities and indebtedness of the
Fund not represented by senior securities, is at least 300% of the aggregate
amount of such securities representing indebtedness and at least 200% of the
aggregate amount of securities representing indebtedness plus the aggregate
liquidation value of the outstanding preferred shares (expected to equal the
aggregate original purchase price of the outstanding preferred shares plus
redemption premium, if any, together with any accrued and unpaid dividends
thereon, whether or not earned or declared and on a cumulative basis). In
addition to the requirements of the 1940 Act, the Fund may be required to comply
with other asset coverage requirements as a condition of the Fund obtaining a
rating of the preferred shares from a Rating Agency. These requirements may
include an asset coverage test more stringent than under the 1940 Act. This
limitation on the Fund's ability to make distributions on its Shares could in
certain circumstances impair the ability of the Fund to maintain its
qualification for taxation as a regulated investment company. The Fund intends,
however, to the extent possible to purchase or redeem preferred shares from time
to time to maintain compliance with such asset coverage requirements and may pay
special dividends to the holders of the preferred shares in certain
circumstances in connection with any such impairment of the Fund's status as a
regulated investment company. See "Investment Objective, Policies and Risks" and
"Distributions and Taxes." Depending on the timing of

any such redemption or repayment, the Fund may be required to pay a premium in
addition to the liquidation preference of the preferred shares to the holders
thereof.

The Fund has no present intention of offering additional Shares, except as
described herein. Other offerings of its Shares, if made, will require approval
of the Board. Any additional offering will not be sold at a price per Share
below the then current net asset value (exclusive of underwriting discounts and
commissions) except in connection with an offering to existing Shareholders or
with the consent of a majority of the Fund's outstanding Shares. The Shares have
no preemptive rights.

The Fund generally will not issue Share certificates. However, upon written
request to the Fund's transfer agent, a share certificate will be issued for any
or all of the full Shares credited to an investor's account. Share certificates
that have been issued to an investor may be returned at any time.

Repurchase of Shares and Other Discount Measures. Because shares of
closed-end management investment companies frequently trade at a discount to
their net asset values, the Board has determined that from time to time it may
be in the interest of Shareholders for the Fund to take corrective actions. The
Board, in consultation with Eaton Vance, will review at least annually the
possibility of open market repurchases and/or tender offers for the Shares and
will consider such factors as the market price of the Shares, the net asset
value of the Shares, the liquidity of the assets of the Fund, effect on the
Fund's expenses, whether such transactions would impair the Fund's status as a
regulated investment company or result in a failure to comply with applicable
asset coverage requirements, general economic conditions and such other events
or conditions which may have a material effect on the Fund's ability to
consummate such transactions. There are no assurances that the Board will, in
fact, decide to undertake either of these actions or if undertaken, that such
actions will result in the Fund's Shares trading at a price which is equal to or
approximates their net asset value. In recognition of the possibility that the
Shares might trade at a discount to net asset value and that any such discount
may not be in the interest of Shareholders, the Board, in consultation with
Eaton Vance, from time to time may review possible actions to reduce any such
discount.

Preferred Shares. The Declaration of Trust authorizes the issuance of an
unlimited number of shares of beneficial interest with preference rights,
including preferred shares (the "Preferred Shares"), having a par value of $0.01
per share, in one or more series, with rights as determined by the Board, by
action of the Board without the approval of the Shareholders.

Under the requirements of the 1940 Act, the Fund must, immediately after
the issuance of any Preferred Shares, have an "asset coverage" of at least 200%.
Asset coverage means the ratio which the value of the total assets of the Fund,
less all liability and indebtedness not represented by senior securities (as
defined in the 1940 Act), bears to the aggregate amount of senior securities
representing indebtedness of the Fund, if any, plus the aggregate liquidation
preference of the Preferred Shares. If the Fund seeks a rating of the Preferred
Shares, asset coverage requirements, in addition to those set forth in the 1940
Act, may be imposed. The liquidation value of the Preferred Shares is expected
to equal their aggregate original purchase price plus redemption premium, if
any, together with any accrued and unpaid dividends thereon (on a cumulative
basis), whether or not earned or declared. The terms of the Preferred Shares,
including their dividend rate, voting rights, liquidation preference and
redemption provisions, will be determined by the Board (subject to applicable
law and the Fund's Declaration of Trust) if and when it authorizes the Preferred
Shares. The Fund may issue Preferred Shares that provide for the periodic
redetermination of the dividend rate at relatively short intervals through an
auction or remarketing procedure, although the terms of the Preferred Shares may
also enable the Fund to lengthen such intervals. At times, the dividend rate as
redetermined on the Fund's Preferred Shares may approach or exceed the Fund's
return after expenses on the investment of proceeds from the Preferred Shares
and the Fund's leverage structure would result in a lower rate of return to
Shareholders than if the Fund were not so structured.

In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Fund, the terms of any Preferred Shares may entitle the
holders of Preferred Shares to receive a preferential liquidating distribution
(expected to equal the original purchase price per share plus redemption
premium, if any, together with accrued and unpaid dividends, whether or not
earned or declared and on a cumulative
29

basis) before any distribution of assets is made to holders of Shares. After
payment of the full amount of the liquidating distribution to which they are
entitled, the preferred shareholders would not be entitled to any further
participation in any distribution of assets by the Fund.

Holders of Preferred Shares, voting as a class, shall be entitled to elect
two of the Fund's Trustees. Under the 1940 Act, if at any time dividends on the
Preferred Shares are unpaid in an amount equal to two full years' dividends
thereon, the holders of all outstanding Preferred Shares, voting as a class,
will be allowed to elect a majority of the Fund's Trustees until all dividends
in default have been paid or declared and set apart for payment. In addition, if
required by the Rating Agency rating the Preferred Shares or if the Board
determines it to be in the best interests of the Shareholders, issuance of the
Preferred Shares may result in more restrictive provisions than required by the
1940 Act being imposed. In this regard, holders of the Preferred Shares may be
entitled to elect a majority of the Fund's Board in other circumstances, for
example, if one payment on the Preferred Shares is in arrears.

The Fund currently intends to seek a Aaa/AAA grade rating for the Preferred
Shares from any Rating Agency. The Fund intends that, as long as Preferred
Shares are outstanding, the composition of its portfolio will reflect guidelines
established by such Rating Agency. Although, as of the date hereof, no such
Rating Agency has established guidelines relating to the Preferred Shares, based
on previous guidelines established by such Rating Agencies for the securities of
other issuers, the Fund anticipates that the guidelines with respect to the
Preferred Shares will establish a set of tests for portfolio composition and
asset coverage that supplement (and in some cases are more restrictive than) the
applicable requirements under the 1940 Act. Although, at this time, no assurance
can be given as to the nature or extent of the guidelines which may be imposed
in connection with obtaining a rating of the Preferred Shares, the Fund
currently anticipates that such guidelines will include asset coverage
requirements which are more restrictive than those under the 1940 Act,
restrictions on certain portfolio investments and investment practices,
requirements that the Fund maintain a portion of its assets in short-term, high-
quality, fixed-income securities and certain mandatory redemption requirements
relating to the Preferred Shares. No assurance can be given that the guidelines
actually imposed with respect to the Preferred Shares by such Rating Agency will
be more or less restrictive than as described in this Prospectus.

Anti-Takeover Provisions in the Declaration of Trust. The Declaration of
Trust includes provisions that could have the effect of limiting the ability of
other entities or persons to acquire control of the Fund or to change the
composition of its Board, and could have the effect of depriving Shareholders of
an opportunity to sell their Shares at a premium over prevailing market prices
by discouraging a third party from seeking to obtain control of the Fund. These
provisions may have the effect of discouraging attempts to acquire control of
the Fund, which attempts could have the effect of increasing the expenses of the
Fund and interfering with the normal operation of the Fund. The Board is divided
into three classes, with the term of one class expiring at each annual meeting
of Shareholders. At each annual meeting, one class of Trustees is elected to a
three-year term. This provision could delay for up to two years the replacement
of a majority of the Board. A Trustee may be removed from office only for cause
by a written instrument signed by the remaining Trustees or by a vote of the
holders of at least 2/3 of the class of shares of the Fund that elected such
Trustee and is entitled to vote on the matter.

In addition, the Declaration of Trust requires the favorable vote of the
holders of at least 75% of the outstanding shares of each class of the Fund,
voting as a class, then entitled to vote to approve, adopt or authorize certain
transactions with 5%-or-greater holders of a class of shares and their
associates, unless the Board shall by resolution have approved a memorandum of
understanding with such holders, in which case normal voting requirements would
be in effect. For purposes of these provisions, a 5%-or-greater holder of a
class of shares (a "Principal Shareholder") refers to any person who, whether
directly or indirectly and whether alone or together with its affiliates and
associates, beneficially owns 5% or more of the outstanding shares of any class
of beneficial interest of the Fund. The transactions subject to these special
approval requirements are: (i) the merger or consolidation of the Fund or any
subsidiary of the Fund with or into any Principal Shareholder; (ii) the issuance
of any securities of the Fund to any Principal Shareholder for cash; (iii) the
sale, lease or exchange of all or any substantial part of the assets of the Fund
to any Principal Shareholder (except assets having an aggregate fair market
value of less than
30

$1,000,000, aggregating for the purpose of such computation all assets sold,
leased or exchanged in any series of similar transactions within a twelve-month
period); or (iv) the sale, lease or exchange to the Fund or any subsidiary
thereof, in exchange for securities of the Fund, of any assets of any Principal
Shareholder (except assets having an aggregate fair market value of less than
$1,000,000, aggregating for the purposes of such computation all assets sold,
leased or exchanged in any series of similar transactions within a twelve-month
period).

The Board has determined that provisions with respect to the Board and the
75% voting requirements described above, which voting requirements are greater
than the minimum requirements under Massachusetts law or the 1940 Act, are in
the best interest of Shareholders generally. Reference should be made to the
Declaration of Trust on file with the SEC for the full text of these provisions.

Conversion to Open-End Fund. The Fund may be converted to an open-end
investment company at any time if approved by the lesser of (i) 2/3 or more of
the Fund's then outstanding Shares and Preferred Shares (if any), each voting
separately as a class, or (ii) more than 50% of the then outstanding Shares and
Preferred Shares (if any), voting separately as a class if such conversion is
recommended by at least 75% of the Trustees then in office. If approved in the
foregoing manner, conversion of the Fund could not occur until 90 days after the
shareholders' meeting at which such conversion was approved and would also
require at least 30 days' prior notice to all shareholders. The composition of
the Fund's portfolio likely would prohibit the Fund from complying with
regulations of the SEC applicable to open-end investment companies. Accordingly,
conversion likely would require significant changes in the Fund's investment
policies and liquidation of a substantial portion of its relatively illiquid
portfolio. Conversion of the Fund to an open-end investment company also would
require the redemption of any outstanding Preferred Shares and could require the
repayment of borrowings, which would eliminate the leveraged capital structure
of the Fund with respect to the Shares. In the event of conversion, the Shares
would cease to be listed on the American Stock Exchange or other national
securities exchange or market system. The Board believes, however, that the
closed-end structure is desirable, given the Fund's investment objective and
policies. Investors should assume, therefore, that it is unlikely that the Board
would vote to convert the Fund to an open-end investment company. Shareholders
of an open-end investment company may require the company to redeem their shares
at any time (except in certain circumstances as authorized by or under the 1940
Act) at their net asset value, less such redemption charge, if any, as might be
in effect at the time of a redemption. The Fund expects to pay all such
redemption requests in cash, but intends to reserve the right to pay redemption
requests in a combination of cash or securities. If such partial payment in
securities were made, investors may incur brokerage costs in converting such
securities to cash. If the Fund were converted to an open-end fund, it is likely
that new Shares would be sold at net asset value plus a sales load.

UNDERWRITING

Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof (the "Underwriting Agreement"), each Underwriter named
below has severally agreed to purchase, and the Fund has agreed to sell to such
Underwriter, the number of Shares set forth opposite the name of such
Underwriter.

UNDERWRITERS NUMBER OF SHARES
------------ ----------------

Salomon Smith Barney Inc. ................................ 1,528,200
UBS Warburg LLC........................................... 1,528,000
A.G. Edwards & Sons, Inc. ................................ 1,528,000
Prudential Securities Incorporated........................ 1,528,000
Quick & Reilly, Inc. A FleetBoston Financial Company...... 1,528,000
Raymond James & Associates, Inc. ......................... 1,528,000
RBC Dain Rauscher, Inc. .................................. 1,528,000
TD Waterhouse Investor Services, Inc. .................... 1,528,000
Wachovia Securities, Inc. ................................ 1,528,000
Wells Fargo Securities, LLC............................... 1,528,000
H&R Block Financial Advisors, Inc. ....................... 318,200
CIBC World Markets Corp. ................................. 318,200
Deutsche Bank Securities Inc. ............................ 318,200
U.S. Bancorp Piper Jaffray Inc. .......................... 318,200
Advest, Inc. ............................................. 178,300
Crowell, Weedon & Co. .................................... 178,300
Fahnestock & Co. Inc. .................................... 178,300
J.J.B. Hilliard, W.L. Lyons, Inc. ........................ 178,300
Janney Montgomery Scott LLC............................... 178,300
Legg Mason Wood Walker, Incorporated...................... 178,300
Ryan, Beck & Co., LLC..................................... 178,300
The Seidler Companies Incorporated........................ 178,300
Stifel, Nicolaus & Company, Incorporated.................. 178,300
Wedbush Morgan Securities Inc. ........................... 178,300
Howe Barnes Investments, Inc. ............................ 95,500
Wayne Hummer & Co. ....................................... 95,500
Johnston, Lemon & Co. Incorporated........................ 95,500
Lasalle St. Securities Inc. .............................. 95,500
Sands Brothers & Co., Ltd. ............................... 95,500
Charles Schwab & Co., Inc. ............................... 95,500
M.L. Stern & Co., Inc. ................................... 95,500
SWS Securities, Inc. ..................................... 95,500
----------
Total............................................. 19,100,000
==========

The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase the Shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to purchase all the Shares (other than those
covered by the over-allotment option described below) if they purchase any of
the Shares. The representatives have advised the Fund that the Underwriters do
not intend to confirm any sales to any accounts over which they exercise
discretionary authority.

The Underwriters, for whom Salomon Smith Barney Inc., UBS Warburg LLC, A.G.
Edwards & Sons, Inc., Prudential Securities Incorporated, Quick & Reilly, Inc. A
FleetBoston Financial Company,

Raymond James & Associates, Inc., RBC Dain Rauscher, Inc., TD Waterhouse
Investor Services, Inc., Wachovia Securities, Inc. and Wells Fargo Securities,
LLC are acting as representatives, propose to offer some of the Shares directly
to the public at the public offering price set forth on the cover page of this
Prospectus and some of the Shares to certain dealers at the public offering
price less a concession not in excess of $0.45 per Share. The sales load the
Fund will pay of $0.675 per share is equal to 4.5% of the initial offering
price. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $0.10 per Share on sales to certain other dealers. Certain
dealers acting in the capacity of sub-underwriters may receive additional
compensation for acting in such a capacity. If all of the Shares are not sold at
the initial offering price, the representatives may change the public offering
price and other selling terms. Investors must pay for any Shares purchased on or
before August 30, 2002. In connection with this offering, Eaton Vance may
perform clearing services without charge for brokers and dealers for whom it
regularly provides clearing services that are participating in the offering as
members of the selling group.

The Fund has granted to the Underwriters an option, exercisable for 45 days
from the date of this Prospectus, to purchase up to 2,865,000 additional Shares
at the public offering price less the sales load. The Underwriters may exercise
such option solely for the purpose of covering over allotments, if any, in
connection with this offering. To the extent such option is exercised, each
Underwriter will be obligated, subject to certain conditions, to purchase a
number of additional Shares approximately proportionate to such Underwriter's
initial purchase commitment.

The Fund and Eaton Vance have agreed that, for a period of 180 days from
the date of this Prospectus, they will not, without the prior written consent of
Salomon Smith Barney Inc., on behalf of the Underwriters, dispose of or hedge
any Shares or any securities convertible into or exchangeable for Shares.
Salomon Smith Barney Inc., in its sole discretion, may release any of the
securities subject to these agreements at any time without notice.

Prior to the offering, there has been no public market for the Shares.
Consequently, the initial public offering price for the Shares was determined by
negotiation among the Fund, Eaton Vance and the representatives. There can be no
assurance, however, that the price at which the Shares will sell in the public
market after this offering will not be lower than the price at which they are
sold by the Underwriters or that an active trading market in the Shares will
develop and continue after this offering. The Fund's common shares have been
listed on the American Stock Exchange under the symbol "EVM".

The Fund and Eaton Vance have agreed to indemnify the several Underwriters
or contribute to losses arising out of certain liabilities, including
liabilities under the Securities Act of 1933, as amended.

Eaton Vance or an affiliate has agreed to pay offering and organizational
costs (other than sales load) that exceed $0.03 per share.

In addition, the Fund has agreed to reimburse the Underwriters for certain
expenses incurred by the Underwriters in the offering.

Certain Underwriters participating in the Share offering may be invited,
some period of time after completion of this offering, to participate in the
offering of preferred shares and will receive compensation for their
participation in that preferred share offering. The number of Shares purchased
by each Underwriter in this offering may be a factor in determining (i) whether
that Underwriter is selected to participate in the offering of the preferred
shares, (ii) the number of preferred shares allocated to that Underwriter in
that offering, and (iii) the amount of certain additional preferred share
underwriting compensation available to that Underwriter. The offering costs
associated with the issuance of preferred shares are currently estimated to be
slightly more than 2% of the total amount of the preferred share offering. These
costs will effectively be borne by the holders of the Shares. See "Fund
Expenses" above.

In connection with the requirements for listing the Fund's Shares on the
American Stock Exchange, the Underwriters have undertaken to sell lots of 100 or
more Shares to a minimum of 400 beneficial owners in the United States. The
minimum investment requirement is 100 Shares.

Certain Underwriters may make a market in the Shares after trading in the
Shares has commenced on the American Stock Exchange. No Underwriter is, however,
obligated to conduct market-making activities and any such activities may be
discontinued at any time without notice, at the sole discretion of the
Underwriter. No assurance can be given as to the liquidity of, or the trading
market for, the Shares as a result of any market-making activities undertaken by
any Underwriter. This Prospectus is to be used by any Underwriter in connection
with the offering and, during the period in which a Prospectus must be
delivered, with offers and sales of the Shares in market-making transactions in
the over-the-counter market at negotiated prices related to prevailing market
prices at the time of the sale.

The Underwriters have advised the Fund that, pursuant to Regulation M under
the Securities Exchange Act of 1934, as amended, certain persons participating
in the offering may engage in transactions, including stabilizing bids, covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Shares on the American Stock
Exchange at a level above that which might otherwise prevail in the open market.
A "stabilizing bid" is a bid for or purchase of the Shares on behalf of an
Underwriter for the purpose of fixing or maintaining the price of the Shares. A
"covering transaction" is a bid for or purchase of the Shares on behalf of an
Underwriter to reduce a short position incurred by the Underwriters in
connection with the offering. A "penalty bid" is a contractual arrangement
whereby if, during a specified period after the issuance of the Shares, the
Underwriters purchase Shares in the open market for the account of the
underwriting syndicate and the Shares purchased can be traced to a particular
Underwriter or member of the selling group, the underwriting syndicate may
require the Underwriter or selling group member in question to purchase the
Shares in question at the cost price to the syndicate or may recover from (or
decline to pay to) the Underwriter or selling group member in question any or
all compensation (including, with respect to a representative, the applicable
syndicate management fee) applicable to the Shares in question. As a result, an
Underwriter or selling group member and, in turn, brokers may lose the fees that
they otherwise would have earned from a sale of the Shares if their customer
resells the Shares while the penalty bid is in effect. The Underwriters are not
required to engage in any of these activities, and any such activities, if
commenced, may be discontinued at any time.

The underwriting agreement provides that it may be terminated in the
absolute discretion of the representatives without liability on the part of any
Underwriter to the Fund or Eaton Vance if, prior to delivery of and payment for
the Shares, (i) trading in the Shares or securities generally on the New York
Stock Exchange, American Stock Exchange, Nasdaq National Market or the Nasdaq
Stock Market shall have been suspended or materially limited, (ii) additional
material governmental restrictions not in force on the date of the underwriting
agreement have been imposed upon trading in securities generally or a general
moratorium on commercial banking activities in New York shall have been declared
by either federal or state authorities or (iii) any outbreak or material
escalation of hostilities or other international or domestic calamity, crisis or
change in political, financial or economic conditions, occurs, the effect of
which is such as to make it, in the judgment of the representatives,
impracticable or inadvisable to commence or continue the offering of the Shares
at the offering price to the public set forth on the cover page of the
Prospectus or to enforce contracts for the resale of the Shares by the
Underwriters.

The Fund anticipates that from time to time the representatives of the
Underwriters and certain other Underwriters may act as brokers or dealers in
connection with the execution of the Fund's portfolio transactions after they
have ceased to be Underwriters and, subject to certain restrictions, may act as
brokers while they are Underwriters.

Prior to the public offering of Shares, Eaton Vance purchased Shares from
the Fund in an amount satisfying the net worth requirements of Section 14(a) of
the 1940 Act. As of the date of this Prospectus, Eaton Vance owned 100% of the
outstanding Shares. Eaton Vance may be deemed to control the Fund until such
time as it owns less than 25% of the outstanding Shares which is expected to
occur as of the completion of the offering of Shares.

The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, New York 10013. The principal business address of
UBS Warburg LLC, 229 Park Avenue, New York, NY 10171.

CUSTODIAN AND TRANSFER AGENT

Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston, MA
02116 is the custodian of the Fund and will maintain custody of the securities
and cash of the Fund. IBT maintains the Fund's general ledger and computes net
asset value per share at least weekly. IBT also attends to details in connection
with the sale, exchange, substitution, transfer and other dealings with the
Fund's investments, and receives and disburses all funds. IBT also assists in
preparation of shareholder reports and the electronic filing of such reports
with the SEC.

PFPC Inc., P.O. Box 43027, Providence, RI 02940-3027 is the transfer agent
and dividend disbursing agent of the Fund.

LEGAL OPINIONS

Certain legal matters in connection with the Shares will be passed upon for
the Fund by Kirkpatrick & Lockhart LLP, Boston, Massachusetts, and for the
Underwriters by Simpson Thacher & Bartlett, New York, New York. Simpson Thacher
& Bartlett may rely as to certain matters of Massachusetts law on the opinion of
Kirkpatrick & Lockhart LLP. Kirkpatrick & Lockhart LLP and Simpson Thacher &
Bartlett may rely as to certain matters of California law on the opinion of
Sidley Austin Brown & Wood LLP, New York, New York.

REPORTS TO STOCKHOLDERS

The Fund will send to Shareholders unaudited semi-annual and audited annual
reports, including a list of investments held.

INDEPENDENT AUDITORS

Deloitte & Touche LLP, Boston, Massachusetts, are the independent
accountants for the Fund and will audit the Fund's financial statements.

ADDITIONAL INFORMATION

The Prospectus and the Statement of Additional Information do not contain
all of the information set forth in the Registration Statement that the Fund has
filed with the SEC. The complete Registration Statement may be obtained from the
SEC upon payment of the fee prescribed by its rules and regulations. The
Statement of Additional Information can be obtained without charge by calling
1-800-225-6265.

Statements contained in this Prospectus as to the contents of any contract
or other documents referred to are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part, each such statement being qualified in all respects by such reference.

TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION

PAGE
----

Additional Investment Information and Restrictions.......... B-1
Trustees and Officers....................................... B-9
Investment Advisory and Other Services...................... B-13
Determination of Net Asset Value............................ B-15
Portfolio Trading........................................... B-15
Taxes....................................................... B-17
Other Information........................................... B-20
Independent Auditors........................................ B-21
Independent Auditors' Report................................ B-22
Financial Statements........................................ B-23
Appendix A: Ratings of Municipal Bonds...................... B-25
Appendix B: Tax Equivalent Yield Table...................... B-31
Appendix C: California and U.S. Territory Information....... B-32
Appendix D: Description of Insurers......................... B-54
Appendix E: Performance Related and Comparative
Information............................................... B-57

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
19,100,000 SHARES
EATON VANCE
INSURED CALIFORNIA MUNICIPAL
BOND FUND

COMMON SHARES

[EATON VANCE LOGO]
------------
PROSPECTUS
AUGUST 27, 2002

------------
SALOMON SMITH BARNEY
UBS WARBURG
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES
QUICK & REILLY, INC.
RAYMOND JAMES
RBC CAPITAL MARKETS
TD WATERHOUSE
WACHOVIA SECURITIES
WELLS FARGO SECURITIES, LLC

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

STATEMENT OF ADDITIONAL INFORMATION
AUGUST 27, 2002

EATON VANCE INSURED CALIFORNIA MUNICIPAL BOND FUND

THE EATON VANCE BUILDING
255 STATE STREET
BOSTON, MASSACHUSETTS 02109
(800) 225-6265

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

TABLE OF CONTENTS

PAGE
----

Additional Investment Information and Restrictions.......... B-1
Trustees and Officers....................................... B-9
Investment Advisory and Other Services...................... B-13
Determination of Net Asset Value............................ B-15
Portfolio Trading........................................... B-15
Taxes....................................................... B-17
Other Information........................................... B-20
Independent Auditors........................................ B-21
Independent Auditors' Report................................ B-22
Financial Statements........................................ B-23
Appendix A: Ratings of Municipal Bonds..................... B-25
Appendix B: Tax Equivalent Yield Table..................... B-31
Appendix C: California and U.S. Territory Information...... B-32
Appendix D: Description of Insurers........................ B-54
Appendix E: Performance Related and Comparative
Information............................................... B-57

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

THIS STATEMENT OF ADDITIONAL INFORMATION ("SAI") IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE PROSPECTUS OF EATON VANCE INSURED CALIFORNIA MUNICIPAL BOND
FUND (THE "FUND") DATED AUGUST 27, 2002, AS SUPPLEMENTED FROM TIME TO TIME,
WHICH IS INCORPORATED HEREIN BY REFERENCE. THIS SAI SHOULD BE READ IN
CONJUNCTION WITH SUCH PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE
BY CONTACTING YOUR FINANCIAL INTERMEDIARY OR CALLING THE FUND AT 1-800-225-6265.

Capitalized terms used in this SAI and not otherwise defined have the
meanings given them in the Fund's Prospectus.

ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS

Municipal Obligations. Municipal obligations are issued to obtain funds
for various public and private purposes. Municipal obligations include long-term
obligations, which are often called municipal bonds, as well as tax-exempt
commercial paper, project notes and municipal notes such as tax, revenue and
bond anticipation notes of short maturity, generally less than three years.
Market rates of interest available with respect to municipal obligations may be
lower than those available with respect to taxable securities, although such
differences may be partially or wholly offset by the effects of federal income
tax on income derived from such taxable securities. While most municipal bonds
pay a fixed rate of interest semi-annually in cash, some bonds pay no periodic
cash interest but instead make a single payment at maturity representing both
principal and interest. Municipal obligations may be issued or subsequently
offered with interest coupons materially greater or less than those then
prevailing, with price adjustments reflecting such deviation.

In general, there are three categories of municipal obligations the
interest on which is exempt from federal income tax and is not a tax preference
item for purposes of the alternative minimum tax ("AMT"): (i) certain "public
purpose" obligations (whenever issued), which include obligations issued
directly by state and local governments or their agencies to fulfill essential
governmental functions; (ii) certain obligations issued before August 8, 1986
for the benefit of non-governmental persons or entities; and (iii) certain
"private activity bonds" issued after August 7, 1986, which include "qualified
Section 501(c)(3) bonds" or refundings of certain obligations included in the
second category.

Interest on certain "private activity bonds" issued after August 7, 1986 is
exempt from regular federal income tax, but is treated as a tax preference item
that could subject the recipient to or increase the recipient's liability for
the AMT. For corporate shareholders, the Fund's distributions derived from
interest on all municipal obligations (whenever issued) is included in "adjusted
current earnings" for purposes of the AMT as applied to corporations (to the
extent not already included in alternative minimum taxable income as income
attributable to private activity bonds). In assessing the federal income tax
treatment of interest on any such obligation, the Fund will rely on an opinion
of the issuer's counsel (when available) obtained by the issuer or other
reliable authority and will not undertake any independent verification thereof.

The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects including the
construction or improvement of schools, highways and roads, water and sewer
systems and a variety of other public purposes. The basic security of general
obligation bonds is the issuer's pledge of its faith, credit, and taxing power
for the payment of principal and interest. The taxes that can be levied for the
payment of debt service may be limited or unlimited as to rate and amount.

Revenue bonds are generally secured by the net revenues derived from a
particular facility or group of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source. Revenue bonds have been
issued to fund a wide variety of capital projects including: electric, gas,
water, sewer and solid waste disposal systems; highways, bridges and tunnels;
port, airport and parking facilities; transportation systems; housing
facilities, colleges and universities and hospitals. Although the principal
security behind these bonds varies widely, many provide additional security in
the form of a debt service reserve fund whose monies may be used to make
principal and interest payments on the issuer's obligations. Housing finance
authorities have a wide range of security including partially or fully insured,
rent subsidized and/or collateralized mortgages, and/or the net revenues from
housing or other public projects. In addition to a debt service reserve fund,
some authorities provide further security in the form of a state's ability
(without legal obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are normally secured by annual
B-1

lease rental payments from the state or locality to the authority sufficient to
cover debt service on the authority's obligations. Such payments are usually
subject to annual appropriations by the state or locality. Industrial
development and pollution control bonds, although nominally issued by municipal
authorities, are in most cases revenue bonds and are generally not secured by
the taxing power of the municipality, but are usually secured by the revenues
derived by the authority from payments of the industrial user or users. The Fund
may on occasion acquire revenue bonds which carry warrants or similar rights
covering equity securities. Such warrants or rights may be held indefinitely,
but if exercised, the Fund anticipates that it would, under normal
circumstances, dispose of any equity securities so acquired within a reasonable
period of time.

The obligations of any person or entity to pay the principal of and
interest on a municipal obligation are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which 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. There is also the possibility that as a result of litigation or
other conditions the power or ability of any person or entity to pay when due
principal of and interest on a municipal obligation may be materially affected.
There have been recent instances of defaults and bankruptcies involving
municipal obligations which were not foreseen by the financial and investment
communities. The Fund will take whatever action it considers appropriate in the
event of anticipated financial difficulties, default or bankruptcy of either the
issuer of any municipal obligation or of the underlying source of funds for debt
service. Such action may include retaining the services of various persons or
firms (including affiliates of the Adviser) to evaluate or protect any real
estate, facilities or other assets securing any such obligation or acquired by
the Fund as a result of any such event, and the Fund may also manage (or engage
other persons to manage) or otherwise deal with any real estate, facilities or
other assets so acquired. The Fund anticipates that real estate consulting and
management services may be required with respect to properties securing various
municipal obligations in its portfolio or subsequently acquired by the Fund. The
Fund will incur additional expenditures in taking protective action with respect
to portfolio obligations in default and assets securing such obligations. To
enforce its rights in the event of a default in the payment of interest or
repayment of principal, or both, the Fund may take possession of and manage the
assets or have a receiver appointed to collect and disburse pledged revenues
securing the issuer's obligations on such securities, which may increase the
operating expenses and adversely affect the net asset value of the Fund. Any
income derived from the ownership or operation of such assets may not be
tax-exempt. In addition, the Fund's intention to qualify as a "regulated
investment company" ("RIC") under the Internal Revenue Code of 1986, as amended
(the "Code") may limit the extent to which the Fund may exercise its rights by
taking possession of such assets, because as a regulated investment company, the
Fund is subject to certain limitations on its investments and on the nature of
its income.

The yields on municipal obligations are dependent on a variety of factors,
including purposes of issue and source of funds for repayment, general money
market conditions, general conditions of the municipal bond market, size of a
particular offering, maturity of the obligation and rating of the issue. The
ratings of Moody's, S&P and Fitch represent their opinions as to the quality of
the municipal obligations which they undertake to rate. It should be emphasized,
however, that ratings are based on judgment and are not absolute standards of
quality. Consequently, municipal obligations with the same maturity, coupon and
rating may have different yields while obligations of the same maturity and
coupon with different ratings may have the same yield. In addition, the market
price of municipal obligations will normally fluctuate with changes in interest
rates, and therefore the net asset value of the Fund will be affected by such
changes.

The Fund also may invest up to 20% of the net assets in uninsured municipal
bonds that are entitled to the benefit of an escrow or trust account that
contains securities issued or guaranteed by the U.S. Government or U.S.
Government agencies, backed by the full faith and credit of the United States,
and sufficient in the amount to ensure the payment of interest and principal on
the original interest payment and maturity dates ("collateralized obligations").
These collateralized obligations generally will not be

B-2

insured and will include, but are not limited to, municipal bonds that have been
advance refunded where the proceeds of the refunding have been used to buy U.S.
Government or U.S. Government agency securities that are placed in escrow and
whose interest or maturing principal payments, or both, are sufficient to cover
the remaining scheduled debt service on that municipal bond.

State Concentration. The Fund may invest 25% or more of its total assets
in municipal obligations of issuers located in California or the U.S.
territories. When the Fund does so, it will be sensitive to factors affecting
California or the U.S. Territory, such as changes in the economy, decreases in
tax collection or the tax base, legislation which limits taxes and changes in
issuer credit ratings. Factors pertaining to California and U.S. territories are
set forth in Appendix C.

Economic Sector Concentration. The Fund may invest 25% or more of its
total assets in municipal obligations of issuers in the same economic sector.
There could be economic, business or political developments which might affect
all municipal obligations in a particular economic sector. In particular,
investments in the industrial revenue bonds listed above might involve (without
limitation) the following risks.

Hospital bond ratings are often based on feasibility studies which contain
projections of expenses, revenues and occupancy levels. Among the influences
affecting a hospital's gross receipts and net income available to service its
debt are demand for hospital services, the ability of the hospital to provide
the services required, management capabilities, economic developments in the
service area, efforts by insurers and government agencies to limit rates and
expenses, confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid and
Medicare funding and possible federal legislation limiting the rates of increase
of hospital charges.

Electric utilities face problems in financing large construction programs
in an inflationary period, cost increases and delay occasioned by safety and
environmental considerations (particularly with respect to nuclear facilities),
difficulty in obtaining fuel at reasonable prices and in achieving timely and
adequate rate relief from regulatory commissions, effects of energy conservation
and limitations on the capacity of the capital market to absorb utility debt.

Bonds to finance life care facilities are normally secured only by the
revenues of each facility and not by state or local government tax payments,
they are subject to a wide variety of risks. Primarily, the projects must
maintain adequate occupancy levels to be able to provide revenues sufficient to
meet debt service payments. Moreover, since a portion of housing, medical care
and other services may be financed by an initial deposit, it is important that
the facility maintain adequate financial reserves to secure estimated actuarial
liabilities. The ability of management to accurately forecast inflationary cost
pressures is an important factor in this process. The facilities may also be
affected adversely by regulatory cost restrictions applied to health care
delivery in general, particularly state regulations or changes in Medicare and
Medicaid payments or qualifications, or restrictions imposed by medical
insurance companies. They may also face competition from alternative health care
or conventional housing facilities in the private or public sector.

Credit Quality. While municipal obligations rated investment grade or
below and comparable unrated municipal obligations may have some quality and
protective characteristics, these characteristics can be expected to be offset
or outweighed by uncertainties or major risk exposures to adverse conditions.
Lower rated and comparable unrated municipal obligations are subject to the risk
of an issuer's inability to meet principal and interest payments on the
obligations (credit risk) and may also be subject to greater price volatility
due to such factors as interest rate sensitivity, market perception of the
creditworthiness of the issuer and general market liquidity (market risk). Lower
rated or unrated municipal obligations are also more likely to react to real or
perceived developments affecting market and credit risk than are more highly
rated obligations, which react primarily to movements in the general level of
interest rates.

Municipal Leases. The Fund may invest in municipal leases and
participations therein, which arrangements frequently involve special risks.
Municipal leases are obligations in the form of a lease or installment purchase
arrangement which is issued by state or local governments to acquire equipment
and

B-3

facilities. Interest income from such obligations is generally exempt from local
and state taxes in the state of issuance. "Participations" in such leases are
undivided interests in a portion of the total obligation. Participations entitle
their holders to receive a pro rata share of all payments under the lease. The
obligation of the issuer to meet its obligations under such leases is often
subject to the appropriation by the appropriate legislative body, on an annual
or other basis, of funds for the payment of the obligations. Investments in
municipal leases are thus subject to the risk that the legislative body will not
make the necessary appropriation and the issuer will not otherwise be willing or
able to meet its obligation. Certain municipal lease obligations are illiquid.

Zero Coupon Bonds. Zero coupon bonds are debt obligations which do not
require the periodic payment of interest and are issued at a significant
discount from face value. The discount approximates the total amount of interest
the bonds will accrue and compound over the period until maturity at a rate of
interest reflecting the market rate of the security at the time of issuance. The
Fund is required to accrue income from zero coupon bonds on a current basis,
even though it does not receive that income currently in cash and the Fund is
required to distribute its income for each taxable year. Thus, the Fund may have
to sell other investments to obtain cash needed to make income distributions.

When-Issued Securities. New issues of municipal obligations are sometimes
offered on a "when-issued" basis, that is, delivery and payment for the
securities normally take place within a specified number of days after the date
of the Fund's commitment and are subject to certain conditions such as the
issuance of satisfactory legal opinions. The Fund may also purchase securities
on a when-issued basis pursuant to refunding contracts in connection with the
refinancing of an issuer's outstanding indebtedness. Refunding contracts
generally require the issuer to sell and the Fund to buy such securities on a
settlement date that could be several months or several years in the future. The
Fund may also purchase instruments that give the Fund the option to purchase a
municipal obligation when and if issued.

The Fund will make commitments to purchase when-issued securities only with
the intention of actually acquiring the securities, but may sell such securities
before the settlement date if it is deemed advisable as a matter of investment
strategy. The payment obligation and the interest rate that will be received on
the securities are fixed at the time the Fund enters into the purchase
commitment. When the Fund commits to purchase a security on a when-issued basis
it records the transaction and reflects the value of the security in determining
its net asset value. Securities purchased on a when-issued basis and the
securities held by the Fund are subject to changes in value based upon the
perception of the creditworthiness of the issuer and changes in the level of
interest rates (i.e. appreciation when interest rates decline and depreciation
when interest rates rise). Therefore, to the extent that the Fund remains
substantially fully invested at the same time that it has purchased securities
on a when-issued basis, there will be greater fluctuations in the Fund's net
asset value than if it set aside cash to pay for when-issued securities.

Redemption, Demand and Put Features and Put Options. Issuers of municipal
obligations reserve the right to call (redeem) the bond. If an issuer redeems
securities held by the Fund during a time of declining interest rates, the Fund
may not be able to reinvest the proceeds in securities providing the same
investment return as the securities redeemed. Also, some bonds may have "put" or
"demand" features that allow early redemption by the bondholder. Longer term
fixed-rate bonds may give the holder a right to request redemption at certain
times (often annually after the lapse of an intermediate term). These bonds are
more defensive than conventional long term bonds because they may protect to
some degree against a rise in interest rates.

Variable Rate Obligations. The Fund may purchase variable rate
obligations. Variable rate instruments provide for adjustments in the interest
rate at specified intervals (weekly, monthly, semi-annually, etc.). The revised
rates are usually set at the issuer's discretion in which case the investor
normally enjoys the right to "put" the security back to the issuer or his agent.
Rate revisions may alternatively be determined by formula or in some other
contractual fashion. Variable rate obligations normally provide that the holder
can demand payment of the obligation on short notice at par with accrued
interest and which are frequently secured by letters of credit or other support
arrangements

B-4

provide by banks. To the extent that such letters of credit or other
arrangements constitute an unconditional guarantee of the issuer's obligations,
a bank may be treated as the issuer of a security for the purposes of complying
with the diversification requirements set forth in Section 5(b) of the 1940 Act
and Rule 5b-2 thereunder. The Fund would anticipate using these bonds as cash
equivalents pending longer term investment of its funds.

Inverse Floaters. The Fund currently does not invest in municipal
securities whose interest rates bear an inverse relationship to the interest
rate on another security or the value of an index ("inverse floaters"). An
investment in inverse floaters may involve greater risk than an investment in a
fixed rate bond. Because changes in the interest rate on the other security or
index inversely affect the residual interest paid on the inverse floater, the
value of an inverse floater is generally more volatile than that of a fixed rate
bond. Inverse floaters have interest rate adjustment formulas which generally
reduce or, in the extreme, eliminate the interest paid to a portfolio when
short-term interest rates rise, and increase the interest paid to the Fund when
short-term interest rates fall. Inverse floaters have varying degrees of
liquidity, and the market for these securities is relatively volatile. These
securities tend to underperform the market for fixed rate bonds in a rising
interest rate environment, but tend to outperform the market for fixed rate
bonds when interest rates decline. Shifts in long-term interest rates may,
however, alter this tendency. Although volatile, inverse floaters typically
offer the potential for yields exceeding the yields available on fixed rate
bonds with comparable credit quality and maturity. These securities usually
permit the investor to convert the floating rate to a fixed rate (normally
adjusted downward), and this optional conversion feature may provide a partial
hedge against rising rates if exercised at an opportune time. Inverse floaters
are leveraged because they provide two or more dollars of bond market exposure
for every dollar invested. Although the Fund does not intend initially to invest
in inverse floaters, the Fund may do so at some point in the future. The Fund
will provide 30 days' written notice prior to any change in its policy in
investing in inverse floaters.

If the other party to an interest rate swap or forward rate contract
defaults, the Fund's risk of loss consists of the net amount of payments that
the Fund is contractually entitled to receive. The net amount of the excess, if
any, of the Fund's obligations over its entitlements will be maintained in a
segregated account by the Fund's custodian. The Fund will not enter into any
interest rate swap or forward rate contract unless the claims-paying ability of
the other party thereto is considered to be investment grade by the investment
adviser. If there is a default by the other party to such a transaction, the
Fund will have contractual remedies pursuant to the agreements related to the
transaction. These instruments are traded in the over-the-counter market.

Liquidity and Protective Put Options. The Fund may also enter into a
separate agreement with the seller of a security or some other person granting
the Fund the right to put the security to the seller thereof or the other person
at an agreed upon price. Such agreements are subject to the risk of default by
the other party, although the Fund intends to limit this type of transaction to
institutions (such as banks or securities dealers) which the Adviser believes
present minimal credit risks. The Fund would engage in this type of transaction
to facilitate portfolio liquidity or (if the seller so agrees) to hedge against
rising interest rates. There is no assurance that this kind of put option will
be available to the Fund or that selling institutions will be willing to permit
the Fund to exercise a put to hedge against rising interest rates. The Fund does
not expect to assign any value to any separate put option which may be acquired
to facilitate portfolio liquidity, inasmuch as the value (if any) of the put
will be reflected in the value assigned to the
B-5

associated security; any put acquired for hedging purposes would be valued in
good faith under methods or procedures established by the Trustees of the Fund
after consideration of all relevant factors, including its expiration date, the
price volatility of the associated security, the difference between the market
price of the associated security and the exercise price of the put, the
creditworthiness of the issuer of the put and the market prices of comparable
put options. Interest income generated by certain bonds having put or demand
features may be taxable.

Illiquid Obligations. At times, a substantial portion of the Fund's assets
may be invested in securities as to which the Fund, by itself or together with
other accounts managed by the Adviser and its affiliates, holds a major portion
or all of such securities. Under adverse market or economic conditions or in the
event of adverse changes in the financial condition of the issuer, the Fund
could find it more difficult to sell such securities when the Adviser believes
it advisable to do so or may be able to sell such securities only at prices
lower than if such securities were more widely held. Under such circumstances,
it may also be more difficult to determine the fair value of such securities for
purposes of computing the Fund's net asset value.

The secondary market for some municipal obligations issued within a state
(including issues which are privately placed with the Fund) is less liquid than
that for taxable debt obligations or other more widely traded municipal
obligations. No established resale market exists for certain of the municipal
obligations in which the Fund may invest. The market for obligations rated below
investment grade is also likely to be less liquid than the market for higher
rated obligations. As a result, the Fund may be unable to dispose of these
municipal obligations at times when it would otherwise wish to do so at the
prices at which they are valued.

Securities Lending. The Fund may seek to increase its income by lending
portfolio securities to broker-dealers or other institutional borrowers.
Distributions by the Fund of any income realized by the Fund from securities
loans will be taxable. If the management of the Fund decides to make securities
loans, it is intended that the value of the securities loaned would not exceed
30% of the Fund's total assets. Securities lending involves risks of delay in
recovery or even loss of rights on the securities loaned if the borrower fails
financially. The Fund has no present intention of engaging in securities
lending.

Futures Contracts and Options on Futures Contracts. A change in the level
of interest rates may affect the value of the securities held by the Fund (or of
securities that the Fund expects to purchase). To hedge against changes in rates
or as a substitute for the purchase of securities, the Fund may enter into (i)
futures contracts for the purchase or sale of debt securities and (ii) futures
contracts on securities indices. All futures contracts entered into by the Fund
are traded on exchanges or boards of trade that are licensed and regulated by
the Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant or brokerage firm which is a member of the relevant
exchange. The Fund may purchase and write call and put options on futures
contracts which are traded on a United States or foreign exchange or board of
trade. The Fund will be required, in connection with transactions in futures
contracts and the writing of options on futures, to make margin deposits, which
will be held by the Fund's custodian for the benefit of the futures commission
merchant through whom the Fund engages in such futures and options transactions.

Some futures contracts and options thereon may become illiquid under
adverse market conditions. In addition, during periods of market volatility, a
commodity exchange may suspend or limit transactions in an exchange-traded
instrument, which may make the instrument temporarily illiquid and difficult to
price. Commodity exchanges may also establish daily limits on the amount that
the price of a futures contract or futures option can vary from the previous
day's settlement price. Once the daily limit is reached, no trades may be made
that day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.

The Fund will engage in futures and related options transactions for bona
fide hedging purposes or non-hedging purposes as defined in or permitted by CFTC
regulations. The Fund will determine that the price fluctuations in the futures
contracts and options on futures used for hedging purposes are substantially
related to price fluctuations in securities held by the Fund or which it expects
to purchase.
B-6

The Fund will engage in transactions in futures and related options contracts
only to the extent such transactions are consistent with the requirements of the
Code for maintaining its qualification as a RIC for federal income tax purposes.

Asset Coverage Requirements. Transactions involving when-issued
securities, futures contracts and options (other than options that the Fund has
purchased), interest rate swaps or forward rate contracts may expose the Fund to
an obligation to another party. The Fund will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities or other options or futures contracts, or (2) cash or liquid
securities (such as readily marketable obligations and money market instruments)
with a value sufficient at all times to cover its potential obligations not
covered as provided in (1) above. The Fund will comply with SEC guidelines
regarding cover for these instruments and, if the guidelines so require, set
aside cash or liquid securities in a segregated account with its custodian in
the prescribed amount. The securities in the segregated account will be marked
to market daily.

Assets used as cover or held in a segregated account maintained by the
custodian cannot be sold while the position requiring coverage or segregation is
outstanding unless they are replaced with other appropriate assets. As a result,
the commitment of a large portion of the Fund's assets to segregated accounts or
to cover could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.

Temporary Investments. Under unusual market conditions, the Fund may
invest temporarily in cash or cash equivalents. Cash equivalents are highly
liquid, short-term securities such as commercial paper, certificates of deposit,
short-term notes and short-term U.S. Government obligations. These securities
may be subject to federal income, state income and/or other taxes.

Portfolio Turnover. The Fund may sell (and later purchase) securities in
anticipation of a market decline (a rise in interest rates) or purchase (and
later sell) securities 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 Fund believes to be a
temporary disparity in the normal yield relationship between the two securities.
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 municipal
obligations or changes in the investment objectives of investors. Such trading
may be expected to increase the portfolio turnover rate, which may increase
capital gains and the expenses incurred in connection with such trading. The
Fund cannot accurately predict its portfolio turnover rate, but it is
anticipated that the annual portfolio turnover rate will generally not exceed
100% (excluding turnover of securities having a maturity of one year or less). A
100% annual turnover rate could occur, for example, if all the securities held
by the Fund were replaced once in a period of one year. A high turnover rate
(100% or more) necessarily involves greater expenses to the Fund.

Investment Restrictions. The following investment restrictions of the Fund
are designated as fundamental policies and as such cannot be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities, which as used in this SAI means the lesser of (a) 67% of the shares
of the Fund present or represented by proxy at a meeting if the holders of more
than 50% of the outstanding shares are present or represented at the meeting or
(b) more than 50% of outstanding shares of the Fund. As a matter of fundamental
policy the Fund may not:

(1) Borrow money, except as permitted by the 1940 Act;

(2) Issue senior securities, as defined in the 1940 Act, other than
(i) preferred shares which immediately after issuance will have asset
coverage of at least 200%, (ii) indebtedness which immediately after
issuance will have asset coverage of at least 300%, or (iii) the borrowings
permitted by investment restriction (1) above;

(3) Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities). The purchase of investment assets

B-7

with the proceeds of a permitted borrowing or securities offering will not
be deemed to be the purchase of securities on margin;

(4) Underwrite securities issued by other persons, except insofar as
it may technically be deemed to be an underwriter under the Securities Act
of 1933 in selling or disposing of a portfolio investment;

(5) Make loans to other persons, except by (a) the acquisition of loan
interests, debt securities and other obligations in which the Fund is
authorized to invest in accordance with its investment objective and
policies, (b) entering into repurchase agreements, and (c) lending its
portfolio securities;

(6) Purchase or sell real estate, although it may purchase and sell
securities which are secured by interests in real estate and securities of
issuers which invest or deal in real estate. The Fund reserves the freedom
of action to hold and to sell real estate acquired as a result of the
ownership of securities;

(7) Purchase or sell physical commodities or contracts for the
purchase or sale of physical commodities. Physical commodities do not
include futures contracts with respect to securities, securities indices or
other financial instruments;

(8) Invest more than 25% of its total assets in issuers in any one
industry.

For purposes of the Fund's investment restrictions, the determination of
the "issuer" of a municipal obligation which is not a general obligation bond
will be made by the Adviser on the basis of the characteristics of the
obligation and other relevant factors, the most significant of which is the
source of funds committed to meeting interest and principal payments of such
obligation.

The Fund may borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of
securities transactions which otherwise might require untimely dispositions of
Fund securities. The 1940 Act currently requires that the Fund have 300% asset
coverage with respect to all borrowings other than temporary borrowings.

For purposes of construing restriction (8), securities of the U.S.
Government, its agencies, or instrumentalities are not considered to represent
industries. Municipal obligations backed by the credit of a governmental entity
are also not considered to represent industries. However, municipal obligations
backed only by the assets and revenues of non-governmental users may for this
purpose be deemed to be issued by such non-governmental users. The foregoing 25%
limitation would apply to these issuers. As discussed in the Prospectus and this
SAI, the Fund may invest more than 25% of its total assets in certain economic
sectors, such as revenue bonds, housing, hospitals and other health care
facilities, and industrial development bonds. The Fund reserves the right to
invest more than 25% of total assets in each of these sectors.

The Fund has adopted the following nonfundamental investment policy which
may be changed by the Trustees without approval of the Fund's shareholders. As a
matter of nonfundamental policy, the Fund may not make short sales of securities
or maintain a short position, unless at all times when a short position is open
it either owns an equal amount of such securities or owns securities convertible
into or exchangeable, without payment of any further consideration, for
securities of the same issue as, and equal in amount to, the securities sold
short.

Upon Board of Trustee approval, the Fund may invest more than 10% of its
total assets in one or more other management investment companies (or may invest
in affiliated investment companies) to the extent permitted by the 1940 Act and
rules thereunder.

Whenever an investment policy or investment restriction set forth in the
Prospectus or this SAI states a maximum percentage of assets that may be
invested in any security or other asset or describes a policy regarding quality
standards, such percentage limitation or standard shall be determined
immediately after and as a result of the Fund's acquisition of such security or
asset. Accordingly, any later increase or decrease resulting from a change in
values, assets or other circumstances will not compel the Fund to dispose of
such security or other asset. Notwithstanding the foregoing, the Fund must
always be in compliance with the borrowing policies set forth above.

B-8

TRUSTEES AND OFFICERS

The Trustees of the Fund are responsible for the overall management and
supervision of the affairs of the Fund. The Trustees and officers of the Fund
are listed below. Except as indicated, each individual has held the office shown
or other offices in the same company for the last five years. The business
address of each Trustee and officer is The Eaton Vance Building, 255 State
Street, Boston, Massachusetts 02109. As used in this SAI, "EVC" refers to Eaton
Vance Corp., "EV" refers to Eaton Vance, Inc., "BMR" refers to Boston Management
and Research and "EVD" refers to Eaton Vance Distributors, Inc. EVC is the
corporate parent of Eaton Vance. EV is the corporate trustee of Eaton Vance.

NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND PRINCIPAL COMPLEX
WITH THE LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER
NAME AND AGE FUND SERVICE PAST FIVE YEARS TRUSTEE(1) DIRECTORSHIPS HELD
------------ -------------- ------------- ---------------------------- ----------- ------------------

INTERESTED TRUSTEES
Jessica M. Bibliowicz Trustee(2) Since 7/25/02 President and Chief 174 None
DOB: 11/28/59 3 Years Executive Officer of
National Financial Partners
(financial services company)
(since April 1999).
President and Chief
Operating Officer of John A.
Levin & Co. (registered
investment adviser) (July
1997 to April 1999) and a
Director of Baker, Fentress
& Company which owns John A.
Levin & Co. (July 1997 to
April 1999). Formerly,
Executive Vice President of
Smith Barney Mutual Funds.
Ms. Bibliowicz is an
interested person because of
her affiliation with a
brokerage firm.
James B. Hawkes Vice President Since 7/8/02 Chairman, President and 179 Director of EVC,
DOB: 11/9/41 and Trustee(3) 3 Years Chief Executive Officer of EV and EVD
BMR, Eaton Vance and their
corporate parent and trustee
(EVC and EV); Vice President
of EVD. President or officer
of 179 investment companies
in the Eaton Vance Fund
Complex. Mr. Hawkes is an
interested person because of
his positions with BMR,
Eaton Vance and EVC, who are
affiliates of the Fund.
NONINTERESTED TRUSTEES
Donald R. Dwight Trustee(2) Since 7/25/02 President of Dwight 179 Trustee/Director
DOB: 3/26/31 3 Years Partners, Inc. (a corporate of the Royce
relations and communications Funds(consisting
company). of 17 portfolios)
Samuel L. Hayes, III Trustee(3) Since 7/25/02 Jacob H. Schiff Professor of 179 Director of
DOB: 2/23/35 3 Years Investment Banking Emeritus, Tiffany & Co.
Harvard University Graduate (specialty
School of Business retailer) and
Administration. Telect, Inc.
(telecommunication
services company)

B-9

Norton H. Reamer Trustee(4) Since 7/25/02 President, Unicorn 179 None
DOB: 9/21/35 3 Years Corporation (an investment
and financial advisory
services company) (since
September 2000). Chairman,
Hellman, Jordan Management
Co., Inc. (an investment
management company) (since
November 2000). Advisory
Director of Berkshire
Capital Corporation
(investment banking firm)
(since June 2002). Formerly
Chairman of the Board,
United Asset Management
Corporation (a holding
company owning institutional
investment management firms)
and Chairman, President and
Director, UAM Funds (mutual
funds).
Lynn A. Stout Trustee(4) Since 7/25/02 Professor of Law, University 173 None
DOB: 9/14/56 3 Years of California at Los Angeles
School of Law (since July
2001). Formerly, Professor
of Law, Georgetown
University Law Center.

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

(1) Includes both master and feeder funds in master-feeder structure.

(2) Class I Trustee whose term expires in 2003.

(3) Class II Trustee whose term expires in 2004.

(4) Class III Trustee whose term expires in 2005.

PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES

TERM OF OFFICE
POSITION(S) AND LENGTH OF
NAME AND AGE WITH FUND SERVICE PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
------------ -------------- -------------- --------------------------------------------

Cynthia Clemson Vice President Since 7/8/02 Vice President of Eaton Vance and BMR.
DOB: 3/2/63 Officer of 16 investment companies managed
by Eaton Vance or BMR.
Thomas J. Fetter President Since 7/8/02 Vice President of Eaton Vance and BMR.
DOB: 8/20/43 Officer of 116 investment companies managed
by Eaton Vance or BMR.
Robert B. MacIntosh Vice President Since 7/8/02 Vice President of Eaton Vance and BMR.
DOB: 1/22/57 Officer of 115 investment companies managed
by Eaton Vance or BMR.
Alan R. Dynner Secretary Since 7/8/02 Vice President, Secretary and Chief Legal
DOB: 10/10/40 Officer of BMR, Eaton Vance, EVD and EVC.
Officer of 179 investment companies managed
by Eaton Vance or BMR.
James L. O'Connor Treasurer Since 7/8/02 Vice President of BMR, Eaton Vance and EVD.
DOB: 4/1/45 Officer of 179 investment companies managed
by Eaton Vance or BMR.

B-10

The Nominating Committee of the Board of Trustees of the Fund is comprised
of the Trustees who are not "interested persons" of the Fund as that term is
defined under the 1940 Act ("noninterested Trustees"). The purpose of the
Committee is to recommend to the Board nominees for the position of
noninterested Trustee and to assure that at least a majority of the Board of
Trustees is comprised of noninterested Trustees of the Fund. The Trustees will,
when a vacancy exists or is anticipated, consider any nominee for Trustee
recommended by a shareholder if such recommendation is submitted to the Trustees
in writing and contains sufficient background information concerning the
individual to enable a proper judgment to be made as to such individual's
qualifications.

Messrs. Dwight (Chairman), Hayes and Reamer are members of the Audit
Committee of the Board of Trustees of the Fund. The Audit Committee's functions
include making recommendations to the Trustees regarding the selection and
performance of the independent accountants, and reviewing matters relative to
accounting and auditing practices and procedures, accounting records, and the
internal accounting controls, of the Fund, and certain service providers.

Messrs. Dwight, Hayes and Reamer and Ms. Stout are members of the Special
Committee of the Board of Trustees of the Fund. The purpose of the Special
Committee is to consider, evaluate and make recommendations to the full Board of
Trustees concerning (i) all contractual arrangements with service providers to
the Fund, including investment advisory, administrative, transfer agency,
custodial and fund accounting and distribution services, and (ii) all other
matters in which Eaton Vance or its affiliates has any actual or potential
conflict of interest with the Fund.

As of the date of this SAI, the Committees had not held any meetings.

In reviewing the approval of the investment advisory agreement between the
Fund and the investment adviser, the noninterested Trustees considered, among
other things, the following:

- A report comparing the fees and expenses of the Fund to a peer group of
funds;

- Information on the relevant peer group(s) of funds and appropriate
indices;

- The economic outlook and the general investment outlook in the relevant
investment markets;

- Eaton Vance's results and financial condition and the overall
organization of the investment adviser;

- Arrangements regarding the distribution of Fund shares;

- The procedures used to determine the fair value of the Fund's assets;

- The allocation of brokerage, including allocations to soft dollar
brokerage and allocations to firms that sell Eaton Vance fund shares;

- Eaton Vance's management of the relationship with the custodian,
subcustodians and fund accountants;

- The resources devoted to Eaton Vance's compliance efforts undertaken on
behalf of the funds it manages and the record of compliance with the
investment policies and restrictions and with policies on personal
securities transactions;

- The quality nature, cost and character of the administrative and other
non-investment management services provided by Eaton Vance and its
affiliates;

- Investment management staffing;

- Operating expenses (including transfer agency expenses) to be paid to
third parties; and

- Information to be provided to investors, including Fund's shareholders.

In addition to the factors mentioned above, the noninterested Trustees also
reviewed the level of the investment adviser's profits in respect of the
management of the Eaton Vance funds, including the Fund. The noninterested
Trustees considered the profits realized by Eaton Vance and its affiliates in
connection

B-11

with the operation of the Fund. The noninterested Trustees also considered Eaton
Vance's profit margins in comparison with available industry data.

The noninterested Trustees did not consider any single factor as
controlling in determining whether or not to approve the investment advisory
agreement(s). Nor are the items described herein all encompassing of the matters
considered by the noninterested Trustees. In assessing the information provided
by Eaton Vance and its affiliates, the noninterested Trustees also took into
consideration the benefits to shareholders of investing in a fund that is part
of large family of funds which provides a large variety of shareholder services.

Based on their consideration of all factors that it deemed material and
assisted by the advice of its independent counsel, the noninterested Trustees
concluded that the approval of the investment advisory agreement(s), including
the fee structure (described herein) is in the interests of shareholders.

Share Ownership. The following table shows the dollar range of equity
securities beneficially owned by each Trustee in the Fund and all Eaton Vance
Funds overseen by the Trustee as of December 31, 2001.

AGGREGATE DOLLAR RANGE
OF EQUITY SECURITIES
DOLLAR RANGE OF OWNED IN ALL REGISTERED
EQUITY SECURITIES FUNDS OVERSEEN BY
OWNED IN THE TRUSTEE IN THE EATON
NAME OF TRUSTEE FUND VANCE FUND COMPLEX
--------------- ----------------- -----------------------

INTERESTED TRUSTEES
Jessica M. Bibliowicz............................. None $10,001 - $50,000
James B. Hawkes................................... None over $100,000
NONINTERESTED TRUSTEES
Donald R. Dwight.................................. None over $100,000
Samuel L. Hayes, III.............................. None over $100,000
Norton H. Reamer.................................. None over $100,000
Lynn A. Stout..................................... None $10,001 - $50,000

As of December 31, 2001, no noninterested Trustee or any of their immediate
family members owned beneficially or of record any class of securities of EVC,
EVD or any person controlling, controlled by or under common control with EVC or
EVD.

During the calendar years ended December 31, 2000 and December 31, 2001, no
noninterested Trustee (or their immediate family members) had:

1. Any direct or indirect interest in Eaton Vance, EVC, EVD or any
person controlling, controlled by or under common control with EVC or EVD;

2. Any direct or indirect material interest in any transaction or
series of similar transactions with (i) the Trust or any Fund; (ii) another
fund managed by EVC, distributed by EVD or a person controlling, controlled
by or under common control with EVC or EVD; (iii) EVC or EVD; (iv) a person
controlling, controlled by or under common control with EVC or EVD; or (v)
an officer of any of the above; or

3. Any direct or indirect relationship with (i) the Trust or any
Fund; (ii) another fund managed by EVC, distributed by EVD or a person
controlling, controlled by or under common control with EVC or EVD; (iii)
EVC or EVD; (iv) a person controlling, controlled by or under common
control with EVC or EVD; or (v) an officer of any of the above.

During the calendar years ended December 31, 2000 and December 31, 2001, no
officer of EVC, EVD or any person controlling, controlled by or under common
control with EVC or EVD served on the Board of Directors of a company where a
noninterested Trustee of the Fund or any of their immediate family members
served as an officer.

Trustees of the Fund who are not affiliated with the Adviser may elect to
defer receipt of all or a percentage of their annual fees in accordance with the
terms of a Trustees Deferred Compensation Plan

B-12

(the "Trustees' Plan"). Under the Trustees' Plan, an eligible Trustee may elect
to have his deferred fees invested by the Fund in the shares of one or more
funds in the Eaton Vance Family of Funds, and the amount paid to the Trustees
under the Trustees' Plan will be determined based upon the performance of such
investments. Deferral of Trustees' fees in accordance with the Trustees' Plan
will have a negligible effect on the Fund's assets, liabilities, and net income
per share, and will not obligate the Fund to retain the services of any Trustee
or obligate the Fund to pay any particular level of compensation to the Trustee.
The Fund does not have a retirement plan for its Trustees.

The fees and expenses of the noninterested Trustees of the Fund are paid by
the Fund. (The Trustees of the Fund who are members of the Eaton Vance
organization receive no compensation from the Fund.) During the Fund's fiscal
year ending October 31, 2002, it is anticipated that the noninterested Trustees
of the Fund will earn the following compensation in their capacities as Trustee.
For the year ended December 31, 2001, the noninterested Trustees earned the
following compensation set forth below in their capacities as Trustees from the
funds in the Eaton Vance fund complex (1).

SOURCE OF JESSICA M. DONALD R. SAMUEL L. NORTON H. LYNN A.
COMPENSATION BIBLIOWICZ DWIGHT HAYES, III REAMER STOUT
------------ ---------- --------- ---------- --------- --------

Fund*.................................. $ 200 $ 200 $ 200 $ 200 $ 200
Fund Complex........................... $160,000 $162,500(2) $170,000 $160,000 $160,000(3)

---------------
* Estimated

(1) As of August 1, 2002, the Eaton Vance fund complex consisted of 179
registered investment companies or series thereof.

(2) Includes $60,000 of deferred compensation.

(3) Includes $16,000 of deferred compensation.

INVESTMENT ADVISORY AND OTHER SERVICES

Eaton Vance, its affiliates and its predecessor companies have been
managing assets of individuals and institutions since 1924 and of investment
companies since 1931. They maintain a large staff of experienced fixed-income
and equity investment professionals to service the needs of their clients. The
fixed-income division focuses on all kinds of taxable investment-grade and
high-yield securities, tax-exempt investment-grade and high-yield securities,
and U.S. Government securities. The equity division covers stocks ranging from
blue chip to emerging growth companies. Eaton Vance and its affiliates act as
adviser to a family of mutual funds, and individual and various institutional
accounts, including corporations, hospitals, retirement plans, universities,
foundations and trusts.

The Fund will be responsible for all of its costs and expenses not
expressly stated to be payable by Eaton Vance under the Advisory Agreement or
Administration Agreement. Such costs and expenses to be borne by the Fund
include, without limitation: custody and transfer agency fees and expenses,
including those incurred for determining net asset value and keeping accounting
books and records; expenses of pricing and valuation services; the cost of share
certificates; membership dues in investment company organizations; expenses of
acquiring, holding and disposing of securities and other investments; fees and
expenses of registering under the securities laws, stock exchange listing fees
and governmental fees; rating agency fees and preferred share remarketing
expenses; expenses of reports to shareholders, proxy statements and other
expenses of shareholders' meetings; insurance premiums; printing and mailing
expenses; interest, taxes and corporate fees; legal and accounting expenses;
compensation and expenses of Trustees not affiliated with Eaton Vance; expenses
of conducting repurchase offers for the purpose of repurchasing Fund shares; and
investment advisory and administration fees. The Fund will also bear expenses
incurred in connection with any litigation in which the Fund is a party and any
legal obligation to indemnify its officers and Trustees with respect thereto, to
the extent not covered by insurance.

The Investment Advisory Agreement continues in effect to March 31, 2004 and
from year to year so long as such continuance is approved at least annually (i)
by the vote of a majority of the noninterested

B-13

Trustees of the Fund or of the Adviser cast in person at a meeting specifically
called for the purpose of voting on such approval and (ii) by the Board of
Trustees of the Fund or by vote of a majority of the outstanding interests of
the Fund. The Fund's Administration Agreement continues in effect from year to
year so long as such continuance is approved at least annually by the vote of a
majority of the Fund's Trustees. Each agreement may be terminated at any time
without penalty on sixty (60) days' written notice by the Trustees of the Fund
or Eaton Vance, as applicable, or by vote of the majority of the outstanding
shares of the Fund. Each agreement will terminate automatically in the event of
its assignment. Each agreement provides that, in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations or duties to the Fund under such agreements on the part of Eaton
Vance, Eaton Vance shall not be liable to the Fund for any loss incurred, to the
extent not covered by insurance.

Eaton Vance is a business trust organized under Massachusetts law. Eaton
Vance, Inc. ("EV") serves as trustee of Eaton Vance. EV is a subsidiary of Eaton
Vance Corporation ("EVC"), a Maryland corporation and publicly-held holding
company. EVC through its subsidiaries and affiliates engages primarily in
investment management, administration and marketing activities. The Directors of
EVC are James B. Hawkes, John G. L. Cabot, Thomas E. Faust, Jr., Leo I. Higdon,
Jr., John M. Nelson, Vincent M. O'Reilly and Ralph Z. Sorenson. All shares of
the outstanding Voting Common Stock of EVC are deposited in a Voting Trust, the
Voting Trustees of which are Messrs. James B. Hawkes, Thomas E. Faust, Jr.,
Jeffrey P. Beale, Alan R. Dynner, Thomas J. Fetter, Scott H. Page, Duncan W.
Richardson, William M. Steul, Payson F. Swaffield, Michael W. Weilheimer and
Wharton P. Whitaker (all of whom are officers of Eaton Vance). The Voting
Trustees have unrestricted voting rights for the election of Directors of EVC.
All of the outstanding voting trust receipts issued under said Voting Trust are
owned by certain of the officers of BMR and Eaton Vance who are also officers,
or officers and Directors of EVC and EV. As indicated under "Trustees and
Officers", all of the officers of the Fund (as well as Mr. Hawkes who is also a
Trustee) hold positions in the Eaton Vance organization.

EVC and its affiliates and their officers and employees from time to time
have transactions with various banks, including the custodian of the Fund, IBT.
It is Eaton Vance's opinion that the terms and conditions of such transactions
were not and will not be influenced by existing or potential custodial or other
relationships between the Fund and such banks.

Code of Ethics. The investment adviser and the Fund have adopted a Code of
Ethics governing personal securities transactions. Under the Code, Eaton Vance
employees may purchase and sell securities (including securities held by the
Fund) subject to certain pre-clearance and reporting requirements and other
procedures.

Investment Advisory Services. Under the general supervision of the Fund's
Board of Trustees, Eaton Vance will carry out the investment and reinvestment of
the assets of the Fund, will furnish continuously an investment program with
respect to the Fund, will determine which securities should be purchased, sold
or exchanged, and will implement such determinations. Eaton Vance will furnish
to the Fund investment advice and provide related office facilities and
personnel for servicing the investments of the Fund. Eaton Vance will compensate
all Trustees and officers of the Fund who are members of the Eaton Vance
organization and who render investment services to the Fund, and will also
compensate all other Eaton Vance personnel who provide research and investment
services to the Fund.

Administrative Services. Under the Administration Agreement, Eaton Vance
is responsible for managing the business affairs of the Fund, subject to the
supervision of the Fund's Board of Trustees. Eaton Vance will furnish to the
Fund all office facilities, equipment and personnel for administering the
affairs of the Fund. Eaton Vance will compensate all Trustees and officers of
the Fund who are members of the Eaton Vance organization and who render
executive and administrative services to the Fund, and will also compensate all
other Eaton Vance personnel who perform management and administrative services
for the Fund. Eaton Vance's administrative services include recordkeeping,
preparation and filing of documents required to comply with federal and state
securities laws, supervising the activities of the Fund's custodian and transfer
agent, providing assistance in connection with the Trustees' and

B-14

shareholders' meetings, providing services in connection with quarterly
repurchase offers and other administrative services necessary to conduct the
Fund's business.

DETERMINATION OF NET ASSET VALUE

The net asset value per Share of the Fund is determined no less frequently
than weekly, generally on the last day of the week that the New York Stock
Exchange (the "Exchange") is open for trading, as of the close of regular
trading on the Exchange (normally 4:00 p.m. New York time). The Fund's net asset
value per Share is determined by Investors Bank & Trust Company ("IBT"), in the
manner authorized by the Trustees of the Fund. Net asset value is computed by
dividing the value of the Fund's total assets, less its liabilities by the
number of shares outstanding.

Inasmuch as the market for municipal obligations is a dealer market with no
central trading location or continuous quotation system, it is not feasible to
obtain last transaction prices for most municipal obligations held by the Fund,
and such obligations, including those purchased on a when-issued basis, will
normally be valued on the basis of valuations furnished by a pricing service.
The pricing service uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities,
various relationships between securities, and yield to maturity in determining
value. Taxable obligations for which price quotations are readily available
normally will be valued at the mean between the latest available bid and asked
prices. Open futures positions on debt securities are valued at the most recent
settlement prices, unless such price does not reflect the fair value of the
contract, in which case the positions will be valued by or at the direction of
the Trustees. Other assets are valued at fair value using methods determined in
good faith by the Trustees.

PORTFOLIO TRADING

Decisions concerning the execution of portfolio security transactions,
including the selection of the market and the executing firm, are made by the
Adviser. The Adviser is also responsible for the execution of transactions for
all other accounts managed by it. The Adviser places the portfolio security
transactions of the Fund and of all other accounts managed by it for execution
with many firms. The Adviser uses its best efforts to obtain execution of
portfolio security transactions at prices which are advantageous to the Fund and
at reasonably competitive spreads or (when a disclosed commission is being
charged) at reasonably competitive commission rates. In seeking such execution,
the Adviser will use its best judgment in evaluating the terms of a transaction,
and will give consideration to various relevant factors, including without
limitation the full range and quality of the executing firm's services, the
value of the brokerage and research services provided, the responsiveness of the
firm to the Adviser, the size and type of the transaction, the nature and
character of the market for the security, the confidentiality, speed and
certainty of effective execution required for the transaction, the general
execution and operational capabilities of the executing firm, the reputation,
reliability, experience and financial condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions, and
the reasonableness of the spread or commission, if any.

Municipal obligations, including state obligations, purchased and sold by
the Fund are generally traded in the over-the-counter market on a net basis
(i.e., without commission) through broker-dealers and banks acting for their own
account rather than as brokers, or otherwise involve transactions directly with
the issuer of such obligations. Such firms attempt to profit from such
transactions by buying at the bid price and selling at the higher asked price of
the market for such obligations, and the difference between the bid and asked
price is customarily referred to as the spread. The Fund may also purchase
municipal obligations from underwriters, and dealers in fixed price offerings,
the cost of which may include undisclosed fees and concessions to the
underwriters. On occasion it may be necessary or appropriate to purchase or sell
a security through a broker on an agency basis, in which case the Fund will
incur a brokerage commission. Although spreads or commissions on portfolio
security transactions will, in the judgment of the Adviser, be reasonable in
relation to the value of the services provided, spreads or commissions exceeding
those which another firm might charge may be paid to firms who were selected to
B-15

execute transactions on behalf of the Fund and the Adviser's other clients for
providing brokerage and research services to the Adviser.

As authorized in Section 28(e) of the Securities Exchange Act of 1934, a
broker or dealer who executes a portfolio transaction on behalf of the Fund may
receive a commission which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if the
Adviser determines in good faith that such compensation was reasonable in
relation to the value of the brokerage and research services provided. This
determination may be made on the basis of that particular transaction or on the
basis of overall responsibilities which the Adviser and its affiliates have for
accounts over which they exercise investment discretion. In making any such
determination, the Adviser will not attempt to place a specific dollar value on
the brokerage and research services provided or to determine what portion of the
commission should be related to such services. Brokerage and research services
may include advice as to the value of securities, the advisability of investing
in, purchasing, or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts; effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement); and
the "Research Services" referred to in the next paragraph.

It is a common practice of the investment advisory industry and of the
advisers of investment companies, institutions and other investors to receive
research, analytical, statistical and quotation services, data, information and
other services, products and materials which assist such advisers in the
performance of their investment responsibilities ("Research Services") from
broker-dealer firms which execute portfolio transactions for the clients of such
advisers and from third parties with which such broker-dealers have
arrangements. Consistent with this practice, the Adviser receives Research
Services from many broker-dealer firms with which the Adviser places the Fund's
transactions and from third parties with which these broker-dealers have
arrangements. These Research Services include such matters as general economic,
political, business and market information, industry and company reviews,
evaluations of securities and portfolio strategies and transactions, proxy
voting data and analysis services, technical analysis of various aspects of the
securities market, recommendations as to the purchase and sale of securities and
other portfolio transactions, financial, industry and trade publications, news
and information services, pricing and quotation equipment and services, and
research oriented computer hardware, software, data bases and services. Any
particular Research Service obtained through a broker-dealer may be used by the
Adviser in connection with client accounts other than those accounts which pay
commissions to such broker-dealer. Any such Research Service may be broadly
useful and of value to the Adviser in rendering investment advisory services to
all or a significant portion of its clients, or may be relevant and useful for
the management of only one client's account or of a few clients' accounts, or
may be useful for the management of merely a segment of certain clients'
accounts, regardless of whether any such account or accounts paid commissions to
the broker-dealer through which such Research Service was obtained. The advisory
fee paid by the Fund is not reduced because the Adviser receives such Research
Services. The Adviser evaluates the nature and quality of the various Research
Services obtained through broker-dealer firms and attempts to allocate
sufficient portfolio security transactions to such firms to ensure the continued
receipt of Research Services which the Adviser believes are useful or of value
to it in rendering investment advisory services to its clients.

The Fund and the Adviser may also receive Research Services from
underwriters and dealers in fixed-price offerings, which Research Services are
reviewed and evaluated by the Adviser in connection with its investment
responsibilities. The investment companies sponsored by the Adviser or its
affiliates may allocate trades in such offerings to acquire information relating
to the performance, fees and expenses of such companies and other mutual funds,
which information is used by the Trustees of such companies to fulfill their
responsibility to oversee the quality of the services provided by various
entities, including the Adviser, to such companies. Such companies may also pay
cash for such information.

Subject to the requirement that the Adviser shall use its best efforts to
seek and execute portfolio security transactions at advantageous prices and at
reasonably competitive spreads or commission rates, the Adviser is authorized to
consider as a factor in the selection of any broker-dealer firm with whom
portfolio
B-16

orders may be placed the fact that such firm has sold or is selling shares of
the Fund or of other investment companies sponsored by the Adviser. This policy
is not inconsistent with a rule of the National Association of Securities
Dealers, Inc. ("NASD"), which rule provides that no firm which is a member of
the NASD shall favor or disfavor the distribution of shares of any particular
investment company or group of investment companies on the basis of brokerage
commissions received or expected by such firm from any source.

Municipal obligations considered as investments for the Fund may also be
appropriate for other investment accounts managed by the Adviser or its
affiliates. Whenever decisions are made to buy or sell securities by the Fund
and one or more of such other accounts simultaneously, the Adviser will allocate
the security transactions (including "hot" issues) in a manner which it believes
to be equitable under the circumstances. As a result of such allocations, there
may be instances where the Fund will not participate in a transaction that is
allocated among other accounts. If an aggregated order cannot be filled
completely, allocations will generally be made on a pro rata basis. An order may
not be allocated on a pro rata basis where, for example: (i) consideration is
given to portfolio managers who have been instrumental in developing or
negotiating a particular investment; (ii) consideration is given to an account
with specialized investment policies that coincide with the particulars of a
specific investment; (iii) pro rata allocation would result in odd-lot or de
minimis amounts being allocated to a portfolio or other client; or (iv) where
the Adviser reasonably determines that departure from a pro rata allocation is
advisable. While these aggregation and allocation policies could have a
detrimental effect on the price or amount of the securities available to the
Fund from time to time, it is the opinion of the Trustees of the Fund that the
benefits from the Adviser's organization outweigh any disadvantage that may
arise from exposure to simultaneous transactions.

TAXES

The following discussion of federal income tax matters is based on the
advice of Kirkpatrick & Lockhart LLP, counsel to the Fund. The Fund has elected
to be treated and intends to qualify each year as a RIC under the Code.
Accordingly, the Fund intends to satisfy certain requirements relating to
sources of its income and diversification of its assets and to distribute
substantially all of its net income (including tax-exempt income) and net
short-term and long-term capital gains (after reduction by any available capital
loss carryforwards) in accordance with the timing requirements imposed by the
Code, so as to maintain its RIC status and to avoid paying any federal income or
excise tax. To the extent it qualifies for treatment as a RIC and satisfies the
above-mentioned distribution requirements, the Fund will not be subject to
federal income tax on income paid to its shareholders in the form of dividends
or capital gain distributions.

In order to avoid incurring a federal excise tax obligation, the Code
requires that the Fund distribute (or be deemed to have distributed) by December
31 of each calendar year (i) at least 98% of its ordinary income (not including
tax-exempt income) for such year, (ii) at least 98% of its capital gain net
income (which is the excess of its realized capital gains over its realized
capital losses), generally computed on the basis of the one-year period ending
on October 31 of such year, after reduction by any available capital loss
carryforwards and (iii) 100% of any income and capital gains from the prior year
(as previously computed) that were not paid out during such year and on which
the Fund paid no federal income tax. Under current law, provided that the Fund
qualifies as a RIC for federal income tax purposes, the Fund should not be
liable for any income, corporate excise or franchise tax in the Commonwealth of
Massachusetts.

If the Fund does not qualify as a RIC for any taxable year, the Fund's
taxable income will be subject to corporate income taxes, and all distributions
from earnings and profits, including distributions of net capital gain (if any),
will be taxable to the shareholder as ordinary income. In addition, in order to
requalify for taxation as a RIC, the Fund may be required to recognize
unrealized gains, pay substantial taxes and interest, and make certain
distributions.

B-17

The Fund's investment in zero coupon and certain other securities will
cause it to realize income prior to the receipt of cash payments with respect to
these securities. Such income will be accrued daily by the Fund and, in order to
avoid a tax payable by the Fund, the Fund may be required to liquidate
securities that it might otherwise have continued to hold in order to generate
cash so that the Fund may make required distributions to its shareholders.

Investments in lower-rated or unrated securities may present special tax
issues for the Fund to the extent that the issuers of these securities default
on their obligations pertaining thereto. The Code is not entirely clear
regarding the federal income tax consequences of the Fund's taking certain
positions in connection with ownership of such distressed securities.

Distributions by the Fund of net tax-exempt interest income that are
properly designated as "exempt-interest dividends" may be treated by
shareholders as interest excludable from gross income under Section 103(a) of
the Code. In order for the Fund to be entitled to pay exempt-interest dividends
to its shareholders, the Fund must and intends to satisfy certain requirements,
including the requirement that, at the close of each quarter of its taxable
year, at least 50% of the value of its total assets consists of obligations the
interest on which is exempt from regular federal income tax under Code Section
103(a). Interest on certain municipal obligations is treated as a tax preference
item for purposes of the AMT. In addition, corporate shareholders must include
the full amount of exempt-interest dividends in computing the preference items
for the purposes of the AMT. Shareholders of the Fund are required to report
tax-exempt interest on their federal income tax returns.

Tax-exempt distributions received from the Fund are taken into account in
determining, and may increase, the portion of social security and certain
railroad retirement benefits that may be subject to federal income tax.

Interest on indebtedness incurred or continued by a shareholder to purchase
or carry shares of the Fund is not deductible to the extent it is deemed related
to the Fund's distributions of tax-exempt interest. Further, entities or persons
who are "substantial users" (or persons related to "substantial users") of
facilities financed by industrial development or private activity bonds should
consult their tax advisers before purchasing shares of the Fund. "Substantial
user" is defined in applicable Treasury regulations to include a "non-exempt
person" who regularly uses in its trade or business a part of a facility
financed from the proceeds of industrial development bonds, and the same
definition should apply in the case of private activity bonds.

Any recognized gain or income attributable to market discount on long-term
tax-exempt municipal obligations (i.e., obligations with a term of more than one
year) purchased after April 30, 1993 (except to the extent of a portion of the
discount attributable to original issue discount), is taxable as ordinary
income. A long-term debt obligation is generally treated as acquired at a market
discount if purchased after its original issue at a price less than (i) the
stated principal amount payable at maturity, in the case of an obligation that
does not have original issue discount or (ii) in the case of an obligation that
does have original issue discount, the sum of the issue price and any original
issue discount that accrued before the obligation was purchased, subject to a de
minimis exclusion.

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 certain types of municipal obligations, and it can be expected that
similar proposals may be introduced in the future. Under federal tax legislation
enacted in 1986, the federal income tax exemption for interest on certain
municipal obligations was eliminated or restricted. As a result of such
legislation, the availability of municipal obligations for investment by the
Fund and the value of the securities held by it may be affected.

In the course of managing its investments, the Fund may realize some
short-term and long-term capital gains (and/or losses) as well as other taxable
income. Any distributions by the Fund of such capital gains (after reduction by
any capital loss carryforwards) or other taxable income would be taxable to
shareholders of the Fund. However, it is expected that such amounts, if any,
would normally be insubstantial in relation to the tax-exempt interest earned by
the Fund and allocated to the Fund.

B-18

The Fund's investments in options, futures contracts, hedging transactions,
forward contracts (to the extent permitted) and certain other transactions will
be subject to special tax rules (including mark-to-market, constructive sale,
straddle, wash sale, short sale and other rules), the effect of which may be to
accelerate income to the Fund, defer Fund losses, cause adjustments in the
holding periods of Fund securities, convert capital gain into ordinary income
and convert short-term capital losses into long-term capital losses. These rules
could therefore affect the amount, timing and character of distributions to
investors. The Fund may have to limit its activities in options and futures
contracts in order to enable it to maintain its RIC status.

Any loss realized upon the sale or exchange of Fund shares with a tax
holding period of 6 months or less will be disallowed to the extent of any
distributions treated as tax-exempt interest with respect to such shares, and if
the loss exceeds the disallowed amount, will be treated as a long-term capital
loss to the extent of any distributions treated as long-term capital gain with
respect to such shares. In addition, all or a portion of a loss realized on a
redemption or other disposition of Fund shares may be disallowed under "wash
sale" rules to the extent the shareholder acquires other shares of the same Fund
(whether through the reinvestment of distributions or otherwise) within the
period beginning 30 days before the redemption of the loss shares and ending 30
days after such date. Any disallowed loss will result in an adjustment to the
shareholder's tax basis in some or all of the other shares acquired.

Sales charges paid upon a purchase of shares cannot be taken into account
for purposes of determining gain or loss on a sale of the shares before the 91st
day after their purchase to the extent a sales charge is reduced or eliminated
in a subsequent acquisition of shares of the Fund (or of another fund) pursuant
to the reinvestment or exchange privilege. Any disregarded amounts will result
in an adjustment to the shareholder's tax basis in some or all of any other
shares acquired.

Dividends and distributions on the Fund's shares are generally subject to
federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed. Such realized gains may be required to be
distributed even when the Fund's net asset value also reflects unrealized
losses. Certain distributions declared in October, November or December and paid
in the following January will be taxed to shareholders as if received on
December 31 of the year in which they were declared.

Amounts paid by the Fund to individuals and certain other shareholders who
have not provided the Fund with their correct taxpayer identification number
("TIN") and certain certifications required by the Internal Revenue Service (the
"IRS") as well as shareholders with respect to whom the Fund has received
certain information from the IRS or a broker, may be subject to "backup"
withholding of federal income tax arising from the Fund's taxable dividends and
other distributions as well as the proceeds of redemption transactions
(including repurchases and exchanges), at a rate of up to 30% for amounts paid
during 2002 and 2003. An individual's TIN is generally his or her social
security number.

The foregoing discussion does not address the special tax rules applicable
to certain classes of investors, such as tax-exempt entities, foreign investors,
insurance companies and financial institutions. Shareholders should consult
their own tax advisers with respect to special tax rules that may apply in their
particular situations, as well as the state, local, and, where applicable,
foreign tax consequences of investing in the Fund.

If the Fund issues preferred shares, the Fund will designate dividends made
to holders of Shares and to holders of those preferred shares in accordance with
each class's proportionate share of each item of Fund income (such as tax-exempt
interest, net capital gains and other taxable income).

The Fund is not appropriate for non-U.S. investors or as a retirement plan
investment.

State and Local Taxes. The exemption of interest income for federal income
tax purposes does not necessarily result in exemption under the income or other
tax laws of any state or local taxing authority. Shareholders of the Fund may be
exempt from state and local taxes on distributions of tax-exempt interest
B-19

income derived from obligations of the state and/or municipalities of the state
in which they are resident, but taxable generally on income derived from
obligations of other jurisdictions. The Fund will report annually to
shareholders the percentages representing the proportionate ratio of its net
tax-exempt income earned in each state.

The foregoing discussion does not address the special tax rules applicable
to certain classes of investors, such as insurance companies and financial
institutions.

Shareholders should consult their own tax advisers with respect to special
tax rules that may apply in their particular situations, as well as the state or
local tax consequences of investing in the Fund.

OTHER INFORMATION

The Fund is an organization of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may, in
certain circumstances, be held personally liable as partners for the obligations
of the trust. The Declaration of Trust contains an express disclaimer of
shareholder liability in connection with the Fund property or the acts,
obligations or affairs of the Fund. The Declaration of Trust also provides for
indemnification out of the Fund property of any shareholder held personally
liable for the claims and liabilities to which a shareholder may become subject
by reason of being or having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself is unable to meet its obligations. The
Fund has been advised by its counsel that the risk of any shareholder incurring
any liability for the obligations of the Fund is remote.

The Declaration of Trust provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to the Fund or its shareholders
to which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office. Voting rights are not cumulative, which means that the
holders of more than 50% of the shares voting for the election of Trustees can
elect 100% of the Trustees and, in such event, the holders of the remaining less
than 50% of the shares voting on the matter will not be able to elect any
Trustees.

The Declaration of Trust provides that no person shall serve as a Trustee
if shareholders holding 2/3 of the outstanding shares have removed him from that
office either by a written declaration filed with the Fund's custodian or by
votes cast at a meeting called for that purpose. The Declaration of Trust
further

B-20

provides that the Trustees of the Fund shall promptly call a meeting of the
shareholders for the purpose of voting upon a question of removal of any such
Trustee or Trustees when requested in writing so to do by the record holders of
not less than 10 per centum of the outstanding shares.

The Fund's Prospectus and this SAI do not contain all of the information
set forth in the Registration Statement that the Fund has filed with the SEC.
The complete Registration Statement may be obtained from the SEC upon payment of
the fee prescribed by its Rules and Regulations.

INDEPENDENT AUDITORS

Deloitte & Touche LLP, Boston, Massachusetts, are the independent auditors
for the Fund, providing audit services, tax return preparation, and assistance
and consultation with respect to the preparation of filings with the SEC.

B-21

INDEPENDENT AUDITORS' REPORT

To the Trustees and Shareholder of
Eaton Vance Insured California Municipal Bond Fund:

We have audited the accompanying statement of assets and liabilities of
Eaton Vance Insured California Municipal Bond Fund (the "Fund") as of August 19,
2002. This financial statement is the responsibility of the Fund's management.
Our responsibility is to express an opinion on this financial statement based on
our audit.

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

In our opinion, such statement of assets and liabilities presents fairly,
in all material respects, the financial position of Eaton Vance Insured
California Municipal Bond Fund as of August 19, 2002 in conformity with
generally accepted accounting principles.

Boston, Massachusetts
August 20, 2002

B-22

EATON VANCE INSURED CALIFORNIA MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 19, 2002

ASSETS
Cash...................................................... $100.000
Offering costs............................................ $300,000
--------
Total assets.............................................. $400,000
========
LIABILITIES
Accrued offering costs.................................... $300,000
--------
Total liabilities......................................... $300,000
========
Net assets applicable to 6,666.67 common shares of
beneficial interests issued and outstanding............... $100,000
========
NET ASSET VALUE AND OFFERING PRICE PER SHARE.............. $ 15.00
========

NOTES TO FINANCIAL STATEMENT

NOTE 1: ORGANIZATION

The Fund was organized as a Massachusetts business trust on July 8, 2002,
and has been inactive since that date except for matters relating to its
organization and registration as a non-diversified, closed-end management
investment company under the Investment Company Act of 1940, as amended, and the
Securities Act of 1933, as amended, and the sale of 6,666.67 common shares to
Eaton Vance Management, the Fund's Investment Adviser.

Eaton Vance Management, or an affiliate, has agreed to pay all
organizational expenses and offering costs (other than sales loads) that exceed
$0.03 per common share.

The Fund's investment objective is to provide current income exempt from
federal income tax, including alternative minimum tax, and California personal
income tax.

NOTE 2: ACCOUNTING POLICIES

The Fund's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America which require the
use of management estimates. Actual results may differ from those estimates.

The Fund's share of offering costs will be recorded as a reduction of the
proceeds from the sale of common shares upon the commencement of Fund
operations. The offering costs reflected above assume the sale of 10,000,000
common shares.

NOTE 3: INVESTMENT MANAGEMENT AGREEMENT

Pursuant to an investment advisory agreement between the Adviser and the
Fund, the Fund has agreed to pay an investment advisory fee, payable on a
monthly basis, at an annual rate of 0.65% of the average weekly gross assets of
the Fund. Gross assets of the Fund shall be calculated by deducting accrued
liabilities of the Fund not including the amount of any preferred shares
outstanding or the principal amount of any indebtedness for money borrowed.

In addition, the Adviser has contractually agreed to reimburse the Fund for
fees and expenses during the first 8 years of operations. These reductions range
from 0.32% of the average weekly gross assets during the first year of
operations, declining to 0.08% of the average weekly gross assets during the
eighth

B-23

year. The Adviser has not agreed to reimburse the Fund for any portion of its
fees and expenses beyond this time.

Eaton Vance serves as the administrator of the Fund, but currently receives
no compensation for providing administrative services to the Fund.

NOTE 4: FEDERAL INCOME TAXES

The Fund intends to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income, if any, and tax-exempt income, including any net realized gain
on investments.

B-24

APPENDIX A

DESCRIPTION OF SECURITIES RATINGS+
MOODY'S INVESTORS SERVICE, INC.

MUNICIPAL BONDS

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

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

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

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

Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.

B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.

C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.

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

+ The ratings indicated herein are believed to be the most recent ratings
available at the date of this SAI for the securities listed. Ratings are
generally given to securities at the time of issuance. While the rating
agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which would be given to these securities on the date of the Fund's
fiscal year end.
B-25

Absence of Rating: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.

Should no rating be assigned, the reason may be one of the following:

1. An application for rating was not received or accepted.

2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.

3. There is a lack of essential data pertaining to the issue or
issuer.

4. The issue was privately placed, in which case the rating is not
published in Moody's publications.

Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.

Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its municipal bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.

MUNICIPAL SHORT-TERM OBLIGATIONS

MIG/VMIG RATINGS U.S. SHORT-TERM RATINGS: In municipal debt issuance,
there are three rating categories for short-term obligations that are considered
investment grade. These ratings are designated as Moody's Investment Grade (MIG)
and are divided into three levels -- MIG 1 through MIG 3.

In addition, those short-term obligations that are of speculative quality
are designated SG, or speculative grade.

In the case of variable rate demand obligations (VRDOs), a two-component
rating is assigned. The first element represents Moody's evaluation of the
degree of risk associated with scheduled principal and interest payments. The
second element represents Moody's evaluation of the degree of risk associated
with the demand feature, using the MIG rating scale.

The short-term rating assigned to the demand feature of VRDOs is designated
as VMIG. When either the long- or short- term aspect of a VRDO is not rated,
that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1.

MIG ratings expire at note maturity. By contrast, VMIG rating expirations
will be a function of each issue's specific structural or credit features.

MIG 1/VMIG 1: This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly reliable liquidity
support, or demonstrated broad-based access to the market for refinancing.

MIG 2/VMIG 2: This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the preceding group.

MIG 3/VMIG 3: This designation denotes acceptable credit quality.
Liquidity and cash-flow protection may be narrow, and market access for
refinancing is likely to be less well-established.

SG: This designation denotes speculative-grade credit quality. Debt
instruments in this category in this category may lack sufficient margins of
protection.

B-26

STANDARD & POOR'S RATINGS GROUP

INVESTMENT GRADE

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

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

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 an adequate capacity to pay
interest and repay principal. Whereas it normally exhibit 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.

SPECULATIVE GRADE

Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.

BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.

B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.

CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.

CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.

C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.

C1: The Rating C1 is reserved for income bonds on which no interest is
being paid.

D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.

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

B-27

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

L: The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit collateral is
insured by the Federal Deposit Insurance Corp. and interest is adequately
collateralized. In the case of certificates of deposit, the letter "L" indicates
that the deposit, combined with other deposits being held in the same right and
capacity, will be honored for principal and accrued pre-default interest up to
the federal insurance limits within 30 days after closing of the insured
institution or, in the event that the deposit is assumed by a successor insured
institution, upon maturity.

NR: NR indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.

MUNICIPAL NOTES

S&P note ratings reflect the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment:

- Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).

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

Note rating symbols are as follows:

SP-1: Strong capacity to pay principal and interest. Those issues
determined to possess very strong characteristics will be given a plus (+)
designation.

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

SP-3: Speculative capacity to pay principal and interest.

FITCH RATINGS

INVESTMENT GRADE BOND RATINGS

AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.

AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated 'AAA'. Because bonds rated
in the 'AAA' and 'AA' categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated 'F-1+'.

A: Bonds considered to be investment grade and of high credit quality. The
obligors ability to pay interest and repay principal is considered to be strong,
but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and

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therefore, impair timely payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for bonds with higher ratings.

HIGH YIELD BOND RATINGS

BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified that
could assist the obligor in satisfying its debt service requirements.

B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.

CCC: Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.

CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.

C: Bonds are in imminent default in payment of interest or principal.

DDD, DD AND D: Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. 'DDD'
represents the highest potential for recovery on these bonds, and 'D' represents
the lowest potential for recovery.

PLUS (+) OR MINUS (-): The ratings from AA to C may be modified by the
addition of a plus or minus sign to indicate the relative position of a credit
within the rating category.

NR: Indicates that Fitch does not rate the specific issue.

CONDITIONAL: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.

INVESTMENT GRADE SHORT-TERM RATINGS

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.

F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.

F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
'F-1+'.

F-2: Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as the 'F-1+' and 'F-1' categories.

F-3: Fair Credit Quality. Issues carrying this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse change could cause these securities to be rated below
investment grade.

* * * * * * * *

Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative bonds. The Fund is dependent on the Investment Adviser's
judgment, analysis and experience in the evaluation of such bonds.

B-29

Investors should note that the assignment of a rating to a bond by a rating
service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.

DESCRIPTION OF THE INSURANCE CLAIMS-PAYING ABILITY RATINGS OF STANDARD & POOR'S
RATINGS GROUP AND MOODY'S INVESTORS SERVICE, INC.

An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability of AAA has the highest rating assigned by S&P. Capacity to
honor insurance contracts is adjudged by S&P to be extremely strong and highly
likely to remain so over a long period of time. A Moody's insurance
claims-paying ability rating is an opinion of the ability of an insurance
company to repay punctually senior policy holder obligations and claims. An
insurer with an insurance claims-paying ability rating of Aaa is adjudged by
Moody's to be of the best quality. In the opinion of Moody's, the policy
obligations of an insurance company with an insurance claims-paying ability
rating of Aaa carry the smallest degree of credit risk and, while the financial
strength of the these companies is likely to change, such changes as can be
visualized are most unlikely to impair the company's fundamentally strong
position.

An insurance claims-paying ability rating by S&P or Moody's does not
constitute an opinion on an specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take in account deductibles,
surrender or cancellation penalties or the timeliness of payment; nor does it
address the ability of a company to meet nonpolicy obligations (i.e., debt
contracts).

The assignment of ratings by S&P and Moody's to debt issues that are fully
or partially supported by insurance policies, contracts, or guarantees is a
separate process from the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination of such debt issues.

B-30

APPENDIX B

TAX EQUIVALENT YIELD TABLE

The table below gives the approximate yield a taxable security must earn at
various income brackets to produce after-tax yields equivalent to those of
tax-exempt bonds yielding from 4% to 7% under the 2002 regular federal income
tax and California personal income tax rates applicable to individuals.

COMBINED FEDERAL AND
CALIFORNIA STATE TAX RATES TAX-EXEMPT YIELD
---------------------------- -------------------------------------------------
SINGLE RETURN JOINT RETURN FEDERAL STATE BLENDED 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
------------- ------------------- -------- ------ -------- ---- ---- ---- ---- ----- ----- -----
(TAXABLE INCOME)** IS EQUIVALENT TO A FULLY TAXABLE YIELD OF

$ 21,504 - $ 27,950 $ 43,007 - $ 46,700 15.0% 6.00% 20.10% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76%
$ 27,951 - $ 30,298 $ 46,701 - $ 60,596 27.0% 6.00% 31.38% 5.83% 6.56% 7.29% 8.02% 8.74% 9.47% 10.20%
$ 30,299 - $ 38,291 $ 60,599 - $ 76,582 27.0% 8.00% 32.84% 5.96% 6.70% 7.44% 8.19% 8.93% 9.68% 10.42%
$ 38,292 - $ 67,700 $ 76,583 - $112,850 27.0% 9.30% 33.79% 6.04% 6.80% 7.55% 8.31% 9.06% 9.82% 10.57%
$ 67,751 - $141,250 $112,851 - $171,950 30.0% 9.30% 36.51% 6.30% 7.09% 7.88% 8.66% 9.45% 10.24% 11.03%
$141,251 - $307,050 $171,951 - $307,050 35.0% 9.30% 41.05% 6.78% 7.63% 8.48% 9.33% 10.18% 11.03% 11.87%
Over $307,050 Over $307,050 38.6% 9.30% 44.31% 7.18% 8.08% 8.98% 9.88% 10.77% 11.67% 12.57%

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

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

The above indicated federal income tax brackets do not take into account
the effect of a reduction in the deductibility of itemized deductions generally
for individual taxpayers with adjusted gross income in excess of $137,300. The
tax brackets also do not show the effects of phaseout of personal exemptions for
single filers with adjusted gross income in excess of $103,000 and joint filers
with adjusted gross income in excess of $206,000. The effective tax brackets and
equivalent taxable yields of those taxpayers will be higher than those indicated
above.

The combined federal and California tax brackets are calculated using the
highest California tax rate applicable within each bracket. Taxpayers may have
lower combined tax brackets and taxable equivalent yields than indicated above.
The combined tax brackets assume that California taxes are itemized deductions
for federal income tax purposes. Investors who do not itemize deductions on
their federal income tax return will have a higher combined bracket and higher
taxable equivalent yield than those indicated above. The applicable federal tax
rates within the brackets are 15%, 27%, 30%, 35.0% and 38.6%, over the same
ranges of income.

Yields shown are for illustration purposes only and are not meant to
represent the Fund's actual yield. No assurance can be given that the Fund will
achieve any specific tax-exempt yield. While it is expected that the Fund will
invest principally in obligations the interest from which is exempt from the
regular federal income tax and California State personal income taxes, other
income received by the Fund may be taxable. The table does not take into account
state or local taxes, if any, payable on Fund distributions. It should also be
noted that the interest earned on certain "private activity bonds", while exempt
from the regular federal income tax, is treated as a tax preference item which
could subject the recipient to the AMT. The illustrations assume that the AMT is
not applicable and do not take into account any tax credits that may be
available.

The information set forth above is as of the date of this SAI. Subsequent
tax law changes could result in prospective or retroactive changes in the tax
brackets, tax rates, and tax-equivalent yields set forth above. Investors should
consult their tax adviser for additional information.

B-31

APPENDIX C

CALIFORNIA AND U.S. TERRITORY INFORMATION

The following is a summary of certain selected information relating to the
economy and finances of California (hereinafter the "State" or "California") and
the U.S. territories listed below. It is not a discussion of any specific
factors that may affect any particular issuer of municipal securities. The
information is not intended to be comprehensive and does not include all of the
economic and financial information, such as certain information pertaining to
budgets, receipts and disbursements, about California or such U.S. territories
that would ordinarily be included in various public documents issued thereby,
such as an official statement prepared in accordance with issuance of general
obligation bonds of California or such U.S. territories. Such an official
statement, together with any updates or supplements thereto, generally may be
obtained upon request to the budget or equivalent office of California or such
U.S. territories. The information below is derived from selected public
documents of the type described above and has not been independently verified by
the Fund.

CALIFORNIA

GENERAL ECONOMIC CONDITIONS

The economy of California is the largest among the 50 states and is one of
the largest in the world, having major components in high technology, trade,
entertainment, agriculture, manufacturing, tourism, construction and services.
California's economy slipped into a moderate recession in early 2001, losing
249,300 jobs between January and November of 2001. The recession was
concentrated in the state's high-tech sector and tourism industry. The latter
was hit hard by the September 11 terrorist attacks. From November 2001 to April
2002, employment grew by 46,300 jobs, as the state began to recover. But the
recovery has been slow so far, and unemployment continues to rise. Unemployment
has risen from 4.7 percent in February 2001 to 6.4 percent in April 2002. (See
"Current State Budget" below.)

California's July 1, 2001 population of nearly 35 million represented over
12 percent of the total United States population.

California's population is concentrated in metropolitan areas. As of the
April 1, 2000 census 97 percent of the State's population resided in the 25
Metropolitan Statistical Areas in the State. As of July 1, 2000, the five-county
Los Angeles area accounted for 48 percent of the State's population with over
16.0 million residents and the 10-county San Francisco Bay Area represented 21
percent of the State's population with a population of over 7.0 million.

Non-farm employment this year is likely to be up about 1.0 percent from
2001. Further growth is projected in 2003, the year's average growth expected to
be 2.7 percent. The unemployment rate -- a lagging indicator -- is forecast to
edge up to 6.4 percent this year from a 6.0 percent average in 2001, and then
decline to 5.7 percent in 2003.

Construction trends are expected to be mixed. Low interest rates and a
large backlog of unmet demand should encourage further gains in new residential
construction, with 153,000 new units forecast to be authorized by building
permits in 2002, up from 149,000 in 2001. Next year, homebuilding is expected to
decline to 148,000 units.

Although California has avoided the commercial construction excesses of the
1980s, slower job growth, coupled with new supply already under construction,
will result in rising commercial and retail vacancy rates, which in turn will
discourage new construction starts. After several years of strong double-digit
growth, nonresidential permit values (not adjusted for inflation) are expected
to slow this year, but edge back up in 2003.

The weakness in personal income growth in the current year is assumed to be
primarily driven by a drop in capital gains as well as due to lower reduced
stock option income. Capital gains for the 2001 tax year are estimated to have
decreased by 60 percent to $47 billion, and are projected to slowly recover with

B-32

a 5 percent increase in 2002. Stock options are estimated to have dropped by
almost 45 percent, to $44 billion in 2001 and are forecast to decline by another
30 percent in 2002, to $31 billion.

PRIOR FISCAL YEARS' FINANCIAL RESULTS

The combination of resurging exports, a strong stock market, and a
rapidly-growing economy in 1999 and early 2000 resulted in strong growth in
General Fund revenues during fiscal year 1999-2000. Currently, however, both the
nation and the State are experiencing an economic downturn.

2000-2001 Fiscal Year Budget. The 2000-2001 Budget Act (the "2000 Budget
Act"), signed by the Governor on June 30, 2000, was enacted on time for the
second consecutive year. The spending plan assumed General Fund revenues and
transfers of $73.9 billion, a 3.8 percent increase over 1999-2000 estimates. The
2000 Budget Act appropriated $78.8 billion from the General Fund, a 17.3 percent
increase over 1999-2000 and reflected the use of $5.5 billion from the State
budget reserve available from surpluses in the prior year. In order not to place
undue pressure on future budget years, about $7.0 billion of the increased
spending in 2000-2001 was for one-time expenditures and investments.

At the time the 2000 Budget Act was signed, the Department of Finance
estimated the June 30, 2001 State budget reserve balance to be $1.781 billion.
In addition, the Governor held back $500 million as a set-aside for litigation
costs. The Governor vetoed just over $1 billion in General Fund and special fund
appropriations from the Budget approved by the Legislature, in order to achieve
the budget reserve. Because of the State's strong cash position, the State
announced that it would not undertake a revenue anticipation note borrowing in
2000-2001.

The 2000 Budget Act included special fund expenditures of $15.6 billion,
and bond fund expenditures of $5.0 billion. Special fund revenues were estimated
at $16.5 billion.

CURRENT STATE BUDGET

Background. The 2001-2002 Governor's Budget, released January 10, 2001
estimated 2001-2002 General Fund revenues and transfers to be about $79.4
billion and proposed $82.9 billion in expenditures, utilizing a portion of the
surplus expected from 2000-2001. The Governor proposed budget reserves in
2001-2002 of $2.4 billion, including $500 million for unplanned litigation
costs.

The May Revision to the 2001-2002 Governor's Budget disclosed a reversal of
the recent General Fund financial trend, as a result of the slowdown in economic
growth in the State starting in the first quarter of 2001 and, most
particularly, the steep drop in stock market levels since early 2000. The Fiscal
Year 2001-2002 Budget Act projects General Fund revenues in 2001-2002 will be
about $75.1 billion, a drop of $2.9 billion from revised 2000-2001 estimates.
Most of the drop is attributed to the personal income tax, which reflects both
slower job and wage growth and a severe decline in capital gains and stock
option income, which is included in personal income tax statistics.

Fiscal Year 2001-2002 Budget Act. The Fiscal Year 2001-2002 Budget Act
(the "2001 Budget Act") was signed by the Governor on July 26, 2001, almost four
weeks after the start of the fiscal year. The Governor vetoed almost $500
million General Fund expenditures from the budget passed by the Legislature. The
spending plan for 2001-2002 included General Fund expenditures of $78.8 billion,
a reduction of $1.3 billion from the prior year. This could be accomplished
without serious program cuts because such a large part of the 2000 Budget Act
comprised one-time expenditures. The spending plan utilized more than half of
the budget surplus as of June 30, 2001, but still left a projected balance in
the Special Fund for Economic Uncertainties at June 30, 2002 of $2.6 billion,
the largest appropriated reserve in State history. The 2001 Budget Act assumed
that, during the course of the fiscal year, the $6.2 billion advanced by the
General Fund to the Department of Water Resources for power purchases will be
repaid with interest. See "Recent Developments Regarding Natural Gas and
Electricity" below.

The 2001 Budget Act also included special fund expenditures of $21.3
billion and bond fund expenditures of $3.2 billion. The State issued $5.7
billion of revenue anticipation notes on October 4, 2001 as part of its cash
management program.
B-33

Some of the important features of the 2001 Budget Act were the following:

1. Proposition 98 per pupil spending was increased by 4.9 percent to
$7,002. Total General Fund spending of $32.4 billion for K-12 education
fully funds enrollment and cost of living increases and also provides
additional funding for a number of programs, such as teacher and principal
training programs, instructional and student achievement improvement
programs, energy cost assistance, and high-tech high schools.

2. Higher education funding was increased to allow for enrollment
increases at both the University of California and the California State
University system with no fee increases. Additional funding was also
provided for 3 percent student growth at community colleges.

3. Health, welfare and social services generally were fully funded for
anticipated caseload growth. The 2001 Budget Act adopted an Administration
proposal to utilize $402 million of tobacco litigation settlement payments
to fund certain health programs.

4. In addition to $4.3 billion of continuing tax relief, the 2001
Budget Act contained about $125 million in new General Fund tax relief,
primarily for senior citizens property tax assistance and certain new tax
credits aimed at rural areas and agricultural equipment. As noted above,
the Legislature modified the law permitting a 0.25 percent cut in the state
sales tax rate if the General Fund reserve exceeds three percent of
revenues in the current fiscal year. This change was not expected to impact
the 2001-2002 fiscal year.

5. The 2001 Budget Act altered the six-year transportation funding
plan started in the 2000-2001 fiscal year. The Legislature postponed for
two years the transfer of sales taxes on gasoline to support transportation
programs, and this transfer will take place during the 2003-2004 to
2007-2008 fiscal years. As a result, $2.5 billion of these sales tax
revenues will remain in the General Fund over the 2001-2002 and 2002-2003
fiscal years. To allow all current projects to remain on schedule through
2002-2003, the legislation authorized certain internal loans from other
transportation accounts. Part of the 2001 Budget Act compromise was an
agreement to place on the March 2002 statewide ballot a constitutional
amendment which would make permanent, after 2007-2008, the dedication of
sales taxes on gasoline to transportation purposes. The constitutional
amendment was approved on March 5, 2002 by 69.1% of voters in the State
voting for the dedication.

6. The 2001 Budget Act provided significant assistance to local
governments including $232.6 million for the COPS and county juvenile
justice crime prevention programs, $209 million for mental health and
social services, $154 million for street and road maintenance, $124 million
for various public safety programs and $34 million for environmental
protection.

2002-2003 Proposed Governor's Budget. The Proposed 2002-2003 Governor's
Budget, released on January 10, 2002 (the "2002-2003 Governor's Budget"),
projected a fall-off in General Fund revenues due to the national economic
recession combined with the stock market decline, which began in mid-2000.
Personal Income Tax receipts, which include stock option and capital gains
realizations, are particularly impacted by the slowing economy and stock market
decline. As a result, the Governor projected a combined budget gap for 2001-2002
and 2002-2003 of approximately $12.5 billion.

The May Revision to the 2002 Governor's Budget (the "May Revision")
projected further deterioration in revenues of $9.5 billion and additional costs
of $1.6 billion over the 2001-2002 and 2002-2003 fiscal years. As a result, the
combined budget gap for 2001-2002 and 2002-2003 rose from the $12.5 billion
estimated in January to $23.6 billion.

The May Revision projected revenues from the three largest sources of tax
revenue (personal income, sales and use and corporation) to be about $61.1
billion in 2001-2002. This is $3.8 billion lower than projected in the 2002
Governor's Budget ($64.9 billion) and $11.7 billion lower than the final
estimates for 2000-2001. Most of the decline in projected tax revenues is
attributable to the personal income tax. Total revenues and transfers, projected
to be $73.8 billion in 2001-2002, include the repayment of $6.7 billion from the
sale of Department of Water Resources Revenue Bonds and other sources to repay
General Fund

B-34

loans with interest. The Power Bonds were originally expected to be sold in June
2002. However, the cash flows now show that the sale is anticipated to occur by
the end of October, 2002. See "Recent Developments Regarding Natural Gas and
Electricity." The May Revision projected major General Fund tax revenues of
$70.6 billion and total General Fund revenues and transfers of $78.6 billion for
2002-2003.

In early June, actual receipts reported by the State Controller's Office
for the month of May were $372 million below forecast, on a fund cash basis.
This was attributable to an overstated estimate of fund cash by the Department
of Finance for the month in the range of $344 million. The Department of Finance
bases its budgetary revenue forecast on receipts on the Agency cash basis, not
fund cash basis. Therefore, these lower receipts on a cash basis do not
translate into a significant change in budgetary revenues.

The Governor proposed to close the $23.6 billion budget gap through a
combination of spending reductions and revenue proposals, as well as the maximum
fiscally responsible level of fund shifts, loans, accelerations, transfers and
deferrals:

1. Expenditure reductions in the 2001-2002 and 2002-2003 fiscal years
(from currently budgeted and projected expenditures based on current
programs) totaling about $7.597 billion. This includes the proposals made
by the Governor in November 2001, which were substantially enacted by the
Legislature.

2. The receipt of $4.5 billion in 2002-2003 from the securitization
(sale) of a large portion of the State's future receipt of payment from
tobacco companies from the settlement of litigation against those
companies.

3. A total of $1.729 billion in loans from various funds, including
$1.095 billion from transportation funds.

4. The shift of $1.327 billion of expenditures from the General Fund
to other funding sources, such as special funds and proposed future bond
funds.

5. General Fund savings of $1.276 billion in 2002-2003 from a
temporary reduction in the Vehicle License Fee offset level from 67.5
percent to 25 percent for the 2003 calendar year only.

6. The receipt of $1.2 billion additional revenues in 2002-2003 from a
two-year suspension of the net operating loss provisions in current law.

7. General Fund savings of $1.149 billion from a one-month deferral of
certain education disbursements from 2001-2002 to July 2002. This total
includes $76 million for the Instructional Time and Staff Development
Reform Program, $61 million for the Standardized Testing and Reporting
Program, $39 million for Beginning Teacher Support and Assistance, $713
million for Targeted Instruction Improvement Block Grant, $144 million for
High Achieving/Improving Schools, and $116 million for community colleges.

8. General Fund savings of $1.083 billion ($223 million in 2001-2002
and $860 million in 2002-2003) from the Treasurer's Debt Restructuring Plan
to amortize the State's long-term debt to more closely approximate level
annual debt service costs rather than the level annual principal. The plan
also includes the issuance of refunding debt to pay selected maturities of
general obligation bonds due between February 2002 and June 2004.

9. Anticipated increases in federal funding for health and human
services programs, security/bioterrorism and other areas totaling about
$1.081 billion.

10. Additional revenue of $938 million in 2002-2003 due to Federal Tax
Conformity ($432 million) and Tax Compliance ($506 million). The former is
comprised of a new proposal to change California tax law to conform with
federal tax law regarding accounting for bad debt reserves for large banks
as well as the pension and individual retirement account conformity package
included in the Governor's Budget, which was passed by the Legislature and
signed by the Governor on May 8, 2002. The latter is comprised of various
proposals such as waiving penalties and interest on delinquent
B-35

accounts, increasing collections activities, ensuring proper auditing of
tax credits and improving the effectiveness of the tax protest and
settlement programs.

11. Accelerations and transfers from other funds to the General Fund
totaling $1.287 billion.

12. Additional revenues of $475 million in 2002-2003 from a 50-cent
increase in the tobacco excise tax.

All of these proposals are subject to consideration by the Legislature and,
in some cases, action by other bodies, such as the federal government. The final
outcome of these proposals will be known in the upcoming months.

Despite the challenge represented by the severe revenue decline and the
budget gap, the May Revision contains the following major components:

1. The May Revision proposed a 4.8 percent increase in K-12 funding
for 2002-2003 above the revised 2001-2002 estimates. This would provide
funding for K-12 schools above the minimum requirement under Proposition 98
at the Test 2 level, fully funding statutory growth and cost-of-living
adjustments. Total Proposition 98 expenditures for education would be about
$7,186 per pupil, an increase from the estimated level of $6,618 for
2001-2002. In addition, the May Revision preserves funding for key
education initiatives including teacher development and recruitment,
instructional materials, class size reduction, assisting low performing
schools, and before and after school care expansion.

2. Although the May Revision proposes to reduce funding for higher
education by 0.6 percent in 2002-2003 compared to the revised estimates for
2001-2002, the proposed reductions are intended to have no direct effect on
core classroom instructional needs. In spite of budget constraints, the May
Revision provides full funding for enrollment increases at the University
of California, California State University and the Community Colleges. The
May Revision also continues funding for the new University of California
campus at Merced, scheduled to open in the fall of 2004.

3. The Governor proposed a total of $30 billion in new general
obligation bonds for local school construction and higher education
facilities to be included in amounts of $10 billion each on the 2002, 2004
and 2006 statewide ballots. Almost all of the last voted bond
authorization, $9.2 billion approved in 1998, has been allocated.

4. Youth and adult corrections expenditures will be reduced by 3.7
percent from the previous year, reflecting slowing inmate population
growth, while protecting public safety. Health and human services
expenditures will be reduced by 5.3 percent, while providing health
insurance coverage for children and critical care programs for seniors.
Combined expenditures for other programs, such as transportation,
resources, environmental protection, general government and tax relief,
will be reduced by 4.2 percent in the aggregate. Many capital outlay
projects currently funded out of the General Fund are proposed to be funded
with bond funding.

5. In addition to the 6,600 positions eliminated since 1999, the May
Revision proposes to eliminate an additional 4,000 state government
positions. The first priority for elimination in each department will be
vacant positions not required to maintain critical public health and safety
functions. A process will be established for the elimination of filled
positions in accordance with state laws, regulations and Memoranda of
Understanding with represented employees.

Final action on the Fiscal Year 2002-2003 Budget Act will occur following
negotiations with the Legislature and the Governor.

FUTURE BUDGETS

It cannot be predicted what actions will be taken in the future by the
State Legislature and the Governor to deal with changing State revenues and
expenditures. The State budget will be affected by national and State economic
conditions and other factors.

B-36

RATINGS

As of March 2002, the following ratings for the State of California general
obligation bonds have been received from Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P") and Fitch, Inc. ("Fitch"):

FITCH MOODY'S S&P
----- ------- ---

AA A1 A+

Currently, the State's rating outlook with Moody's and S&P remains negative
and its rating with Fitch remains on rating watch -- negative.

These ratings apply to the State only and are not indicative of the ratings
assigned to local governments, such as counties, cities, school districts and
other local agencies.

Any explanation of the significance of such ratings may be obtained only
from the rating agency furnishing such ratings. There is no assurance that such
ratings will continue for any given period of time or that they will not be
revised downward or withdrawn entirely if, in the judgment of the particular
rating agency, circumstances so warrant.

RECENT DEVELOPMENTS REGARDING NATURAL GAS AND ELECTRICITY

During the past year California has experienced difficulties with the
prices and supplies of natural gas and electricity in much of the State. These
difficulties are likely to continue for several years. The State Department of
Finance believes there is potential for economic disruption if power supplies
are interrupted, and that longer term business investment and location decisions
may be adversely affected by potential disruptions.

Shortages of electricity available within the service areas of California's
three investor-owned utilities (the "Utilities") have resulted in the need to
implement rotating electricity blackouts, affecting millions of Californians, on
several occasions since the start of 2001. Following the first incidence of such
blackouts in January 2001, the Governor proclaimed a state of emergency to exist
in California under the California Emergency Services Act (the "Emergency
Services Act") on the basis that the electricity available from California's
Utilities was insufficient to prevent widespread and prolonged disruption of
electric service in California. The Governor directed the State Department of
Water Resources ("DWR") to enter into contracts and arrangements for the
purchase and sale of electric power as necessary to assist in mitigating the
effects of the emergency (the "Power Supply Program"). Following the Governor's
proclamation under the Emergency Services Act, the Power Supply Program was
further authorized by the enactment of legislation (Chapter 4 and 9, First
Extraordinary Session of 2001, hereafter referred to as the "Power Supply Act")
and the adoption of related orders by the California Public Utilities Commission
("CPUC").

DWR began selling electricity to 10 million retail electric customers in
California in January 2001. DWR purchases power from wholesale supplies under
long-term contracts and in short-term and spot market transactions. DWR
electricity is delivered to the customers through the transmission and
distribution systems of the Utilities and payments from the customers are
collected for DWR by the Utilities pursuant to servicing arrangements ordered by
the CPUC. The DWR power supply program is expected to supply the shortfall (the
"net short") between the amount of electricity required by customers of the
Utilities and the amount of electricity furnished to customers by the Utilities
until December 31, 2002. The Governor and the CPUC are developing plans for the
provision of the net short after 2002, including plans to enable each of the
Utilities to be able to furnish the portion of the net short not provided by
DWR's long-term contracts (the "residual net short"). Alternatively, it is
possible that the authorization of DWR to provide the residual net short will be
extended by legislation or that another State agency will be authorized to
develop a successor program.

DWR's Power Supply Program has been financed by unsecured loans from the
General Fund (and certain other funds) of the State, plus retail customer
payments received by DWR. As of May 31, 2002,

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DWR had, since the start of the program on January 17, 2001, incurred power
purchase obligations and administrative expenses aggregating slightly more than
$13 billion, of which $6.2 billion was advanced from the General Fund (of which
$116 million has already been repaid) and $5.2 billion was paid from retail
customer payments received by the DWR. Advances from the General Fund ceased in
June 2001 after DWR arranged secured loans from banks and other financial
institutions (the "Interim Loans"), providing net proceeds aggregating
approximately $4.1 billion.

Pursuant to the Power Supply Act, DWR plans to issue approximately $11
billion of revenue bonds to fund its Power Purchase Program (or provide
long-term financing for costs that have been financed on an interim basis with
advances from the General Fund of the State and an interim loan from certain
lenders). The revenue bonds will be repaid from a dedicated revenue stream
derived from retail end use customer payments for electricity. Completion of the
DWR bond sale is dependant on a number of factors. The timing of the bond sale
is uncertain but DWR expects it to occur in 2002. The State may make additional
loans or other advances from the State General Fund to support the Power Supply
Program subsequent to the issuance of the DWR revenue bonds. Alternative sources
of additional funding for the power supply program (if needed) would be rate
increases and additional revenue bonds or other obligations. The principal
amount of revenue bonds that can be issued by DWR may not exceed $13.4 billion.

The terms of the Interim Loans require that the DWR revenue bond proceeds
be used to prepay the Interim Loans before being used to repay the State loans
or to pay expenses of the Power Supply Program. Unless the Interim Loans are
prepaid, Interim Loan principal is payable in eleven quarterly installments
commencing on April 30, 2002. Currently, there is $3.8 billion outstanding.
Interest is payable at variable rates tied to market indices. Interest was
capitalized through February 2002, and thereafter principal and interest are
payable solely from revenues from power sales and other funds of the Power
Supply Program after provision is made for the payment of power purchase costs
and other operating expenses of the Power Supply Program. The Interim Loans are
not a general obligation of the State and are not repayable from or secured by
the General Fund. The loan agreement does not provide for acceleration of the
Interim Loans if DWR is not in compliance with the terms of the loan agreement.
DWR's current revenue requirement includes amounts sufficient to pay scheduled
Interim Loan debt service until a new revenue requirement can be implemented.

Delays in issuing the DWR revenue bonds would in turn delay the DWR's
planned loan repayments to the General Fund and may require additional loans
from the General Fund. If State loans to the DWR affect available resources to
pay for normal State operations, the State could issue short-term obligations to
maintain adequate cash reserves. The State has issued short-term obligations in
the past to meet its cash flow needs.

On April 6, 2001, Pacific Gas & Electric ("PG&E"), a Utility, filed for
voluntary protection under Chapter 11 of the federal Bankruptcy Code. The
bankruptcy proceedings (hereafter the "PG&E Bankruptcy") are pending in U.S.
Bankruptcy Court in San Francisco, California. During the PG&E Bankruptcy, it is
anticipated that PG&E's operations will continue under current management, while
the Bankruptcy Court decides on the allocation of PG&E's available cash flow and
assets among its various creditors. The State has filed numerous claims as a
creditor of PG&E, including, but not limited to, claims for income and property
taxes, regulatory fees, fines and penalties and environmental fees, fines and
penalties. PG&E or other parties to the PG&E Bankruptcy may seek to have the
Bankruptcy Court take actions that affect prices charged to end users for
electricity or affect existing contracts for purchase or sale of electricity.
Bankruptcies involving large and complex companies typically take several years
to conclude. PG&E's parent company, PG&E Corp., has not filed for bankruptcy
protection. On September 20, 2001, PG&E filed its reorganization plan with the
Bankruptcy Court. The plan seeks an extensive restructuring of PG&E's business
and the transfer of certain of its assets, including its electric and gas
transmission assets, to newly created limited liability companies. PG&E has also
filed the plan at FERC, the Securities and Exchange Commission and the Nuclear
Regulatory Commission seeking their approval of the elements under their
jurisdiction. On November 27, 2001, the CPUC filed its opposition to the PG&E
disclosure statement describing the reorganization plan. On February 27, 2002,
the CPUC filed a term sheet on an alternate plan of reorganization. The
Bankruptcy Judge accepted the term sheet, and
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ordered the CPUC to file a plan of reorganization and disclosure statement by
April 15, 2002 with no date set for a hearing. On April 3, 2002, PG&E filed an
amended disclosure statement and plan of reorganization. A hearing on PG&E's
amended plan of reorganization was held on April 11, 2002. On April 15, 2002,
the CPUC filed an alternate plan of reorganization and disclosure statement.
Both plans have been submitted to the creditors for voting. The Bankruptcy Judge
has scheduled July 17, 2002, as the date for filing objections for both plans
and August 12, 2002 as the date by which creditors must return their ballots
accepting or rejecting the plans. The votes have not yet been counted. On August
23, 2002, the CPUC and the creditors' committee reached an agreement to ask the
Bankruptcy Judge to reopen the vote and let creditors consider a revised version
of the CPUC plan.

Southern California Edison ("SCE"), a Utility, has not sought protection of
or been forced into bankruptcy, although this may change in the future. SCE has
entered into a Memorandum of Understanding with the Governor designed to
strengthen its financial condition.

All three Utilities have applications pending before the CPUC seeking
authorization to increase rates further to recover past losses and increase
future revenues. On October 2, 2001, SCE and the CPUC announced the proposed
settlement of certain pending litigation which is intended to allow SCE to
recover from ratepayers a substantial portion of its accumulated debts. The
settlement was approved by the federal District Court on October 5, 2001. A
consumer group has appealed that decision. The group's motions for stay of
judgment pending appeal have been denied by both the District Court (on remand)
and the appellate court. Oral argument on that appeal occurred on March 7, 2002,
but the Court has not yet ruled. SCE had previously indicated that it might seek
bankruptcy law protection if the Legislature did not enact legislation to assist
its financial recovery. See "Pending Litigation" below for a discussion of
related lawsuits. The amount and timing of further rate increases for
electricity supplied by DWR and the Utilities may be affected by a number of
factors, including rehearings and appeals of the applicable CPUC orders and the
PG&E Bankruptcy.

A number of lawsuits have been filed concerning various aspects of the
current energy situation. These include disputes over rates set by the CPUC;
responsibility for electricity and natural gas purchases made by the Utilities
and the California Independent System Operator (the "ISO"); continuing
obligations of certain small power generators; and antitrust and fraud claims
against various parties. (See "Pending Litigation" below for a discussion of
certain of these lawsuits and further discussion of the PG&E Bankruptcy.)

California imports a substantial amount of its natural gas. Limited gas
transmission pipeline capacity into California and a major pipeline break in New
Mexico during the summer of 2000, coupled with increases in wholesale prices for
natural gas in the United States, have resulted in substantial price increases
that are being passed on to business and residential consumers. Also, local
municipalities and governmental entities are paying increased service costs,
which might negatively impact their budgets. Pipeline expansion is planned but
will not be complete for several years. Nationwide, relatively high prices for
natural gas are likely to persist for several years. Supplies of natural gas in
northern and central California are also being affected by the financial
difficulty of the utility company serving that region. Shortages of natural gas
supplies could adversely affect the economy, and particularly generation of
electricity, much of which is fueled by natural gas.

Since January 2001, the Governor and Legislature have implemented a number
of steps through new laws and Executive Orders to respond to the energy problems
in the State. These steps include expediting power plant construction and other
means of increasing electricity supplies, implementing vigorous energy
conservation programs, and entering into long-term power supply and natural gas
supply contracts to reduce reliance on spot markets. The Governor believes the
combination of these steps, along with moderate temperatures, allowed the State
to avoid any electricity interruptions during the peak summer energy demand
season.

While the State expects that over time the measures described above,
coupled with conservation, load management and improved energy efficiency, will
continue to enable the State to avoid disruptions of the supply of electricity
to the public, and will maintain lower wholesale power prices and ultimately
promote
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the financial recovery of the Utilities, the situation continues to be fluid and
subject to many uncertainties. There can be no assurance that there will not be
future disruptions in power supplies or related developments which could
adversely affect the State's economy, and which could in turn affect State
revenues, or the health and comfort of its citizens. Further, the PG&E
Bankruptcy interjects a new party, the federal Bankruptcy Court, into the making
of decisions regarding future electricity costs and the role of PG&E. There can
be no assurance that there will not be future disruptions in energy supplies or
related developments that could adversely affect the State's and local
governments' economies, the State's business climate and that could in turn
affect State and local revenues.

LOCAL GOVERNMENTS

The primary units of local government in California are the counties,
ranging in population from 1,200 (Alpine) to over 9,800,000 (Los Angeles).
Counties are responsible for providing many basic services, including indigent
healthcare, welfare, jails and public safety in unincorporated areas. There are
also about 478 incorporated cities and thousands of special districts formed for
education, utility and other services. The fiscal condition of local governments
has been constrained since the enactment of "Proposition 13" in 1978 and other
constitutional amendments, which reduced and limited the future growth of
property taxes and limited the ability of local governments to impose "special
taxes" (those devoted to a specific purpose) without two-thirds voter approval.
Counties, in particular, have had fewer options to raise revenues than many
other local governmental entities, and have been required to maintain many
services.

In the aftermath of Proposition 13, the State provided aid to local
governments from the General Fund to make up some of the loss of property tax
moneys, including taking over the principal responsibility for funding local
K-12 schools and community colleges. During the recession of the early 1990s,
the Legislature eliminated most of the remaining components of the
post-Proposition 13 aid to local government entities other than K-14 education
districts, by requiring cities and counties to transfer some of their property
tax revenues to school districts. However, the Legislature also has provided
additional funding sources (such as sales taxes) and reduced certain mandates
for local services. Local governments sued the State (Sonoma County, et al. v.
Commission on State Mandates, et al.) over these transfers. The appeals court
denied the plaintiffs' position and the subsequent appeal was not heard by the
State Supreme Court.

Since then the State has also provided additional funding to counties and
cities through various programs. The 2001 Budget Act and related legislation
provide assistance to local governments, including $357 million for various
local public safety programs, including the Citizens' Option for Public Safety
("COPS") program to support local front-line law enforcement, sheriffs'
departments for jail construction and operations, and district attorneys for
prosecution, $154 million for deferred maintenance of local streets and roads,
$60 million in assistance for housing, $209 million for mental health and social
services and $34 million for environmental protection. For 2002-2003 the State
proposes to continue to provide $121.3 million for the COPS program,
approximately $134 million for deferred maintenance of local streets and roads,
$38 million for environmental protection and hundreds of millions for health and
human services. Nevertheless, the energy situation may have an impact on whether
these moneys are actually allocated to the local governments. (See "Recent
Developments Regarding Natural Gas and Electricity" above.)

The economies of various local governments may be negatively affected by
the energy situation in California. (See "Recent Developments Regarding Natural
Gas and Electricity" above.) Additionally, for the majority of local governments
that do not have publicly owned utilities, the increased charges for power will
have budgetary impact, but the degree of that impact cannot be ascertained at
this time.

The entire Statewide welfare system was changed in response to the change
in federal welfare law in 1996. The federal block grant formula established in
1996 is operative through federal fiscal year 2002. Under the revised basic
State welfare system, California Work Opportunity and Responsibility to Kids
("CalWORKs"), counties are given flexibility to develop their own plans,
consistent with State law, to implement Welfare-to-Work and to administer many
of its elements and their costs for administrative and

B-40

support services are capped at 1996-1997 levels. Counties are also given
financial incentives if, at the individual county level or statewide, the
CalWORKs program produces savings associated with specified Welfare-to-Work
outcomes. Under Ca1WORKs, counties will still be required to provide "general
assistance" aid to certain persons who cannot obtain welfare from other
programs.

Administration of the CalWORKs program is largely at the county level, and
the counties receive financial incentives for success in this program. Beginning
in 2000-2001, county performance incentive earnings are subject to Budget Act
appropriation. Counties will have earned $1.2 billion through the end of
2001-2002, but have only spent $186.6 million through December 2001. Because the
Department of Social Services (the "DSS") has allocated $1.1 billion to
counties, the majority of this funding currently resides in county bank
accounts.

Recently, the federal government formally notified the DSS that the State
is in violation of the federal Cash Management Act in drawing down federal
Temporary Assistance for Needy Families ("TANF") dollars for fiscal incentive
purposes that were not going to be immediately spent by the counties. TANF is a
federal block grant program with lifetime time limits on TANF recipients, work
requirements and other welfare reform changes. Under the Cash Management Act,
TANF funds are to remain at the federal level until such time as a state is
going to actually expend those funds. The DSS plans to recover the $600 million
that is expected to remain unexpended by the counties. The May Revision to the
2002 Governor's Budget proposes to use $169.2 million as a funding source in
2002-2003 to maintain CalWORKS funding within available resources and $120
million to fund a one-time augmentation to CalWORKS employment services. The
remaining, $310.8 million will be appropriated to counties for 2002-2003. In
addition to $97 million in incentives earned prior to 2000-2001, $169.2 million
may need to be paid to counties in the future. The $120 million would not need
to be paid back because the counties would be required to waive their
entitlement to these incentive funds as a condition for receipt of the one-time
employment services augmentation.

Welfare caseloads have declined considerably with the implementation of the
CalWORKs program. The 2002-2003 CalWORKS caseload is projected to be 524,000, up
from 507,000 cases in 2001-2002. This represents a major improvement from the
rapid growth of the early 1990s, when caseload peaked at 921,000 cases in
1994-1995. The longer-term impact of the Law and CalWORKS is being evaluated by
the RAND Corporation, with a series of reports to be furnished and the final
report to be released in 2002.

The 2001-2002 CalWORKs budget reflects that California has met the
federally-mandated work participation requirements for federal fiscal years
1997, 1998, 1999, and 2000. Having met that goal, the federally-imposed
maintenance-of-effort ("MOE") level for California was reduced from 80 percent
of the federal fiscal year 1994 baseline expenditures for the former Aid to
Families with Dependent Children ("AFDC") program ($2.9 billion) to 75 percent
($2.7 billion). It is expected that California will continue to meet the work
participation goal in federal fiscal year 2001 and beyond. In addition, it is
assumed that California will receive a TANF High Performance Bonus award of $20
million in 2001-2002. This bonus will be awarded to states for their successes
in moving welfare recipients to work and sustaining their participation in the
workforce during federal fiscal year 2001. California also received a TANF High
Performance Bonus Award in 1999-2000 and 2000-2001 based upon the State's
success during federal fiscal years 1999 and 2000 respectively.

In 2002-2003 it is anticipated that California will continue to meet, but
not exceed, the federally-required $2.7 billion combined State and county MOE
requirement. The May Revision includes total CalWORKs-related expenditures of
$7.4 billion for 2002-2003, including child care transfer amounts for the
Department of Education and the general TANF Block Grant reserve.

Authorization for the TANF program ends September 30, 2002. For the TANF
program to continue, the U.S. Congress must pass, and the President must sign,
legislation reauthorizing the program prior to that date. Although
reauthorization could simply involve extending the funding period, it is more
likely that Congress and the President will consider several key policy changes.
It is unknown at this time how California's TANF funding will be affected by
reauthorization.

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Historically, funding for the State's trial court system was divided
between the State and the counties. In 1997, legislation consolidated the trial
court funding at the State level in order to streamline the operation of the
courts, provide a dedicated revenue source and relieve fiscal pressure on the
counties. Since then, the county general purpose contribution for court
operations was reduced by $415 million and cities are retaining $68 million in
fine and penalty revenue previously remitted to the State. The State's trial
court system will receive approximately $1.7 billion in State resources and $475
million in resources from the counties in 2002-2003.

Tobacco Litigation. In late 1998, the State signed a settlement agreement
with the four major cigarette manufacturers. The State agreed to drop its
lawsuit and not to sue in the future for monetary damages. Tobacco manufacturers
agreed to billions of dollars in payments and restrictions in marketing
activities. Under the settlement agreement, the tobacco manufacturers agreed to
pay California governments a total of approximately $25 billion (subject to
adjustments) over a period of 25 years. Beyond 2025, payments of approximately
$900 million per year will continue in perpetuity. Under a separate Memorandum
of Understanding, half of the moneys will be paid to the State and half to local
governments (all counties and the cities of San Diego, Los Angeles, San
Francisco and San Jose). During Fiscal Year 2000-2001, the General Fund received
$386 million in settlement payments. The 2001 Budget Act forecasts payments to
the State totaling $488 million in 2001-2002 of which $86 million will go to the
General Fund and the balance will be in a special fund to pay certain healthcare
costs and debt service payments for a Tobacco Settlement securitization. The
2001 Budget Act forecasts payments to the State totaling $474 million in
2002-2003, which will be deposited in a special fund to pay certain healthcare
costs and debt service payments for a tobacco settlement securitization.

The specific amount to be received by the State and local governments is
subject to adjustment. Details in the settlement agreement allow reduction of
the tobacco companies' payments because of certain types of federal legislation,
or decreases in cigarette sales. Settlement payments can increase due to
inflation or increases in cigarette sales. The "second annual" payment, received
in April 2002, was 15.3 percent lower than the base settlement amount due to
reduced sales. Future payment estimates have been reduced by a similar
percentage. In the event that any of the tobacco companies goes into bankruptcy,
the State could seek to terminate the agreement with respect to those companies
filing bankruptcy actions, thereby reinstating all claims against those
companies. The State may then pursue those claims in the bankruptcy litigation,
or as otherwise provided by law. Also, several parties have brought a lawsuit
challenging the settlement and seeking damages. (See "Constitutional and
Statutory Limitations; Future Initiatives; Pending Litigation" below.)

CONSTITUTIONAL AND STATUTORY LIMITATIONS; FUTURE INITIATIVES; PENDING LITIGATION

Constitutional and Statutory Limitations. Article XIII A of the California
Constitution (which resulted from the voter-approved Proposition 13 in 1978)
limits the taxing powers of California public agencies. Article XIII A provides
that the maximum ad valorem tax on real property cannot exceed one percent of
the "full cash value" of the property and effectively prohibits the levying of
any other ad valorem tax on real property for general purposes. However, on June
3, 1986, Proposition 46, an amendment to Article XIII A, was approved by the
voters of the State of California, creating a new exemption under Article XIII A
permitting an increase in ad valorem taxes on real property in excess of 1
percent for bonded indebtedness approved by two-thirds of the voters voting on
the proposed indebtedness and (as a result of a constitutional amendment
approved by California voters on November 7, 2000) on bonded indebtedness for
school facilities and equipment approved by 55 percent of the voters voting on
the bond measure, subject to certain restrictions. "Full cash value" is defined
as "the county assessor's valuation of real property as shown on the 1975-1976
tax bill under 'full cash value' or, thereafter, the appraised value of real
property when purchased, newly constructed, or a change in ownership has
occurred after the 1975 assessment." The "full cash value" is subject to annual
adjustment to reflect increases (not to exceed two percent) or decreases in the
consumer price index or comparable local data, or to reflect reductions in
property value caused by damage, destruction or other factors.

B-42

On November 7, 2000, voters approved Proposition 39 called the "Smaller
Classes, Safer Schools and Financial Accountability Act" (the "Smaller Classes
Act"). The Smaller Classes Act amends Section 1 of Article XIII A, Section 18 of
Article XVI of the California Constitution and Section 47614 of the California
Education Code. Effective upon its passage, the newly added Section 18(b) of
Article XVI Allows an alternative means of seeking voter approval for bonded
indebtedness by 55 percent of the vote, rather than the two-thirds majority
required under Section 18 of Article XVI of the Constitution. The reduced 55
percent voter requirement applies only if the bond measure submitted to the
voters includes certain restrictions, identifications and certifications.
Section 1(b)(3) of Article XIII A has been added to except from the one percent
ad valorem tax limitation under Section 1(a) of Article XIII A of the
Constitution levies to pay bonds approved by 55 percent of the voters subject to
the restrictions with respect to the ballot measure.

The Legislature enacted AB 1908, Chapter 44, which became effective upon
passage of Proposition 39. AB 1908 amends various sections of the Education
Code. Under amendments to Sections 15268 and 15270 of the Education Code, the
following limits on ad valorem taxes apply in any single election: (1) for a
school district, indebtedness shall not exceed $30 per $100,000 of taxable
property; (2) for a unified school district, indebtedness shall not exceed $60
per $100,000 of taxable property; and (3) for a community college district,
indebtedness shall not exceed $25 per $100,000 of taxable property. Finally, AB
1908 requires that a citizens' oversight committee must be appointed who will
review the use of the bond funds and inform the public about their proper usage
and perform annual audits.

Article XIII B of the California Constitution limits the amount of
appropriations of the State and of the local governments to the amount of
appropriations of the entity for the prior year, adjusted for changes in the
cost of living, population and the services that local governments have
financial responsibility for providing. To the extent that the revenues of the
State and/or local governments exceed their appropriations, the excess revenues
must be rebated to the public either directly or through a tax decrease.
Expenditures for voter-approved debt service costs are not included in the
appropriations limit.

At the November 8, 1988 general election, California voters approved an
initiative known as Proposition 98. Proposition 98 changed State funding of
public education below the university level and the operation of the state
appropriations limit, primarily by guaranteeing K-14 schools a minimum share of
General Fund revenues.

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

During the recession in the early 1990's, General Fund revenues for several
years were less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,200 from the 1991-1992
Fiscal Year to the 1993-1994 Fiscal Year.

In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, that challenged the validity of these off-budget loans. The settlement of
this case, finalized in July 1996, provides, among other things, that both the
State and K-14 schools share in the repayment of prior years' emergency loans to
schools. Of the total $1.76 billion in loans, the State is repaying $935 million
by forgiveness of the amount owed, while schools are repaying $825 million. The
State's share of the repayment is reflected as an appropriation above the
current Proposition 98 base calculation. The schools' share of the repayment
counts either as appropriations that count toward satisfying the Proposition 98
guarantee, or as appropriations from "below" the current base. Repayments are
spread over the eight-year period of the 1994-1995 Fiscal Year through the
2001-2002 Fiscal Year to mitigate any adverse fiscal impact.
B-43

Increased General Fund revenues, above initial budget projections, in the
1994-1995 through 2000-2001 Fiscal Years along with policy decisions to increase
K-14 appropriations have resulted in retroactive increases in Proposition 98
appropriations from subsequent Fiscal Years' budgets. Because of the State's
increasing revenues and emphasis on improving education resources, per-pupil
funding at the K-12 level has increased by more than 65.2 percent from the level
in place in 1994-1995, to an estimated $7,186 per pupil in 2002-2003.

Although total revenues (General Fund subject to the State Appropriations
Limit (the "SAL") and local property taxes) have increased steadily since
1994-95, the projected level of General Fund SAL revenue has declined by over
$3.5 billion and $3.4 billion for 2001-2002 and 2002-2003, respectively, since
the 2002-2003 Governor's Budget. The estimate of the guarantee has increased
$1.184 billion since the Governor's Budget due primarily to increases in the
California per capita personal income and average daily attendance. In response
to the lower revised revenues for 2001-2002 and 2002-2003, and the increase in
the Proposition 98 guarantee in the budget year, the May Revision proposes to
defer $1.149 billion of undisbursed 2001-2002 appropriations. To further address
the overall fiscal situation in the current year, the May Revision proposes to
reappropriate over $503 million in unspent Proposition 98 funds from prior years
to backfill an identical decrease to the 2001-2002 Proposition 98 appropriation
level. The reductions in 2001-2002 Proposition 98 appropriations leave the total
appropriation at $5.5 billion above the Test 3 guarantee level.

The revenue projection for 2002-2003 exceeds the revised 2001-2002
estimates by approximately $5.9 billion. The General Fund share of the guarantee
will increase approximately $2.7 billion, from $29.5 billion in 2001-2002 to
$32.2 billion in 2002-2003. Total funding for K-14 education provides a funding
level of approximately $47.2 billion ($7,186 per K-12 pupil), an increase of
nine percent compared to the revised 2001-2002 level.

On November 5, 1996 voters approved Proposition 218 called the "Right to
Vote on Taxes Act" which incorporates Articles XIII C and XIII D into the
California Constitution. Those provisions enact limitations on the ability of
local government agencies to impose or raise various taxes, fees, charges and
assessments without voter approval. Certain "general taxes" imposed after
January 1, 1995 must be approved by voters in order to remain in effect. In
addition, Article XIII C clarifies the right of local voters to reduce taxes,
fees, assessments, or charges through local initiatives. There are a number of
ambiguities concerning the Proposition and its impact on local governments and
their bonded debt that will require interpretation by the courts or the State
Legislature. Proposition 218 does not affect the State or its ability to levy or
collect taxes.

At the November 1998 election, voters approved Proposition 2. This
proposition requires the General Fund to repay loans made from certain
transportation special accounts (such as the State Highway Account) at least
once per fiscal year, or up to 30 days after adoption of the annual budget act.
Since the General Fund may reborrow from the transportation accounts soon after
the annual repayment is made the proposition is not expected to have any adverse
impact on the State's cash flow.

Because of the complexities of Article XIII B, the ambiguities and possible
inconsistencies in its terms, the applicability of its exceptions and exemptions
and the impossibility of predicting future appropriations, the Fund cannot
predict the impact of this or related legislation on the bonds in the Fund's
portfolios. Other Constitutional amendments affecting State and local taxes and
appropriations have been proposed from time to time. If any such initiatives are
adopted, the State could be pressured to provide additional financial assistance
to local governments or appropriate revenues as mandated by such initiatives.
Propositions such as Proposition 98 and others that may be adopted in the future
may place increasing pressure on the State's budget over future years,
potentially reducing resources available for other State programs, especially to
the extent the Article XIII B spending limit would restrain the State's ability
to fund such other programs by raising taxes.

The voters of California adopted a statutory initiative ("Proposition 62")
at the November 4, 1986 election. Proposition 62, as enacted in the California
Government Code, among other things, generally (1) requires that any tax for
general governmental purposes imposed by local governmental entities be
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approved by resolution or ordinance adopted by two-thirds vote of the
governmental agency's legislative body and by a majority of the electorate of
the governmental entity and (2) requires that any special tax (defined as taxes
levied for other than general governmental purposes) imposed by a local
governmental entity be approved by a two-thirds vote of the voters within that
jurisdiction.

Following its adoption by the voters, various provisions of Proposition 62
were declared unconstitutional at the appellate court level and in reliance on
such decisions many local governments imposed taxes without compliance with the
specified voter approval requirements of Proposition 62. On September 28, 1995,
however, the California Supreme Court, in Santa Clara County Local
Transportation Authority v. Guardino, upheld the constitutionality of the
portion of Proposition 62 requiring voter approval as a condition precedent to
the imposition of taxes by a local government.

On June 4, 2001, in Howard Jarvis Taxpayers Association v. City of La
Habra, the California Supreme Court disapproved a December 15, 1997 holding in
McBreaty v. City of Brawley in which the State Court of Appeals concluded that
the three-year statute of limitations applicable to taxes subject to Proposition
62 requirements ran from the date of the Guardino decision. The Supreme Court
held that a local governmental entity's continued imposition and collection of a
tax without voter approval was an ongoing or continuous violation of Proposition
62 and that the validity of a tax measure may be challenged within the statutory
period after any collection of the tax, regardless of whether more than three
years had passed since the tax measure was adopted. Thus, each time an
unconstitutional tax is collected, the statute of limitations is triggered
again.

As a result of this ruling, absent the application of a different statute
of limitations, a tax originally imposed in violation of Proposition 62
requirements is potentially subject to court challenge within three years of its
collection. Various California local governments may be subject to challenge
under the La Habra ruling. Should a challenge be successful, Proposition 62
provides that the portion of the one percent general ad valorem property tax
levy allocated to that local government is reduced by $1 for every $1 in revenue
attributable to the improperly imposed tax for each year that such tax is
collected. The practical applicability of this provision has not been
determined. Future litigation and legislation may resolve some or all of the
issues raised by the Guardino and City of La Habra decisions.

Future Initiatives. Articles XIII A, XIII B, XIII C and XIII D were each
adopted as measures that qualified for the ballot pursuant to the State's
initiative process. From time to time, other initiative measures could be
adopted that could affect revenues of the State or public agencies within the
State.

Pending Litigation. The State of California is a party to numerous legal
proceedings, many of which normally occur in governmental operations. Some of
the more significant lawsuits pending against the State are described below.

The State is a defendant in Paterno v. State of California, a coordinated
action involving 3,000 plaintiffs seeking recovery for damages caused by the
Yuba River flood of February 1986. The trial court found liability in inverse
condemnation and awarded damages of $500,000 to a sample of plaintiffs. The
State's potential liability to the remaining plaintiffs ranges from $800 million
to $1.5 billion. In 1992, the State and plaintiffs filed appeals. In August
1999, the court of appeal issued a decision reversing the trial court's judgment
against the State and remanding the case for retrial on the inverse condemnation
cause of action. The California Supreme Court denied plaintiffs' petition for
review. By "Intended Decision" dated September 11, 2001, following a four-month
bench trial, the judge ruled that the 3,000 plaintiffs take nothing from the
State or its co-defendant, Reclamation District 784. Plaintiffs have appealed.
Appellant's Opening Brief is due August 23, 2002.

On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers Association et al.
v. Kathleen Connell filed a complaint for certain declaratory and injunctive
relief challenging the authority of the State Controller to make payments from
the State Treasury in the absence of a State budget. On July 21, 1998, the trial
court issued a preliminary injunction prohibiting the State Controller from
paying moneys from the State Treasury for Fiscal Year 1998-1999, with certain
limited exceptions, in the absence of a State budget. The preliminary
injunction, among other things, prohibited the State Controller from making any
payments

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pursuant to any continuing appropriation. On July 22 and July 27, 1998, various
employee unions that had intervened in the case appealed the trial court's
preliminary injunction and asked the court of appeal to stay the preliminary
injunction. On July 28, 1998, the court of appeal granted the unions' requests
and stayed the preliminary injunction pending the court of appeal's decision on
the merits of the appeal. On August 5, 1998, the court of appeal denied the
plaintiffs' request to reconsider the stay. Also on July 22, 1998, the State
Controller asked the California Supreme Court to immediately stay the trial
court's preliminary injunction and to overrule the order granting the
preliminary injunction on the merits. On July 29, 1998, the Supreme Court
transferred the State Controller's request to the court of appeal. On May 29,
2002, the court of appeal upheld the Controller's authority to make payments
pursuant to continuing appropriations in the absence of a state budget. Thus,
the Controller may make payments of principal and interest on state bonds.
However, the Court of Appeal held that absent an adopted budget or emergency
appropriation, the State Controller could not disburse certain Proposition 98
moneys. This ruling could result in the State suspending certain Proposition 98
payments to school districts for Fiscal Year 2002-2003 if the State does not
adopt a budget or pass an emergency appropriation in order to make such
payments. In prior years the State has enacted an emergency appropriation in the
absence of an adopted budget in order to disburse Proposition 98 moneys to the
State's school districts.

In County of Orange v. Orange County Assessment Appeals Board #3; Bezaire,
et. al., Real Parties in Interest, the Superior Court of Orange County has
determined that the Orange County assessor's office received property taxes from
two taxpayers in excess of the amounts collectable under Article XIIIA of the
California Constitution (sometimes referred to as "Proposition 13"). The
plaintiffs' legal claim focuses on the constitutionality of the practice of the
Orange County assessor's office to increase or "recapture" the assessed values
of real properties that temporarily decline and then increase in value. The
plaintiffs are also seeking the certification of their action as a class action.
Pending the determination of certain class certification issues, the court's
decision is not final. Should the court's determination become final, it will
bind only the County of Orange and its assessor's office. However, indirect
effects of a final determination that the contested assessment practices are
contrary to Proposition 13, could result in costs to the State in an aggregate
amount in excess of $400 million.

In January of 1997, California experienced major flooding with preliminary
estimates of property damage of approximately $1.6 to $2.0 billion. In McMahon
v. State, a substantial number of plaintiffs have joined suit against the State,
local agencies, and private companies and contractors seeking compensation for
the damages they suffered as a result of the 1997 flooding. After various
pre-trial proceedings, the State filed its answer to the plaintiffs' complaint
in January 2000. The State is defending the action.

The State has been involved in three refund actions, California Assn. of
Retail Tobacconists (CART), et al. v. Board of Equalization et al., Cigarettes
Cheaper! et al. v. Board of Equalization, et al. and McLane/Suneast, et al. v.
Board of Equalization, et al., that challenge the constitutionality of
Proposition 10, which the voters passed in 1998 to establish the Children and
Families Commission and local county commissions and to fund early childhood
development programs. CART and Cigarettes Cheaper! allege that Proposition 10,
which increases the excise tax on tobacco products, violates 11 sections of the
California Constitution and related provisions of law. McLane/Suneast challenges
only the "double tax" aspect of Proposition 10. Trial of these three
consolidated cases commenced on September 15, 2000 and concluded on November 15,
2000. A final statement of decision was issued on December 7, 2000, and judgment
in favor of all defendants as to all 30 consolidated counts was entered on
January 9, 2001. The CART plaintiffs and Cigarettes Cheaper! plaintiffs timely
appealed these and all other issues. Respondents filed their brief on July 5,
2002. Reply briefs are due September 3, 2002. Due to the facial challenge, there
is exposure as to the entire $750 million per year collected under Proposition
10 together with interest, which could amount to several billion dollars by the
time the cases are finally resolved.

In Charles Davis, et al. v. California Health and Human Services Agency, et
al., the plaintiffs have brought a class action under a number of federal acts,
including the Americans with Disabilities Act, seeking declaratory and
injunctive relief, alleging that persons who are institutionalized with
disabilities at a San Francisco-run 1,200-bed skilled nursing facility (Laguna
Honda) who require long term care should be assessed as to whether they can be
treated at home or in community-based facilities, and then provided
B-46

appropriate care. The State has filed an answer. At this early stage in the
proceedings, it is difficult to assess the financial impact of a judgment
against the State. Should the plaintiffs prevail, however, the State's liability
could exceed $400 million. The State is defending this action.

In Stephen Sanchez, et al. v. Grantland Johnson, et al., the plaintiffs
have brought a class action in federal District Court for the Northern District
of California, seeking declaratory and injunctive relief, alleging, in part,
that provider rates for community-based services for developmentally disabled
individuals are discriminatory under the Americans with Disabilities Act, and
violate the Social Security Act, the Civil Rights Act and the Rehabilitation
Act, because they result in unnecessary institutionalization of developmentally
disabled persons. The State has filed a responsive pleading and is contesting
this case. At this early stage in the proceedings, it is difficult to assess the
financial impact of a judgment against the State. Should the plaintiffs prevail,
however, the State's liability could exceed $400 million.

A number of lawsuits have been commenced concerning various aspects of the
current energy situation. These include disputes over rates set by the CPUC;
responsibility for the electricity and natural gas purchases made by the
Utilities and the ISO and the just and reasonable nature of certain of DWR's
long-term power purchase contracts. Except for the consolidated actions
challenging the Governor's authority to commandeer "block forward contracts"
referred to below, these actions do not seek a judgment against the State's
General Fund, and in some cases neither the State nor the DWR is even a party to
these actions. However, these cases may have an impact on the price or supply of
energy in California, or impact the timing of the sale of the DWR revenue bonds
expected to occur in 2002.

More than thirty market participants filed claims aggregating over $1
billion for compensation from the State as a result of the Governor's
commandeering of block forward contracts by Executive Orders in February 2001.
The Victim Compensation and Government Claims Board was divested of jurisdiction
to hear these claims as a result of a petition for writ of mandate by claimants
the California Power Exchange ("CalPX"), PG&E and Reliant. The issue of whether
and to what extent compensation is due is now before the Sacramento County
Superior Court in a declaratory relief action filed by the State, People v. ACN
Energy, Inc., et al. (O1AS05497), which names as defendants those market
participants which the State believes might claim compensation as a result of
the Governor's actions. Pending inverse condemnation actions against the State
by the CalPX (Los Angeles County Superior Court No. BC 254509), PG&E (San
Francisco City and County Superior Court No. 322921) and Reliant (Los Angeles
County Superior Court No. BC 254563) have been joined with the declaratory
relief action in Judicial Council Coordination Proceeding No. 4203, the
Sacramento County Superior Court. The applicable Bankruptcy Courts have granted
relief from the automatic stay of bankruptcy to enable the parties to prosecute
and defend to final judgment the claims pertaining to PG&E and the Ca1PX.

In Duke Energy Trading and Marketing v. Davis, et al. (U.S. District Court,
C.D. Cal.), the plaintiff challenges the Governor's orders commandeering SCE and
PG&E block forward market contracts held by the California Power Exchange on the
ground that the orders violated the Supremacy Clause and other constitutional
provisions. Duke Energy seeks a temporary restraining order ("TRO") and an
injunction barring the Governor from taking any action against Duke Energy under
the authority of the Executive Orders and a declaration that Duke Energy has no
obligation to deliver power under the block forward contracts. The hearing on
the TRO, seeking an order restraining the ISO from requiring the energy producer
to supply energy under the contracts, was taken off calendar. Pursuant to an
interim settlement, Duke Energy delivered power to the DWR through April 30,
2001. On April 30, 2001, the U.S. district court granted Governor Davis' motion
to dismiss plaintiff's complaint based on Eleventh Amendment immunity and denied
plaintiff's motions for partial summary judgment to certify final judgment. On
May 4, 2001, Duke Energy dismissed its claims in the district court against
co-defendant, the Power Exchange, without prejudice and filed its notice of
appeal to the Ninth Circuit Court of Appeal. The United States Court of Appeals
for the Ninth Circuit found that the Ex parte Young exception to the Eleventh
Amendment applied and that the Governor's interference with the block forward
contracts' security provisions was preempted by the federal scheme established
by FERC. The Governor's petition for certiorari in the United States Supreme
Court was denied on May 30, 2002.

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In Pacific Gas and Electric Company v. The California Department of Water
Resources, et al. (Sacramento County Superior Court, 01CS01200) PG&E contends
that when DWR reached the determination that its revenue requirement for 2001-02
was "just and reasonable" (a determination the Power Supply Act authorizes DWR
to make), DWR failed to follow the California Administrative Procedure Act (the
"APA"). On June 7, 2002, the superior court issued a judgment finding that DWR
had failed to follow the APA in making its "just and reasonable" determination,
and commanded DWR to follow the procedures mandated by the APA before making any
"just and reasonable" determination. The court's order also stated that its
ruling does not in any way affect any action taken by the CPUC, including the
enforcement and collection of certain existing rates and charges based on a CPUC
order implementing cost recovery of DWR's 2001-02 revenue requirement (CPUC
Decision 02-02-052, dated February 21, 2002, and mailed February 22, 2002). This
matter may be appealed during the 60 days following the notice of entry of
judgment. DWR has not yet determined whether to appeal this decision. The
California Supreme Court denied a petition filed by DWR in this same case
seeking review of an earlier decision of the superior court denying DWR's motion
for judgment on the pleadings.

In Carboneau v. State of California et al., filed on November 9, 2001 in
Sacramento Superior Court (01AS06848), the plaintiffs make factual allegations
that include, among others, that certain named defendants who participated in
the negotiation of certain long-term contracts had conflicts of interest. The
plaintiffs plead, among other things, that in negotiating these power contracts,
defendants engaged in unfair business practices and violated anti-trust laws.
Plaintiffs seek declaratory and injunctive relief as well as damages, with a
main objective being to have all electricity contracts entered into by the DWR
since January 2001 declared void as against public policy. On May 17, 2002, the
Superior Court issued a tentative ruling granting the State's demurrer of
plaintiffs' complaint, without leave to amend.

In McClintock, et. al. v. Budhraja, DWR, et. al., filed May 1, 2002, in Los
Angeles County Superior Court (GC029447), plaintiffs, including eight members of
the California State Legislature, allege a DWR consultant involved in
negotiating certain of the long-term power contracts had a conflict of interest,
and as a result certain of the long-term contracts are void. The plaintiffs
seek, among other things, to restrain or enjoin DWR's performance under the
long-term power contracts, a declaration that the contracts are void, an order
of restitution to the General Fund of amounts paid by the State to power
providers, and an order of restitution to the General Fund of amounts paid by
the State to power providers with knowledge of the conflict.

In Millar v. Allegheny Energy, et. al., filed May 13, 2002, in San
Francisco City and County Superior Court (407867), plaintiff alleges that the
sellers who entered into certain of the long-term power contracts engaged in
unfair business acts and practices, and seeks to enjoin the enforcement of
certain terms and conditions of the long-term power contracts and restitution of
moneys wrongfully obtained by the power providers. DWR is named solely as a
"nominal defendant," and restitution is not sought from DWR or the State.

In Sempra Energy Resources v. Department of Water Resources, filed May 29,
2002, in San Diego County Superior Court (789291), plaintiff seeks declaratory
relief as to the respective rights and duties of plaintiff and DWR under the
long-term energy contract between the parties. Plaintiff claims that it is not
in breach of that contract, and that moreover, its actions would not constitute
a material breach entitling DWR to suspend its performance under the contract.

At the time the California energy market was deregulated, the CPUC froze
IOU rates at levels then thought to be sufficient to permit the Utilities an
opportunity to recover certain pre-deregulation costs from their customers. SCE
and PG&E have alleged that these rates are insufficient to permit recovery of
FERC-tariffed power purchase costs, and have sought to have the rate freeze
lifted. The CPUC has not lifted the rate freeze, and the two Utilities have
filed separate actions alleging that the CPUC refusal violates the filed rate
doctrine and various constitutional provisions.

Pacific Gas and Electric v. Lynch is pending in the United States District
Court, Northern District of California (C 01-3023 VRW). Both plaintiff and
defendants have filed motions for summary judgment,

B-48

which were heard on May 24, 2002. The court took the matters under submission.
If required, a trial has been scheduled for January of 2003.

Southern California Edison v. Lynch is now pending in the United States
Court of Appeals for the Ninth Circuit (01-56879, 01-56993 and 01-57020,
consolidated). The CPUC and SCE had reached settlement, and that settlement had
been approved by the district court. The district court had also denied motions
of several electricity generators to intervene in opposition of the settlement.
The electricity generators and a consumer group have appealed the settlement and
the order denying intervention. Oral argument was heard on March 4, 2002, and
the matter was submitted. The court has not entered a decision.

PG&E filed an adversary proceeding in bankruptcy court (see "Recent
Developments Regarding Natural Gas and Electricity" above) to prevent the CPUC
from implementing or enforcing any order that requires PG&E to make certain
transfers between certain regulatory accounts which track PG&E revenues and
costs. PG&E asserts that such an order would have the effect of extending the
rate freeze presently in effect, and delaying the time when PG&E can seek rates
sufficient to recover its costs of obtaining power. The bankruptcy court
dismissed this complaint with prejudice and denied PG&E's motion for preliminary
injunction. Cross-appeals are pending in the United States District Court, in
Pacific Gas and Electric Company (PG&E) v. Lynch, U.S. District Court, Northern
District of California (01-2490 VRW). All briefing has been submitted. Pacific
Gas and Electric Bankruptcy

On April 6, 2001, PG&E filed a voluntary Chapter 11 bankruptcy petition in
United States Bankruptcy Court for the Northern District of California, San
Francisco Division (In re Pacific Gas and Electric, United States Bankruptcy
Court, N.D. Cal.). The State has filed numerous claims as a creditor of PG&E,
including, but not limited to, claims for income and property taxes, regulatory
fees, fines and penalties, and environmental fees, fines and penalties. The
bankruptcy proceedings are pending.

DWR has filed administrative claims for post-petition purchases of
electricity on PG&E's behalf, arising from the sale of electric energy or
services for the customers of PG&E for the period April 7, 2001, through
December 31, 2001, in an estimated amount of approximately $311.5 million.
Claims for amounts due for January, 2002, and beyond, if any, may be filed. DWR
has also filed claims for pre-petition power-related matters in the estimated
amount of approximately $225 million.

PG&E's proposed plan of reorganization seeks an extensive restructuring of
PG&E's business and the transfer of certain of its assets, including its
electric and gas transmission assets, to newly created limited liability
companies on the theory that the Bankruptcy Code preempts state law. The plan
states that PG&E will seek to establish conditions to PG&E's resumption of its
responsibility for the power currently being provided its customers by DWR, and
a ruling to prohibit it from accepting an assignment of any of DWR's long-term
power purchase contracts. The court ruled that PG&E must amend its plan to
remove relief that is contrary to the State's sovereign immunity or prove that
the State has waived its sovereign immunity, and that PG&E must proceed on an
implied preemption theory, rather than on an express preemption theory. PG&E has
appealed the bankruptcy court's decision in the United States District Court,
Northern District of California (In re Pacific Gas and Electric Company, case
no. 3:02-cv-01550 (VRW)) on two separate grounds, and the CPUC and state
agencies have cross-appealed and objected to the appeal. The CPUC and state
agencies' motion to dismiss the appeal is scheduled to be heard on June 13,
2002.

PG&E filed a second amended plan and disclosure statement, and, in response
to an order of the court, filed a further amended disclosure statement. The
court has approved PG&E's disclosure statement, which will be sent to creditors
concurrently with the disclosure statement of the alternative plan of
reorganization filed on April 15, 2002, by the CPUC. Both plans have been
submitted to the creditors for voting. The Bankruptcy Judge has scheduled July
17, 2002 as the date for filing objections for both plans and August 12, 2002 as
the date by which creditors must return their ballots accepting or rejecting the
plans.

B-49

PG&E has also requested that the bankruptcy court deny implementation of
the "Servicing Agreement" with DWR. The Servicing Agreement, provides the
procedural mechanisms for PG&E to supply distribution and billing services to
allow DWR to deliver its power to retail end users and receive payment therefor.
PG&E contends that the CPUC order is tantamount to a diversion of the assets of
the bankruptcy estate, which would be detrimental to the estate and its
reorganization efforts. DWR and the CPUC filed oppositions to the motion on
various grounds. Because of developments at the CPUC, PG&E must amend its motion
if the matter is to be heard by the bankruptcy court. The matter has been
postponed indefinitely.

The California Power Exchange (the "PX") served as an independent,
non-profit entity responsible for administering the competitive wholesale
electricity market in California. After a December 2000 FERC order permitting
the Utilities to purchase and sell other than through the PX, PX operations
slowed dramatically and the PX suspended trading on January 31, 2001. The PX
filed for protection under Chapter 11 of the Bankruptcy Code on March 9, 2001
(United States Bankruptcy Court, Central District of California, No.
LA01-16577-ES). The Bankruptcy Court approved the fifth amended disclosure
statement filed by the Participant's Committee on June 28, 2002, and has
scheduled September 23, 2002, as the date for the hearing on the confirmation of
the plan. The estimated combined total of claims in two claimant classes that
pertain to the Utilities and the ISO is $2.9 billion.

OBLIGATIONS OF OTHER ISSUERS

Other Issuers of California Municipal Obligations. 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. To reduce State General Fund
support for school districts, the 1992-93 and 1993-94 Budget Acts caused local
governments to transfer $3.9 billion of property tax revenues to school
districts, representing loss of the post-Proposition 13 "bailout" aid. Local
governments have in return received greater revenues and greater flexibility to
operate health and welfare 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 2001-02, the State has provided over $350 million to support
local law enforcement costs. The current fiscal crisis may result in some
reductions in these payments in 2002-03.

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 continue to be reduced. Any such reductions
in State aid could compound the serious fiscal constraints already experienced
by many local 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 recent economic
slowdown in the State, with its corresponding reduction in State and local
revenues, will put additional pressure on local government finances in the
coming years.

B-50

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 CalWORKs system on local governments is still unknown.

Assessment Bonds. California Municipal Obligations which are assessment
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 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 taxes, except from amounts, if any, in a reserve fund established for the
bonds.

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

The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks related
to the policy of awarding exclusive contracts to certain hospitals.

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 (e.g., 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, 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.

B-51

The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or 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 legislation
will be enacted. Nor is it possible, at present, to determine the impact of any
such legislation on California Municipal Obligations 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 Obligations.

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.

U.S. TERRITORIES

PUERTO RICO. Puerto Rico has a diversified economy dominated by the
manufacturing and service sectors. The North American Free Trade Agreement
("NAFTA"), which became effective January 1, 1994, has led to loss of lower wage
jobs such as textiles, but economic growth in other areas, particularly tourism,
pharmaceuticals, construction and the high technology areas have compensated for
that loss

The Commonwealth of Puerto Rico differs from the states in its relationship
with the federal government. Most federal taxes, except those such as social
security taxes that are imposed by mutual consent, are not levied in Puerto
Rico. Section 936 of the Code has provided a tax credit for certain qualified
U.S. corporations electing "possessions corporation" status. However, in 1993,
Section 936 was amended to provide for two alternative limitations on the
Section 936 credit attributable to certain active business income. The first
limitation was based on the economic activity of the Section 936 possessions
corporation. The second limited the credit to a specified percentage of the
credit allowed under prior law. In 1996, Section 936 credit was repealed except
that the credit attributable to possessions source business income with respect
to certain existing credit claimants was subjected to a phase out over a ten
year period (subject to additional caps).

Also in 1996, a new Section 30A was added to the Code. Section 30A permits
a "qualifying domestic corporation" that meets certain gross income tests to
claim a credit against the federal income tax in an amount equal to the portion
of the tax which is attributable to the taxable income from sources outside of
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 a trade or
business. Section 30A will be phased out by January 1, 2006. The Governor of
Puerto Rico proposed that Congress permanently extend Section 30A until the
Puerto Rican economy achieves certain economic improvements. To date, however,
no action has been taken.

During the mid and late 1990s the Commonwealth of Puerto Rico benefited
from a robust U.S. economy, more aggressive tax collections and low oil prices.
This created an expanded employment base, job growth, reduction in unemployment,
increase in tourism spending, real GDP growth in the 3.1% to 3.5% range over the
last 5 fiscal years and significant increases in General Fund cash balances from
fiscal year end 1997 to fiscal year end 1999. These factors, combined with
minimal negative impact to date from the 1996 federal legislation phasing out
Section 936 tax benefits to Puerto Rico subsidiaries of U.S. corporations,
created a positive outlook for the credit in the late 1990s. Despite the fact
that there have

B-52

been some high profile U.S. companies that have left the island partially due to
the Section 936 phase out, many corporations have elected to convert to
controlled foreign corporation ("CFC") status, which allows them to delay
federal income taxes until the income is distributed to U.S. shareholders.

In fiscal year 2000, the outlook on the credit turned negative due to the
slowdown in the U.S. economy (88% of Puerto Rico's exports go to the U.S.),
uncertainty regarding increasing oil prices, failure of the government to reign
in health care costs, expense overruns in education and a decreasing rate of
employment growth. As a result, the General Fund recorded a $268 million deficit
in fiscal year 2000 due to increased education and health care spending.

A new administration, the Popular Democratic Party that favors Puerto
Rico's commonwealth status over a potential statehood status, took office in
January, 2001. It was not long before they realized the presence of continued
fiscal stress and estimated a fiscal year 2001 budget shortfall of $700 million.
The shortfall was stated to be caused by weakened revenue growth due to the
slowing pace of employment and a softening U.S. economy.

The major key to maintaining Puerto Rico's external ratings (Baa1/A- from
Moody's and S&P, respectively) is the ability of the government to balance
fiscal year 2002 performance after lackluster fiscal year 2001 results which
necessitated deficit financing. Complicating matters is the uncertainty
surrounding the negative effects on tourism caused by September 11th terrorist
attacks and the scope and duration of the continued slowdown in the U.S.
economy.

THE 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 adversely affected by a recession in
either the United States or Europe. The attacks of September 11, 2001 will
likely have an adverse affect on tourism, the extent of which is unclear. 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). In
addition, eventual elimination of the Section 936 tax credit for those companies
with operations in USVI may lead to slower growth in the future.

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 past years. 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 earlier this
year have had a negative impact on the island's economy in 1998. Based on these
factors, S&P downgraded Guam's rating to BBB- from BBB with a negative outlook
on May 26, 1999. Although total visitors improved in 1999 and 2000, they were
weakened by economic slowdowns and the effects of the September 11th terrorist
attacks in 2001. These negative trends have had an unfavorable effect on Guam's
financial position with consistent general fund deficits from 1997-1999 and a
small surplus in 2000. Fiscal year 2001 is expected to be worse than fiscal year
2000. Guam also has a high debt burden. These factors caused S&P to downgrade
Guam's rating to BB (below investment grade) from BBB- on March 25, 2002. Guam
is not rated by Moody's.

B-53

APPENDIX D

DESCRIPTION OF INSURERS

The following information relates to the Fund and supplements the
information contained under "Additional Information about Investment
Policies -- Insurance."

In General. Insured obligations held by the Fund will be insured as to
their scheduled payment of principal and interest under (i) an insurance policy
obtained by the issuer or underwriter of the obligation at the time of its
original issuance ("Issue Insurance"), (ii) an insurance policy obtained by the
Fund or a third party subsequent to the obligation's original issuance
("Secondary Market Insurance") or (iii) a municipal insurance policy purchased
by the Fund ("Portfolio Insurance"). The Fund anticipates that all or
substantially all of its insured obligations will be subject to Issue Insurance
or Secondary Market Insurance. Although the insurance feature reduces certain
financial risks, the premiums for Portfolio Insurance (which, if purchased by
the Fund, are paid from the Fund's assets) and the higher market price paid for
obligations covered by Issue Insurance or Secondary Market Insurance reduce the
Fund's current yield.

Insurance will cover the timely payment of interest and principal on
obligations and will be obtained from insurers with a claims-paying ability
rated Aaa by Moody's or AAA by S&P or Fitch. Obligations insured by any insurer
with such a claims-paying ability rating will generally carry the same rating or
credit risk as the insurer. See Appendix A for a brief description of Moody's,
Fitch's and S&P's claims-paying ability ratings. Such insurers must guarantee
the timely payment of all principal and interest on obligations as they become
due. Such insurance may, however, provide that in the event of non-payment of
interest or principal when due with respect to an insured obligation, the
insurer is not obligated to make such payment until a specified time period has
lapsed (which may be 30 days or more after it has been notified by the Fund that
such non-payment has occurred). For these purposes, a payment of principal is
due only at final maturity of the obligation and not at the time any earlier
sinking fund payment is due. While the insurance will guarantee the timely
payment of principal and interest, it does not guarantee the market value of the
obligations or the net asset value of the Fund.

Obligations are generally eligible to be insured under Portfolio Insurance
if, at the time of purchase by the Fund, they are identified separately or by
category in qualitative guidelines furnished by the mutual fund insurer and are
in compliance with the aggregate limitations on amounts set forth in such
guidelines. Premium variations are based, in part, on the rating of the
obligations being insured at the time the Fund purchases the obligations. The
insurer may prospectively withdraw particular obligations from the
classifications of securities eligible for insurance or change the aggregate
amount limitation of each issue or category of eligible obligations. The insurer
must, however, continue to insure the full amount of the obligations previously
acquired which the insurer has indicated are eligible for insurance, so long as
they continue to be held by the Fund. The qualitative guidelines and aggregate
amount limitations established by the insurer from time to time will not
necessarily be the same as those the Fund would use to govern selection of
obligations for the Fund. Therefore, from time to time such guidelines and
limitations may affect investment decisions in the event the Fund's securities
are insured by Portfolio Insurance.

For Portfolio Insurance that terminates upon the sale of the insured
security, the insurance does not have any effect on the resale value of such
security. Therefore, the Fund will generally retain any insured obligations
which are in default or, in the judgment of the Investment Adviser, are in
significant risk of default and place a value on the insurance. This value will
be equal to the difference between the market value of the defaulted insured
obligations and the market value of similar obligations which are not in
default. As a result, the Investment Adviser may be unable to manage the
securities held by the Fund to the extent the Fund holds defaulted insured
obligations, which will limit its ability in certain circumstances to purchase
other obligations. While a defaulted insured obligation is held by the Fund, the
Fund will continue to pay the insurance premium thereon but will also collect
interest payments from the insurer and retain the right to collect the full
amount of principal from the insurer when the insured obligation becomes due.
The Fund expects that the market value of a defaulted insured obligation covered
by Issue
B-54

Insurance or Secondary Market Insurance will generally be greater than the
market value of an otherwise comparable defaulted obligation covered by
Portfolio Insurance.

The Fund may also invest in obligations that are secured by an escrow or
trust account which contains securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, that are backed by the full faith
and credit of the United States, and sufficient in amount to ensure the payment
of interest on and principal of the secured California obligation
("collateralized obligations"). Collateralized obligations generally are
regarded as having the credit characteristics of the underlying U.S. Government,
agency or instrumentality securities. These obligations will not be subject to
Issue Insurance, Secondary Market Insurance or Portfolio Insurance. Accordingly,
despite the existence of these credit support characteristics, these obligations
will not be considered to be insured obligations for purposes of the Fund's
policy of investing at least 80% of its net assets in insured obligations.

Principal Insurers. Currently, Municipal Bond Investors Assurance
Corporation ("MBIA"), Financial Guaranty Insurance Company ("FGIC"), AMBAC
Indemnity Corporation ("AMBAC"), ACA, Radian Asset Assurance ("Radian"), XL
Capital Assurance ("XL Capital"), CDC IXIS Financial Guaranty North America,
Inc. ("CIFG NA"), and Financial Security Assurance Corp., together with its
affiliated insurance companies -- Financial Security Assurance International
Inc. and Financial Security Assurance of Oklahoma, Inc. (collectively, "FSA"),
are considered to have a high claims-paying ability and, therefore, are eligible
insurers for the Fund's obligations. Additional insurers may be added without
further notification. The following information concerning these eligible
insurers is based upon information provided by such insurers or information
filed with certain state insurance regulators. Neither the Fund has
independently verified such information and make no representations as to the
accuracy and adequacy of such information or as to the absence of material
adverse changes subsequent to the date thereof.

MBIA is a monoline financial guaranty insurance company created from an
unincorporated association (the Municipal Bond Insurance Association), through
which its members wrote municipal bond insurance on a several and joint-basis
through 1986. On January 5, 1990, MBIA acquired all of the outstanding stock of
Bond Investors Group, Inc., the parent of Bond Investors Guaranty Insurance
Company ("BIG"), which has subsequently changed its name to MBIA Insurance Corp.
of Illinois. Through a reinsurance agreement, BIG ceded all of its net insured
risks, as well as its related unearned premium and contingency reserves, to
MBIA. MBIA issues municipal bond insurance policies guarantying the timely
payment of principal and interest on new municipal bond issues and leasing
obligations of municipal entities, secondary market insurance of such
instruments and insurance on such instruments held in unit investment trusts and
mutual funds. As of December 31, 2001, MBIA had total assets of approximately
$16.12 billion and qualified statutory capital of approximately $4.8 billion.
MBIA has a claims-paying ability rating of "AAA" by S&P and "Aaa" by Moody's.

Financial Guaranty Insurance Corporation, a wholly owned subsidiary of FGIC
Corporation, which is a wholly owned subsidiary of General Electric Capital
Corporation, is an insurer of municipal securities, including new issues,
securities held in unit investment trusts and mutual funds, and those traded on
secondary markets. The investors in FGIC Corporation are not obligated to pay
the debts of or claims against FGIC. As of December 31, 2000, FGIC had total
assets of approximately $2.75 billion and qualified statutory capital of
approximately $1.99 billion. FGIC has a claims-paying ability rating of "AAA" by
S&P and Fitch, and "Aaa" by Moody's.

AMBAC, a wholly owned subsidiary of AMBAC Inc., is a monoline insurance
company whose policies guaranty the payment of principal and interest on
municipal obligations issues. As of December 31, 2001, AMBAC had assets of
approximately $12.26 billion and qualified statutory capital of approximately
$3.26 billion. AMBAC has a claims-paying ability rating of "AAA" by S&P and
"Aaa" by Moody's.

ACA is a Maryland domiciled financial insurance company. ACA is the primary
subsidiary of American Access Capital Holding Inc. ACA carries a single A
rating. Total claims paying resources were $383 million in 2001, with total
statutory capital of $120.8 million. Soft capital totaled $135 million,

B-55

though a loss coverage agreement with ACE American Insurance Co., (rated A). ACA
insures primarily in the municipal and CDO market and acts as the
manager/originator of CDO issues.

Radian is a wholly owned subsidiary of Radian Group Inc. Radian is rated AA
by S&P and Fitch and provides financial guaranty insurance and reinsurance for
debt and asset backed securities. Radian was formerly known as Asset Guarantee
Company and was purchased by Radian Group for $518 million in February 2001. As
of December 31, 2001, Radian had assets of $381 million and statutory capital of
$169.8 million.

XL Capital is a new AAA rated financial guarantor and a wholly owned
subsidiary of property casualty insurer XL Capital Ltd. XL Capital began
transactions in January of 2001 and is rated AAA / Aaa by Moody's and S&P
respectively. It is currently capitalized with $100 million and cedes 90% of its
exposure to XL Financial Assurance a Bermuda based subsidiary of XL Capital Ltd.
XL Financial Assurance has $274 million in hard capital and $100 million in stop
loss protection. Beyond this XL Financial Assurance further guarantees 100% of
XL Capital exposure with $2.7 billion in shareholders equity. XL Capital has $88
million in assets and through its parent and subsidiary agreements XL Capital
has $1 billion in qualified statutory capital.

CIFG NA is a new financial Guarantor rated AAA from Fitch, Moody's and S&P.
CIFG NA is a subsidiary of CDC IXIS Financial Guaranty ("CIFG"), which is a
subsidiary of CIFG Holding, which is in turn owned by parent company CDC IXIS.
CDC IXIS is a French domiciled corporation with a broad spectrum of insurance
related businesses. CIFG recently entered the bond insurance business with two
companies, CIFG Europe and CIFG NA. CIFG is capitalized with $280 million in
cash, with CIFG NA holding $100 million in cash. CDC IXIS backs the two entities
with $220 million in the form of a subordinated loan agreement. Over 75% of CIFG
NA's business will be passed on through a reinsurance policy to CIFG. Combining
all capital, CIFG NA will have claims paying resources of $500 million.

FSA purchased Capital Guaranty Insurance Company including its book of
business and reserves effective December 20, 1995. FSA is a monoline insurer
whose policies guaranty the timely payment of principal and interest on new
issue and secondary market issue municipal securities transactions, among other
financial obligations. As of December 31, 2001, FSA had total assets of
approximately $4.3 billion and qualified statutory capital of approximately
$1.52 billion. FSA has a claims-paying ability rating of "AAA" by S&P and "Aaa"
by Moody's. On March 14, 2000, Dexia, Europe's largest municipal lender with
assets in excess of $230 billion announced that it had signed a definitive
agreement providing for the acquisition of FSA Holdings, holding company for
FSA, Inc. Dexia acquired the company in the second quarter of 2000, for $2.6
billion in cash, or $76 per share.

B-56

APPENDIX E

PERFORMANCE RELATED & COMPARATIVE INFORMATION

[EATON VANCE LOGO]

EATON VANCE INSURED MUNICIPAL BOND FUNDS [PHOTO OF BRIDGE]

INSURED NATIONAL (EIM*)

INSURED CALIFORNIA (EVM*)

INSURED NEW YORK (ENX*)
---------------------------------------------

(*) AMEX symbol

AT LEAST 80% AAA-RATED & INSURED 100% EXEMPT FROM AMT

- Attractive Monthly Income Exempt from Federal Income Tax, Federal
Alternative Minimum Tax and, Where Applicable, State and Local Taxes

- Quality Of Professionally Managed, 100% Investment-Grade Portfolios

- At Least 80% of Assets Invested in Obligations AAA-Rated and Insured as
to Timely Payment of Interest and Principal

- Emphasis on Current Yield and on Seeking Undervalued Securities to
Enhance Total Return

- Quality Diversifier with Potential for Reducing Overall Portfolio Risk

- American Stock Exchange Listing Provides Daily Liquidity

Initial Public Offering
August 2002

B-57

WHY INVEST IN AN EATON VANCE
INSURED MUNICIPAL BOND FUND NOW?

1. INSURED MUNICIPALS REPRESENT UNCOMMON VALUE IN THE CURRENT MARKET ENVIRONMENT

Over the past 10 years, insured municipal bond yields have averaged
approximately 90% of yields on 30-year U.S. Treasury bonds. At June 30, 2002, a
representative tax-exempt insured municipal bond was yielding more than 95% of
the taxable yield of a 30-Year U.S. Treasury bond. With such exceptional tax-
free yields available, why pay taxes on your investment earnings?

Source: Municipal Market Advisors. The chart compares the yield of a 30-year,
AAA-rated general obligation insured municipal bond with that of a 30-year U.S.
Treasury bond. Unlike the Funds, these bonds carry no management fees, account
charges or other expenses. U.S. Treasury bonds offer a government guarantee as
to timely payment of interest and repayment of principal on maturity; income is
tax-exempt at the state and local level. Insured municipal bonds are not
guaranteed by the U.S. Government. In addition to general obligation bonds,
insured municipal obligations can include revenue bonds. Past performance is no
guarantee of future results.

YIELD RELATIONSHIP OF 30-YEAR GENERAL OBLIGATION

INSURED MUNICIPAL BOND TO 30-YEAR TREASURY BOND

CURRENT: 95.6%
AVERAGE: 90.1%

[LINE GRAPH]

2. ATTRACTIVE TAXABLE EQUIVALENT YIELDS

- By investing in an Eaton Vance Insured Municipal Bond Fund, your
after-tax income can be higher because the income paid is largely free of
regular federal income tax and 100% exempt from federal alternative
minimum tax. For State Funds, income is largely free of state and local
taxes, too, for residents of the applicable state. Depending on your tax
bracket, a tax-free investment can make a significant difference, and it
can be especially important for people in higher brackets.

- For example, the current yield from a 30-year insured municipal bond is
5.27%, which is equivalent to an 8.58% taxable yield. The current yield
from a taxable 30-year U.S. Treasury Bond is 5.51%.

Consult your tax advisor.

Source: Municipal Market Advisors. As of 6/30/02. Based on maximum federal
income tax rate of 38.6%. The current yield of a 30-year insured municipal bond
is not indicative of the yield of any of the Eaton Vance Insured Municipal Bond
Funds. Past performance is no guarantee of future results.

DETERMINE YOUR TAX-FREE ADVANTAGE

NATIONAL (EIM*)

IN A TAX-FREE YIELD OF
TAX -------------------------------------
BRACKET 5.50% 5.75% 6.00% 6.25% 6.50%
------- ----- ----- ----- ----- -----
EQUALS A TAXABLE INVESTMENT YIELDING

15.00 % 6.47% 6.76% 7.06% 7.35% 7.65%
27.00 7.53 7.88 8.22 8.56 8.90
30.00 7.86 8.21 8.57 8.93 9.29
35.00 8.46 8.85 9.23 9.62 10.00
38.60 8.96 9.36 9.77 10.18 10.59

B-58

DOUBLE TAX FREE FOR RESIDENTS OF CALIFORNIA(1) (EVM*)

A TAX-FREE YIELD OF
IN -------------------------------------
TAX
BRACKET 5.50% 5.75% 6.00% 6.25% 6.50%
------- ----- ----- ----- ----- -----
EQUALS A TAXABLE INVESTMENT YIELDING

22.91% 7.13% 7.46% 7.78% 8.11% 8.43%
33.79 8.31 8.68 9.06 9.44 9.82
36.51 8.66 9.06 9.45 9.84 10.24
41.05 9.33 9.75 10.18 10.60 11.03
44.31 9.88 10.33 10.77 11.22 11.67

DOUBLE TAX FREE FOR RESIDENTS OF
NEW YORK(2) (ENX*)

A TAX-FREE YIELD OF
IN -------------------------------------
TAX
BRACKET 5.50% 5.75% 6.00% 6.25% 6.50%
------- ----- ----- ----- ----- -----
EQUALS A TAXABLE INVESTMENT YIELDING

20.82% 6.95% 7.26% 7.58% 7.89% 8.21%
32.00 8.09 8.46 8.82 9.19 9.56
34.80 8.43 8.82 9.20 9.59 9.97
39.45 9.08 9.50 9.91 10.32 10.74
42.81 9.62 10.05 10.49 10.93 11.36

TRIPLE TAX FREE FOR RESIDENTS OF
N.Y. CITY(3) (ENX*)

A TAX-FREE YIELD OF
IN -------------------------------------
TAX
BRACKET 5.50% 5.75% 6.00% 6.25% 6.50%
------- ----- ----- ----- ----- -----
EQUALS A TAXABLE INVESTMENT YIELDING

23.87% 7.22% 7.55% 7.88% 8.21% 8.54%
34.66 8.42 8.80 9.18 9.57 9.95
37.35 8.78 9.18 9.58 9.98 10.37
41.82 9.45 9.88 10.31 10.74 11.17
45.05 10.01 10.46 10.92 11.37 11.83

---------------
(*) AMEX symbol.

The tax brackets shown are based on 2002 federal and state income tax
rates. Actual tax brackets may be higher due to the phaseout of personal
exemptions and limitations on the deductibility of itemized deductions over
certain ranges of income. The tables assume deductibility of state taxes on the
federal return. Your actual bracket will vary, depending on your income,
exemptions and deductions. Consult your tax advisor. Tax-free yields shown are
for illustration purposes only and are not meant to represent or predict actual
results of an investment in any of the Eaton Vance Insured Municipal Bond Funds.
The lower your combined federal and state tax rate, the less you can take
advantage of tax-free investing, which can be seen by comparing the taxable
equivalent yields at a given tax-free yield level for different tax brackets.
The tables do not take into account the effects of capital gains taxes. In
addition, the Funds may invest in securities that are not exempt from federal or
state income taxes, although they do not intend to do so to a significant
degree. Source: Eaton Vance.

B-59

(1) Combined tax brackets are based on 2002 federal income tax rates
and the highest 2002 California state tax rate applicable to each bracket.

(2) Combined tax brackets are based on 2002 federal income tax rates
and the highest 2002 New York state tax rate applicable to each bracket.

(3) Combined tax brackets are based on 2002 federal income tax rates
and the highest 2002 New York state and New York City tax rates applicable
to each bracket, plus the New York City surcharge.

WHY INVEST IN AN EATON VANCE
INSURED MUNICIPAL BOND FUND NOW?

3. HIGH-QUALITY INSURED PORTFOLIOS

Each Eaton Vance Insured Municipal Bond Fund invests 100% of its assets in
investment-grade municipal securities. At least 80% of assets are invested in
municipal obligations of the highest investment grade (Aaa/AAA) and insured as
to the timely payment of interest and principal. Insurance does not protect the
market value of such obligations or the net asset value of the Fund.

As rated by Moody's Investors Service, Inc., Standard & Poor's Ratings
Group or by Fitch Rating or, if unrated, determined by Eaton Vance to be of
comparable quality.

4. AVOID THE ALTERNATIVE MINIMUM TAX

The federal alternative minimum tax (AMT) was originally devised to reduce
certain deductions for high-income taxpayers and to make everyone with
significant income pay some federal income tax. Because it is not indexed for
inflation, over time, the AMT has affected more and more taxpayers. As a result,
an insured municipal bond portfolio 100% exempt from AMT may hold significant
appeal to a rising number of filers who are, or may be, subject to the AMT.

THE IMPACT OF THE ALTERNATIVE MINIMUM TAX (AMT)

TAX PAID
RETURNS FILED (BILLIONS OF NOMINAL
YEAR (MILLIONS) $)
---- ------------- -----------------------

1990................................................ 0.1 $ 0.8
2001................................................ 1.5 $ 6.4
2010................................................ 17.0 $38.2

Sources: For historical data, Internal Revenue Service, Statistics of Income
Bulletin, various issues, and Economic Report of the President (2001); for
projections, Congressional Budget Office (2001); Rebelein and Tempalski (2001)
(AMT numbers); Zaffino (2000) (individual income tax total). Figures for 2001
and 2010 are projections.

5. THE CLOSED-END STRUCTURE PROVIDES AN EFFECTIVE WAY OF INVESTING IN MUNICIPAL
BONDS

Closed-end funds can remain fully invested, are not subject to inflows and
outflows of assets and can utilize a leveraged capital structure, which provides
greater flexibility in portfolio management than open-end mutual funds,
resulting in the potential for enhanced returns.

Sources: Thomson Wealth Management; Lipper Inc. Returns are as of 6/30/02.
Closed-end fund returns are based on the market returns of approximately 90
national leveraged and non-leveraged closed-end municipal funds. Open-end fund
returns are based on the NAV returns of 48 national, non-leveraged, open-end,
insured front-load funds. Past performance is no guarantee of future results. It
is not possible to invest directly in an index or average. Unlike the Funds,
indices carry no management fees, account

B-60

charges or other expenses. The Eaton Vance Insured Municipal Bond Funds will not
seek to match the composition or performance of any such indices or averages.
Performance of the various indices or averages should not be viewed as
indicative of any of the Eaton Vance Insured Municipal Bond Funds. Total return
is affected by changes in current yield, net asset value and market performance.

AVERAGE ANNUAL TOTAL RETURNS

[BAR GRAPH]

THOMSON LIPPER OPEN-END
CLOSE-END MUNICIPAL INSURED MUNICIPAL DEBT
NATIONAL INDEX FUNDS AVERAGE
------------------- ----------------------

1 Year........................................ 7.32 5.87
3 Years....................................... 6.60 5.55
5 Years....................................... 6.14 5.13
10 Years...................................... 7.01 5.91

6. PORTFOLIO DIVERSIFIER WITH POTENTIAL FOR REDUCING RISK

Historically, when stocks have declined, insured municipal bonds have often
gone up in value. Adding an insured municipal bond fund to an overall portfolio
may help lower overall investment risk.

Source: Lipper Inc. Returns are as of 6/30/02. Insured municipal bond returns
are those of the Lehman Brothers Insured Municipal Bond Index, an unmanaged
index that is a broad measure of performance of insured, investment-grade
municipal bonds with maturities of at least one year. The S&P 500 Composite
Index is an unmanaged index of 500 common stocks commonly used as a measure of
U.S. stock market performance. It is not possible to invest directly in an
index. Unlike the Funds, indices carry no management fees, account charges or
other expenses. The Eaton Vance Insured Municipal Bond Funds will not seek to
match the composition or performance of any such indices. Performance of an
index should not be viewed as indicative of that of any of the Eaton Vance
Insured Municipal Bond Funds. Past performance is no guarantee of future
results.

AVERAGE ANNUAL TOTAL RETURNS

[BAR GRAPH]

LEHMAN BROTHER INSURED S&P 500
MUNICIPAL BOND INDEX COMPOSITE INDEX
---------------------- ---------------

1 Year........................................... 7.19 -17.98
3 Years.......................................... 6.93 -9.17
5 Years.......................................... 6.45 3.67
10 Years......................................... 6.87 11.42

Shares of the Eaton Vance Insured Municipal Bond Funds are not insured by
the FDIC and are not deposits or other obligations of, or guaranteed by, any
depository institution. Shares are subject to investment risks, including
possible loss of principal invested.

INSURED MUNICIPAL BOND YIELDS ARE OVER 95%* OF THOSE FROM LONG-TERM TREASURIES.
WHY PAY TAXES?

(*) At 6/30/02

KEY FEATURES

- ATTRACTIVE TAX-EXEMPT MONTHLY INCOME-EACH EATON VANCE INSURED MUNICIPAL BOND
FUND IS DESIGNED TO PROVIDE INCOME FREE FROM REGULAR

B-61

FEDERAL INCOME TAX, FEDERAL ALTERNATIVE MINIMUM TAX AND, FOR STATE FUNDS,
STATE AND LOCAL TAXES FOR RESIDENTS OF THAT STATE.

- QUALITY OF PROFESSIONALLY MANAGED, INVESTMENT-GRADE PORTFOLIOS-EACH FUND
INVESTS AT LEAST 80% OF ITS ASSETS IN MUNICIPAL OBLIGATIONS OF THE HIGHEST
INVESTMENT-GRADE (Aaa/AAA).

- PREDOMINANTLY INSURED-EACH FUND INVESTS AT LEAST 80% OF ITS ASSETS IN
MUNICIPAL OBLIGATIONS INSURED AS TO THE TIMELY PAYMENT OF INTEREST AND
PRINCIPAL.

- EMPHASIS ON CURRENT YIELD AND VALUE INVESTING MAY MEAN ENHANCED TOTAL
RETURN -- TO ENHANCE PERFORMANCE, THE FUNDS SEEK INSURED MUNICIPAL BONDS THAT
ARE UNDERVALUED IN THE MARKETPLACE AND WHICH MAY OFFER THE POTENTIAL FOR
HIGHER TOTAL RETURNS. THERE IS NO ASSURANCE THE FUNDS' OBJECTIVES WILL BE
ATTAINED.

- PREMIER ADVISER-EATON VANCE HAS BEEN MANAGING MUNICIPAL BOND FUNDS SINCE 1978.

- DAILY LIQUIDITY -- THE FUNDS EXPECT TO BE LISTED ON THE AMERICAN STOCK
EXCHANGE.

EATON VANCE INSURED MUNICIPAL BOND FUNDS
INVESTMENT-GRADE PORTFOLIOS 100% EXEMPT FROM FEDERAL ALTERNATIVE MINIMUM TAX

AIRPORTS -- SCHOOLS -- ROADWAYS -- BRIDGES -- MEDICAL FACILITIES

OBJECTIVE: The Eaton Vance Insured Municipal Bond Funds are newly organized
closed-end investment companies that seek to provide current income exempt from
regular federal income tax, federal alternative minimum tax and, for state
funds, state and local taxes.* They invest primarily in the highest quality
municipal bonds which are insured as to the payment of interest and principal.

Municipal bonds are debt obligations issued by or on behalf of the states,
territories and possessions of the U.S. and District of Columbia and their
political subdivisions, agencies, or instrumentalities, the interest on which is
exempt from regular federal income tax and, where applicable, state and local
taxes. These securities are used to finance public projects, like building
schools, highways, hospitals and bridges. By investing in municipal bonds, you
invest in our nation's future and in a better quality of life.

(*) A portion of each Eaton Vance Insured Municipal Bond Fund's income may be
subject to federal income and/or state and local taxes. Investors in New
York and California who purchase the appropriate State Fund for their state
of residency will receive income exempt from both federal and respective
state and, where applicable, local taxes. Distributions of any taxable net
investment income and net short-term capital gains are taxable as ordinary
income.

INVESTMENT APPROACH

- Under normal market conditions, at least 80% of each Fund's assets will be
invested in municipal debt obligations insured** as to principal and interest
payments by insurers having claims-paying ability rated Aaa/AAA.

- At least 80% of assets will be invested in municipal securities of the highest
investment grade at the time of investment (i.e., rated Aaa by Moody's
Investor Service, Inc., or AAA by either Standard & Poor's Ratings Group or by
Fitch Rating) or, if unrated, determined by Eaton Vance to be of comparable
quality. The Funds' investments in unrated obligations will be more dependent
on the expertise and analytical abilities of Eaton Vance than investments in
rated obligations.

B-62

[PHOTO OF OVERPASS]

- Up to 20% of each Fund's assets will be invested in investment-grade municipal
obligations (i.e., rated below Aaa/AAA, but no lower than Baa/BBB by Moody's,
Standard & Poor's or Fitch) and unrated municipal obligations considered to be
of comparable quality by Eaton Vance and/or municipal obligations that are
uninsured.
---------------

(**) Insurance does not protect the market value of such obligations or the net
asset value of the Fund.

ADVANTAGES OF A PROFESSIONALLY MANAGED MUNICIPAL FUND

Beyond providing ready access to a broad market of securities,
professionally managed funds, like the Eaton Vance Insured Municipal Bond Funds,
offer investors many attractive advantages over purchasing individual insured
municipal bonds, including monthly income, diversification by different issuers
and daily liquidity.

Perhaps more important are the advantages of active management by dedicated
municipal bond specialists who concentrate full time on seeking opportunities in
the municipal bond market.

[PHOTO OF AIRPLANE]

Investors should be aware that individual bonds, when held to maturity,
offer both a fixed principal value and rate of return. Conversely, a bond fund
does not offer a fixed rate of return and shares, when sold, may be worth more
or less than their original cost.

VALUE INVESTING

Eaton Vance has one of the strongest teams of research analysts, traders
and portfolio managers in the industry devoted exclusively to analyzing
municipal securities, including insured municipal bonds. The team's goal is to
find municipal bonds of high quality that have been undervalued in the
marketplace due to differing dynamics in individual sectors of the municipal
bond market, municipal bond supply, and the structure of individual bonds,
especially in regard to maturities, coupons, and call dates. The Eaton Vance
team of professionals constantly monitors historical and current yield spreads
to find relative value in the marketplace.

This research capability is key to identifying trends which impact the
yield-spread relationships of all bonds, including those in the insured sector.

A MANAGED FUND OR BONDS?

COMPARE THESE FEATURES

MANAGED INDIVIDUAL
TAX-FREE MUNICIPAL
FUND BONDS
-------- ----------

Monthly Income.............................................. / NO
-- ----------
Professional Management..................................... / NO
-- ----------
In-Depth Market Analysis.................................... / NO
-- ----------
Liquidity................................................... / NOT ALWAYS
-- ----------
Diversification Among Different Issuers*.................... / NO
-- ----------
Free Dividend & Capital Gain Reinvestment................... / NO
-- ----------
Potential for Increased Income Through Leverage............. / NO
-- ----------
Low-Cost Access............................................. / NO
-- ----------

B-63

(*) The Eaton Vance Insured Municipal Bond Funds are "non-diversified" for
purposes of the Investment Company Act of 1940. See Risks.

THE CLOSED-END FUND ADVANTAGE

Closed-end funds have greater flexibility than open-end funds, including
the ability to remain more fully invested and to use financial leverage. The
ability to borrow at short-term tax-exempt rates and invest at generally higher
long-term tax-exempt rates enables closed-end funds, like the Eaton Vance
Insured Municipal Bond Funds, to offer investors enhanced yield potential over
other municipal investments. Investors searching for yield may find the Funds'
taxable-equivalent yield potential compelling. In addition, the Funds'
closed-end structure is a benefit because it protects the Funds from the
continuous inflow and outflow of assets that can complicate portfolio
management.

[PHOTO OF FREEWAY]

HIGHER YIELD POTENTIAL

Each Fund expects to utilize financial leverage by issuing preferred stock
(on which the Fund will pay a generally lower short-term tax-exempt yield) and
investing the proceeds at typically higher long-term tax-exempt yields.

Each Fund intends to utilize financial leverage initially of up to
approximately 38% of its total assets (including the amount obtained through
leverage). Each may also utilize other transactions, such as purchasing
when-issued securities and futures contracts, which may have the effect of
leverage.

Although the Funds' leveraged capital structure offers the opportunity for
increased current income, it also involves risks. See Risks.

AMERICAN STOCK EXCHANGE LISTING

To provide daily liquidity, the Funds have applied for listing of their
shares on the AMEX. (See proposed symbols on the taxable equivalent yield
tables.) The shares of closed-end funds frequently trade at a discount to net
asset value. This risk may be greater for investors selling their shares shortly
after completion of the public offering. See Risks.

EXPERIENCED PORTFOLIO MANAGEMENT

Eaton Vance was one of the first municipal bond fund managers, having
managed such funds since 1978. Eaton Vance's 22-person municipal bond team
includes five portfolio managers, three traders and nine credit specialists, who
are responsible for managing approximately $7 billion in municipal securities.*
Eaton Vance has one of the strongest teams of research analysts in the industry
devoted exclusively to analyzing municipal securities. With 41 open-end and 10
closed-end municipal bond funds under supervision, the team has experience
managing a wide range of municipal securities. The emphasis on research and
continuing credit analysis on each portfolio holding enables Eaton Vance's
portfolio managers to take advantage of yield and capital appreciation
opportunities generated through investment research.

PREMIER INVESTMENT ADVISER

Eaton Vance Management, a subsidiary of Eaton Vance Corp., is the Funds'
investment adviser. Eaton Vance, its affiliates and predecessor companies have
been managing assets of individuals and institutions since 1924 and managing
investment companies since 1931. Eaton Vance and it affiliates currently have
over $56 billion* in assets under management.
---------------

(*) At 6/30/02

B-64

RISKS

Before investing, consult your investment representative about how the
Funds differ from other investment companies regarding credit risk, liquidity,
charges and expenses, and other issues of importance. Please read the prospectus
carefully, especially Investment Objective, Policies and Risks.

No Operating History -- Each Fund is a closed-end investment company with
no operating history. Each is designed for long-term investors, not as a trading
vehicle.

Interest Rate and Market Risk -- Prices of municipal obligations tend to
fall as interest rates rise. Securities with longer maturities or durations tend
to fluctuate more in price in response to changes in market interest rates. A
decline in the prices of the municipal obligations owned by a Fund would cause a
decline in the net asset value of the Fund, which could adversely affect the
trading price of the Fund's Shares. This risk is usually greater among municipal
obligations with longer maturities or durations. Although each Fund has no
policy governing the maturities or durations of its investments, each Fund
expects (other things being equal) to invest in a portfolio of longer-term
securities, which means it will be subject to greater market risk than a fund
investing solely in shorter-term securities. Market risk is often greater among
certain types of debt securities, such as zero-coupon bonds, which do not make
regular interest payments. As interest rates change, these bonds often fluctuate
in price more than coupon bonds that make regular interest payments. Because
each Fund may invest in these types of securities, it may be subject to greater
market risk than a fund investing only in current interest paying securities.

Income Risk -- Income investors receive is based primarily on interest each
Fund earns from its investments, which can vary widely over the short and long
term. If long-term interest rates drop, investors' income from the Fund over
time could drop as well if the Fund purchases securities with lower interest
coupons.

Call Risk -- If interest rates fall, issuers of callable bonds with high
coupons may call (prepay) their bonds before maturity. During declining interest
rates, each Fund is likely to replace a called security with a lower-yielding
one, decreasing the Fund's dividends and possibly affecting the market price of
Shares. Similar risks exist when the Fund invests the proceeds from matured or
traded municipal obligations at market interest rates that are below the Fund's
current earning's rate.

Credit Risk -- Credit risk is the risk that one or more municipal bonds in
a Fund's portfolio will decline in price, or fail to pay interest or principal
when due, because the issuer of the bond experiences a decline in its financial
status.

Liquidity Risk -- Each Fund may invest in securities for which there is no
readily available trading market or which are otherwise illiquid. The Fund may
not be able to readily dispose of such securities at prices approximating those
at which it could sell such securities if they were more widely traded. As a
result of such illiquidity, the Fund may have to sell other investments or
engage in borrowing to meet its obligations. Limited liquidity could affect the
market price of the securities, thereby adversely affecting the Fund's net asset
value and ability to make dividend distributions.

Municipal Bond Market -- Certain obligations in which the Funds will invest
will not be registered with the Securities and Exchange Commission or any state
securities commission and generally will not be listed on any national
securities exchange. Therefore, the amount of public information available about
portfolio securities will be limited, and the performance of the Funds is more
dependent on the analytical abilities of Eaton Vance than would be so for an
investment company investing primarily in registered or exchange-listed
securities.

Effects of Leverage -- The use of leverage through issuance of preferred
shares by each Fund creates an opportunity for increased net income, but, at the
same time, creates special risks. There can be no assurance that a leveraging
strategy will be successful during any period in which it is employed. Each Fund
intends to use leverage to provide the holders of Shares with a potentially
higher return. Leverage creates risks for holders of Shares, including the
likelihood of greater volatility of net asset value and market price of the
Shares and the risk that fluctuations in dividend rates on any preferred shares
may

B-65

affect the return to Shareholders. It is anticipated that preferred share
dividends will be based on the yields of short-term municipal obligations, while
the proceeds of any preferred share offering will be invested in longer-term
municipal obligations, which typically have higher yields. To the extent the
income derived from securities purchased with funds received from leverage
exceeds the cost of leverage, a Fund's return will be greater than if leverage
had not been used. Conversely, if the income from the securities purchased with
such funds is not sufficient to cover the cost of leverage, the return to a Fund
will be less than if leverage had not been used, and therefore the amount
available for distribution to Shareholders as dividends and other distributions
will be reduced. In the latter case, Eaton Vance in its best judgment may
nevertheless determine to maintain the Fund's leveraged position if it deems
such action to be appropriate.

In addition, under current federal income tax law, each Fund is required to
allocate a portion of any net realized capital gains or other taxable income to
holders of preferred shares. The terms of any preferred shares are expected to
require the Fund to pay to any preferred shareholders additional dividends
intended to compensate the preferred shareholders for taxes payable on any
capital gains or other taxable income allocated to the preferred shares. Any
such additional dividends will reduce the amount available for distribution to
the Shareholders. The fee paid to Eaton Vance will be calculated on the basis of
the Fund's gross assets, including proceeds from the issuance of preferred
shares, so the fees will be higher when leverage is utilized.

Each Fund currently intends to seek an investment grade rating on any
preferred shares from a rating agency. The Fund may be subject to investment
restrictions of the rating agency as a result. These restrictions may impose
asset coverage or portfolio composition requirements that are more stringent
than those imposed on the Fund by the Investment Company Act of 1940, as
amended. It is not anticipated that these covenants or guidelines will impede
Eaton Vance in managing each Fund's portfolio in accordance with its investment
objective and policies.

Municipal Bond Insurance -- In the event Moody's, S&P or Fitch (or all of
them) should downgrade its assessment of the claims-paying ability of a
particular insurer, it (or they) could also be expected to downgrade the ratings
assigned to municipal bonds insured by such insurer, and municipal bonds insured
under Portfolio Insurance issued by such insurer also would be of reduced
quality in the Fund's portfolio. Any such downgrade could have an adverse impact
on the net asset value and market price of a Fund's Shares. In addition, to the
extent a Fund employs Portfolio Insurance, the Fund may be subject to certain
restrictions on investments imposed by guidelines of the insurance companies
issuing such Portfolio Insurance. Each Fund does not expect these guidelines to
prevent Eaton Vance from managing the Fund's portfolio in accordance with the
Fund's investment objective and policies.

Insurance relates specifically to the payment of interest and principal on
the bonds in the Funds' portfolios and not to the market value of those bonds or
the share prices of the Funds, which will fluctuate with the market and, at the
time of sale, may be worth more or less than the original investment. No
representation is made as to any insurer's ability to meet its commitments.

Concentration -- The National Fund may invest 25% or more of its total
assets in municipal obligations of issuers located in the same state (or in a
U.S. Territory) or in the same economic sector, such as revenue obligations of
health care facilities, hospitals or airports. This may make the Fund more
susceptible to adverse economic, political or regulatory occurrences affecting a
particular state, territory or economic sector.

Each State Insured Municipal Bond Fund primarily invests in municipal
obligations of issuers located in its relevant state and may invest 25% or more
of its total assets in municipal obligations of issuers located in the same U.S.
territory or in the same economic sector, such as revenue obligations of health
care facilities, hospitals or airports. This may make a Fund more susceptible to
adverse economic, political or regulatory occurrences affecting that respective
state, a particular territory or economic sector.

Anti-Takeover Provisions -- Each Fund's Declaration of Trust includes
provisions that could have the effect of limiting the ability of other persons
or entities to acquire control of such Fund or to change the composition of its
Board of Trustees.

B-66

Additional Investment Practices -- The Funds may use investment practices
that involve special considerations, including purchasing futures contracts and
shares of other closed-end funds. This may result in the Fund earning taxable
income or gains.

Market Price of Shares -- Shares of closed-end investment companies often
trade at a discount from their net asset value, and the Funds' shares may
likewise trade at a discount. The trading price of each Fund's shares may be
less than the public offering price. This risk may be greater for investors who
sell their shares in a relatively short period after completion of the public
offering.

Non-Diversification -- With respect to up to 50% of its assets, each Fund
will be able to invest more than 5% (but not more than 25%) of the value of its
total assets in the obligations of any single issuer. To the extent that a
relatively high percentage of assets is invested in obligations of a limited
number of issuers, each Fund may be more susceptible than a more widely
diversified investment company to any single economic, political or regulatory
occurrence.

The information contained herein and in each preliminary prospectus is
incomplete and may be changed. We may not sell these securities until each of
the registration statements filed with the Securities and Exchange Commission is
effective. This document is not an offer to sell these securities and is not
soliciting offers to buy each of these securities in any state where the offer
or sale is not permitted. This is not an offering, which may only be made by a
final prospectus. The final prospectus for each Fund should be read carefully
before you invest or send money. The Funds involve a number of risks, including
the risk of leverage, trading discount and default. The Funds may differ from
other investment companies in terms of credit risk, liquidity, charges and
expenses, and other important issues.

Consult the preliminary prospectus for each Eaton Vance Insured Municipal
Bond Fund for more complete information, including risk considerations, charges
and expenses. Preliminary prospectuses are available on request from your
financial advisor, or you may obtain a copy from each Fund by calling
1-800-225-6265.

(C) Eaton Vance -- The Eaton Vance Building -- 255 State Street --
Boston, MA 02109 -- www.eatonvance.com
Salomon Smith Barney Inc.

B-67

WHY BUY BONDS?

- Positive Economic Environment -- Interest rate outlook remains
neutral -- Economic growth in the US is moderate -- Inflation, which is key to
bond market performance, is benign, and the current outlook is excellent because
of productivity gains, low wage pressures and continuing competitiveness within
industry.

- Attractive Yields -- Bond yields in general are attractive relative to those
from short-term, income-producing vehicles.

- Opportunity for Reallocation -- With the fall-off in the stock market many
portfolios need to diversify against risk by shifting some assets to
income-producing investments.

- Favorable Demographics -- The aging baby boom generation is hitting its peak
earning years, and many boomers should be looking to shelter investment income.

1403-7/02 CE-IMBFCB

B-68

EATON VANCE INSURED CALIFORNIA MUNICIPAL BOND FUND

STATEMENT OF ADDITIONAL INFORMATION
AUGUST 27, 2002

INVESTMENT ADVISER AND ADMINISTRATOR
Eaton Vance Management
24 Federal Street
Boston, MA 02110

CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, MA 02116

TRANSFER AGENT
PFPC Inc.
P.O. Box 43027
Providence, RI 02940-3027
(800) 331-1710

INDEPENDENT AUDITORS
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116

PART C -- OTHER INFORMATION

Item 24. Financial Statements and Exhibits

(1) Financial Statements:

Included in Part A:

Not applicable.

Included in Part B:

Independent Auditor's Report
Statement of Assets and Liabilities as of August 19, 2002
Note to Financial Statement

(2) Exhibits:

(a) Agreement and Declaration of Trust dated July 8, 2002 is
incorporated herein by reference to the Registrant's initial
Registration Statement on Form N-2 (File Nos. 333-92202 and
811-21147) as to the Registrant's common shares of beneficial
interest ("Common Shares") filed with the Securities and Exchange
Commission (the "Commission") on July 10, 2002 (Accession No.
0000898432-02-000465) ("Initial Common Shares Registration
Statement").

(b) By-Laws are incorporated herein by reference to the Trust's
Initial Common Shares Registration Statement.

(d) Form of Specimen Certificate for Common Shares of Beneficial
Interest incorporated herein by reference to the Trust's Initial
Common Shares Registration Statement.

(e) Dividend Reinvestment Plan is incorporated herein by reference to
the Trust's Initial Common Shares Registration Statement.

(f) Not applicable.

(g) Investment Advisory Agreement dated July 25, 2002 is incorporated
herein by reference to Pre-Effective Amendment No. 1 to the
Registrant's Common Shares Registration Statement filed with the
Commission on July 26, 2002 (Accession No. 0000950135-02-003434)
("Pre-Effective Amendment No. 1").

(h) (1) Form of Underwriting Agreement is incorporated herein by
reference to Pre-Effective Amendment No. 3 to the
Registrant's Common Shares Registration Statement filed
with the commission on August 27, 2002 (Accession No.
0000950135-02-003951) ("Pre-Effective Amendment No. 3").

(2) Form of Master Agreement Among Underwriters is
incorporated herein by reference to Pre-Effective
Amendment No. 3.

(3) Form of Master Selected Dealers Agreement is incorporated
herein by reference to Pre-Effective Amendment No. 3.

(i) The Securities and Exchange Commission has granted the Registrant
an exemptive order that permits the Registrant to enter into
deferred compensation arrangements with its independent Trustees.
See in the matter of Capital Exchange Fund, Inc., Release No.
IC-20671 (November 1, 1994).

(j) (1) Master Custodian Agreement with Investors Bank & Trust
Company dated July 25, 2002 is incorporated herein by
reference to Pre-Effective Amendment No. 1.

(2) Extension Agreement dated August 31, 2000 to Master
Custodian Agreement with Investors Bank & Trust Company
filed as Exhibit (g)(4) to Post-Effective Amendment No. 85
of Eaton Vance Municipals Trust (File Nos. 33-572,
811-4409) filed with the Commission on January 23, 2001
(Accession No. 0000940394-01-500027) and incorporated
herein by reference.

(3) Delegation Agreement dated December 11, 2000, with
Investors Bank & Trust Company filed as Exhibit (j)(e) to
the Eaton Vance Prime Rate Reserves N-2, Amendment No. 5
(File Nos. 333-32267, 811-05808) filed April 3, 2002
(Accession No. 0000940394-01-500126) and incorporated
herein by reference.

(k) (1) Amendment to the Transfer Agency and Services Agreement
dated July 25, 2002 is incorporated herein by reference to
Pre-Effective Amendment No. 1.

(2) Transfer Agency and Services Agreement dated December 21,
1998 is incorporated herein by reference to Pre-Effective
Amendment No. 1.

(3) Administration Agreement dated July 25, 2002 is
incorporated herein by reference to Pre-Effective
Amendment No. 1

(l) Opinion and Consent of Kirkpatrick & Lockhart LLP is incorporated
herein by reference to Pre-Effective Amendment No. 3.

(m) Not applicable.

(n) Consent of Independent Auditors filed herewith.

(o) Not applicable.

(p) Letter Agreement with Eaton Vance Management is incorporated
herein by reference to Pre-Effective Amendment No. 3.

(q) Not applicable.

(r) Code of Ethics adopted by Eaton Vance Corp., Eaton Vance
Management, Boston Management and Research, Eaton Vance
Distributors, Inc. and the Eaton Vance Funds effective September
1, 2000, as revised June 4, 2002, filed as Exhibit (p) to
Post-Effective Amendment No. 45 of Eaton Vance Investment Trust
(File Nos, 33-1121, 811-4443) filed July 24, 2002 (Accession No.
0000940394-02-000462) and incorporated herein by reference.

(s) Power of Attorney is incorporated herein by reference to
Pre-Effective Amendment No. 1.

Item 25. Marketing Arrangements

See Form of Underwriting Agreement filed herewith.

Item 26. Other Expenses of Issuance and Distribution

The approximate expenses in connection with the offering, some of which
will be borne by the Adviser, are as follows:

Registration and Filing Fees........................................ $ 33,120
Listing Fees........................................................ 5,000
National Association of Securities Dealers, Inc. Fees............... 10,500
Costs of Printing and Engraving..................................... 150,000
Accounting Fees and Expenses........................................ 6,000
Legal Fees and Expenses............................................. 60,000
Total............................................................... $264,620
-------

Item 27. Persons Controlled by or Under Common control

None.

Item 28. Number of Holders of Securities

Set forth below is the number of record holders as of August 27, 2002 of
each class of securities of the Registrant:

Number of
Title of Class Record Holders
-------------- --------------

Common Shares of Beneficial Interest,
par value $0.01 per share............................... 1

Item 29. Indemnification

The Registrant's By-Laws filed in the Trust's Initial Common Shares
Registration Statement contain and the Underwriting Agreement to be filed is
expected to contain provisions limiting the liability, and providing for
indemnification, of the Trustees and officers under certain circumstances.

Registrant's Trustees and officers are insured under a standard
investment company errors and omissions

insurance policy covering loss incurred by reason of negligent errors and
omissions committed in their official capacities as such.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
described in this Item 29, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

Item 30. Business and other Connections of Investment Adviser

Reference is made to: (i) the information set forth under the caption
"Investment Advisory and Other Services" in the Statement of Additional
Information; (ii) the Eaton Vance Corp. 10-K filed under the Securities Exchange
Act of 1934 (File No. 1-8100); and (iii) the Form ADV of Eaton Vance Management
(File No. 801-15930) filed with the Commission, all of which are incorporated
herein by reference.

Item 31. Location of Accounts and Records

All applicable accounts, books and documents required to be maintained by
the Registrant by Section 31(a) of the Investment Company Act of 1940 and the
Rules promulgated thereunder are in the possession and custody of the
Registrant's custodian, Investors Bank & Trust Company, 200 Clarendon Street,
16th Floor, Boston, MA 02116, and its transfer agent, PFPC Inc., 4400 Computer
Drive, Westborough, MA 01581-5120, with the exception of certain corporate
documents and portfolio trading documents which are in the possession and
custody of Eaton Vance Management, The Eaton Vance Building, 255 State Street,
Boston, MA 02109. Registrant is informed that all applicable accounts, books and
documents required to be maintained by registered investment advisers are in the
custody and possession of Eaton Vance Management.

Item 32. Management Services

Not applicable.

Item 33. Undertakings

1. The Registrant undertakes to suspend offering of Preferred Shares until
the prospectus is amended if (1) subsequent to the effective date of this
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of this Registration Statement or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.

2. Not applicable.

3. Not applicable.

4. Not applicable.

5. The Registrant undertakes that:

a. for the purpose of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in the form of prospectus
filed by the Registrant pursuant to 497(h) under the 1933Act shall
be deemed to be part of the Registration Statement as of the time
it was declared effective; and

b. for the purpose of determining any liability under the
Securities Act, each post-effective amendment

that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of
receipt of an oral or written request, its Statement of Additional
Information.

NOTICE

A copy of the Agreement and Declaration of Trust of Eaton Vance Insured
California Municipal Bond Fund is on file with the Secretary of State of the
Commonwealth of Massachusetts and notice is hereby given that this instrument is
executed on behalf of the Registrant by an officer of the Registrant as an
officer and not individually and that the obligations of or arising out of this
instrument are not binding upon any of the Trustees, officers or shareholders
individually, but are binding only upon the assets and property of the
Registrant.

SIGNATURES

Pursuant to requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Boston and the
Commonwealth of Massachusetts, on the 28th day of August 2002.

EATON VANCE INSURED CALIFORNIA MUNICIPAL BOND FUND

By: /s/ Thomas J. Fetter*
-----------------------------
Thomas J. Fetter
President

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

/s/ Thomas J. Fetter* President and Principal August 28, 2002
----------------------------- Executive Officer
Thomas J. Fetter

/s/ James L. O'Connor* Treasurer and Principal Financial August 28, 2002
----------------------------- and Accounting Officer
James L. O'Connor

/s/ Jessica M. Bibliowicz* Trustee August 28, 2002
-----------------------------
Jessica M. Bibliowicz

/s/ Donald R. Dwight* Trustee August 28, 2002
-----------------------------
Donald R. Dwight

/s/ James B. Hawkes* Trustee August 28, 2002
-----------------------------
James B. Hawkes

/s/ Samuel L. Hayes, III* Trustee August 28, 2002
-----------------------------
Samuel L. Hayes, III

/s/ Norton H. Reamer* Trustee August 28, 2002
-----------------------------
Norton H. Reamer

/s/ Lynn A. Stout* Trustee August 28, 2002
-----------------------------
Lynn A. Stout

* By: /s/ Alan R. Dynner
------------------------------------
Alan R. Dynner (As attorney-in-fact)

INDEX TO EXHIBITS

(n) Consent of Independent Auditors filed herewith.